network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

from production networks to geographical economics abstract although standard economics textbooks are seldom interested in production networks modern economies are more and more based upon supplier customer interactions one can consider entire sectors of the economy as generalised supply chains we will take this view in the present paper and study under which conditions local failures to produce or simply to deliver can result in avalanches of shortage and bankruptcies and in localisation of the economic activity we will show that a large class of models exhibit scale free distributions of production and wealth among firms and that regions of high production are localised

regulatory environments and the location decision evidence from the early foreign market entries of new technology based firms new technology based firms ntbfs embarking on a strategy of rapid internationalisation choose foreign market entries that minimise transaction costs and the related risks of failure means to reduce the young firms vulnerability to the appropriation of intellectual capital are particularly important influences on early foreign market choices we explore the effect of the institutional dimension specifically the national regulatory environment on the location choices and the speed of internationalisation by british and german ntbfs we provide evidence that entrepreneurial young firms choose to enter country markets offering better regulatory protection for their intellectual property this decision is moderated by a home regulatory regime bias in contrast we observe that the speed of internationalisation is influenced less by the foreign regulatory regime and more by industry and firm characteristics we also observe that managerial experience influences the location choices of ntbfs facing regulatory hazards

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

an introduction to the law and economics of intellectual property although economists have written on topics of intellectual property for a long time the impact of economics on public policy in this area has been slight especially as compared to the influence of professional writings in areas such as antitrust and taxation we believe that too few of the profession s resources have been devoted to these issues and that of those resources that have been employed too few have been devoted to empirical analyses we hope that this introductory essay and the three papers that follow will stimulate interest in this subject this introductory essay first describes some of the basic economic tradeoffs involved in intellectual property law and then describes the framework of the law in the six areas described above patent copyright semiconductor protection trademark trade secret and misappropriation it is intended both to provide thumbnail descriptions of the various intellectual property regimes to economists working in this area and to indicate where additional economic research might be useful

intellectual property rights and the governance of international r d partnerships this paper studies the degree to which country differences in intellectual property rights protection affect the choice of companies for a particular mode of international inter firm r d partnering it focuses on the preference of companies for either an equity joint venture or a contractual partnership we find that international differences in intellectual property rights protection are a significant factor with less secure protection firms choose r d joint ventures rather than contractual partnerships the level of technological change in industries has an inverse effect on the preference for international r d joint ventures

sovereign defaults by currency denomination abstract this paper explores the drivers of sovereign default in 100 countries over the period 1996 2012 we build a new data set of sovereign defaults and find that default events for local and foreign currency bonds are equally likely however governments default under different economic and financial conditions depending on the currency in which bonds are issued the explained variation in default probability rises from 43 to 62 when we account for differences in currency denomination we also provide evidence that global factors and market sentiment which are known to drive sovereign spreads do not help explain the probability of sovereign default hence these factors appear to affect the price of sovereign credit risk although not the risk itself

does stronger patent protection increase export variety evidence from us product level data proponents of global intellectual property rights iprs reforms have argued that developing countries weak iprs limit their access to foreign innovative products and technologies central to our understanding of the effects of iprs on product access is the influence of national differences in patent protection on corporate behavior and business strategy of multinational firms using detailed product data on us exports from 1990 to 2000 this research note assesses the impact of strengthening iprs in developing countries on product variety of us exports colonial origin and cross industry variation in patent effectiveness serve to identify the impact the results show that the strengthening of iprs increased exports of new products in patent sensitive industries the expansion in product variety accounted for the entire increase in us exports the findings substantiate claims that ratification of trips by developing countries promotes access to new foreign products and technologies additionally the results demonstrate that patent protection is a significant institutional factor in us firms business decisions over the introduction of new products and processes into a developing country marketplace

strategic pricing of new pharmaceuticals this paper provides empirical evidence on the leading factors affecting the prices of new pharmaceuticals both at introduction and after 4 6 and 8 years most important is the extent of therapeutic advance embodied in a new product for drugs which represent important therapeutic gains launch prices can be two or three times those of existing drugs used for the same purposes while drugs that largely duplicate the actions of currently available products are typically priced at comparable levels in addition the number of branded substitutes has a substantial negative effect on launch prices which reflects the importance of competitive pressures duplicate products thereby play an important economic role in pharmaceutical markets

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

why economic dynamics matter in assessing climate change damages illustration on extreme events extreme events are one of the main channels through which climate and socioeconomic systems interact and it is likely that climate change will modify the probability distribution of the losses they generate the long term growth models used in climate change assessments however cannot capture the eects of such shortterm shocks to investigate this issue a non equilibrium dynamic model nedym is used to assess the macroeconomic consequences of extreme events this exercise allowed us to dene the economic amplic ation ratio as the ratio of the overall production loss due to an event to its direct costs this ratio could be used to improve the cost benet analysis of prevention measures we found also that unlike a solow like model nedym exhibits a bifurcation in gdp losses for each value of the capacity to fund reconstruction gdp losses remain moderate if the intensity and frequency of extremes remain under a threshold value beyond which gdp losses increase sharply this bifurcation may partly explain why some poor countries that experience repeated natural disasters cannot develop applied to the specic issue of climate change this model suggests that changes in the distribution of extremes may entail signican t gdp losses in absence of specic adaptation it suggests therefore that to avoid inaccurately low assessments of damages researchers must take into account the distribution of extremes instead of their average cost and make explicit assumptions on the organization of future economies

the measurement of intellectual property rights protection this research improves upon empirical studies that examine the measurement of intellectual property rights ipr protection prior measures examine only one type of law or lack a component that addresses the actual enforcement of these laws the measure presented here uses three types of ipr laws and enforcement components for them

systemic risk financial contagion and financial fragility abstract although it is hard to arrive at a widely accepted definition for systemic risk it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest financial payments banking etc sometimes to the point of making its operation impossible we model systemic risk with two main components a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system our model could be conceptually represented by a network already described in previous works in this work we show how is possible to estimate the distribution of losses for the banking system with our model additionally we show how it is possible to separate the distribution of losses into two components the losses incurred by the initial shock and the losses resulting from the contagion process finally once the distribution is estimated we can derive standard risk measures for the system as a whole another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the cvar in order to evaluate if the system is becoming more or less risky in fact more or less fragile additionally we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

firm network characteristics and economic robustness to natural disasters this article proposes a theoretical framework to investigate economic robustness to exogenous shocks such as natural disasters it is based on a dynamic model that represents a regional economy as a network of production units through the disaggregation of sector scale input output tables results suggest that disaster related output losses depend on direct losses heterogeneity and on the economic network structure two aggregate indexes concentration and clustering appear as important drivers of economic robustness offering opportunities for robustness enhancing strategies modern industrial organization seems to reduce short term robustness in a trade off against higher efficiency in normal times c 2011 published by elsevier b v

how does liquidity affect government bond yields the paper explores the determinants of yield differentials between sovereign bonds using euro area data there is a common trend in yield differentials which is correlated with a measure of aggregate risk in contrast liquidity differentials display sizeable heterogeneity and no common factor we propose a simple model with endogenous liquidity demand where a bond s liquidity premium depends both on its transaction cost and on investment opportunities the model predicts that yield differentials should increase in both liquidity and risk with an interaction term of the opposite sign testing these predictions on daily data we find that the aggregate risk factor is consistently priced liquidity differentials are priced for a subset of countries and their interaction with the risk factor is in line with the model s prediction and crucial to detect their effect

natural disasters and macroeconomic performance recent empirical research has shown that output and gdp per capita in the aftermath of natural disasters are not necessarily lower than before the event in many cases both are not significantly affected and surprisingly sometimes they are found to respond positively to natural disasters here we propose a novel economic theory that explains these observations specifically we show that gdp is driven above its pre shock level when natural disasters destroy predominantly durable consumption goods cars furniture etc disasters destroying mainly productive capital in contrast are predicted to reduce gdp insignificant responses of gdp can be expected when disasters destroy both durable goods and productive capital we extend the model by a residential housing sector and show that disasters may also have an insignificant impact on gdp when they destroy residential houses and durable goods we show that disasters irrespective of whether their impact on gdp is positive negative or insignificant entail considerable losses of aggregate welfare

international joint venture partner selection the role of the host country legal environment this study attempts to enhance our understanding of how a host country s legal environment influences international joint venture ijv partner selection criteria empirical results based on survey data collected on 169 ijvs revealed that host country rule of law perceptions negatively influence appropriation and coordination cost concerns which positively influence partner related criteria furthermore these concerns mediate the relationship between perceptions of host country rule of law and partner related criteria

evolutionary modelling of the macro economic impacts of catastrophic flood events this paper examines the possible contribution of evolutionary economics to macro economic modelling of flood impacts to provide guidance for future economic risk modelling most macro economic models start from a neoclassical economic perspective and focus on equilibrium outcomes either in a static or dynamic way and describe economic processes at a high level of aggregation as a consequence they typically fail to account for the complexity of social interactions and other behavioural responses of consumers and producers to disasters which may affect the macroeconomic impacts of floods employing evolutionary principles and methods such as agent based modelling may help to address some of the shortcomings of current macro economic models we explore and discuss the implications of applying consumer and producer heterogeneity bounded rationality network effects social and technological learning co evolution and adaptive policy making concepts into existing economic frameworks for the assessment of macro economic impacts of floods authors abstract

do sovereign credit default swaps represent a clean measure of sovereign default risk a factor model approach abstract in this study we use a factor model in order to decompose sovereign credit default swaps cds spreads into default liquidity systematic liquidity and correlation components by calibrating the model to sovereign cdss and bonds we are able to present a better decomposition and a more accurate measure of spread components our analysis reveals that sovereign cds spreads are highly driven by liquidity 55 6 of default risk and 44 32 of liquidity and that sovereign bond spreads are less subject to liquidity frictions and therefore could represent a better proxy for sovereign default risk 73 of default risk and 26 86 of liquidity furthermore our model enables us to directly study the effect of systematic liquidity and flight to liquidity risks on bond and cds spreads through the factor sensitivity matrix we find that these risks do have an influence on the default intensity and they contribute significantly to spread movements finally our empirical results advance the idea that the increase in the cds spreads observed during the crisis period was mainly due to a surge in liquidity rather than to an increase in the default intensity

credit chains and bankruptcy propagation in production networks abstract we present a simple model of a production network in which firms are linked by supplier customer relationships involving extension of trade credit our aim is to identify the minimal set of mechanisms which reproduce qualitatively the main stylized facts of industrial demography such as firms size distribution and at the same time the correlation over time and across firms of output growth and bankruptcies the behavior of aggregate variables can be traced back to the direct firm firm interdependence in this paper we assume that the number of firms is constant and the network has a periodic static structure but the framework allows further extensions to investigate which network structures are more robust against domino effects and if the network is let to evolve in time which structures emerge spontaneously depending on the individual strategies for orders and delivery

the tylenol incident ensuing regulation and stock prices the much publicized tylenol incident in 1982 led to stringent packaging regulations for over the counter pharmaceutical drugs the sudden incident and the swift progression of associated events offer a unique opportunity to assess the wealth effects of the resultant regulations the market value of common stock of johnson johnson makers of tylenol declined by approximately 29 percent amounting to 2 31 billion although other firms in the industry also suffered significantly their share price decline did not occur around the tylenol incident but occurred around the subsequent packaging reg ulation proceedings on average 28 other pharmaceutical firms analyzed in this study experienced a decline of 310 million per firm or a total of about 8 68 billion the results suggest that the regulation had a significant negative effect on the common stock prices of firms in the pharmaceutical industry

dealing with dealers sovereign cds comovements abstract we show that sovereign cds that have common dealers tend to be more correlated especially when the dealers display similar quoting activity in those contracts over time this commonality in dealers activity is a powerful driver of cds return comovements over and above fundamental similarities between countries including default liquidity and macro factors we posit that the mechanism causing the excess correlation is the buying pressure faced by cds dealers for credit enhancements and regulatory capital reliefs an instrumental variable analysis helps alleviate the endogeneity concerns in our analysis

practical implications of game theoretic models of r and d the purpose of this paper is to survey recent game theoretic models of research and development and to ask whether they yield practical implications or testable hypotheses the papers i will be discussing have been written or published within the past five years they have a good deal in common relying upon similar assumptions and building upon each other because of this the literature surveyed here may seem narrow and some relevant work has probably been inadvertently omitted i apologize for these omissions for want of space i will not discuss the normative conclusions of this literature

credit contagion and aggregate losses abstract credit contagion refers to the propagation of economic distress from one firm to another this article proposes a reduced form model for these contagion phenomena assuming they are due to the local interaction of firms in a business partner network we study aggregate credit losses on large portfolios of financial positions contracted with firms subject to credit contagion in particular we provide an explicit gaussian approximation of the distribution of portfolio losses this enables us to quantify the relation between the volatility of losses and the determinants of credit contagion we find that contagion processes have typically a second order effect on portfolio losses they induce additional fluctuations of losses around their averages whose size depends on the number of business partners of the firms

the political economy of the pharmaceutical industry e conomicsis a practical science since its inception as an independent discipline it has probed the major policy issues of the day the topics that aroused the interests of its practitioners have generally been those that presented government officials with critical choices the modern literature on the economics of the pharmaceutical industry is no exception this body of material originated with the investigations of the kefauver committee in late 1959 public interest was aroused by the spectacle of confrontation between committee and industry the record made by this committee and its successors grew to tens of thousands of pages as claims and counterclaims were offered regarding industry conduct and performance the primary line of attack concerned pharmaceutical prices and profits the committee demonstrated that prices generally exceeded direct costs of manufacturing for 22 major pharmaceutical firms in 1958 costs of goods sold were merely 32 percent of total sales u s senate report 1961 p 31 the committee argued that this fact alone demonstrated the presence of monopoly power while the substantial difference between revenues and production costs permitted high expenditures on research and development it also paid for even higher selling outlays moreover reported rates of return after taxes during this period on the order of 21 to 22 percent exceeded twice the average for all manufacturing the industry replied that on the contrary prices were low relative to the value afforded consumers and high returns on successful products were required to balance the losses from the large numbers of unsuccessful ones the relevant concept of marginal costs according to the industry position must include the costs of developing and marketing new products and therefore prices were not excessive at all although it admitted earning substantial profits the industry argued that without these returns research outlays would be limited and the number of new drugs reduced the committee countered that little of social value arose from industry research molecules were manipulated and the new drugs that resulted were therapeutically similar to those already on the market indeed it suggested that much