Start-up costs and pecuniary externalities as barriers to economic development

We use a dynamic monopolistic competition model to show that an economythat inherits a small range of specialized inputs can be trapped into alower stage of development. The limited availability of specialized inputsforces the final goods producers to use a labor intensive technology, whichin turn implies a small inducement to introduce new intermediate inputs. Thestart--up costs, which make the intermediate inputs producers subject todynamic increasing returns, and pecuniary externalities that result from thefactor substitution in the final goods sector, play essential roles in themodel.

Bubbly collateral and economic activity

This paper develops a model of the bubbly economy and uses it to study the effects of bailoutpolicies. In the bubbly economy, weak enforcement institutions do not allow firms to pledge futurerevenues to their creditors. As a result, "fundamental" collateral is scarce and this impairs the intermediationprocess that transforms savings into capital. To overcome this shortage of "fundamental"collateral, the bubbly economy creates "bubbly" collateral. This additional collateral supports anintricate array of intra- and inter-generational transfers that allow savings to be transformed intocapital and bubbles. Swings in investor sentiment lead to fluctuations in the amount of bubblycollateral, giving rise to bubbly business cycles with very rich and complex dynamics.Bailout policies can affect these dynamics in a variety of ways. Expected bailouts provideadditional collateral and expand investment and the capital stock. Realized bailouts reduce thesupply of funds and contract investment and the capital stock. Thus, bailout policies tend to fosterinvestment and growth in normal times, but to depress investment and growth during crisis periods.We show how to design bailout policies that maximize various policy objectives.

Measuring time-varying economic fears with consumption-based stochastic discount factors

This paper analyzes empirically the volatility of consumption-based stochastic discount factors as a measure of implicit economic fears by studying its relationship with future economic and stock market cycles. Time-varying economic fears seem to be well captured by the volatility of stochastic discount factors. In particular, the volatility of recursive utility-based stochastic discount factor with contemporaneous growth explains between 9 and 34 percent of future changes in industrial production at short and long horizons respectively. They also explain ex-ante uncertainty and risk aversion. However, future stock market cycles are better explained by a similar stochastic discount factor with long-run consumption growth. This specification of the stochastic discount factor presents higher volatility and lower pricing errors than the specification with contemporaneous consumption growth.

Motivation, test scores and economic success

This paper argues that low-stakes test scores, available in surveys, may be partially determinedby test-taking motivation, which is associated with personality traits but not with cognitiveability. Therefore, such test score distributions may not be informative regarding cognitiveability distributions. Moreover, correlations, found in survey data, between high test scoresand economic success may be partially caused by favorable personality traits. To demonstratethese points, I use the coding speed test that was administered without incentives to NationalLongitudinal Survey of Youth 1979 (NLSY) participants. I suggest that due to its simplicityits scores may especially depend on individuals' test-taking motivation. I show that controllingfor conventional measures of cognitive skills, the coding speed scores are correlated with futureearnings of male NLSY participants. Moreover, the coding speed scores of highly motivated,though less educated, population (potential enlists to the armed forces) are higher than NLSYparticipants' scores. I then use controlled experiments to show that when no performance-basedincentives are provided, participants' characteristics, but not their cognitive skills, affect effortinvested in the coding speed test. Thus, participants with the same ability (measured by theirscores on an incentivized test) have significantly different scores on tests without performance-based incentives.

Determinants of economic growth: Will data tell?

Many factors inhibiting and facilitating economic growth havebeen suggested. Can agnostics rely on international incomedata to tell them which matter? We find that agnostic priorslead to conclusions that are sensitive to differences acrossavailable income estimates. For example, the PWT 6.2 revisionof the 1960-96 income estimates in the PWT 6.1 leads tosubstantial changes regarding the role of government,international trade, demography, and geography. We concludethat margins of error in international income estimates appeartoo large for agnostic growth empirics.

Economic growth and investment in the Arab world

This paper analyses the economic growth performance in the Arab world overthe last forty years. The Arab world has managed to reduce povertyperformance despite its relatively disappointing growth performance. Werelate this poor performance of both oil and non-oil producers toinvestment. Contrary to widespread belief, we do not find evidence that lowquantity of investment is the main of low growth. The decline in theinvestment rate followed rather than preceded the reduction in the aggregategrowth rate. We conclude that the low quality of investment projects is thekey determinant of growth. The excessive reliance on public investment, thelow quality of financial institutions, the bad business environment (due topolitical and social instability and to excessive public intervention andoverregulation) and the low quality of human capital are importantdeterminants of systematically unproductive investment decisions and, thus,low economic growth.

Modern energy consumption and economic modernisation in Latin America and the Caribbean between 1890 and 1925

In the absence of comparable macroeconomic indicators for most of the Latin Americaneconomies before the 1930s, the apparent consumption of energy is used in this paper as a proxyof the degree of modernisation of Latin America and the Caribbean. This paper presents anestimate of the apparent consumption per head of modern energies (coal, petroleum andhydroelectricity) for 30 countries of Latin American and the Caribbean for 1890 to 1925,multiplying the number of countries for which energy consumption estimates were previouslyavailable. As a result, the paper provides the basis for a quantitative comparative analysis ofmodernisation performance beyond the few countries for which historical national accounts areavailable in Latin America.

Banks, liquidity crises and economic growth

How do the liquidity functions of banks affect investment and growth at different stages ofeconomic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where agents, who experience idiosyncratic liquidity shocks, can invest in a liquid storage technology or in a partially illiquid Cobb Douglas technology. By pooling liquidity risk, banks play a growth enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. We show that middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, they eventually converge to a financially safe long run steady state. Finally, the model replicates the empirical fact of higher costs of banking crises for middle income economies.

Economic rationality and ethical behavior

This paper argues that economic rationality and ethical behavior cannotbe reduced one to the other, casting doubts on the validity of formulaslike 'profit is ethical' or 'ethics pays'. In order to express ethicaldilemmas as opposing economic interest with ethical concerns, we proposea model of rational behavior that combines these two irreducible dimensions in an open but not arbitrary manner. Behaviors that are neither ethicalnor profitable are considered irrational (non-arbitrariness). However,behaviors that are profitable but unethical, and behaviors that are ethicalbut not profitable, are all treated as rational (openness). Combiningethical concerns with economic interest, ethical business is in turn anoptimal form of rationality between venality and sacrifice.Because every one prefers to communicate that he acts ethically, ethicalbusiness remains ambiguous until some economic interest is actuallysacrificed. We argue however that ethical business has an interest indemonstrating its consistency between communication and behavior by atransparent attitude. On the other hand, venal behaviors must remainconfidential to hide the corresponding lack of consistency. Thisdiscursive approach based on transparency and confidentiality helpsto further distinguish between ethical and unethical business behaviors.

Corporate criminal law and organization incentives: A managerial perspective

Corporate criminal liability puts a serious challenge to the economictheory of enforcement. Are corporate crimes different from other crimes?Are these crimes best deterred by punishing individuals, punishing corporations, or both? What is optimal structure of sanctions? Shouldcorporate liability be criminal or civil? This paper has two majorcontributions to the literature. First, it provides a common analyticalframework to most results presented and largely discussed in the field.In second place, by making use of the framework, we provide new insightsinto how corporations should be punished for the offenses committed bytheir employees.