Working Paper n. 1/95
Corporate Governance and Commercial banking: A Comparative Economic Perspective with Emphasis on Germany, Japan and the United States
Jonathan R. Macey, Goffrey Miller
This article explores the role played by commercial banks in the corporate governance system of Germany, Japan and the United States. banks are portrayed as institutional investitures that purchase both equity and debt from corporations. Because banks act rationally and self-interestedly in their dealings with their clients, the mix of equity and debt owned by will inform banks' preferences for the sorts of projects they would like their clients to pursue.
We show that the interests of banks as fixed claimants (lenders) often dominates the interests of banks as equity claimants (stockholders). Consequently, the continuos monitoring conducted by banks in Germany, japan and the united States may not be sufficient to protect shareholders' interests due to the straightforward conflicts of interest that exist between the fixed claimants who make loans and the residual claimants who have invested risk capital in firms and have the greatest stake in the financial success of the firms. Because of this conflict between the interests of banks and the interest of other public shareholders, bank monitoring may be inferior to a well-functioning public market for corporate control as a mechanism for monitoring firm performance from the shareholders' perspective.
Working Paper n. 2/95
The regulation of corporate acquisitions a law an economics analysis of European proposal for reform
Clas Bergström, Peter Högfeldt, Jonathan R. Macey, Per Samuelsson
A well-functioning market for corporate control is considered by the EC Commission as an important method for monitoring incumbent management and for improving the allocation of resources within Europe. This article examines the regulation of corporate acquisitions in Europe as well as inherent restrictions on takeovers from a law and economics perspective. We find that the European proposal for reform in the proposed 13th Company Law directive do not live up to their promise of encouraging acquisitions. Indeed, we find that the proposed rules inhibit acquisitions in significant ways, and therefore are more likely to result in reduced monitoring of incumbent management and in inefficiencies in the allocation of productive resources in Europe.
Working Paper n. 3/95
Testing for absolute purchasing power parity
Collin Crownover, John Pippenger, Douglas G. Steigerwald
Purchasing Power parity (PPP) is an equilibrium condition equating the nominal exchange rate between two countries whit the relative price of identical bundle of goods in each country. Previous time-series researchers use price indices to study PPP, so they test relative PPP. We use new data that measures price levels, so we test absolute PPP. price levels provide a test of absolute PPP because, unlike price indices, price levels do not contain a base period in which the nominal exchange rate equals the price ratio by construction. We find support for absolute PPP.
Working Paper n. 4/95
Dependent children and aged parents: funding education and social security in an aging economy
Rowena A. Pecchenino, Patricia S. Pollard
In the last decades of the twenties century the economies of the industrialized nations have seen their populations age and their trend rates of growth slow. Further, dependency ratios are on the rise, so that the financial burden on the productive middle aged to fund the retirements of their aged parents and the schooling of their dependent children is increasing. Using an overlapping generations framework in which agents live for three periods, we examine the effects of an aging population and the social security system's response to this aging on parents' private expenditures on their children and on local government expenditures on education. Further, we analyze the effects of various social security tax schemes and of various education schemes on human and physical accumulation, social welfare and economic growth.
Working Paper n. 5/95
Property rights and innovation with implications for income distribution
Svetozar Pejovich
The purpose of this paper is to connect property rights and economic development. To this end, the paper analyzes the effects of alternative property rights on the flow of innovation. By focusing on institutional arrangements that have been tried over a long period of times, the paper yields analytical propositions about the effects of be evaluated against actual experiences. Those arrangements are private property rights in capitalism, and economic planning and labor participation in the management of business firms in socialism. The conclusion is that alternative property rights have specific and predictable effects on economic development.
Working Paper n. 6/95
The minimum wage
Deepak Lal
The Paper sets the recent revival of the case for a minimum wage on grounds of "dynamic monopsony" in intellectual and comparative perspective. It argues that the purported divergences between wages and marginal products are unavoidable in real world labour markets riddled with uncertainty. Apart concentrated-minimum wages would have other deleterious side effects, eg. reducing human capital formation because of the compression of wages and the reduction in the incentive to acquire skills, they induce.
Working Paper n. 7/95
India and China: contrasts in economic liberalization?
Deepak Lal
It is argued that in both India and China despite some important differences: (a) similar cultural and political imperatives led to similar system of dirigisme and economic outcomes - with the Chinese growth higher than the Indian Because of higher investments: (b) crises engendered by their dirigiste regimes impelled reform; (c) their attempts to replace the plan by the market have striking similarities but (d) ultimately because of continuing atavistic attitudes to trade and commerce the reforms remain insecure.
Working Paper n. 8/95
Testing for cointegration with transaction costs. the case of the law of one price
Tasos Mastroyiannis, John Pippenger
Even when there are strong economic reasons for believing that two series are cointegrated, cointegration test often fail to reject the null of no cointegration. We believe that a major reason these tests often fail to reject that null is because they ignore the econometric effects of transaction costs. Transact costs introduce a neutral range into economic models within which arbitrage fails and the error correction mechanism between series disappears.
We use some improved data for the law of one price to illustrate how transaction costs introduce nonlinear cointegration and bias linear tests toward accepting no cointegration. Our analysis of the law of one price begins with a reinterpretation of Roll's efficient commodity market model that yields a conventional statement of the law of one price. We then introduce transaction costs and estimate the resulting model with switching regression.
Working Paper n. 9/95
Equilibrium wage and dismissal processes
Christopher J. Flinn
We develop and estimate an equilibrium model of the labor market in which inefficient employees are systematically eliminated from the sector of the market characterized by asymmetric information and moral hazard. Systematic selection on the distribution of productivity characteristics produces unique wage sequences which are increasing in tenure for employees never previously terminated even in the absence of long-term contracting between employees and individual firms. We provide sufficient conditions for there to exist an equilibrium model using micro-level data from the national Longitudinal Survey-Youth Cohort panel.
Working Paper n. 10/95
Rationalizing child support decisions
Daniela Del Boca, Christopher J. Flinn
We provide a framework within which the child support compliance decisions of noncustodial fathers and the child support awards set by institutional agents can be coherently interpreted. The model of child support transfers is able to qualitatively capture the features of the monthly payment distribution. Estimated parental decision rules are used to infer the implicit weights given by institutional agents to the post-divorce welfare of parents and children. We find that the weight attached to the combined welfare of the custodial mother and child is significantly less than the weight given to the father's welfare in most sample cases. (JEL D10, K40)
Working Paper n. 11/95
A public choice approach to transition in eastern Europe
Enrico Colombatto, Jonathan Macey
The recent experience in Eastern Europe demonstrates that the three pillars of transition - privatization, price liberalization and currency convertibility - are extremely fragile, unless they are realized within a suitable institutional framework. The present paper tries to develop a public-choice approach to transition, by applying the principles of economic theory to the production of law and legislation. Competing hypotheses of constitution making are studies in detail, and the crucial role of nomenclature emphasized. As a result, the future is shown to depend on whether the constitutional moment is effectively under way, or just a prospect; in the former case - contrary to common beliefs - hopes for rapid and sound improvement would probably be misplace.
Working Paper n. 12/95
New Stories on exchange-rate policies in transition
Enrico Colombatto, Jonathan Macey
The paper presents a public-choice analysis of the existing exchange-rate regimes in transition economies, which special reference to the East-European case. The degree of convertibility and of exchange-rate flexibility turn out to be crucial in order to understand how rent-seeking coalitions are formed and interact with political institutions. On the other hand, the choice of the exchange-rate regime may not follow the usual, well-known, textbook rules. The links between policy making, rent seeking coalitions are formed and interact with political institutions. On the other hand, the choice of the exchange-rate regime may not follow the usual, well-known, textbook rules. The links between policy making, rent seeking and exchange-rate regimes are thus examined in detail from a theoretical point of view, and then compared with the existing empirical evidence. Some comments about the role of the West and of international organizations are also put forward.
Working Paper n. 13/95
La domanda di moneta (M2) in Italia: analisi econometrica dei dati dal 1982 al 1991
Paola Donati
Questo lavoro propone un modello di lungo termine a due equazioni per spiegare la di domanda di moneta (M2) in Italia. Le grandezze utilizzate sono, oltre all'aggregato M2, il PIL, le Attivitā Finanziarie sull'Interno relativo al settore non statale, il tasso di interesse netto corrisposto sulla moneta M2 e il tasso netto di rendimento sui BOT. Si assume che tra le variabili considerate sussistano due vincoli indipendenti di lungo termine, per cui l'aggregato M2 il tasso di rendimento ad esso relativo, possono essere spiegati attraverso due relazioni distinte espresse in funzione delle altre tre variabili considerate.
La metodologia di analisi dei dati adottata č quella della cointegrazione. E' stato applicato l'algoritmo proposto da Johansen (1988) e (1989) e Johansen-Juselieus (1990) che consente di determinare in un solo passo di analisi tutte le relazioni di lungo termine esistenti fra le grandezze.
Working Paper n. 14/95
What prospect for post-communism?
Andrzej Brzeski
These reflections deal with some contradictory developments in post-communist Russia. They stress the need for clarifying and strengthening property rights and point to the role of politics in achieving economic progress.
Working Paper n. 15/95
Pure consumption time
Ian Steedman
Consumption per se takes time, quite independently of any "household production" time ā la Beker. Hence most household face two constrains on consumption-an expenditure constraint and a time constraint. (Note that the latter, correctly specified, is an exact equality and not a weak inequality). Not surprisingly, the presence of time constraint can affect standard results of consumer theory. There must be an inferior commodity; Giffen goods are more likely; discontinuities in the quantity/price relations are likely; Hicksian cross-substitution effects can be unequal; and so on.
Very high income households may face only the time constraint on consumption; note that the familiar "non-satiation axiom" will be violated; there is a "best bundle". The last third of the paper suggests that a time-focus facilitates connections with wider social theory.
Working Paper n. 16/95
Endogenous growth and the size of the market
Abhirup Sarkar
A model of endogenous growth is considered where demand plays a crucial role in determining the rate of technical progress and growth. We show that the size of the middle class is extremely important in determining the rate of growth and the latter is zero unless the economy has a sufficiently large middle class. The existence long run positive growth is also shown to be dependent upon initial conditions.
Working Paper n. 17/95
Wage dispersion and productive efficiency: evidence for Sweden
Douglas A. Hibbs, Jr., Håkan Locking
The effects of wage dispersion on productive efficiency is a topic rich in theoretical conjecture, a common object of Scandinavian polemical debate and at the same time an issue almost barren of systematic econometric evidence. The Swedish record of enormous compression of relative wages under the institutional regime of centralized solidarity bargaining, followed by substantial de-compression of wages after central bargaining broke down, provides an almost ideal natural experiment for empirical testing of theories and presented in this paper from regression experiments based on distribution-augmented production and labor productivity functions yields no support of "fairness, morale and cohesiveness" theories implying that wage leveling within workplaces and industries may enhance productivity. We do find substantial evidence, however, that reduction of inter-industry wage differentials contributed positively to output and productivity growth, most likely for the structural reasons emphasized by leading trade union economists almost a half century ago.
Working Paper n. 18/95
Wage Compression, Wage Drift and Wage Inflation in Sweden
Douglas A Hibbs, Jr., Håkan Locking
Historically, equality of wage distribution was a vital trade union objective in Sweden, yet it has received scant attention in the academic wage formation literature. In this paper we derive a model for the joint endogeneity of centrally contracted wages and decentralized wage drift in which central union attempts to reduce dispersion of relative wages plays a pivotal role. Our empirical results demonstrate that efforts to level wage differentials through central bargaining exerted large positive effects on both centrally negotiated wage changes and wage drift. We also show that wage drift was readily predicted by central negotiators, and likely was fully incorporated into central wage agreements. central wage formation therefore dominated the wage inflation process. after the breakdown of central bargaining in 1983, however, the institutional capacity to affect wage distribution from the top dissolved, and the influence of conventional market forces on wage development was magnified.
Working Paper n. 19/95
Money and Credit in an open-ended universe
Jean-Pierre Centi
Why has the Hayekian theory of trade cycle entered mainstream economics while monetary competition has not? Is there some inconsistency in Heyekian monetary theory? Is the idea of private competing moneys inconsistent with the other basic principles of the Austrian theory? Is Austrian economics simply neoclassical economics in disguise? This paper is written in order to answer these questions. The first section starts with a very short sketch of basic principles of Austrian economics. An important effect of this approach is that money and credit are in no way ad hoc devices closing the universe. It is the purpose of the second section to focus on the institutional nature of money. Money, like law, can be viewed as capitalized trust. The argument of the paper is that not only there is a conceptual similarity of law and money, but there must also be complementary in their emergence. HAYEK directed his economic analysis towards the characteristics of the appropriate institutional structure for monetary soundness. In the third section, I have tried to outline the differences between Hayek's contribution and the recent mainstream developments. Although there are agreements on some points, there are strong differences in methodology and normative implications. In the fourth section I deal with the necessity of monetary discipline. The crucial question is one of trust. A property rights approach to the money supply would be useful. In the fifth and final section, it is shown that the rule of monetary competition is fully consistent with Hayek's theory of evolution. This rule is the only one which does not violate the moral principle of liability. The option of monetary competition is eventually worth pursuing because of the discipline that it imposes on further increases in the size of governments, and because it gives morality precedence over the equilibrium - cum - efficiency criteria.
Working Paper n. 20/95
Banks and the banking market
Rowena A. Pecchenino
This paper develops a model of the banking market in which individual banks make decisions concerning both the size and risk characteristics of their portfolios, and in which actions of one bank spill over to affect actions of other banks. By specifying a shock and tracing its effects on all banks active in the market, various questions of market behavior, such as herding, credit crunches, bank reaction to policy changes, etc., are examined.
Working Paper n. 21/95
Corporate real estate management in Italy
Halbert C. Smith
The purpose of this study was to assess the status of real estate management by large non real estate companies in Italy. In-depth interview with 11 large industrial, banking, insurance, and retailing companies were held from March to June, 1995. A search of similar and related studies in the U.S. revealed that most firms do not manage their real estate to take full advantage of its potential to improve the financial performance of the companies. This study found that all of the companies interviewed manage their real estate in a very professional manner. They regularly collect and analyze various types of performance measures, and they operate the real estate efficiently. A striking finding which surfaced virtually every interview is the extent to which the participants feel that the real estate market is constrained by taxes, laws, rules, and inefficient processes by the national and local governments. Consequently, strategic decisions such as renting vs. buying, portfolio composition, and financing alternatives are more determined by constraints and less by market considerations than in the U.S. .
Working Paper n. 22/95
On the relationship between price and output seasonality in backward agricultural markets
Abhirup Sarkar
The purpose of the paper is to explain, in terms of a simple theoretical model, why low (high) price seasonality coexists with high (low) output seasonality in some backward agricultural markets. The explanation is provided in terms of differences in the degree of monopoly across markets coupled with government procurement activity.
Working Paper n. 23/95
Privatizing the process of institutional change in eastern Europe
Svetozar Pejovich
Analysis in this paper identifies the interaction of formal and informal rules, all of which carry their incentives and transaction costs, as a major factor influencing economic performance and social stability in a society. Analysis also shows that the method of choosing new formal rules is a critical circumstance affecting to lower (or raise) transaction costs. By linking institutional changes and economic performance via the effects of the former on incentives affecting transaction costs, the paper provides satisfactory answers to numerous questions arising in post-1989 Eastern Europe such as why do we observe differences in the direction of institutional changes, what are the efficiency implications of those differences, and why has the transition process faltered in many East European countries?
Working Paper n. 24/95
The use of comonotone random variables in economics: a review of some results
Alain Chateauneuf, Michčle Cohen, Robert Kast
Different notions of comonotonicity dispersed in a wide range of literature are reviewed. We first gather and analyse different definitions that have been given in various contexts, then we emphasize several relevant applications of comonotonicity in economics. This includes decision theory along the line of the "non-expected" utility models and its applications to the measure of risks, risk aversion and aversion to uncertainty. A characterization of Pareto optimal allocation for risk averse agents is particularly relevant to the theory of insurance. Inequality measures are reviewed along their implicit use of comonotonicity and generalization is proposed. The hedging effect of non comonotone random variables is applied to financial assets valuation theory and to the choice of portfolios.
Working Paper n. 25/95
Free Trade zones, tariffs and the real exchange rate
Bharat R. Hazari, Pasquale M. Sgro
This paper examines the consequences of changes in factor endowments and final and intermediate good tariffs on structural adjustment, urban unemployment and the real exchange rate in the presence of a free trade zone and foreign capital in host country. We set up general equilibrium model which consists of two regions, five goods (including an FTZ), a Harris-Todaro minimum wage, and an imported intermediate good and foreign capital. The FTZ is incorporated as an additional sector in the urban region and its existence is taken as given.
This general equilibrium framework captures various characteristics of models used in trade and/or development literature. First, the model combines fixed and flexible prices: fixed prices for traded goods. Second, it captures the dualism that is present in the labour markets of many countries: a formal labour market with a minimum wage and informal labour market with flexible wages. Third, it also distinguishes between urban and rural physical and value factor intensities. Fourth, it brings in the role of demand conditions due to the presence of non-trade goods. Fifth it represents a combination of Hechscher-Ohlin and Ricardo-Viner models of trade. Finally, and most importantly it shows how urban variables have important effects on rural variables.
Several interesting results are obtained regarding the effects of tariff changes on regional income factor rewards, structural change and the real exchange rate. in the presence of a minimum wage and an FTZ a tariff raises (lowers) the reward if domestic (foreign) capital. Hence, the pressure for tariff protection comes from the domestic or foreign owners of capital. These changes depend on the domestic to foreign capital intensities in the urban trade goods sector. An increase in the final good tariff may raise both urban and regional incomes and buy the Pareto criterion improve aggregate welfare. This result is an extension of trade and distortion literature to a two agent framework. Another effect of tariff increase, under certain plausible conditions, is to shift resources from the traded goods sector to non-traded goods. Such structural adjustment is not desirable from the development perspective. Such developments do not allow the economy to fully exploit global trade opportunities. Non conventional results are obtained regarding the movement of the real exchange rate in the response to changes in tariffs. These results arise due to the minimum wage restriction in the urban region and the role of domestic-foreign capital intensities (including the FTZ).
Working Paper n. 26/95
Value, efficiency, and rules: the limits of economics
Louis De Alessi
The failure to separate normative from positive economics continues to bedevil economists, yielding analyses and policy recommendations that are value-loaded and biased against individual liberty and open markets.
In particular, mainstream economists who compare alternative rules (and institutions) routinely introduce notions of economic efficiency and assumptions about the state of the world the disregard individual values. First, analyst typical define economic efficiency in terms of some ideal state, implicitly choosing some social welfare function as a benchmark. Pareto and other social welfare criteria inherently are value-loaded. Second, analysts assume that values can be measured objectively by outside observers, thereby ignoring individuals' subjective (personal-use) values. Third, analysts frequently assume antecedent conditions that are empirically false - for example, that all individuals have identical preferences - and fail to specify rules of correspondence for key theoretical terms. Fourth, analyst compare institutions on the basis of equilibrium conditions that are seldom reached. In a world of change, the process of adjustment may be much more important.
The common law is an interesting example of a set of rules that provides order without imposing it. Both statutory and common law apply to all individuals. Unlike statutory rules, however, the common law allows individuals to contract around the rule. Thus, the common law allows a sort of unanimity.
Although current notions of economic efficiency seem to provide scientific, objective criteria for comparing rules, in practice they mask normative criteria that favor rules limiting individual liberty and open markets. At best, economics offers a theoretical framework for analyzing the consequences of changes in circumstances and for examining the interaction and congruence of alternative rules with various ethical norms.
Working Paper n. 27/95
Modeling foreign exchange markets: stock versus flow
John Pippenger
The increased exchange rate volatility following the collapse of Bretton Woods was widely views as excessive and inconsistent with a flow approach. As a result, portfolio balance replaced the flow approach. But after 20 years, portfolio balance models have not improved our ability to explain short-run exchange ate behavior. So it appears appropriate to ask whether the shift from flow to stock was correct. The first part of this paper critically reviews the reasons for the switch from flow to stock. Section II reviews some evidence that is inconsistent with portfolio balance. The following section outlines an approach in which both the standard stock and flow models are special cases. The next two sections develop and test ways of discriminating between portfolio balance and general flow model. Empirical results are consistent with the flow approach, but very difficult to reconcile with portfolio balance.
Working Paper n. 28/95
Valutazione contingente della disponibilitā a pagare per una riduzione del rumore
Ugo Colombino, Marilena Locatelli Biey
I decisori politici possono incontrare la necessitā di stimare il valore economico di beni che non hanno un mercato.
Uno dei metodi utilizzabili al riguardo, č quello della "valutazione contingente" che, nel presente studio, viene impiegata per stimare la disponibilitā a pagare per una diminuzione dell'inquinamento da rumore.
L'impiego dei modelli Probit e Logit applicato ad un campione estratto dall'anagrafe di Torino, ha permesso una stima della "disponibilitā a pagare" media e mediana rispettivamente di 600.000 e 400.000 lire per abitazione, con piccolissime differenze tra I due modelli.
Working Paper n. 29/95
An experimental investigation of the impact of ambiguity on the valuation of self-insurance and self-protection
Carmela Di Mauro, Anna Maffioletti
We build two experimental markets to examine individual valuations of risk-reductions with two risk-management tools: self-insurance and self-protection. We find no positive evidence that the risk -reducing mechanisms constitute a "frame". Ambiguity do not alter valuation. Finally, Unlike the results obtained by Hogarth and Kunreuther for the case of market insurance, our findings do not provide a strong support for the "Anchoring and Adjustment" ambiguity model.
Working Paper n. 30/95
Vertical inter-firm relation: a competition policy issue?
Annette Bongardt
The last decade has seen a shift of production philosophy from mass production ("Fordism") to lean production and supply practices ("Toyotism") on a global scale. In terms of firm organization this has meant the substitution of arm's length market geographically concentrated in regional trading blocks.
This paper addresses the issue whether and to what extent conflicts in the world trade arena (e.g., anti-dumping VERs) can be traced back to diverging national competition policies on networks of firms and whether there is need for their harmonization.
The case of the automotive industry - the first industry to adept the new production and supply practices cum vertical network organization - is drawn on to illustrate the possible present sources of conflict and their relevance in the future.