Manage Research Papers

Adrian Masters and Abhinay Muthoo

This paper studies a dynamic model of a market such as a labour market in which firms post wages and search for workers but trade may occur at a negotiated wage procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents’ match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a posted price rather than at a negotiated price.

Daniel Sgroi and Andrew J. Oswald

Many governments wish to assess the quality of their universities. A prominent example is the UK’s new Research Excellence Framework (REF) 2014. In the REF, peer-review panels will be provided with information on publications and citations. This paper suggests a way in which panels could choose the weights to attach to these two indicators. The analysis draws in an intuitive way on the concept of Bayesian updating (where citations gradually reveal information about the initially imperfectly-observed importance of the research). Our study should not be interpreted as the argument that only mechanistic measures ought to be used in a REF.

Luca Gelsomini

We model strategic trading by a rent-seeking insider, who exchanges without being spotted, and propose a comprehensive theory of market non-anonymity. Several novel results are established. They depend on asset value proprieties, beliefs, inter-temporal choices, and investors characteristics. In equilibrium, under a regulation mandating public trade revelation, disclosures may shift prices. If they do, uninformed manipulations arise only in some instances. Specifically, insiders constrained on asset holdings earn more than they would without such a disclosure rule. Consequently, mandating disclosures is unnecessary, as informative trades will be revealed voluntarily. This result reveals a previously unexplored link to the literature on (uncertified/non-factual) announcements.

Andrew J. Oswald

Many environmentalists have not yet discovered and understood the value to them of a new research literature. That literature is the economics of happiness. It offers a potentially important tool for future policy debate. In particular, this literature offers a defensible way to calculate the costs and benefits of the true happiness value of ‘green’ variables – and to weigh those against the happiness value to people of extra income and consumption. Some of the latest research findings turn out to accord well with environmentalists’ intuitions: green variables seem to have large direct effects on human well-being; society would arguably be better to concentrate more on environmental aims and less on monetary or materialistic ones; greater consumption of things in Western society cannot be expected to make us much happier.

David G. Blanchflower, Andrew J. Oswald & Sarah Stewart-Brown

Humans run on a fuel called food. Yet economists and other social scientists rarely study what people eat. We provide simple evidence consistent with the existence of a link between the consumption of fruit and vegetables and high well-being. In cross-sectional data, happiness and mental health rise in an approximately dose-response way with the number of daily portions of fruit and vegetables. The pattern is remarkably robust to adjustment for a large number of other demographic, social and economic variables. Well-being peaks at approximately 7 portions per day. We document this relationship in three data sets, covering approximately 80,000 randomly selected British individuals, and for seven measures of well-being (life satisfaction, WEMWBS mental well-being, GHQ mental disorders, self-reported health, happiness, nervousness, and feeling low). Reverse causality and problems of confounding remain possible. We discuss the strengths and weaknesses of our analysis, how government policy-makers might wish to react to it, and what kinds of further research -- especially randomized trials -- would be valuable.

Michael P. Clements

Survey respondents who make point predictions and histogram forecasts of macro-variables reveal both how uncertain they believe the future to be, ex ante, as well as their ex post performance. Macroeconomic forecasters tend to be overconfident at horizons of a year or more, but over-estimate the uncertainty surrounding their predictions at short horizons.

Francesca Busetto, Giulio Codognato and Sayantan Ghosal

In this paper, in an exchange economy with atoms and an atomless part, we analyze the Walras equilibrium allocations of the exchange economy with which relationship between the set of the Cournot-Nash equilibrium allocations of a strategic market game and the set of the it is associated. In an example, we show that, even when atoms are countably infinite, Cournot-Nash equilibria yield different allocations from the Walras equilibrium allocations of the underlying exchange economy. We partially replicate the exchange economy by increasing the number of atoms without affecting the atomless part while ensuring that the measure space of agents remains finite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market game associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy.

Jonathan 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. We examine a seven year period of pricing behaviour by the major British supermarkets encompassing the recession year 2008 and the partial recovery of 2009. 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.

Erez Yerushalmi

Many arid countries use an administrative water allocation mechanism. Quotas, price discrimination, and increasing block taris are set and enforced by prohibiting the resale of water. Critics of this mechanism argue that allocation is politicized, subjective and slow to respond, and therefore misallocates water compared to a market mechanism. However, an administrative mechanism also promotes social goals thatare not valued economically. In this paper, both positive and negative impacts of the administrative allocation are explored, using a general equilibrium model and with Israel as a case study. The model concludes that from 1995 to 2006, potable water misallocation in Israel was relatively small, on average of 5.5 percent of the potable water supply. The value of agricultural amenities is imputed at approximately 2.3 times agricultural output. At the margin, introducing a water market in Israel is not recommended, i.e., net-social welfare would fall.

Daniel Gutknecht

This paper develops a test for monotonicity of the regression function under endogeneity. The novel testing framework is applied to study monotonicity of the reservation wage as a function of elapsed unemployment duration. Hence, the objective of the paper is twofold: from a theoretical perspective, it proposes a test that formally assesses monotonicity of the regression function in the case of a continuous, endogenous regressor. This is accomplished by combining diff erent nonparametric conditional mean estimators using either control functions or unobservable exogenous variation to address endogeneity with a test statistic based on a functional of a second order U-process. The modied statistic is shown to have a non-standard asymptotic distribution (similar to related tests) from which asymptotic critical values can directly be derived rather than approximated by bootstrap resampling methods. The test is shown to be consistent against general alternatives. From an empirical perspective, the paper provides a detailed investigation of the effect of elapsed unemployment duration on reservation wages in a nonparametric setup. This effect is difficult to measure due to the simultaneity of both variables. Despite some evidence in the literature for a declining reservation wage function over the course of unemployment, no information about the actual form of this decline has yet been provided. Using a standard job search model, it is shown that monotonicity of the reservation wage function, a restriction imposed by several empirical studies, only holds under certain (rather restrictive) conditions on the variables in the model. The test from above is applied to formally evaluate this shape restriction and it is found that reservation wage functions (conditional on different characteristics) do not decline monotonically.

Luciana A.Nicollier

By studying a monopoly investment decision, this paper considers the informativeness of customers complaints in contexts characterised by the absence of direct benefits and free riding incentives. Neither the consumer nor the regulator observe the firm's investment, they only observe a realisation of quality that is related to investment in a first order stochastically dominance sense. After observing quality, consumers decide whether to complain based on the difference between the realised quality and a reference point defined by their rational expectations. If a high proportion of consumers complain, the regulator punishes the firm. The paper shows that the absence of a reference point results either in no complaints in equilibrium or in the proportion of complaints being independent of the realised level of quality. The main result is that complaints are not always informative about the level of quality being delivered by the firm. Indeed, a firm might be punished despite of investment levels being high if consumers expected high quality or, on the contrary, not being punished when investing is low if consumers expected low quality. Furthermore, this lack of informativeness can be worsened by a repeated interaction between the firm and the consumers.

Gianluca Grimalda , Anirban Kar and Eugenio Proto

Fairness emerges as a relevant factor in redistributive preferences in surveys and experiments. We study experimentally the impact of varying the probability with which players are assigned to initial positions in Ultimatum Games (UGs). In the baseline case players have equal opportunities of being assigned the proposer position .arguably the more advantaged one in UGs. Chances become increasingly unequal across three treatments. We also manipulate the inter-temporal allocation of opportunities over rounds. We find that: (1) The more initial chances are distributed unequally, the lower the acceptance rates of a given offer; consequently, offers increase; (2) Being assigned a mere 1% chance of occupying the proposer role ompared to none, significantly increases acceptance rates and decreases offers; (3) Players accept even extreme amounts of unequal chances within each round in exchange for overall equality of opportunities across rounds. Procedural fairness both static and dynamic - has clear relevance for individuals.

Eugenio Proto and Aldo Rustichini

We show that personality traits mediate the effect of income on Life Satisfaction. The effect is strong in the case of Neuroticism, which measures the sensitivity to threat and punishment, in both the British Household Panel Survey and the German Socioeconomic Panel. Neuroticism increases the usually observed concavity of the relationship: Individuals with higher Neuroticism score enjoy income more than those with lower score if they are poorer and enjoy income less if they are richer. When the interaction between income and neuroticism is introduced, income does not have significant effect on his own. To interpret the results, we present a simple model where we assume that (i) Life Satisfaction is dependent from the gap between aspired and realized income, and this is modulated by Neuroticism and (ii) income increases in aspirations with a slope less than unity, so that the gap between aspired and realized income increase with aspirations. From the estimation of this model we argue that poorer tend to over-shoot in their aspiration, while rich tend to under-shoot. The estimation of the model also shows substantial effect of traits on income.

Jonathan S. Seaton and Michael Waterson

Price leadership is a concept that lacks precision. We propose a deliberately narrow, falsifiable, definition and illustrate its feasibility using the two leading British supermarket chains. We find both firms engaging in leadership behaviour over a range of products, with the larger being somewhat more dominant but the smaller increasing leadership activity over time. Surprisingly, more price leadership events are price reductions than price increases, but the increases are of larger monetary amounts (so average price increases over time) and the events appear not necessarily related to cost changes. Price leadership appears to play some role in price increases.

Michael P Clements

The recent literature has suggested that macroeconomic forecasters may have asymmetric loss functions, and that there may be heterogeneity across forecasters in the degree to which they weigh under and over-predictions. Using an individual-level analysis that exploits the SPF respondents. histogram forecasts, we find little evidence of asymmetric loss for the inflation forecasters.

Laura Coroneo, Valentina Corradi and Paulo Santos Monteiro

Selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for ination that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specication tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy

Michael Rousakis

How does the economy respond to shocks to expectations? This paper addresses this question within a cashless, monetary economy. A competitive economy features producers and consumers/workers with asymmetric information. Only workers observe current productivity and hence they perfectly anticipate prices, whereas all agents observe a noisy signal about long-run productivity. Information asymmetries imply that monetary policy and consumers' expectations have real effects. Non-fundamental, purely expectational shocks are conventionally thought of as demand shocks. While this remains a possibility, expectational shocks can also have the characteristics of supply shocks: if positive, they increase output and employment, and lower ination. Whether expectational shocks manifest themselves as demand or supply shocks depends on the monetary policy pursued. Forward-looking policies generate multiple equilibria in which the role of consumers' expectations is arbitrary. Optimal policies restore the complete information equilibrium. They do so by manipulating prices so that producers correctly anticipate their revenue despite their uncertainty about current productivity. I design targets for forward-looking interest-rate rules which restore the complete information equilibrium for any policy parameters. Ination stabilization per se is typically suboptimal as it can at best eliminate uncertainty arising through prices. This offers a motivation for the Dual Mandate of central banks.

Michael Rousakis

This paper shows that implementation cycles, introduced in Shleifer (1986) , are possible in the presence of capital and the absence of borrowing constraints. In a two-sector economy, patents on cost-saving ideas which take the form of investment-specic technological change arrive exogenously at a sequential, perfectly smooth rate: in odd-numbered periods, they reach a firm producing capital of type 1 and, in the even-numbered ones, a firm producing capital of type 2 . Firms can make profits out of these once. While the immediate appropriation (henceforth, \implementation") of patents is always a possibility, for accordingly formed expectations, firms can alternatively implement their patents simultaneously. This is because investment-specific technological change naturally introduces a one-period discrepancy between the time firms implement their patents and the time they receive revenue out of them. The implementation of a patent implies a sharp fall in investment which, in turn, causes a boom in current consumption. As a result, the consumption boom takes place before the wealth boom. This not only eliminates the need to smooth consumption away from the wealth boom to the period before it as conjectured, but, further, it implies that the interest rate paid when revenue is realized and wealth expands falls. Consequently, present discounted profits rise and implementation cycles can become a possibility. In a policy extension, I show that prolonging patent rights to two periods rules out \implementation cycles" and may lead to a welfare improvement.

Konstantinos Mavromatis

In this paper I show, using both empirical and theoretical analysis, that changes in monetary policy in one country can have important effects on other economies. My new empirical evidence shows that changes in the monetary policy behaviour of the Fed since the start of the Euro, well captured by a Markov-switching Taylor rule, have had significant effects on the behaviour of inflation and output in the Eurozone even though ECB’s monetary policy is found to be fairly stable. Using a two-country DSGE model, I examine this case theoretically; monetary policy in one of the countries (labelled foreign) switches regimes according to a Markov-switching process and this has nonnegligible effects in the other (home) country. Switching by the foreign central bank renders commitment to a time invariant interest rate rule suboptimal for the home central bank. This is because home agents expectations change as foreign monetary policy changes which affects the dynamics of home inflation and output. Optimal policy in the home country instead reacts to the regime of the foreign monetary policy and so implies a time-varying reaction of the home Central Bank. Following this time-varying optimal policy at home eliminates the effects in the home country of foreign regime shifts, and also reduces dramatically the effects in the foreign country. Therefore, changes in foreign monetary regimes should not be neglected in considering monetary policy at home.

Patrick Legros, Andrew F. Newman & Eugenio Proto

We consider a model in which appropriate organization fosters innovation, but because of contractibility problems, this benet cannot be internalized. The organizational design element we focus on is the division of labor, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation depends on the interaction of the markets for labor and for inventions. A high level of specialization is chosen when the wage share is low. But low wage shares arise only when there are few entrepreneurs, which limits the market for innovations therefore and discourages inventive activity. When there are many entrepreneurs, the innovation market is large, but the rate of invention is low because there is little specialization.Rapid technological progress therefore requires a balance between these opposing effects, which occurs with a moderate relative scarcity of entrepreneurs and workers. In a dynamic version of the model in which a credit constraint limits entry into entrepreneurship, this relative scarcity depends on the wealth distribution, which evolves endogenously. There is an inverted-U relation between growth rates driven by innovation and the level of inequality. Institutional improvements have ambiguous effects on growth. In light of the model, we offer a reassessment of the mechanism by which organizational innovations such as the factory may have spawned the industrial revolution.

Gregory S. Crawford, Nicola Tosini, and Keith Waehrer

In February 2008, British Telecommunications (BT) introduced automatically renewing, or "rollover", contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts in media and telecommunications markets.

Gregory S. Crawford

Empirical models of differentiated product demand are widely used by both aca- demics and practitioners. While these methods treat carefully the potential endogene- ity of price, until recently they have assumed the number and characteristics of the products offered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of "orthogonal" instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure "quality markups" and the welfare consequences of endogenous prod- uct quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed.

Eugenio Proto and Daniel Sgroi

We perform an experiment designed to assess the accuracy of beliefs about distributions. The beliefs relate to behavior (mobile phone purchasing decisions, hypothetical restaurant choices), attitudes (happiness, politics) and observable characteristics (height, weight) and are typically formed through real world experiences. We find a powerful and ubiquitous bias in perceptions that is \self-centered" in the sense that an individual's beliefs about the population distribution changes with their own position in the distribution. In particular, those at extremes tend to perceive themselves as closer to the middle of the distribution than is the case. We discuss possible explanations for this bias.

Francesco Giavazzi and Michael McMahon

This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

Michael P Clements

We consider whether survey respondents.probability distributions, reported as histograms, provide reliable and coherent point predictions, when viewed through the lens of a Bayesian learning model, and whether they are well calibrated more generally. We argue that a role remains for eliciting directly-reported point predictions in surveys of professional forecasters.

Ratula Chakraborty, Paul Dobson, Jonathan S. Seaton and Michael Waterson

We investigate micro pricing behaviour in groceries (the UK’s most important consumer market) over eight years including the inflationary period of early 2008. We find behaviour sharply distinguished from most previous work, namely that overall basket prices rise but more individual prices fall than rise! This is consistent with retailers obscuring the fact of rising basket prices. We employ a significant new source of data that captures cross-competitor interplay in prices at a very detailed level. Unusually but importantly, our work takes into account that consumers buy baskets of goods, rather than individual products, when shopping at supermarkets

Stephen Broadberry , Sayantan Ghosal and Eugenio Proto

The Industrial Revolution is often characterized as the culmination of a process of commercialisation; however, the precise nature of such a link remains unclear. This paper models and analyses one such link: the impact of a higher degree of anonymity of market transactions on relative factor prices. Commercialisation raises wages as impersonal labour market transactions replace personalized customary relations. This leads, in equilibrium, to higher real wages to prevent shirking. To the extent that capital and labor are (imperfect) substitutes, the resulting shift in relative factor prices leads to the adoption of a more capital-intensive production technology which, in turn, results in a faster rate of technological progress via enhanced learning by doing. We provide evidence using European historical data that England was among the most urbanized and the highest wage countries at the onset of the industrial revolution.

Patrick O’Callaghan

Suppose a decision-maker is willing to make statements of the form: “I prefer to choose alternative a when in context p, than to choose alternative b when in context q”. Contexts p and q may refer to given probability distributions over a set of states, and b and c to alternatives such as: “turn left” or “turn right” at a junction. In such decision problems, the set of alternatives is discrete and there is a continuum of possible contexts. I assume there is a is a mixture operation on the space of contexts (eg. convex combinations of lotteries), and propose a model that defines preferences over a collection of mixture spaces indexed by a discrete set. The model yields a spectrum of possibilities: some decision-makers are well represented by a standard von Neumann–Morgenstern type of utility function; whilst for others, utility across some or all the mixture spaces is only ordinally comparable.An application to the decision problem of Karni and Safra (2000) leads to a generalization, and shows that state-dependence and comparability are distinct concepts. A final application provides a novel way of modeling incomplete preferences and explaining the Allais paradox.

Kalyan Chatterjee and Bhaskar Dutta

This paper studies a model of diffusion in a fixed, finite connected network. There is an interested party that knows the quality of the product or idea being propagated and chooses an implant in the network to influence other agents to buy or adopt. Agents are either innovators, who adopt immediately, or rational. Rational consumers buy if buying rather than waiting maximizes expected utility. We consider the conditions on the network under which efficient diffusion of the good product with probability one is a perfect Bayes equilibrium. Centrality measures and the structure of the entire network are both important. We also discuss various inefficient equilibria

David Ronayne

This paper compares standard and local projection techniques in the production of impulse response functions both theoretically and empirically. Through careful selection of a structural decomposition, the comparison continues to an application of US data to the textbook ISLM model. It is argued that local projection techniques offer a remedy to the bias of the conventional method especially at horizons longer than the vector autoregression‘s lag length. The application highlights that the techniques can have different answers to important questions.

Marco Alfano, Wiji Arulampalam and Uma Kambhampati

This paper makes a significant contribution on both conceptual and methodological fronts, in the analysis of the effect of maternal autonomy on school enrolment age of children in India. The school entry age is modelled using a discrete time duration model where maternal autonomy is entered as a latent characteristic, and allowed to be associated with various parental and household characteristics which also conditionally affect school entry age. The model identification is achieved by using proxy measures collected in the third round of the National Family Health Survey of India, on information relating to the economic, decision-making, physical and emotional autonomy of a woman. We concentrate on three very different states in India – Andhra Pradesh, Kerala and Uttar Pradesh. Our results indicate that female autonomy is not associated with socio-economic characteristics of the woman or her family in Kerala (except maternal education), while it is strongly correlated to these characteristics in both Andhra Pradesh and Uttar Pradesh. Secondly, while female autonomy is significant in influencing the school starting age in UP, it is less important in AP and not significant at all in Kerala.

Peter J Hammond

The subjective expected utility (SEU) criterion is formulated for a particular four-person “laboratory game” that a Bayesian rational decision maker plays with Nature, Chance, and an Experimenter who influences what quantum behaviour is observable by choosing an orthonormal basis in a separable complex Hilbert space of latent variables. Nature chooses a state in this basis, along with an observed data series governing Chance’s random choice of consequence. When Gleason’s theorem holds, imposing quantum equivalence implies that the expected likelihood of
any data series w.r.t. prior beliefs equals the trace of the product of appropriate subjective density and likelihood operators.

Eugenio Proto and Daniel Sgroi

In an incentivized experiment we identify a powerful and ubiquitous bias: individuals regard their own characteristics and choices as more common than is the case. We establish this \false consensus" bias in terms of happiness, political
stance, mobile phone brand and on the attitude to deference in a hypothetical restaurant choice, and show that it is not limited to the distribution of hard to observe characteristics and choices but also to weight and height. We also show that the bias is not driven by the fact that the tallest, happiest, most left/right-wing, etc. are more salient.

Monica Giulietti, Luigi Grossi and Michael Waterson

This paper studies the impact of a re in 2006 which removed the possibility of access to the Rough gas storage facilities covering over 80% of total UK storage, at a time when major withdrawals from storage would have likely taken place. Implicitly, it shows the value of such gas storage facilities, in a country with relatively little storage, where we might therefore see a considerable impact. We find that the major effect on activity was through an increased sensitivity of supply to prices and an increased variance in this sensitivity, not through physical shortages of gas.

Sascha O. Becker and Ludger Woessmann

We model the effect of Protestant vs. Catholic denomination in an economic theory of suicide, accounting for differences in religious-community integration, views about man’s impact on God’s grace, and the possibility of confessing sins. We test the theory using a unique micro-regional dataset of 452 counties in 19th century Prussia, when religiousness was still pervasive. Our instrumental-variable model exploits the concentric dispersion of Protestantism around Wittenberg to circumvent selectivity bias. Protestantism had a substantial positive effect on suicide in 1816-21 and 1869-71. We address issues of bias from mental illness, misreporting, weather conditions, within-county heterogeneity, religious concentration, and gender composition.

Mark B. Stewart

This paper investigates possible spillover effects of the UK minimum wage. The halt in the growth in inequality in the lower half of the wage distribution (as measured by the 50:10 percentile ratio) since the mid 1990s, in contrast to the continued inequality growth in the upper half of the distribution, suggests the possibility of a minimum wage effect and spillover effects on wages above the minimum. This paper analyses individual wage changes, using both a difference-in-differences estimator and a specification involving cross-uprating comparisons, and concludes that there have not been minimum wage spillovers. Since the UK minimum wage has always been below the 10th percentile, this lack of spillovers implies that minimum wage changes have not had an effect on the 50:10 percentile ratio measure of inequality in the lower half of the wage distribution.

Michael McMahon

Rather than an endorsement or a criticism of classroom games, the conclusion is cautionary advice on how to best make use of games within an overall course.

Stephen Hansen and Michael McMahon

Consider an expert who must take one of two decisions whose consequences are uncertain. Two individual characteristics can potentially guide her decision. First, there are her preferences over the outcomes associated with each decision. Second, in an idea going back to Condorcet (1785), she might receive private signals that allow her to update her beliefs about the probabilities of the dierent outcomes being realized. Many papers in the theory literature, especially in the area of committees,1 explicitly model both dimensions and allow each to in uence decision making.

Michael W. L. Elsby, Jennifer C. Smith and Jonathan Wadsworth

Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this variation. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job-finding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.

Daniel Gutknecht

In this paper, we study nonclassical measurement error in the continuous dependent variable of a semiparametric transformation model. The latter is a popular choice in practice nesting various nonlinear duration and censored regression models. The main complication arises because we allow the (additive) measurement error to be correlated with a (continuous) component of the regressors as well as with the true, unobserved dependent variable itself. This problem has not yet been studied in the literature, but we argue that it is relevant for various empirical setups with mismeasured, continuous survey data like earnings or durations. We develop a framework to identify and consistently estimate (up to scale) the parameter vector of the transformation model. Our estimator links a two-step control function approach of Imbens and Newey (2009) with a rank estimator similar to Khan (2001) and is shown to have desirable asymptotic properties. We prove that `m out of n' bootstrap can be used to obtain a consistent approximation of the asymptotic variance and study the estimator's nite sample performance in a Monte Carlo Simulation. To illustrate the empirical usefulness of our procedure, we estimate an earnings equation model using annual data from the Health and Retirement Study (HRS). We find some evidence for a bias in the coecients of years of education and age, emphasizing once again the importance to adjust for potential measurement error bias in empirical work.

Ben Lockwood and Francesco Porcelli

This paper studies Comprehensive Performance Assessment, an explicit incentive scheme for local government in England. Motivated by a simple theoretical political agency model, we predict that CPA should increase service quality and local taxation, but have an ambiguous effect on the efficiency of service provision. We test these predictions using a difference in difference approach, using Welsh local authorities as a control group, exploiting the fact that local authorities in Wales were not subject to the same CPA regime. To do this, we construct original indices of service quality and efficiency, using Best Value Performance Indicators. We estimate that CPA increased the e¤ective band D council tax rate in England relative to Wales by 4%, and increased our index of service quality output also by about 4%, but had no signi…cant effect on our efficiency indices. There is evidence of heterogenous e¤ects of CPA on efficiency, with some evidence that CPA impacted more on less efficient councils, and the "harder test" from 2005-8 having a much bigger effect.

Emilio Fernandez-Corugedo, Michael McMahon, Stephen Millard and Lukasz Rachel

In this paper we rst document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard exibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effcts on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to oset such shocks.

Mark B. Stewart

This paper presents a method for estimating the effects of a policy change on an outcome distribution that uses a comparator quantile rather than a control group and provides methods for estimating the variances of the estimators. The empirical analysis presents estimates of “spillover” effects of increases in the UK minimum wage, i.e. effects on the wages of those already above the minimum, under different counterfactual distribution shift assumptions. Evidence is presented against a simple scaled counterfactual. On the basis of the proposed counterfactual estimated spillover effects are small and in most cases do not reach above the 5th. percentile.

Peter J. Hammond, Federica Liberini and Eugenio Proto

Sacks, Stevenson and Wolfers (2010) question earlier results like Easterlin's showing that long-run economic growth often fails to improve individuals' average reports of their own subjective well-being (SWB). We use World Values Survey data to establish that the proportion of individuals reporting happiness level h, and whose income falls below any fixed threshold, always diminishes as h increases. The implied positive association between income and reported happiness suggests that it is possible in principle to construct multi-dimensional summary statistics based on reported SWB that could be used to evaluate economic policy.

Michael P. Clements

We present a novel approach to assessing the attentiveness of professional forecasters to news about the macroeconomy. We fi…nd evidence that professional forecasters, taken as a group, do not always update their estimates of the current state of the economy to refl‡ect the latest releases of revised estimates of key data.

Nikhil Vellodi

In this paper, we generalize the notion of a communication equilibrium (Forges 1986, Myerson 1986) of a game with incomplete information by introducing two new types of correlation device, namely extended and Bayesian devices. These new devices explicitly model the `thinking process' of the device, i.e. the manner in which it generates outputs conditional on inputs. We proceed to endow these devices with both information processing errors, in the form of non-partitional information, and multiple transition and prior distributions, and prove that these two properties are equivalent in this context, thereby generalizing the result of Brandenburger, Dekel and Geanakoplos (1988).
We proceed to discuss the Revelation Principle for each device, and conclude by nesting a certain class of `cheap-talk' equilibria of the underlying game within Bayesian communication equilibria.

Michael P. Clements

We investigate two characteristics of survey forecasts that are shown to contribute to their superiority over purely model-based forecasts. These are that the consensus forecasts incorporate the effects of perceived changes in the long-run outlook, as well as embodying departures from the path toward the long-run expectation. Both characteristics on average tend to enhance forecast accuracy. At the level of the individual forecasts, there is scant evidence that the second characteristic enhances forecast accuracy, and the average accuracy of the individual forecasts can be improved by applying a mechanical correction.

Michael P. Clements and Ana Beatriz Galvão

We show how to improve the accuracy of real-time forecasts from models that include autoregressive terms by estimating the models on ‘lightly-revised’data instead of using data from the latest-available vintage. Forecast accuracy is improved by reorganizing the data vintages employed in the estimation of the model in such a way that the vintages used in estimation are of a similar maturity to the data in the forecast loss function. The size of the expected reductions in mean squared error depend on the characteristics of the data revision process. Empirically, we find RMSFE gains of 2-4% when forecasting output growth and inflation with AR models, and gains of the order of 8% with ADL models.

Gabriel Desgranges and Sayantan Ghosal

We define a continuous index of strategic stability, p-stability, which requires equilibrium to be the unique outcome compatible with common knowledge of rationality and common knowledge of p-beliefs (beliefs that put probability at least p on the equilibrium profile). We show that every equilibrium (within a large class) is p-stable for some p < 1 and justify, in smooth settings, the intuition that the slope of the best response map is related to the stability of equilibrium. We show that adding incomplete information on fundamentals could decrease the degree of strategic stability. In two applications to large markets we (i) show that a unique equilibrium globally unstable (under tâtonnement dynamics) has, nevertheless, a measure of strategic stability, (ii) characterize the conditions under which enhanced equilibrium effi ciency results in decreased strategic stability.

Peter Backus

In this paper I estimate income and price elasticities of donations to six different charitable causes to test the assumption that charity is a homogeneous good. In the US, charitable donations can be deducted from taxable income. This has long been recognized as producing a price, or taxprice, of giving equal to one minus the marginal tax rate faced by the donor. A substantial portion of the economic literature on giving has focused on estimating price and income elasticities of giving as the received wisdom suggests that a price elasticity greater than unity is indicative of the ‘treasury efficiency’ of the tax deductibility of charitable contributions, as the loss to tax revenue is less than the increase in giving. However, a major limitation of nearly all the previous attempts to identify such effects has been the implicit assumption that charity is a homogeneous good, meaning giving to one type of charity is a perfect substitute for any other and that the causespecific responsiveness of giving to changes in price and income is equal across those causes. If this assumption is violated, then estimates may be biased and policies designed to increase charitable contributions may be sub-optimal. Results suggest that the tax-price of giving only affects giving to religious organisations and that the income effect is invariant over charitable causes.

Andrew J Oswald

This paper argues -- in line with the proposals of the recent Stiglitz Commission on the Measurement of Economic Performance and Social Progress -- that we should now be measuring a nation‟s emotional prosperity rather than its economic prosperity (that is, we ought to focus on the level of mental well-being not the number of pounds in people‟s bank accounts). The paper reviews recent ideas in this field. It also describes seven recent studies that, worryingly, suggest that emotional prosperity may be declining through time. For labour-market specialists, a key question for future research is how much this downward trend can be traced back to increased pressures in working life. That question currently remains open.

Michael Waterson and Chris Doyle

The iPhone 4 was introduced into the UK market on 24th June 2010 to significant consumer interest. This clearly exceeded supply through conventional channels, since there was very extensive activity in terms of bidding on eBay auctions for the product.We monitored all eBay transactions on the iPhone 4 for six weeks from introduction, with total transactions amounting to around £1.5m. We analyse determinants of the winning bid in terms of characteristics of the phone, the seller and the buyer. Our most notable and novel finding relative to previous studies is a very significant premium over list price being paid in almost all cases, with positive uplift factors including whether the phone was unlocked and whether it could be sold overseas. Demand fell over time, as evidenced by lower achieved prices, but the fall in price was relatively modest. A significant premium of 32GB over 16GB versions is revealed.

Ben Lockwood

This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production effciency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.

Jan Hošek, Luboš Komárek and Martin Motl

This article discusses the relationship between monetary policy and oil prices and, in a broader sense, commodity prices. Firstly, it focuses on describing the relationship between key macroeconomic variables, gas prices and other commodity prices relative to oil prices. Subsequently, it discusses the existence of “transmission channels” through which monetary policy can be propagated to oil prices (or prices of commodities). It then provides an insight into the CNB’s forecasting process, both by looking retrospectively at the oil price outlook in the past and by analysing a transitory and a permanent shock (a rise in the oil price of USD 30/b). The simulated oil price shock is calculated from the average level of Brent oil prices in the first quarter of 2010, i.e. USD 77.50/b.

Stephen Hansen and Michael McMahon

We test whether outside experts have information not available to insiders by using the voting record of the Bank of England's Monetary Policy Committee. Members with more private information should vote more often against conventional wisdom, which we measure as the average belief of market economists about future interest rates. We find evidence that external members indeed have information not available to internals, but also use a quasi-natural experiment to show they may exaggerate their expertise to obtain reappointment. This implies that an optimal
committee, even outside monetary policy, should potentially include outsiders, but needs to manage career concerns.

Michael W.L. Elsby and Jennifer C Smith

The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the U.K. and by the contraction in GDP in the U.K. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment. Unemployment duration has not increased to the levels seen in previous recessions, in contrast to the U.S. where duration substantially exceeds previous peaks. Looking forward, the U.K. labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the U.K. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future.

Jennifer Smith

This paper shows that in the UK, increases in unemployment in a recession are driven by rises in the separation rate. A new decomposition of unemployment dynamics is devised that does not require unemployment to be in steady
state at all times. This is important because low UK transition rates –one quarter the size of the US –imply substantial deviation of unemployment from steady state near cyclical turning points. In periods of moderation, the job finding rate is shown to have most influence on UK unemployment dynamics. Evidence comes from the first study of monthly data derived from individuals’ labour market spells recorded in the British Household Panel Survey from 1988 to 2008.

Eugenio Proto and Daniel Sgroi

Cognitive biases have been a recognised feature of research into human behaviour since at least Kahneman and Tversky’s ground‐breaking work of the 1970s. We find that such biases extend into the realm of perceptions about relative happiness and we compare and contrast this phenomenon across three other characteristics: height, weight and political stance. Our findings indicate a powerful and consistent bias in the way individuals perceive their place in the population distribution. In particular, those at extremes perceive a population distribution that is incorrectly and heavily biased towards themselves, irrespective of whether the characteristic is objective and easily observed or not.

Dennis Leech

There is no consensus on the properties of voting power indices when there are a large number of voters in a weighted voting body. On the one hand, in some real-world cases that have been studied the power indices have been found to be nearly proportional to the weights (eg the EUCM, US Electoral College). This is true for both the Penrose-Banzhaf and the Shapley-Shubik indices. It has been suggested that this is a manifestation of a conjecture by Penrose (known subsequently as the Penrose limit theorem, that has been shown to hold under certain conditions). On the other hand, we have the older literature from cooperative game theory, due to Shapley and his collaborators, showing that, where there are a finite number of voters whose weights remain constant in relative terms, and where the quota remains constant in relative terms, while the total number of voters increases without limit - so called oceanic games - the powers of the voters with finite weight tend to limiting values that are, in general, not proportional to the weights. These results, too, are supported by empirical studies of large voting bodies (eg. the IMF/WB boards, corporate shareholder control). This paper proposes a restatement of the Penrose Limit theorem and shows that, for both the power indices, convergence occurs in general, in the limit as the Laakso-Taagepera index of political fragmentation increases. This new version reconciles the dierent theoretical and empirical results that have been found for large voting bodies.

Kalyan Chatterjee and Bhaskar Dutta

Social networks representing the pattern of social interactions - who talks to or who observes whom- play a crucial role as a medium for the spread of information, ideas, diseases, products. Someone in the population may be struck with an infection or may adopt a new technology, and it can then either die out quickly or spread throughout the population, depending possibly on the location of the initial appearance, the structure of the network - for instance, how dense it is. The dynamics of adoption -the extent to which individuals are influenced by their neighbours, the impact of "word-of- mouth" communication- also plays a role in determining the speed of diusion. Given the large range of contexts in which social learning is important, it is not surprising that researchers from various disciplines have studied processes of diffusion from a variety of perspectives.

Monica Giulietti, Michael Waterson and Matthijs R. Wildenbeest

This paper studies consumer search and pricing behaviour in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who find it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our estimates with observed switching behaviour and find they match well.

Abhinay Muthoo and Suresh Mutuswami

This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons
market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second-best mechanisms is also explored.

Robert Leech and Dennis Leech

Much current research in functional magnetic resonance imaging (fMRI) employs multivariate machine learning approaches (e.g., support vector machines) to detect distributed spatial patterns from the temporal fluctuations of the neural signal. The aim of many studies is not classification, however, but investigation of multivariate spatial patterns, which pattern classifiers detect only indirectly. Here we propose a direct statistical measure for the existence of distributed spatial patterns (or spatial heterogeneity) applicable to fMRI datasets. We extend the univariate general linear model (GLM), typically used in fMRI analysis, to a multivariate case. We demonstrate that contrasting maximum likelihood estimations of different restrictions on this multivariate model can be used to estimate the extent of spatial heterogeneity in fMRI data. Under asymptotic assumptions inference can be made with reference to the 2 distribution. The test statistic is then assessed using simulated timecourses derived from real fMRI data followed by analyzing data from a real fMRI experiment. These analyses demonstrate the utility of the proposed measure of heterogeneity as well as considerations in its application. Measuring spatial heterogeneity in fMRI has important theoretical implications in its own right and may have potential uses for better characterising neurological conditions such as stroke and Alzheimer’s disease

Eugenio Proto, Daniel Sgroi and Andrew J. Oswald

We live in a high-divorce age. Parents worry about the possibility of negative effects upon their children. This paper tests whether recent parental-divorce has deleterious consequences for grown children. Under controlled conditions, it measures students’ happiness with life, and their productivity in a standardized laboratory task. No negative effects from divorce can be detected. If anything, happiness and productivity are greater, particularly among males, if they have experienced parental divorce. Using longitudinal BHPS data -- to control for fixed effects -- we crosscheck this result on happiness. Again, the evidence suggests that young people’s mental well-being improves after parental divorce.

Andrés Carvajal, Marzena Rostek and Marek Weretka

This paper examines the optimal bundling strategies of a multiproduct monopoly in markets in which a seller cannot monitor and thereby restrict the purchases of buyers to a single bundle, while buyers have resale opportunities. In such markets, the standard mechanism through which bundling increases seller profits, based on price discrimination, is not feasible. The profit-maximizing bundling strategy is characterized, given the restrictions on pricing policies resulting from resale and a lack of monitoring. The welfare implications of optimal bundling are analyzed.

Daniel Sgroi, Eugenio Proto, Andrew J. Oswald and Alexander Dobson

Economists and behavioural scientists are beginning to make extensive use of measures of subjective well-being, and such data are potentially of value to policy-makers. A particularly famous difficulty is that of “priming”: if the order or nature of survey questions changes people’s likely replies then we have grounds to be concerned about the reliability of wellbeing data and inferences from them. This study tests for priming effects from important life events. It presents evidence from a laboratory experiment which indicates that subjective well-being measures are in general robust to such concerns

Sushama Murty

Five attributes of emission generating technologies are identified and a concept of byproduction is introduced, which implies these five attributes. Murty and Russell [2010] characterization of technologies, which requires distinguishing between intended production of rms and nature's laws of emission generation, is shown to be both necessary and suficient for by-production. While intended production could be postulated to satisfy standard input and output free-disposability, these will necessarily be violated by nature's emission generation mechanism, which satises costly disposability of emission as defined in Murty [2010]. Marginal technical and economic costs of abatement are derived for technologies exhibiting by-production. The former measures the loss in intended outputs when the firm is mandated to reduce emissions, while the latter measures its loss in profits under regulation. The by-production approach reveals a rich set of abatement options available to firms. These include reductions in the use of fuel inputs, inter-fuel substitution, increase in cleaning-up efforts, and technological change. In a simple model of by-production, we show that, when faced with regulation, the firm will use all or some of these strategies. This is in contrast to the standard input-approach to modeling emission generating technologies, where we show that, under a Pigouvian tax, a firm will reduce its emissions, solely, by increasing its cleaning-up eort. The standard input-approach also allows some paths of inputs and outputs, which seem inconsistent with nature's laws of emission generation, to become technologically feasible. Our model of by-production illustrates that, while common abatement paths considered in the literature do involve a technological trade-off between emission reduction and intended production, there also almost always exist abatement paths where it is possible to have both greater emission reductions and greater intended outputs. Further, marginal abatement costs will usually be decreasing in the initial level of emissions of firms. Counterintuitive as these results may sound in the first instance, they are intuitively obvious in the by-production approach as it is rich enough to incorporate both standard economic assumptions, such as diminishing returns, with respect to intended production of firms and the rules of nature that govern emission generation.

Marco Francesconi and Abhinay Muthoo

This paper develops a theory of the allocation of authority between two players who are in a “complex” partnership, that is, a partnership which produces impure public goods. We show that the optimal allocation depends on technological factors, the parties’ valuations of the goods produced, and the degree of impurity of these goods. When the degree of impurity is large, control rights should be given to the main investor, irrespective of preference considerations. There are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party’s investment is more important than the other party’s. If the parties’ investments are of similar importance and the degree of impurity is large, shared authority is optimal with a greater share going to the low-valuation party. If the importance of the parties’ investments is similar but the degree of impurity is neither large nor small, the low-valuation party should receive sole authority. We analyze an extension in which side payments are infeasible. We check for robustness of our results in several dimensions, such as allowing for multiple parties or for joint authority, apply our results to interpret a number of complex partnerships, including those involving schools and child custody.

Kevin Denny, Orla Doyle, Patricia O’Reilly and Vincent O’Sullivan

There is a well established socioeconomic gradient in educational attainment, despite much effort in recent decades to address this inequality. This study evaluates a university access program that provides financial, academic and social support to low socioeconomic status (SES) students using a natural experiment which exploits the time variation in the expansion of the program across schools. The program has parallels with US affirmative actions programs, although preferential treatment is based on SES rather than ethnicity. Evaluating the effectiveness of programs targeting disadvantaged students in Ireland is particularly salient given the high rate of return to education and the lack of intergenerational mobility in educational attainment. Overall, we identify positive treatment effects on first year exam performance, progression to second year and final year graduation rates, with the impact often stronger for higher ability students. We find similar patterns of results for students that entered through the regular system and the affirmative action’ group i.e. the students that entered with lower high school grades. The program affects the performance of both male and female students, albeit in different ways. This study suggests that access programs can be an effective means of improving academic outcomes for socio-economically disadvantaged students.

Sushama Murty and R. Robert Russell

We distinguish between intended production and residual generation and introduce the concept of by-production. We show that by-production provides the fundamental explanation for the positive correlation that is observed between intended production and residual generation. Most of the existing literature attributes the observed positive correlation to abatement options available to firms. We show that abatement options of firms add to the phenomenon of by-production in strengthening the observed positive correlation. The existing literature usually does not explicitly model abatement options of firms, but considers a reduced form of the technology, which satises standard disposability assumptions with respect to all inputs and intended outputs. We show that more than one implicit production relation is needed to capture all the technological trade-os that are implied by by-production. From our model, we are able to derive a reduced form of the technology that is in the spirit of the one that is usually studied in the literature. However, we nd that our reduced form technology violates standard disposability with respect to inputs and intended outputs that cause pollution. We derive implications from the phenomenon of by-production for the econometric and Data Envelopment Analysis (DEA) specications of pollution-generating technologies. We derive a DEA specification of technologies that satisfy by-production. Such a specification can be used to study issues relating to measurement of efficiency, marginal abatement costs, productivity, etc., of firms with technologies that generate pollution.

Michael Waterson

It started with the Beer Orders (1989). A watershed decision was made by the Law Lords in July 2006. For one man, Bernie Crehan, this was the culmination of a 15 year episode in the pub trade, in which he has made legal history as the first UK case of damages for breach of competition law being awarded by a court. Possibly hundreds of other cases hung on their Lordships’ decision and Nomura, the Japanese bank that took over the chain called Inntrepreneur, had a total potential liability of £100m. And it all concerns Article 81, vertical agreements, and the price of a pint of beer.

Dennis Novy

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor.

Sayantan Ghosal and James Porter

Is the result that equilibrium trading outcomes are ecient in markets without frictions robust to a scenario where agents' beliefs and plans aren't already aligned at their equilibrium values? In this paper, starting from a situation where agents' beliefs and plans aren't already aligned at their equilibrium values, we study whether out of equilibrium trading converges to efficient allocations. We show that out-of-equilibrium trading does converge with probability 1 to an efficient allocation even when traders have limited information and trade cautiously. In economies where preferences can be represented by Cobb-Douglass utility functions, we show, numerically, that the rate of convergence will be exponential. We show that experimentation leads to convergence in some examples where multilateral exchange is essential to achieve gains from trade. We prove that experimentation does converge with probability 1 to an efficient allocation and the speed of convergence remains exponential with Cobb-Douglass utility functions.

Rita de la Feria and Ben Lockwood

This paper provides a legal and economic analysis of the European Commission’s recent proposals for reforming the application of VAT to financial services, with particular focus on their “third pillar”, under which firms would be allowed to opt-into taxation on exempt insurance and financial services. From a legal perspective, we show that the proposals’ “first and second pillar” would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime. Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States. On the economic side, we show that quite generally, when firms cannot coordinate their behaviour, they have an individual incentive to opt-in on business-to-business (B2B) transactions, but not on business-to-consumer (B2C) transactions. We also show that opting in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But, these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided for a number of EU countries.

Sandro C. Andrade and Emanuel Kohlscheen

Using survey data, we document that foreign-owned institutions became more pessimistic than locally owned institutions about the strength of the Brazilian currency around the 2002 presidential elections. As a result of their relative pessimism, foreign owned institutions made larger forecast errors. Consistent with the emergence of their
relative pessimism, foreign investors heavily sold Brazilian stocks and the Brazilian currency in futures markets ahead of the 2002 elections. Periods of stronger foreign sell-off were associated with larger equity price declines and larger depreciation of the Brazilian Real in spot and futures markets. These results are consistent with foreign investors’ lack of knowledge of Brazilian institutions contributing to the sharp depreciation of the Brazilian currency and stock market ahead of the 2002 presidential elections.

Rafael Sánchez

This study exploits the reduction of weekly working hours from 48 to 45 occured in Chile in January 2005. We use this pure and exogenous policy change to identify the employment effects of such a policy. Our main contribution is that we overcome the problems of previous studies such as: selection between hours and employment, lack of identification strategy due to the joint implementation of policies and lack of crucial variables (like hourly wages and usual hours). Our results suggest no significant effects of a reduction of standard hours on employment transitions and a significant effect on hourly wages (i.e. wage compensation). These results are robust to several specifications.

Alessandro Diego Scopelliti

The present work analyzes the interaction between antitrust policy and intellectual property protection, with particular reference to the cases of refusal to supply, when it concerns ideas or inventions protected by an IP right. For this purpose, the paper preliminarily discusses the governing principles of antitrust policy on abuse of dominance and refusal to deal, as they have been implemented in the decisions of the EU Competition Authority, and it presents the specific issues related to the implementation of antitrust policy in the innovative industries.Then, the paper examines in particular the Microsoft Europe Case, as decided by the European commission in 2004, focusing on the issue of the interoperability between the operating systems for personal computers and the operating systems for work group servers. The theoretical model, developed as an extension of the framework proposed by Choi and Stefanadis (2001) to the case of refusal to deal, suggests an explanation of the case, alternative to the one adopted by the Commission, if not necessarily in the final outcome of the decision, at least in the analytical arguments and in the dynamics of the market structure. In particular, we show that the refusal to supply the compatibility between the two complementary products was determined not only by the intention to leverage its dominant position to the adjacent market of server operating systems, but especially by the concern for keeping the monopoly on its core market, that is the one of PC operating system, given the future evolution of the software market, due to the diffusion of cloud computing.

Alexander Klein

This paper analyzes the rural-urban migration of families in the Bohemian region of Pilsen in 1900. Using a new 1300-family dataset from the 1900 population census I examine the role of children‘s education in rural-urban migration. I find that families migrated to the city such that the educational attainment of their children would be maximized and that there is a positive correlation between family migration and children being apprentices in urban areas. The results suggest that rural-urban migration was powered not only by the exploitation of rural-urban wage gaps but also by aspirations to engage in human capital investment.

Andres Carvajal and John K H Quah

An observer makes a number of observations of an industry producing a homogeneous good. Each observation consists of the market price, the output of individual firms and perhaps information on each firm's production cost. We provide various tests (typically, linear programs) with which the observer can determine if the data set is consistent with the hypothesis that firms in this industry are playing a Cournot game at each observation. When cost information is wholly or partially unavailable, these tests could potentially be used to derive cost information on the firms. This paper is a contribution to the literature that aims to characterize (in various contexts) the restrictions that a data set must satisfy for it to be consistent with Nash outcomes in a game. It is also inspired by the seminal result of Afriat (and the subsequent literature) which addresses similar issues in the context of consumer demand, though one important technical dierence from most of these results is that the objective functions of firms in a Cournot game are not necessarily quasiconcave.

Pablo Beker and Subir Chattopadhyay

We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agent’s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent’s consumption is bounded away from zero eventually, the other agent’s consumption is zero eventually–so either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent’s consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) and Blume and Easley (2006) where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which neither agent is eliminated.

Bhaskar Dutta and Arunava Sen

We investigate the problem of Nash implementation in the presence of "partially honest" individuals. A partially honest player is one who has a strict preference for revealing the true state over lying when truthtelling does not lead to a worse outcome (according to preferences in the true state) than that which obtains when lying. We show that when there are at least three individuals, the presence of even a single partially honest individual (whose identity is not known to the planner) can lead to a dramatic increase in the class of Nash implementable social choice correspondences. In particular, all social choice correspondences satisfying No Veto Power can be implemented. We also provide necessary and sufficient conditions for implementation in the two-person case when there is exactly one partially honest individual and when both individuals are partially honest. We describe some implications of the characterization conditions for the two-person case. Finally, we extend our three or more individual result to the case where there is an individual with an arbitrary small but strictly positive probability of being partially honest.

Volker Nitsch and Nikolaus Wolf

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or “red tape” barriers to trade, but arise from economic fundamentals.

Mark Harrison

The paper provides a rare case study of terrorism and counter-terrorism within a closed society, carried out under a blanket of official secrecy. This case is unexpectedly revealing in what it tells us about terrorism, counterterrorism,
and the relative strengths of open and closed societies. Documents from the archive of the Lithuania KGB show how the Soviet authorities managed the hunt for the perpetrators of bombing attacks carried out in Moscow in January 1977. Lithuania, a sensitive border region with a troubled history, was far distant from the epicenter of the conspiracy in Soviet Armenia, but the authorities did not know this beforehand, and made considerable efforts to establish or rule out a Lithuanian connection. It was a problem that the KGB, like other Soviet organizations, was vulnerable to boxchecking and other kinds of perfunctory working to the plan. The career concerns of regional KGB leaders appear to have countered this tendency. The paper evaluates the strengths and weaknesses of a counter-terrorist operation carried out under conditions of the intense secrecy that was normal in the Soviet police state.

Dimitrios Xefteris and Kostas Matakos

We study electoral rule choice in a multi-party model where parties are office-motivated and uncertainty over the electoral outcome is present. We show that when all dominant parties (parties with positive probability of winning the elections) have sufficiently good chances of winning, then they agree to change the PR with a more majoritarian rule. We identify the exact degree of disproportionality of the new rule and we prove that it is increasing in the expected vote share of the minority parties (parties with zero probability of winning). The necessary and sufficient conditions for such collusion in favour of a majoritarian rule are: a) the high rents from a single-party government, b) sufficient uncertainty over the electoral outcome and c) ideological proximity of the dominant parties.

Alexander Klein

This paper constructs an estimate of the total personal income for every U.S state in 1880, 1890, 1900, and 1910. The series includes new figures for 1890 and 1910, and updated figures for 1880 and 1900, which were originally estimated by Richard Easterlin more than fifty years ago. The estimation follows the methodology developed by Easterlin. The paper presents a comparison of the original with the updated 1880 and 1900 figures, a formalization of Easterlin’s methodology, the details of the data sources and the calculation of the new 1890 and 1910 U.S. states’ total personal income estimates.

Shurojit Chatterji, Sayantan Ghosal, Sean Walsh and John Whalley

In this paper we discuss global climate change mitigation that builds on existing unilateral actions to deliver ever deepening emission cuts over time. A wide array of unilateral environmental measures have been documented. We discuss the rationale for suchmeasures and argue that unilateral initiatives have the potential to generate positive spillover effects both within and across countries. Using a simple dynamic model of learning, we show how global negotiations can accelerate convergence to a global low emissions regime by building on and strengthening the positive spillovers inherent in unilateral initiatives.

Dennis Leech and Robert Leech

We discuss the reform of the voting rules at the heart of the governance of the IMF and World Bank (the BWIs) in terms of three principles that we suggest ought to be fundamental: simplicity, transparency and democratic legitimacy. By simplicity we mean that the rules should make sense in terms of the purposes of the BWI and be easy to understand. By transparency we mean that the rules mean what they appear to mean in the sense of leading to the same distribution of voting power as the institution's designers intended. We show using voting power analysis that the inequality in the distribution of voting power among countries is greater than that of their voting weight. By democratic legitimacy, we consider whether we can reconcile weighted voting with democracy. Our conclusion is that the voting rules as they currently exist are far from satisfying any of these criteria and that recent reform proposals do not lead us to change this conclusion.

Monica Giuletti, Luigi Grossi and Michael Waterson

This paper explores the relationship between domestic retail electricity prices in Great Britain and their determinants in the particular context of the New Electricity Trading Arrangements (NETA) introduced in 2001. The analysis requires a consistent comparison of wholesale power price series before and after NETA, which we investigate using a range of wholesale future price series. Despite its stated intention of reducing prices, we conclude that the net effect of NETA alongside other developments instead merely rearranged where money was made in the system.

Sushama Murty

We explore the scope of employing standard assumptions and replicating standard (Kuhn-Tucker-type) techniques that are used to study the rst-best Pareto frontier to the study of Pareto frontiers of second-best economies. In the context of a simple second-best situation created by the inability of the government to implement personalized lump-sum transfers and where the government takes recourse to linear (Ramsey) commodity taxes as alternative redistributive devices, we identify at least three potential problems that second-best situations create for obtaining well-behaved Pareto frontiers. We show that additional conditions are required to ensure that the second-best Pareto frontier of an economy with H consumers will have the expected structure of a H -1-dimensional manifold. Second-best Pareto optima, as is well-known, are characterized by consumption and/ or production inefficiencies. In a class of private-ownership economies with Ramsey taxation, we show that, generically, while the jointly production and consumption inefficient component of the second-best Pareto manifold is a submanifold that also has a dimension equal to H 􀀀 1, the production efficient but consumption inefficient, consumption efficient but production inefficient, and the first-best components are lower dimensional, and hence negligible in size, submanifolds. Thus, we formally demonstrate that, generically, in second-best economies, joint production and consumption ineciencies are prevalent and, hence, neither producer nor consumer prices reveal the true social shadow prices of resources. The recovery of unobservable shadow prices from observable data is crucial for cost-benet analysis of competing public sector projects. Our results demonstrate the important need for further research for recovering the true social shadow prices from observable data in second-best economies.

Andrei Markevich and Mark Harrison

We are working towards filling the last remaining gap in the historical national accounts of Russia and the USSR in the twentieth century. The gap includes the GreatWar (1914 to 1917), the Bolshevik Revolution, the Civil War and War Communism (1918 to 1921), and postwar recovery under the New Economic Policy of a mixed economy (1921 to 1928). Our work builds on our predecessors and also returns to a number of original sources. We find that the economic performance of the Russian Empire in wartime was somewhat better than previously thought; that of War Communism was correspondingly worse. We confirm the persistence of losses associated with the Civil War into the postwar period, or the failure of the New Economic Policy to achieve full recovery, or some mixture of both.We conclude that the GreatWar and CivilWar produced the deepest economic trauma of Russia’s troubled twentieth century.

Alexandre Janiak and Paulo Santos Monteiro

We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous : it is responsible for about one half of the welfare cost of inflation.

Mark Harrison

Attempting to satisfy their political masters in a target-driven culture, Soviet managers had to optimize on many margins simultaneously. One of these was the margin of truthfulness. False accounting for the value of production appears to have been widespread in some branches of the economy and some periods of time. A feature of cases of false accounting was that they commonly involved the aggravating element of conspiracy. The paper provides new evidence on the nature and extent of false accounting; the scale and optimal size of underlying conspiracies; the authorities’ difficulty in committing to penalize it and the importance of political connections in securing leniency; and the importance of herd effects, leading to correlated risk taking and periodic asset price bubbles in the socialist market where interpersonal trust was traded.

Charles Blackorby and Sushama Murty

We study the link between second-best production efficiency and the constraints on income distribution imposed by private ownership of firms in economies with Ramsey taxation. We review the result of Dasgupta and Stiglitz [1972], Mirrlees [1972], Hahn [1973], and Sadka [1977] about firm-specific profit taxation leading to second-best production efficiency. Problems in the proofs of this result in these papers have been identified by Reinhorn [2005]. We provide an alternative, and with some hope a more intuitive, proof of this result. The mechanism employed in our proof is also used to show second-best production efficiency under some configuarations of private ownership without any (or at best, uniform) profit taxation. The results obtained raise questions about the genericity of the phenomenon of second-best production inefficiency and about recovering social shadow prices in such economies.

Robin A. Naylor and Jeremy Smith

Changes in educational participation rates across cohorts are likely to imply changes in the ability-education relationship and thereby to impact on estimated returns to education. We show that skewness in the underlying ability distribution is a key determinant of the impact of graduate expansion on the college wage premium. Calibrating the model against the increased proportion of university students in Britain, we find that changes in the average ability gap between university students and others are likely to have mitigated demand-side forces.

Norman Ireland, Robin A. Naylor, Jeremy Smith and Shqiponja Telhaj

An increase over time in the proportion of young people obtaining a degree is likely to impact on the relative ability compositions (i) of graduates and non-graduates and (ii) across graduates with different classes of degree award. In a signalling framework, we examine the implications of this on biases across cohorts in estimates of educational returns. In an empirical analysis, we exploit administrative data on whole populations of UK university students for ten graduate cohorts to investigate the extent to which early labour market outcomes vary with class of degree awarded. Consistent with our theoretical model, we find that returns by degree class increased across cohorts during a period of substantial graduate expansion. We also corroborate the empirical findings with evidence from complementary data on graduate sample surveys

Emanuel Kohlscheen

In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices.

Emanuel Kohlscheen

This paper analyzes the incidence of domestic and external debt crises for a sample of 53 emerging economies between 1980 and 2005. Even though there is substantial time variation in the default rates during the period, sovereign default rates for domestic debts are typically lower than those for external debts. The incidence of both types of defaults is explained by means of the estimation of independent and simultaneous limited-dependent variable models. The results show that while there is considerable evidence that external defaults trigger domestic defaults, evidence for the reverse link disappears when default propensities are estimated in a simultaneous equation model

Andrew J. Oswald, James I. Oswald and Hezlin Ashraf-Ball

Unlike oil and coal, which are compressed forms of energy, renewable energy requires unusually large land areas. This article calculates the consequences of a switch to hydrogen-cell vehicles powered by electricity from wind turbines. It then re-does the calculation for three other green energy sources: wave power; biofuels; solar energy. We argue that policy-makers and social scientists need to understand the significant spatial demands of a move to a carbon-free society.

Claudio Mezzetti and Ludovic Renou

A mechanism implements a social choice correspondence f in mixed Nash equilibrium if at any preference profile, the set of all pure and mixed Nash equilibrium outcomes coincides with the set of f-optimal alternatives at that preference profile. This definition generalizes Maskin’s definition of Nash implementation in that it does not require each optimal alternative to be the outcome of a pure Nash equilibrium. We show that the condition of weak set-monotonicity, a weakening of Maskin’s monotonicity, is necessary for implementation. We provide sufficient conditions for implementation and show that important social choice correspondences that are not Maskin monotonic can be implemented in mixed Nash equilibrium.

Amrita Dhillon, Javier García-Fronti and Lei Zhang

The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structures with a larger fraction of long term lenders are associated with a lower default probability and lower risk premia. Moreover, competitive markets structures lead to loss in efficiency as well when there is moral hazard, in contrast to the case with perfect enforceability and information