September 5th, 2010

Research Papers

LCERPA 2010-2
Title: LONG MEMORY IN DIAMOND MARKET RETURNS AND VOLATILITY
Author(s): Lu, Chenxi, Terence Tai-Leung Chong and Wing Hong Chan.
Date uploaded: April 2010

Abstract: This paper provides a first attempt to test for long memory in the international diamond market returns and volatility. The results from Lo's modified R/S statistic suggest that diamond returns do not have long memory, while strong evidence is found for long memory in diamond volatilities. The results have important implications for the efficiency of the diamond market and predictability of the diamond return and volatility.

Keywords: Long memory, Modified R/S statistic, Diamond market

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LCERPA 2010-1
Title: LOSS AVERSION AND INTERTEMPORAL CHOICE: A LABORATORY INVESTIGATION
Author(s): R. J. Oxoby and William G. Morrison.
Date uploaded: March 2010

Abstract: We present results from a laboratory study of loss aversion in the context of intertemporal choice. We investigate whether the provision of (windfall) endowments results in different elicited discount rates relative to subjects who earn income or earn and retain the income for a period before making intertemporal decisions. We hypothesize that loss aversion in an intertemporal choice yields higher discount rates among subjects earning and retaining. Our results support this hypothesis: among subjects who earn and retain their income we elicit substantially higher discount rates relative to those experiencing a windfall gain.

Keywords: intertemporal choice, discount rates, experiments

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LCERPA 2009-11
Title: WHY DOES DIVERSITY MATTER? - AN EMPIRICAL ANALYSIS OF PIPED WATER PROVISION IN SUB-SAHARAN AFRICA
Author(s): Ken Jackson
Date uploaded: October 2009

Abstract: Ethnic diversity has been shown to have signifcant, negative efects on the provision of basic public goods, in both developed and developing countries. However, the mechanism underlying this relationship is not fully understood. Two basic theories are drawn from the literature and incorporated within a single model, allowing for the derivation of key diferences in their empirical predictions. The critical diference between models of differential demand and those of collective action problems lies in the distribution of public good provision across households. Using the DHS survey from 15 countries of Sub-Saharan Africa, covering over 100,000 households, I am able to test for the presence of aggregate effects of ethnic diversity and the distributional consequences. The results suggest that local ethnic diversity plays a critical role in limiting the provision of piped water in Sub-Saharan Africa, and that the mechanism behind this effect is ineffective local governance.

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LCERPA 2009-10
Title: Contract Enforceability and the Evolution of Social Capital
Author(s): Ken Jackson
Date uploaded: September 2009

Abstract: Social capital, in the form of generalized trust, appears to have signi cant consequences for economic development. Yet we know little about how social capital evolves, and more specifically, on the role of government institutions in promoting or hindering social capital. This paper develops a model of social capital evolution that focuses on the interaction between government institutions related to contract enforcement and the incentives for civic engagement. The key results suggest a non-linear relationship between government institutions and social capital development, with only intermediate levels of contracting institutions supporting social capital development. For countries with low-levels of social capital, there exists a social capital trap, as no level of contracting institutions can generate the incentives necessary to support the development of social capital. The presence of social divisions caused by factors such as ethnic diversity or wealth inequality may exacerbate this problem.

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LCERPA 2009-09
Title: UNDERSTANDING SOCIAL INCLUSION, SOCIAL COHESION AND SOCIAL CAPITAL
Author(s): Robert J. Oxoby
Date uploaded: Aug 2009

Abstract: The topics of social capital, social cohesion, and social inclusion are increasingly gaining interest in economics, sociology, and politics, particularly in regards to addressing poverty and designing related policies. Here, we seek to develop the connections and interdependencies between these related concepts. We offer a framework for understanding the differences between these concepts and how they fit together in individual decision making.

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LCERPA 2009-08
Title: A QUESTION OF SCALE: ETHNIC DIVERSITY AND THE PROVISION OF PUBLIC GOODS
Author(s): Ken Jackson
Date uploaded: June 2009

Abstract: Ethnic diversity has been shown to have negative consequences on the delivery of key public goods. It may be expected that the impact of ethnicity will be most critical in the diverse societies of Sub-Saharan Africa where the problems of development appear particularly in-tractable. However, given the centralized nature of African politics, the measurement of ethnic diversity is an important factor in the analysis. This paper demonstrates that ethnic diversity has a significant impact on the provision of basic public services such as water and electricity across 13 countries of Sub-Saharan Africa, when measured at local and regional scales, respectively.

Keywords - ethnic diversity, public goods, Africa JEL codes - H42, O17, H70

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LCERPA 2009-07
Title: FINANCIAL INTEGRATION, NOMINAL RIGIDITY AND MONETARY POLICY
Author(s): Ke Pang
Date uploaded: April 2009

Abstract: This paper analyzes the welfare impact of financial integration in a standard monetary open-economy model. Financial integration may reduce welfare in the presence of nominal price rigidity and constraints on the efficient use of monetary policy. The reason is that financial integration leads to an increase in the terms of trade volatility, which is already excessive from a welfare standpoint. From a policy perspective, the model implies that developing economies that are experiencing financial integration may attempt to alleviate the welfare cost of integration by stabilizing the exchange rate, which eliminates the excessive terms of trade adjustment. Hence, this paper provides a novel explanation of "fear of floating". On the other hand, for advanced economies that have the ability to operate efficient inflation targeting monetary policies, financial integration is always beneficial. Thus, the model accounts for the observed acceleration in cross-border asset trade among advanced economies in the early 1990s, as it was mainly the industrial countries that switched to an inflation targeting regime at the time.

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LCERPA 2009-06
Title: THE 1974 AND 2008 FOOD PRICE CRISES: DÉJÀ-VU?
Author(s): Sue Horton
Date uploaded: April 2009

Abstract: The most important policy lesson of the 1974 crisis - that additional investment in agricultural development is a high priority - is even more true in responding to the 2008 crisis. Climate change is bringing additional urgency to the needs in this area.

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LCERPA 2009-05
Title: IODINE STATUS AND AVAILABILITY OF IODIZED SALT: A CROSS-COUNTRY ANALYSIS
Author(s): Sue Horton and Alexander Miloff
Date uploaded: April 2009

Abstract: We use simple multivariate regression for two separate datasets, one for 30 developing countries, and one for 13 developed countries, using data on coverage of salt iodization and soil iodine levels. Results: Median urinary iodine excretion is significantly and positively related to household consumption of iodized salt (elasticity is 0.73) for developing countries, but the soil coefficient is not significant, likely because the dummy variable is not well measured. For the developed countries, there is a positive and significant effect of salt penetration rates (elasticity of 0.83), and a positive and significant effect of soil iodine(elasticity of 0.77). There is also a suggestion that countries with more serious soil deficits, are more likely to iodize salt, such that univariate regressions of urinary iodine excretion on salt consumption or penetration rates underestimate the beneficial effects of iodized salt availability on iodine nutrition. Conclusions: There are limitations to cross-section (ecologic) studies such as this, and the data are not perfect. Nevertheless, the results provide support for policies to iodize salt, given the widespread deficiency of iodine in diets worldwide.

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LCERPA 2009-04
Title: Equity Home Bias and Nominal Rigidity
Author(s): Ke Pang
Date uploaded: March 2009

Abstract: This paper examines optimal portfolio decisions in a monetary open-economy DSGE model. In a complete market environment, Engel and Matsumoto (2005) find that sticky price can generate equity home bias. However, their result is sensitive to the structure of the financial market. In an incomplete market environment, we find super home bias" in the equilibrium equity portfolio, which casts doubt on the ability of sticky price alone in describing the observed equity portfolios. We further show that introducing sticky wage helps to match the data.

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LCERPA 2009-03
Equality Through Exposure: International Trade and the Racial Wage Gap
Author(s): Azim Essaji, Gregory Sweeney and Alexandros Kotsopoulos
Date uploaded: Jan 2009

Abstract: A key implication of Becker's (1957) work on discrimination is that greater product market competition can reduce employment discrimination generally, and discriminatory wage gaps in particular. Using US data on manufacturing wages and import exposure, we explore whether increased competition, in the form of a heightened exposure to imports, reduces the racial wage gap. Our findings support Becker's contention. We find that import exposure helped narrow the racial wage gap by about 1.4 percentage points between 1983 and 1993. The effect is especially pronounced among the most disadvantaged: unskilled Southern workers. For them, import exposure helped reduce racial wage disparities by 2.2 percentage points.

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LCERPA Research paper number: 2009-02
Common (Stock) Sense about Risk-Shifting and Bank Bailouts
Author(s): Linus Wilson and Wendy Wu
Date uploaded: Jan 2009

Abstract: If a bank faces potential insolvency, it will be tempted to reject good loans and accept bad loans to shift risk onto its creditors. We analyze effectiveness of buying up toxic mortgages in troubled banks, buying preferred stock, and buying common stock. If bailouts for banks that are deemed 'too-big-too-fail' involve buying assets at above market values, then these banks are encouraged ex ante to gamble on bad assets. Buying up common (preferred) stock is always the most (least) ex ante- and ex post-efficient type of capital infusion whether or not the bank volunteers for the recapitalization.

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LCERPA Research paper number: 2009-01
First Contract Arbitration: Effects on Bargaining and Work Stoppages
Author(s): Susan Johnson
Date uploaded: Jan 2009

Abstract: Newly certified unions often have a difficult time negotiating a first agreement. The Employee Free Choice Act contains a proposal to reform the National Labor Relations Act to provide for First Contract Arbitration (FCA). This article uses a panel of Canadian jurisdictions which have introduced FCA at different times over several decades, to address three questions:

(1) How does first contract arbitration (FCA) affect the incidence of first agreement work stoppages? (2) Does FCA encourage or discourage collective bargaining involving first agreements? (3) Does FCA influence the duration of first agreement work stoppages? I find that FCA reduces first agreement work stoppage incidence by at least 50 percent. Despite this, FCA is not accessed frequently and it is even rarer for a first contract (in whole or in part) to be imposed. Together these results suggest that FCA encourages collective bargaining by creating an incentive for the parties to bargain in good faith and negotiate an agreement. Finally, FCA has no statistically significant impact on the duration of first agreement work stoppages.

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LCERPA Research paper number: 2008-04
Title: Factor adjustments after deregulation: panel evidence from Columbian plants.
Author(s): Marcela Eslava, John Haltiwanger, Adriana Kugler and Maurice Kugler
Date uploaded: Sep 2008

Abstract: We analyze employment and capital adjustments using plant data from the Colombian Annual Manufacturing Survey. We estimate adjustment functions for capital and labour as a non-linear function of the gaps between desired and actual factor levels, allowing for interdependence in adjustments of the two factors. In addition to non-linear employment and capital adjustments in response to market fundamentals, we find that capital shortages reduce hiring and labour surpluses reduce capital shedding. We also find that after factor market deregulation in Colombia in 1991, factor adjustment hazards increased on the job destruction and capital formation margins. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency. Yet, the actual impact of the Colombian deregulation on aggregate productivity through factor adjustment was modest.

LCERPA Research paper number: 2008-03
Title: Product Quality at the Plant Level: Plant Size, Exports, Output Prices and Input Prices in Colombia
Author(s): M. Kugler and E. Verhoogen
Date uploaded: Jan 2008

Abstract: This paper uses uniquely rich and representative data on the unit values of 'outputs' (products) and inputs of Colombian manufacturing plants to draw inferences about the extent of quality differentiation at the plant level. We extend the Melitz (2003) framework to include heterogeneity of inputs and a complementarity between plant productivity and input quality in producing output quality and we show that the resulting model carries distinctive implications for two simple reduced-form correlations - between output prices and plant size and between input prices and plant size - and for how those correlations vary across sectors. We then document three plant level facts: (1) output prices are positively correlated with plant size within industries, on average; (2) input prices are positively correlated with plant size within industries, on average; and (3) both correlations are more positive in industries with more scope for quality differentiation, as measured by the advertising and R & D intensity of U.S. firms. The correlations between export status and input and output prices are similar to those for plant size. These facts are consistent with our model of quality differentiation of both outputs and inputs, and difficult to reconcile with models that assume homogeneity or symmetry of either set of goods. Beyond recommending an amendment of the Melitz (2003) model, the results highlight shortcomings of standard methods of productivity estimation, generalize and provide an explanation for the well-known employer size-wage effect, and suggest new channels through which liberalization of trade in output markets may affect input markets and vice-versa.

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LCERPA Research paper number: 2008-02
Title: Revisiting the Coyne Affair: A Singular Event that Changed the Course Of Canadian Monetary History
Author(s): Pierre Siklos
Date uploaded: Aug 2008

Abstract: The Coyne Affair is the greatest institutional crisis faced by the Bank of Canada in its history. The crisis took place in 1959-1961 and led to the resignation of the Governor, once he was cleared of any wrongdoing. The crisis eventually resulted in a major reform of the Bank of Canada Act. Archival and empirical evidence is used to assess the performance of monetary policy throughout the 1950s. In doing so, a real-time dataset is constructed for both Canada and the US that permit estimation of reaction functions. I find that the case against James Coyne is 'not proven'.

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LCERPA Research paper 2008-01
Title: A model of duel-market airport operations to assess Canada's airport rent formula.
Author(s): William G. Morrison
Date uploaded: 17-09-08

Abstract: This paper develops a model in which an airport has both aviation and non-aviation activities and where demand complementarities exist between these markets. The model provides an analysis of aviation charges, and output under for-profit and non-profit governance structures, and in the case of non-profit airports, the model is used to assess the impact of Canada's recently revised airport rent formula, implemented as an ad valorem tax.

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