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Economics Working Papers, 1993

93-01 DOUGLAS, STRATFORD M. and David K. Guilkey.

"Using the Bootstrap to Improve Standard Error Estimates in a Switching Regressions Model."

Abstract: We identify and analyze a twofold problem in Quandt's "Reorder" switching regressions model, and evaluate the bootstrap as a solution. First, the Reorder technique offers no way of estimating the parameters of the switch point estimator's distribution. Second, regression parameters and standard errors are estimated conditional on the switch point estimate and hence are biased downward relative to unconditional standard errors. We estimate a response surface to evaluate the accuracy and responsiveness of the bootstrap standard errors. Our results indicate that the bootstrap estimates standard errors of both the switch point estimator and regression coefficient estimators with reasonable accuracy.


"`Voting with your Feet' and the Quality of Life Index: A Simple Non-Parametric Approach Applied to Canada," published in Economics Letters.

Abstract: This paper develops a new technique that uses the utility-maximizing migration decisions of rational voters/consumers to construct QOL rankings. We apply our technique to Canadian inter-provincial migration data for 1970-1990.


"Estimating Aid-Allocation Criteria with Panel Data," published in The Economic Journal.

Abstract: In 1990, the net amount of economic aid, or official development assistance, to all recipients from all multilateral and bilateral sources was about US$62 billion, an amount that exceeded the GDPs of Greece and Portugal. Despite the size of this yearly transfer there has been no rigorous modeling ans estimation of the criteria by which it occurs. As a result, there is little agreement about the extent to which ODA is allocated according to the needs of the recipient countries. The purpose of this paper is to develop a rigorous theoretical model of ODA allocation that can be used to provide consistent estimates of the importance of recipient needs. We find that while per capita income is not an important determinant of ODA, infant mortality and political/civil rights are. We also find evidence of a bias against populous countries.


"The Reevaluation of the Differences among Metropolitan, Nonmetropolitan, and Central City Poverty."

Abstract: It is well known that the metropolitan and nonmetropolitan poor differ in many aspects. However, the difference in poverty intensity has been evaluated by the official poverty measure--the headcount ratio which has several drawbacks. The official poverty statistics also suffer from an arbitrary poverty line. This paper uses newly developed distribution-sensitive measures and 1980 census data to reconsider the differences between metropolitan versus nonmetropolitan, central city versus nonmetropolitan. Instead of using a single, arguable poverty line, this paper lets the poverty line vary over an income range so that the conclusions are more robust. We also divide the U.S. into four regions and examine the poverty rankings within and cross these regions. The headcount ratio and new measures give different results


"The Effects of Technological Uncertainty on the Optimal Location of a Competitive Firm: A Reexamination of Tombak."

Abstract: In the past several years, there have been numerous articles written on the effects of uncertainty on a firm's optimal location. Included in these is an article by Mihkel Tombak in which technological uncertainty is introduced to a model which uses a Leontief production function and a Weberian triangle to describe a firm's location problem. The conclusion of Tombak's analysis is that a firm will locate closer to its input sources when technological uncertainty is introduced. The purpose of this paper is to show that Tombak's conclusions are not justified. In Section I, Tombak's model is described in detail along with additional comments necessary for the analysis. Section II attempts to reproduce Tombak's results. In this section it is shown that the Tombak model does not offer the unambiguous results as shown in his article. Section III concludes the paper by summarizing the basic findings of this analysis and offers suggestions for future research.


"Optimal Location in the Hotelling Duopoly Model with Demand Uncertainty."

Abstract: This paper incorporates demand uncertainty into the basic Hotelling framework by allowing random shocks to the desirability of the firm's product. It follows that the choice of location affects the average level of demand as well as the riskiness of demand: reducing the distance to the other firm raises expected demand and payoff but also lowers the degree of differentiation between the firms so that even small negative shocks to the desirability of the firm's product may cause it to lose all demand. Risk averse firms will locate away from the center and, depending on their degree of risk aversion and the size of the market, may locate to the left or to the right of the quartile points (which constitute the socially most desirable location). The demand uncertainty removes the discontinuity in the profit function of the original Hotelling model and a Bertrand-Nash equilibrium is derived for a uniform distribution of the random term.


"Public Capital Expenditure in a Dynamic Macro Model of Monopolistic Competition."

Abstract: The optimal level and composition of public expenditure is examined in a version of the Long and Plosser (1983) model, generalized to admit monopolistically competitive sectors. Overconsumption is shown to be systemic. While particular micro-based industrial policies could produce Pareto optimality, they may be inapplicable due to sectoral heterogeneity and possible informational asymmetries. Macro-based expenditure policy, however, is easily implementable. The paper finds that expenditure on publicly provided goods should exceed the perfectly competitive quantity (even in the absence of nonrivalry and nonexclusion issues) as long as the investment component is large enough. The extent to which expenditure should exceed the competitive level depends on average economies of scale, a productivity-enhancement measure, and the average degree of monopoly power in the economy. Even with decreasing returns, optimal public investment is higher than in competition due to pecuniary aggregate supply externalities: the public investment raised productivity of all firms, stimulating investment, which in turn lowers input costs to the government and private sector


"Is Military Expenditure Really a Luxury Good?: An International Panel Study of LDCs."

Abstract: This paper reconsiders cross-sectional studies that suggest that the share of a country's income that goes towards military expenditures increases with income. Because these studies do not consider fixed effects for each, their results are driven by heterogeneity bias. I develop an alternative model that is capable of accounting for the fixed effects. Using this model I demonstrate that, contrary to previous studies, the share of military expenditures actually decreases with a county's income, and that military expenditure is unrelated to population, all else constant.


"Business Cycle Sources and Price Level - Output Correlation," published in Journal of Macroeconomics, Summer 1994.

Abstract: This paper shows that predominantly aggregate demand- (supply-) driven output fluctuations are consistent with a negative (positive) correlation between the price level and output, but only if aggregate supply is flatter (steeper) than aggregate demand. These results hold even with zero covariance between demand and supply shocks, and these confluences are more likely to occur for algebraically higher values of the correlation between demand and supply shocks. Thus care should be taken in using observed signs of price level-output correlations to draw inferences about the validity of supply- or demand-based macro theories.

93-10 DOUGLAS, STRATFORD M. and Joseph Sulock.

"Estimating Educational Production Functions with Correction for Drops," published in Journal of Economic Education.

Abstract: Previous attempts to estimate functions explaining student performance in economics classes have ignored the sample selection bias created by students who drop the class. This paper defines the problem, identifies Heckman's two-step method as a possible corrective, and demonstrates its use. The first step uses a probit model to estimate the probability of dropping the class; the second step models the student's performance using either a Cobb-Douglas or a Translog production function. We compare bias-corrected and uncorrected versions of the model, and also examine the effect of gender on performance. The data set used for the application contains unusually complete information about students who drop the class, and about the effort and ability of all of the students on the class.


"A Numerical Technique for the Evaluation of Tax Incidence."

Abstract: We develop a numerical technique for evaluating the incidence of a change in local taxes. We base the technique on a two-region general equilibrium model of tax incidence. A numerical example, using West Virginia and Pennsylvania as the regions of study, illustrates the nature of tax incidence. Our numerical technique serves as a useful alternative for evaluating the effects of tax policy on the distribution of income between major economic groups for different regions. With only minor modifications, the model and technique are equally applicable to the study of public spending and budget policy.


"Money-Income Correlations under Active Monetary Policy."

Abstract: Data from the 1980's suggest a near-disappearance of the previous positive correlations between money growth (variously defined) and income growth. This paper shows that such observations do not imply that the money supply has become irrelevant. A dynamic policy formulation context with lags is analyzed, and the following principal results are obtained: (I) If policy is optimal, nominal income growth is uncorrelated with current and lagged (but not future) money growth. (ii) If policy is overactive (or, underactive), the contemporaneous correlation between income growth and money growth is positive (or, negative).

93-13 ACHARYA, ARNAB and Michael Spagat.

"Individual Savings and Monetary Overhang: A Model with Empty Shelves and Parallel Markets," published in Economic Systems.

Abstract: We construct a model of individual savings behavior with an infinite horizon under conditions where money takes on a lottery ticket characteristic. In each period a consumer can shop in state stores at low official prices with some known probability. With complementary probability she must make all her purchases on a parallel market at higher prices. Savings are generated by the stochastic two-tiered pricing scheme. These savings can be treated as a form of "monetary overhang", since their existence depends on the peculiar mechanism of two-tiered pricing. We show in the general model that a solution to the consumer's problem will exist. Moreover, the savings distribution will converge to a steady state under this solution, i.e., persistent shortages do not lead to constantly growing savings. We study in detail a variety of examples that illuminate the motivation for saving. We show that there can exist a speculative motive for saving under which saving will occur in periods where the consumer is not allowed to buy at subsidized prices and thus speculates that she will be able to do so in the relatively near future. There can also exist a precautionary motive for saving under which saving will occur in periods where the consumer is allowed to buy at subsidized prices but believes that she may forced to make major purchases at higher parallel market prices in the near future. We clarify how the shape of the utility function determines which of the two savings motives prevails.

93-14 See Revised Version: Working Paper 95-08.


"Monopoly Unions and Corporatism: Implications for Strategic Trade Policy." Forthcoming in International Economic Journal.

Abstract: This paper analyzes the effects of corporatism on wage, employment, trade policy and national welfare, in the context of international market share rivalry. We also focus on issues of policy coordination to liberalize trade, cooperation between governments and finally international cooperation between unions. One of the striking results of the paper is that when an optimal (Nash) subsidy is in place, wages, employment and the level of the optimal export subsidy itself become independent of the degree of corporatism. This result breaks down under free trade or when domestic policy makers endogenize the foreign wage, yielding the familiar negative relationship between the degree of corporatism and wages. The independence is once again restored when optimal cooperation subsidies are in place and unions set cooperative wages.

93-16 See Revised Version: Working Paper 95-09.

93-17 See Revised Version: Working Paper 95-06.

93-18 Levernier, William and BRIAN CUSHING.

"A New Look at the Determinants of the Intrametropolitan Distribution of Population and Employment: The Relevance of Spatial Factors." Published in Journal of Urban Studies, October 1994.

Abstract: The intrametropolitan distribution of population and employment is a topic of considerable interest due to its implications for urban development. We develop an econometric model relating these distributions to a variety of factors. Several unique explanatory variable and allowing for multiple suburban jurisdictions enable us to better model the spatial aspects of a metropolitan area. We find that housing cost and quality are the most important determinants of the population distribution, which is the most important determinant of the employment distribution; however, causation between population and employment runs both ways. Spatial factors, including transportation infrastructure, play an important role in metropolitan development. The importance of various factors differs between manufacturing and nonmanufacturing employment and between the white and nonwhite populations.

93-19 See Revised Version: Working Paper 95-07.


"Demand Elasticities, Asymmetry and Strategic Trade Policy."

Abstract: This paper shows that demand elasticities and asymmetry are important determinants of the welfare effects and direction of strategic trade policy. The symmetric case has been analyzed to show that the direction of trade intervention is critically dependent on properties of the elasticity of demand. Under unit elastic demand (a market of fixed revenues ) free trade is optimal under symmetry, and a subsidy (tax) is optimal if the exporting firm is larger (smaller). Under demand convexity the larger nations have been shown to subsidize more aggressively. It has been shown that the outcome of a non-cooperative trade policy game is likely to be favorable to the larger nations.


"Economic Evaluation when Lives are at Stake."

Abstract: In public policy decisions affecting mortality, economic evaluations such as cost-benefit and cost-effectiveness analysis are often wrongfully performed. Such economic evaluations are wrong because the methods employed, such as the human capital approach to valuing lines and the quality-adjusted life-year index, do not have the broad social perspective required by Paretian welfare theory, and the value assumptions underlying these methods are disturbing. Both economists and noneconomists need to recognize that cost-benefit analysis using willingness-to-pay measure is the only valid and broadly applicable approach. Attempts to rely on the other methods can only jeopardize the role of economics in public policy decision making.


"Controlling Pollution with Investment of Cost Reducing Technology."

Abstract: Investment reduces the operating cost of meeting a mandated environmental quality. As investment undertakings must occur prior to the regulating period, we postulate that the firm chooses the optimal level of investment in anticipation of the regulator's stipulation to be implemented through a tax-subsidy scheme. If the firm possesses private information regarding its cost structure, the optimal environmental target, given a capital stock, can be enforced through a linear subsidy. The centralized investment under imperfect information is smaller than the benchmark investment level. The decentralized investment level, somewhat surprisingly, can be greater than the full information investment level.