the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

on the empirics of foreign aid and growth the present paper re examines the effectiveness of foreign aid theoretically and empirically using a standard olg model we show that aid inflows will in general affect long run productivity the size and direction of the impact may depend on policies deep structural characteristics and the size of the inflow the empirical analysis investigates these possibilities overall we find that aid has been effective in spurring growth but the magnitude of the effect depends on climate related circumstances finally we argue that the collier dollar allocation rule should be seriously reconsidered by donor agencies if aid effectiveness is related to climate the usefulness of foreign aid in promoting growth in developing countries has been an area of controversy ever since rosenstein rodan in 1943 advocated for aid to eastern and south eastern europe browsing through successive editions of a leading textbook in development economics provides a telling illustration of how the confidence in aid effectiveness dwindled over the years in the first edition of leading issues in economic development meier 1964 dedicated a full 18 page section to the issue of foreign aid he started out asking how much aid by the time of the sixth edition meier 1995 the treatment of foreign aid had been cut into half and the questions in focus were why official assistance and does aid work in the 2000 edition meier and rauch 2000 foreign aid is not even listed in the index

corporate control and real investment in incomplete markets abstract in the standard real options approach to investment under uncertainty agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets however in most situations corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm s investment opportunities are not spanned by those of existing assets the present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge in the paper the investment policy selected by the manager reflects a trade off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges the analysis demonstrates that risk aversion induces the manager to speed up investment leading to a significant erosion of the value of the option to wait

actions versus prospects the effect of problem representation on regret suppose that you must choose between lotteries s safer and r riskier shown in the top half of figure 1 there are 100 possible states of the world and the consequence of s and r are indicated for each state the states of the world with the consequence win 8 000 are separate from the states with the consequence win 20 000 you may find s less appealing knowing that if you choose it and one of the states 71 100 occurs you would have received 20 000 had you picked r suppose that you must choose between lotteries s and r shown in the bottom half of figure 1 though the prospects probability distribution of consequences of s and r are identical to those of s and r the states of the world with positive payoffs overlap you may find s more appealing knowing that if you choose it and one of the states 1 30 occurs you would have received 20 000 had you picked r but s pays an 8 000 consolation prize a series of papers by graham loomes 1988a b 1989 and chris starmer and robert sugden 1989 provides evidence that in evaluating identical prospects the juxtaposition of consequences against different states of the world has a systematic effect on choice under uncertainty as predicted by regret theory david e bell 1982 peter c fishburn 1982 loomes and sugden 1982 1987a regret effects violate expected utility theory and all other prospect based theories of choice all of the laboratory evidence of regret or juxtaposition effects however has been generated under the problem representation in figure 1 the matrix of state contingent consequences while loomes 1988b p 468 argues that evidence of regret effects indicates that prospect based theories may all be failing to capture an important element in decision making under uncertainty this paper suggests that the experimental evidence of regret effects observed so far is specific to the matrix problem representation nearly 400 subjects completed versions of two questionnaires in which choice problems were presented in different formats the juxtaposition of consequences sways choices but only under the matrix presentation the first questionnaire indicates that regret effects are not observed when statecontingent consequences are described by ticket numbers rather than a matrix the second questionnaire indicates that if the matrix format is changed slightly to a simple proportional format subjects apparently compare prospects and ignore the juxtaposition of consequences regret theory predicts that choice depends on the juxtaposition of consequences but regret effects should be invariant to different representations of state contingent consequences

excessive risk taking and the maturity structure of debt abstract this paper analyses the effect of short term debt on equityholders risk taking decisions we show that if short term debt limits the expropriation of debtholders it also implies a lower leverage which prevents the firm from increasing tax shields we then examine the incentive of equityholders to increase the firm risk when debtholders hold the option to swap a perpetual coupon bond with short term debt we find that this option mitigates equityholders risk shifting incentives compared to standard short term debt this restructuring option deters debtholders expropriation it increases leverage and it reduces the loss in tax shields due to asset substitution

reforming performance based aid allocation practice performance based aid allocation systems are used by a number of multilateral agencies to allocate aid among developing countries a number of bilateral agencies also allocate aid on the basis of the performance of recipients albeit in a less systematic way than these multilateral agencies this paper points to a number of fundamental problems associated with performance based aid allocation systems including a problematic balancing of need and performance criteria being reductionist with respect to the drivers of effective aid and not being sufficiently nuanced with respect to performance by ignoring a lack of human capital and economic vulnerability in recipient countries together with providing a theoretical framework that articulates these issues this paper introduces and outlines the papers that follow in this special section

are there negative returns to aid the world bank report assessing aid assumes that an inflow of aid above a certain level starts to have negative effects in this analysis we empirically test this assumption we find evidence for negative returns to aid at high levels of aid inflows however the results are sensitive to both the countries included in the sample and model specification moreover the turning point above which aid starts to have a negative effect on growth seems to be much higher than assumed in the background calculations for assessing aid

aid growth nexus empirical evidence from fiji foreign aid to the island economies is a major source for foreign exchange and resource needs this paper presents an empirical analysis of the relationship between foreign aid and economic growth in the case of fiji a neoclassical production function is applied to estimate the aid growth nexus since the data employed are time series for the period 1968 to 1996 the autoregressive distributed lag approach to cointegration is utilized to estimate the models components of total aid such as grant aid loan aid technical cooperation bilateral and multilateral aid flows are also utilized to estimate a disaggregated short run and long run relationship between foreign aid and economic growth the results show that total aid flows and its various forms i e bilateral aid grant aid and technical cooperation grant aid has a significant impact on economic growth in fiji as for domestic resources only exports and private investments in two equations show positive contribution to growth

can the world cut poverty in half how policy reform and effective aid can meet international development goals abstract poverty in the developing world will decline by about one half by 2015 if the trends of the 1990s persist most of this poverty reduction will occur in asia however while poverty will decline only slightly in africa effective aid could make a contribution to greater poverty reduction in lagging regions even more potent would be significant policy reform in these countries we develop a model of efficient aid in which flows respond to policy improvements that create a better environment for poverty reduction and effective aid we investigate scenarios of policy reform and efficient aid that point the way to how the world can cut poverty in half in every major region

the dynamics of aid and political rights using cross country panel data we explore the extent to which the variation over time in measures of democracy and political rights can be explained by changes in aid inflows thus providing direct evidence on the impact of innovations in donor policy on the quality of recipient governance we distinguish between the short run and long run effects of changes in aid our results are very different from those based on cross country variation in aid inflows we find evidence of large differences between the effect of aid for political reform and the effect of other types of aid in aggregate these effects also depend on the recipient country s initial level of political development there is no evidence that aid intended for political reform has achieved its objective and in some countries it may be counterproductive however aggregate aid can have a beneficial effect on political rights

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

scaling up foreign aid will the big push work international donors are substantially scaling up aid programmes at the same time there are widespread reservations over how much aid recipient countries can use effectively such concerns are supported by the aid effectiveness literature which finds that there are limits to the amounts of aid recipients can efficiently absorb this article demonstrates that a big push in foreign aid will not lead to diminishing returns as long as donors get the inter country allocation of aid right this is true even if donors provide aid at levels equal to the well known target of 0 7 per cent of their gross national income

regret theory a bold alternative to the alternatives in their famous 1982 paper in this journal loomes and sugden introduced regret theory now more than 30 years later the case for the historical importance of this contribution can be made

observing violations of transitivity by experimental methods the preference reversal phenomenon is usually interpreted as evidence of nontransitivity of preference but has also been explained as the result of the difference between individuals responses to choice and valuation problems the devices used by experimenters to elicit valuations and the random lottery selection incentive system this paper reports an experiment designed so that none of these factors could generate systematic nontransitivities yet systematic violations of transitivity were still found the pattern of violation was analogous with that found in previous preference reversal experiments and is consistent with regret theory copyright 1991 by the econometric society

altruism evolution and welfare economics henrich clearly presents the convincing evidence that the evolution of prosocial preferences altruism and altruistic punishment is both theoretically possible and empirically present in human populations henrich convinces us using only the most restrictive arguments if one goes beyond the assumptions of one gene one trait or recognizes the existence of social cognition caporael 1997 the case for the existence of prosocial behavior is overwhelming furthermore while henrich is probably correct in saying that large scale social cooperation is unique to the human species mounting evidence suggests that prosocial behavior is also present in such diverse non human species as lions meerkats fire ants and arabian babblers clutton brock 2002 so why is the reaction against the notion of pure altruism so strong in both economics and biology a likely reason is that it goes against the dominant cultural belief in progress through competition among individuals both evolutionary biology and political economy matured in victorian england where darwin s careful and cautious argument for evolution by natural selection was recast as survival of the fittest a metaphor which fit the dog eat dog world of commercial society rugged individualism is reflected in the gene based reductionism of biology as well as the agent based reductionism of welfare economics bergh and van den gowdy 2003 in his contribution henrich establishes the theoretical basis for cultural group selection based on large scale cooperation he shows that the existence of prosocial behavior cannot be explained by individual based characteristic alone such as kin selection reciprocal altruism or costly signaling this does not contradict darwinian natural selection which can operate on any statistically reliable pattern patterns of culture may vary widely in human societies based on the different kinds of cultural transmission including conformist transmission a short cut to reliable information prestige based transmission punishment of non conformists and normative conformity by which people want their behavior to match that of the group the interplay between these kinds of cultural transmission and the in

dynamic investment and capital structure under manager shareholder conflict abstract this paper investigates the interactions between the investment and financing decisions of a firm under manager shareholder conflicts arising from asymmetric information in particular we extend the manager shareholder conflict problem in a real options model by incorporating debt financing we show that manager shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments which lead to a decrease in the equity value moreover given the presence of manager shareholder conflicts debt financing increases investment and decreases total social welfare as a result there is a trade off between the efficiency of investment and total social welfare with debt financing these results fit well with the findings of previous empirical work in this area

non transitive preferences over gains and losses although transitivity is often regarded as an indispensable principle of rational choice under uncertainty some decision models allow nontransitive preferences one of these regret theory is consistent with a particular pattern of choice cycles when payoffs are nonnegative and the opposite pattern of cycles when payoffs are nonpositive this paper presents evidence from an experiment designed to test these implications of regret theory copyright 1992 by royal economic society

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

on aid growth and good policies this study provides a critical analysis of the growth regressions in burnside and dollar 2000 first we analyse the relationship between aid and government expenditure in a modified neo classical growth model one of the main results of the analysis is that while good policies spur growths they may at the same time reduce the effectiveness of foreign aid second we show that the econometric results in burnside and dollar emphasising the crucial role of interaction between aid and good policies in the growth process are fragile as they are extremely data dependent finally we demonstrate that the burnside and dollar data lend support to the idea that the association between aid and growth can be approximated by decreasing returns to aid this finding conforms well to regression results in other recent studies

the anarchy of numbers aid development and cross country empirics the recent literature contains many stories of how foreign aid affects economic growth aid raises growth in countries with good policies or with difficult economic environments or outside the tropics or on average but with diminishing returns the diversity of the results suggests that many are fragile seven important aid growth papers are tested for robustness using 14 minimally arbitrary tests deriving mainly from differences among the studies themselves this approach investigates the importance of potentially arbitrary specification choices while minimizing the arbitrariness in testing choices all of the results appear fragile especially to sample expansion

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

aid allocation and poverty reduction the authors derive a poverty efficient allocation of aid and compare it with actual aid allocations they build the poverty efficient allocation in two stages first they use new world bank ratings of 20 different aspects of national policy to establish the current relationship between aid policies and growth onto that they add a mapping from growth to poverty reduction which reflects the level and distribution of income they compare the effects of using headcount and poverty gap measures of poverty they find the actual allocation of aid to be radically different from the poverty efficient allocation in the efficient allocation for a given of poverty aid tapers in with policy reform in the actual allocation aid tapers out with reform in the efficient allocation aid is targeted disproportionately to countries with severe poverty and adequate polices the type of country where 74 percent of the world s poor live in the actual allocation such countries receive a much smaller share of aid 56 percent than their share of the world s poor with the present allocation aid is effective in sustainably lifting about 30 million people a year out of absolute poverty with a poverty efficient allocation this would increase to about 80 million people even with political constraints introduced to keep allocations for india and china constant poverty reduction would increase to about 60 million reallocating aid is politically difficult but it may be considerably less difficult than quadrupling aid budgets which is what the authors estimate would be necessary to achieve the same impact on poverty reduction with existing aid allocations

the impact of foreign aid on economic growth in papua new guinea this article investigates the impact of foreign aid on economic growth in papua new guinea png using time series data for the period 1965 to 1999 following the most recent literature the article examines whether aid effectiveness is conditional on levels of economic policy and governance an empirical model is estimated using the autoregressive distributed lag ardl approach to cointegration proposed by pesaran and shin 1995 results provide little evidence that aid and its various components have contributed to economic growth in png there is some evidence that aid is more effective during periods when the country has undertaken a world bank structural adjustment program sap an alternative interpretation is that a sap may be more effective at spurring growth when supported by foreign aid

financing growth through foreign aid and private foreign loans nonlinearities and complementarities abstract are the growth consequences of foreign aid and foreign private loans different for the recipient nations in this study we analyze in a unified way how these two instruments affect economic growth of 131 developing nations over the period 1996 2010 we find that there are diminishing returns to foreign aid while there are increasing returns to foreign loans using these estimated non linearities we find a critical level of international financial transfer where the marginal effect of foreign aid is larger than that of loans if and only if the transfer loans or foreign aid is below this critical level in addition we analyze the interaction between these two types of transfers and find evidence of complementarity disaggregation of aid into grants and concessional loans suggests that it is in fact the former that exhibits concave relationship with growth

aid and growth regressions this paper examines the relationship between foreign aid and growth in real gdp per capita as it emerges from simple augmentations of popular cross country growth specifications it is shown that aid in all likelihood increases the growth rate and this result is not conditional on good policy there are however decreasing returns to aid and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables when investment and human capital are controlled for no positive effect of aid is found yet aid continues to impact on growth via investment we conclude by stressing the need for more theoretical work before this kind of cross country regressions are used for policy purposes

aid and growth in small island developing states aid flows to small island developing states sids are enormous by international standards when compared to the size of their economies yet these countries face many severe economic challenges and many have experienced declines in the living standards of their citizens this paper looks at the impact of aid on what is treated as a necessary precondition for improvements in living standards typically defined specifically it examines the impact of foreign aid on real per capita income growth in sids by econometrically analysing cross country data for the period 1980 to 2004 a variety of econometric techniques and measures of aid are used results suggest that foreign aid is effective at spurring economic growth but with diminishing returns

is aid oil an analysis of whether africa can absorb more aid summary this paper considers whether africa can absorb a doubling of aid if oil revenues provide a natural experiment the results are disappointing far from being transformational they have been markedly less successful than aid one implication is that the delivery modalities of aid though heavily criticized have substantially added value the paper discusses which modalities may have been most useful unfortunately aid appears to be subject to diminishing returns so that doubling aid through conventional modalities would not double its impact the paper concludes by considering innovations in aid modalities which might offset diminishing returns