is protection for sale evidence on the grossman helpman theory of endogenous protection grossman and helpman 1994 present a theory of endogenous protection by explicitly modeling government industry interactions for which mere black box models previously existed they obtain a ramsey pricing type solution to the provision of protection which emphasizes the role of inverse import penetration ratios and import elasticities on the lobbying side the model makes predictions about lobbying competition and lobbying spending according to deadweight costs from protection the model not only makes for richer theory in terms of rigor and elegance but its predictions are directly testable whether the grossman helman model stands up to real world data is investigated in this paper predictions from both the protection side and lobbying side are tested using cross sectional u s nontariff barrier data we also compare the second generation grossman helpman model with a more traditional specification our results call for serious consideration of this model in the political economy literature

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

combining risk assessment and economics in managing a sanitary phytosanitary risk the agreement on the application of sanitary and phytosanitary sps measures provides guidelines for countries to protect domestic production from pests and diseases the guidelines permit consideration of consumer welfare we find an optimal set of sps measures considering total welfare and mitigation strategies our model suggests that it is optimal and less restrictive to apply mitigation strategies first and then an additional smaller tariff if necessary relative cost of mitigation determines the amount of the mitigation strategies applied in the importing and exporting countries

disguised protectionism global trade rules and alien invasive species current international law strongly favors policies designed to make imports safer e g in terms of invasive species over policies explicitly designed to discourage imports we show that this preference may be counterproductive a externality in trade is incorporated into a political economy model of policy formation nations can address the externality by inspecting cargo and imposing a fine on contaminated imports we compare the equilibrium when inspection is the only policy option relative to the equilibrium that emerging when nations may also manipulate the tariff ruling out the tariff causes socially excessive stringency in general social welfare losses if domestic supply is highly inelastic and in some circumstances an increase in the real tariff measured as the difference between world and domestic prices

rational expectations and the effect of exchange rate intervention on the exchange rate a theoretical model is proposed in which the exchange rate is affected by current and capital account transactions and the central bank intervenes in the foreign exchange market by buying and selling foreign exchange the effects of this intervention on the exchange rate are explored under the assumption that exchange rate expectations are formed rationally and solutions are obtained for the perfect and imperfect foresight cases the paper concludes with a discussion of the non optimality of time inconsistent policies when exchange rate expectations are rational

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

policy choice theory and evidence from commitment via international trade agreements abstract why do governments employ inefficient policies when more efficient ones are available for the same purpose we address this puzzle in the context of redistribution toward special interest groups sigs by focusing on a set of important policies tariffs and non tariff barriers ntbs in our policy choice model a government can gain by committing to constrain tariffs through international agreements even if this leads to the use of less efficient ntbs commitment has political value because it improves the bargaining position of a government that is weak relative to domestic sigs using detailed data we find support for several of the model s predictions including i tariff commitments in trade agreements increase the likelihood and restrictiveness of ntbs but not enough to offset the original tariff reductions ii tariff commitments are more likely to be adopted and more stringent when the government is weaker relative to a sig thus the results can explain the use of inefficient policies for redistribution and suggest that the bargaining motive is an important source of the political value of commitment in international agreements

avoiding invasives trade related policies for controlling unintentional exotic species introductions abstract international commodity trade serves as the primary conduit for unintentional introductions of damaging exotic species we use a simple model of contaminated goods trade to analyze the optimal mix of tariffs and inspections as means of controlling damage from this negative externality among other policy relevant results we find that 1 while it is always optimal to employ tariffs there are non trivial cases in which inspections should optimally be set to zero 2 a higher infection rate requires a higher tariff but beyond a point optimal inspections decrease in the infection rate and finally 3 taking a dynamic view and considering future effects of current introductions leads unambiguously to more stringent inspections but may give rise to higher or lower tariffs

protection for sale in a developing country democracy vs dictatorship for a genuine small open economy that has experienced both dictatorship and democracy we find support for the predictions of the grossman helpman 1994 protection for sale model in contrast to previous studies we use various protection measures including tariffs the direct measure of the theoretical model and perform both single year and panel regressions using turkish industry level data the government s weight on welfare is estimated to be much larger than that on contributions more importantly we find that this weight is generally higher for the democratic regime than for dictatorship

protection for sale an empirical investigation comment do contributions levels matter for endogenous protection or is the existence of a lobby sufficient are lobbies net benefits from protection identical to their contribution levels or does the level of protection simply reflect contribution levels of supporters and opponents we estimate the influence driven grossman and helpman 1994 and the tariff function findlay and wellisz 1982 models within a unified theoretical framework to examine the contrasting implications derived from these two prominent tariff formation models we find strong evidence that protection is indeed for sale the important new result is however that not only the existence of lobbies matters but also the relative size of the sectoral pro and anti protection contributions using j tests to compare the power of the models directly we cannot reject the null of correct specification of the influence driven model and find evidence of some misspecification in the tariff function model

some empirical evidence on the production level and production cost smoothing models of inventory investment the production smoothing model of inventories has long been the basic paradigm within which empirical research on inventories has been conducted the basic hypothesis embedded in this model is that inventories of finished goods serve primarily to smooth production levels in the face of fluctuating demand and convex cost functions however once we allow for shocks to technology and the costs of producing output firms will also use inventories to shift production from periods in which production costs are relatively high to periods in which production costs are relatively low in this sense inventories can serve to smooth production costs rather production levels in this paper we examine the empirical plausibility of the production level and production cost smoothing models of inventories our basic strategy is to derive and contrast a set of unconditional moment restrictions implied by these models in a way that minimizes the role of auxiliary assumptions regarding market structure and industry demand we find overwhelming evidence against the production level smoothing model and very little evidence against the production cost smoothing mode1 we conclude that the variance of production exceeds the variance of sales in most manufacturing industries because the production cost smoothing role of inventories is quantitatively more important than the production level smoothing role of inventories this abstract was borrowed from another version of this item

forbearance deposit insurance pricing and incentive compatible bank regulation abstract this paper examines the incentive compatible role of regulatory forbearance policy in the context of optimal bank regulation under moral hazard we show that when a bank s asset portfolio returns have market risk the regulator can influence the bank s choice of ex ante risk by delaying the closure of an insolvent bank the optimal closure policy involves co ordinating the closure decision with market wide performance such a policy may significantly alleviate the bank s ex ante risk shifting problem furthermore even fixed rate deposit insurance can be optimal when combined with a sound forbearance policy and a minimum capital standard

rent seeking in international trade the great tomato war this paper presents a model of international rent seeking activities by producers in both exporting and importing nations the model is applied to the winter vegetable trade between the united states and mexico an analysis is made of the attempts to form export import coalitions reasons for these failures are given due to past failures to impede trade essentially free trade in winter vegetables between the two countries exists

capital regulation and deposit insurance abstract a model of deposit insurance in which the bank closure rule can systematically deviate from the economic insolvency condition used in earlier models is developed simulation of that model for plausible parameter values suggests that the failure to close banks on a timely basis has a profound effect in increasing the insurer s liability the implications of these results for capital regulation are discussed

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

how trade politics affect invasive species control abstract trade has become the main mode of transport for many invasive species including diseases and agricultural pests most species are brought to their new homes unintentionally which constitutes a market failure rooted in international trade unless it is practical to drive invasion risk to zero the external costs may justify a tariff in this paper we analyze the political process likely to govern the formation of tariffs so justified using a straightforward incorporation of an invasive species externality into grossman and helpman s gh well known political economy model we show that our measure of disguised protectionism the gap between the optimal tariff and that set in the equilibrium of the political economy game is equal to the tariff that would be set if there were no invasive species and no international disciplines on trade policy the informational needs required to distinguish disguised protectionism from legitimate public goods protection are formidable

is nafta plus an option in the north american agrifood sector with the implementation of the north american free t rade agreement naft a nearly complete there are concerns that the easy ga ins in efficiency have been achieved and that additional steps towards the economic integration of the

estimating statistical properties of political economic decisions revelation of criteria implicit in setting policy is addressed in a political economic framework that includes identification and estimation of unknown parameters in the presence of multiple sources of uncertainty policy formation is viewed as an optimization process under which the government maximizes a criterion function subject to market constraints a method for estimating political criterion function weights and their associated standard errors over multiple time periods is presented the approach is illustrated with an empirical example from japanese rice and wheat trade policy

market based risk adjusted examination schedules for depository institutions abstract among deposit insurance reforms considered by economists and policymakers have been prompt resolution of problem institutions risk adjusted deposit insurance premiums and risk adjusted capital requirements some economists have further suggested that risk adjusted deposit insurance premiums or capital ratios be calculated by applying option pricing models to stock market data alternatively the option methodology could be used to establish a risk based examination schedule whereby riskier banks would be examined on a more frequent basis such an examination schedule would be consistent with prompt resolution strategies since it would relate the frequency of examination and closeness of supervision to banks riskness this paper demonstrates how a risk adjusted examination schedule could be derived the paper also considers alternatives to the assumptions regarding examination policies made in standard applications of the option model which may not be valid for the sample periods previously used it discusses potential resulting biases and ways to mitigate their effects

trade diversion from tomato suspension agreements trade barriers can cause output to be diverted to other countries and into other products we study the effect of a voluntary price restraint vpr on mexican tomatoes entering the united states the diversion caused by the vpr is statistically and economically significant representing over four fifths of the direct effects of the trade barrier when the vpr was binding mexico exported more tomatoes to canada the united states cut back on exports while canada increased their exports to the united states the vpr also diverted fresh tomatoes in mexico into paste production which was then exported to the united states des barrieres commerciales peuvent entrainer la diversion de l output vers d autres pays ou d autres productions on etudie la diversion causee par les accords de restriction volontaire des prix arvp des tomates mexicaines entrant sur le marche americain la diversion causee par les arvp a ete statistiquement et economiquement significative representant plus des quatre cinquiemes des effets directs de la barriere tarifaire quand les arvp ont ete contraignants le mexique a exporte plus de tomates au canada les etats unis ont reduit leurs exportations alors que le canada augmentait ses exportations vers les etats unis les arvp ont aussi entraine une diversion des tomates fraiches au mexique vers la production de puree de tomate un produit qui a alors ete exporte vers les etats unis

the valuation of fdic deposit insurance using option pricing estimates when congress set the premium rate for fdic deposit insurance in the banking act of 1935 which authorized a permanent federal insurance system neither experience nor theory could offer much guidance regarding an appropriate fee structure although rates have since been periodically revised the fdic has yet to attempt to set the insurance rate at a ifair level that is a level equal to administrative costs plus the ex ante value of the insurance such a premium is the rate that would be charged by competitive private insurers however7 the garn st germain act of 1982 directed the fdic to consider the feasibility of a risk based premium structure in response the fdic has suggested a trial system in which each insured bank will be placed in one of three risk classes based on credit and interest rate risk relative to capital and a premium rate will be assigned to each group those rates will be determined in part by the loss experience of the entire banking system fdic 1983 another approach to the determination of the appropriate insurance premium has been offered by merton 1977 who suggested using the analogous relationship between deposit guarantees and put options to value fdic insurance in this paper we follow merton s suggestion and calculate bank specific estimates of the proper premium for deposit insurance for the banks in our sample we find that fdic rates greatly exceed estimates of the fair value of the insurance derived from the blackscholes 1972 option pricing model

a policy preference function for government intervention in the u s wheat market this paper estimates a policy preference function that explains the government s choices of target prices government held wheat stocks and public wheat research funding the policy preference function depends on producers surplus consumers surplus and budget expenditures an important innovation in this paper is the inclusion of interactions between public research expenditures and other public policy variables results indicate that the government places a premium of 25 to 45 on the welfare of wheat producers of relative to budget expenditures while wheat consumers welfare is discounted as much as 50 relative to budget expenditures the purpose of this paper is to provide an explanation of government commodity programs stock accumulations and research expenditures in the u s wheat sector the explanation is based on a policy preference function ppf that depends on producers surplus consumers surplus and budget expenditures it is assumed that target prices reductions in or additions to government stocks and public research expenditures are chosen to maximize the policy preference function the central contribution of the paper is the estimation of a function that is consistent with the observed government interventions in the u s wheat market that is the paper explains the observed target prices government sales and public research expenditures as rational behavior by a government which seeks to maximize the estimated policy preference function the approach in this paper is based on the political interest group theories of peltzman and becker applications of these ideas to agriculture include rausser and freebairn s description of the beef industry gardner s 1985 analysis

unintended biological invasions does risk vary by trading partner abstract international trade is the primary conduit for unintentional and damaging species introductions but biogeographic heterogeneity and differences in historical trade exposure across trade partners suggest that not all imports are equally risky we develop an analytical model linking exotic species introductions and discoveries to trade volumes the model is estimated using a novel historical data set on global trade and species introductions by region our estimates support theoretical predictions that trade from different regions poses different risks and that the cumulative number of introductions from a region is a concave function of imports for each trade region we then calculate the marginal and cumulative invasion risk from additional trade simple volume restrictions on imports to reduce nis introductions are not advisable based on coarse cost benefit calculations

risk based capital adequacy standards for a sample of 43 major banks abstract the paper extends the option theoretic framework for the estimation of risk adjusted deposit premiums to the calculation of risk based capital adequacy standards based on market data for equity and the book value of debt the model solves for the market value of the capital infusion required to lower the implied deposit premium to acceptable levels of risk this capital infusion can then be translated into market value capital adequacy standards and book value capital asset ratios the determination of which is within the current statutory discretion of regulatory agencies the model is empirically applied to a sample of 43 major u s banks

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

on optimality and time consistency when expectations are rational abstract this paper explores the implications of time inconsistency for optimal economic policy making it is found that if policy makers determine policy on the assumption that expectations are adaptive when in fact they are rational economic policy can be destabilising this adds support to reservations which kydland and prescott 1977 have raised about the appropriateness of standard optimal control methods a method is proposed which is a modification of standard optimal control techniques and which allows for the endogeneity of expectations when this method is used to determine policy there is no indication that policy is destabilising

import restrictions in the presence of a health risk an illustration using fmd we present a simple model linking infection risk from imports to a tariff the risk causes the exporter of the infected product to face a higher tariff than would otherwise be the case a numerical example is developed for u s beef imports from nations with foot and mouth disease fmd the additional tariffs are sensitive to the specification of risk and the expected magnitude of loss due to an fmd outbreak for a low risk of importing fmd the tariffs levied against the exporter of fmd infected beef are not prohibitive but become so as the risk or expected output loss rises

a market evaluation of the risk based capital standards for the u s financial system abstract this paper evaluates u s risk based capital guidelines by comparing stock market measures of institutions risk with current regulatory risk based capital measures the first part of the evaluation compares overall market and regulatory risk based capital measures of current capital adequacy required capital and the capital infusion required to meet the capital requirement the second part compares regulatory risk weights on individual risk categories with market determined risk weights the results suggest that the market and risk based capital standards agree to some extent on the adequacy of institutions current capital and required capital infusion but that their measures of asset risk are not positively correlated further the 100 percent risk category for banks and the 50 and 200 percent categories for s ls do distinguish activities that are riskier by market measures however the market model makes limited distinctions among the other categories in addition the results suggest that some off balance sheet activities for banks may reduce asset risk

a reexamination of the over or under pricing of deposit insurance this study shows how fair deposit insurance premia can be calculated using data on bank stock prices interest rate movements and income and balance sheet accounts fair insurance premia are estimat ed under the alternative assumptions that the fdic provides either a limited term variable rate or unlimited term insurance cont ract to banks the paper s results suggest that for nearly all of the large commerical banks in the sample the actual insurance premium c harged by the fdic falls between the bounds of fair limited term and unlimited term insurance premia copyright 1987 by ohio state university press

political economy sectoral shocks and border enforcement in this paper we examine the correlation between sectoral shocks and border enforcement in the united states enforcement of national borders is the main policy instrument the u s government uses to combat illegal immigration the motivation for the exercise is to see whether border enforcement falls following positive shocks to sectors that are intensive in the use of undocumented labor as would be consistent with political economy models of how enforcement policy against illegal immigration is determined the main finding is that border enforcement is negatively correlated with lagged relative price changes in the apparel fruits and vegetables and slaughtered livestock industries and with housing starts in the western united states this suggests that authorities relax border enforcement when the demand for undocumented workers is high

tariff equivalent of technical barriers to trade with imperfect substitution and trade costs the price wedge method yields a tariff equivalent estimate of technical barriers to trade tbt an extension of this method accounts for imperfect substitution between domestic and imported goods and incorporates recent findings on trade costs we explore the sensitivity of this revamped tbt estimate to its key determinants substitution elasticity preference for home good and trade cost we use the augmented approach to investigate the recent japan u s apple trade dispute and find that removing the japanese tbt would yield limited export gains to the united states we then draw policy implications of our findings

tariffs and the risk of invasive pest introductions in commodity imports theory and empirical evidence abstract we investigate using tariffs as corrective taxes to reduce risks from biological invasions due to expanded world trade a theoretical analysis indicates that higher tariffs have ambiguous effects on invasive pest introductions an econometric analysis using data from us department of agriculture surveillance screening indicates that tariff rates exert a negligible influence on expected invasive pest introductions from commodities currently facing positive tariffs removal of duty free status would decrease expected pest intercepts but undermine other goals of us trade policy and lower consumer welfare consumer welfare loss is on the order of 38 million per expected intercept avoided

protectionism versus risk in screening for invasive species abstract i examine the extent to which enforcement of a biosecurity import restriction us border inspections for foreign pests and diseases is used as a protectionist trade barrier the parameters of a structural model of border inspection are estimated using a detailed dataset documenting the outcome of us agricultural border inspections i find that inspections are conducted in a manner that places an implied welfare weight on domestic producers relative to consumers ranging from 1 to 1 63 i also find evidence that the inspection agency takes terms of trade into account when inspecting agricultural imports these results suggest that border inspections are used as a protectionist non tariff barrier

market valuation of bank assets and deposit insurance in canada we examine a sample of canadian banks and use option pricing theory to infer the market value of a bank s assets from the observed market value and volatility of its equity we find that market value estimates are significantly different from corresponding book values these differences vary significantly across banks suggesting that market values provide bank specific information not found in book values we also derive that risk adjusted deposit insurance premia for these banks our results suggest that the current fixed rate deposit insurance premium system has resulted in significant

the welfare implications of minimum quality standards previous analysis of the social welfare implications of minimum quality standards has yielded no decisive results in this paper the specific nature of consumer and producer responses to quality standards is incorporated into the analysis both consumer and producer gains are shown to be impossible when consumers can perceive quality before purchase even if low quality produce is diverted to secondary markets standards unambiguously reduce net social benefits the paper explores the possibility that minimum quality standards are a form of rent seeking behavior