
0749 Bouaddi, Mohammed; Rombouts, Jeroen V.K.  Mixed Exponential Power Asymmetric Conditional Heteroskedasticity
To match the stylized facts of high frequency financial time series precisely ad parsimoniously, this paper presents a finite mixture of conditional exponential power distributions where each component exhibits asymmetric conditional heteroskedasticity. We provide stationarity conditions and unconditional moments to the fourth order. We apply this new class to Dow Jones index returns. We find that a twocomponent mixed exponential power distribution dominates mixed normal distributions with more components, and more parameters, both insample and outofsample. In contrast to mixed normal distributions, all the conditional variance processes become stationary. This happens because the mixed exponential power distribution allows for componentspecific shape parameters so that it can better capture the tail behaviour. Therefore, the more general new class has attractive features over mixed normal distributions in our application: Less components are necessary and the conditional variances in the components are stationary processes. Results on NASDAQ index returns are similar.
0748 Auray, Stéphane; Eyquem, Aurélien  On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union
In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a twocountry model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national inflation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption.
0747 Guay, Alain; Pelgrin, Florian  Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions
In this paper, we investigate the information content of implied probabilities (Back and Brown, 1993) to improve estimation in unconditional moment conditions models. We propose and evaluate two 3step euclidian empirical likelihood estimators and their biascorrection versions for weakly dependant data. The first one is the time series extension of the 3SEEL proposed by Antoine, Bonnal and Renault (2007). The second one is new and uses in contrast only an estimator of the weighting matrix at an efficient 2step GMM estimator, while leaving unrestricted the Jacobian matrix. Both estimators use implied probabilities to achieve higherorder improvements relative to the traditional GMM estimator. A MonteCarlo study reveals that the finite and large sample properties of the (biascorrected) 3step estimators compare very favorably to the existing approaches: the 2step GMM and the continuous updating estimator. As an application, we reassess the empirical evidence regarding the New Keynesian Phillips curve in the US.
0746 Duclos, JeanYves; Fortin, Bernard; Fournier, AndréeAnne  An Analysis of Effective Marginal Tax Rates in Quebec
This article draws up a portrait of effective marginal tax rates (EMTRs) on labour income in Quebec. It aims at allowing a better understanding of the impact of tax policy on the behavior of economic agents. Using an accounting microsimulation model that reproduces the system of taxes and transfers in 2002 Quebec, we measure the EMTRs that result from the interaction of the mechanisms of income taxation and redistribution. Moreover, we evaluate the distribution of EMTRs in the population. The analysis of EMTRs shows, inter alia, that family policy, whose assistance is targeted towards lowincome families, generates high levels of EMTRs ascribable to the generally fast reduction of transfers as income increases. More than a quarter of heads of singleparent households face an EMTR which can reach, and even exceed, 80%. As for the twoparent families, they mostly face EMTRs of around 50%. We show the importance of accounting for EMTR heterogeneity, both with respect to types of families and levels of incomes, as well as evaluating the variability of EMTRs in the population.
0745 Dumont, Étienne; Fortin, Bernard; Jacquemet, Nicolas; Shearer, Bruce  Physicians' Multitasking and Incentives: Empirical Evidence from a Natural Experiment
We analyse how physicians respond to contractual changes and incentives within a multitasking environment. In 1999 the Quebec government (Canada) introduced an optional mixed compensation system, combining a fixed per diem with a discounted (relative to the traditional feeforservice system) fee for services provided. We combine panel survey and administrative data on Quebec physicians to evaluate the impact of this change in incentives on their practice choices. We highlight the differentiated impact of incentives on various dimensions of physicians behaviour by considering a wide range of labour supply variables: time spent on seeing patients, time devoted to teaching, administrative tasks or research, as well as the volume of clinical services and average time per clinical service. Our results show that, on average, the reform induced physicians who changed from FFS to MC to reduce their volume of (billable) services by 6.15% and to reduce their hours of work spent on seeing patients by 2.57%. Their average time spent per service increased by 3.58%, suggesting a potential qualityquantity substitution. Also the reform induced these physicians these increase their time spent on teaching and administrative duties (tasks not remunerated under the feeforservice system) by 7.9%.
0744 Cuff, Katherine; Marceau, Nicolas  Equilibrium Excess Demand in the Rental Housing Market
We develop a model of a competitive rental housing market with endogenous default due to income uncertainty. There is a large number of identical, potential suppliers who each face a fixed cost of entering the rental housing market. Those suppliers who choose to enter decide how many rental units to supply and the rental price to charge. Potential tenants who differ in their income and face an uninsurable income shock choose whether to engage in a costly search for rental housing. If they find a rental unit, then they must commit to a rental agreement before the income uncertainty is resolved. Consequently, some tenants may default on their rental payments. We show that tenancy default can explain persistent excess demand in the rental housing market without any government price regulations. With excess demand in equilibrium, some individuals are simply unable to find rental housing. We study both government regulations affecting the cost of default to the housing suppliers and the quality of rental units, and the imposition of rent control. We show that rent control can have nonstandard effects on the access to rental housing and on welfare.
0743 Danthine, JeanPierre; Kurmann, André  The Business Cycle Implications of Reciprocity in Labor Relations
We develop a reciprocitybased model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rentsharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with microstudies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock.
0742 Fei, Wenan; Fluet, Claude; Schlesinger, Harris  Uncertain Bequest Needs and LongTerm Insurance Contracts
We examine how longterm life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the make up of his or her future family, much less their financial needs. Ideally, the individual would like to insure the risk of having high future bequest needs; but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive two equivalent longterm life insurance contracts that are incentive compatible and achieve a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of such contracts and we show how thirdparty financial products, although beneficial to the individual in the short run, can be welfare decreasing over one's lifetime.
0741 Dionne, Georges; Gauthier, Geneviève; Hammami, Khemais; Maurice, Mathieu; Simonato, JeanGuy  A Reduced Form Model of Default Spreads with Markov Switching Macroeconomic Factors
An important research area of the corporate yield spread literature seeks to measure the proportion of the spread explained by factors such as the possibility of default, liquidity or tax differentials. We contribute to this literature by assessing the ability of observed macroeconomic factors and the possibility of changes in regime to explain the proportion in yield spreads caused by the risk of default in the context of a reduced form model. For this purpose, we extend the Markov Switching riskfree term structure model of Bansal and Zhou (2002) to the corporate bond setting and develop recursive formulas for default probabilities, riskfree and risky zerocoupon bond yields. The model is calibrated out of sample with consumption, inflation, riskfree yield and default data over the 19871996 period. Our results indicate that inflation is a key factor to consider for explaining default spreads during our sample period. We also find that the estimated default spreads can explain up to half of the 10 year to maturity Baa zerocoupon yield in certain regime with different sensitivities to consumption and inflation through time.
0740 Bramoullé, Yann; List, John A.; Price, Michael K.  On the Formation of BuyerSeller Relationships when Product Quality is Perfectly Observable
This study explores the formation of buyerseller relationships in markets with observable quality. We develop a model that explains why relationships form in equilibrium within such markets. A key feature of our model is that as individuals gain experience in the marketplace, they resolve uncertainty over unobserved bargainer types. Relationships thus form as a means to reduce such transactions costs and uncertainty. We explore the usefulness of our theory by using a battery of simulations and experimental treatments. Overall, we find that our theoretical predictions are largely confirmed. Interestingly, the quantitative impact of relationships on overall market efficiency depends critically on the extent to which market structure affects the matching of buyers and sellers that could profitably transact. In certain important cases, a greater number of buyerseller relationships can reduce market efficiency.
0739 Boucher, Vincent; Bramoullé, Yann  Risk Aversion and International Environmental Agreements
We introduce uncertainty and risk aversion to the study of international environmental agreements. We consider a simple model with identical agents and linear payoffs. We show that a stable treaty with positive action always exists. While uncertainty lowers the actions of signatories, we find that it may increase participation. In addition, uncertainty may generate multiple equilibria. A treaty with low action and low participation may coexist with one with high action and high participation. Overall, and despite risk aversion, the impact of uncertainty on welfare may be positive. A reduction in uncertainty may hurt international cooperation.
0738 Alessandria, George; Delacroix, Alain  Trade and the (Dis)Incentive to Reform Labor Markets: the Case of Reform in the European Union
In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through their effect on the terms of trade. A key finding in the open economy is that the share of the welfare gains from domestic labor market reform exported substantially exceeds the share of the goods exported. In our baseline case, 105 percent of the welfare gains are exported even though the domestic economy only exports 30 percent of its goods. Thus, with international trade a country receives little to no benefit, and possibly even loses, from unilaterally reforming its labor market. A coordinated elimination of firing taxes yields considerable benefits. We find the welfare gains to the U.K. from labor market reform by its continental trading partners of 0.21 percent of steady state consumption. This insight provides some explanation for recent efforts toward labor market reform in the European Union.
0737 Fève, Patrick; Guay, Alain  The Response of Hours to a Technology Shock: a TwoStep Structural VAR Approach
The response of hours worked to a technology shock is an important and a controversial issue in macroeconomics. Unfortunately, the estimated response is generally sensitive to the specification of hours in SVARs. This paper uses a simple twostep approach in order to consistently estimate technology shocks from a SVAR model and the response of hours that follow this shock. The first step considers a SVAR model with a set of relevant stationary variables, but excluding hours. Given a consistent estimate of technology shocks in the first step, the response of hours to this shock is estimated in a second step. When applied to US data, the twostep approach predicts a shortrun decrease of hours after a technology improvement followed by a humpshaped positive response. This result is robust to the specification of hours, different sample periods, measures of hours and output and to the variables included in the VAR in the first step.
0736 Fève, Patrick; Guay, Alain  Identification of Technology Shocks in Structural VARs
The usefulness of SVARs for developing empirically plausible models is actually subject to many controversies in quantitative macroeconomics. In this paper, we propose a simple alternative two step SVARs based procedure which consistently identifies and estimates the effect of permanent technology shocks on aggregate variables. Simulation experiments from a standard business cycle model show that our approach outperforms standard SVARs. The two step procedure, when applied to actual data, predicts a significant shortrun decrease of hours after a technology improvement followed by a delayed and humpshaped positive response. Additionally, the rate of inflation and the nominal interest rate displays a significant decrease after a positive technology shock.
0735 Araar, Abdelkrim; Duclos, JeanYves  Poverty and Inequality Components: a Micro Framework
This paper explores the link between poverty and inequality through an analysis of the poverty impact of changes in incomecomponent inequality and in between an within group inequality. This can help shed light on the theoretical and empirical linkages between poverty, growth and inequality. It might also help design policies to improve both equity and welfare. The tools are illustrated using the recent 2004 Nigerian national household survey. The analytically derived linkages are supported by the empirical illustration, and interesting insights also emerge from the empirical analysis. One such insight is that both the sign and the size of the elasticities can be quite sensitive to the choice of measurement assumptions (such as the choice of inequality and poverty aversion parameters, and that of the poverty line). The elasticities are also very much distributivesensitive and dependent on the type of inequalitychanging processes taking place. This also suggests that the response of poverty to growth can also be expected to be significantly context specific.
0734 Bellemare, Charles; Bissonnette, Luc; Kröger, Sabine  Flexible Approximation of Subjective Expectations using Probability Questions  An Application to the Investment Game 
We use spline interpolation to approximate the subjective cumulative distribution function of an economic agent over the future realization of a continuous (possibly censored) random variable. The method proposed exploits information collected using a small number of probability questions on expectations and requires a weak prior knowledge of the shape of the underlying distribution. We find that eliciting 4 or 5 points on the cumulative distribution function of an agent is sufficient to accurately approximate a wide variety of underlying distributions. We show that estimated moments of general functions of the random variable can be computed analytically and/or using standard simulation techniques. We illustrate the usefulness of the method by estimating a simple model to asses the impact of expectations on investment decisions in a commonly used trust game.
0732 Bouezmarni, Taoufik; Rombouts, Jeroen V.K.  Nonparametric Density Estimation for Multivariate Bounded Data
We propose a new nonparametric estimator for the density function of multivariate bounded data. As frequently observed in practice, the variables may be partially bounded (e.g., nonnegative) or completely bounded (e.g., in the unit interval). In addition, the variables may have a point mass. We reduce the conditions on the underlying density to a minimum by proposing a nonparametric approach. By using a gamma, a beta, or a local linear kernel (also called boundary kernels), in a product kernel, the suggested estimator becomes simple in implementation and robust to the well known boundary bias problem. We investigate the mean integrated squared error properties, including the rate of convergence, uniform strong consistency and asymptotic normality. We establish consistency of the least squares crossvalidation method to select optimal bandwidth parameters. A detailed simulation study investigates the performance of the estimators. Applications using lottery and corporate finance data are provided.
0731 Bouezmarni, Taoufik; Rombouts, Jeroen V.K.  Semiparametric Multivariate Density Estimation for Positive Data Using Copulas
In this paper we estimate density functions for positive multivariate data. We propose a semiparametric approach. The estimator combines gamma kernels or local linear kernels, also called boundary kernels, for the estimation of the marginal densities with semiparametric copulas to model the dependence. This semiparametric approach is robust both to the well known boundary bias problem and the curse of dimensionality problem. We derive the mean integrated squared error properties, including the rate of convergence, the uniform strong consistency and the asymptotic normality. A simulation study investigates the finite sample performance of the estimator. We find that univariate least squares cross validation, to choose the bandwidth for the estimation of the marginal densities, works well and that the estimator we propose performs very well also for data with unbounded support. Applications in the field of finance are provided.
0730 Fagart, MarieCécile; Fluet, Claude  Liability Insurance under the Negligence Rule
We analyze the efficiency properties of the negligence rule with liability insurance, when the tortfeasor's behavior is imperfectly observable both by the insurer and the court. Efficiency is shown to depend on the extent to which the evidence is informative, on the evidentiary standard for finding negligence, and on whether insurance contracts can condition directly on the same evidence as used by courts to assess behavior. When evidence is not directly contractible, the negligence rule with compensatory damages is generally inefficient and can be improved by decoupling liability from the harm suffered by the victim.
0729 Bourgeon, JeanMarc; Dionne, Georges  On Debt Service and Renegotiation when Debtholders Are More Strategic
The contingent claims analysis of the firm financing often presents a debt renegotiation game with a passive bank which does not use strategically its capability to force liquidation, contrary to what is observed in practice. The first purpose of this paper is to introduce more strategic bank behaviour into the continuoustime model developed by MellaBarral and Perraudin (1997) and Hackbarth, Hennessy, and Leland (2007). Its second purpose is to account for variations in the information obtained by the parties during the contract period. We show that with public information and private debt only, the optimal probability of debt renegotiation is fixed by the firm's anticipated liquidation value. When we add public debt and asymmetric information, the goodtype firm may be tempted to mimic the badtype to reduce its debt service. We show that to deter such mimicking, banks may sometimes refuse to renegotiate with strong firms having a low liquidation value. Our results are in line with the empirical observation that recovery rate at emergence of bankruptcy is function of the share of private debt in all the firm's debt and is relatively low.
0728 Dionne, Georges; Dostie, Benoit  Estimating the Effect of a Change in Insurance Pricing Regime on Accidents with Endogenous Mobility
In this paper, we estimate the impact of introducing a bonusmalus system on the probability of having automobile accidents, taking into account contract duration or the client mobility between insurers. We show that the new incentive scheme reduces accident rates of all policyholders when contract duration is taken into account, but does not affect accident rates of movers that shirk the imposed incentive effects of the new insurance pricing scheme.
0727 Chemin, Matthieu  The Impact of the Judiciary on Entrepreneurship: Evaluation of Pakistan's Access to Justice Programme
A key element of government is to uphold law and order. This paper will evaluate the impact of slow judiciaries on entrepreneurship. In 2002 a judicial reform was implemented in 6 of Pakistan's 117 districts to facilitate rapid case disposal. Drawing on a panel dataset of 875 district judges' performance between 2001 and 2003, a differenceindifferences analysis shows that judges disposed of 25 percent more cases thanks to the reform. Three rounds of the Labour Force Surveys will be then used to show that the reform improved security of property rights, encouraged people to seek loans, fostered entrepreneurship and was associated with increased transition from unemployment and paid employment to entrepreneurship.
0726 Chemin, Matthieu  Decoding the Code of Civil Procedure: Do Judiciaries Matter for Growth?
This paper attempts to measure the causal impact of the speed of judiciaries on economic activity by using two novel instrumental variables measuring judicial procedural ambiguity and complexity. Firs, I find that temporally exogenous conflicting judicial decisions taken in India due to the Code of Civil Procedure's ambiguity lead to higher expected trial duration as judges are required to spend considerable time in choosing between several conflicting views. Second, I find that Indian High Court amendments complicating procedures to treat a case are related to higher trial duration. By using spatial and temporal variations in the occurrence of conflicting decisions and enactment of amendments as instrumental variables, I am able to measure the impact of judicial speed on credit markets, agricultural development and manufacturing performance.
0725 Chemin, Matthieu  Does Judicial Quality Shape Economic Activity? Evidence from a Judicial Reform in India
This paper investigates the impact of judiciaries on firms' contracting behaviour and economic performance. In 2002, the Code of Civil Procedure Amendment Act was enacted in India to facilitate speedy disposal of civil suits. Some State High Courts had already enacted some of the amendments contained in this reform a long time ago. This spatial variation in the reform's implementation is used to identify the effect of judicial quality on firm's behavior. Using small informal firm data, I find that the reform led to fewer breaches of contract, encouraged investment, facilitated access to finance, and expanded rental markets.
0724 Chemin, Matthieu  The Impact of the Judiciary on Economic Activity: Evidence from India
This paper examines the consequences of slow judiciaries on firms' contracting behaviour in India. After deriving testable implications from a game theoretical model, I examine how case pendency rates in India's state courts affect the contracting behaviour of 170,000 small nonagricultural informal firms from the 2000 National Sample Survey's 55th round. I find that a slow judiciary implies more breaches of contract, discourages firms from undertaking relationshipspecific investments, impedes firms' access to formal financial institutions, and favours inefficient dynasties. Moving a firm from the highest to the lowest pendency state would result in a 10% improvement in firm performance.
0723 Dionne, Georges; Dahen, Hela  What about Underevaluating Operational Value at Risk in the Banking Sector?
The objective of this article is to develop a precise and rigorous measurement of a bank's operational VaR. We compare our model to the standard model frequency used in practice. This standard model is constructed based on lognormal and Poisson distributions which do not take into account any data which fall below the truncature threshold and undervalue bank's exposure to risk. Our risk measurement also brings into account external operational losses that have been scaled to the studied bank. This, in effect, allows us to account for certain possible extreme losses which have not yet occurred. The GB2 proves to be a good candidate for consideration when determining the severity distribution of operational losses. As the GB2 has already been applied recently in several financial domains, this article argues in favor of the relevance of its application in modeling operational risk. For the tails of the distributions, we have chosen the Pareto distribution. We have also shown that the Poisson model, unlike the negativebinomial model, is retained in none of the cases for frequencies. Finally, we show that the operational VaR is largely underestimated when the calculations are based solely on internal data.
0722 Panova, Elena  Congruence Among Voters and Contributions to Political Campaigns
This paper builds a theory of electoral campaign contributions. Interest groups contribute to political campaigns to signal their private information on the valence of candidates for office. Campaign contributions by an interest group enhance electoral fortunes by a candidate who is valent with this group. The candidate preferred by an interest group whose private information is the most precise receives the highest contributions and wins political office. Campaign contributions are smaller than donor electoral sorting benefits.
0721 Bellemare, Charles; Kröger, Sabine; van Soest, Arthur  Preferences, Intentions, and Expectations: a LargeScale Experiment with a Representative Subject Pool
We specify and estimate an econometric model which separately identifies distributional preferences and the effects of perceived intentions on responder behavior in the ultimatum game. We allow the effects of perceived intentions to depend, among other things, on the subjective probabilities responders attach to the possible offers. We estimate the model on a large representative sample from the Dutch population. We find that the relative importance of distributional preferences and perceived intentions depends significantly on the socioeconomic characteristics of responders. Strong inequity aversion to the other player's disadvantage is found for lower educated and older respondents. Responders tend to punish unfavorable offers more if they expect that fair proposals will occur with higher probability.
0720 Amano, Robert; Moran, Kevin; Murchison, Stephen; Rennison, Andrew  Trend Inflation, Wage and Price Rigidities, and Welfare
This paper studies the steadystate costs of inflation in a generalequilibrium model with real per capita output growth and staggered nominal price and wage contracts.
Our analysis shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steadystate output and welfare losses are quantitatively important even for low values of trend inflation. Further, we show that nominal wage contracting is quantitatively more important than nominal price contracting in generating these losses. This important result does not arise from price dispersion per se but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. We also demonstrate that accounting for productivity growth is important for calculating the welfare costs of inflation. Indeed, the presence of two percent productivity growth increases the welfare costs of inflation in our benchmark specification by a factor of four relative to the nogrowth case.
0719 Cheikbossian, Guillaume; Marceau, Nicolas  Why is Law Enforcement Decentralized?
Law enforcement is decentralized. It is so despite documented interjurisdictional externalities which would justify its centralization. To explain this fact, we construct a political economy model of law enforcement. Under decentralization, law enforcement in each region is in accord with the preferences of regional citizens, but interjurisdictional externalities are neglected. Under centralization, law enforcement for all regions is chosen by a legislature of regional representatives which may take externalities into account. However, the majority rule applies for decisions made by the central legislature and this implies that the allocation of enforcement resources may be skewed in favour of those who belong to the required majority. We show that the choice between centralization and decentralization depends on the technology of law enforcement and the nature of the interjurisdictional externalities.
0718 Deffains, Bruno; Fluet, Claude  Legal versus Normative Incentives under Judicial Error
We analyze the complementarity between legal incentives (the threat of being held liable for damages) and normative incentives (the fear of social disapproval or stigma) in situations where instances of misbehavior are not perfectly observable. There may be multiple equilibria within a given legal regime, as well as multiple sociolegal equilibria. In particular, there are high stigmahigh evidentiary standard regimes versus low stigmalow standard ones. We argue that this may explain some of the differences between common law and civil law regarding the notions of fault or negligence. Our analysis also provides an explanation for trends currently observed in civillaw systems, in particular the weakening of evidentiary requirements in tort cases.
0717 Blouin, Max; Pallage, Stéphane  Addressing the Food Aid Curse
In this paper, we build a model of agrarian economies in which a kleptocratic government taxes farmers to maximize its lifetime utility. The model is a dynamic general equilibrium model in which the subsistence of farmers requires a minimum level of consumption. We analyze the effect that a benevolent food aid agency can have in such an environment. If it expects the food aid agency to intervene, the kleptocratic government will starve its farmers, in a clear case of the Samaritan's dilemma. We show that the likelihood of manmade famines, however, can be greatly reduced if the food aid agency intervenes with probability slightly lower than one. No aid agency devoted to saving lines, however, can commit to such policy. We propose a solution to this food aid curse.
0716 Fluet, Claude; Garella, Paolo G.  Relying on the Information of Others: Debt Rescheduling with Multiple Lenders
Can inertia in terminating unsuccessful loans be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? We show that fear of being last in a liquidation run prevents the aggregation of the lenders' information about the value of continuation. Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to rescheduling. The gamble is that others lenders may have sharper information. At equilibrium, rescheduling occurs even if all lenders received bad news. This is inefficient (increasing the cost of capital) compared to perfect information sharing. However, from a social point of view, barren information sharing, the equilibrium does not exhibit excessive reliance on the information of others.
0715 Dionne, Georges; Gagné, Robert; Nouira, Abdelhakim  Determinants of Insurers' Performance in Risk Pooling, Risk Management, and Financial Intermediation Activities
Corporate finance theory predicts that firms' characteristics affect agency costs and hence their efficiency. Cummins et al. (2006) have proposed a cost function specification that measures separately insurer efficiency in handling risk pooling, risk management, and financial intermediation functions. We investigate the insurer characteristics that determine these efficiencies. Our empirical results show that mutuals outperform stock insurers in handling the three functions. Independent agents and high capitalization reduce the cost efficiency of risk pooling. Certain characteristics such as being a group of affiliated insurers, handling a higher volume of business in commercial lines, assuming more reinsurance, or investing a higher proportion of assets in bonds, do significantly increase insurers' efficiency in risk management and financial intermediation.
0714 Angers, JeanFrançois; Desjardins, Denise; Dionne, Georges; Dostie, Benoit; Guertin, François  Poisson Models with EmployerEmployee Unobserved Heterogeneity: an Application to Absence Data
We propose a parametric model based on the Poisson distribution that permits to take into account both unobserved worker and workplace heterogeneity as long as both effects are nested. By assuming that workplace and worker unobserved heterogeneity components follow a gamma and a Dirichlet distribution respectively, we obtain a closed form for the unconditional density function. We estimate the model to obtain the determinants of absenteeism using linked employeremployee Canadian data from the Workplace and Employee Survey (2003). Coefficient estimates are interpreted in the framework of the typical laborleisure model. We show that omitting unobserved heterogeneity on either side of the employment relationship leads to notable biases in the estimated coefficients. In particular, the impact of wages on absences is underestimated in simpler models.
0713 Charlot, Olivier; Malherbet, Franck  Réforme de la protection de l'emploi et inégalités face au chômage dans un modèle d'appariement
Cet article s'intéresse aux effets liés à l'introduction d'un système de modulation des cotisations patronales à l'assurance chômage (ou experience rating) sur le niveau et la structure du chômage par qualification. Nous construisons pour cela un modèle d'appariement dans lequel l'évolution de la demande de travail, les décisions de création et destruction d'emplois, ainsi que l'évolution des taxes destinées à financer l'assurance chômage sont endogènes. Dans ce cadre, la protection de l'emploi a des effets qui peuvent être différenciés selon le niveau de qualification considéré. L'introduction d'un système de modulation des cotisations employeur à l'assurance chômage pourrait améliorer le fonctionnement du marché du travail; l'importance des éventuels effets indésirables liés à ce système dépend surtout de la capacité à substituer la taxe d'experience rating aux dispositifs de protection de l'emploi déjà en place.
0712 Kurmann, André; PetroskyNadeau, Nicolas  Search Frictions in Physical Capital Markets as a Propagation Mechanism
We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firmlevel capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations.
0711 Marceau, Nicolas; Mongrain, Steeve; Wilson, John D.  Why Do Most Countries Set High Tax Rates on Capital?
We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are the left to set revenue maximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without crosscountry differences in the taxation of mobile capital. Nevertheless our main result is that the nonpreferential regime generates larger global tax revenue, despite the sizable revenue loss from the emergence of lowtax countries. By extending the analysis to include crosscountry differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.
0710 Lemelin, André  Bond Indebtedness in a Recursive Dynamic CGE Model
In this paper, we present a minimalist version of a model of bond financing and debt, imbedded in a stepwise dynamic CGE model. The proposed specification takes into account the main characteristics of bond financing. Bonds compete on the securities market with shares, so that the yield demanded by the buyers of new bond issues increases as the cumulative bond debt grows relative to the stock of outstanding shares.
Restrictions are imposed on the maturity structure of bonds, so that it is possible to attain a reasonable compromise between a realistic representation of the evolution of the debt, and the demands on model memory of past variables values which impinge on the current period.
In the proposed model, the borrowing government reimburses bonds that have reached maturity, and pays interest on the outstanding debt. The prices of bonds issued at different periods and with different maturities are consistent with an arbitrage equilibrium. The supply of new bonds and of new shares is determined by the government's and business's borrowing needs. Security demand reflects the rational choices of portfolio managing households, following a version of the DecaluwéSouissi model.
These notions are illustrated with fictitious data in model EXTERDebt. The full specification of the model is described, and simulation results are presented which demonstrate model properties.
0709 Araar, Abdelkrim; Duclos, JeanYves; Audet, Mathieu; Makdissi, Paul  Testing for ProPoorness of Growth, with an Application to Mexico
This paper proposes techniques to test for whether growth has been propoor. We first review different definitions of propoorness and argue for the use of methods that can generate results that are robust over classes of propoor measures and ranges of poverty lines. We then provide statistical procedures that rely on the use of sample data to infer whether growth has been propoor in a population. We apply these procedures to Mexican household surveys for the years of 1992, 1998 and 2004. We find strong statistical evidence that Mexican growth has been absolutely antipoor between 1992 and 1998, absolutely propoor between 1998 and 2004 and between 1992 and 2004, and relatively propoor between 1992 and 2004 and between 1998 and 2004. The relative assessment of the period between 1992 and 1998 is statistically too weak to lead to a robust evaluation of that period.
0708 Bellemare, Charles; Shearer, Bruce  Gift Exchange within a Firm: Evidence from a Field Experiment
We present results from a field experiment testing the giftexchange hypothesis inside a treeplanting firm paying its workforce incentive contracts. Firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity. We compare planter productivity  the number of trees planted per day  on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block, and thus under similar planting conditions. We find direct evidence that the gift had a significant and positive effect on daily planter productivity, controlling for planterfixed effects, weather conditions and other random daily shocks. Moreover, reciprocity is the strongest when the relationship between planters and the firm is long term.
0707 Audet, Mathieu; Boccanfuso, Dorothée; Makdissi, Paul  Food Subsidies and Poverty in Egypt: Analysis of Program Reform using Stochastic Dominance
Throughout this article, we utilize consumption dominance curves, a tool developed by Makdissi and Wodon (2002) to analyze the impacts on poverty brought on by changes in the food subsidy system in Egypt. The Egypt Integrated Household Survey (EIHS) of 1997 allows us to conclude that changes brought to these subsidies have not always worked towards alleviating poverty.
0706 Blouin, Max; Pallage, Stéphane  Humanitarian Relief and Civil Conflict
We examine the effects of famine relief efforts (food aid) in regions undergoing civil war. In our model, warlords seize a fraction of all aid entering the region. How much they loot affects their choice of army size; therefore the manner in which aid is delivered influences warfare. We identify a delivery plan for aid which minimizes total recruitment in equilibrium.
0705 Bramoullé, Yann; Djebbari, Habiba; Fortin, Bernard  Identification of Peer Effects through Social Networks
We provide new results regarding the identification of peer effects. We consider an extended version of the linearinmeans model where each individual has his own specific reference group. Interactions are thus structured through a social network. We assume that correlated unobservables are either absent, or treated as fixed effects at the component level. In both cases, we provide easytocheck necessary and sufficient conditions for identification. We show that endogenous and exogenous effects are generally identified under network interaction, although identification may fail for some particular structures. Monte Carlo simulations provide an analysis of the effects of some crucial characteristics of a network (i.e., density, intransitivity) on the estimates of social effects. Our approach generalizes a number of previous results due to Manski (1993), Moffitt (2001), and Lee (2006).
0704 Bramoullé, Yann; SaintPaul, Gilles  Research Cycles
This paper studies the dynamics of fundamental research. We develop a simple model where researchers allocate their effort between improving existing fields and inventing new ones. A key assumption is that scientists derive utility from recognition from other scientists. We show that the economy can be either in a regime where new fields are constantly invented, and then converges to a steady state, or in a cyclical regime where periods of innovation alternate with periods of exploitation. We characterize the cyclical dynamics of the economy, show that indeterminacy may appear, and establish some comparative statics and welfare implications.
0703 Emons, Winand; Fluet, Claude  Accuracy versus Falsification Costs: the Optimal Amount of Evidence under Different Procedures
An arbiter can decide a case on the basis of his priors or he can ask for further evidence from the two parties to the conflict. The parties may misrepresent evidence in their favor at a cost. The arbiter is concerned about accuracy and low procedural costs. When both parties testify, each of them distorts the evidence less than when they testify alone. When the fixed cost of testifying is low, the arbiter hears both, for intermediate values one, and for high values no party at all. The arbiter's ability to remain uninformed as well as sequential testifying makes it more likely that the arbiter requires evidence.
0702 Dahen, Hela; Dionne, Georges  Scalling Models for the Severity and Frequency of External Operational Loss Data
According to Basel II criteria, the use of external data is absolutely indispensable to the implementation of an advanced method for calculating operational capital. This article investigates how the severity and frequencies of external losses are scaled for integration with internal data. We set up an initial model designed to explain the loss severity. This model takes into account firm size, location, and business lines as well as risk types. It also shows how to calculate the internal loss equivalent to an external loss, which might occur in a given bank. OLS estimation results show that the above variables have significant power in explaining the loss amount. They are used to develop a normalization formula.
A second model based on external data is developed to scale the frequency of losses over a given period. Two regression models are analyzed: the truncated Poisson model and the truncated negative binomial model. Variables estimating the size and geographical distribution of the banks’ activities have been introduced as explanatory variables. The results show that the negative binomial distribution outperforms the Poisson distribution. The scaling is done by calculating the parameters of the selected distribution based on the estimated coefficients and the variables related to a given bank. Frequency of losses of more than $1 million are generated on a specific horizon.
0701 Paarsch, Harry J.; Shearer, Bruce S.  The Response to Incentives and Contractual Efficiency: Evidence from a Field Experiment
We investigate the efficiency of piecerate contracts using data from a field experiment, conducted within a treeplanting firm. During the experiment, the piece rate paid to planters was exogenously increased. Regression methods yield an estimate of the elasticity of output with respect to changes in the piece rate of 0.39. Regression methods are limited in their ability to predict the performance of alternative contracts. Therefore, we apply structural methods to interpret the experimental data. Our structural estimate of the elasticity is 0.37, very close to the regression estimate. Importantly, our structural model is identified without imposing profit maximization. This allows us to evaluate the optimality of the observed contract. We simply measure the profit distance between the observed contract and the profitmaximizing contract, evaluated at the structural parameter estimates. We estimate this distance to be negligible, suggesting that the observed contract closely approximates the expectedprofit maximizing contract under asymmetric information. Under complete information, expected profits would increase by approximately fourteen percent, holding expected utility constant.