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09-53 Boileau, Martin; Moyen, Nathalie - Corporate Cash Savings: Precaution versus Liquidity

Cash holdings as a proportion of total assets of U.S corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash holdings. The first is linked to the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is linked to the liquidity motive requiring firms to meet their current liquidity needs. We find that the mechanism embedded in the liquidity motive best explains how the increased idiosyncratic risk nearly doubled cash holdings. As for the precautionary motive, its importance has decreased over time to the point generating very little precautionary savings.

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09-52 Chitiga, Margaret; Mabugu, Ramos; Maisonnave, Hélène; Robichaud, Véronique; Decaluwé, Bernard - The Impact of the International Economic Crisis in South Africa

A dynamic computable general equilibrium model based on the PEP standard model developed by Decaluwé et al. (2009) is used to evaluate the impacts of the international crisis on the South African economy. However, we have changed some assumptions in order to better represent South African specificities. A major innovation in this regard is the modelling of unemployment and the influence of labour unions on the labour market. Two scenarios encompassing a severe and moderate recession are run. The effects of the crisis on the economy are really quite harsh, even in the moderate recession scenario, both in the short run and the long run. Indeed, the decrease of world prices combined with the drop of world demand lead to a decrease in production for many sectors with consequent laying off of workers. The impact on institutions is also worrying: agents see their income as well as their savings decreasing. The huge drop in firms’ savings has a dire impact on total investment while the huge negative impact on government accounts of protracted slow global growth imply tight public budgets for some time to come. Thus, some gains made by the government prior to the crisis may have been reversed by the economic crisis. It is apparent from the results that the impact of the crisis will drag into the long run with the situation still below what it would have been in the absence of a crisis until 2015.

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09-51 Deffains, Bruno; Fluet, Claude - Legal Liability when Individuals Have Moral Concerns

We incorporate normative motivations into the economic model of accidents and tort rules. The social norm is that one should avoid harming others and should compensate if nevertheless harm is caused. To some extent, this is internalized through intrinsic moral concerns; moreover, those thought not to adhere to the norm are met with social disapproval. Moral and reputational concerns are not strong enough, however, for injurers to willingly compensate their victims. Absent legal liability, normative concerns induce precautions to prevent harm but precautions are then socially inefficient. By contrast, perfectly enforced legal liability crowds out informal incentives completely (e.g., individuals causing harm suffer no stigma) but precautions are then socially efficient. Under imperfectly enforced legal liability, formal legal sanctions and normative concerns are complements and interact to induce more precautions than under no-liability.

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09-50 Grebe, Tim; Ivanova-Stenzel, Radosveta; Kröger, Sabine - Buy-it-Now Prices in eBay Auctions - The Field in the Lab

This article is an experimental investigation on decision making in online auction markets. We focus on a widely used format, the Buy-It-Now auction on eBay, where sellers post prices at which buyers can purchase a good prior to an auction. Even though, buyer behavior is well studied in Buy-It-Now auctions, up to date little is known about the behavior of sellers. In this article, we study how sellers set Buy-It-Now prices by combining the use of a real online auction market (the eBay platform and eBay traders) with the techniques of lab experiments. We find a striking relation between information about agents provided by eBay and their behavior. Information about buyers is correlated with their deviation from true value bidding. Sellers respond strategically to this information when deciding on their Buy-It-Now prices. Our results highlight consequences of information publicly available in (online) markets and underline the crucial role of institutional details.

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09-49 Arseneau, David M.; Chugh, Sanjay K.; Kurmann, André - Asset Value Constraints ini Models of Incomplete Factor Taxation

This paper clarifies the role of initial asset value constraints in Ramsey models of incomplete factor taxation. We show that the optimal long-run capital tax is zero in the long run if and only if there is no binding constraint on the initial capital tax rate. This finding contrasts with Armenter (2008) who argues that zero long-run capital taxes reappear in models of incomplete factor taxation as long as the government is barred from manipulating initial asset wealth. The reason for this difference is that the two constraints cannot both be binding at the same time. Hence, in Armenter’s (2008) analysis, the initial asset value constraint is necessarily more restrictive than the constraint on the initial capital tax rate.

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09-48 Laurent, Sébastien; Rombouts, Jeroen V.K.; Violante, Francesco - On Loss Functions and Ranking Forecasting Performances of Multivariate Volatility Models

A large number of parameterizations have been proposed to model conditional variance dynamics in a multivariate framework. However, little is known about the ranking of multivariate volatility models in terms of their forecasting ability. The ranking of multivariate volatility models is inherently problematic because it requires the use of a proxy for the unobservable volatility matrix and this substitution may severely affect the ranking. We address this issue by investigating the properties of the ranking with respect to alternative statistical loss functions used to evaluate model performances. We provide conditions on the functional form of the loss function that ensure the proxy-based ranking to be consistent for the true one – i.e., the ranking that would be obtained if the true variance matrix was observable. We identify a large set of loss functions that yield a consistent ranking. In a simulation study, we sample data from a continuous time multivariate diffusion process and compare the ordering delivered by both consistent and inconsistent loss functions. We further discuss the sensitivity of the ranking to the quality of the proxy and the degree of similarity between models. An application to three foreign exchange rates, where we compare the forecasting performance of 16 multivariate GARCH specifications, is provided.

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09-47 Blouin, Max; Pallage, Stéphane - Warlords, Famine and Food Aid: Who Fights, Who Starves ?

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 and use it to feed soldiers. They hire their troops within a population of farmers heterogeneous in skills. We determine the equilibrium distribution of labor in this environment and study how the existence and allocation strategies of a benevolent food aid agency affect this equilibrium. Our model allows us to precisely predict who will fight and who will work in every circumstance.

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09-46 Herrmann, Markus - Monopoly Pricing of an Antibiotic Subject to Bacterial Resistance

We develop a dynamic bio-economic model of bacterial resistance and disease transmission in which we characterize the pricing policy of a monopolist who is protected by a patent. After expiration, the monopolist behaves competitively in a generic industry having open access to the common pool of antibiotic efficacy and infection. The monopolist manages endogenously the levels of antibiotic efficacy as well as the infected population, which represent quality and market size respectively and achieves, at least temporarily, higher such levels than a hypothetically myopic monopolist who does not take into account the dynamic externalities. The pricing policy and the biological system are characterized by the turnpike property. Before the patent vanishes, the monopolist behaves more and more myopically, leading to a continuous decrease in the price of the antibiotic. Once the generic industry takes over, a discontinuous fall in price occurs. Whether a prolongation of the patent is socially desirable depends on the relative levels of antibiotic efficacy and infection.

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09-45 Araar, Abdelkrim - The Hybrid Multidimensional Index of Inequality

In this paper, we propose a new multidimensional inequality index that satisfies a fundamental set of desired properties. We discuss the case where the social evaluation function of welfare depends simultaneously on unidimensional and multidimensional forms of inequality. We show how this mixed social norm interferes with the most popular axioms conceived specifically for multidimensional indices of inequality. Illustrations of the proposed developments are made using the Cameroonian household surveys, conducted in 2001. It is shown that multidimensional inequality is more pronounced in the Cameroonian semi-urban and rural areas whereas the monetary inequality is more pronounced in urban area.

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09-44 Dionne, Georges - Structured Finance, Risk Management, and the Recent Financial Crisis

Structured finance is often mentioned as the main cause of the latest financial crisis. We argue that structured finance per se did not trigger the last financial crisis. The crisis was propagated around the world because of poor risk management such as agency problems in the securitization market, poor rating and pricing standards, rating agency incentives, lack of market transparency, the search for higher yields by top decision makers and the failure of regulators and central banks to understand the implications of the changing environment.

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09-43 Behrens, Kristian; Peralta, Susana; Picard, Pierre M. - Transfer Pricing Rules, OECD Guidelines, and Market Distortions

We study the impact of transfer pricing rules on sales prices, firms’ organizational structure, and consumers’ utility within a two-country monopolistic competition model featuring source-based profit taxes that differ across countries. Firms can either become multinationals, i.e., they serve the foreign market through a fully controlled affiliate; or they can become exporters, i.e., they serve the foreign market by contracting with an independent distributor. Compared to the benchmark cases, where tax authorities are either unable to audit firms or where they are able to audit them perfectly, the use of the OECD’s Comparable Uncontrolled Price (CUP) or Cost-Plus (CP) rule distorts firms’ output and pricing decisions. The reason is that the comparable arm’s length transactions between exporters and distributors, which serve as benchmarks, are not efficient. We show that implementing the CUP or CP rules is detrimental to consumers in the low tax country, yet benefits consumers in the high tax country.

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09-42 Bauwens, Luc; Rombouts, Jeroen V.K. - On Marginal Likelihood Computation in Change-Point Models

Change-point models are useful for modeling times series subject to structural breaks. For interpretation and forecasting, it is essential to estimate correctly the number of change points in this class of models. In Bayesian inference, the number of change-points is typically chosen by the marginal likelihood criterion, computed by Chib’s method. This method requires to select a value in the parameter space at which the computation is done. We explain in detail how to perform Bayesian inference for a change point dynamic regression model and how to compute its marginal likelihood. Motivated by our results from three empirical illustrations, a simulation study shows that Chib’s method is robust with respect to the choice of the parameter value used in the computations, among posterior mean, mode and quartiles. Furthermore, the performance of the Bayesian information criterion, which is based on maximum likelihood estimates, in selecting the correct model is comparable to that of the marginal likelihood.

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09-41 Bramoullé, Yann; Goyal, Sanjeev - Favoritism

Favoritism is the act of offering jobs, contracts and resources to members of one's social group in preference to outsiders. Favoritism is widely practiced and this motivates an exploration of its origins and economic consequences.
Our main finding is that individuals have an interest to trade favors over time and that this will come at the expense of others, who are outside their group. We show that favoritism is relatively easier to sustain in smaller groups. Favoritism entails social costs as it usually leads to inefficient allocations. However, favoritism can lead to payoff advantages for larger groups. Productivity enhancing investments are larger in groups which practice favoritism. The availability of investment opportunities can reinforce payoff inequalities across groups.

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09-40 Behrens, Kristian; Murata, Yasusada - Trade, Competition, and Efficiency

We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.

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09-39 Bibi, Sami; Makdissi, Paul; Yazbeck, Myra - Equivalence Scales and Housing Deprivation Orderings: an Example Using Lebanese Data

Housing deprivation orderings raise challenges as far as measurement is concerned. The first challenge resides in the identification of an adequate variable that characterizes housing services consumed by households. Another challenge may arise in the comparisons of housing services consumption between households of different sizes and composition. The last challenge may arise in the choice of a deprivation threshold and of a deprivation index. In this paper we address theoretically those challenges. An empirical illustration is offered using Lebanese data.

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09-38 Gugl, Elisabeth; Leroux, Justin - Share the Gain, Share the Pain? Almost Transferable Utility, Changes in Production Possibilities, and Bargaining Solutions

Consider an n-person economy in which efficiency is independent of distribution but the cardinal properties of the agents’ utility functions precludes transferable utility (a property we call “Almost TU”). We show that Almost TU is a necessary and sufficient condition for all agents to either benefit jointly or suffer jointly with any change in production possibilities under well-behaved generalized utilitarian bargaining solutions (of which the Nash Bargaining and the utilitarian solutions are special cases). We apply the result to household decisionmaking in the contex of the Rotten Kid Theorem and in evaluating a change in family taxation.

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09-37 Maisonnave, Hélène; Decaluwé, Bernard - Politique éducative et marché du travail en Afrique du Sud. Une analyse en équilibre général calculable dynamique

Cet article analyse l’impact d’une augmentation des dépenses publiques en éducation sur la performance du système éducatif sud africain et ses conséquences sur le marché du travail en utilisant un Modèle d’Équilibre Général Calculable (MEGC) en dynamique séquentielle. Le système éducatif sud africain porte les stigmates de l’Apartheid et une intervention publique plus accentuée est l’un des moyens envisagés pour corriger les inégalités héritées de l’ancien régime politique. Nos résultats montrent une amélioration des performances des étudiants et des effets positifs à court terme sur l’économie. À long terme, la population sud africaine, et en particulier les African, devient plus qualifiée, mais l’économie ne créant pas suffisamment d’emplois, une partie de ces nouveaux qualifiés se retrouve au chômage.

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09-36 Maisonnave, Hélène; Decaluwé, Bernard; Chitiga, Margaret - Does South African Affirmative Action Policy Reduce Poverty? a CGE Analysis

This paper presents a computable general equilibrium model (CGEM) able to measure the impacts of the affirmative action policy set up in South Africa. In order to decrease inequalities inherited from the former regime, the government encourages firms to employ Historically Disadvantaged Persons (HDP). Through this study, we evaluate the impact of this policy on employment, poverty and inequality. To evaluate impacts on poverty and inequality, we use a CGE Top Down approach. The paper analyses two scenarios; the first one deals with the impact of affirmative action on skilled jobs. The second scenario adds to the previous by including semi skilled workers in the simulation. Both of these scenarios show a deep decrease in unemployment as well as a fall of poverty for each population groups.

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09-35 Lefebvre, Pierre; Merrigan, Philip - Public Subsidies to Private Schools Do Make a Difference for Achievement in Mathematics: Longitudinal Evidence from Canada

Selection into private schools is the principal cause of bias when estimating the effect of private schooling on academic achievement. By exploiting the generous public subsidizing of private high schools in the province of Québec, the second most populous province in Canada, we identify the causal impact of attendance in a private high school on achievement in mathematics. Because the supply of highly subsidized spaces is much higher at the high school level than at the grade school level, 60% of transitions from the public to private sector occur at the end of grade school, we assume that these transitions are exogenous with respect to changes in transitory unobserved variables affecting math scores conditional on variables such as changes in income and child fixed effects. Using data from Statistics Canada’s National Longitudinal Survey on Children and Youth (NLSCY), we estimate the effect of attending a private high school on the percentile rank and a standardized math test score with different models (child fixed-effect, random-effect and a pooled OLS) and restricted samples to control for the degree of selection. The results, interpreted as a treatment on the treated effect show that the effect of changing schools, from a public grade school to a private high school, increases the percentile rank of the math score between 5 and 10 points and by between .13 to .35 of a standard deviation depending on the specifications and samples.

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09-34 Chemin, Matthieu; de Laat, Joost - Can Warm Glow Alleviate Credit Market Failure? Evidence from Online Peer-to-Peer Lenders

This paper looks at an institutional innovation in which Western investors lend peer-to-peer to poor country enterprises. Using a unique dataset from an online lending platform called MyC4, we find that MyC4’s Western lenders grant lower interest rates to pro-poor, socially responsible (SR), and pro-female African projects, thus internalizing positive externalities. Using novel instrumental variables to account for interest rates’ endogeneity, we find that these lower interest rates substantially improve the repayment performance of borrowers, and do not reflect profit-maximizing behavior. This new way to organize finance improves credit market efficiency and the success rate of poorntry enterprises.

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09-33 Mitik, Lulit; Decaluwé, Bernard - Market Labor, Household Work and Schooling in South Africa: Modeling the Effects of Trade on Adults' and Children's Time Allocation

This paper analyzes how economic policies can influence parents’ decisions about their children’s schooling, household work and leisure in South Africa. Using a dynamic computable general equilibrium model that integrates both market and non-market activities, distinguishing male and female workers on the one hand, and adult and child non-market work and leisure on the other, we find that, in the context of trade liberalization, gender inequality is likely to rise between adults and between boys and girls. Furthermore, the paper notes that the increase in adult male and female market labor supply is made possible through the substitution of children for parents in household work, although more so in some groups than others. These effects sustain in the long run.

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09-32 Bellemare, Charles; Shearer, Bruce - On the Relevance and Composition of Gifts within the Firm: Evidence from Field Experiments

We investigate the economic relevance and the composition of gifts within a firm where output is contractible. We develop a structural econometric model that identifies workers’ optimal reaction to monetary gifts received from their employer. We estimate the model using data from two separate field experiments, both conducted within a tree-planting firm. We use the estimated structural parameters to generalize beyond the experiment, simulating how workers would react to different gifts on the part of the firm, within different labour-market settings. We find that gifts have a role to play within this firm, increasing in importance when the workers’ outside alternatives deteriorate. Profit-maximizing gifts would increase profits within slack labour markets by up to 10% on average and by up to 17% for certain types of workers. These gifts represent significant increases in worker earnings; the average gift paid to workers attains 22% of average expected earnings in the absence of gifts. We find that gifts should be given by setting piece-rates above the market-clearing level rather than through fixed wages.

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09-31 Aboul-Enein, Shady; Dionne, Georges; Papageorgiou, Nicolas - Performance Analysis of a Collateralized Fund Obligation (CFO) Equity Tranche

This article examines the performance of the junior tranche of a Collateralized Fund Obligation (CFO), i.e. the residual claim (equity) on a securitized portfolio of hedge funds. We use a polynomial goal programming model to create optimal portfolios of hedge funds, conditional to investor preferences and diversification constraints (maximum allocation per strategy). For each portfolio we build CFO structures that have different levels of leverage, and analyze both the stand alone performance as well as potential diversification benefits (low systematic risk exposures) of investing in the Equity Tranche of these structures. We find that the unconstrained mean-variance portfolio yields a high performance, but greater exposure to systematic risk. We observe the exact opposite picture in the case of unconstrained optimization where a skewness bias is added, thus proving the existence of a trade-off between stand alone performance and low exposure to systematic risk factors. We provide evidence that leveraged exposure to these hedge fund portfolios through the structuring of CFOs creates value for the Equity Tranche investor.

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09-30 François, Pascal; Hübner, Georges; Papageorgiou, Nicolas - A Dynamic Model of Risk-Shifting Incentives with Convertible Debt

In a one-period setting Green (1984) demonstrates that convertible debt perfectly mitigates the asset substitution problem by curbing shareholders’ incentive to increase risk. This is because claimholders design the capital structure precisely when the risk-shifting opportunity is available. In practice, firms do not alter their capital structure over the life of the convertible debt. Hence, when the risk-shifting opportunity arises, convertible debt design may no longer match with firm asset value to mitigate the asset substitution problem. This leaves room for a strategic non-cooperative game between shareholders and convertible debtholders. We show that two risk-shifting scenarios arise as attainable Nash equilibria. Pure asset substitution occurs when, despite convertible debtholders not exercising their conversion option, shareholders still find it profitable to shift risk. Strategic conversion occurs when, despite convertible debtholders giving up the conversion option value, they are better off receiving their share of the wealth expropriation from straight debtholders. We use contingent claims analysis and the Black and Scholes (1973) setup to characterize the equilibria. Even when initial convertibles debt is endogenously designed so as to minimize the likelihood of risk-shifting equilibria, we show that asset substitution cannot be completely eliminated. Our overall conclusion is that – in contrast to agency theory’s claim – convertible debt is an imperfect instrument for mitigating shareholders’ incentive to increase risk.

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09-29 Dionne, Georges; François, Pascal; Maalaoui, Olfa - Detecting Regime Shifts in Corporate Credit Spreads

Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market conditions, whereas the volatility regime is short lived and, apart from recessionary periods, detected during major financial crises. Our methodology provides an independent way of supporting structural equilibrium models and points toward monetary and credit supply effects to account for the persistence of credit spreads and their predictive power over the business cycle.

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09-28 Behrens, Kristian; Murata, Yasusada - Globalization and Individual Gains from Trade

We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. We illustrate this effect using data on GDP per capita and population for 186 countries, as well as parameter estimates for domestic income distributions. Our results suggest that U.S. trade with countries of similar GDP per capita makes all agents in both countries better off, whereas trade with countries having lower GDP per capita may adversely affect up to 11% of the U.S. population.

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09-27 Bouezmarni,Taoufik; Rombouts, Jeroen V.K.; Taamouti, Abderrahim - A Nonparametric Copula Based Test for Conditional Independence with Applications to Granger Causality

This paper proposes a new nonparametric test for conditional independence, which is based on the comparison of Bernstein copula densities using the Hellinger distance. The test is easy to implement because it does not involve a weighting function in the test statistic, and it can be applied in general settings since there is no restriction on the dimension of the data. In fact, to apply the test, only a bandwidth is needed for the nonparametric copula. We prove that the test statistic is asymptotically pivotal under the null hypothesis, establish local power properties, and motivate the validity of the bootstrap technique that we use in finite sample settings. A simulation study illustrates the good size and power properties of the test. We illustrate the empirical relevance of our test by focusing on Granger causality using financial time series data to test for nonlinear leverage versus volatility feedback effects and to test for causality between stock returns and trading volume. In a third application, we investigate Granger causality between macroeconomic variables.

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09-26 Rombouts, Jeroen V.K.; Stentoft, Lars - Bayesian Option Pricing Using Mixed Normal Heteroskedasticity Models

While stochastic volatility models improve on the option pricing error when compared to the Black-Scholes-Merton model, mispricings remain. This paper uses mixed normal heteroskedasticity models to price options. Our model allows for significant negative skewness and time varying higher order moments of the risk neutral distribution. Parameter inference using Gibbs sampling is explained and we detail how to compute risk neutral predictive densities taking into account parameter uncertainty. When forecasting out-of-sample options on the S&P 500 index, substantial improvements are found compared to a benchmark model in terms of dollar losses and the ability to explain the smirk in implied volatilities.

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09-25 Guay, Alain; Guerre, Emmanuel; Lazarova, Stepana - Adaptive Rate-Optimal Detection of Smalll Autocorrelation Coefficients

A new test is proposed for the null of absence of serial correlation. The test uses a data-driven smoothing parameter. The resulting test statistic has a standard limit distribution under the null. The smoothing parameter is calibrated to achieve rate-optimality against several classes of alternatives. The test can detect alternatives with many small correlation coefficients that can go to zero with an optimal adaptive rate which is faster than the parametric rate. The adaptive rate-optimality against smooth alternatives of the new test is established as well. The test can also detect ARMA and local Pitman alternatives converging to the null with a rate close or equal to the parametric one. A simulation experiment and an application to  monthly financial square returns illustrate the usefulness of the proposed approach.

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09-24 Bibi, Sami; Duclos, Jean-Yves - L'effet des taxes et des transferts sur la pauvreté au Québec et au Canada

Ce papier estime la contribution des principales sources de revenu ainsi que des principaux impôts, taxes de vente et transferts aux particuliers à l’allégement de la pauvreté au Québec et au Canada. Cette contribution est départagée en un produit de la taille de ces sources et de leur performance relative par dollar dépensé. Un problème important auquel fait face cet  exercice est que l’ordre selon lequel les différentes composantes du revenu sont classées peut influencer considérablement la part de la réduction de la pauvreté attribuée à chacune de ces composantes. Comme il est généralement arbitraire de privilégier un ordre plutôt qu’un autre, nous utilisons une règle de partage qui attribue à chaque composante du revenu une part de l’allégement total indépendante de l’ordonnancement choisi. Des tests de robustesse sont également effectués pour mesurer la sensibilité des résultats obtenus aux choix, souvent critiquables, du seuil et de la mesure de pauvreté. 

Les résultats révèlent d’une part que les programmes sociaux les plus généreux (comme les pensions de retraite) ne sont pas toujours les plus performants en matière de réduction de la pauvreté par dollar dépensé, et que d’autre part les mesures fiscales les moins généreuses (comme les prestations provinciales pour enfants) peuvent être parmi les plus performantes en matière d’allégement de la pauvreté par dollar dépensé. On constate aussi que, relativement au reste du Canada, les programmes sociaux du Québec sont parmi les plus généreux et les plus efficaces en termes d’allégement de la pauvreté, avec en contrepartie une fiscalité toutefois plus lourde et plus coûteuse.

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09-23 Dostie, Benoit; Jayaraman, Rajshri - The Effect of Adversity on Process Innovations and Managerial Incentives

This paper asks whether adversity spurs the introduction of process innovations and increases the use of managerial incentives by firms. Using a large panel data set of workplaces in Canada, our identification strategy relies on exogenous variation in adversity arising from increased border security along the 49th parallel following 9/11. Our longitudinal difference-in-differences estimates indicate that firms responded to adversity by introducing new or improved processes, but did not change their use of managerial incentives. These results suggest that the threat of bankruptcy may provide impetus for improving efficiency.

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09-22 Bibi, Sami; Duclos, Jean-Yves - La pauvreté au Québec et au Canada

Ce papier estime l'évolution de la pauvreté au Québec et au Canada de 1996 à 2005 ainsi que les effets des principaux impôts et transferts aux particuliers sur l'allégement de la pauvreté. Cette analyse valide et complète les évaluations de certains organismes officiels tels que Statistique Canada, l'Institut de la Statistique du Québec et le Ministère de l'Emploi et de la Solidarité Sociale. Un problème important auquel fait face toute analyse comparative de la pauvreté est le choix du seuil et de la mesure de pauvreté. Comme il est généralement arbitraire de privilégier un choix plutôt qu'un autre, des tests de robustesse sont effectués. Ces tests montrent que le classement des provinces canadiennes en termes de pauvreté absolue et relative est souvent sensible au choix du seuil et de la mesure de pauvreté.

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09-21 Pallage, Stéphane; Scruggs, Lyle; Zimmerman, Christian - Measuring Unemployment Insurance Generosity

Unemployment insurance policies are multidimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which make intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. In this paper, we develop a methodology to measure the generosity of unemployment insurance programs with a single metric. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemploymnet insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time.

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09-20 Blouin, Max - The Economics of Child Soldiering

This paper presents a model of conflict which allows belligerents to recruit both adults and children as soldiers. Warlords fight over the country's productive (i.e. non military) output, and are aware of the tradeoff involved in recruitment: anyone who becomes a soldier cannot produce output. In equilibrium, child recruitment is determined by children's productivity relative to adults in both war and civilian production. The model's findings have implications for arms traffic control and bans on child labor.

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09-19 Behrens, Kristian; Robert-Nicoud, Frédéric - Survival of the Fittest in Cities: Agglomeration Polarization, and Income Inequality

Using a large sample of US urban areas, we provide systematic evidence that mean household income rises with city size ('agglomeration'), that this effect is stronger for the top of the income distribution ('polarization'), and that household income inequality increases at a decreasing rate in city size ('inequality'). To account simultaneously for these facts, we develop a microfounded model of endogenous city formation in which urban centres select the most productive agents. Income inequality is driven by both the 'poverty' and the 'superstar' margins: whereas the least productive agents fail in a tougher urban environment, which increases 'poverty', the most productive agents become 'superstar' who reap the benefits from a larger urban market. At equilibrium, the returns to skills are increasing in city size, thereby dilating the income distribution. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, how they interact through the channels of trade, and how inter-city trade influences intra-city income inequality.

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09-18 Dionne, Georges; Gauthier, Geneviève; Ouertani, Nadia - Basket Options on Heterogeneous Underlying Assets

Basket options are among the most popular products of the new generation of exotic options. This attraction is explained by the fact that they can efficiently and simultaneously hedge a wide variety of intrinsically different financial risks. They are flexible enough to include all the risks faced by non-financial firms. Unfortunately,  the existing literature on basket options considers only homogeneous baskets where all the underlying assets are identical and hedge the same kind of risk. Moreover, the empirical implementation of basket-option models is not yet well developed, particularly when they are composed of heterogeneous underlying assets. This paper focus on the modelization and the parameters estimation of basket options on commodity price with stochastic convenience yield, exchange rate, and domestic and foreign zero-coupon bonds in a stochastic interest rates setting. We empirically compare the performance of the heterogeneous basket option to that of a portfolio of individual options. The results show that the basket strategy is less expensive and more efficient. We apply the maximum-likelihood method to estimate the different parameters of the theoretical basket model as well as the correlations between the variables. Monte Carlo studies are conducted to examine the performance of the maximum-likelihood estimator in finite samples of simulated data. A real data study is presented.

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09-17 Parent, Daniel - Intergenerational Progress in Educational Attainment when Institutional Change Really Matters: a Case Study of Franco-Americans vs. French-Speaking Quebeckers

Using U.S. and Canadian census data I exploit the massive out migration of approximately 1 million French-Canadians who moved mainly to New England between 1865 and 1930 to look at how the educational attainment and enrollment patterns of their descendants compare with those of same ages French-speaking Quebeckers. Data from the 1971 (1970) Canadian (U.S.) censuses reveal that New England born residents who had French as their mother tongue enjoyed a considerable advantage in terms of educational attainment. I attribute this large discrepancy to their exposure to the U.S. public school system which had no equivalent in Quebec until the late sixties. This result is even more remarkable given the alleged negative selection out of Quebec and the fact that Franco-Americans were fairly successful in replicating the same educational institutions as the ones existing in Quebec. Turning to the 2001 (2000) Canadian (U.S.) censuses, I find strong signs that the gap has subsided for the younger aged individuals. In fact, contrary to 30 years earlier, young Quebeckers in 2001 had roughly the same number of years of schooling and were at least as likely to have some post-secondary education. However, they still trail when it comes to having at least a B.A. degree. This partial reversal reflects the impact of the "reverse treatment" by which Quebec made profound changes to its educational institutions, particularly in the post-secondary system, in the mid-to-late 60's. Given the speed at which this partial catch-up occurred, it would appear that the magnitude of the intergenerational externalities that can be associated with education is at best fairly modest.

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09-16 Heywood, John S.; Parent, Daniel - Performance Pay and the White-Black Wage Gap

We show that the reported tendency for performance pay to be associated with greater wage inequality at the top of the earnings distribution applies only to white workers. This results in the white-black wage differential among those in performance pay jobs growing over the earnings distribution even as the same differential shrinks over the distribution for those not in performance pay jobs. We show this remains true even when examining suitable counterfactuals that hold observables constant between whites and blacks. We explore reasons behind our finding that performance pay is associated with greater racial earnings gaps at the top of the wage distribution focusing on the interactions between discrimination, unmeasured ability and selection.

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09-15 Dessy, Sylvain; Rambeloma, Tiana - Immigration Policy, Remittances, and Growth in the Migrant-Sending Country

As evidence accumulates to expose the ineffectiveness of foreign aid, there are increasing calls for rich countries to open up their immigration policies so as to enable migrants' remittances to substitute for foreign aid as a growth-stimulant in poor, migrant-sending countries. In this paper, we use an endogenous growth model to argue that the growth effects of transnational migration and remittances are entirely mediated by the human capital profile of emigrants, as determined by immigration policy at the destination country. Quantitatively we find that when immigration policy at the destination country provokes a "brain drain", growth is negatively impacted in the sending country despite remittances. The reverse is true when immigration policy targets workers with low levels of human capital.

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09-14 Dionne, Georges; Laajimi, Sadok - On the Determinants of the Implied Default Barrier

We use the maximum likelihood (ML) estimation approach to estimate the default barriers from market values of equities for a sample of 762 public industrial Canadian firms. The ML approach allows us to estimate the asset instantaneous drift, volatility and barrier level simultaneously, when the firm's equity is priced as a Down-and-Out European call (DOC) option. We find that the estimated barrier is positive and significant in our sample. Moreover, we compare the default prediction accuracy of the DOC framework with the KMV-Merton approach. Using probit estimation, we find that the default probability from the two structural models provides similar in-sample fits, but the barrier option framework achieves better out-of-sample forecasts. Regression analysis shows that leverage is not the only determinant of the default barrier. The implied default threshold is also positively related to financing costs, and negatively to liquidity, asset volatility and firm size. We also find that liquidation costs, renegotiation frictions and equity holders' bargaining power increase the implied default barrier level.

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09-13 Bramoullé, Yann; Fortin, Bernard - The Econometrics of Social Networks

In a social network, agents have their own reference group that may influence their behavior. In turn, the agents' attributes and their behavior affect the formation and the structure of the social network. We survey the econometric literature on both aspects of social networks and discuss the identification and estimation issues they raise.

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09-12 Panova, Elena - Confirmatory News

This paper investigates how competition in the media affects the quality of news. In our model, demand for news depends on the market perception of the media's ability to receive correct information: it is positive if and only if news is potentially useful for the voting decision. When the media receives information which contradics commonly shared priors, it either reports this information or it confirms the priors: "most likely, my information is correct, but my potential buyers may be unable to assess the quality of news and attribute it according to common priors". We ask whether competition may help to elicit information from the media. Our answer is positive when news covers issues on which the priors are sufficiently precise, or the follow-up quality assessment is a likely event. However, when news concerns controversial issues and it is hardly possible to assess its quality, competitive pressures induce confirmatory reporting.

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09-11 Lacroix, Guy - Assessing the Impact of a Wage Subsidy for Single Parents on Social Assistance in Canada

In 2002 the Quebec government implemented the "Action Emploi" (AE) program aimed at making work pay for long-term social assistance recipients (SA). AE offered a generous wage subsidy that could last up to three years to recipients who found a full-time job within twelve months. The programs was implemented on an experimental basis for a single year. Based on little empirical evidence, a slightly modified version of the program was implemented on permanent basis in May 2008.

The paper investigates the impact of the temporary program by focusing on the labour market transitions of the targeted population starting one year before the implementation of the program and up until the end of 2005. We use a multi-state multi-episode model. The endogeneity of the participation status is accounted for by treating AE as a distinct state and by allowing correlated unobserved factors to affect the transitions. The model is estimated by the method of simulated moments. Our results show that AE has indeed increased the duration of Off-SA spells and decreased the duration of SA spells slightly. There is also some evidence that the response to the program varies considerably with unobserved individual characteristics.

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09-10 Duclos, Jean-Yves; Leblanc, Josée; Sahn, David - Comparing Population Distributions from bin-Aggregated Sample Data: an Application to Historical Height Data from France

This paper develops a methodology to estimate the entire population distributions from bin-aggregated sample data. We do this through the estimation of the parameters of mixtures of distributions that allow for maximal parametric flexibility. The statistical approach we develop enables comparisons of the full distributions of height data from potential army conscripts across France's 88 departments for most of the nineteenth century. These comparisons are made by testing for differences-of-means stochastic dominance. Corrections for possible measurements errors are also devised by taking advantage of the richness of the data sets. Our methodology is of interest to researchers working on historical as well as contemporary bin-aggregated or histogram-type data, something that is still widely done since much of the information that is publicly available is in that form, often due to restrictions due to political sensitivity and/or confidentiality concerns.

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09-09 Duclos, Jean-Yves; Échevin, Damien - Health and Income: a Robust Comparison of Canada and the US

This paper uses sequential stochastic dominance procedures to compare the joint distribution of health and income across space and time. It is the first application of which we are aware of methods to compare multidimensional distributions of income and health using procedures that are robust to aggregation techniques. The paper's approach is more general than comparisons of health gradients and does not require the estimation of health equivalent incomes. We illustrate the approach by contrasting Canada and the US using comparable data. Canada dominates the US over the lower bi-dimensional welfare distribution of health and income, though not generally in terms of the uni-dimensional distribution of health or income.  The paper also finds that welfare for both Canadians and Americans has not unambiguously improved during the last decade over the joint distribution of income and health, in spite of the fact that the uni-dimensional distributions of income have clearly improved during that period.

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09-08 Eberly, Janice; Rebelo, Sergio; Vincent, Nicolas - Investment and Value: a Neoclassical Benchmark

Do investment models fit firm-level data? - which model fits best? To answer this question we estimate alternative models using Compustat data. We find that both a version of the Hayashi (1982) and a model with decreasing returns to scale in production fit firm-level data very well. Our estimates suggest that there is substantial measurement error in Q. This measurement error implies that the investment-cash-flow regressions that have received so much attention are ineffectual to discriminate among alternative models. In fact, the models that we estimate generate empirically plausible cash-flow and lagged-investment effects even though they were not designed to produce them.

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09-07 Kleshchelski, Isaac; Vincent, Nicolas - Robust Equilibrium Yield Curves

This paper studies the quantitative implications of the interaction between robust control and stochastic volatility for key asset pricing phenomena. We present an equilibrium term structure model in which output growth is conditionally heteroskedastic. The agent does not know the true model of the economy and chooses optimal policies that are robust to model misspecification. The choice of robust policies greatly amplifies the effect of conditional heteroskedasticity in consumption growth, improving the model's ability to explain asset prices. In a robust control framework, stochastic volatility in consumption growth generates both a state-dependent market price of model uncertainty and a stochastic market price of risk. We estimate the model using data from the bond and equity markets, as well as consumption data. We show that the model is consistent with key empirical regularities that characterize the bond and equity markets. We also characterize empirically the set of models the robust representative agent entertains, and show that this set is "small". In other words, it is statistically difficult to distinguish between models in this set.

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09-06 Bouakez, Hafedh; Cardia, Emanuela; Ruge-Marcia, Francisco J. - Sectoral Price Rigidity and Aggregate Dynamics

In this paper, we study the macroeconomic implications of sectoral heterogeneity and, in particular, heterogeneity in price setting, through the lens of a highly disaggregated multi-sector model. The model incorporates several realistic features and is estimated using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are remarkably consistent with those reported in micro-based studies, especially for non-sale prices. The model is used to study (i) the contribution of sectoral characteristics to the observed cross sectional heterogeneity in sectoral output and inflation responses to a monetary policy shock, (ii) the implications of sectoral price rigidity for aggregate output and inflation dynamics and for cost pass-through, and (iii) the role of sectoral shocks in explaining sectoral prices and quantities.

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09-05 Maalaoui, Olfa; Dionne, Georges; François, Pascal - Credit Spread Changes within Switching Regimes

Many empirical studies on credit spread determinants consider a single-regime model over the entire sample period and find limited explanatory power. We model the credit cycle independently from macroeconomic fundamentals using a Markov regime switching model. We show that accounting for endogenous credit cycles enhances the explanatory power of credit spread determinants. The single regime model cannot be improved when conditioning on the states of the NBER economic cycle. Furthermore, the regime-based model highlights a positive relation between credit spreads and the risk-free rate in the high regime. Inverted relations are also obtained for some other determinants.

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09-04 Kurmann, André - Holdups and Overinvestment in Physical Capital Markets

Firms in many situations must make investment decisions long before they meet with new capital suppliers. In addition, most physical capital is specific to a task or location, thus implying potentially important switching costs in case negotiations between a firm and a supplier break down. The present paper analyzes the implications of these frictions.  The sequentiality of investment makes it impossible to write binding ex-ante contracts. Together with the rents arising from switching costs, this implies a holdup problem. In partial equilibrium, firms react strategically by overinvesting so as to reduce their marginal productivity and thus the price of capital they negotiate with their suppliers upon matching. In general equilibrium, the holdup problem interacts with externalities from switching costs, resulting in inefficient allocations. In a more general macroeconomic context, the holdup problem in physical capital markets interacts with holdup problems in labor markets that typically lead to underinvestment. As long as capital and labor are complements, this presents the firm with a trade-off between overinvestment and overemployment that neutralizes, at least partially, the distortionary effects of each of the two holdup problems.

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09-03 Bramoullé, Yann; Rogers, Brian W. - Diversity and Popularity in Social Networks

Homophily, the tendency of linked agents to have similar characteristics, is an important feature of social networks. We present a new model of network formation that allows the linking process to depend on individuals types and study the impact of such a bias on the network structure. Our main results fall into three categories: (i) we compare the distributions of intra- and inter-group links in terms of stochastic dominance, (ii) we show how, at the group level, homophily depends on the groups size and the details of the formation process, and (iii) we understand precisely the determinants of local homophily at the individual level. Especially, we find that popular individuals have more diverse networks. Our results are supported empirically in the AddHealth data looking at networks of social connections between boys and girls.

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09-02 Emons, Winand; Fluet, Claude - Non-comparative versus Comparative Advertising as a Quality Signal

Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristic quality. The difference in the quality levels determines how the firms share the market. Firms know the quality levels, consumers do not. Under non-comparative advertising a firm may signal its own quality. Under comparative advertising firms may signal the quality differential. In both scenarios the firms may attempt to mislead at a cost. If firms advertise, in both scenarios equilibria are revealing. Under comparative advertising the firms never advertise together which they may do under non-comparative advertising.

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09-01 Bellemare, Charles; Lepage, Patrick; Shearer, Bruce - Peer Pressure, Incentives, and Gender: an Experimental Analysis of Motivation in the Workplace

We present results from a real-effort experiment, simulating actual work-place conditions, comparing the productivity of workers under fixed wages and piece rates. Workers, who were paid to enter data, were exposed to different degrees of peer pressure under both payment systems. The peer pressure was generated in the form of private information about the productivity of their peers. We have two main results. First, we find no level of peer pressure for which the productivity of either male or female workers is significantly higher than productivity without peer pressure. Second, we find that very low and very high levels of peer pressure can significantly decrease productivity (particularly for men paid fixed wages). These results are consistent with models of conformism and self-motivation.
 

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
Madame Hélène Diatta  | Téléphone : 514 987-6181 | Télécopieur : 514 987-4707 | Courriel : diatta.helene@uqam.ca
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