Economics Department Seminar Series

Department of Economics

Seminar Series
Copies may be downloaded by clicking on the title of the paper.

For more information you may contact Stratford Douglas, the Seminar Series Coordinator.

Fall 2004

If you do not have Acrobat Reader for your browser, you can download it freely from Adobe's Web site. Download Adobe Acrobat Reader

All seminars are 3:30 – 5:00 and in room 441 B&E Building, except as noted.

September 10, 2004 Jan Brueckner, University of Illinois. "The Political Economy of Urban Transport-System Choice"
Abstract: This paper analyzes the political economy of transport-system choice, with the goal of gaining an understanding of the forces involved in this important urban public policy decision. Transport systems pose a continuous trade-off between time and money cost, so that a city can choose a fast system with a high money cost per mile or slower, cheaper system. The paper compares the socially optimal transport system to the one chosen under the voting process, focusing on both homogeneous and heterogeneous cities, while considering different landownership arrangements.

September 17, 2004 Suryadipta Roy, West Virginia University. “Is There Income Inferiority in Illegal Drug Consumption?"
Abstract: Using data from the National Survey on Drug Use and Health, evidence of income inferiority in illegal drug consumption is presented. This is done by estimation of binary choice probit models with endogenous regressors. The exercise has been conducted in two stages: in the first stage, estimation results of single equation probit models are presented. In the second stage, the simultaneity issue between drug consumption and income has been addressed by estimating an ordered probit equation and using the fitted value for income as an instrument in estimating the original drug consumption equation. A set of individual factors have been included as control variables in the consumption equation in order to check the robustness of results. The results indicate that accounting for simultaneity improves the income inferiority results. An implication of this study is that substance abuse policies rather than income distribution might be a more effective weapon in controlling drug consumption. Moreover, it points towards the regressive consequence of treating addictive drugs illegal, since it is the poor who end up paying the higher price due to their “illegal” status.

October 1, 2004 Janet Kohlhase, University of Houston. "The Effects of Public Policy and Firm Characteristics on Location Decisions."
Abstract: The paper explores the determinants of firm location in a polycentric city using data for the Houston region. Firm location is modeled in a discrete choice framework using eight employment centers and outlying areas as possible choices. Agglomerative and dispersive forces are explicitly treated as are taxes and other characteristics that vary over space. The finding show that the presence and strength of the agglomerative forces and tax effects vary widely by type of model estimated. For the subcenter-choice model, property taxes have large deterrent effects on firms' locations for the four industrial groups analyzed here: oil and gas, manufacturing, FIRE, and services. While agglomeration effects are present in the subcenter-choice estimates, they are weaker and are positive for only the FIRE and service industrial groups.

October 8, 2004 Robert Lawson, Capital University. "Institutions and the Impact of Investment on Growth."
Abstract: The literature on institutions and economic growth has demonstrated a close relationship between the quality of institutions and prosperity. this paper examines the impact of institutions on investment and thereby growth. The empirical results show that the private investment rate of countries is higher and that the productivity of that investment is greater in countries with higher quality institutions. It also shows that even models that include various indicators of institutional quality along with inputs such as physical and human capital will generally underestimate the impact of institutions on growth. Further, future institutional improvements are more likely to occur against a background of poor economic performance than one of sustained growth.

October 15, 2004 Wallace Oates, University of Maryland. “Toward a Second-Generation Theory of Fiscal Federalism".
Abstract: Drawing on a wide range of literature and ideas, a new "second-generation theory of fiscal federalism" is emerging that provides new insights into the structure and working of federal systems. After a restatement and review of the first general theory, this paper surveys this new body of work and offers some thoughts on the ways in which it is extending our understanding of fiscal federalism and its implications for the designs of fiscal institutions.

October 22, 2004
Amela Karabegovic, The Fraser Institute. "Economic Freedom of North America, 2004 Annual Report"

October 29, 2004 Marcelo Olarreaga, Trade Policy Division, World Bank. "Import Demand Elasticities and Trade Distortions."

Abstract: To study the effects of tariffs on GDP one needs import demand elasticities as the tariff line level that are consistent with GDP maximization. These do not exist. We modify Kohli's (1991) GDP Function approach to estimate demand elasticities for 4625 imported goods in 117 countries. Following Anderson and Neary (1992, 1994) and Feenstra (1995), we use these estimates to construct theoretically-sound trade restrictiveness indices (TRIs) and GDP losses associated with existing tariff structures. Countries are revealed to be 30 percent more restrictive than their simple or import-weighted average tariffs would suggest. Thus, distortion is nontrivial. GDP losses are the largest in the United States, China, India, Mexico and Germany. JEL Classification numbers: F1, F10, F13

Keywords: Import demand elasticities, GDP function, trade restrictiveness, deadweight loss

November 5, 2004 Kenneth Jones, FDIC. "Increased Concentration in Banking: Megabanks and Their Implications for Deposit Insurance"

Abstract: During the past two decades, the U.S. banking industry has experienced an unprecedented wave of consolidation, marked by a substantial decline in the number of insured depository institutions and the emergence of banking behemoths with assets totaling in the hundreds of billions of dollars. This unparalleled concentration of assets and deposits among a handful of "megabanks" has important implications for deposit insurance. Most importantly, the Federal Deposit Insurance Corporation (FDIC) now faces a situation in which the failure of even a single megabank could overwhelm the resources immediately available to the deposit insurance system and expose both the banking industry and the government (i.e., taxpayers) to huge potential liabilities. This article highlights the current structure of the banking industry, examines the threat that this structure poses to the deposit insurance funds, and suggests possible approaches for dealing with megabanks and the increasing concentration of insured deposits.

November 12, 2004 Sydney C. Ludvigson, NYU. "Euler Equations in Theory and in Fact"

Abstract: Among the most important pieces of empirical evidence against of the standard representative-agent, consumption-based asset pricing paradigm are the formidable unconditional Euler equation errors the model produces for two asset returns: a broad stock market index return and short-term interest rate. Unconditional Euler equation errors are also large for a broader cross-section of returns. Here we ask whether leading asset pricing models specically developed to address empirical puzzles associated with the standard paradigm explain these empirical facts. We find that, in many cases, they do not. We present several results. First, we show that if the true pricing kernel that sets the unconditional Euler equation errors to zero is jointly lognormally distributed with aggregate consumption and returns, then values for the subjective discount factor and relative risk aversion can always be found for which the standard model generates identical unconditional asset pricing implications for two asset returns, a risky and risk-free asset. Second, we show, using simulated data from several leading asset pricing frameworks, that many economic models share this property even though the pricing kernel, returns, and consumption are not jointly lognormally distributed in those models. Third, in contrast to the above results, we provide an example of a limited participation/incomplete markets model that can explain these empirical facts.
JEL: G12, G10.

November 19, 2004 Last Day before Thanksgiving Break! Timothy Mount, Cornell University.

December 3, 2004 Lynne Kiesling, Northwestern University. "Investment Incentives and Dynamic Efficiency in Electricity Markets: An Experimental Analysis"
ABSTRACT: This paper presents an experimental analysis of the interaction between investment choices and market processes in an environment in which producers have strategic interdependence. Subjects made capacity and output quantity choices while simultaneously facing a passive linear demand in both a low-demand market and a high-demand market. In one Stage subjects could choose between two different types of investment (“peak” and “baseload”). Subjects generally achieved high efficiency, leaving little money on the table, and in the Stage with two investment choices were less able to exploit their strategic interdependence to raise output prices than when they had only one investment choice. The market outcomes also more closely approximated the Cournot predictions than either the monopoly predictions or the social optimum predictions, although none of the three models predicted the actual outcomes with any precision.

	Seminar Series Copies may be downloaded by clicking on the title of the paper. For more information you may contact Stratford Douglas, the Seminar Series Coordinator. Fall 2004 If you do not have Acrobat Reader for your browser, you can download it freely from Adobe's Web site. Download Adobe Acrobat Reader
	All seminars are 3:30 – 5:00 and in room 441 B&E Building, except as noted.
September 10, 2004	Jan Brueckner, University of Illinois. "The Political Economy of Urban Transport-System Choice" Abstract: This paper analyzes the political economy of transport-system choice, with the goal of gaining an understanding of the forces involved in this important urban public policy decision. Transport systems pose a continuous trade-off between time and money cost, so that a city can choose a fast system with a high money cost per mile or slower, cheaper system. The paper compares the socially optimal transport system to the one chosen under the voting process, focusing on both homogeneous and heterogeneous cities, while considering different landownership arrangements.
September 17, 2004	Suryadipta Roy, West Virginia University. “Is There Income Inferiority in Illegal Drug Consumption?" Abstract: Using data from the National Survey on Drug Use and Health, evidence of income inferiority in illegal drug consumption is presented. This is done by estimation of binary choice probit models with endogenous regressors. The exercise has been conducted in two stages: in the first stage, estimation results of single equation probit models are presented. In the second stage, the simultaneity issue between drug consumption and income has been addressed by estimating an ordered probit equation and using the fitted value for income as an instrument in estimating the original drug consumption equation. A set of individual factors have been included as control variables in the consumption equation in order to check the robustness of results. The results indicate that accounting for simultaneity improves the income inferiority results. An implication of this study is that substance abuse policies rather than income distribution might be a more effective weapon in controlling drug consumption. Moreover, it points towards the regressive consequence of treating addictive drugs illegal, since it is the poor who end up paying the higher price due to their “illegal” status.
October 1, 2004	Janet Kohlhase, University of Houston. "The Effects of Public Policy and Firm Characteristics on Location Decisions." Abstract: The paper explores the determinants of firm location in a polycentric city using data for the Houston region. Firm location is modeled in a discrete choice framework using eight employment centers and outlying areas as possible choices. Agglomerative and dispersive forces are explicitly treated as are taxes and other characteristics that vary over space. The finding show that the presence and strength of the agglomerative forces and tax effects vary widely by type of model estimated. For the subcenter-choice model, property taxes have large deterrent effects on firms' locations for the four industrial groups analyzed here: oil and gas, manufacturing, FIRE, and services. While agglomeration effects are present in the subcenter-choice estimates, they are weaker and are positive for only the FIRE and service industrial groups.
October 8, 2004	Robert Lawson, Capital University. "Institutions and the Impact of Investment on Growth." Abstract: The literature on institutions and economic growth has demonstrated a close relationship between the quality of institutions and prosperity. this paper examines the impact of institutions on investment and thereby growth. The empirical results show that the private investment rate of countries is higher and that the productivity of that investment is greater in countries with higher quality institutions. It also shows that even models that include various indicators of institutional quality along with inputs such as physical and human capital will generally underestimate the impact of institutions on growth. Further, future institutional improvements are more likely to occur against a background of poor economic performance than one of sustained growth.
October 15, 2004	Wallace Oates, University of Maryland. “Toward a Second-Generation Theory of Fiscal Federalism". Abstract: Drawing on a wide range of literature and ideas, a new "second-generation theory of fiscal federalism" is emerging that provides new insights into the structure and working of federal systems. After a restatement and review of the first general theory, this paper surveys this new body of work and offers some thoughts on the ways in which it is extending our understanding of fiscal federalism and its implications for the designs of fiscal institutions.
October 22, 2004	Amela Karabegovic, The Fraser Institute. "Economic Freedom of North America, 2004 Annual Report"
October 29, 2004	Marcelo Olarreaga, Trade Policy Division, World Bank. "Import Demand Elasticities and Trade Distortions." Abstract: To study the effects of tariffs on GDP one needs import demand elasticities as the tariff line level that are consistent with GDP maximization. These do not exist. We modify Kohli's (1991) GDP Function approach to estimate demand elasticities for 4625 imported goods in 117 countries. Following Anderson and Neary (1992, 1994) and Feenstra (1995), we use these estimates to construct theoretically-sound trade restrictiveness indices (TRIs) and GDP losses associated with existing tariff structures. Countries are revealed to be 30 percent more restrictive than their simple or import-weighted average tariffs would suggest. Thus, distortion is nontrivial. GDP losses are the largest in the United States, China, India, Mexico and Germany. JEL Classification numbers: F1, F10, F13 Keywords: Import demand elasticities, GDP function, trade restrictiveness, deadweight loss
November 5, 2004	Kenneth Jones, FDIC. "Increased Concentration in Banking: Megabanks and Their Implications for Deposit Insurance" Abstract: During the past two decades, the U.S. banking industry has experienced an unprecedented wave of consolidation, marked by a substantial decline in the number of insured depository institutions and the emergence of banking behemoths with assets totaling in the hundreds of billions of dollars. This unparalleled concentration of assets and deposits among a handful of "megabanks" has important implications for deposit insurance. Most importantly, the Federal Deposit Insurance Corporation (FDIC) now faces a situation in which the failure of even a single megabank could overwhelm the resources immediately available to the deposit insurance system and expose both the banking industry and the government (i.e., taxpayers) to huge potential liabilities. This article highlights the current structure of the banking industry, examines the threat that this structure poses to the deposit insurance funds, and suggests possible approaches for dealing with megabanks and the increasing concentration of insured deposits.
November 12, 2004	Sydney C. Ludvigson, NYU. "Euler Equations in Theory and in Fact" Abstract: Among the most important pieces of empirical evidence against of the standard representative-agent, consumption-based asset pricing paradigm are the formidable unconditional Euler equation errors the model produces for two asset returns: a broad stock market index return and short-term interest rate. Unconditional Euler equation errors are also large for a broader cross-section of returns. Here we ask whether leading asset pricing models specically developed to address empirical puzzles associated with the standard paradigm explain these empirical facts. We find that, in many cases, they do not. We present several results. First, we show that if the true pricing kernel that sets the unconditional Euler equation errors to zero is jointly lognormally distributed with aggregate consumption and returns, then values for the subjective discount factor and relative risk aversion can always be found for which the standard model generates identical unconditional asset pricing implications for two asset returns, a risky and risk-free asset. Second, we show, using simulated data from several leading asset pricing frameworks, that many economic models share this property even though the pricing kernel, returns, and consumption are not jointly lognormally distributed in those models. Third, in contrast to the above results, we provide an example of a limited participation/incomplete markets model that can explain these empirical facts. JEL: G12, G10.
November 19, 2004 Last Day before Thanksgiving Break!	Timothy Mount, Cornell University.
December 3, 2004	Lynne Kiesling, Northwestern University. "Investment Incentives and Dynamic Efficiency in Electricity Markets: An Experimental Analysis" ABSTRACT: This paper presents an experimental analysis of the interaction between investment choices and market processes in an environment in which producers have strategic interdependence. Subjects made capacity and output quantity choices while simultaneously facing a passive linear demand in both a low-demand market and a high-demand market. In one Stage subjects could choose between two different types of investment (“peak” and “baseload”). Subjects generally achieved high efficiency, leaving little money on the table, and in the Stage with two investment choices were less able to exploit their strategic interdependence to raise output prices than when they had only one investment choice. The market outcomes also more closely approximated the Cournot predictions than either the monopoly predictions or the social optimum predictions, although none of the three models predicted the actual outcomes with any precision.