Inference with Dependent Data in Accounting and Finance Applications

We review developments in conducting inference for model parameters in the presence of intertemporal and cross‐sectional dependence with an emphasis on panel data applications. We review the use of heteroskedasticity and autocorrelation consistent (HAC) standard error estimators, which include the standard clustered and multiway clustered estimators, and discuss alternative sample‐splitting inference procedures, such as the Fama–Macbeth procedure, within this context. We outline pros and cons of the different procedures. We then illustrate the properties of the discussed procedures within a simulation experiment designed to mimic the type of firm‐level panel data that might be encountered in accounting and finance applications. Our conclusion, based on theoretical properties and simulation performance, is that sample‐splitting procedures with suitably chosen splits are the most likely to deliver robust inferential statements with approximately correct coverage properties in the types of large, heterogeneous panels many researchers are likely to face.     

FISCAL CONVERGENCE IN THE EUROPEAN UNION BEFORE THE CRISIS

This article investigates fiscal convergence attained by EU countries in the period 1991–2008, by employing β‐ and σ‐convergence techniques complemented by a time series analysis. Overall our results highlight a distinctive convergence pattern in the European Union. Fiscal discipline leading to a fast convergence of deficit/GDP ratio over the 1990s markedly weakened in the following decade. Nonetheless, after the Euro debut a pronounced convergence in total revenue and total government spending emerges, with different patterns characterizing each expenditure component. Despite this evidence of fiscal harmonization, European treaties failed to attract countries toward a common share of government debt over GDP. (JEL E61, H11, C23)     

COMPETENCE — THE SYMBOLIC PASSE-PARTOUT TO CHANGE IN A LEARNING ORGANIZATION

The methodology of social representation theory was applied to the concept of competence during the follow-up phase of an action-research project in the public sector. The competence of authority — a key concept in legal culture and in the bureaucratic model — was contrasted with the competence to solve problems, as one of the cornerstones of the learning organization. When verified a posteriori the social representation of competence among middle managers proved to be an interesting hybrid, which anchored the new in a legal culture in the form of the capacity to interpret problems, coupled with the ability to conceptualize problems. The objectivization of competence is based on the dynamic between these two cognitive processes: from the particular to the general, from the abstract to the concrete.     

The Age of the Dragon: The Effect of Imports from China on Firm‐Level Prices

We analyze the impact of increased import penetration from China on the dynamics of firm‐level output prices in Italy. Accounting for potential endogeneity biases we find a significant and negative causal relationship: a 0.1 percentage point higher Chinese import penetration restrains price growth by 0.17 percentage points per year. This relationship reflects a procompetitive effect induced by cheaper imports, and, thanks to the firm‐level dimension of our data, we show that it is driven by low‐productivity firms within less skill‐intensive sectors. Finally, we show that Chinese import competition also had a dampening effect on Italian overall inflation.     

MARKET SEGMENTATION WITH NONLINEAR PRICING*

We study the benefits and drawbacks of allowing firms to offer different price‐quality menus to captive consumers and to consumers more exposed to competition (market segmentation). We show that the effect of market segmentation depends on the relationship between the range of consumer preferences found in captive and competitive markets. When the range of consumer preferences in captive markets is ‘wide,’ segmentation is quality and (aggregate) welfare reducing, while the opposite holds when the range of consumer preferences in captive markets is ‘narrow.’ Segmentation always harms captive consumers, while it always benefits consumers located in competitive markets.     

Asymmetric Information and Annuities

The standard Rothschild and Stiglitz (1976) and Wilson (1977) analysis of adverse selection economies is extended to a particular model of annuity market which features both elements of moral hazard and adverse selection. Individuals are heterogeneous with respect to time preferences and they make investments in health care that affect their survival probabilities. The main case considered is that where both preferences and investments (and hence the endogenous survival probabilities) are unobserved. Thus, the model captures a further source of inefficiency that is particular to annuity market: an endogenous correlation between the desire for annuities and the survival probabilities. The basic insights of Wilson (1977) —as worked out by Eckstein, Eichenbaum and Peled (1985) —are worth also in this new setting. When the equilibrium is separating, the government intervention may yield Pareto improvements. If the equilibrium is pooling, the government intervention may improve the well‐being of individuals affected by the inefficiencies and the negative externalities caused by the asymmetric information.