Econ Stud Research Articles

Trade Openness and Domestic Market Share

This paper analyzes how Egyptian manufacturing plants respond to changes in trade tariffs using firm-level data from the World Bank Enterprise Survey. Using Levinsohn and Petrin (Rev Econ Stud 70(2):317–341, 2003) methodology to calculate the total factor productivity for the Egyptian firms in the sample, the results stand in line with the heterogeneous-firm models of international trade predicting that fall in trade costs leads to a decrease in the market shares of domestic firms. The decrease of market share of the Egyptian manufacturing firms after trade reforms in 2004 reflects that the market became less concentrated after trade openness.

The human rights foundations of an EKC with a minimum consumption requirement: theory, implications, and quantitative findings

Andreoni and Levinson’s (J Public Econ 80:269–286, 2001) EKC model is modified to include Stone (Econ J 63:511–527, 1954) and Geary (Rev Econ Stud 18(99):65–66, 1950) preferences where the economic agent has a minimum consumption requirement (MCR). We show that at each level of income, an increase in the MCR is associated with higher levels of pollution, and the threshold level of income at which the EKC inverts changes with a change in the MCR. A numerical exercise further supports these findings. We offer a policy discussion within the context of the environmental impacts of meeting a MCR noting that doing so is costly in terms of the impact on pollution and the resources required to mitigate pollution in its presence.

Comparison of information structures in stochastic games with imperfect public monitoring

This paper studies the impact of an improvement of information structure upon the perfect public equilibrium payoff set in discounted stochastic games with imperfect public monitoring. We first suggest three partial orders on information structures in stochastic games. Although each of them reduces to the notion of garbling in repeated games (Kandori in Rev Econ Stud 59:581–593, 1992), we find that an improvement of information in terms of our two garbling notions does not imply an expansion of the equilibrium payoff set for some games. We also show that more informativeness in terms of our third notion of garbling is sufficient for the expansion, thereby extending the well-known monotonicity result in Kandori (1992) to stochastic games.

Aggregation biases in empirical Euler consumption equations: evidence from Spanish data

This paper investigates the implications of aggregation in empirical analyses of Euler equations for consumption. We compare the results obtained after estimating the same model using total and non-durable microeconomic consumption data, from the maximum aggregation level (Spanish National Accounts) to household data from the Spanish Expenditure Survey (Encuesta Continua de Presupuestos Familiares). We use this survey to build cohort and aggregate data to test the model using different aggregate measures for consumption. The results we obtain confirm the theoretical predictions summarised in Blundell and Stoker (J Econ Lit 43:347–391, 2005. https://doi.org/10.1257/0022051054661486) as well as in previous empirical evidence, i.e. aggregation turns out to be crucial to empirically study Euler equations for consumption (Attanasio and Weber in Rev Econ Stud 60:631–649, 1993. https://doi.org/10.2307/229812) or when simulating real business cycle models (Guvenen in J Monet Econ 53:1451–1472, 2006. https://doi.org/10.1016/j.jmoneco.2005.06.001). The estimated elasticity of intertemporal substitution (EIS) with aggregated data is biased as compared with the corresponding estimate using microeconomic data. Further, we find that the size of the bias increases with the level of aggregation. Finally, our estimates confirm Hall (J Polit Econ 96:339–357, 1988. http://dx.doi.org/10.2139/ssrn.2704067) result that the EIS is not statistically different from zero, unless panel data are used.

Costly state verification and truthtelling: a note on the theory of debt contracts

When firms want to raise external financing, why do they resort to contracts with fixed repayment, i.e., standard debt contracts? The canonical work of Gale and Hellwig (Rev Econ Stud, 52(4):647–663, 1985) gives the following answer to this question: Assuming that only the entrepreneur can observe the project’s outcome free of charge, the standard debt contract proves to be an incentive-compatible financing design. However, this approach remains inadequate, as neither the lender nor the borrower is given the possibility to act strategically. The paper at hand takes up this aspect. By means of a simple game-theoretic model and focusing on a binary outcome setting, it is shown that every risky standard debt contract is dominated by at least one ownership contract. In this respect, costly state verification cannot act as a raison d’etre of contracts with fixed repayment.

Bubbles, growth and imperfection of credit market in a two-country model

This study extends Hirano and Yanagawa (Rev Econ Stud 84(1):406–443, 2017) to an asymmetric two-country model and examines bubbles effects on each country’s long-run economic growth rate. This study also provides numerical examples with respect to the relationship between each country’s growth rate and their financial frictions in the balanced growth equilibria with bubbles and without bubbles. It shows that foreign bubbles have positive and negative effects on both countries’ growth rates, and which effect dominates depends on the level of financial development in both countries. In this study, the positive effect of bubbles tends to dominate when the total level of financial frictions in both countries is relatively low. When the total effect of bubbles on the growth rate is positive, the burst of foreign bubbles leads to a decrease in the growth rate in both countries. This implies that there is a positive correlation between foreign bubbles and the domestic as well as the foreign country’s growth rate.

Investment and financial constraints in Indian firms: Does working capital smoothen fixed investment?

The purpose of this paper is twofold, first to examine the investment-cash flow sensitivity in fixed and working capital investments and second to determine the role played by working capital in smoothing fixed investment. The study is based on secondary financial data of 254 Indian manufacturing firms obtained from CAPITALINE database, pertaining to a period of 10 years. This study employs two-step AB difference GMM estimator proposed by Arellano and Bond (Rev Econ Stud 58(2):277–297, 1991) to arrive at results. Results of the study confirm that working capital investment is excessively sensitive to cash flow shocks. Further we found that both fixed and working capital investment in constrained firms are more sensitive to cash flow shocks when compared to unconstrained firm. Furthermore, the fixed investment smoothing is higher in case of constrained firms. The study is a pioneer in testing whether fixed and working capital investments are sensitive to cash flow shocks and how investment-cash flow sensitivity changes with financial constraints of Indian firms. In addition, this study tends to examine the role of working capital in smoothing the fixed investment. Furthermore, this study explains this phenomenon in more detail by focusing on investment smoothing across constrained and unconstrained firms.

Evolutionary Competition Between Adjustment Processes in Cournot Oligopoly: Instability and Complex Dynamics

We consider a model of evolutionary competition between adjustment processes in the Cournot oligopoly model and investigate the effect of increasing the number of firms. Our focus is on Nash play versus a general short-memory adaptive adjustment process. We find that, although Nash play has a stabilizing influence, a sufficient increase in the number of firms in the market tends to make the Cournot-Nash equilibrium unstable. This shows that the famous result by Theocharis (Rev Econ Stud 1960), that Cournot oligopoly markets are unstable for more than three firms, is robust, although the instability threshold increases in the presence of Nash firms. We establish that both the existence and the level of this threshold depend on the information costs associated with Nash play. Moreover, the interaction between adjustment processes naturally leads to the emergence of complicated endogenous fluctuations as the number of firms increases, even when demand and costs are linear.

Reducing the dimensionality of a selfishly optimal nonlinear income tax problem

Roell (Voting over nonlinear income tax schedules, unpublished manuscript, 2012) considers a political economy version of the finite-type Mirrlees (Rev Econ Stud 38:175–208, 1971) nonlinear income tax problem in which each type proposes its selfishly optimal tax schedule with majority rule used to select among them. We show that it is possible to solve a selfishly optimal nonlinear income tax problem by first solving for the optimal consumptions using a reduced-form problem that only involves these variables and then using the optimal consumptions in two recursion formulae to compute the optimal incomes. The analysis extends the methodology introduced in Weymark (J Publ Econ 30:199–217, 1986b) so as to handle problems in which not all of the adjacent incentive constraints bind in the same direction.

The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel

I document that US financial uncertainty shocks, measured by an increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without a material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose a credit channel as a propagation mechanism of US financial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell (Rev Econ Stud 71(3):883–913 2004) with a portfolio choice model of constrained international investors. As international investors pull their money from EMEs—to satisfy their Value-at-Risk constraints—in response to financial uncertainty shocks, borrowing costs increase and domestic credit contracts. Higher borrowing costs and a decline in domestic credit, in turn, lead to a fall in investment in the non-tradable sector that causes a real depreciation via currency mismatch prevalent in EMEs and a decline in total output through sectoral linkages. The empirical regularity obtained by estimating structural VARs of 18 EMEs is consistent with the prediction of the model.

On Preemption in Discrete and Continuous Time

The seminal work of Fudenberg and Tirole (Rev Econ Stud 52(3):383–401, 1985) on how preemption erodes the value of an option to wait raises general questions about the relation between models in discrete and continuous time and thus about the interpretation of its central result, relying on an “infinitely fine grid”. Here, it is shown that, for a class of timing games including the model of Fudenberg and Tirole, their solution concept is indeed the limit of symmetric subgame-perfect equilibria of the game when restricted to any sequence of grids becoming infinitely fine. Furthermore, additional subgame-perfect equilibria using conventional continuous-time mixed strategies are identified.

The impact of foreign direct investment on CO2 emissions in Turkey: new evidence from cointegration and bootstrap causality analysis.

Pollution haven hypothesis (PHH), which is defined as foreign direct investment inducing a raising impact on the pollution level in the hosting country, is lately a subject of discussion in the field of economics. This study, within the scope of related discussion, aims to look into the potential impact of foreign direct investments on CO2 emission in Turkey in 1974-2013 period using environmental Kuznets curve (EKC) model. For this purpose, Maki (Econ Model 29(5):2011-2015, 2012) structural break cointegration test, Stock and Watson (Econometrica 61:783-820, 1993) dynamic ordinary least square estimator (DOLS), and Hacker and Hatemi-J (J Econ Stud 39(2):144-160, 2012) bootstrap test for causality method are used. Research results indicate the existence of a long-term balance relationship between FDI, economic growth, energy usage, and CO2 emission. As per this relationship, in Turkey, (1) the potential impact of FDI on CO2 emission is positive. This result shows that PHH is valid in Turkey. (2) Moreover, this is not a one-way relationship; the changes in CO2 emission also affect FDI entries. (3) The results also provide evidence for the existence of the EKC hypothesis in Turkey. Within the frame of related findings, the study concludes several polities and presents various suggestions.

Business cycles, financial cycles and capital structure

We perform peridogram based cycle analysis of firm capital structure and find evidence that firms’ leverage is both persistent and cyclical. The cyclicality of leverage is supported by the trade-off, pecking order and market timing capital structure theories (Korajczyk and Levy in J Financ Econ 68:75–109, 2003; Bhamra et al. in Rev Financ Stud 23:645–703, 2010). Although market timing theory research supports persistence, previous literature dictates that the trade-off and pecking order theories may predict either persistent or mean reverting leverage. Our tests reject mean reversion in favor of persistent and cyclical leverage. We corroborate pecking order theory literature that predicts leverage is persistent. In these models, when firms’ investment spending is below earnings, leverage decreases. In addition, we examine whether firms change their capital structure as a result of business and financial cycles. Since financial cycles last longer than business cycles, financial cycles should have a long term effect on leverage. Our findings confirm the persistent leverage business cycle models that suggest firms change their capital structure due to financial and credit cycles (Jermann and Quadrini in Am Econ Rev 102:238–271, 2012; Azariadis et al. in Rev Econ Stud 83:1364–1405, 2016). We conclude that leverage is persistent due to the cyclicality of the financing decision.

The Impact of Field Court Attendance Notices on Property Crime in New South Wales, Australia

This paper investigates the impact of Field Court Attendance Notices (FCANs) on rates of property crime in New South Wales (NSW), Australia. FCANs are used for relatively minor offenses, are issued ‘on the spot’, and provide an alternative to the time consuming process of arresting an alleged offender and taking them to the police station for processing. Despite their use in NSW for over 20 years, this study is the first to evaluate their impact on crime. We use data provided by the NSW Bureau of Crime Statistics and Research, and the Australian Bureau of Statistics. We specify a general dynamic panel data model estimated via the Arellano and Bond (Rev Econ Stud 58:277–297, 1991) estimator, specifically the first-differenced twostep generalised method of moments (GMM) estimator. For property crime as a whole, in both the short- and long-run, we find no significant relationship between the use of FCANS and levels of offending. However, when offending rates are disaggregated into 11 sub-categories, we find that in the short-run an increase in the use of FCANs leads to statistically significant decreases in the rate of crime for five of the sub-categories offenses considered (break and enter dwelling; motor vehicle theft; steal from motor vehicle; steal from retail store and; steal from dwelling). The long-run results are largely consistent with the short-run results in terms of their signs and statistical significance, suggesting that the effects persist. The empirical analysis presented in this paper suggests that the use of FCANs is an effective and potentially efficient policing strategy for a subset of property offenses, in that offenders can be processed at lower cost and long-run rates of certain crimes reduced.

Internalizing fertility and education externalities on capital returns

This paper explains, first, that, since households disregard the impact in the aggregate of their fertility and education choices on the return to their own savings, the market does not implement the mix of population and skills that a planner internalizing all externalities from fertility and education would choose. It then shows that for an economy without capital over-accumulation—the empirically relevant case, cf. Abel et al. (Rev Econ Stud 56(1):1–19, 1989)—a market supplying efficiency units of labor beyond the planner’s level does so by leading households to go for quality over quantity in their reproductive choices—over-investing in education and depressing fertility with respect to the planner’s levels—a feature reminiscent of reproductive patterns in developed economies. It is finally shown that a pension scheme contingent to the household’s fertility and education investment decentralizes the planner’s allocation as an equilibrium outcome. Such pension scheme is financed through a tax on the increase in labor income that results from households education investment. Interestingly enough, the usual tax-financed compulsory education does not decentralize the planner’s allocation, even when the mandatory level of education is the planner’s, since it does not address the misalignment of incentives at the heart of the problem.

(No) Foundations of dominant-strategy mechanisms: a comment on Chung and Ely (2007)

This comment revisits Chung and Ely (Rev Econ Stud 74:447–476, 2007) in which robustly optimal auctions where investigated. Chung and Ely used a maxmin approach to define robust optimality. Chung and Ely provided conditions under which dominant strategy auctions are robustly optimal in their sense. This comment proposes a refinement of Chung and Ely’s criterion and shows that, with this refined criterion, dominant strategy auctions are not optimal if there are at least three bidders. According to the refinement the auctioneer should not choose dominated auctions, that is, auctions for which there exist other mechanisms that never generate lower expected revenue, and sometimes higher expected revenue. We construct such a dominating mechanism for dominant strategy auctions. The construction exploits the possibility of side bets when beliefs are not derived from common priors. Chung and Ely (Rev Econ Stud 74:447–476, 2007) admitted such beliefs.

The farsighted core in a political game with asymmetric information

We consider a three-player-political game that modifies a weighted majority game by having farsighted players. We follow Acemoglu et al. (Rev Econ Stud 75:987–1009, 2008) in assuming that the power of each player is exogenously given but allow a winning coalition to choose any wealth distribution, as in Jordan (2006). Under complete information, the farsighted core is enlarged by the heterogeneity of player’s powers. In addition, we introduce asymmetric information about powers among players and define a corresponding concept of the farsighted core under asymmetric information which is a variant of the credible core in Dutta and Vohra (Math Soc Sci 50:148–165, 2005).

Impact of a changing climate on global stability, wellbeing, and planetary health

Impact of a changing climate on global stability, wellbeing, and planetary health

Bayesian learning with multiple priors and nonvanishing ambiguity

The existing models of Bayesian learning with multiple priors by Marinacci (Stat Pap 43:145–151, 2002) and by Epstein and Schneider (Rev Econ Stud 74:1275–1303, 2007) formalize the intuitive notion that ambiguity should vanish through statistical learning in an one-urn environment. Moreover, the multiple priors decision maker of these models will eventually learn the “truth.” To accommodate nonvanishing violations of Savage’s (The foundations of statistics, Wiley, New York, 1954) sure-thing principle, as reported in Nicholls et al. (J Risk Uncertain 50:97–115, 2015), we construct and analyze a model of Bayesian learning with multiple priors for which ambiguity does not necessarily vanish in an one-urn environment. Our decision maker only forms posteriors from priors that survive a prior selection rule which discriminates, with probability one, against priors whose expected Kullback–Leibler divergence from the “truth” is too far off from the minimal expected Kullback–Leibler divergence over all priors. The “stubbornness” parameter of our prior selection rule thereby governs how much ambiguity will remain in the limit of our learning model.

Does a Survey Based Capacity Utilization Measure Help Predicting Brazilian Output Gap in Real-Time?

The aim of the paper is to assess the informational content of a survey-based measure of the Brazilian manufacturing capacity utilization rate produced by the Brazilian Institute of Economics from Getulio Vargas Foundation. From a theoretical point of view, the survey-based capacity measure should provide meaningful information with respect to the Brazilian business cycle. In this work, we choose to use the output gap as the most comprehensive and convincing proxy of the cyclical situation (Graff and Sturm in CESifo Econ Stud 58(1):220–251, 2012). More specifically, we will refer to a real-time version of the output gap, using an existing real-time GDP data set produced by the Central Bank of Brazil (Cusinato et al. in Empir Econ, 2012). The information efficiency of the real-time output gap estimates is tested checking whether survey data can help producing real-time estimates that are significantly closer to the latest releases. In this sense, the paper provides a significant contribution to the existing literature, extending analysis already available for OECD countries to the Brazilian economy. Our main result is that survey data can indeed help to produce more efficient estimates of the output gap in real time.