Durham University Business School Working Papers Series
ISSN: 1749-3641 (Online)
Population Growth and Technological Change: a Pure Welfarist Approach (pdf)
Thomas Renström and and Luca Spataro
Abstract: In this paper we characterize the optimal steady state and dynamics of an intertemporal economy in presence of endogenous fertility. For doing this we propose a new version of Critical Level Utilitarianism (CLU) a là Blackorby et al (1995), that we call Relative CLU, which is shown to be axiomatically founded and allows for time-varying critical level. In particular, we show that under such social preferences both the short and the long run effects of technological shocks on the optimal population growth are non-trivial, depending on the characteristics of both preferences and production technology.
Abstract: We analyze the distributional effects of adjustment cost in an environment with incomplete capital market. We find that a higher adjustment cost for human capital acquisition slows down the intergenerational mobility and results in a persistent inequality across generations. A low depreciation cost of human capital contributes to longer life of the capital which could elevate this adjustment cost and hence contribute to this inequality persistence. A lower total factor productivity could hurt poor with a higher marginal product when human capital has low depreciation. This could add to the slowing of intergenerational mobility when adjustment cost is present. The quantitative analysis of our model suggests that the human capital adjustment cost is nontrivial to reproduce the observed persistence of inequality.
Abstract: The fixed effects (FE) estimator of "conditional convergence" in income based dynamic panel models could be biased downward when capital adjustment cost is present. Such a capital adjustment cost means a rising marginal cost of investment which could slow down the convergence. The standard FE regression fails to take into account of this capital adjustment cost and thus it could overestimate the rate of convergence. Using a Ramsey model with long-run adjustment cost of capital, we characterize this bias that does not go away even for a longer time dimension. The size of the bias is greater in economies with a higher adjustment cost. The cross-country regression suggests that the size of this bias could be substantial.
Koen P.R. Bartels (Glasgow), Guido Cozzi and Noemi Mantovan (Bangor University)
Abstract: The debate on volunteering has paid insufficient attention to the relationship between public spending and volunteering. Recently, the importance of this relationship was highlighted by the current British government's "Big Society" plan, which asserts that withdrawing public agencies and spending will be compensated by an increase in volunteering. This idea is based on the widely held belief that a high degree of government intervention decreases voluntary activities. This paper uses a multidisciplinary approach to develop a more refined understanding of how public spending affects the decision to volunteer. A theoretical model conceptualizes this relationship in terms of time donation by employed individuals. The model is empirically developed through an econometric analysis of two survey data sets and interpretative analysis of narratives of local volunteers and public professionals. The results suggest that volunteering is likely to decline when government intervention is decreased and recommend a collaborative approach to sustaining volunteering.
Alberto Alesina (Harvard and ICIER Bocconi), Guido Cozzi and Noemi Mantovan (Bangor University)
Abstract: Ideas about what is "fair" influence preferences for redistribution. We study the dynamic evolution of different economies in which redistributive policies, perception of fairness, inequality and growth are jointly determined. We show how including beliefs about fairness can keep two otherwise identical countries in di¤erent development paths for a very long time. We show how different initial conditions regarding how "fair" is the same level of inequality can lead to two permanently different steady states. We also explore how bequest taxation can be an efficient way of redistributing wealth to correct "unfair" past accumulation of inequality.
04. Distributional effects of public policy choices (pdf, published, Economic Letters, 2012, 115(1), pp 56-59.)
Abstract: This paper examines the effects of a budget-neutral public spending allocation between public investment and private investment subsidy on inequality dynamics and intergenerational mobility in an environment with heterogenous households and incomplete capital market.
Augustin Kwasi Fosu (UNU-WIDER), Yoseph Yilma Getachew, and Thomas Ziesemer (Maastricht)
Abstract: How much does public capital matter for economic growth? How large should it be? This paper attempts to answer these questions, taking the case of SSA countries. It develops and estimates a model that posits a nonlinear relationship between public investment and growth, to determine the growth-maximizing public investment GDP share. It empirically also accounts for the crowding-in and crowding-out effects between public and private investment, with equations estimated separately and simultaneously, using System GMM. The paper further runs simulation and examines the public investment GDP share that maximizes consumption. This is estimated to be between 8.4 percent and 11.0 percent. The results from estimating the growth model are in the middle of this range, which is larger than the observed value of 7.2 percent at the end of the sample period. These outcomes suggest that, on average, there has been public under-investment in Africa, contrary to previous findings.
Guido Cozzi and Silvia Galli (Hull University Business School)
Abstract: The incentives to conduct basic or applied research play a central role for economic growth. How does increasing early innovation appropriability affect basic research, applied research, education, and wage inequality? This paper analyzes the macroeconomic effects of patent protection by incorporating a two-stage cumulative innovation structure into a quality-ladder growth model with skill acquisition. We focus on two issues (a) the over-protection vs. the under-protection of intellectual property rights in basic research; (b) the evolution of jurisprudence shaping the bargaining power of the upstream innovators. We show that the dynamic general equilibrium interations may seriously mislead the empirical assessment of the growth effects of IPR policy: stronger protection of upstream innovation always looks bad in the short- and possibly medium-run. We argue that in a common law system an explictly dynamic macroeconomic analysis is appropriate. We also provide a simple "rule of thumb" indicator of the basic researcher bargaining power.
Abstract: Contrary to a popular belief, the most popular Ak growth models display transitional dynamics once the representative agent and complete markets assumptions are overturned. The class of models is identified with diminishing-returns at individual but constant-returns at aggregate due to externality effects. Under incomplete markets, the former implies that dynasties with a lower levels of initial capital grow faster. This is picked up by the aggregate economy that passes through a long transitional period before it converges to its balanced growth path. During the transition period, aggregate consumption and output grow at the same rate but higher than that of capital.
Abstract: Inspired by the Chinese experience, we develop a Schumpeterian growth model of distance to frontier in which economic growth in the developing country is driven by domestic innovation as well as imitation and transfer of foreign technologies through foreign direct investment. We show that optimal intellectual property rights (IPR) protection is stage-dependent. At an early stage of development, the country implements weak IPR protection to facilitate imitation. At a later stage of development, the country implements strong IPR protection to encourage domestic innovation. We also calibrate the model to aggregate data of the Chinese economy to simulate the optimal path of patent strength, which is increasing as the country evolves towards the world technology frontier, and this dynamic pattern is consistent with the actual evolution of the patent system in China. Furthermore, we provide empirical evidence based on a dynamic panel regression to support the key mechanism in our theoretical model.
13. Production efficiency and excess supply (pdf)
Abstract: This paper demonstrates that intermediate goods should not be taxed even in the presence of dividend payments to households, thus clarifying previous results. We also find that optimal government policy in a second best world may include stockpiles of output — private supply exceeds private demand, and the government purchases the surplus. This may provide a possible explanation for some agricultural policies.
Charlie Weir (Robert Gordon University), Oleksandr Talavera and Alexander Muravyev (IZA and St. Petersburg University GSOM)
Abstract: This paper studies the relationship between directors’ human capital and the company’s performance. In particular, we focus on the effect on performance of non-executive directors who are also executive directors in other firms. We find a positive relationship between the presence of these non-executive directors and the accounting performance of the appointing company. The effect is stronger if these directors are also executive directors at companies that are performing well. Additionally, the similarity of industry plays a role. The results support the view that appointing firms benefit from the human capital of the appointee.
11. Is India Shining?(pdf)
Anurag Banerjee and Nilanjan Banik (Institute for Financial Management and Research, Chennai, India)
Abstract: In India, the popular perception is economic reforms have benefited the rich more than the poor leading to an unequal income distribution, as in Quah's twin peaks hypothesis. In this article we test this hypothesis by studying the spatial dynamics of income distribution. Using district-level per-capita income we find that the income distribution has not changed. The perception about economic reforms having benefitted only the rich is not correct because income growth across districts is positively correlated spatially. Thus there is a positive spatial multiplier effect on income and growth. In addition, we also identify physical infrastructure, human capital, and factories, as factors responsible for increase in income for both the rich, and the poor districts.
Steffen Andersen, James C. Cox, Glenn W. Harrison, Morten Lau, E. Elisabet Rutström and Vjollca Sadiraj
Abstract: Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiments is consistent with partial asset integration: they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings.
Koen P.R. Bartels (University of Glasgow), Guido Cozzi and Noemi Mantovan
Abstract: The current British Government is "Big Society" plan is based on the idea that granting more freedom to local communities and volunteers will compensate for a withdrawal of public agencies and spending. This idea is grounded on a widely held belief about the relationship between government and volunteering: a high degree of government intervention will cause a crowding out of voluntary activity. Up to now, however, the crowding out hypothesis has hardly been supported by any empirical evidence or solid theoretical foundations. We develop a simple theoretical model to predict how fiscal policy affects the individual decision to volunteer or not. The predictions of the model are tested through the econometric analysis of two survey data sets, and interpretative analysis of narratives of local volunteers and public officials. Contrary to conventional wisdom, our results suggest that volunteering, by the individuals in the actively working population, declines when government intervention is decreased.
8. Who Pays for Job Training? (pdf)
Abstract: A puzzling feature of the UK labour market is that there is not enough investment in job training (either by workers or by firms) while there is a high skill premium. We model this as a two sector (skilled and unskilled) economy with a non-cooperative training game between vacant skilled firms and unemployed unskilled workers. A vacant skilled firm has an incentive to train an unskilled worker because of the chance of a better match with a skilled worker. On the other hand, an unskilled worker has an incentive to train because it could increase his lifetime earning. Using a social planning problem as a baseline, the paper demonstrates that while it is socially optimal to invest in job training, the private sector may fail to internalize these benefits in a wide range of economies. Calibrating the model for the UK economy, we compute the welfare gain due to the institution of job training in various environments. The welfare gain from a training programme is highest if workers instead of firms bear the cost of training. The model also predicts that while the skill gap decreases, the income inequality could rise when a job training programme is in place.
Mauricio Armellini and Parantap Basu
Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
6. Media Sentiment and UK Stock Returns (pdf)
Abstract: This paper is the first to determine the effect that media sentiment has on stock returns for UK companies and tests whether there is any return predictability contained in the UK media sentiment data. We show that measures of positive and negative media sentiment have significant relationships with stock returns on the day news articles are published and that there is return predictability inherent in negative media sentiment the day following publication of media articles. We construct a news-based trading strategy to demonstrate the application of these results that earns significant positive abnormal returns.
Abstract: Although important both theoretically and practically, the nature of consumer economic expectation formation has been little studied, particularly by psychologists. The most relevant previous research suggests that expectations are based on a heuristic that results in them being significantly biased. Further, relevant indicator series are poorly utilized. However, this earlier research used a task lacking in potentially important features of the real world, and this may have impaired performance. In the current experiment, participants received a more ecologically-valid task. Although there was still evidence of heuristic use, leading to suboptimal performance and bias, this performance was significantly better than anticipated from previous research, particularly regarding use of indicator series. However, when a strong trend in the criterion series allowed accurate forecasting without consideration of indicators, they were little used. I conclude that expectations are formed by first extrapolating the criterion series and only if that works poorly is other relevant information considered. Thus consumers appear to trade-off accuracy against effort, such that more effort is expended only when some threshold of acceptable performance fails to be reached.
4. Non-Linear Mixed Logit (pdf, forthcoming Theory and Decision)
Steffen Andersen, Glenn W. Harrison, Arne Risa Hole, Morten Lau and E. Elisabet Rutström
Abstract: We develop an extension of the familiar linear mixed logit model to allow for the direct estimation of parametric non-linear functions defined over structural parameters. Classic applications include the estimation of coefficients of utility functions to characterize risk attitudes and discounting functions to characterize impatience. There are several unexpected benefits of this extension, apart from the ability to directly estimate structural parameters of theoretical interest.
Steffen Andersen, Glenn W. Harrison, Morten Lau & E. Elisabet Rutström
Abstract: Convenient assumptions about qualitative properties of the intertemporal utility function have generated counter-intuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable then the latter two concepts are the inverse of each other. We review a simple theoretical specification with a long lineage in the literature on multi-attribute utility, and demonstrate the critical role of a concept known as intertemporal risk aversion or intertemporal correlation aversion. This concept is the intertemporal analogue of a more general concept applied to two attributes of utility, but where the attributes just happen to be the time-dating of the good. In the context of intertemporal utility functions, the concept provides an intuitive explanation of possible differences between (the inverse of) atemporal risk aversion and the intertemporal elasticity of substitution. We use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles, and that the convenient additive specification of the intertemporal utility function is not an appropriate representation of preferences over time.
Steffen Andersen, Glenn W. Harrison, Morten Lau & E. Elisabet Rutström
Abstract: We evaluate the claim that individuals exhibit a magnitude effect in their discounting behavior, which is said to occur when higher discount rates are inferred from choices made with lower principals, all else being equal. If the effect is robust, as claimed, we should be able to see it using procedures that are more familiar to economists. Using data collected from a representative sample of adult Danes, we find statistically significant evidence of a small magnitude effect, at levels that are much smaller than is typically claimed. This evidence only surfaces if one carefully controls for unobserved individual heterogeneity in the population. And it disappears completely if we include discounting choices in which both options have some time delay.
Steffen Andersen, Glenn W. Harrison, Morten Lau & E. Elisabet Rutström
Abstract: We re-evaluate the theory, experimental design and econometrics behind claims that individuals exhibit non-constant discounting behavior. Theory points to the importance of controlling for the non-linearity of the utility function of individuals, since the discount rate is defined over time-dated utility flows and not flows of money. It also points to a menagerie of functional forms to characterize different types of non-constant discounting behavior. The implied experimental design calls for individuals to undertake several tasks to allow us to identify these models, and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments. The implied econometrics calls for structural estimation of the theoretical models, allowing for joint estimation of utility functions and discounting functions. Using data collected from a representative sample of 413 adult Danes in 2009, we draw striking conclusions. Assuming an exponential discounting model we estimate discount rates to be 5.6% on average: this is significantly lower than all previous estimates using controlled experiments. We also find no evidence to support quasi-hyperbolic discounting or "fixed cost" discounting, and only modest evidence to support other specifications of non-constant discounting. Furthermore, the evidence for non-constant discounting, while statistically significant, is not economically significant in terms of the size of the estimated discount rates. We undertake extensive robustness checks on these findings, including a detailed review of the previous, comparable literature.
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