Search

This paper investigates the impact of government corruption on corporate tax avoidance in China. A new method of weighted imputed profit is introduced to measure the firm's true profit to improve the measurement of tax avoidance. Employing a large sample of nearly 600,000 firms from 1998 to 2007, the empirical results illustrate that government corruption is positively related to tax avoidance. More specifically, I find that a one standard deviation increase in government corruption corresponds to a 6% increase in tax avoidance by firms. I find consistent evidence when using a natural experiment, Tax Sharing Act in 2002. In addition, I find that domestic private firms tend to avoid a larger portion of their tax liabilities than foreign or state-owned firms. Moreover, this paper confirms that tax avoidance increases with tax rates. Overall, this paper suggests that fighting corruption in local governments may lead to higher rates of tax collection.

This paper examines the impact of economic policy uncertainty on non-executive employees from the perspective of pay-performance sensitivity (PPS). Economy-wide uncertainty can trigger adverse impacts for businesses, and in response enterprises may adjust employee pay to maintain their level of activity. Using firm-level data on A-share companies listed on the Shanghai and Shenzhen Stock Exchanges during 2003–2016, this paper finds that better-performing firms pay higher wages on average, which they adjust only during uncertain times. We also show that the impact of economic policy uncertainty on PPS is more pronounced in the context of labor-intensive, highly competitive industries and state-owned enterprises, because they tend to respond to uncertainty via wage adjustment. The evidence demonstrates that the pay-performance link is much weaker during uncertain times, when different subgroups react differently. However, our finding of a robust pay-performance relation holds, even with a range of firm-level controls and accounting for different levels of firm heterogeneity.

This paper investigates the effect of antidumping on multi-product firms’ adjustment in export quality using highly disaggregated Chinese exports data at the firm-product-country level for the period 2000–2014. In response to antidumping, firms tend to upgrade the quality of their exports for targeted products in affected markets by product adjustment, with this effect being more pronounced for firms with ex ante higher product quality. Antidumping induces resource reallocation across firms for a product such that higher-quality firms upgrade the quality while lower-quality firms are unaffected, and reallocation across products within a firm with the quality of products of higher competency increasing more substantially under antidumping policy. Our paper contributes to our understanding on how a multi-product firm adjusts by reallocating resources across products in the face of trade policy shocks.

This paper investigates whether market competition encourages firms to be more socially responsible. We find that firms in more competitive markets exhibit better overall social performance, as measured by doing well (“strength”) and doing badly (“concern”) in areas such as community, environment, human rights, and treatment of employees. To deal with endogeneity, we instrument market competition on entry barrier and observe that market competition only significantly reduces social concerns but not increases social strengths. Thus, firms are more reactive in reducing social concerns than proactive in augmenting their social strengths. Amongst these concerns, firms appear to be more active in reducing environmental concerns. The paper underscores the limitations in relying on the “invisible hand” of the market to deal with the multi-dimensional challenges of firms’ social performance.

Do all aspects of social capital improve repayment behavior in group lending programs? The group lending literature typically uses one or few measures of social capital in a linear form, and systematically understates the uncertainty of results and model specifications. As a result, many papers conclude that specific measures of social capital do not matter. This paper introduces Bayesian Model Averaging to the group lending literature and simultaneously tests the validity of six different measures of social capital. While the initial analysis suggests that only few measures matter, this result becomes invalid when using model selection criteria and Bayesian Model Averaging while allowing for nonlinearity and interactions between different aspects of social capital. We find geographical proximity, trust, friendship, group homogeneity, and acquaintanceship to be important factors in explaining group repayment with mixed evidence for relatives. Our results suggest that microfinance institutions should target borrowing groups with more social capital.

This paper studies the impact of tax cuts on enterprises’ R&D intensity. We use a natural experiment involving China’s business tax changing to value-added tax (“BT to VAT”) to identify any causality. The results reveal that this tax reform has prompted enterprises to increase their research and development (R&D) investment. Specifically, a stronger ability to transfer tax, results in this change having a more significant promotional effect on enterprises’ R&D intensity. Further analysis demonstrates that firms with different ownership types and in different industries respond differently to the “BT to VAT” policy. Our findings are only significant for non-state-owned and other modern service enterprises. This paper provides a theoretical and empirical basis for detailed analyses of the effects of “BT to VAT” policy, particularly the government’s subsequent improvement to the tax reform policy, to further stimulate enterprise investments in R&D as well as industrial upgrading.

This paper analyzes the implementation of the optimal policies at the Zero Lower Bound (ZLB) by the Taylor rule in the presence of a cost channel. We find that, the presence of a cost channel significantly impairs the ability of the Taylor rule to implement optimal policies when economy is subject to the ZLB. The main findings of the paper are, (i) the Taylor rule with optimally chosen inflation target partially implements the optimal discretionary policy but cannot implement the optimal policy under commitment, and (ii) the T-only policy, which follows discretion after an optimally chosen exit date from the ZLB, is the best that can be implemented by the Taylor rule in the presence of cost channel.

This paper examines the implications of growing international production fragmentation-induced trade in intermediate goods on environmental quality. Specifically, by making use of a general equilibrium framework, this paper explores the link between trade in intermediate goods and pollution in a setting of endogenous environmental policy. The paper shows that international trade in intermediate goods, through an increase in the number of components available to the international producers, affects the level of pollution and environmental quality. Specifically, developed countries may reduce pollution at the cost of more pollution in developing countries.

Many economists believe that recessions arise when aggregate demand is insufficient to support full employment. However, replicating this intuition within a real business cycle (RBC) model has proven surprisingly challenging. Rather than eliciting a contraction, lower consumer demand leads to greater household savings in many such models, fueling new investment and causing the economy to expand. The present paper proposes a novel way to resolve this apparent paradox: risk-averse firms. In the model to follow, cautious firms reduce their demand for investment prior to a recession. This contraction in the demand for capital overcomes the increased supply arising from consumer savings and restores intuitive business cycle behavior. In particular, the paper demonstrates that the model economy contracts when subjected to an uncertainty shock in consumer demand, mimicking a pre-recessionary environment in which firms, fearing a lack of orders, precipitate the downturn by reducing capital expenditures. These results are consistent with microeconomic evidence that uncertainty, particularly uncertainty about future demand, is the primary reason for firms shedding workers or scaling down operations in advance of an economic downturn. More generally, they imply that firm's attitudes towards risk shouldn't be ignored in modern macroeconomic models.

This paper models the portfolio investment performance with options by using a risk index, which is defined as the average loss below the risk-free interest rate. Using a risk-free interest rate as the uniform reference rate for all portfolios, the risk index offers an easier-to-compare loss value than the value-at-risk return, where portfolio specific references are used to calculate the average losses. Besides, uncertainty theory is used in the paper to derive the portfolio decision when stock prices are subject to experts' estimations. By analytical computation and empirical analysis, we find that portfolios considering options generate better return than the ones without options. The empirical analysis reveals that the options can effectively hedge the risk, and the call option with a higher exercise price offers higher return per unit of option premium. Furthermore, our proposed model produces higher expected return in most cases than the model where the risk is measured by the chance of the total return failing to reach the threshold level of return.

This paper explores whether and how media serves as an information intermediary in the capital market and predicts value creation from mergers and acquisitions (M&As). Using a sample of 288 M&A deals in the U.S. market from 2000 to 2015, this paper examines whether pre-merger news about acquirers correlates to M&A performance. The empirical evidence shows that a positive media attitude before merger announcements has predictive power for stock returns in both the short and long run. Moreover, media pessimism is associated with higher bid premiums, meaning that acquirers must raise the bid price to offset the negative effects produced by the media. These findings suggest that media news contains information relevant to M&A performance and thus has implications for shareholder wealth.

This paper examines the relationships between the asset bubble and the banking stability from both theoretical and empirical perspectives. The theoretical analysis demonstrates that the moral hazard caused by the deposit insurance and limited liability might facilitate the banks to hold bubble assets for the purpose of risk premium. Meanwhile the supervisory intensity, leverage ratio and credit spread provide the conditions for banks to hold bubble assets through their effects on risk premium. Once the banks hold the bubble assets, their stability will deteriorate because of four types of effects, namely internal leverage, cash withdrawal, credit friction and network effects. This paper also utilizes the BMA-PVAR model to test the theoretical findings by employing the data from 26 representative economies for a period between 2000 and 2014. The empirical evidences are consistent with the theoretical findings that the equity bubbles will lower the banking stability. The empirical evidences also suggest that the banking instability will be detrimental to the economic growth.

This paper presents empirical evidence in support of an account of unbalanced growth in the South African economy: an interaction between sectorally differentiated total factor productivity growth, with a price elasticity of demand below unity. As sectors with faster TFP growth produce more real output over time, their relative prices fall, with the price changes triggering increases in consumption demand that less than offset the price fall. As a result sectoral shares in nominal output decline. This generates a structural shift of the labour factor input to low productivity sectors over time. Policies targeting returns to labour and wage growth alone will be insufficient to address unemployment. Instead, policies targeting the supply side of the economy and international competitiveness are likely more effective for raising employment and growth. The paper is the first to test the TFP-price elasticity mechanism on emerging market data, and a first explanation of unbalanced growth in South Africa.

This paper is concerned with the increasingly active role of governments in shaping and promoting corporate social responsibility (CSR). Introducing the cost of taxation into a governmental decision-making framework, the paper elucidates probable strategic substitutes and complements between CSR promotion and import tariffs, based on a welfare analysis. It shows that there exists an optimal degree of promotion for CSR and an optimal tariff rate imposed on foreign firms, but only if the cost of taxation is relatively low. In particular, it finds that this cost should be kept to a low level in countries that wish to enlarge consumer-oriented CSR initiatives and attract foreign exports.

This paper compares total factor productivity (TFP) growth and its components for both manufacturing- and service-based firms in India for the period 2008 to 2014. TFP growth based on data envelopment analysis shows higher productivity for the service sector as compared to the manufacturing sector. Further, decomposition of TFP growth results indicates that both the manufacturing and services sectors are driven mainly by technical change. Comparing TFP growth at the sub-sectoral level shows that mean TFP growth is highest in the case of IT firms as compared to the chemical, textile and trade industries. Further, the determinants of TFP growth using a feasible generalised least squares model indicate that capital intensity, capital turnover ratio and debt significantly affect productivity growth in the case of manufacturing. However, none of the determinants except capital intensity affect productivity growth in the services sector. From a policy standpoint, this paper suggests greater emphasis on both the service and manufacturing sectors despite some variability among firms.

Low service quality in the utility sector (electricity, water, natural gas, etc.) is a major obstacle to economic advancement in developing countries. This paper provides an explanation for low quality of service through examining the rational responses of firms (utility providers) to subsidy policy. Cross-subsidies are widely applied to spur poor households’ consumption of utility services. This raises the issue of whether charging lower prices to poor households, while boosting their consumption, induces firms to lower the quality of service received by these households. We specify an analytical model in which the government may not fully cover the firm's deficit from subsidizing poor households. Our main findings are: 1) when government transfers fail to cover this deficit, the firm reduces quality for subsidized consumers; 2) the difference in quality across consumer income groups might be reduced by an increase in the amount of government transfers. This paper also identifies several directions for future research, including the impacts of cross-subsidies on social welfare and a better design of subsidy funding mechanism.

Surveys, which are designed to collect data and include professional forecasts of macroeconomic variables, are of great interest to central banks and various institutions. The formal evaluation of such forecasts has attracted considerable attention in literature. However, empirical studies focusing on China are limited. This paper firstly proposes a new approach to test forecasts' accuracy and efficiency under asymmetric loss function by using a unique dataset from surveys conducted by the State Administration of Foreign Exchange in China. It is found that forecasters of the four macroeconomic variables (i.e., GDP growth rate, CPI, exports and imports) partially utilize new information and publicly available information under LINEX loss function when they update the forecasts, which are similar to those under quadratic loss function. Besides, a new finding in this paper is that over-smoothing hardly exists in the forecasts of GDP growth rate and CPI in China, which is different from the results in developed countries. Our findings suggest clear areas of opportunity to improve the accuracy of the forecasts, such as considering the negative autocorrelation found in forecast revisions of CPI.

This paper examined how the trading behavior of individuals is altered by their attitudes toward objective probabilities. To this end, we adopted anticipated utility (combined with the Wang transform) to model market participants' wellbeing in an ambiguous context. In this case, different types of prudent traders with heterogeneous information were assumed in the market. Findings reveal that traders might limit their participation (even without ambiguity), whereas their prudence attitude drives them to cautiously trade the risky asset. We also extended our baseline model to explore the role of ambiguity and argue that ambiguity itself includes limited marginal effects on individuals' trading behavior. Moreover, two scenarios are considered wherein we respectively derive a unique general equilibrium: where traders 1) share the same prudence level and 2) have distinct prudence degrees. Consequently, the “chase-the-quantity” phenomenon is found in the equilibrium. Overall, this paper proposes a potential method for depicting individuals’ attitudes toward asset losses and gains, and provides some implications for comprehending their trading behavior under ambiguity.

This paper analyzes the formation mechanism of polarization in China’s labor market from the perspective of skill-biased technological change (SBTC). Using the World Input–Output Database for 1995–2009 and China’s industry database for 2010–2016, this paper measures the SBTC of 33 industries in China and conducts empirical tests. Results show that SBTC significantly promotes growth in employment and wages among both high-skilled and low-skilled workers but has no significant impact on the employment and wages of medium-skilled workers. A further analysis by using quantile regression shows that SBTC inhibits employment and wage growth among medium-skilled workers to some extent. These results indicate that SBTC is a crucial source of employment and wage polarization and contributes to labor market polarization in China.

When foreign firms motivated by higher profits engage in off-shore production activities of unemployment ridden host countries, concerns increase about the possibility of exploitation of local workers. However, using a two good two factor model this paper shows that foreign firms’ engagement under the scenario actually improves the host country's structure of wages, skill composition, employment level and wage inequality which cannot be achieved under full employment in the host countries. This paper thus presents a mechanism that explains the effects of export processing zones observed in most of the transitional economies of the world. Results have practical implications for traditional structural changes expected for these economies. Although foreign firms come to earn profits, it is possible for host country workers to take a part of the rent away from the foreign firms as they are doing currently in different parts of the world.

This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of this decision published one week later. Unlike related papers, we measure the market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.

This paper presents a model of Value Added Tax (VAT) evasion in a monopolistically competitive closed economy. The paper shows that an increase in the intra-brand elasticity of substitution can lower output VAT evasion when under-reporting of final sales and input VAT credits occur jointly. Because of the improvement in VAT compliance, equilibrium prices will fall and VAT revenues will rise both in the short and in the long run. Disentangling the love of variety and the elasticity of substitution utility parameters, it turns out that, in a symmetric general equilibrium solution with free entry and exit of firms, an increase in the substitution elasticity is welfare improving when love of variety is not too strong.

A number of countries, mostly small and island economies manage fixed exchange and often devalue it as a stabilisation strategy. The current paper investigates the effectiveness of devaluation in improving trade balance with reference to Fiji. A small island economy has limited exportable and hence highly depends on imports for both consumption and production purposes. A devaluation, therefore, inflates domestic price and appreciates the real exchange immediately by raising importable consumption and discouraging imports used in domestic production. The paper applies various econometric models for empirical investigation of its impact and transmission mechanism. Strong long-run relationship found between real exchange rate and trade balance explains that appreciation of currency has been responsible for the rising trade deficit in the economy. Moreover, the devaluation did not demonstrate J-curve phenomenon. The effect of devaluation strongly contributed to the domestic inflation has been while quite weak on stimulating aggregate demand.

This paper shows that negative economic shocks can have permanent effects on potential output—the amount that can be produced if the economy is at full capacity. In order to do so, we build an agent-based model of growth and distribution where heterogeneous firms adjust capital accumulation discontinuously because of sunk costs and of market constraints. This economy is characterized by a particular form of path dependency, “genuine hysteresis”: the most important temporary shocks affect potential output permanently. The results of the simulations implemented show indeed that austerity policies that trigger debt deleveraging, precautionary saving and wage tightening affect negatively the long-run path of the economy. As a matter of consequence, our paper sheds some light on issues that many European countries have been facing since 2008, and puts into question the possibility for most of these countries to reach the pre-crisis rates of growth. The most likely scenario for Europe in the upcoming decades is therefore a chronicle underutilization of fixed productive capacity and labor force.

This paper analyzes how imitation can be a catalyst for innovation—a benefit that is often overlooked in the literature. My research shows that a process of learning to innovate occurs as technology diffuses from a more advanced country to a less developed country; therefore, increasing the recipient country's ability to innovate. I find that the efficiency of labor in the R&D sector of the economy determines whether a country learns how to innovate or not. My research predicts that developing countries that have a healthier and more educated workforce can benefit the most from technology diffusion and are more likely to transition from imitating to innovating. On the other hand, countries that have less efficient R&D workers will continue to imitate products from more developed countries instead of inventing new products. Both the level and growth rate of output and TFP increase if a country manages to transition from imitation to innovation. Examining the dynamics that exist between imitation, innovation, and economic growth is important because it can lead to more effective industrial policy. As the results from this paper show, imitation is beneficial and should be supported and encouraged until it becomes feasible and makes sense economically for a country to switch to innovation. Countries that are dependent on technology diffusion should focus on improving the efficiency of their R&D workers if they want to learn how to invent new products. All of the theoretical results of the model are substantiated by empirical evidence.

In the present paper, we constructed a DSGE model with two types of workers with heterogeneous wage contracts, unionized and non-unionized wages, to investigate macroeconomic dynamics and welfare implications. The innovative feature of this paper is to examine direct substitution effects between workers with both types of wage contracts by introducing firms that jointly employ them. It is revealed that the macroeconomic volatility and welfare loss to asymmetric labor productivity shock increased and decreased with the elasticity of substitution between two types of workers and labor unions' bargaining power, respectively. Furthermore, those of monetary policy shock increased with labor unions' bargaining power, which implies that better monetary policy design is more important when unions are more influential.

In times of fiscal stress, governments fail to adjust fiscal policy in line with the requirements for debt sustainability. Under these circumstances, monetary policy impacts the probability of sovereign default alongside inflation dynamics. Uribe (2006) studies the relationship between inflation and sovereign defaults with a model in which the central bank controls a risky interest rate. He concludes that low inflation can only be maintained if the government sometimes defaults. This paper follows Uribe (2006) by examining monetary policy that controls a risky interest rate. However, it differs by the baseline assumption about the objectives of the central bank. In this paper, monetary policy is not pure inflation targeting: it is assumed that the central bank minimizes the probability of default under the upper restriction on inflation. An advantage of this framework is that it avoids the issue of zero risk premium, which exists in Uribe (2006), while at the same time allowing a study of the relationship between the constraints on monetary pol icy, the equilibrium default rate, and the risk premium. We show that monetary policy that controls the risky interest rate can mitigate default risks only when the upper limit on inflation is sufficiently high. The higher the agents believe the upper limit on inflation to be, the lower the equilibrium risk premium and probability of default are. Under a low default rate, constraints on inflation can only be fulfilled when fiscal shocks are either positive or small.

We tackle two questions in this paper: In the sovereign debt crisis, what moves the euro-area inflation outlook, and has the firm anchoring of medium to long-term inflation expectations been affected? We try to answer these questions by looking at option-implied probability density functions of future inflation. Deriving densities from a new data set on options on the euro-area harmonised index of consumer prices (excluding tobacco) provides us with the full distribution of inflation expectations, including uncertainty and asymmetry of market participants' beliefs about the inflation outlook. The daily data set allows us to analyse the effects of monetary policy announcements and macro news in a time-varying event study framework despite the short sample period from 2009 to 2013. Due to renewed fears of deflation, we compare option-implied and statistical density functions to gain insight into deflation risk. Inflation expectations show a decreasing mean but growing uncertainty, especially since the intensification of the sovereign debt crisis in mid-2011. Around the same time, the influence of monetary policy announcements on inflation expectations across all horizons diminished. Tail events such as deflation, although still contained, have become more probable. The impact of macroeconomic news on inflation probabilities has overall decreased and shifted towards countries more affected by the crisis. This paper's results regarding the anchoring of inflation expectations are twofold: The mean and low sensitivity to actual news speak for anchored inflation expectations, whereas the growing uncertainty reveals market participants' concerns about possible extreme inflation or deflation outcomes in the future.

In this paper, I investigate the determinants of price differences in the shares of cross-listed firms in domestic and foreign markets. Diverging from the literature in this field, I introduce a methodology that is independent of any specific form of utility function. My theoretical analysis indicates that investment opportunities and consumption growth cause price disparities between the domestic and foreign shares of cross-listed firms. First, I show that stocks are overpriced in the local market if and only if other domestic investment opportunities are riskier and have a lower expected return than those available in foreign markets. Second, I show that domestic shares are overpriced if and only if the aggregate consumption or consumption growth in the domestic economy is smaller than that in the foreign economy. Approaches in this paper can not only explain H-share discount but also any other cross-listed price disparity.

In this paper, we investigate the indirect economic effects of the Hizmet movement. Participants of the Hizmet movement have spread all around the world, opening various types of educational institutions (more than a thousand) ranging from kindergartens to universities since the early 1990s. The main motivation of volunteers in the Hizmet movement comes from the ideas of a Turkish scholar, Fethullah Gulen: to help humankind to be better off. This non-profit movement has created mutual economic benefits for Turkey and the host countries where schools have been established. Turkish schools help many nations to recognize Turkish culture, and create bonds between Turkey and these countries. Eventually, these ties might result in better understanding and more sympathy towards each other. Additionally, these Turkish schools work as informal trade officials, making it much easier for Turkish merchants – both followers of the Hizmet movement and independent merchants – to have trade connections with other countries. In this paper, we show that there is a substantial increase in the volume of exports from Turkey to the countries where Turkish schools have been opened. In particular, we observe this increase in the countries where Turkey did not have a close economic relationship previously. Moreover, we show that Turkish schools have boosted not only Turkish exports to these host countries but also imports from them.

This paper examines the determinants of military expenditures with a special focus on political regimes for more than 130 countries for the period of 1963–2000 by employing a dynamic panel data analysis. The paper aims at contributing to the literature by utilizing a recently constructed political regime data set and controlling for income inequality, a key variable that has not received substantial attention in the context of political regimes, economic growth and military expenditures. Covering a large set of countries and an extended time period, the paper reveals further evidence on the linkage between democracy and military expenditures. Our results yield two crucial facts. First, social democratic political regimes have a tendency to spend less on armaments as a share of the national income; compared to social democracy, all other political regimes are likely to have higher military burdens, confirming previous findings of the negative relationship between level of democracy and military burden. Second, the analysis shows that a higher income inequality is associated with a higher military burden.

Monetary integration, and more specifically, the creation of a monetary union in Europe, raises new economic questions concerning its functioning and governance. In particular, we focus on the implications of high and persistent current account deficits for the economic performance of monetary union members in the medium term. Recent literature has argued that conventional measures of external sustainability are misleading because they omit the effects of capital variations on net foreign asset positions due to, among others, stock or debt market crises. In this paper we revisit external sustainability making use of the database developed by Lane and Milesi-Ferretti (2007) that includes these “valuation effects”. The sample period studied covers from the launching of the monetary integration process in Europe (the creation of the European Snake in 1972) up to 2011. Our econometric methodology accounts for the increasing cross-section dependence among EMU countries as well as for possible structural breaks endogenously determined. The results point to the need of abrupt adjustments, either led by the markets or promoted by pro-active policy measures, in order to offset external disequilibria. These results would give support to the surveillance measures proposed by the European Commission (2009, 2010a) and would reject the Lawson's doctrine of “laissez-faire”. M. Camarero and C. Tamarit, and J.L. Carrion-i-Silvestre gratefully acknowledge the financial support from the MICINN CICYT co-ordinated projects CICYT ECO2011-30260-C03-01 and 03 respectively. Cecilio Tamarit and Mariam Camarero are also members of the Research Group of Excellence on Economic Integration INTECO, funded by Generalitat Valenciana Prometeo action 2009/098. This paper has been developed within the research network SOLVEX, (ECO2009-06676-E/ECON) funded by MICINN.

This paper attempts to assess the impact of skill loss on the persistence of cyclical unemployment. The observations from the Current Population Survey and the Bureau of Labor Statistics suggest a countercyclical total unemployment rate that exhibits high persistence. A framework that features search frictions is developed. Households choose search intensities, and firms create vacancies. Workers accumulate skills through past work experience, or a process of learning-by-doing. This paper extends the learning-by-doing framework to consider endogenous skill loss by the unemployed, or a process of loss-of-learning-by-not-doing. An adverse aggregate technological shock induces workers to reduce their search intensity and firms to reduce their creation of vacancies. As unemployment increases, workers lose their accumulated skills. The skill obsolescence causes a decline in the future marginal productivity of workers. The decline in productivity causes a persistence in the cyclical downturn, and a delay in the recovery of the economy. This allows the model to capture the observed unemployment persistence.

Are productivity differences across producers in an industry a good indicator of allocative inefficiency? If so, what are the welfare consequences of reallocating labor from lesser to more productive producers? This paper addresses these questions in the context of factor specificity, which generates endogenous distribution of total factor productivity across producers, and reallocation of labor across sectors, as well as within a sector. The paper builds a multi-sector, multi-region general equilibrium model with land as a region-specific factor, and calibrates it using state-level U.S. data from 1960 to 2004, a period with considerable reallocation of labor out of agriculture. The results show that large and persistent differences in agricultural productivity across U.S. states are consistent with factor specificity due to geoclimatic conditions and do not correspond to economically significant allocative inefficiencies.

This paper investigates the effect of governance on levels of water pollution for all industrial activities as well as by some specific industry category in a sample of OECD economies. Using an institutional ecological economic conceptual framework, the effects of several measures of governance are empirically examined. Our findings reveal that the rule of law, regulatory quality, control of corruption, government effectiveness and voice and accountability are negatively and statistically significantly correlated with water pollution across all industrial activities as well as specific industry groups. We conclude that governance matters for mitigating industrial water pollution. This novel paper adds to the existing literature on industrial water pollution by developing a modeling approach that empirically examines questions that have so far not been explored in institutional ecological economics and demonstrates the importance of the framework for addressing real life ecological problems that are common across the world. Policy implications are drawn.

Earlier studies on foreign direct investment (FDI) have mainly focused on its benefits. This paper examines the nature of FDI-related productivity spillovers in China's manufacturing sector. The empirical analysis based on firm level panel data, over the period 2000–2007, reveals that productivity spillovers arising from FDI from Hong Kong, Macau and Taiwan exhibit not only heterogeneity but also curvilinearity. The size of the spillovers depends on firm age, capital intensity and ownership structure. We find that FDI-related spillovers from the rest of the world are heterogeneous but not curvilinear. We find that the size of productivity spillovers depends on firm size and product quality. The analysis presented in this paper sheds some light on the complex pattern of FDI-related spillovers.

This paper examines the ‘small share’ problem inherent within the constant elasticity of substitution Armington specification. As a de facto research tool in the quantitative trade literature, this structural bias plagues the results of numerous multi-region CGE studies. Kuiper and van Tongeren (2006) proposed a fusion of gravity and CGE specifications to remedy said bias, which the current paper further develops. With a pervasiveness of ‘small-share’ examples on Mercosur–European Union trade owing to the latter's restrictive tariff regime, the results reveal that significant additional trade led gains to Mercosur under a potential preferential trade agreement when compared with the standard Armington treatment.

This paper investigates how the availability of alternative forms of bribe payments, on top of money, may facilitate corruption. There are two bribe payment technologies and a Corruptor and a Receiver must agree on the value and on the technology of the bribe. The paper infers which form of payment can be used by analyzing probabilities of punishment, bargaining powers of agents, and relative efficiency of the two different technologies. By assumption, monetary payments have distinct efficiency than do non-monetary favors. If the Receiver has a sufficiently high utility for payments using a particular technology, then only bribes paid via this technology are feasible. There is also a range of intermediate cases where monetary bribery is used if and only if the relative bargaining power of the Receiver is sufficiently large compared to that of the Corruptor.

This paper analyses how the quality of governance, the size of public spending, and economic development affect the relationship between bureaucratic corruption and economic growth. The analysis shows that the interaction between corruption and governance shapes the efficiency of public spending, which in turn, determines the growth effects of corruption. Specifically, corruption improves economic efficiency only when the actual government size is above the optimal level. It implies that a growth-maximising level of corruption is possible. This paper also finds that the incidence of corruption declines with economic development. This is because with economic development the wage rate rises and makes private rent seeking costs higher, thereby, discouraging corruption. The main policy implication is that targeting tax evaders instead of bureaucrats is more effective in terms of both reducing corruption and improving the growth potential of an economy.

In this paper, I examine a quality-then-price game in a fully covered market where firms are uncertain about consumer tastes regarding quality. The equilibrium is characterized under the fixed costs and variable costs of quality improvement, respectively. It is shown that the uncertainty is a differentiation force, and the quality differentiation increases more under variable costs than under fixed costs. In addition, an increase in uncertainty leads to higher profits and higher social welfare regardless of whether under fixed or variable costs. This result contrasts with the lower welfare in the Hotelling model with uncertainty. Finally, an analysis of the case of partial market coverage with uncertainty completes this paper.

Since the seminal work by Sims (1980), the impulse response functions are regularly applied to capture the propagation mechanism of a shock across time. This paper suggests a new approach for allowing asymmetry in the impulse response functions. This is an issue that has been neglected in the existing literature on the estimation of impulses. In the current paper it is shown how the underlying variables can be transformed into cumulative positive and negative changes in order to estimate the impulses to an asymmetric innovation. An application is provided to demonstrate how the propagation mechanism of an asymmetric impulse operates.

This paper studies a dynamic procurement problem by reverse auction for a retailer with stochastic demand. In each period, the retailer based on his inventory needs to determine a payment function (a procurement contract) according to which a number of potential suppliers compete in the reverse auction. We show the existence of the retailer's optimal payment function and find that the suppliers' Bayesian–Nash equilibrium bidding strategy is similar to the base-stock policy in the traditional multi-period inventory control problems when the retailer incurs no fixed setup cost, while similar to the ( s , S ) policy when the retailer incurs a fixed setup cost. This strategy is for the suppliers, instead of for the retailer, depends on the supplier's marginal cost and so is stochastic for the retailer. Thus, this paper extends well beyond traditional procurement environments studied so far in the inventory control literature.

This paper analyses the descriptive power of the different extensions of the Taylor rule. It also investigates whether monetary policy in South Africa can indeed be described by a linear Taylor rule or, instead, by a nonlinear rule. In particular, we extend the linear Taylor rule to a regime-switching framework, where the transition from one regime to another occurs in a smooth way, using a logistic smooth transition regression (LSTR) approach. The purpose of this paper is to evaluate the behaviour of monetary authorities in emerging countries, particularly in South Africa, in response to changes in macroeconomic variables over time based on LSTR model. In this sense, we empirically analyse Taylor-type equations for short-term interest rate in South Africa using quarterly data covering the period 1995:Q3–2011:Q4. Our results show that the nonlinear approach leads to the reduction of the measurement errors by 150 basis points in 1998 and 40 basis points in 2009. Moreover, the South Africa's monetary policy exhibits nonlinear patterns that better capture special events and unexpected contingencies and may contain relevant information rendering it applicable only to unusual conditions i.e., recession. Additionally, the presence of asymmetries in the reaction function of the South African Reserve Bank (SARB) requires disconnection from its automatic pilot rule and use of judgement to make decisions.

This paper analyzes the optimality of financial portfolios when the investor has a utility with ambiguity aversion. It provides a general result about the optimal portfolio profile under ambiguity, in the Anscombe–Aumann framework, using the Maccheroni et al. (2006) approach which includes Gilboa and Schmeidler's (1989) multiple prior preferences and Hansen and Sargent's (2011) multiplier preferences. The paper then details the CRRA case with an ambiguity index based on relative entropy. Such findings have practical applications in structured portfolio management. Indeed, it is important to take account of uncertainty about the true values of financial parameters when determining the best portfolio profile.

This paper establishes a static three-sector general equilibrium model by accommodating environmental pollution to investigate the impact exerted by skilled immigrants and foreign direct investment on the skilled–unskilled wage inequality. Environment is treated as an input for agricultural production. The production process of the urban low-skill sector generates environmental pollution, which deteriorates the rural environment and thereby influences agricultural production. The present paper highlights the role of environmental pollution in the determination of the skilled–unskilled wage inequality due to skilled immigrants and foreign direct investment.

This paper examines the controversy involving international trade by employing a simple model. It analyzes the effects of unilateral technological improvements in one entity on the welfare of that entity and its trading partners. Improvements in one country are irreversible and lead to substantial welfare effects on its trading partner. The result reveals some unpleasant free trade arithmetic. However, the results do not suggest that the trade should be curtailed. Rather, the paper advocates a critical need to allocate additional resources in order to maintain their competitive edge in an era when economies are becoming increasingly integrated.

This paper contributes to the literature on the relationship between the yield curve and macroeconomic variables by focusing on an emerging market case: Turkey. The most important result of the paper is that the relationship between the yield curve and macroeconomic variables is significantly affected by the change in monetary policy which is associated with the implementation of inflation targeting (IT) regime. While before the IT regime the yield curve is affected to some extent by macroeconomic variables, after the IT regime, it is mainly driven by macroeconomic variables. We also find that central bank has gained ability to affect the entire yield curve with the IT regime. The other important result is that in addition to inflation and real activities, the exchange rates also play an important role in the yield curve dynamics in Turkey.

In this paper we derive optimal legal expenses insurance for litigants and payment method for lawyers when neither the litigant's quantity choice nor the lawyer's legal effort is contractible. Three points are highlighted as our conclusions. First, to design an optimal insurance-payment system, demand-side cost-sharing is necessary. Second, supply-side cost-sharing is necessary only if the quantity and effort are substitutes and the payment contract involves hourly fees. Third, the optimal insurance-payment system could be achieved under conditional fees and sliding fees. Reputation incentives and side-contracts are also discussed in this paper.

The paper contributes to the literature relating to inequality and economic growth, in particular, we investigate the effects of wealth distribution on the kind of growth driven by innovation, i.e. Schumpeterian growth. Since two types of individuals are assumed, the poor and the rich, Gini-coefficient is treated in two variables, namely the relative wealth of the poor and the population share of the poor, each having a different effect on economic performance. Particularly in the separating equilibrium, an improvement in the relative wealth of the poor impedes economic growth, but a decline in the population share of the poor enhances economic growth. Furthermore, the current paper combines the Schumpeterian quality improvement model and the neoclassic production function. Thus, the impact of wealth inequality on economic growth is through the supply of human capital as well as the demand for better quality goods. Our results suggest that empirical research on the base of Gini-coefficient cannot generate a general relationship between wealth inequality and economic growth.

This paper aims to investigate the relationship between inventory change and the industry cycle in a deeper way. The nonlinear, two-state, trivariate, Markov regime-switching model developed in this paper which includes inventory change, capacity utilization and chip sales not only obtains satisfactory out-of-sample forecasts of the probability of the industry being in recession, but also, through the regimes identified by the model, provides interesting stories of dynamics within the industry and new evidence that the change in semiconductor inventory is in fact countercyclical with respect to chip sales.