Categoria: wp2002


Miroslav Prokopijevic – March 2002
“…the reformer has enemies in all these who profit by the old order, and only lukewarm defenders in all those who would profit by the new”.
Machiavelli, The Prince, Ch. VI.

Abstract: Countries without natural resources or foreign aid can grow just if they do serious economic liberalization. Liberal reforms are first followed by a post-reform recession, and afterwards with growth, provided they create a well business environment, compared to alternatives. Economies growing because of liberalization just exceptionally undertake further reforms in order to enlarge gains – is the main finding of this study.

Wealth Polarization and Pulverization in Fractal Societies

Fabio Privileggi and Guido Cozzi

Abstract: In this paper we study the geometrical properties of the support of the limit distributions of income/wealth in economies with uninsurable individual risk, and how they are affected by technology and preference parameters and by policy variables.

We work out two simple successive generation models with stochastic human capital accumulation and with R&D and we prove that intense technological progress makes the support of the wealth distribution converge to a fractal Cantor-like set. Such limit distribution implies the disappearance of the middle class, with a “gap” between two polarized wealth clusters that widens as the growth rate becomes higher. Hence, we claim that in a highly meritocratic world in which the payoff of the successful individuals is high enough, and in which social mobility is strong, societies tend to look highly “fractalized”.

We also show that a redistribution scheme financed by proportional taxation does not help cure society’s disconnection/polarization; on the contrary, it might increase it. Finally we show that these results are not confined to our analytically worked out examples but are easily extended to a widely used class of macroeconomic and growth models.
Keywords: Inequality and Growth, Education, Technological Change, Wealth Polarization/Pulverization, Iterated Function System, Attractor, Fractal, Cantor Set, Invariant Distribution

Multivariate option pricing with copulas

Abstract: In this paper we suggest the adoption of copula functions in order
to price multivariate contingent claims. Copulas enable us to imbed the
marginal distributions extracted from vertical spreads in the options markets
in a multivariate pricing kernel.

We prove that such kernel is a copula
fucntion, and that its super-replication strategy is represented by the
Fréchet bounds. As applications, we provide prices for binary digital options,
options on the minimum and options to exchange one asset for another.

For each of these products, we provide no-arbitrage pricing bounds,
as well as the values consistent with independence of the underlying assets.
As a …nal reference value, we use a copula function calibrated on historical

“Rain Follows the Plow” and Dryfarming Doctrine: The Climate Information Problem and Homestead Failure in the Upper Great Plains, 1890-1925

In the late 19th and early 20th centuries, the North American agricultural frontier moved into semi-arid
regions of the Great Plains where farming was vulnerable to drought. Farmers who migrated to the region
had to adapt their crops, techniques, and farm sizes to better fit the environment. But there was very
incomplete information for making these adjustments, and ultimately they were insufficient: too many small,
dry-land wheat farms were founded, only to be abandoned in the midst of drought. Two episodes of
homestead settlement and collapse in western Kansas in 1893-94 and in eastern Montana in 1917-21 are

We go beyond the existing literature by explicitly detailing the weather information problem
facing settlers and showing precisely why widespread homestead failure occurred. We present a Bayesian
learning model to indicate how new climate information was incrementally incorporated to revise views of
agricultural prospects. Primary data are used to show the lagged response of homesteaders to new drought
information and to illustrate the differential impact of drought on small farms. Dryfarming doctrine arose as a
solution to the problems faced by farmers in the region. Despite its optimistic claims, it was an imperfect
response to drought.