Windfall Gain Research Articles

Expectations, Identity and Affordability: The Housing Dreams of Australia’s Generation Y

Australia’s generation Y has grown up believing in ‘the great Australian dream’, which is inseparable from home ownership. It embodies a sense of independence, possibly entitlement, and an expectation of economic and social advancement. In this paper Generation Y’s ‘dreams’ regarding their first home are examined with perceived risk being applied as a theoretical lens. It is found that Generation Y has expectations regarding the quality of their first home that significantly exceeds their earning capacity and that the significance of housing as an expression of identity acts as a driver of both the gap between earnings and expectations and perceptions of affordability. Nevertheless Generation Y retains a strong belief that they can ultimately get what they want and are willing to wait until their household income increases as a result of personal success, windfall gain such as inheritance or entering into a marriage/partnership.

Preparedness, Crisis Management and Policy Change: The Euro Area at the Critical Juncture of 2008–2013

Research Highlights and Abstract This article contributes to the literature on ideational and institutional change at critical junctures more generally, and in the context of economic crises in particular. In the context of explosive economic crises critical junctures should be conceptualised as consisting of two distinct phases—a phase of emergency crisis management and a subsequent phase of purposeful institution building. The analytical significance of the crisis management phase lies in its tendency to create path dependencies for subsequent ideational entrepreneurs and institution building efforts. Crisis management is always ‘bricolage’. However, in order to understand why certain tools are ‘at hand’ during a crisis, one needs to take into account the variable of crisis preparedness. Contingency planning for non-normal times is a constitutive aspect of any economic policy paradigm. The empirical analysis shows that the euro area's lack of preparedness caused the ECB to assume a dominant position during the emergency phase of the crisis. This windfall gain in power for the ECB has already begun to shape the future institutional architecture of the EMU. Focusing on the experience of the euro area in general, and the ECB in particular, this article argues that in the context of explosive financial crises a phase of emergency crisis management precedes the phase of purposeful institution building. Importantly for our understanding of policy change, crisis management measures create their own path dependencies. However, albeit often improvised, crisis management decisions are not entirely contingent. The article therefore introduces the notion of preparedness, which measures the extent to which the pre-crisis policy paradigm was prepared for the joint occurrence of, in this case, a systemic banking crisis and a sovereign debt crisis. The analysis shows that the Euro area's lack of preparedness caused the ECB to assume a dominant position in the euro area during the emergency phase of the crisis. This windfall gain in power for the ECB has already begun to shape the future institutional architecture of the EMU.

To be or not to be: dilemma of Africa's economic engagement with China and other emerging economies

In this study an attempt to examine the China−Africa trade potential and the implications of exploiting that potential is made. The potential is examined using the Trade Complementarity Index and the stochastic frontier gravity model of trade. The results suggest that there is considerable potential to expand China−Africa trade. Apart from reforming trade policies, removing other behind-the-border socio-political-institutional constraints and improving trade facilitation would contribute to realization of this potential. However, the realization of this potential may entail locking African countries in primary commodity sectors (and hence de-industrialization). A non-parametric test using the ‘Galtonian regression method’ as well as a multi-country version of the Heckscher−Ohlin−Vanek trade model is employed to test this pattern. The results suggest that African countries are characterized by re-deepening specialization in the primary commodity exports sector owing to China's commodity demand surge. We also found that the indirect impacts of this demand surge are more significant. This calls for strategic policy engagement with China, India and other emerging economies such as Brazil with the aim of balancing between the temporary resource windfall gain and the future industrialization and development of the continent.

Easy come, easy go

A growing number of experimental studies focus on the differences between the lab and the field. One important difference between many lab and field experiments is how the endowment is obtained. By conducting a dictator game experiment, we investigate the influences of windfall and earned endowment on behavior in the laboratory and in the field. We find subjects donate more in both environments if the endowment is a windfall gain. However, although the experimental design was intended to control for all effects other than environment, there are significant differences in behavior between the lab and the field for both windfall and earned endowment. This points to the importance of discussing the context when interpreting both laboratory and field experiment results as well as when conducting replication studies.

Inequality aversion and the house money effect

In this paper, we analyse if individual inequality aversion measured with simple experimental games depends on whether the monetary endowment in these games is either a windfall gain (“house money”) or a reward for a certain effort-related performance. We then examine whether the way of preference elicitation affects the explanatory power of inequality aversion in social dilemma situations. Our results indicate that individual inequality aversion measured by the model of Fehr and Schmidt (Quarterly Journal of Economics 114(3):817–868, 1999) is not generally robust to the way endowments emerge. The inequality aversion model has only low predictive power for individual behaviour. It performs best when the endowment is house money and relatively small.

Inflation, nominal portfolios, and wealth redistribution in Canada

Abstract This paper quantifies the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities. We find that the effects are non‐trivial even for low inflation episodes. The main winners are young, middle‐class households with mortgage debt. The government receives a windfall gain from its long‐term debt. The old, the rich or the middle‐aged, middle‐class lose, largely owing to their holdings of bonds and non‐indexed defined benefit pension assets. Finally, our Canada‐U.S. comparison reveals that the extent of redistributions can be quite different even between countries of similar economic and legal environments.

Entrepreneurship, windfall gains and financial constraints: Evidence from Germany

We investigate the link between the propensity to become an entrepreneur and the exogenous release from financial constraints in Germany. This is defined in terms of the movement from employment to self-employment on receipt of a financial windfall. A theoretical framework developing Evans and Jovanovic (1989) is set up and tested with panel data from German households. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. The data reveal that differences in ability and income affect the change in employment status. We also report that there is no evidence that becoming self-employed involves the anticipation of windfall gains.

Do women behave more reciprocally than men? Gender differences in real effort dictator games

AbstractWe analyze dictator allocation decisions in an experiment where the recipients have to earn the pot to be divided with a real-effort task. As the recipients move before the dictators, their effort decisions resemble the first move in a trust game. Depending on the recipients’ performance, the size of the pot is either high or low. We compare this real-effort treatment to a baseline treatment where the pot is a windfall gain and where a lottery determines the pot size. In the baseline treatment, reciprocity cannot play a role. We find that female dictators show reciprocity and decrease their taking-rates significantly in the real-effort treatment. This treatment effect is larger when female dictators make a decision on recipients who successfully generated a large pot compared to the case where the recipients performed poorly. By contrast, there is no treatment effect with male dictators, who generally exhibit more selfish behavior.

The impact of macroeconomic indicators on stock exchange performance in Kazakhstan

This paper aims to investigate the causal relationship between macroeconomic indicators and Kazakhstan stock exchange (KASE) index. The results indicate the existence of cointegrations between these series implying violation of market efficiency hypothesis. The results of the study are in compliance not only with theory but also with the issues in practice. Using the bound testing approach, within the Autoregressive Distributed Lag (ARDL) model framework, we examine their long-run relationship. Johansen Cointegration test, Engel-Granger two-step approach and Granger causality test reveal that the main determinants of KASE are income per capita, inflation and the exchange rate and dummy variable accounting for worldwide crisis impact. Other effect on stock index comes from oil price volatility measure, causing windfall gain effect as a consequence of rapid, but temporary, increase in oil price. Key words: KASE, stock market return, macroeconomic variables, natural resource curse.

Do Women Behave More Reciprocally than Men? Gender Differences in Real Effort Dictator Games

We analyze dictator allocation decisions in an experiment where the recipients have to earn the pot to be divided with a real-effort task. As the recipients move before the dictators, their effort decisions resemble the first move in a trust game. Depending on the recipients’ performance, the size of the pot is either high or low. We compare this real-effort treatment to a baseline treatment where the pot is a windfall gain and where a lottery determines the pot size. In the baseline treatment, reciprocity cannot play a role. We find that female dictators show reciprocity and decrease their taking-rates significantly in the real-effort treatment. This treatment effect is larger when female dictators make a decision on recipients who successfully generated a large pot compared to the case where the recipients performed poorly. By contrast, there is no treatment effect with male dictators, who generally exhibit more selfish behavior.

Evolution of Fairness: Rereading the Data

J. Henrich et al. 's Research Article (“Markets, religion, community size, and the evolution of fairness and punishment,” 19 March, p. [1480][1]) is a valuable addition to the growing literature testing behavioral hypotheses through careful cross-cultural measurement. However, the data they report falsify their theory. The authors propose that increases in third-party punishment of unfairness drove an increase in fairness norms, enabling the emergence of large-scale market economies. Critical to this theory is their hypothesis that exposure to third-party punishment actually elicits an increase in fairness. Relevant to evaluating this hypothesis, the authors conducted two near-parallel economic games: a Dictator Game (in which a “dictator” unilaterally divides a windfall gain with another person—a measure of fairness) and a Third-Party Punishment Game (the Dictator Game with the addition of exposure to possible third-party punishment). Their central hypothesis requires that adding punishment to the Dictator Game will increase fairness, but their data show that the addition of punishment decreases fairness (p. 1483). This finding unambiguously refutes their central hypothesis. Henrich et al. also assert that their data—showing patterned cultural variability in cooperation—can determine whether modern levels of generosity and altruism are driven by an evolved social psychology or by cultural processes. The authors claim that their data decisively favor the cultural processes hypothesis. Yet nothing in their data can test (even in principle) whether it is psychological or cultural processes (or both) that cause these cross-cultural differences. Only long-abandoned instinct-as-reflex theories expect invariant responses in the face of different social inputs. By contrast, modern adaptationist theories predict that our evolved social psychology will be calibrated by relevant environmental inputs. Many of these inputs—such as the local value of long-term cooperative relationships and the fidelity of reputations—are likely to covary with market integration, making it at least as likely that an evolved, context-sensitive social psychology is driving the results that the authors observe. That is, psychological and cultural theories both predict cross-cultural variation. [1]: /lookup/doi/10.1126/science.1182238

Stability and Explanatory Power of Inequality Aversion – An Investigation of the House Money Effect

In this paper, we analyse if individual inequality aversion measured with simple experimental games depends on whether the monetary endowment in these games is either a windfall gain (“house money”) or a reward for a certain effort-related performance. Moreover, we analyse whether the way of preference elicitation affects the explanatory power of inequality aversion in social dilemma situations. Our results indicate that individual inequality aversion is not generally robust to the way endowments emerge. Furthermore, the use of money earned by real efforts instead of house money does not improve the generally low predictive power of the inequality aversion model. Hypotheses based on the inequality aversion model lose their predictive power when preferences are elicited with earned money.

Loss Aversion and Intertemporal Choice: A Laboratory Investigation

We present results from a laboratory study of loss aversion in the context of intertemporal choice. We investigate whether the provision of (windfall) endowments results in different elicited discount rates relative to subjects who earn income or earn and retain the income for a period before making intertemporal decisions. We hypothesize that loss aversion in an intertemporal choice yields higher discount rates among subjects earning and retaining. Our results support this hypothesis: among subjects who earn and retain their income we elicit substantially higher discount rates relative to those experiencing a windfall gain.

Ex-dividend Arbitrage in Option Markets

We examine the behavior of call options surrounding the underlying stock's ex-dividend date. The evidence is inconsistent with the predictions of a rational exercise policy; a significant fraction of the open interest remains unexercised, resulting in a windfall gain to option writers. This triggers a sophisticated trading scheme that enables short-term traders to receive a significant fraction of the gains. The trading scheme inflates reported volume and distorts its traditional relations to liquidity. The dramatic increases in the volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Promotion de l'investissement : quelle politique mettre en œuvre ?

Résumé Quel regard la science économique porte-telle sur les instruments de politique économique visant à soutenir l’investissement ? La contribution parcourt les principaux arguments permettant d’opposer incitants ciblés et incitants généraux . Deux approches éclairent cette question. Un premier éclairage, ex post , considère tour à tour les critères de sélectivité, gouvernance publique, neutralité et efficience. La seconde approche, ex ante , relève l’effet attendu des différents instruments sur le coût du capital et les taux effectifs de taxation. Pour mettre la question en perspective, la contribution débute par quelques observations statistiques sur les performances de croissance économique et d’investissement dans les trois régions du pays.

Voracity and Growth Reconsidered

This article investigates economic performance when enforceable property rights are missing and subsistence needs matter. It shows that if per capita income is sufficiently high, a windfall gain in productivity triggers behavior that leads to higher growth (the normal reaction). The same shock can produce voracious behavior and lower growth when faced by poor economic agents, in particular when their productivity is low and their society is largely fractionalized. This leads to a re-assessment of the voracity effect. Economic and social performance depends no longer on character traits (the assumed curvature of the utility function) as assumed in the earlier literature. Instead, the initial degree of development, the state of technology, and the make up of society are decisive. An extension towards a two-sector economy shows that conditions for an active informal sector of low productivity are much less restrictive than originally thought.

The income distributive implications of recent private health insurance policy reforms in Australia

The Australian government implemented a series of private health insurance (PHI) policy reforms between 1997 and 2000. As a result, the proportion of the population with PHI coverage increased by more than 35%. However, this study found significant evidence that the policy reform disproportionately favours high-income earners. In particular, the 30% premium subsidy represents a windfall gain for households which would have purchased PHI even without the rebate. The amount of such gain is estimated to be around $900 million per year, a large proportion of which went to higher income households.

BITs and bargains: Strategic aspects of bilateral and multilateral regulation of foreign investment

Bilateral investment treaties (BITs) provide international standards for the protection of foreign investment. Andrew Guzman has argued that BITs represent a prisoner's dilemma for developing countries—they would have been better off operating under customary international law. We formalize and critique Guzman's claim and demonstrate that a prisoner's dilemma is not necessary to explain the developing countries’ behavior. Instead, the optimal strategy for newly independent states may have been to reap a windfall gain by a temporary period of expropriation and then to use BITs to commit to respecting property rights to new foreign investments. Finally, we argue that a multilateral agreement on investment (MAI) is now unlikely because the widespread coverage of BITs has narrowed the achievable surplus of an MAI.

Misadventure and the Form of Payment in Corporate Acquisitions

If the share price of a firm rises on the announcement of its intention to acquire another firm, it is generally perceived to be a positive signal from the market of the logic of the proposed transaction, and the likelihood that the transaction will consummate. Notwithstanding that some portion of the rising price may be as a result of speculators hoping to realize a windfall gain over the offer period, the increase in price may also be interpreted as an initial reflection of the expected value to be created from the proposed combination of the two entities. In the light of a significant body of evidence suggesting that returns arising from acquisitions are negative — or, at best, neutral — to shareholders in bidding firms,1 a rising share price for a bidding firm should be a cause for celebration.

Behavioral Economics and Fundamental Tax Reform

The most common use of the insights of behavioral economics in the cause of fundamental tax reform has been to argue for the employment of ad hoc tax-favored savings vehicles - such as individual retirement accounts (IRAs), medical, and educational savings accounts, and so on - within an income-tax framework. There is no reason under a rational life-cycle model of individual savings behavior why these ad hoc vehicles should work, to increase savings on the micro (individual) or macro (collective social) levels, whether they follow the postpaid approach of traditional IRAs or the prepaid approach of Roth IRAs. Prepaid accounts generate a windfall gain to existing savers, and offer no cash-flow relief for current non-savers to help them save. Postpaid accounts can be easily arbitraged by borrowing, or dissaving. Proponents of these plans thus point to lessons from behavioral economics, arguing that myopic individuals who use mental accounts might be led to save by the special vehicles. This essay takes exception to this standard view. It argues that this view of matters misconceives basic principles of behavioral economics, using ad hoc findings in an ad hoc fashion to justify ad hoc, incremental reform. Best understood, behavioral economics suggests that ad hoc tax favored plans will not work. This counter-theory is supported by the data, which show, broadly, decades of ad hoc tax-favored vehicles within the Internal Revenue Code, with more apparently on the way, matched by convincing evidence of little or no savings by most Americans, and little savings in the aggregate. The essay concludes by suggesting that a happier, more stable marriage of behavioral economics and fundamental tax reform suggests fundamental, not incremental, reform of the tax system.