Should I Stay or Should I Go? On Relative Deprivation and Migration Dynamics

An overlapping-generations model for rural to urban labor migration is developed. In the migration decision the potential migrants consider both the absolute income gain and the relative deprivation associated with moving to town. It is shown that the relative deprivation mechanism introduces a positive externality between generations of migrants that can generate dual equilibria.     

Predator or prey?: Parasitic enterprises in economic development

In many developing and transition economies Mafia-like activities are rampant. Extortion and other forms of predation lower profitability in private businesses and distort investment incentives. Incorporated in a model of industrialization, bimodal club convergence may result. Economies may get stuck in a Predators’ Club characterized by a vicious cycle of poverty and predation. Societies with a low flow of new entrepreneurs are especially vulnerable to predation and never get out of this club. Poor societies with a high flow of new entrepreneurs, however, may grow out of the trap and join the rich Producers’ Club.     

Fighting against the odds

The fight for power is not only over immediate rents, but also over advantageous positions in future power struggles. When incumbency yields an extra fighting edge, current struggles involve high stakes as a victory today may guarantee the victory also tomorrow. Such an incumbency edge may stem from the control of the army, the police and other instruments reserved for the government. The conclusions drawn from static conflict models are turned on their head when the fight is also over the incumbency edge. A sharper incumbency edge increases the implicit prizes of winning. The fighting intensity may therefore rise when the strength of each side becomes more unequal. Unbalanced fights can last long and become particularly severe. This is in contrast to the standard result that equal strengths give the most intense fighting. Received: June 2004, Accepted: December 2004, We want to thank the editor and a referee.     

Supply‐ versus Demand‐Side Policies in the Presence of Carbon Leakage and the Green Paradox

We consider a climate coalition that seeks to reduce global emissions in the presence of carbon leakage and resource exhaustibility. We show that a credible announcement of future unilateral supply‐side policies delays foreign emissions, and we derive the optimal combination of consumer taxes and producer taxes when we consider leakages from free riders, both within periods and across periods. The tax shares generally differ over time. A decline in the present value of the social cost of carbon over time supports a time path where the consumers’ tax share of the total carbon tax also declines over time. We illustrate our findings with a numerical model.     

Cursed by Resources or Institutions?

Natural resource‐abundant countries constitute both growth losers and growth winners, and the main difference between the success cases and the cases of failure lies in the quality of institutions. With grabber‐friendly institutions more natural resources push aggregate income down, while with producer‐friendly institutions more natural resources increase income. Such a theory finds strong support in data. A key question we also discuss is if resources in addition alter the quality of institutions. When that is the case, countries with bad institutions suffer a double resource curse – as the deterioration of institutions strengthens the negative effect of more natural resources.     

Poverty and crime in 19th century Germany

We estimate the impact of poverty on crime in 19th century Bavaria, Germany. Rainfall is used as an instrumental variable for grain (rye) prices to address econometric identification problems in the existing literature. The rye price was a major determinant of living standards during this period. The rye price has a positive effect on property crime: a one standard deviation increased property crime by 8%. OLS estimates are twice as large as instrumental variable estimates, highlighting the value of our empirical approach. Higher rye prices lead to significantly less violent crime, though, and we argue that higher beer prices, caused by the higher rye prices, are a likely explanation.     

With or Without U? The Appropriate Test for a U‐Shaped Relationship*

Nonlinear relationships are common in economic theory, and such relationships are also frequently tested empirically. We argue that the usual test of nonlinear relationships is flawed and derive the appropriate test for a U‐shaped relationship. Our test gives the exact necessary and sufficient conditions for the test of a U shape in finite samples in a large class of models.     

Addiction – and rational choice theory

Becker and Murphy's theory is a well‐known contribution to economists on the discussion of addiction. This class of rational choice theory is still the most important reference for economists studying addiction. In this paper, the model and the economist's rational choice theory were challenged by modern neurobiological theory. The paper suggested reconstruction work of the standard inter‐temporal choice model along four lines to reduce the gap between the theory and the clinical definition of addiction: (1) a discount rate that varies; (2) revision of the concept consumption capital; (3) the possibility for genetic predisposition to addiction (even if the research up to now has not identified such a gene); and (4) social mechanisms that influence our behaviour.     

Emissions Trading with Updated Allocation: Effects on Entry/Exit and Distribution

Allocation of emissions allowances may have significant distributional and efficiency effects. It is well known that cost-efficiency may be achieved if allowances are auctioned or distributed in a lump sum manner, e.g., based on emissions levels before the start of the system (‘grandfathering’). Böhringer and Lange (Eur Econ Rev 49:2041–2055, 2005) show that a cost-effective outcome can also be achieved if the base year for allocation is continually updated (‘updating’), given that banking and borrowing are prohibited. In this paper we examine whether updating alters the entry and exit conditions for firms compared to grandfathering, and how it affects profits for new and existing firms. We find that the two schemes function surprisingly similar: First, the incentives to entry and exit are identical. Second, the total value of free quotas to existing firms, based on emissions before the system starts, is also identical without any auctioning. With updating initial claims for free allowances have a shorter lifetime compared to grandfathering, but quota prices are higher as firms anticipate the effect of current emissions on future claims to free allowances. The two effects exactly cancel each other out. If there is some combination of auction and free allocation, the total value of free quotas will always be highest under grandfathering if the auction rate is the same. Entry and exit incentives are still equal.     

On the Geometry of the Instrumental Variable Estimator*

I derive the exact distribution of the exact determined instrumental variable estimator using a geometric approach. The approach provides a decomposition of the exact estimator. The results show that by geometric reasoning one may efficiently derive the distribution of the estimation error. The often striking non‐normal shape of the instrumental variable estimator, in the case of weak instruments and small samples, follows intuitively by the geometry of the problem. The method allows for intuitive interpretations of how the shape of the distribution is determined by instrument quality and endogeneity. The approach can also be used when deriving the exact distribution of any ratio of stochastic variables.