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| 0801 |
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Valuing Intergenerational Transfers: What's Social Security Worth?
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Liqun Liu
Private Enterprise Research Center
Texas A&M University
Andrew J. Rettenmaier
Private Enterprise Research Center
Texas A&M University
Thomas R. Saving
Private Enterprise Research Center
Texas A&M University
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We develop a framework for valuing long-term government programs when
future expenditures and revenues are uncertain. In this framework we
recognize that the risk-free government bond rate is risk-free only to
bond holders and not to the interest payers. The ultimate payers should
discount future expenditures at a lower rate and future revenues at a higher
rate than the risk-free bond return. We apply these results (i) in an
aggregate way to the existing U.S. Social Security program, (ii) in an
individual way to the value of the Social Security contract, and (iii) to
a "Big Bang" Social Security reform. The total taxpayer burden of Social
Security is greater than current estimates by up to 240 percent. On the
individual level the Social Security contract for all risk-averse individuals
except those in the lowest income group has a negative value. Finally, there
is a "Big Bang" transition to a prepaid Social Security system that is Pareto.
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| 0802 |
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The Conditional Nature of the Value of Corporate Governance
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Jianxin (Daniel) Chi
School of Global Management and Leadership
Arizona State University
D. Scott Lee
Private Enterprise Research Center
Mays Business School
Texas A&M University
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Agency theory suggests that governance matters more among firms with greater
potential agency costs. Rational investors are unlikely to value safeguards against
unlikely events. Yet, few studies of the relation between governance and firm value
control for investor perceptions of the likelihood of agency conflicts. Following Jensen
(1986), we use free cash flow as a proxy for the perceived likelihood of agency conflicts.
We find that firm value is an increasing function of improved governance quality among
firms with high free cash flow. In contrast, governance benefits are lower or insignificant
among firms with a low likelihood of agency conflicts (i.e., firms with low free cash
flow). We show that this conditional relation between firm value and governance quality
could lead to erroneous conclusions that the two variables are unrelated.
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| 0803 |
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An Empirical Study of the Credit Market with Unobserved Consumer Types
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Li Gan
Private Enterprise Research Center
Department of Economics
Texas A&M University
Roberto Mosquera
Department of Economics
Texas A&M University
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This paper proposes an econometric model to identify
unobserved consumer types in the credit market. Consumers choose
different amounts of loan because of differences in their time or risk
preferences (types). Thus, the unconditional probability of default is
modeled using a mixture density combining a type-conditioning
default variable with a type-determining random variable. The model
is estimated using individual-level consumer credit card information.
The parameter estimates and statistical tests support this kind of
specification. Furthermore, the model produces better out-of-sample
predictions on the probability of default than traditional models;
hence, it provides evidence of the existence of types in the consumer
credit market.
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| 0804 |
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Elections and Consumption Insurance: Evidence from Chinese Villages
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Li Gan
Private Enterprise Research Center
Department of Economics
Texas A&M University
Lixin Colin Xu
Development Research Group
World Bank
Yang Yao
China Center for Economic Research
Peking University
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Despite a large literature on consumption insurance, little is known about how rural
consumption insurance is affected by institutions in general and democracy in particular. This paper
examines if and how much consumption insurance of Chinese village residents is affected by
whether the village leaders are democratically elected. In our sample period from 1987 to 2002,
Chinese villages completed the transition from government-appointed village leaders to elected ones.
Exploring a unique panel data set of 1400 households from this period, we find that consumption
insurance is more complete when the households live in villages with elected village leaders.
Furthermore, democracy improves consumption insurance only for the poor and the middle-income
farmers, but not for the rich. The results are robust when we allow for pre-trending and potential
endogeneity of elections. We also find evidence that the election effects on consumption insurance
tend to be significant only in election year and the pre-election years (relative to the immediate postelection
year), and when the village committees consist largely of non-Communist-Party members.
These findings suggest that incentives created by elections do matter for consumption insurance. Our
findings underline the importance of democratic governance for ensuring better rural consumption
insurance and poverty reduction.
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| 0805 |
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The Consequences to Managers for Financial Misrepresentation
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Jonathan M. Karpoff
Department of Finance
University of Washington
D. Scott Lee
Private Enterprise Research Center
Department of Finance
Texas A&M University
Gerald S. Martin
Department of Finance
Texas A&M University
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We track the fortunes of all 2,206 individuals identified as responsible
parties for all 788 SEC and Department of Justice enforcement actions for
financial misrepresentation from 1978 through September 30, 2006. Fully
93% lose their jobs by the end of the regulatory enforcement period.
A majority explicitly are fired. The likelihood of ouster increases with
the cost of the misconduct to shareholders and the quality of the firm's
governance. Culpable managers also bear substantial financial losses through
restrictions on their future employment, their shareholdings in the firm,
and SEC fines. A sizeable minority (28%) face criminal charges and penalties,
including jail sentences that average 4.3 years. These results indicate that
the individual perpetrators of financial misconduct face significant disciplinary action.
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Forthcoming in Journal of Financial Economics, 2008
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| 0806 |
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State to State Variation in Medicare Spending and Utilization through Time
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Andrew J. Rettenmaier
Private Enterprise Research Center
Texas A&M University
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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This study uses the Continuous Medicare History Sample (CMHS),
a large longitudinal 5% sample of Medicare beneficiaries from
1974 to 2003, to study state to state variation in Medicare
spending and utilization through time. We show that spending
and utilization disparities are significant at the state level.
More importantly, the data show that variations in Medicare spending
between states narrow over time, particularly in the earlier
years of the sample period and in years following major reforms.
The trends in variation are more mixed when considering utilization
measures based on the subcategories of services covered by Medicare.
We also find that the variations in both spending and medical
resource utilization remain significant even if an array of demographic,
demand side and supply side variables are controlled for, although
there is evidence of conditional convergence in utilization of the
subcomponents with the exception of hospital inpatient short stays.
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| 0807 |
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Former Government Officials as Outside Directors: The Role of Human and Social Capital
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Richard H. Lester
Department of Management
Texas A&M University
Amy Hillman
Department of Management
Arizona State University
Asghar Zardkoohi
Private Enterprise Research Center
Department of Management
Texas A&M University
Albert A. Cannella, Jr.
A. B. Freeman School of Business
Tulane University
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The resources that individual directors bring to corporate boards are largely a
function of their human and social capital. While research has explored the value of
having former federal government officials join boards, we study factors that make one
particular former government official more, or less, attractive as a director than another.
Specifically, we explore the depth, breadth, and deterioration of former government
officials' human and social capital and find that these dimensions of human and social
capital are influential predictors of corporate outside directorships.
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Forthcoming in Academy of Management Journal, 2008
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| 0808 |
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The Adequacy of Educational Cost Functions: Lessons from Texas
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Timothy J. Gronberg
Private Enterprise Research Center
Department of Economics
Texas A&M University
Dennis W. Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
Lori L. Taylor
The Bush School of Government and Public Service
Texas A&M University
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Adequacy studies based on cost functions have come under attack. A recent Texas court
battle featured two cost functions, one professional judgment study and three widely
divergent estimates of the cost of adequacy. At the low end of the scale, the state's expert
estimated that it would cost an additional $68,000 to raise the 46 plaintiff districts to a
reasonable standard of adequacy. The plaintiff's experts estimated that it would cost at
least $457 million to meet the same standard of performance. Enough time has passed to
look back and determine which one had the more accurate predicted cost of adequacy.
We think the evidence points to a clear winner in the horse race between the two cost
function analyses put forward in Texas, and we point to some of the differences in the
three studies as a potential guide to researchers, policymakers and others interested in
studying the cost of adequacy.
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Click 0906 to view the current 2009 version of the paper in pdf format.
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| 0809 |
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The Macroeconomic Consequences of Remittances
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Dennis Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
Diego Vacaflores
Department of Finance and Economics
Texas State University
George S. Naufal
Department of Economics
American University of Sharjah
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We study the impact of remittances on a small open economy with a stochastic
limited participation model with cash in advance constraints and costly
adjustment of cash holdings. We examine the impact of remittances on the
steady state, as well as on the dynamics of the main macroeconomic aggregates.
We find that a positive remittances shock forces the exchange rate to depreciate
and lowers both output and the interest rate in the period of the shock,
irrespective of adjustment costs on money balances, but increase output in
the subsequent periods, while consumption rises on impact.
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| 0810 |
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An Alternative DEA Methodology for Non-Controllable (Environmental) Inputs
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Norabajra Asava-vallobh
Department of Economics
Texas A&M University
Timothy J. Gronberg
Private Enterprise Research Center
Department of Economics
Texas A&M University
Dennis W. Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
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Data Envelopment Analysis or DEA is a standard methodology
for assessing technical efficiency. In many DEA applications,
e.g. the case of schools or hospitals, the issue arises of
calculating efficiency in the presence of non-discretionary/environmental
inputs. We propose a three-stage DEA model to address the environmental
input issue, and we provide a simulation analysis that illustrates the
implementation and potential advantages of our approach relative to the
leading existing multi-stage model of non-discretionary inputs.
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| 0811 |
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Endogenous Patient Responses and the Consistence Principle in CEA
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Liqun Liu
Private Enterprise Research Center
Texas A&M University
Andrew J. Rettenmaier
Private Enterprise Research Center
Texas A&M University
Thomas R. Saving
Private Enterprise Research Center
Texas A&M University
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The "consistence principle" in medical cost-effectiveness analysis (CEA)
requires that one either include both the cost and the utility benefit of
a change (in medical expenditures, consumption or leisure) caused by an
intervention or none of them. Within a lifetime utility maximization
framework and by distinguishing between exogenous changes directly brought
about by an intervention and endogenous patient responses to the exogenous
changes, this paper addresses two questions related to the consistence
principle: (1) how to choose among alternative internally consistent
exclusion/inclusion rules and (2) what to do with the survival consumption
costs and earnings based on the consistence principle. It finds that, for an
endogenous change, excluding or including both the cost and the utility
benefit of the change makes no difference to the evaluation outcome,
although the exclusion option has an informational advantage. Further, in
agreement with the consistence principle, welfare maximization implies that
survival consumption costs and earnings directly associated with an
intervention should be included in CEA.
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