Working Papers 2006

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16-06 The Role of Collateralized Household Debt in Macroeconomic Stabilization

Jeffrey R. Campbelly Zvi Hercowitz

 

Working paper #16-06 The Role of Collateralized Household Debt in Macroeconomic Stabilization
Jeffrey R. Campbelly Zvi Hercowitz

Market innovations following the ¯nancial reforms of the early 1980s drastically
reduced equity requirements associated with collateralized household borrowing. This
paper examines the contribution of this development to the macroeconomic stabilization
that occurred shortly thereafter. The model combines collateralized household debt
with heterogeneity of time preference in a calibrated general equilibrium setup. We
use this framework to characterize the business cycle implications of lowering required
down payments and rates of amortization for durable goods purchases as in the early
1980s. The model predicts that this reduction of equity requirements can explain a
large fraction of the actual volatility decline in hours worked, output, household debt,
and household durable goods purchases.

JEL: E32, E65.

Keywords: Consumer Credit, Housing, Deregulation, Labor Supply, Business Cycle Stabi-
lization.

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15-06 PUBLIC-PRIVATE PARTNERSHIPS: PUBLIC-ECONOMICS PERSPECTIVES

Efraim Sadka

 

Working paper #15-06 PUBLIC-PRIVATE PARTNERSHIPS: PUBLIC-ECONOMICS PERSPECTIVES

Efraim Sadka

Public-Private Partnerships are nowadays spread all over the world. It may be quite plausible
that they were initially started mainly as an attempt to evade expenditure controls and hide
public budget deficits. Nevertheless, they have by now gone a long way of restructuring. If
transparently reported and properly designed, public-private partnerships can also play a
useful role in enhancing the efficiency of the provision of services that were supplied before
solely by the public sector. This paper provides some public-economics perspectives on these
partnerships.

JEL: D61, D73, H41, H43, H54, H57.

Keywords: public-private partnership, private-finance initiative, build-operate-transfer.

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14-06 Patents, Imitation and Licensing In an Asymmetric Dynamic R&D Race

Chaim Fershtman and Sarit Markovich

Published in: International Journal of Industrial Organization, Volume 28, Issue 2, March 2010, Pages 113–126

Working paper #14-2006 Patents, Imitation and Licensing In an Asymmetric Dynamic R&D Race
Chaim Fershtman and Sarit Markovich

R&D is an inherently dynamic process which involves different intermediate steps that need
to be developed before the completion of the final invention. Firms are not necessarily
symmetric in their R&D abilities; some may have advantages in early stages of the R&D
process while others may have advantages in other stages of the process. The paper uses a
simple two-firm asymmetric ability multistage R&D race model to analyze the effect of
different types of patent policy regimes and licensing arrangement on the speed of innovation,
firm value and consumers' surplus. The paper demonstrates the circumstances under which a
weak patent protection regime, which facilitates free imitation of any intermediate technology,
may yield a higher overall surplus than a regime that awards patent for the final innovation.
This result holds even in cases where the length of the patent is optimally calculated.

Published in: International Journal of Industrial Organization, Volume 28, Issue 2, March 2010, Pages 113–126

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13-06 How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Cross-Section of Countries
Adi Brender and Allan Drazen

Published in: The American Economic Review, Volume 98, No. 5, 2008, Pages 2203-2220.

Working paper #13-06 How Do Budget Deficits and Economic Growth Affect Reelection Prospects?
Evidence from a Large Cross-Section of Countries
Adi Brender and Allan Drazen

ABSTRACT: Conventional wisdom is that good economic conditions or expansionary fiscal
policy help incumbents get re-elected, but this has not been tested in a large cross-section of
countries. We test these arguments in a sample of 74 countries over the period 1960-2003. We
find no evidence that deficits help reelection in any group of countries –developed and less
developed, new and old democracies, countries with different government or electoral systems,
and countries with different levels of democracy. In developed countries, especially old
democracies, election-year deficits actually reduce the probability that a leader is reelected, with
similar negative electoral effects of deficits in the earlier years of an incumbent's term in office.
Higher growth rates of real GDP per-capita raise the probability of reelection only in the less
developed countries and in new democracies, but voters are affected by growth over the leader's
term in office rather than in the election year itself. Low inflation is rewarded by voters only in
the developed countries. The effects we find are not only statistically significant, but also quite
substantial quantitatively. We also suggest how the absence of a positive electoral effect of
deficits can be consistent with the political deficit cycle found in new democracies.

JEL: D72, E62, H62

Keywords: political budget cycle, political business cycle, fiscal manipulation

Published in: The American Economic Review, Volume 98, No. 5, 2008, Pages 2203-2220.

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12-06 Pork Barrel Cycles
Allan Drazen and Marcela Eslava

 

Working paper #12-06 Pork Barrel Cycles
Allan Drazen and Marcela Eslava

We present a model of political budget cycles in which incumbents influence voters by targeting
government spending to specific groups of voters at the expense of other voters or other expenditures.
Each voter faces a signal extraction problem: being targeted with expenditure before
the election may reflect opportunistic manipulation, but may also reflect a sincere preference of
the incumbent for the types of spending that voter prefers. We show the existence of a political
equilibrium in which rational voters support an incumbent who targets them with spending before
the election even though they know it may be electorally motivated. In equilibrium voters in the
more “swing” regions are targeted at the expense of types of spending not favored by these voters.
This will be true even if they know they live in swing regions. However, the responsiveness of
these voters to electoral manipulation depends on whether they face some degree of uncertainty
about the electoral importance of the group they are in. Use of targeted spending also implies voters
can be influenced without election-year deficits, consistent with recent finding for established
democracies.

JEL classification: D72, E62, D78

Keywords: expenditure composition, political budget cycle, special interest groups, electoral
manipulation

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11-06 Electoral Economics in New Democracies: Affecting Attitudes About Democracy
Adi Brender and Allan Drazen

 

 

Working paper #11-2006 Electoral Economics in New Democracies: Affecting Attitudes About Democracy
Adi Brender and Allan Drazen

Recent research finds that political budget cycles are predominantly a phenomenon of new
democracies, but also indicates that even in these countries higher deficits in election years do
not help incumbents to get reelected. We suggest that the higher election year deficits in recently
democraticized countries may reflect the response of democratic leaders to the public’s uncertainty
about the value of democracy, as indicated by our findings from the World Values Survey. We
present a model in which voters form beliefs about the efficacy of democracy on the basis of
economic outcomes. To force a reversion to a non-democratic regime, anti-democratic elites must
gain sufficient support from the citizenry. This leads government to increase expenditures and
deficits before elections —when new democracies are particularly fragile - in the attempt to convince
voters that “democracy works”, with these expenditures going primarily to citizens rather than
elites. Data on the composition of election year expenditure increases in new democracies are
broadly consistent with the suggested pattern. The focus on citizens rather than elites, and the
implications of the necessity of “buying off” citizens rather than elites to prevent a successful coup
or similar measure contrasts with some of the recent literature on democratic consolidation.

JEL classification: D72, E62, D78

Keywords: democratic consolidation, fragility, fiscal policy

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10-06 The “Names Game”: Harnessing Inventors Patent Data for Economic Research
Manuel Trajtenberg, Gil Shiff and Ran Melamed

Published in: Annals of Economics and Statistics, No. 93/94, 2009, Pages 79-108.

Working paper # 10-06 The “Names Game”: Harnessing Inventors Patent Data for Economic Research
Manuel Trajtenberg, Gil Shiff and Ran Melamed

The goal of this paper is to lay out a methodology and corresponding computer
algorithms, that allow us to extract the detailed data on inventors contained in patents,
and harness it for economic research. Patent data has long been used in empirical research
in economics, and yet the information on the identity (i.e. the names and location) of the
patents’ inventors has seldom been deployed in a large scale, primarily because of the
“who is who” problem: the name of a given inventor may be spelled differently across
her/his patents, and the exact same name may correspond to different inventors (i.e. the
“John Smith” problem). Given that there are over 2 million patents with 2 inventors per
patent on average, the “who is who” problem applies to over 4 million “records”, which
is obviously too large to tackle manually. We have thus developed an elaborate
methodology and computerized procedure to address this problem in a comprehensive
way. The end result is a list of 1.6 million unique inventors from all over the world, with
detailed data on their patenting histories, their employers, co-inventors, etc. Forty percent
of them have more than one patent, and 70,000 have more than 10 patents. We can trace
those multiple inventors across time and space, and thus study the causes and
consequences of their mobility across countries, regions, and employers. Given the
increasing availability of large computerized data sets on individuals, there may be plenty
of opportunities to deploy this methodology to other areas of economic research as well.

JEL: O30, C81, C88

Keywords: Patents, inventors, mobility, computer software.

Published in: Annals of Economics and Statistics, No. 93/94, 2009, Pages 79-108.

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9-06 - Private Investments in Higher Education: Comparing Alternative Funding Schemes

Bernhard Eckwert and Itzhak Zilcha

Published in: Economica, Volume 79, Issue 313, 2012, Pages 76–96.

Working paper #9-06 Private Investments in Higher Education: Comparing Alternative Funding Schemes

Bernhard Eckwert and Itzhak Zilcha

We consider an OLG economy with endogenous human capital formation.
Young individuals make decision about their investment in higher education
only after they obtain some signal, correlated to their ability. We examine three
different funding regimes, each requires governmental intervention but not funding,
available to students if they choose to invest in higher education. The economic implications
of such funding schemes in equilibrium are studies, in particular the effects
on accumulation of human capital and income inequality.

JEL: D31, D91, H31, I22
Keywords: higher education, funding, human capital, income inequality.

Published in: Economica, Volume 79, Issue 313, 2012, pages 76–96.

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8-06 History as a Coordination Device
Rossella Argenziano and Itzhak Gilboa

Published in: Theory and Decision, 2012, Volume 73, Issue 4, Pages 501-512.

 

Working paper #8-06 History as a Coordination Device
Rossella Argenziano and Itzhak Gilboa

Coordination games often have multiple equilibria. The selection
of equilibrium raises the question of belief formation: how do players
generate beliefs about the behavior of other players? This paper takes
the view that the answer lies in history, that is, in the outcomes of similar
coordination games played in the past, possibly by other players.
We analyze a simple model in which a large population has to make a
simultaneous decision regarding participation in a coup attempt. We
assume a dynamic process that faces different populations with such
games for randomly selected values of a parameter. We show that history
serves as a coordination device, and determines for which values of
the parameter a revolution would succeed. We also show that, for certain
values of the parameter in question, the limit behavior depends
on the way history unfolds, and cannot be determined from a-priori
considerations.

Keywords: Belief formation, Similarity, Coordination games, Equilibrium selection

Published in: Theory and Decision, 2012, Volume 73, Issue 4, Pages 501-512.

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7-09 Inflation Targeting in Dollarized Economies

Leonardo Leiderman, Rodolfo Maino, and Eric Parrado

 

Working paper #7-09 Inflation Targeting in Dollarized Economies
Leonardo Leiderman, Rodolfo Maino, and Eric Parrado

The shift to inflation targeting has contributed to the relatively low inflation observed in some
emerging market economies although, as noted by many economists, the preconditions required for
a successful implementation were not in place. The existence of managed exchange rate regimes, a
narrow base of domestic nominal financial assets, the lack of market instruments to hedge
exchange rate risks, together with fear of floating and dollarization, have been stressed as factors
that might weaken the efficacy of monetary policy. By examining various aspects of monetary
transmission and policy formulation in two highly dollarized economies (Peru an Bolivia) vis-à-vis
two economies with low levels of dollarization (Chile and Colombia), we found that while
dollarization imposes differences in both the transmission capacity of monetary policy and its
impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy
regime.

JEL: E31, E4, E5
Keywords: Monetary policy, inflation targeting, dollarization.

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6-06 Innovation Policy for Development: an Overview
Manuel Trajtenberg

 

Wroking paper #6-06 Innovation Policy for Development: an Overview
Manuel Trajtenberg

This paper provides a framework for thinking about innovation policies for
development; it does so by flashing up the key issues which arise in this context, and by
examining in detail the case of innovation policy in Israel. A few premises guide the
analysis: First, innovation for development should be construed as a broad notion that
includes widely distributed innovations of all stripes, both in products and in processes,
generated by rank and file workers as much as by R&D labs. Second, the economic
rationale for government support of R&D needs to be adapted to the economic
environment of developing countries; the notion of spillovers should be reexamined in
view of globalization, and the same goes for the working of “General Purpose
Technologies” (GPTs). The Israeli economy offers a fascinating illustration of
extraordinary success in innovation, particularly in ICT, yet the benefits from the High
Tech sector eluded the rest of the economy, giving rise to a “dual economy” and slow
growth for the economy as a whole. Understanding this outcome provides valuable
insights for the design of growth-promoting innovation policies. Lastly, the paper
discusses the policy corollaries that emerge from the analysis, and in particular the main
levers which innovation policies for development should act upon: skills formation,
provision of incentives, access to information, and availability of finance.

JEL: O14, O30, O38

Keywords: Innovation, Development, Policy, Spillovers.

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5-2006 Trade, FDI, and the Organization of Firms

Elhanan Helpman

 

Working paper #5-2006 Trade, FDI, and the Organization of Firms
Elhanan Helpman

New developments in the world economy have triggered research designed to better understand
the changes in trade and investment patterns, and the reorganization of production across
national borders. Although traditional trade theory has much to offer in explaining parts of this
puzzle, other parts required new approaches. Particularly acute has been the need to model
alternative forms of involvement of business firms in foreign activities, because organizational
change has been central in the transformation of the world economy. This paper reviews the
literature that has emerged from these efforts.
The theoretical refinements have focused on the individual firm, studying its choices in
response to its own characteristics, the nature of the industry in which it operates, and the
opportunities afforded by foreign trade and investment. Important among these choices are organizational
features, such as sourcing strategies. But the theory has gone beyond the individual
firm, studying the implications of firm behavior for the structure of industries. It provides new
explanations for trade structure and patterns of FDI, both within and across industries, and
has identified new sources of comparative advantage.

Keywords: international trade, foreign direct investment, comparative advantage, heterogeneity,
incomplete contracts, organization of production.

JEL: D23, F1, F2.

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4-06 Separation of Powers and the Budget Process

Elhanan Helpman and Gene M. Grossman

Published in: Journal of Public Economics, Volume 92, Issues 3–4, 2008, Pages 407–425.

Working paper# 4-06 Separation of Powers and the Budget Process

Elhanan Helpman and Gene M. Grossman

We study budget formation in a model featuring separation of powers. In our model,
the legislature designs a budget bill that can include a cap on total spending and ear-
marked allocations to designated public projects. Each project provides random bene…ts
to one of many interest groups. The legislature can delegate spending decisions to the
executive, who can observe the productivity of all projects before choosing which to
fund. However, the ruling coalition in the legislature and the executive serve di¤erent
constituencies, so their interests are not perfectly aligned. We consider settings that di¤er
in terms of the breadth and overlap in the constituencies of the two branches, and asso-
ciate these with the political systems and circumstances under which they most naturally
arise. Earmarks are more likely to occur when the executive serves broad interests, while
a binding budget cap arises when the executive’s constituency is more narrow than that
of the powerful legislators.

JEL: H61, D78, H41

Keywords: government spending, …scal policy, pork-barrel politics, comparative
political economics.

Published in: Journal of Public Economics, Volume 92, Issues 3–4, 2008, Pages 407–425.

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3-06 Temptation–Driven Preferences
Eddie Dekel, Barton L. Lipman and Aldo Rustichini

 

Published in: Review of Economic Studies, Volume 76, Issue 3, 2009, Pages 937-971.

Working paper#3-06 Temptation–Driven Preferences
Eddie Dekel, Barton L. Lipman and Aldo Rustichini

"My own behavior baffles me. For I find myself not doing what I really want to do but
doing what I really loathe.” Saint Paul
What behavior can be explained using the hypothesis that the agent faces temptation
but is otherwise a “standard rational agent”? In earlier work, Gul–Pesendorfer [2001] use
a set betweenness axiom to restrict the set of preferences considered by Dekel, Lipman,
and Rustichini [2001] to those explainable via temptation. We argue that set betweenness
rules out plausible and interesting forms of temptation including some which may be
important in applications. We propose a pair of alternative axioms called DFC, desire
for commitment, and AIC, approximate improvements are chosen. DFC characterizes
temptation as situations where given any set of alternatives, the agent prefers committing
herself to some particular item from the set rather than leaving herself the flexibility of
choosing later. AIC is based on the idea that if adding an option to a menu improves
the menu, it is because that option is chosen under some circumstances. From this
interpretation, the axiom concludes that if an improvement is worse (as a commitment)
than some commitment from the menu, then the best commitment from the menu is
strictly preferred to facing the menu. We show that these axioms characterize a natural
generalization of the Gul–Pesendorfer representation.

JEL: D01, D11

Published in: Review of Economic Studies, Volume 76, Issue 3, 2009, Pages 937-971.

 

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2-06 Divorce, Remarriage and Child Support

Pierre-Andre Chiappori and Yoram Weiss

 

 

Punlished in: Journal of Labor Economics, Vol. 25, No. 1, 2007, Pages 37-74. 

Working paper #2-06 Divorce, Remarriage and Child Support

Pierre-Andre Chiappori and Yoram Weiss

Modern marriage markets display increasing turnover, with less marriage
but more divorce and remarriage. As a consequence, a large number of children
live in single parent and step parent households. There is substantial evidence
that children of divorced parents do not perform as well as comparable children
in intact families. However, there is also some evidence that this gap declines
with the aggregate divorce rate. We develop a model in which the higher
expectations for remarriage associated with higher divorce rates can trigger
an equilibrium in which divorced fathers make more generous transfers that
benefit their children and the mother in the aftermath of divorce. As a result,
the welfare loss of children from the separation of their parents can be lower
when divorce and remarriage rates rise.

Punlished in: Journal of Labor Economics, Vol. 25, No. 1, 2007, Pages 37-74. 

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1-06 Partnership dissolution with interdependent

Philippe Jehiel† and Ady Pauzner‡

Punlished in: The RAND Journal of Economics, Volume 37, Issue 1, 2006, pages 1–22.

Working paper #1-06 Partnership dissolution with interdependent

Philippe Jehiel† and Ady Pauzner‡

We study partnership dissolution when the valuations are interdependent and only
one party is informed about the valuations. In contrast with the case of private values
(Cramton, Gibbons, and Klemperer 1987), in which efficient trade is feasible whenever
initial shares are about equal, there exists a wide class of situations in which full
efficiency cannot be reached. In these cases: (1) The subsidy required to restore the
Þrst-best is minimal when the entire ownership is allocated initially to one of the
parties. (2) Ruling out external subsidies, the second-best welfare is maximized when
one of the parties initially has full ownership.

Punlished in: The RAND Journal of Economics, Volume 37, Issue 1, 2006, pages 1–22.

 

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