...takes the bus to work The choice of transportation may be influenced by a variety of factors. A key variable is: xi the extra time in minutes needed for a bus journey compared to travel by car (this may be negative to indicate that a bus journey is faster than using a car), for i = 1, . . . , N. 1 Econ 326 - Chapter 16 The linear probability model explains the choice variable by the linear regression equation: y i = β1 + β 2 x i + e i for i = 1, 2, . . . , N Estimation by the least squares principle (OLS) gives parameter estimates of β1 and β 2 as b1 and b2 . For some value of interest x 0 a prediction is calculated as: y 0 = b1 + b 2 x 0 ˆ ˆ The predicted value y 0 has the interpretation as the probability that the event will occur ( y = 1 ) given the value x 0 . For the transportation to work example, y 0 is the probability that an ˆ individual will drive a car to work given a difference in travel time for a bus journey compared to a car trip. 2 Econ 326 - Chapter 16 For the data set with transportation travel times least squares (OLS) estimation of the linear probability model is: y i = 0.48 + 0.007 x i ˆ R 2 = 0.61 The intercept estimate gives the probability that a worker chooses to drive a car to work when there is no difference in travel time between a car trip and a bus journey (that is, the...
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...impending accident, this control enables him to adjust the total amount of risk facing the car’s occupants and how that risk is distributed. In other words, his maneuvers will have allocative and distributive effects on the occupants’ risk. The driver’s distributive choices reveal his relative preferences for himself over his passengers. The manifestation of injuries amongst the occupants allows observation of those relative preferences. A theory of spousal altruism – indeed any romantic notion of marriage – would predict that a husband is more willing to sacrifice himself for his passenger when the passenger is his wife.2 The central purpose of this paper is to test this prediction. We compare the probability that drivers travelling with spouses sacrifice their own life to the probability that drivers traveling with other women sacrifice their own life to estimate...
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...2012-2013 PAWNSHOPS AND BEHAVIORAL ECONOMICS 193 PAWNSHOPS, BEHAVIORAL ECONOMICS, AND SELF-REGULATION SUSAN PAYNE CARTER* AND PAIGE MARTA SKIBA** I. Introduction Pawnbroking is the oldest source of credit.1 There is growing public interest in day-to-day pawnbroking operations, as evidenced by the popularity of reality shows such as “Pawn Stars” and “Hardcore Pawn.”2 Television viewers’ curiosity about an old credit institution may be due to the fact that 7% of all U.S. households have used pawn credit.3 Although pawnshops predate biblical times, researchers know surprisingly little about this ancient form of banking and its customers.4 We fill this gap by documenting detailed information on pawnshop loan repayment and default, and by discussing how pawnshop borrowers’ behavior is consistent with various behavioral economics phenomena. Pawnshop loans are small, short-term, collateralized loans typically used by low-income consumers. The borrower leaves a possession, or “pledge,” as collateral in exchange for a loan, typically of $75–$100.5 Interest rates vary by state and range from 2 Assistant Professor, Office of Economic and Manpower Analysis, United States Military Academy. susan.carter@usma.edu. The views expressed in this paper do not necessarily represent those of the United States Military Academy, the United States Army, or the Department of Defense. ** Associate Professor of Law, Vanderbilt University...
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...2012-2013 PAWNSHOPS AND BEHAVIORAL ECONOMICS 193 PAWNSHOPS, BEHAVIORAL ECONOMICS, AND SELF-REGULATION SUSAN PAYNE CARTER* AND PAIGE MARTA SKIBA** I. Introduction Pawnbroking is the oldest source of credit.1 There is growing public interest in day-to-day pawnbroking operations, as evidenced by the popularity of reality shows such as “Pawn Stars” and “Hardcore Pawn.”2 Television viewers’ curiosity about an old credit institution may be due to the fact that 7% of all U.S. households have used pawn credit.3 Although pawnshops predate biblical times, researchers know surprisingly little about this ancient form of banking and its customers.4 We fill this gap by documenting detailed information on pawnshop loan repayment and default, and by discussing how pawnshop borrowers’ behavior is consistent with various behavioral economics phenomena. Pawnshop loans are small, short-term, collateralized loans typically used by low-income consumers. The borrower leaves a possession, or “pledge,” as collateral in exchange for a loan, typically of $75–$100.5 Interest rates vary by state and range from 2 Assistant Professor, Office of Economic and Manpower Analysis, United States Military Academy. susan.carter@usma.edu. The views expressed in this paper do not necessarily represent those of the United States Military Academy, the United States Army, or the Department of Defense. ** Associate Professor of Law, Vanderbilt University...
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...HIER Harvard Institute of Economic Research Discussion Paper Number 2097 Paternalism and Psychology by Edward L. Glaeser December 2005 HARVARD UNIVERSITY Cambridge, Massachusetts This paper can be downloaded without charge from: http://post.economics.harvard.edu/hier/2005papers/2005list.html The Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=860865 Paternalism and Psychology Edward L. Glaeser† Does bounded rationality make paternalism more attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasion and when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationality will often increase the costs of government decisionmaking relative to private decisionmaking, because consumers have better incentives to overcome errors than government decisionmakers, consumers have stronger incentives to choose well when they are purchasing than when they are voting and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats. As such, recognizing the limits of human cognition may strengthen the case for limited government. INTRODUCTION An increasingly large body of evidence documenting bounded rationality and non-standard preferences has led many scholars to question eco1 nomics’ traditional hostility towards paternalism. After all, if individuals have so many cognitive difficulties then...
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...Journal of International Economics 77 (2009) 255–264 Contents lists available at ScienceDirect Journal of International Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / j i e On the origins of comparative advantage Arnaud Costinot ⁎ MIT and NBER, United States a r t i c l e i n f o Article history: Received 5 April 2007 Received in revised form 15 January 2009 Accepted 15 January 2009 Keywords: Complexity Institutional quality Human capital Division of labor Comparative advantage JEL classification: F10 a b s t r a c t This paper proposes a simple theory of international trade with endogenous productivity differences across countries. The core of our analysis lies in the determinants of the division of labor. We consider a world economy comprising two large countries, with a continuum of goods and one factor of production, labor. Each good is characterized by its complexity, defined as the number of tasks that must be performed to produce one unit. There are increasing returns to scale in the performance of each task, which creates gains from specialization, and uncertainty in the enforcement of each contract, which create transaction costs. The trade-off between these two forces pins down the size of productive teams across sectors in each country. Under free trade, the country where teams are larger specializes in the more complex goods. In our model, it is the country where the product of institutional...
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...JOURNAL OF APPLIED ECONOMETRICS J. Appl. Econ. 23: 925– 948 (2008) Published online 7 November 2008 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/jae.1036 ECONOMETRICS OF AUCTIONS BY LEAST SQUARES LEONARDO REZENDE* PUC-Rio, Rio de Janeiro, Brazil; and University of Illinois at Urbana–Champaign, Illinois, USA SUMMARY I investigate using the method of ordinary least squares (OLS) on auction data. I find that for parameterizations of the valuation distribution that are common in empirical practice, an adaptation of OLS provides unbiased estimators of structural parameters. Under symmetric independent private values, adapted OLS is a specialization of the method of moments strategy of Laffont, Ossard and Vuong (1995). In contrast to their estimator, here simulation is not required, leading to a computationally simpler procedure. The paper also discusses using estimation results for inference on the shape of the valuation distribution, and applicability outside the symmetric independent private values framework. Copyright 2008 John Wiley & Sons, Ltd. Received 15 September 2006; Revised 1 July 2008 1. INTRODUCTION The field of econometrics of auctions has been successful in providing methods for the investigation of auction data that are well grounded in economic theory and allow for inference on the structure of an auction environment. Today, a researcher has a number of alternative structural methods, especially within the independent private-values paradigm...
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...REGULATION FOR CONSERVATIVES: BEHAVIORAL ECONOMICS AND THE CASE FOR “ASYMMETRIC PATERNALISM” COLIN CAMERER, SAMUEL ISSACHAROFF, GEORGE LOEWENSTEIN, † TED O’DONOGHUE, AND MATTHEW RABIN INTRODUCTION Regulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in a way that imposes harm on an individual basis but yields net societal benefits. A good example is taxation to fund public goods such as roads. In such situations, an individual would be better off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax. In this paper, we are concerned with a third form of regulation: paternalistic regulations that are designed to help on an individual basis. Paternalism treads on consumer sovereignty by forcing, or preventing, choices for the individual’s own good, much as when parents limit their child’s freedom to skip school or eat candy for dinner. Recent research in behavioral economics has identified a variety of decision-making errors that may expand the scope of paternalistic regula- Professor Camerer is the Rea and Lela Axline Professor of Business Economics, California Institute of Technology; Professor Issacharoff is the Harold R. Medina Professor of Procedural Jurisprudence, Columbia Law School; Professor Loewenstein is a Professor of Economics and Psychology...
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...Public Disclosure Authorized WPS5314 Policy Research Working Paper 5314 Public Disclosure Authorized Regional Trade Agreements Caroline Freund Emanuel Ornelas Public Disclosure Authorized Public Disclosure Authorized The World Bank Development Research Group Trade and Integration Team May 2010 Policy Research Working Paper 5314 Abstract This paper reviews the theoretical and empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the past 15 years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all of these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization has materialized, while the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences. This paper—a product of the Trade and Integration Team, Development Research Group—is part of a larger effort in...
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...A Direct Test of the Theory of Comparative Advantage: The Case of Japan Author(s): Daniel M. Bernhofen and John C. Brown Reviewed work(s): Source: Journal of Political Economy, Vol. 112, No. 1 (February 2004), pp. 48-67 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/10.1086/379944 . Accessed: 10/02/2012 10:27 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to Journal of Political Economy. http://www.jstor.org A Direct Test of the Theory of Comparative Advantage: The Case of Japan Daniel M. Bernhofen and John C. Brown Clark University We exploit Japan’s sudden and complete opening up to international trade in the 1860s to test the empirical validity of one of the oldest and most fundamental propositions in economics: the theory of comparative advantage. Historical evidence supports the assertion that the characteristics of the Japanese economy at the time were compatible with the...
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...not restrain the shape of the cash flow distributions. This shows that Fama’s assertion that the distributions of one-period single returns become more and more skewed cannot be generalized to multiperiod budgeting problems. Secondly, in a subsequent analysis we characterize the cash flow distributions under the additional assumption of a deterministic dividend yield. In this case a linear relationship between returns and cash flows obtains. Keywords Cost of capital . Capital budgeting 1 Introduction According to standard textbook advice, asset valuation is done by discounting the expected future cash flows of an investment with an appropriate risk-adjusted discount rate. The expectation is taken with regards to the subjective probability of the investor, and the risk adjusted discount rate is given by the expected rate of The authors thank the Verein zur Förderung der Zusammenarbeit von Lehre und...
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...association or the Companies Act 1965. Although they are granted the rights to make decision on the management board and the approval rights in passing directors’ proposals, some shareholders find it inadequate as the current approval rights is a fairly weak tool in controlling agency problem. With wide and in-depth coverage of ongoing corporate tussles, shareholder awareness has improved to the point that shareholders now want to hold management accountable to proper corporate governance. Hence, in this essay, the issue of whether Malaysia should encourage shareholder empowerment to improve corporate governance in companies and thereby attract more foreign direct investment is discussed. To support my arguments three main decision-making power; rules-of the-game, game-ending and scaling-down; as well as the approval rights and proposal rights are discussed. Definition of Shareholder empowerment Shareholder empowerment means the increasing rights given to shareholder to participate in corporate decisions. These rights include the proposal rights and approval rights, which could be classified under the rights to decide. Right to propose emphasize on shareholders right to initiate their proposals to control managerial agency problem whereas right to approve emphasize on the approval of managerial proposal. Similarly, according to Bratton and Wachter, shareholder empowerment...
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...The American economic JUNE 1958 Revlew NUMBER THREE VOLUME XLVIII THE COST OF CAPITAL, CORPORATION FINANCE AND THE THEORY OF INVESTMIENT By FRANCO MODIGLIAN1 AND MERTON H. MILLER* What is the "cost of capital" to a firm in a world in which funds are used to acquire assets whose yields are uncertain; and in which capital can be obtained by many different media, ranging from pure debt instruments, representing money-fixed claims, to pure equity issues, giving holders only the right to a pro-rata share in the uncertain venture.? This question has vexed at least three classes of economists: (1) the corporation finance specialist concerned with the techniques of financing firms so as to ensure their survival and growth; (2) the managerial economist concerned with capital budgeting; and (3) the economic theorist concerned with explaining investment behavior at both the micro and macro levels.' In much of his formal analysis, the economic theorist at least has tended to side-step the essence of this cost-of-capital problem by proceeding as though physical assets-like bonds-could be regarded as yielding known, sure streams. Given this assumption, the theorist has concluded that the cost of capital to the owners of a firm is simply the rate of interest on bonds; and has derived the familiar proposition that the firm, acting rationally, will tend to push investmnent to the point * The authors are, respectively, professor and associate professor of economics in...
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...Journal of International Money and Finance xxx (2014) 1e24 Contents lists available at ScienceDirect Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf Living with the trilemma constraint: Relative trilemma policy divergence, crises, and output losses for developing countries Joshua Aizenman a, 1, Hiro Ito b, * a b University of Southern California and the NBER, University Park, Los Angeles, CA 90089-0043, USA Department of Economics, Portland State University, 1721 SW Broadway, Portland, OR 97201, USA a b s t r a c t JEL classification: F31 F36 F41 O24 Keywords: Impossible trinity International reserves Financial liberalization Financial crisis Exchange rate regime This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last 15 years. We find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis. However, a developing or emerging market country with a higher degree of relative policy divergence...
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...AFTER THE BAILOUT: REGULATING SYSTEMIC MORAL HAZARD* Karl S. Okamoto ** How do we prevent excessive risk taking in the financial markets? This Essay offers a strategy for regulating financial markets to better prevent the kind of disaster we saw during the Financial Crisis of 2008. By developing a model of risk-manager decisionmaking, this Essay illustrates how even “good people” acting in utterly rational and expected ways brought us into economic turmoil. The assertion of this Essay is that the root cause of the Financial Crisis was systemic moral hazard. Systemic moral hazard poses a unique challenge in crafting a regulatory response. The challenge lies in that the best response to systemic moral hazard is “predictive prevention.” It is inherently difficult to reward individuals for producing predictive prevention. Unsurprisingly, markets fail to produce it at optimal levels and thus cannot prevent systemic moral hazard and the kind of crises that ensue. The difficulty in valuing predictive prevention is seen when we model how risk managers make decisions regarding the prevention of excessive risk. The model reveals how the balance can be tipped in favor of risk taking that leads to systemic failure and broad social harm. The model also reveals how regulation might work to reset the balance to one that is superior for society. We can achieve optimal risktaking decisionmaking in two ways: (1) by requiring all asset managers in the market to put their own money at risk in...
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