Economics, Department of

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Policy Implications of Alternative Economic Paradigms: Some Surprises from Endogenous Technological Changes

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

One of the most neglected issues in modern economics concerns the consequences of technological change that is ubiquitous and endogenous. To address these we need to model technology as more than a scalar value in an aggregate production function, dealing with technological change in its messy micro economic details. This paper illustrates these points by considering the policy implications of some alternative economic theories that treat technology differently. The first section contrasts the policy implications of neoclassical and evolutionary economics with respect to the evaluation of the efficiency of the price system, policies with respect to 'distortions,' policies to discourage monopolies, to encourage economic growth in general, and infant industries and specific technological advances in particular. The second section contrasts New Classical and various versions of Keynesian economics with respect to micro behavioural underpinnings of macro relations, the place of technology as a driving force of economic change, and aggregate demand as both a source of fluctuations and a variable to be manipulated by policy makers.

Document type: 
Report

Rules, Rule-Following, and Cooperation

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

Rules are thought to persist to the extent that the direct benefits of having them (e.g. reduced transactions costs) exceed the costs of enforcement and of occasional misapplications. We argue that a second crucial role of rules is as screening mechanisms for identifying cooperative types. Thus we underestimate the social value of rules when we consider only their instrumental value in solving a particular problem. We demonstrate experimentally that costly rule-following can be used to screen for conditional cooperators. Subjects participate in a rule-following task in which they may incur costs to follow an arbitrary written rule in an individual choice setting. Without their knowledge, we sort them into groups according to their willingness to follow the rule. These groups then play repeated public goods or trust games. Rule-following groups sustain high public goods contributions over time, but in rule-breaking groups cooperation decays. Rulefollowers also reciprocate more in trust games. However, when individuals are not sorted by type, we observe no differences in the behavior of rule-followers and rule-breakers.

Document type: 
Report

Land Markets and Inequality: Evidence from Medieval England

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

The 13th century witnessed a substantial increase in inequality in the distribution of peasant landholdings relative to the distribution of the late 11th century. Innovations in property rights over land in 12th century England induced peasants to include the trading of small parcels of land as part of their risk coping strategy. We argue that these events are related. Recent theoretical work in development economics has explored the relationship between inequality and asset markets. When agents are able to trade productive assets to manage risk, the resulting dynamics may generate increasing inequality over time. We employ a simulation strategy to analyze the impact of land markets in generating inequality in 13th century landholdings. We find that the dominant factor contributing to the unequal distribution of land was the interaction between emerging land markets and population growth driven by high fertility rates in households with large landholdings.

Document type: 
Report

Generalized Random Coefficients With Equivalence Scale Applications

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

We propose a generalization of random coefficients models, in which the regression model is an unknown function of a vector of regressors, each of which is multiplied by an unobserved error. We also investigate a more restrictive model which is additive (or additive with interactions) in unknown functions of each regressor multiplied by its error. We show nonparametric identification of these models. In addition to providing a natural generalization of random coefficients, we provide economic motivations for the model based on demand system estimation. In these applications, the random coefficients can be interpreted as random utility parameters that take the form of Engel scales or Barten scales, which in the past were estimated as deterministic preference heterogeneity or household technology parameters. We apply these results to consumer surplus and related welfare calculations.

Document type: 
Report

Party Nomination Procedures and Quality of Government

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper explores empirically the relation between party's procedures to nominate candidates, such as primaries, and quality of government. Using a panel data of Latin America countries, I find robust evidence that the quality of government is higher during the mandate of primary-nominated presidents. The empirical strategy exploits within country variation and controls for relevant covariates at country and party level. Using an instrumental variable approach with determinants of primary adoption produces similar results. The findings are consistent with primaries increasing incentives among candidates to improve policy design, and suggest that party institutions matter for governance.

Document type: 
Report

Local Spending, Transfers and Costly Tax Collection

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper studies the effect of costly taxation on the fiscal response of local governments to intergovernmental transfers. Using a panel dataset of Peruvian municipalities, I find robust evidence that central government's grants have a greater stimulatory effect in municipalities facing higher tax collection costs. The results are consistent with costly taxation partially explaining the flypaper effect.

Document type: 
Report

Mining, Pollution and Agricultural Productivity: Evidence from Ghana

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

Most modern mines in the developing world are located in rural areas, where agriculture is the main source of livelihood. This creates the potential of negative spillovers to farmers through competition for key inputs (such as land) and environmental pollution. To explore this issue, we examine the case of gold mining in Ghana. Through the estimation of an agricultural production function using household level data, we find that mining has reduced agricultural productivity by almost 40%. This result is driven by polluting mines, not by input availability. Because of its crowding out effects on agriculture, we find that the mining activity is associated with an increase in poverty, child malnutrition and respiratory diseases. A simple cost-benefit analysis shows that the fiscal contribution of mining would not have been enough to compensate affected populations.

Document type: 
Report

Model Validation and Learning

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper studies adaptive learning with multiple models. An agent operating in a self-referential environment is aware of potential model misspecification, and tries to detect it, in real-time, using an econometric specification test. If the current model passes the test, it is used to construct an optimal policy. If it fails the test, a new model is selected from a fixed set of models. As the rate of coefficient updating decreases, one model becomes dominant, and is used 'almost always'. Dominant models can be characterized using the tools of large deviations theory. The analysis is applied to Sargent's (1999) Phillips Curve model.

Document type: 
Report

Heterogenous Beliefs and Tests of Present Value Models

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia’s (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents’ information sets. When these conditions are satisfied, agents must ‘forecast the forecasts of others’. The additional dynamics of the heterogeneous beliefs equilibrium can account for observed violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.

Document type: 
Report

A Behavioral Defense of Rational Expectations

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope.

Document type: 
Report