Assessing the Political Viability of Labour Market Reform: The Case of Employment Protection

We analyze the political support for employment protection legislation. Unlike my previous work on the same topic, this paper pays a lot of attention to the role of obsolescence in the growth process. In voting in favour of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. The support for employment protection will then depend on the value of the latter relative to the cost of the former. We highlight two key deeterminants of this trade-off: first, the workers' bargaining power, second, the economy's growth rate-more precisely its rate of creative destruction.

Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Labour Market Formation Patterns in Nineteenth Century Catalonia

In this paper we portray the features of the Catalan textiles labour market in a period of technological change. Supply and demand for labour as well as a gendered view of living standards are presented. A first set of results is that labour supply adjusts to changes in labour demand trough the spread of new demographic attitudes. In this respect we imply that labour economic agents (or labour population) were able to modify the economic condition of their children. A second set of results refers to living standards and income distribution inequality. In this respect we see that unemployment and protectionism were the main sources breeding income inequality. A third set of results deals with the extreme labour market segmentation according to gender. Since women s real wages did not obey to an economic rationale we conclude that women were outside the labour market.

The Simple Economics of Conglomeration with Bankruptcy Costs: Separate or Joint Financing?

Which projects should be financed through separate non-recourse loans (or limited- liability companies) and which should be bundled into a single loan? In the pres- ence of bankruptcy costs, this conglomeration decision trades off the benefit of co- insurance with the cost of risk contamination. This paper characterize this tradeoff for projects with binary returns, depending on the mean, variability, and skewness of returns, the bankruptcy recovery rate, the correlation across projects, the number of projects, and their heterogeneous characteristics. In some cases, separate financing dominates joint financing, even though it increases the interest rate or the probability of bankruptcy.

From severance pay to self-insurance: Effects of severance payments savings accounts in Colombia

In 1990 Colombia replaced its traditional system of severance paymentswith a new system of severance payments savings accounts (SPSAs). Althoughseverance payments often are justified on the grounds that they provideinsurance against earnings loss, they also increase costs for employersand distort employment decisions. The impact of severance payments dependslargely on how much of the costs to employers can be shifted to workers.The theoretical analysis in this paper shows that, in contrast to atraditional system of severance payments, the system of SPSAs facilitatesthe shifting of severance payments costs to workers in the form of lowerwages. Empirical results using the Colombian National Household Surveysindicate that the introduction of SPSAs shifted around 80% of the totalseverance payments contributions to wages and had a positive effect onweekly hours. Results using the 1997 Colombian Living Standards MeasurementSurvey suggest that, although SPSAs in part replaced employer insurancewith self-insurance, SPSAs continue to play a consumption smoothing rolefor the non-employed.

The illusion of control, the structures of prizes and the demand for football pools in Spain

Using data for all the fixtures for the seasons from 1972-73 to 2002-03, we estimate a dynamic model of demand for football pools in Spain paying attention to whether their main economic explanatory variable is the effective price of a ticket or the jackpot. Additionally, we evaluate the importance of the composition of the list of games in terms of whether First Division matches are included or not. Results show that the jackpot model is preferred to the effective price model, having important implications in terms of how the structure of the game should be changed in order to increase demand.

Are rules-based government programs shielded from special-interest politics? Evidence from revenue-sharing transfers in Brazil

Manipulation of government finances for the benefit of narrowly defined groups is usuallythought to be limited to the part of the budget over which politicians exercise discretion inthe short run, such as earmarks. Analyzing a revenue-sharing program between the centraland local governments in Brazil that uses an allocation formula based on local population estimates,I document two main results: first, that the population estimates entering the formulawere manipulated and second, that this manipulation was political in nature. Consistent withswing-voter targeting by the right-wing central government, I find that municipalities withroughly equal right-wing and non-right-wing vote shares benefited relative to opposition orconservative core support municipalities. These findings suggest that the exclusive focus ondiscretionary transfers in the extant empirical literature on special-interest politics may understatethe true scope of tactical redistribution that is going on under programmatic disguise.

The drift of public spending towards the elderly: A generational analysis of the trend of public policies in Spain

The tendency for public welfare spending to be increasingly aimed at the elderly has been pointed out for the US and other developed countries. While population ageing is a common trend, it is not obvious why the shift in spending exceeds the trend in ageing, or why per capita spending on the elderly increases.We show that this is the case in Spain, identify the losers from this development, discuss the policies that underlie this trend, and propose adjustments based on Musgrave s fixed proportions rule as an inter-generationally fair distribution.

Doctors without borders: The returns to an occupational license for Soviet immigrant physicians in Israel

Re-licensing requirements for professionals that move across borders arewidespread. In this paper, we measure the returns to an occupationallicense using novel data on Soviet trained physicians that immigrated toIsrael. An immigrant re-training assignment rule used by the IsraelMinistry of Health provides an exogenous source of variation inre-licensing outcomes. Instrumental variables and quantile treatmenteffects estimates of the returns to an occupational license indicate excesswages due to occupational entry restrictions and negative selectioninto licensing status. We develop a model of optimal license acquisitionwhich suggests that the wages of high-skilled immigrant physicians in thenonphysician sector outweigh the lower direct costs that these immigrantsface in acquiring a medical license. Licensing thus leads to lower averagequality of service. However, the positive earnings effect of entry restrictionsfar outweighs the lower practitioner quality earnings effect that licensinginduces.

Market and institutional determinants in the regulation of conveyancers

Demand for law professionals in the conveyancing of property is decreasing because of market and institutional changes. On the market side, many transactions feature large, well-known parties and standardized transactions, which make professionals less effective or necessary for protecting the parties to private contracts. On the institutional side, public titling makes it possible to dispense with a broadening set of their former functions. Recording of deeds made professionals redundant as depositories of deeds and reduced demand for them to design title guarantees. Effective registration of rights increasingly substitutes professionals for detecting title conflicts with third parties and gathering their consent. Market changes undermine the information asymmetry rationale for regulating conveyancing, while institutional changes facilitate liberalizing not only conduct but also license regulations. These arguments are supported here by disentangling the logic of titling systems and presenting empirical evidence from the European and USA markets.

¿Es posible reducir el gasto sanitario a través del subsidio a los seguros sanitarios privados? La doble cobertura sanitaria en Catalunya. Estimación de patrones de utilización de servicios sanitarios y simulación de costes asociados a la asistencia

The objective of this study consists in quantifying in money terms thepotential reduction in usage of public health care outlets associatedto the tenure of double (public plus private) insurance. In order to address the problem, a probabilistic model for visits to physicians is specified and estimated using data from the Catalonian Health Survey. Also, a model for the marginal cost of a visit to a physician is estimated using data from a representative sample of fee-for-service payments from a major insurer. Combining the estimates from the two models it is possible to quantify in money terms the cost/savings of alternative policies which bear an impact on the adoption of double insurance by the population. The results suggest that the private sector absorbs an important volumeof demand which would be re-directed to the public sector if consumerscease to hold double insurance.

The effects of poor financial information systems on the long term sustainability of local public services. Empirical evidence from the Catalan Municipalities

In this paper we describe the existence of financial illusion in public accountingand we comment on its effects for the future sustainability of local publicservices. We relate these features to the lack of incentives amongst publicmanagers for improving the financial reporting and thus management of publicassets. Financial illusion pays off for politicians and managers since it allowsfor larger public expenditure increases and managerial slack, these beingarguments in their utility functions. This preference is strengthen by the shorttime perspective of politically appointed public managers. Both factors runagainst public accountability. This hypothesis is tested for Spain by using anunique sample. We take data from around forty Catalan local authorities withpopulation above 20,000 for the financial years 1993-98. We build this databasis from the Catalan Auditing Office Reports in a way that it can be linkedto some other local social and economic variables in order to test ourassumptions. The results confirm that there is a statistical relationship between the financialillusion index (FI as constructed in the paper) and higher current expenditure.This reflects on important overruns and increases of the delay in payingsuppliers, as well as on a higher difficulties to face capital finance. Mechanismsfor FI creation have to do among other factors, with delays in paying suppliers(and thereafter higher future financial costs per unit of service), no adequateprovision for bad debts and lack of appropriate capital funding either forreposition or for new equipments. For this, it is crucial to monitor the way inwhich capital transfers are accounted in local public sheet balances. As a result,for most of the Municipalities we analyse, the funds for guaranteeing continuityand sustainability of public services provision are today at risk.Given managerial incentives at present in public institutions, we conclude thatpublic regulation recently enforced for assuring better information systems inlocal public management may not be enough to change the current state of affairs.

Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility

This paper explores biases in the elicitation of utilities under risk and the contribution that generalizations of expected utility can make to the resolution of these biases. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studies, prospect theory was most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect(riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation why we found no improvement of prospect theory over expected utility in risk-risk methods may be that there was less overweighting of small probabilities in our study than has commonly been observed.

A sequential model for older workers’ labor transitions after a health shock

In this work we study older workers (50 64) labor force transitions after a health/disability shock. We find that the probability of keeping working decreases with both age and severity of the shock. Moreover, we find strong interactions between age and severity in the 50 64 age range and none in the 30 49 age range. Regarding demographics we find that being female and married reduce the probability of keeping work. On the contrary, being main breadwinner, education and skill levels increase it. Interestingly, the effect of some demographics changes its sign when we look at transitions from inactivity to work. This is the case of being married or having a working spouse. Undoubtedly, leisure complementarities should play a role in the latter case. Since the data we use contains a very detailed information on disabilities, we are able to evaluate the marginal effect of each type of disability either in the probability of keeping working or in returning back to work. Some of these results may have strong policy implications.

The significance of distributive effects in social assessment of health care

In this paper we address the importance of distributive effects in the social valuation of QALY's. We propose a social welfarefunction that generalises the functions traditionally used in the health economic literature. The novelty is that, depending on the individual health gains, our function can representeither preferences for concentrating or preferences for spreading total gain or both together, an issue which has notbeen addressed until now. Based on an experiment, we observe that this generalisation provides a suitable approximation tothe sampled social preferences.