Purdue CIBER Working Papers

Reforming Undergraduate Economics Instruction in the Former Soviet Union

Michael Watts et al. — Thu, 27 Oct 2011 10:00:14 PDT

Skills, Labour Costs, and Vertically Differentiated Industries: A General Equilibrium Analysis

Stefan Lutz et al. — Thu, 27 Oct 2011 10:00:10 PDT

The effect of labour costs on industry profits, employment and labour income is at the heart of the current European debate on industry competitiveness. High wages paid in European countries such as Germany are generally considered harmful for industry profitability. Though, high wages appear also to be associated with high labour skills and then with superior product quality. Similarly, a reduction in labour taxes is often invoked as a tool t improve industry profitability, but this argument hardly takes into account the demand effects of such a tax reform. In this paper we analyse the trade-off between labour costs and industry profits by means of a simple general equilibrium model where one industry is oligopolistic and vertically differentiated. The manufacutring of products of a higher quality requires the employment of a larger amount of skilled labour. Given an underlying skills distribution, the model determines profits, wages and aggregate income and welfare. Results show that high net wages due to a low skills endowment in the economy are typically associated with low profits. Labour taxation unambiguously raises gross wages, but has little effect on net wages. Depending on how the tax revenue is redistributed, higher taxation may either depress or boost industry profits.

Stock Index Futures Trading and Volatility in International Equity Markets

Huseyin Gulen et al. — Thu, 27 Oct 2011 10:00:03 PDT

We examine stock market volatility before and after the introduction of equity index futures trading in twenty-five countries using various models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country's index with the world market portfolio. We find that futures trading is related to an increase in conditional volatility in the United States and Japan, but in nearly every other country, we find either no significant effect, or volatility-dampening effect. This result appears to be robust to model specification, and is corroborated by further analysis of the relationship between volatility, trading volume and open itnerest in stock index futures. We also document an increase in conditional covariance between country-specific and world returns at the time of futures listing.

The Impact of Tariff and Non-Tariff Barriers to Trade in Agricultural Commodities: A Disaggregated Approach

Jon Haveman et al. — Thu, 27 Oct 2011 09:59:59 PDT

The Effect of National Culture on Partner Buyouts in Cross-Border Biotechnology Alliances

Timothy B. Folta et al. — Thu, 27 Oct 2011 09:59:57 PDT

This study examines how national culture influences the likelihood and rate of buyouts amont R&D equity alliances and joint ventures in the biotechnology industry. We hypothesize that the interaction of specific national culture attributes and cultural differences between alliance partners bear upon: a) the amount of endogenous uncertainty surrounding the potential integration of the target firm and b) the marginal rate of learning in hierarchical versus collaborative governance. Applying a competing hazard model to a sample of 173 joint ventures and minority equity collaborations in the biotechnology industry, we found that investing firms from high power distance and high uncertainty avoidance countries are more likely to buy out their alliance partners. Furthermore, greater cultural distance between alliance partners increases the likelihood of partner buyout when investing firms are from high power distance countries.

Global Diversification, Industrial Diversification, and Firm Value

David J. Denis et al. — Thu, 27 Oct 2011 09:59:54 PDT

Using a sample of 27,287 firm-years over the period of 1983-1993 we document an increasing trend in both the incidence and level of global diversification over time. This trend does not, however, reflect a substitution of global for industrial diversification. Global diversification results in average valuation discounts of the same magnitude as those for industrial diversification. Analysis of the changes in excess value associated with changes in diversification status reveals that increases in global diversification reduce excess value, while reductions in global diversification increase excess value.

The Cadbury Committee, Corporate Performance and Top Management Turnover

Jay Dahya et al. — Thu, 27 Oct 2011 09:59:52 PDT

In December 1992, the Cadbury Committee published the Code of Best Practice which recommended that boards of publicly-traded UK corporations include at least three outside directors and that the positions of the chairman of the board and chief executive officer not be held by a single individual. The underlying presumption was that these government-sponsored recommendations would lead to enhanced board oversight. As a test of that presumption, we analyze the relation between top management turnover and corporate performance. We find that CEO turnover increased following publications of the Code, that the relationship between CEO turnover and performance was strengthened following publication of the Code, and that the increase in the sensitivity of turnover to performance was concentrated among firms that adopted the Cadbury Committee's recommendation.

Voluntary Participation and Spite in Public Good Provision Experiments: an International Comparison

Timothy N. Cason et al. — Thu, 27 Oct 2011 09:59:50 PDT

This paper studies public good provision in the laboratory using the voluntary contribution mechanism, in a cross-cultural experiment conducted in the United States and Japan. Our environment differs from the standard voluntary contribution mechanism because in one treatment, subjects first decide whether or not to participate in providing this public good. This participation decision is conveyed to the other subject prior to the subjects' contribution decisions. We find that only the American data support the evolutionary stable strategy Nash equilibrium predicitons, and that behavior is significantly different across countries. Japanese subjects are more likely to act spitefully in the early periods of the experiment, even though our design changes subject pairings each period so that subjects never interact twice with the same opponent. Surprisingly, this spiteful behavior eventually leads to more efficient public good contributions for Japanese subjects than for American subjects.

Sources of Dispersion in Inflation Forecasts

John A. Carlson et al. — Thu, 27 Oct 2011 09:59:48 PDT

Cross-section dispersion of expected inflation is often explained by differences in information sets across agents, but there is little empirical evidence attesting to that. The purpose of this paper is to examine whether dispersion in consumer forecasts of inflation is generated by factors such as relative price observations, different perceptions of monetary policy, and personal characteristics. We use unique data from Bulgaria that allow us to examine such effects at the micro level.

Stores, Prices, and Currency Substitution

Camera Gabriele et al. — Thu, 27 Oct 2011 09:59:45 PDT

We study endogenous currency substitution in a decentralized trade environment. Sellers maximize profits from sales of imperfectly substitutable goods by posting prices in either one of two currencies. A unique symmetric equilibrium exists where goods are priced only in the local currency. This occurs if foreign trade is sporadic, there is sufficient but not excessive liquidity, and discounting is low. Excess or scarcity of liquidity, however, induces sellers to extract all surplus from buyers. This destroys the monetary equilibrium and shuts down trade. Equilibria with and without currency substitution coexist on some redion of the parameter space, and may be multiple. We prove that purchasing power parity may hold even if foreign trade is costly and the currency's value differs across countries. International circulation of money may expand the extent of the market hence enhance welfare.

Can Subsidies for MARs be Procompetitive

Kala Krishna et al. — Thu, 27 Oct 2011 09:59:42 PDT

We show that a market access requirement (MAR) can increase competition and reduces prices if a properly designed subsidy scheme is used to enforce the requirement. This is in contrast to most of the recent literature which has generally concluded that MARs are unambiguously anticompetitive. Our analysis underscores the importance of proper targeting and shows that it is sensitive to the composition of firms within an industry.

Trade Reduction, Diversion and Compression: Empirical Regularities in the Effects of Protective Measures

Jon D. Haveman et al. — Thu, 27 Oct 2011 09:59:40 PDT

We analyze the effectiveness of protective measures in a differentiated products framework using highly disaggregated data. The extent of the data and level of disaggregation permits us to separate the aggregate effect of tariffs and non-tariff barriers (NTBs) into reduction, diversion and compression effects.

Determinants of Currency Risk Premiums

J. A. Carlson et al. — Thu, 27 Oct 2011 09:59:37 PDT

The risk premium is a function of both the interest rate differential and the gap between the current exchange rate and its long-run equilibrium in a model of the foreign exchange market with both non-speculating traders and rational speculators. If the speculators have an alternative to specializing in exchange-rate speculation, then there should be no presumption that uncovered interest rate parity will hold even approximately with a long-run equilibrium number of speculators. Furthermore, when other traders respond to interest-rate differentials, the model can give rise to a negative relationship between the interest-rate differential and the subsequent change in the exchange rate, a phenomenon that is often evident in foreign exchange markets.

Expectations Formation and Inflation Persistence

J. A. Carlson et al. — Thu, 27 Oct 2011 09:59:34 PDT

This paper studies the dynamics of inflation if monetary policy is transparent only to part of the population. We find that average long-run inflation decreases in the proportion of agents with naive expectations and, because of tradeoffs between speed of adjustment and long-run inflation, central banks prefer a higher proportion of agents who form informed expectations in high inflation periods but not so in lower inflation periods. We use survey data on expectations of inflation from Bulgaria collected at the time a currency board was introduced in that country to test for influences on the heterogeneity of expectations across agents.

Comparing Working Capital Practices in Canada, the United States, and Australia: A Note

Nabil T. Koury et al. — Thu, 27 Oct 2011 09:59:31 PDT

International Integration and Growth: a Survey and Empirical Investigation

Jon D. Haveman et al. — Thu, 27 Oct 2011 09:59:28 PDT

After surveying the theoretical and empirical work, we attempt a comprehensive assessment of different forms of international integration on growth. In particular, we consider the impact of trade, of inward foreign direct investment, of preferential treatment of less developed countries, and of membership in trade blocs.

Voluntary Participation and Spite in Public Good Provision Experiments: an International Comparison

Timothy N. Cason et al. — Thu, 27 Oct 2011 09:59:25 PDT

Financing Publicly Traded U.S. Corporations in Public and Private Security Markets, 1970-1997: Where, How, How Much, With What, When and Why

Kenneth A. Carow et al. — Thu, 27 Oct 2011 09:59:23 PDT

Economic Lessons of the Kobe Earthquake

G. Horwich — Thu, 27 Oct 2011 09:59:20 PDT

The earthquake that struck the Japanese port city of Kobe on January 17, 1995, was the most severe quake ever to strike a modern urban area. It has become the most studied, analyzed, and discussed natural disaster in history. What I propose to add to this dialogue is an economist's overview of what he saw in Kobe 19 months after the event and what he learned during the ensuing 6 months.

The Effects of Protection on the Patter of Trade: A Disaggregated Analysis (a)

Jon D. Haveman et al. — Thu, 27 Oct 2011 09:59:18 PDT

We analyze the effects of protection using disaggregated data. This permits analysis of distinct effects of tariffs and NTBs on trade. Our analysis indicates that tariffs tend to shift trade towards larger exporters. We find significant trade diversion caused by tariffs. In the case of NTBs, we find quantitative barriers are more likely to raise prices than are price restrictions. Quantity barriers appear to lead exporters to concentrate on higher priced varieties. We do not find much evidence to suggest that countries not targeted by an NTB gain at the expense of targeted countries. We find that NTBs tend to substitute for tariffs.