gender differences in trust and reciprocity evidence from a large scale experiment with heterogeneous subjects this article examines gender differences in an experimental trust game recent studies have shown that men trust more and that women are more reciprocal in laboratory experiments participants in these studies however are typically university students who may not be representative of the entire population in this study we use data from a large scale experiment with heterogeneous subjects who are representative of the german population we find that men exhibit not only more trusting behaviour but also more reciprocating behaviour than women moreover our results are indicative of age dependent gender differences for men we find an inverse u shaped relationship between age on the one hand and both trust and reciprocity on the other however we do not find age effects for women

swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

some macroeconomics for the 21st century this note describes a numerical simulation of a model of economic growth a simplified version of robert tamura s 1996 model of world income dynamics based on technology diffusion the model makes predictions for trends in average world income growth and about the evolution of the relative income distribution that accord well with observation the model is used to forecast the course of world income growth and income inequality over the century to come

default risk and the effective duration of bonds default risk creates difficulties for fixed income portfolio managers in measuring a portfolio s exposure to interest rate risk it also heightens the anxiety of traders and arbitragers who are hedging their investments and it compounds financial institutions problem of matching assets and liabilities the consensus among researchers is that credit risk shortens the effective duration of corporate bonds this paper provides estimates of how much shorter durations become because of credit risk these estimates are based on observable data and easily estimated bond pricing parameters because the duration measures are taken with respect to movements in a common reference rate of interest they can be used with greater confidence than can other measures when attempting to compute the duration of a portfolio of bonds subject to varying degrees of credit risk

a pricing model for secondary market yield based floating rate notes subject to default risk abstract the purpose of this article is to price secondary market yield based floating rate notes smy frns subject to default risk smy frns are derivatives on the default free term structure of interest rates on the term structures for default risky credit classes and on the structure of a determined pool of bonds the main problem in smy frn pricing as compared to the pricing of standard interest rate or credit derivatives is market incompleteness which makes traditional no arbitrage pricing by replication fail in general smy frns are subject to two types of default risk first the smy frn issuer may go bankrupt direct default risk second the possibility of the bankruptcy of the issuers in the underlying pool has an influence on the smy frn coupons indirect default risk this article is the first one which provides a no arbitrage pricing model for smy frns with direct and indirect default risks it is also the first article applying incomplete market pricing methodology to smy frns

interest rate swaps abstract using quotations from two interest rate swap dealers with different credit ratings aaa and a we examine the effect of dealers credit reputations on swap quotations and bid offer spreads the aaa offer rates are significantly higher than the a offer rates and the aaa bid rates are significantly lower than the a bid rates we also document the relation between swap rates and par bond yields estimated from london interbank offered rate libor and bid rate libid data we identify some of the problems in testing the implications of swap pricing theory

from malthusian stagnation to modern growth this paper investigates the historical evolution of the relationship among population growth technological change and standard of living the analysis focuses on two most important differences among the malthusian regime post malthusian regime and modern growth regime these were the behavior of income per capita and the relationship between the level of income per capita and the population growth rate the modern growth regime is characterized by steady growth in both income per capita and the level of technology in the malthusian regime technological progress and population growth was glacial by modern standards and income per capita was fairly constant in contrast to the modern growth regime the relationship between per capita income and population growth in the malthusian regime was positive post malthusian regime shared one characteristic with each of the two regimes in addition this paper developed and described an endogenous growth model consistent with the above mentioned transition process

the valuation of floating rate instruments abstract a framework for valuing floating rate notes is developed to examine the effects of 1 lags in the coupon formula 2 special contractual features and 3 default risk evidence from a sample of floaters indicates they sold at significant discounts while lags in the coupon formulas and other contractual features make these notes more variable they do not account for the magnitude of the discounts we conclude that the fixed default premium in the coupon formula of a typical note is inadequate to compensate for time varying default premiums demanded by investors who treat other corporate short term paper as close substitutes

innovation and inequality in a small world we present a multicountry theory of economic growth and r d driven technological progress in which countries are connected by a network of knowledge exchange technological progress in any country depends on the state of technology in the countries it exchanges knowledge with the diffusion of knowledge throughout the world explains a period of increasing world inequality followed by decreasing relative inequality knowledge diffusion through a small world network produces an extraordinary diversity of country growth performances including the overtaking of individual countries and the replacement of the technologically leading country in the course of world development

seven centuries of european economic growth and decline this paper investigates very long run pre industrial economic development new annual gdp per capita data for six european countries over the last seven hundred years paint a clearer picture of the history of european economic development first the paper confirms that sustained growth has been a recent phenomenon but rejects the argument that there was no long run growth in living standards before the industrial revolution instead the evidence demonstrates the existence of numerous periods of economic growth before the nineteenth century unsustained but raising gdp per capita it also shows that many of these economies experienced substantial economic decline thus rather than being stagnant pre nineteenth century european economies experienced a great deal of change finally it offers some evidence that from the nineteenth century these economies increased the likelihood of being in a phase of economic growth and reduced the risk of being in a phase of economic decline

prepayment and the valuation of mortgage backed securities this paper puts forward a valuation framework for mortgage backed securities rather than imposing an optimal value minimizing call condition we assume that at each point in time there exists a probability of prepaying this conditional probability depends upon the prevailing state of the economy to implement our valuation procedure we use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate gnma prepayment experience by integrating this empirical prepayment function into our valuation framework we provide a complete model to value mortgagebacked securities given an optimal value minimizing call policy a mortgage should never be called when its market value is less than its call price similarly a mortgage should be called if it is worth more than its call price however mortgagors often call their loans when the prevailing refinancing rate exceeds the contract rate on the loan dunn and mcconnell 1981 in addition some mortgagors do not call their loans when the loan s contract rate exceeds the prevailing refinancing rate the purpose of this paper is to put forward a valuation framework for mortgagebacked securities consistent with these stylized facts associated with mortgage prepayments the mortgagor s prepayment decision is integral to our valuation framework however we do not impose an optimal value minimizing call condition to price these securities rather we assume that at each point in time there exists a probability of prepaying this conditional probability depending upon the prevailing state of the economy by integrating this prepayment function into our valuation framework we provide a complete model to value mortgage backed securities to implement our valuation procedures we estimate a prepayment function given recent gnma prepayment experience we follow green and shoven 1986 by using a proportional hazards model to estimate the influence of various explanatory variables or covariates on the mortgagor s prepayment decision distinct from green and shoven we explicitly model the effects of seasoning as well as investigating the influence of interest cost savings from refinancing in addition we also consider the effects of lagged refinancing rates heterogeneity

pricing credit derivatives with rating transitions we present a model for pricing risky debt and valuing credit derivatives that is easily calibrated to existing variables our approach expands a classical term structure model to allow for multiple rating classes of debt the framework has two salient features 1 it uses a rating transition matrix as the driver for the default process and 2 the entire set of rating categories is calibrated jointly which allows arbitrage free restrictions across rating classes as a bond migrates among them we illustrate the approach by applying it to price credit sensitive notes that have coupon payments linked to the rating of the underlying credit

convertible bond underpricing renegotiable covenants seasoning and convergence we investigate the long standing puzzle on the underpricings of convertible bonds we hypothesize that the observed underpricing is induced by the possibility that a convertible bond might renegotiate on some of its covenants e g an imbedded put option in financial difficulties consistent with our hypothesis we find that the initial underpricing is larger for lower rated bonds the underpricing worsens if the issuer experiences subsequent financial difficulties however conditional on no rating downgrades our main empirical result shows that convertible bond prices do converge to their theoretical prices within two years this seasoning period is shorter for higher rated convertible bonds

a review of angus deaton s the great escape health wealth and the origins of inequality this book explores the relationship between the material standard of living and health both across countries and over time above all deaton is interested in the question of whether income growth contributes significantly to better health his answer is no saving lives in poor countries is not expensive and there are many episodes of massive health improvements in the absence of income growth as an alternative he argues that the cross sectional correlation between health and income is induced by variation in institutional quality while over time parallel improvements in income and health have been a result of advancing knowledge

transportation costs agricultural productivity and cross country income differences i document large difierences in domestic transport costs and transportation infrastructure across nations the richest countries have 5 times lower transport costs and 32 times more infrastructure per capita than the poorest countries of the world are these difierences a source of aggregate labor productivity difierences across nations using a three sector two region general equilibrium model i show that high transport costs can distort the allocation of resources not only across geographically dispersed production units within sectors but also between agriculture and non agriculture taking as given the observed difierences in transportation costs and transportation infrastructure per capita i quantify the role of transportation for cross country income difierences the calibrated model produces an income disparity of 7 5 between the 5 rich and 5 poor countries this corresponds to an improvement of 50 relative to the disparity predicted by a two sector model of agriculture and non agriculture furthermore the efiects of advancements in transportation are non linear the elasticity of aggregate labor productivity with respect to transport labor productivity in the poorest nations is 6 times higher than in the richest ones the efiects of transport frictions are even more pronounced when restrictions to regional migration are introduced

a discrete time approach to arbitrage free pricing of credit derivatives this paper develops a framework for modelling risky debt and valuing credit derivatives that is flexible and simple to implement and that is to the maximum extent possible based on observables our approach is based on expanding the heath jarrow morton term structure model to allow for defaultable debt rather than follow the procedure of implying out the behavior of spreads from assumptions concerning the default process we work directly with the evolution of spreads the risk neutral drifts in the resulting model possess a recursive representation that facilitates implementation and makes it possible to handle path dependence and early exercise features without difficulty the framework permits embedding a variety of specifications for default we present an empirical example of a default structure which provides promising calibration results

the role of trade in structural transformation abstract low agriculture productivity is considered a key obstacle to economic development for many countries international trade in agricultural goods can help overcome this barrier and facilitate structural transformation because it allows countries to import part of their food needs this article quantifies the role of trade in this context through the examples of south korea during the last 50 years and great britain in the 19th century to do the analysis i calibrate and simulate a two sector neoclassical growth model to match the data and perform the policy experiments i find that agricultural imports played a crucial role in the early transformation of great britain while in south korea trade also had a positive impact on its structural transformation but it could have played a much larger role if the country had not introduced agricultural protection policies

inequality in landownership the emergence of human capital promoting institutions and the great divergence this paper suggests that inequality in the distribution of landownership adversely affected the emergence of human capital promoting institutions e g public schooling and thus the pace and the nature of the transition from an agricultural to an industrial economy contributing to the emergence of the great divergence in income per capita across countries the prediction of the theory regarding the adverse effect of the concentration of landownership on education expenditure is established empirically based on evidence from the beginning of the 20th century in the u s

the default risk of swaps we characterize the exchange of financial claims from risky swaps these transfers are among three groups shareholders debtholders and the swap counterparty from this analysis we derive equilibrium swap rates and relate them to debt market spreads we then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders in a simplified case we obtain closed form solutions for the value of the default risk in the swap for interest rate swaps we obtain numerical solutions for the equilibrium swap rate including default risk we compare these with equilibrium debt market default risk spreads swaps have been one of the most explosive and important innovations in international capital markets in the last 10 years in its simplest form a swap consists of an agreement hetween two entities called counterparties to exchange in the future two streams of cash flows in a currency swap these streams of cash flows consist of a stream of interest and principal payments in one cvtrrency exchanged for a stream of interest and principal payments of the same maturity in another currency in an interest rate swap they consist of streams of interest payments of one type fixed or floating exchanged for streams of interest payments of the other type in the same currency the two types of swap are shown in appendix 1 the economic importance of swap transactions is the fact that they can he comhined with deht issues to change the nature of the liahility for the borrower the sum of a hond issue and a currency swap gives a net liability stream which is equivalent to transforming the bond liability into a different currency a floating rate note combined with an interest rate swap results in a liability equivalent to fixed rate debt two issues have dominated the academic literature on swaps the first concerns the reasons for their use arbitrage of imperfections in capital markets was the original cause of their appearance price and henderson 1984 turnbull 1987 shows that lowering borrowing costs by a synthetic transaction involving a swap is not possible in a complete integrated capital market subsequent authors wall and pringle 1988 arak estrella groodman and silver 1988 smith smithson and wakeman 1987 observe

single factor duration models in a discrete general equilibrium framework single factor duration models sfdms for valuing debt securities have gained rapid acceptance by bond practitioners in recent years but slower acceptance by academics in large measure the slower academic acceptance reflects the lack of a rigorously developed underlying economic or financial theoretic base partially as a result some sfdms have undesirable behavioral characteristics foremost among these is that they appear to be inconsistent with accepted general equilibrium conditions this paper has two purposes the first is to construct explicitly the theoretical underpinnings of the model and the second is to develop the conditions under which the model does satisfy general equilibrium conditions this is done in sections i and ii respectively

an economic analysis of interest rate swaps interest rate swaps a financial innovation in recent years are based upon the principle of comparative advantage an interest rate swap is a useful tool for active liability management and for hedging against interest rate risk the purpose of this paper is to provide a simple economic analysis of interest rate swaps alternative uses of and the appropriate valuation procedure for interest rate swaps are described the significant increase in both the levels and the volatilities of market interest rates since the late 70 s has resulted in substantially higher interest rate risks faced by business firms and financial institutions the problem and consequences of interest rate risk exposure are particularly serious for firms in which the duration of assets does not match the duration of the liabilities for instance most financial institutions and many corporations financed long term fixed rate assets with short term floating rate liabilities such firms lose when the shortterm interest rates in the market rise unexpectedly because for given fixed rates of return on their assets the short term interest costs that they have to pay rise with the market interest rates conversely these firms gain from an unexpected decline in short term market interest rates in recent years the introduction and the development of new financial products in the capital markets such as interest rate futures interest rate options and interest rate swaps represent logical responses to the increased need to reduce firms exposure to interest rate risk

gender differences in education in a dynamic household bargaining model in this paper we explore the issue of gender differences in education in the context of a two sex overlapping generations model where men and women of each generation bargain over consumpt ion number of children and investment in education of their children conditional on gender and parents are altruistic toward their children we show that the difference in the education levels of boys and girls implied by our model is smaller than the one that would result from a pure investment model also we show that as long as the time cost associated with bearing children is positive women bear the entire time cost associated with child rearing we use our model to estimate the cost to a woman of having a child the estimate we obtain using cross country data suggests that such cost amounts to about 5 of the working lifetime of a woman

the food problem and the evolution of international income levels in most poor countries large fractions of land labor and other productive resources are devoted to producing food for subsistence needs we show that a model incorporating the food problem can provide new and useful insights into the evolution of international income levels in particular we find that the food problem can explain why some countries started to realize increases in per capita output more than 250 years later in history than others we also show that the food problem has important implications for growth miracles and the speed at which a country converges to its balanced growth path

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

the dynamic capabilities of firms an introduction an expanded paradigm is needed to explain how competitive advantage is gained and held firms resorting to resource bas ed strategy attempt to accumulate valuable technology assets and employ an aggressive intellectual property stance however winners in the global marketplace have been firms demonstrating timely responsiveness and rapid and flexible product innovation along with the management capability to effectively coordinate and redeploy internal and external competences this source of competitive advantage dynamic capabilities emphasizes two aspects first it refers to the shifting character of the environment second it emphasizes the key role of strategic management in appropriately adapting integrating and re configuring internal and external organizational skills resources and functional competences toward changing environment 3 only recently have researchers begun to focus on the specifics of developing firm specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment the dynamic capabilities approach provides a coherent framework to integrate existing conceptual and empirical knowledge and facilitate prescription this paper argues that the competitive advanis tage of firms stems from dynamic capabilities rooted in high performance routines z operating inside the firm embedded in the firm s processes and conditioned by its history it offers dynamic capabilities as an emerging paradigm of the modern business j firm that draws on multiple disciplines and advances with the help of industry studies in the usa and elsewhere

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

das human kapital a theory of the demise of the class structure this paper suggests that the demise of the capitalists workers class structure was a socio economic transformation orchestrated by the capitalists in reaction to the increasing importance of human capital in sustaining their profit rates physical capital accumulation in the process of industrialization enhanced the importance of human capital in production and generated incentives for capitalists to support the provision of public education for the masses triggering the demise of the existing class structure the implications of the theory are consistent with the voting patterns on england s education reform of 1902

empirics of hills plateaus mountains and plains a markov switching approach to growth abstract most economic growth research has been aimed at explaining cross country differences in average growth rates however it is well known that growth experiences differ over time within a country almost as much as they differ among countries this paper builds on pritchett s 2000 pritchett lant understanding patterns of economic growth searching for hills among plateaus mountains and plains world bank economic review may 2000 14 2 221 250 observation that the growth process can be thought of as transitions between different growth regimes and proposes a framework for systematic analysis of such regimes and the dynamics of the transitions i estimate a markov switching regression to characterize four distinct growth regimes and transitions between them the results show that countries switch among regimes of stable growth miracle catch up stagnation and crisis with the transition probabilities determined by the quality of institutions better institutions appear to improve long run growth by making episodes of fast growth more persistent low average growth rates in countries with weak institutions are a result of these countries spending more time in stagnation regimes rather then being incapable of fast growth at all weak institutions do not rule out growth takeoffs but limit their sustainability the approach directs attention to shifts in growth performance and highlights the fact that identical average growth rates can mask very distinct growth paths

the valuation and analysis of adjustable rate mortgages securities whose payoffs depend upon the actual path of the underlying state variables pose problems for standard backward valuation techniques in this paper we show that there is a method of solving such problems that requires the addition of but a single auxiliary state variable the technique is illustrated by examining an adjustable rate mortgage arm with yearly and lifetime caps the arm amortizes and can be prepaid at any time we also handle other prominent features of arms including points and teasers this method of using a single auxiliary state variable to handle path dependencies is a general one applicable to more complex models of the economic environment and to other financial contracts

a contingent claims analysis of the interest rate risk characteristics of corporate liabilities abstract this paper provides a contingent claims analysis of the interest rate risk characteristics of corporate liabilities by identifying merton s 1973 option pricing model with vasicek s 1977 mean reverting term structure model only a non zero positive range of duration values for the firms assets is shown to be consistent with the previous empirical evidence on the interest rate sensitivity of corporate stocks and bonds chance s 1990 duration measure is shown to be biased downward under empirically realistic conditions theoretical conditions are derived under which the duration of a default prone zero coupon bond can be either higher or lower than the duration of the corresponding default free bond the duration of the default prone bond of a firm with high low interest rate sensitive assets is shown to be an increasing decreasing function of the bond s default risk

a simple approach to interest rate option pricing a simple introduction to contingent claim valuation of risky assets in a discrete time stochastic interest rate economy is provided taking the term structure of interest rates as exogenous closed form solutions are derived for european options written on 1 treasury bills 2 interest rate forward contracts 3 interest rate futures contracts 4 treasury bonds 5 interest rate caps 6 stock options 7 equity forward contracts 8 equity futures contracts 9 eurodollar liabilities and 10 foreign exchange contracts article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

the influence of political distortions on economic performance alberto alesina is the nathaniel ropes professor of political economy and chairman of the department of economics at harvard university in this interview he discusses with brian snowdon his views on several important contemporary issues including politics and the business cycle budget deficits currency unions the european union the size of nations economic growth inequality democracy foreign aid ethnic fractionalisation and the welfare state in the us and europe

the role of the structural transformation in aggregate productivity we investigate the role of sectoral differences in labor productivity in explaining the process of structural transformation the secular reallocation of labor across sectors and the time path of aggregate productivity across countries using a simple model of the structural transformation that is calibrated to the growth experience of the united states we measure sectoral labor productivity differences across countries productivity differences between rich and poor countries are large in agriculture and services and smaller in manufacturing moreover over time productivity gaps have been substantially reduced in agriculture and industry but not nearly as much in services in the model these sectoral productivity patterns generate implications that are broadly consistent with the cross country evidence on the structural transformation aggregate productivity paths and relative prices we show that productivity catch up in industry explains about 50 percent of the gains in aggregate productivity across countries while low relative productivity in services and the lack of catch up explains all the experiences of slowdown stagnation and decline observed across countries

economic transformation population growth and the long run world income distribution abstract we present and calibrate a model where trade with advanced economies spurs development and trade opportunities depend on the relative population in advanced and developing countries as developing countries become advanced prospects improve for the remaining developing countries if population growth differentials between developing and advanced economies are small economic development accelerates over time otherwise long run global prosperity requires a sufficiently large initial population in advanced countries more open countries develop faster but more openness by all developing countries may only modestly increase their aggregate growth china s development may hurt developing countries in the short run but improves their long run prospects

barriers and the transition to modern growth abstract this paper argues that barriers affect both the beginning date and the subsequent pace of modern growth and taking into account this fact enriches our knowledge of cross country income differences the model matches the observed inverted u shape of cross country income differences which implies that a substantial fraction of current income differences is transitional hence the model requires smaller barriers to account for current income differences relative to models that focus only on steady states empirically i find that differences in the beginning dates of modern growth explain large differences in incomes

r d implementation and stagnation a schumpeterian theory of convergence clubs we use schumpeterian growth theory to account for the divergence in per capita income that has taken place between countries since the mid 19th century as well as for the convergence that took place amongst the richest countries during the second half of the 20th century the argument is based on the premise that technological change underwent a fundamental transformation in the 19th century associated with new scientific ideas and the increasingly scientific content of new technologies countries then sorted themselves into three convergence groups r d implementation and stagnation a country s group membership depends on initial conditions as well as on fundamentals

floating rate notes and immunization as shown in several of those papers the appropriate immunizing duration is a function of the assumption regarding the stochastic process describing the man ner in which the term structure of interest rates changes the theory has been well developed for ordinary bonds this paper extends the existing literature on duration and immunization to a different type of security the floating rate note the floating rate note frn is a debt security in which coupon payments adjust according to changes in interest rates the coupons are closely tied to cur rent short term spot rates with the result that prices of frns are always at or near par value they became popular in this country in 1974 with a citieorp issue

introduction to a general equilibrium approach to economic growth abstract endogenous growth theory has had some success in explaining the observed data related to the process of economic growth however the results of the models in this literature are typically very sensitive to their micro economic structure it is therefore important to understand how the growth process behaves under more general specifications of such features as the number of commodities the number and preferences of consumers the factors of production and the financial and information structures in other words valuable insights can be gained by integrating growth theory into the framework of general equilibrium theory the summary of the papers in this volume focuses on seven issues that are crucial to this integration and highlights the contributions of the papers to the resolution of these issues journal of economic literature classification numbers c61 d50 d90 f43 o30 o41

climate and the emergence of global income differences the latitude gradient in comparative development is a striking fact as one moves away from the equator economic activity rises while this regularity is well known it is not well understood in the present paper we take a step towards unpacking this gradient perhaps the strongest correlate with absolute latitude is the intensity of ultraviolet radiation uv r which epidemiological research has shown to be a cause of a wide range of diseases we establish that uv r is strongly and negatively correlated with economic activity both across and within countries we propose and test a mechanism that links uv r to current income differences via the impact of disease ecology on the timing of the take off to sustained growth

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

human capital and economic development abstract this paper develops a general equilibrium model of fertility and human capital investment with young adult mortality because young adult mortality is negatively related to average young adult human capital human capital accumulation lowers mortality inducing demographic transition and industrial revolution data confirm that young adult mortality is related negatively to schooling and the rate of return to schooling and positively to fertility the data indicate a negative relationship between tfp growth and schooling accumulation the model fits the data on country populations per capita incomes human capital total fertility rates infant mortality life expectancy and conditional life expectancy

the determinants of expatriate staffing by japanese multinationals in asia control learning and vertical business groups we empirically examine the determinants of the decision whether or not to appoint an expatriate as the managing director of overseas affiliates for a sample of 844 japanese manufacturing affiliates operating in asia in 1995 confirmation is found for hypotheses derived both from a control and coordination perspective on expatriation and from a knowledge creation and learning perspective strategic dependence of the parent on the affiliate increases the propensity to appoint expatriates whereas localisation of the affiliate reduces it organisational experience in the country both by the affiliate and by the firm increases the probability that host country nationals will be appointed inter firm relationships within vertical keiretsu groups impact on expatriation policies through inter organisational knowledge exchange in host countries and the mitigation of localisation requirements owing to intra group transactions

democracy development and the international system as noted by seymour m lipset over 50 years ago development and democracy have been strongly correlated in the contemporary world today even after the prolonged democratization wave that started in the 1970s and accelerated in the 1990s the distribution of democracies remains highly skewed by level of per capita income whereas 94 of the countries with a per capita income above 10 000 in constant of 1996 held free and competitive elections in 1999 only 18 with a per capita income below 2 000 did so this empirical relationship between income and democracy was even tighter earlier in history just looking at per capita income we can successfully predict 76 of the annual observations of political regimes in sovereign countries after world war two the proportion of cases that are predicted correctly is 85 for the interwar period and 91 before world war one 1

the impact of credit risk on the pricing and duration of floating rate notes abstract this paper describes the pricing and duration of floating rate instruments when the borrower s credit risk has changed since the note was issued in these cases the value of the note on repricing dates equals par plus the present value of the basis point change in credit risk as a result the duration of a floater for which credit risk has increased fallen is less than greater than the time to reset and may even be negative positive correlation between credit risk and interest rates will ceteris paribus increase the duration of the floater

a path dependent approach to security valuation with application to interest rate contingent claims abstract the last two decades have witnessed a tremendous growth in the volume of assets and liabilities whose cash flows depend in a variety of ways on the path of interest rates some of these including floating rate notes and swap agreements contractually base cash flows on current and past interest rates and contain caps floors and other more complex features others including mortgages many corporate bonds and time deposits are fixed rate instruments that contain embedded options such as those to prepay call or withdrawal the irregular exercise of these options causes cash flows to vary as time proceeds and interest rates rise or fall this paper develops a state contingent claims technique for valuing such securities it is derived from the option based model of breeden and litzenberger 1978 using the transition matrix approach of banz and miller 1978 particular attention is paid to valuing so called path dependent securities whose contemporaneous cash flows depend on the historical path of interest rates as well as their current level a detailed example is provided in which an adjustable rate mortgage is valued under a variety of economic and security specific assumptions

spatial inequality and development is there an inverted u relationship abstract this paper studies the hypothesis of an inverted u shaped relationship between spatial inequality and economic development the theory of kuznets 1955 and williamson 1965 suggests that spatial inequality first increases in the process of development and then decreases to test this hypothesis i have used a unique panel data set of spatial inequalities in 56 countries at different stages of economic development covering the period 1980 2009 parametric and semiparametric regressions are carried out using cross section and unbalanced panel data the results provide strong support for the existence of an inverted u i also find some evidence that spatial inequalities increase again at very high levels of economic development

the pricing of default free interest rate cap floor and collar agreements the paper focuses on the valuation of caps floors and collars in a contingent claim framework under continuous time these instruments are interpreted as options on traded zero coupon bonds the bond prices themselves are used as the underlying stochastic variables this has the advantage that we end up with closed form solutions which are easy to compute special attention is devoted to the choice of the stochastic process appropriate for the price dynamics of the underlying zero coupon bonds the increased volatility of interest rates and the introduction of numerous variable rate instruments have led to a more intensive use of highly sophisticated risk hedging tools among them interest rate caps floors and collars have recently gained a growing popularity an interest rate cap is an agreement between the provider of the cap and a borrower to limit the borrower s floating interest rate to a specific level for a given period of time to be more precise the borrower selects a reference rate to hedge e g libor a period of time to hedge e g 5 years and the level of protection desired e g a ceiling of 200 basis points above the current level of the libor if the market rate exceeds the ceiling rate the cap provider will make payments to the buyer sufficient to bring his rate back to the ceiling when the market rate is below the ceiling no payment is made

redefining the role of the state an interview with introduction by brian snowdon professor joseph stiglitz is without question one of the world s leading economists in his extensive research he has made seminal contributions to the analysis of the economic consequences of incomplete information and uncertainty this work has greatly enhanced economists understanding of the welfare properties of markets and the sources of market failure his research has also contributed to the development of better microeconomic foundations for keynesian macroeconomic models most recently professor stiglitz has been heavily involved in controversial public policy debates relating to the east asian crisis problems of transition from communism to capitalism the limitations of the washington consensus and globalisation and development a common theme in all of these debates relates to the role of government and legitimate borders of the state in both developed and developing economies in this article interview professor stiglitz gives his views on these and several other important global issues

from malthus to modern growth can epidemics explain the three regimes we model demographic and economic long run development in a setting where mortality is endogenous and subject to epidemic shocks the model replicates the full transition from malthusian stagnation to modern growth consistent with the historical facts the economy also passes an intermediate post malthusian phase where growth rates of both population and per capita income increase simultaneously as mortality rates fall and become less volatile the escape from the malthusian trap is the result of a series of mild epidemic shocks making it inevitable at some stage but its timing random calibrations show that it can differ by thousands of generations absent differences in exogenous parameters

asian growth and african development since world war ii integration with the world economy has arguably been the chief route from poverty to wealth japan initially exported cheap goods and later moved on to more technologically sophisticated products when japan became rich korea taiwan province of china hong kong sar and singapore replaced japan as low wage exporters and when these countries moved on to more sophisticated products thailand and malaysia filled their niche more recently china has become an important exporter of manufactured goods and india is increasingly moving into services exports no mainland sub saharan african country has experienced this type of transformation even countries that have undergone major economic reforms seem far from takeoff forecasts for africa based on extrapolation of its historical experience tend to be bleak we consider whether it is possible to construct a model consistent with the data which supports a more optimistic view motivated by the asian experience the model assumes countries can potentially undergo rapid economic transformation only if they integrate into the world economy by producing nontraditional exports for the purposes of constructing a long run model of the world economy we are agnostic on whether exports matter due to technological learning by doing spillovers political economy considerations or other factors as each developing country transforms and becomes advanced it further improves trade opportunities for the remaining developing countries for example if china becomes rich a billion more people will live in countries that import toys and a billion fewer will live in countries that export them our approach is similar to that of robert e lucas 2000 in that we assume growth prospects improve with the state of the world economy potentially generating accelerating world growth unlike lucas 2000 however we allow for differential population growth between rich and poor countries the steady state proportion of the world population living in advanced countries depends on the rate at which developing countries transform into advanced ones and on the magnitude of population growth differentials between these two groups of countries the economic transformation process will overcome the demographic trend leading to a prosperous steady state only if the initial share of world population in advanced countries is above a threshold a simple calibration using historical data suggests that the longrun prospects for lagging developing regions may hinge on a race between economic growth in china and india and population growth in the lagging regions particularly africa if the former wins we may eventually observe accelerating global growth this suggests some caution should be used when interpreting empirical studies on growth determinants as these results may not be stable over time country characteristics that lead to poor performances today may well allow for rapid growth in the future if and when the world economy reaches a sufficiently advanced stage our model also suggests a queuing effect where the order in which countries are absorbed into the world economy is determined by the quality of their policies economic reforms in one country may potentially have a large impact on growth if they move the country to the front of the queue but similar reforms in all countries may have a much smaller impact on world growth

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

floating rate securities and immunization some further results this article examines the interest rate risk characteristics of a general class of floating rate securities which includes chance s securities as a special case the calculation of duration for chance s securities is zero as it should be securities in the broader class can have durations that are negative or longer than the period of time that must elapse before the payments can reflect changes in market interest rates the effect on duration of changes in the parameters of the function relating interest rate shocks to the payments and changes in the slope of the term structure are examined

on the evolution of the world income distribution the post world war ii period has seen substantial changes in the distribution of gdp per worker around the world in the upper half of the distribution a number of countries have exhibited large increases in income relative to the richest countries in the bottom half several countries have seen incomes fall relative to the richest countries the net result of these changes is a movement in the shape of the world income distribution from something that looks like a normal distribution in 1960 to a bi modal twin peaks distribution in 1988 projecting these changes into the future suggests a number of interesting ndings first it seems likely that the united states will lose its position as the country with the highest level of gdp per worker second growth miracles have been more common in recent decades than growth disasters if these dynamics continue the future income distribution will involve far more rich countries and far fewer poor countries than currently observed

option theory and floating rate securities with a comparison of adjustable and fixed rate mortgages this article demonstrates how to value floating rate securities in particular adjustable rate mortgages in the presence of default the problem is not a straightforward one since endogenous termination default and prepayment necessitates solution by backward procedures but caps on the floating rate then create path dependencies the solution is to introduce an artificial state variable the past contract rate in addition to the natural stochastic variables the interest and the house price process with this technique a numerical investigation of the properties of defaultable adjustable rate mortgages is provided in all cases a comparison is made with standard fixed rate mortgages coauthors are donald c keenan walter j muller iii and james f epperson copyright 1993 by university of chicago press

from individual skills to organizational capability in japan two contrasting conceptualizations of skills lead one to attribute different roles to inter firm networks if skills are regarded as a public good then inter firm networks are like clubs that police the scope for firms to benefit from skills without paying for their acquisition by contrast if skills are regarded as a distinct and hard to imitate asset then inter firm networks provide an essential non market mechanism for spreading it the problem in the former conceptualization is market failure due to the ease of spill over of knowledge while the counterpart problem in the latter conceptualization is the difficulty of diffusing tacit knowledge by market mechanisms this paper describes toyota motor corporation s supplier development programmes in the wider industrial context of japan it concludes that of the two perspectives the knowledge as a distinctive asset perspective is more appropriate in understanding the rationale behind the elaborate mechanisms for developing suppliers in the long term

the volatility of short term interest rates an empirical comparison of alternative models of the term structure of interest rates we estimate and compare a variety of continuous time models of the short term riskless rate using the generalised method of moments we find that the most successful models in capturing the dynamics of the short term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate a number of well known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility we show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk

barriers to capital accumulation and aggregate total factor productivity i develop a growth model where a single good can be produced with a traditional and a modern technology the traditional technology features low total factor productivity tfp and a low share of reproducible capital in this framework barriers to capital accumulation affect technology use and therefore aggregate tfp the theory thus connects recent models of factor accumulation and of tfp the model is calibrated by interpreting traditional production as agriculture and nonreproducible capital as land the theory implies that barriers are associated with large agricultural shares as supported by cross country and time series evidence the required tfp differences needed in the model to account for a given income disparity are reduced by 1 2 relative to the standard model that abstracts from technology choice

nonlinear economic growth some theory and cross country evidence abstract this paper aims to test the existence of different growth regimes that is of different relationships between growth rate and income level we propose a simple nonlinear growth model and test its empirical implications by estimating markov transition matrices and stochastic kernels we show that growth is indeed nonlinear a first phase of slow or zero growth is followed by a take off and finally by a phase of deceleration we discuss the relevance of these results with respect to the issue of convergence and reversibility of development in the light of models of structural change and technological diffusion

globalisation and economic growth a historical perspective this paper reviews the historical evidence on the relationship between globalisation and economic growth divergence in the growth of income and industrialisation in the twentieth century is documented but it is also noted that international income inequality appears to have decreased since about 1870 and that long run trends in the human development index are much less pessimistic about the experience of developing countries it is argued that trade liberalisation has been good for growth on average but that successful capital liberalisation requires high institutional quality and that the developmental state may have an important role to play in the early stages of development the recent claim by robert lucas that the 21st century will see a massive reduction in income inequality across countries in a globalised world economy is sceptically discussed in the context of empirical evidence that bad institutions are often persistent and that geography is still a major factor in explaining international income differences