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Economics Working Papers, 2009

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

09-01 Guse, Eran

“Heterogeneous Expectations, Adaptive Learning, and Evolutionary Dynamics”

Abstract: This paper presents a linear self-referential macroeconomic model with the possibility of multiple equilibria where agents have the choice of using one of two forecasting models (one of minimum state variable form and the other of sunspot form) to form expectations of current and future prices. Endogenous predictor selection is modeled as an evolutionary game where individuals choose among the forecasting models based on relative performance. Some Nash solutions are not relevant as they are not stable under evolutionary or adaptive learning. Finally, it is shown that the sunspot equilibrium is fragile against temporary shocks to information costs.

09-02 Douglas, Stratford, and Shuichiro Nishioka

“International Differences in Emissions Intensity and Emissions Content of Global Trade”

Abstract: Understanding international differences in the emissions intensity of trade and production is essential to understanding the effects of greenhouse gas limitation policies. We develop data on emissions from 48 industrial sectors in 32 countries and estimate the CO2 emissions intensity of production and trade. We find no evidence that developing countries specialize in emissions-intensive sectors; instead, emissions intensities differ systematically across countries because of differences in production techniques. Northern and Western European countries have the lowest emissions-intensity, while Southern and Eastern European countries and China have the highest emissions-intensity. Developed countries such as Japan and the United States whose trading partners are mostly developing countries import the most emissions.

09-03 Cassing, James, and Shuichiro Nishioka

“Nonhomothetic Tastes and Missing Trade of Factor Services”

Abstract: The recent literature on the Heckscher-Ohlin-Vanek (HOV) model has concentrated on the production side, particularly the unrealistic assumptions of identical techniques and factor price equalization. However, less is known about the demand side. In this paper, we study the assumption of identical and homothetic preferences as a cause of the empirical failures in the HOV prediction. While the relaxation in identical production techniques is still crucial to predict the direction of factor trade, nonhomothetic tastes are shown to play an important role in explaining why factor trade is “missing” in the sense of Trefler (1995) relative to the HOV prediction.

09-04 Balvers, Ron, Du, Ding, and Xiaobing Zhao

“What Do Financial Markets Reveal about Global Warming?”

Abstract: Financial market information can provide an objective assessment of expected losses due to global warming. In a Merton-type asset pricing model, with asset prices affected by changes in investment opportunities caused by global warming, the risk premium is significantly negative and growing over time, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on the global warming factor. Required returns are 0.11 percent higher due to global warming, implying a present value loss of 4.18 percent of wealth. These costs complement and exceed previous estimates of the cost of global warming.

09-05 Coyne, Christopher, and Claudia Williamson

“Trade Openness and Culture”

Abstract: This paper empirically analyzes the effect of trade openness on culture, measured by indicators of trust, respect for others, perceived level of self-determination, and level of obedience. These cultural categories play a central role in encouraging or limiting economic and social interactions and therefore impact economic outcomes. We find that trade openness has a positive and highly significant impact on culture. The more open a country is to trade, the more likely it is to possess culture conducive to increased social and economic interactions. This result is robust to the inclusion of a variety of control variables, different model specifications, and alternative trade measures.

09-06 Coyne, Christopher, and Rachel Mathers

“The Fatal Conceit of Foreign Intervention”

Abstract: The fatal conceit is the assumption that the world can be shaped according to human desires. This paper argues that the logic of the fatal conceit can be applied to foreign interventions which go beyond the limits of what can be rationally constructed by reason alone. In suffering from the fatal conceit, these interventions are characterized by: (1) the realization that intentions do not equal results, (2) a reliance on top-down planning, (3) the view of development as a technological issue, (4) a reliance on bureaucracy over markets, and (5) the primacy of collectivism over individualism. These characteristics explain why interventions extending beyond the limits of what can be rationally constructed tend to fail.

09-07 Coyne, Christopher, Dempster, Gregory, and Justin Isaacs

“Asset Values and the Credibility of Peace Agreements”

Abstract: Continuous violent conflict is a central cause of economic stagnation in many of the world’s poorest countries. Peace agreements are one common tool used to attempt to break these ‘conflict traps.’ However, these agreements often fail due to the lack of a clear and credible commitment by the parties involved in the contract. We contend that long-term financial asset values will reflect the credibility of the participants to peace agreements because the expectation of sustained peace will result in higher long-term asset prices. We utilize equity index prices from Sri Lanka to test our theory. We also consider the accuracy of equity prices versus other predictors of credibility including exchange rates and survey responses. Our conclusion is that long-term financial asset prices indicate the likelihood of conflict or peace and can inform policies as they relate to conflict-torn states.

09-08 Sobel, Russell S., Nabamita Dutta, and Sanjukta Roy

“Beyond Borders: Is Media Freedom Contagious?”

Abstract: Previous literature stresses the importance of free media for economic development. By its nature TV, radio, and newspapers cross borders, allowing citizens to easily sample media from neighboring countries. This creates pressure for domestic reform and spreads media freedom between countries. Using spatial econometric techniques, and a sample of 102 countries, we test for the presence of geographic spillovers in media freedom. We find that a country’s level of media freedom significantly depends on its neighbors. Countries ‘catch’ approximately 20 percent of their media freedom from neighboring countries. Our results are robust to alternative specifications and measures of press freedom.

09-09 Sobel, Russell S. and Brian J. Osoba

“Youth Gangs as Pseudo-Governments: Implications for Violent Crime.”

Abstract: We hypothesize the failure of government to protect the rights of individuals from violence committed by youths has led to the formation of youth gangs as protective agencies. Our theory predicts an opposite direction of causality between gang activity and violent crime than is widely accepted. While areas with more gang activity also have more violence, our results suggest gangs form as protection agencies precisely in areas with high violent crime rates. While gangs, like governments, use violence to enforce rules, the net impact of gangs is likely to lower violent crime. We test this hypothesis and offer policy implications.

09-10 Sobel, Russell S., Christopher J. Coyne, and Peter T. Leeson

“The Political Economy of FEMA: Did Reorganization Matter?”

Abstract: This paper investigates the political economy of FEMA’s post-9/11 merger with the Department of Homeland Security. Using panel data for the post-DHS merger but pre-Katrina period, we examine how FEMA’s much-debated reorganization has impacted the strong political influences on disaster declaration and relief spending identified by Garrett and Sobel (2003) before FEMA’s reorganization. We find that although politically-important states for the president continue to have a higher rate of disaster declaration, disaster expenditures are no longer higher in states with congressional representation on FEMA oversight committees. These results suggest reorganization has reduced political pressures within FEMA. Tullock’s theory of bureaucracy helps to explain this change.

09-11 Sobel, Russell S. and Matt E. Ryan

“Seniority and Anti-competitive Restrictions on the Legislative Common Pool: Tenure’s Impact on the Overall Production of Legislation and the Concentration of Political Benefits.”

Abstract: It is well established that geographic areas benefit, in terms of the share of government spending they capture, from having a legislator with higher tenure, holding constant the tenure of other legislators. However, the implications of this literature for how the total production of legislation changes if all members gained seniority is less clear. Drawing on the literature that uses an industrial organization framework to analyze legislative institutions, we explore the effects of average tenure and disparity in tenure on legislative production. Consistent with Holcombe and Parker (1991) we find that both factors help to enclose the legislative common pool.

09-12 Dutta, Nabamita, Sanjukta Roy, and Russell S. Sobel

“Does a Free Press Nurture Entrepreneurship?”

Abstract: Entrepreneurship is the main engine of economic growth and prosperity. Previous research has explored both the factors that make individuals more likely to be entrepreneurs and the economic policies that foster entrepreneurial activity. In this paper we explore, for the first time, the relationship between media freedom and entrepreneurial activity. A free press might increase entrepreneurial activity because it increases the flow of ideas and information, leading to both more new discoveries as well as an easier ability for entrepreneurs to market and sell new products and innovations.

09-13 Nishioka, Shuichiro

“Reconsidering the Role of Capital Accumulation for International Specialization across Industries”

Abstract: The Heckscher-Ohlin-Vanek (HOV) model allows us to analyze whether countries specialize in particular subsets of industries as they accumulate production factors. Davis and Weinstein (2001) provided evidence that global data supports the HOV model when production techniques are modified to reflect countries’ capital abundances. However, once factor trades are measured bilaterally from the producer countries’ techniques, the HOV prediction can be supported without specialization. This paper examines the relative importance of specialization and technical differences. While I find that developed and developing countries employ different techniques, capital accumulation does not cause a shift in the domestic production mix towards more capital-intensive one. The international mobility in capital appears to be crucial to understand why it is difficult to provide evidence for capital-driven specialization.

09-14 Serban, Alina

“Combining Mean Reversion and Momentum Trading Strategies in Foreign Exchange Markets”

Abstract: The literature on equity markets documents the existence of mean reversion and momentum phenomena. Researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion. This paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets. The strategy was originally designed for equity markets, but it also generates abnormal returns when applied to uncovered interest parity deviations for ten countries. I find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets. Quantitatively, this strategy performs better in foreign exchange markets than in equity markets. Also, it outperforms traditional foreign exchange trading strategies, such as carry trades and moving average rules.