Both Sides of the Story: Skill-biased Technological Change, Labour Market Frictions, and Endogenous Two-Sided Heterogeneity

This paper presents a stylised framework to examine how skill-biased technological change and labour market frictions affect the relationship between economic expansion and unskilled unemployment. The first part of the analysis focuses on the investment decisions in skill-acquisition and technology adoption activities faced by workers and firms in response to the introduction of an innovative technology. The second part examines how endogenous two-sided heterogeneity in the labour market affects the macroeconomic outcomes in terms of unemployment, technological diffusion, and economic expansion. To conclude, the framework is used to discuss the effects of alternative forms of policy intervention on agents' investment decisions and on the macroeconomic outcomes.

Endogenous Price Flexibility and Optimal Monetary Policy

Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endogenising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push disturbances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfarerelevant output gap.

Second-Order Approximation to the Rotemberg Model around a Distorted Steady State

Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.

On the FDI-attracting property of privatizatio

In this paper, we provide an explanation of why privatization may attract foreign investors willing to enter a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfaremaximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI and put forward its potentially positive role. On the one hand, it may reduce the negative impact on welfare of an FDI-attracting privatization. On the other hand, it may prevent a welfare-reducing investment by the foreign firm. This sheds light on the substitute/complementary relationship between the two policies and the two objectives of governments.

Future of the Clean Development Mechanism in Tackling Climate Change

Using a theoretical framework, we explain the impact of the Clean Development Mechanism (CDM) on emissions in Annex I and non-Annex I countries. We show that on one hand, emissions in the non-Annex I country decline because of abatement sponsored by the Annex I country under the CDM; on the other hand, emissions may increase because (i) the Annex I country increases emissions in its own country, and (ii) the non-Annex I country crowds out the bene ts from the CDM projects by increasing its domestic emissions. For the CDM to be e¤ective in reducing global emissions, we show that partial Certi ed Emissions Reduction credits should be given to the Annex I country that sponsors CDM projects in the non-Annex I country. We also suggest that the CDM Executive Board should not allow the CDM projects to be hosted by non-Annex I countries that are too conscious about their emission levels.

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.

The Change Questionnaire predicts change in hazardous tobacco and alcohol use.

INTRODUCTION: Assessing motivation for change is deemed an important step in the treatment process that allows further refinement of the intervention in motivational interviewing (MI) and brief MI (BMI) adaptations. During MI (and BMI) sessions, motivation for change is expressed by the client as "change talk", i.e. all statements inclined toward or away from change. We tested the predictive validity of the Change Questionnaire, a 12-item instrument assessing motivation to change, on hazardous tobacco and alcohol use. METHODS: As part of the baseline measurements for a randomized controlled trial on multi-substance BMI at the Lausanne recruitment center (army conscription is mandatory in Switzerland for males at age 20, and thus provides a unique opportunity to address a non-clinical and largely representative sample of young men), 213 participants completed the questionnaire on tobacco and 95 on alcohol and were followed-up six months later. The overall Change Questionnaire score and its six subscales (Desire, Ability, Reasons, Need, Commitment, and Taking steps) were used as predictors of hazardous tobacco use (defined as daily smoking) and hazardous alcohol use (defined as more than one occasion with six standard drinks or more per month, and/or more than 21 standard drinks per week) in bivariate logistic regression models at follow-up. RESULTS: Higher overall Change scores were significant predictors of decreased risk for hazardous tobacco (odds ratio [OR] = 0.83, p = 0.046) and alcohol (OR = 0.76, p = 0.03) use. Several sub-dimensions were associated with the outcomes in bivariate analyses. Using a principal components analysis to reduce the number of predictors for multivariate models, we obtained two components. 'Ability to change' was strongly related to change in hazardous tobacco use (OR = 0.54, p < 0.001), the second we interpreted as 'Other change language dimensions' and which was significantly related to change in hazardous alcohol use (OR = 0.81, p = 0.05). CONCLUSIONS: The present findings lend initial support for the predictive validity of the Change Questionnaire on hazardous tobacco and alcohol use, making it an interesting and potentially useful tool for assessing motivation to change among young males.

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.

Institutions, Property Rights, and Economic Development in Historical Perspective

Institutions, and more speci cally private property rights, have come to be seen as a major determinant of long-run economic development. We evaluate the case for property rights as an explanatory factor of the Industrial Revolution and derive some lessons for the analysis of developing countries today. We pay particular attention to the role of property rights in the accumulation of physical capital and the production of new ideas. The evidence that we review from the economic history literature does not support the institutional thesis.

Forecasting the European Carbon Market

In an effort to meet its obligations under the Kyoto Protocol, in 2005 the European Union introduced a cap-and-trade scheme where mandated installations are allocated permits to emit CO2. Financial markets have developed that allow companies to trade these carbon permits. For the EU to achieve reductions in CO2 emissions at a minimum cost, it is necessary that companies make appropriate investments and policymakers design optimal policies. In an effort to clarify the workings of the carbon market, several recent papers have attempted to statistically model it. However, the European carbon market (EU ETS) has many institutional features that potentially impact on daily carbon prices (and associated nancial futures). As a consequence, the carbon market has properties that are quite different from conventional financial assets traded in mature markets. In this paper, we use dynamic model averaging (DMA) in order to forecast in this newly-developing market. DMA is a recently-developed statistical method which has three advantages over conventional approaches. First, it allows the coefficients on the predictors in a forecasting model to change over time. Second, it allows for the entire fore- casting model to change over time. Third, it surmounts statistical problems which arise from the large number of potential predictors that can explain carbon prices. Our empirical results indicate that there are both important policy and statistical bene ts with our approach. Statistically, we present strong evidence that there is substantial turbulence and change in the EU ETS market, and that DMA can model these features and forecast accurately compared to conventional approaches. From a policy perspective, we discuss the relative and changing role of different price drivers in the EU ETS. Finally, we document the forecast performance of DMA and discuss how this relates to the efficiency and maturity of this market.

The Marginal Productivity Theory Of The Price Of Capital: An Historical Perspective On The Origins Of The Codswallop

Although it might have been expected that, by this point in time, the unacceptability of the marginal productivity theory of the return on capital would be universally agreed, that is evidently not the case. Popular textbooks still propound the dogma to the innocent. This note is presented in the hope that a succinct indication of the origins of the theory it will contribute to a more general appreciation of the unrealistic and illogical nature of this doctrine.

Does readiness to change predict subsequent alcohol consumption in medical inpatients with unhealthy alcohol use?

We studied whether readiness to change predicts alcohol consumption (drinks per day) 3 months later in 267 medical inpatients with unhealthy alcohol use. We used 3 readiness to change measures: a 1 to 10 visual analog scale (VAS) and two factors of the Stages of Change Readiness and Treatment Eagerness Scale: Perception of Problems (PP) and Taking Action (TA). Subjects with the highest level of VAS-measured readiness consumed significantly fewer drinks 3 months later [Incidence rate ratio (IRR) and 95% confidence interval (CI): 0.57 (0.36, 0.91) highest vs. lowest tertile]. Greater PP was associated with more drinking [IRR (95%CI): 1.94 (1.02, 3.68) third vs. lowest quartile]. Greater TA scores were associated with less drinking [IRR (95%CI): 0.42 (0.23, 0.78) highest vs. lowest quartile]. Perception of Problems' association with more drinking may reflect severity rather than an aspect of readiness associated with ability to change; high levels of Taking Action appear to predict less drinking. Although assessing readiness to change may have clinical utility, assessing the patient's planned actions may have more predictive value for future improvement in alcohol consumption.

Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

This paper examines the impact of Knightian uncertainty upon optimal climate policy through the prism of a continuous-time real option modelling framework. We analytically determine optimal intertemporal climate policies under ambiguous assessments of climate damages. Additionally, numerical simulations are provided to illustrate the properties of the model. The results indicate that increasing Knightian uncertainty accelerates climate policy, i.e. policy makers become more reluctant to postpone the timing of climate policies into the future.