Exchanging market access at the outsiders' expense: the case of customs unions

Abstract.  Under a customs union, countries can exchange preferential market access by coordinating external tariffs to shift profits from excluded countries. I show that the exporting rents resulting from this coordination can offset trade diversion losses produced by the union, even if its members are relatively small in world markets. Such gains come, however, at the expense of excluded countries. I show that small countries can use customs unions also to foster multilateral cooperation, by increasing the incentives of excluded countries to support global free trade.     

Impacts of Market Reform on Spatial Volatility of Maize Prices in Tanzania

Maize is one of the major staples and cash crops for many Tanzanians. Excessive volatility of maize prices destabilises farm income in maize‐growing regions and is likely to jeopardise nutrition and investment in many poor rural communities. This study investigates whether market reform policies in Tanzania have increased the volatility of maize prices, and identifies regional characteristics that can be attributed to the spatial price volatility. To achieve the objectives, an autoregressive conditional heteroskedasticity in mean (ARCH‐M) model is developed and estimated in this study. Results show that the reforms have increased farm‐gate prices and overall price volatility. Maize prices are lower in surplus and less developed regions than those in deficit and developed regions. Results also show that the developed and maize‐deficit regions, and regions bordering other countries have experienced less volatile prices than less developed, maize‐surplus and non‐bordering regions. Our findings indicate that investments in communication and transportation infrastructures from government and donor countries are likely to increase inter‐regional and international trade, thereby reducing the spatial price volatility in Tanzanian maize prices in the long run.     

A NOTE ON SOME ‘WEAK FORM’ TESTS OF CAPITAL MARKET EFFICIENCY IN NEW ZEALAND*

This paper reports the results of some experiments designed to test the ‘weak form’ efficiency of the New Zealand Stock Market The experiments were tests of serial correlation for various lags, and runs tests. The evidence suggests that the New Zealand market, at least as reflected in those securities tested, is essentially weak-form efficient     

Trade liberalization, outsourcing, and the hold-up problem

This paper shows that, in a bilateral relationship where a foreign supplier has to make a relationship-specific investment but cannot enforce a complete contract, the standard hold-up problem of underinvestment is aggravated when trade incurs a tariff. In this context, we identify two new channels through which trade liberalization enhances international trade. First, lower tariffs increase the incentives of foreign suppliers to undertake cost-reducing investments. Second, lower tariffs may prompt vertical multinational integration. These indirect effects imply that responses of trade volumes to trade liberalization are greater than standard trade models suggest and help explain current trends toward foreign outsourcing and intra-firm trade.     

The effect of earnings quality and country-level institutions on the value relevance of earnings

This study investigates the relationship between the value relevance of earnings and earnings quality across countries. We find that there is a stronger relationship between earnings quality and the value relevance of earnings in countries with high investor protection than in countries with weak investor protection. We also find that the association between the value relevance of earnings and earnings quality is higher when a country’s information environment is less opaque. Overall, our study documents evidence on international differences in the ability of stock prices to capture useful accounting information, consistent with the notion that the returns-earnings association reflects not only the quality of accounting earnings but also the informativeness of stock prices.     

A diffusion approximation for the ruin function of a risk process with compounding assets

Abstract

The traditional theory of collective risk is concerned with fluctuations in the capital reserve {Y(t): t ?O} of an insurance company. The classical model represents {Y(t)} as a positive constant x (initial capital) plus a deterministic linear function (cumulative income) minus a compound Poisson process (cumulative claims). The central problem is to determine the ruin probability ψ(x) that capital ever falls to zero. It is known that, under reasonable assumptions, one can approximate {Y(t)} by an appropriate Wiener process and hence ψ(.) by the corresponding exponential function of (Brownian) first passage probabilities. This paper considers the classical model modified by the assumption that interest is earned continuously on current capital at rate β > O. It is argued that Y(t) can in this case be approximated by a diffusion process Y*(t) which is closely related to the classical Ornstein-Uhlenbeck process. The diffusion {Y*(t)}, which we call compounding Brownian motion, reduces to the ordinary Wiener process when β = O. The first passage probabilities for Y*(t) are found to form a truncated normal distribution, which approximates the ruin function ψ(.) for the model with compounding assets. The approximate expression for ψ(.) is compared against the exact expression for a special case in which the latter is known. Assuming parameter values for which one would anticipate a good approximation, the two expressions are found to agree extremely well over a wide range of initial asset levels.