Formal Economic Models Research Articles

The Impact of Analyst, CEO, and Firm Reputations on Investors in the UK and Japanese Stock Markets

AbstractWe examine the importance of multiple agents’ reputations on the market's reaction to analysts’ stock recommendation revisions (analyst revisions), individually and interactively, in the UK and Japanese stock markets. We find some notable variations in reputation effects between the two markets. In the UK, analyst reputation amplifies the market's reaction to analyst revisions, while in Japan, analyst reputation has no significant impact. Firm reputation diminishes (amplifies) the market's reaction to analyst revisions in the UK (Japan). Only CEO reputation generates similar effects in the UK and Japan, dampening the market's reaction to analyst revisions. We also find that reputations interact in different ways in the two markets. Specifically, firm reputation and CEO reputation tend to moderate the positive effect of analyst reputation in the UK; however, in Japan, CEO reputation tends to moderate the positive effect of firm reputation, but there is no significant interaction effect between analyst reputation and CEO/firm reputation. Our findings are explained using insights both from formal economic models and from various cultural and institutional characteristics.

Editor’s Introduction

Editor’s Introduction Michael D. Pante Circulation is integral to the viability of all forms of currency. What a particular society considers as money needs to be constantly exchanged among individuals for it to gain stability as a conduit for transactions involving goods and services. Hence, the value of a currency, whether it comes in the form of salt, shells, or cryptocurrency, is largely independent of the object used as money but rather is significantly influenced by the community that uses it. The theme of this issue shows this fundamental but oft-neglected link between the social and the economic. It presents a different side of the Philippine economy, evincing how ethnographic and historical perspectives offer valuable insights that allow us to understand currencies and commodities apart from formal economic viewpoints. One such insight forces us to view funerary customs in a different light, as seen in “Pig Is Money: Aremag (Funerals) among the Ibaloy of Upper Loacan (Itogon, Benguet).” A team of foreign and local scholars analyzes how the aremag ritual, the first funeral cycle performed by the Ibaloy in Benguet, goes beyond the preparation of the deceased for their journey to the next world. This tradition, which involves the killing of a pig and communal sharing of its meat, includes transactions that can be viewed as economic in nature. Due to the complex practices and taboos that determine how the meat ought to be divided and eaten, the pig “embodies the notion of money” (520). The ethnographic work of Frédéric Laugrand, Antoine Laugrand, Gliseria Magapin, and Jazil Tamang shows that, depending on the context, the animal can represent various forms of economic goods: wealth (for both the living and the deceased), inheritance, luck, bountiful harvests, and gold ore. However, compared with traditional types of currency, the pig prepared during the aremag can be understood as currency in so far as “it is exchanged as wealth that socially and economically binds the deceased and the living” (497). While the lead article dissects what can be construed as a case study of an informal form of money, Lisandro E. Claudio’s article turns to the institution that manages the country’s official currency and monetary policy. It revisits [End Page 493] the career of Miguel Cuaderno, Central Bank governor from 1949 to 1960, and argues that his anti-inflationary policies were aligned with his austerity paradigm, which positions his ideas closer to the monetary conservatism of the International Monetary Fund than the economic progressivism attached to his anti-imperialist reputation. However, rather than focus on formal economic models or treatises, Claudio employs “a textual approach” to understand the governor’s ideas not just “numerically but also discursively” (531), thereby allowing for interdisciplinary dialogue between methods used in the humanities and economics. As shown in Cuaderno’s case, economic paradigms, like currencies and commodities, are never static and usually follow the global flow of ideas, a reality that has influenced the commercial landscape of the Philippines since the colonial period. For instance, the economy’s shift from mercantilism to liberalism, which transpired from the 1770s to the 1820s, was facilitated by a network of individuals and institutions imbued with the influence of the Basque Enlightenment, especially the Basque maritime trading diaspora. Aitor Anduaga emphasizes the role of the Royal Basque Society of Friends of the Country and the Royal Company of the Philippines as the key agents of this transition, enabling not just a qualitative change in the nature of the tradable commodities but, more importantly, the tectonic shift toward the establishment of a free trade regime. Like currencies, commodities necessitate a high degree of circulation, as highlighted in Leo Paulo I. Imperial’s study of the Albert Louis Ammen Transportation Company (Alatco). Founded in 1914, the Alatco, being the first bus company in the Philippines, pioneered motorized mobility outside the nation’s capital, in particular, in the Bicol Region. The company’s transport service was critical given that material prosperity in the region at that time was predicated on the shipment of abaca fibers from otherwise inaccessible mountainous slopes to the seaports and train stations that would link them to their markets in Manila and abroad. In...

Porter model of economic development at the back of an envelope

AbstractThe Porter model of economic development links the phases of development with national competitiveness. His model lies at the heart of the Global Competitiveness Index. It appears, curiously enough, that there is nowhere in the economics literature a concise explanation of the Porter model of economic development. This paper not only fills this gap but also draws the line of separation between formal economic models and narrative economic models; provides a rigorous presentation of Porter model of economic development; distinguishes between the Porter development path and Porter's law of economic development; strips Porter model to its bare essentials in a single picture; and finally, shows that the Porter model satisfies the condition known as the way the world works (www) constraint.

Reply to “Research incentives and research output”: a caution on quantity incentives and the use of economic models for higher education policy

Using an economic model of academic behaviour, Jorgensenn and Hanssen (Higher Education, 76, 1029–1049, 2018) find that a research incentive based on pages of output would not compromise research quality. Given that quantity is more easily observable, they suggest that such an incentive may have merit as an actual policy. This finding of the economic modelling exercise is shown to rest on an inadequate representation of the policy problem: once the policymaker’s resource trade-off is accounted for, the result fails to hold. A number of other findings and assumptions are critically examined, along with the problematic conflation of findings and assumptions. These concerns raise the broader matter of the merit of using formal economic models to inform higher education policy. A number of reasons are provided to substantiate the view that such models are likely to be inappropriate for this purpose and any policy proposals derived in this fashion ought to be treated with considerable caution.

Insolvent trading and voluntary administration in Australia: economic winners and losers?

AbstractAustralian directors who incur debts while their companies are insolvent can be pursued by the corporate regulator for compensation when their companies fail. Under the Australian insolvent trading laws, directors no longer experience ‘true’ limited liability, and as expected, they adjust their behaviour as a result. Identifying director's rational behaviour in an insolvent trading world is difficult as there are no formal economic models of director decision‐making under Australian current corporate law. In this paper, we develop such a model primarily for private companies. We incorporate the threat of insolvent trading as well as director's tactical use of voluntary administration to avoid insolvent trading litigation. We show that neither a combination of insolvent trading or voluntary administration can simultaneously ensure creditors‐best outcomes, eliminate insolvent trading and reduce director underinvestment.

Constitutive explanations in neuroeconomics: principles and a case study on money

So far, the methodological debate about neuroeconomics rarely refers to original methodological positions in the neurosciences. I confront one of the most influential ones, the constitutive explanations or mechanism approach, with methodological claims that directly relate the economic model of choice with neuronal embodiments, represented by Glimcher’s influential work. Constitutive explanations are composite and non-reductionist, therefore allow for recognizing complex causal interactions between basal neuronal phenomena and cognitive structures, also involving external symbolic media. I demonstrate the power of this methodology in discussing the example of money, which Glimcher posits as one of the most important research tasks in further developing neuroeconomics. Whereas Glimcher justifies neuroscientific reductionism by presenting an evolutionary rationale for deploying formal economic models on particular modules enabling choice, the case of money reveals the need for mechanistic explanations that include a substantial role for cultural evolution, though recognizing causal interactions with basal neuronal mechanisms.

Experimental Economics: Economic and Game Theoretic Principles in Experimental Research in the Social Sciences

Understanding individual and social decisions and how they are affected by the environment and institutional constraints is at the heart of the the social sciences. With the exception of psychology, traditionally in the social sciences empirical evidence is gathered via happenstance data. Such data are plagued with endogeneity problems and unobserved variables which make it difficult to draw causal inferences and reliably test theories. In the last thirty years laboratory experiments are increasingly adopted, especially in economics. Experimental economics research is often based on formal economic or game theoretical models with clear-cut rules which allow unambiguous inferences from changes in environmental variables. This model-based approach is tightly linked to two principles of experimental economics: the use of task related (monetary) incentives and the proscription of deception. Experimental economics plays an important role in theory and model falsification as well as in digging up behavioral regularities in individual and interactive decision making. Research in experimental economics was instrumental in the development of new models of other-regarding preferences, boundedly rational reasoning, adaptive learning, and ‘noisy’ equilibrium models. The toolbox of economics experiments informs research in decision neuroscience and is also applied in many other fields of the social sciences. Undoubtedly, experimental economics will continue to challenge newly emerging models and suggest new theories of human behavior and keep on to significantly contribute to knowledge in the social sciences.

Universities in a knowledge economy or ecology? Policy, contestation and abjection

Policies to repurpose universities as drivers of a global knowledge economy are often inspired by formal economic models based on marketable knowledge. Their rationality calls for transactional leaders to impose organizational models on universities to reshape their relationships both internally and with a plethora of stakeholders in the ‘field’ of the global knowledge economy. Polanyi’s ‘substantive economy’ and Tsing’s ‘liveable landscape’ provide alternative ways of conceptualizing this field as an ‘ecology’ where universities are embedded in a tissue of social relationships, which all have to be carefully configured to sustain the university’s principled existence. The article uses ‘anthropology of policy’ as an approach and Denmark as an example to trace how policy-makers’ top–down, ‘authoritative instrumentalist’ approach to university reform involved reworking the concept of ‘freedom’. In contrast, an anthropological and ‘democratic’ approach treats policy as a process in which people from many different sites in society engage in contesting top–down ideas and shaping the kinds of institutions and policy worlds they wish to inhabit. Academics, and especially senior women, contested the new meaning of ‘freedom’ for their research, teaching and public engagement, and the principles on which to organize boundaries and relations with surrounding society. In these contests, the exponents of a more ecological approach were defeated, cast out, abjected.

Conclusion

The three articles included in this special issue are extremely diverse, both in terms of objects studied and methods employed. Travelling from Russia to the EU is a long journey to undertake. Reconciling formal economic models, discourse analysis, and domestic institutionalism is no less challenging. However, at least three commonalities emerge: state formation, territorial identity and the importance of the informal dimension of federalism.

The Multiple Uses of Subjective Well-Being Indicators

There are barriers to the significant use of subjective well-being indicators in policy making. These barriers can be overcome, but this will take a co-ordinated effort. These indicators can play multiple roles. They can stimulate public debate, inform the development of formal or informal economic models, influence the choice of other indicators more directly related to policy outcomes, draw attention to important issues which might otherwise be ignored, input into a new form of cost benefit analysis, be used in before and after appraisal, and be used by the public to hold politicians to account. Subjective indicators are better placed to play these roles than either dashboards or indexes based on objective indicators. It is not clear whether they will play these roles and two scenarios are possible. In the first, the relatively marginal role the indicators are beginning to play in policy will be expand, but they will not move centre stage, or in any way challenge existing headline indicators such as gross domestic product. In the second, a set of tools is developed which politicians and journalists find useful, both for communicating and for developing their ideas. In this scenario, the ideas implicit in subjective well-being indicators find their way into public debate and thus drive policy change. As a result they do challenge existing headline indicators.

Why Can’t We All Just Get Along: Structural Modeling and Natural Experiments in Merger Analysis

Economists have two basic methodologies: structuralism, in which formal economic models control the analysis, and experimentalism, in which economic theory guides the analysis, but data from experiments determines the policy recommendation. The choice between the two approaches is often quite controversial, although each approach has its own strengths and limitations. Under either approach, the scientific method requires testing and, when choosing between models with comparable empirical support, verification. We describe how these approaches play out in merger analysis; where Cournot and Bertrand models of competition are the standard Structuralist tools. In contrast, Experimentalists generally search for some type of evidence of a relationship between structure and market performance. Which methodology is superior for merger analysis depends first on empirical testing of the relevant theories and then on how closely the facts of the market match the assumptions of the relevant economic theory and how much precision the analysis requires to generate a useful conclusion. We illustrate these tradeoffs with examples from three recently-litigated cases.

Social Interactions in Economic Models of Migration: A Review and Appraisal

This paper reviews economic research on labour migration which explicitly or implicitly accounts for socially mediated influences on migration choices. Both theoretical and empirical models are considered. The focus is on models analysing migration decision-making (initiation and perpetuation). The article also considers how economics accounts for non-market interactions related to settlement decisions, duration of stay, and labour market assimilation. Previous surveys have comprehensively reviewed the modelling of both migration behaviour and effects in economic theory. This paper focuses upon efforts to meld concepts traditionally pursued separately in economics and sociology into formal economic models.

An Analytical Model of E-Recruiting Investment Decision: An Economic Employment Approach

The online recruiting market is one of the most rapidly growing e-commerce areas. Since the mid-1990s, a number of e-recruiting methods such as job boards, corporate career Web sites, and e-recruiting consortia have been introduced into the labor market. Among them, e-recruiting with the use of a corporate career Web site has been touted as the most efficient and cost-effective recruiting method. While the corporate career Web sites have experienced a phenomenal growth, no formal economic models have been developed for the analysis and assessment of investment decisions in various e-recruiting technologies. In this paper, a mathematics-based economic decision model for e-recruiting technology investment is introduced to evaluate the economic impact of various e-recruiting technologies. A classical economic order quantity (EOQ) model was extended to include costs uniquely associated with recruiting activities such as staffing and coordination costs. We derive a minimum employment level for an optimal investment in e-recruiting technologies. The model suggests that the optimal investment cost increases rapidly near the minimum number of employees to be recruited, but the growth of the optimal investment cost slows down as the total number of employees becomes greater than the minimum number of employees to be recruited.

Buzz: face-to-face contact and the urban economy

This paper argues that existing models of urban concentrations are incomplete unless grounded in the most fundamental aspect of proximity; face-to-face contact. Face-to-face contact has four main features: it is an efficient communication technology; it can help solve incentive problems; it can facilitate socialization and learning; and it provides psychological motivation. We discuss each of these features in turn, and develop formal economic models of two of them. Face-to-face is particularly important in environments where information is imperfect, rapidly changing, and not easily codified, key features of many creative activities.

Buzz: face-to-face contact and the urban economy

This paper argues that existing models of urban concentrations are incomplete unless grounded in the most fundamental aspect of proximity; face-to-face contact. Face-to-face contact has four main features; it is an efficient communication technology; it can help solve incentive problems; it can facilitate socialization and learning; and it provides psychological motivation. We discuss each of these features in turn, and develop formal economic models of two of them. Face-to-face is particularly important in environments where information is imperfect, rapidly changing, and not easily codified, key features of many creative activities.

Multilateral negotiations over climate change policy

Negotiations in the real world have many features which tend to be ignored in policy modeling. They are often multilateral, involving many negotiating parties with preferences over outcomes that can differ substantially. They are also often multidimensional, in the sense that several policies are negotiated over simultaneously. Trade negotiations are a prime example, as are negotiations over environmental policies to abate carbon dioxide (CO 2). We demonstrate how one can formally model this type of negotiation process. We use a policy-oriented computable general equilibrium model to generate preference functions which are then used in a formal multilateral bargaining game. The case is to study climate change policy, but the main contribution is to demonstrate how one can integrate formal economic models of the impacts of policies with formal bargaining models of the negotiations over those policies.

The Pros and Cons of Merger Control

This book commemorates the 10th Anniversary of the Swedish Competition Authority and consists of four individual contributions from independent scholars and professionals with expertise in the economics of merger control. Neven and Roller evaluate decisions made by the European Commission for a sample of cases considered in the last ten years in light of the stock market anticipations of the deals' anti-competitive consequences. A main finding is that the Commission has done fairly well in clearing pro-competitive mergers, but not as well in prohibiting anti-competitive ones. The discrepancy between decisions and the stock market's anticipations may be associated with the scope of the concept of dominance, political influence, and possible shortcomings in the treatment of efficiencies. The evidence supports the view that changes in the treatment of efficiencies by the Commission as well as procedural and institutional reforms are needed. Since phase I discrepancies are more common, increasing the time limits, or, alternatively opening phase II investigations more frequently may well be justified. Kai-Uwe Kuhn examines the analysis of collective dominance following the judgment by the Court of First Instance on the Airtours case. Collective dominance may be simple in theory, but it is complex to verify in practice. Several criticisms are raised against the implementation of the concept by the Commission. A key weakness is a lack of solid economic analysis. The Airtours judgment may have effectively put a lid on Pandora's box of non-essential arguments previously advanced to support the creation of collective dominance in some cases. Alternative instruments, based mainly on the tools of economic theory, may prove better suited for identifying such behaviour. Gregory Werden and Luke Froeb advocate the use of formal economic models calibrated to fit the industry under review. Calibrated economic models provide quantitative tools for market delineation and direct estimation of the effects of proposed mergers on prices, quantities, and welfare. Simulating mergers often offers opportunities for understanding what happens when two companies become one better than those with traditional structural analysis. In particular, the technique is well suited for assessing the impact on competition of mergers involving differentiated consumer products. Henrik Horn and Johan Stennek explore the debate on whether firms in small countries are at a disadvantage because of EU merger control. Markets are often national, making it harder for firms in small countries to merge simply because they would very soon reach critical market shares, although they would still be relatively small in absolute size. It may therefore be beneficial for a small country to allow mergers that potentially hurt domestic consumers, since they have the advantage of making the companies large enough to be internationally competitive. A counter argument is that sacrificing consumer interests is not necessary since the companies can engage in cross-border mergers instead.

Unintended consequences: the impact of factor endowments, culture, and politics on long-run economic performance

In this book, based on 1995 Ohlin Lectures, Deepak Lal provides an accessible, interdisciplinary account of role of culture in shaping economic performance. Topics addressed include a possible future clash of civilizations, role of Asian values in East Asian economic miracle, cultural versus economic causes of social decay in West, and whether modernization leads to Westernization. Lal makes an important distinction between material and cosmological beliefs, showing how both were initially shaped by factor endowments and how they have evolved in response to changing historical pressures in different civilizations.Lal's first major theme is interaction of factor endowments, culture, and politics in explaining modern intensive growth in West. The other major theme is role of individualism--an inadvertent legacy of medieval Catholic Church--in promoting this growth, and strange metamorphoses this has caused in both West's cosmological beliefs and interaction between the West and rest. Lal takes account of relevant literature in history, anthropology, social psychology, evolutionary biology, neurology, and sociology, and economic history of regions and cultures that form Eurasia. An appendix shows how stories Lal tells can be described by four formal economic models.

A critical comment on Braun's “restricted access in exchange systems"*

In general this comment tackles the problems and difficulties potentially combined with an application of formal economic models and constructs, such as the Walras equilibrium and microeconmic demand theory, to pure sociological contexts. In particular, this is done by analyzing a further attempt, as recently suggested by Braun (1993 and 1994), to extend the well‐known Coleman Model by incorporating the embeddedness of social transactions in incomplete social network structures. “Pars pro toto” it is proved that Braun's conceptualization contains some weaknesses which imply that fundamental conclusions drawn in his article have to be revised.

Quantitative Methods, Historical Micro-Data and the Interpretation of Canadian Economic History

In evaluating the application of quantitative methods to historical micro-data in Canadian economic history, the authors focus on contributions to that branch of “micro” economic history marked by the collection and analysis of data describing personal and household economic and social characteristics. This approach involves the use of primary historical records, such as census manuscripts, probate records, assessment roils, land records, and parish records. The authors outline several illustrative studies, and offer a number of reasons why such studies have failed to make more significant impacts on the interpretation of Canadian history. They conclude that there has been a cautious underinvestment in such studies in Canada, partly as a result of the poor quality and incompleteness of the surviving census data, which have limited the applicability of formal economic models by economic historians. They offer several suggestions for better coordination of multi-disciplinary research efforts and wider dissemination of micro-data sets among quantitative historians.