TIME‐CONSISTENT AND MARKET‐CONSISTENT EVALUATIONS

We consider evaluation methods for payoffs with an inherent financial risk as encountered for instance for portfolios held by pension funds and insurance companies. Pricing such payoffs in a way consistent to market prices typically involves combining actuarial techniques with methods from mathematical finance. We propose to extend standard actuarial principles by a new market‐consistent evaluation procedure which we call “two‐step market evaluation.” This procedure preserves the structure of standard evaluation techniques and has many other appealing properties. We give a complete axiomatic characterization for two‐step market evaluations. We show further that in a dynamic setting with continuous stock prices every evaluation which is time‐consistent and market‐consistent is a two‐step market evaluation. We also give characterization results and examples in terms of g‐expectations in a Brownian‐Poisson setting.     

Does the ban on trans-fats improve public health? In search of the optimal policy response

This paper examines the contribution of the regulatory ban on trans-fats and voluntary trans-fat regulation to public health outcomes for a sample of 39 countries in the period 1990–2015. To this end, we exploit within-country variation in trans-fat legislation to estimate the impact of the trans fat ban on cardiovascular mortality and obesity rates. Our difference-in-difference estimates indicate modest and beneficial effects of the trans-fats ban in reducing cardiovascular mortality and obesity rate. We find that the ban on trans fats tends to decrease the mortality rate attributed to cardiovascular diseases while the effects on the obesity rates are significant, especially among children and adolescent age group. By contrast, voluntary regulation of trans fats and demand-driven regulatory strategies are generally not associated with a marked drop in the obesity rate. By controlling for country-specific time trends, we show that the estimated mortality- and obesity-related impact of the ban is not driven by pre-existing trends, and does not affect non-cardiovascular mortality rate.

     

Competition and managerial autonomy

I formalize and challenge the idea that competition forces managers to make better choices, thus favoring managerial autonomy in decision making. If managers care about keeping their position or avoiding interference, and they can make strategic choices that affect both expected firm profits and their riskiness, even if competition at first pushes the manager towards profit maximization, further increases in competition might lead him to take excessive risks. To curb this possibility, the principal owner optimally reduces the degree of autonomy granted to the manager. Hence, higher levels of managerial autonomy are more likely for intermediate levels of competition.     

Robustness of banking networks to idiosyncratic and systemic shocks: a network-based approach

We propose a network-based structural model of credit risk to demonstrate how idiosyncratic and systemic shocks propagate across the banking system and evaluate the costs. The banking system is built as a network of heterogeneous banks which are connected with one another. In such a system, single credit events propagate through the interbank market from debtors to creditors and across the system. The shock is imposed as an unexpected event. We demonstrate that while idiosyncratic shocks cannot substantially disturb the banking system, a systemic shock of even a moderate magnitude can be highly detrimental. Such shock includes a huge contagious potential. We demonstrate that the costs of the shock are largely determined by the extent of contagion and range from negligible to catastrophic. The results imply that a severe crisis has to be initiated by a systemic shock of at least moderate magnitude. Capital ratio and the bank size are two additional factors of the banking system stability. Finally, credit risk analysis is sensitive to the network topology and exhibits a profound nonlinear characteristic.     

Bipolarity and/or duality of social survey measurement scales and the question-order effect

When measuring (complex) attitudes within a social survey, researchers often use balanced lists of positive and negative items. The purpose of the present research is to investigate: (a) whether a specific order of measurement scale items can lead to the bipolar (single-dimensional) concept (attitude) being recognised as a dual (bi-dimensional) concept and vice-versa; and (b) whether item order can affect the consistency (metric characteristics) of a measurement scale. An experiment on a group of social science students was conducted: students were randomly split into three subgroups and three different version of a questionnaire (with three differing item orders) were applied. A multi-group confirmatory factor analysis (‘CFA’) and a single group CFA for each item order separately were applied. The final conclusion of the experiment is that there is no general rule about how and when respondents form separate (dual) or unidimensional (continuous) representations of measured concepts. Item-order effects are possible, but they are not as important as one would expect. The results of the experiment also suggest that other factors should be taken into account: the content of the measured concept and the cognitive sophistication of the respondents.     

Price elasticity of demand for broadband: Evidence from Latin America and the Caribbean

In this study the authors analyze fixed broadband retail prices in Latin America and the Caribbean (LAC), and provide estimates about the effect of price changes on broadband adoption. The analysis is based on a survey of plans and tariffs conducted by the authors during Q2 2010. Their results suggest that fixed broadband services in LAC are generally expensive and of poor quality when benchmarked against Organisation for Economic Co-operation and Development (OECD) countries, although there is significant variance between markets in the region. In order to isolate the effect of prices on broadband adoption they use an instrumental-variable approach. Their findings show that broadband demand is relatively elastic to price in LAC but not in the OECD. They estimate that an average price reduction of 10% would result in an increase of almost 22% in the penetration rate in LAC, equivalent to almost 8.5 million additional broadband connections. Several policy implications result from these findings. First, national broadband policies in LAC should pay a closer attention to a deficit of competition in fixed broadband services, as households and firms face high prices for poor quality services, thus deterring adoption. Second, while their findings generally suggest that price reductions could significantly increase penetration, they elasticity estimates reveal that price effects might not be sufficient to achieve the penetration goals set in national broadband plans. This validates the need for complementary policy strategies that affect other determinants of broadband demand. The example of Brazil is used to illustrate this finding.     

The Case for International Coordination of Electricity Regulation: Evidence from the Measurement of Efficiency in South America

A decade of experience has shown that monitoring the performance of public and private monopolies is the hardest part of electricity sector reform in South America—because operators control most of the information needed for effective regulation. South American electricity regulators can reduce this information asymmetry by increasing international coordination and relying on comparative measures of efficiency. To make it possible for them to do so, countries should harmonize their regulatory databases and develop methodologies for making comparisons. This paper uses data envelopment analysis and stochastic frontier analysis to estimate the efficiency of South America's main electricity distribution companies. Both approaches allow regulators to use relatively simple tests to check the robustness of their findings, strengthening their positions at regulatory hearings.     

Interbank rules during economic declines: Can banks safeguard capital base?

Journal of Economic Interaction and Coordination - This paper studies the role of interbank credit within an agent-based model of the financial sector. Our main contribution consists in a...     

Transaction costs and economic growth under common legal system: State‐level evidence from Mexico

This paper examines the contribution of administrative and procedural transaction costs to economic growth under common legal system. We show that administrative and procedural costs vary quite a lot even within the institutional environment sharing the common legal system. States with low‐cost business registration, low‐cost access to property rights and greater judicial efficiency tend to have consistently higher growth. The established effects are robust to alternative model specifications, heterogeneity bias, and to a variety of control variables that might confound the effects of administrative and procedural costs on growth. Such differences in costs are far from being trivial as we show that these within‐system differences might be instrumental in influencing economic growth. Lower administrative and procedural costs induce growth by increasing investment rate, lowering unemployment rate, encouraging labor supply and improving total factor productivity. In the counterfactual scenario, the transition from high‐cost to low‐cost regime is associated with substantial growth and development gains over time. By exploiting the variation in the disease environment, ethnic fractionalization and historical urbanization, we show that the negative effect of rising procedural and administrative costs on growth and development appears to be causal.