IEPR Working Papers

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IEPR10.7

The Economic Costs of Naxalite Violence and The Economic Benefits of a unique Robust Security Response

Rahul Nilakantan and Saurabh Singhal

Abstract: Using the synthetic control method of analysis, we provide the first measurements of the macroeconomic costs of Naxalite violence in India, as well as exploit a natural experiment in one of the affected states to measure the direct economic benefits of a unique robust security response. Compared to a synthetic control region constructed from states not affected by Naxalite violence, we find that states affected by Naxalite violence lost on average 12.48% of their per capita NSDP over the period 1980 to 2000. Of the states affected by Naxalite violence, only one state i.e. Andhra Pradesh raised a specially trained and equipped police force in 1989 known as the Greyhounds, dedicated mainly to combating the Naxalite insurgency. Compared to a synthetic control region constructed from states affected by Naxalite violence that did not raise a specially trained anti-Naxalite police force, we find that Andhra Pradesh gained on average 17.23% of its per capita NSDP over the period 1989 to 2000. Placebo tests indicate that both results are significant.

JEL Classication : D74, F52, H56

IEPR10.6

Reforming Capitalism

Michael Magill, Martine Quinzii and Jean-Charles Rochet

Abstract: This paper presents a model of the stakeholder corporation and analyzes the equilibrium of an economy with stakeholder firms. The analysis is based on a model of a production economy that differs from the standard approach based on states of nature. The property that differentiates it from the standard model (which justifies the shareholder approach to the corporation) is that firms’ choices of investment influence the probability distributions of their outputs, and hence exert external effects on consumers and employees: as a result profit maximization and competitive behavior do not lead to Pareto optimality. Using a Coasian approach to resolve the problem of externalities, we show that if firms issue not only equity shares but also marketable property rights for employees and consumers, and if firms’ managers maximize the total values of their firms (shareholder value plus consumer and employee values) then Pareto optimality of equilibrium is restored when agents are identical. In the more realistic case where agents are heterogeneous, reforming capitalism by giving some weight to employee and consumer surpluses in the objective of the firms always increases social welfare.

IEPR10.5

Supply, Demand and Monetary Policy Shocks in a Multi-Country New Keynesian Model

Stephane Dees, M. Hashem Pesaran, L. Vanessa Smith, Ron P. Smith

Abstract: This paper estimates and solves a multi-country version of the standard DSGE New Keynesian (NK) model. The country-specic models include a Phillips curve determining inflation, an IS curve determining output, a Taylor Rule determining interest rates, and a real eective exchange rate equation. The IS equation includes a real exchange rate variable and a country-specic foreign output variable to capture direct inter-country linkages. In accord with the theory all variables are measured as deviations from their steady states, which are estimated as long-horizon forecasts from a reduced-form cointegrating global vector autoregression. The resulting rational expectations model is then estimated for 33 countries on data for 1980Q1- 2006Q4, by inequality constrained IV, using lagged and contemporaneous foreign variables as instruments, subject to the restrictions implied by the NK theory. The multi-country DSGE NK model is then solved to provide estimates of identied supply, demand and monetary pol icy shocks. Following the literature, we assume that the within country supply, demand and monetary policy shocks are orthogonal, though shocks of the same type (e.g. supply shocks in dierent countries) can be correlated. We discuss estimation of impulse response functions and variance decompositions in such large systems, and present estimates allowing for both direct channels of international transmission through regression coe!cients and indirect channels through error spillover eects. Bootstrapped error bands are also provided for the cross country responses of a shock to the US monetary policy.

Keywords: Global VAR (GVAR), New Keynesian DSGE models, supply shocks, demand shocks, monetary policy shocks.

JEL Classication : C32, E17, F37, F42.

IEPR10.4

The happiness–income paradox revisited

Richard A. Easterlin1, Laura Angelescu McVey, Malgorzata Switek, Onnicha Sawangfa, Jacqueline Smith Zweig

Abstract: The striking thing about the happiness–income paradox is that over the long-term —usually a period of 10 y or more—happiness does not increase as a country’s income rises. Heretofore the evidence for this was limited to developed countries. This article presents evidence that the long term nil relationship between happiness and income holds also for a number of developing countries, the eastern European countries transitioning from socialism to capitalism, and an even wider sample of developed countries than previously studied. It also finds that in the short-term in all three groups of countries, happiness and income go together, i.e., happiness tends to fall in economic contractions and rise in expansions. Recent critiques of the paradox, claiming the time series relationship between happiness and income is positive, are the result either of a statistical artifact or a confusion of the short-term relationship with the long-term one.

Keywords: Easterlin Paradox, life satisfaction, subjective well-being

IEPR10.3

Asymmetry and Revenue in First-Price Auctions

Harrison Cheng

Abstract: We show by an example that in first-price IPV auctions, asymmetry in bidders’valuations need not reduce the revenue compared to a benchmark symmetric model with the same amount of social surplus. Asymmetry need not reduce competition in first-price auctions.

Keywords: asymmetry, revenue effect, first-price auctions, private value

JEL classification: D4, D8

IEPR10.2

Assessing the Contribution of R&D to Total Factor Productivity – a Bayesian Approach to Account for Heterogeneity and Heteroscedasticity

Georges Bresson, Cheng Hsiao, Alain Pirotte

Abstract:This paper proposes a hierarchical Bayes estimator for a panel data random coefficient model with heteroscedasticity to assess the contribution of R&D capital to total factor productivity. Based on Hall (1993) data for 323 US firms over 1976-1990, we find that there appear to have substantial unobserved heterogeneity and heteroskedasticity across firms and industries that support the use of our Bayes inference procedure. We find much higher returns to R&D capital and a more pronounced downswing for the 1981-85 period, followed by a more pronounced upswing than those yielded by the
conventional feasible generalized least squares estimators or other estimates. The estimated elasticities of R&D capital are 0.062 for 1976-80, 0.036 for 1981-85 and 0.081 for 1986-90, while the estimated elasticities of ordinary capital are much more stable over these periods.

Keywords:R&D, Productivity, Heteroskedasticity, Hierarchical Bayes, Markov Chain Monte Carlo simulations, Panel data, Random coefficient model.

JEL Classification: C11, C23, D24.

IEPR10.1

A Panel Data Approach for Program Evaluation--Measuring the Benefits of Political and Economic Integration of Hong Kong with Mainland China

Cheng Hsiao, H. Steve Ching, Shui Ki Wan

Abstract:We propose a simple to implement panel data method to evaluate the impacts of social policy. The basic idea is to exploit the dependence among cross-sectional units to construct the counterfactuals. The cross-sectional correlations are attributed to the
presence of some (unobserved) common factors. However, instead of trying to estimate the unobserved factors, we propose to use observed data. We use a panel of 24 countries to evaluate the impact of political and economic integration of Hong Kong (HK) with Mainland China. We find that the political integration hardly had any impact. However, the economic integration has raised HK’s annual real GDP by about 4%.

Keywords:panel data, factor model, cross-sectional dependence, program evaluation, ARMA models.