High equity premia and crash fears - Rational foundations

Summary. We show that in a Lucas endowment economy in which the process for dividends is described by a lattice tree subject to infrequent but observable structural breaks, in equilibrium recursive rational learning may inflate the equity risk premium and reduce the risk-free interest rate for low levels of risk aversion. The key condition for these results to obtain is the presence of sufficient initial pessimism. The relevance of these findings is magnified by the fact that under full information our artificial economy cannot generate asset returns matching the empirical evidence for any positive relative risk aversion.Received: 20 September 2003, Revised: 27 April 2005, JEL Classification Numbers: D83, E44, G12.I am indebted to Mordecai Kurz (the co-Editor), one anonymous Referee, Gabriele Camera, Sadayuki Ono, Olesia Verchenko, and Allan Timmermann for many useful comments. I also think seminar paticipants at the European Economic Association meetings in Stockholm (August 2003) and the Midwest Economics Association in St. Louis (March 2003).     

Efficiency Measurement in Network Industries: Application to the Swiss Railway Companies

The persistence of increasingly high government subsidies in Switzerland’s railroads has led the federal and cantonal authorities to discussing the possibility of high-powered incentive contracts such as those based on cost efficiency benchmarking. Railways are however, characterized by a high degree of unobserved heterogeneity that could bias the efficiency estimates. This paper examines the performance of several panel data models to measure cost efficiency in network industries. The unobserved firm-specific effects and the resulting biases are studied through a comparative study of several stochastic frontier models, applied to a panel of 50 railway companies operating over a 13-year period.* The authors wish to thank Michael Crew and two anonymous referees for their helpful suggestions. Aurelio Fetz provided an excellent assistance, which is gratefully acknowledged. Any remaining errors are the responsibility of the authors.This revised version was published in June 2005 with corrections in the author affiliations.     

Privatisation and aggregate output: testing for macroeconomic transmission channels

In this paper we examine empirically the impact of privatisation on output in the UK, through macroeconomic transmission channels. While most privatisation studies focus on microeconomic shocks, namely at the firm level, we are interested to see whether a large scale privatisation policy, as the one pursued in the UK in the 1980 and 1990s, had a measurable impact on output. This may contribute to the ex post evaluation of this policy and complement the microeconomic evidence. We use quarterly data from 1979 to 1998 of privatisation proceeds, as our impulse policy variable, and of private consumption, gross fixed capital formation, net government expenditures, as transmission channels, and aggregate output as our final response variable. The econometric methodology is based on Structural Vector Auto-regressive models and Impulse Response Functions. Non-stationarity and cointegration properties of the time series have also been considered. We find that privatisation shocks do not have an impact in the consumption-output model, but have a moderate and transitory impact in the investment and the public expenditures models. Such positive demand effects, however, have not been completely matched by supply side effects, and, consequently, privatisation in the UK did not contribute to a sustained economic growth.

International asset allocation under regime switching, skew, and kurtosis preferences

This paper investigates the international asset allocation effectsof time-variations in higher-order moments of stock returnssuch as skewness and kurtosis. In the context of a four-momentInternational Capital Asset Pricing Model (ICAPM) specificationthat relates stock returns in five regions to returns on a globalmarket portfolio and allows for time-varying prices of covariance,co-skewness, and co-kurtosis risk, we find evidence of distinctbull and bear regimes. Ignoring such regimes, an unhedged USinvestor's optimal portfolio is strongly diversified internationally.The presence of regimes in the return distribution leads toa substantial increase in the investor's optimal holdings ofUS stocks, as does the introduction of skewness and kurtosispreferences.     

Marx and the Development of Critical Political Economy

Abstract

Although relevant analytical developments were provided over time by the critique of economic theory, they did not succeed in inhibiting the occurrence of a full-fledged revival of the neoclassical interpretation of capitalism. The development of critical economics and its capability of checking the influence of the dominant economic culture have been especially prejudiced by the failed integration between the analyses of Marx and Keynes. Following Keynes, once the ‘inducement to invest’ had been singled out as the central question for the explanation of output levels, one should have promptly acknowledged that on this very question Marx's analysis was significantly richer and more relevant than Keynes's—the richness and relevance of the former ultimately resting on the great attention Marx dedicated to the complex question of the influence of income distribution on the capitalists’ incentive to invest. It is argued in the article that through the study of this influence Marx succeeded in putting together the essential elements of a critical theory of effective demand, based on the principles and mechanisms that govern the distribution of income between profits and wages.     

Selective Schools

This paper studies how schooling admission tests affect economic performance in an economy where individuals are endowed with both academic and non‐academic abilities and both abilities matter for labour productivity. We develop a simple model with schools run by the goverment, where individuals signal their abilities by taking an admission test and sort into low quality and high quality schools. When abilities are poorly correlated in the population, as documented in the literature, a standard test based only on academic abilities can be less efficient than a balanced test, which considers both ability types. We show that a sequential testing strategy, with schools testing academic abilities and firms testing non‐academic abilities on the sub‐sample of graduates of high quality schools, does not necessarily replicate the outcome of a balanced test.     

Digital transformation of cultural institutions: a statistical analysis of Italian and Campania GLAMs

Quality & Quantity - Digitalization is playing a prominent role in cultural economics reshaping GLAM organizations toward a more relevant income generation. However achieving a higher level of...     

Technology policy for the knowledge economy: Public support to young ICT service firms

Public intervention in high-tech sectors is often advocated to resolve market imperfections that may possibly limit the viability of young high-tech enterprises. Although some European countries have adopted national government support policies that explicitly target this type of firm, in Italy and in other EU countries, there are no national support measures specifically designed for them. The paper focuses on the information and communication technologies (ICT) services sector in Italy. It aims to investigate whether both horizontal general-purpose direct support mechanisms at the national level and financial support measures provided by local administrative entities (which rarely have been specific to the ICT sector) permit an efficient allocation of public funds.     

Delegation of Authority In Business Organizations: An Empirical Test

This paper tests the predictions of economic theory on the determinants of the allocation of decision-making power through the estimates of ordered probit models with random effects. Our findings show that the complexity of plants' operations and organization, the characteristics of the communication technologies in use, the ownership status of plants and the product mix of their parent companies figure prominently in explaining whether authority is delegated to the plant manager or not. In addition, the nature of the decision under consideration turns out to affect the allocation of authority.     

Path analysis with partial association measures

This paper discusses the use of partial association measures for carrying out path analyses on categorical data. The measures considered are essentially PRE (proportion of reduction in error of prediction) measures for nominal variables and concordance-discordance indices for ordinal ones. These measures provide a natural way to evaluate the strength of the path linking a non-measurable response variable to one of several categorical explanatory factors. Concerning the decomposition of raw association into direct and indirect effects, it is shown, however, that they do not share the properties of conventional path coefficients for measurable variables. Especially purely nominal association measures need to be interpreted with care. The scope of the partial measures for path analysis is illustrated through a study of the relationships between the educational styles experienced by swiss adolescents and their selfesteem.