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2014 Working Papers

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1055 - Voting in Legislative Elections Under Plurality Rule

Niall Hughes

Conventional models of single district plurality elections show that with three parties anything can happen - extreme policies can win regardless of voter preferences. I show that when when single district elections are used to fill a legislature we get back to a world where the median voter matters. An extreme policy will generally only come about if it is preferred by the median voter in a majority of districts, while the mere existence of a centrist party can lead to moderate outcomes even if the party itself wins few seats. Furthermore, I show that while standard single district elections always have misaligned voting i.e. some voters do not vote for their preferred choice, equilibria of the legislative election exist with no misaligned voting in any district. Finally, I show that when parties are impatient, a xed rule on how legislative bargaining occurs will lead to more coalition governments, while uncertainty will favour single party governments

1054 - Incentives to Innovate, Compatibility and Efficiency in Durable Goods Markets with Network Effects

Thanos Athanasopoulos

This paper investigates the relation between firms’ R&D incentives and their compatibility decisions regarding durable, imperfectly substitutable network goods in the presence of forward looking consumers. Non drastic product innovation is sequential and both an initially dominant firm and a smaller rival are potential inventors. For sufficiently innovative future products, our first key result is that the dominant firm invests more when there is compatibility and voluntarily decides to supply interoperability information. This happens as the probability that he is the only inventor increases, allowing him to enjoy a higher expected future profit that outweighs the current lost revenue. For economies whose initial market size is considerably large, the rival also demands compatibility but this is no longer true in industries with a relatively smaller number of existing consumers. For less innovative new versions, the dominant firm rejects compatibility and there is a cutoff in network externalities below which he invests more when there is incompatibility. Regarding welfare, we find that a laissez faire Competition Law with respect to the IPR holders is socially preferable.

1053 - Effects of Marginal Specifications on Copula Estimation

Kazim Azam

This paper studies the effect of marginal distributions on a copula, in the case of mixed discrete-continuous random variables. The existing literature has proposed various methods to deal with mixed marginals: this paper is the first to quantify their effect in a unified Bayesian setting. Using order statistics based information for the marginals, as proposed by Ho (2007), we find that in small samples the bias and mean square error are at least half in size as compared to those of empirical or misspecified marginal distributions. The difference in the bias and mean square error enlarges with increasing sample size, especially for low count discrete variables. We employ the order statistics method on firm-level patents data, containing both discrete and continuous random variables, and consistently estimate their correlation.

1052 - Dependence Analysis between Foreign Exchange Rates: A Semi-Parametric Copula Approach

Kazim Azam

Not only currencies are assets in investor's portfolio, central banks use them for implementing economic policies.This implies existence of some type of dependence pattern among the currencies. We investigate such patterns among daily Deutsche Mark (DM) (Euro later), UK Sterling (GBP) and the Japanese Yen (JPY) exchange rate, all considered against the US Dollar during various economic conditions. To overcome the short-comings of mis- specification, normality and linear dependence for such time series, a exible semi-parametric copula methodology is adopted where the marginals are non-parametric but the copula is parametrically specified. Dependence is estimated both as a constant and time-varying measure. During the Pre-Euro period, we find slightly more dependence when both DM (Euro)/USD and GBP/USD jointly appreciate as compared to joint depreciation, especially in the late 90s. Such results are reversed for GBP/USD and JPY/USD in the early 90s. Post-Euro, DM (Euro)/USD and GBP/USD exhibit stronger dependen e when they jointly appreciate, which could indicate preference for price-stability in EU zone. Whereas the dependence of JPY/USD with both DM (Euro)/USD and GBP/USD is stronger when they jointly depreciate, this could imply preference for export competitiveness among the countries. In the beginning of Recent-Crisis period, DM (EURO)/USD and GBP/USD show more dependence when they jointly depreciate, but later we see the similar tendency for these currencies to be related more when they jointly appreciate. Such measures of asymmetric dependence among the currencies provide vital insight into Central banks preferences and investors portfolio balancing.

1051 - Mike Pitt and Kazim Azam

Mike Pitt and Kazim Azam

This paper presents a method to specify a strictly stationary univariate time series model with particular emphasis on the marginal characteristics (fat tailedness, skewness etc.). It is the first time in time series models with specified marginal distribution, a non-parametric specification is used. Through a Copula distribution, the marginal aspect are separated and the information contained within the order statistics allow to efficiently model a discretely-varied time series. The estimation is done through Bayesian method. The method is invariant to any copula family and for any level of heterogeneity in the random variable. Using count times series of weekly rearm homicides in Cape Town, South Africa, we show our method eciently estimates the copula parameter representing the first-order Markov chain transition density.

1050 - Optimal Security Design under Asymmetric Information and Profit Manipulation

Kostas Koufopoulos , Roman Kozhan, Giulio Trigilia

We consider a model of external financing under ex ante asymmetric information and profit manipulation (non veriability). Contrary to conventional wisdom, the optimal contract is not standard debt, and it is not monotonic. Instead, it resembles a contingent convertible (CoCo) bond. In particular: (i) if the profit manipulation and/or adverse selection are not severe, there exists a unique separating equilibrium in CoCos; (ii) in the intermediate region, if the distribution of earnings is unbounded above there exists a unique pooling equilibrium in CoCos, otherwise debt might be issued but it is never the unique equilibrium; (iii) nally, if profit manipulation is severe, there is no financing. These findings suggest that the standard monotonicity constraint exogenously imposed in the security design literature must be reconsidered. Crucially, profit manipulation is part of the optimal contract, and non-monotonic, convertible securities mitigate the asymmetric information problem. We discuss milestone payments in venture capital as an application.

1049 - The Wind of Change: Maritime Technology, Trade and Economic Development

Luigi Pascali

The 1870-1913 period marked the birth of the first era of trade globalization. How did this tremendous increase in trade affect economic development? This work isolates a causality channel by exploiting the fact that the steamship produced an asymmetric change in trade distances among countries. Before the invention of the steamship, trade routes depended on wind patterns. The introduction of the steamship in the shipping industry reduced shipping costs and time in a disproportionate manner across countries and trade routes. Using this source of variation and a completely novel set of data on shipping times, trade, and development that spans the great majority of the world between 1850 and 1900, I find that 1) the adoption of the steamship was the major reason for the first wave of trade globalization, 2) only a small number of countries that were characterized by more inclusive institutions benefited from globalization, and 3) globalization exerted a negative effect on both urbanization rates and economic deelopment in most other countries.

1048 - Optimal strategies for operating energy storage in an arbitrage market

Lisa Flatley, Robert S MacKay , Michael Waterson

We characterise profit-maximising operating strategies, over some time horizon [0, T], for an energy store which is trading in an arbitrage market. Our theory allows for leakage, operating inefficiencies and general cost functions. In the special case where the operating cost of a store depends only on its instantaneous power ouput (or input), we present an algorithm to determine the optimal strategies. A key feature is that this algorithm is localised in time, in the sense that the action of the store at a time t 2 [0, T] only requires information about electricity prices over some subinterval of time [t, ] [t, T].

1047 - A vision of the European energy future? The impact of the German response to the Fukushima earthquake

Luigi Grossi , Sven Heim and Michael Waterson

The German response to the Fukushima nuclear power plant incident was possibly the most significant change of policy towards nuclear power outside Japan, leading to a sudden and very significant shift in the underlying power generation structure in Germany. This provides a very useful natural experiment on the impact of increasing proportions of renewable compared to conventional fuel inputs into power production, helping us to see how changed proportions in future as a result of policy moves in favour of renewables are likely to impact. We find through quasi-experimental exploration of a modified demand-supply framework that despite the swift, unpredicted change, the main impact was a significant increase in prices, partly caused by more frequent situations with unilateral market power. The price impact was also most significant in off-peak hours leading to changed investment incentives. There were no appreciable quantity effects on the market, such as power outages, contrary to some views that the impacts w uld be significant. Furthermore, we find the sudden and unilateral phase-out decision by the German government has significantly affected electricity prices and thus competitiveness in neighbouring countries.

1046 - Individual and Societal Wisdom: Explaining the Paradox of Human Aging and High Well-Being

Dilip V. Jeste and Andrew J. Oswald

Objective: Although human aging is characterized by loss of fertility and progressive decline in physical abilities, later life is associated with better psychological health and well-being. Furthermore, there has been an unprecedented increase in average lifespan over the past century without corresponding extensions of fertile and healthy age spans. We propose a possible explanation for these paradoxical phenomena. Method: We reviewed the relevant literature on aging, well-being, and wisdom. Results: An increase in specific components of individual wisdom in later life may make up for the loss of fertility as well as declining physical health. However, current data on the relationship between aging and individual wisdom are not consistent, and do not explain increased longevity in the general population during the past century. We propose that greater societal wisdom (including compassion) may account for the notable increase in average lifespan over the last century. Data in older adults with serious mentaillnesses are limited, but suggest that many of them too experience improved psychosocial functioning, although their longevity has not yet increased, suggesting persistent stigma against mental illness and inadequate societal compassion.

1045 - Cooperation and Personality

Eugenio Proto and Aldo Rustichini

Cooperating behavior may be fostered by personality traits reflecting either favorable inclination to others or willingness to comply with norms and rules. We test the relative importance of these two factors in an experiment where subjects provide real mental effort in two treatments with identical task, differing only by whether others' payment is affected. If the first hypothesis is true, subjects reporting high agreeableness score should put more effort; if the second is true, reporting higher conscientiousness should predict more effort. We find experimental support for the second hypothesis but not for the first, as subjects reporting high Altruism do not behave consistently with this statement.

1044 - The Effects of Entry in Oligopoly with Bargained Wages

Robin Naylor and Christian Soegaard

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 unionised 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 labour market rivalry which induces (profit-enhancing) wage moderation. Whether the product or labour market effect dominates depends both on the extent of union bargaining power and on the nature of union preferences. An incumbent monopolist will have an incentive to accommodate entry if the labour market effect dominates. We also show that this incentive is stronger if the incumbent anticipates that, post entry, it will be able to act as a Stackelberg leader.

1043 - Compatibility, Intellectual Property, Innovation and Welfare in Durable Goods Markets with Network Effects

Thanos Athanasopoulos

This paper serves as a new contribution in understanding how firms’ decisions regarding compatibility relate to their incentives to invest into improving their durable, network goods in the presence of forward looking consumers. It is the first attempt to introduce a new framework in the literature by using a sequential game where the smaller firm can build on the dominant firm’s existing knowledge. Our first key result is that the market leader may indeed support compatibility with its rival and this happens when it anticipates a substantial quality improvement by the competitor allowing him to extract in the present market more of the higher total expected surplus that emerges when interoperability is present. On the other hand, the rival always supports compatibility because she can charge a higher price due to a larger network. Furthermore, we find that interoperability does not de-facto maximise social welfare and we identify no market failure when network effects are not particularly strong.

1042 - Corporate Taxes and the Growth of the Firm

Federica Liberini

It is desirable to reduce the number of "artificial" merger and acquisitions (MA) designed to escape from high tax jurisdictions, without discouraging domestic firms from growing into highly productive multinational corporations. This paper studies the effect of corporate taxes on the headquarter's decision to expand its extensive margins through the acquisition of pre-existing firms. A model for the investment behaviour of heterogeneous firms is built, and Corporate taxes are introduced. The model shows that higher home statutory corporate tax rates make exports relatively more expensive, making firms more likely to serve foreign demand through cross-border acquisitions. The model's predictions are tested on a dynamic random parameter probit model estimated on firm-level data. The model's predictions are confirmed by the results from the empirical investigation. The data also support the hypothesis that there are sunk costs associated with becoming a multinational corporation, and that domestic firm that overcome these costs and acquire their first foreign subsidiary are more likely to complete further acquisitions. In addition, the inability to shift profit to foreign locations makes domestic firms more sensitive to home corporate taxes, as their capacity to capture investment opportunity is negatively affected by a reduction in net tax profit.

1041 - Price Flexibility in British Supermarkets: Moderation and Recession

Huw Dixon, Jonathon S Seaton and Michael Waterson

This paper delivers a significantly different empirical perspective on micro pricing behaviour and its impact on macroeconomic processes than previous studies, largely resulting from the fact that our weekly price data for the three major British supermarkets spans a seven year period including the crisis years 2008-2010. We find that there is a large and significant change in the behaviour of prices from 2008 onwards: prices change more frequently and the average duration of price spells declines significantly. Several of our findings run strongly counter to established empirical regularities, in particular the high overall frequency of regular or reference price changes we uncover, the greater intensity of change in more turbulent times and the numerical dominance of price falls over rises. The pricing behaviour revealed also significantly challenges the implicit assumption that prices are tracking cost changes.

1040 - The Effect of Stolen Goods Markets on Crime: Evidence from a Quasi - Natural Experiment

Rocco D'Este

This paper investigates the effect of stolen goods markets on crime. We focus on pawnshops, a business that have long been suspected of illicit trade. The analysis of a unique panel dataset of 2176 US counties from 1997 - 2010 uncovers an elasticity of pawnshops to theft crimes of 0.8 to 1.4. We then exploit the raise in gold price as a quasi - natural experiment, where the intensity of the treatment is given by the predetermined concentration of pawnshops in the county. A one standard deviation increase in pawnshops’ initial allocation raises the effect of gold price on burglaries by 0.05 to 0.10 standard deviation. No effect is ever detected on any other type of crime.

1038 - Human Well-Being and In-Work Benefits: A Randomized Controlled Trial

Richard Dorsett & Andrew J. Oswald

Many politicians believe they can intervene in the economy to improve people’s lives. But can they? In a social experiment carried out in the United Kingdom, extensive in-work support was randomly assigned among 16,000 disadvantaged people. We follow a sub-sample of 3,500 single parents for 5 ensuing years. The results reveal a remarkable, and troubling, finding. Long after eligibility had ceased, the treated individuals had substantially lower psychological well-being, worried more about money, and were increasingly prone to debt. Thus helping people apparently hurt them. We discuss a behavioral framework consistent with our findings and reflect on implications for policy.

1037 - Longitudinal Evidence for a Midlife Nadir in Human Well-being: Results from Four Data Sets

Terence C. Chenga, Nattavudh Powdthavee & Andrew J. Oswald

There is a large amount of cross-sectional evidence for a midlife low in the life cycle of human happiness and well-being (a ‘U shape’). Yet no genuinely longitudinal inquiry has uncovered evidence for a U-shaped pattern. Thus some researchers believe the U is a statistical artefact. We re-examine this fundamental cross-disciplinary question. We suggest a new test. Drawing on four data sets, and only within-person changes in well-being, we document powerful support for a U-shape in unadjusted longitudinal data without the need for regression equations. The paper’s methodological contribution is to exploit the first-derivative properties of a well-being equation.

1036 - Temptation with Uncertain Normative Preferences

John Stovall

We model a decision maker who anticipates being aected by temptation but is also uncertain about what is normatively best. Our model is an extended version of Gul and Pesendorfer's (2001) where there are three time periods: in the ex-ante period the agent chooses a set of menus, in the interim period she chooses a menu from this set, and in the nal period she chooses from the menu. We posit axioms from the ex-ante perspective. Our main axiom on preference states that the agent prefers to have the option to commit in the interim period. Our representation is a generalization of Dekel et al.'s (2009) and identies the agent's multiple normative preferences and multiple temptations. We also characterize the uncertain normative preference analogue to the representation in Stovall (2010). Finally, we characterize the special case where normative preference is not uncertain. This special case allows us to uniquely identify therepresentations of Dekel et al. (2009) and Stovall (2010).

1035 - Collective Rationality and Monostone Path Division Rules

John Stovall

We impose the axiom Independence of Irrelevant Alternatives on division rules for the conflicting claims problem. With the addition of Consistency and Resource Monotonicity, this characterizes a family of rules which can be described in three different but intuitive ways. First, a rule is identified with a fixed monotone path in the space of awards, and for a given claims vector, the path of awards for that claims vector is simply the monotone path truncated by the claims vector. Second, a rule is identified with a set of parametric functions indexed by the claimants, and for a given claims problem, each claimant receives the value of his parametric function at a common parameter value, but truncated by his claim. Third, a rule is identified with an additively separable, strictly concave social welfare function, and for a given claims problem, the mount awarded is the maximizer of the social welfare function subject to the constraint of choosing a feasible award. This third way of describing the family of rule is similar to Lensberg's (1987) solution for bargaining problems applied to conflicting claims problems.