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Economics Working Papers, 2006

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

06-01 Hyungna Oh, Asawari Moholkar, Stratford Douglas, and Powsiri Klinkhachorn.

"System Reliability and Price Responsiveness of Residential Loads."

Abstract: Excessive peak load increases the transmission system's vulnerability to reliability problems. One tactic for reducing peak loads is to increase the responsiveness of demand to changes in wholesale electricity prices. This research describes the Computer-Aided Home Energy Management (CAHEM) system, which integrates consumer preferences and real-time information about electricity prices, loads, and weather into a load-shifting algorithm that seeks an optimal tradeoff between residential electricity consumer satisfaction and peak load reduction using a rule-based fuzzy controller. We evaluate the effects of the CAHEM system on the larger power system, using PJM data from 1999, and then use the CAHEM system as the basis of a model of consumer response that we embed in a larger multi-agent simulation (MAS) of the electricity market. We focus on characteristics germane to the reliability of the transmission system, particularly price spike behavior and capacity availability and utilization. Because our findings suggest that strategic suppliers reduce their offers in response to increased consumer price-responsiveness, we cast some doubt upon assumptions that more consumer flexibility will necessarily increase the reliability of the system as a whole.

06-02 Arabinda Basistha.

"Hours per Capita and Productivity: Evidence from Correlated Unobserved Components Models."

Abstract: Recent studies debate the effect of a permanent productivity shock on hours per capita within a structural VAR context. This paper examines the issue using a correlated unobserved components (UC) framework. The estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours. This result is robust for non-stationary, levels stationary and differenced stationary specifications of hours. A comparison of the UC framework to the structural VAR framework shows that the UC framework with hours in levels performs better.

06-03 Peter T. Leeson, and William N. Trumbull.

"Comparing Apples: Normalcy, Russia, and the Remaining Post-Socialist World."

Abstract: Shleifer and Treisman (2005) argue that Russia is a "normal country." Their benchmark for normalcy, however, refers primarily to middle-income countries like Mexico and Argentina. We propose that a more meaningful benchmark is the experience of other post-socialist transition countries, which share common political and economic histories with Russia, and have faced similar transition obstacles since communism's collapse. We compare Russia's economic performance, media freedom, democracy, and corruption since Russia began transition, to these benchmarks in all other post-socialist countries since they began their transitions. We find that Russia consistently and significantly performs below normal compared to its cohort.

06-04 Peter T. Leeson, and Russell S. Sobel.

"Contagious Capitalism."

Abstract: Is capitalism contagious? Since WWI, global foreign policy has treated economic freedom/repression like a virus that spreads between countries. Most recently, the "domino theory" of freedom has played prominently in U.S. foreign policy toward Asia, Latin America, and the Caribbean during the Cold War, and the Middle East during the War on Terror. This paper investigates the spread of economic freedom between nations. Our analysis considers two potential channels of this spread: geography and trade. We estimate two models of spatial dependence using panel data that cover more than 100 countries between 1985 and 2000. We find that capitalism is in fact contagious. Countries consistently "catch" about 20 percent of their average geographic neighbors' and trading partners' levels and changes in economic freedom. We also explore American foreign military intervention's ability to spread economic freedom abroad. We find that although intervention may increase freedom in U.S.-occupied countries, this freedom is not contagious. Using our estimates of freedom's spread when it is contagious, we simulate the impact of successful Iraqi occupation on Middle Eastern freedom. Even under the most favorable assumptions, we find that U.S. occupation would minimally improve freedom in this region.

06-05 Russell S. Sobel, and Andrea M. Dean.

"Has Wal-Mart Buried Mom and Pop?: The Impact of Wal-Mart on Self Employment and Small Establishments in the United States."

Abstract: Saving traditional small 'mom and pop' businesses has been a justification for political and court decisions preventing Wal-Mart from opening new stores virtually everywhere across the United States. We present the first rigorous econometric investigation of how Wal-Mart actually impacts the small business sector. We examine the rate of self-employment and the number of small-employer establishments using both time-series and cross-sectional data. Contrary to popular belief, our results suggest that the process of creative destruction unleashed by Wal-Mart has had no statistically significant long-run impact on the overall size and profitability of the small business sector in the United States.

06-06 Russell S. Sobel.

"Testing Baumol: Institutional Quality and the Productivity of Entrepreneurship."

Abstract: Baumol's (1990) theory of productive and unproductive entrepreneurship is a significant recent contribution to the economics of entrepreneurship literature. He hypothesizes that entrepreneurial individuals channel their effort in different directions depending on the quality of prevailing economic, political, and legal institutions. This institutional structure determines the relative reward to investing entrepreneurial energies into productive market activities versus unproductive political and legal activities (e.g., lobbying and lawsuits). Good institutions channel effort into productive entrepreneurship, sustaining higher rates of economic growth. I test and confirm Baumol's theory, and discuss its significance to the literature and policy reform.

06-07 Peter T. Leeson, and Russell S. Sobel.

"Weathering Corruption."

Abstract: Could bad weather be responsible for U.S. corruption? This paper argues that natural disasters create resource windfalls in the states they strike by triggering federally-provided natural disaster relief. Consistent with the theory that natural resource and foreign aid windfalls increase public corruption, disaster relief windfalls likely do as well. We investigate this hypothesis by exploring the effect of FEMA-provided disaster relief on public corruption. The results support our hypothesis. Each additional $1 per capita in average annual FEMA relief increases corruption nearly 2.5 percent in the average state. Eliminating FEMA disaster relief would reduce corruption more than 20 percent in the average state. Our findings suggest that notoriously corrupt regions of the United States, such as the Gulf Coast, are notoriously corrupt because natural disasters frequently strike them.

06-08 Nathan J. Ashby, and Russell S. Sobel.

"Income Inequality and Economic Freedom in the U.S. States."

Abstract: This paper examines the impact of economic freedom on income inequality using cross-sectional data for U.S. states. While previous research has explored this relationship internationally, the results have been conflicting. In addition, while it seems obvious that the large institutional differences across countries will impact income inequality, it isn't so obvious that the smaller variation in policies among U.S. states can have a measurable impact. Can improvements in income inequality be used as a justification for marginal pro-market policy reforms at the state level, or is this argument applicable only to national-level institutional reforms?

06-09 Russell S. Sobel, and Peter T. Leeson.

"The Use of Knowledge in Natural Disaster Relief Management."

Abstract: To successfully coordinate natural disaster relief, society must solve Hayek's "knowledge problem" at three critical information nodes: (1) identification of disaster; (2) determination of what relief is needed and who needs which relief resources; and (3) evaluation of on-going relief efforts. This paper investigates the comparative ability of government and the private sector to do this. We find that government is inherently incapable of generating the information needed to solve the knowledge problem at any of these nodes. In contrast, the private sector is capable of solving the knowledge problem at each information node. The results of our analysis suggest that disaster relief reforms which leave government as the primary manager of natural disasters are bound to fail. Correcting government's information failure in the context of disaster relief requires eliminating its root cause: government itself.

06-10 Jonathan Munemo, Subhayu Bandyopadhyay, and Arabinda Basistha.

"Foreign Aid and Export Performance: A Panel Data Analysis of Developing Countries."

Abstract: The effect of foreign aid on economic activity of a country can be dampened as it can potentially have adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates do not show negative effect of foreign aid on exports. The estimated coefficients are mostly positive but insignificant. The result is robust to use of two different export performance measures and different sub-samples.

06-11 Subhayu Bandyopadhyay, and Suryadipta Roy.

"Corruption and Trade Protection: Evidence from Panel Data."

Abstract: We complement the existing literature on corruption and trade policy by providing new estimates of the effects of corruption (and institutions) on trade protection. We control for unobserved heterogeneity among countries with properly specified fixed effects, exploiting the time dimension present in the dataset. The issue of endogeneity of corruption with respect to trade policy is addressed. Furthermore, two separate institutional measures are used in the same regression to estimate their comparative impacts on trade policy. The central finding is that corruption and lack of contract enforcement significantly increase trade protection and have negative effects on trade openness.

06-12 George W. Hammond, and Eric Thompson.

"Determinants of Income Growth in U.S. Metropolitan and Non-metropolitan Labor Markets."

Abstract: This research analyzes determinants of growth across U.S. labor market regions, using a production function approach based on four inputs: labor, manufacturing investment, human capital investment, and public capital investment. We find significant differences in the relative influence of growth determinants between metropolitan and non-metropolitan regions during the 1969-1999 period. We find little role for public capital investment in either metropolitan or non-metropolitan regions, but that manufacturing investment tended to spur growth in non-metropolitan regions, in contrast to results for metropolitan regions. We find that human capital matters for both metropolitan and non-metropolitan regions, but that increased human capital investment in metropolitan regions may have a larger impact on growth than in non-metropolitan regions. Further, the presence of more colleges and universities, more household amenities, and lower tax rates were all found to encourage human capital accumulation in U.S. labor market areas.

06-13 Subhayu Bandyopadhyay, and Howard J. Wall.

"Policy Evaluation in the Presence of Outsourcing : Global Competitiveness versus Political Feasibility."

Abstract: With outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. When there is a minimum wage, an outsourcing tax switches jobs to unemployed natives. In this case, the policy is both politically popular and economically sound because it raises national income. This is possible because of the pre-existing distortion in the labor market caused by the minimum wage. The effect of an export subsidy is less clear. It may or may not be justified on welfare grounds. Also, increased international competition has no effect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. The paper is extended to consider the scenarios of wage flexibility and price competition.

06-14 Subhayu Bandyopadhyay, and Howard J. Wall.

"The Determinants of Aid in the Post-Cold War Era."

Abstract: This paper estimates the responsiveness of aid to recipient countries' economic and physical needs, civil/political rights, and government effectiveness. We look exclusively at the post-Cold War era and control for the political, strategic, and other considerations of donors with fixed effects. In general, we find that aid and per capita income were negatively related, while aid was positively related with infant mortality, rights, and government effectiveness.

06-15 Subhayu Bandyopadhyay, and Howard J. Wall.

"Immigration and Outsourcing: A General Equilibrium Analysis."

Abstract: This paper analyzes the issues of immigration and outsourcing in a general-equilibrium model of international factor mobility. In our model, legal immigration is controlled through a quota, while outsourcing is determined by the firms (in response to market conditions) and through policy-imposed barriers. A loosening of the immigration quota reduces outsourcing, enriches capitalists, leads to losses for native workers, and raises national income. If the nation targets an exogenously determined immigration level, the second-best outsourcing tax can be either positive or negative. If in addition to the immigration target there is a wage target (arising out of income distribution concerns), an outsourcing subsidy is required. The analysis is extended to consider illegal immigration if skilled and unskilled labor are complements in production. If the two kinds of labor are complements (substitutes), national income increases (decreases) monotonically with the level of legal immigration.

06-16 Subhayu Bandyopadhyay, and Howard J. Wall.

Popova Julia, and Stratford Douglas. "Storage and the Electricity Forward Premium."

Abstract: We develop and test a model describing the influence of natural gas storage on the electricity forward premium. The model is constructed by linking the effect of gas storage on the higher moments of the distribution of electricity prices to an established model of the effect of those moments on the forward premium. The model predicts a (weakly) positive effect of gas storage on the electricity forward premium when loads are light, but a sharply negative effect when demand for electricity is high and demand for gas is low. The model predicts a daily pattern of stronger effects in the afternoon. Empirical results, based on PJM data, strongly support the model.

06-17 Hammond George W., and Brian J. Osoba.

Metropolitan Statistical Area Designation: Aggregate and Industry Growth Impacts.

Abstract: The federal Office of Management and Budget's (OMB) periodic release of updated metropolitan statistical area (MSA) definitions frequently garners significant attention from local economic development professionals and policymakers. The interest is grounded, in part, in the common belief that the designation of a region as a new MSA will spur its subsequent growth. The purpose of this paper is to test the hypothesis that the MSA designation influences local growth, using Office of Management and Budget (OMB) designations released since 1980 and data on per capita personal income, population, and employment. Based on results from several methods, including quasi-experimental matching, we find little evidence that the MSA designation has a significant impact on long-term employment or per capita income growth. However, we do find some evidence in favor of a short-run impact on aggregate employment growth and more significant impacts on population growth. We disaggregate employment and find significant short-run impacts on transportation and utilities; retail trade; and government. We find longer-term impacts on services and finance, insurance, and real estate employment growth.