returns to regionalism the past decade has witnessed a renewed interest in regional trade agreements with many policymakers and academics seeming to believe that these provide more than the traditional gains from trade this article examines several possible benefits that regional trade agreements may confer on their partners including credibility signaling bargaining power insurance and coordination it assesses the necessary conditions for each possible channel to work gives stylized examples of specific types of policy where the benefit might be applicable examines cases where the explanation might be relevant and discusses their overall plausibility it concludes by examining the north american free trade agreement and the europe agreements

profits and politics coordinating technology adoption in agriculture abstract this paper examines the political economy of government led coordination of economic activity in a simple two sector model in which individuals choice of agricultural technology affects industrialization we demonstrate the existence of multiple equilibria the economy is either characterized by the use of a traditional agricultural technology and a low level of industrialization or the use of a mechanized technology and a high level of industrialization relative to the traditional technology use of the mechanized technology increases output but leaves some population groups worse off we show that the distributional implications of choosing the mechanized technology restrict the possibility of pareto improving coordination by an elected policy maker even when we allow for income redistribution

europe vs america institutional hysteresis in a simple normative model we show how the differences in us and european institutions can arise in a normative model the paper focuses on the labor market and the government s decision to set unemployment benefits in response to an unemployment shock the government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse incentive effects whereby benefits increase unemployment it is found that when an adverse shock occurs benefits should be increased most when the adverse incentive effects of benefits are largest adjustment costs of changing benefits introduce hysteresis and can help explain why post oil shock benefits remained high in europe but not in the us desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple requires the third derivative of the utility function to be non negative and self correcting empirical evidence concerning the role of corporatism is discussed

costly arbitrage evidence from closed end funds arbitrage costs lead to large deviations of prices from fundamentals using a sample of closed end funds i find that the market value of a fund is more likely to deviate from the value of its assets 1 for funds with portfolios that are difficult to replicate 2 for funds that pay out smaller dividends 3 for funds with lower market values and 4 when interest rates are high these factors are related to the magnitude of the deviation as opposed to the direction i e whether discount or premium and explain a quarter of cross sectional mispricing variation these findings are consistent with noise trader models of asset pricing

asset allocation and asset location household evidence from the survey of consumer finances abstract the rapid growth of assets in self directed tax deferred retirement accounts has generated a new set of financial decisions for many households in addition to deciding which assets to hold the traditional choice among bonds stocks and other investment classes households with substantial assets in both taxable and tax deferred accounts tda must now decide where to hold them this paper uses data from the survey of consumer finances to assess how many households have enough assets in both taxable and tax deferred accounts to face significant asset location choices it also investigates the asset location decisions these households make in 2001 49 of households had at least some assets in a tax deferred account and more than 11 million households had at least us 25 000 in both a taxable and a tax deferred account asset allocation inside and outside tax deferred accounts is quite similar with about 70 of assets in each location invested in equity securities roughly two thirds of households with financial assets in both taxable and tax deferred accounts hold portfolios that are tax efficient most of the other third could reduce their taxes by relocating heavily taxed fixed income assets to their tax deferred account for more than half of the households that hold apparently tax inefficient portfolios however a shift of less than us 10 000 in financial assets would eliminate tax inefficiency

the need for enemies we develop a model where some politicians have an edge in undertaking a task and this gives them electoral advantage creating an incentive to underperform in the task we test the empirical implications in the context of fighting against insurgents using colombian data the main prediction is that large defeats for the insurgents reduce the probability that these politicians fight them especially in electorally salient places we find that after the largest victories against farc rebels the government reduced its counterinsurgency efforts especially in politically important municipalities politicians need to keep enemies alive in order to maintain their political advantage

export growth slowdown and currency crisis the malaysian experience a slowdown in export growth occurred in all east asian economies that were affected by the asian currency crisis misaligned exchange rates have been widely cited as a cause of the slowdown in the malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance using the us yen dollar rate as a proxy for exchange rate misalignment and us total new orders for electronics as a proxy for global electronics demand cointegration analysis was used to establish the likely causes of a slowdown in malaysia s export performance empirical results suggest that a unique long run relationship exists between all three variables the policy implications of these results including exchange rate monitoring and export diversification are discussed in the conclusion

can tax loss selling explain the january seasonal in stock returns this paper analyzes the tax loss selling hypothesis as an explanation of the january seasonal in stock returns and argues that rational tax loss selling implies little relation between the january seasonal and the long term loss empirical results show that the january seasonal is as strongly related to the long term loss as it is to the short term loss the evidence is inconsistent with a model that explains the january seasonal by optimal tax trading

return seasonality in stocks and their underlying assets tax loss selling versus information explanations results of tests contrasting tax loss selling with intertemporal information variation as explanations of the january seasonal in stock returns are reported closed end fund shares display the typical size related january seasonal while their net asset values do not interpreting the net asset value return as a proxy for information about underlying assets this result indicates information variation is not a necessary condition for the january effect in stocks the share returns at the turn of the year are negatively related to their mean preceding year returns and positively related to the standard deviations of their preceding year returns these results are consistent with tax loss selling article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

credible commitment and success with public enterprise reform abstract this paper studies why some efforts at public enterprise reform fail and why others succeed economic reforms are intended to increase efficiency and thus help sustain long term growth yet many governments have had difficulty sustaining the reforms they initiated and have reintroduced rigid controls over markets and enterprises this is because either in the process of implementation the government discovers that the costs of carrying the reform further are greater than the expected efficiency gains or the public is skeptical that the new policies can be sustained and does not take the actions necessary for the gains to be realized this paper develops a new institutionalist framework and employs various measures of policy commitment and net gain from continued reform to analyze these issues the paper suggests ways in which the potential success or failure of a reform can be assessed with implications for the steps that reformers might take to increase the chances of success

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

contra coercion russian tax reform exogenous shocks and negotiated institutional change the view of institutions as coercion rather than as contracts dominates the comparative politics literature on both institutional creation and the politics of economic reform the emergence of a collectively optimal tax code in russia demonstrates the limitations of this emphasis on coercion this new tax code was not imposed by a strong central leader mandated by international institutions or the result of state capture by powerful economic interest groups rather it is the product of a mutually beneficial exchange between the russian government and the russian oil companies russia s ability to negotiate an effective tax regime also suggests the conditions under which and the microcausal mechanism whereby exogenous shocks promote institutional change and economic reform owing to their mutual vulnerability and interdependence the august 1998 financial crisis generated widely shared perceptions among these actors that the payoffs of cooperation had changed yet the economic reform institution that resulted required a series of incremental strategic moves that established common knowledge

political economy of public policies insights from distortions to agricultural and food markets the agricultural and food sector is an ideal case for investigating the political economy of public policies many of the policy developments in this sector since the 1950s have been sudden and transformational while others have been gradual but persistent this paper reviews and synthesizes the literature on trends and fluctuations in market distortions and the political economy explanations that have been advanced based on a rich global data set covering a half century of evidence on commodities countries and policy instruments the paper identifies hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible

reciprocated unilateralism in trade reforms with majority voting this paper shows how unilateral liberalization in one country can increase the voting support for reciprocal reduction in trade barriers in a partner country when trade policies are determined simultaneously in the two countries we show the possibility of multiple political equilibria one in which the countries are both protectionist and another in which they trade freely with each other starting with trade protection in both countries a unilateral reform in one country is shown to bring about a free trade equilibrium that obtains majority support in both countries

endogenous trade policy through majority voting an empirical investigation abstract the median voter approach to trade policy determination within a heckscher ohlin framework as in mayer am econ rev 74 5 1984 970 predicts that an increase in inequality holding constant the economy s overall relative endowments raises trade barriers in capital abundant economies and lowers them in capital scarce economies we find support for this prediction using cross country data on inequality capital abundance and diverse measures of protection we perform certain robustness checks that include controlling for the effects of political rights and schooling as well as using alternative datasets on factor endowments

the role of uncertainty and learning for the success of international climate agreements abstract transnational externalities e g transboundary pollution trade contagious diseases and terrorism warrant coordination and cooperation between governments but this proves often difficult one reason for the meager success is the public good character of many of these economic problems encouraging free riding another reason one might suspect is uncertainty surrounding most environmental problems and in particular climate change this provides often an excuse for remaining inactive paradoxically some recent papers have concluded just the opposite the veil of uncertainty can be conducive to the success of international environmental cooperation in this paper we explain why and under which conditions this can be true however we argue that those conditions are the exception rather than the rule most important we suggest a mechanism for those conditions where learning has a negative effect on the success of cooperation which removes this effect or even turns it into a positive effect our results apply beyond the specifics of climate change to similar problems where cooperation generates positive externalities

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

year end tax induced sales and stock market seasonality the paper relates two phenomena in the stock market the high return during the month of january and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year the findings suggest that due to the taxinduced sales the price of many stocks over the last 35 years was temporarily depressed in december but recovered in the following january this price recovery is a major contributor to the high returns observed in january the tax effect is present in firms of all sizes but much more pronounced for small firms the analysis also indicates that a more precise identification of the tax switch candidates may prove that the taxinduced sales are in fact the sole contributor to the high january s returns the issue of seasonality in the stock market has attracted the attention of researchers for some time rozeff and kinney 13 present evidence of seasonality in the market index with the months of january and july having a peak return the seasonal movements in the average return in the market could not be fully accounted for by a corresponding seasonal pattern in the market risk they offer three explanations to this phenomenon tax induced sales release of accounting information and seasonal demand for cash the first explanation has received some support from recent research dyl 4 studied the effects of capital gain taxes on trading volumes of common stocks and concluded that capital gain taxes affect investors year end portfolio decisions and that this effect is in turn reflected in the trading volumes of common stocks in december p 174 mcenally 10 and branch 2 studied the effects of the tax induced trading on securities return and found that depressed stocks at the end of the year are likely to bounce back immediately after year end the existence of a pronounced seasonal behavior in the market might suggest some form of market inefficiency a strategy under which stocks are bought towards the end of the year and sold at the beginning of the following year might yield an abnormal return despite the seasonal behavior of stock returns it would be indeed surprising if this regularity which has not gone unnoticed by the financial community could be exploited to bring a risk adjusted excess return the objective of this paper is to examine jointly the two phenomena tax

portfolios in disguise window dressing in bond fund holdings abstract this paper builds on the limited body of research on window dressing by bond mutual funds our monthly bias free sample allows us to undertake a more comprehensive study than is possible with the quarterly data traditionally employed in otherwise similar studies we test window dressing in a straightforward manner using monthly undisclosed portfolios which makes it possible to compare changes in public debt allocations around quarterly disclosures our results support the hypothesis that window dressing patterns vary with market conditions we also conduct thorough tests that indicate the significant influence of fund size on window dressing individual analyses provide evidence that this cosmetic practice is not a widespread behaviour in the spanish bond fund industry

an aggregate import demand function for bangladesh a cointegration approach this paper investigates the existence of a long run aggregate merchandise import demand function for bangladesh during the period 1974 94 the cointegration and error correction modelling approaches have been applied empirical results suggest that there exists a unique long run or equilibrium relationship among real quantitities of imports real import prices real gdp and real foreign exchange reserves the dynamic behaviour of import demand has been investigated by estimating two types of error correction models in which the error correction terms have been found significant in model i real import prices and real gdp lagged one year and in model ii real import prices real gdp lagged one year real imports lagged one quarter and a dummy variable capturing the effects of import liberalization policies have all emerged as important determinants of import demand function the error correction models have also been found to be robust as they satisfy almost all relevant diagnostic tests

why don t you trade only four days a year an empirical study into the abnormal returns of quarters first trading day in this research i examined a calendar anomaly that occurs at the beginning of each quarter through an examination of 34 years of daily and annual returns for the s p500 and 13 years of returns for popular etfs i have demonstrated the existence of the first day of quarter fdq effect by trading only four days a year from the beginning of 2000 until the end of 2013 an investor could have gained 113 1 of the s p500 returns for that period while being exposed to stock risk for only 56 days moreover for 11 of those 14 years of trading the fdq was responsible for more than 10 of the annual returns only for two years since 2000 2001 2005 has the fdq yielded a negative return the biggest beneficiary of the fdq is the financial sector which for the last 13 years of investing has been non fertile showing 6 12 total return investing only at the beginning of each quarter for a total of 52 days would have yielded a return of 40 17 the next beneficiary of the fdq is the technological sector the 82 5 of total return gained in this sector over the last 13 years could have been gained in only 52 days of trading

income distribution human capital and economic growth in colombia abstract colombian income distribution has followed a clear path during the last two decades in the second half of the 1970s human capital accumulation reduced the dispersion of income distribution and lead to a period of stagnation between 1983 and 1990 when mobility declined after the structural reforms a skill bias technological change the wage differential for skilled workers increased inequality by a polarization in the bi modal distribution of income these topics are discussed in the paper along some dynamic aspects of income and educational mobility in colombia

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

do after tax returns affect mutual fund inflows abstract this paper explores the relationship between the after tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds previous studies have documented that funds with high pretax returns attract greater inflows this paper presents evidence based on a large sample of retail equity mutual funds over the period 1993 1999 that after tax returns have more explanatory power than pretax returns in explaining inflows in addition funds with large overhangs of unrealized capital gains experience smaller inflows all else equal than funds without such unrealized gains a large capital gain overhang discourages both gross fund inflows and gross outflows but the inflow effect dominates the outflow effect

leviathan resists the endogenous relationship between privatization and firm performance using a panel dataset of privatized cement firms in turkey this paper models and finds support for the simultaneous relationship between privatization and firm performance it is found that favorable short run performance weak market potential higher employment lower socio economic development concentrated voter preferences and weaker representation of right wing parties in the firms locality delay the timing of privatization the paper also finds that privatization increases output in the medium term by reducing the labor stock and promoting the adoption of more advanced technology such that production shifts from constant to decreasing returns to scale

compensations as signaling devices in the political economy of reforms we propose an explanation for why efficient reforms are not carried out when losers can block their implementation and compensations are feasible in our model a government tries to sequentially implement two efficient reforms by bargaining with interest groups the organization of interest groups is endogenous compensations are distortionary and different governments care differently about distortions governments use low compensations to discourage losers who just want to receive transfers from organizing this comes at the cost of reforms being blocked by interest groups with relatively high losses resulting in a bias against payment of compensations and the implementation of reforms

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

capital flight and political risk abstract this paper provides the first serious attempt to examine the relationship between political risk and capital flight for a large set of developing countries the outcomes of the analysis show that in most cases political risk variables do have a statistically robust relationship to capital flight once domestic and international macroeconomic circumstances are added at least when the robustness test as proposed by sala i martin is applied we conclude that on the basis of the analysis in this paper we have found support for the hypothesis that political risk leads to increased capital flight

redistributive politics and economic efficiency the political process often compensates the losers from technical change or international competition in an economically inefficient way namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses we find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome to achieve economically efficient outcomes it is necessary that those making economically inefficient choices not be given offsetting transfers but the political process distributes income on the basis of political characteristics which are in general different from the economic characteristics that are rewarded by the market we identify circumstances in which the inefficient choosers have desirable political characteristics and are therefore immune from threats of having to face the economic consequences of their choices

towards an equilibrium level of market reform how politics affects the dynamics of policy change in this article we examine the dynamics of economic reforms that are implemented by incumbent policy makers interested in maintaining their political power we use a sample of 86 countries over a time period going from 1980 to 2001 and find that the achievement of an equilibrium level of market liberalization is highly costly our results are robust to endogenity and model specification

price stability and central bank independence discipline credibility and democratic institutions despite mixed empirical evidence in the past two decades central bank independence cbi has been on the rise under the assumption that it ensures price stability using an encompassing theoretical approach and new yearly data for de jure cbi seventy eight countries 1973 2008 we reexamine this relationship distinguishing the role of printing less money discipline from the public s beliefs about the central bank s likely actions credibility democracies differ from dictatorships in the likelihood of political interference and changes to the law because of the presence of political opposition and the freedom to expose government actions cbi in democracies should be directly reflected in lower money supply growth besides being more disciplinarian it also ensures a more robust money demand by reducing inflation expectations and therefore inflation empirical results are robust and support a discipline effect conditioned by political institutions as well as a credibility effect

the effect of excessively elastic expectations on exchange rate volatility in the dornbusch overshooting model abstract bilson has described the empirical finding that the forward exchange rate overestimates the speed of return to equilibrium as a finding of excessive speculation and has drawn implications for the volatility of the exchange rate the present paper pursues this tack within the sticky price monetary model made famous by dornbusch it is shown theoretically that if the market overestimates the speed of adjustment the degree of overshooting is reduced in this sense excessive speculation leads to reduced volatility

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

trade liberalization through asset markets abstract political economy expositions of trade policy have traditionally described asset or factor ownership as not subject to change asset markets however allow individuals to change the composition of income sources we consider an economy with stochastic productivity to show how the equilibrium composition of asset portfolios influences individual attitudes toward free trade the model links financial market completeness and trade liberalization in the second half of the 20th century and provides a contributing answer to why governments in poorer countries without well developed financial markets have failed to liberalize trade

the turn of the year effect and tax loss selling by institutional investors prior studies attribute the turn of the year effect whereby small capitalization stocks earn unusually high returns in early january to tax loss selling by individual investors and window dressing by institutional investors my results suggest that a significant portion of the effect on turn of the year returns that prior studies attribute to window dressing is actually attributable to tax loss selling by institutional investors among small capitalization stocks i find that institutional investors with strong tax incentives and weak window dressing incentives realize significantly more losses in the fourth quarter than in the first three quarters of the calendar year and that their fourth quarter realized losses have a significant impact on turn of the year returns a one percentage point change in these institutional investors fourth quarter realized losses scaled by a firm s market capitalization results in an increase of 47 basis points in the firm s average daily return over the first three trading days of january which represents a 46 percent change for the mean firm

can tax loss selling explain the january effect a note the january effect remains an unexplained phenomenon in financial economics that the month of january has consistently shown higher mean stock returns than other months has been documented by several researchers beginning with rozeff and kinney 19 additional research by keim 14 showed that approximately half the annual size effect is attributable to abnormal returns in january 1 roll 18 confirmed keim s results as has subsequent research such as lakonishok and smidt 15 2 the most often advanced explanation for the january effect is tax motivated transactions 3 first proposed in 1942 by wachtel 21 the tax loss selling hypothesis is frequently advocated in the popular press as a major influence on stock price behavior essentially this hypothesis states that investors seek to reduce their taxes by realizing losses at year end thereby depressing stock prices stocks return to equilibrium levels after year end providing abnormally high returns in january despite the popularity of the tax loss selling hypothesis it is difficult to justify upon serious reflection justification requires acceptance of the proposition that speculators are prevented from purchasing tax loss candidates before year end with the intention to sell them after year end no theoretical justification has been presented for the hypothesis instead using both theoretical and empirical approaches constantinides 5 argues that such action cannot explain the january effect if the market is efficient 4 his results imply that empirical studies supporting the tax loss selling hypothesis provide evidence of market inefficiency as for the empirical evidence branch 3 dyl 8 roll 18 reinganum 17 and givoly and ovadia 10 have provided support for the tax loss selling hypothesis 5 recently schultz 20 tested the tax explanation by examining the

the benefit of crises for economic reforms when expenditures consistently outrun revenue the resulting inflation may have the effect of convincing the public and government that taxes must be raised to finance public investment in the advanced industrial countries income taxation and big spurts in taxation generally have become possible only under the impact of major emergency and crisis mostly in wartime in a number of developing countries in

reform in eastern europe how can the new governments of eastern europe succeed in moving from centrally planned to freemarket economies this incisive report identifies and describes the major policy choices to be made and discusses what will work and what will not reform in eastern europe provides a comprehensive easily read statement of reform policy that stands in the mainstream of modern western economics based on their experience with stabilization policies in other countries the authors show how eastern europe can reduce unemployment during the painful adjustment process create effective and socially acceptable mechanisms to subject enterprises to market discipline and replace barter trade under cmea with market based international trade

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

trade liberalization and industrial growth in pakistan a cointegration analysis using the framework of an endogenous growth model this study empirically analyses the relationship between trade policies and industrial growth in pakistan during the period 1973 1995 the cointegration and error correction modelling approaches have been applied the empirical results suggest that there exists a unique long run relationship among the aggregate growth function of industrial value added and its major determinants of the real capital stock the labour force real exports the import tariff collection rate and the secondary school enrolment ratio the short term dynamic behaviour of pakistan s growth function of industrial value added has been investigated by estimating an error correction model in which the error correction term has been found to be correctly signed and statistically significant

why and when do governments initiate public enterprise reform initiating public enterprise reform is a complex decision influenced by economic factors as well as the ideological biases and personalities of political leaders nevertheless the use of a contracting framework yields important generalizations about what drives the decision this article argues that the decision depends fundamentally on the potential efficiency gains from the reform and its associated transactions costs costs arise because of asymmetries in information and opportunism problems that usually plague contract negotiations the article identifies observable variables that may affect either the potential gains or the transactions costs uses them to construct a simple probit decision making model and tests the model using data from fifteen developing countries over a twenty year period

insider ownership human resource strategies and performance in a transition economy researchers and potential investors in transition economies need to understand the human resource management hrm strategies of target firms since human resources are arguably their most valuable assets understanding is difficult however because hrm strategies help to determine firms performance but are in turn influenced by corporate governance particularly insider ownership this paper employs a structural equation modeling methodology to examine the relations between governance hrm strategies and performance in the context of a novel dataset of ukrainian industrial firms it is found that insider ownership is positively associated with high commitment hrm strategies and negatively with low commitment cost cutting hrm strategies cost cutting hrm strategies are in turn associated with weaker firm performance these outcomes correspond broadly with theoretical expectations

institutions and the turn of the year effect evidence from actual institutional trades abstract using a large proprietary database of institutional trades we investigate whether institutional investors drive the turn of the year toy effect institutions that engage in window dressing tax loss selling or risk shifting will contribute to the toy effect by selling small poorly performing stocks at the end of december and or buying those same stocks at the beginning of january we find abnormal pension fund selling in small stocks with poor past performance during the final trading days in december providing some support for the window dressing hypothesis however we find little evidence that institutional tax loss selling or risk shifting trading strategies contribute to toy returns furthermore stocks with no institutional trading around the year end exhibit considerably stronger toy return patterns than stocks in which institutions trade taken together our results suggest that institutions play a limited role in driving the toy effect

understanding economic policy reform one of the eventual consequences of the global debt crisis was a wave of market oriented economic reforms this paper discusses the state of our knowledge on the political economy of this process why were inefficient and often unsustainable policies maintained for so long why are so many governments reforming now after decades of adherence to policies of an opposite kind have the reformers internalized the correct lessons from the east asian experience finally are there any helpful rules for reformers to follow in guiding their policies through complicated political terrain

a comparison between economic systems with an application to transition abstract this paper develops a general equilibrium theory of endogenous firm and class formation under non contractibility with heterogeneous individuals a collectivist economy a private ownership economy and a mixed economy are compared on the basis of identical economic fundamentals methodological symmetry each economic system generates specific inefficiencies so that none dominates the others in general the main trade off is between the welfare loss associated with risk taking in the private ownership economy and the informational problems in the collectivist economy we then use this framework to study the political economy of transition between economic systems and provide detailed welfare results

exploring the political economy of labour market institutions labour markets how reforms took place many economists argue that the european unemployment problem relates to large labour market rigidities this paper argues that many of those inflexibilities and the underlying institutional regulations can be understood as the outcome of political influence by incumbent employees this is because many policies that increase unemployment actually benefit these insiders an empirical investigation of the determinants of labour market institutions demonstrates that the observations are consistent with this view the findings imply 1 higher exposure of the employed to unemployment facilitates a reduction in the level of employment protection 2 unemployment benefits are lower the more employment reacts to wages 3 a higher level of unemployment and the existence of a right wing government slow down the growth rate of the minimum wage giles saint paul

optimal stock trading with personal taxes implications for prices and the abnormal january returns abstract the tax law confers upon the investor a timing option to realize capital losses and defer capital gains with the tax rate on long term gains and losses being about half the short term rate the law provides a second timing option to realize losses short term and gains long term if at all our theory and simulation over the 1962 1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term tax trading does not explain the small firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices the january anomaly only if investors are irrational or ignorant of the price seasonality

rain emotions and voting for the status quo abstract do emotions affect the decision between change and the status quo we exploit exogenous variation in emotions caused by rain and analyze data on more than 870 000 municipal vote outcomes in switzerland to address this question the empirical tests are based on administrative ballot outcomes and individual postvote survey data we find that rain decreases the share of votes for political change our robustness checks suggest that this finding is not driven by changes in the composition of the electorate and changes in information acquisition in addition we provide evidence that rain might have altered the outcome of several high stake votes we discuss the psychological mechanism and document that rain reduces the willingness to take risks a pattern that is consistent with the observed reduction in the support for change

evidence on tax motivated securities trading behavior tax loss selling by investors in common stocks near the end of calendar years has been proposed as an explanation for the turn of the year effect in stock returns past analyses of this hypothesis have relied on inferential data we provide here some direct data from a compilation of over 80 000 actual common stock investment round trips by a sample of 3000 individual investors we find strong evidence of a concentration of loss taking trades late in the year and milder evidence of a concentration just prior to the dates when investments become eligible for long term tax treatment the question as to whether and in what manner the impostion of a tax on realized capital gains affects the securities trading behavior of investors who are subject to the tax has been a longstanding topic of research in the financial ecomonics literature the original attention devoted to the matter was motivated primarily by a concern about resource allocation and federal tax revenue consequences and was directed toward the phenomenon of what has been termed the lock in effect of a gains tax that issue has remained an important public policy one and continues today as part of the ongoing debate about appropriate strategies for reducing the federal budget deficit particular additional interest in the topic has emerged in recent years however because securities transactions undertaken systematically for tax reasons have also been proposed as part of the explanation for certain observed anomalies in historical common stock returns most prominently the well documented turn of the year effect our purpose here is to provide some new evidence that decisions by investors as to the timing of the realization of capital gains and losses from their common stock investments are significantly affected by tax considerations this evidence indicates that a difference in the tax rates applicable to realizations classified as short and long term influences the timing of individual investors trades and further that there is a clear tendency for trades by individuals which give rise to losses to be concentrated near the end of calendar which for them are also tax years while we cannot conclude that

portfolio disclosures and year end price shifts commercial paper sells at an extra discount if it matures in the next calendar year but treasury bills do not the discount is apparent in downward price shifts before the year end and upward price shifts at the turn of the year that are significantly correlated with the simultaneous returns to small stocks and that cannot reflect tax loss selling cross sectional and time series tests on prices as well as flow of funds evidence on trades by institutional investors indicate that both the debt and equity patterns reflect agency problems related to portfolio disclosures financial research has brought considerable analysis to bear on the turn of the year in the equity market but not the money market extant literature starting with keim and stambaugh 1986 reports similarities between equity market and money market price shifts in january but has not examined time series and cross sections of money market prices at the high resolution common in studies of the equity market repeating tests from the equity literature on money market prices this article finds a more precise and robust characterization of the price shifts this characterization combined with observations of year end shifts in money market holdings supports the view that intermediaries move prices with strategic responses to portfolio disclosures the main empirical result is that commercial paper pays a higher yield if it matures across the end of the year that is it imputes a forward premium for the holding period from the last trading day of one year to the first trading day of the next this premium is even higher for issues with more default risk and longer maturity as measured at the end of the year and has a substantial impact on yield spreads i argue that the forward premium reflects an abnormally high market price for bearing risk across the year end and that this high price reflects the disutility to intermediaries of showing risky portfolios to claimholders or regulators the connection between portfolio disclosures and price shifts was proposed by haugen and lakonishok hl 1988 as an explanation of the equity market january effect as originally documented by keim 1983 with monthly data

tax reform and the political economy of the tax base abstract this paper studies the political prospects for reform in a model where the tax base and statutory rate are separate instruments of tax policy the model suggests that large changes in the tax code may be easier to enact than marginal reforms the tax base faces a tipping point where even the beneficiaries from tax exemptions support reform at this tipping point tax reform is pareto improving politically feasible tax reform occurs when fiscal needs are large but may nonetheless involve reductions in marginal tax rates there is strategic complementarity in lobbying for tax exemptions resulting in multiple equilibria the model s main predictions are consistent with recent tax reforms in oecd countries

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

optimal consumption and investment with capital gains taxes this article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short sale restrictions the optimal decisions are a function of the investor s age initial portfolio holdings and tax basis our results capture the trade off between the diversification benefits and tax costs of trading over an investor s lifetime the incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor s age contrary to standard financial advice the optimal equity holding increases well into an investor s lifetime in our model due to the forgiveness of capital gains taxes at death taxes play an important role in the decision making process of individuals concerning their consumption and investment plans the taxation of returns on financial assets alters the benefits of saving for future consumption and thus affects the trade off between current consumption and investment moreover the ability of investors to defer the taxation of capital gains alters the relative valuation of stocks and bonds and thus affects the optimal portfolio composition of investors the deferral feature of capital gains taxes also affects the trade off investors face regarding taxes and diversification investors would like to maintain an optimally diversified portfolio over time

the political economy of food subsidy reform the case of egypt abstract this paper examines the political economy of food subsidy reform efforts in egypt egypt provides a case of a country with a large food subsidy program that has been relatively effective as a social safety net but a program that is also expensive and poorly targeted to the needy policy discussions about strategies to improve the system s performance run into the extreme political sensitivity of the issue of food subsidies in egypt food subsidies are perceived to be important in promoting political stability and providing some legitimacy to a political system where civil liberties are limited egypt therefore illustrates the dilemmas facing policymakers and others contemplating food subsidy reform in developing countries where there are concerns that reform may spark political unrest this paper argues that even in cases where food subsidy reform is a highly politicized issue there are still a number of pragmatic policy steps that can be taken that meet the twin goals of reforming the system in ways that better target the poor while functioning more efficiently

are individual investors tax savvy evidence from retail and discount brokerage accounts using brokerage account data we analyze the tax awareness of individual investors we find strong evidence that taxes matter investors prefer to locate bonds and mutual funds in retirement accounts and in december harvest stock losses in their taxable accounts however investors also trade actively in their taxable accounts realize gains more frequently than losses and locate a material portion of their bonds in taxable accounts though taxes leave clear footprints in the data we analyze many investors could improve their after tax performance by fully capitalizing on the tax avoidance strategies available to equities while optimally locating their assets

economic reform and political transition in africa the quest for a politics of development the 1980s were bracketed by crises in africa as protracted economic malaise was succeeded by a wave of political reform analysts have sought to understand the sources of economic decline as well as the political requisites for recovery in the region neoclassical and structuralist analyses have been challenged by state centric views of economic change the latter perspective emphasizes the need for capable developmental states as a basis for long term adjustment but a political theory of economic change is still lacking such a theory must address the institutional foundations of growth as well as the shifting basis of social coalitions in african regimes political liberalization suggests the possibility of a new setting for economic reform though the effects of political reform on institutions and coalitions remain ambiguous and democratization cannot be regarded as a panacea for the region s developmental failure future research must look more closely at the interests and structures in transitional regimes and scholars should adopt a more comparative vantage on africa s challenges of reform

tax efficient trading of municipal bonds the author proposes a dynamic strategy to optimize the after tax performance of a municipal bond portfolio this study extends previous work on one time tax loss selling he considers a potential tax driven trading opportunity as an option with quantifiable value acquired automatically and without cost in a taxable account within this formulation selling a bond and reinvesting in another also entails the swap of the associated tax options when considering the value of the tax option acquired upon reinvestment the time to optimum execution is drastically reduced in comparison to one time selling the author assumes that the choice of reinvestment bonds maintains the same interest rate exposure as that from before the sale

the discreet charm of formal institutions postcommunist party competition and state oversight why do some new democratic political politicians constrain themselves and reduce their discretion to extract resources from the state and the processes of privatization postcommunist democracies show surprising variation in the adoption of formal institutions of monitoring and oversight these institutions regulate markets empower citizen oversight and police the use and distribution of state assets these have arisen rapidly in some countries and with considerable delays in others accounts that link institutional creation to european union imposition initial bargaining and parliamentary divisions do not fully explain the variation instead in the nine consolidated democracies and free markets examined here robust political competition triggered mechanisms of anticipatory institution building and moderation of government behavior

dynamic commitment and incomplete policy rules considering the dynamics of commitment highlights some neglected features of time inconsistency problems we modify the standard rules versus discretion question in three ways 1 a government that does not commit today retains the option to do so tomorrow 2 the government s commitment capability is restricted to a class of simple rules and 3 the government s ability to make irrevocable commitments is restricted three results stand out first the option to wait makes the incumbent regime rules or discretion relatively more attractive second the option to wait means that increased uncertainty makes the incumbent regime more attlwactive third because the commitment decision takes place in real time policy choice displays hysteresis when monetary policy is subject to dynamic inconsistencies optimal policy requires some precommitment by the central bank despite a proliferation of mechanisms designed to address this problem work in this area has continued to assume a once and for all choice between rules and discretion this paper asks two closely related questions first what happens if commitment decisions are made in real time so that failure to commit today does not rule out the possibility of commitment tomorrow second if governments can make only commitments that are difficult but not impossible to reverse what determines the dynamics of commitment and reversal the assumption of once and for all choice enforces simplistic dynamics on the policy process if the standard models are interpreted literally for example the commitment problem for u s monetary policy is moot having been resolved with the founding of the federal reserve system in 1914 if not at the constitutional convention of 1789 much of the interest in dynamic inconsistency however arises pre

fighting inflation in a transitional regime russia s anomalous stabilization russia s recent experience fighting inflation dramatic success in 1995 96 after repeated failures in 1992 94 poses a challenge for existing theories of the politics of macroeconomic stabilization monthly inflation rates fell to close to zero despite a deeply unpopular president distracted by heart disease a government penetrated by economic lobbies a far from independent central bank a parliament dominated by opposition factions a lively election season and the fiscal pressures of fighting a regional war the article reviews this experience shows its incompatibility with existing political economy theories and proposes an explanation with implications for other reforming regimes success was achieved by offering previous beneficiaries from inflation major commercial banks and subsidized sectors other sources of government protected rents that did not increase the money supply even when expropriating powerful rent seekers is politically infeasible it is sometimes possible to trade them less inflationary rents for ones that are more inflationary

market reform as a stimulus to particularistic politics we know little about how market reform affects political development especially citizens behavior market reform advocates prescribe that citizens should reduce their reliance on the state turn to nonstate actors for assistance and obtain limited state goods and services through their membership in certain social categories not their particular traits an analysis of three mass surveys and 232 interviews the author conducted in central asia along with additional data from 24 postcommunist countries reveals that market reform can have effects opposite from those prescribed individuals may make particularistic demands of government officials instead of relying on nonstate actors this occurs in countries where state economic intervention was substantial and where reforms reduced the state s economic role but failed to develop market enhancing institutions under these conditions individuals informally seek resources from state officials because nonstate actors do not offer substitute resources and

the option to wait in collective decisions and optimal majority rules abstract we consider a model in which voters over time receive more information about their preferences concerning an irreversible social decision voters can either implement the project in the first period or they can postpone the decision to the second period we analyze the effects of different majority rules individual first period voting behavior may become less conservative under supermajority rules and it is even possible that a project is implemented in the first period under a supermajority rule that would not be implemented under simple majority rule we characterize the optimal majority rule which is a supermajority rule in contrast to individual investment problems society may be better off if the option to postpone the decision did not exist these results are qualitatively robust to natural generalizations of our model

volume for winners and losers taxation and other motives for stock trading capital gains taxes create incentives to trade our major finding is that turnover is higher for winners stocks the prices of which have increased than for losers which is not consistent with the tax prediction however the turnover in december and january is evidence of tax motivated trading there is a relatively high turnover for losers in december and for winners in january we conclude that taxes influence turnover but other motives for trading are more important we were unable to find evidence that changing the length of the holding period required to qualify for long term capital gains treatment affected turnover investors responding to the tax incentives in the capital gains laws should produce predictable patterns in the volume of trading in a stock but not necessarily in its price this study uses past price patterns as a proxy to measure the incentives to sell or avoid selling a stock and observes trading volumes to estimate the extent to which investors respond to these incentives past price patterns may influence trading volumes for other non tax related reasons as well these are also considered we find that past prices influence current incentives to trade through both tax and non tax motives winners tend to have higher abnormal volumes than losers this would be expected if non tax related motives were predominant however the influence of tax related motives on trading volume is shown by seasonal variations in the relationship between past price changes and turnover as predicted by tax induced trading theories the volume of losers is higher than normal in december and the volume of winners is higher than normal in january we found no evidence that trading volume was affected by changes in the length of the holding period required to qualify for long term capital gains investors reactions to capital gains taxes are important for several reasons first a comprehensive understanding of investor behavior would include both price and volume understanding the relationship between taxes and volume is a fruitful and convenient method of contributing to this subject the resource allocation consequences of capital gains taxes are controversial in part because

tax loss selling and the january effect evidence from municipal bond closed end funds this paper provides direct evidence supporting the tax loss selling hypothesis as an explanation of the january effect examining turn of the year return and volume patterns for municipal bond closed end funds which are held mostly by tax sensitive individual investors we document a january effect for these funds but not for their underlying assets we provide evidence that this effect can be largely explained by tax loss selling activities at the previous year end moreover we find that funds associated with brokerage firms display more tax loss selling behavior suggesting that tax counseling plays a role among the numerous stock return anomalies probably none has generated more interest than that of the turn of the year or january effect the phenomenon in which small capitalization stocks realize unusually high returns in early january 1 the literature offers a number of hypotheses to explain this phenomenon including the tax loss selling hypothesis the window dressing hypothesis the insider trading information release hypothesis and the seasonality of the risk return relation hypothesis given existing evidence in some support for the first two hypotheses the debate continues with respect to which of these the tax loss selling of individual investors or the window dressing of

a reform dilemma in polarized democracies abstract we study the feasibility and efficiency of policy reforms in democracies we develop a simple election model where i reforms are costly for voters and politicians and these costs increase with the extent of policy change and ii politicians differ in their ability to carry out reforms efficiently we identify a so called reform dilemma which manifests itself in two variants from a static perspective low reform ability politicians are elected when political parties are polarized who then impose high costs on citizens for each reform step this property of elections arises as low reform ability is a substitute for policy commitment from a dynamic perspective incumbents may choose socially undesirable policies to align the social need for reform with their own reform ability and are thus re elected regardless of their reform ability

learning about the prospects for mobility economic and political dynamics following fundamental policy reform abstract the political left turn in latin america which lagged its transition to liberalized market economies by a decade or more challenges conventional economic explanations of voting behavior this paper generalizes the forward looking voter model to a broad range of dynamic possibly non concave income processes under full information the model implies support for redistributive policies materializes rapidly if few prospects of upward mobility are present in contrast modeling voters evolving beliefs about an unknown income dynamic process shows a slow and polarizing shift toward redistributive preferences simulation using fitted income dynamics suggests that this imperfect information perspective accounts for latin america s right to left political shift and offers additional insights about political dynamics in the face of economic polarization

endogenous choice of trade policy instruments abstract recently developed theories of endogenous trade policy formation have attempted to explain tariffs as the result of economic interest seeking by individuals or groups this note demonstrates that tariffs will not emerge as a policy choice if income is redistributed solely through trade policy induced factor price changes a production tax cum subsidy will be adopted as both gainers and losers are better off than with a tariff

gradualism versus big bang speed and sustainability of reforms a beneficial reform may be blocked by a majority if it is implemented by a big bang but the same reform may succeed with an optimally designed gradualist approach a gradualist approach can sometimes split opposition force and is in this sense more politically sustainable on the other hand if both approaches are politically preferred to no reform a big bang is often preferred to gradualism in terms of both political support as well as economic efficiency

loss aversion in politics we study how loss aversion affects the political equilibrium in a simple majority voting model first we show a status quo bias which leads to path dependence second loss aversion implies a moderating effect on the most extreme voters third in a dynamic setting the effect of loss aversion diminishes with the length of the planning horizon of voters however in the presence of a projection bias majorities are partially unable to understand how fast they will adapt to a new policy this makes changes less likely and induces time inconsistency policy changes are timid at the beginning while in later periods they are made progressively more radical fourth in a stochastic environment loss aversion yields a significant distaste for risk but also a smaller attachment to the status quo the application of these results to a model of redistribution leads to empirically plausible implications

institutions and individuals at the turn of the year this article evaluates the tax loss selling hypothesis against the window dressing hypothesis as explanations for turn of the year anomalies we examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former controlling for capitalization we find that in early january late december stocks with greater individual investor interest outperform underperform stocks with greater institutional investor interest these results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value the results are most consistent with the tax loss selling hypothesis as an explanation for the turn of the year effect

tax distortions and bond issue pricing abstract original issue premium oip bonds are the norm in the us tax exempt market but very rare in the taxable market a tax subsidy helps explain this disparity unlike bonds issued at par or discount the price of oip bonds can fall and yet remain above par providing secondary market buyers with more tax exempt coupon and less taxable market discount gain the subsidy for oip bonds explains additional previously undocumented empirical facts in a calibration exercise the subsidy s expected cost to the u s treasury is estimated at 1 7 billion per year

is free trade passe abstract if there were an economist s creed it would surely contain the affirmations i understand the principle of comparative advantage and i advocate free trade yet the case for free trade is currently more in doubt than at any time since the 1817 publication of ricardo s principles of political economy and this is due to changes that have recently taken place in the theory of international trade while new developments in international trade theory may not yet be familiar to the profession at large they have been substantial and radical in the last ten years the traditional constant returns perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition these new models call into doubt the extent to which actual trade can be explained by comparative advantage they also open the possibility that government intervention in trade via import restrictions export subsidies

do hedge funds manage their reported returns f or funds with high incentives and more opportunities to inflate returns we find that i returns during december are significantly higher than returns during the rest of the year even after controlling for risk in both the time series and the cross section and ii this december spike is greater than for funds with lower incentives and fewer opportunities to inflate returns these results suggest that hedge funds manage their returns upward in an opportunistic fashion in order to earn higher fees finally we find strong evidence that funds inflate december returns by underreporting returns earlier in the year but only weak evidence that funds borrow from january returns in the following year jel g10 g19 g23 g30

environmental economics and ecological economics where they can converge abstract environmental economics and ecological economics share the common objective of understanding the human economy environment interaction in order to redirect the economies towards sustainability in pursuing this objective these two perspectives utilise different types of analytical framework and are opposed to each other on many of the fundamental theoretical and methodological issues while the environmental economics has progressed within a narrowly but sharply focused neoclassical analytical approach the ecological economics has expanded by adopting a diversified approach which led to widen the gap between the two this article makes an attempt to highlight the divergence between these two perspectives on different issues and identifies certain research avenues that would potentially bring convergence between these two perspectives