responding to financial crisis the case of jamaica abstract the adverse economic and social effects of the financial crises that have afflicted many developing countries in recent years have highlighted the need to develop a policy response which addresses the vulnerability of financial systems to systemic instability and crisis the article examines the experience of jamaica a country which managed a financial sector crisis during the 1990s without the assistance or involvement of the international monetary fund lessons are drawn from the jamaica case study for the domestic management of banking sector failures in lower income countries

capture and governance at local and national levels 135 despite the importance of this issue not much systematic research appears to have been devoted to assessing the relative susceptibility of national and local governments to interestgroup capture here we describe a model of two party electoral competition with probabilistic voting behavior and lobbying by specialinterest groups based on david baron 1994 and gene grossman and elhanan helpman 1996 that helps identify determinants of relative capture at different levels of government these include relative levels of voter awareness and interest group cohesiveness electoral uncertainty electoral competition heterogeneity of districts with respect to inequality and the electoral system while some of these uphold the traditional madisonian presumption others are likely to create a tendency for lower capture at the local level so the net effect is theoretically ambiguous this suggests that the extent of relative capture may be context specific and needs to be assessed empirically

empirical exercises in estimating the effects of different types of financial institutions functioning on economic growth while recent studies of the finance growth nexus have focused on the use of proxies which more accurately capture the theorized functioning of the financial sector they have tended to focus either on the functioning of the financial sector as a whole or on the dominant institutions within the sector little attention has been paid to a comparison of the relative effects of different types of financial institutions on economic growth this article attempts to get a deeper understanding of the finance growth process by disaggregating the total financial sector impact and examining the individual and relative effects of each type of institution in the financial sector we explore the empirical properties of alternative specifications of models of the impact of financial institutions functioning on economic growth by conducting a number of exercises these exercises experiment with various model specifications to represent the long and short run impacts of the financial institutions functioning on econo

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

political decentralization and corruption evidence from around the world abstract how does political decentralization affect the frequency and costliness of bribe extraction by corrupt officials previous empirical studies using subjective indexes of perceived corruption and mostly fiscal indicators of decentralization have suggested conflicting conclusions in search of more precise findings we combine and explore two new data sources an original cross national data set on particular types of decentralization and the results of a firm level survey conducted in 80 countries about firms concrete experiences with bribery in countries with a larger number of government or administrative tiers and given local revenues a larger number of local public employees reported bribery was more frequent when local or central governments received a larger share of gdp in revenue bribery was less frequent overall the results suggest the danger of uncoordinated rent seeking as government structures become more complex

do voters demand responsive governments evidence from indian disaster relief abstract using rainfall public relief and election data from india we examine how governments respond to adverse shocks and how voters react to these responses the data show that voters punish the incumbent party for weather events beyond its control however fewer voters punish the ruling party when its government responds vigorously to the crisis indicating that voters reward the government for responding to disasters we also find evidence suggesting that voters only respond to rainfall and government relief efforts during the year immediately preceding the election in accordance with these electoral incentives governments appear to be more generous with disaster relief in election years these results describe how failures in electoral accountability can lead to suboptimal policy outcomes

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

risk aversion and the term structure of real interest rates abstract the term structure of real interest rates is studied in the context of a consumption based general equilibrium model it is shown that the expectations hypothesis is approximately satisfied for low interest rate volatility otherwise the term premia are generally positive

the condorcet jury theorem free speech and correlated votes one of the more optimistic if obscure propositions about democracy is condorcet s jury theorem cjt the theorem establishes that under certain conditions a majority of a group with limited information about a pair of alternatives is more likely to choose the better alternative than any one member of the group the theorem thus provides a mathematical basis for majority rule voting and potentially gives an important clue to our understanding of the strength of democratic government yet cjt makes two overly restrictive assumptions it assumes that individuals vote independently and that they share a common goal clearly the assumptions preclude any application of the theorem to democratic politics not surprisingly black 1963 163 ruled that the theorem offers truly an unpromising start recently interest in the theorem was revived by miller 1986 who permits voters to have conflicting goals and by grofman and feld 1988 who link it with rousseau s general will miller 1986 and grofman and feld 1988 however retain the assumption of independence in this paper i generalize cjt for correlated votes and offer an analytical basis for free speech moreover i apply the generalized theorem to organization theory who should a chief executive choose as advisers the main results of the paper are summarized for large groups condorcet s result would hold under fairly general conditions for small groups the conditions are severe finally under reasonable assumptions p the probability that a majority selects the

federalism and accountability with distorted election choices abstract random factors such as bad weather or exogenous economic shocks affect the re election of politicians and can reduce accountability such distorted election choices interact with the architecture of government contrasting centralized with decentralized political systems this study shows that centralization is likely to result in higher accountability if election choices are subject to small random distortions furthermore equity and efficiency arguments for uniform policies in centralized systems are derived as these are likely to result in the better overall performance of politicians and in more equal performance across regions

fiscal decentralization and economic growth reconsidered recent studies examining the relation between fiscal decentralization and economic growth have failed to take account of the extent of the independent taxing powers available to sub national governments and thus have substantially overstated the degree of effective decentralization results from a cross section study of 19 oecd member countries suggest that when the measure of fiscal decentralization is limited to the revenues over which sub national governments have full autonomy its impact on economic growth is not statistically significant

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

distributional conflict and jurisdictional organization abstract this paper explores the endogenous formation of jurisdictions assuming the political process is a costly fight to acquire shares of the gnp pie in such a setting the stability of a unified jurisdiction is not necessarily determined by the preferences of the richest member region we also show that a system of federalism is especially significant in ameliorating distributional competition and conflict less resources are spent in aggregate on appropriative activities under a hierarchical system of federalism than in a unified jurisdiction with a single central government

shared accountability and partial decentralization in local public good provision abstract recent decentralization reforms in developing countries have often lead to the coexistence of multiple tiers of government in given policy areas triggering new accountability issues this paper provides a novel theoretical treatment of the efficiency consequences of such partial expenditure decentralization it develops a political agency model in which two levels of government are involved in the provision of a local public good with voters imperfectly informed about each government s contribution to the public good a central result of the model is that partial decentralization is desirable only if the benefits of vertical complementarity in public good provision outweigh the costs of reduced accountability which result from detrimental vertical strategic interactions operating through the electoral process through variants of the model the interplay between decentralization and democratization is analyzed from a positive point of view the model predicts a relationship between electoral incentives and equilibrium decentralization

revealed yardstick competition local government efficiency patterns in norway this paper investigates whether the production efficiency of norwegian local governments exhibits a spatial pattern that is compatible with the hypothesis of yardstick competition in order to check whether yardstick competition is really responsible for the observed spatial pattern and rule out alternative theoretical explanations the paper exploits unique information from a survey on local politicians attitudes towards comparative evaluation of local bureaus performances against other jurisdictions benchmarking merging the latter information with the observed interdependence in efficiency the paper provides evidence that comparative performance evaluation generates positive spatial auto correlation in local efficiency indicators

decentralization and corruption evidence across countries the relationship between decentralization of government activities and the extent of rent extraction by private parties is an important element in the recent debate on institutional design the theoretical literature makes ambiguous predictions about this relationship and it has remained virtually unexamined by empiricists the authors make a first attempt at examining the issue empirically by looking at the cross country relationship between fiscal decentralization and corruption as measured by a number of different indices their estimates suggest that fiscal decentralization in government spending is significantly associated with lower corruption moreover they find that the origin of a country s legal system for example civil versus common legal code performs extremely well as an instrument for decentralization the estimated relationship between decentralization when so instrumented and corruption is even stronger the evidence suggests a number of interesting areas for future work including investigating whether there are specific services for which decentralized provision has a particularly strong impact on political rent extraction and understanding the channels through which decentralization succeeds in keeping corruption in check

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

the economics of rotating savings and credit associations evidence from the jamaican partner abstract using a unique sample of rotating savings and credit association rosca members from jamaica we provide the first econometric tests of the recent theoretical advances in the literature on roscas and find considerable support for an economic theory of roscas we find for example that payments to the rosca leader significantly enhance the sustainability of the rosca and that the contractual relationship between the leader and other rosca members is transaction cost minimizing when the degree of asset specificity is higher the contract is more flexible other theoretical predictions we validate are the inverse relationship between size of rosca and size of contribution and the use of rosca funds for durable goods purchase

the term structure of interest rates in a model with heterogeneous agents abstract this paper examines the term structure of interest rates in a stochastic overlapping generations model several discrete time discrete state models show that the term structure premium is generally positive this paper demonstrates that these results hinge upon the assumption of a single representative agent and if heterogeneous agents are introduced a negative term structure premium cannot be ruled out

restoring banking stability beyond supervised capital requirements emerging economies have been particularly prone to financial sector crises reflecting marked information asymmetries and political interference as well as the substantial volatility in underlying economic conditions and the vulnerability of banking and finance when structural economic changes create a new and uncharted operating environment the standard regulatory paradigm relies mainly on supervised capital adequacy but it may not be enough other measures to improve the incentive structure for bankers regulators and other market participants could effectively increase the number of concerned skilled and watchful eyes intermittent application of supplementary blunt instruments could also be useful

general equilibrium properties of the term structure of interest rates abstract the paper examines the allocation of consumption and investment in a three date binomial model in order to determine the sign of the real term structure premium in general equilibrium when production functions are concave markets are complete and future production possibilities are the same irrespective of which state of the world occurs the term structure premium will be positive in incomplete markets constant or increasing absolute risk aversion is sufficient to guarantee a positive term structure premium although in the more likely case of decreasing absolute risk aversion a negative premium cannot be ruled out

accountability and fiscal equalization abstract a common feature of multi jurisdictional systems is equalization programs the implementation of such programs that is based on some measurement of sub national fiscal capacity and effort is particularly complex within a political economy model this paper analyzes the impact of such systems on accountability identifying a positive and a negative effect the positive effect arises because with equalized fiscal resources a consequence of equalization citizens attach more importance to any remaining variation in public good supplies and so punish rent taking more severely this induces politicians to restrain themselves and so accountability improves the negative effect arises because the complexity of such programs reduces the informational content of observed public good supplies this introduces a perverse fiscal incentive that reduces accountability thus the overall impact of equalization programs on accountability depends on the balance of these effects

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

fiscal decentralization and economic growth a cross country study abstract we use a panel data set of 46 countries over the 1970 1989 period to investigate the relationship between fiscal decentralization and economic growth we find a negative relationship between fiscal decentralization and growth in developing countries but none in developed countries several explanations are offered for our findings

a political agency model of coattail voting abstract this paper provides a theoretical model for the coattail effect where a popular candidate for one branch of government attracts votes to candidates from the same political party for other branches of government i assume a political agency framework with moral hazard in order to analyze the coattail effect in simultaneous presidential and congressional elections i show that coattail voting is the outcome of the optimal reelection scheme adopted by a representative voter to motivate politicians efforts in a retrospective voting environment i assume that an office motivated politician executive or member of congress prefers her counterpart to be affiliated with the same political party this correlation of incentives leads the voter to adopt a joint performance evaluation rule which is conditioned on the politicians belonging to the same party or to different parties two sided coattail effects then arise on the one hand an executive s success props up while failure drags down her partisan ally in the congressional election which implies a presidential coattail effect on the other hand the executive s reelection itself is affected by a congress member s performance which results in a reverse coattail effect

globalisation economic policy and convergence a number of recent contributions to the growth literature have emphasised the positive role played by the forces of globalisation in enabling poor countries to converge on the living standards of rich ones these include sachs and warner 1995 aziz and wescott 1997 imf 1997 world bank 1997 dollar and burnside 1997 edwards 1998 and collier and dollar 1999 and their general message is well captured by sachs and warner s claim 1995 p 3 that open economies converge and closed ones do not in other words if developing countries were to adopt a consistent policy package conducive to the preservation of an open economy that would according to all the authors cited above at least be a necessary condition for convergence there is some disagreement within the washington consensus concerning exactly what the ingredients of this consistent policy package are with sachs and warner laying primary emphasis on measures of trade policy openness collier and dollar 1999 examining a broader range of policy instruments including social policy measures and aziz and wescott 1997 p 18 arguing that what matters is complementarity with three separate elements needed in combination trade openness macro stability and a relatively low degree of government involvement in economic activity the imf s world economic outlook for may 1997 seeks to summarise the state of play by arguing that

overlapping political budget cycles we advance the literature on political budget cycles by testing for cycles in expenditures for elections to the legislative and the executive branches using municipal data we identify cycles independently for the two branches evaluate the effects of overlaps and account for general year effects we find sizable effects on expenditures before legislative elections and even larger effects before joint elections to the legislature and the office of mayor in the case of coincident elections we show that it is important whether the incumbent chief executive seeks reelection to account for the potential endogeneity of that decision we apply an iv approach using age and pension eligibility rules

what explains the success or failure of structural adjustment programs in the 1980s development assistance shifted largely from financing investments such as roads and dams to promoting policy reform this change came because of a growing awareness that developing countries were held back more by poor policies than by a lack of finance for investment after nearly 20 years experience with policy based or conditional lending there have now been many studies of adjustment lending most of which take a case study approach many conclude that policy based lending works if countries have decided on their own to reform the authors examine a database of 220 world bank supported reform programs to identify why adjustment programs succeed or fail they find that a few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time variables under the world bank s control resources devoted to preparation and supervision or number of conditions have no relationship with an adjustment program s success or failure what development agencies must do then is select promising candidates for adjustment support when the candidates is a poor selection devoting more administrative resources or imposing more conditions will not increase the likelihood of successful reform to improve its success rate with adjustment lending the world bank must become more selective and do a better job of understanding which environments are promising for reform and which are not that is likely to lead to fewer adjustment loans unless there is a significant change in the number of promising reformers to become more effective at supporting policy reform the agency must be willing to accept that this may lead to smaller volumes of lending

moment based estimation of stochastic volatility abstract this paper makes use of the distributional information contained in high frequency data to test for the specification of the functional form of the volatility process within the class of stochastic volatility models it s calculus is implemented in order to obtain the first and second conditional moment of the driving stochastic differential equation for the volatility process these analytical expressions are augmented by their lag and lag squared and are used to form the corresponding gmm estimator the base case stochastic volatility model is extended to allow for the leverage effect and jumps in returns empirical estimation confirms the presence of fast mean reversion in volatility and jumps in returns for the 5 min s p 500 stock market index further estimation results also seem to indicate the presence of jumps in the volatility process that are correlated to the jumps in returns

rent seeking spillovers and the benefits of decentralization abstract in the presence of spillovers decentralized provision of local public goods may lead to a higher surplus than centralized provision even though localities have identical preferences indeed free riding costs associated to decentralization can be lower than the costs of rent seeking and influence activities under centralization actually centralization yields a higher level of regional surplus only if both the spillover effect from local public spending is sufficiently large and the elasticity of the influence function is sufficiently small

comparative dynamics of an equilibrium intertemporal asset pricing model this paper uses recursive competitive theory to develop a general equilibrium asset pricing model in this framework all prices and rates of return are endogenously determined thus enabling us to analyze the effects of changes in preferences technological uncertainty and expectations on the structure of security prices in particular we focus on how the market risk premium varies with changes in the underlying economic environment an issue which other asset pricing models have chosen not to address