Private Enterprise Research Center

The existing literature holds that the willingness to pay (WTP) for mortality risk reduction increases with the initial risk because of a "dead-anyway" effect, that is, a higher initial risk leads to a lower expected marginal utility of wealth. However, individuals are often able to undertake costly actions on their own that reduce the fatality probability, allowing for a "high-payment" effect in which wealth becomes more valuable as part of it is diverted to fighting fatality risk. The high-payment effect outweighs the dead anyway effect, and the WTP for risk reduction decreases with the initial risk. The existing result that the WTP for risk reduction increases with initial wealth still holds.

Published in European Economic Review, 2006

Go to Top

0302

A Generalized Design for Bilateral Trade Flow Models

Badi H. Baltagi
Private Enterprise Research Center
Department of Economics
Texas A&M University

Peter Egger
Department of Economic Theory, Economic Policy and Economic History
University of Innsbruck

Michael Pfaffermayr
Department of Economic Theory, Economic Policy and Economic History
University of Innsbruck

This paper suggests a full interaction effects design to analyze bilateral trade flows. This is illustrated with an unbalanced panel of bilateral trade between the triad (EU15, USA, and Japan) economies and their 57 most important trading partners over the period 1986-1997. Our full interaction model finds empirical support for the New Trade Theory and Linder’s hypothesis. We show that the omission of one or more interaction effects can result in biased estimates and misleading inference.

Published in Economics Letters, September 2003

Go to Top

0303

Incentive Pay for Other-Regarding Workers

William S. Neilson
Private Enterprise Research Center
Department of Economics
Texas A&M University

Jill Stowe
The Fuqua School of Business
Duke University

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status-seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers' inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead.

Click 0303 to view the paper in pdf format.

Go to Top

0304

The Case for Regulatory Rent-Seeking: CRA Based Protests of Bank Mergers and Acquisitions

Marshall Gramm
Department of Economics and Business Administration
Rhodes College

This paper addresses the question of regulatory rent seeking based on protests of proposed bank mergers and acquisitions submitted by community groups to bank regulators. Theories of CRA-related community group behavior based on benevolence and rent seeking, yield significantly different implications concerning the effect of a bank's CRA rating on protest probability, allowing for a clear test of the underlying motive for protest activity. The analysis shows: (1) protests impose significant time cost on merger and acquisition applications and (2) the benevolent-based theory must be rejected in favor of the rent-seeking theory.

Click 0304 to view the paper in pdf format.

Go to Top

0305

The Effect of Monetary Policy on Bank Lending and Aggregate Output: Asymmetries from Nonlinearities in the Lending Channel

Dennis W. Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University

Jui-chuan (Della) Chang
Department of Economics
Texas A&M University

The main purpose of the paper is to explore whether bank-lending behavior can provide a convincing explanation for the asymmetric effect of monetary policy on output. We investigate whether contractionary and expansionary policies have asymmetric impacts on bank loans, and whether there are further differences in the response of small banks and big banks to policy actions. We also investigate the link between changes in bank lending and aggregate economic activity. To emphasize differences in banks' asset size as indicators of balance-sheet strength, we aggregate the Call Reports data over the period 1976Q1-1999Q3. Our goal is to simultaneously capture the existence of the "lending view" of the monetary transmission mechanism, the strong relationship between loan growth and output growth, and the asymmetric effect of monetary policy on output. We use a nonlinear vector autoregressive approach to carry out our analysis. Our results show that asymmetry in the response of bank lending to monetary policy is not a substantially contributing factor in explaining the different responses of output to contractionary and expansionary policy.

Published in the Annals of Economics and Finance, 2005

Go to Top

0306

The Free Silver Movement In America: A Reinterpretation

Marshall Gramm
Department of Economics and Business Administration
Rhodes College

Phil Gramm
UBS Investment Bank

This paper analyzes the Free Silver Period of American history under circumstances where there are differential returns on nominal units of money in reducing the cost of exchange. The result is an optimum denominational structure of the money stock. We then apply the theory to data from the period and show that during the Free Silver period the country suffered from an acute shortage of small denominations of hand-to-hand money, which raised the costs of exchange and produced hardship, especially in the South and the West. Within the context of an optimally denominated money stock, the Free Silver movement is seen as an effort to eliminate a shortage of subsidiary coins rather than to increase the aggregate money supply. Since this shortage affected debtors and creditors alike, it is not surprising that cheap money policies in the areas of money shortage obtained widespread popular support. Not only does the existing data suggest such an explanation, but the proponents of cheap money stated it continuously, and the legal structure of coinage laws of the 1880s and 1890s could hardly have produced any other result. Our work suggests a new and more logically appealing explanation of the Cheap Money movement in America.

Published in The Journal of Economic History, 2004

Go to Top

0307

Climbing The Economic Ladder

Andrew J. Rettenmaier
Private Enterprise Research Center
Texas A&M University

Donald R. Deere
Private Enterprise Research Center
Department of Economics
Texas A&M University

Over the past 25 years, the distribution of wages in the U.S. economy has become more unequal. Does this mean we are moving toward a society of "haves" and "have nots"? There is considerable economic mobility in America, as large numbers of people move up and down the economic ladder in relatively short periods of time. One way to think about mobility is to array wage earners into fifths, ranging from the lowest income quintile to the highest quintile. Mobility is then measured by the movement among the quintiles over time. After one year, about one-third of the workers who were in the bottom income quintile move to a higher quintile; and about one-quarter who were in the top quintile move to a lower one. Of those who were originally in the intermediate three quintiles, about half move to another quintile. There is even more movement over longer periods. We were able to compare the wages of workers of the same age over a 15 year time period: The percent of workers who remained in the same quintile after one year was 60%. The percent remaining in the same quintile fell to 43% after five years, to 33% after 10 years, and to 29% after 15 years. Another way to think about mobility is to compare the economic position of parents with their children and grandchildren. Only 31 percent of children are in the same income quintile as their parents. To put this in perspective, 20 percent would be the same just by random chance. Furthermore, income differences between high and low income earners tend to be eliminated by the third generation, on the average. The primary reason for rising inequality of wage income is the higher wage premium paid to those with skills. But this is good news for those concerned about equality of opportunity. One of the most important factors allowing people to escape the lowest income quintile is the acquisition of education and job skills. Moreover, on-the-job-training tends to naturally make workers more valuable over the course of a work life. White male workers tend to be at the 20th percentile in the overall white men's wage distribution at age 21. This means that only 20% of workers earn less than they do and 80% earn more. However, after 10 years of job experience (when the 21 year-olds become 31), they reach the 50th percentile - earning the average wage for all white male workers. Between 31 and 59 years of age they average near the 60th percentile - earning more than 60% of all workers at that point. As these workers near retirement, however they fall back to the average wage again. One of the important lessons of this study is the importance of taking advantage of educational opportunities. Education can overcome differences in parental income, increases the likelihood of escaping low income and maintaining high income, and is a determinant of one's progress through the earnings distribution during one's lifetime.

Click 0307 to view the paper in pdf format.

Go to Top

0308

Investigation of Patterns in Food-Away-from-Home Expenditure for China

Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University

Cheng Fang
FAO United Nations

Insik Min
Department of Economics
Kyung Hee University

Using China's urban household-level survey data from 1992 and 1998, we study household food-away-from-home (FAFH) expenditure across the two time periods and across regions. We use a popular parametric linear specification and a newly developed nonparametric estimation method (with mixed categorical and continuous variables) to estimate the FAFH expenditure function. The nonparametric model shows that the income elasticities have increased from 1992 to 1998, while the parametric model suggests the contrary. The goodness-of-fit analysis, a model specification test, and in-sample analysis all suggest that the nonparametric method gives better description of the data than the parametric approach. The nonparametric estimation results also reveal other interesting FAFH consumption patterns which are not detected by the parametric method.

Published in China Economic Review, 2004

Go to Top

0309

Implementation in Production Economies with Increasing Returns

Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University

In this paper, we investigate incentive aspects of a general price-setting equilibrium principle in production economies with increasing returns or more general types of non-convexities. We do so by introducing the notion of generalized mechanism. We allow preferences and individual endowments to be unknown to the planner. We present a simple generalized mechanism whose social equilibrium allocations coincide with pricing equilibrium allocations. The pricing equilibrium solutions are very general and include marginal pricing equilibrium, loss-free pricing equilibrium, average pricing equilibrium, and voluntary trading equilibrium as special cases. When a pricing equilibrium principle yields Pareto efficient allocations, the mechanism doubly implements the pricing equilibrium correspondence in social and strong social equilibria. Furthermore, the mechanisms work not only for three or more agents, but also for two-agent economies.

Published in Mathematical Social Sciences, 2005

Go to Top

0310

Generalized Mechanism and Implementation in Economies with Non-Convex Production Technologies Unknown to the Designer

Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University

In this paper, we study the problem of the incentive mechanism design for non-convex production economies by introducing the notion of generalized mechanism in which one agent's feasible message domain may depend on the other agents' messages. We consider implementation of various most often considered price equilibrium principles by using well-behaved and simple mechanisms. We allow that production sets, preferences and individual endowments are all unknown to the planner. We present generalized mechanisms that fully implement loss-free, average cost, marginal cost, voluntary trading, and quantity-taking pricing equilibrium allocations in social equilibrium. These mechanisms are elementary and natural mechanisms, which have many nice properties such as feasibility, continuity, forthrightness, and best response. In addition, they use finite-dimensional message spaces which are lower than the existing mechanisms that implement Walrasian allocations for convex production economies with more than two agents. Furthermore, the mechanisms work not only for three or more agents, but also for two-agent economies.

Click 0310 to view the paper in pdf format.

Go to Top

0311

Reputation and Optimal Contract for Central Bankers: A Unified Approach

Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University

Jingyuan Li
Department of Economics
Texas A&M University

This paper studies the time inconsistency problem on monetary policy for central banks using a unified approach that combines reputation forces and contracts. We first characterize the conditions for reputation forces to eliminate the inflation bias of discretionary policy. We then propose an optimal contract that can be used with reputation forces to implement a desired socially optimal monetary policy rule when the reputation forces alone are not large enough to discourage a central bank to use a surprise inflation policy. In contrast to most of the existing contracts that are contingent on realized inflation rates which are in turn contingent on production shocks, like the standard reputation model, a central banker in our hybrid mechanism is punished only when she uses a surprise inflation rate. Since the penalty proposed is the lowest one that discourages the central bank from attempting to cheat and the sum of the loss, reputation forces, and the penalty for the central bank to cheat is the same as the loss at the socially optimal inflation rate, our hybrid mechanism is the most efficient and robust mechanism that implement the socially optimal monetary policy rule. We also provide a upper bound of the penalty that is be lower than that of the existing contracts when realized inflation rate is greater than a certain level.

Click 0311 to view the paper in pdf format.

Go to Top

0312

Implementation of Pareto Efficient Allocations

Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University

This paper considers implementation and double implementation of Pareto efficient allocations for production economies by using the generalized mechanism approach. We allow production sets, preferences and individual endowments are all unknown to the planner. We present a well-behaved generalized mechanism that fully implements constrained price equilibrium allocations with transfers, and consequently, fully implement Pareto efficient allocations in social equilibrium. The mechanism then is modified to fully doubly implement Pareto efficient allocations in social and strong social equilibria. The mechanisms constructed in the paper have many nice properties such as feasibility, continuity, forthrightness, and best response. In addition, they use finite-dimensional message spaces. Furthermore, the mechanisms work not only for three or more agents, but also for two-agent economies.

Click 0312 to view the paper in pdf format.

Go to Top

0313

A Panel Data Study of Physicians' Labor Supply: The Case of Norway

Badi Baltagi
Private Enterprise Research Center
Department of Economics
Texas A&M University

Espen Bratberg
Department of Economics
University of Bergen

Tor Helge Holmas
Programme for Health Economics in Bergen
University of Bergen

Physicians are key personnel in a sector which is important due to its size as well as the quality of service it provides. We estimate the labor supply of physicians employed at hospitals in Norway, using personnel register data merged with other public records. A dynamic labor supply equation is estimated using a sample of 1303 male physicians observed over the period 1993-97. The methods of estimation are GMM and system GMM. We reject the static model in favor of a dynamic model and obtain short run wage elasticities around 0.3. This is higher than previously estimated for physicians, in particular for those who are not self-employed.

Published in Health Economics, 2005

Go to Top

0314

How Is Corporate Misconduct Penalized? Enforcement Actions through the Foreign Corrupt Practices Act

Scott Lee
Private Enterprise Research Center
Department of Finance
Texas A&M University

Jonathan M. Karpoff
University of Washington

Arvind Mahajan
Department of Finance
Texas A&M University

Gerald S. Martin
Department of Finance
Texas A&M University

As its name implies, the Foreign Corrupt Practices Act of 1977 (FCPA) outlaws bribery of foreign officials by U.S. corporations. Less known, however, are the broad powers that the FCPA grants to the Securities and Exchange Commission (SEC) for disciplining accounting misrepresentations by firms that list their securities in the United States. We find that the SEC uses its FCPA-related powers frequently, bringing 604 enforcement actions against publicly-traded corporations from the Act's inception through 2002. Only 7% of these actions relate to foreign bribery, and bribery-related enforcement actions typically carry small penalties. In contrast, accounting-related actions are both common and heavily penalized. Firms and individuals have been fined a total of $12.1 billion, and 66 managers have received jail sentences. These legal penalties are positively related to measures of the size and severity of the violations. The market imposes the largest monetary penalties for FCPA-related accounting violations. The initial announcement of an FCPA-related accounting enforcement action is associated with a mean abnormal return of �10.3% for the defendant firm. This augments a 20.1% loss in share value that accompanies prior events — such as unforeseen executive turnover or asset write-downs — that trigger the SEC's FCPA-related investigation. Nearly half of these losses can be attributed to impaired operations or lost reputation from the misrepresentations. This evidence belies a widespread view that corporate misdeeds are disciplined lightly. To the contrary, legal and market penalties can be substantial. Furthermore, such penalties are not applied indiscriminately, as both legal and market penalties are related to the harms imposed by the violations.

Click 0314 to view the paper in pdf format.

Go to Top

HOME

ABOUT