Institutions and the Scale Effect

Growth models which imply a scale effect are commonly refuted on the basis of empirical evidence. A focus on the extent of the market as opposed to the scale of the country has led recent studies to reconsider the role that country scale plays when conditioning on other factors. We consider a variant of a simple learning by doing model to account for the potential role for institutions in determining the strength – and direction – of the scale effect. Using cross-country data, we find a significant interaction between property rights institutions and the effect of scale on long-run growth: In countries with poor property rights institutions, scale is positively related with income per capita; where property rights institutions are good, higher scale is associated with lower per capita ncomes. We find no evidence of such role for contracting institutions.

An investigation of customer order flow in the foreign exchange market

This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new, and the largest, proprietary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make several contributions. Firstly, we investigate the extent to which customer order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables. Secondly, we address the issue of whether order flows contain (private) information which explain exchange rates changes. Thirdly, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets

Infrastructure Finance and Industrial Takeoff in England

That financial matters did not constrain industrial takeoff in the UK is generally accepted in the historical literature; in contrast, contemporary empirical analyses have found evidence that financial development can be a causal determinant of economic growth. We look to reconcile these findings by concentrating on a particular aspect of industrialising UK where inefficiencies in finance could have had bite: The finance of physical infrastructures. We document the historical record and develop the importance of spatial disaggregation and spillovers in both technological and financial development. We develop a simple model that captures the nature of infrastructure finance within a theory of endogenous growth where financial costs are endogenous. We argue that the conception of the finance-growth nexus as a largely static, aggregative phenomenon misses out a good deal of complexity and we relate that complexity to a number of implications for regulation of both financial systems and the emergence of infrastructures

The effects of entry in thin markets

We consider entry of additional firms into the market for a single commodity in which both sellers and buyers are permitted to interact strategically. We show that the market is quasi-competitive, in that the inclusion of an additional seller lowers the price and increases the volume of trade, as expected. However, whilst buyers benefit from this change under reasonable conditions on preferences, we cannot conclude that sellers are always made worse off in the face of more intense competition, contrary to the conventional wisdom. We characterize the conditions under which entry by new sellers may raise the equilibrium profit of existing sellers, which will depend in an intuitive way on the elasticity of a strategic analog of demand and the market share of existing sellers, and encompass completely standard economic environments.

Finance and Balanced Growth

The Uzawa (1961) theorem applied to finance and growthsuggests that a long-run positive correlation between financial efficiency and depth is only present when variations in the extent of access to financial services are considered. Improvements in financial efficiency can lead to new capital augmenting technologies along the balanced path, but only improvements in financial efficiency directed towards labor can change the rate of growth in the long-run. These findings suggest ways to understand some of the more nuanced relationships between finance and growth observed in the data and point in a number of directions for future research.

Contracting Institutions and Development

The quality of contracting institutions has been thought to be of second-order importance next to the impact that good property rights institutions can have on long-run growth. Using a large range of proxies for each type of institution, we find a robust negative link between the quality of contracting institutions and long-run growth when we condition on property rights and a number of additional macroeconomic variables. Although the result remains something of a puzzle, we present evidence which suggests that only when property rights institutions are good do contracting institutions appear also to be good for development. Good contracting institutions can reduce long-run growth when property rights are not secured, presumably because the gains from the (costly) contracting institutions cannot be realised. This suggests that contracting institutions can benefit growth, and that the sequence of institutional change can matter.

Transaction Costs and Institutions

This paper proposes a simple framework for understanding endogenous transaction costs - their composition, size and implications. In a model of diversification against risk, we distinguish between investments in institutions that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues.

Trade in bilateral oligopoly with endogenous market formation

We study a strategic market game in which traders are endowed with both a good and money and can choose whether to buy or sell the good. We derive conditions under which a non-autarkic equilibrium exists and when the only equilibrium is autarky. Autarky is ‘nice’ (robust to small perturbations in the game) when it is the only equilibrium, and ‘very nice’ (robust to large perturbations) when no gains from trade exist. We characterize economies where autarky is nice but not very nice; that is, when gains from trade exist and yet no trade takes place.

Domestic Violence and Football in Glasgow: Are Reference Points Relevant?

Much research suggests that sporting events can trigger domestic violence with recent evidence suggesting that pre-match expectations (which can be interpreted as reference points) play an especially important role in this relationship. In particular, unexpectedly disappointing results have been associated with large increases in domestic violence. This paper contributes to this literature using a new data set containing every domestic violence incident in Glasgow over a period of more than eight years. We find that Old Firm matches, where Glasgow rivals Celtic and Rangers play, are associated with large increases in domestic violence (regardless of the timing or the outcome of the match). Non-Old Firm matches tend to have little impact on domestic violence. Furthermore, we fi nd little evidence for the importance of reference points. Matches with disappointing outcomes, relative to pre-match expectations, are found to be associated with unusual increases in domestic violence only in a very limited set of matches.

Domestic Violence and Football in Glasgow: Are Reference Points Relevant?

Much research suggests that sporting events can trigger domestic violence with recent evidence suggesting that pre-match expectations (which can be interpreted as reference points) play an especially important role in this relationship. In particular, unexpectedly disappointing results have been associated with large increases in domestic violence. This paper contributes to this literature using a new data set containing every domestic violence incident in Glasgow over a period of more than eight years. We find that Old Firm matches, where Glasgow rivals Celtic and Rangers play, are associated with large increases in domestic violence (regardless of the timing or the outcome of the match). Non-Old Firm matches tend to have little impact on domestic violence. Furthermore, we find little evidence for the importance of reference points. Matches with disappointing outcomes, relative to pre-match expectations, are found to be associated with unusual increases in domestic violence only in a very limited set of matches.

On Cobb-Douglas Preferences in Bilateral Oligopoly

Bilateral oligopoly is a simple model of exchange in which a finite set of sellers seek to exchange the goods they are endowed with for money with a finite set of buyers, and no price-taking assumptions are imposed. If trade takes place via a strategic market game bilateral oligopoly can be thought of as two linked proportional-sharing contests: in one the sellers share the aggregate bid from the buyers in proportion to their supply and in the other the buyers share the aggregate supply in proportion to their bids. The analysis can be separated into two ‘partial games’. First, fix the aggregate bid at B; in the first partial game the sellers contest this fixed prize in proportion to their supply and the aggregate supply in the equilibrium of this game is X˜ (B). Next, fix the aggregate supply at X; in the second partial game the buyers contest this fixed prize in proportion to their bids and the aggregate bid in the equilibrium of this game is ˜B (X). The analysis of these two partial games takes into account competition within each side of the market. Equilibrium in bilateral oligopoly must take into account competition between sellers and buyers and requires, for example, ˜B (X˜ (B)) = B. When all traders have Cobb-Douglas preferences ˜ X(B) does not depend on B and ˜B (X) does not depend on X: whilst there is competition within each side of the market there is no strategic interdependence between the sides of the market. The Cobb-Douglas assumption provides a tractable framework in which to explore the features of fully strategic trade but it misses perhaps the most interesting feature of bilateral oligopoly, the implications of which are investigated.

Spatial Takeoff in the First Industrial Revolution

Using the framework of Desmet and Rossi-Hansberg (forthcoming), we present a model of spatial takeoff that is calibrated using spatially-disaggregated occupational data for England in c.1710. The model predicts changes in the spatial distribution of agricultural and manufacturing employment which match data for c.1817 and 1861. The model also matches a number of aggregate changes that characterise the first industrial revolution. Using counterfactual geographical distributions, we show that the initial concentration of productivity can matter for whether and when an industrial takeoff occurs. Subsidies to innovation in either sector can bring forward the date of takeoff while subsidies to the use of land by manufacturing firms can significantly delay a takeoff because it decreases spatial concentration of activity.

Spatial Takeoff in the First Industrial Revolution

Using the framework of Desmet and Rossi-Hansberg (forthcoming), we present a model of spatial takeoff that is calibrated using spatially-disaggregated occupational data for England in c.1710. The model predicts changes in the spatial distribution of agricultural and manufacturing employment which match data for c.1817 and 1861. The model also matches a number of aggregate changes that characterise the first industrial revolution. Using counterfactual geographical distributions, we show that the initial concentration of productivity can matter for whether and when an industrial takeoff occurs. Subsidies to innovation in either sector can bring forward the date of takeoff while subsidies to the use of land by manufacturing firms can significantly delay a takeoff because it decreases spatial concentration of activity.

Estimating the Price of ROCs

The UK government introduced the Renewable Obligation (RO), a system of tradable quotas, to encourage the installation of renewable electricity capacity. Each unit of generation from renewables created a renewable obligation certificate (ROC). Electricity generators must either; earn ROCs through their own production, purchase ROCs in the market or pay the buy-out price to comply with the quota set by the RO. A unique aspect of this regulation is that all entities holding ROCs receive a share of the buy-out fund (the sum of all compliance purchases using the buy-out price). This set-up ensures that the difference between the market price for ROCs and the buy-out price should equal the expected share of the buy-out fund, as regulated entities arbitrage these two compliance options. The expected share of the buy-out fund depends on whether enough renewable generation is available to meet the quota. This analysis tests whether variables associated with renewable generation or electricity demand are correlated with, and thus can help predict, the price of ROCs.

A Theory of Wage Setting Behavior

Concerns for fairness, workers' morale and reciprocity infuence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn in uences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms expectations are key drivers of the propositions derived.