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Economics Working Papers, 1992


"Intertemporal Optimization under Threat of VER," published in Journal of International Economic Integration.

Abstract: The imposition of commercial policy does not generally come as a complete surprise to the affected parties. Exporting firms have some information about the political climate in their export markets, and thus, can assess the probability of a trade restraint being imposed. In the case of a quantity restriction, it is likely that the volume of trade allowed after the restraint is positively related to the volume of trade before the restraint. Thus, firms have an incentive to increase current production so that the losses they would incur in the event of a restriction are decreased. Such an incentive is referred to in the literature as the 'Yano effect'. This paper uses an imperfectly competitive model to develop a different and more direct channel for the Yano effect and to determine its impact on intertemporal welfare.

92-02 Chapman, Kenneth S. and GOVIND HARIHARAN.

"Social Security, Health and the Optimal Length of Retired Life:An Empirical Analysis."

Abstract: This paper introduces Social Security and retirement into the theory of optimal length of life presented in Grossman (1971) and Ehrlich and Chuma (1990). We provide the first evidence that, holding constant initial health, larger Social Security benefits prolong life. In particular, we find that the impact of benefits on length of life is nearly 70% greater that the impact of benefits on retirement, making it a more critical determinant of the length of retired life. Our work implies that a substitution effect between length of life and age at retirement is significant. This suggests that existing structural form estimations of the relationship between retirement and health which exclude retirement age from health equations are not theoretically valid. In addition, our work provides broad support for other relationships discussed in Ehrlich and Chuma (1990). In particular, thrifty people are found to live longer lives.

92-03 DOUGLAS, STRATFORD, Karen Smith Conway, and Gary D. Ferrier.

"A Switching Regression Model with Imperfect Sample Separation Information: With an Application to nonstrained Labor Supply," published in International Economic Review.

Abstract: This research uses switching regression techniques in the presence of "noisy" sample separation information to estimate a frontier function. Such information may suggest that some agents achieve efficiency while others do not; however, it may be inaccurate. We develop a frontier model that both uses this information and provides evidence as to its quality. We also construct three simpler estimators that are useful when researchers deem the information to be perfect. While our application is to constrained labor supply, the techniques developed here can be applied wherever information (of whatever quality) about the relative efficiency of economic agents is available.


"An Argument for Relative Risk Aversion Below Unity," published in International Economic Review as "Relative Risk Aversion with Arrow-Debreu Securities."

Abstract: This paper presents a benchmark portfolio problem and argues that plausibility requires comparative static behavior which occurs if and only if relative risk aversion is below one. The problem involves a complete set of Arrow-Debreu securities, each of which pays a positive return in only one state. An increase in the return to asset i in state i causes an increase (no change; a decrease) in demand for asset i if and only if relative risk aversion evaluated in state i is less that (equal to; grater than) unity. Intuition is provided for the case of constant relative risk aversion.


"The Allocation of Official Development Assistance."

Abstract: This paper is an examination of the criteria by which foreign aid, or official development assistance (ODA), flows from donor countries to recipients. I develop a theoretical model based on donor optimization and apply is to the total net ODA allocations of three periods: 1979-80, 1984-85, 1988-89. The estimation indicates that per capita income and population are correlated with per capita ODA receipts, while infant mortality and political/civil rights are not.

92-06 Chapman, Kenneth S. and GOVIND HARIHARAN.

"Can Costly Regulations Kill People?" published in Journal of Risk and Uncertainty.

92-07 Jans, Ivette, HOWARD J. WALL, and GOVIND HARIHARAN.

"Protectionist Reputations and the Threat of Voluntary Export Restraints."

Abstract: Voluntary export restraints, or VERs, are often administered such that each firm's post-VER output allocation is positively related to its output under free trade. When this is true, a credible threat of a future VER will induce foreign firms to dump in the current period, decreasing g the domestic price (the Yano effect), and possibly increasing welfare. We show that if an importing government's preferences are private information and if the government makes a series of VER decisions, there may exist an incentive for a welfare-maximizing government that normally prefers free trade to maintain a protectionist reputation by imposing a VER.

92-08 BALVERS, RONALD J. and Thomas F. Cosimano.

"Inflation Variability and Gradualist Monetary Policy." Published in Review of Economic Studies.

Abstract: This paper considers that optimal approach to reducing inflation under the assumption that the principal cost of inflation is due to its conditional variability. A macro model is specified in which inflation is stochastically related to money growth, with unobservable time-varying autonomous and induced components. In reducing money growth the policy maker much consider a tradeoff between short-run and long-run variability. A sharp reduction in money growth, on the one hand reduces multiplier uncertainty--the Brainard (1967) effect; shortens the adjustment period; and provides information about the responsiveness of inflation to money; but, on the other hand, induces additional variability as the economy heads into unknown territory. Our model implies that a gradual policy is always optimal, and explains the dichotomy between moderate inflation countries that adopt gradual money growth reduction and high inflation countries that adopt a sharper reduction in money growth. Additionally, the analysis sheds light on the more general problem of learning with two unobservable parameters.


"On Testing the Kuznets U-shaped Hypotheses: A Stochastic Dominance Approach with a Statistical Inference."

92-10 Bishop, John, VICTOR CHOW, and BUHONG ZHENG.

"Three Essays on Poverty Measurement."

Abstract: This paper develops a simple testing procedure for generalized decomposable poverty measures. We show that the estimates of the decomposable poverty measures, including overall and subgroup indices, subgroup total and percentage contributions, and weighted subgroup percentage contributions, have a (asymptotic) jointly normal distribution. The full variance-covariance structure is derived and can be estimated consistently without prior specification of the population density underlying the sample data. The (overall/decomposed) poverty indices can thus be used as tools for statistical inference instead of simply as descriptive statistics.

92-11 BALVERS, RONALD J., John Affleck-Graves, Robert E. Miller, and Kevin Scanlon.

"The Underpricing of Initial Public Offerings: A Theoretical and Empirical Reconsideration of the Asymmetric Information Hypothesis," published in Review of Quantitative Finance and Accounting.

Abstract: In this paper we generalize Rock's theory regarding the underpricing of IPOs. In Rock's model, informed investors have a firm-specific informational advantage pertaining to a firm's cash flow. We derive the new results that the level of beta and the size of the market risk premium positively affect underpricing. These implications extend the adverse selection theory and further distinguish this theory form the current state of signaling theories of underpricing. The results put the "hot and cold" issue markets phenomenon in a theoretical context. Empirical results are consistent with the theoretical propositions and provide support for Rock's's theory of underpricing.


"Price Variability and Price Risk in Natural Gas Markets."

Abstract: This paper is about minimizing price risk in the presence of price variability. Most energy markets, like the North American natural gas spot market have trend, seasonal, and short-term random components to the variability of their prices. In such markets, this paper argues that contracts that minimize overall price risk will specify a price for gas delivered under the contract that varies with the average seasonal and trend variation in the market price of gas, bu resists short-term random variations. Included is an analysis of the magnitude and structure of the variability of U.S. natural gas spot prices, with an analysis of the costs imposed on produces, merchants, and consumers by fixed priced contracts and regulation.


"Characteristics of the Metropolitan and Nonmetropolitan Poor: A Comparative Analysis."

Abstract: We wish to bring together three strands of poverty research: urban poverty, rural poverty, and measurement of poverty. We undertake a comparative analysis of urban and rural poverty in the United States. However, instead of only focusing on whether an individual is in a family whose income falls either above or below the official poverty line, we devote some attention to the depth of poverty. This part of the paper may be viewed as a comparative analysis of poverty under different poverty lines, i.e. under different definitions of what constitutes poverty. We not only find significant urban/rural differences in the analysis, but also significant differences when we change the poverty line from the official poverty line as defined by the U.S. Government to just 50 percent of the official poverty line. This last aspect of the research reveals the usefulness of considering measures of poverty that re more complete and more robust than is the standard Head Count Ratio, which does not account for characteristics such as intensity (depth) of poverty.


"The Hazard of Starting Smoking: Empirical Results from a Rational Model," published in Journal of Health Economics.

Abstract: Understanding the determinants of the hazard of starting smoking is of great importance in developing policy to reduce the number of smokers. This paper develops a split population duration model of the decision to start smoking. Using data form the 1978 and 1979 Smoking Supplements to the National Health Interview Survey, we find some evidence that lifetime educational attainment, gender, and race are important determinants of both whether and when the smoking habit is initiated. The study finds no evidence that higher cigarette prices would have a significant impact on teenage decisions to pick up the smoking habit.


"The Non-Equivalence of Specific and Ad Valorem Tariffs with Quality- Differentiated Goods" (revision of 91-01) published in Journal of Economic Integration.

Abstract: This paper is an extension of the literature inaugurated by Falvey that examines the effects of tariffs when the affected goods are quality-differentiated. I demonstrate that an ad valorem tariff may actually increase the sales and market shares of some imported qualities, and that the protection offered to the domestic industry may not be spread among all domestically produced qualities. A specific tariff also does not distribute the burden and benefits to all firms in the market. Only those qualities that are the closest substitutes for imports will be affected. For either type of tariff, the total sale in the market contract only if the lowest quality is imported.