College of Business and Economics

Selections

MA / PhD in Economics: photo of the globe and numbers.

Economics Working Papers

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

2005 - Return to Working Papers list

05 - 01:
Roy, Suryadipta.
pdf image"Are Illegal Drugs Inferior Goods."

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 simultaneity issue between drug consumption and income has been addressed by using a two-step estimation procedure. The results indicate that accounting for simultaneity shows income inferiority with regard to drug consumption. An implication of this study is that income distributive policies might be effective in controlling drug consumption. It also points out the regressive nature of the government's substance abuse program.

05 - 02:
Bandyopadhyay, Subhayu and Sudeshna C. Bandyopadhyay.
pdf image"Illegal Immigration: Optimal Enforcement and Capital Mobility."

Abstract: This paper analyzes the effectiveness of enforcement in controlling illegal immigration in two scenarios, capital mobility and capital immobility in the host nation (for illigal immigrants). The source nation is assumed thoughout to have immobility of capital. We show that the net enforcement expenditure is higher (lower) in the presence of capital mobility if the host nation is an importer (exporter) of capital at the target immigration level. Furthermore, we show that if the host nation is an exporter of capital at the point of zero enforcement (unrestricted immigration), it must have lower enforcement expenditure (compared to capital immobility) for any illegal immigration targtet. If it is an importer of capital at zero enforcement, there is some ambiguity. National income must be higher (lower) under capital mobility (compared to immobility) if the host nation is an importer (exporter) of capital at the target immigration level. The analysis is extended to consider endogenous determination of optimal immigration level. Under capital mobility, for a capital exporting nation, the optimal enforcement and the national income levels are higher, while the optimal immigration level is lower.

05 - 03:
Bandyopadhyay, Subhayu and Sudeshna C. Bandyopadhyay.
pdf image"Trade and Child Labor: A General Equilibrium Analysis."

Abstract: This paper augments the existing literature on trade and child labor by exploring the effects of terms of trade changes in the context of a three good general equilibrium model, where one of the goods is a non-traded good. We find that under quasi-linear preferences the effect of the terms of trade on child labor depends critically on the pattern of substitutability (or complementarity) in the excess demand functions between the export good and the non-traded good. We extend the analysis to the case of homothetic preferences and find that the basic result is somewhat modified in a context where the marginal utility of income is affected by the terms of trade. We also extend the analysis to the case where factors move freely between the three goods as in a Heckscher-Ohlin type framework. Finally, we show that a balanced budget policy of taxing the education of skilled families and subsidizing the education of unskilled families must reduce child labor without any impact on aggregate welfare.

05 - 04:
Bandyopadhyay, Subhayu and Ryo Takashima.
pdf image"Trade Policy and Illegal Immigration."

Abstract: We use a version of the Meade model to consider the effects of interdependent import tariffs in the presence illegal immigration. First, we consider the small union case and derive the Nash tariff equilibrium for two potential members of a Preferential Trade Agreement (PTA). We analyze conditions under which a movement from the Nash equilibrium to complete intra-bloc tariff elimination (FTA) is likely to be welfare augmenting. The paper also considers how reduction of the external tariff may impact the Nash equilibrium tariffs of the potential bloc members. The analysis is extended to the large union case to consider the conditions under which terms of trade of bloc members improve with respect to the non-member nation(s).

05 - 05:
Balvers, Ronald J. and Dayong Huang.
pdf image"Productivity-Based Asset Pricing: Theory and Evidence."

Abstract: This paper considers asset pricing from the production side. It differs from earlier approaches to production-based asset pricing in that the pricing kernel is derived by replacing the marginal rate of intertemporal substitution with an amended version of the marginal rate of intertemporal transformation in a complete markets economy. Relying on a general version of the traditional Real Business Cycle macro model we find that the variables determining the mean returns of all financial assets are the productivity shock as the sole factor together with the capital stock and lagged Solow residual (productivity level) as conditioning variables. Standard GMM estimation finds that our model improves on the complementary consumption-based and market-based approaches and is competitive with the Fama-French three-factor model. The model explains the size premium from differences in the unconditional sensitivity to productivity shocks-small firms are more sensitive to productivity shocks-and explains the value premium from differences in the conditional sensitivity to productivity shocks-growth stocks are more sensitive to productivity shocks in good states when the risk premium is low.

05 - 06:
Balvers, Ronald J. and Dayong Huang.
pdf image"Evaluation of Linear Asset Pricing Models by Implied Portfolio Performance."

Abstract: We develop a measure, previously considered in a different context by Kandel and Stambaugh (1995), to evaluate linear asset pricing models. The "KS-ratio" criterion rates a model's usefulness based on the mean portfolio return that a mean-variance decision maker obtains for any given variance choice by using the model for optimal portfolio decisions. It is equivalent to a cross-sectional GLS R-square criterion and to a measure of minimum distance between the factor frontier and the asset frontier. We assess the value of the KS-ratio compared to the HJ-distance and ad hoc goodness-of-fit evaluation criteria for simulated returns and apply the criteria with actual data to nine prominent asset pricing models. The KS criterion outperforms the HJ criterion and complements the OLS R-square in selecting the "true" asset pricing model. The real-data application shows that, with or without correction for the number of factors, the Chen-Roll-Ross five-macro-factor model outperforms the Fama-French three-factor model and all theory-based models according to the KS and HJ measures but not according to the OLS R-square criterion. For each criterion random-factor models outperform the CAPM and the CCAPM.