Neoclassical versus Frontier Production Models? Testing for the Skewness of Regression Residuals*

The empirical literature on production and cost functions is divided into two strands. The neoclassical approach concentrates on model parameters, while the frontier approach decomposes the disturbance term to a symmetric noise term and a positively skewed inefficiency term. We propose a theoretical justification for the skewness of the inefficiency term, arguing that this skewness is the key testable hypothesis of the frontier approach. We propose to test the regression residuals for skewness in order to distinguish the two competing approaches. Our test builds directly upon the asymmetry of regression residuals and does not require any prior distributional assumptions.     

The High‐Frequency Responses of Australian Financial Futures to Unexpected Cash Rate Announcements*

This study examines the high‐frequency responses of Australian financial futures to monetary surprises using intra‐day futures data. Using the event window method with tick data to control for the endogeneity between market interest rates and the cash rate, our empirical findings support the following. First, monetary policy announcements significantly impact not only short‐term interest rate futures but also longer‐term treasury security future markets. Second, the most significant responses of these markets occur in the event window that contains the policy announcement. Third, we also find that the monetary policy is not well anticipated by market participants until the Reserve Bank of Australia’s policy release.     

Search in cities

The aim of this paper is to expose the recent developments of urban search models which incorporate a land market into a search-matching framework. Using these models, we will be able to explain why unemployment rates vary within a city, how city structure affects workers’ labor-market outcomes, how unemployment benefits and the job-destruction rate affect the growth of cities and why workers living far away from job centers search less intensively and experience higher unemployment rates than those residing closer to jobs. We are also able to explain why, as compared to whites, black workers spend more time commuting to work but travel less miles and search for jobs over a smaller area.     

A political economy theory of the soft budget constraint

Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.     

Is Education Prejudiced by Country-Risk?

We consider country-risk as a determinant of education growth in a panel of countries. Applying cross-country dynamic panel data estimations, we show that among the different levels of education, the secondary is the most affected, followed by the tertiary. When different single measures of risk are considered one by one, the tertiary education is affected by more types of risk than any other level of education. This contributes to the literature on the educational production function, as it adds a robust determinant of that function and indicates that politicians should endeavour to decrease country-risk to enhance education.     

Time-consistent taxation in a dynastic family model with human and physical capital and a balanced government budget

Abstract .  This paper analyzes optimal, time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget. When tax revenue is used for publicly provided consumption or lump-sum transfers, leisure would be higher than its social optimum. Pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax. Also, it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax, and hence it is not a practical guide to policy. Further, a consumption tax, or equivalently a uniform income tax with investment subsidies at the same rate, can be improved on by taxing capital income more heavily than labour income.     

A testable model of consumption with externalities

This paper presents a nonparametric model of interdependent preferences, where an individual's consumption may act as an externality on the preferences of other consumers. We assume that individual price consumption data is observed for all consumers. It is known that the general consumption model with externalities imposes few restrictions on the observed data, where the consistency requirement is Nash rationalizability. We motivate potential games as an important sub class of games where the family of concave potential games is refutable and imposes stronger restrictions on observed data. We use this framework to extend the analysis of Brown and Matzkin [D. Brown, R. Matzkin, Testable restrictions on the equilibrium manifold, Econometrica 64 (1996) 1249-1262] on refutable pure exchange economies to pure exchange economies with externalities. Finally, we discuss an application of this model to inter-household consumption data.     

Are property rights enough?Re‐evaluating a big‐bang claim1

We investigate the claim made by proponents of the big‐bang strategy that the establishment of property rights in an economy in transition creates its own demand for the enforcement of laws to protect those rights. Our model contains a government engaging in activities to accomplish objectives that depend on public support for the enforcement of the rule of law and agents who interpret the level of activities of the government as indications of the government's intent to enforce the rule of law. Agents, using the level of government activities as an input to their decisions, choose whether to support the government's objectives. We establish conditions under which the level of activities chosen by the government maximizes its benefits, and simultaneously induces the constituency to support enforcement of the rule of law. These conditions provide a basis for the argument for the implementation of the big‐bang policy. When these conditions do not hold, however, we show that the level of activities that maximizes the government's benefits may have only a minor impact on support for the enforcement of the rule of law. Two characteristics play an important role in these conditions: the initial level of crime and the types of activities the government chooses to undertake. We present examples showing that the initial level of crime has the more dramatic effect on subsequent support for the rule of law.     

Gender difference in the impact of retirement on cognitive abilities: Evidence from urban China

This paper examines the impact of retirement on cognitive functioning by gender in urban China and investigates the underlying mechanisms. Based on data from the China Health and Retirement Longitudinal Study, the paper uses the mandatory retirement ages and different policy enforcement between the public and private sectors as instruments for retirement status. The analysis finds substantial gender heterogeneity in the effect of retirement on cognition, with a positive and significant effect for males, but a negative and less significant effect for females. The beneficial effects on cognition are stronger for male blue-collar workers, who are likely to pursue a more active lifestyle at retirement. Further investigation shows that the results are partly driven by differential behavioral changes at retirement, and the gender difference in retirement ages may also play a potential role.     

Has Switzerland Really Been Marked by Low Productivity Growth? Hours Worked and Labor Productivity in Switzerland in a Long‐run Perspective

This paper shows that previous work has understated Switzerland's performance in terms of labor productivity growth. First, available data on hours worked are incoherent and overestimate growth in hours worked. The paper therefore establishes a consistent series of total hours worked and its components covering 1950–2010, showing that Swiss labor inputs actually were stable from 1964 to 2007. Second, long‐term improvements in Switzerland's Terms of Trade indicate that quality improvements in Swiss exports might not be fully mirrored in growth of GDP and, hence, productivity growth.