financial markets and growth the last five years have witnessed a resurgence of interest in the relationship between financial intermediation and economic growth this issue had been extensively studied nearly two decades earlier by goldsmith 1969 mckinnon 1973 shaw 1973 and others who produced considerable evidence that financial development correlates with growth but their work though insightful lacked analytical foundations in traditional growth theory financial intermediation could be related to the level of the capital stock per worker or to the level of productivity but not to their respective growth rates the latter were ascribed to exogenous technical progress the recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of endogenous growth models which have shown that there can be self sustaining growth without exogenous technical progress and that the growth rate can be related to preferences technology income distribution and institutional arrangements this provides the theoretical underpinning that early contributors lacked tinancial intermediation can be shown to have not only level effects but also growth effects the resulting models have offered important insights into the effect of financial development on growth and vice versa they have also provided new impetus to empirical research on these issues this paper reviews the ground covered so far on the theoretical and empirical front and points to some still unresolved issues

the finance growth link in latin america this paper analyzes the relationship between financial development and economic growth in latin america with a granger causality test and impulse response functions in a panel vector autoregression var model with annual observations from a sample of 18 countries from 1962 to 2005 it is shown that while economic growth causes financial development financial development does not cause economic growth this finding is robust to different model specifications and different financial indicators interestingly when the sample is divided according to different income levels and institutional quality there is two way causality between financial development and economic growth only for the middle income group and for countries with stronger rule of law and creditor rights the impulse response functions show that a shock to financial development has a positive impact on economic growth only for these subsamples but the net effect of financial development on growth is relatively small during the 1980s most latin american countries suffered from distorted financial systems in this decade the government kept interest rate controls allocated credit arbitrarily and deterred the expansion of security markets and the creation of new financial institutions edwards 1999 nonetheless there has been a significant improvement on the levels of financial development in the region while credit to the private sector as a share of gross domestic product gdp in the latin american region was on average 12 in the 1960s it grew to an average of 29 in the early 2000s 1 even though latin american countries experienced significant financial reforms in the 1990s that promoted financial deregulation and the growth of the stock market financial development indicators show that the region is financially underdeveloped when compared to other emerging regions 2 therefore lack of financial depth may be a barrier to better economic performance in latin america the link between financial development and economic growth is complex because the direction of causation between the two variables may run both ways theoretical and empirical analyses support causality running from financial development to economic growth supply leading hypothesis but there is also evidence that economic growth causes financial

financial factors in economic development financial factors have been assigned strategic importance in economic development but very different factors have been isolated in the respective experiences in asia unrepressed financial markets in mobilizing saving and allocating investment have been given prominence in latin america the central question is the role of inflationary finance the scope for deficits to enhance growth and increasingly the feedback from high and unstable inflation to poor economic performance this paper reviews and contrasts the two approaches and concludes that the strong claims for the benefits of financial liberalization are not supported by evidence financial factors are important but probably only when financial instability becomes a dominant force the scope for inflationary finance is small and the risks are larger than commonly accepted when hyperinflation takes over and foreign exchange crises disrupt the price system and shorten the economic horizon to a week or a month normal economic development is suspended moreover difficult to reverse capital flight puts savings outside the home economy attention should focus on these extreme cases and explore deeper the thresholds at which financial factors become dominant and the channels through which this occurs superior growth performance in this perspective may be more a reflection of adaptability than financial deepening this abstract was borrowed from another version of this item

issues in the measurement of economic depreciation introductory remarks i introduction most capital goods are used up in the process of producing output machine tools wear out trucks break down electronic equipment becomes obsolete when an asset reaches a point at which it is no longer economical to repair and maintain it is withdrawn from service as the physical deterioration and retirement of assets cause the productive capacity to decline to zero a parallel loss in asset financial value occurs this depreciation of value is a cost that must be subtracted from gross revenue in order to determine the income accruing to the asset it is also the amount that must be added to the balance sheet in order to keep wealth intact these are relatively straightforward distinctions that are routinely used in various fields of economics in studies of economic growth particularly in the new growth theory with its focus on the role of capital formation in environmental economics with its concerns about sustainable growth in production theory with the study of capital formation in industrial organization with issues involving the rate of return to capital and in public finance with its interest in the taxation of income from capital it is therefore perplexing that these important distinctions have been the source of much confusion and error it is common for example to see deterioration called depreciation though the former is a quantity concept and the latter refers to financial value other confusions have led to the inference that there are two logically separate concepts of capital one appropriate for wealth accounting and the other for the study of productivity and growth part of the problem lies with the historic confusion and controversy within capital theory itself the controversy is manifest in academic debates over the role of capital in economic growth viz the cambridge controversies in capital theory a major source of difficulty arises from the fact that by definition a capital good yields its services over the course of several years and the fact that capital goods are generally owner utilized this leads to a fundamental difference vis a vis non capital inputs like labor and materials that complicates the measurement problem enormously and necessitates the use of imputational methods and approximations to get at the underlying economic prices and quantities unlike labor which is purely an input capital goods are both inputs and outputs of the production process and this fact adds yet another dimension to the analysis in the spring of 1992 the current state of research on capital wealth and depreciation was the subject of a one day conference on research in income and wealth symposium held in washington d c at the board of governors of the federal reserve under the auspices of the national bureau of economic research this symposium ranged over many of the issues in the measurement of economic depreciation and presented both an appraisal of past research and an important set of new results the five following papers of this issue of economic inquiry are devoted to the proceedings of the workshop in the hope that further research interest will be stimulated in this crucial and under researched branch of economics ii issues in depreciation analysis given the history of confusion surrounding the concept of economic depreciation it would seem useful to precede the conference papers with a few introductory remarks about the problem of depreciation we will start with the simple example of a small manufacturing company that owns three machines one that was purchased at the beginning of the current year 1996 at a cost of 100 000 one purchased five years ago at a cost of 80 000 and one purchased twenty years ago for 40 000 the three machines are intended to perform the same set of tasks and are essentially the same except for wear and tear due to age and to design improvements that have occurred over time

finance and the sources of growth at various stages of economic development this article studies the effects of financial development on the sources of growth in different groups of countries recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries this hypothesis is tested with panel data from 74 countries using gmm dynamic panel techniques results are consistent with the hypothesis finance has a strong positive influence on productivity growth primarily in more developed economies in less developed economies the effect of finance on output growth occurs primarily through capital accumulation jel o4 g1

testing alternative theories of the firm transaction cost knowledge based and measurement explanations for make or buy decisions in information services firms boundary choices have undergone careful examination in recent years particularly in information services while transaction cost economics provides a widely tested explanation for boundary choice more recent theoretical work advances competing knowledge based and measurement cost explanations similar to transaction cost economics these theories examine the impact of exchange attributes on the performance of markets and hierarchies as institutions of governance these theories however offer alternative attributes to those suggested by transaction cost economics or offer alternative mechanisms through which similar attributes influence make buy choices traditional empirical specifications of make buy models are unable to comparatively test among these alternative theories by developing and testing a model of comparative institutional performance rather than institutional choice we examine the degree of support for these competing explanations of boundary choice hypotheses are tested using data on the governance of nine information services at 152 companies our results suggest that a theory of the firm and a theory of boundary choice is likely to be complex requiring integration of transaction cost knowledge based and measurement reasoning 1998 john wiley sons ltd

are any growth theories robust this article investigates the strength of empirical evidence for various growth theories when there is model uncertainty with respect to the correct growth model using model averaging methods we find little evidence that so called fundamental growth theories play an important role in explaining aggregate growth in contrast we find strong evidence for macroeconomic policy effects and a role for unexplained regional heterogeneity as well as some evidence of parameter heterogeneity in the aggregate production function we conclude that the ability of cross country growth regressions to adjudicate the relative importance of alternative growth theories is limited despite the vast amount of empirical research generated by new growth theories there is remarkably little consensus on which mechanisms are most salient in explaining cross country differences this article is designed to provide some evidence on this question by examining the robustness of empirical support for different growth the ories as determinants of both aggregate growth and its underlying components total factor productivity tfp growth and physical and human capital accumulation one reason for the lack of empirical consensus on growth determinants is that the main statistical tool in empirical studies cross country growth regressions provides very different answers depending on how the regression is specified which for this context typically amounts to the choice of control variables individual papers typically employ regressions that include modest subsets of the body of regressors that have been pro posed in the literature as a whole others employ a kitchen sink approach to evaluate the relative evidentiary support of competing growth theories in such an exercise a large number of variables are included in a regression and those variables that prove to be significant are then declared to be the important determinants of growth while the others are dismissed as unimportant rodrik et al 2002 sachs 2003

the financial development and growth nexus a meta analysis this is the accepted manuscript the final version is available from wiley at http onlinelibrary wiley com doi 10 1111 joes 12086 abstract

total factor productivity and the measurement of technological change tfp is interpreted in the literature in different mutually contradictory ways changes in tfp are shown to measure not technological change only the super normal returns to investing in such change returns that exceed the full opportunity cost of the activity thus in the limit technological change can proceed with unchanged tfp measuring the effects of technological change instead requires counterfactual estimates reasons why changes in tfp are imperfect measures of super normal returns are also studied reasons connected with the timing of output responses the treatment of r d in the national accounts the omission of resource inputs and two types of aggregation la productivite totale des facteurs et la mesure du changement technologique la productivite totale des facteurs ptf est interpretee dans la litterature de manieres differentes et mutuellement contradictoires on montre que les changements dans la ptf ne mesurent pas le changement technologique mais seulement les rendements supra normaux sur les investissements dans de tels changements des rendements qui depassent le plein cout d opportunite de cette activite donc a la limite le changement technologique peut proceder sans que la ptf change mesurer les effets du changement technique reclame des evaluations d hypotheses de rechange les raisons pour lesquelles les changements dans la ptf sont des mesures imparfaites des rendements supra normaux sont aussi etudiees raisons connectees avec la reponse des niveaux de production le traitement de la r d dans les comptes nationaux l omission des intrants de ressources et deux types d agregation

is the relationship between financial development and economic growth monotonic evidence from a sample of middle income countries summary we revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980 2008 period using pooled mean group estimations in a dynamic heterogeneous panel setting we show that there is an inverted u shaped relationship between finance and growth in the long run in the short run the relationship is insignificant this suggests that too much finance can exert a negative influence on growth in middle income countries the finding of a non monotonic effect of financial development on growth is confirmed by estimating a threshold model

reassessment of the finance growth nexus in the presence of structural breaks this article investigates empirically the causality between financial development and economic growth for 11 sample countries in a structural break framework via minimum lagrange multiplier unit root test and hsiao s causality test we find most of the series can be more accurately characterized as a segmented trend stationary process around structural breaks as opposed to a stochastic unit root process which has important implications for policy makers to formulate long term development strategy and short run stabilization policies as well as for academics to carry out cointegration analysis besides we find different causality patterns in sample countries which depart from those found in the existing literature highlighting that it might be unreliable to apply only conventional unit root test and inappropriate to take the first difference of the series to achieve stationarity all of which might result in model misspecification our analysis also provides some evidence on the source of the mixed res

uncertainty of governmental relief and the crowding out of flood insurance this paper discusses the problem of crowding out of insurance by co existing governmental relief programs the so called charity hazard in the context of different institutional schemes of governmental disaster relief in austria and germany we test empirically whether an assured partial relief scheme as in austria drives a stronger crowding out of private insurance than a scheme promising full relief which is subject to ad hoc political decision making as in germany our general finding is that the institutional design of governmental relief programs significantly affects the demand for private natural hazard insurance

financial structure and economic growth recent empirical work on financial structure and economic growth analyzes multi country dataset in panel and or cross section frameworks and concludes that financial structure is irrelevant we highlight their shortcomings and re examine this issue utilizing a time series and a dynamic heterogeneous panel methods our sample consists of fourteen countries tests reveal that cross country data cannot be pooled financial structure significantly explains output levels in most countries the results are rigorously scrutinized through bootstrap exercises and they are robust to extensive sensitivity tests we also test for several hypotheses about the prospective role of financial structure and financial development on economic growth

the relevance of p star analysis to uk monetary policy recent articles have attempted to restore the use of a simple measure of the money supply as an indicator of future price levels p star and to reestablish a causal link from money to prices in this paper we argue that the p star approach is flawed it is certainly more complex than traditional monetarist approaches but the fundamental questions of causality are in no way either affected or resolved we argue that the p star relationship does not have a causal link with prices but rather the causality runs from prices to money we also find that there is some causality running from money to real income so that monetary conditions do seem to have some predictive power for future levels of activity copyright 1994 by royal economic society

common stochastic trends in international stock markets abstract this paper presents evidence concerning the number of common stochastic trends in the equity markets of the u s japan england germany and canada monthly and quarterly data from january 1974 through august 1990 on morgan stanley s capital international indices are used to compute johansen 1990 tests for common trends the results indicate the presence of a single common trend driving these countries stock markets estimates of the factor loadings suggest that this trend is most important in the japanese market and least important in the canadian market to interpret this evidence the paper demonstrates that under weak conditions the unit root and cointegration structure of stock prices should mirror the unit root and cointegration structure of their dividend payments the paper tests this prediction by constructing national dividend series from capital international s dividend yield data as well as by using gnp data as with stock prices the evidence points to a single common trend although the stochastic properties and relative importance of this trend differs somewhat from the trend in stock prices

interest rate reforms financial deepening and economic growth in cameroon an empirical investigation the impact of interest rate reforms on financial deepening and growth in cameroon is examined we employ five proxies of financial deepening against deposit rate a proxy for interest rate reforms the impact of interest rate reforms on financial deepening is sensitive to the proxy used for financial deepening the impact is almost negative and significant for all the indicators except for the ratio of broad money to gross domestic product where it is positive and significant in the first lag this means that financial repression helps improve broad money and hinders the development of the other indicators of financial development in cameroon

testing the endogenous growth model public expenditure taxation and growth over the long run endogenous growth models such as barro 1990 predict that government expenditure and taxation will have both temporary and permanent effects on growth we test this prediction using panels of annual and period averaged data for oecd countries during 1970 95 isolating long run from short run fiscal effects our results strongly support the endogenous growth model and suggest that long run fiscal effects are not fully captured by period averaging and static panel methods unlike previous investigations our estimates are free from biases associated with incomplete specification of the government budget constraint and do not appear to result from endogeneity of fiscal or investment variables jel classification h30 o40 validation du modele de croissance endogene depenses publiques fiscalite et croissance a long terme des modeles de croissance endogene comme celui de barro 1990 predisent que depenses gouvernementales et fiscalite vont avoir des effets temporaires et permanents sur la croissance on met cette prevision au test a l aide de donnees annuelles et pour certaines moyennes couvrant des sous periodes pour les pays de l ocde 1970 95 dans le but de departager les effets a court et a long terme les resultats valident fortement le modele de croissance endogene et suggerent que les effets fiscaux a long terme ne sont pas pleinement captures par des methodes utilisant des moyennes ou des methodes statiques contrairement aux resultats d enquetes anterieures les resultats proposes ne souffrent pas de distorsions attribuables a une specification incomplete de la contrainte budgetaire du gouvernement et ne semblent pas etre l effet d echo de l endogeneite des variables fiscales et de l investissement

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

financial development and economic growth the case of taiwan this paper examines the relationship between financial development and economic growth in taiwan from 1962 to 1998 using a four variable var model the competing hypotheses of demand following versus supply leading are empirically tested the results from granger causality tests based on vector error correction models vecm suggest unidirectional causality running from financial development measured as the ratio of m2 to gdp to economic growth this result supports the supply leading hypothesis for taiwan this finding highlights the importance of financial development in taiwan s recent growth

the value of delegated quality control this paper studies the case in which a firm delegates quality control to an independent monitor in a repeated game consumers trust provides incentives to acquire information about whether the good is defective and withhold defective goods from sale if third party reports are observable to consumers delegation lessens the first and dispenses with the second moral hazard concern but also creates agency costs internal quality control is optimal only if trades are sufficiently frequent and consumer information is sufficiently precise this result holds in the presence of the possibility of collusion fully non verifiable presale information and economies of scale in external quality control

financial development and economic growth international evidence the importance of the relationship between financial development and economic growth has been well recognized and emphasized in the field of economic development 1 although recent writings on this subject seem to accept the hypothesis that financial development is crucial for successful economic growth 2 patrick asked the critical question which sector financial or real leads in the dynamic process of economic development patrick identified two possible patterns in the causal relationship between financial development and economic growth in the first growth induces an expansion of the financial system 3 according to this view called demand following the lack of financial growth is a manifestation of the lack of demand for financial services as the real side of the economy develops its demands for various new financial services materialize and these are met rather passively from the financial side in the second pattern the expansion of the financial system precedes the demand for its services channeling scarce resources from small savers to large investors according to relative rates of return the financial sector precedes and induces real growth the deliberate establishment and promotion of financial institutions in many less developed countries ldcs might reflect this belief in the supply leading relationship between the two developments a natural question then concerns the direction of causality between financial development and economic growth patrick asserted that the direction of causality changes over the course of development in his view financial development is able to induce real innovation type investment before sustained modern economic growth gets under way and as the process of real growth occurs the supply leading impetus gradually becomes less important and the demand following financial response

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

the direction of causality between financial development and economic growth abstract this paper employs the geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth the paper finds that 1 financial development generally leads to economic growth 2 the granger causality from financial development to economic growth and the granger causality from economic growth to financial development coexist 3 financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries 4 the longer the sampling interval the larger the effect of financial development on economic growth 5 financial deepening propels economic growth through both a more rapid capital accumulation and productivity growth with the latter channel being the strongest

does financial development lead economic growth a vector auto regression appraisal using a vector autoregression var approach several hypotheses are re examined suggested by the literature concerning the relationship between financial development and economic growth investment and productivity the models use quarterly time series data from ten oecd countries and china innovation accounting or variance decomposition and impulse response function analysis is applied to examine interrelationships between variables in the var system and therefore differs from the more usual granger causality approach in particular it examines the relationship between financial development proxied by total credit at best weak support is found for the hypothesis that financial development leads economic growth

a new global database on agriculture investment and capital stock abstract this paper introduces a new analytical database on aggregate physical investment flows and capital stock in agriculture forestry and fishing for 189 countries and territories over the period 1995 2017 long time series of the agricultural investment to value added ratio are employed to obtain agricultural investment flows these latter are subsequently converted into capital stock series by applying a variant of the perpetual inventory method this article describes the database content and the data sources the methodology used to deal with missing data in the investment to value added ratio as well as several measurement issues underlying its development lastly it presents an overview of the main global and regional trends in agricultural gross fixed capital formation and capital stock drawing some implications and directions for future research

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

how much income redistribution an explanation based on vote buying and corruption this paper studies how income tax rates are determined and how they are related to government corruption in the form of fund capture a model is presented where rich voters can block redistribution by buying the votes of some poor voters in equilibrium there is only limited redistribution and income tax rates are a negative function of government corruption when rich voters can bribe the government an additional equilibrium with zero taxation is possible the link between corruption and tax rates is tested using cross country data the empirical evidence is fully consistent with the predictions of the model

a survey of recent developments in the literature of finance and growth this paper provides a survey of the recent progress in the literature of financial development and economic growth the survey highlights that most empirical studies focus on either testing the role of financial development in stimulating economic growth or examining the direction of causality between these two variables although the positive role of finance on growth has become a stylized fact there are some methodological reservations about the results from these empirical studies several key issues unresolved in the literature are highlighted the paper also points to several directions for future research

explaining organizational diseconomies of scale in r d agency problems and the allocation of engineering talent ideas and effort by firm size the comparative efficiency and success of small firms in r d remains largely unexplained this paper empirically examines scale diseconomies in offering employment contracts as an explanation for diseconomies of scale in r d the paper argues that small firms more efficiently resolve the severe agency problems of hidden information and hidden behavior in r d small firms more efficiently offer contracts that reward performance than large firms and consequently small firms attract and retain engineers with higher ability and skill further small firms through these more performance contingent contracts induce higher levels of effort than large firms the study tests and generally confirms these hypotheses using data collected from 912 current and former engineering employees of two large high technology companies

honesty in a model of strategic information transmission we consider the following simple model of consumer fraud consumers need one of two possible repairs an expensive repair denoted e or an inexpensive repair denoted i the exogenous probability that a consumer needs the more costly remedy is r each consumer is assumed to know r an expert can observe with certainty which of the two repairs is needed and can offer to sell either to the consumer in a simple extension we allow for uncertainty with respect to the expert s observation we assume that selling the expensive remedy to a consumer who needs only the inexpensive one is more profitable than selling the inexpensive one thus h eii h1 iji where h denotes profit and i denotes conditional on needing the profit functions are increasing in the price of the respective repairs for convenience we suppress the dependence of h on prices in our notation we also assume that a consumer prefers to obtain the appropriate repair to the inappropriate one thus u eie u ije and u iii u eii where u is the consumer s payoff lastly we assume that the functions u eje and u e i are decreasing in the price of the expensive repair and that u iie and u iii are decreasing in the price of the inexpensive repair we also assume that u iie is decreasing in the price of the expensive repair since the consumer ultimately buys the expensive repair in this case see below for further assumptions regarding the repairs we are interested in the equilibrium levels of honesty in this model how honest is the expert at the equilibrium do consumers always follow the expert s advice does the level of honesty increase as the interests of the agents become more similar in a sense to be defined below our assumptions are similar to those in the abstract strategic information transmission models of vincent crawford and joel sobel 1982 and jerry green and nancy stokey 1980 we follow the former paper which asks whether the signals sent become less noisy as the agents preferences become more similar despite the similarity of our model to crawford sobel s we arrive at some different conclusions with respect to the expert s honesty vis a vis the agents closeness of interests we explain this in detail in section iii in addition we allow that the expert may be uncertain about the true state of the world we also explicitly model the level of expert honesty which extends crawford sobel the outline of the paper is as follows in section i we provide the details of the model and show that a unique equilibrium exists comparative static results and a simple extension incorporating the assumption of the incompetent expert are given in section ii we draw comparisons with crawfordsobel in section iii in section iv we conclude with a brief summary

finance is good for the poor but it depends where you live i examine whether or not the incomes of the poor systematically grow with average incomes and whether financial development enhances the incomes of the poorest quintile following the methodology of dollar and kraay 2002 i find once extending dollar and kraay s data their findings are robust to the lucas critique and economic growth is important for poverty reduction universally however in comparison to other authors work i show financial development aids the incomes of the poor in certain regions whilst it may be detrimental in others this proposes evidence against a one size fits all model adding a further contribution to the literature on financial development and poverty

on the role of verifiability and commitment in credence goods markets a client has a problem but does not know whether it is serious or minor she consults an expert who can correctly diagnose and fix her problem this paper characterizes the equilibrium pricing and recommendation strategies of an expert under the assumptions that i the type of treatment is verifiable by the client ii the client has the option of rejecting any treatment recommendation and iii the expert is not liable for the outcome of the treatment it is found for any parameter configuration that there exist equilibria in which the expert makes fraudulent recommendations resulting in inefficient treatment the market outcome is compared with that under an alternative market environment in which the expert is liable for treatment outcome but the type of treatment performed is non verifiable it is shown that for some parameter configurations the equilibrium is more efficient when liability is in place than when the treatment is verifiable these findings stand in sharp contrast to the received wisdom that the market outcome under verifiability of treatment is efficient while the market outcome under liability for outcome is not finally this paper shows that the existence of some honest experts may induce more fraudulent behavior by opportunistic experts

explaining the swollen middle why most transactions are a mix of market and hierarchy why are firms sometimes more efficient than markets at organizing transactions why are most transactions arrayed neither at the pure market nor at the pure hierarchy end of the continuum but rather in the swollen middle incorporating features of both market and hierarchy why don t firms make greater use of price incentives this paper addresses these three questions by developing a model of the choice of institution one key building block is the distinction between organizing methods hierarchy and the price system and institutions firms and markets hierarchy and the price system are two distinct methods for organizing transactions each with particular costs and benefits markets and firms are institutions which use one or both of these methods although markets predominantly use prices and firms rely principally on hierarchy there is not a one to one correspondence between prices and markets or between hierarchy and firms indeed the paper argues that it is generally more efficient to use a mix of both methods than to specialize in either the paper focuses on the enforcement properties of prices and hierarchy hierarchy controls individuals directly by constraining their behavior by imposing behavior constraints while prices do it indirectly by measuring their outputs through price constraints under hierarchy individuals receive a salary to do as told while self employed individuals governed by the price system are rewarded on the basis of their output each system has its own biases using prices maximizes effort minimizes shirking but incites individuals to inflate the price and or reduce the quality of their output it encourages cheating relying on hierarchy results in the opposite bias under hierarchy individuals are not paid in function of their output but instead are rewarded for following directives they have thus strong incentives to minimize effort to shirk unless properly supervised but being paid a fixed sum to follow orders they have few incentives to cheat hence the price system experiences low shirking but potentially high cheating costs while hierarchy faces low cheating but high shirking costs organizing costs are the sum of shirking and cheating costs any given transaction will be organized by the mix of price and hierarchy i e by the mix of price and behavior constraints that minimizes organizing costs a transaction will be organized within a firm if the reduction in cheating costs achieved by replacing price constraints by behavior constraints exceeds the resulting increase in shirking costs and by the market in the opposite case the paper shows that cheating and shirking costs increase more than proportionately as one concentrates in either pure price or behavior constraints hence using a mix of both methods generally minimizes the sum of cheating and shirking costs this explains why most transactions exhibit features of both markets and hierarchy the paper shows clearly the tradeoff involved between price and behavior constraints it explains the costs and benefits of using two types of price incentives in firms piecework and profit centers and predicts when they will be used

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

financial development and economic growth evidence from panel unit root and cointegration tests abstract in this paper we investigate the long run relationship between financial depth and economic growth trying to utilize the data in the most efficient manner via panel unit root tests and panel cointegration analysis in addition we use threshold cointegration tests and dynamic panel data estimation for a panel based vector error correction model the long run relationship is estimated using fully modified ols for 10 developing countries the empirical results provide clear support for the hypothesis that there is a single equilibrium relation between financial depth growth and ancillary variables and that the only cointegrating relation implies unidirectional causality from financial depth to growth

interest rate management in ldc s the mckinnon argument that higher time deposit rates raise output and lower inflation in the short run and increase medium term growth by raising the savings rate are shown to depend crucially on the assumption that portfolio shifts into td s come out of an asset providing less intermediation than the banking system we show that if instead the shift is out of an asset providing more intermediation e g loans on a curbmarket raising td rates is contractionary in the short run may have negative impacts on growth and can lead to more rather than less inflation in the short run

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

psychological pressure in competitive environments new evidence from randomized natural experiments dynamic competitive settings may create psychological pressure when feedback about the performance of competitors is provided before the end of the competition such psychological pressure could produce a first mover advantage despite a priori equal winning probabilities using data from a randomized natural experiment penalty shootouts in soccer we reexamine evidence by apesteguia and palacios huerta apesteguia j palacios huerta i 2010 psychological pressure in competitive environments evidence from a randomized natural experiment amer econom rev 100 5 2548 2564 they report a 21 percentage point advantage for first movers over second movers in terms of winning probabilities extending their sample of 129 shootouts to 540 we fail to detect any significant first mover advantage our results are fully consistent with recent evidence from other sports contests this paper was accepted by teck ho behavioral economics

household decision making in rural china using experiments to estimate the influences of spouses abstract many economic decisions are made jointly within households running an experiment on intertemporal choice we investigate the relative influence of spouses on joint household decisions we let each spouse first decide individually and then jointly with the other spouse we propose the use of a random parameter probit model to measure the relative influence of spouses on joint decisions we find that joint choices are in between husbands and wives choices with respect to impatience indicating that both spouses have an influence on joint decisions however we estimate that in 99 of households husbands have a stronger influence than wives

if at first you don t succeed profits prices and market structure in a model of quality with unknowable consumer heterogeneity why are higher quality niches seen as intrinsically more profitable in business circles why do high quality products sometimes have a low real price whereas it is unusual to see low quality products with high real prices can markets have quality differentiation as well as quality bunching how does the rate at which fixed costs change with quality affect market structure in this article we develop a new model of quality that casts light on such issues

of finance and development neglected and unsettled questions abstract the article analyzes some of the neglected and still unsettled issues on the interrelationship of finance and development and in the subdiscipline of finance notably the implications of the dichotomy of formal and informal finance the modalities and sequencing of financial reform the challenge of maintaining competition in oligopolistic systems the scope for market related monetary policy instruments the case for autonomy of central banks and divestiture of their developmental role and revamping of their prudential functions it argues for a sharply focused country specific issues oriented research agenda

price competition between an expert and a non expert abstract this paper characterizes price competition between an expert and a non expert in contrast with the expert the non expert s repair technology is not always successful consumers visit the expert after experiencing an unsuccessful match at the non expert this re entry affects the behavior of both sellers for low enough probability of successful repair at the non expert all consumers first visit the non expert and a timid pricing equilibrium results if the non expert s repair technology performs well enough it pays for some consumers to disregard the non expert a visit they directly go to the expert s shop and an aggressive pricing equilibrium pops up for intermediate values of the non expert s successful repair a mixed pricing equilibrium emerges where the expert randomizes over the monopoly price and some lower price

social preferences during childhood and the role of gender and age an experiment in austria and sweden we examine social preferences of swedish and austrian children and adolescents using the experimental design of charness and rabin 2002 we find that difference aversion decreases while social welfare preferences increase with age

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

financial market development and trade openness evidence from emerging economies international trade is said to be the engine of economic growth despite an enormous effort to explain this phenomenon the relationship between financial market development and trade openness and integration into the world economy is still an enigma this article investigates the relationship between financial market development and trade openness to do this we develop a long run and short run model a bounds testing approach to cointegration for 18 emerging economies over the period 1980 to 2011 estimates from all models show that financial market development including both the stock market and the banking sector has significant effect on trade openness in both short run and long run phenomena in the majority of countries despite many similarities among emerging economies additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country s specific structure

total factor productivity growth in agriculture a malmquist index analysis of 93 countries 1980 2000 in this paper we examine levels and trends in agricultural output and productivity in 93 developed and developing countries that account for a major portion of the world population and agricultural output we make use of data drawn from the food and agriculture organization of the united nations and our study covers the period 1980 2000 due to the non availability of reliable input price data the study uses data envelopment analysis dea to derive malmquist productivity indexes the study examines trends in agricultural productivity over the period issues of catch up and convergence or in some cases possible divergence in productivity in agriculture are examined within a global framework the paper also derives the shadow prices and value shares that are implicit in the dea based malmquist productivity indices and examines the plausibility of their levels and trends over the study period

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

limited liability shareholder rights and the problem of corporate irresponsibility there has long been a tendency to see the corporate legal form as presently constituted as economically determined as the more or less inevitable product of the demands of advanced technology and economic efficiency through an examination of its historical emergence focusing in particular on the introduction of general limited liability and the development of the modern doctrine of separate corporate personality this paper takes issue with this view arguing that the corporate legal form was and is in large part a political construct developed to accommodate and protect the rentier investor it is moreover a construct which institutionalises irresponsibility against this backdrop different ways of trying to resolve the problem of corporate irresponsibility are explored the key the paper suggests is to be found in decoupling the privilege of limited liability from rights of control

productivity growth in world agriculture sources and constraints during the last half century advances in crop production came from expansion in areas irrigated from more intensive application of fertilizers and crop protection chemicals and from crop varieties that were more responsive to technical inputs and management advances in animal production came from genetic improvements and advances in animal nutrition differences among developed and developing countries in output per hectare and per worker have widened if these gaps are to be narrowed agricultural research capacity in developing countries will have to be substantially strengthened

experts vs discounters consumer free riding and experts withholding advice in markets for credence goods this paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable and if they face competition by discounters who are not able to perform a diagnosis the unobservability of diagnosis effort and the credence characteristic of the good induce experts to choose incentive compatible tariff structures this makes them vulnerable to competition by discounters we explore the conditions under which honestly diagnosing experts survive competition by discounters we identify situations in which experts misdiagnose consumers in order to prevent them from free riding on experts advice and we discuss policy options to solve the free riding consumers cheating experts problem

the dynamics of smithian growth this paper analyzes the evolution of an economy where growth is driven by increased specialization caused by the geographical expansion of markets it proves that such smithian growth exhibits generic threshold behavior below a critical density of transport linkages the economy is split into isolated local markets with limited specialization above the critical density these markets begin to fuse into a large economywide market causing growth to accelerate this allows an explicit test of the consensus among historians of sung dynasty china that the economic revolution during that period was a result of commercialization caused by the creation of a national waterway network

capital services in u s agriculture concepts comparisons and the treatment of interest rates this paper begins with a review of the methods and assumptions used to measure capital service flows two data series on capital inputs in u s agriculture are briefly described and compared we show that measures of capital services are sensitive to the treatment of interest rates notably the use of fixed versus variable market rates significantly affects measures of the quantity and productivity of agricultural capital in the united states we conclude that when calculating capital usage in u s agriculture the use of a fixed interest rate generates more plausible estimates than the use of an annual market rate

vertical restraints in a model of vertical differentiation we consider the case of a manufacturer who sells a homogeneous good to retailers who compete in prices and cum sales or post sales services we show that the optimal linear price contract is inefficient from the point of view of the vertical structure and that simple forms of vertical restraints such as resale price maintenance and franchise fees dominate the optimal linear price contract but do not restore vertical efficiency our analysis is concluded with the description of an efficient contract

on the rationale of bank lending in pre crisis thailand evidence from credit files is provided to examine bank lending determinants of thai commercial banks their lending practice follows reasonable patterns as a standard set of variables including indirect risk variables explains much of the variance in interest rate spread reflecting institutional differences with mature markets we find a higher importance of relationship banking and risk control via credit availability information about later default reveals prudent relationship lending however banks could have made better use of available information about borrowers riskiness these findings do not support a general verdict of bad banking but indicate room to improve lending decisions

heterogeneous borrowers liquidity and the search for credit abstract we develop a general equilibrium model of credit formation where borrowers and lenders must search for matches and where the composition of borrowers adjusts to satisfy equilibrium entry conditions when market liquidity dries up as a result of fundamental shocks to the system fewer borrowers will participate in the credit market with low quality borrowers suffering disproportionately because of a flight to quality however less liquid credit markets need not be associated with lower social output because the effect of higher average quality may outweigh that of reduced market participation depending crucially on the source of the liquidity shock

the root cause of economic growth under capitalism drawing on historical and other empirical evidence this paper provides a causal explanation of a central question why sustained per capita growth occurs in capitalist economies i e in what way capitalism differs from the market that gives it this property it describes an endogenous economic logic that is based on the institutional characteristics of capitalist firms in the non financial sector especially the flexibility of the inputs that they can call upon and of the size of the market that they can supply this perspective naturally generates a realistic theoretical account not only of the source of economic growth but also of the evolution of market structure the forces that produce divergence in for example profit rates a starting point for explaining price setting and a language for describing firms economic power it draws on previous traditions especially those based on the works of marx and schumpeter but differs from them in important respects copyright the author 2011 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the role of the state in financial markets this paper reexamines the role of the state in financial markets and identifies seven major market failures that provide a potential rationale for government intervention in practice government interventions in capital markets even in industrial countries have been pervasive the paper provides a taxonomy of those interventions with respect to both the objectives they serve and the instruments they employ there is a role for the government in financial markets but the success of government interventions has been mixed it is important that interventions be well designed the paper sets out principles for government regulatory interventions and applies them to prudential regulation it then examines three other areas of intervention directed credit finanical repression and competition policy and identifies circumstances in which some amount of financial repression may actually be beneficial

organizational capabilities and the economic history of the industrial enterprise in my book scale and scope 1990 i focused on the history of the modern industrial firm from the 1880s when such firms first appeared through world war ii i did so by comparing the fortunes of more than 600 enterprises the 200 largest industrial firms at three points in time world war i 1929 and world war ii in each of the three major industrial economies those of the united states britain and germany in this paper i first describe the similarities in the historical beginnings and continuing evolution of these enterprises and then outline my explanation for these similarities next i relate my explanation of these empirical regularities to four major economic theories relating to the firm the neoclassical the principal agent the transaction cost and the evolutionary finally i suggest the value of the transactions cost and evolutionary theories to historians and economists who are attempting to explain the beginnings and growth of modern industrial enterprises

credence goods experts and risk aversion abstract the existing literature on credence goods and expert services has overlooked the importance of risk aversion in this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk averse consumers our results show that the presence of risk aversion reduces the expert s incentive to invest in diagnosis and may thus lead to consumers mistreatment

does financial development contribute to poverty reduction the article examines the contribution of financial development to poverty reduction in developing countries building on earlier research which has established links between financial development and economic growth and between economic growth and poverty reduction the article tests for a causal process linking financial sector growth and poverty reduction the empirical results indicate that up to a threshold level of economic development financial sector growth contributes to poverty reduction through the growth enhancing effect the impact of financial development on poverty reduction will be affected however by any change in income inequality resulting from financial development

a quantitative reassessment of the finance growth nexus evidence from a multivariate var abstract the long run relationship between financial development and economic growth is examined in a multivariate vector autoregression var framework using 10 sample countries difficulties surrounding the cross country regressions and bivariate time series studies are outlined the long run financial development and output relationships are identified in a cointegrating framework through tests of over identifying restrictions we find bi directional causality between financial development and economic growth in all the sample countries conclusions that stand distinct from those in the existing empirical literature we attribute our findings to i analysis of a higher dimensional system ii a new method of identifying the long run economic relationships and iii a new approach to long run causality testing

credence goods monopolists abstract with a credence good consumers never discover how much of the good they actually need therefore the seller acts as the expert determining the customers requirements this information asymmetry creates strong incentives for the seller to cheat on services we analyze whether the market mechanism may induce non fraudulent seller behavior we consider four scenarios differing in the amount of information consumers have at hand to infer the seller s incentives to be honest in three constellations the profit maximizing credence goods monopolist provides honest services only in one scenario there is no trade

linkages between financial deepening trade openness and economic development causality evidence from sub saharan africa summary this contribution tests for causality between financial deepening trade openness and economic development for 16 sub saharan african countries the hsiao granger method is used to add to the existing empirical evidence only limited support is found for the popular hypothesis of finance led growth in general the evidence indicates that financial deepening and trade openness have swayed economic development rather marginally in particular the investigated countries have failed to benefit from financial deepening development strategies prioritizing financial or trade sector development hence cannot be supported

a cross country database for sector investment and capital this article presents a new database of investment and capital in agriculture manufacturing and the overall economy it covers 62 industrial and developing countries for the years 1967 92 a common method is used in the calculations to facilitate comparisons across countries and sectors the sensitivity of the calculations to choices of parameters and estimation methods is tested collectively the data show that as economies grow capital stocks accumulate but the composition of capital changes together and individually capital stocks in agriculture and manufacturing constitute a smaller share of the total capital stock than they did 20 years ago capital labor ratios show that agriculture has become more capital intensive m most countries the composition of agricultural capital has changed as well capital from investments in orchards and livestock has declined relative to capital from fixed investments in machinery irrigation and buildings

causality between financial development and economic growth an application of vector error correction and variance decomposition methods to saudi arabia this article makes an attempt to test the possible directions of causality between financial development and economic growth which were labelled by patrick 1966 as the supply leading and demand following hypothesis saudi arabia is taken as a case study the methods applied are the error correction and variance decompositions techniques including the most recently developed long run structural modelling lrsm pesaran and shin 2002 which by imposing exactly identifying and overidentifying restrictions on the cointegrating vector has taken care of a major limitation of the conventional cointegrating estimates in that they were atheoretical in nature to the best of our knowledge there has not been any study on this issue with the application of the techniques that incorporate lrsm the stability of the functions has also been tested by cumulative sum cusum cumulative sum of squares cusumsq and chow test chow tests our findings based on the above mentioned rigorous techniques tend to s

some methodological problems with the neoclassical analysis of the east asian miracle this paper discusses the recent controversy over the sources of economic growth in east asia this empirical work has either used growth accounting or estimated econometrically aggregate production functions it is shown that it is possible to approximate the value added accounting identity i e value added equals labour s compensation plus total profits by a mathematical expression that has all the properties of a well behaved neoclassical aggregate production function this implies that statistical estimations of putative aggregate production functions can provide no independent evidence as to whether they accurately describe the production technology of the economy or indeed whether the aggregate production function actually exists a corollary is that the conventional measures of the growth of total factor productivity cannot be unambiguously interpreted as an estimate of the rate of technical progress the paper reviews the works of kim and lau and young and in the light of this explains why both analyses and interpretations of the notion of total factor productivity growth as the rate of technical progress are problematical copyright 2003 oxford university press

how social preferences shape incentives in experimental markets for credence goods credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus maximising quality while standard theory predicts that equal mark up prices solve the credence goods problem if customers can verify the quality received experimental evidence indicates the opposite we identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers social preference types our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency

the condition of the working class in england 1209 2004 i use building workers wages for 1209 2004 and the skill premium to consider the causes and consequences of the industrial revolution real wages were trendless before 1800 as would be predicted for the malthusian era comparing wages with population however suggests that the break from the technological stagnation of the malthusian era came around 1640 long before the classic industrial revolution and even before the arrival of modern democracy in 1689 building wages also conflict with human capital interpretations of the industrial revolution as modeled by gary becker kevin murphy and robert tamura oded galor and david weil and robert lucas human capital accumulation began when the rewards for skills were unchanged and when fertility was increasing

financial liberalization financial sector development and growth evidence from malaysia abstract the objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of malaysia using time series data from 1960 to 2001 we conduct cointegration and causality tests to assess the finance growth link by taking the real interest rate and financial repression into account the empirical evidence suggests that financial liberalization through removing the repressionist policies has a favorable effect in stimulating financial sector development financial depth and economic development are positively related but contrary to the conventional findings our results support robinson s view that output growth leads to higher financial depth in the long run

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted

educational systems growth and income distribution a quantitative study this study sets out to develop a dynamic model within an economy characterized by the coexistence of public and private schools under imperfect credit market conditions in an attempt to provide a clearer understanding of the evolution of economic growth and income inequality we find that any government wishing to reduce income inequality should adopt policies aimed at increasing the enrollment rate in public schools however whilst high enrollment rates can be sustained in private schools and thus create enhanced economic growth this can only occur if accompanied by the liberalization of the credit markets

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

thresholds of financial development in the euro area we analyse the dynamics of financial development and economic growth in the euro area as these countries went through considerably higher levels of financial development using a balanced panel data of 38 years from 1980 to 2018 we offer new evidence on the finance growth nexus we show the presence of non linearity as there is an inverted u shaped relationship between finance and growth in the long run estimating the thresholds in the finance growth nexus we notice a threshold effect at 74 86 of gdp for domestic credit 51 of gdp for stock turnover ratio and 65 of gdp for stock market capitalisation we notice that exceeding the threshold causes deceleration in economic growth as too much finance results in crowding out effect for productive economic activities the panel granger causality test results show that financial development should be associated with optimal growth performance these findings in the euro area provide some useful policy implications to the emerging and developing economies in designing their financial development strategies

car mechanics in the lab investigating the behavior of real experts on experimental markets for credence goods credence goods such as car repairs or medical services are characterized by severe informational asymmetries between sellers and consumers leading to fraud in the form of provision of insufficient service undertreatment provision of unnecessary service overtreatment and charging too much for a given service overcharging recent experimental research involving a standard student subject pool has examined the influence of informational and market conditions on the type and level of fraud we investigate whether professional car mechanics as real sellers of credence goods react in the same way to changes in informational and institutional constraints while we find qualitatively similar effects in the fraud dimensions of undertreatment and overcharging for both subject pools car mechanics are significantly more prone to supplying unnecessary services in all conditions which could be a result of decision heuristics they learned in their professional training