The Persistence of Income Shocks: Evidence from Rural Indonesia

This paper estimates the persistence of transient income shocks to farm households in rural Indonesia. Persistence is defined as the elasticity of a household's 1997 household per capita income with respect to its 1993 per capita income, controlling for time‐invariant characteristics of the household. Local rainfall levels are used as an exogenous source of transitory variation in 1993 income. Four main conclusions emerge. First, roughly 30% of household income shocks remain after four years. Second, the persistence of negative and positive shocks is approximately equal; if anything, positive shocks last longer. Third, neither positive nor negative income shocks disproportionately affect poor households. Finally, measurement error in income and unobserved household heterogeneity are important sources of bias. These findings cast doubt on common arguments advocating public intervention to stabilize or redistribute income, and suggest that anti‐poverty policy should address more permanent causes of household poverty.     

How does managed care do it?

Integrating the health services and insurance industries, as health maintenance organizations (HMOs) do, could lower expenditure by reducing either the quantity of services or unit price or both. We compare the treatment of heart disease in HMOs and traditional insurance plans using two datasets from Massachusetts. The nature of these health problems should minimize selection. HMOs have 30% to 40% lower expenditures than traditional plans. Both actual treatments and health outcomes differ little; virtually all the difference in spending comes from lower unit prices. Managed care may yield substantial increases in measured productivity relative to traditional insurance.     

R&D spillovers and the case for industrial policy in an open economy

In this paper we consider the case for subsidies towards firmswhich generate R&D spillovers in open economies. We showthat in the presence of strategic behaviour by firms many expectedresults are overturned. Local R&D spillovers to other domesticfirms may justify an R&D tax rather than a subsidy; R&Dcooperation by local firms over-internalises the externalityand also justifies an R&D tax; and international spilloverswhich benefit foreign firms may justify a subsidy, even thoughthe government cares only about the profits of home firms.     

Transaction costs and foreign direct investment in developing countries

Foreign Direct Investment (FDI) has been used by a number of developing countries to build a national competitive advantage in a global economy. Most of the literature on FDI in developing countries has focused on low-cost factors in these countries. But in a global economy where low cost factors are available at various locations around the globe, transaction costs related to the assumptions of "bounded rationality" and "opportunism" are becoming increasingly important in FDI decisions. These assumptions have been applied by researchers over the years to explain major changes in the organizational structure of corporations. This paper incorporates the assumptions of bounded rationality and opportunism to discuss factors that a firm considers in its decision to undertake FDI. A statistical analysis was carried out to test the validity of the arguments presented in the paper.     

WATER BANKING AND RESTORATION OF ENDANGERED SPECIES HABITAT: AN APPLICATION TO THE SNAKE RIVER

Most river basins have experienced development of water projects to promote flood control, recreation, and hydropower and agricultural production. Though the projects helped establish stable economies, there have been adverse impacts to the natural environment and wildlife that reside in these river basins. One of the key policy tools for habitat restoration is management of instream flows. Alternative water banking policies for restoring habitat are compared using a spatial optimization model to identify which policies work best to augment instream flows for habitat restoration. Results indicate that policy goals dictate what type of water bank is preferred.     

A new estimate of transaction costs

Transaction costs are important for a host of empirical analysesfrom market efficiency to international market research. Buttransaction costs estimates are not always available, or whereavailable, are cumbersome to use and expensive to purchase.We present a model that requires only the time series of dailysecurity returns to endogenously estimate the effective transactioncosts for any firm, exchange, or time period. The feature ofthe data that allows for the estimation of transaction costsis the incidence of zero returns. Incorporating zero returnsin the return-generating process, the model provides continuousestimates of average round-trip transaction costs from 1963to 1990 that are 1.2% and 10.3% for large and small decile firms,respectively. These estimates are highly correlated (85%), withthe most commonly used transaction cost estimators.