Working Paper no.1/97
A rent-seeking view of the ageing problem in developed countries
Enrico Colombatto
This paper considers the ageing problem as the outcome of the changing equilibrium between the coalitions involved in the provision of the welfare state and of state pensions. The situation inherited from the past consists of an unfair deal between a relatively small number of workers and a relatively large numbers of non-voting youth. It is argued that such a deal allowed social expenditure to expand at the expense of future workers. Future workers have now become voting individuals who realize that they cannot transfer the unfair deal to future generations, for lack of future workers supporting future pensioners. As a consequence present workers are bound to renegotiate the deal with present retirees, and confront the powerful bureaucratic coalition. Possible solutions to this conflict are presented and discussed.
Working Paper no. 2/97
La SNIA 1917-1939: dai noli marittimi alle fibre tessili artificiali
Marcella Spadoni
Il settore delle fibre tessili artificiali si sviluppo in Italia a cominciare dai primi anni del Novecento e presentò, fin dalle origini, le caratteristiche di un oligopolio, per la presenza di rilevanti barriere protettive, in grado di limitare l'ingresso di nuovi produttori: esistenza di brevetti, necessità di raggiungere dimensioni consistenti per poter ammortizzare i necessari impianti. Ben presto la SNIA Viscosa assunse la posizione di leader indiscussa, non soltanto sul mercato italiano, ma anche su quello mondiale. Questo articolo ha lo scopo di descrivere le principali vicende che videro come protagonista la Società Torinese, dalla sua costituzione nel 1917, fino alla vigilia della seconda guerra mondiale, passando attraverso il primo dopoguerra, la rivalutazione del '26, la crisi del '29, il periodo dell'autarchia.
Working Paper no. 3/97
Economic activity and ecological dynamics: modelling the implications of increasing stress on natural system self-regeneration processes
Silvana Dalmazzone
This paper focuses on the dynamic interactions between economic and natural systems from the point of view of ecosystems' regeneration processes and capacity to assimilate polluting emissions. It is shown how, under very general assumptions, a reduction in ecological systems' recovery rate and structural stability is the unavoidable outcome of continuously increasing levels of stress. Moreover, we analyze the set of conditions under which non linear behaviours, discontinuous environmental change and irreversibility turn out to be not just hypothetical risks, but intrinsic consequences of unlimited over-exploitation. These results highlight the uncertainty realted to ecosystems' dynamical response to perturbation, and consequently the importance of incorporating ecological information into economic models whenever the optimal scale of the economic activity is not indipendent of its natural environment.
Working Paper no. 4/97
Insider trading, investment, and welfare: a perturbation analysis
Sudipto Bhattacharya, Giovanna Nicodano
We compare competitive equilibrium outcomes with and without trading by a privately informed "monopolistic" insider, in a model with: (a) real investment portfolio choices ex ante, prior to the insider's acquisition of interim information about investment returns, and (b) noise trading generated by aggregate uncertainty regarding other agents' intertemporal consumption preferences, for risk-averse agents who would reach an ex ante Pareto optimal outcome without any return information, given these preferences. The welfare implications of insider trading for ex ante expected utilities of agents is analyzed, beyond comparing aggregate investment choices with and without insiders as in past work.
Working Paper no. 5/97
On the fifth anniversary of Friederich August von Hayek's (1899-1992) death: March 23, 1997
Kurt R. Leube
(abstract not available)
Working Paper no. 6/97
A political economy analysis of congressional voting patterns of Nafta
In-Bong Kang, Kenneth Greene
This paper examines the extent to which the voters in the US Congress in 1993 on the North American free Trade Agreement can be explained by the legislator's political constituencies' interests as well as those of their financial contributors' and their own ideology and political capital. It finds that because of the extreme degree of publicity connected with the vote that constituent narrowly defined employment consequences were less important than some of other rational determinants of voting.
Working Paper no. 7/97
Italian corporate governance: one American's perspective
Jonathan R. Macey
From an economic perspective, corporate governance systems should operate to control agency and transaction costs within firms, and to provide formal or informal mechanisms for the protection of property rights among shareholders and human capital investments among workers. Italy is remarkable because its corporate governance does not have either a market for corporate control to protect minority shareholders, or strong universal banks to monitor and control incumbent management. This is remarkable because Italy has exhibited strong economic performance in the postwar period, despite the fact that the country lacks the positive characteristics of either of the "paradigmatic" corporate governance systems. This article catalogues the weaknesses of the Italian corporate governance system from a law and economics perspective, and concludes that this success can be attributed to two factors. The first factor that contributes to Italy's success is that Italian firms have been successful in "innovating around" its corporate governance system. In particular, Italy has solved the classic problem of the separation of ownership and control within the large publicly held form by eliminating the separation of ownership and control to a much greater extent than any other developed country. Italy has many more small firms on any measure than the industrialized countries, and these firms contribute more to Italy's economic output than similar firms in other countries. Second, the small Italian firm, with its emphasis on local, and even family-based employment patterns, solves the problem of how to provide workers with sufficient incentives to make firm specific human capital investments far better than the system that exists, for example, in the U.S.. Workers in small Italian firms, who have far less job mobility, and relatively more job security, have strong incentive to make specialized, firm specific human capital investments, that have allowed the Italian small manufacturing sector to enjoy unparalleled success in innovation and product design.
Working Paper no. 8/97
Debt commitments and family labor supply decisions
Daniela del Boca, Annamaria Lusardi
In this paper, we examine the relationship between housing financing and family labor supply using Italian data. We investigate whether mortgage commitments as well as other debts are related to wives' labor supply. We address the issue of endogeneity by using simultaneous equation models. In analyzing the effect of housing financing on family labor supply, it is important to consider some institutional factors that differentiate Italy from other advanced countries. The most notable characteristics of the Italian housing market are the high down-payment requirements, short mortgage duration, and long loan application processes. We test whether wives' labor supply is responsive to mortgage debts (relative to other debts) and whether recent changes towards flexibility in the financial market may be in part responsible for the increase in married women's labor supply among homeowners.
Working Paper no. 9/97
Resilience and stability in ecological economic systems
Silvana Dalmazzone, Charles Perrings
The impact of economic activity on the sensitivity of the natural environment to stress and shock is a growing concern in ecology, economics, and environmental science alike. Indeed, the impact of economic activity on ecosystem resilience is a core concern of ecological economics. The paper considers renewable natural resources that may or may not be exploited directly (through harvest), but are indirectly impacted through either pollution or the incidental effects of harvest. These include all currently exploited renewable natural resources, and many resources that are not exploited but are nevertheless impacted by human activity. The paper shows that, under very general assumptions, the direct and indirect impacts of economic activity reduce both the recovery rate of such resources and their stability - their resilience. We analyze the set of conditions under which the impacts of economic activity are discontinuous and irreversible. The results highlight the uncertainty in ecosystems responses to perturbation. They underline the importance of incorporating ecological information into economic models whenever ecological dynamics are not indipendent of economic activity.
Working Paper no. 10/97
Lessons from transition in Eastern Europe. A property-right interpretation
Enrico Colombatto, Jonathan R. Macey
This paper questions the neo-classical and gradualist views to transition in Eastern Europe, and suggest a property-right approach based on the economics of institutions and the public-choice literature. This allows us to make a clear and most important distinction between reform and transition: only the latter is a serious attempt to change the existing property rights system. It is argued that the chances for successful transition depend critically on the public-choice equilibria prevailing at the beginning of the transition process, and on the sources of legitimacy for the ruling coalition(s). This conceptual framework is then applied to analyze the case of the former Soviet Union and of three different categories of East-European countries.
Working Paper no. 11/97
Information and transaction costs as the determinants of tolerable growth levels
Enrico Colombatto, Jonathan R. Macey
Combining elements of public choice and institutional economics, this paper develops a new theory to explain disappointing growth patterns in developed and undeveloped contries. Consistent with public choice theory, we view interest groups as entities that organize into political coalitions to engage in rent-seeking which, in turn thwards growth. However, consistent with institutional economies, we see differences in the information and transaction costs faced by various groups and individuals in society as critical in determining the efficacy of rent seeking. Where transactions and information costs are low, people more easily perceive and oppose activities conducive to deadweight losses: interest-groups coalitions will be unable to dominate society and inhibit growth. Existing ruling coalitions can be replaced with great difficulty, so that low growth will not be tolerated. By constrast, where information and transaction costs are high, low growth will be tolerated because it will be too costly for relatively weak groups to galvanize into effective political coalitions to check the rent-seeking proclivities of the dominant interest groups. And, by definition, high transaction and information costs make it hard to displace incumbent leaders who produce poor growth results. In a nutshell,we argue that rent-seeking in all countries is the major impediment to growth. In turn, rent seeking is bounded by fear of political reprisal by the firms and groups who are damaged by the rent-seeking. The varying levels of information and transaction costs in different countries will determine the point at which politicians and bureaucrats can expect political reprisal. This, in turn, will determine how much growth we can expect.
Working Paper no. 12/97
Reflections on Coase, cost, and efficiency
Louis De Alessi
The paper examines a numeber of issues raised by Coase's normative proposal that, if transaction cost are positive and substantial, the courts consider consider assigning a disputed right to the party who values it more. Among other difficulties, the approach implies that changes in the wealth of individuals do not matter as long as aggregate wealth is not reduced; this view is inconsistent with a rule of law in an economic system based on private property rights. Coase's proposal to reduce externalities would substitute government intervention through the courts for Pigou's proposal to use taxes and subsidies. Thus, it is open to the same criticisms that Coase leveled at Pigou, including the failure to compare the full consequences under the alternative institutional arrangements and the inability to measure values.
Working Paper no. 13/97
Substitution possibilities for energuy in the Italian economy: a general to specific econometric analysis
Claudio Morana
The paper considers a neoclassical model set in the cost function approach estimate primary energy factor demands for the Italian economy, using a translog cost function specification. Cointegration theory is employed to estimate the long-run factor share model, and the general to specific methodology to derive an error correction formulation for the short-run adjustement process. Both quarterly and yearly series, for the period 1978q1-1994q4 and 1960-1994, respectively, have been considered in the analysis. The different energy sources substitution pattern obtained by the quarterly and annual series and the super exogeneity property of annual model suggest the importance of using low frequency data rather than quarterly data in estimating long-run relationships.
Working Paper no. 14/97
Between consensus and dissent. The intellectual styles of Keynes and Hayek
Jack Birner
Although Keynes and Hayek were opponents in their economics, they share ideas on intellectual history, social philosophy, and methodology. Yet there remain a number of important differences, which can be reduced to their different intellectual styles.
Working Paper no. 15/97
Property rights, contracts, cyclical social preferences, and the Coase theorem: a synthesis
Peter Bernholz
The Coase Theorem (Coase 1960) states that negative externalities will be removed by bargaining in a market economy, whatever the initial assignement of property rights, if transaction costs are absent. This claim has been rightly challenged years ago (Aivazian and Callen 1981) for situations involving more than two persons and (or) issues. In this paper the Coase Theorem will be generalized to cover such more complex situations. This implies that more stringend assumption have to be made to ensure the validity of this generalized version. In the process of presenting the critique of the theorem implies remarkable consequences for the debate on the importance of Arrow's (1963) Impossibility Theorem and of Sen's (1976) Theorem of the Impossibility of a Paretian Liberal. For transaction costs are also notably neglected in the social choice literature. Thus one might ask whether the Coase Theorem might not also hold for the more general case envisioned by Arrow's General Impossibility Theorem, which includes all decisions by political bodies, organizations, groups and individuals and is not limited to decisions related to market participants. If this were true there would be no need to be concerned about Arrow's General Impossibility Theorem, since all inefficient outcomes would be removed by contracts. The same would be true for Sen's Impossibility of a Paretian Liberal. Also, if such contracts could be enforced, the outcomes reached would be stable, thus removing the instability and inconsistency implied by social preference cycles, in which each outcome is dominated by another one. The present paper tries to answer these questions.
Working Paper no. 16/97
Think tanks, advocacy coalitions, and public policy: a first look at the Italian case
Claudio M. Radaelli, Alberto P. Martini
The paper provides a description of Italian think tanks and situates their role in the current Italian political transition. The paper begins with a qualitative examination of the most important indipendent policy research institutes (i.e. their main areas of activity, recent internationalisation, and main changes in the 1990's). Subsequently, a quantitative analysis based on a sample of organisations producing policy analysis is presented. The interpretation of empirical evidence is based upon the advocacy coalition framework (Sabatier and Jenkins-Smith 1993), which in this paper is applied to the two most important episodes characterising the Italian transition, i.e. fiscal adjustment and electoral reform. The authors argue that Italian think tanks have been instrumental in facilitating policy change by acting within an advocacy coalition for fiscal adjustement. Instead, there is no influence of think tanks in the order episode of policy change, i.e. electoral reform, although leaders of Italian policy research institutes were engaged in sustaining the coalition for institutional reforms. In the conlusion the authors contend that research with a theoretical orientation should not investigate policy institutes per se, but should look at the wider political activity of advocacy coalitions in the policy process.
Working Paper no. 17/97
Money, utility, intertemporal general equilibrium, and cyclical fluctuations: on the origins of F. A. Hayek's research programme in economics
Jack Birner
Hayek's monetary business cycle theory is not a direct extension of his earliest work on money. It emerged from his correction of previous utility theories, and his construction of an intertemporal general equilibrium theory. These are solutions to specific problems which together with four methodological principles constitute a research programme.
Working Paper no. 18/97
Free-market economies, rule of law and policy-making
Enrico Colombatto
This paper analyzes the main features of a free-market system, where uncertainty can be reduced, but no eliminated, and government intervention is legitimate only when it originates from a clear principal-agent link between policy makers and a very large majority of the population. In particular this requires a tight constitutional framework, so that incumbent policy makers can be removed whenever they engage in rent-seeking activities and violate the principal-agent contract. Nevertheless, government agents usually manage to acquire some power, not only authority. As a consequence, free-market principles are violated, and individual property rights are transferred to an extent which goes beyond the level some individuals are willing to agree to. Although governments still draw their legitimacy from the people, the principal-agent link is weakened, and a free-market model is replaced by a mixed economy. Constitutional engineering may help in slowing down the involuntary transfer of power from the individuals to government(s), but it cannot stop it.
Working Paper no. 19/97
Private property rights as the basis for free market environmentalism
Louis De Alessi
Environmental problems can arise when transaction costs are positive or private property rights are missing. Government solutions fail due to the lack of suitable incentives, objective measures of value, and value-free benchmark for comparing alternatives. Market solutions use private property rights to tie the welfare of individuals to their success in making others better off, fostering the internalization of external effects and adaptation to change while avoiding the divisive effects of rent seeking. Moreover, they resrt on the ethical/moral values of voluntary choices by free individuals.
Working Paper no. 20/97
Are Italians also fiscal conservatives?
Kenneth V. Greene
Data on Christian Democratic party and Communist Party voters shares in nineteen Italian regions in the post war era analyzed to see if voters punish or reward politicians for economic performance and for big growth in government spending. We find that the DC is harmed by inflation and employment but benefitted from economics growth. Some evidence also is presented which implies that its potential constituency acts as fiscal conservatives.
Working Paper no. 21/97
Modelling evolutionary long-run relationships: an application to the Italian energy market
Claudio Morana
The paper considers a SUTSE model embedded in a dynamic framework to estimate an energy cost share model for the Italian economy in an evolutionary environment. This is achieved by allowing stochastic seasonal and trend components in the long-run specification and constructing an error correction mechanism to model short-run dynamics. Modelling instability in the structural time series approach has provided some improvement in the estimates of the elasticities of substituitions and of the price elasticities with respect to those obtained using deterministic trend and seasonal components. Tests for instability in the cointegration regression support the evolutionary specification adopted.