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No. 2015_3   (Download full text)
Michael G. Porter, Zohid Askarov and Sarah Hilborn
Securing Unlimited Water Supply in Adelaide over the Next Century Balancing Desalinated and Murray-Darling Basin Water
This paper assesses the two major water supply options for a growing but relatively dry metropolitan Adelaide – desalination and expanded trading of water from the Murray-Darling Basin (MDB). What we present in this paper is a portfolio approach suggesting a mixed strategy of desalination and water trading to meet growing demand over the hundred year period from 2014. Crucially, the scope for expanding water trading keeps average costs down, for as long as the political agreements work and drought does not prevent the use of allocations. However, our modelling shows that in the long run water trade in combination with modular augmentation of desalination capacity can achieve a mix of security and cost that avoids spikes in market prices of MDB allocations during drought. The strategy also avoids the real business and household costs, loss of garden value and inconvenience of water restrictions.
Keywords: water portfolio, water costs, desalination, augmentation costs, entitlement, allocations
No. 2015_2   (Download full text)
Pedro Gomis-Porqueras and Laura Puzzello
Winners and Losers from the euro
This paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro using the synthetic control method. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. The Netherlands is estimated would have been as well off without the euro. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain these income effects. We find that early euro adopters with a business cycle more synchronized to that of the union, and more open to intra-union trade and migration lost less or gained more from the euro. A key role in the transmission of post-euro income losses across union members has been played by the integration of capital markets.
JEL-Codes: C21; C23; E65; F33; N14
Keywords: Monetary Union; Synthetic Control Method; Per Capita Income; euro
No. 2015_1   (Download full text)
Zohid Askarov and Hristos Doucouliagos
Spatial Aid Spillovers During Transition
We investigate whether development aid stimulates growth in transition economies, paying particular attention to the possibility of spatial spillovers arising from aid. We find that aid has a positive impact on growth of the recipient country. However, aid also appears to generate adverse growth spillovers on other nations. In contrast, we find that growth in one transition economy tends to spillover to bordering countries and there are significant positive spatial spillovers from good policies. Spillovers are an important part of the growth experience of transitional economies.
JEL-Codes: O4, O5, F35
Keywords: aid effectiveness, spatial spillovers, transition economies
No. 2014_9   (Download full text)
Jae Kim, Hristos Doucouliagos and Hendrix College
Market Efficiency in Asian and Australasian Stock Markets: A Fresh Look at the Evidence
Market efficiency is an important feature of successful financial markets. The aim of this paper is to analyze the available evidence on the efficient market hypothesis (EMH). Meta-regression analysis is applied to 1,560 estimates of the Variance Ratio test of the efficiency of Asian and Australasian stock markets. We test if there is evidence of violation of the EMH and we also explain the heterogeneity in the reported test results. Our meta-regression analysis specifically accommodates the possibility of publication selection in favor of accepting the null hypothesis of market efficiency. We find that Asian stock markets are, on average, not informationally efficient. However, market efficiency has improved over time and market capitalization and economic freedom influences stock market efficiency; more developed and less regulated stock markets are more efficient.
JEL-Codes: G10, G14
Keywords: Random walk, meta-regression, efficient market hypothesis
No. 2014_8   (Download full text)
Zohid Askarov and Hristos Doucouliagos
Aid and Institutions in Transition Economies
We investigate whether aid contributed to institutional development in transition economies. We find that aid flows have a positive effect on democratization, especially on constraints on the executive and political participation. At the same time, total aid has no effect on overall quality of governance, while US aid appears to have a negative impact on some dimensions of governance. Aid’s differential impact on democracy and governance is consistent with uneven development of institutions and the democracy consolidation hypothesis. We also find that aid has a non-linear effect on democracy. Openness has a positive effect on both democracy and good governance. Oil resources have an adverse effect on democracy. Adult mortality, civil war and adherence to Islam are all detrimental to good governance.
Keywords: aid, institutions, democracy, governance
No. 2014_7   (Download full text)
Pedro Gomis-Porqueras, Timothy Kam and Christopher Waller
Breaking the Curse of Kareken and Wallace with Private Information
We study the endogenous choice to accept fiat objects as media of exchange and the implications for nominal exchange rate determination. We consider an economy with two currencies which can be used to settle any transactions. However, currencies can be counterfeited at a fixed cost and the decision to counterfeit is private information. This induces equilibrium liquidity constraints on the currencies in circulation. We show that the threat of counterfeiting can pin down the nominal exchange rate even when the currencies are perfect substitutes, thus breaking the Kareken-Wallace indeterminacy result. We also find that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rates. Finally, we show that the threat of counterfeiting can also help determine nominal exchange rates in a variety of different trading environments. These include a two-country setup with tradable and non-tradable goods sectors, and with an alternative timing of money injections.
JEL-Codes: D82, D83, F4
Keywords: Multiple Currencies, Counterfeiting Threat, Liquidity, Exchange Rates
No. 2014_6   (Download full text)
Craig A. Gallet and Hristos Doucouliagos
There is much disparity in estimates of the income elasticity of air travel across the literature. We examine this disparity by applying meta-regression techniques. Controlling for several issues, including publication selection bias, while our preferred baseline income elasticity estimate of 1.186 is consistent with air travel being a luxury and a slightly immature market, there are several features of the literature which sway the income elasticity away from this baseline. For instance, the income elasticity increases to 1.546 on international routes, yet decreases to 0.633 when air fare is included in a dynamic specification of demand, ceteris paribus. Other characteristics of the literature, such as those involving various data and estimation choices, have less influence on the reported income elasticity.
Keywords: income elasticity, air travel, meta-regression analysis
No. 2014_5   (Download full text)
Zohid Askarov and Hristos Doucouliagos
Development Aid and Growth in Transition Economies
Empirical studies normally analyze diverse and heterogeneous groups of countries, producing very mixed evidence on the effectiveness of development aid in promoting growth. We focus on whether aid promotes economic growth in transitional economies. We find that aid, on average, has had a positive impact on growth for this specific group of countries. This result is robust to samples, estimators, and the use of alternate instruments to address endogeneity. Aid effectiveness is not conditional on good policy and there is little evidence of non-linear growth effects arising from aid.
No. 2014_4   (Download full text)
Randy Silvers and Raul Susmel
Compensation of a Manager: The Case of Major League Baseball
In this paper, we are interested in the impact a Major League Baseball (MLB) manager has on a team’s outcome. Using data on manager’s contracts, team performance, and team and manager characteristics, first, we determine the variables that determine a manager's salary. Then, we use a forecasting-type analysis to study the determinants of a manager’s performance, measured by winning percentage, attendance or playoff appearances. We find that a manager's past performance affects his current salary, but his current salary does not affect the team's performance. Our results support the lack of a competitive and efficient market for MLB managers.
No. 2014_3   (Download full text)
Incorporating cultural values and preferences in wetland valuation and policy
This paper reports the findings of a choice modelling study designed to estimate the willingness-to-pay (WTP) for improvement of the ecosystem services of Bung Khong Long wetland in Thailand. The findings indicate that the cultural values associated with the wetland are significant suggesting that incorporating culture preferences may be a key factor in supporting wetland conservation. Attitudinal characteristics of respondents are important factors influencing WTP, implying community preferences are important in the effectiveness of environmental conservation efforts for this community.
Keywords: Wetland valuation, Cultural values, Choice modelling
No. 2014_2   (Download full text)
Emin Gahramanov and Xueli Tang
Impatient in Experiments, but Patient in Simulations: A Challenge to a Neoclassical Model.
Despite ample empirical evidence on the prevalence of high discount rates among people, applied, quantitative-theoretical macro studies with exponential discounting often assume low positive, or even negative discount rate values. Relying on recent advances from the numerical optimal control branch of mathematics, we solve a neoclassical, continuous time model of endogenous consumption/saving and labor supply, and show that even if an agent has a moderately high discount rate, his labour supply and consumption behavior will be highly counterfactual. We provide a remedy to such counterfactual findings by augmenting a standard utility function based on recent evidences from the leisure sciences, while maintaining a rational choice approach of neoclassical economics.
JEL-Codes: D91, C02, C61, J22, J26
Keywords: Bounded control; Numerical Optimal Control; Life-cycle Consumption and Labor-Leisure
No. 2014_10   (Download full text)
Mehmet Ulubasoglu, Debdulal Mallick, Mokhtarul Wadud, Phillip Hone and Henry Haszler
Food Demand Elasticities for Australia
There is renewed interest in robust estimates of food demand elasticities at a disaggregated level not only to analyse the impact of changing food preferences on the agricultural sector, but also to establish the likely impact of pricing incentives on households. Using data drawn from two national Household Expenditure Surveys covering the periods 1998/99 and 2003/04, and adopting an Almost Ideal Demand System approach that addresses the zero observations problem, this paper estimates a food demand system for 15 food categories for Australia. The categories cover the standard food items that Australian households demand routinely. Own-price, crossprice and expenditure elasticity estimates of the Marshallian and Hicksian types have been derived for all categories. The parameter estimates obtained in this study represent the first integrated set of food demand elasticities based on a highly disaggregated food demand system for Australia, and all accord with economic intuition.
Keywords: Food demand, AIDS model, Australia
No. 2014_1   (Download full text)
Emin Gahramanov and Xueli Tang
Career Interruptions: A Neglected Aspect of a Neoclassical Model
There is voluminous literature on the reasons behind career interruptions, ranging from maternity leave and organizational layoffs, to national service and human capital acquisition. We show that a standard, neoclassical model of intertemporal consumption/saving and labor/leisure choices without any friction can generate multiple career interruptions as a natural outcome of a consumption/leisure smoothing exercise performed by perfectly rational agents. Given the complexity of such a model, and to be consistent with traditions from the optimal control branch of mathematics, we use advances in numerical optimal control to solve a neoclassical problem.
JEL-Codes: J22, J26, D91, C02, C61
Keywords: Career interruptions; Life-cycle consumption and labor-leisure; Bounded control; Pseudospectral optimal control.
No. 2013_9   (Download full text)
Aaron Nicholas, Ranjan Ray and Kompal Sinha
Duration and Multidimensionality in Poverty Measurement
This paper unites two strands of the literature on subgroup decomposable poverty measurement originating from Foster, Greer and Thorbecke (1984) by incorporating information on both multiple dimensions and multiple periods. This generalises the Alkire and Foster (2011a) measure into a dynamic setting. In doing so, it introduces two variants of the ‘transfer’ axiom: one that gives increasing weight to individuals whose deprivations are concentrated as repeated dimensions in a specific period (what we term ‘breadth’) versus one that gives increasing weight to individuals whose deprivations are concentrated as repeated periods in a specific dimension (‘length’). The measure is able to differentiate between both aspects of poverty and consequently allows the assignment of different weights to each aspect. This makes it well suited to make comparison across subgroups when individual longitudinal data is available. We apply the proposed measure to longitudinal data from China where we compare differences in the estimate of poverty relative to existing measures.
JEL-Codes: I31, I32
Keywords: Multidimensional Poverty; Duration of Poverty; Transfer Axiom; Subgroup Decomposability
No. 2013_8   (Download full text)
Cong S. Pham and Mehmet A. Ulubaşoğlu
Using product-level trade data, we empirically investigate the export patterns of more than 150 countries in their exports to the U.S., Brazil, India and Japan. We document strong evidence that exporters specialize according to their relative factor endowments, technology, and economic size. Moreover, developed, economically larger, and technologically-advanced countries are the major exporters of new products, spanning a wide range of product categories with high unit values. Our findings constitute a building block for the phenomenon that a large proportion of the global trade takes place among developed economies, and that the latter are also major exporters to developing markets.
JEL-Codes: F11, F2, C21
No. 2013_7   (Download full text)
Nejat Anbarci, Nick Feltovich and Mehmet Y. Gurdal
The contractor game: a theoretical and experimental analysis
We introduce the contractor game , related to the ultimatum game (UG). The proposer makes an offer , and simultaneously sends a cheap talk message , indicating (possibly falsely) the amount of the offer. The responder observes the message with certainty and the offer with probability p before accepting or rejecting the offer. We theoretically examine versions with p = 0 and p = 0.5 along with the UG, played by some standard economic agents and others who are averse to inequity, lies and lying. The equilibria yield intuitive predictions, which are supported by our experimental results. Offers are higher when they might be seen by the responder. Messages over–state offers, but less so when the offer might be seen. Responders are more likely to accept an unseen offer if it might have been seen. When offers are seen, responders reward truthful messages, rather than punishing lies, compared to when no message is sent.
JEL-Codes: C72, C78, D82
Keywords: ultimatum game, messages, lies, truth–telling, other–regarding behaviour
No. 2013_6   (Download full text)
Nejat Anbarci, Pedro Gomis-Porqueras and Marcus Pivato
Formal and Informal Markets: A Strategic and Dynamic Perspective
In formal markets, to attract buyers, sellers must publicly advertise their prices and locations. But in informal markets, sellers must remain anonymous from government authorities. Since agents' payoffs depend on the ratio of buyers and sellers in each of these markets, all agents try to position themselves in the market which can yield them the highest possible payoff. This strategic interaction in turn critically affects the time evolution of these two markets. In our benchmark model, in which only sellers can switch between these markets, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist. Sellers switch from the formal to the informal market whenever costs of trading in the informal market decrease, and vice versa. In a richer environment, where both sellers and buyers can switch between markets, and the sellers' and buyers' costs of trading in the formal market net of those in the informal market have opposite signs, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist.
JEL-Codes: C7, D49
Keywords: Price posting, bargaining, matching, formal sector, informal sector
No. 2013_5   (Download full text)
Emin Gahramanov and Xueli Tang
Solving for the Retirement Age in a Continuous-time Model with Endogenous Labor Supply
This paper studies a continuous-time life-cycle model with a consumption-leisure choice made by a finitely-lived agent with a random lifetime. We explicitly account for the leisure constraint in the corresponding constrained optimal control problem with a commonly postulated solution structure, and provide a complete analytic solution of the problem. By solving both the constrained and unconstrained control formulations, we demonstrate the inaccuracy of the latter formulation (where an unconstrained leisure path gets truncated once it exceeds the time endowment limit) can indeed be significant. For cases when the subjective discount rate is quite close to or exceeds the interest rate, the optimal control path would not be consistent with the structure of the optimal solution so commonly postulated in applied studies.
JEL-Codes: D91, C02, C61, J22, J26
Keywords: Constrained control; Pontryagin’s Maximum Principle; Life-cycle consumption and labor- leisure
No. 2013_4   (Download full text)
Pedro Gomis Porqueras, Solmaz Moslehi and Richard M. H. Suen
Endogenous Health in a Model of Calories, Medical Services and Health Shocks
This paper presents a theoretical framework that incorporates both preventive actions and treatment opportunities to study health outcomes. In particular, we allow for an agent's eating decision to alter the distribution of future health shocks. Once a shock is realized medical care can be used to improve her health. Thus, choosing a healthier diet is a form of self-protection while medical expenditures are a form of self-insurance. The model helps rationalize why agents choose to be overweight even though they are fully aware of its adverse health consequences. Moreover, this framework predicts that wealthier individuals, on average, have lower morbidity rates and lead a healthier lifestyle. Finally, our numerical exercise captures U.S. cross-sectional facts regarding the choice of diet, medical expenditures as well as health and non-food expenditures.
JEL-Codes: D81, I12, J11.
Keywords: Calories, Medical Care, Health Shock.
No. 2013_3   (Download full text)
Nejat Anbarci, Richard Dutu and Nick Feltovich
Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation
How does the inflation tax impact on buyers’ and sellers’ behaviour? How strong is its effect on aggregate economic activity? To answer, we develop a model of directed search and monetary exchange with inflation. In the model, sellers post prices, which buyers observe before deciding on cash holdings that are costly due to inflation. We derive simple theoretical propositions regarding the effects of inflation in this environment. We then test the model’s predictions with a laboratory experiment that closely implements the theoretical framework. Our main finding confirms that not only is the inflation tax harmful to the economy – with cash holdings, GDP and welfare all falling as inflation rises – but also that its effect is relatively larger at low rates of inflation than at higher rates. For instance, when inflation rises from 0% to 5%, GDP falls by 2.8 percent, an effect 5 to 7 times stronger than when inflation rises from 5% to 30%. Our findings lead us to conclude that the inflation tax is a monetary policy channel of primary importance, even at low inflation rates.
JEL-Codes: E31, E40, C90
Keywords: money, inflation tax, directed search, posted prices, cash balances, welfare loss, frictions, experiment
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