# abstracts

The Warwick Economics Research Paper Series

(TWERPS)

ABSTRACTS

The following are abstracts of Warwick Economics Research Papers. For

details of how to obtain copies click here. Abstracts do not appear for all

papers; more will be added over time.

WORKING PAPER NO 658

Parents' Current Income, Long-Term Characteristics and Children's

Education: Evidence from the 1970 British Cohort Study

Massimiliano Bratti

This paper investigates the effect of parents’ current income and

long-term family characteristics on individuals’ highest educational

qualification obtained by age 26 using UK data from the 1970 British

Cohort Study. The issues of the possible sample selection bias produced

by the not completely random omission of current family income

and that of its potential endogeneity are addressed, using a hot-deck

multiple imputation procedure and including an indicator of child ability,

respectively. I find evidence that current family income has a statistically

significant positive impact on children’s education, although

it is one of negligible magnitude. Long-term family characteristics are

far more important

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WORKING PAPER NO 657

Schooling Effects on Subsequent University Performance: Evidence for

the UK University Population

Robin Naylor and Jeremy Smith

From a unique data-set identifying the school attended prior to university

for a full cohort of UK university students, we examine the determinants

of final degree classification. We exploit the detailed school-level

information and focus on the influence of school characteristics, such as

school type, on subsequent performance of students at university. We

estimate that, on average, a male (female) graduate who attended an

Independent school is 6.5 (5.4) percentage points less likely to obtain a

`good' degree than is a student who attended an LEA (that is,

state-sector) school, ceteris paribus. We also find considerable

variation around this average figure across different Independent schools.

We find that, for males, the variation in the probability of attaining a

`good' degree across schools can largely be explained by the level of

school fees.

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WORKING PAPER NO 656

Consumption Patterns Over Pay Periods

Clare Kelly and Gauthier Lanot

This paper establishes a theoretical framework to characterise the optimal

behaviour of individuals who receive income periodically but make

consumption decisions on a more frequent basis. The model incorporates

price uncertainty and imperfect credit markets. The simulated

numerical solution to this model shows that weekly consumption functions

are ordered such that the functions within the payment period are highest

in the first and the last week of the payment cycle for all wealth levels.

Using weekly expenditure data from the FES, we estimate the coefficient

of relative risk aversion (point estimates are between 1.2 and 7) and the

extent of measurement error in the data (which accounts for

approximately 60% of the variance in thedata).

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WORKING PAPER NO 655

Fast Food- the early years: Geography and the growth of a chain-store

in the UK*

Joanne Sault, Otto Toivanen and Michael Waterson

We examine the development of UK outlets of a major fast food chain,

from inauguration in 1974 until 1990, after which industry structure

changed somewhat. The chain effectively introduced the counter-service

burger concept. Locational spread across local authority district markets is

explained by the characteristics of the areas where the outlets are sited.

Of special interest is the effect of scale economies, measured by outlet

numbers in neighboring districts. Both first and second entry are

examined. We find that the hazard of first entry is positively influenced

by market size and population density and negatively by distance from

company headquarters.

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WORKING PAPER NO 654

Testing for Cointegration Rank Using Bayes Factors

Katsuhiro Sugita

This paper proposes Bayesian methods for estimating the cointegration

rank using Bayes factors. We consider natural conjugate priors for

computing Bayes factors. First, we estimate the cointegrating vectors for

each possible rank. Then, we compute the Bayes factors for each rank

against 0 rank. Monte Carlo simulations show that using Bayes factor

with conjugate priors produces fairly good results. We apply the method

to demand for money in the US.

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WORKING PAPER NO 653

The Propertiers of Some Goodness-of Fit Tests

Gianna Boero, Jeremy Smith, and Kenneth F. Wallis

The properties of Pearson’s goodness-of-fit test, as used in density

forecast evaluation, income distribution analysis and elsewhere, are

analysed. The components-of-chi-squared or “Pearson analog” tests of

Anderson (1994) are shown to be less generally applicable than was

originally claimed. For the case of equiprobable classes, where the

general components tests remain valid, a Monte Carlo study shows that

tests directed towards skewness and kurtosis may have low power, due

to differences between the class boundaries and the intersection points of

the distributions being compared. The power of individual component

tests can be increased by the use of nonequiprobable classes

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WORKING PAPER NO 652

Why Are Trade Agreements Regional?

Ben Zissimos

This paper argues that free trade agreements (FTAs) are regional because,

in their absence, optimal tariffs are higher against (close)regional partners

than (distant) countries outside the region. Optimal tarffs shift rents from

foreign firms to domestic citizens. Lower transport costs imply higher

rents and therefore higher tarffs. So regional FTAs have a higher pay-off

than non-regional FTAs. Therefore, only regional FTAs may yield positive

gains when sponsoring a FTA is costly. To analyze equilibrium, standard

theory of non-cooperative networks is extended to allow for asymmetric

players. Naive best response dynamics show that ‘trade blocks can be

stepping blocks’ for free trade.

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WORKING PAPER NO 651

Smooth Particle Filters for Likelihood Evaluation and Maximisation

Michael K. Pitt

In this paper,a method is introduced for approximating the likelihood for

the unknown parameters of a state space model.The approximation

converges to the true likelihood as the simulation size goes to infinity. In

addition,the approximating likelihood is continuous as a function of the

unknown parameters under rather general conditions.The approach

advocated is fast, robust and avoids many of the pitfalls associated with

current techniques based upon importance sampling.We assess the

performance of the method by considering a linear state space model,

comparing the results with the Kalman filter, which delivers the true

likelihood. We also apply the method to a non-Gaussian state space mo

del, the Stochastic Volatility model, finding that the approach is efficient

and effective. Applications to continuous time finance models are also

considered. A result is established which allows the likelihood to be

estimated quickly and efficiently using the output from the general

auxilary particle filter.

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WORKING PAPER NO 650

On the Size and Structure of Group cooperation

Matthew Haag and Roger Lagunoff

This paper examines characteristics of cooperative behavior in a

repeated, n-person, continuous action generalization of a Prisoner’s

Dilemma game. When time preferences are heterogeneous and bounded

away from one, how “much” cooperation can be achieved by an ongoing

group? How does group cooperation vary with the group’s size and

structure? For an arbitrary distribution of discount factors, we

characterize the maximal average co-operation (MAC) likelihood of this

game. The MAC likelihood is the highest average level of cooperation,

over all stationary subgame perfect equilibrium paths, that the group can

achieve. The MAC likelihood is shown to be increasing in monotone

shifts, and decreasing in mean preserving spreads, of the distribution of

discount factors. The latter suggests that more heterogeneous groups are

less cooperative on average. Finally, we establish weak conditions under

which the MAC likelihood exhibits increasing returns to scale when

discounting is heterogeneous. That is, larger groups are more cooperative,

on average, than smaller ones. By contrast, when the group has a

common discount factor, the MAC likelihood is invariant to group size.

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WORKING PAPER NO 649

Pay Cuts and Morale: a Test of Downward Nominal Rigitity

Jennifer C. Smith

This paper tests the "morale" theory of downward nominal wage rigidity.

This theory relies on workers disliking nominal pay cuts: cuts should make

workers less happy. We investigate this using panel data on individual

employees' pay and satisfaction. We confirm that nominal cuts do make

workers less happy than if their pay had not fallen. But we find no

difference in the effect on happiness of cuts and pay freezes. This

represents important information about the nature of wage rigidity in

practice and the applicability of the morale theory. The morale theory may

be able to explain generalised downward wage rigidity, but apparently fails

to explain downward nominal rigidity.

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WORKING PAPER NO 648

Power Indices as an Aid to Institutional Design: The Generalised

Apportionment Problem

A priori voting power analysis can be useful in helping to design a weighted

voting system that has certain intended properties. Power indices can help

determine how many weighted votes each member should be allocated and

what the decision rule should be. These choices can be made in the light of

a requirement that there be a given distribution of power and/or a desired

division of powers between individual members and the collective

institution. This paper focuses on the former problem: choosing the

weights given that the power indices and the decision rule are fixed

exogenously

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WORKING PAPER NO 647

Optimum Currency Area Theory: An Approach for Thinking about

Monetary Integration

Roman Horvath and Lubos Komarek

The optimum currency area (OCA) theory tries to answer an almost

prohibitively difficult question: what is the optimal number of currencies to

be used in one region. The difficulty of the question leads to a low

operational precision of OCA theory. Therefore, we argue that the OCA

theory is a framework for discussion about monetary integration. We

summarize theoretical issues from the classical contributions to the OCA

literature in the 1960s to the modern “endogenous view”. A short survey

of empirical studies on the OCA theory in the connection with the EMU

and the Czech Republic is presented. Finally, we calculate OCA-indexes

for the Czech Republic, EU, Germany and Portugal. The index predicts

exchange rates variability from the view of traditional OCA criteria and

asseses benefit-cost ratio of implementing common currency for a pair of

the countries. We compare the structural similarity of the Czech Republic

and Portugal to the German economy and find that the Czech economy is

closer. The results are reversed when the EU economy is considered as a

benchmark country.

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WORKING PAPER NO 646

Theoretical and Empirical Analysis of the Debt-Adjusted Real Exchange

Rate in Selected Transition Economies During 1994-2001

This paper aims to enrich the debate on the overvaluation/undervaluation

of the Czech koruna and the currencies of other selected transition

economies by applying the concept of the debt-adjusted real exchange rate

(DARER), thereby offering monetary policy makers another indicator for

more responsive management of this important economic variable. The

motivation for constructing DARER is the fact that many transition

economies finance their long-term current account deficits with capital

flows, which often leads to real overvaluation of their currencies. DARER

can signal to the authorities that the real exchange rate is becoming

unsustainable in the medium term and that if this signal is ignored, a

currency crisis may ensue. The paper is in seven parts. The first three

parts contain the theoretical underpinning of the concept. Part four defines

newly proposed indicators of exchange rate overvaluation. Part five

contains empirical DARER results for the Czech Republic. Part six and

annex 1 to this work contain empirical DARER results for selected

transition countries, including a brief description of those countries’

exchange rate histories. The final part examines the possibilities and

limitations of the DARER concept in practice. The primary aim of this part,

however, is to explain the information content of the real exchange rate as

a very good warning signal of potential currency crisis.

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WORKING PAPER NO 645

The Use of Coleman's Power Indices to Inform the Choice of Voting

Rule with Reference to the IMF Governing Body and the EU Council of

Ministers

In his well known 1971 paper the mathematical sociologist James S.

Coleman, proposed three measures of voting power: (1) "the power of a

collectivity to act", (2) "the power to prevent action" and (3) "the power to

initiate action". (1) is a measure of the overall decisiveness of a voting

body taking into account its size, decision rule and the weights of its

members, while (2) and (3) are separate indices of the power of individual

members, in being able to block or achieve decisions. These measures

seem to have been little used for a variety of reasons, although the paper

itself is widely cited. First, much of the power indices literature has

focused on normalised indices which gives no role to (1) and means that

(2) and (3) are identical. Second, Coleman's coalition model is different

from that of Shapley and Shubik which has sometimes tended to dominate

in discussions of voting power. Third, (2) and (3) are indistinguishable

when the decision quota is a simple majority, the distinction becoming

important in other voting situations. In this paper I propose that these

indices, which are based on a fundamentally different notion of power

than that assumed by game-theoretic approaches, have a useful role in

aiding a better understanding of collective institutions in which decisions

are taken by voting. I use them to illustrate different aspects of the design

of a weighted voting system such as the governing body of the IMF or

World Bank, or the system of QMV in the European Council.

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WORKING PAPER NO 644

Computation of Power Indices

Dennis Leech

Power indices are a useful tool for studying voting systems in which

different members have different numbers of votes. Many international

organisations are organised in this way in order to accommodate

differences in size of countries, including the system of QMV in the

European Union Council of Ministers. A power index is a measure of power

based on the idea that a member’s power is his ability to swing a decision

by changing the way his vote is cast.

This paper addresses the problem of the computation of the two most

widely used power indices, the so-called classical power indices, the

Banzhaf index (and also the related Coleman indices) and the

Shapley-Shubik index. It discusses the various methods that have been

proposed in the literature: Direct Enumeration, Monte Carlo Simulation,

Generating Functions, Multilinear Extensions Approximation, the Modified

MLE Approximation Method. The advantages and disadvantages of the

algorithms are discussed including computational complexity. It also

describes methods for so called “oceanic games”.

The paper also discusses the so-called “inverse problem” of finding what

the weights should be given the desired power indices. The method is

potentially useful as providing a basis for designing a voting system with a

given desired distribution of power among the members, for example, to

reflect differences in population or financial contributions. Examples are

given from the International Monetary Fund, shareholder voting and the

European Union Council.

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WORKING PAPER NO 643

From Drought to Flood: Environmental Constrints and the Policial

Economy of Civic Virtue

Francesco L Galassi

The paper models co-operative engagement under varying environmental

constraints giving rise to different forms of collective action problems,

specifically focussing on water management in pre-industrial societies. I

show that societies where water availability is strongly seasonal develop no

mechanism to encourage society-wide co-operative behaviour because the

benefits of water storage are fully excludable. With pre-industrial

technology water storage is a pure club good, and optimal club size can be

shown to be very small under credible parameter values, converging to 1 in

some cases (private good). The social consequences of the environmental

constraint include strongly circumscribed co-operation and rent seeking. In

contrast, areas where water management involved flood control and

irrigation develop society-wide institutions based on self-sustaining

co-operative engagement assisted by external policing. The model thus

offers an explanation of varying levels of "civic virtue" in different areas.

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WORKING PAPER NO 642

Do Countries Compete over Corporate Tax Rates?

Michael P Devereux, Ben Lockwood and Michela Redoano

This paper tests whether OECD countries compete with each other over

corporate taxes in order to attract investment. We develop two models:

with firm mobility, countries compete only over the statutory tax rate or

the effective average tax rate, while with capital mobility, countries

compete only over the effective marginal tax rate. We estimate the

parameters of reaction functions using data from 21 countries between

1983 and 1999. Wefind evidence that countries compete over all three

measures, but particularly over the statutory tax rate and the effective

average tax rate. This is consistent with a belief amongst governments

that location choices by multinationalfirms are discrete. We alsofind

evidence of concave reaction functions, consistent with the model outlined

in the paper.

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WORKING PAPER NO 641

Advances in the Theory of Large Cooperative Games and Application to

Club Theory: The Side Payments Case

Alexander Kovalenkov and Myrna Wooders

In a series of papers (Kovalenkov and Wooders 2001a, Games and

Economic Behavior, 2001b, Mathematics of Operations Research, and

1997, Journal of Economic Theory to appear), the authors have developed

the framework of parameterized collections of games and also that of

parameterized collections of economies with clubs. These papers apply to

collections of games with nontransferable utility and similarly to economies

with clubs and general preferences. The game theoretic framework

encompasses the earlier `pregame' framework (cf., Wooders 1994b

Econometrica) and also earlier models of economies with clubs and with

possibly multiple memberships in clubs (cf. Shubik and Wooders 1982). In

this paper, we consider the special case of games with side payments and

illustrate the application of our more general results in this special, and

much simpler but still important, framework. The motivation for this line

of research is developed and application to environmental problems is

discussed.

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WORKING PAPER NO 640

Dynamic Club Formation with Coordination

Tone Arnold and Myrna Wooders

We present a dynamic model of jurisdiction formation in a society of

identical people. The process is described by a Markov chain that is

defined by myopic optimization on the part of the players. We show that

the process will converge to a Nash equilibrium club structure. Next, we

allow for coordination between members of the same club,i.e. club

members can form coalitions for one period and deviate jointly. We define

a Nash club equilibrium (NCE) as a strategy configuration that is immune

to such coalitional deviations. We show that, if one exists, this modified

process will converge to a NCE configuration with probability one. Finally,

we deal with the case where a NCE fails to exist due to indivisibility

problems. When the population size is not an integer multiple of the

optimal club size, there will be left over players who prevent the process

from settling down. We define the concept of an approximate Nash club

equilibrium (ANCE), which means that all but k players are playing a Nash

club equilibrium, where k is defined by the minimal number of left over

players. We show that the modified process converges to an ergodic set of

states each of which is ANCE

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WORKING PAPER NO 639

Competitive Pricing in Socially Networked Economies

Nizar Allouch and Myrna Wooders

In the context of a socially networked economy, this paper demon-strates

an Edgeworth equivalence between the set of competitive allocations and

the core. Each participant in the economy may have multiple links with

other participants and the equilibrium network may be as large as the

entire set of participants. A clique is a group of people who are all

connected with each other. Large cliques, possibly as large as the entire

population, are permitted; this is important since we wish to include in our

analysis large, world-wide organizations such as workers in multi-national

firms and members of world-wide environmental organizations, for

example, as well as small cliques, such as two-person partnerships. A

special case of our model is equivalent to a club economy where clubs may

be large and individuals may belong to multiple clubs. The features of our

model that cliques within a networked economy may be as large as the

entire population and individuals may belong to multiple cliques thus allow

us to extend the extant decentralisation literature on competitive pricing

in economies with clubs and multiple memberships (where club sizes are

uniformly bounded, independent of the size of the economy).

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WORKING PAPER NO 638

The Effects of Entry in Bilateral Oligopoly

Robin Naylor

We show that a firm’s profits under Cournot oligopoly can be increasing in

the number of firms in the industry if wages are determined by

(decentralised) bargaining in unionized bilateral oligopoly. The intuition for

the result is that increased product market competition following an

increase in the number of firms is mirrored by increased labor market

rivalry which induces (profit-enhancing) wage moderation. Whether the

product or labor market effect dominates depends both on the extent of

union bargaining power and on the nature of union preferences. A corollary

of the results derived is that if the upstream agents are firms rather than

labor unions, then profits are always decreasing in the number of firms, as

in the standard Cournot model. We also show that if bargaining is

centralized then there is no wage moderation effect and wages are the

same independent of the number of firms, as in the standard model with

exogenous factor costs.

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WORKING PAPER NO 637

Arbitrage, Equilibrium and Nonsatiation

Nizar Allouch, Cuong Le Van and Frank H Page Jr

In his seminal paper on arbitrage and competitive equilibrium in

unbounded exchange economies, Werner (Econometrica, 1987)proved the

existence of a competitive equilibrium, under a price no-arbitrage

condition, without assuming either local or global nonsatiation. Werner's

existence result contrasts sharply with classical existence results for

bounded exchange economies which require, at minimum, global

nonsatiation at rational allocations. Why do un-bounded exchange

economies admit existence without local or global nonsatiation? This

question is the focus of our paper. We make two main contributions to the

theory of arbitrage and competitive equilibrium. First, we show that, in

general, in unbounded exchange economies (for example, asset exchange

economies allowing short sales), even if some agents' preferences are

satiated, the absence of arbitrage is sufficient for the existence of

competitive equilibria, as long as each agent who is satiated has a

nonempty set of useful net trades - that is, as long as agents' preferences

satisfy weak nonsatiation. Second, we provide a new approach to proving

existence in unbounded exchange economies. The key step in our new

approach is to transform the original economy to an economy satisfying

global nonsatiation such that all equilibria of the transformed economy are

equilibria of the original economy. What our approach makes clear is that

it is precisely the condition of weak nonsatiation - a condition

considerably weaker than local or global nonsatiation - that makes possible

this transformation. Moreover, as we show via examples, without weak

nonsatiation, existence fails.

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WORKING PAPER NO 636

Social Conformity and Equilibrium in Pure Strategies in Games with

Many Players

Myrna Wooders, Edward Cartwright and Reinhard Selten

We introduce a framework of noncooperative pregames, in which players

are characterized by their attributes, and demonstrate that for all games

with sufficiently many players, there exist approximate (e )Nash equilibria

in pure strategies. In fact, every mixed strategy equilibrium can be

used to construct an e-equilibrium in pure strategies, an ‘e -purification’

result. Our main result is a social conformity theorem. Interpret a set of

players, all with attributes in some convex subset of attribute space and all

playing the same strategy, as a society. Observe that the number of

societies may be as large as the number of players. Our social conformity

result dictates that, given e > 0, there is an integer L, depending on e but

not on the number of players, such that any suffciently large game has an e

-equilibrium in pure strategies that induces a partition of the player set

into fewer than L societies.

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WORKING PAPER NO 635

Information and Command

Mark Harrison

Information adds value to transactions in three ways: it supports

reputations, permits customisation, and provides yardsticks. In the Soviet

economy such information was frequently not produced; if produced, it was

often concealed; whether concealed or not, it was often of poor quality. In

short, the Soviet command system forced economic growth on the basis of

a relatively low–value information stock. This may help explain aspects of

Soviet postwar economic growth and slowdown, the collapse of the

command system, and the persistence of low output after the collapse.

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WORKING PAPER NO 634

Approximate Cores of Games and Economies with Clubs

Alexander Kovalenkov and Myrna Holtz Wooders

We introduce the framework of parameterized collections of games with

and without sidepayments and provide three nonemptiness of approximate

core theorems. The parameters bound (a) the number of approximate

types of players and the size of the approximation and (b) the size of

nearly effective groups of players and their distance

from exact effectiveness. Our theorems are based on a new notion of

partition-balanced profiles and approximately partition-balanced profiles.

The results are applied to a new model of an economy with clubs. In

contrast to the extant literature, our approach allows both widespread

externalities and uniform results.

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WORKING PAPER NO 633

Consolidation, Market Power and Cost Economies in the Banking

Industry: Empirical Evidence from Argentina

Maria Eugenia Delfino

The Argentine banking industry has experienced increasing consolidation

during the last decade. On the one hand, it can be argued that this has

resulted from cost economies, perhaps associated with technical change.

But on the other, it can also be argued that increased concentration in this

industry may allow the exploitation of market power in the input (deposits)

and output (loans) markets. These issues are addressed in this study using

bank-level data for Argentine retail banks over the period 1993-2000 to

estimate a cost-function based model incorporating deposits- and

loans-market pricing behaviour. The results provide evidence of market

power exploitation in both the markets for loans and deposits but also the

presence of significant cost economies. The findings further show an

increase in consumers’ surplus and banks’ profits over the period possibly

associated to the exploitation of cost economies and technical change

which may have counteracted the effect of market power.

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WORKING PAPER NO 632

Incentives to Corporate Governance Activism

Dennis Leech

This paper considers the incentives faced by investors (financial

institutions) to become actively involved in the direction of their

under-performing portfolio companies as proposed by recent policy reports

on corporate governance. It proposes a metric by which to measure the

returns to activism in terms of the size of holding, measures of risk and

return to the company, the degree of under performance and the level of

commission received by fiduciary fund managers. By comparing this with

costs of activism it proposes a method by which 'significant shareholdings'

may be estimated. A significant shareholding is the level above which a

shareholding in a company may be said to have private incentives to

activism. This approach is applied to two groups of companies listed on

the London Stock Exchange, the top 250 and a ten percent random sample.

The results indicate that there are very strong incentives for shareholders

to be activist participants in corporate governance among the top 250

companies while there is much more diversity among the smaller

companies. Results differ considerably between those where the

shareholder is an own-account investor and a fund manager.

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WORKING PAPER NO 631

The Cournot-Bertrand Profit Differential: A Reversal Result in a

Differentiated Duopoly with Wage Bargaining

Monica Correa Lopez and Robin A. Naylor

This paper compares Cournot and Bertrand equilibria in a downstream

differentiated duopoly in which the input price (wage) paid by each

downstream firm is the outcome of a strategic bargain with its upstream

supplier (labour union). We show that the standard result that Cournot

equilibrium profits exceed those under Bertrand competition - when the

differentiated duopoly game is played in imperfect substitutes - is

reversible. Whether equilibrium profits are higher under Cournot or

Bertrand competition is shown to depend upon the nature of the upstream

agents’ preferences, on the distribution of bargaining power over the input

price and on the degree of product market differentiation. We find that

the standard result holds unless unions are both powerful and place

considerable weight on the wage argument in their utility function. One

implication of this is that if the upstream agents are profit-maximising

firms, then the standard result will obtain.

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WORKING PAPER NO 630

The Impact of the Introduction of the UK Minimum Wage on the

Employment Probabilities of Low Wage Workers

Mark B. Stewart

This paper uses longitudinal data from three contrasting datasets (matched

Labour Force Surveys, the British Household Panel Survey and matched

New Earnings Surveys) to estimate the impact of the introduction of the

UK minimum wage (in April 1999) on the probability of subsequent

employment among those whose wages would have needed to be raised

to comply with the minimum. A difference-in-differences estimator is

used, based on position in the wage distribution. No significant adverse

employment effects are found for any of the four demographic groups

considered (adult and youth, men and women) or in any of the three

datasets used.

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WORKING PAPER NO 629

Cost Monotonicity, Consistency and Minimum Cost Spanning

Tree Games

Bhaskar Dutta and Anirban Kar

We propose a new cost allocation rule for minimum cost spanning tree

games. The new rule is a core selection and also satisfies cost

monotonicity. We also give characterization theorems for the new rule as

well as the much-studied Bird allocation. We show that the principal

difference between these two rules is in terms of their consistency

properties

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WORKING PAPER NO 628

Equilibrium Agenda Formation

Bhaskar Dutta, Matthew O. Jackson and Michel Le Breton

We develop a definition of equilibrium for agenda formation in

general voting settings. The definition is independent of any protocol.

We show that the set of equilibrium outcomes for any Pareto efficient

voting rule is uniquely determined. We also show that for such voting

rules, if preferences are strict then the set of equilibrium outcomes

coincides with that of the outcomes generated by considering all full

agendas for voting by successive elimination and show that the set

of equilibrium outcomes corresponds with the Banks set. We also

examine the implications in several other settings.

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WORKING PAPER NO 627

Firms' Strategies for Reducing the Effectiveness of Consumer Price

Search

Normal J. Ireland

This paper considers a simple model of competition based on some buyers

making price comparisons between two suppliers. The difficulties of

making appropriate comparisons are made greater by exclusive dealer

agreements and restrictions, and by suppliers trading under more than one

name. It is argued that suppliers will set prices using mixed strategies,

and that prices become less competitive as price comparisons become

more difficult. The implications for competition policy are considered in

the light of recent judgements of the UK’s Office of Fair Trading and the

European Court of Justice.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 626

Corporate Governance and the Public Interest

J. Robert Branston, Keith Cowling and Roger Sugden

A theory of the firm based on strategic decision-making highlights

governance as a central issue. Preferences vary over strategy but not all

interests are currently being represented, resulting in a failure to govern in

the public interest. As solutions, we consider the design of

company law and also more immediate ways forward, focusing on

regulation and democratically controlled public agencies, but stressing the

fundamental significance of active, effective citizens. Throughout, the

arguments are illustrated using examples from various countries and

industries, including education, information technology, football and public

utilities in Europe and the US.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 625

The Problem of Regional "Hollowing Out" in Japan:

Lessons for Regional Industrial Policy

Keith Cowling and Philip R. Tomlinson

This paper considers the problems of "hollowing out" using a Case Study of

Japan's machinery sector. In doing so, it explores the roots of the present

crisis by focusing upon the role played by Japan's large transnational

corporations. This is important because these corporations are the "central

actors" within the Japanese economy and they control a significant

proportion of Japanese manufacturing. It is their strategic decisions -

those that determine the level and location of investment, employment

and output - which ultimately shape the development path for Japanese

industry (see Cowling and Sugden, 1994, 1998). In recent years, Japan’s

large transnationals have become engaged in the process of elite

globalisation, pursuing their own interests at the expense of domestic

Japanese industry. This is a fundamental insight that is crucial for

designing appropriate policy responses to arrest Japan's current industrial

decline. It is argued that the lessons from Japan's experience might guide

policy-makers in other regions, such as Wisconsin, who are concerned with

future industrial development, the effects of globalisation and problems of

"hollowing out".

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 624

Re-Visiting the Roots of Japan's Structural Decline:

The Role of the Japanese Corporation

Keith Cowling and Philip R. Tomlinson

For a long period in the twentieth century, the development of the

Japanese corporation appeared congruent with the development of the

Japanese economy. The growth maximising behaviour of the Japanese

corporation and the preference for internal growth over acquisitions (see

Odagiri, 1992) appeared to suit the long-term ambitions of Japan. Now,

that formerly clear connexion between the ambitions of corporate Japan

and the Japanese public interest is no longer so clear. Increasingly, the

global ambitions of the corporation appear as an impediment to Japan's

development. By favouring the development of large-scale transnational

corporations, Japanese industrial policy-making appears to have contained

a fundamental flaw. Japan is now dominated by large-scale organisations

that are controlled by a corporate elite. It is unlikely that their strategic

decisions will correspond with the wider public interest, which raises the

possibility that Japan is now afflicted with "strategic failure". Other

examples from around the world suggest that Japan is not unique in this

respect. Alternative ways forward are suggested.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 623

A Note on Two Notions of Arbitrage

Nizar Allouch

Since Hart's [5] and Werner's [10] seminal papers, several conditions have

been proposed to show the existence of equilibrium in an asset exchange

economy with short-selling. In this note, we discuss the relationship

between two no-arbitrage conditions. The first condition is the assumption

that the individually rational utility set U is compact, as considered by

Dana, Le Van and Magnien [1]. The second is inconsequential arbitrage,

introduced by Page, Wooders and Monteiro [9]. The main result of this

comparison is to show that the inconsequential arbitrage condition is

stronger than the assumption that U is compact.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 622

Tax Competition Reconsidered

Myrna H Wooders, Ben Zissimos and Amrita Dhillon

In a classic model of tax competition, we show that the level of public good

provision and taxation in a Nash equilibrium can be efficient or inefficient

with either too much, or too little public good provision. The key is

whether there exists a unilateral incentive to deviate from the efficient

state and, if so, whether this entails raising or lowering taxes. A priori,

there is no reason to suppose the incentive is in either one direction or the

other. In addition, we demonstrate conditions ensuring existence of an

asymmetric Nash equilibrium with efficient public good provision. As in

prior literature, local amenities enhance capital’s productivity. Prior

literature, however, focuses on under-provision of public goods.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 621

Networks and Farsighted Stability

Frank H PageJr, Myrna H. Wooders and Samir Kamat

The main contribution of this paper is to provide a framework in which the

notion of farsighed stability for games, introduced by Chwe (1994) can be

applied to directed networks. Then, using Chwe's basic result on the

nonemptiness of farsightedly stable sets for games, we show that for any

given collection of directed networks and any given collection of rules

governing network formation, there exists a farsightedly stable directed

network.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 620

Female Competition, Evolution and the Battle of the Sexes

Myrna Wooders and Hugo van den Berg

As female primates carry and nurse the fetus, it naturally falls on them to

rear the offspring. On the assumption that males are at least equally adept

at obtaining food, it follows that they generate a surplus which they might

either share with females or consume themselves. This choice lies at the

heart of an evolutionary battle of the sexes. If females suceed in obtaining

a large share of the surplus, there is little scope for size dimorphism

between males and females; otherwise males can use the surplus to

sustain larger and stronger bodies, which are advantageous in sexual

competition with other males. Besides competing with males, females may

compete with each other. Moreover, dependency may coincide with

sexiness and such dependency can persist. This paper examines these

ideas in a game-theoretic setting.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 619

Can Indonesia Gain from Log Export Barriers?

May Arunanondchai

We use a simple model of sequential duopoly to examine the effect of

different industrial structures on firms' output decision and profit shares in

the international market for raw and processed tropical timber products.

The model provides insights that can be applied to the Indonesian logging

and plywood industry: shedding light on the appropriate policy responses.

Whether optimal trade policy in each industry involves a tax or subsidy

depends on the ownership structure and on the comparative profit margins

from upstream and downstream exports. Log barriers may improve

welfare even if the downstream sector is inefficient. When the industry is

vertically separated, this is true regardless of the comparative profit

margins. However, when the industry is vertically integrated (which is the

case of Indonesia), this is only true when the downstream sector is more

profitable at the margin.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 618

Factors Affecting the Probability of First-year Medical Student Dropout

in the UK: A logistic analysis for the entry cohorts of 1980-1992

Wiji Arulampalam, Robin Naylor and Jeremy Smith

Objectives: To assess the extent to which various factors influence the

probability that an individual medical student will drop out of medical

school during their first year of study, focussing on the influence both of

prior qualifications, such as A-level subjects taken and scores attained,

and of type of school and family background.

Results: The probability that a student will drop out of medical school

during their first year of study is influenced significantly both by the

subjects studied at A-level and by the scores achieved. Among students

who took Biology, Chemistry and Physics at A-level, each extra grade

achieved reduces the probability of dropping out by about one-third of a

percentage point. There is an additional effect for students with the

maximum A-level score of 30 points in their best 3 A-levels (that is, three

grade As): such a student is almost one percentage point less likely to drop

out of medical school, ceteris paribus, compared to a student with 28

points. Furthermore, this estimated effect of A-level performance on

dropout behaviour is very similar for each of the 13 cohorts. In general,

indicators of both the social class and the previous school background of

the student are largely insignificant, with the exception that students with

a parent who is a medical doctor are significantly less likely to drop out.

There are significant differences by gender, with males more likely to drop

out. There is also evidence of significant age effects, with a tendency for

the dropout probability to fall with age.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 617

What has been Happening to the Quality of Workers' Lives in Britain

Jonathan Gardner and Andrew J. Oswald

This paper studies workers’ lives in modern Britain. It uses longitudinal

data to examine stress and job satisfaction through the decade of the

1990s. The results are disturbing. On both measures, the wellbeing of

British public sector workers worsened sharply over the decade. The size of

the deterioration was between one half point and one full point on a

standard GHQ mental stress scale. This is remarkably large. Stress levels

among private sector employees also rose. Job satisfaction in the private

sector ran approximately flat through time. These findings may be of

interest to nations who are thinking of adopting the British government’s

policies towards the public sector, and to those who have conjectured that

working life is becoming more pressurised.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 616

Well-Being over Time in Britain and the USA

David G. Blanchflower and Andrew J Oswald

This paper estimates micro-econometric happiness equations for the

United States and Great Britain. Reported levels of wellbeing have

declined over the last quarter of a century in the US; life satisfaction has

run approximately flat through time in Britain. These findings are

consistent with the Easterlin hypothesis (1974, 1995). The happiness of

American blacks, however, has risen. Despite legislation on gender

discrimination, the well-being of women has declined. White women in the

US have been the biggest losers. Well-being equations have a stable

structure. Money buys happiness. People care also about relative income.

Wellbeing is U-shaped in age. The paper estimates the dollar values of

events like unemployment and divorce. They are large. A lasting marriage

(compared to widow-hood as a ‘natural’ experiment), for example, is

estimated to be worth $100,000 a year.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 615

The Macroeconomics of Happiness

Rafael di Tella, Robert J. MacCulloch and Andrew J Oswald

This paper shows that macroeconomic movements have strong effects on

the happiness of nations. First, we find that there are clear

microeconomic patterns in the psychological well-being levels of a quarter

of a million randomly sampled Europeans and Americans from the 1970's to

the 1990's. Happiness equations are monotonically increasing in income,

and have a similar structure in different countries. Second, movements in

reported well-being are correlated with changes in macroeconomic

variables such as Gross Domestic Product. This holds true after

controlling for the personal characteristics of respondents, country

fixed-effects, year dummies, and country-specific time trends. Third, the

paper establishes that recessions create psychic losses that extend beyond

the fall in GDP and rise in the number of people unemployed. These losses

are large. Fourth, the welfare state appears to be a compensating force:

higher unemployment benefits are associated with higher national

well-being.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 614

Demand for Money in the Transition Economy: The Case of the Czech

Republic 1993-2001

Lubos Komarek and Martin Melecky

In this paper we strive to present a somewhat internationalised view of

demand for money as applied to the Czech Republic. We extend the

traditional money demand function, consisting purely of domestic

variables, to include certain foreign determinants that probably affect the

demand for money in a small open transition economy. We do so in the

case of both narrow and broad money. For the purposes of generalisation

and robust estimates we employ several estimation techniques, namely the

Johansen procedure, ARDL, DOLS and ADL. We also consider the aspect of

the stability of such estimates. Finally, we analyse the possible effects on

prices and output of disequilibria on money market. We have found that a

liquidity gap probably has a significant influence on both prices and output.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 613

Currency Substituion in the Transition Economy: A Case of the Czech

Republic 1993-2001

Lubos Komarek and Martin Melecky

Currency substitution appears to be an important issue affecting the

design of monetary policy, especially in transition economies. Therefore,

this paper strives to analyze the particular relevance of a currency

substitution phenomenon for the Czech Republic is case. We initially

discuss various approaches and definitions of currency substitution that

found in the literature. Subsequently, we discuss the role of currency

substitution in small open economies in transition with some illustrations

relating to the Czech Republic - we distinguish and analyse a locally and

globally substituting currency from a substituted one and consequences of

euroization. The empirical part of this paper presents estimations of

modified Branson and Henderson portfolio model for the Czech Republic’s

case. This provides a multi-perspective approach to currency substitution

in a broad sense. Further, we attempt to intensify the robustness of our

estimation, applying several cointegration techniques. These are namely

the Johansen procedure, the ARDL, the DOLS and the ADL. Finally, we

discuss potential implications of currency and assets substitution according

to our estimates present in the Czech economy.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 612

Profit-Sharing, Bertrand Competition and Monopoly Unions: A Note

Amrita Dhillon and Emmanuel Petrakis

This paper studies a strategic aspect of profit-sharing in an oligopolistic

industry with a monopoly union. Whenever a uniform profit share exists in

the industry, we show that a union that values the per worker

remuneration positively, may have incentives to reduce industry

employment, decreasing thus total output and causing total profits to

increase. Thus, we show that profit-sharing may lead to higher profits for

such an industry even if productivity effects are absent.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 611

The Political Economy of a Soviet Military R&D Failure: Steam

Power for Aviation, 1932 to 1939

Mark Harrison

By studying a Soviet R&D failure, the prewar attempt to create a new

aeroengine technology based on the steam turbine, we find out more about

the motivations, strategies, and payoffs of principals and agents in the

Soviet command economy. Alternative approaches to the evaluation of

R&D failure are outlined. New archival documentation shows the scale and

scope of the Soviet R&D effort in this field. The allocation of R&D

resources resulted from agents’ horizontal interactions within a vertical

command hierarchy. Project funding was determined in a context of biased

information, adverse selection, and agents’ rent seeking. Funding was

rationed across projects and through time. Budget constraints on

individual projects were softened in the presence of sunk costs, but were

hardened periodically. There is no evidence that rents were intentionally

distributed through the Soviet military R&D system to win trust or reward

loyalty; the termination of aviation steam power R&D in 1939 despite

the sunk costs they represented was timely.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 610

The Battle of the Sexes over the Distribution of Male Surplus

Myrna Wooders and Hugo van den Berg

Female primates carry and nurse the fetus, and thus have the firrst

responsibility for rearing the offspring. Assuming males are at least equally

adept at obtaining food, males might either share surplus food with

females or consume the food themselves. The distribution of the surplus is

the subject of a battle of the sexes. If females succeed in obtaining a large

share of the surplus, then there is little size dimorphism between males

and females; otherwise males use the surplus themselves to become larger

and stronger, and to engage in sexual competition with other males.

Besides competing with males, females may compete with each other.

Dependency may coincide with sexual competitiveness (sexiness). This

paper introduces these ideas in a game theoretic setting and derives a

simple bound on the male ‘sexiness’ required for a nonsupportive strategy

to be worthwhile.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 609

Soviet Industry and the Red Army Under Stalin: A Military-Industrial

Complex?

Mark Harrison

The paper considers some of the views of the Stalin–era relationship

between Soviet industry and the Red Army that are current in the

literature, and disentangles some confusions of translation. The economic

weight of the defence sector in the economic system is summarised in

various aspects. The lessons of recent archival research are used as a

basis for analysing the army–industry relationship under Stalin as a

prisoners’ dilemma in which, despite the potential gains from mutual

cooperation, each party faced a strong incentive to cheat on the other. It

is concluded that the idea of a Soviet military–industrial complex is not

strictly applicable to the Stalin period, but there may be greater

justification for the Soviet Union after Stalin.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 608

Learning in elections and Voter Turnout Equilibria

Stefano DeMichelis and Amrita Dhillon

Both complete and incomplete game Theoretic Models of Voter Turnout

(Palfrey and Rosenthal, 1983,1985) have the problem of multiple equilib-

ria, some of which seem unreasonable. How can the counter intuitive high

turnout equilibria be explained? Palfrey and Rosenthal (1985) suggest

that the main reason is that strategic uncertainty istoo low in a com-

plete information model. We show that this is not the main problem with

these equilibria{ incomplete information may exacerbate the problem of

multiple equilibria. We propose a very intuitive criterion based on voter

learning to distinguish reasonable equilibria. This paper makes precise the

sense in which the high turnout equilibria in the Palfrey-Rosenthal model

are not robust. We show how the model can be used to qualitatively

explain several phenomena observed in reality.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 607

The Role of Consumers in Competition and Competion Policy

Michael Waterson

This paper develops the idea that consumers’ behaviour matters

significantly from the viewpoint of industry performance. This is examined

through some theoretical propositions, but then at greater length by means

of some case study examples. These examples demonstrate how, even in

potentially competitive industries, reluctance on the part of consumers to

search or to switch suppliers can lead to a sub-competitive outcome. The

significance of non-traditional competition policy remedies in changing the

outcome is drawn out.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 606

Plan, Siphoning, and Corruption in the Soviet Command Economy

Mark Harrison and Byung-Yeon Kim

This paper reconsiders Andrei Shleifer and Robert Vishny’s suggestion that

a socialist industry will always prefer to cut both price and output relative

to a market–clearing equilibrium in order to maximise bribe income. The

evidence from recent archival studies of the Soviet economy does not

support this conjecture. To understand the evidence we present an

analytical framework within which a plan–setter and an effort–setter

interact, subject to a hard resource constraint, to determine real output

and hidden inflation simultaneously. We find that managers who use

resources gained corruptly were enabled to produce more real output with

less hidden inflation and fulfil the plan more honestly as a result. We find

clear rationales for plan–setters to have tolerated corruption and siphoning

while maintaining plan tension, and we associate reduced plan tension in

the 1970s with the spread of disloyal behaviours.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 605

The Soviet Market for Inventions:

The Case of Jet propulsion 1932 to 1944

Mark Harrison

The paper outlines the problem of aviation jet propulsion in the interwar

period and World War II and analyses Soviet progress towards a

solution using newly available archival documentation. Soviet R&D

commitments were influenced by long–term security motivations and the

need to invest in local tacit knowledge. The scale and diversity of the

Soviet R&D effort is described. The allocation of resources resulted from

R&D agents’ horizontally organised market–like interactions within a

vertically organised command system. Financing decisions were made in a

context of asymmetric information, adverse selection, and opportunism.

Overall funding was rationed; budget constraints on individual projects

were soft, but were periodically hardened. In addition to decisions to

finance and refinance or terminate projects, takeovers and mergers took

place in a secondary asset market. There is evidence of rent–seeking

activity, but where rent–seeking was detected it was punished.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 604

Are Command Economies Unstable? Why did the Soviet Economy

Collapse?

Mark Harrison

The collapse of the Soviet economy at the end of the 1980s is ascribed to

command failure. The likely sources of command failure and economic

collapse in the Soviet case are analysed in terms of the payoffs to a

dictator who controls the level of coercion and producers who control the

level of effort. This approach is used to frame an analytical narrative of

the evolution of the Soviet system under Brezhnev and Gorbachev. The

paper is a nontechnical version of TWERPS no. 602.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 603

The USSR and Total War: Why didn't the Soviet Economy Collapse in

1942

Mark Harrison

The economic dimensions of the Soviet war effort are appraised. The

surprising fact is that the Soviet economy did not collapse in 1942. A

rational-choice model is developed to illustrate the economic conditions

under which a wartime collapse of the economy is rendered more and less

likely.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 602

Coercion, Compliance and the Collapse of the Soviet Economy

Mark Harrison

Are command systems that rest on coercion inherently unstable, and did

the Soviet economy collapse for this reason? Postwar evidence is

inconsistent with the hypothesis that the Soviet economy was unstable. If

it was not unstable, why did it collapse? A repeated game of coordination

between a dictator and producers shows that a high level of coercion may

yield a stable high–output equilibrium, that the command economy contains

a time–consistency problem for central planners, and that a transition to a

low state of coercion and performance in which everyone’s income falls

may be brought about by rising monitoring costs and the dictator’s loss of

reputation. The facts of the Soviet case are consistent with a collapse

triggered when the dictator threw in the towel.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 601

Evolution &Voting: How Nature Makes us Public Spirited

John P. Conley, Ali Toossi and Myrna Wooders

We reconsider the classic puzzle of why election turnouts are persistently

so high when formal analysis strongly suggests that rational agents

should not vote. If we assume that voters are not making systematic

mistakes,the most plausible explanation seems to be agents receive

benefits, from the act of voting itself. This is very close to assuming the

answer, however, and immediately begs the question of why agents feel a

warm glow from participating in the electoral process. In this paper, we

approach this question from an evolutionary standpoint. We show for a

range of situations that public-spirited agents have an evolutionary ad-

vantage ver those who are not as public-spirited. We also explore when

this kind of altruistic behavior is disadvantageous to agents. The details

depend on the costs of voting, the degree to which agents have different

preferences ver public policies and the ratio of various preference types in

the population, but we conclude that evolution may often be a force that

causes agents to internalize the benefits their actions confer on others

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 600

Government Collusion in Janeba's Model of Multijurisdictional Tax

Competition

Lloyd Barton

Eckhard Janeba (Dec 2000 “Tax Competition when Governments lack

Commitment” American Economic Review 90, 1508-19) has recently

suggested a novel approach to modelling the relationship between

governments and multinational firms. As part of ongoing research into

various aspects of multijurisdictional tax competition, this paper

investigates the possibility of allowing for collusion between governments

when setting tax rates in the model. The findings show that a

self-enforcing agreement is possible, with the beneficial effect of cutting

the firm’s excess profits, limiting investment in excess capacity, and

raising government revenue.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 599

My Word is My Bond: Reputation as Collateral in Nineteenth Century

English Provincial Banking

Francesco L. Galassi and Lucy A. Newton

There are few real-world economic transactions that do not involve an

element of trust, yet in textbook economics trust is not prominently

discussed. In that world, perfectly informed and computationally endowed

agents reach optimal, enforceable decisions in continuously harmonising

exchanges. Trust is therefore linked to deviations from the textbook ideal:

incomplete information, costly enforcement, and computational limitations

faced by agents. Trust can then be thought of as an algorithm, in other

words, a way of resolving uncertainty in a complex world. In this sense

trust may be seen as a form of expectation concerning the behaviour of

other agents whose actions and intentions cannot be (fully) observed. This

paper pursues this approach by “running the algorithm backwards” and

trying to establish what factors led a 19th century provincial English bank

to trust different loan applicants. Using a data-set of some 200 loan

decisions, and knowing the size of collateral (if any) requested, we develop

a method to estimate the probability that the bank attached to each

borrower’s promise to repay (i.e., the trust the bank had towards the

borrower), adjusting for stages in the business cycle. We then regress this

estimated probability on a variety of observable borrower characteristics.

We find that trust is not correlated with a priori expected variables, such

as borrower’s assets or frequency of interaction. This suggests that trust

was built up in other interactions, possibly through social or religious

networks, and that the banking relationship reflected information available

to bank directors other than what was purely pertinent to the borrowers’

economic conditions. This has strong implications for the allocation of

credit to industry in 19th century England.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 598

The Geometry of Arbitrage and the Existence of Competitive

Equilibrium

Nizar Allouch, Cuong le Van and Frank H. Page Jr

We present the basic geometry of arbitrage, and use this basic geometry

to shed new light on the relationships between various no-arbitrage

conditions found in the literature. For example, under very mild

conditions, we show that the no-arbitrage conditions of Hart (1974) and

Werner (1987) are equivalent and imply the compactness of the set of

utility possibilities. Moreover, we show that if agents' sets of useless net

trades are linerly independent, then the Hart-Werner conditions are

equivalent to the stronger conditon of no-unbounded-arbitrage due to Page

(1987) - and in turn, all are equivalent to compactness of the set of

rational allocations. We also consider the problem of existence of

equilibrium. We show, for example that under a uniformity condition on

preferneces weaker than Werner's Uniformity condition, the Hart-Werner

no-arbitrage conditions are sufficient for existence. With an additional

condition of weak no half-lines - a condition weaker than Werner's

no-half-lines condition - we show that the Hart-Werner conditions are both

necessary and sufficient for existence.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 597

A Hazard Model of the Probability of Medical School Dropout in the

United Kingdom

Wiji Arulampalam, Robin A. Naylor and Jeremy P. Smith

From individual-level longitudinal data for two entire cohorts of medical

students in UK universities, we analyse the probability that an individual

student will ‘drop out’ of medical school prior to the successful completion

of their studies. We examine the cohort of students enrolling for a medical

degree at the start of the academic years 1985 or 1986. We find evidence

that medical student completion is influenced by measures of academic

preparedness, sex, and age as well as by the characteristics of the medical

school itself. On the basis of our results, we also comment on the

construction of institutional performance indicators against the criterion of

student dropout.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 596

Real Exchange Rate Trends in Transitional Countries

Jan Frait and Lubos Komarek

The paper presents an analysis of the determinants of the real exchange

rate with emphasis on its long-term aspects and searching for the

equilibrium paths. It introduces the behavioural models of exchange rates

(especially the BEER and the NATREX), that are alternatives to the

often-used fundamental models of the FEER type. Authors constructed the

theoretical and econometric behavioural model, which could analyse the

medium-term and long-term dynamics of the real exchange rate. This

paper also introduces real exchange rate as an indicator of convergence for

transitional countries to EU countries and analyses the link between real

exchange rate and double speed economy or deindustrialisation,

respectively. This analysis is relevant almost for all transitional countries

now. The paper explains the appreciation trend of real exchange rates in

transitional economies. It is identifying the set of factors that let to

sustainable real appreciation of the Czech Koruna and also the set of

factors that possibly caused unsustainable real depreciation in the past.

There is also a set of arguments against any other rapid real appreciation

of the Czech Koruna. The paper also tried to fuel these arguments by an

econometric analysis, which used our behavioural model of the equilibrium

real exchange rate. It was shown that the Czech real exchange rate was

especially determined by real fundamental factors: productivity, terms of

trade and world interest rates and foreign direct investment.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 595

Construction of Stationary Time Series via the Giggs Sampler with

Application to Volatility Models

Michael K Pitt and Stephen G Walker

In this paper, we provide a method for modelling stationary time series.

We allow the family of marginal densities for the observations to be

specified. Our approach is to construct the model with a specified

marginal family and build the dependence structure around it. We show

that the resulting time series is linear with a simple autocorrelation

structure. In particular, we present an original application of the Gibbs

sampler. We illustrate our approach by fitting a model to time series

count data with a marginal Poisson-gamma density.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 594

Multiproduct Firms and Product Differentiation: a survey

Juan A. Manez and Michael Waterson

We start the survey by reviewing the implications of horizontal and vertical

product differentiation on market structure under the assumption of

single-product firms. Then, we analyse the main results of the

multi-product firm models, both when variants are assumed differentiated

in vertical attributes only and when varieants are assumed differentiated

in two dimensions (vertical and horizontal). Finally, we review the

empirical literature about the discrete-choice models of product

differention.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 593

Market Structure and Entry: Where's the Beef?

Otto Toivanen and Michael Waterson

We study the effects of market structure on entry using data from the UK

fast food (counter-service burger)industry over the years 1991-1995. Over

this period, the market can be characterized as a duopoly. We find that

market structure matters greatly: for both firms, rival presence increases

the probability of entry. We control for market specific time-invariant

unobservables and their correlation with existing outlets of both firms

through a variety of methods. Such unobservables generally play a minor

role. For both firms, variable profits per customer are increasing in the

number of own outlets, and decreasing in the number of rival outlets.

Structural form estimations show that the positive effect of rival presence

on the probability of entry is due to firm learning: rival presence increases

the estimate of the size of the market. The firms are differently affected

by demand variables and have different fixed costs of entry. These results

strongly suggest the presence of product differentiation, firm learning and

market power.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 592

Three Principles of Competitive Nonlinear Pricing

Frank H. Page Jr and Paulo K. Monteiro

We make three contributions to the theory of contracting under

asymmetric information. First , we establish a competitive analog to the

revelation principle which we call the implementation principle. This

principle provides a complete characterization of all incentive compatible,

indirect contracting mechanisms in terms of contract catalogs (or menus),

and allows us to conclude that in competitive contracting situations, firms

in choosing their contracting strategies can restrict attention, without loss

of generality, to contract catalogs. Second, we establish a competitive

taxation principle. This principle, a refinement of the implementation

principle, provides a complete characterization of all implementable

nonlinear pricing schedules in terms of product-price catalogs and allows us

to reduce any game played over nonlinear pricing schedules to a

strategically equivalent game played over product-price catalogs. Third,

applying the notion of payoff security (Reny (1999)) and the competitive

taxation principle, we demonstrate the existence of a Nash equilibrium for

the mixed extension of the nonlinear pricing game. Moreover, we identify

a large class of competitive nonlinear pricing games whose mixed

extensions satisfy payoff security.

This paper extends earlier work by the first author (see Page 1992, 1999)).

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 591

Bayesian Cointegration Analysis

Katsuhiro Sugita

This paper proposes Bayesian estimation of cointegrated VAR systems and

a simple method of estimating the cointegration rank using the Bayes

factors for the adjustment term. Monte Carlo experiments show that the

method proposed is more powerful in selecting the rank, especially with a

small sample size, than Johansen's LR test. This is due to the fact that

Bayesian analysis uses the exact distributions instead of relying on

asymptotic distribution theory. The method proposed here is relatively

easy to implement. Over-identifying restrictions on the cointegrating

vectors are also considered.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 590

Leadership Cartels in Industries with Differentiated Products

Pedro Posada

This article analyses cartels that act as a Stackelberg leader with respect

to a competitive fringe in industries supplying differentiated products. The

main objectives are to investigate how cartel stability changes with the

degree of differentiation and the cartel size, to predict endogenous cartels

and to carry out a welfare analysis. Both repeated and static games are

considered as well as industries competing in quantities and prices. The

results indicate that the degree of stability can be either an increasing,

decreasing or non-monotonic function of the degree of product

differentiation, depending on the cartel size, the industry size, the

competition type and the reaction of cartel loyal members to defection. An

endogenous cartel size is also predicted. Other significant results are:

some cartels can be sustained under simple static game Nash equilibrium,

some cartels may be socially desirable, not all cartels are beneficial for the

fringe members and a free riding problem does not necessarily emerge

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 589

Some First Results for Noncooperative Pregames:

Social Conformity and Equilibrium in Pure Strategies

Myrna Wooders, Reinhard Selten and Edward Cartwright

We introduce the framework of noncooperative pregames and

demonstrate that for all games with sufficiently many players, there exist

approximate (E) Nash equilibria in pure strategies. In fact, every mixed

strategy equilibrium can be used to construct an E-equilibrium in pure

strategies — ours is an 'E-purification’ result. Our main result is that there

exists an E-equilibrium in pure strategies with the property that most

players choose the same strategies as all other players with similar

attributes. More precisely, there is an integer L, depending on E but not on

the number of players, so that any sufficiently large society can be

partitioned into fewer than L groups, or cultures, consisting of similar

players, and all players in the same group play the same pure strategy. In

ongoing research, we are extending the model to cover a broader class of

situations, including incomplete information.

We would be grateful for any comments that might help us improve the

paper.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 588

Arbitrage and Equilibrium in Economies with Externalities

Cuong Le Van, Frank H. Page Jr. and Myrna H Wooders

We introduce consumption externalities into a general equilibrium model

with arbitrary consumption sets. To treat the problem of existence of

equilibrium, a condition of no unbounded arbitrage, extending the

condition of Page (1987) and Page and Wooders (1993, 1996) is defined.

It is proven that this condition is sufficient for the existence of an

equilibrium and both necessary and sufficient for compactness of the set

of rational allocations.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 587

Fair Reweighting of the Votes in the EU Council of Ministers and the

Choice of Majority Requirement for Qualified Majority Voting during

Successive Enlargements

Dennis Leech

This paper examines the system of Qualified Majority Voting, used by the

Council of Ministers of the European Union, from the perspective of

enlargement of the Union. It uses an approach based on power indices due

to Penrose, Banzhaf and Coleman to make two analyses: (1) the question

of the voting power of member countries from the point of view of

fairness, and (2) the question of how the majority quota required for QMV

should be determined. It studies two scenarios for change from 2005

onwards envisaged by the Nice Treaty: (1) no enlargement, the EU

comprising 15 member countries, and (2) full enlargement to 27 members

by the accession of all the present twelve candidates. The proposal is made

that fair weights be determined algorithmically as a technical or routine

matter as the membership changes. The analysis of how the quota affects

power shows the trade-offs that countries face between their blocking

power and the power of the Council to act. The main findings are: (1) that

the weights laid down in the Nice Treaty are close to being fair, the only

significant discrepancies being the under representation of Germany and

Romania, and the over representation of Spain and Poland; (2) the

majority quota required for a decision is set too high for the Council of

Ministers to be an effective decision making body.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 586

The Efficiency, Equity and Politics of Emission Permit Trading

Myrna Wooders and Ben Zissimos

This paper illustrates that an international permit trading system may hurt

relatively poor countries by making associated economic activities

unaffordable. A model is constructed in which the free market solution is

Pareto inefficient as a result of pollution. The introduction of tradable

permits allows pollution to be internalised, and brings about an increase in

the total social surplus. But when incomes vary, this may not lead to a

Pareto improvement; those in poor countries stop the polluting activity

because they cannot afford to do otherwise. Only those in relatively rich

countries are made better off. This may explain why poor countries are

reluctant to ratify the Kyoto Protocol, itself advocating a permit trading

scheme. The politico-economic implications of permit trading are also

examined. We show that the democratic requirements for ratification

impose a lower bound on pollution reduction that can be achieved through

a system of pollution permits with trade.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 585

Axiomatization of Ratio Equilibria in Public Good Economies

A. van den Nouweland, S. Tijs and M.H. Wooders

Using consistency properties, we characterize the cost-sharing scheme

arising from the ratio equilibrium concept for economies with public

goods. The characterization turns out to be surprisingly simple and

direct. In contrast to most axiomatic characterizations based on reduced

games and consistency properties, our characterization requires that in the

reduced game, the players take as given the proportions of the costs paid

by the members of the complementary player set, rather than their utility

levels.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 584

Does the Choice of University Matter? A Study of the Differences across

UK Universities in Life Sciences Students' Degree Performance

Massimiliano Bratti

This paper investigates differences across UK universities in 1993 life

sciences students’ degree performance using individual-level data from

the Universities’ Statistical Record (USR). Differences across universities

are analysed by specifying and estimating a subject-specific educational

production function. Even after including a wide range of controls

for the quality of students, significant differences emerge across

universities in students’ degree performance. We apply a two-stage

estimation procedure and find evidence that a large part of ‘university

effects’ cannot be explained by the kind of institutional inputs commonly

used in the literature on school quality. Finally, we compare the

unadjusted ranking of universities based on the proportion of ‘good’

(first and upper second class honours) degrees awarded with that based

on the estimated probability of a ‘good’ degree obtained from the

microeconometric model and find significant differences between the two

indicators of universities’ performance.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 583

Members' Voting Power in the Governance of the International

Monetary Fund

Dennis Leech

In general in an organisation whose system of governance involves

weighted voting, a member's weight in terms of the number of votes and

the formal power it represents differ. Power indices provide a means of

analysing this difference. The paper uses new algorithms for computing

power indices for large games. Three analyses are carried out: (1) the

distribution of Banzhaf voting power among members in 1999; the results

show that the United States has considerably more power over ordinary

decisions than its weight of 17% but that the use of special supermajorities

limits its power; (2) the effect of varying the majority requirement on the

power of the IMF to act and the powers of members to prevent and initiate

action (Coleman indices); the results show the effect of supermajorities

severely limits the power to act and therefore renders the voting system

ineffective in democratic terms, also the sovereignty of the United States

within the IMF is effectively limited to just the power of veto; (3) the

paper proposes the determination of the weights instrumentally by means

of an iterative algorithm to give the required power distribution; this

would be a useful procedure for determining appropriate changes in

weights consequent on changes to individual countries' quotas; this is

applied to the 1999 data. Policy recommendations are, first, that the IMF

use only simple majority voting, and discontinue using special

supermajorities, and, second, allocate voting weight instrumentally using

power indices.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 581

Is Comprehensive Education Really Free? A Case Study of the Effects of

Secondary School Admissions Policies on House Prices in One Local

Area.

Dennis Leech and Erick Campos

This paper reports on a study that tests the anecdotal hypothesis that

parents are willing to pay a premium to secure places for their children in

popular and oversubscribed comprehensive schools. Since many local

education authorities use admissions policies based on catchment areas

and places in popular schools are very hard to obtain from outside these

areas - but very easy from within them - parents have an incentive to

move house for the sake of their children's education. This would be

expected to be reflected in house prices. The study uses a cross sectional

sample based on two popular schools in one local education authority area,

Coventry. Differences in housing quality are dealt with by using the

technique of hedonic regression and differences in location by sample

selection within a block sample design. The sample was chosen from a

limited number of locations spanning different catchment areas in order to

reduce both observable and unobservable variability in nuisance effects

while maximising the variation in catchment areas. The results suggest

that there are strong school catchment area effects. For one of the two

popular schools we find a 20 percent premium and for the other a 16

percent premium on house prices ceteris paribus.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 580

Do Elections Always Motivate Incumbents?

Eric Le Borgne and Ben Lockwood

This paper studies a principal-agent model of the relationship between

office-holders and the electorate, where the office-holder is initially

uninformed about herability (following Holmström, 1999). If office-holder

effort and ability interact in the “production function” that determines

performance in office, then an office-holder has an incentive to

experiment, i.e. raise effort so that performance becomes a more

accurate signal of her ability. Elections reduce the experimentation effect,

and the reduction in this effect may more than o¤set the positive “career

concerns” effect of elections on effort. Moreover, when this occurs,

appointment of officials (random

selection from the citizenry and tenure) may Pareto-dominate elections.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 579

Computing Classical Power Indices For Large Finite Voting Games

Dennis Leech

Voting Power Indices enable the analysis of the distribution of power in a

legislature or voting body in which different members have different

numbers of votes. Although this approach to the measurement of power,

based on co-operative game theory, has been known for a long time its

empirical application has been to some extent limited, in part by the

difficulty of computing the indices when there are many players. This

paper presents new algorithms for computing the classical power indices,

those of

Shapley and Shubik (1954) and of Banzhaf (1963), which are essentially

modifications of approximation methods due to Owen, and have been

shown to work well in real applications. They are of most utility in

situations where both the number of players is large and their voting

weights are very non-uniform, some members having considerably larger

numbers of votes than others, where Owen's approximation methods are

least accurate. The suggestion is made that the availability of such

improved algorithms might stimulate further applied research in this field.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 578

'Reverse Hysteresis': R&D Investment with Stochastic Innovation

Helen Weeds

We consider optimal investment behavior for a firm facing both

technological and economic uncertainty, in the context of a research

project with unpredictable outcomes. The optimal investment strategy, in

the form of a pair of trigger points for investment and abandonment, is

derived. As in Dixit (1989), the investment trigger exceeds the Marshallian

investment point. However the abandonment trigger may exceed the

Marshallian exit point, in contrast to the Dixit result, giving rise to

‘reverse hysteresis.’ Thus the firm tends to abandon research rapidly as

profitability declines, at times despite the existence of positive expected

profits. The model also provides a unified framework encompassing two

existing models as limiting cases.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 577

Sleeping Patents and Computsory Licensing: An Options Analysis

Helen Weeds

Why should a firm wish to create a new technology that it will leave

unexploited for some time? Sleeping patents have long been perceived as

anticompetitive devices, used by dominant firms to block entry into their

market. In a real options framework with both economic and technological

uncertainty, we show that a sleeping patent may arise as the result of

optimal forward-looking behavior, in the absence of any anticompetitive

motive. We also consider the effect of possible measures to enforce the

development of sleeping patents and find that these are likely to harm

incentives for firms to engage in research.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 576

Strategic Delay in a Real Optimna Model of R&D Competition

Helen Weeds

This paper considers irreversible investment in competing research

projects with uncertain returns under a winner-takes-all patent system.

Uncertainty takes two distinct forms: the technological success of the

project is probabilistic, while the economic value of the patent to be won

evolves stochastically over time. According to the theory of real options

uncertainty generates an option value of delay, but with two competing

firms the fear of preemption would appear to undermine this approach. In

non-cooperative equilibrium two patterns of investment emerge depending

on parameter values. In a preemptive leader-follower equilibrium firms

invest sequentially and option values are reduced by competition. A

symmetric outcome may also occur, however, in which investment is more

delayed than the

single-firm counterpart. Comparing this with the optimal cooperative

investment pattern, investment is found to be more delayed when firms

act non-cooperatively, as each holds back from investing in the fear of

starting a patent race. Implications of the analysis for empirical and policy

issues in R&D are considered.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 575

Networks, Options and Preemption

Robin Mason and Helen Weeds

This paper examines the irreversible adoption of a technology whose

returns are uncertain, when there is an advantage to being the first

adopter, but a network advantage to adopting when others also do so. Two

patterns of adoption emerge: sequential, in which the leader aggressively

preempts its rival; and a more accommodating outcome in which the firms

adopt simultaneously. There are two main results. First, conditional on

adoption being sequential, the follower adopts at the incorrect point,

compared to the co-operative solution. The leader adopts at the

co-operative point when there is no preemption, and too early if there is

preemption. Secondly, there is insufficient simultaneous adoption in

equilibrium. The paper examines the effect of uncertainty, network effects

and preemption on these ineffciencies. Standard results do not always

hold. For example, the analysis raises

the unusual possibility that an increase in uncertainty may cause the first

mover to adopt the technology earlier.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 574

A Nonscale Growth Model with R&D and Human Capital

Accumulation

Maria-Joao Ribeiro

This paper aims to contribute to the new growth theory with a model in

which the engine of growth is human capital growth. Building on Romer's

[1990] model, two new functions are introduced: (1) a specification for

the production of new designs that assumes no externalities and no

inventions before time zero; and (2) A specification for the accumulation

of human capital technically similar to that in Lucas [1988]. As opposed

to Romer's model, the scale-effects prediction is eliminated because

technological growth does not depend on the number of researchers, but

instead on the rate of growth of human capital. Moreover, the model

introduced carries a new prediction: Growth depends positively on the

ratio of final-good workers to researchers.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 573

Buybacks of Domestic Debt in Public Debt Management

Silvia Marchesi

In the model a fiscal stabilisation is announced under asymmetry of

information between the government and the private investors. The

government could be of two types: a dry type and a wet type, according to

the amount of spending cuts it decides to make. Private investors may

thus lack confidence in the stabilisation program and interest rates would

be too high, reflecting this lack of credibility. A dry type which has to

finance new spending may want to signal its resolution (type) in order to

lower its interest costs and one way to do that would be to repurchase a

fraction of the outstanding debt. The wet type could also decide to buyback

some of its debt in order to pretend to be a dry type and to (possibly) lower

its interest payments. It is showed that a critical amount of buyback exists

such that the two types could be separated.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 572

The Dummies Guide' to Lottery Design

Ian Walker and Juliet Young

This paper outlines the issues relevant to the operation of lottery games.

We consider how such games should be designed, what a portfolio of

games might look like, how the operator should be regulated, how

spending on lottery games should be taxed, and what considerations are

relevant to the use of the revenue from such games.

Our research suggests that the lottery tickets sales depend positively on

the proportion of revenue returned as prizes (i.e the mean of the prize

distribution), the skewness in the prize distribution (e.g how much of the

prize money goes to the jackpot), and negatively on the variance in the

prize distribution. Thus good causes revenue might be higher if the game

were meaner (less of the stakes used as prize money), or if more of the

prize money was used for the jackpot, or if the variance in the expected

prizes were reduced. In practice, it is difficult to change one aspect of the

design of the prize distribution without having a counterveiling effect on

another aspect. Thus, it is difficult to make judgements about the merits of

alternative game designs without looking at all of the parameters being

proposed.

We find no empirical evidence to suggest that there is any merit in having

much of the take-out (the revenue that is not returned as prizes) dedicated

to good-causes, and no evidence that the nature of the operator might

make any difference.

The current “beauty contest” process of choosing an operator is fraught

with risk and we suggest that, subject to a probity

check, the license should be auctioned.

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WORKING PAPER NO 571

Trade Bloc Formation Under Imperfect Competition

Paola Conconi

We examine the endogenous formation of trade blocs when markets are

characterized by imperfect competition and governments use import

tariffs and export subsidies to alter the strategic interactions between

oligopolistic firms. Using a simple model of intra-industry trade between

three ex-ante symmetric countries, we find that, while 'pure' customs

unions - entailing tariff cooperation only - are stepping stones towards

global free trade, 'impure' customs unions - involving the coordinated use

of both tariffs and subsidies - are stumbling blocs against it. Our analysis

suggests that an international ban on export subsidies could held to sustain

global free trade.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 570

Green and Producer Lobbies: Enemies or Allies?

Paola Conconi

In this paper we employ a common agency model to study the role of green

and producer lobbies in the determination of trade and environmental

policies. We focus on two large countries that are linked by trade flows

and transboundary pollution externalities. We show that the nature of the

relationship between lobbies and the relative efficiency of unilateral and

cooperative policy outcomes depend crucially on three factors: the type of

policy regime, whether governments act unilaterally or cooperatively, and

the extend of the 'pollution leakages'.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 569

The Assignment of Powers in Federal and Unitary States

Ben Lockwood

This paper studies a model where the power to set policy (a choice of

project) may be assigned to central or regional government via either a

federal or unitary referendum (constitutional rule, CR). The benefit of

central provision is an economy of scale, while the cost is political

inefficiency. The relationship between federal and unitary CRs is

characterized in the asymptotic case as the number of regions becomes

large, under the assumption that the median project benefit in any region

is a random draw from a fixed distribution, G. Under some symmetry

assumptions, the relationship depends only on the shape of G, not on how

willingnesses to pay are distributed within regions. The relationship to

Cremer and Palfrey's (1996) "principle of aggregation" is established.

Asymptotic results on the efficiency of the two CRs are also provided.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 568

"Are People Willing to Pay to Reduce Others' Incomes?

Daniel Zizzo and Andrew Oswald

This paper studies utility interdependence in the laboratory. We design an

experiment where subjects can reduce (“burn”) other subjects’ money.

Those who burn the money of others have to give up some of their own

cash. Despite this cost, and contrary to the assumptions of economics

textbooks, the majority of our subjects choose to destroy at least part of

others’ money holdings. We vary experimentally the amount that subjects

have to pay to reduce other people’s cash. The implied price elasticity of

burning is calculated; it is mostly less than unity. There is a strong

correlation between wealth, or rank, and the amounts by which subjects

are burnt. In making their decisions, many burners, especially

disadvantaged ones, seem to care about whether another person

‘deserves’ the money he has. Deservingness is not simply a matter of

relative payoff.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 567

"Tax Competition and Tax Co-Ordination Under Destination and Origin

Principles: A Synthesis

Ben Lockwood

This paper proposes a general framework for analysing commodity tax

competition under destination and origin principles, based on three

possible tax spillovers, the consumer price spillover, the producer

price/terms of trade spillover, and rent spillovers. A model is presented

which can be extended to accomodate all three spillovers. Using this

model, many of the results in the existing literature can be derived,

compared, and extended.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 566

"Renegotiation of Social Contracts by Majority Rule"

Dan Anderberg and Carlo Perroni

We consider renegotiation of social earnings insurance arrangements by

majority voting in an economy where ex-ante identical individuals make

unobservable private investments in education. We show that

voting-based renegotiation can result in a higher expected level of

investment in comparison to the case where social insurance is determined

by an appointed social planner. We also find that, with voting-based

renegotioation, the availability of costly ex-post information about private

investment can help overcome commitment problems. These findings call

into question the practice of using a representative-consumer approach

when modelling dynamic policy problems in large economies.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 565

"P-Star-Model Based Analysis of Inflation Dynamic in the Czech

Republic"

Jan Frait, Lobos Komarek and Lumir Kulhanek

The paper presents a version of the P* model of inflation dynamics for a

small open economy and applies it to the Czech economy time series from

the period of 1991-1999. The paper is organised as follows. Section 2

presents a brief discussion of the monetary policy indicators issue. Section

3 describes the logics of the P* model. Section 4 explains the extension of

the basic model to the case of a small open economy. Section 5 applies the

model to the Czech economy data and presents the estimates of the Czech

inflation dynamics determination.

The results of the estimates suggest that the dynamics of the Czech

inflation evolves in line with a P* model logic: the inflation in the current

period changes to close the price gap, i.e. the gap between actual and

equilibrium price level. The foreign component of the price gap seems to

be more important than domestic component which supports the

hypothesis that the equilibrium price level in the Czech Republic is to a

large extent determined by the monetary policy in the EU via the explicit or

implicit peg of the Czech currency exchange rate to EUR. The overall

results show that the inflation in the Czech Republic is primarily a

monetary phenomenon.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 564

"Shareholder Power and Corprate Governace"

Dennis Leech

The pattern of ownership and control of British industry is unusual

compared with most other countries in that ownership is relatively

dispersed. Typically the largest shareholder in any large listed company is

likely to own a voting minority of the shares. Majority ownership by a

single shareholder is unusual. It is not uncommon for the largest

shareholding to be under 20 percent and in many cases it is much less than

that. A broadly similar pattern is observed in the USA.

Two inferences about corporate governance are conventionally drawn from

this, following the early work of Berle and Means: (1) All but the very

largest shareholders are typically too small to have any real incentive to

participate in decision making; (2) All but the very largest shareholdings

are too small to have any real voting power. The question of voting power

is the focus of this paper. Conventional analyses use a rule of thumb of

20%, assuming shareholders to be fundamentally passive in relation to the

running of the company, whatever their style of investment management,

unless one of them is above this figure. The London Stock Exchange

defines a controlling holding to be one greater than 30 percent. Much

empirical work uses declarable stakes, which in the UK are those of 3

percent or more, and disregards anything smaller assuming it to be

powerless. In fact, however, a 1% stake in the 100th largest company

(Smiths Industries) is worth about £29million, which suggests its owner has

strong incentives to be active, and might wish to use his voting power.

Theoretical voting power of minority shareholding blocks is studied using

the game-theoretic idea of voting power indices. This is applied to a model

of ownership control based on the definition of control used by Berle and

Means in their classic study. The results give support for use of a 20

percent rule in many cases but not all. Also they support the idea that

many companies are potentially controlled by a block of a few large

shareholders working in concert.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 563

"An Empirical comparison of the performance of Classical Power

Indicies"

Dennis Leech

Power indices are general measures of the relative voting power of

individual members of a voting body. They are useful in helping understand

and design voting bodies particularly those which employ weighted voting,

in which different members having different numbers of votes. It is well

known that in such bodies a member's voting power, in the sense of their

capacity to affect the outcomes of votes called, rarely corresponds to the

actual number of votes allocated to him. Many voting bodies for which this

is an important consideration exist: examples include international

organisations (notably the World Bank, the IMF, the European Union), the

US presidential Electoral College and corporations in which votes are

proportionate to stockholdings.

Two classical power indices dominate the literature: the Shapley-Shubik

index and the Banzhaf index (also known by other names). Both are based

on the idea that a member's power depends on the relative number of

times they can change a coalition from losing to winning by joining it and

adding their vote. They may be defined in probabilistic terms as the

probability of being able to swing the result of a vote, where all possible

outcomes are taken as equiprobable. The indices differ however in the way

they count voting coalitions. In probabilistic terms they use different

coalition models and therefore differ in precisely what is meant by

equiprobable outcomes.

The indices have been used in a number of empirical applications but their

relative performance has remained an open question for many years, a

factor, which has hindered the wider acceptance of the approach.

Where both the indices have been used for the same case, they have often

given different results, sometimes substantially so, and theoretical studies

of their properties have not been conclusive. There is therefore a need for

comparative testing of their relative performance in practical contexts.

Very little work of this type has been done however for a number of

reasons: lack of independent indicators of power in actual voting bodies

with which to compare them, difficulties in obtaining consistent data on a

voting body over time with sufficient variation in the disposition of votes

among members of actual legislatures and the lack of independent criteria

against which the results of the indices may be judged. It has also been

hampered to some extent by lack of easily available algorithms for

computing the indices in large games.

This paper assesses the indices against a set of reasonable criteria in

terms of shareholder voting power and the control of the corporation in a

large cross section of British companies. Each company is a separate

voting body and there is much variation in the distribution of voting shares

among them. Moreover reasonable criteria exist against which to judge

the indices. New algorithms for the Shapley-Shubik and Banzhaf indices are

applied to detailed data on beneficial ownership of 444 large UK companies

without majority control. Because some of the data is missing, both finite

and oceanic games of shareholder voting are studied to overcome this

problem.

The results, judged against these criteria, are unfavorable to the

Shapley-Shubik index and suggest that the Banzhaf index much better

reflects the variations in the power of shareholders between companies as

the weights of shareholder blocks vary.

Keywords: Power indices; Shapley-Shubik index; Banzhaf index; oceanic

games; co-operative game theory.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 562

"Asset Ownership and Investment Incentives Revisited"

David de Meza and Ben Lockwood

Previous work on the property rights theory of the firm suggests that in

the presence of outside options, asset ownership may demotivate

managers. This paper shows that this conclusion relies on the assumption

that a manager’s outside option only depends on her own investment. In

many cases, an asset owner has the opportunity to continue with a project

even if the team breaks up. The investments of non-owners may then be

devalued, but are typically not wholly lost to the owner. This weakens the

bargaining power of the non-owner. So, in the presence of cross effects,

outside options do not necessarily overturn the property of the original

Grossman-Hart-Moore model that an asset transfer may motivate the

gainer and demotivate the loser.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 561

"Inconsequential Arbitrage"

Frank H Page Jr, Myrna H. Wooders and Paulo K.Monteiro

We introduce the concept of inconsequential arbitrage and, in the context

of a model allowing short-sales and half-lines in indifference surfaces, we

prove that inconsequential arbitrage is sufficient for existence of

equilibrium. With a slightly stronger condition of local nonsatiation than

required for existence of equilibrium and with a mild uniformity condition

on arbitrage opportunities, we show that the existence of a pareto-optimal

allocation implies inconsequential arbitrage, implying that inconsequential

arbitrage is necessary and sufficient for existence of an equilibrium. By

further strengthening our nonsatiation condition, we obtain a second

welfare theorem for exchange economies allowing short sales. To further

understand inconsequential arbitrage, we introduce the notion of

exhaustible arbitrage and we show that any inconsequential arbitrage is

exhaustible. We also compare inconsequential arbitrage to the conditions

limiting arbitrage of hart (1974) and Werner (1987), as well as to the

conditions recently introduced by Dan, Le Van, and Magnien (1999) and

Allouch (1999). For example, we show that the condition of Hart

(translated to a general equilibrium setting) and the condition of Werner

are equivalent. We then show that the Hart/Werner conditions imply

inconsequential arbitrage. To highlight the extent to which we extend

Hart and Werner, we construct an example of an exchange economy in

which inconsequential arbitrage holds (and is necessary and sufficient for

existence), while the Hart/Werner conditions do not hold. Finally, under

additional conditions on the model, we show that if agents' indifference

surfaces contain no half lines, then inconsequential arbitrage, the

Hart/Werner conditions, the Dana, Le Van, and Magnien condition, and

Allouch's conditions are all equivalent - and in turn, equivalent to the

existence of equilibrium.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 560

"Commuting in Great Britain in the 1990s"

Andrew Benito and Andrew J. Oswald

The paper studies commuting in Great Britain in the 1990s. The average

one-way commute to work is now 38 minutes in London, 33 minutes in the

south-east, and 21 minutes in the rest of the country. There are three

other findings. First, commuting times are especially long among the

highly educated, among home-owners, and among those who work in large

plants and offices. In Britain, people with university degrees spend 50%

more time travelling to work than those with low qualifications. Private

renters do much less commuting than owner-occupiers. Second, there has

recently been a rise in commuting times in the south-east and the capital.

In our sample, full-time workers in London have lost 70 minutes per week

of leisure time to commuting during the course of the 1990s. By contrast,

outside the south-east of Britain, there has been no increase in commuting

over this decade. In the south-east, 30% of workers now take at least 45

minutes to get to work. In the rest of the country, only 10% do. Third,

after controlling for other factors and allowing for the endogeneity of the

wage rate, there is a ceteris paribus inverse relationship between

commuting hours and hourly pay.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 559

"Housing Subisidies and Work Incentives in Great Britain"

Paul Bingley and Ian Walker

In Great Britain the move away from rented accommodation to owner

occupation is leaving behind a large group of households with low incomes,

wages and hours of work, and high housing costs, who are increasingly in

receipt of welfare transfers. The disparity along all of these dimensions

between renters and owner occupiers has continued to grow since the

1970’s.

The relationship between housing costs, wages and transfer programmes is

complex and yet plays an important part in determining the incentive to

work for individuals in low income or high housing cost households. While

it is true that many individuals who are in these categories are out of the

labour force (retired, sick and disabled), there are many who are not and

whose incentive to seek work, or to work harder if already in work, could

be modified by directly changing the rent levels they face or indirectly via

changes to the structure of programmes designed to subsidise housing for

the poor.

Here we estimate a static discrete choice labour supply model which allows

for housing benefit programme participation. We use samples of 42491

married women and 13340 unmarried women drawn from Great Britain

Family Resources Surveys 1994/5-97/8. We find that women are quite

responsive to labour supply incentives, housing benefit income has similar

incentive effects to earned income which suggests any "stigma" is small.

Our analysis is complemented by simulating housing benefit and direct rent

subsidy reforms.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 558

"Issue Linkage and Issue Tie-in in Multilateral Negotiations"

Paola Conconi and Carlo Perroni

We describe a model of international, multidimensional policy coordination

where countries can enter into selective and separate agreements with

different partners along different policy dimensions. The model is used to

examine the implications of negotiation tie-in - the requirement that

agreements must span multiple dimensions of interaction - for the viability

of multilateral cooperation when countries are linked by international trade

flows and transboundary pollution. We show that, while in some cases

negotiation tie-in has either no effect or can make multilateral cooperation

more viable, in others a formal tie-in constraint

can make an otherwise viable joint multilateral agreement unstable.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 557

"Staggered Wages and Output Dynamics under Disinflation"

Guido Ascari and Neil Rankin

We study the output costs of a reduction in monetary growth in a dynamic

general equilibrium model with staggered wages. The money wage is fixed

for two periods, and is chosen according to intertemporal optimisation.

Agents have labour market monopoly power. We show that the introduction

of microfoundations helps to resolve the puzzle raised by directly

postulated models, namely that disinflation in staggered pricing models

causes a boom. In our model disinflation, whether unanticipated or

anticipated, unambiguously causes a slump.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 556

"Cartel Stability and Product Differentiaiton: How Much Do the Size of

the Cartel and the Size of the Industry Matter?"

Pedro Posada

This article analyses how the degree of product differentiation, the size of

the cartel and the size of the industry affect the stability of a cartel

formed by any number of firms in an industry of any size. The paper

considers a supergame-theoretic model to define stability. After a

non-loyal member leaves the cartel, two possible reactions by the

remaining members of the cartel are assumed. The first one is a trigger

strategy where the cartel dissolves after one member has left and the

second is one where the cartel keeps acting as a cartel with one member

less. The work also extends the analysis to investigate the stability of the

remaining cartel. The results indicate that the relation between the cartel

stability and the degree of differentiation of the products depends

considerably on the size of the cartel, the size of the industry and the

reaction of the loyal members of the cartel.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 555

"Micro Evidence on Human Capital as the Engine of Growth"

Philip Trostel

This study examines a crucial assumption in much of the recent work on

endogenous growth, namely, constant returns to scale in the production of

human capital. A simple model is constructed to show that the returns to

scale in human capital production can be inferred from the relationship

between the wage rate and years of schooling. A large international micro

dataset is used to estimate this relationship. The empirical evidence is

decisive. There are decreasing returns to scale in human capital

production; that is, the micro-level evidence is not supportive of

endogenous growth driven by human capital accumulation.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 554

"Education and Work"

Philip Trostel and Ian Walker

This paper examines the linkage between the incentives to work and to

invest in human capital through education. These incentives are shown to

be mutally reinforcing in a simple stylized model. This theoretical

predicton is investigated empirically using three large micro datasets

covering a broad set of countries. As one might expect, education and

work are strongly (positively) correlated. This correlation has important

implications for models of fiscal policy and economic growth. It also has

important implications for the estimation of labor supply and the rate of

return to education.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 553

"Measuring Social Capital: Culture as an Explanation of Italy's Economic

Dualism"

Francesco Galassi and Stephen Pudney

The paper presents a quantitative test of the oft-repeated view that Italy’s

backward and poor South suffered from low “social capital”, a tendency to

defect from co-operative engagements. The problem with such assertions

is that they run the risk of taking as evidence in favour of the hypothesis

the very observations that need to be explained. The analysis carried out

in this work tries to break out of this impasse by analysing the conditions

under which it was ex ante welfare-improving for farmers in early 20th

century Italy to join an unlimited liability rural co-operative bank which

would give them access to cheaper credit but also exposed them to the risk

of their neighbours’ defection. These co-ops are a prime testing ground

for the cultural explanation in that they spread rapidly throughout Northern

Italy in the late 19th century, but never gained a similar popularity in the

South. I estimate the switching function for these co-ops in different parts

of the country to test whether Northern and Southern farmers faced

significantly different choice sets when making the decision to join.

Identical choice sets but differential responses would of course favour the

cultural explanation of the South’s backwardness. The results suggest that

for the same parameter values, the choice sets for North and South were

different, though whether this difference was large enough to explain the

full difference in responses is not completely clear.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 552

"Output Risk in Tuscan Agriculture in the Late 19th and Early 20th

Centuries"

Francesco Galassi and Stephen Pudney

We analyse output risk in Italian agriculture over the period 1870-1914.

We use data on a set of 16 tenanted plots grouped into three farms

comprising a single large estate. We estimate the degree of risk

associated with each separate crop, with the portfolio of crops at the level

of the plot, the farm and the estate. We highlight two particular features:

the relatively high risk associated with tree crops (wine, oil and nuts); and

the substantial scope for the landlord to reduce risk through crop

diversification across plots. We discuss the implications of these for

tenure contract theory.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 551

"A Penny for your Thoughts: e-mail and the under-valuation of expert

time"

Chris Willmore

The cost incurred by the sender of an e-mail does not reflect the costs to

the recipient, leading to a larger number of messages being sent than is

optimal for the general welfare. As a solution, we suggest a per-message

e-mail tax on the sender similar to that proposed by Shiman (1996), with

the addition of a recipient-determined 'contact list'. The recipient derives

utility from messages sent by those on this list, and they are not to be

taxed when sending messages to the recipient. We recommend that the

tax revenue be divided between a regulating body and the e-mail

recipient's Internet service provider.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 550

"Gradualism and Irreversibility"

Ben Lockwood and Jonathan P. Thomas

This paper considers a class of two-player dynamic games in which each

player controls a one-dimensional variable which we interpret as a level of

cooperation. In the base model, there is an irreversibility constraint

stating that this variable can never be reduced, only increased. It

otherwise satisfies the usual discounted repeated game assumptions.

Under certain restrictions on the payoff function, which make the stage

game resemble a continuous version of the Prisoners’ Dilemma, we

characterize efficient symmetric equilibria, and show that cooperation

levels exhibit gradualism and converge, when payoffs are smooth, to a

level strictly below the one-shot efficient level: the irreversibility induces a

steady-state as well as a dynamic inefficiency. As players become very

patient, however, payoffs converge to (though never attain) the efficient

level. We also show that a related model in which an irreversibility arises

through players choosing an incremental variable, such as investment, can

be transformed into the base model with similar results. Applications to a

public goods sequential contribution model and a model of capacity

reduction in a declining industry are discussed. The analysis is extended to

incorporate partial reversibility, asymmetric equilibria, and sequential

moves.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 549

"When are Plurality Rule Voting Games Dominance-Solvable?"

Amrita Dhillon and Ben Lockwood

This paper studies the dominance-solvability (by iterated deletion of

weakly dominated strategies) of plurality rule voting games. For K > 3

alternatives and n > 3 voters, we find sufficient conditions for the game to

be dominance-solvable (DS) and not to be DS. These conditions can be

stated in terms of only one statistic of the game, the largest proportion of

voters who agree on which alternative is worst in a sequence of subsets of

the original set of alternatives. When n is large, “almost all” games can be

classified as either DS or not DS. If the game is DS, a Condorcet Winner

always exists when n > 4, and the outcome is always the Condorcet Winner

when the electorate is sufficiently replicated

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 548

"Can Green Lobbies Replace a World Envorinmental Organization"

Paola Conconi

We employ a common agency model to examine how green lobbies affect

the determination of trade and environmental policy in two large countries

that are linked through trade flows and transboundary pollution. We show

that, when governments are not restricted in their ability to use trade

barriers, environmental lobbying always results in higher pollution taxes

relative to a no-lobbying scenario. Consequently, uncoordinated

environmental policies are closer to the effcient Pigouvian solution than

internationally coordinated policies. If, however, governments are bound

by international trade rules, green lobbies may bias environmental policies

downwards and environmental policy coordination is unambiguously

effciency-enhancing.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 547

"Useful government Spending, Direct Crowding-Out and Fiscal Policy

Interdependence"

Giovanni Ganelli

This paper introduces perfect substitutability between private and public

consumption in a dynamic, open economy with imperfect competition and

nominal rigidities. This implies a direct crowding-out effect that,

generalising to the two-country case some well-known properties of a

closed economy, tends to reduce consumption following both domestic and

foreign expansions. A less expected result is that sub-stitutability has a

positive effect on the short-run output spillover. We also show that, if we

modify the model to allow for home bias in government spending,

temporary fiscal expansions display a "quasi-neutrality" property.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 546

"A Law of Scarcity for Games"

Alexander Kovalenkov and Myrna Holtz Wooders

The "law of scarcity" is that scarceness is rewarded; recall, for example,

the diamonds and water paradox. In this paper, furthering research

initiated in Kelso and Crawford (1982, Econometrica 50, 1483-1504) for

matching models, we demonstrate a law of scarcity for cores and

approximate cores of games.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 545

"Elections and Strategic Positioning Games"

Frank H Page, Jr and Myrna Holtz Wooders

We formalize the interplay between expected voting behavior and stragetic

positioning behavior of candidates as a common agency problem in which

the candidates (i.e. the principals) compete for voters (i.e. agents) via the

issues they choose and the positions they take. A political situation is

defined as a feasible combination of candidate positions and expected

political payoffs to the candidates. Taking this approach, we are led

naturally to a particular formalization of the candidates’ positioning game,

called a political situation game. Within the context of this game, we

define the notion of farsighted stability (introduced in an abstract setting

by Chwe (1994)) and apply Chwe’s result to obtain existence of farsightedly

stable outcomes. We compute the farsightedly stable sets for several

examples of political situations games, with outcomes that conform to

real-world observations.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 544

"Time-Inconsistent Candidates vs. Time-Inconsistent Voters: Imperfect

Policy Commitment in Political Equilibrium"

Marco Pani and Carlo Perroni

This paper examines whether policy commitment mechanisms, when

available, will be used by the elected policymaker in a political-economy

equilibrium. We describe a two-period repeated voting model where

second-period outcomes depend on commitment choices made by an

elected policymaker in the first period, and where elected candidates may

choose to deviate from their preferred level of commitment, retaining

discretionary control of policy variables, in order to secure a favourable

second-period political outcome. The implications of different political

tenure systems for the candidates who are elected, the policy targets that

are selected, the degree of commitment to their implementation, and the

policies that are actually implemented in the model are examined.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 542

"Adoption of an IMF Programme and Debt Rescheduling. An Empirical

Analysis"

Silvia Marchesi

Abstract

The existence of an empirical relationship between the adoption of an IMF

programme and the concession of a debt rescheduling by commercial and

official creditors is tested using a bivariate probit model. If countries who

have arrangements with the IMF are more likely than others to obtain a

rescheduling of their external debt we could conclude that the adoption of

an IMF programme could work as a sort of signal of a country’s “good

willingness”, which is thus rewarded with the debt relief. The results

confirm the existence of a significant effect of the adoption of an IMF

programme on the subsequent concession of a debt rescheduling by

creditors.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 540

"The Allocation of Carbon Permits within One Country: A General

Equilibrium Analysis of the United Kingdom"

T. Huw Edwards and John P. Hutton

As part of the Kyoto agreement on limiting carbon emissions, from 2008

onwards an international market in auctionable carbon permits will be

established. This raises the issue of whether trading should be simply

between governments or between companies, or in the latter case how

such permits should be allocated.

Our paper uses the British section of a CGE model of the European energy

sectors to evaluate the economics of various methods of allocating permits

within a country, as discussed in Lord Marshall’s recent report to the

British government. The option of allocation entirely by auction is similar

to the setting of a carbon tax, and the recycling of revenues to reduce or

offset other economic distortions could produce a potential net benefit to

incomes and employment. 'Grandfathering' some of the permits free to

large firms, according to their base year carbon emissions, would mean

loss of the benefits of recycling auction revenues. This might be

exacerbated if it created windfall profits repatriated by foreign

shareholders. The third major alternative is to review the allocation

regularly, awarding permits to all firms according to a ‘benchmark’

allocation, based on 'best practice' as estimated by outside experts. This

would be similar in practice to recycling the revenue as an output subsidy

to the industry, though it could be complicated to implement. Such a

system could allow much of the potential ‘double dividend’ to be realised,

though it might still be preferable to auction permits, with the revenues

used to offset taxes across a wider spread of industry.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 539

"Child Support Reform: Some Analysis of the 1999 White Paper"

Gillian Paul and Ian Walker

This paper uses a sample of lone mothers (and former lone mothers who

are now repartnered) drawn from the 1997 Family Resources Survey to

analyse the potential effects of reforming the UK system of Child Support.

The main deficiency of the data is that non-resident fathers cannot be

matched to the mothers in the data and this is overcome by exploiting

information from another dataset which gives the joint distribution of the

characteristics of separated parents. The effects of reforming the Child

Support system is simulated for the amount of maintenance liabilities, the

amount paid and the net incomes of households containing mothers with

care and households containing non-resident fathers. The likely effects of

the reform are simulated at various levels of compliance. The analysis

highlights the need for further research into the incentive effects of Child

Support on individual behaviour.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 538

"A Further Extension of the KKMS Theorem"

Yakar Kannai and Myrna Holtz Wooders

Recently Reny and Wooders ([23]) showed that there is some point in the

intersection of sets in Shapley's ([24]) generalization of the

Knaster-Kuratowski-Mazurkiwicz Theorem with the property that the

collection of all sets containing that point is partnered as well as balanced.

In this paper we provide a further extension by showing that the collection

of all such sets can be chosen to be strictly balanced, implying the

Reny-Wooders result. Our proof is topological, based on the

Eilenberg-Montgomery fixed point Theorem. Reny and Wooders ([23]) also

show that if the collection of partnered points in the intersection is

countable, then at least one of them is minimally partnered. Applying

degree theory for correspondences, we show that if this collection is only

assumed to be zero dimensional (or if the set of partnered and strictly

balanced points is of dimension zero), then there is at least one strictly

balanced and minimally partnered point in the intersection. The approach

presented in this paper sheds a new geometric-topological light on the

Reny-Wooders results.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 537

"An Explicit Bound on E For Nonemptimess of E-Cores of Games"

Alexander Kovalenkov and Myrna Holtz Wooders

We consider parameterized collections of games without side payments

and determine a bound on E so that all suffciently large games in the

collection have non-empty E-cores. Our result makes explicit the

relationship between the required size of E for non-emptiness of the

E-core, the parameters describing the collection of games, and the size of

the total player set. Given the parameters describing the collection, the

larger the game, the smaller the E that can bechosen.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 536

"Epsilon Cores of Games and Economies with Limited Side Payments"

Alexander Kovalenkov and Myrna Holtz Wooders

We introduce the concept of a parameterized collection of games with

limited side payments, ruling out large transfers of utility. Under the

assumption that the payoff set of the grand coalition is convex, we show

that a game with limited side payments has a nonempty E-core. Our main

result is that, when some degree of side-paymentness within

nearly-effective small groups is assumed, then all payoffs in the E-core

treat similar players similarly. A bound on the distance between E-core

payoffs of any two similar players is given in terms of the parameters

describing the game. These results add to the literature showing that

games with many players and small effective groups have the properties of

competitive markets.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 535

"Approximate Cores of Games and Economies with Clubs

Alexander Kovalenkov and Myrna Holtz Wooders

We introduce the framework of parameterized collections of games and

provide three nonemptiness of approximate core theorems for arbitrary

games with and without sidepayments. The parameters bound (a) the

number of approximate types of players and the size of the approximation

and (b) the size of

nearly effective groups of players and their distance from exact

effectiveness. The theorems are based on a new notion of

partition-balanced profiles and approximately partition-balanced profiles.

The results are then applied to a new model of an economy with clubs. In

contrast to the extant literature, our

approach allows both widespread externalities and uniform results.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 534

"Economic Integration and Human Capital Investment"

Norman Ireland and Guido Merzoni

In this paper we seek to characterise a market for heterogeneous

managers created by heterogeneous firms and the decisions on investment

in both sector-specific and firm-specific human capital when those

decisions are made prior to the realisation of firms' profitability and the

degree of markets’ integration may vary. We consider the (Nash)

equilibrium and relate this to a first-best allocation. The rent-seeking

motives of managers and firms will generally make sector- and

firm-specific investment decisions not socially optimum, both with respect

to the number of investors and the level of each investment. The effect on

welfare of markets’ integration varies with the nature of the skills

considered. With more general, sector-specific, skills more integration, by

increasing the matching ability of the market, reduces the distortion

caused by rent-seeking, and increases social welfare. However, with more

specific skills the increased matching ability of a more integrated market,

by making managers more mobile, destroys some firm-specific human

capital and so reduces welfare.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 533

"Investment Subsidies and Time Consistent Environmental Policy"

Lisandro Abrego and Carlo Perroni

'We describe a model of dynamic poluution abatement choices with

heterogeneous agents, where, due to the presence of a distributional

objective and to the absence of incentive-compatible compensation

mechanisms, the choice of a second-best level of emission taxation is

time-inconsistent. In this model, we investigate whether investment

subsidies can act as a substitute for policy commitment.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 532

"Low-Pay Transitions and Attrition Bias in Italy: An Analysis Using

Simulation Based Estimation"

Lorenzo Cappellari

'This paper analyses the extent to which existing econometric models of

low-pay transition probabilities in Italy are biased by the presence of

endogenous panel attrition. Non-random exits from the sample of wage

earners may result from both demand and supply side factors and this

could lead to under- or overestimation (respectively) of the extent of

low-wage persistence. The analysis is carried out by extending the

bivariate probit model used in Cappellari [1999] (where starting state and

transition probabilities are jointly modelled thus tackling the endogeneity

of the conditioning starting wage state) with a third equation which

controls for the non-randomness of panel attrition. The resulting trivariate

probit model with endogenous switching, whose evaluation is not feasible

within the routines customarily available in microeconometric packages, is

implemented by applying simulation estimation techniques. Results show

the ignorability of attrition in SHIW data, thus pointing towards the

robustness of the results previously obtained without controlling for

attrition.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 531

"Low-Wage Mobility in the Italian Market"

Lorenzo Cappellari

'This paper uses SHIW panel data for 1993 and 1995 to model individual

transition probabilities at the bottom of the Italian wage distribution. The

analysis is based on a bivariate probit model with endogenous switching

which allows tackling the initial conditions problem, i.e. the potential

endogeneity of the conditioning starting state. Results show the

appropriateness of such a choice: the correlation between state and

transition probabilities is significantly different from zero, while

overlooking endogeneity leads to overstatement of both size and

significance of coefficients in the transition equation. The paper shows

that while some factors such as education, sex and geographical location

have an effect on low-pay persistence, job related variables are more

effective in avoiding falls into low-pay from higher pay. It is also shown

how raw persistence involves a considerable share of true state

dependence, pointing towards the existence of low-pay stigma.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 530

"Heterogeneity and the Distribution of Wages"

V.Bhaskar and Ted To

A number of theories (search and efficiency wages) have been developed,

in part, to explain why identically able workers are often paid different

wages. However, when there is a minimum wage, they do not explain the

resulting "spike" in the wage distribution. Our model's predictions are

consistent with this evidence. We assume that workers are equally able

but have heterogeneous preferences for non-wage characteristics, while

employers have heterogeneous productivity characteristics. This results in

a model of labor market oligopsony where "inside" and "outside" forces

interact, producing wage dispersion as well as a spike at the minimum

wage.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 529

"Minority Control: An Analysis of British Companies Using Voting Power

Indices"

Dennis Leech

'An exercise in the empirical use of voting power indices from cooperative

game theory to applied ownership data for large companies, this paper

contributes in two areas: (1) the analysis of company control based on

shareholding voting power, and (2) the empirical use of power indices and

understanding of the comparative properties of different indices. New

algorithms for calculating power indices, which quantify voting power in

weighted voting bodies like company meetings, are applied to detailed

data on beneficial ownership of 444 large UK companies without majority

control. The results show that the Banzhaf index is, and the Shapley-Shubik

index is not, useful for this analysis and a control classification of the

firms is obtained.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 528

"Identification and Estimation of a Labour Market Model for the

Tradeables Sector: The Greek Case"

Costas Milas and Jesus G. Otero

'This paper derives a theoretical labour market model for the tradeables

sector of a small open economy. Using Greek manufacturing data and

applying multivariate cointegrating techniques, two cointegrating vectors

are estimated based on the a priori restrictions provided by the theoretical

model; a labour demand and a real exchange rate equation, respectively.

The short-run estimates of the model suggest that labour decisions not

only depend upon past disequilibria in the labour market, but also on the

discrepancy between the real exchange rate and its implied long-run

equilibrium relationship, that is, the magnitude of the real exchange rate

misalignment.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 527

"Production Externalities and Two-Way Distortion in

Principal-Multi-Agent Problems"

Ben Lockwood

'This paper studies an otherwise standard principal-agent problem with

hidden information, but whether there are positive production

externalities between agents: the output of any agent depends positively

on the effort expended by the other agents. It is shown that the optimal

contract for the principal exhibits two-way distortion: the effort of any

agent is oversupplied (relative to the first-best) when his marginal cost

effort is low, and undersupplied his marginal cost of effort is high. This

pattern of distortion cannot otherwise arise in optimal single- or

multi-agent incentive contracts, unless there are countervailing incentives.

However, unlike the countervailing incentives case, the pattern of

distortion is robust to the precise form of the externality. '

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 526

"Time, Self-Selection and User Charges for Public Goods"

Dan Anderberg, Fredrik Andersson and Alessandro Balestrino

'Many public goods generate utility only when combined with time-input.

Important examples include road networks and publicly provided leisure

facilities. If it is possible to charge for the time spent using the public

good it is generally a second-best Pareto optimal policy to do so even in

the absence of congestion. An optimal linear user charge is analysed within

a standard optimum income-tax framework. Second-best public good

provision in the presence of a user charge is also characterized and factors

that influence the direction of optimal distortion of the public good supply

are identified.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 524

"Modelling the Behaviour of the Spot Prices of Various Types of Coffee"

By Jesus G. Otero and Costas Milas

'This paper investigates long-run relationships among the spot prices of

four coffee types. We find two cointegrating vectors: one between the

prices of Other Milds and Colombian coffee, and the other one between

Unwashed Arabicas and Robustas. Following Pesaran and Shin (1996),

persistence profile analysis of the two cointegrating vectors shows a rapid

adjustment towards their equilibrium value. This suggests that the four

coffee markets are highly related, and that discrepancies in the

equilibrium relationships are short-lived. Out of sample evaluation of the

model is reasonably good, except for two occasions of sharp price

increases following adverse weather conditions.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 523

"A Dynamic Macroeconometric Model For Short-Run Stabilisation in

India"

By Sushanta K. Mallick

'This paper presents a small macroeconometric model examining the

determinants of Indian trade and inflation to address the effects of a

reform policy package similar to those implemented in 1991. This is

different from previous studies along one important dimension that we

explicitly incorporate the non-stationarity of the data into our model and

estimation procedures, which suggest that the stationarity assumption

may be a source of misspecification in previous work. So the model has

been estimated using the data from 1950 to 1995 employing fully-modified

Phillips-Hansen Method of estimation to obtain the cointegrating relations

and short-run dynamic model. Policy simulations using dynamic simulations

method compare the dynamic responses to devaluation with the responses

to tight credit policy. It is shown that the trade balance effects of tight

credit policy are more enduring than those of devaluation. The simulations

demonstrate that the devaluation has actually worsened the trade balance

and hence devaluation is not an option in response to a negative trade

shock, whereas the reduction in domestic credit produces a desirable

improvement in the trade balance.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 522

"Business Cycles Asymmetries: Characterisation and Testing based on

Markov-Switching Autoregressions"

By Michael P. Clements and Hans-Martin Krolzig

'We propose testing for business cycle asymmetries in Markov-switching

autoregressive (MS-AR) models. We derive the parametric restrictions on

MS-AR models that rule out types of asymmetries such as deepness,

steepness, and sharpness, and set out a testing procedure based on Wald

statistics which have standard asymptotics. For a two-regime model, such

as that popularised by Hamilton (1989), we show that deepness implies

sharpness (and vice versa) while the process is always non-steep. We

illustrate with two and three-state MS models of US GNP growth, and with

models of US output and employment. Our findings are compared with

those obtained from standard non-parametric tests.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 521

"Maximum Sustainable Government Debt in the Overlapping

Generational Model"

By Neil Rankin and Barbara Roffia

'The theoretical determinants of maximum sustainable government debt

are investigated using Diamond’s overlapping-generations model. A level

of debt is defined to be ‘sustainable’ if a steady state with non-degenerate

values of economic variables exists. We show that a maximum sustainable

level of debt almost always exists. Most interestingly, it normally occurs at

a ‘catastrophe’ rather than a ‘degeneracy’, i.e. where variables such as

capital and consumption are in the interiors, rather than at the limits, of

their economically meaningful ranges. This means that if debt is increased

step by step, the economy may suddenly collapse without obvious warning.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 520

"A Note on the Estimated Coefficients in Random Effects Probit Models"

By Wiji Arulampalam

'This note points out to applied researchers what adjustments are needed

to the coefficient estimates in a random effects probit model in order to

make valid comparisons in terms of coefficient estimates and marginal

effects across different specifications. These adjustments are necessary

because of the normalisation that is used by standard software in order to

facilitate easy estimation of the random effects probit model.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 518

"Too Cool for School? A Theory of Countersignaling"

By Nick Feltovich, Rick Harbaugh and Ted To

'In sender-receiver games high-quality types can distinguish themselves

from low-quality types by sending a costly signal. Allowing for additional,

noisy information on sender types can radically alter sender behavior in

such games. We examine equilibria where meduim types seperate

themselves from low types by signaling, but high types then differentiate

themselves from medium types by not signaling or counter-signaling. High

types not only save the cost of signaling by relying on the additional

information to stochastically separate themselves from low types, but in

doing so they separate themselves from the signaling medium types.

Hence they may countersignal even when signaling is a productive activity.

To evaluate this theory we report on a two-cell experiment in which the

unique Nash-equilibrium of one cell involves countersignaling by high

types. Experimental results confirm that subjects can learn to

countersignal.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 516

"Forecasting with Difference-Stationary and Trend-Stationary Models'

By M. P. Clements and D. P. Hendry

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 515

"A Non-Normative Theory of Inflation and Central Bank Independence"

By Berthold Herrendorf and Manfred J. M. Neumann

We study monetary policy under different central bank constitutions when

the labor-market insiders set the nominal wage so that outsiders are

involuntarily unemployed. If the insiders are in the majority, the

representative insider will be the median voter. We show that an

independent central bank, if controlled by the median voter, does not

produce a systematic inflation bias, albeit equilibrium employment is too

low from a social welfare point of view. A dependent central bank, in

contrast, is forced by the government to collect seigniorage and to take

the government's re-election prospects into account. The predictions of our

theory are consistent with the evidence that central bank independence

decreases average inflation and inflation variability, but does not affect

employment variability.'

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 513

"Distributive Politics and the Benefits of Decentralisation"

By Ben Lockwood

This paper integrates the distributive politics literature with the literature

on decentralization by incorporating inter-regional project externalities

into a standard model of distributive policy. A key finding is that the

degree of uniformity (or "universalism") of the provision of regional

projects is endogenous, and depends on the strength of the externality.

The welfare benefits of decentralization, and the performance of

"constitutional rules" (such as majority voting) which may be used to

choose between decentralization and centralization, are then discussed in

this framework.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 512

"Tests of the Expectations Hypothesis and Policy Reaction to the Term

Spread: Some Comparative Evidence"

By Gianna Boero and Costanza Torricelli

The aim of this paper is to evaluate the impact of monetary policy in tests

of the Expectations Hypothesis of the term structure of interest rates. We

apply the model developed by McCallum (1994b), in which the Expectations

Hypothesis interacts with a policy reaction function and with a

time-varying term premium, to eight countries with different monetary

policy stances, within the period 1985 to 1995. The results suggest the

importance of the treatment of monetary policy in explaining the empirical

performance of the Expectations Hypothesis. Amongst other results, we

also find that the model performs better for some countries than others

depending upon the monetary policy stance adopted.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 511

"The Assignment of Powers in Federal and Unitary States"

By Ben Lockwood

This paper studies a model where the power to set policy (a choice of

project) may be assigned to central and regional government via either a

federal or unitary constitutional rule (CR). The benefit of central provision

is economies of scale, while the cost is political inefficiency. Using the

analytical tool of the net dissenting vote, the relationship between federal

and unitary CRs is characterized. Efficiency of CRs is also studied: the

federal CR need not be more efficient than the unitary CR when regions

are diverse in tastes.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 487

"Forecasting Seasonal UK Consumption"

By Michael P. Clements and Jeremy Smith

Periodic models for seasonal data allow the parameters of the model to

vary across the different seasons. This paper uses the components of UK

consumption to see whether the periodic autoregressive (PAR) model yields

more accurate forecasts than non-periodic models, such as the airline

model of Box and Jenkins, and autoregressive models that pre-test for

(seasonal) unit roots. We analyse possible explanations for the relatively

poor forecast performance of the periodic models that we find,

notwithstanding the apparent support such models receive from the data

in-sample.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 477

"Crime and Drugs"

By Chris Doyle and Jennifer Smith

We present a model which ties together rational drug consumption,

taxation, crime and other drug-related externalities. Drug control policy is

addressed using an optimal tax framework. Consumption, possession and

production of a drug may be prohibited, legalized or decriminalized. In all

regimes illicit production of a drug may take place and drug-related crime

occurs. We show that illicit drug production, the price elasticity of demand

for a drug, the addictive nature of a drug, the effectiveness of drug

enforcement strategies, and income distribution all influence optimal

(second best) policy. Prohibition is contrasted with decriminalization and

legalization, and where legalization yields a higher welfare than prohibition

we show that this can be associated with greater drug-related crime and

more drug addiction. The model is discussed in the context of US National

Drug Control Strategy.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 467

"Performance of Alternative Forecasting Methods for SETAR Models"

By Michael P. Clements and Jeremy Smith

We compare a number of methods that have been proposed in the

literature for obtaining h-step ahead minimum mean square error

forecasts for SETAR models. These forecasts are compared to those from

an AR model. The comparison of forecasting methods is made using Monte

Carlo simulation. The Monte Carlo method of calculating SETAR forecasts

is generally at least as good as that of the other methods we consider. An

exception is when the disturbances in the SETAR model come from a highly

asymmetric distribution, when a Bootstrap method is to be preferred.

An empirical application calculates multi-period forecasts from a SETAR

model of US GNP using a number of the forecasting methods. We find that

whether there are improvements in forecast performance relative to a

linear AR model depends on the historical epoch we select, and whether

forecasts are evaluated conditional on the regime the process was in at the

time the forecast was made.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 464

"A Monte Carlo Study of the Forecasting Performance of Empirical

SETAR Models"

By Michael P. Clements and Jeremy Smith

In this paper we investigate the multi-period forecast performance of a

number of empirical self-exciting threshold autoregressive (SETAR) models

that have been proposed in the literature for modelling exchange rates and

GNP, amongst other variables. We take each of the empirical SETAR

models in turn as the DGP to ensure that the 'non-linearity' characterises

the future, and compare the forecast performance of SETAR and linear

autoregressive models on a number of quantitative and qualitative

criteria. Our results indicate that non-linear models have an edge in

certain states of nature but not in others, and that this can be highlighted

by evaluating forecasts conditional upon the regime.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 455

"Bargaining Power and Local Labour Market Influences on Wage

Determination"

By Jennifer Smith

This paper uses a unique panel of data at the level of the bargaining group

to examine aspects of 'right-to-manage' models of wage determination.

Empirical measures of firms' and unions' bargaining power are identified

and found to be important influences on wage setting. The role of union

characteristics in wage determination is examined; results confirm their

importance and illuminate previous survey findings. Features of the local

labour market are shown to affect bargained wages over and above the

influence of aggregate factors.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

WORKING PAPER NO 454

"Saving, Investment and Real Interest Rates"

By Jennifer Smith

This paper investigates the determinants of real interest rates at world

and country level. The starting point is the idea that real interest rates

reflect the interaction of desired saving and planned investment, using the

framework developed by Barro and Sala-i-Martin (1990) and Barro (1992).

The paper updates previous results and extends the analysis to study long

real interest rates. We analyse which factors have been responsible for

real rate 'regime shifts' during 1959 to 1992. We examine the

determinants of interest rate differentials across ten major industrialised

countries and provide estimates of the extent of capital market

integration.

[TOP OF TWERPS ABSTRACTS] [LIST OF TWERPS]

Most of the following papers are not available on-line. However hard copies

can be obtained from Fiona Brown, Department of Economics, University of

Warwick, Coventry CV4 7AL.

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