taxes housing and capital accumulation in a two sector growing economy abstract it is sometimes argued that the favorable tax treatment afforded to housing may lead to an oversupply of housing at the expense of capital this issue is examined in the context of a growing two sector economy in the basic model where the rate of time preference is constant and labor is instantaneously sectorally mobile the long run response of the capital stock to a tax on housing depends upon the relative capital intensities of the two sectors while the long run relative asset price of housing remains unchanged the robustness of these propositions to changes in the model are considered taxes on capital are also analyzed

asset pricing with loss aversion using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk free interest rate equity premium and the sharpe ratio to time series data behavioral nance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing research has now started to explore the implications of behaviorally founded preferences for asset price characteristics encouraged by some studies of benartzki and thaler 1995 and barberis et al 2001 we study asset pricing with loss aversion in a production economy we here employ a stochastic growth model and use a stochastic version of a dynamic programming method with adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences as our results show a model with loss aversion performs considerably better than pure consumption based asset pricing models

another century of economic science there is a widespread consensus that during the past century economic science has come of age it has developed powerful statistical tools to analyse economic data to make forecasts and to test alternative hypotheses and it has employed sophisticated mathematical techniques to articulate its theories and to prove basic theorems characterising the economy samuelson 1947 encapsulated the mid century enthusiasm for the scientific method in his classic foundations of economic analysis arguing that economics should be based on observable behaviour and testable hypotheses and with his theory of revealed preference showing how this could be done with the theory of consumers behaviour

forecasting and trading monetary policy effects on the riskless yield curve with regime switching nelson siegel models abstract we use 1982 2014 data on the us riskless yield curve to show that regime switching dynamics in nelson siegel factor models extended to encompass variables that summarize the state of monetary policy lead to superior predictive accuracy such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation exploiting regimes we obtain evidence that the increase in predictive accuracy is stronger during the great financial crisis when monetary policy underwent a significant sudden shift although more caution applies in comparisons to a naive random walk benchmark over a few sub samples and when transaction costs are accounted for we report that the increase in predictive power owed to the combination of regimes and of variables that capture the stance of unconventional monetary policies is tradeable we devise and test butterfly strategies that exploit the forecasts from the models and obtain evidence of risk adjusted profits both per se and in comparisons to simpler models

savings and loan and finance industry pac contributions to incumbent members of the house banking committee this paper examines the relationship between campaign contributions from savings and loan and finance industry pacs and membership on the house banking committee the distinguishing features of this paper are that we focus on campaign contributions at an industry level and we use regression analysis to determine whether membership on the house banking committee the committee with oversight responsibility for the savings and loan industry influences the level of contributions received by an individual legislator we find that members of the house banking committee do receive significantly greater contributions from the savings and loan and finance pacs than do other members of congress and that being chairman of the house banking committee also pays a dividend

the distribution of the u s capital stock between residential and industrial uses the purpose of the present study is to measure the extent to which an increase in the total capital stock induces an increase in the stock of residential capital i e to measure the marginal propensity of additional capital to be absorbed in residential capital a knowledge of this propensity is important to evaluate the national return on additional saving and to understand the impact that an increased capital stock could have on labor productivity and on the composition of national output the present paper provides both a theoretical and an empirical examination of this question this abstract was borrowed from another version of this item

a test of the structure of pac contracts an analysis of house gun control votes in the 1980s enactment of the bill was a major victory for the national rifle association which had worked for years to win relaxation of the landmark gun control act of 1968 congressional quarterly almanac 1986 p 82 i introduction every election the same political action committees pacs contribute millions of dollars to candidates for office well informed participants in the political process surely must get value for their money yet empirical research fails to provide systematic evidence that campaign contributions influence congressional roll call votes 1 a mischaracterization of the exchange between pacs and politicians may produce these contradictory results empirical studies of roll call voting typically use pac contributions from only one election cycle earlier studies generally assume prepayment in the prior congress while more contemporary studies assume a spot exchange recent empirical work however suggests another possibility interest groups may buy current influence with money spent over multiple election cycles stratmann 1995 shows that contributions from both the current and the previous election cycles influence floor votes on agricultural price supports snyder 1990 1992 presents evidence that interest groups make long term investments in politicians previous studies by arbitrarily imposing a payment structure may have produced erroneous estimates of the influence of pac money on legislative votes we examine roll call votes on gun control in the u s house of representatives during the 1980s to determine whether pacs make spot market purchases prepay for votes in the prior election cycle or make long term investments we investigate whether pac contributions have a durable long term investment effect as snyder 1992 suggests we consider two types of evidence concerning the campaign contribution contract first we examine the pattern of expenditures by the two dominant interest groups concerned with gun control the national rifle association nra and hand gun control hgc their expenditures provide strong evidence against the spot market exchange hypothesis both groups made significant expenditures in sessions of congress in which no floor vote occurred nor were these expenditures purchasing services such as committee work in a spot market exchange further 1986 nra expenditures are significantly higher for first term representatives which is consistent with long term investments but contradicts a spot exchange since freshmen have the least influence to sell second we include expenditures from both the current and the five previous election cycles as separate independent variables in a model of roll call voting to date no empirical paper tests whether pac money from more than two cycles influences roll call voting and only stratmann 1995 and grenzke 1989 use a model that specifies money from more than one cycle in an equation explaining roll call votes our probit estimates indicate that nra expenditures in the three most recent election cycles and hgc expenditures in the two most recent cycles buy votes the independent effect of expenditures from different cycles suggests that contributions are neither an unqualified one session prepayment nor a spot exchange the influence of nra expenditures two sessions prior to the roll call votes is evidence of a long term investment the literature on the determinants of roll call voting assumes that pac contributions alter representatives votes interest groups might instead simply provide campaign assistance to their supporters to affect the composition of congress stratmann 1991 bronars and lott 1997 if a difficult to quantify variable and thus omitted from regressions signals a representative s true position and interest groups make campaign contributions on the basis of this variable pac contributions might appear to influence votes the pattern of contributions and votes on gun control however indicates attempts by the nra and hgc to influence votes not merely the composition of congress

liquidity shocks size and the relative performance of hedge fund strategies abstract we examine whether the increase in the flow of capital to hedge funds over the period 1994 2005 had a negative impact on performance more specifically we study the relative performance of small versus large funds for each of the hedge fund strategies our results indicate that on an absolute return basis small funds outperform large funds on a risk adjusted return basis however we find that large funds outperform small funds and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds further funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks we also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks

eminent domain power and afterwards leviathan s post taking opportunism this paper investigates post taking procedures a research area not yet fully explored it discusses the economic implications underlying the landowner s repurchase right rr which can be invoked upon the occurrence of a so called change in use after taking rr is compared with the government s discretion regarding such changes the lack of post taking accountability tends to create power ripe for abuse and rr appears to be an effective device for constraining leviathan s opportunism finally a parsimonious estimation supports that under the overriding rr regime there exists the systematic post taking opportunism whereby original public projects are changed into inappropriate projects

coase s choice of methodology this paper examines the nature of ronald h coase s realism by considering the relationship between theories and facts in his methodology i focus especially on coase s criticisms of friedman s 1953 essay as set out in a lecture published in 1982 it is shown that in developing his argument coase applies his institutional economics to address the question of how economists operating within a regulated market for ideas choose their theories he calls for realism in methodology and carries out an empirical study of economists choices he explores how the profession is regulated and highlights how discourse impacts on the functioning of science a key question addressed within this paper is how can coase maintain a sociological and rhetorical view of science without falling into relativism i identify the different motives for theory choice that coase considers and show that his answer is both institutional and epistemic this helps to clarify the status of the empirical basis in coase s methodology and sheds new light on the nature of his realism i conclude by carrying out a reflexive analysis of coase s text as a text that attempts to justify the methodology on which it is itself based

first branch or root the congress the president and the federal reserve much of the literature on the power of elected officials and bureaucratic agencies argues from an empirical perspective that bureaus appears to exercise autonomy in this paper a theoretical model sets out the conditions under which the congress the president and one agency we use the u s federal reserve as an extended example can dictate policy outcomes the results of the paper include the congressional dominance theorem if more than 2 3 of house members and more than 2 3 of senate members agree on something they get it the theorem is obvious the proof is in the u s constitution but often forgotten in the substantive literature more realistic results are derived for situations where the preferences of members of congress are more diverse powers of the president to influence policy with and without appointments are also analyzed

the adequacy of investment choices offered by 401k plans abstract the choices made by 401 k participants are the product of two different decisions what is offered and what is chosen while there have been a number of studies of the decisions made by participants in 401 k plans there have been no studies of the adequacy of the full set of choices offered to 401 k participants this paper analyzes the adequacy and characteristics of the choices offered to 401 k plan participants for over 400 plans we find that only 53 of the plans offer an adequate set of options and that over a 20 year period offering inadequate options makes a difference in terminal wealth of over 53 we find that funds included in the plans are riskier but have a slightly higher return than the general population of funds in the same categories however we find that the return difference is roughly equal to the difference in expenses between funds selected by plans and randomly selected funds we study the characteristics of plans that are associated with adequate investment choices including an analysis of the use of company stock plan size and the use of sophisticated strategies

politics and the rescue of insolvent savings and loans before 1989 the results presented in this paper are consistent with those predicted by public choice economists who believe that regulatory agencies represent the interests of their controlling congressional committees membership on committees is not random congressmen seek committee assignments where they can represent the interests of their constituency congressmen from states where financial institutions are significant will seek membership on their respective banking committees once on those committees congressmen will seek to protect and promote their own constituency in the case of the savings and loan industry insolvent savings and loans received benefits from staying in operation these savings and loans gained another chance to gamble for resurrection being shut down or placed in a management consignment program did not give this option the results presented in our paper indicate that participation in one of the rescue programs is not random savings and loans in states with political power representation on the senate banking committee are less likely to be resolved

will bounty hunting revenue agents increase enforcement while the final version of the 1986 tax reform act retained budget funding of the irs the senate proposal to finance spending from audit revenues represented a seriously debated alternative that continues to receive attention as a method for increasing enforcement at one level the ultimate failure of the proposal is puzzling given congress s unwillingness to raise tax rates to cover spending the budget deficits of the 1980s must be financed from some other source inflation borrowing or increased enforcement turning the irs into a bounty hunting agency would seem to be a straightforward way of producing extra revenue

bureaucratic discretion or congressional control regulatory policymaking by the federal trade commission this paper extends stigler and peltzman s approach to regulation by incorporating a legislature the model yields comparative statics results and hence testable implications the paper then tests between two opposing approaches about regulatory agency behavior the first assumes agencies operate independently of the legislature and hence exercise discretion the second assumes that congress controls agency decisions the recent behavior of the federal trade commission provides the empirical setting substantial evidence is found for the specific predictions of the model including the hypothesis of systematic congressional influence over ftc decisions

an econometric analysis of choice of mortgage design in the united kingdom the research seks to better understand the choice of mortgage design by households in the united kingdom family expenditures survey data is used to test the various hypotheses on the determinants of the choice between an endowment and a repayment mortgage a bivariate probit model with sample selection is estimated to detect any likely selectivity bias arising out of tenure choice the theoretical modelling reflects the behaviour of liquidity constrained households comparing comparative periodic mortgage costs and households concerned with the oppurtunity cost of equity in a property actual choices appear to reflect the impact of nominal interest rates income and cash flow considerations there is little direct evidence that the choice of mortgage repayment vehicle is motivated by portfolio design there is some tentative evidence of supply side pressure on endowment mortgage take up

the expectation hypothesis of the term structure of very short term rates statistical tests and economic value this paper re examines the validity of the expectation hypothesis eh of the term structure of us repo rates ranging in maturity from overnight to three months we extend the work of longstaff 2000a in two directions i we implement statistical tests designed to increase test power in this context ii more importantly we assess the economic value of departures from the eh based on criteria of profitability and economic significance in the context of a simple trading strategy the eh is rejected throughout the term structure examined on the basis of the statistical tests however the results of our economic analysis are favorable to the eh suggesting that the statistical rejections of the eh in the repo market are economically insignificant

law and economics at chicago it is a double honor to have been invited to deliver the simons lecture on the occasion of the celebration of the centennial of the university of chicago although at my age a century seems a rather short period we all know that the university of chicago has not suffered from the usual human limitations it emerged from the ground fully grown it had neither an infancy nor an adolescence and wasted no time in working its way to the top it started at the top economics at the university of chicago was no exception the first head of the economics department j l laughlin himself a redoubtable authority on money set about recruiting a formidable faculty including thorstein veblen when i went as a student to the london school of economics in 1929 some thirty seven years after the formation of the university of chicago its economics department was recognized to be one of the most powerful in the world foremost in our minds at the time mainly as a result of the teaching of lionel robbins was frank knight he was regarded at the london school of economics as one of the greatest of economists and his book risk uncertainty and profit was closely studied by all serious students of economics there then there was jacob viner an economic theorist of great ability and erudition whose work put him in the top rank of economists another member of the faculty was henry schultz one of the pioneers of econometrics whose empirical work on the derivation of statistical demand schedules was regarded as a major contribution to economics finally there was paul douglas a strange man who thought it more important and interesting to be a united states senator than a professor at the university of chicago his empirical work on wages and

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

capital rules the domestic politics of international regulatory harmonization in the past fifteen years financial regulators from the developed world have attempted to create international regulatory standards in a variety of financial issue areas their negotiations are notable for the stark variation in the preferences of regulators toward international regulatory harmonization certain regulators actively resist any attempts at regulatory harmonization while others are vocal in their advocacy for an international agreement when will regulators seek to harmonize their rules with their foreign counterparts i propose a principal agent framework for analyzing regulator behavior that views international harmonization as a means of satisfying domestic political pressures the framework predicts that regulators are more likely to seek international regulatory harmonization when confidence in the stability of financial institutions is declining and when competitive pressures are increasing from foreign firms facing less stringent regulations i explore the consistency of the framework with two important cases in the history of international financial regulation the negotiations among bank regulators leading up to the 1988 basel accord on bank capital adequacy and the negotiations among securities regulators over capital adequacy for securities firms between 1988 and 1992 i thank gabe aguilera david bach ethan bueno de mesquita dan carpenter bill clark mark copelovitch jeff frieden dan gingerich dan ho devesh kapur joseph n r sanberg ross schaap allan stam matt stephenson two anonymous reviewers and the editors of io for helpful comments discussions and feedback i am also indebted to the thirty current and former regulators and financial industry executives who participated in interviews to advance this project finally i thank the weatherhead center for international affairs and the center for european studies for research funding

the new economics of organization over the last ten years or so an important new approach to the study of organizations has emerged within economics it is perhaps best characterized by three elements a contractual perspective on organizational relationships a theoretical focus on hierarchical control and formal analysis via principal agent models this paper provides political scientists with an overview of the new economics of organization and explores its implications for the study of public bureaucracy so far positive political theory has not contributed much to our understanding of public bureaucracy in part this is due to the unsympathetic treatment that rational modeling and most other modes of quantitative analysis have long received from students of public administration the other side of the coin however is that positive theorists have not made much of an effort to develop theories of bureaucracy their concerns have centered around two basic mechanisms of social choice voting and markets and they have devoted little systematic attention to a third mechanism that is clearly important for understanding how societies and other aggregates make collective decisions this third and relatively unexplored mechanism is hierarchy movement toward a positive theory of hierarchies would fill a serious gap in the social choice literature while at the same time making a theoretical contribution that strikes to the essence of public bureaucracy indeed of all organizations in fact significant steps toward a positive theory of hierarchies have very recently been taken but by economists not political scientists in small numbers of course economists made contributions to the study of public bureaucracy some time ago with the pioneering works of downs 1967 tullock 1965 and niskanen 1971 but this new wave of theoretical work is different it is already a large complex body of literature that is the focus of innovation and excitement among a growing number of economists and it reflects an unusual degree of theoretical coherence and cumulative effort work in this tradition tends to receive orientation from a distinctive economic approach to the analysis of organizations an approach perhaps best characterized by three elements a contractual perspective on organizational relationships a focus on hierarchical control and formal analysis via principal agent models this approach has emerged from recent attempts to move beyond the neoclassical theory of the firm which assumes away all organizational considerations to a theory of economic organizations that can explain why firms corporations and other enterprises behave as they do propo

the statistics of sharpe ratios the building blocks of the sharpe ratio expected returns and volatilities are unknown quantities that must be estimated statistically and are therefore subject to estimation error this raises the natural question how accurately are sharpe ratios measured to address this question i derive explicit expressions for the statistical distribution of the sharpe ratio using standard asymptotic theory under several sets of assumptions for the return generating process independently and identically distributed returns stationary returns and with time aggregation i show that monthly sharpe ratios cannot be annualized by multiplying by 12 except under very special circumstances and i derive the correct method of conversion in the general case of stationary returns in an illustrative empirical example of mutual funds and hedge funds i find that the annual sharpe ratio for a hedge fund can be overstated by as much as 65 percent because of the presence of serial correlation in monthly returns and once this

housing taxation and capital accumulation this paper studies the impact of the preferential tax treatment of housing capital in a dynamic general equilibrium life cycle economy populated by heterogeneous individuals the model includes the main housing tax provisions currently in place in the u s and a minimum downpayment requirement upon purchasing non divisible houses the tax code makes the return on housing capital larger than that on business capital which distorts the lifetime profile and composition of individuals savings the wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility simulations show that individuals at all income levels would rather live in a world where imputed rents are taxed or one where mortgage interest payments are not deductible furthermore distributional effects are much smaller than conventionally believed

only winners in tough times repeat hedge fund performance persistence over different market conditions we provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets specifically we construct two performance measures downsidereturns and upsidereturns conditioned on the level of overall hedge fund sector returns after adjusting for risks funds in the highest downsidereturns quintile outperform funds in the lowest quintile by about 7 in the subsequent year whereas funds with better upsidereturns do not outperform subsequently the downsidereturns can predict future fund performance over a horizon as long as 3 years for both winners and losers and for funds with few share restrictions

the allocation of capital between residential and nonresidential uses taxes inflation and capital market constraints we have constructed a simple two sector model of the demand for housing and corporate capital economic growth and an increase in the inflation rate were then simulated with a number of model variants the model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it the existence of capital market constraints offsets the bias against corporate capital but it introduces a sharp inefficient reallocation of housing from less wealthy constrained households to wealthy households who do not have gains on mortgages and are not financially constrained

the limits of independence and the policy of the ecb it is argued that the european central bank s independence is not as secure as it seems and that as a result it has appreciable institutional incentives to protect and enhance its position it follows that its behaviour should not be understood as being solely determined by the pursuit of price stability one consequence is that certain points on which it has been criticised on the basis that its approach makes for ineffective monetary policy might be better understood as often effective attempts to protect its position another is that making a central bank or any other institution completely independent may be much harder than it seems and failed attempts which come close are not necessarily to be preferred even by the advocates of independence to less ambitious designs

a stochastic dominance analysis of yen carry trades abstract yen carry trades have made headline news for over a decade we examine the profitability of such trades for the period 2001 2009 yen carry trades generated high mean returns and sharpe ratios prior to the recent financial crisis they continued to outperform major stock markets for the full sample period given the non normality of carry trade returns we apply non parametric tests based on stochastic dominance sd to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on us and global stock market indices we apply a general test for sd developed recently by linton maasoumi and whang 2005 to six currencies as well as portfolios of these currencies for a large class of risk averse investors profits from yen carry trades cannot be attributed to risks

the dynamics of the singapore private housing market in this paper a dynamic stock flow model is modified and applied to the singapore private housing market two empirical models are then constructed which offer an explanation for the dynamic patterns of both real private housing prices and new housing construction in the long run movements in the real gdp per capita and the total housing stock are found to have significant impacts on real housing prices while the user cost the public resale housing prices and the autocorrelation of housing prices with one lag explain most of the short run dynamics of real housing prices on the supply side the long run price elasticity of new housing construction is 1 31 it is also found that long run new housing construction drops 6 5 per cent for every 1 per cent increase in the total housing stock

the influence of the economic approaches to regulation on banking regulations a short history of banking regulations this article highlights the theoretical foundations of the regulations at work in the banking sector and examines their responsibility in the onset of the 2007 2008 financial crisis drawing a parallel between the main changes in banking regulations since the 1960s and the evolutions in the economic analyses of regulation over the same period it shows that the shift from the public interest theory of regulation that prevailed until the late 1960s towards the private interest theory of regulation accounts for the substitution of micro prudential regulations for macro prudential ones and explains a paradigmatic change in the conception of the regulatory instruments of the banking authorities it also shows that although the outcome of several factors the 2007 2008 crisis was also a consequence of the fact that the economic analysis of banking regulations supported micro prudential regulations that fail to take the global features and impact of banking activities into account and have proved unable to recommend effective solutions in a context of crisis

evaluation by the aumann and serrano performance index and sharpe ratio bitcoin performance abstractwe compare bitcoin performance based on the aumann and serrano performance index and sharpe ratio assuming that asset returns follow the class of discrete normal mixture distributions the aumann and serrano performance index can take into account higher moments of the underlying distribution of assets and is relevant for risk averse investors we evaluate bitcoin performance based on the aumann and serrano index relative to the performance of other assets our evaluation shows that bitcoin is rated highly by the sharpe ratio but rated very poorly by the aumann and serrano index we also find some stock assets can beat bitcoin by the sharpe ratio when an investment horizon is monthly

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

determinants of the amount and type of corruption in state fiscal bureaucracies an analysis of late imperial china a principal agent model of relations between rulers and state officials is used to derive several propositions concerning the amount and type of corruption in state bureaucracies the model is appl

gordon tullock entrepreneur of public choice when gordon tullock first encountered james m buchanan in 1957 as an initial step in his transition from the bureaucracy of the u s department of state to the ivy league atmosphere of the university of virginia he carried with him a voluminous manuscript on bureaucracy that he had tried unsuccessfully to publish buchanan 1987a 11 although eight years would pass before that manuscript eventually would be published three years after publication of the calculus of consent 1962 tullock s pioneering instincts already had directed him to the as yet uncharted path of public choice already had alerted him to the ubiquitous presence of homo economicus in the marketplace of politics buchanan quickly recognized the potential importance of combining tullock s insight with his own wicksellian notion of the importance of consent in political process as the basis for a radical research program trespassing across the traditional boundaries of economics and politics ignoring tullock s lack of formal training in economics buchanan installed him in the thomas jefferson center for studies in political economy and thereby provided that crucially important initial support absent which many a potential entrepreneur has failed to fulfill his talent steadfast in this judgment and firm in his resolve buchanan later was to gamble his own career together with the future of the virginia school of political economy in a 1968 exodus from charlottesville as the left leaning ideologically activist bureaucracy of thomas jefferson s academy thrice denied tullock a well earned promotion to full professor breit 1986 buchanan s judgment was sound and the virginia school reemerged unscathed and fortified as buchanan and his protege regrouped in the foothills of the appalachian mountains to carry the baton of the virginia public choice research

anticipatory traders and trading speed we examine whether speed is an important characteristic of traders who anticipate local price trends these anticipatory participants correctly trade prior to the overall market and systematically act before other participants they use manual and algorithmic order entry methods but most are not fast enough to be high frequency traders hfts those anticipating price trends have impacts as if they are informed traders while the case for anticipatory participants affecting the volume of other traders is rejected a follow up sample shows significant attrition in accounts and difficulty maintaining the anticipatory strategies to identify anticipatory traders we devise novel methods to isolate local price trends using order book data from the west texas intermediate wti crude oil futures market

a note on empirical sharpe ratio dynamics abstract generating a high positive excess return in a prospective period does not necessarily increase the empirical sharpe ratio of an investment fund therefore we derive a critical range in which prospective excess returns must lie in order to increase its empirical sharpe ratio we also give a formal statement of an excess return value within this critical range that leads to the maximum possible empirical sharpe ratio in the prospective period

choice of mortgage instrument liquidity constraints and the demand for housing debt in the uk the research uses microdata to estimate reduced form mortgage demand equations based on truncated regressions dissagregated by choice of mortgage instrument the choice is between a standard annuity mortgage and a balloon type mortgage the endowment the estimates are used to indicate the differential impact of credit market rationing and financial liberalization on households the results indicate significant variations in mortgage demand by choice of mortgage instrument econometric testing demonstrates that the choice between an endowment and a repayment mortgage can be used as an exogenous indicator of liquidity and portfolio positions and different user costs of owner occupation

hedge funds pricing controls and the smoothing of self reported returns w e investigate the extent to which hedge fund managers smooth self reported returns in contrast to prior research on the anomalous properties of hedge fund returns we observe the mechanisms used to price the fund s investment positions and report the fund s performance to investors thereby allowing us to differentiate between asset illiquidity and misreporting based explanations we find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing traditional controls however such as removing the manager from the setting and reporting of the fund s net asset value and the use of reputable auditors and administrators are not associated with lower levels of smoothing with respect to asset illiquidity versus misreporting investment style and portfolio characteristics explain 14 0 24 3 of the variation in our smoothing measures and pricing controls explain an additional 4 1 8 8 suggesting that asset illiquidity is the major factor driving the anomalous properties of self reported hedge fund returns jel g12 g23 m41 m42

a political theory of regulation with some observations on railway abandonments one of the main themes of partisan dispute in the recent past and doubtless in the foreseeable future is whether or not the value of detailed governmental regulation of the economy exceeds the cost this is exactly the kind of dispute that might be resolved by raising it from the level of mere partisan interest to the level of economic and political science unfortunately however it has not been raised because we do not have the necessary intellectual apparatus namely a theory about the motivation for the operation of and the consequences of regulation as a result most of the discussion consists of biased ad hoc explanations of particular cases with little effort to formulate and test alternative generalizations we have therefore nothing but unresolved and unresolvable disputes about a more or less random collection of stories and some contradictory recipes about cause and effect

ranking of investment funds acceptability versus robustness abstract within the class of performance ratios the sharpe measure can lead to misleading evaluation and various modifications have been investigated as a starting point we consider the axiomatic approach based on the notion of acceptable index of performance our goal is to show how the promising properties possessed by alternative measures such as the gain loss ratio or the average value at risk ratio are not compatible with the statistical robustness of their estimated counterparts this clearly affects the ranking of funds and consequently the performance persistence we study the qualitative robustness along with the quantitative resistance of the corresponding estimators in a nonparametric setting we include the value at risk ratio which is not an acceptability index of performance these measures do not possess qualitative robustness nonetheless we show how some degree of resistance to data contamination restricted to bounded intervals can be recovered using the relationship between the influence function of estimators and their bias for large samples we suggest the average value at risk ratio and the value at risk ratio as the less sensitive to outliers as a consequence acceptability is no longer a prerequisite for performance evaluation to limit the alteration of a given ranking among alternative investment funds one can use the not acceptable value at risk ratio as well eventually we propose a modified ratio either of the trimmed mean or of the median to the value at risk

a residence time model of housing markets abstract this paper estimates a semi markov model of housing markets in which families move from one home to another spend a random amount of time in each home and choose whether to own or to rent at each move limiting conditions of the semi markov process are used to characterize the steady state frequency of owner occupied housing and to simulate the impact of changes in housing tax policy this approach differs markedly from previous studies of housing tax policy which focus on the entire population as opposed to the movers and ignore the effect of household residence times see king 1980 rosen 1979 white and white 1977 or laidler 1969 residence times further influence the analysis by affecting the relative cost of owning to renting in the tenure choice model homeowners pay legal and realtor fees at the time they move out of their homes which renters do not have to pay the discounted value of these fees declines with length of stay and provides a structural explanation of why families with longer residence times have a greater propensity to own results from the empirical analysis suggest that the semi markov model closely predicts conditions in the united states and provide important insights into the effects of housing tax policy residence times are also found to influence household tenure choice through their impact on the discounted legal and realtor fees paid by homeowners

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

why so much stability one of duncan black s 1958 more important contributions was a classically simple proof that with complex issues and majority voting a stable outcome is unlikely this very simple proof that there would normally be no motion which can get a majority against all others and hence that any possible outcome is dominated by another has been elaborated and made more precise by later work without most improbable conditions endless cycling would be expected this is particularly true when logrolling is present as it normally is if we look at the real world however we observe not only is there no endless cycling but acts are passed with reasonable dispatch and then remain unchanged for very long periods of time thus theory and reality seem to be not only out of contact but actually in sharp conflict it is the purpose of this article to demonstrate that our existing theory when properly looked at does indeed imply a relatively stable outcome to voting in some cases however this stability will not be a true equilibrium because a random member of a large set will be chosen and then that random outcome will be left unchanged for long periods of time it does not dominate all other outcomes but is retained merely because of its particular history there are already several possible explanations for the observed stability in the literature we will take them up as they become relevant to the general line of reasoning i should however warn the reader that my own previous work including joint work with buchanan will play a major role here this may simply reflect egotism but i think that some of the early work which is now partially forgotten can provide solutions for more modern problems much recent public choice work has involved spatial models and these models frequently ignore logrolling the reason presumably is that it is very hard to put logrolling in a two dimensional diagram we shall begin considering such special models and assume that the issues are the sort that does not lead to logrolling and then turn to more complex logrolling problems with respect to the first situation in which logrolling does not occur there is already one possible explanation for the observed stability in the literature

the social and private micro level consequences of homeownership abstract this paper reviews the literature that describes the micro level economic and social consequences of homeownership we adopt an interdisciplinary approach and include studies from economics sociology geography political science psychology and other disciplines our focus is on the set of consequences of homeownership in developed countries our list of potential outcomes of homeownership includes the impact on household wealth and portfolio choice mobility labor force participation urban structure and segregation home maintenance political and social activities health demographics self esteem and child outcomes there is substantial evidence that homeownership has important effects on some household behaviors and outcomes however we find that much of the past 30 year s literature on consequences of homeowning is deficient from a theoretical or econometric perspective we suggest solutions and identify research gaps present in the literature

an economic evaluation of empirical exchange rate models this paper provides a comprehensive evaluation of the short horizon predictive ability of economic fundamentals and forward premiums on monthly exchange rate returns in a framework that allows for volatility timing we implement bayesian methods for estimation and ranking of a set of empirical exchange rate models and construct combined forecasts based on bayesian model averaging more importantly we assess the economic value of the in sample and out of sample forecasting power of the empirical models and find two key results 1 a risk averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and 2 strategies based on combined forecasts yield large economic gains over the random walk benchmark these two results are robust to reasonably high transaction costs

on the risk of stocks in the long run a familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them if this proposition were true then the cost of insuring against earning less than the risk free rate of interest should decline as the investment horizon lengthens this paper shows that the opposite is true even if stock returns are mean reverting in the long run the case for young people investing more heavily than older people in stocks cannot therefore rest solely on the long run properties of stock returns for guarantors of money fixed annuities the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong

balancing environmental protection and energy production in the federal hydropower licensing process the u s federal energy regulatory commission ferc must balance environmental protection of riverine resources with the nation s growing demand for power production every time it issues a hydroelectric license this paper models the bureaucratic agency s decision making process in issuing these licenses data on nearly 500 hydro power licenses issued from 1983 to 2005 are utilized it is discovered that legislative and institutional constraints are by far the largest influences on ferc s regulatory decisions implying that if the current allocation of surface water in the united states is considered inefficient the most effective way to alter this allocation is by passing new legislation or by implementing institutional reform at ferc

does inflation affect real behavior the case of housing an important tradition in economics is to assume that demand depends upon relative prices and is homogenous of degree zero for the most part this has been interpreted as meaning inflation changes in the price level leaves demand unchanged recent work by a number of economists has challenged this position for the case of housing demand two arguments have been made that inflation acting in concert with existing institutions alters the quantity of housing demanded and the decision to rent or own a house the first argument states that inflation and the standard fixed payment mortgage combine to reduce the size of the mortgage loan a household can obtain for the purpose of buying a home this works to reduce the quantity of owner occupied housing demanded given the importance of mortgage finance to the demand for owner occupied housing the second argument focuses on the inflation adjusted after tax cost of owner occupied housing it simply states that an increase in the rate of anticipated inflation of the general price level reduces the after tax cost of housing thus increasing the demand for housing and the demand for homeownership there has been little empirical testing of these two arguments the purpose of this paper is to formulate and estimate a model which will give an indication of the quantitative significance of the two arguments a housing demand equation and a tenure choice equation own versus rent are estimated using a sample of about 6000 households from the 1975 annual housing survey 10 the estimates suggest that inflation dampens housing demand and homeownership opportunity for most households even though the inflation adjusted after tax cost of owner occupied housing declines as inflation heats up the paper consists of six sections including the introduction section two examines the ways inflation affects housing choices in more detail the third section contains the specification of the econometric model that forms the basis of the study section four is a discussion of econometric problems and the data used the results of the estimates are discussed in the fifth section the paper concludes with a presentation of the major conclusions and policy implications of the study

the adaptive markets hypothesis evidence from the foreign exchange market we analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true out of sample tests on previously studied rules the excess returns of the 1970s and 1980s were genuine and not just the result of data mining but these profit opportunities had disappeared by the early 1990s for filter and moving average rules returns to less studied rules also have declined but have probably not completely disappeared high volatility prevents precise estimation of mean returns these regularities are consistent with the adaptive markets hypothesis lo 2004 but not with the efficient markets hypothesis

does the choice of performance measure influence the evaluation of hedge funds abstract the sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund hedge fund returns differ significantly from a normal distribution for this reason other performance measures for hedge fund returns have been proposed in both the academic and practice oriented literature in conducting an empirical study based on return data of 2763 hedge funds we compare the sharpe ratio with 12 other performance measures despite significant deviations of hedge fund returns from a normal distribution our comparison of the sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds

government organization and power i introduction economists have systematically examined the economics of government finance and long ago established that the means of financing government creates inefficiencies in the market for instance see baumol and bradford 1970 and diamond and mirrlees 1971a 1971b what may be less well examined and understood is that apart from the distortions that arise from the means of government finance government officials can have an incentive to provide a combination of services and taxes that are nonoptimal as in niskanen 1997 the ability of government to exercise coercive and pricing power creates these incentives a growing number of articles explore the effect of government power on its size for example anderson and tollison 1988 and rogers and rogers 1995 examine the implications of pricing power for government size in his work on bureaucracy niskanen 1971 considered the implications of coercive power for government size olson 1991 mcguire and olson 1996 niskanen 1997 and mcguire 2001 examine the implications of the joint exercise of coercive and pricing powers by an autocratic government to our knowledge however no previous work explicitly distinguishes between the coercive and pricing powers of government and none systematically examines all the possible combinations of coercive and pricing powers in the present analysis we develop a simple theoretical framework that allows us to examine on an integrated basis the exercise of government power the framework abstracts from any distortions in the means of government finance and separates government power into two dimensions pure coercive power and pure pricing power pure coercive power is the ability of a government to compel consumers to accept more of the public good than they desire at each tax price through fiat coercive power typically arises when citizens are unable to exit a jurisdiction costlessly and the government is able to push citizens beyond what they would accept in a voluntary relationship pure pricing power is the government s ability to restrict output along a given demand curve and earn rents by doing so pricing power typically arises when the government has limited competition and faces a downward sloping demand curve for its services we consider four polar combinations of coercive and pricing power in comparison to the social optimum lindahl democracy monopoly niskanen bureaucracy and autocracy as shown in figure 1 the government in lindahl democracy exercises neither coercive nor pricing power a monopoly government is able to restrict its output and exercise pricing power to earn rents in a traditional monopolistic fashion but it cannot engage price discrimination or expropriation to obtain any remaining consumer surplus from its citizens a niskanen bureaucracy can exact all of the surplus that consumers obtain from the public goods it provides but it must use the surplus in the production of public goods it cannot exercise pricing power and restrict output to obtain rents as a monopoly would an autocracy exercises both coercive and pricing power in practice democratic governments are likely to have both coercive and pricing powers rather than to conform to the lindahl ideal our analytical framework allows us to clarify and reconcile the differences between some of the previous contributions to the literature on government power and size in democracy a government can simultaneously use its coercive power to grow too large and its pricing power to restrict its output and earn rents furthermore government size or rents alone may be poor indicators of the extent to which government fails to achieve optimality in its provision of services government power may be used to generate rents provide too much government service or a combination of both ii social optimum consider a jurisdiction or economy with n identical individuals and two goods a purely public good and a purely private good

real and nominal interest rates and the demand for housing abstract this paper is an empirical study of the relationship between inflation expectations and the demand for housing the major findings are that housing demand is a function of both expected inflation and the real interest rate but that demand cannot be specified as a function of the nominal rate it is also shown that expected inflation has a larger impact on those households that are likely to be constrained by capital market imperfections

assigning property rights to radio spectrum users why did fcc license auctions take 67 years abstract while leo herzel 1951 and ronald coase 1959 persuasively argued for auctioning licenses issued by the federal communications commission fcc not until 1993 did the u s congress grant the fcc authority to assign wireless operating permits via competitive bidding why were auctions with obvious efficiency and equity advantages so long in coming why were comparative hearings in the public interest first abandoned as assignment tools in 1981 not for auctions but for lotteries and why were radio and tv licenses pointedly excluded from auctions four factors the special interest of regulators in influencing broadcasting content the limits placed on explicit program regulation by the u s constitution the recent increase in the relative economic importance of nonbroadcast wireless services and the agency problem embedded in central planning are used to explain both the political stability of economically inefficient licensing methods and recent reforms

a public choice theory of the great contraction the conventional chicago wisdom about the great contraction is that it was the result of a massive policy failure according to this view the collapse of the economy was brought about mostly by the fact that the monetary policymakers of the day were more concerned with internal power struggles than with supplying reserves to member banks an explanation which with apologies to professor stigler must have elicited uproarious laughter at the bankers club it has been our purpose in this paper to suggest an alternative theory briefly stated the restrictive monetary policy pursued by the fed from 1929 to 1933 was motivated by the economic interests of member banks the fed s policy produced a massive differential failure rate between member and nonmember banks in which the latter were eliminated at a rate at least five times higher than the former fed member banks faced substantially less competition in the banking market after the house cleaning than before although all banks suffered net losses in the short run in the long run member bank profitability was enhanced by the reduction in the number of nonmember competitors at the same time the fed itself benefitted from a substantial increase in the proportion of the total banking system within its bureaucratic jurisdiction and from a change in its method of finance putting the great contraction in interest group terms we suggested that the fed was acting as the agent of congressmen serving on important oversight committees who in turn were representing the interests of the member banks in their states due to interstate branching restrictions the state is the relevant geographic market within which banks compete we tested this hypothesis using bank failure rate data across states and found that holding other things equal the failure rates of nonmember banks in the early 1930s were significantly higher in states with representation on the house banking and currency committee of course not even friedman and schwartz 1963 299 301 argue that fed policy was the sole direct cause of the great contraction but instead maintain that the fed acted in such a way as to take a relatively severe contraction and turn it into by far the most severe business cycle contraction in the whole of u s history but to the extent that the great contraction was worsened by fed policy and this in turn led to the succession of events called the great depression the latter was a side effect of economically rational interests of federal reserve member banks to say the least this would appear to have been an enormously inefficient method of obtaining the postulated benefits certainly there were other less costly methods available by which member banks could have reduced the number of their nonmember rivals this is perhaps the most difficult problem our theory of the great contraction confronts we can offer two responses first although the literature on the great depression tends to focus on fluctuations in national macroeconomic aggregates e g the money supply unemployment and so on it is clear that the severity of the depression differed radically across states states with relatively large agricultural sectors tended to be especially hard hit suffering the highest rates of unemployment and the most significant numbers of bank failures by contrast states in some other areas most notably new england and the southeast seemed to be less seriously affected we note that in some of our regressions the number of nonmember bank failures was negatively and significantly related to state unemployment rates in 1934 this is certainly not conclusive evidence but it does suggest a pattern of differential costs associated with the great contraction that is the costs of providing benefits to federal reserve member banks in states with representation on the relevant oversight committees may have fallen more heavily on the economies of states not so represented if so this would cast a very different light on the actual costs of these policies to the relevant political decision makers second the potential dilemma in this case is no worse than that encountered in the application of the economic theory of politics to many other kinds of government behavior economists since adam smith have ascribed protectionist trade policies to the influence of special interest groups who benefit modestly at the cost of relatively huge economic inefficiencies many other government actions that might be plausibly explained from an interest group perspective would similarly seem to involve costs to the economy which grossly outweigh the benefits special interests might reasonably expect presumably even in such seemingly extreme cases marginal benefits equal marginal costs to the relevant actors some writers have suggested that the political marketplace in modern democracies is characterized by much larger transactions costs than are normally encountered in ordinary markets see demsetz 1982 this might help explain the seemingly huge discrepancies we observe between apparent concentrated benefits and diffused costs in depression era monetary policy in any event this problem is not peculiar to our theory but is shared by many applications of the interest group model of government it is worth emphasizing that the events we have described do fall into the interest group model s stylized depiction of concentrated benefits versus diffuse costs moreover without having a complete picture of all of the options available to the monetary policymakers we cannot be sure that any of the alternatives was in fact more efficient we do know the path that was chosen and that contrary to the conventional wisdom this path had a rationally motivated interest group basis

the dynamic efficiency cost of not taxing housing traditional welfare cost estimates of tax subsidies for owner occupied housing are less than 0 5 of gnp in the united states and canada this paper argues that these static measures understate the true cost of the tax subsidy increasing the capital income tax makes untaxed housing more valuable delivering a windfall bonus to existing homeowners at the expense of future generations this intergenerational transfer has real efficiency effects in the presence of pre existing tax distortions when housing is in fixed supply the dynamic efficiency cost of preferential tax treatment for housing is as much as 2 2 of gnp or 120 billion dollars in 1990

the intellectual legacy of gordon tullock gordon tullock is one of the world s leading economists even more so than chicago s gary becker tullock has extended the rational choice model into areas previously judged to lie outside the realm of economics this essay identifies tullock s contributions to constitutional political economy public choice bureaucracy the law and bio economics the essay focuses attention most especially on tullock s pioneering contributions to public choice including his twenty year editorship of public choice

hedge fund risk dynamics implications for performance appraisal accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes strategies and leverage in response to changing market conditions and arbitrage opportunities the standard measure of performance is the abnormal return defined by a hedge fund s exposure to risk factors if exposures are assumed constant when in fact they vary through time estimated abnormal returns may be incorrect we employ an optimal changepoint regression that allows risk exposures to shift and illustrate the impact on performance appraisal using a sample of live and dead funds during the period january 1994 through december 2005