bluuebunny/crossref_metadata_2025 huggingface dataset:
Matching Up the Data on Education with Economic Growth Models
Authors: Papageorgiou Chris , Pérez-Sebastián Fidel
Published: December 2005

The growth literature has not yet fully established how data on educational attainment should be introduced in theories involving human capital. This paper examines alternative specifications of human capital within the Mincerian class that once incorporated in standard growth models may generate predictions that match up with the existing data on education. First, we analyze predictions in the Bils and Klenow (2000) model and show that although they behave correctly under some parameterizations, they are also subject to some shortcomings. Next, we present a standard neoclassical two-sector growth model that adopts a human capital specification in which the fraction of individual's time endowment in school is viewed as an investment rate. We show that the optimally chosen educational attainment predicted by the calibrated model does not correspond to the data as it is unrealistically high. Finally, we propose an alternative specification of human capital based on a law of motion of educational attainment that successfully matches up with the data.
Income and Wealth Distributions Along the Business Cycle: Implications from the Neoclassical Growth Model
Authors: Maliar Lilia , Maliar Serguei , Mora Juan
Published: December 2005

This paper studies the business cycle dynamics of income and wealth distributions in the context of the neoclassical growth model where agents are heterogeneous in initial wealth and non-acquired skills. Our economy admits a representative consumer which enables us to characterize distributive dynamics by the evolution of aggregate quantities. We show that inequality in both wealth and income follow a countercyclical pattern: the former is countercyclical because labor income is more sensitive to the business cycle than capital income, while the latter is countercyclical due to the wealth-distribution effect. We find that the predictions of the model about the income distribution dynamics accord well with the U.S. data.
The Monetary Policy Committee's Reaction Function: An Exercise in Estimation
Authors: Goodhart Charles A.E.
Published: December 2005

Owing to lags in the transmission mechanism of monetary policy, central banks put much weight on forecasts of the future paths of output and inflation. So there has been considerable recent interest in forward-looking Taylor-type reaction functions. Using publicly available data on the Monetary Policy Committee’s forecasts for UK inflation and output growth, 1997-2003, we examine how the coefficients in such reaction functions changed as we switched between ex post forecasts – those published after, and incorporating, the preceding interest rate decision – and ex ante forecasts – those presented to the MPC before that decision – and also as we vary the (forecast) horizon, out to eight quarters ahead. In our data set, the coefficients vary sensitively as the horizon/forecast basis changes. Our results are consistent with the hypothesis that the MPC tried aggressively to eliminate any predicted, ex ante, deviation of inflation from target immediately it emerged, with no apparent indication of intended inertia, or gradualism, in response. Nevertheless the time path of official short term interest rates during these years shows the usual record of consecutive similarly-signed small steps.
Technology Adoption in Follower Countries: With or Without Local R&D Activities?
Authors: Todo Yasuyuki
Published: December 2005

Technology adoption in follower countries can be accomplished by local R&D activities, but it can also be achieved without formal R&D, for example, by foreign direct investment. Empirical evidence suggests that current R&D activities often expand local knowledge for future R&D, while adoption without R&D does not seem to have this effect. We formalize this idea in a quality-ladder growth model and find that this biased externality results in multiple steady states: In the long run, countries with sufficient initial knowledge and human capital converge to a state in which R&D is locally undertaken and thus become relatively rich, while other countries fully rely on technology adoption without R&D and stay poor. Switching regression using cross-country data supports the presence of multiple steady states in R&D expenditures.
Should Developing Countries Strengthen their Intellectual Property Rights?
Authors: Angeles Luis
Published: December 2005

This paper evaluates the welfare consequences of implementing intellectual property rights in developing countries. The protection of intellectual property in poor countries promises to increase world innovation, but this would not come without costs. Higher prices for consumers in that part of the world are the negative side of this policy.We present a general equilibrium model with two regions (the North and the South) to compare these two effects. Our main contribution is to show that the results will depend on the difference in economic development (represented by labor productivity) between the two regions. The South might suffer a net welfare loss if its productivity level is very low with respect to the North.
Vertical Diversity, Communication Gap and Equilibrium Growth
Authors: Das Satya P
Published: December 2005

This paper examines the effect of vertical diversity in workers' skill on the long-run growth rate of an economy. It uses a two-sector model where the technology of the consumption-good sector is supermodular and that of the R&D sector is submodular. By adopting Grossman and Maggi's (2000) model to a framework of growth, it shows first that diversity is conducive to growth. As the main innovation, a notion of communication gap is introduced among workers. It is shown that if vertical diversity is sufficiently high relative to the communication gap, the growth rate may not increase with diversity; there may be an inverse-U shaped relationship.
Aggregate Price Changes and Dispersion: A Comparison of the Equity and Goods and Services Markets
Authors: Parsley David C. , Popper Helen A.
Published: December 2005

Many existing studies have found a correlation between inflation and price dispersion in goods markets. In this paper, we document that a similar correlation can be found in equity markets. We estimate the correlation between overall price changes and dispersion in the NYSE and in the NASDAQ. Using quarterly data from 1975 to 1999, we compare the stock market correlations with those of goods markets. We find striking correlations in both sets of markets. The most prominent explanations of the goods market correlation (such as menu costs) cannot plausibly apply to equity markets. Thus, our findings indicate that the correlation appears to be more widespread than can be accounted for by the usual explanations.
The Buffer-Stock Consumption Model with Endogenous Income Shifts
Authors: Malchow-Møller Nikolaj , Thorsen Bo Jellesmark
Published: December 2005

Credit-constrained households must use savings both to smooth consumption and to finance productive investments. This non-separability between consumption and production decisions is ignored in the standard intertemporal buffer-stock consumption model where income growth is exogenous. This paper develops an intertemporal model of household consumption and investment in the presence of credit constraints and income uncertainty. Investment options are modelled as irreversible, indivisible, and non-stationary, allowing for endogenous income growth. The resulting behaviour is markedly different from that of the standard buffer-stock model.
Dissemination of Technology in Market and Planned Economies
Authors: Iacopetta Maurizio
Published: December 2005

The Soviet Union was competing head to head with market economies in the generation of new technologies, not only in traditional industries such as steelmaking, electricity, and machineries, but also in high tech-areas such as synthetic materials and microelectronics. Yet its productivity performance was significantly worse than that of both developing and industrial countries. R&D-based growth models cannot explain this fact, as the Soviet effort in research and education was comparable to that of most advanced countries. I claim that a technology adoption model helps us understand better the Soviet experience. I hypothesize that the Soviet managerial compensation system generated an incentive for the manager to perform only a modest retooling activity out of fear of breaking the production norm that the planner imposed upon the firm.
Interest-Rate Smoothing: Monetary Policy Inertia or Unobserved Variables?
Authors: Gerlach-Kristen Petra
Published: December 2005

Interest-rate smoothing is traditionally attributed to the gradual adjustment of monetary policy to shocks. Rudebusch (2002) argues that smoothing can also arise spuriously if an autocorrelated variable is incorrectly excluded from the estimated reaction function. This paper presents a model which discriminates between these two explanations using U.S. data. We find that both seem to matter, but that policy inertia appears to be less important than suggested by the existing literature. Further, the excluded variable is likely to reflect financial market conditions.
What Does It Take to Explain Procyclical Productivity?
Authors: Wen Yi
Published: December 2005

Labor productivity comoves strongly with output, leads output and employment, and is only weakly correlated with employment. Procyclical productivity is observed in virtually all countries and industries, and it is observed even in periods of fluctuations due to pure demand shocks, such as during the Great Depression and the second World War. This paper shows that a standard RBC model driven by demand shocks alone is able to explain procyclical productivity without the need to resort to technology shocks or increasing returns to scale. The key element is labor hoarding due to adjustment cost of labor. It is also shown that the observed cross-country differences in productivity cycles can be rationalized by a single parameter alone - the size of the adjustment cost of labor.
Endogenous Distribution, Politics, and the Growth-Equity Tradeoff
Authors: Das Satya P , Ghate Chetan
Published: December 2005

In comparison to the standard literature on inequality and growth which assumes the former to be exogenous, we formulate a model in which inequality and growth are both endogenous. Long-run distribution, at least locally, is shown to be independent of the initial distribution of factor ownership. It is shown that exogenous policy changes that are primarily targeted towards growth and foster less inequality do enhance growth. But policies that are primarily redistributive and imply a more equal distribution reduce growth. This is consistent with recent empirical work which shows that inequality and growth may be positively related.
Tariffs, Entry Regulation and Markups: Country Size Matters
Authors: Hoekman Bernard , Kee Hiau Looi , Olarreaga Marcelo
Published: December 2005

Actual and potential competition is a powerful source of discipline on the pricing behavior of firms. This paper extends the empirical literature on the pro-competitive impact of policy reforms by investigating the effects on price markups of barriers to both domestic and foreign entry in a sample of developed and developing countries. While both are found to be important determinants of industry markups, we find that country size affects the impact of tariffs and domestic entry regulation. Country size dampens the impact of the former and strengthens the effect of the latter.
Risky Collateral and Deposit Insurance
Authors: Kocherlakota Narayana R
Published: December 2005

This paper provides a new rationalization for deposit insurance and systemic disintermediations. I consider an environment in which borrowers face no penalty for failing to repay obligations except the loss of their collateral. I assume that this collateral has aggregate risk. For a subset of the exogenous parameters, I demonstrate that an optimal arrangement features deposit insurance. For a strictly smaller set of parameters, it is optimal in some states of the world to have systemic distintermediations and concomitant falls in real output.
Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)
Authors: Carroll Christopher Dixon
Published: December 2005

This paper shows that standard methods for estimating log-linearized consumption Euler equations using micro data cannot successfully uncover structural parameters like the coefficient of relative risk aversion from a dataset of simulated consumers behaving exactly according to the standard model. Furthermore, consumption growth for the simulated consumers is very highly statistically related to predictable income growth -- and thus standard `excess sensitivity' tests would reject the hypothesis that consumers are behaving according to the model. Results are not much better for the second-order approximation to the Euler equation. The paper concludes that empirical estimation of consumption Euler equations should be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation.
Population Changes and Capital Accumulation: The Aging of the Baby Boom
Authors: Ríos-Rull José-Víctor
Published: December 2005

In this paper I explore the quantitative implications for savings of population aging. In doing so, I pay particular attention to some features that have been partially over-looked in the literature. These features include the details of the population aging process, the initial conditions with respect to assets holdings, and the relation between age and household size. In order to do so, I develop recursive methods capable of dealing with overlapping generations environments where the population is stochastic.

The main findings are: i) If population patterns revert to the averages of the last 50 years, the reduction in aggregate savings due to changes in the age structure of the population is small. ii) If, however, the demographic process is such that fertility patterns remain at their current low levels, then the effects of the aging of the baby boom are very large. iii) Initial conditions matter: both the choice for initial assets and the choice for the mechanism through which current fertility reverts to its long run average have implications for the economic allocations. And iv) The contribution of general equilibrium effects is to exacerbate the reduction of savings since population aging tends to make labor relatively scarce, and, therefore, to reduce rates of return of capital, which in turn reduces savings even further.
Was an Industrial Revolution Inevitable? Economic Growth Over the Very Long Run
Authors: Jones Charles I.
Published: December 2005

This paper studies a growth model that is able to match several key facts of economic history. For thousands of years, the average standard of living seems to have risen very little, despite increases in the level of technology and large increases in the level of the population. Then, after thousands of years of little change, the level of per capita consumption increased dramatically in less than two centuries. Quantitative analysis of the model highlights two factors central to understanding this history. The first is a virtuous circle: more people produce more ideas, which in turn makes additional population growth possible. The second is an improvement in institutions that promote innovation, such as property rights: the simulated economy indicates that arguably the single most important factor in the transition to modern growth has been the increase in the fraction of output paid to compensate inventors for the fruits of their labor.
The Great Inflation of the Seventies: What Really Happened?
Authors: Nelson Edward
Published: December 2005

This paper revisits the issue of what factors produced the macroeconomic policies that led to the Great Inflation of the 1970s. I emphasize that a satisfactory explanation should satisfy two important criteria. First, it must be consistent with the record of views on the economy, manifested in statements by policymakers and prominent financial commentators. Second, it should work for countries beside the United States. I show that the monetary policy neglect hypothesis–which claims that policymakers took a nonmonetary view of the inflation process–meets these criteria. Other explanations of the Great Inflation are ruled out, with one exception (the output gap mismeasurement hypothesis), which supplements the monetary policy neglect hypothesis. The study covers the Great Inflation in both the United Kingdom and the United States, with policymakers’ views on the economy documented using 1970s news reports.
Unstable Relationships
Authors: Burdett Kenneth , Imai Ryoichi , Wright Randall
Published: December 2005

We analyze models where agents search for partners to form relationships (employment, marriage, etc.), and may or may not continue searching for different partners while matched. Matched agents are less inclined to search if their match yields more utility, and also if it is more stable. If one partner searches the relationship is less stable, so the other is more inclined to search, potentially making instability a self-fulfilling prophecy. We show this can generate multiple -- indeed, a continuum of -- equilibria. We investigate efficiency and show that in any equilibrium there tends to be too much turnover, unemployment, and inequality. We calibrate an example to see how well the model can account for job-to-job transitions, and to see how much endogenous instability matters.
The Judicialisation of Politics and the Politicisation of the Judiciary in China (1978-2005)
Authors: Balme Stephanie
Published: December 2005

This paper deals with the interactions between law and politics in the particular context of a post-revolutionary socialist regime embarked on a wide-ranging process of reforms  China since the end of Mao era. This theme intersects with a number of others which are essential to an understanding of Chinese society today : socio-economic changes and their relation to legality, the interactions between judicial transition and political changes, and, more systematically, the prospects for democracy. The time-frame of this paper includes a long period, which, for reasons of clarity, we will take as being from 1978 (at the time of the adoption of the policy of "reform and opening up", gaige kaifang) to the present day, which is to say more than twenty-five of the fifty-four years of the existence of the Peoples Republic of China (PRC), which was founded in 1949. One will argue that judicial reform in China has in fact constituted as much a technical response as a political response, unexpected after the violent events of Maoism, to the fragmentation of the Party State. Secondly, the contemporary forms of judicialisation of politics have been mostly institutionalised a posteriori in relation to social and judicial practice. Thirdly, since the mid-1990s both the growing differentiation between institutions and the professionalisation and networking (both national and international) of legal practitioners have made possible better anticipation of the stages of the modernisation of the legal system, and above all the preservation of its autonomy in relation to other reform programmes embarked on by Beijing. Lastly, we will see that the foundations of the legal-rational State in China are undergoing rapid change, and that a continuously increasing number of individuals are contributing to their definition. All this is evidence, in our eyes, of a historical process of construction of a legal State, but without any historical determinism as to the future form of a Rule of Law which conforms to the canons of the historical scheme. Indeed, some Chinese school of historians of the law suggest an inversion of the way in which the institutional modernisation of China has been conceived since the end of the 19th century. The classical adage to serve as the basis for reform should become: "Western knowledge as essence, Chinese knowledge as use", not the opposite.
Cultural Relativism the American Way: The Nationalist School of International Law in the United States
Authors: Lorite Escorihuela Alejandro
Published: December 2005

This article examines a fairly recent, exponentially growing, and increasingly unavoidable body of international legal scholarship in the United States of America. This scholarly movement is here labeled "Nationalist International Law" (NIL). Considerable debate in American international law circles surrounds at present two lines of questions raised in the writing of individuals that are here associated with NIL. The first line deals with the status of international law in the United States' constitutional order and in particular the role of federal judges in enforcing international legal norms. The second broad area of debate concerns the nature of international law independently of domestic legal orders, and especially whether it should be considered law at all, as well as the proper method to be applied to its study. The type of writing, of arguments, and of methodology differ depending on the type of debate: in the first one the problems are framed as (mainly) ones of constitutional law, whereas in the second the problems are presented as mainly ones for political science to solve. The main argument of the article is that beyond this disciplinary divide, and beside the mere fact that the same people sometimes participate in both debates, the two broad types of interventions made by people associated here with NIL are united by a common methodological basis and project. In the combination of the two we can truly witness the contours of a scholarly movement of "Nationalist International Law" and explore the more important consequences of its enterprise for the discipline and the life of international law. The first part of the article presents a background image of academic activity as a form of politics, in order to underscore that what matters here is not the obvious political alignment of individual academics, but the dynamics of a scholarly dialogue that both highlights and obscures the politics of international law. The second part reconstructs NIL's scholarship as a collage of three domains of intervention, the "outer realm", the "inner realm", and the "sovereign border", corresponding to different modes of writing and intervention on the part of NIL. The third part presents the figure of "imperial sovereignty" as the intellectual and political outcome of NIL's unifying methodological nationalism, particularly as it results from NIL's debate with the liberal internationalists' self-positioned alternative. Finally, concluding thoughts are proposed on international legal nationalism, NIL's reactionary rhetoric and xenophobic epistemology, and the space left for a so-called European contribution to international legal dialogue.
The Efficient Capital Market Hypothesis Revisited: Implications of the Economic Model for the United States Regulator
Authors: Cioppa Paolo
Published: December 2005

Most capital market regulation is expressly or implicitly based on a theory of how the regulated market works. That is, the regulation requires actor A to take action X or prohibits A from taking action Yall with the purpose of getting the market to do M or preventing the market from doing N. Such regulation rests, explicitly or by implication, on some theory that connects the actions X or Yby actor Awith market reactions M and N. In the United States, the Efficient Capital Market Hypothesis is the basis for most regulation. The behavioral finances approach can be integrated into the same framework of law and economics, of which it constitutes an improvement capable of explaining the failure of the EMCH in some marginal cases. Except in short periods like the high-tech bubble, however, behavioral finance may only explain the actions of certain investors, such as individuals, and not the actions of the market as a whole. In the United States, arbitrageurs will overcome psychologically based trading in most cases. The Efficient Capital Market Hypothesis is an economic model, which assumes that the market is comprised of a large number of rational participants and that information is fully and quickly available to them. In the U.S. and the U.K., the elements of an efficient market can generally be traced. In turn, information is provided to the market by corporate insiders. Thus, a risk exists that it be limited, inaccurate, or fraudulent. As a general matter, corporate governance refers to an important legal relationship that exists between managers, auditors and the board of directors. In the United States, the companys management governs the company under the supervision of the board of directors and for the benefit of its shareholders. Auditors ensure that the management complies with accounting standards, thereby providing shareholders and prospective investors with an accurate understanding of the companys financial health. Two factors played an important role in leading to the corporate scandals of the early 2000s: a) auditors misperception that their responsibilities was to serve the management, and b) the need for CEOs and CFOs to ensure that financial information (particularly referred to quarterly and annually financial disclosures) be accurate. This paper argues that the ECMH still provides (some 40 years after its widespread dissemination) the theory of how markets work, which is the most useful theory for regulators in the United States.
Second-Best Pollution Taxation and Environmental Quality
Authors: Gaube Thomas
Published: December 2005

This paper deals with second-best pollution taxation by investigating allocations instead of the corresponding tax rates. Assuming certain restrictions on utility and that the marginal revenue from environmental taxation is positive, it is shown that environmental quality is higher in second best where only distortionary taxes are used to finance public expenditures than in the first-best optimum where lump-sum taxes are available.
Home Bias in Portfolios and Taxation of Asset Income
Authors: Gordon Roger Hall , Gaspar Vitor
Published: December 2005

Intuitively, the observed "home bias" in individual portfolios plausibly explains the international capital immobility reported by Feldstein and Horioka (1980) as well as the survival of taxes on capital income. These intuitions are examined in a model where consumers prefer to consume domestically produced goods. The results show that international capital immobility is indeed present in the model: extra domestic savings generate extra investment primarily in the home country. When monetary policy focuses on exchange rate stabilization random domestic prices cause individuals to heavily invest in domestic equity as a hedge against price fluctuations. However our findings show that the specialization of equity portfolios does not necessarily facilitate the taxation of capital income. While random equity returns do facilitate taxes on equity income, as shown in Gordon and Varian (1989) and Huizinga and Nielsen (1997), random consumer prices appear to undermine taxes on capital income.
Do Publicly Traded Corporations Act in the Public Interest?
Authors: Gordon Roger H.
Published: December 2005

Models of corporate behavior normally assume that a firm acts in the interest of shareholders, and that shareholders care only about the returns they receive on the shares they own in that firm. But shareholders should also care about the effects of a manager's decisions on the value of shares they own in other firms, on the price they pay as consumers for the firm's output, on the costs they bear from pollutants emitted by the firm, on the value of the firm's bonds they own, on government tax revenue that finances public expenditures benefiting shareholders, etc. These effects are normally presumed to be of second order. This paper reexamines this presumption, argues that many of these effects are likely to be important, and explores the resulting implications for forecasted corporate behavior.
Tax Reform and Human Capital Accumulation: Evidence from an Empirical General Equilibrium Model of Skill Formation
Authors: Taber Christopher
Published: December 2005

The progressivity of the tax system has a potentially large disincentive effect on human capital accumulation. It is thus surprising that Heckman, Lochner, and Taber (1998b, 1999a,b) represent the only previous empirical work on this important topic. I build on their work a) by accounting for the tax system when estimating the model, b) by performing welfare analysis, c) by examining the transition from one steady state to another, and d) by adding a number of robustness checks. I first estimate a dynamic general equilibrium model of schooling and on-the-job training on micro data. The estimates are then used to measure the extent to which the progressivity of the tax system distorts human capital. I find a small long run effect of progressivity on schooling. I find larger short run effects, but that they are short lived. The impact of the reform on human capital acquired on the job depends on how it is measured. Under one measure the effect is large, but the consequence of this on earnings seems to be small. Perhaps surprisingly, the welfare effects are typically favorable for progressive wage taxes (with flat capital taxation) versus a flat income tax in the long run. The welfare effects are different when I examine a progressive income tax as virtually all workers prefer the flat income tax to it. I also build on Heckman, Lochner, and Taber's (1998b,1999a,b) evidence on the extent to which taxation of physical capital favors human capital investment. These simulations also yield small long run effects on schooling and on human capital stocks.
Internationally Common Features of Public Old-Age Pensions, and Their Implications for Models of the Public Sector
Authors: Mulligan Casey B , Sala-i-Martin Xavier
Published: December 2005

What does the international history of old-age Social Security program design say about the forces creating and sustaining it as a public program? First, because many program features are internationally common, and/or explained by country characteristics, SS may emerge and grow due to systematic political and economic forces. Second, some observations suggest that political forces are important: (a) SS redistributes from young to old, even when the elderly consume as much or more than do the young, and (b) benefits increase with lifetime earnings and are hardly means-tested. On the other hand, it is not simply a matter of the elderly out-voting the young, because: (c) benefit formulas induce retirement, especially in the countries with the largest SS budgets, and (d) similar public pension programs emerge and grow under very different political regimes. We explain how empirical observations, and some currently unanswered empirical questions, relate to various public pension theories.
Ethnic Ties and the Provision of Credit: Relationship-Level Evidence from African Firms
Authors: Fisman Raymond J
Published: December 2005

This paper studies the effect of ethnic ties on trade credit provision. Previous work in Africa has found that entrepreneurs of Asian and European descent are more likely to obtain credit from their suppliers. However, since these analyses use firm-level data, one cannot distinguish the effect of community ties from that of unobserved firm quality that is correlated with the owner's ethnic background. Using data on specific supplier relationships of African firms, this paper more directly examines the effect of ethnic ties on trade credit provision. Results from random and fixed-effects models indicate that firms are twice as likely to obtain credit from suppliers from within the owners' ethnic communities as from outsiders, suggestive of a very strong effect of communal ties. However, these ties accounts for only a small proportion (15 percent) of the overall preferential credit access enjoyed by entrepreneurs of non-African descent.
Trade Integration and Political Turbulence: Environmental Policy Consequences
Authors: Fredriksson Per G , Mani Muthukumara
Published: December 2005

This paper contributes to the unresolved issue regarding the effect of economic integration on environmental policymaking. In particular, we discuss the joint impact of trade openness and political stability on environmental policymaking. Our theory predicts that the effect of trade integration on environmental policy is conditional on the degree of political stability. Trade integration affects the stringency of environmental policies due to changes in industry bribery behavior, and the effect is conditional on the degree of political stability. The empirical findings support the theory and are robust to alternative specifications. The stringency enhancing effect on environmental policy of trade integration is greater in politically stable countries.
Testing for Pollution Havens Inside and Outside of Regional Trading Blocs
Authors: Kahn Matthew E , Yoshino Yutaka
Published: December 2005

This paper examines the composition of bilateral manufacturing trade in terms of its pollution intensity. A growing share of world trade takes place between nations who are members of the same regional trade agreement (RTA). We analyze how the formation of RTAs affects the composition of trade. We focus on whether richer or poorer nations specialize in exporting dirty goods. Using bilateral trade data over the years 1980 to 1997 for 128 nations for 34 manufacturing industries, we document that low-, middle-, and high-income nations differ with respect to their income elasticity in exporting dirty goods. Outside of RTA blocs, we find general support for the pollution haven hypothesis. As a nations income rises, its exports of dirty goods decrease relative to its exports of clean goods. When we compare, low-income, middle-income and high-income nations, we find that middle-income nations have the largest dirty trade income elasticity. Participation in a RTA slightly weakens the pollution haven effect observed outside of regional trading blocs. We also document cross-RTA heterogeneity in the composition of trade across 13 major RTAs in our sample.
Political and Economic Forces Sustaining Social Security
Authors: Mulligan Casey B , Sala-i-Martin Xavier
Published: December 2005

What economic forces create and sustain old-age Social Security as a public program? We relate political, efficiency, and narrative theories of Social Security to empirical results reported in our companion paper in this volume. Political theories, including rational majority voting and pressure group theories, feature a redistributive struggle among groups. "Efficiency theories," which model SS as a full or partial solution to market failure, include optimal redistribution, retirement insurance, and alleviating labor market congestion. Finally we analyze three "narrative" theories.

Overall, retirement, and not alleviating poverty, seems important at the margin, which means that plans to reduce intergenerational redistribution may not be politically sustainable merely because they provide "adequate" incomes for the elderly. Politics seem important, because cross-cohort redistribution is so prevalent, even when the old are consuming as much or more than do the young. SS reform would therefore be assisted by political reforms equalizing political power across generations.
The Budgetary Repercussions Of Capital Convictions
Authors: Baicker Katherine
Published: December 2005

Understanding how transient fiscal distress affects the stability and distribution of local budgets is increasingly important as control of public spending and revenues becomes more decentralized. This paper exploits the large and unexpected shock to county budgets imposed by capital crime trials, first to understand the incidence of the cost of capital convictions, and second to uncover the effects of local fiscal distress on the level and distribution of public spending and revenues. I show that these trials are quite costly relative to county budgets (with each trial causing an increase in county spending of more than $2 million), and that the costs are borne primarily by increasing taxes (although perhaps partially by decreases in police and capital spending). Using these trials as a source of exogenous variation, I also find significant inter-jurisdictional spillovers of both spending and revenues.
Trade Liberalization and Pollution Havens
Authors: Ederington Josh , Levinson Arik , Minier Jenny
Published: December 2005

U.S. Presidential Executive Order 13141 commits the United States to a careful assessment and consideration of the environmental impacts of trade agreements. The most direct mechanism through which trade liberalization would affect environmental quality in the U.S. is through the composition of industries. Freer trade means greater specialization, increasing the concentration of polluting industries in some countries and decreasing it in others. We begin by documenting the substantial shift in U.S. manufacturing toward cleaner industries from 1972 to 1994. We then use annual industry-level data on imports to the U.S. to examine whether this compositional shift can be traced to the significant trade liberalization that occurred over the same time period, and we conclude that no such connection exists. A shift toward cleaner industries has also occurred among U.S. imports, and we find no evidence that pollution-intensive industries have been disproportionately affected by the tariff changes.
Managed Trade, Trade Liberalisation and Local Pollution
Authors: Regibeau Pierre M , Gallegos Alberto
Published: December 2005

Abstract The current paper addresses the relationship between trade and endogenous pollution levels, with a focus different from the previous literature. The mechanism linking pollution and trade here is that trade policy provides the home government with a credible threat that helps motivate domestic firms to adopt cleaner technologies. This credible threat comes from the fact that the government has a greater incentive to protect a clean industry than to protect a very polluting one. In that sense, the existence of trade helps reduce domestic pollution compared to what would prevail in a situation of autarky. On the other hand, a commitment to free trade would be counterproductive: it removes the governments ability to credibly threaten lower levels of protection. In fact we show that any trade liberalization hurts the welfare of the home country. In terms of world welfare, moderate trade liberalization is helpful, but only as long as it does not affect the technology choices of the firms. Because committing to lower bounded tariffs limits a governments ability to enforce strict environmental standards, a country that has agreed to tighter tariff limits under the World Trade Organization would, other things equal, be a more likely pollution haven than a country with weaker WTO commitments.
Trade Pessimists vs Technology Optimists: Induced Technical Change and Pollution Havens
Authors: Di Maria Corrado , Smulders Sjak A.
Published: December 2005

Our paper focuses on the role of endogenous technology and technology spillovers in explaining cross country differences in pollution and the pollution haven effect of international trade. In our North-South trade model, technology is endogenously developed by the North and imitated by the South. Environmental regulators choose national environmental policies by trading off the income gains and the disutility from a rise in pollution. Differences in environmental stringency are entirely driven by differences in investment opportunities and distortions that follow from the difference in intellectual property rights protection. We show that without goods trade and in the absence of technology subsidies, the North imposes more stringent environmental regulation than the South. When opening up to trade, the South experiences a rise in prices for pollution-intensive goods and tends to raise pollution as in a standard trade model. Induced technical change, however, may reverse this pollution haven effect.
Unbundling the Pollution Haven Hypothesis
Authors: Taylor M. Scott
Published: December 2005

The "Pollution Haven Hypothesis" (PHH) is one of the most hotly debated predictions in all of international economics. This paper explains the theory behind the PHH by dividing the hypothesis into a series of logical steps linking assumptions on exogenous country characteristics to predictions on trade flows and pollution levels. I then discuss recent theoretical and empirical contributions investigating the PHH to show how each contribution either questions the logical inevitability, or the empirical significance of one or more steps in the pollution haven chain of logic. Suggestions for future research are also provided.
Why Governments Should Tax Mobile Capital in the Presence of Unemployment
Authors: Koskela Erkki , Schöb Ronnie
Published: December 2005

This paper shows that a small open economy that suffers from involuntary unemployment should levy a positive source-based tax on capital income. A revenue-neutral tax reform that increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower the marginal cost of production, increase output, reduce unemployment, and increase domestic welfare as long as the labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, if the elasticity of substitution between capital and labour is above a critical value (which is itself below one). Finally, and importantly, independent of the size of the elasticity of substitution, the government can promote wage moderation and reduce unemployment by increasing the personal tax credit of employed workers instead of reducing the labour tax rate.
The Effects of Social Security Privatization on Household Saving: Evidence from Chile
Authors: Coronado Julia Lynn
Published: December 2005

In recent years, a handful of countries have converted the financing of their social security systems from pay-as-you-go (PAYGO) to partial or full funding. Privatization is viewed as one way to insulate social security from the political and demographic pressures that currently threaten the financial stability of PAYGO systems. However, privatization would improve a nation's situation only if such a reform increases domestic saving. In this paper I use evidence from Chile, where social security was privatized in 1981, to assess the impact of such a reform on household saving rates. I find that the reform provided a significant stimulus for net of social security household saving; increasing household saving rates between 5 and 10 percentage points.
The Savings Impact of College Financial Aid
Authors: Dick Andrew W. , Edlin Aaron S. , Emch Eric R.
Published: December 2005

When parents save money for their children's college education, a portion of their savings is later taken away in the form of reduced eligibility for college financial aid. We estimate the long-run impact of this implicit asset tax by estimating family preferences over life-cycle consumption, savings and college choices and then simulating family choices over these variables under various hypothetical financial aid systems with different asset treatments. Our simulations suggest that the implicit taxes in the current college financial aid system may in the long run reduce economy-wide asset holdings in the U.S. by $186 billion versus aid systems with no implicit asset taxes. This figure is less than 1% of total U.S. wealth during the years of our data. It, however, reflects a 10.2% reduction is asset holdings for affected families.
Credits, Crises, and Capital Controls: A Microeconomic Analysis
Authors: Neeman Zvika , Orosel Gerhard Oskar
Published: December 2005

We analyze the behavior of foreign banks who sequentially provide credit to finance projects in an emerging market. The foreign banks are exposed to both project-risks and the macro-economic risk of a currency crisis, and there are no bailout guarantees. Nevertheless, we show that it is often the case that banks provide too much credit too easily and that this behavior may precipitate the onset of a currency crisis. We demonstrate how the imposition of capital controls in the form of taxes and subsidies on foreign investment may improve the situation. Whereas most of the literature on currency crises focuses its analysis on debtor countries and thus on the borrowers' side, our paper illustrates that the lenders' side also deserves attention.
Complexity, Bounded Rationality and Heuristic Search
Authors: MacLeod W. Bentley
Published: December 2005

This paper explores the use of heuristic search algorithms for modeling human decision making. It is shown that this algorithm is consistent with many observed behavioral regularities, and may help explain deviations from rational choice. The main insight is that the heuristic function can be viewed as formal implementation of one aspect of emotion as discussed in Descarte's Error by Antonio Damasio. Consistent with Damasio's observations, it is shown that the quality of decision making is very sensitive to the nature of the heuristic ("emotion"), and hence this may help us better understand the role of emotion in rational choice theory.
Suggested Subsidies are Sub-optimal Unless Combined with an Output Tax
Authors: Fullerton Don , Mohr Robert D.
Published: December 2005

Because of difficulties measuring pollution, many prior papers suggest a subsidy to some observable method of reducing pollution. We take three such papers as examples, and we extend each of them to show how welfare under the suggested subsidy can be increased by the addition of an output tax. While the suggested subsidy reduces damage per unit of output, it also decreases the firm's cost of production and the equilibrium break-even price. It might therefore increase output  unless combined with an output tax. While this general point has appeared in prior literature, it has been overlooked in specific applications. We illustrate the applicability of a tax-subsidy combination in three very different models of different environmental problems. Using one example, we show that a properly-constructed subsidy-tax combination is equivalent to a Pigovian tax. Another example is a computational model, extended here to show that the policy combination can yield a welfare gain that is more than three times the gain from using the subsidy alone. The third example is a theoretical model, used to show that the subsidy alone increases production and thus could increase total pollution. An additional output tax offsets this increase in production.
The Spite Motive and Equilibrium Behavior in Auctions
Authors: Morgan John , Steiglitz Ken , Reis George
Published: December 2005

We study auctions where bidders have independent private values but attach a disutility to the surplus of rivals, and derive symmetric equilibria for first-price, second-price, English, and Dutch auctions. We find that equilibrium bidding is more aggressive than standard predictions. Indeed, in second-price auctions it is optimal to bid above one's valuation; that is, bidding "frenzies" can arise in equilibrium. Further, revenue equivalence between second-price and first-price auctions breaks down, with second-price outperforming first-price. We also find that strategic equivalence between second-price and English auctions no longer holds, although they remain revenue equivalent. We conclude that spiteful bidding rationalizes anomalies observed in laboratory experiments across the four auction forms better than the leading alternatives.