The Appraisal of projects with environmental impacts. Efficiency and Sustainability

It is usually assumed that the appraisal of the impacts experienced by present generations does not entail any difficulty. However, this is not true. Moreover, there is not a widely accepted methodology for taking these impacts into account. Some of the controversial issues are: the appropriate value for the discount rate, the choice of the units for expressing the impacts, physical or monetary units -income, consumption or investment- and the valuation of tangible and intangible goods. When approaching the problem of very long term impacts, there is also the problem of valuing the impacts experienced by future generations, through e.g., the use of an intergenerational discount rate. However, if this were the case, the present generation perspective would prevail, as if all the property rights on the resources were owned by them. Therefore, the sustainability requirement should also be incorporated into the analysis. We will analyze these problems in this article and show some possible solutions.

North-South trade and directed technical change

In a world where poor countries provide weak protection for intellectual property rights (IPRs), market integration shifts technical change in favor of rich nations. Through this channel, free trade may amplify international income differences. At the same time, integration with countries where IPRs are weakly protected can slow down the world growth rate. An important implication of these results is that protection of intellectual property is most beneficial in open countries. This prediction, which is novel in the literature, is consistent with evidence from a panel of 53 countries observed in the years 1965-1990. The paper also provides empirical support for the mechanism linking North-South trade to the direction of technical change: an increase in import penetration from low-wage, low-IPRs, countries is followed by a sharp fall in R&D investment in a panel of US manufacturing sectors.

Subgroups of small index in Aut(Fn) and Kazhdan's property (T)

We give a series of interesting subgroups of finite index in Aut(Fn). One of them has index 42 in Aut(F3) and infinite abelianization. This implies that Aut(F3) does not have Kazhdan’s property (T) (see [3] and [6] for another proofs). We proved also that every subgroup of finite index in Aut(Fn), n &= 3, which contains the subgroup of IA-automorphisms, has a finite abelianization.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

Political Risk, Economic Integration, and the Foreign Direct Investment Decision

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

The Global Side of the Investment-Savings Puzzle

In this paper we re-examine the long standing and puzzling correlation between national savings and investment in industrial countries. We apply an econometric methodology that allows us to separate idiosyncratic correlation at the country level from correlation at the global level. In a major break with the existing literature, we find no evidence of a long run relationship in the idiosyncratic components of savings and investment. We also find that the global components in savings and investments comove, indicating that they react to shocks of a global nature.

Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa

In this paper we diverge from the existing empirical literature on FDI determinants in two ways. First, we decompose the sources of the foreign direct investment (FDI) gap between Sub-Saharan Africa (SSA) and other developing regions. Once market size has been accounted for, we nd that SSA's FDI de cit is mostly explained by insufficient provision of public goods: low human capital accumulation, especially health, in SSA explains 100-140% of the inter-regional FDI gaps. Second, we estimate the indirect effect of infectious diseases on FDI through their direct impact on health. We find that a 1% point rise in HIV prevalence in the adult population is associated with a decrease in net FDI inflows of 3.5%, while a country in which 100% of the population is at risk of contracting deadly malaria receives about 16% less FDI than a similar country located in a malaria-free region.

Do Institutions Matter for Foreign Direct Investment?

In this paper the role of institutions in determining foreign direct investment (FDI) is investigated using a large panel of 107 countries during 1981 and 2005. We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights, the rule of law and expropriation risk. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing and particularly in services. We also provide policy implications for institutional reform.

Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico

This paper shows that introducing weak property rights in the standard real business cycle (RBC) model can help to explain economic fluctuations. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights only - without technology shocks - can match the second moments in the data for Mexico well. In particular, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data, especially those related to labor. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980-1994, which is a feature that the neoclassical model cannot match.

Short-Run Strategies For Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982-1994 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

Strategic investment and international outsourcing in unionised oligopoly

We critically consider the conventional belief that the attractiveness of international outsourcing lies in cheaper labour costs overseas and that it offers a means to ‘escape’ the power of unions. We develop an oligopoly model in which firms facing unionised domestic labour market choose between producing an intermediate in-house or outsourcing it to a non-unionised foreign supplier that makes a relationship specific investment in developing the intermediate. We show that outsourcing typically results in higher wages and does not always reduce marginal costs. Trade liberalisation favours outsourcing particularly for the relatively less efficient firms.

Short-Run Strategies For Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982-1994 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Using Effluent Charges in Promoting Investment in Water Pollution Control Technology: A Model of Coordination Failure among Firms

Untreated wastewater being directly discharged into rivers is a very harmful environmental hazard that needs to be tackled urgently in many countries. In order to safeguard the river ecosystem and reduce water pollution, it is important to have an effluent charge policy that promotes the investment of wastewater treatment technology by domestic firms. This paper considers the strategic interaction between the government and the domestic firms regarding the investment in the wastewater treatment technology and the design of optimal e­ffluent charge policy that should be implemented. In this model, the higher is the proportion of non-investing firms, the higher would be the probability of having to incur an e­ffluent charge and the higher would be that charge. On one hand the government needs to impose a sufficiently strict policy to ensure that firms have strong incentive to invest. On the other hand, it cannot be too strict that it drives out firms which cannot afford to invest in such expensive technology. The paper analyses the factors that affect the probability of investment in this technology. It also explains the difficulty of imposing a strict environment policy in countries that have too many small firms which cannot afford to invest unless subsidised.

Negative investment in China: financing constraints and restructuring versus growth

This paper attempts to address a puzzle in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative net investment is commonly found at the microeconomic level. Using a large firm-level dataset, we test three hypotheses to explain the existence and extent of negative investment in each ownership group: what we term the efficiency (or restructuring) hypothesis, the (lack of) financing hypothesis, and the (slow) growth hypothesis. Our panel data probit estimations shows that negative investment by state-owned firms can be explained mainly by inefficiency: owing to over-investment or mis-investment in the past, these firms have had to restructure and to get rid of obsolete capital in the face of increasing competition and hardening budgets. The financing explanation holds for private firms, which have had to divest in order to raise capital. However, rapid economic growth weighs against both effects in all types of firms, with a larger impact for firms in the private and foreign sectors. A tobit model, estimated to examine the determinants of the amount of negative investment, yields similar conclusions.