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03-46 Dionne, G. - The Foundations of Banks' Risk Regulation: a Review of the Literature

The stability of the banking industry around the world has been observed as periodical since the Great Depression. Financial markets have changed dramatically over the last twenty-five years, introducing more competition for and from banks. Banks are the financial institutions responsible for providing liquidity to the economy. This responsibility is, however, the main cause of their fragility. Deposit insurance is the most efficient instruments for protecting depositors and for preventing bank runs.  Pricing deposit insurance according to the individual bank's risk seems to be the most appropriate strategy but it does not seem to be sufficient in the sense that it seems to remain residual information problems in the market, although there is no appropriate analysis on this issue. In 1988, the G10 modified banking regulation significantly by setting capital standards for international banks. These standards have now been adopted by more than one hundred countries as part of their national regulation of banks' risk. Current regulation of bank capital adequacy has its critics because it imposes the same rules on all banks. This seems particularly unsuitable when applied to credit risk which is the major source of a bank's risk (about 70%). Moreover, diversification of a bank's credit-risk portfolio is not taken into account in the computation of capital ratios. These shortcomings seem to have distorted the behaviour of banks and this makes it much more complicated to monitor them. In fact, it is not even clear that the higher capital ratios observed since the introduction of this new form of capital regulation necessarily lower risks. Additional reform is expected in 2004, but there is as yet no consensus on the form it will take nor on whether it will suitably regulate banks in individual countries. Consequently, it might be appropriate to continue developing national regulation based on optimal deposit insurance (with individual insurance pricing and continuous auditing on individual risk) and to keep searching for other optimal complementary instruments for use against systemic risk, instruments suitably designed to fit the banking industry's peculiar structure. Other market discipline (such as subordinated debt) and governance instruments may be more efficent than the current capital requirement scheme for the banks' commitment problem associated to deposit insurance. The central bank should be responsible for aggregate liquidity. Confidence in the financial sector is a public good that must be ensured by the government. Who should be in charge: the central bank or a regulatory agency? The revised literature seems to say that this role should be taken by a regulatory agency independent from the central bank and independent from the political power.

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03-45 Diagne, A.; Boccanfuso, D.; Barry, D.G. - La rentabilité de l'investissement dans l'éducation au Sénégal

Depuis les années 60, la rentabilité du système éducatif suscite un intérêt croissant auprès des décideurs lorsqu'il s'agit de faire un choix d'investissement. Toutefois, la plupart des travaux consacrés à cette problématique portent sur les rendements internes de l'éducation. Cette étude se propose de mesurer la rentabilité externe de l'investissement relativement important, consenti dans l'éducation par les ménages (rendement privé) et la collectivité (rendement social). Il est reconnu que l'État et les ménages sénégalais consacrent d'importantes ressources à l'éducation sans avoir cependant une idée précise du rendement de leur investissement. Cette étude devrait combler cette lacune. La méthode utilisée est celle du taux de rendement interne appliquée aux données de l'Enquête Sénégalaise Auprès des Ménages (ESAM) de 1995. Les revenus nets bruts proviennent de ceux de l'année 1995.

L'étude montre qu'au Sénégal l'éducation est en général un secteur d'investissement rentable où le rendement privé est plus élevé que le rendement social. De plus, une analyse par sous-secteur fait ressortir que l'investissement social dans le secondaire et le supérieur n'est pas rentable contrairement à l'enseignement primaire et moyen. Enfin, le chômage et le redoublement ont un impact négatif sur les rentabilités sociale et privée.

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03-44 Kurmann, A. - Quantifying the Uncertainty about the Fit of a New Keynesian Pricing Model: Extended Version

Recent studies by Gali and Gertler (1999) and Sbordone (2002) conclude that a theoretical inflation series implied by the forward-looking New Keynesian pricing model of Calvo (1983) fits post-1960 U.S. inflation closely. Their theoretical inflation series is conditional on (i) a reduced-form forecasting process for real marginal cost; and (ii) the calibration of the structural pricing equation implied by the Calvo model. The present paper shows that both of these determinants are surrounded by considerable uncertainty. When quantifying the impact of this uncertainty on theoretical inflation, I find that we can no longer say whether the Calvo model explains observed inflation dynamics very well or very poorly.

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03-43 Savard, Luc - Poverty and Income Distribution in a CGE-Household Micro-Simulation Model: Top-Down/Bottom Up Approach

This paper highlights the idea of combining CGE modeling with a micro-household model (micro-simulation) to generate a convergent solution, thus providing the basis to perform counterfactual analysis of trade and fiscal policies, and their impact on poverty. In recent years, a number of papers have presented different approaches using CGE models to analyze poverty. Among them, the standard CG models, which generates changes in the income of representative households in order to allow poverty analysis, albeit with no intra-group changes in the distribution; CGE models with high levels of household disaggregation (3200) and the micro-simulation approach to modeling (with no feedback effect to the CGE model). In this paper, we provide an alternative to these methods that allows a richer micro-household modeling than the first two approaches, while keeping the properties of standard CGE (feedback effect of household behavior) which is usually simplified in micro-simulation context. We also introduce segmented labor markets, with waiting unemployment, inspired by Magnac (1991), which provides a basis for important changes in household income (i.e. when a worker leaves unemployment or becomes unemployed). Global and decomposable poverty analysis and income distribution indicators are computed at base year and after a 50% reduction in trade.

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03-42 Lacroix, G.; Santarossa, G.; Gagné, P. - Une analyse de la dynamique de la dépendance à l'assistance-emploi des populations natives et immigrantes québécoises

Many recent empirical studies have shown that recent cohorts of immigrants to western countries face more hardship than previous cohorts. In Quebec, for instance, the welfare dependency rates of immigrants have steadily increased between 1982 and 1998 and are insensitive to fluctuations in the business cycles, contrary to what has been observed for natives.
   This study seeks to better understand the process of economic and social integration of immigrants to Quebec as seen through their dependency toward the employment-assistance program (welfare benefits program), relative to that of the natives. The analysis focuses on the dynamics of participation to the employment-assistance program between January 1975 and March 2000. The study is divided into separate sections:
1. A comparative analysis of schooling and income between natives and immigrants of Quebec, Ontario and British-Columbia.
2. A descriptive analysis of socio-demographic characteristics and participation rates in the employment-insurance program between 1975 and 2000.
3. An econometric analysis of the dynamics of program participation that highlights the contribution of many factors to the observed dynamics as well as the immigration status.

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03-41 Duclos, J.-Y.; Échevin, D. - Bi-Polarization Comparisons

This note provides simple tests for first-order bi-polarization orderings of distributions of living standards. In doing so, the paper also offers an ethical basis and an interpretation for the common use of some simple measures of distances from the median. Illustrations using Luxembourg Income Study data show that several countries can be ranked by such tests of bi-polarization.

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03-40 Buffeteau, S.; Échevin, D. - Taxation, Marriage and Labor Supply: Evidence from a Natural Experiment in France

This paper uses the French family quotient ("quotient familial") reform of 1995 to analyse the impact of the individual income tax on marriage behavior and labor supply decisions. An important feature of this reform was the cancellation of fiscal subsidies aimed at cohabitant couples with children. Before 1995, the system of the familly  quotient granted one extra half unit to each single parent with children as defined for tax purposes. The 1995 family quotient reform cancels the benefit for cohabitants with children by introducing the notion of isolated parents with children in the tax declaration. This measure thus compensates the marriage penalty for couples with children but does not change anything for couples without children. As a result, the tax for a one-earner cohabitant couple with one child that earns 35,000 euros a year has increased by about 1,200 euros after the reform. To assess the impact of the reform, we use the difference-in-differences estimation approach. Using the panel structure of the French employment survey (1990-2000) we find that the probability of marriage has increased for stable couples by about 4 points because of the reform. In a second stage, the response of married women with children is analyzed, using as a control group women who did not have children before they married. We therefore identify the tax effect as the difference between the change in the labor supply of women with children before they married and the change in the labor supply of women without children before they married. We find strong evidence that the labor supply of married women has decreased due to the 1995 family quotient reform. Nevertheless, although our results support the working hours response, they are inconclusive as to participation response.

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03-39 Boileau, M.; Normandin, M. - Dynamics of the Current Account and Interest Differentials

We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the nonborrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority's reaction function.

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03-38 Normandin, M.; St-Amour, P. - Recursive Measures of Total Wealth and Portfolio Return

This letter presents and assesses a procedure to generate recursive measures of aggregate total wealth and portfolio return. Conceptually, the procedure is more flexible than the classical replacement cost and present value methods. Empirically, the procedure yields recursive measures that appear more realistic than those obtained from the classical methods.

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03-37 Normandin, M.; Phaneuf, L. - Monetary Policy Shocks: Testing Identification Conditions Under Time-Varying Conditional Volatility

We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the nonborrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority's reaction function.

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03-36 Kamionka, T.; Lacroix, G. - Assessing the Impact of Non-Response on the Treatment Effect in the Canadian Self-Sufficiency Experiment

In Canada, a policy aiming at helping single parents on social assistance become self-reliant was implemented on an experimental basis. The Self-Sufficiency Entry Effects Demonstration randomly selected a sample of 4,134 single parents who had applied for welfare between January 1994 and March 1995. It turned out only 3,135 took part in the experiment despite a 50% chance of receiving a generous, time-limited, earnings supplement conditional on finding a full-time jobs and leaving income assistance within a year.
The purpose of this paper is to determine whether a non-response rate as high as 20% is likely to bias the measurement of the treatment effect. We compare the estimated impact of the program using experimental data only to that obtained using additional data on individuals not taking part in the experiment. We write the likelihood of various sets of information and obtain relevant estimates of program impact on welfare spell durations. We find strong evidence of non-response bias in the data. When we correct for the bias, we find that estimates that rely on experimental data only significantly underestimate the true impact of the program.

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03-35 Bibi, Sami; Duclos, Jean-Yves - Equity and Policy Effectiveness with Imperfect Targeting

We propose a general cost-of-inequality approach that jointly integrates horizontal and vertical equity criteria in the assessment of poverty alleviation programs, with the strength of each criterion being captured through its own inequity-aversion parameter. This contrasts with the assessment of poverty alleviation programs done with simple under-coverage and leakage ratios or with other methods that do not take into account the heterogeneity of the poor and that do not address directly the social benefits of achieving normative criteria. Our methodology is illustrated using Tunisian data and two alternative poverty alleviation policies. We find inter alia that the social ranking of commodity and socio-demographic targeting in Tunisia depends on the policymaker's comparative preference for vertical and horizontal equity.

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03-34 Desrochers, M.; Fischer, K.P. - Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks

This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part presents a theoretical framework rooted in principles of transaction cost economics (TCE) that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical study that compares X-efficiency between members of the Quebec Desjardins movement (DM) and the United States Credit Union system (USCU), the first organized as a tight network of institutions and the second composed largely by independent institutions with few ties. The fundamental proposition is that networks, are a superior form of governance mechanism (over markets and mergers) for relatively wide and relevant ranges of contractual hazard and size of the institutions. Further, that networks provide substitute, hierarchy based, control mechanisms when size of the institutions dilutes internal governance mechanisms, discouraging subgoal pursuits and expense preferences by agents, both occurring in large FC. The theory allows us to generate a set of testable hypothesis of which we highlight three: i) For small FC, differences in efficiency will be relatively small, if any. ii) Large institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii) Networks should display lower variance in the size as well as in performance indicators. Throughout, empirical results are consistent with our central theoretical proposition.

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03-33 Boccanfuso, D.; Cabral, F.; Cissé, F.; Diagne, A.; Savard, L.

La nouvelle orientation de la politique économique au Sénégal vise à accroître les revenus des pauvres et à attaquer la pauvreté là où elle est principalement localisée. La stratégie de réduction de la pauvreté va être mise en oeuvre dans un contexte de libéralisation des échanges commerciaux internationaux notamment dans le secteur agricole. Dans ce contexte, nous avons développé un modèle d'équilibre général calculable micro-simulé multi-ménages du type Decaluwé et al. (1999) permettant d'évaluer l'impact que pourront avoir ces politiques agricoles à l'échelle des ménages et de faire le lien entre ces réformes économiques, la pauvreté et la distribution de revenu. Ce modèle offre beaucoup de flexibilité en permettant notamment de modifier la distribution des groupes cibles qui n'ont pas à être retenus avant l'exercice de simulation afin d'effectuer l'analyse de pauvreté et d'inégalité ex post à l'exercice de modélisation. Dans ce travail, nous avons également comparé les effets en terme d'analyse de pauvreté et d'inégalité entre une distribution paramétrique (Dagum, 3 paramètres) et une distribution non-paramétrique et montré que ce choix engendrait des différences significatives quant aux effets sur la pauvreté. Contrairement aux applications faite par Decaluwé et al. (1999) et Cockburn (2002) au Népal, les impacts sur la pauvreté sont assez importants, ce qui montre que cette approche offre un outil riche permettant d'évaluer l'impact de politiques économiques ou chocs externes sur la pauvreté et la distribution de revenu.

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03-32 Boccanfuso, Dorothée; Decaluwé, Bernard; Savard, Luc - Poverty, Income Distribution and CGE Modeling: Does the Functional Form of Distribution Matter?

In this paper, we provide an overview of approaches used to model income distribution and poverty in CGE models. CGE models have started to use income distribution functional forms such as the lognormal, Pareto, beta distribution and Kernel non-parametric methods to apply GFT poverty indices. None of the authors of these papers have gone into much detail to justify the use of one method or functional form over the other, within the context of this type of work. Extensive literature exists on the choice of functional forms to estimate income distribution; however it has not been utilized in the CGE context. Given the fact that the desegregation of groups of households can be important in CGE analysis and the fact that the impact on income of policy simulations are often small in CGE models, we investigate the importance of the choice of the functional form used to estimate the income distribution of groups of households. We compare six functional forms with parametric estimation and on a non-parametric method. Results show that no single form is more appropriate in all cases or groups of households. The characteristics of samples and subgroups play an important role and the choice should be guided by the best fitting distribution.

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03-31 Lacroix, Guy; Santarossa, Gino - L'impact des regroupements municipaux sur le fadeau fiscal et la valeur des propriétés résidentielles au Québec, 1992-1999

Nous étudions l'impact des regroupements municipaux survenus au Québec entre 1992 et 1999 sur les taux de taxation effectifs et la valeur marchande des propriétés résidentielles. Nous montrons que l'effet d'un regroupement sur ces deux volets de la vie municipale est indéterminé a priori. L'évaluation s'appuie sur deux méthodes économétriques récentes abondamment utilisées dans la littérature sur l'évaluation des politiques publiques: (1) L'estimateur différence de différences et (2) l'estimateur par appariement.

Les deux méthodes économétriques donnent des résultats qualitativement cohérents et robustes. Dans l'ensemble, les regroupements observés entre 1992 et 1999 ont eu pour effet de diminuer globalement les taux de taxation effectifs d'environ 15%. Une analyse plus fine des résultats montre toutefois que seuls les villes et les villages qui se sont regroupés ont bénéficié d'une baisse de leur taux de taxation. Enfin, la valeur marchande des propriétés résidentielles ne semble pas avoir été affectée par les regroupements.

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03-30 Havet, Nathalie; Lacroix, Guy - Career Starts and the Male-Female Wage Gap

The paper focuses on the early career patterns of young male and female workers. It investigates potential dynamic links between statistical discrimination, mobility, tenure and wage profiles. The model assumes that it is more costly for an employer to assess female workers' productivity and that the noise/signal ratio tapers off more rapidly for male workers. These two assumptions yield numerous theoretical predictions pertaining togender wage gaps. These are tested using French data. It turns out most predictions are supported by the data.

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03-29 Dionne, Georges; Giuliano, Florence; Picard, Pierre - Optimal Auditing for Insurance Fraud

This article aims at making a bridge between the theory of optimal auditing and current procedures applied to audit files in different markets where scoring is the instrument used to implement an audit strategy. The literature has not yet developed an optimal audit policy for the scoring methodology. Our application is meant for the audit of insurance fraud but can be applied to many other activities that use the scoring approach. On the theoretical side, we show that the optimal auditing strategy takes the form of a "Red Flags Strategy" which consists in referring claims to a Special Investigation Unit (SIU) when certain fraud indicators are observed. Fraud indicators are classified based on the degree the which they reveal an increasing probability of fraud and this strategy remains optimal if the investigation policy is budget constrained. Moreover, the auditing policy acts as a deterrence device. On the empirical side, for significant results are obtained with data from a large European insurance company. First, we are able to compute a critical suspicion index for fraud, providing a threshold above which all claims must be audited. Secondly, we obtain that if the insurer applies this policy, he will save more than €22 million, which represents 43% of the current cost of fraudulent claims. Thirdly, we show that it is possible to improve these results by using information capable of isolating different groups of insureds with different morale costs of fraud. Finally, our results indicate how the deterrence effect of the audit scheme can be taken into account and how it affects the optimal auditing strategy.

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03-28 Grimard, Franque; Parent, Daniel - Education and Smoking: Were Vietnam War Draft Avoiders Also More Likely to Avoid Smoking?

We use the Vietnam War draft avoidance behavior documented by Card and Lemieux (2002) as a quasi-natural experiment to infer causation from education to smoking and find strong evidence that education, whether it be measured in years of completed schooling or in educational attainment categories, reduces the probability of smoking at the time of the interview, more particularly the probability of smoking regularly. Interestingly, however, while we find that more education substantially increases the probability of never smoking, our other main finding is suggestive that increased education has a limited impact on smoking cessation behavior. On the one hand there is little evidence that it helps to increase the probability of not smoking regularly at the time of the interview, conditional on having smoked regularly at any time. However, among former regular smokers, those with more education have significantly shorter smoking careers.

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03-27 Pallage, Stéphane; Robe, Michel A. - Leland & Pyle Meet Foreign Aid? Adverse Selection and the Procyclicality of Financial Aid Flows

Official development assistance (grants and subsidized loans from foreign aid agencies) is the main source of external finance in developing countries. These financial aid flows are positively correlated with the recipients' business cycles, which is puzzling because it reinforces already strong and costly macroeconomic fluctuations in the recipient countries. We propose an explanation related to a familiar corporate finance theory of inside equity commitments. We assume that donor agencies and recipient governments value projects differently, and that donors know less than recipients do about projects. We show that donors can make an aid recipient identify high-return projects by conditioning aid on the recipient's committing some of its own funds to the selected projects. This commitment makes recommending bad projects costly. Contributing "counterpart funds" is more difficult during economic downturns, however - which leads to aid procyclicality. This simple model of investment financing and aid provision produces aid contracts consistent with those used by aid agencies, rationalizes observed aid flow patterns, and yields a rich set of testable empirical predictions.         

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03-26 Shearer, Bruce - Compensation Policy and Worker Performance: Identifying Incentive Effects from Field Experiments

The role of field experiments in evaluating the effect of compensation policies on worker productivity is considered. Particular attention is paid to the ability of a field experiment to identify the effect of a permanent change in firm policy. While field experiments solve endogeneity problems through randomization, they do so within a specific, and at times artificial, environment that may not be replicated by a permanent policy change. As such, rather than providing a basis for the unrestricted identification of incentive effects, experiments are better thought of as providing exogenous variation with which to identify structural parameters. These parameters can, in turn, be used to predict the effects of policy changes.

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03-25 Bental, Benjamin; Demougin, Dominique - Incentive Contracts and Total Factor Productivity

This paper focuses on the endogenous determination of effort as a source of productivity growth. The economy is populated by infinitely lived households. Every period, members of each household may choose whether to be self-employed or become employees in a "corporate sector". Labor relations in the corporate sector are characterized by a double-moral hazard problem. To induce effort, the optimal labor contract stipulates for a bonus.. Nevertheless, due to double moral hazard, employees extract some rents. As the economy grows, employees' rents increase, thereby raising the marginal benefit of monitoring. The ensuing changes in the optimal labor contract induce higher effort along the growth path. The model creates an endogenous association between growth and total factor productivity, and demonstrates that substantial cross-country productivity differences may be ascribed to differences in incentive structures.

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03-24 Boadway, Robin; Cuff, Katherine; Marceau, Nicolas - Agglomeration Effects and the Competition for Firms

A two-region economy consists of a given but different number of immobile workers in each region, and a given number of mobile firms. Firms create jobs where they locate, but there is frictional unemployment. Two sorts of agglomeration effects arise: those from economies of scale in matching, and those from production economies external to the firm. Regions may either be part of a unitary state in which case all regional policies are decided by the central government, or they may be part of a federal state in which case some policies are determined by the regional governments. We characterize the resource allocations in both a unitary and a federal state, and identify the set of instruments that are required to replicate the social optimum in each state.

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03-23 Dessy, Sylvain; Pallage, Stéphane - The Economics of Child Trafficking

In this paper, we highlight the economic effects of the existence of child trafficking. We show that the risk of child trafficking on the labor market acts as a deterrent to supply child labor, unless household survival is at stake. An imperfectly enforceable legislation aiming at the fighting child trafficking, by raising the expected gains parents derive from sending their children to work, will cause a rise in the number of child laborers. We show that it can even cause the incidence of child trafficking to rise. Our findings are consistent with the view that the fight against child trafficking can only be won by effectively combining legislation with other policy measures, including better quality for education, redistribution, or appropriately targeted poverty alleviation programs.

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03-22 Demougin, Dominique; Fluet, Claude - Inequity Aversion in Tournaments

We consider the cost of providing incentives through tournaments when workers are inequity averse and performance evaluation is costly. The principal never benefits from empathy between the workers, but he may benefit from their propensity for envy depending on the costs of assessing performance. More envious employees are preferred when these costs are high, less envious ones when they are low.

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03-21 Desrochers, Martin; Lamberte, Mario - Efficiency and Expense Preference in Philippines' Cooperative Rural Banks

This paper attempted to test whether efficient cooperative rural banks (CRBs) have a better control of their agency costs. We used two different concepts of efficiency, namely, cost efficiency and alternative profit efficiency, and found somewhat different results from both approaches. Using Stochastic Frontier Approach and Distribution Free Approach, we tested two different propositions. The first proposition is that an adequate corporate governance scheme should improve efficiency of CRBs. We failed to find very conclusive evidence that corporate governance theories apply to the Philippines’ CRBs. However, the results confirmed both managers’ compensation theory and large stakeholders theory. The second proposition is that agency costs should reduce efficiency of CRBs, and we found a much clearer relationship on that issue. As expected, most efficient CRBs are characterized by a better control of agency costs. These results are in accordance with previous studies on shirking behavior among mutual financial intermediaries. We also found that rural CRBs are  most profit-efficient, despite their somewhat regular cost-efficiency, a manifestation that they are able to charge higher fees for the quality of services they offer. Large CRBs are not able to pass their higher costs to customers through higher fees. We found that small CRBs might have a better interest rate policy, that is, they offer lower rates on both loans and deposits.

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03-20 Danthine, Jean-Pierre; Kurmann, André - Fair Wages in a New Keynesian Model of the Business Cycle

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics - notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.

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03-19 Ambler, Steve; Guay, Alain; Phaneuf, Louis - Labor Market Imperfections and the Dynamics of Postwar Business Cycles

An estimated dynamic general equilibrium model which features imperfectly competitive households, sticky nominal wages and costly labor input adjustment is shown to be consistent with several stylized aspects of U.S. postwar business cycle dynamics including the positive serial correlation of output, consumption, investment and employment growth over short horizons and the persistent, hump-shaped response of output to innovations in the temporary component.

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03-18 Demougin, Dominique; Fluet, Claude - Group vs. Individual Performance Pay When Workers are Envious

We consider the effects on reward systems of workers' concern with relative pay by comparing the wage costs of providing incentives through group versus individual bonus schemes. When workers have a propensity for envy, either scheme may be the least cost one depending on the workers' outside opportunities and on the precision of available performance measures. The result follows from the trade-off between the dissatisfaction associated with the prospect of unequal pay and the incentives it generates when workers are envious.

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03-17 Dessy, Sylvain E. - Endogenous Technical Progress and the Emergence of Child Labor Laws

I develop a theory of technical progress that uncovers sufficient conditions for opposition to the adoption of child labor laws to disappear over time. The supply of child labor comes exclusively from unskilled parents, because of their inability to help their children benefit from formal education, while its demand originates from capitalists-the firms’ owners. Because child labor crowds out adult employment, there are always social pressures to ban it. However, such pressures are met by capitalists’ opposition. Capitalists oppose the adoption of a ban on child labor because such a ban reduces opportunities for earning a high return on capital. Technical progress, induced by skill accumulation, improves the earning prospects of firm hiring adult workers only, while it reduces those of firms hiring children only. As a result, more capitalists are drawn into the adult labor markets, and industrial opposition to a ban on child labor eventually vanishes over time. Provided child labor exhibits skill-enhancing learning-by-doing, policy action to speed up the emergence of child labor laws should therefore focus on education reforms that raise the quality of education school-goers receive, and on political reforms that raise the cost of lobbying legislators against adopting a ban on child labor. However, in countries where child labor provides little or no opportunities for learning-by-doing, no law will emerge unless appropriately targeted poverty alleviation mechanisms are designed, in order to induce unskilled parents to allocate a positive fraction of child’s time to schooling.

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03-16 Gordon, Stephen; St-Amour, Pascal - Asset Returns and State-Dependent Risk Preferences

We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the assets.

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03-15 Shearer, Bruce - Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment

Data from a field experiment conducted within a tree-planting firm are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages. The experiment provides daily observations on individual worker productivity under both piece rates and fixed wages. ANOVA methods are used to estimate the incentive effect to be 20%. Since planting conditions potentially affect the incentive effect, structural econometric methods are used to generalize the experimental results to out-of-sample conditions. The structural model suggests that the average incentive effect outside of the experimental conditions would be at least 21.7%

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03-14 Dessy, Sylvain; Pallage, Stéphane - Gender Discrimination, Human Capital, and Marriage

We use a household bargaining model to provide a rationale for gender discrimination in pay to disappear. In societies where women have a credible outside option to marriage and have the right to bargain with their future husband over the benefits of their union, the elimination of gender discrimination in pay is likely to come as a Pareto improvement. If educated women face discrimination in the labor market, they may exploit their biological comparative advantage in child-bearing to extract a high enough compensatory transfer from their male partner, in exchange for the right to share custody of children. Anticipating this, men will have a vested interest in supporting the elimination of gender discrimination in pay exists, it is likely that many women's rights including the right to start their own business are still violated.

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03-13 Duclos, Jean-Yves; Makdissi, Paul; Wodon, Quentin - Poverty-Reducing Tax Reforms with Heterogeneous Agents

The poverty impact of indirect tax reforms is analyzed using sequential stochastic dominance methods. This allows agents to differ in dimensions that cannot always be precisely captured within the usual money-metric indicators of living standards. Examples of such dimensions include household size and composition, temporal or spatial variation in price indices, and individual needs and "merits".

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03-12 Bibi, Sami; Duclos, Jean-Yves - Decomposing Poverty Changes into Vertical and Horizontal Components

Variations in aggregate poverty indices can be due to differences in average poverty intensity, to changes in the welfare distances between those poor of initially unequal welfare status, and/or to emerging disparities in welfare among those poor of initially similar welfare status. This note uses a general cost-of-inequality approach that decomposes the total change in poverty into a sum of indices of each of these three components. This decomposition can serve inter alia to integrate horizontal and vertical equity criteria in the poverty alleviation assessment of social and economic programs. The use of these measures in briefly illustrated using Tunisian data.

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03-11 Dionne, Georges; Harchaoui, Tarek M. - Banks' Capital, Securitization and Credit Risk: an Empirical Evidence for Canada

This paper is the first attempt that empirically investigates the relationship between banks capital, securitization and risk in the context of the rapid growth of off-balance-sheet activities in the Canadian financial sector. The evidence over the 1988-1998 period indicates that a) securitization has negative effects on both Tier 1 and Total risk-based capital ratios, and b) there exists a positive statistical link between securitization and banks' risk. These results seem to accord with Kim and Santomero (1988) who concluded that banks might be induced to shift to more risky assets under the current capital requirements for credit risk.

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03-10 Araar, Abdelkrim; Duclos, Jean-Yves; Blais, François - Effets redistributifs d'un régime d'allocation universelle: une simulation pour le Québec

The paper simulates the redistributive impact of three possible scenarios for the introduction of a basic income (BI, also sometimes called "citizens' income") in Québec. The simulations are revenue neutral at the joint provincial-federal government level. The first scenario assumes that a set of social programmes and fiscal transfers is replaced by a BI system. This does not change the marginal tax rates of the personal income tax system. These programmes and transfers include most of the personal tax credits. A second scenario also changes the explicit marginal tax rates of the personal income tax system such as to reduce the adverse redistributive impact of the first scenario. The third scenario further eliminates income support and employment insurance, such a to make the BI system more generous, and it also modifies substantially the explicit marginal tax rates of the personal income tax system through a move to a "flat-tax" system.

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03-09 Chenny, Shirley; St-Amour, Pascal; Vencatachellum, Désiré - Slave Prices from Succession and Bankruptcy Sales in Mauritius, 1825-1827

We construct a unique data set from succession and bankruptcy sales in Mauritius to investigate the determinants of slave prices between 1825 and 1827. We find that males, females sold with children, skilled slaves and slaves sold during the peak sugar cane harvest season all fetched higher prices. In comparison, handicapped and non-native slaves were sold at a discount. Moreover, the young-children premium increased over the period. This may indicate that slave owners did not think that slavery would be abolished in the near future or thought that they would be compensated in such an event.

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03-08 Bargain, Olivier; Moreau, Nicolas - Is the Collective Model of Labor Supply Useful for Tax Policy Analysis? a Simulation Exercise

The literature on household behavior contains hardly any empirical research on the within-household distributional effect of tax-benefit policies. We simulate this effect in the framework of a collective model of labor supply when shifting from a joint to an individual taxation system in France. We show that the net-of-tax relative earning potential of the wife is a significant determinant of intrahousehold negotiation but with very low elasticity. Consequently, the labor supply responses to the reform are entirely driven by the traditional substitution and income effects as in a unitary model. For some households only, the reform alters the intrahousehold distribution in a way that tends to change normative conclusions. A sensitivity analysis shows that the collective model would be required if the tax reform was both radical and of extended scope.

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03-07 Ambler, Steve - Nominal Wage Rigidity as a Nash Equilibrium

Models of the microfoundations of nominal price rigidities show that in the absence of real rigidities, individual firms have strong incentives to adjust prices even if other firms do not: price rigidity is not a Nash equilibrium unless the fixed cost of adjusting prices is implausibly high. This paper shows that nominal wage rigidity can be supported as a Nash equilibrium with relatively small adjustment costs and without real rigidities. The size of the necessary adjustment costs decreases labor supply elasticity increases, but is quite small for empirically plausible values of the latter. The minimum adjustment cost is relatively insensitive to the degree of substitutability between types of  labor in production.

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03-06 Duclos, Jean-Yves; Jalbert, Vincent; Araar, Abdelkrim - Classical Horizontal Inequity and Reranking: an Integrating Approach

The last 20 years have seen a significant evolution in the literature on horizontal inequity (HI) and have generated two major and "rival" methodological strands, namely, classical HI and reranking. We propose in this paper a class of ethically flexible tools that integrate these two strands. This is achieved using a measure of inequality that merges the well-known Gini coefficient and Atkinson indices, and that allows a decomposition of the total redistributive effect of taxes and transfers into a vertical equity effect and a loss of redistribution due to either classical HI or reranking. An inequality-change approach and a money-metric cost-of-inequality approach are developed. The latter approach makes aggregate classical HI decomposable across groups. As in recent work, equals are identified through a nonparametric estimation of the joint density of gross and net incomes. An illustration using Canadian data from 1981 to 1994 shows a substantial, and increasing, robust erosion of redistribution attributable both to classical HI and to reranking, but does not reveal which of reranking or classical HI is more important since this requires a judgement that is fundamentally normative in nature.

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03-05 Duclos, Jean-Yves; Makdissi, Paul; Wodon, Quentin - Poverty-Efficient Transfer Programs: the Role of Targeting and Allocation Rules

We propose simple graphical methods to identify poverty-reducing transfer program reforms. The methods are based on Program Dominance curves that display cumulative program benefits weighted by powers of poverty gaps. These curves can be decomposed simply as sums of targeting dominance curves and allocation dominance ones, and can serve to verify whether the assessment of program reforms is sensitive to the choice of poverty lines and poverty measures as well as to differences in revenue sources and behavioral impacts across programs.

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03-04 Duclos, Jean-Yves; Sahn, David; Younger, Stephen D. - Robust Multidimensional Poverty Comparisons

We investigate how to make poverty comparisons using multidimensional indicators of well-being, showing in particular how to check whether the comparisons are robust to aggregation procedures and to the choice of multidimensional poverty lines. In contrast to earlier work, our methodology applies equally well to what can be defined as "union", "intersection" or "intermediate" approaches to dealing with multidimensional indicators of well-being. When one of two indicators is discrete, our methods specialize to those that have previously been developed to deal with household composition heterogeneity. To make these procedures of some practical usefulness, the paper is also the first to derive the sampling distribution of various multidimensional poverty estimators, including estimators of the "critical" poverty frontiers outside which multidimensional poverty comparisons can no longer be deemed ethically robust. The results are illustrated using data from a number of developing countries.

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03-03 Duclos, Jean-Yves; Makdissi, Paul - Restricted and Unrestricted Dominance for Welfare, Inequality and Poverty Orderings

This paper extends the previous literature on the ethical links between the measurement of poverty, social welfare and inequality. We show inter alia, how, when the range of possible poverty lines is unbounded above, a robust ranking of absolute poverty may be interpreted as a robust ranking of social welfare, and a robust ranking of relative poverty may be intepreted as a robust ranking of inequality, and this, for any order of stochastic dominance.

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03-02 Duclos, Jean-Yves; Grégoire, Philippe - Absolute and Relative Deprivation and the Measurement of Poverty

This paper develops the link between poverty and inequality by focussing on a class of poverty indices (some of them well-known) which aggregate normative concerns for absolute and relative deprivation. The indices are distinguished by a parameter value that captures the ethical sensitivity of poverty measurement to "exclusion" or "relative-deprivation" aversion. The indices can be readily used to predict the impact of growth on poverty. An illustration using LIS data finds that the United States show more relative deprivation than Denmark and Belgium whatever the percentiles considered, but that overall deprivation comparisons of the four countries considered will generally depend on the intensity of the ethical concern for relative deprivation. The impact of growth on poverty also depends on the presence of and on the attention granted to concerns over relative deprivation.

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03-01 Duclos, Jean-Yves; Esteban, Joan; Ray, Debraj - Polarization: Concepts, Measurement, Estimation

The purpose of this paper is two-fold. First, we develop the measurement theory of polarization for the case in which asset distributions can be described using density functions. Second, we provide sample estimators of population polarization indices that can be used to compare polarization across time or entities. Distribution-free statistical inference results are also derived in order to ensure that the orderings of polarization across entities are not simply due to sampling noise. An illustration of the use of these tools using data from 21 countries shows that polarization and inequality orderings can often differ in practice.

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi
ESG UQAM, Université du Québec à Montréal, C.P. 8888, Succ. Centre-Ville, Montréal (Québec) CANADA H3C 3P8
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