This paper assesses the determinants of European outward and inward processing trade. Thereby, it distinguishes between size, relative factor endowment, (other) cost factors and infrastructure variables. Using a large panel of bilateral processing trade flows of the EU12 countries at the aggregate level over the period 1988–1999, we find that infrastructure variables, relative factor endowments and other cost variables are important determinants for the EU's outward processing trade. Costs also play a key role for the EU's inward processing trade.
We examine the relationship between the supply of skilled labor, technological change and relative wages. In accounting for the role of skilled labor in both production activities and productivity- enhancing "support" activities we derive the following results. First, an increase in the supply of skilled labor raises the employment share of non-production labor within firms, without lowering relative wages. Second, new technologies raise wage inequality only in so far as they give incentives to firms to reallocate skilled labor towards non-production activities. In contrast, skill-biased technological change of the sort usually considered in the literature does not affect wage inequality.
Industrial delicensing which began in 1985 in India marked a discrete break from a past of centrally planned industrial development. Similar liberalization episodes are taking place across the globe. We develop a simple Schumpeterian growth model to understand how firms respond to the entry threat imposed by liberalization. The model emphasises that firm responses, even within the same industrial sector, are likely to be heterogeneous leading to an increase in within industry inequality. Technologically advanced firms and those located in regions with pro-business institutions are more likely to respond to the threat of entry by investing in new technologies and production processes. Empirical analysis using a panel of 3-digit state-industry data from India for the period 1980-1997 confirms that delicensing led to an increase in within industry inequality in industrial performance.
This article presents a tractable dynamic general equilibrium model explaining cross-country data on geographical mobility, unemployment, and labor market institutions. Rational forward-looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self-reinforcing mechanism can yield two steady-states: one "European" and one "American." The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI.
Trust pervades human societies. Trust is indispensable in friendship, love, families and organizations, and plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success. Little is known, however, about the biological basis of trust among humans. Here we show that intranasal administration of oxytocin, a neuropeptide that plays a key role in social attachment and affiliation in non-human mammals, causes a substantial increase in trust among humans, thereby greatly increasing the benefits from social interactions. We also show that the effect of oxytocin on trust is not due to a general increase in the readiness to bear risks. On the contrary, oxytocin specifically affects an individual's willingness to accept social risks arising through interpersonal interactions. These results concur with animal research suggesting an essential role for oxytocin as a biological basis of prosocial approach behaviour.
The paper presents a simple model to study the effects of rumours on markets. Agents in our economy communicate with their local neighbours which gives rise to the possible spread of a rumour. As the rumour affects beliefs of the agents the evolution of the rumour has a direct impact on market outcomes. Our results show that if the rumour dies out long-run equilibrium prices correspond to pre-rumour values. However, if the rumour stays present it produces a price run-up for the good that is positively targeted by the rumour. Price run-ups related to rumours have been observed in empirical studies by Rose [Rose, A.M., 1951. Rumor in the stock market. Public Opinion Quarterly 15, 461–486], Pound and Zeckhauser [Pound, J., Zeckhauser, R., 1990. Clearly heard on the street: the effect of takeover rumors on stock prices. Journal of Business 63, 291–308] and Zivney et al. [Zivney, T., Bertin, W.J., Torabzadeh, K.M., 1996. Overreaction to take-over speculation. Quarterly Review of Economics and Finance 36, 89–115]. The present model provides an analytical foundation for this finding.
Is discounting of future decision-makers’ consumption utilities consistent with "pure" altruism toward those decision-makers, that is, a concern that they are better off according to their own, likewise forward-looking, preferences? It turns out that the answer is positive for many but not all discount functions used in the economics literature. In particular, "hyperbolic" discounting of the form used by Phelps and Pollak (1968) and Laibson (1997) is consistent with exponential altruism towards all future generations. More generally, we establish a one-to-one relationship between discount functions and altruism weight systems, and provide sufficient, as well as necessary, conditions for discount functions to be consistent with pure altruism.
This paper investigates the outcome of ageing on taxes and hospitalisation of the elderly using panel data on 23 Swedish county councils 1980–1999. We test two hypotheses; whether a larger share of elderly has no negative effect on bed days per elderly person and no positive effect on tax rates. We reject the first hypothesis but fail to reject the second hypothesis. Further we cannot reject the hypothesis of a unitary elasticity of the share of elderly on bed days per elderly person. These results imply that the old bear the entire cost of adjustment when the population grows older.
The conventional parameterizations of cumulative prospect theory do not explain the St. Petersburg paradox. To do so, the power coefficient of an individual’s utility function must be lower than the power coefficient of an individual’s probability weighting function.
We model income redistribution with dynamic distortions as determined by rational voting without commitment among individuals of different types and income realizations. We find that redistribution is too persistent relative to that chosen by a planner with commitment. The difference is larger, the lower is the political influence of young agents, the lower is the altruistic concern for future generations, and the lower is risk-aversion. Furthermore, there tends to be too much redistribution in the political equilibrium. Finally, smooth preference aggregation, as under probabilistic voting, produces less persistence and does not admit multiple equilibria, which occur under majority-voting aggregation.
