Modelling Interbank Relations during the International Financial Crisis

This paper examines the effects of the current financial crisis on the correlations of four international banking stocks. We find that in the beginning of the crisis banks generally show a transition to a higher correlation followed by a dramatic decline towards the end of 2008. These findings are consistent with both traditional contagion theory and the more recent network theory of contagion. JEL classifications: C51; G15 Keywords: Financial Crises; Contagion; Interbank Markets.

The size of the underground economy in Germany: A correction of the record and new evidence from the Modified-Cash-deposit-Ratio approach

Based on the Ahumada et al. (2007, Review of Income and Wealth) critique we revise existing estimates of the size of the German underground economy. Among other things, it turns out that most of these estimates are untenable and that the tax pressure induced size of the German underground economy may be much lower than previously thought. To this extent, German policy and law makers have been misguided during the last three decades. Therefore, we introduce the Modified-Cash-Deposit-Ratio (MCDR) approach, which is not subject to the recent critique and apply it to Germany for the period 1960 to 2008. JEL: O17, Q41, C22, Keywords: underground economy, shadow economy, cash-depositratio, currency demand approach, MIMIC approach

Welfare Maximizing Contest Success Functions when the Planner Cannot Commit

We analyze how a contest organizer chooses optimally the winner when the contestants' efforts are already exerted and commitment to the use of a given contest success function is not possible. We de…ne the notion of rationalizability in mixed-strategies to capture such a situation. Our approach allows to derive different contest success functions depending on the aims and attitudes of the decider. We derive contest success functions which are closely related to commonly used functions providing new support for them. By taking into account social welfare considerations our approach bridges the contest literature and the recent literature on political economy. Keywords: Endogenous Contests, Contest Success Function, Mixed-Strategies. JEL Classi…cation: C72 (Noncooperative Games), D72 (Economic Models of Political Processes: Rent-Seeking, Elections), D74 (Conflict; Conflict Resolution; Alliances)

On the effect of the geographical scope of agglomeration economies on firm location

This article analyses how agglomeration economies shaped the location decisions of new manufacturing start-ups in Catalan municipalities in 2001-2005. We estimate whether the locations of new firms are spatially autocorrelated and whether this phenomenon is industry-specific. Our aim is to estimate the geographical scope of agglomeration economies on firm entries. The data set comes from a compulsory register of manufacturing establishments (REIC: Catalan Manufacturing Establishments Register). JEL classification: R1, R3 Keywords: firm location; spatial autocorrelation

Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity

We study a general static noisy rational expectations model where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust. JEL Classification: D82, D83, G14 Keywords: Rational expectations equilibrium, asymmetric information, risk exposure, hedging, supply information, information acquisition.

Sincere Lobby Formation

This paper analyzes endogenous lobbying over a unidimensional policy issue. Individuals differ in policy preferences and decide either to join one of two opposite interest lobbies or not to take part in lobbying activities. Once formed, lobbies make contributions to the incumbent government in exchange for a policy favor as in a common-agency model. A "sincere-lobby-formation" condition for equilibrium is introduced: an individual joins a lobby if their gain from the policy change that this lobby might achieve exceeds a contribution fee. Thus, an equilibrium occurs only if no lobby member would prefer their lobby to cease to exist. I show the existence of an equilibrium with two organized lobbies. Individuals with more extreme preferences are more likely to join lobbying activities. I fi…nd that lobbying somewhat moderates the government's preferences, i.e., it shifts the …final policy in favor of individuals who are initially disadvantaged by the government's pro- or anti-policy preferred position. Under a utilitarian government, however, lobbying does not affect the fi…nal policy, and political competition results in a socially optimal outcome. JEL classi…cation: D72. Keywords: Sincere lobby formation; common agency; endogenous lobbying.

Structural decomposition analysis and input-output subsystems: An application to Spanish CO2 emissions

Analysis of gas emissions by the input-output subsystem approach provides detailed insight into pollution generation in an economy. Structural decomposition analysis, on the other hand, identifies the factors behind the changes in key variables over time. Extending the input-output subsystem model to account for the changes in these variables reveals the channels by which environmental burdens are caused and transmitted throughout the production system. In this paper we propose a decomposition of the changes in the components of CO2 emissions captured by an input-output subsystems representation. The empirical application is for the Spanish service sector, and the economic and environmental data are for years 1990 and 2000. Our results show that services increased their CO2 emissions mainly because of a rise in emissions generated by non-services to cover the final demand for services. In all service activities, the decomposed effects show an increase in CO2 emissions due to a decrease in emission coefficients (i.e., emissions per unit of output) compensated by an increase in emissions caused both by the input-output coefficients and the rise in demand for services. Finally, large asymmetries exist not only in the quantitative changes in the CO2 emissions of the various services but also in the decomposed effects of these changes. Keywords: structural decomposition analysis, input-output subsystems, CO2 emissions, service sector.

Product differentiation, competitive pressure and the effects of innovation on the success and survivability of firms in oligopoly markets

In a recent paper Tishler and Milstein (2009) fi…nd that increased competition may increase aggregate R&D spending while market output decreases. Therefore, they obtain the surprising result that R&D spending is excessive when competition becomes intense. Their result is based on the standard linear demand function for differentiated products introduced by Bowley (1924) where decreased product differentiation is interpreted as more competitive pressure. In this paper I show that at an aggregate level this interpretation is problematic because equilibrium effects are dominated by a demand reduction effect. A slight modifi…cation of the standard demand function eliminates this effect. For the Tishler and Milstein (2009) setting it is shown that then increased competition increases both R&D spending and aggregate market output. Therefore, at least for consumers, more intense competition increases welfare. Journal of Economic Literature Classi…fication Numbers: D43, L1, O3. Keywords: Oligopoly markets, Product differentiation, Competitive pressure.

Endogenous Mergers of Complements with Mixed Bundling

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner fi…rms decrease the price of the bundled system. Besides, when markets for individual components are suffi…ciently important, partner …firms raise prices of stand-alone products, exploiting their monopoly power in local markets and making substitute 'mix-and-match' composite products less attractive to consumers. Even though these effects favor the pro…fitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important). Keywords: complements; merger; mixed bundling; separate consumption JEL classi…fication: L13; L41; D43

Technology, business models and network structure in the airline industry

Network airlines have been increasingly focusing their operations on hub airports through the exploitation of connecting traffic, allowing them to take advantage of economies of traffic density, which are unequivocal in the airline industry. Less attention has been devoted to airlines' decisions on point-to-point thin routes, which could be served using different aircraft technologies and different business models. This paper examines, both theoretically and empirically, the impact on airlines' networks of the two major innovations in the airline industry in the last two decades: the regional jet technology and the low-cost business model. We show that, under certain circumstances, direct services on point-to-point thin routes can be viable and thus airlines may be interested in deviating passengers out of the hub. Keywords: regional jet technology; low-cost business model; point-to-point network; hub-and-spoke network JEL Classi…fication Numbers: L13; L2; L93

On the automatic application of inequality indexes in the analysis of the international distribution of environmental indicators

In recent years traditional inequality measures have been used to quite a considerable extent to examine the international distribution of environmental indicators. One of its main characteristics is that each one assigns different weights to the changes that occur in the different sections of the variable distribution and, consequently, the results they yield can potentially be very different. Hence, we suggest the appropriateness of using a range of well-recommended measures to achieve more robust results. We also provide an empirical test for the comparative behaviour of several suitable inequality measures and environmental indicators. Our findings support the hypothesis that in some cases there are differences among measures in both the sign of the evolution and its size. JEL codes: D39; Q43; Q56. Keywords: international environment factor distribution; Kaya factors; Inequality measurement

A Political Agency Model of Coattail Voting

In this paper, I provide a formal justi…cation for a well-established coattail effect, when a popular candidate at one branch of government attracts votes to candidates from the same political party for other branches of government. A political agency frame- work with moral hazard is applied to analyze coattails in simultaneous presidential and congressional elections. I show that coattail voting is a natural outcome of the optimal reelection scheme adopted by a representative voter to motivate politicians' efforts in a retrospective voting environment. I assume that an office-motivated politician (executive or congressman) prefers her counterpart to be affiliated with the same political party. This correlation of incentives leads the voter to adopt a joint performance evaluation rule, which is conditioned on the politicians belonging to the same party or different parties. The two-sided coattail effects then arise. On the one hand, the executive's suc- cess/failure props up/drags down her partisan ally in congressional election, which implies presidential coattails. On the other hand, the executive's reelection itself is affected by the congressman's performance, which results in reverse coattails. JEL classi…fication: D72, D86. Keywords: Coattail voting; Presidential coattails; Reverse coattails; Simultaneous elections; Political Agency; Retrospective voting.

Signaling in Dynamic Contests: Some Impossibility Results

General signaling results in dynamic Tullock contests have been missing for long. The reason is the tractability of the problems. In this paper, an uninformed contestant with valuation vx competes against an informed opponent with valuation, either high vh or low vl. We show that; (i) When the hierarchy of valuations is vh ≥ vx ≥ vl, there is no pooling. Sandbagging is too costly for the high type. (ii) When the order of valuations is vx ≥ vh ≥ vl, there is no separation if vh and vl are close. Sandbagging is cheap due to the proximity of valuations. However, if vh and vx are close, there is no pooling. First period cost of pooling is high. (iii) For valuations satisfying vh ≥ vl ≥ vx, there is no separation if vh and vl are close. Bluffing in the first period is cheap for the low valuation type. Conversely, if vx and vl are close there is no pooling. Bluffing in the first stage is too costly. JEL: C72, C73, D44, D82. KEYWORDS: Signaling, Dynamic Contests, Non-existence, Sandbag Pooling, Bluff Pooling, Separating

Quantiles of the Realized Stock-Bond Correlation

Abstract: We scrutinize the realized stock-bond correlation based upon high frequency returns. We use quantile regressions to pin down the systematic variation of the extreme tails over their economic determinants. The correlation dependence behaves differently when the correlation is large negative and large positive. The important explanatory variables at the extreme low quantile are the short rate, the yield spread, and the volatility index. At the extreme high quantile the bond market liquidity is also important. The empirical fi…ndings are only partially robust to using less precise measures of the stock-bond correlation. The results are not caused by the recent …financial crisis. Keywords: Extreme returns; Financial crisis; Realized stock-bond correlation; Quantile regressions; VIX. JEL Classifi…cations: C22; G01; G11; G12

Decentralization, happiness and the perception of institutions

This paper analyses whether the different powers and resources at the disposal of local and regional governments across Europe deliver greater satisfaction with political institutions and lead to greater personal happiness. The analysis uses microdata from the four available waves of the European social survey (2002, 2004, 2006 and 2008), including more than 160,000 observations of individuals living in 29 European countries. Our results reveal that political and fiscal decentralization have a positive and significant effect on individuals’ overall happiness. Fiscal decentralization also exerts a significant effect on the level of satisfaction with political and economic institutions and with the education and health systems, whereas the effect of political decentralization on these variables is more limited. The results show that citizens seem to be happier with the actual capacity of their local governments to deliver than with the general principle that they can have a say on their daily politics and policies. Keywords: Happiness, well-being, satisfaction, fiscal and political decentralization, Europe. JEL codes: H11, H77