Manage Research Papers

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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

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.

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.

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.

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.

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.

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.

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.

Eric Le Borgne and Ben Lockwood

We investigate whether relevant private information about citizens’ competence in political ffice can be credibly revealed by their entry and campaign expenditure decisions, as opposed to choice of policy once in office. We find that this depends on whether voters and candidates have common or conflicting interests; only in the former case can entry be revealing in equilibrium. We apply these results to Rogoff’s (1990) model of the political budget cycle, allowing for candidate entry, as well as elections: as interests are common, low-ability candidates are screened out at the entry stage, and so there is no signaling via fiscal policy (i.e. no “political budget cycle”). In a variant of the Rogoff. model where citizens differ in honesty, rather than ability, interests are conflicting, and so the political budget cycle can persist in equilibrium.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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'.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

Silvia Marchesi

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.

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.

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.

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.

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 be chosen

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.

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.

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.

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.'

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.'

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.'

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.

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.'

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.'

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. '

Dan Anderberg, Fredrik Andersson and Alessandro Balestrino

Many public goods generate utility only when combined with a 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.

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 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.

Jesús G. Otero & 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

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.

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.'

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.'

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.

David G. Blanchflower and Andrew J. Oswald

Many observers believe that times are growing harder for young people in Western society. This paper looks at the evidence and finds that conventional wisdom appears to be wrong. Using the U.S. General Social Surveys and the Eurobarometer Surveys, the paper studies the reported happiness and life-satisfaction scores of random samples of young men and women. The data cover the USA and thirteen European countries. Our main finding is that from the 1970s to the 1990s the well-being of the young increased quite markedly. A number of possible explanations are considered.

N. Feltovich, R. Harbaugh and T. 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 medium types separate themselves from low types by signaling, but high types then differentiate them­selves from medium types by not signaling, or countersignaling. High types not only save the cost of signaling by relying on the additional information to stochastically separate them 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 coun-tersignal.

Ben Lockwood, Marcus Miller, Ted To & John Whalley

Programme and Proceedings of 1998 Warwick Summer Research Workshop on "Economic Aspects of Globalisation" held in the Department of Economics 13-25 July 1998

M. P. Clements and D. P. Hendry

The behaviour of difference-stationary and trend-stationary processes has been the subject of considerable analysis in the literature. Nevertheless, there do not seem to be any direct comparisons of the properties of each for both being potential data-generation processes. We look at the consequences of incorrect choice between these models for forecasting when parameters are known, and when parameters have to be estimated. The outcomes are surprisingly different from established results.

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 the 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.

T. Masuda

In 1977 the Japanese Antimonopoly Law introduced the report collecting system on parallel price increases, i.e., price leadership. The substantial aim of this system is to encourage self-restraint with regard to irrational parallel price increase. We investigate some features of price leadership and then assess the regulation effects of the Law. (1) We can judge such price leadership as an effective one that the leading companies played a leading role in both increase date and ratio and then other subordinate companies followed soon after the leading one. (2) Intermediary goods producers shifted fully their cost increase on to their selling price. (3) After this system was enacted, there was a considerable possibility that major companies have practiced discretionary parallel price increases. We conclude that price reporting systems do not always have regulation effects on parallel price increase contrary to the aim of Law.

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

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

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 proved.

D. Leech

Voting Power Indices enable the analysis of the distribution of power in a legislature or voting body which uses weighted voting. Although the approach, based on co-operative game theory, has been known for a long time it has not been very widely applied, in part because of the difficulty of computing the indices when there are many players. This paper presents new algorithms for the classical power indices which have been shown to work well in real applications. We suggest that the availability of such accurate and efficient algorithms might stimulate further research in this under-researched field.

M.P. Clements and J. Smith

In economics density forecasts are rarely available, and as a result attention has traditionally focused on point forecasts of the mean and the use of mean square error statistics to represent the loss function. We extend the methods of forecast density evaluation in Diebold, Gunther and Tay (1997) to compare linear and non-linear model-based forecasts of US output growth and changes in the unemployment rate. Of prime concern is whether concentrating solely on the first moment obscures the potential usefulness of non-linear models as forecasting devices.

R. Skidelsky

It is widely assumed that Keynesianism is as dead as the dodo, and that Keynes's own life and thought are matters of purely historical interest. I am not going to challenge the first proposition head on: I have some sympathy with it. There is no future in the hubristic Keynesianism of thirty years ago, which regarded economies as machines to be pushed and pulled this way and that by technical experts on the basis of huge macroeconomic forecasting models. But I have a great affection for the mind and spirit of John Maynard Keynes, and hope to show that much of his thought retains its freshness over the gap of fifty two years since he died.

R. Skidelsky

As the well-known story of Bretton Woods has it, there were two plans, the White Plan and the Keynes Plan. The White Plan, from the US Treasury, championed liberal internationalism'; the Keynes Plan, from the UK Treasury, tried to secure for Britain sufficient freedom from international pressures to be able to pursue full employment and other desirable social policies. The British saw internationalism as a constraint, the Americans as an opportunity. The Bretton Woods Agreement was a successful attempt to reconcile these two views; each country accommodated the requirements of the other, without sacrificing its own aims. The result was the 'golden age' of the 1950s and 1960s, so different from the interwar years. In 1946 President Truman called the Agreement 'a cornerstone upon the foundation of which a sound economic world can -and must -be erected'. And a leading historian of the Agreement wrote in 1978 that 'during a quarter of a century' it had stood as the 'foundation upon which world trade, production, employment and investment were gradually built'.

Marco Pani

While most economic studies on corruption are mainly concerned with its actual occurrence, in this paper we claim that most economic effects rather derive from its mere possibility. When corruption is prevented through an expensive monitoring activity and by offering high incentives, its effects persist although corruption does not actually occur - a situation that may be described as "hidden corruption". In this paper, we formalise corruption as a particular principal-agent-client relation; we identify the essential economic characteristics of corruption, and we analyse different types of equilibria that arise under different circumstances. While corruption actually occurs in only one type of equilibria, its effects persist, although reduced in magnitude, in all the other types, where corruption is prevented but still potentially present; moreover, while equilibria of different types do not necessarily exhibit relevant differences in terms of expected utility, substantial differences appear instead when the possibility of corruption is removed. This paper also addresses other topics related to corruption, like the reasons that support the introduction of a legal norm prohibiting it, the effects of corruption on efficiency and social conflict, and the existence and implications of multiple equilibria.

C. Eberwein and Ted To

We study dynamic price adjustment under imperfect competition when consumers have non-time-separable preferences. In our model an intertemporal link arises in the consumers' maximization problems because current consumption decisions affect the utility of future consumption. Thus future demand depends on the current price and ,firms must take this into account when making their decisions. The main result is that equilibrium prices follow a dynamic stochastic process in which the current price depends on past prices and on random disturbances. The convergence of prices to the 'long run expected price' is monotonic if current and future consumption are substitutes and oscillatory if they are complements.

Michael P. Clements and Jeremy Smith

We consider the forecasting performance of two SETAR exchange rate models proposed by Krager and Kugler (1993). Assuming that the models are good approximations to the data generating process, we show that whether the non-linearities inherent in the data can be exploited to forecast better than a random walk depends on both how forecast accuracy is assessed and on the 'state of nature'. Evaluation based on traditional measures, such as (root) mean squared forecast errors, may mask the superiority of the non-linear models. Generalized impulse response functions are also calculated as a means of portraying the asymmetric response to shocks implied by such models.

Gregorio Impavido

This paper argues that a mutual relationship exists between the development of institutional investors, and more specifically the development of pension funds, and the development of stock markets. It is shown that the development of pension funds promotes the development of stock markets directly through bargaining or indirectly through improving funds allocation efficiency. Growth is eventually achieved through a larger number of firms listed on the stock exchange and with firms disclosing a larger volume of information. This in turn, positively affects the development of pension funds and corporate governance mechanisms.

P. Raimondos-Moller and Kim A Scharf

The literature on the regulation of multinationals' transfer prices has not considered the possibility that governments choose their transfer pricing rules in a non-cooperative fashion. The present paper fills this gap and shows that a non-cooperative equilibrium is characterised by above-optimal levels of effective taxation in comparison with a cooperative solution. We also derive conditions under which harmonisation of transfer pricing rules lead to a Pareto improvement, and show that harmonisation according to the 'arm's length' principle — the form of harmonisation advocated by international organisations such as the OECD — is not Pareto improving relative to the non¬cooperative outcome.

Amrita Dhillon, Carlo Perroni and Kim A. Scharf

This paper investigates whether tax competition can survive under tax coordination, when information is private or nonverifiable. We focus on a two-jurisdiction model where capital can move across borders, and where jurisdictions have different public good requirements, but are otherwise identical. In this setting, coordination may call for a second-best allocation supported by differentiated tax rates. If, however, information on jurisdictions' types is private or nonverifiable, such a second-best allocation may not be implementable. We show that incentive compatibility requirements will generally affect not only the choice of coordinated rates in states where jurisdictions are different, but also the choice of harmonized rates in states where jurisdictions have identical preferences for public consumption.

E. Barth, O. Raaum and Robin Naylor

We exploit rare information on the union status of both individual employees and of their workplaces to address two related issues. First, we find a positive effect of workplace trade union density on the level of the individual's pay. Second, we find that the individual's union membership status loses its significance when we control for establishment-level union density. The union wage effect is therefore a pure public good, with individual membership conveying a positive wage externality.

David G. Blanchflower and Andrew J. Oswald

The paper examines the labour markets of Eastern Europe. It studies the problem of high levels of joblessness among young people. New microeconomic data are used -- drawing upon the latest Eurobarometer Surveys and samples from the International Social Survey Programme. These two data sets are designed to allow comparative research. They provide detailed information on approximately 60,000 randomly sampled adult and youth workers in the transition economies. To provide a comparison, the paper uses Western data from the same sources. The paper begins by showing that, in both the West and East, adult and youth unemployment rates are closely correlated. It provides scatter-plot evidence using country cross-sections for the early 1990s. This suggests that to understand joblessness among the young it is necessary to understand joblessness among the old.