ALBERT

Notes: Economists have overlooked and misunderstood the impact of illegal financial flows -- "dirty money" -- on the global economy, according to Raymond Baker and Jennifer Nordin. Estimated at $1 trillion annually, dirty money renders economic analysis inaccurate and undermines development in poor countries.

Notes: After decades of near constancy at 40 cents on the dollar, the gender pay gap has declined markedly. Francine Blau and Lawrence Kahn document these developments and explore the reasons both for the remaining gender pay gap and changes in the gap over time.

Notes: Peter Navarro and the China Price project explore how China has become the world's "factory floor" in just a few short decades.

Notes: Aaron Edlin confesses his selfish reasons to root for a collapse of housing prices and explains why many who worry should not.

Notes: Harlan Greene wonders whether the inadequacy of U.S. efforts to gracefully accommodate its ethnic melting pot could account for the troubling statistics in "Garrison America."

Notes: Adam Smith's methodology -- and the modern economist's -- is one of theory, led by observation. Alternative methodologies, including opinion surveys of businessmen are no more likely to generate useful answers than this time-tested epistemology.

Notes: Observation-based analysis at the firm and plant level is alive, well, and growing, according to Frank Giarratani. More than eight hundred scholars, including many economists, embrace observation-based analysis, and identify with industry studies as a research field based on this principle.

Notes: Steffen Kallbekken and Torben K. Mideksa explain why economic analysis may demand sharp emissions reductions today rather than the gradual path recommended by Sheila Olmstead and Robert Stavins.

Notes: Carbon taxes are not likely to be politically feasible in the U.S. for addressing climate change in the short term, according to Robert Hahn and Peter Passell. The time is now ripe for the U.S. to consider adopting a cap and trade approach to reducing greenhouse gas emissions.

Notes: We analyze a monetary model with flexible labor supply, cash-in-advance constraints, and seigniorage- and tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases or increase in tax rates eliminates the sunspot equilibria in many cases. However, raising taxes enough to balance the budget can fail to achieve determinacy.

Notes: This paper shows that standard Schumpeterian theory does not imply that the incumbent monopolist has too little incentive to carry out R&D aimed at displacing its own product. If the patent holder is rational as is any other R&D investor, she will know that in equilibrium her patent's obsolescence shall not be affected by her own R&D investment, because all the R&D firms operate under perfect competition and constant returns to scale at the private level. This reconciles Schumpeterian theory with the empirical evidence on innovation by incumbents. It is proved that the usual macroeconomic implications maintain their validity.

Notes: This paper examines the role of monetary policy in the presence of endogenous time preference. The framework in which this issue is addressed is a monetary model with cash-in-advance constraints and an additional trading friction that is typical of the class of "liquidity models" of the monetary business cycle. We find that the nature of the optimal policy designed to remove these distortions gets modified in the presence of endogenous utility discounting. Consequently the role of monetary policy is significantly altered. Specifically, monetary policy is likely to be less activist relative to the model with a fixed rate of time preference.

Notes: We construct a dynamic error correction model of the Australian labor market using a macroeconomic panel across seven states from 1972:3 to 1999:1. Medium-run equilibrium estimates support a real wage-productivity gap and an unemployment gap. The dynamic short-run estimates support expectations-augmented Phillips curves for wages and prices, and demand-led employment growth. We compare three procedures - pooled, aggregate and mean group estimates. Considerable heterogeneity existed across states in the pooled procedure, and state-level variables had a significant impact in the aggregate procedure. Out-of-sample aggregate forecasting for the pooled, aggregate and mean group procedures suggests that the pooled one performs best.

Notes: This paper argues that the effect of openness to trade on process innovations and skill premia importantly depends on the structure of labor markets in developed countries. Openness to trade with less developed countries is often modelled as a fall in the relative price of unskilled-labor intensive goods. We show within the model of Acemoglu (2003b) that such a fall in the relative price can make wage floors more binding and trigger costly process innovations that increase the productivity of unskilled workers. Empirical evidence using an industry panel for the US and Germany in the 1970s to 1990s supports this hypothesis: (i) embodied technology change seems distorted towards unskilled-labor intensive industries in Germany where wage floors are more important and (ii) embodied technology change in the 1980s is associated with an increase of the share of skilled labor in the wage bill of 15 percentage points in the US whereas the corresponding increase in Germany is much smaller at 3 percentage points.

Notes: The coexistence of barriers to labor mobility with large output-per-worker disparities driven by Total Factor Productivity (TFP) differences suggests that the world's labor force is misallocated across countries. We investigate the extent and consequences of this potential misallocation in the context of a simple two-location growth model, in which production requires capital, labor and an essential immobile factor (land). We characterize the magnitude of labor movements implied by an efficient long-run allocation, and derive their implications for capital accumulation. Quantitatively, even for moderate TFP differences, we find substantial increases in world output associated with efficient allocations. These output increases are driven by large movements of labor from low to high TFP countries, as well as by a sizeable increase in the capital stock and changes in its endogenous division across countries. Our results are robust to a large set of parameter values, including unrealistically conservative ones.

Notes: Cooley and Soares (1999) show that a pay-as-you-go (unfunded) pension system can be an outcome of a political equilibrium even without intergenerational altruism. This note assumes an endogenous growth model rather than an exogenous one. This assumption establishes a link between the savings rate and economic growth. Since the introduction of a pay-as-you-go system lowers the savings rate, it has an adverse effect on the growth rate and hence on the future interest rate and future pensions. When this additional incentive is taken into account, the level of the pay-as-you-go system chosen in political equilibrium can be lower or even, depending on calibration values, disappear entirely, relative to the exogenous growth model of Cooley and Soares.

Notes: Despite large potential gains, international equity investment is less diversified across countries than predicted by the international version of the traditional capital asset pricing model (ICAPM). This paper provides empirical evidence on the impact of capital market frictions on international equity portfolios using data on bilateral equity holdings. Two important findings are reported: First, besides a home bias in equities, a 'friendship bias' can be observed for some country pairs. Second, indirect barriers such as the degree of financial market development and especially information asymmetries have strong explanatory power, whereas direct barriers such as capital flow restrictions have no impact.

Notes: We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents' expectations determine the equilibrium level of inflation). In our model, sticky-price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.

Notes: This paper finds that a benchmark model of habit formation in consumer preferences can explain two well-known failures of the permanent income hypothesis: the sensitivity of aggregate consumption to predictable changes in income and to lagged consumer sentiment. One novel feature of the paper's methodology is to allow for measurement errors and other transitory elements (for example, weather-related disturbances) in consumption data. In contrast with traditional wisdom, aggregate consumption growth appears to be highly persistent after controlling for measurement errors and transitory consumption fluctuations: the estimates of persistence in quarterly consumption growth jump up from the commonly assumed 0.3 to about 0.7.

Notes: We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. However, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits.

Notes: In this paper we present a technique for assessing data quality based on conformity with Benford's Law, which states that the first digits of numbers generated from natural phenomena do not occur with equal frequency. If data do not conform to the Benford distribution, then questions arise about the process that generated it. Because neutral transformations should preserve conformity to Benford's Law, any macroeconomic adjustment that destroys this conformity should make those calculations suspect.Benford's Law is applied to one of the most commonly used data sets in economics: international macroeconomic statistics. We find that the World Bank international GDP data and purchasing power parity (PPP) corrected Penn World tables for OECD countries conform well to Benford's Law. But some subsets of the data - particularly GDP figures from the developing world -- show non-conformity consistent with deliberate manipulation of the underlying series. The test also flags potential problems with a variety of standard macro transformations of the data.

Notes: This paper describes a simple Wicksellian macroeconomic model that can be used in undergraduate macroeconomics courses. It is designed as an alternative to the Romer (2000) model that is slowly replacing IS-LM/AS-AD in many textbooks. The Wicksellian model has four desirable features relative to the Romer model. First, it treats the interest rate as an exogenous monetary policy instrument rather than assuming that the central bank follows a monetary policy rule. Second, the model can be used to derive a monetary policy rule that is consistent with optimizing behavior on the part of the central bank. Third, the model includes a term structure equation. Fourth, the model has a simple recursive structure that makes it easy to work with. The model can be used to analyze a number of interesting issues in monetary policy that are difficult to handle in the IS-LM/AS-AD or Romer model frameworks. These include issues involving permanent versus temporary expenditures shocks, anticipated expenditures shocks, and shocks to the term structure of interest rates. The model can easily be simplified for use in a principles course or extended for use in upper-level macroeconomics courses.

Notes: This paper empirically decomposes the channels through which the determinants of growth operate. Methodologically, channel decomposition combines growth accounting with regression analysis. Under channel decomposition, the determinants could affect aggregate productivity growth through physical capital accumulation, through human capital acquisition, or through growth in total factor productivity (TFP). The results from channel decomposition show that TFP growth is the main channel of operation for most of the determinants. Specifically, TFP growth, not factor accumulation, is what accounts for conditional convergence. This finding is extremely robust. There is also no evidence that rich and poor countries converge through different channels.

Notes: In many countries, Employment Protection Legislation (EPL) establishes less strict dismissal procedures for specific groups of workers. This paper builds a simple matching model with heterogeneous workers in order to analyze this feature of EPL. We use the model to analyze the effects of reforms targeted at lowering the firing costs of a particular group of workers, and compare the results with those stemming from a comprehensive reform that reduces firing costs for all workers. The model is calibrated for the Spanish economy, where an important reform of this kind took place in 1997. Overall, our results point out that EPL reforms achieve the largest reduction in unemployment when they are targeted to workers with lower and more volatile productivity.

Notes: Since the mid-1990s, extraordinary advances in semiconductors have enhanced the embodied nature of information technology, fuelling efficiency growth in computers and communication equipment industries. The consequent fall in prices has enabled the rapid diffusion of these new technologies, which have reached the critical threshold to foster productivity growth. In light of the recent growth pattern of the United States, this paper presents a model where the endogenous engine of development is the learning-by-doing process stemming from the usage of ICT for investment and consumption. Based on a two-sector framework (à la Whelan) that distinguishes between ICT-producers and -users, the model yields a sound representation of the stylized facts of the Information Age.

Notes: During the period from 1990 to 2002, U.S. households experienced a dramatic wealth cycle, induced by a 369 percent appreciation in the value of real per capita liquid stock-market assets, followed by a 55 percent decline. However, despite predictions at the time by some analysts relying on life-cycle models of consumption, consumer spending in real terms continued to rise throughout this period. Using data that include the period from 1990 to 2005, traditional approaches to estimating macroeconomic wealth effects on consumption confront two puzzles: (i) econometric evidence of a stable cointegrating relationship among consumption, income, and wealth is weak at best; and (ii) life-cycle models that rely on aggregate measures of wealth cannot explain why consumption did not collapse when the value of stock-market assets declined so dramatically. We address both puzzles by decomposing wealth according to the liquidity of household assets. In particular, we find that significant appreciation in the value of real estate assets that occurred after the peak of the wealth cycle helped to sustain consumer spending from 2000 to 2005.

Notes: This paper presents a two-sector growth model of international trade that can account for the key features of the postwar world development experience. Two sectors represent traditional primitive production and modern sophisticated production. Due to increasing returns in the modern sector, the open-economy version of our model gives rise to three different equilibria: one in which the country produces only primitive goods and converges to a low-income steady state; another in which it produces both primitive and sophisticated goods and converges to the world-average steady state; and a third in which it specializes in the production of sophisticated goods and converges to a balanced growth path. We argue that the development experiences of poor, rich and growth-miracle countries are well described by these three equilibria.

Notes: Common practice in the housing and wealth distribution literature has proceeded as if the modeling of housing rental markets was unnecessary due to renters' relative low levels of wealth and the smaller fraction they represent in the total population. This paper shows, however, that their inclusion matters substantially when dealing with wealth concentration over the life-cycle. Renters are concentrated in the poorer and younger groups and when matching the data on wealth inequality by age groups, the model improves relative to a one asset economy and relative to a housing model with no rental markets.

Notes: This paper investigates one causal link between entrepreneurial overconfidence and economic growth in the US. Evidence from the social psychology literature suggests that this biased perception can lead to more successful outcomes for individuals. This paper examines the impacts of entrepreneurial overconfidence on the aggregate economy using an R&D-driven endogenous growth model. From this perspective, overconfidence is equivalent to a subsidy to R&D such that overconfident entrepreneurs are more likely to invest, and this increased R&D intensity is the driving force behind faster economic growth. In terms of social welfare, a small degree of overconfidence moves the market equilibrium level of R&D closer to the social optimum; however, a large degree of overconfidence may move the economy beyond the optimal level. Therefore, the welfare impact is ambiguous.

Notes: This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.

Notes: We construct a dynamic general equilibrium model in which household debt is sticky in nominal terms and debtor households are credit constrained. Interest payments on debt contracts may be at floating rates or fixed for the duration of the contract. A key result is that a simple static Taylor Rule can result in a prolonged period in which real interest rates are cut rather than raised in response to an inflationary shock. We show how the proportion of fixed rate contracts affects the monetary transmission mechanism and its implications for the distributional effects of an inflationary shock.

Notes: We build a stylised 12-country model of the euro area and use it to analyse how differences in national inflation and growth rates arise within the European Economic and Monetary Union (EMU). We find that the main source of differentials in the early years of the EMU have been aggregate demand shocks, followed by cost-push shocks; euro exchange rate shocks come third. Among the propagation mechanisms a key role is played by inflation persistence; for plausible parameter values even small changes in persistence can produce a dramatic increase in the differentials. Finally, we also find that a tight control of average area-wide inflation around a target tends to reduce the differentials as well.

Notes: This paper considers the canonical stochastic growth model with CRRA utility and Cobb-Douglas technology. It obtains a closed-form solution for the case where capital's share is equal to the reciprocal of the intertemporal elasticity of substitution. This provides a useful benchmark that illuminates the transmission mechanism under uncertainty. In particular, it highlights the complicated ways in which risk and nonlinearities interact, via Jensen's inequality, to affect the steady state capital stock.

Notes: The classical gold standard has long been associated with long-run price stability. But short-run price variability led critics of the gold standard to propose reforms that look much like modern versions of price-path targeting. This paper uses a dynamic stochastic general equilibrium model to examine price dynamics under alternative policy regimes. In the model, a pure inflation target provides more short-run price stability than does the gold standard and, although it introduces a unit root into the price level, it leads to as much long-term price stability as does the gold standard for horizons shorter than 20 years. Relative to these regimes, Fisher's compensated dollar (or pure price-path targeting) reduces inflation uncertainty by an order of magnitude at all horizons. A Taylor rule, with its relatively large weight on output, leads to large uncertainty about inflation at long horizons. This long-run inflation uncertainty can be largely eliminated by introducing an additional response to the deviation of the price level from a desired path.

Notes: The relationship between income and voting is usually studied using current income. Instead, I estimate how permanent income affects voting and to what extent voters are forward looking. A proxy for permanent income is constructed from stated expectations about one's future economic situation. Using panel data from the Norwegian Election Study I estimate the effect of stated expectations on realized future income to compute the effect of expectations. This is then linked to voting behaviour. Contrasting permanent and transitory income, the former has a large impact and the latter has little explanatory power on voting. This supports the hypothesis of forward looking voting. A high expected permanent income increase the propensity to vote Conservative.

Notes: This paper extends the savers-spenders theory of Mankiw (2000) to analyze fiscal policy in a small open economy with endogenous labor supply. It is first shown that tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange rate dynamics. We also show how ``rational" agents may magnify or dampen the responses of ``irrational" agents, and discuss how, unlike in previous contributions, this is in our model purely a result of the shape of rational agents' utility functions.

Notes: This paper assesses sign restrictions via a controlled experiment. A researcher estimates a VAR on an infinite amount of data generated by a DSGE model. He or she then imposes sign restrictions on impulse responses to identify a structural shock while being agnostic about the response of a key variable of interest to this shock. Can such an agnostic identification procedure pin down the correct sign of this unconstrained response?The DSGE models of Erceg, Henderson, and Levin (2000), as well as of Smets and Wouters (2003), are used as data generating processes. Two conditions must be met for the method to unambiguously deliver the correct sign of the unconstrained impulse response. First, a sufficiently large number of restrictions must be imposed -- more than what is typically imposed in applied work. Second, the variance of the shock under study must be sufficiently large -- larger than the values provided by Bayesian estimations of the DSGE models. Hence, sign restrictions can be a useful tool to recover structural shocks from VAR residuals.

Notes: This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. In both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. Long-term rates, however, turn out to be better instruments of monetary policy than short-term rates when the concern for inflation volatility is high.

Notes: Official and four alternative regime classification schemes based on observed exchange rate behaviour are used to examine the relationship with inflation and growth in 91 developing countries over the period 1984-2001. Apart from one scheme that produces markedly unfavourable results for floating (for reasons that are discussed in the paper), the consistent findings are that (a) floats have similar growth rates to soft pegs and only slightly higher inflation; and (b) hard pegs have lower inflation and slower growth than other regimes.

Notes: This paper provides a framework for the analysis of firms' integration strategies that incorporates the endogenous determination of the number of firms that serve foreign markets through exports and the number of multinational firms that choose to engage in horizontal foreign direct investments. The aim of the study is to investigate how differences in firms' integration strategies affect the way productivity and monetary policy shocks spread their effects worldwide. Building on a general equilibrium model in the tradition of the new open economy macroeconomics with national and multinational enterprises, I find that firms' integration strategies play a key role in the international business cycle and they help explain a number of puzzling features in exchange rate data. The paper makes two main contributions. First, it provides an explanation of long-term deviations from purchasing power parity due to changes in the extensive margin of firms serving world markets via exporting and foreign investment that is novel in the literature. Second, it explores optimal monetary policy in a framework with endogenous trade and foreign investments, elucidating an interesting new trade-off between efficiency and volatility. My results show that monetary stabilization, by discouraging entry of new firms, might involve a policy trade-off between the desire to smooth fluctuations in producers' prices and the need to facilitate adjustments in consumers' prices.

Notes: This paper examines the performances of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is evaluated in two ways. The first way is comparing the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the basis of the actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. This comparison is done for a wide range of loss functions. It does not assume that the chairman necessarily behaved by minimizing a loss function; it just compares his actual behavior to what he could have done had he minimized a particular loss function. The second way, on the other hand, assumes that each chairman minimized a loss function, and it chooses for each chairman which of the various loss functions tried comes closest to matching the actual values of the control variable to the optimal values. A summary evaluation of each chairman is presented in Section 6.

Notes: Development accounting exercises based on an aggregate production function find technology is biased in favor of a country's abundant production factors. We provide an explanation for this finding based on the Heckscher-Ohlin model. Countries trade and specialize in the industries that use intensively the production factors they are abundantly endowed with. For given factor endowment ratios, this implies smaller international differences in factor price ratios than under autarky. Thus, when measuring the factor bias of technology with the same aggregate production function for all countries, they appear to have an abundant-factor bias in their technologies.

Notes: Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Latin America and Asia. We study the ability of various versions of the small open economy neoclassical growth model to account for the behavior of inputs, output, and aggregate productivity during Mexico's 1994-95 crisis. We find that that capital utilization and labor hoarding can account for a large fraction of the fall in measured productivity. While capital utilization alone does little to improve the performance of the model during the crisis, introducing labor hoarding significantly reduces the gap between the evidence and the predicted fall in output and hours.

Notes: Changes in firms' investment expenditures are considered one of the primary channels through which energy price shocks are transmitted to the economy. It is widely believed that the response of business fixed investment to energy price increases differs from its response to energy price decreases. We show that the apparent symmetry in the estimated responses of business fixed investment in equipment and structures cannot be reconciled with standard theoretical explanations of asymmetric responses. Rather this evidence is an artifact (1) of the aggregation of mining-related expenditures by the oil, natural gas, and coal mining industry and all other expenditures, and (2) of ignoring an exogenous shift in investment caused by the 1986 Tax Reform Act. After controlling for these factors, formal statistical tests are unable to reject the hypothesis of symmetric responses to energy price shocks for all components of investment in structures. For nonresidential equipment there is weak statistical evidence of classical asymmetries in some components, but not in the aggregate. Once symmetry is imposed and mining-related expenditures are excluded, the estimated response of business fixed investment in equipment and structures tends to be small and statistically insignificant. Historical decompositions show that energy price shocks have played a minor role in driving fluctuations in nonresidential fixed investment other than investment in mining.

Notes: We offer a model that sheds light on the debate over whether corporate ownership concentration converges to the Berle-Means image. Our model takes into account the importance of both legal rules and firm-specific arrangements. Our analytical result is that share ownership concentration either persists or falls depending on the relative importance of these protective arrangements. In particular, our model predicts: (a) diffuse corporate ownership in nations that impose legal limits on blockholders' clout to expropriate minority shareholder rights, and (b) concentrated corporate ownership in nations that rely on asset specificity as a form of investor protection. Our empirical work suggests partial convergence toward Berle-Means diffuse share ownership. It is thereby reasonable to infer the existence of path dependent forces on ownership concentration. But this result does not preclude the possibility of functional convergence or convergence to the diffuse form of share ownership via cross-listings on the major U.S. stock exchanges that impose stringent disclosure and listing requirements. In essence, these results suggest a case for the co-existence of the preexisting path-dependency and functional-convergence stories.

Notes: This study empirically investigates whether racial and ethnic differences in police searches of stopped drivers reflect efficient enforcement or biased policing. Null hypotheses consistent with efficient enforcement are derived from alternative assumptions regarding police objectives: 1) police seek to maximize public safety, and 2) police seek to maximize the hit rate. We use both an outcomes-based non-parametric analysis and a standard benchmarking parametric approach (regression analysis). Both approaches yield the same results: law enforcement officers display both personal and police cultural bias in their propensity to search African American and Latino drivers. African American and Latino status tends to lower the guilt signal required for police suspicion. Further, white officers police differently than their African American and Latino colleagues. White officers are 73 percent of the sworn police force, conduct 88 percent of the searches, and have a hit rate of 20 percent. Latino officers are 11 percent of the sworn labor force, conduct 8 percent of the searches, and have a hit rate of 24 percent. African American officers are 15 percent of the sworn labor force, conduct 4 percent of the searches, and have a hit rate of 26 percent. The preferential treatment of white drivers by police is attenuated with increases in the fraction of racial and ethnic minority residents in the county where the stop occurred.

Notes: In this paper we assert that, if an offender can dispose of some or all of his wealth after violating the law, raising the fine up to his wealth level will induce him to dispose of his wealth, thereby increasing social cost without deterring more offenses. This suggests that the socially optimal fine should be set below the offender's maximum wealth level.

Notes: This paper investigates the evolution of competition policy decisions in the US and, particularly, in the EU, concerning mandatory access to an essential facility held by a dominant firm. Based on some recent and controversial EU antitrust decisions, we outline a comprehensive test for identifying an essential facility and consequently imposing a mandatory access obligation on dominant firms.

Notes: The popularity of the International Court of Justice (ICJ) is the subject of much controversy. This paper examines usage of the ICJ by all United Nations (UN) member states as compared with its usage by those states with the top-ten economies of the world. Five hypotheses explaining the decrease in ICJ usage by the top-ten economies are presented as follows: (1) a home-bias of judges, (2) the diversification of international tribunals, (3) changes in the composition of the cases filed, (4) the (re-)allocation of power, and (5) an increased heterogeneity of external institutions among UN member states. We find empirical evidence that an increase in UN membership has led to increased heterogeneity, which in turn has led to a decline in usage of the ICJ by the top-ten economies.

Notes: The corporate lawyer-client privilege is increasingly controversial. Courts assert that the privilege promotes corporate compliance with the law as long as it is restricted to communications in furtherance of legal advice. This article assumes the privilege increases the probability that a corporation will escape liability. Courts can apply various tests to determine whether the agent who communicated with the corporate attorney can be defined as a representative of the corporation. The most restrictive test, the "control group" test, has been rejected by most American jurisdictions, but it has recently re-emerged in the United Kingdom. The author proposes that this test motivates corporations to restructure their optimal internal decision-making processes in order to "squeeze" into the privilege. When plaintiffs are uninformed about the internal organization of a corporate defendant, even corporations that cannot squeeze into the test have an incentive to mimic the behavior of privileged corporations, and consequently pursue socially harmful actions. These findings are supported by case law from control group jurisdictions.

Notes: In a comprehensive study extending prior research, Prince and Rubin (2002) use the event study methodology, and find negative market reaction to a sample of 15 initial filings of product liability litigation and 29 other litigation events against U.S. automakers between 1973 and 1995. They conclude that the event study methodology is a useful way to measure the costs of litigation. In contrast, after examination of a new sample of 144 initial filing events and 465 other litigation events for six major automobile firms from 1985 to 2000, and after re-examining Prince and Rubin's data, we find that the market reaction to all but the most extreme and infrequent events is generally not significant. We suggest that the event study methodology may not generally be useful to study the social costs of litigation, but may be useful for unexpected abnormal litigation events where the potential liabilities (including reputation and other losses triggered by litigation) may far exceed the legal liability reserves set up by firms. We find mixed results for the market impact of litigation against a competitor. When a product liability lawsuit is first filed against a U.S. firm, the market values of the Japanese firms significantly decline. When a Japanese firm is sued for product liability, the U.S. firms register a significant increase in market value. However, these spillover results have to be interpreted with caution because of small sample sizes and possible confounding events.

Notes: This paper provides a coherent framework for classifying cases with multiple tortfeasors in relation to the efficient allocation of liability across the tortfeasors. We construct a simple model in which various tortfeasors contribute to a loss, and consider efficient liability rules under various assumptions.

Notes: We attempt to revise the inspection game used by George Tsebelis to model phenomena in criminal justice. The refinement has been conducted by disaggregating the game payoffs and then using findings from empirical studies to reconstruct the game. In contrast to Tsebelis' propositions, we find that the severity of punishment may affect the offending behavior of individuals. The result also holds for the case in which the authority initiates crime prevention programs, by providing incentives to those who do not have a criminal history. The impact of increasing the severity of punishment on reducing individuals' offending behavior is less certain than that of instigating crime prevention programs. This result holds so long as the authority does not alter the levels of enforcement.

Notes: Miller v. Schoene approved the uncompensated destruction of cedar trees that were alternate hosts to a fungus that damaged apples but not cedars. Supreme Court Justice Harlan F. Stone's opinion noted that deciding for either cedar or apple growers would amount to action by the state. Scholars have claimed that Miller marked the demise of the public/private distinction in constitutional law. This article presents historical evidence to the contrary. A widely-accepted standard--higher commercial value--commonly decided whose interests should prevail in such controversies. The analysis also shows that moral hazard explains why cedar owners were denied just compensation, which orchardists had originally been willing to tax themselves to pay. Cedar owners whose land actually gained in value when their trees were cut down nonetheless availed themselves of damages.

Notes: This paper shows that unilateral-harm contexts with role-type uncertainty can create incentives similar to bilateral-harm contexts. For this purpose, we show that the result of Dharmapala and Hoffmann (2005), namely that standard liability rules do not lead to efficient care choices by injurer and victim if precaution costs are interdependent and harm is unilateral whereas they can in the case of bilateral harm, depends on role-type certainty.

Notes: In some recent works, negligence-based liability has been severely criticized. It has been argued that negligence-based liability does not form a convincing basis for liability assignment. Causation-based liability has been proposed as an alternative basis of liability determination. Parisi and Fon (2004) have studied the efficiency properties of the causal apportionment of liability. The authors have shown that when care levels as well as activity levels of the parties affect the causation of an accident, causation based liability does not provide efficient incentives for the parties. In this paper, we assume the activity levels to be constant. Under this assumption, we have demonstrated the existence of liability rules that are efficient and at the same time `consistent' with the requirement of causation liability. In addition, it is shown that under these rules the equilibrium outcome is unique. The analysis has been undertaken in a very general framework.

Notes: Harsh sanctions are conventionally assumed to primarily benefit vulnerable targets. Contrary to this perception, this article shows that augmented sanctions often serve the less vulnerable targets. While decreasing crime, harsher sanctions also induce the police to shift enforcement efforts from more to less vulnerable victims. When this shift is substantial, augmented sanctions exacerbate--rather than reduce--the risk to vulnerable victims. Based on this insight, this article suggests several normative implications concerning the efficacy of enhanced sanctions, the importance of victims' funds, and the connection between police operations and apprehension rates.

Notes: This article develops a model in which firms may commit to disclose varying amounts of two types of information, accuracy information and agency information, and in which a regulator may also mandate disclosures. The resulting analysis provides a way to better understand the relationship between disclosure regulation and social welfare, including issues such as: how disclosure regulation can generate social welfare gains (contra Dye, 1990; Admati & Pfleiderer, 2000), why imposing disclosure requirements on only certain firms and certain information may be efficient, and why stricter mandatory disclosure requirements may be an efficient regulatory response to more robust public securities markets (contra La Porta, Lopez de Silanes, & Shleifer, 2006).

Notes: What explains the popularity of law and economics (L&E) in some academic communities and the scarcity of such scholarship in others? Many explanations have been given for the centrality of economic analysis in American legal thought and its marginality in Europe. This article examines what drives scholars to select L&E as a topic for research. It does so by implementing the methodology of many papers in the field - by assuming that regulation and incentives matter. Legal scholars face very different academic incentives in different parts of the world. In some countries, the academic standards for appointment, promotion and tenure encourage legal scholars to concentrate on L&E. In others, they strongly discourage such research. Thus, we should expect wide variation in the participation rate of legal scholars in the L&E discourse across countries. On the other hand, economists are evaluated with similar yardsticks everywhere, and thus their participation rate is likely to vary much less. The hypothesis of this paper is that academic incentives are a major factor in the level of participation in L&E scholarship. This "incentives hypothesis" is presented and then examined empirically with data gathered from the list of authors in L&E journals and the list of participants in L&E conferences. The data generally support the hypothesis. In legal academia, the incentives to focus research on L&E topics are the strongest in Israel, weaker in North America, and weakest in Europe. In fact, the data reveal that lawyers' authorship of L&E papers weighted by population is about ten times higher in Israel than in North America; while in Europe it is almost five times lower than in North America. By comparison, the weighted participation level of economists - who face relatively similar academic environments across countries - in L&E research is not significantly different across countries.

Notes: The text of a Laudatio delivered on September 16, 2006 by Professor Francesco Parisi on the occasion of the awarding of an honorary membership in the European Association of Law and Economics (EALE) to Professor Pietro Trimarchi. This was the first such honorary membership awarded by this association.

Notes: This paper develops a stylized model of international treaty formation and analyzes the different modalities with which states can become part of an international treaty according to the procedures set forth by the Vienna Convention on the Law of Treaties. We consider the rules governing accession to international treaties, distinguishing between three situations: (i) Treaties for which acceptance of a new member requires unanimous approval of the signatory states with an amendment of the original treaty agreement (closed treaties); (ii) Treaties where acceptance of a new member is made possible through approval by a majority of the existing member states (semi-open treaties); and (iii) Treaties where the original member states have agreed to leave the treaty open for accession by other states (open treaties).

Notes: Courts may determine that an offer is irrevocable due to the offeree's reasonable reliance on it. For instance, the landmark case of Drennan v. Star Paving Co. (1958) held a subcontractor's price offer to be irrevocable once it had been relied upon by the general contractor in computing his overall bid. However, a rule of implied irrevocability raises two main difficulties. First, it seems unfair to force the offeror to commit, but not the offeree. Second, from an ex ante perspective, the implied irrevocability rule seems to deter parties from submitting low-priced, unqualified offers. These concerns have led several scholars to argue for modification of the rule. This paper rationalizes the implied irrevocability rule by demonstrating that the above concerns are unfounded. We demonstrate that whereas some restrictions on the offeree's freedom to conduct bid shopping ex post (i.e., after the uncertainties are resolved) are essential in order to allow him to receive viable price offers ex ante, these restrictions need not be absolute nor legally enforced. Partial restrictions, in the form of a self-enforced Binding Range, may well suffice. The plausible existence of a self-enforced Binding Range ensures that offerors have incentives to submit irrevocable bids because they can expect to earn a profit by submitting the best offer. This paper characterizes the optimal size of the Binding Range, and explores what legal provisions should be applied when the self-enforced Binding Range is sub-optimal.

Notes: Introduction to the Twenty-Second Annual Conference of the European Association of Law and Economics, Ljubljana, Slovenia

Notes: In most countries, wireless communications rely on administrative allocation of radio spectrum. The inefficiencies associated with this centralized approach have led economists, starting with Coase in 1959, to suggest "propertyzing" radio spectrum. Critics of this approach assert that property rights impose prohibitive transaction costs and inhibit development of wireless services. Reforms enacted in Guatemala (in 1996) and El Salvador (in 1997) have largely implemented policies suggested by Coase, yielding a natural experiment. Evidence generated in the mobile telephone market suggests that these regimes are associated with relatively efficient policy outcomes, including abundant spectrum availability and a high degree of competitiveness, and with correspondingly low retail prices and high rates of output (minutes of use). Further, such markets appear to avoid high transaction costs in the public or private sectors. We conclude that these liberal reforms tend to produce results consistent with Coase's policy conjecture.

Notes: The making of the information/knowledge society has driven a flourishing body of literature on the law and economics of copyright. This paper introduces the articles collected in the following symposium, produced by a number of scholars participating in the lively worldwide community devoted to the study of the economic role of copyright law in light of current technological change. The aim of these writings as a whole is to broaden the analytical perspective and stimulate further research, thanks to a wide selection of topics related to behavioral analysis, competition policy, insurance, cultural economics and other fields.

Notes: This paper considers how the economics of intellectual property can benefit from what has been published in the area of the economics of insurance. The objective is to show that the two areas of study are sufficiently related for the insights of the latter to be relevant to the former. Since the economics of insurance is a very mature subject, while the economics of IP is much younger, it seems that there could be many valuable lessons from insurance that can be imported into IP, at least at a first degree of approximation.

Notes: The music and movie industries have recently added individual consumers as the target of the file sharing lawsuits. It is often questioned why the industries use substantial resources to fight in the courtrooms instead of making better and more affordable products. In this article, we first analyze the reasons of the industry behavior suggesting that the court strategy may be in fact more effective, at least in the short term, than it should be based on pure economic calculations. However, the empirical evidence seems to imply that lawsuits fail to send a strong signal to individuals about the society's supposedly negative attitude towards file sharing. General deterrence from the threat of being sued does not help in the end either because people are risk seeking in the face of making a decision between a certain and probable loss. In conclusion, we argue that the court strategy cannot be used to establish any social norm with a long lasting effect on individual behavior as long as the peer pressure works towards the opposite direction.

Notes: Copyright law provides an excellent case study with which to evaluate Harold Demsetz's theory of property rights. Regardless of how one feels about the relationship between property and intellectual property, it is hard to escape the fact that intellectual property rights have expanded and grown more property-like and more privatized in recent decades. In this article, I critique the undeniable Demsetzian trend in copyright law and challenge some of the fundamental premises upon which rest the normative arguments for continued privatization and propertization of intellectual resources. First, I focus on the perceived benefits of internalizing externalities, arguing that externalities do not necessarily distort incentives or, more generally, the market allocation of resources. For many externalities, there is no efficiency benefit to internalization (whether accomplished by Pigouvian taxes/subsidies or property rights). In the end, the benefits of internalization must be carefully assessed rather than assumed. The view that increasing the degree of internalization through private property rights inevitably leads to increased incentives to invest in creation or distribution is not well-established in either theory or practice. Second, I focus on the frequently-invoked solution of efficient licensing and the "logic" that property rights should be extended "into every corner in which people derive enjoyment and value...[so that] signals of consumer preference [may] trigger and direct [producers'] investments" (Goldstein, 1994). I argue that a fundamental flaw in this logic undermines the efficient licensing hypothesis. Social demand for individuals' access to and use of copyright protected works often exceeds private demand. Purchasers'/licensees' willingness to pay reflects only their private demand and does not take into account value that others might realize as a result of their use. As I explain, many uses of copyrighted works generate value for third-parties. Finally, drawing from the first two points, I argue that, from a Coasean perspective, both externalities and property rights have symmetrical and reciprocal potentials to distort the market allocation of resources. A priori and devoid of context, one cannot say that the potential distortions caused by a property right, externality, or incremental change in a property right have a net positive or negative effect on social welfare.

Notes: This paper investigates the interplay between copyright law and antitrust law in two distinct respects. We first argue that the origin of copyright seems to be rooted not only in the need to foster the production and the spread of knowledge but also in the necessity of limiting market power on the side of distributors. We then show the potential impact on market competition of the evolution of copyright as a property rule. While property rules reduce transaction costs in the standard case of bilateral monopoly over the exchange of information goods, they might increase transaction costs. When coupled with market power, a property rule enables the right holder to control uses and prices so as to implement entry deterrence strategies against potential competitors. Conversely, we argue that reversing property rules in favor of competitors or switching to liability rules for copyright may restore competitive outcomes. This conclusion brings new insights on the application of the essential facility doctrine to copyrighted works.

Notes: Over the last century, performers gradually acquired statutory protection of their economic and moral rights. These rights are not copyright in the legal sense but neighboring rights and until recently, they were mainly remuneration rights that are collectively administered. With the WPPT (WIPO Performers and Phonograms Treaty), performers now have individual exclusive rights for digital performances; this leads to the question: what has motivated this change - is it a change in the perception of the value of performer or a change brought about by the changing technology of copying or, indeed, a change that reflects different economic costs and benefits? The paper discusses the role of copyright law as an incentive to performers and asks if the economic role of the performer is so different from that of the author. The conclusion is that a complex interaction of the legal regulations, economic conditions and institutional arrangements for administering these new rights will determine the outcome.

Notes: This paper uses a strategic entry-deterrence framework to study the relationship between copying cost, and a monopolist's profit and product quality. The potential entrant is a fake-producer producing and selling identical copies of the monopolist's product. The monopolist's subgame perfect equilibrium quality and profit is either unaffected or positively affected by changes in the copying cost. Tariffs on copying devices may be an effective copyright right protection instrument. Though an increase in tariff increases the product quality and monopolist's profit, its welfare effects are ambiguous.

Notes: Copyright protection can be divided into ?ve levels: subject matter, level of abstraction, exceptions, term limit, and restricted acts. Although copyright exceptions, in particular the fair use doctrine, and term limit have been subject to signi?cant economic analyses, studies on protection and the limits of protection of subject matter, and level of abstraction in copyright are still fairly scarce. Furthermore, the dominant model for optimal copyright protection is problematic for it requires a standard-based copyright doctrine to achieve what was postulated. Since copyright doctrines in respect of protection based on the level of abstraction are more rule-based in nature, an alternative explanation is in order. In a recent article titled "Copyright as a Rule of Evidence", Douglas Lichtman (2003) hinted such an approach where evidence plays a role in explaining this set of doctrines. In this paper, we use an abstraction and a probabilistic model to explain copyright doctrines. Copyright doctrines such as the idea-expression dichotomy, the originality requirement, de minimis rule, substantiality requirement, merger doctrine, and the scènes á faire doctrine, have the effect of creating a protection divide. Doctrines such as the causal connection requirement, independent creation defence, and the objective similarity requirement, further create an inference divide. We show that the protection and inference divides are relevant in protecting the literal and non-literal dimensions in a copyrighted work. Furthermore, we ?nd that between the protection divide and the inference divide, there is a region of non-strict liability protection. All these three regions, and the related copyright doctrines, are explained by an evidence theory of minimising the risk of court error in deciding infringement cases.

Notes: Sequential innovation with actual patent infringement and uncertainty in litigation is analyzed. Comparative statics shows that within a wide range of model parameters, a basic researcher holding a patent is able to extract all of the profit facilitated by the basic innovation. The patent holder achieves this by offering a licensing contract which the subsequent innovator accepts in the shadow of paying infringement damages. It is further demonstrated that, under rather general circumstances, broader patent breadth may diminish the patent holder's incentive to innovate: that is to extract all of the profit from the subsequent innovator commercializing the innovation.

Notes: Many legal scholars believe that equity should be considered in designing legal rules. Kaplow and Shavell (1994) seriously challenged this approach. They proved that the tax transfer system is superior to legal rules in redistributing wealth. This paper reexamines their 'double distortion' claim, presenting two main arguments. The first shows that the 'double distortion' claim is not necessarily valid under welfarism. In particular, under an ex post approach to welfarism, which generally implies that society pays attention to the ex post (actual) rather than expected redistribution, the proof of the tax superiority breaks down. Secondly, and more importantly, it is proven that, in principle, tort rules can easily be designed to circumvent 'double distortion' effects. Thus, the tort system is not inherently more inefficient than the tax-transfer system in accomplishing redistribution. The paper generally concludes that although there are often no good reasons for redistribution within the legal system, theoretically and a priori it is not an inferior redistribution mechanism.

Notes: The impact of aging on healthcare expenditure (HCE) has been at the center of a prolonged debate. This paper purports to shed light on several issues of this debate by presenting new evidence on the "red herring" hypothesis advanced by Zweifel, Felder and Meier (1999). This hypothesis amounts to distinguishing a mortality from a morbidity component in healthcare expenditure (HCE) and claiming that failure to make this distinction results in excessive estimates of future growth of HCE. A re-estimation based on a much larger data set is performed, using the refined econometric methodology. The main contribution is consistency, however. Rather than treating the mortality component as a residual in forecasting, its dynamics are analyzed in the same detail as that of the morbidity component when predicting the impact of population aging on the future growth of HCE. For the case of Switzerland, it finds this impact to be relatively small regardless of whether or not the mortality component is accounted for, thus qualifying the "red herring" hypothesis.

Notes: Corrupt politicians, and poor government more generally, are commonly viewed as a primary barrier to economic progress. The roots to these problems run deep in many political systems across the developing world, and attempts at reform have rarely found much success. To combat this impasse, we suggest a radical new approach to local politics that, instead of proposing reforms to the electoral process, focuses on the political actors that might enter into this process. Specifically, we suggest that private firms be allowed to compete in elections to hold public office. That is, a corporate entity (e.g., Ernst and Young), rather than an individual representative of the firm, would be permitted to contest a local election. We argue that this is feasible: sufficient economic incentives could be put in place to induce firms to run for office, particularly if company office-holders prove to be competent in revenue collection. More importantly, we claim that there are many channels through which company politics should improve government, from breaking up entrenched old boys' networks to leveraging a company's existing organizational expertise. Private firms have realized efficiency and performance gains in areas such as infrastructure and many bureaucratic functions; we argue that the private sector can also attain results in politics, the most public of all realms.

Notes: The conventional wisdom is that the surge in productivity growth which has surged in the United States over the past 15 years has been attributed almost wholly to advances in the production and use of information technology. While this is certainly evident from the statistics, a driving force behind the IT revolution has been the development and growth of new firms. Indeed, the U.S. economy has achieved a remarkable transformation over the last several decades from an economy characterized by large, bureaucratic firms into one increasingly powered by entrepreneurial innovation. The challenge ahead therefore is to cement and strengthen the entrepreneurial form of capitalism. In this paper, we provide a framework for policymaking to achieve this objective.

Notes: Vaccination provides indirect benefits to the unvaccinated. Despite its important policy implications, there is little analytical or empirical work to quantify this externality, nor is it incorporated in a number of cost-benefit studies of vaccine programs. We use a standard epidemiological model to analyze how the magnitude of this externality varies with the number of vaccinations, vaccine efficacy, and disease infectiousness. We also provide empirical estimates using parameters for influenza and mumps epidemics. The pattern of the externality is complex and striking, unlike that suggested in standard treatments. The size of the externality is not necessarily monotonic in the number vaccinated, vaccine efficacy, nor disease infectiousness. Moreover, its magnitude can be remarkably large. In particular, the marginal externality of a vaccination can be greater than one case of illness prevented among the nonvaccinated, so its omission from policy analyses implies serious biases.

Notes: Recently, researchers have started to re-examine the so-called Atkinson-Stiglitz theorem on optimal commodity taxation. The essence of such research is to examine whether or not it is optimal to distort markets other than the labor market for achieving the second-best resource allocation. I examine this theorem by introducing the comparative advantage of human capital accumulation. More specifically, I assume that people with high ability obtain a higher return from skilled human capital accumulation than people with low ability. I explore the implication of this comparative advantage of human capital accumulation for the Atkinson-Stiglitz theorem on optimal commodity taxation.

Notes: Donohue and Levitt (2001) attribute over half of the decline in U.S. crime rates during the 1990s to abortion legalization. This paper conducts similar research by exploiting cross-province time-series variation in Canadian data. The use of Canadian data allows me to separate the effects of teenage abortions from general abortion rates. This distinction is important, as more than a quarter of the drop in violent crime can be attributed to the increase in teenage abortions that occurred after legalization. These results suggest that lower crime rates from abortion legalization are due to better timing of births rather than lower cohort size. They are further substantiated by OLS estimates, which imply that the drop in teenage fertility rates during the 1960s and 1970s is responsible for more than half of the decline in violent crime rates witnessed during the 1990s.

Notes: This paper uses a two-stage Cournot duopoly model with demand uncertainly to examine the strategic role debt plays in deterring a company from entering when a potential entrant can enter one of several markets. We show that as the number of alternative markets available for entry rises, the incumbents' incentive to use debt as a deterrent falls. Thus, a potential entrant will prefer to have a larger number of alternative markets to enter in order to lower the incumbents' incentive to take strategic actions against it.

Notes: Individuals often respond with strong emotions to being penalised. Such responses suggest that informal penalties are important and play a role in creating deterrence. In this paper informal penalties are analysed in the context of medical errors. The introduction of informal penalties, if dependent upon formal ones, implies that: (i) the optimal enforcement regime becomes more lenient, and in some cases the lack of formal punishment is preferred, (ii) the first-best solution becomes unattainable, (iii) liability rates and formal penalty level are no longer perfect deterrence substitutes. In addition, powers of informal penalties provide a rationale for administrative sanctions (informal criticism, reprimands and warnings).

Notes: This paper compares the performance of a two-sided combinatorial call market, direct negotiation, and double auction for consolidating fragmented land. Experimental results suggest direct negotiation produces higher efficiencies than other mechanisms. The combinatorial call market tends to alleviate the exposure problem, and performs well when 1) swapping is easily agreeable, and 2) the number of subjects and commodities are increased and the initial endowments are unchallenging. The two-sided combinatorial call market, however, suffers from the holdout problem when the number of subjects and commodities is small.

Notes: This study presents a model of optimal contracting for health services in the presence of excess demand and waiting times. We assume that: i) hospitals differ in their demand for treatment; ii) potential demand is private information of the provider; iii) specialists can dump patients; iv) activity and waiting times are contractible. A separating equilibrium exists when it is optimal for the purchaser to contract more activity and longer waiting times to those hospitals with higher demand. Hospitals with low demand gain informational rents. A pooling equilibrium may also occur.

Notes: This paper revisits the 'jobs versus the environment' debate and provides the first analysis for a country other than the US. We firstly examine the impact of environmental regulations on employment assuming such regulations are exogenous. However, for the first time in a study of this nature, we then allow environmental regulation costs and employment to be endogenously determined. Environmental regulation costs are not found to have a statistically significant effect on employment whether such costs are treated as being exogenous or endogenous. We therefore find no evidence of a trade-off between jobs and the environment.

Notes: In this paper we study a model of rational consumption and quitting in the context of harmful addictive goods. We assume that a person has imperfect information about his ability to resist and terminate the addiction. We first characterize the optimal consumption path of a non-addicted person, along which his stock of the addictive substance is either always increasing (and thus addiction occurs stochastically), always decreasing, or always unchanged. We then characterize the optimal consumption path of an addicted person, along which he may attempt to quit the addiction for a period of time, and then resume his consumption if the attempt is unsuccessful. Finally, we remark on the issues of regret, multiple attempts to quit, and quitting programs.

Notes: Banks supply liquidity to insure individuals against possible short-term consumption shocks. The higher this level of illiquidity insurance the lower the investments in long run assets, and the higher the risk of a bank run generated by a real negative shock. If individuals are sufficiently risk averse, competitive banks trade off liquidity insurance for portfolio risk. High growth expectations, typical of emerging economies, increase the optimal liquidity supply even when this increases the risk of a bank run. On the contrary, deposit contracts offered when economic performances are very uncertain (like in less developed economies), and where output fluctuations are milder (like in developed economies), are less exposed to the risk of a bank run. In this setting, a bail-out in case of crisis is ex-ante Pareto efficient even if it always increases the risk of crisis.

Notes: To avoid the extremely high profit levels found in the recent experience of public utilities' regulation, some regulators have introduced a profit-sharing (PS) rule that revises prices to the benefit of consumers. However, in order to be successful, a PS rule should satisfy appropriate incentive conditions.In this paper, we study the incentive properties of a second best PS mechanism designed by the regulator to induce a regulated monopolist to divert its "excessive" profits to the customers. In a real option model where a regulated monopolist manages a long-term franchise contract and the regulator has the option to revoke the contract if there is serious welfare loss, we first endogenously derive the welfare maximising PS rule under the verifiability of profits. We then explore the dynamic efficiency of this PS rule under the non-verifiability of profits and study the firm's incentive to comply with it in an infinite-horizon game. Finally, we derive the price adjustment path which follows the adoption of a PS rule in a price cap regulation.We show that the riskiness of the distribution of the firm's future profits and the regulator's cost in revoking the franchise contract are key factors in determining the equilibrium properties of a dynamic PS rule.

Notes: Combining four surveys conducted over a forty year period, I calculate intergenerational earnings elasticities for Australia, using predicted earnings in parents' occupations as a proxy for actual parental earnings. In the most recent survey, the elasticity of sons' wages with respect to fathers' wages is around 0.2. Comparing this estimate with earlier surveys, I find little evidence that intergenerational mobility in Australia has significantly risen or fallen over time. Applying the same methodology to United States data, I find that Australian society exhibits more intergenerational mobility than the United States. My method appears to slightly overstate the degree of intergenerational mobility; if the true intergenerational earnings elasticity in the United States is 0.4-0.6 (as recent studies have suggested), then the intergenerational earnings elasticity in Australia is probably around 0.2-0.3.

Notes: Phyllis Thompson reviews Kenneth Kiple's A Movable Feast: Ten Millennia of Food Globalization.

Notes: Daniel J. Sargent reviews Zbigniew Brzezinski's Second Chance.

Notes: This article provides a case study on joint production technologies in the market for blood products. The discussion and analysis are motivated by a patent for a plasma-scrubbing technology, acquired solely by the Red Cross. This example of joint production is used to illustrate questions surrounding the leveraging of monopoly power. Specifically, could the Red Cross utilize its monopoly over one jointly produced good (scrubbed plasma) to extend market power to a non-monopolized good (red blood cells) when competing with the Blood Centers of America? The case considers the potential for a dual monopoly (by the Red Cross in both markets), limit pricing on the part of the Red Cross in the market for red blood cells, and a shared market in which the Red Cross is a monopoly in the market for plasma but competes with the Blood Centers of America in the market for red blood cells.

Notes: We estimate real US GDP growth as a threshold autoregressive process, and construct confidence intervals for the parameter estimates. However, there are various approaches that can be used in constructing the confidence intervals. We construct confidence intervals for the slope coefficients and the threshold using asymptotic results and bootstrap methods, finding that the results for the different methods have very different economic implications. We perform a Monte Carlo experiment to evaluate the various methods. Surprisingly, the confidence intervals are wide enough to cast doubt on the assertion that the time-series responses of GDP to negative growth rates are different than the responses to positive growth rates.

Notes: This paper investigates the transmission mechanisms of structural shocks and volatility between economies through trade links, and the effects of synchronization on business cycles. We investigate the transmission of outside structural shocks and the fluctuations that the shocks generate. We identify conditions under which international economic links reduce the volatility and unpredictability of economic output emanating from shocks within the individual economies. Under certain conditions, devaluation of a country's currency causes reduction in the unpredictability of the business cycle and its volatility as seen by that country's exporters, while increased valuation of a country's currency produces higher unpredictability and volatility, as seen by the country's importers.

Notes: Despite expansionary fiscal and monetary policies, the Japanese real economy has been stagnating since the bubble bursting in the early nineties. Within a multivariate setup, this paper proposes to test for and date apossible structural shift in the response of Japanese macroeconomic fluctuations to aggregate supply and aggregate demand shocks. The econometric methodology directly derives from Andrews (1993) and Bai, Lumsdaine and Stock (1998) theoretical results. Our empirical study from monthly post-1980 observations reveals i) a significant structural break in the end of 1991, and ii) a sharp decrease in the influence of demand shocks on Japanese output fluctuations after this date.