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In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). Within a system of quantile regressions for four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies) we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions. Using daily data, we can trace out the spillover effects over time in a set of impulse response functions and find that they reach their peak after 10 to 15 days.
The paper uses fiscal reaction functions for a panel of euro-area countries to investigate whether euro membership has reduced the responsiveness of countries to shocks in the level of inherited debt compared to the period prior to succession to the euro. While we find some evidence for such a loss in prudence, the results are not robust to changes in the specification, such as an exclusion of Greece from the panel. This suggests that the current debt problems may result to a large extent from preexisting debt levels prior to entry or from a larger need for fiscal prudence in a common currency, while an adverse change in the fiscal reaction functions for most countries does not apply.
We consider the continuous-time portfolio optimization problem of an investor with constant relative risk aversion who maximizes expected utility of terminal wealth. The risky asset follows a jump-diffusion model with a diffusion state variable. We propose an approximation method that replaces the jumps by a diffusion and solve the resulting problem analytically. Furthermore, we provide explicit bounds on the true optimal strategy and the relative wealth equivalent loss that do not rely on results from the true model. We apply our method to a calibrated affine model and fine that relative wealth equivalent losses are below 1.16% if the jump size is stochastic and below 1% if the jump size is constant and γ ≥ 5. We perform robustness checks for various levels of risk-aversion, expected jump size, and jump intensity.
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model calibrates well to U.S. consumption data from the Consumer Expenditure Survey.
Existing studies from the United States, Latin America, and Asia provide scant evidence that private schools dramatically improve academic performance relative to public schools. Using data from Kenya—a poor country with weak public institutions—we find a large effect of private schooling on test scores, equivalent to one full standard deviation. This finding is robust to endogenous sorting of more able pupils into private schools. The magnitude of the effect dwarfs the impact of any rigorously tested intervention to raise performance within public schools. Furthermore, nearly twothirds of private schools operate at lower cost than the median government school.
A large empirical literature has shown that user fees signicantly deter public service utilization in developing #countries. While most of these results reflect partial equilibrium analysis, we find that the nationwide abolition of public school fees in Kenya in 2003 led to no increase in net public enrollment rates, but rather a dramatic shift toward private schooling. Results suggest this divergence between partial- and general-equilibrium effects is partially explained by social interactions: the entry of poorer pupils into free education contributed to the exit of their more affluent peers.
The recent wave of randomized trials in development economics has provoked criticisms regarding external validity. We investigate two concerns—heterogeneity across beneficiaries and implementers—in a randomized trial of contract teachers in Kenyan schools. The intervention, previously shown to raise test scores in NGO- led trials in Western Kenya and parts of India, was replicated across all Kenyan provinces by an NGO and the government. Strong effects of shortterm contracts produced in controlled experimental settings are lost in weak public institutions: NGO implementation produces a positive effect on test scores across diverse contexts, while government implementation yields zero effect. The data suggests that the stark contrast in success between the government and NGO arm can be traced back to implementation constraints and political economy forces put in motion as the program went to scale.
The efficacy of monetary authority actions depends primarily on the ability of the monetary authority to affect inflation expectations, which ultimately depend on agents' trust. We propose a model embedding trust cycles, as emerging from sequential coordination games between atomistic agents and the policy maker, in a monetary model. Trust affects agents' stochastic discount factor, namely the price of future risk, and their expectation formation process: these effects in turn interact with the monetary transmission mechanism. Using data from the Eurobarometer survey we analyze the link between trust on the one side and the transmission mechanism of shocks and of the policy rate on the other: data show that the two interact significantly and in a way comparable to the obtained in our model.
This paper investigates risk-taking in the liquid portfolios held by a large panel of Swedish twins. We document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth, leading to different risk sensitivities across investors. Human capital, which we estimate directly from individual labor income, also drives risk-taking positively, while internal habit and expenditure commitments tend to reduce it. Our micro findings lend strong support to decreasing relative risk aversion and habit formation preferences. Furthermore, heterogeneous risk sensitivities across investors help reconcile individual preferences with representative-agent models.
We develop a dynamic network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.
This paper analyzes the equilibrium pricing implications of contagion risk in a Lucas-tree economy with recursive preferences and jumps. We introduce a new economic channel allowing for the possibility that endowment shocks simultaneously trigger a regime shift to a bad economic state. We document that these contagious jumps have far-reaching asset pricing implications. The risk premium for such shocks is superadditive, i.e. it is 2.5\% larger than the sum of the risk premia for pure endowment shocks and regime switches. Moreover, contagion risk reduces the risk-free rate by around 0.5\%. We also derive semiclosed-form solutions for the wealth-consumption ratio and the price-dividend ratios in an economy with two Lucas trees and analyze cross-sectional effects of contagion risk qualitatively. We find that heterogeneity among the assets with respect to contagion risk can increase risk premia disproportionately. In particular, big assets with a large exposure to contagious shocks carry significantly higher risk premia.
In Germany, as in almost all industrial countries, active pharmaceutical substances can now be found in virtually all water bodies and occasionally also in drinking water. Even though the concentrations in question tend to be very low, there are initial signs of their impact on aquatic life. There is no evidence as yet of any acute consequences for human health. It is, however, impossible to rule out long-term consequences from these minimal concentrations or unexpected effects from the interaction between various active ingredients (cocktail effect). At special risk here are sensitive segments of the population such as children and the chronically ill. There is thus a need for action on precautionary grounds.
The main actors in the health system are largely unaware of the problem posed by drug residues in water. Although knowledge cannot be equated with awareness – given the existence of the ‘not wanting to know' phenomenon – the first step is to generate a consolidated knowledge base. Only by creating awareness of the problem can further strategies be implemented to ultimately enlighten and bring about behavioural change. At stake here is the overall everyday handling of medications, including prescription, compliance, and drug-free disease prevention down to the doctor-patient relationship. The latter, namely, is often characterised by misunderstandings and a lack of communication about the – supposed – need to prescribe drugs.
The first part of the strategy for the general public involves using various channels and media to address three different target groups. These were identified by ISOE in an empirical survey as reacting differently to the problem under review:
· ‘The Deniers/Relativists'
· ‘The Truth-Seekers'
· ‘The Hypersensitives'
The intention is to address each target group in the right tone and using the most suitable line of reasoning via specific media and with the proper degree of differentiation. The ‘Truth-Seekers' play an opinion-leading role here. They can be provided with highly differentiated information through sophisticated media which they then pass on to their dialogue partners in an appropriate form.
The second part of the strategy for the general public relates to the communication of proper disposal routes for expired drugs. The goal is to confine disposal to pharmacies so that on no account are they flushed down the sink or toilet. Based on an analysis of typical errors in existing communications media on this topic, ISOE prepared recommendations for drafting proper information materials.
In addressing pharmacists, the first priority is to convey hard facts: to this end we propose a PR campaign to place articles in the main specialist media. At the same time, the subject should feature in training and continuing education programmes. Another aim is to strengthen the advisory function of the pharmacies. The environmentally sensitive target group would indeed react positively to having their attention drawn to the issue of drug residues in water. For all other customers, the pharmacists can and should act as consultants: they emphasise how important it is to take medication as instructed (compliance) and use suitable pack sizes, and warn older customers in particular about the potential hazards of improper drug intake.
The first stage of the communications strategy for doctors likewise revolves around knowledge. Here, however, it is important to take into account their self-image as scientists while in fact having little grasp of this specific area. The line to take is that of ‘discursive selfenlightenment'. This means that the issue of drug residues in water cannot be conveyed to doctors by laymen but must be taken up and imparted via the major media of the medical profession and by medical association officials (top-down).
The second stage, namely that of raising doctors’ awareness of the problem, is likely to encounter strong resistance from some of the medical profession. They may fear a threat of interference in treatment plans from an environmental perspective and feel the need to emphasise that doctors are not responsible for environmental issues. As shown in empirical surveys by ISOE, such a defensive reaction is ultimately down to an underlying taboo: people are loath to discuss the over-prescription taking place in countless doctors' surgeries. And it is a fact that this problem cannot be tackled from the environmental perspective, although the goals of water protection are indeed consistent with the economic objectives of restraint in the deployment of drugs. Any communications measure for this target group has to bear in mind that doctors feel restricted by what they see as a ‘perpetual health reform' no matter which government is in power. On no account are they prepared to tolerate any new form of regulation, in this case for environmental reasons.
An entirely different view of the problem is taken by ‘critical doctors' such as specialists in environmental health and those with a naturopathic focus. They are interested in the problem because they see a connection between the quality of our environment and our health. What is more, they have patients keen to be prescribed as few drugs as possible and who are instead interested in ‘talking medicine'. So, any communication strategy intent on tackling the difficult problem of oversubscribing drugs needs to look carefully at the experiences of these medical professionals and also at a ‘bottom-up strategy'.
Implementation of strategic communications should be entrusted to an agency with experience in ‘issue management'. Knowledge of social marketing and the influencing of behaviour are further prerequisites. All important decisions should be taken by a consensus committee (‘MeriWa'1 round table), in which the medical profession, pharmacists and consumers are represented.
This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis.
Basel III and CEO compensation in banks: pay structures as a regulatory signal : [March 6, 2013]
(2013)
This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis.
We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.
Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks’ runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk.
This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. However, the significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we also document that only idiosyncratic volatility (ivol) has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting according to the size of idiosyncratic volatility, we only find a significant ivol anomaly for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portfolios are all positive. Double sorting on idiosyncratic volatility and R&D expenses also reveals these differences between R&D and non-R&D firms. To simultaneously control for several explanatory variables, we also run panel regressions of portfolio alphas which confirm the relative importance of idiosyncratic volatility that is amplified by R&D expenses.
We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index.
Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth.
We test whether investor mood affects trading with data on all stock market transactions in Finland, utilizing variation in daylight and local weather. We find some evidence that environmental mood variables (local weather, length of day, daylight saving and lunar phase) affect investors’ direction of trade and volume. The effect magnitudes are roughly comparable to those of classical seasonals, such as the Monday effect. The statistical significance of the mood variables is weak in many cases, however. Only very little of the day-to-day variation in trading is collectively explained by all mood variables and calendar effects, but lower frequency variation seems connected to holiday seasons.
We use unique data from financial advisers’ professional exam scores and combine it with other variables to create an index of financial sophistication. Using this index to explain long-term stock return expectations, we find that more sophisticated financial advisers tend to have lower return expectations. A one standard deviation increase in the sophistication index reduces expected returns by 1.1 percentage points. The effect is stronger for emerging market stocks (2.3 percentage points). The sophistication effect contributes 60% to the model fit, while employer fixed effects combined contribute less than 30%. These results help understand the formation of potentially excessively optimistic expectations.
A natural experiment in which customer-owned mutual companies converted to publicly listed firms created a plausibly exogenous shock to the stock market participation status of tens of thousands of people. We find the shock changed the way people vote in the affected areas, with a 10% increase in share-ownership rate being followed by a 1.3%–3.1% increase in right-of-center vote share. The institutional details and additional tests suggest that wealth, liquidity, and tax-related incentives cannot fully explain the results. A plausible explanation is that the associated increase in the salience of stock ownership causes a shift in voters’ attention.
The European Commission recently put forward a proposal for a regulation to amend and strengthen the 2009 version of the EU's rules on the regulation of credit rating agencies ("CRA3"). Among other things, Art. 35a of the draft proposal introduces strict liability for rating agencies. This liability proposal is at odds with the aim to strengthen competition in the rating sector and could have a chilling effect on capital markets. The paper analyses existing rules on civil liability of rating agencies under different legal systems. Subsequently, the provision under Art. 35a of the Draft Proposal is examinded more closely. Suggestions on possible improvemts of the proposal are made.
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We uncover an additional factor contributing to debt culture, namely social influences emanating from the perceived average income of peers. Using unique information from a representative household survey of the Dutch population that circumvents the need to define the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing – especially among those who consider themselves poorer than their peers – and on indebtedness, suggesting a link to financial distress. We check the robustness of our results using several approaches to rule out spurious associations and handle correlated effects.
Between the 12th and 16th centuries the Hanseatic merchants obtained extremely important privileges from the rulers of the countries with whom they traded. These secured their commercial and legal status and the autonomy of their staples in Flanders, England, Norway, Denmark and Russia. Within these privileges no other subject receives so extensive a treatment as court procedure. Here, the single most important concern of the Hanseatic merchants was their position in front of alien courts. The article analyses the great attention given to court procedure in the twenty main Hanseatic privileges: What did the merchants require? Which procedural rules were necessary to encourage them to submit their disputes to alien public court instead of taking the matter into their own hands and turning to extra-judicial methods to resolve matters, e.g. cancellation of business relations, boycotts or even trade wars? This analysis suggests that the two most important concerns reflected in the procedural rules were to avoid delay to the next trading trip and to ensure a rational law of proof. The former was addressed by pressing for short-term scheduling and swift judgment and by the dispensation from appearing before the court in person. The latter included avoidance of duels and other ordeals and the attempt to obtain parity by appointing half of the jurors from Hanseatic cities.
Improvements in water infrastructure in developing countries are of major importance for achieving access to clean water. CuveWaters, a research based IWRM project, currently underway in Namibia, is testing different technical options to de-centralise water supply and upgrade sanitation. The Cuvelai Basin is affected by highly variable precipitation, mostly saline groundwater and a lack of perennial rivers. Water management is characterised by strong dependency on a water pipeline. Finding ways to improve the situation calls for a good grasp of the local situation regarding water utilisation patterns. Technologically sophisticated concepts can easily clash with users’ socio-cultural needs and everyday behaviour as well as their understanding of planning and maintenance. A demand-responsive approach has therefore been developed. It combines a qualitative socio-empirical perspective with participatory planning. This paper discusses method development, empirical application and results. The approaches aim is to support mutual learning as a basis for a sustainable change process.
Namibia is known to be the most arid country south of the Sahara. Average annual rainfall is not only relatively low in most parts of the country, it is also highly variable. Only 8 per cent of the country receives enough rain during a normal rainy season to practice rainfed cultivation. At the same time between 60 per cent and 70 per cent of the population depend on subsistence agro-pastoralism in non-freehold or communal areas. Against the background of rising unemployment, the livelihoods of the majority of these people are likely to depend on natural resources in the foreseeable future.
Natural resources generally are under considerable strain. As the rural population increases, so is the demand for natural resources, land and water specifically. Dependency on subsistence farming which is the result of large scale rural poverty exacerbates the problem. Large parts of the country are stocked injudiciously, resulting in overgrazing and water is frequently overabstracted, leading to declining water tables (MET 2005: 2).
Unequal access to both land and water has prompted government to introduce reforms in these sectors. These reforms were guided by the desire to manage resources more sustainably while providing more equal access to them. In terms of NDP 2, sustainability means to use natural resources in such a way so as not to ‘compromise the ability of future generations to make use of these resources’ (NDP 2: 595).
Immediately after Independence government started reform processes in the land and water sectors. However, these reforms have happened at different paces and largely independent of each other. Increasingly policy makers and development practitioners realised that land and water management needed to be integrated, as decisions about land management and land use options had a direct impact on water resources. Conversely the availability of water sets the parameters for what is possible in terms of agricultural production and other land uses. The north-central regions face a particular challenge in this regard as the region carries more livestock than it can sustain in the long run. At the same time, close to half the households do not own any livestock. Access to livestock by these households would improve their abilities to cultivate their land more efficiently in order to feed themselves and thus reduce poverty levels.
But livestock are a major consumer of water. In 2000 livestock was consuming more water than the domestic sector. The figures were 77Mm3/a and 67Mm3/a respectively (Urban et al. 2003 Annex 7: 2). This situation has prompted a Project Progress Report on the Namibia Water Resources Management Review in 2003 to conclude that Given the extreme water scarcity in most parts of the country, land and water issues are closely linked. It therefore seems indispensable to mutually adjust land – and water sector reform processes (Ibid: 20).
This paper will briefly look at four institutions that are central to land and water management with a view to assess the extent to which they interact. These are Communal Land Boards, Water Point Committees, Traditional Authorities and Regional Councils. A discussion of relevant policy documents and legislative instruments will investigate whether the existing policy framework
provides for an integrated approach or not. Before doing this, it appears sensible to briefly situate these four institutions in the wider maze of institutions operating at regional and
sub-regional level. All these institutions – important as they are in the quest to improve participation at the regional and sub-regional level – are competing for time and input fros mallscale farmers.
Although intellectual property law is a distinctively Western, modern, and relatively young body of law, it has spread all over the world, now encompassing all but a very few outsiders such as Afghanistan, Somalia, and Vanuatu. This article presents three legal transfers that contributed to this development: first, from real property in land and movables to intellectual property in the late 18th century in Western Europe; second, from Western Europe, in particular from the United Kingdom and France to the rest of the world during the colonial era in the 19th and early 20th century; third, from the protection of new knowledge to the protection of traditional knowledge, held by indigenous communities in developing countries, on 5 August 1963. This story illuminates how legal transfers in a broad sense – including, but not limited to legal transplants - drive the evolution of law.
In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy using a new database of models designed for such investigations. We focus on three representative models due to Christiano, Eichenbaum, Evans (2005), Smets and Wouters (2007) and Taylor (1993a). Although these models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, optimized monetary policy rules differ across models and lack robustness. Model averaging offers an effective strategy for improving the robustness of policy rules.
In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
This paper investigates how an office-motivated incumbent can use transparency enhancement on public spending to signal his budgetary management ability and win re-election. We show that when the incumbent faces a popular challenger, transparency policy can be an effective signaling device. A more popular challenger can reduce the probability to enhance transparency, while voters can be better off due to a more informative signaling. It is also shown that a higher level of public interest in fiscal issues can increase the probability of enhancing transparency, while voters can be worse off by a less informative signaling.
This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
This paper investigates the effect of anticipated/experienced regret and pride on individual investors’ decisions to hold or sell a winning or losing investment, in the form of the disposition effect. As expected the results suggest that in the loss domain, low anticipated regret predicts a greater probability of selling a losing investment. While in the gain domain, high anticipated pride indicates a greater probability of selling a winning investment. The effects of high experienced regret/pride on the selling probability are found as well. An unexpected finding is that regret (pride) seems to be not only relevant for the loss (gain) domain, but also for the gain (loss) domain. In addition, this paper presents evidence of interconnectedness between anticipated and experienced emotions. The authors discuss the implications of these findings and possible avenues for further research.
After nearly two decades of US leadership during the 1980s and 1990s, are Europe’s venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit – if any – each particular firm’s investors choose for the venture.
Venture capital (VC) investment has long been conceptualized as a local business , in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) network. Consistent with the view that local networks matter, existing research confirms that local and geographically distant portfolio firms are sourced, syndicated, funded, and monitored differently. Curiously, emerging research on VC investment practice within the United States finds that distant investments, as measured by “exits” (either initial public offering or merger & acquisition) out-perform local investments. These findings raise important questions about the assumed benefits of local network membership and proximity. To more deeply probe these questions, we contrast the deal structure of cross-border VC investment with domestic VC investment, and contrast the deal structure of cross-border VC investments that include a local
partner with those that do not. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 suggests that cross-border investment practice, in terms of deal sourcing, syndication, and performance indeed change with proximity, but that monitoring practices do not. Further, we find that the inclusion of a local partner in the investment syndicate yields surprisingly few benefits. This evidence, we argue, raises important questions about VC investment practice as well as the ability of firms to capture and lever the presumed benefits of network membership.
From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere.
In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus.
We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.
In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.
We examine both the degree and the structural stability of inflation persis tence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. Economic theory, however, provides various reasons -for example downward wage rigidities or menu costs- to expect higher inflation persistence at the upper than at the lower tail of the conditional inflation distribution.
Based on post-war US data we indeed find slower mean reversion in response to positive than to negative shocks. We find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. Inflation persistence has decreased and become more homogeneous across quantiles. Persistence at the conditional mean became more informative about the degree of persistence across the entire conditional inflation distribution. While prior to the 1980s inflation was not mean reverting in response to large positive shocks, our evidence strongly suggests that since the end of the Volcker disinflation the unit root can be rejected at every quantile including the upper tail of the conditional inflation distribution.