Oxford Economic Papers - recent issues

Longer life, higher welfare?

Grimm, M., Harttgen, K. — 2008-03-18

Whereas life expectancy continues to increase in most industrialized countries, many developing and transition countries are today confronted with decreases in life expectancy. Usual measures employed to compare welfare over time and space fail to deal with such demographic change and may lead to the so-called ‘repugnant conclusion’ that lower life expectancy involves higher welfare per capita. We illustrate this type of transmission channel using various welfare criteria and reference populations. We also consider feed-back effects from the demography on the economy using a neo-classical growth model. We show that the ‘repugnant conclusion’ can be avoided if we choose a lifetime welfare measure instead of a period (or snapshot) welfare measure. All concepts are illustrated empirically using a small sample of developed and developing countries.

Growth, inequality, and welfare: comparisons across space and time

Gruen, C., Klasen, S. — 2008-03-18

We propose and apply several welfare measures that combine average income with a measure of inequality to undertake cross-country comparisons of aggregate welfare for the 1970 to 2000 period. Our welfare measures, which are based on theoretical and empirical findings on the role of inequality in social welfare, drastically change the impression of levels of welfare, significantly affect the welfare ranking of countries in different benchmark years, affect changes in ranking over time, and affect convergence between industrialized and developing countries. While the results are sensitive to the type of inequality and its presumed effect on welfare, the results are robust to different ways to address comparability problems inherent in the inequality data used.

Job-worker mismatch and cognitive decline

de Grip, A., Bosma, H., Willems, D., van Boxtel, M. — 2008-03-18

We have used longitudinal test data on various aspects of people's cognitive abilities to analyse whether overeducated workers are more vulnerable to a decline in their cognitive abilities, and undereducated workers are less vulnerable. We found that a job-worker mismatch induces a cognitive decline with respect to immediate and delayed recall abilities, cognitive flexibility and verbal fluency. Our findings indicate that, to some extent, it is the adjustment of the ability level of the overeducated and undereducated workers that adjusts initial job-worker mismatch. This adds to the relevance of preventing overeducation, and shows that being employed in a challenging job contributes to workers’ cognitive resilience.

Unemployment duration and unemployment insurance: a comparative analysis based on Scandinavian micro data

Roed, K., Jensen, P., Thoursie, A. — 2008-03-18

Based on pooled register data from Norway and Sweden, we find that differences in unemployment duration patterns reflect dissimilarities in unemployment insurance (UI) systems in a way that convincingly establishes the link between economic incentives and job search behaviour. Specifically, UI benefits are relatively more generous for low-income workers in Sweden than in Norway, leading to relatively longer unemployment spells for low-income workers in Sweden. Based on the between-countries variation in replacement ratios, we find that the elasticity of the outflow rate from insured unemployment with respect to the replacement ratio is approximately one in Norway and 0.5 in Sweden.

Why are more redistributive social security systems smaller? A median voter approach

Koethenbuerger, M., Poutvaara, P., Profeta, P. — 2008-03-18

One of the stylized facts of unfunded social security programs is that programs are larger in size, measured relative to the GDP, the tighter the link between pension claims and past earnings. We provide a political economy explanation of this stylized fact in a median voter model, where people vote on the social security tax rate. We compare pension systems with flat-rate and earnings-related benefit formulas. Only flat-rate benefits redistribute within a generation from high to low income groups. If labor supply is endogenous, they also imply larger efficiency costs than earnings-related schemes. Using data on eight European countries, we find that the median voter is typically middle-aged with high income. For these voters, earnings-related systems are more attractive both because of less intragenerational redistribution and lower distortions in labor supply. The median voter model is also able to account for a considerable degree of cross-country variation in contribution rates.

Assessing inflation targeting through intervention analysis

Angeriz, A., Arestis, P. — 2008-03-18

The aim of this paper is to deal with the empirical aspects of the ‘new’ monetary policy framework, known as Inflation Targeting. Applying Intervention Analysis to multivariate Structural Time Series models, which avoids certain biases encountered in the use of conventional regression estimators, new empirical evidence is produced in the case of a number of OECD countries. These results demonstrate that although Inflation Targeting has gone hand-in-hand with low inflation, the strategy was introduced well after inflation had begun its downward trend. But, then, Inflation Targeting ‘locks in’ low inflation rates. The evidence produced in this paper suggests that non-Inflation Targeting central banks have also been successful on this score.

Non-productive consumption loans and threshold effects in the inflation-growth relationship

Hung, F.-S. — 2008-03-18

Recent empirical evidence indicates that two inflation thresholds exist in the inflation-growth relationship. Pre-existing theoretical models, however, fail to generate such a pattern. By adding consumption loans (which are non-productive) into a standard model of imperfect information, this paper finds that an increase in the inflation rate may increase, decrease, or have no significant effect on economic growth for inflation rates below a threshold level; however, for inflation rates higher than this threshold level, an increase in the inflation rate significantly reduces economic growth. Moreover, the marginal impact of an increase in the inflation rate in terms of reducing economic growth increases with the rise in the inflation rate, until the inflation rates reach the second threshold level, from which such a marginal effect significantly decreases. These results accord well with recent empirical evidence.

How to measure the unobservable: a panel technique for the analysis of TFP convergence

Di Liberto, A., Pigliaru, F., Mura, R. — 2008-03-18

This paper proposes a fixed-effect panel methodology that enables us to simultaneously take into account both TFP convergence and the traditional neoclassical-type of convergence. We analyse a sample of Italian regions between 1963 and 1993 and find strong evidence that both mechanisms were at work during the process of aggregate regional convergence observed in Italy up to the mid-seventies. Finally, we find that our TFP estimates are highly positively correlated with standard human capital measures, where the latter is not statistically significant in growth regressions. This evidence confirms one of the hypotheses of the Nelson and Phelps approach, namely that human capital is the main determinant of technological catch-up. Our results are robust to the use of different estimation procedures such as simple LSDV, Kiviet-corrected LSDV, and GMM à la Arellano and Bond.

Intrinsic comparative statics of a general class of profit-maximizing rate-of-return regulated firms

Caputo, M. R., Partovi, M. H. — 2008-03-18

An exhaustive comparative statics analysis of a general rate-of-return regulated, profit-maximizing model of the firm is carried out under a minimal set of assumptions. The resulting intrinsic comparative statics are contained in a positive semi-definite matrix. Each element of this matrix consists of a product of the A-J effect term and a Slutsky-like expression, thereby permitting the familiar interpretation of a compensated price change. The minimal set of assumptions allows a range of anomalous behavior that includes, inter alia, a reversal of the sign of the A-J effect and an increase in the use of an unregulated factor as a result of a compensated own-price increase. The implications of additional assumptions for the mathematical structure of the model and its economic consequences are discussed, and the equivalency relations among those assumptions are delineated. Throughout, mathematical results of the analysis are interpreted with a view to elucidating their intuitive economic significance.

Acknowledgements

2008-03-18

Choosing to become a 'lost cause': the perverse effects of benefit preconditions

Farrell, L., Frijters, P. — 2007-12-10

This paper argues that preconditions for welfare benefit entitlements based on labour market prospects can be counterproductive when they create an incentive for individuals to abstain from any investment earlier in life that could improve future prospects. Benefit entitlements based partly on investments made prior to labour market entry are then Pareto-improving.

A theory of exploitative child labor

Rogers, C. A., Swinnerton, K. A. — 2007-12-10

We develop a model in which some child labor is exploitative. Since exploited child laborers are paid less than the value of the marginal product of labor, there is scope for policy intervention to be Pareto improving. We illustrate this by showing that a system of inspection and fines targeted on exploitative child labor increases the aggregate output produced by children. We also establish that such intervention secures the release of children from exploitative working conditions, to their benefit. The distributional implications of the intervention among employers and among children who had not been exploited depends on whether capital is mobile internationally, and can depend on whether the elimination of exploitative child labor is partial or complete.

Male wages and female welfare: private markets, public goods, and intrahousehold inequality

Ghosh, S., Kanbur, R. — 2007-12-10

We show how an apparently welfare improving phenomenon like an increase in the wage of the male member of a family can result in a seemingly paradoxical result where the entire family is worse off. There is male and female specialization in activities such that the female member is involved in a community level public good. A rise in the male wage leads to adjustment of household time allocation with the male working more in the market and less on household activities. In turn, the female works more on household activities and less on the community public good, failing to internalize the negative externality imposed on other members of the community. Under quite general conditions the implied negative effect can more than offset the positive effect of the male wage raise, and the entire family is worse off. The theoretical results are consistent with empirical findings in the literature.

Fiscal policy and endogenous growth with public infrastructure

Agenor, P.-R. — 2007-12-10

Optimal tax and spending allocation rules are derived in an endogenous growth model where raw labor must be educated to become productive and infrastructure services affect the schooling technology. Growth- and welfare-maximizing solutions are compared under nonseparable utility in consumption and government-provided services. Among other results, it is shown that the optimal share of spending on infrastructure depends not only on production elasticities but also on the quality of schooling and the degree to which infrastructure services affect the production of educated labor. Congestion costs in education raise the optimal share of spending on infrastructure.

A life-cycle overlapping-generations model of the small open economy

Heijdra, B. J., Romp, W. E. — 2007-12-10

We construct an overlapping generations model for the small open economy incorporating a realistic description of the mortality process. With age-dependent mortality, the typical life-cycle pattern of consumption and saving results from the maximizing behaviour of individual households. Our ‘Blanchard-Yaari-Modigliani’ model is used to analytically study a number of typical shocks affecting the small open economy, namely a balanced-budget public spending shock, a temporary Ricardian tax cut, and an interest rate shock. The demographic details matter a lot—both the impulse-response functions and the welfare profiles (associated with the different shocks) are critically affected by them. These demographic details furthermore do not wash out in the aggregate. The model is flexible and can be applied to a wide variety of theoretical and policy issues.

The liquidity effect in a flexible-price monetary model

Chen, S.-S. — 2007-12-10

This paper examines the impact of macroeconomic policy shocks in a flexible-price dynamic stochastic general equilibrium (DSGE) model with money. Rather than adopting a money supply rule, monetary policy is modelled as a central bank using a simple interest rate rule (Taylor rule). Without assuming price stickiness or frictions in financial markets, this model is found to account for liquidity effects, generate higher persistence in output and inflation, and capture the positive unconditional cross-correlations relating inflation and output.

Innovations and manufacturing export performance in the OECD countries

Madsen, J. B. — 2007-12-10

This paper addresses two puzzles in international trade, namely why traditional estimates of income elasticities of exports are implausibly high and why export growth varies much more markedly across countries than can be explained by changes in price competitiveness and variations in income growth in export markets. Using data for 18 OECD countries it is shown that market integration and the level of technology and competitiveness can, to some extent, explain these two puzzles.

Advertising, in-house R&D, and growth

Grossmann, V. — 2007-12-10

This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and combative advertising expenditure, and its implications for economic growth, firm size, and welfare. The analysis shows that, somewhat surprisingly, higher incentives to engage in advertising, although combative, unambiguously foster innovation activity of firms. This, possibly, leads to faster growth and even higher welfare. These results rest on two features of the model which are well-supported by empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm size rise. Second, firm size and R&D expenditure are positively related as larger firms are able to spread R&D costs over higher sales. The analysis also suggests that R&D subsidies are conducive to R&D and growth without inducing firms to raise advertising outlays.

Introduction

Dimsdale, N., Thomas, M. — 2007-10-02

War and welfare: Britain, France, and the United States 1807 14

O'Rourke, K. H. — 2007-10-02

This paper assesses the relative welfare costs of the various embargos and blockades of the years 1807–1814 in three countries: Britain, France, and the United States. Relative price evidence indicates that these blockades and embargos did restrict trade, and that Britain was less severely affected than her rivals. Benchmark welfare estimates for the United States are particularly high, at roughly 4–5% per annum. While absolute welfare estimates depend on elasticity assumptions, the US unambiguously came out worst in these disputes, and Britain almost surely suffered lower losses than France as well.

The markup for lemons: quality and uncertainty in American and British used-car markets c. 1953 73

Offer, A. — 2007-10-02

Automobile depreciation rates and dealer markups in the United States and Britain during the 1950s and 1960s provide evidence on the effect of asymmetric information on market structures. Initial depreciation was not exceptional, and trade was not disabled. The risk of asymmetric information was not large, and was largely covered by dealer warranties. Adverse selection kicked in as cars aged: markups increased and fixed selling costs caused dealers to withdraw from trading older cars. Despite their lower quality, British makes depreciated less, probably due to different novelty signals and longer styling cycles.

Promotion tournaments and white collar careers: evidence from Williams Deacon's Bank, 1890 1941

Seltzer, A. J., Frank, J. — 2007-10-02

This paper uses a unique historical dataset constructed from the payroll records of Williams Deacon's Bank to examine career structures in a white collar firm. We examine promotions from the level of clerk to branch manager in the context of the Bank's strong internal labour market. There is evidence the Bank used promotion tournaments with returns to promotion that were inversely related to the probability of promotion. In expectation these returns were relatively constant over an individual's career. There is also evidence that the Bank compensated individuals with pay rises for frequent lateral moves and even demotions. Such moves were designed to discourage dishonest behaviour.

Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares

Shea, G. S. — 2007-10-02

South Sea Company subscription shares were compound call options on the firm's own fully-paid shares. From the description of shares found in 6 Geo.1, c.4, a theory of their pricing is developed. A method for computing subscription share values is also developed. Calculated theoretical values for subscription shares are compared to the shares’ historical values and a close correspondence between the two is demonstrated. The prices of the subscriptions relative to fully-paid share prices thus appear to be explainable using simple financial economic theory and to have been formed quite rationally. There is no obvious evidence of barriers to arbitrage or inefficiencies in the markets for fully-paid shares and subscription shares during the financial crisis known as the South Sea Bubble.

What made southwest German firms innovative around 1900? Assessing the importance of intra- and inter-industry externalities

Baten, J., Spadavecchia, A., Streb, J., Yin, S. — 2007-10-02

This paper investigates the impact of clustering on the innovative activity of firms. The study, one of the few using firm-level data, is based on a newly constructed dataset, including information on patents and 2407 manufacturing firms located in the state of Baden at the turn of the 20^th century. The analysis assesses the importance of intra- and inter-industry externalities, among other determinants, for the innovative activity of firms in the sample. The results show that both types of externalities were important, with the former being more important for the whole sample and the latter for small firms. Moreover, consistent with Winter's theory of ‘technological regimes’, our results show that firms differ in the type of knowledge base they utilize in their innovative activity, a result rich in policy implications.

Globalization, natural resources, and foreign investment: a view from the resource-rich tropics

Huff, G. — 2007-10-02

This article uses data drawn from Southeast Asia and West Africa to help explain the geographical distribution of foreign investment. Why during late nineteenth- and early twentieth-century globalization did the attributes of abundant natural resources, mass migration, and export expansion that attracted large foreign investment to the New World not similarly draw capital to the tropics? I argue that in a number of tropical countries, rich natural resources and cheap labour available through mass migration effectively substituted for foreign borrowing. At the same time, the dominant institution of colonialism throughout Southeast Asia and West Africa limited borrowing from abroad and helped to ensure that even for these resource-rich countries capital flows remained slight.

Labour market integration in a pre-industrial economy: Catalonia, 1772 1816

Mora-Sitja, N. — 2007-10-02

This paper examines labour's reward and labour market integration in Catalonia before the first Industrial Revolution. Using new quantitative evidence on urban wages, it addresses two main issues. First, what was the performance of agricultural and urban wages during the last five decades of the so-called pre-industrial period, and what consequences did wage evolution have for labourers? Second, did wage responses reflect a situation of labour market integration? The findings here support the idea that labour markets worked before the advent of the Industrial Revolution, and find resonance with wider arguments on the overall development of Catalonia.