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1999

Economics Working Papers, 1999

Copies may be downloaded on pdf, or hard copies may be requested from Joshua Hall, Working Paper Coordinator.

99 - 01 MITCHELL, DOUGLAS W. and Gregory M. Gelles.

"Switching, Mean-Seeking, and Relative Risk with Two or More Risky Assets."

Abstract: This paper relates and extends two strands of literature on behavioral implications of utility function features. A class of utility functions switching preference no more than once between W0 r ~ and W0 s ~ is identified (r ~ and s ~ being per-dollar returns of alternative portfolios), as is the subclass permitting only switches to the higher-mean portfolio. This latter subclass, which permits expected utility to be expressed in terms of the mean and suitably defined relative risk of final wealth, never decreases expected per-dollar final wealth and never decreases relative risk of final wealth in optimal n-asset portfolios as initial wealth rises.

99 - 02 SOBEL, RUSSELL S. and Thomas A. Garrett. 

"On the Measurement of Rent Seeking and its Social Opportunity Cost."

Abstract:Utilizing 4-digit industry data by county, we compare the allocation of resources across industries in state capital areas with noncapital areas. We are able to identify which industries are expanded and contracted relative to noncapital areas. Our results provide the first direct evidence (and measurement) of the forgone productive activity resulting from resources being reallocated toward rent seeking and interest group activity. Our data also allow us to isolate the extent of indirect and in-kind rent seeking, which can account for part of the reason why traditional, direct rent seeking is small compared to theoretical predictions.

99 - 03 SOBEL, RUSSELL S.

"The Unanimous Voting Rule Is Not the Political Equivalent to Market Exchange."

Abstract: The unanimous voting rule is often viewed as analogous to voluntary market exchange. This paper demonstrates that when third-party pecuniary effects exist, this analogy breaks down because unlike markets, unanimous voting requires compensation for these effects. Thus, the outcomes will be necessarily, and fundamentally, different. This compensation requirement renders the political process less efficient, and gives rise to rent-seeking behavior. Because of one-person-one-vote and high transactions costs of bargaining, this compensation is generally unfeasible, meaning an efficient market outcome will be rejected by the unanimous voting rule. This serves as another reason why a less-than-unanimous voting rule may be optimal.

99-04 MITCHELL, DOUGLAS W.

"Effects of Decision Interval on Optimal Intertemporal Portfolios With Serially Correlated Returns."

Abstract: This paper considers portfolio choice when transactions costs imply multi-period decision intervals. The risky share sequence must be precommitted at the decision time, either constrained (as in Samuelson (1991)) or not constrained (as in Balvers and Mitchell (forthcoming)) to be constant across time periods. For a broad, plausible class of dynamic returns processes, contrary to Samuelson under log utility decisions for the more distant future are more conservative. This class is exemplified by serially correlated ARMA(p,q) processes, and by appropriately parameterized finite-state Markov processes with or without serial correlation. The source of Samuelson's contrary result is elucidated.

99-05 CUSHING, BRIAN and Buhong Zheng.

"Locational Differences in the Underlying Characteristics of Poverty."

Abstract: We explore how poverty differs between urban and rural areas and among U.S. regions, using metropolitan versus nonmetropolitan to proxy urban versus rural. Our study focuses on social and demographic characteristics, rather than economic characteristics. We are concerned with which personal characteristics appear to increase the risk of poverty, regardless of whether these characteristics manifest themselves through unemployment, low-wage employment, or some other economic problem that ultimately leads to poverty. Using data for the working-age population from the one percent Public Use Microdata Sample of the 1990 Census of Population and Housing, we find significant differences in predictors of poverty across area types and regions. Our empirical results suggest that anti-poverty programs should vary across area types and regions in order to meet the unique needs of each location's low-income population.

99-06 VILASUSO, JON and Mark R. Frascatore.

"Public Policy and R&D when Research Joint Ventures are Costly."

Abstract: This paper examines the role of policy when forming a R&D joint venture is costly. Contrary to previous studies, we document an active role for public policy, as the interests of firms are not necessarily aligned with societal interests. The nature of policy, however, depends on the joint venture cost. If the cost of forming a joint venture is relatively low, then policy may call for subsidizing the joint venture to encourage collaboration. However if forming a joint venture is very costly, then there are cases where social welfare is improved if policy encourages R&D competition with no joint venture.

99-07 VILASUSO, JON.

"Causality Tests and Conditional Heteroskedasticity: Monte Carlo Evidence."

Abstract: This paper investigates the reliability of causality tests based on least squares when conditional heteroskedasticity exists. Monte Carlo evidence documents considerable size distortion if the conditional variances are correlated. Inference based on a heteroskedasticity and autocorrelation consistent covariance matrix offers little improvement. This size distortion traces to an inability to discriminate between causality in mean and causality in variance. As a result, this paper endorses conducting causality tests based on an empirical specification that explicitly models the conditional means and conditional variances. The relationship between money and prices serves as an illustrative example.

99-08 VILASUSO, JON.

"Forecasting Heavy-Tailed Random Variables: A Monte Carlo Assessment of Robust Estimation Methods."

Abstract: This paper conducts Monte Carlo simulations to assess the reliability of autoregressive parameter estimates using least squares and robust estimation methods when the disturbance term is heavy-tailed. Overall, robust parameter estimation displays less bias than least squares. There are, however, important differences between robust estimation methods. For each heavy-tailed distribution and random process, least median of squares estimation results in the least bias. Out-of-sample forecasts of changes in the federal funds rate serve as an illustrative example where gains in forecast accuracy are achieved using least median of squares estimation.

99-09 VILASUSO, JON and David Katz.

"Spectral Tests of Market Efficiency in International Stock Markets."

Abstract: This paper uses spectral tests to examine the efficient markets hypothesis for international stock market data. The tests are robust to distributional assumptions and the presence of conditional heteroskedasticity. We reject the efficient markets hypothesis for each country under examination except France, Germany, the Netherlands, and Switzerland. We find that rejections of the efficient markets hypothesis are traced to both predictable long-run characteristics and short-run seasonals in international stock market returns.

99-10 VILASUSO, JON and Alanson Minkler.

"Agency and Transaction Cost Determinants of Corporate Finance: A Synthesis."

Abstract: We develop a dynamic model to incorporate the assumptions and insights of both the agency and transaction cost literatures about corporate finance. In general, we find that neither cost can be ignored and that the firm's optimal strategy includes the use of both equity and debt finance. The main insight is that the conditions most favorable for reducing transaction costs are the same as those for reducing the agency costs of debt. Empirically, we find that this insight is important in that both agency and transaction costs are significant determinants of the capital structure of firms.