Abstract: Abstract This paper considers the persistence of earnings differentials between wage earners and the self-employed through modeling overconfidence. The model examines challenges of limited information and its impact in the decision-making process. Using a Bayesian setting and concentrating specifically on the entrepreneur’s entry decision, the model shows how limited information can lead to substantial overestimation of potential profits and other outcomes even if the decision-maker has unbiased prior beliefs. The driving force behind the conclusion is the assumption that decision-makers, such as entrepreneurs, are not aware that available information is limited. For entrepreneurship, the resulting bias leads to overconfidence, excessive entry and the persistence of lower returns to entrepreneurship when compared to returns in the wage sector. This situation may arise wherever attrition is present, from military to business schools to medicine. Going the extra mile to gather and incorporate all relevant information into decision-making pays off in better quality decisions. PubDate: 2021-01-04
Abstract: Abstract When participating in an auction is costly, a potential bidder has to decide whether to enter the auction or not. The extent to which the potential bidders know their private cost before making their entry decisions determines how selective the entry process is. Endogenous selective entry is common in many auctions and it has important implications for designing auctions, in particular, choosing the bid discount policy that is frequently used in public procurements to achieve distributional goals of the government. Prior empirical studies of the bid preferences were based on frameworks that either did not explicitly model endogenous participation or assumed endogenous, but non-selective participation. This study empirically investigated whether the entry process is selective in the highway procurement auctions run by the California Department of Transportation. To this end, the asymmetric affiliated-signal model was adapted to permit endogenous selective entry. Model parameters, including entry costs and distributions of construction costs for regular and fringe companies, were estimated nonparametrically. The results show evidence favoring selective entry of the fringe firms and imply that the level of bid discount required to achieve the procurement buyer’s policy objective may be lower than what is previously found in the literature under the assumption of non-selective entry. PubDate: 2020-12-11
Abstract: Abstract Both the efficient market hypothesis and modern portfolio theory rest on the assumptions of the Gaussian probability distribution and independence of consecutive returns. This paper provides a brief excursion into the history of capital market research. A measure of long-range dependence (Hurst exponent) was applied to daily returns of selected stock indices and individual firms. The Hurst exponent was estimated using rescaled range analysis. The estimates are based on an unusually large sample of empirical-time series from capital markets. This method distinguishes whether the data-generating process follows random walk or exhibits antipersistent or persistent behavior. Both the efficient market hypothesis and modern portfolio theory assume that the data-generating process has no memory, i.e. follows Brownian motion. The random walk process is characterized by a Hurst exponent value of 0.5. Values greater than 0.5 and less than 1 indicate a persistence of local trends. Values between 0 and 0.5 indicate a process that reverts to the mean more often than a random process (mean-reverting process). The results indicated that the series of daily returns exhibit predominantly persistent or antipersistent behavior. Therefore, Brownian motion cannot be perceived as the norm for describing stock market behavior. These findings challenge the assumption of a random walk in stock prices, valuation models and assessment of risk. PubDate: 2020-12-04
Abstract: Abstract This paper investigates the public-private remuneration patterns in South Africa with time-series methods for the first time since the introduction of an inflation-targeting framework in 2000. Co-integration tests and analysis confirm that there is a stable, long-run relationship between nominal and real remuneration in the public and private sector. The adjustment to the deviations from this long-run relationship is strong and significant for public-sector remuneration, while private-sector wages neither respond to deviations from the long-run relationship nor lagged changes in public-sector remuneration. The causal direction from private- to public-sector remuneration does not change if real earnings are calculated with the gross domestic product deflator. This is confirmed by simple Granger-causality tests. PubDate: 2020-12-03
Abstract: Abstract This paper models a consumer loan market with a vertical structure where an upstream monopolist supplies funds to downstream nonbanks. The nonbanks supply funds to consumers in the consumer loans market. An inverse demand function of the consumer is linear. The downstream nonbank freely enters the market as long as it earns a positive profit. First, this paper derives free-entry equilibrium without government regulation. Next, this paper examines the effects of government regulation on the entry of nonbanks. Two regulatory schemes are investigated: partial regulation, wherein the government can only control the interest rate the monopolist sets, and full regulation, wherein the government can control the number of nonbanks as well as the interest rate. This paper presents four new results. First, downstream firms insufficiently enter the market under partial regulation. Second, downstream firms excessively enter the market under full regulation. Third, the establishment of the upstream public firm improves welfare even though its profit is negative under partial regulation. Fourth, full regulation is welfare improving compared to partial regulation. PubDate: 2020-12-01
Abstract: Abstract There is growing evidence of risks associated with excessive technology use, especially among teens and young adults. However, little is known about the characteristics of those who are at elevated risk of being problematic users. Using data from the 2012 Current Population Survey Internet Use Supplement and Educational Supplement for teens and young adults, this study developed a conceptual framework for modeling technology use. A three-part categorization of use was posited for utilitarian, social and entertainment purposes, which fit observed data well in confirmatory factor analysis. Seemingly unrelated regression was used to examine the demographic characteristics associated with each of the three categories of use. Exploratory factor analysis uncovered five distinct types of users, including one user type that was hypothesized to likely be at elevated risk of problematic use. Regression results indicated that females in their twenties who are in school and have greater access to technology were most likely to fall into this higher-risk category. Young people who live with both parents were less likely to belong to this category. This study highlighted the importance of constructing models that facilitate identification of patterns of use that may characterize a subset of users at high risk of problematic use. The findings can be applied to other contexts to inform policies related to technology and society as well. PubDate: 2020-11-04
Abstract: Abstract This paper presents a new rationalization for bailouts of sovereign debt in monetary unions, such as those observed during the recent Euro crisis. It introduces a model where member countries of the monetary union are ex-ante identical, and each derives utility from consumption and disutility from the union-wide inflation rate. The union’s central bank is utilitarian and lacks commitment. Countries borrow or save in a market for nominal sovereign debt in response to idiosyncratic income shocks, with countries that receive positive income shocks saving and countries that receive negative income shocks borrowing. Ex post, the monetary union’s central bank will attempt to devalue sovereign debt through surprise inflation, as this will redistribute income from rich creditor countries to poor debtor countries. Creditor countries choose to bailout debtor countries because bailouts will weaken the redistributive motives of the central bank and forestall surprise inflation. As bailouts in this environment constitute a payment from lucky creditor countries to unlucky debtor countries, they mimic a risk-sharing arrangement that insures against income shocks. The payments made by creditor countries are incentive-compatible due to the shared currency and inflation rate in the monetary union. This ability of countries to provide each other with incentive-compatible insurance constitutes a novel theory of optimal currency areas. This insurance benefit of the monetary union is largest for countries with negatively correlated income shocks, in contrast to the classic Mundell-Friedman optimal currency area criterion. PubDate: 2020-09-30
Abstract: Abstract Competition is a key feature of the market process assumed to improve market outcomes. But how strong is the relationship between competition and positive consumer experiences, and how does the relationship vary across space and type of competitor' Phoenix is a suitable setting in which to explore these questions because it is a major metropolitan area with thousands of unique restaurants rated on Yelp. The consumer experience is measured based upon Yelp user-generated reviews through July 2016, with higher ratings reflecting better customer experiences. Competition is defined in different ways depending upon the number of overall, same-price and same-type restaurants nearby. Given differences between chain and independent restaurants, competition is further segmented across these two types of establishments. After controlling for restaurant characteristics, census-tract-level demographics, census-tract fixed effects and sub-industry fixed effects the results suggest that spatial competition is only associated with better customer experiences for same-category independent restaurants within driving distance (1-5 miles). The association is not present for overall and same-price independent restaurant competition nor for chain restaurants. Consistent with the sprawling layout of the Phoenix area, the effect of competition is only for restaurants within driving distance. These findings are relevant for cities designing policies to attract residents by offering high-quality consumer amenities. PubDate: 2020-09-19
Abstract: Abstract Japanese exports did not immediately react to the depreciations of the yen after a change in the economic policy framework in 2012, with the launching of Abenomics. This article focuses on the Japanese foreign sector and investigates the extent to which exchange rate changes affect Japanese real exports. After studying the dynamic properties of the included time series variables, a vector error correction model was estimated for the period 1980–2016 based on trade data from the World Bank and the International Monetary Fund. This study investigated the dynamic causal relationships among real exports, external demand, price competitiveness, and real imports. Within a large body of literature on Japanese exports, most extant studies used the trade balance as the dependent variable. One novelty of this study is the estimation of a quatrovariate system in which the components of trade balance, namely real exports and real imports, are both endogenously determined. A unique long-run cointegration equation was identified in which the external demand for exports, as proxied by gross domestic product of the rest of the world combined, has the most significant impact on real exports. The elasticity of real exports with respect to the real exchange rate was 2.34. However, the speed of adjustment towards long-run equilibrium was about 9% per year, which was rather slow. The low speed of adjustment implies it would take approximately 10 years for the full adjustment to take place and, thus, provides a novel explanation as to why the yen’s depreciation, triggered by Abenomics, did not boost Japanese exports as was expected by the Japanese government. PubDate: 2020-09-04
Abstract: Abstract This paper uses a three-tax linear model to study the optimal tax mix numerically. The three aggregate taxes relate to labour, capital and commodities. The most striking result is that with a linear expenditure system based on econometric estimates, indirect (i.e. commodity) taxation dominates the optimal tax mix, with over 80% of tax revenue coming from indirect taxes. Although some analytical justification is presented for this surprising result, it should be tested numerically using other econometrically estimated utility-demand systems. Comprehensive computational modelling of the optimal tax mix has been absent from the literature. In light of the results presented here, there appears to be considerable scope for further research in this area. From a theoretical perspective, a major innovation in this paper is the introduction of capital taxation into a static tax mix model. The analytical part of the paper provides approximate predictions for optimal linear tax rates, called the modified inverse elasticity rule. Using these formulas, explanations are provided for the dominance of indirect taxation in the optimal tax mix. PubDate: 2020-09-02
Abstract: Abstract Public policy aimed at reducing consumption of tobacco or alcohol products often results in purchases of lower-taxed alternatives. Many studies find tobacco and alcohol to be habit-forming, so taxing these commodities often has little impact in reducing purchases. There is much evidence that different alcohol and tobacco products are either substitutes or complements in use but these studies exclude the impact of casino gambling and lotteries. This is surprising given the evidence of high returns for companies investing in all types of ‘sin’ goods. The demand for ‘sin’ goods is analyzed using both myopic and rational habit-forming models. Durability was found to be largest for wine and tobacco and lowest for casino gambling. Tobacco and beer were the most net habit-forming commodities. All ‘sin’ goods were net habit-forming in the rational model, but under myopic habit formation, spirits and wine were net durable goods. The research highlights the importance of including casino gambling and lotteries, which are typically excluded when estimating substitution or complementarity between ‘sin’ goods. Casino gambling and lotteries are both net habit-forming and are substitutes in use for each other. Imposing taxes to reduce the misuse of alcohol and tobacco products is likely to have some unintended consequences, such as increases in personal expenditure on casino gambling and lotteries. PubDate: 2020-08-29
Abstract: Abstract This paper investigates the presence of herding behavior across a spectrum of commodities (i.e., agricultural, energy, precious metals, and metals) futures prices obtained from Datastream. For the first time in English-language literature, this study provides an explicit investigation of the role of deviations of U.S. monetary policy decisions from a standard Taylor-type monetary rule, in driving herding behavior with respect to commodity futures prices, spanning the period 1990–2017. The results document that the commodity markets are characterized by herding. Such herding behavior is not only driven by U.S. monetary policy decisions. Such decisions exert asymmetric effects on this behavior. An additional novelty is that the results document that herding is stronger during discretionary monetary policy regimes. PubDate: 2020-08-28
Abstract: Abstract Using hourly and weekly wages from the Canadian Labour Force Survey from 2000 until 2018, workers were separated into full-time and part-time and the following striking observation was documented. The overall gender wage gap is larger than either the full-time pay gap or the part-time pay gap, even after controlling for detailed personal and job characteristics. This result is a consequence of two findings: (i) part-time wages are lower than full-time wages, and (ii) the majority of part-time workers are women. In aggregation, this brings down the average female wage, leading to a larger aggregate gender wage gap. This was further linked to a differential selection by gender into full-time and part-time work, with women of higher earnings potential being overrepresented in the pool of part-time workers, resulting in no gender pay gap in the part-time worker category. Policies targeted at encouraging full-time employment for women should therefore reduce the gender wage gap. PubDate: 2020-08-13
Abstract: Abstract This paper investigates whether the economic growth of China and India matters for the long-term economic prosperity of African nations. Annual World Bank data were used to determine the growth of African countries for the period from 2002 to 2016. The analytical framework includes the standard Barro growth regression model. The Arellano and Bond generalised method of moments estimation procedure was used to analyse the data, overcoming the issues of autocorrelation, heteroscedasticity and endogeneity. The findings based on the generalised method of moments estimation indicate that the economic growth of China, but not of India, had a statistically significant (p = 0.10) positive correlation with the economic growth of Africa. It is concluded that the economic growth of China assumed a significant decisive role in supporting African economic prosperity. Hence, Africa is likely to realise long-term beneficial growth and development effects by actively integrating with large economies, such as China. PubDate: 2020-08-12
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