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2011

Economics Working Papers, 2011

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

11-01 Guse, Eran

"Adaptive Learning, Endogenous Uncertainty, and Asymmetric Dynamics"

Abstract: I introduce "Expectational Business Cycles" where output fluctuates due to learning, heterogeneous forecasting models and random changes in the efficient forecasting model. Agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process. Increased uncertainty, due to a shock to the structure of the economy, may result in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. Expectational business cycles tend to arrive faster, last longer and are more severe as agents possess less information.

11-02 K. Victor Chow

"Conditional Information Ratios and the Information Curve"

Abstract: Conditional information ratios (CIR) measure lower partial performance of a portfolio conditional to the distribution of returns on the benchmark. The Information Curve plotted by a serial CIR provides an overall view of performance especially under downside scenarios. The CIR approach is closely related to the theory of conditional stochastic dominance and is thus distributional and modeling free. Statistical inference for CIR performance evaluation is developed and is free from the assumption of normality. Empirical evidence shows that although many US equity mutual funds suffer from the 2005-2010 downtrends, some funds outperform the market and provide good downside protection. Additionally, this article suggests Conditional Sharpe Ratios are useful for measuring hedge fund performance.

11-03 Wiseman, Travis, and Young, Andrew

"Economic Freedom, Entrepreneurship, & Income Levels: Some US State-Level Empirics"

Abstract: Recent literatures on entrepreneurship and economic growth estimate the empirical relationships between the following pairs of variables: (1) institutions and entrepreneurial activity; (2) institutions and economic growth; and (3) entrepreneurship and economic growth. This paper revisits each of these relationships using US state-level real GDP per capita, the Economic Freedom of North America index, and the state-level productive and unproductive entrepreneurship scores provided by Sobel (2008). We examine whether productive (unproductive) entrepreneurial activity is associated with higher (lower) levels or growth rates of income. Additionally, we aim to "connect the dots" by asking whether higher institutional quality (i.e., greater economic freedom) affects income primarily through its effects on entrepreneurial activity. We argue that, if this is true, economic freedom should be a good instrument for entrepreneurship in an income regression.

11-04 Guse, Eran, and Wong, Sunny M.C.

"Adaptive Learning and Information Diffusion"

Abstract: This paper introduces a two-stage interactive cobweb model with information diffusion. The additional stage of information diffusion leads to a possibility of up to five equilibria. Stability properties under learning remain similar to those under a model with one-way information diffusion, but this modified assumption improves forecast efficiency for all firms involved.

11-05 Young, Andrew T., and Zuleta, Henando

"Golden Rule for Wages"

Abstract: We consider a decentralized version of the neoclassical growth model where labor share is chosen by workers to maximize their long run (permanent) wages. In this framework, if the labor share increases relative to the competitive share, workers capture a larger share of a smaller total income in the steady-state. This is because the incentives to invest are lower and the steady-state capital to labor ratio is lower. We find that the "Golden Rule" labor share is equal to the elasticity of output with respect to labor. This is precisely what would obtain under the assumption of competitive factor markets. We also consider the model with two classes of workers: organized and unorganized. In this case, organized labor may chooses a higher than competitive share and the difference is economically significant for plausible parameter values. Furthermore, relative to the Cobb-Douglas case, organized labor chooses a higher share for the empirically relevant case of an elasticity of substitution less than unity. We also analyze a multisector version of the model where workers in each sector are organized and choose their share of that sector's output. The golden rule of wages still holds: each sector's workers can do no better than to choose the competitive labor share. In summary: organized labor can only improve its lot at the expense of unorganized labor; not at the expense of capital.

11-06 Young, Andrew T., and Zuleta, Henando

"Do Unions Increase Labor's Shares? Evidence from US Industry-Level Data"

Abstract: We explore the relationship between union density and labor's shares using panel data on 35 industries, spanning the entire US economy, for the years 1983 through 2005. For the full sample, a standard deviation increase in union density (membership or coverage rates) is associated with an increase in an industry's labor's share of about one and a half standard deviations. However, for manufacturing industries the effect is much smaller: a standard deviation increase in density is associated with only a one half standard deviation higher labor's share. We control for capital-to-output ratios in our analysis; doing so implies the sign and magnitude of the elasticity of substitution between labor and capital. We find that this elasticity is less than unity in our sample but relatively high in manufacturing industries. Since the effect of unions on labor's share appears to be increasing in the elasticity of substitution, our study provides support in favor of the right-to-manage model of union bargaining over the efficiency bargaining model.

11-07 Nishioka, Shuichiro, and Ripoll, Marla

"Productivity, trade and the R&D content of intermediate inputs"

Abstract: This paper explores a novel way to evaluate the extent to which R&D knowledge embodied in intermediate inputs correlates with productivity at the industry level. We propose the concept of R&D content of intermediates, which represents the R&D stock embodied in intermediate goods used in production. This concept parallels that of factor content of trade, and it requires the use of a global input-output matrix that speci.es all industries and countries involved in the intermediate purchases. Using a sample of 32 countries and 13 manufacturing industries we compute the elasticity of industry-level TFP with respect to the R&D content of intermediates. We find that among high-R&D industries, the R&D embodied in foreign inputs purchased from the own industry is significantly associated with industry-level TFP. In contrast, intermediate input trade does not appear to be a significant channel of R&D diffusion among low-R&D industries.

11-08 Bondarenko, Elena, and Nishioka, Shuichiro

"Determinants of Convergence in the Marginal Product of Capital"

Abstract: This paper examines the determinants of convergence in the marginal product of capital. We develop an empirical model from Solow's growth model and augment it to include global factors of financial flows and capital embodied in commodity trade. Using data from 52 countries during the period from 1970 to 2005, we show that the marginal product of capital converges. However, this convergence is conditional upon country- specific variables such as reproducible capital share. Saving rates, foreign direct investment, and international trade are essential determinants of this conditional convergence. We find no evidence that debt financial flows reduce the global difference in the marginal product of capital. International trade also contributes to this convergence by equalizing international prices of investment and consumption goods.