IMDEA Working Papers in Economics and Social Sciences

IMDEA WP No. 2010-18  (Download full text)

Consumption, retirement and life-cycle prices: Evidence from Spain

by María José Luengo-Prado and Almudena Sevilla-Sanz
Evidence from several countries reveals a substantial drop in household consumption around retirement age that some researchers believe is difficult to reconcile with standard life-cycle models. Using detailed expenditure data from a Spanish panel survey, we find no evidence of a consumption-retirement puzzle in Spain for the period of 1985–2004. However, we find a drop in food expenditure at home from 1998 to 2004 and evidence on households paying lower prices for the food they purchase after retirement in this latter period. Our findings are consistent with a household model that allows for home production whereby retirees substitute away from market goods to home production, as long as one accounts for the greater participation in housework by men after retirement coinciding with the latter period of the survey.

Created: 2010/08/16

JEL-Codes: E21

IMDEA WP No. 2010-17  (Download full text)

House prices and risk sharing

by Dmytro Hryshko, María José Luengo-Prado and Bent E. Sørensen
Homeowners in the Panel Study of Income Dynamics are able to maintain a high level of consumption following job loss (or disability) in periods of rising local house prices while the consumption drop for homeowners who lose their job in times of lower house prices is substantial. These results are consistent with homeowners being able to access wealth gains when housing appreciates as witnessed by their ability to smooth consumption more than renters. A calibrated model of endogenous homeownership and consumption is able to reproduce the patterns in the data quite well and provides an interpretation of the empirical results.

Created: 2010/08/16

IMDEA WP No. 2010-16  (Download full text)

Price support in the stock market

by Benjamin Golez and José M. Marín
The interplay of delegated portfolio management and asset management ownership generates a double agency problem that may result on trading to support security prices. We test this hypothesis analyzing the trading patterns of mutual funds a¢ liated with banks with the stocks of their controlling banks. We show that affiliated mutual funds tend to increase the holdings of the parent bank stock following a large drop in the stock price of the bank. Further, we provide evidence that these patterns of trading are not consistent with portfolio rebalancing into the banking sector, contrarian trading or timing skills. We also provide evidence that the patterns of trading are not information-driven. This leads us to conclude that affiliated mutual funds follow this strategy to support the price of the parent bank.

Created: 2010/08/02

JEL-Codes: G30; G23; G32; G28; G21; K22

Keywords: price support; con‡ict of interests; agency problem; mutual funds; asset management; fund families; banks; prosecution

IMDEA WP No. 2010-15  (Download full text)

Do clusters generate greater innovation and growth? An analysis of European regions

by Andrés Rodríguez-Pose and Fabrice Comptour
The analysis of clusters has attracted considerable interest over the last few decades. The articulation of clusters into complex networks and systems of innovation – generally known as regional innovation systems – has, in particular, been associated with the delivery of greater innovation and growth. However, despite the growing economic and policy relevance of clusters, little systematic research has been conducted into their association with other factors promoting innovation and economic growth. This paper addresses this issue by looking at the relationship between innovation and economic growth in 152 regions of Europe during the period between 1995 and 2006. Using an econometric model with a static and a dynamic dimension, the results of the analysis highlight that: a) regional growth through innovation in Europe is fundamentally connected to the presence of an adequate socioeconomic environment and, in particular, to the existence of a well-trained and educated pool of workers; b) the presence of clusters matters for regional growth, but only in combination with a good ‘social filter’, and this association wanes in time; c) more traditional R&D variables have a weak initial connection to economic development, but this connection increases over time and, is, once again, contingent on the existence of adequate socioeconomic conditions.

Created: 2010/07/12

Keywords: clusters; regional innovation systems; innovation; regional economic growth; socioeconomic conditions; regions; European Union

Forthcoming in Professional Geographer

IMDEA WP No. 2010-14  (Download full text)

Cohesion policy in the European Union: Growth, geography, institutions

by Thomas Farole, Andrés Rodríguez-Pose and Michael Storper
Since the reform of the Structural Funds in 1989, the EU has made the principle of cohesion one of its key policies. Much of the language of European cohesion policy eschews the idea of tradeoffs between efficiency and equity, suggesting it is possible to maximise overall growth whilst also achieving continuous convergence in outcomes and productivity across Europe’s regions. Yet, given the rise in inter-regional disparities, it is unclear that cohesion policy has altered the pathway of development from what would have occurred in the absence of intervention. This paper draws on geographical economics, institutionalist social science, and endogenous growth theory, with the aim of providing a fresh look at cohesion policy. By highlighting a complex set of potential tradeoffs and inter-relations – overall growth and efficiency; inter-territorial equity; territorial democracy and governance capacities; and social equity within places – it revisits the rationale of cohesion policy, with particular attention to the geographical dynamics of economic development.

Created: 2010/06/25

Forthcoming in Journal of Common Market Studies

IMDEA WP No. 2010-13  (Download full text)

Trade and regional inequality

by Andrés Rodríguez-Pose
This paper examines the relationship between openness and within-country regional inequality across 28 countries over the period 1975-2005, paying special attention to whether increases in global trade affect the developed and developing world differently. Using a combination of static and dynamic panel data analysis, it is found that while increases in trade per se do not lead to greater territorial polarisation, in combination with certain country-specific conditions, trade has a positive and significant association with regional inequality. In particular, states with higher interregional differences in sectoral endowments, a lower share of government expenditure, and a combination of high internal transaction costs with a higher degree of coincidence between the regional income distribution and regional foreign market access positions have experienced the greatest rise in territorial inequality when exposed to greater trade flows. This means that changes in trade regimes have had a more polarising effect in low and middle income countries, whose structural features tend to potentiate the trade effect and whose levels of internal spatial inequality are, on average, significantly higher than in high income countries.

Created: 2010/06/25

JEL-Codes: F11; O18; R12; R58

Keywords: trade; regional inequalit; low and medium income countries

IMDEA WP No. 2010-12  (Download full text)

Socially-embedded investments: Explaining gender differences in job-specific skills

by Javier G. Polavieja
Gender-differences in post-schooling skill investments play a central role in stratification processes. Yet little research has been devoted to explaining how these differences come about. This paperhelps to fill this gap by proposing and testing a job-investment model with social-interaction effects that melds substantive ideas of sociology and economics. Firms use strategic compensation profiles in order to protect their job-specific skill investments and this shifts the weight of the investment decision to the supply side. Employees consider the tenure-reward profiles of different job-specific investment options and chose rationally on the basis of their expected survival probabilities in each of them. Given uncertainty, actors are likely to inform their job-survival expectations by observing their social context. Three different forms of social influence are distinguished: social-learning,social norms and role identification. It is further argued that social influences on job-survival expectations can be identified empirically by blocking individuals' work and family preferences. Several hypotheses are derived and tested to a subsample of approximately 2,700 young single wage-earners nested in 261 different European regions and 24 different European countries. Results show that young women's job-investment decisions are significantly correlated with 1) the social visibility of women in highly specialized jobs in the preceding generation; 2) the proportion of men who do housework in their potential marriage markets, and 3) the existing fertility norms.

Created: 2010/06/15

JEL-Codes: D8; D13 J10; J16; J22; J24; M52; M53; Z10; Z13

Keywords: gender; job-specific investments; social interactions; strategic compensation; social learning; social norms; role identification; prefrences; european social survey

IMDEA WP No. 2010-11  (Download full text)

Ex-post regret learning in games with fixed and random matching: The case of private values

by Rene Saran and Roberto Serrano
In contexts in which players have no priors, we analyze a learning process based on ex-post regret as a guide to understand how to play games of incomplete information under private values. The conclusions depend on whether players interact within a fixed set (fixed matching) or they are randomly matched to play the game (random matching). The relevant long run predictions are minimal sets that are closed under “the same or better reply” operations. Under additional assumptions in each case, the prediction boils down to pure Nash equilibria, pure ex-post equilibria or pure minimax regret equilibria. These three paradigms exhibit nice robustness properties in the sense that they are independent of beliefs about the exogenous uncertainty of type spaces. The results are illustrated in second-price auctions, first-price auctions and Bertrand duopolies.

Created: 2010/06/08

JEL-Codes: C72; C73; D43; D44; D82; D83

Keywords: fixed and random matching; incomplete information; ex-post regret learning; nash equilibrium; ex-post equilibrium; minimax regret equilibrium; second-price auction;first-price auction;bertrand duopoly

IMDEA WP No. 2010-10  (Download full text)

Regret matching with finite memory

by Rene Saran and Roberto Serrano
We consider the regret matching process with finite memory. For general games in normal form, it is shown that any recurrent class of the dynamics must be such that the action profiles that appear in it constitute a closed set under the “same or better reply” correspondence (CUSOBR set) that does not contain a smaller product set that is closed under “same or better replies,” i.e., a smaller PCUSOBR set. Two characterizations of the recurrent classes are offered. First, for the class of weakly acyclic games under better replies, each recurrent class is monomorphic and corresponds to each pure Nash equilibrium. Second, for a modified process with random sampling, if the sample size is sufficiently small with respect to the memory bound, the recurrent classes consist of action profiles that are minimal PCUSOBR sets. Our results are used in a robust example that shows that the limiting empirical distribution of play can be arbitrarily far from correlated equilibria for any large but finite choice of the memory bound.

Created: 2010/06/04

JEL-Codes: C72; C73; D83

Keywords: regret matching; nash equilibria; closed sets under same or better replies; correlated equilibria

IMDEA WP No. 2010-09  (Download full text)

Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries

by Andrés Rodríguez-Pose and Roberto Ezcurra
The global drive towards decentralization has been increasingly justified on the basis that greater transfers of resources to subnational governments are expected to deliver greater efficiency in the provision of public goods and services and greater economic growth. This paper examines whether this is the case, by analysing the relationship between decentralization and economic growth in 21 OECD countries during the period between 1990 and 2005 and controlling not only for fiscal decentralization, but also for political and administrative decentralization. The results point towards a negative and significant association between fiscal decentralization and economic growth in the sample countries, a relationship which is robust to the inclusion of a series of control variables and to differences in expenditure preferences by subnational governments. The impact of political and administrative decentralization on economic growth is weaker and sensitive to the definition and measurement of political decentralization.

Created: 2010/05/24

JEL-Codes: H71;H72;H77

Keywords: fiscal decentralization;political decentralization;administrative decentralization;economic growth;OECD

Forthcoming in Journal of Economic Geography

IMDEA WP No. 2010-08  (Download full text)

Migration, wages, and parental background: Obstacles to entrepreneurship and growth in East Germany

by Zoë Kuehn
For the last decade, the East German economy has been suffering from high unemployment and low economic growth. Policy makers often point to the lack of entrepreneurship as one of East Germany's main problems. This paper addresses the question of how East Germany's integration into an established economy, West Germany, may have hindered a fruitful development of entrepreneurship and how this may have affected economic growth. I build a model economy that places Lucas's (1978) span-of-control model into an overlapping-generations framework. Following Hassler and Rodríguez Mora (2000) managerial knowhow is defined as a combination of two factors, innate talent and entrepreneurial parental background, and growth depends on the innate talent of entrepreneurs. In East Germany, the lack of entrepreneurial parental background makes talent the decisive factor in occupational choice and more talented entrepreneurs should contribute to high growth rates. However, three key aspects of its integration into West Germany inhibit this mechanism: 1) the unrestricted mobility of East Germans to the West, 2) the policy of fixing East German wages as fractions of West German wages, and 3) the importance of parental background for entrepreneurship in West Germany. Counterfactual experiments show that eliminating any of these three aspects leads to more entrepreneurs, less unemployment, and higher economic growth in East Germany.

Created: 2010/05/12

JEL-Codes: F15; E24; J22

Keywords: entrepreneurship; allocation of talent; social mobility; transition

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the Bank of Spain Excellence Programme

IMDEA WP No. 2010-07  (Download full text)

Tax rates, governance, and the informal economy in high-income countries

by Zoë Kuehn
About 16.7% of output in high-income OECD countries was produced informally in 2001-02 (Schneider, 2002). Davis and Henrekson, (2004) show that there exists a positive relation between tax rates and the informal economy for high-income OECD countries. While existing models of the informal economy mostly focus on developing countries where informality is linked to the use of labor-intensive and low productive technologies, this paper studies the mechanisms behind the informal economy in high-income countries. I build a model economy, following Lucas, (1978), in which agents decide to become workers, managers of informal firms, or managers of formal firms. Managers of informal firms use the same technology as formal managers. However, they do not pay taxes but run the risk of getting caught, taxed, and fined. Simulations show that differences in tax rates can only account for approximately 33% of the observed variation in informal economy across high-income countries. When combining differences in tax rates with differences in governance quality, the extent to which these tax rates are enforced, the model accounts for approximately 56% of the cross-country variation in informal economy. Policy experiments show that if all countries attained Switzerland's governance quality, average informality would drop by around 15%. I estimate average costs of this policy to be equivalent to at most 26% of the average tax administration's budget and find gains in tax revenues to be around ten times larger than these costs.

Created: 2010/05/12

JEL-Codes: H2; E26; H26; J24

Keywords: informal economies; high-income countries; tax rates; governance

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the Bank of Spain Excellence Programme

IMDEA WP No. 2010-06  (Download full text)

How much competition is a secondary market?

by Jiawei Chen, Susanna Esteban and Matthew Shum
Do active secondary markets aid or harm durable goods manufacturers? We build a dynamic equilibrium model of durable goods oligopoly, with consumers who incur lumpy costs when transacting in the secondary market, and calibrate it to U.S. automobile industry data. By varying transaction costs, we obtain a direct measure of the competitive pressure that secondary markets create on durable goods manufacturers. For our calibrated parameter values, closing down the secondary market increases (net) profits of new car manufacturers by 39%. This suggests that regulatory changes that lower liquidity in secondary markets may aid manufacturers.

Created: 2010/04/21

Keywords: secondary markets; durable goods; oligopoly; transaction costs; automobile industry; market power

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the Bank of Spain Excellence Programme

IMDEA WP No. 2010-05  (Download full text)

Evaluating the conditions for robust mechanism design

by Takashi Kunimoto and Roberto Serrano
We assess the strength of the different conditions identified in the literature of robust mechanism design. We focus on three conditions: ex post incentive compatibility, robust monotonicity, and robust measurability. Ex post incentive compatibility has been shown to be necessary for any concept of robust implementation, while robust monotonicity and robust measurability have been shown to be necessary for robust (full) exact and virtual implementation, respectively. This paper shows that while violations of ex post incentive compatibility and robust monotonicity do not easily go away, we identify a mild condition on environments in which robust measurability is satisfied by all social choice functions over an open and dense subset of first-order types. We conclude that there is a precise sense in which robust virtual implementation can be significantly more permissive than robust exact implementation.

Created: 2010/03/25

JEL-Codes: C72; D78; D82

Keywords: robust mechanism design; ex post incentive compatibility; robust monotonicity; robust measurability

IMDEA WP No. 2010-04  (Download full text)

A quantitative theory of the gender gap in wages

by Andrés Erosa, Luisa Fuster and Diego Restuccia
This paper measures how much of the gender wage gap over the life cycle is due to the fact that working hours are lower for women than for men. We build a quantitative theory of fertility, labor supply, and human capital accumulation decisions to measure gender differences in human capital investments over the life cycle. We assume that there are no gender differences in the human capital technology and calibrate this technology using wage-age profiles of men. The calibration of females assumes that children involve a forced reduction in hours of work that falls on females rather thanon males and that there is an exogenous gender gap in hours of work. We find that our theory accounts for all of the increase in the gender wage gap over the life cycle in the NLSY79 data. The impact of children on the labor supply of females accounts for 56% and 45% of the increase in the gender wage gap over the life cycle among non-college and college individuals, while the rest is due to exogenous gender differences in hours ofwork. We also find that children play an important role in understanding the variationof the gender wage gap across recent cohorts of women and the slower wage growth faced by black women relative to non-black women in the U.S. economy.

Created: 2010/03/25

JEL-Codes: J2; J3

Keywords: gender wage gap; employment; experience; fertility; human capital

IMDEA WP No. 2010-03  (Download full text)

A new necessary condition for implementation in iteratively undominated strategies

by Takashi Kunimoto and Roberto Serrano
Implementation in iteratively undominated strategies relies on permissive conditions. However, for the sufficiency results available, authors have relied on assumptions that amount to quasilinear preferences on a numeraire. We uncover a new necessary condition that implies that such assumptions cannot be dispensed with. We term the condition “restricted deception-proofness.” It requires that, in environments with identical preferences, the social choice function be immune to all deceptions, making it then stronger than incentive compatibility. In some environments the conditions for (exact or approximate) implementation are more restrictive than previously thought.

Created: 2010/01/20

JEL-Codes: C72; D78; D82

Keywords: mechanism design; exact and approximate implementation; iteratively undominated strategies; restricted deception-proofness; incentive compatibility; measurability

IMDEA WP No. 2010-02  (Download full text)

Do institutions matter for regional development?

by Andrés Rodríguez-Pose
This paper discusses whether institutions matter for regional development and how to integrate them in regional development strategies. It finds that while institutions are crucial for economic development, generating an institution-based regional development strategy is likely to be undermined by the lack of definition of what are adequate, solid, and efficient institutions. Problems related to the measurement of institutions, to their space and time variability, to the difficulties in establishing the right mix of formal and informal institutions, and to the endogeneity between institutions and economic development make one-size-fits-all approaches to operationalizing institutions difficult. Development strategies specifically tailored to the conditions of different regional institutional environments across regions may yield greater returns.

Created: 2010/01/11

IMDEA WP No. 2010-01  (Download full text)

Economic geographers and the limelight: The reaction to the 2009 World Development Report

by Andrés Rodríguez-Pose
The reaction of economic geographers to the World Bank's World Development Report 2009 – Reshaping Economic Geography – has so far been a corporatist turf-protecting exercise. The report has been dismissed as the work of economists who completely ignore a rich tradition of work by 'proper' economic geographers. However, this negative response has prevented geographers from engaging constructively with the World Bank's analysis and proposals. In this note I argue that, while the report presents an accurate diagnosis of recent development trends and should be praised for its flexibility in providing numerous policy alternatives, geographers can significantly contribute to promote a discussion around two key issues in the report: its treatment of institutions and its recommendation of spatially-blind policies.

Created: 2010/01/11

Forthcoming in Economic Geography

IMDEA WP No. 2009-18  (Download full text)

Spatial development

by Klaus Desmet and Esteban Rossi-Hansberg
We present a theory of spatial development. Manufacturing and services firms located in a continuous geographic area choose each period how much to innovate. Firms trade subject to transport costs and technology diffuses spatially across locations. The result is a spatial endogenous growth theory that can shed light on the link between the evolution of economic activity over time and space. We apply the model to study the evolution of the U.S. economy in the last few decades and find that the model can generate the reduction in the employment share in manufacturing, the increase in service productivity starting in the second part of the 1990s, the increase in the value and dispersion of land rents in the same period, as well as several other spatial and temporal patterns.

Created: 2009/12/16

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme

IMDEA WP No. 2009-17  (Download full text)

The political economy of ethnolinguistic cleavages

by Klaus Desmet, Ignacio Ortuño-Ortín and Romain Wacziarg
This paper proposes a new method to measure ethnolinguistic diversity and offers new results linking such diversity with a range of political economy outcomes — civil conflict, redistribution, economic growth and the provision of public goods. We use linguistic trees, describing the genealogical relationship between the entire set of 6, 912 world languages, to compute measures of fractionalization and polarization at different levels of linguistic aggregation. By doing so, we let the data inform us on which linguistic cleavages are most relevant, rather than making ad hoc choices of linguistic classifications. We find drastically different effects of linguistic diversity at different levels of aggregation: deep cleavages, originating thousands of years ago, lead to measures of diversity that are better predictors of civil conflict and redistribution than those that account for more recent and superficial divisions. The opposite pattern holds when it comes to the impact of linguistic diversity on growth and public goods provision, where finer distinctions between languages matter.

Created: 2009/12/16

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme

IMDEA WP No. 2009-16  (Download full text)

On Spatial dynamics

by Klaus Desmet and Esteban Rossi-Hansberg
It has long been recognized that the forces that lead to the agglomeration of economic activity and to aggregate growth are similar. Unfortunately, few formal frameworks have been advanced to explore this link. We critically discuss the literature and present a simple framework that can circumvent some of the main obstacles we identify. We discuss the main characteristics of an equilibrium allocation in this dynamic spatial framework, present a numerical example to illustrate the forces at work, and provide some supporting empirical evidence.

Created: 2009/12/16

JEL-Codes: O3; O4; R1

Keywords: dynamic spatial models; technology diffusion; spillovers; trade; factor mobility; growth

Published Journal of Regional Science 50(1), February 2010: 43-63

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme

IMDEA WP No. 2009-15  (Download full text)

Returns to migration, education, and externalities in the European Union

by Andrés Rodríguez-Pose and Vassilis Tselios
This paper uses microeconomic data for more than 100,000 European individuals in order to analyse whether the individual economic returns to education vary between migrants and non-migrants and whether any differences in earnings between these two groups are affected by household and/or geographical (regional and interregional) externalities. The results point out that while education is a fundamental determinant of earnings, European labour markets do not discriminate in the returns to education between migrants and nonmigrants. Household, regional, and supra-regional externalities influence the economic returns to education in a similar way for local, intranational, and supra-national migrants. The results are robust to the introduction of a large number of individual, household, and regional controls.

Created: 2009/11/03

JEL-Codes: 015; R23

Keywords: individual earnings; migration; educational attainment; externalities; household; regions; Europe

Published in Papers in Regional Science 89(2), June 2010: 411-434

IMDEA WP No. 2009-14  (Download full text)

Labor-market exposure as a determinant of attitudes toward immigration

by Francesc Ortega and Javier G. Polavieja
This paper re-examines the role of labor-market competition as a determinant of attitudes toward immigration. We claim two main contributions. First, we use more sophisticated measures of the degree of exposure to competition from immigrants than previously done. Specifically, we focus on the protection derived from investments in job-specific human capital and from specialization in communication-intensive jobs, in addition to formal education. Second, we explicitly account for the potential endogeneity arising from job search. Methodologically, we estimate, by instrumental variables, an econometric model that allows for heterogeneity at the individual, regional, and country level. Drawing on the 2004 European Social Survey, we obtain three main results. First, our estimates show that individuals that are currently employed in less exposed jobs are relatively more pro-immigration. This is true for both our new measures of exposure. Second, we show that the protection granted by job-specific human capital is clearly distinct from the protection granted by formal education. Yet the positive effect of education on pro-immigration attitudes is greatly reduced when we control for the degree of communication intensity of respondents' occupations. Third, OLS estimates are biased in a direction that suggests that natives respond to immigration by switching to less exposed jobs. The latter finding provides indirect support for the endogenous job specialization hypothesis postulated by Peri and Sparber (2009).

Created: 2009/10/21

JEL-Codes: F1; F22; J61; J31; R13

Keywords: immigration attitudes; labor market; job-specific human capital; communication skills; international migration

IMDEA WP No. 2009-13  (Download full text)

Innovating in the periphery: Firms, values, and innovation in Southwest Norway

by Rune Dahl Fitjar and Andrés Rodríguez-Pose
How do peripheral and relatively isolated regions innovate? Recent research has tended to stress the importance of agglomeration economies and geographical proximity as key motors of innovation. According to this research, large core areas have significant advantages with respect to peripheral areas in innovation potential. Yet, despite these trends, some remote areas of the periphery are remarkably innovative even in the absence of critical innovation masses. In this paper we examine one such case – the region of Southwest Norway – which has managed to remain innovative and dynamic, despite having a below average investment in R&D in the Norwegian context. The results of the paper highlight that innovation in Southwest Norway does not stem from agglomeration and physical proximity, but from other types of proximity, such as cognitive and organizational proximity, rooted in soft institutional arrangements. This suggests that the formation of regional hubs with strong connections to international innovative networks may be a way to overcome peripherality in order to innovate.

Created: 2009/10/09

Keywords: innovation; institutions; distance; trust; open-mindedness; periphery; Norway

Forthcoming in European Planning Studies

IMDEA WP No. 2009-12  (Download full text)

Equilibrium blocking in large quasilinear economies

by Yusuke Kamishiro and Roberto Serrano
We study information transmission in large interim quasilinear economies using the theory of the core. We concentrate on the core with respect to equilibrium blocking, a core notion in which information is transmitted endogenously within coalitions, as blocking can be understood as an equilibrium of a communication mechanism used by players in coalitions. We consider independent, ex-post and signal-based replicas of the basic economy. For each, we offer an array of negative and positive convergence results as a function of the complexity of the mechanisms used by coalitions. We identify conditions under which asymmetric information remains as an externality and non-market outcomes stay in the core, as well as those for the core to converge to the set of incentive compatible ex-post Walrasian allocations. Further, all the results are robust to the relaxation of the incentive constraints, and hence suggest a process through which information may get incorporated into a fully revealing equilibrium price function.

Created: 2009/10/09

JEL-Codes: C71; C72; D51; D82

Keywords: core w.r.t. equilibrium blocking; core convergence; independent replicas; ex-post replicas; signal-based replicas; information transmission; communication mechanisms; mediation; rational expectations

IMDEA WP No. 2009-11  (Download full text)

How important is human capital? A quantitative theory assessment of world income inequality

by Andrés Erosa, Tatyana Koreshkova and Diego Restuccia
We develop a quantitative theory of human capital investments in order to evaluate the magnitude of cross-country differences in total factor productivity (TFP) that explains the variation in per-capita incomes across countries. We build a heterogeneous-agent economy with cross-sectional variation in ability, schooling, and expenditures on schooling quality. By embedding our analysis in a growth model with tradable and non-tradable sectors, we model sectorial productivity differences across countries, as documented in Hsieh and Klenow (2007). The parameters governing human capital production and random ability and taste processes are restricted by a set of cross-sectional data moments such as variances and intergenerational correlations of earnings and schooling, as well as slope coefficient and R2 in a Mincer regression. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: To explain a 20-fold difference in the output per worker the model requires a 5-fold difference in the TFP of the tradable sector, versus an 18-fold difference if human capital is fixed across countries. Moreover, we find that sectorial productivity differences play a prominent role in quantitative implications of the theory.

Created: 2009/09/30

Published in Review of Economic Studies 77(4), October 2010: 1421-1449

IMDEA WP No. 2009-10  (Download full text)

A general equilibrium analysis of parental leave policies

by Andrés Erosa, Luisa Fuster and Diego Restuccia
Despite mandatory parental-leave policies being a prevalent feature of labor markets in developed countries, the aggregate effects of leave policies are not well understood. In order to assess the quantitative impact of mandated leave policies in the economy, we develop ageneral-equilibrium model of fertility and labor-market decisions that builds on the labormarket framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies, but this benefit occurs at the expense of a reduction in the welfare of males. Mandated leave policies have important effects on fertility, leave taking decisions, and employment rate of mothers with infants. These effects are driven by how policy affects bargaining in job matches: Young females anticipate that there are some states in the future in which their threat point in bargaining will be higher. Because the realization of these states depend on the decisions of females to give birth and take a leave, the change in the threat point induced by the policy subsidizes fertility and leave taking. Unpaid parental leaves have a small impact on the time that mothers spend with their children but paid parental leaves can be an effective tool to encourage mothers to spend time with theirchildren after giving birth.

Created: 2009/09/30

JEL-Codes: E24; E60; J2; J3

Keywords: human capital; labor-market equilibrium; parental-leave policies; fertility; temporary separations

Forthcoming in Review of Economic Dynamics

IMDEA WP No. 2009-09  (Download full text)

The magnitude and causes of agglomeration economies

by Diego Puga
Firms and workers are much more productive in large and dense urban environments. There is substantial evidence of such agglomeration economies based on three aproaches. First, on a clustering of production beyond what can be explained by chance or comparative advantage. Second, on spatial patterns in wages and rents. Third, on systematic variations in productivity with the urban environment. However, more needs to be learned about the causes of agglomeration economies. We have good models of agglomeration through sharing and matching, but not a deep enough understanding of learning in cities. Despite recent progress, more work is needed to distinguish empirically between alternative causes.

Created: 2009/09/21

JEL-Codes: R30

Keywords: agglomeration economies

Published in Journal of Regional Science 50(1), February 2010: 203-219

IMDEA WP No. 2009-08  (Download full text)

Multiplicity of mixed equilibria in mechanisms: A unified approach to exact and approximate implementation

by Roberto Serrano and Rajiv Vohra
We characterize full implementation of social choice sets in mixed strategy Bayesian equilibrium. Our results concern both exact and virtual mixed implementation. For exact implementation, we identify a strengthening of Bayesian monotonicity, which we refer to as mixed Bayesian monotonicity. It is shown that, in economic environments with at least three agents, mixed Bayesian implementation is equivalent to mixed Bayesian monotonicity, incentive compatibility and closure. For implementing a social choice function, the case of two-agents is also covered by these conditions and mixed Bayesian monotonicity reduces to Bayesian monotonicity. Following parallel steps, mixed virtual implementation is shown to be equivalent to mixed virtual monotonicity, incentive compatibility and closure. The key condition, mixed virtual monotonicity, is argued to be very weak. In particular, it is weaker than Abreu-Matsushima's measurability, there by implying that: (1) virtual implementation in mixed Bayesian equilibrium is more permissive than virtual implementation in iteratively undominated strategies, and (2) non-regular mechanisms are essential for the implementation of rules in that gap.

Created: 2009/09/21

JEL-Codes: C72; D78; D82

Keywords: exact implementation; approximate implementation; incomplete information; incentive compatibility; monotonicity

Forthcoming in Journal of Mathematical Economics

IMDEA WP No. 2009-07  (Download full text)

Individual earnings and educational externalities in the European Union

by Andrés Rodríguez-Pose and Vassilis Tselios
This paper examines whether differences in educational externalities affect individual earnings across regions in the EU. Using microeconomic data from the European Community Household Panel, the analysis relies on spatial economic analysis in order to determine to what extent differences in individual earnings are the result of (a) the educational attainment of the individual, (b) the educational attainment of the other members of the household he/she lives in, (c) the educational endowment of the region where the individual lives, or (d) the educational endowment of the neighbouring regions. The results highlight that, in addition to the expected positive returns of personal educational attainment, place-based regional and supra-regional educational externalities generate significant pecuniary benefits for workers. These findings are robust to the inclusion of different individual, household, and regional control variables.

Created: 2009/07/23

Keywords: individual earnings; educational attainment; externalities; households; regions; Europe

Forthcoming in Regional Studies, 2010

IMDEA WP No. 2009-06  (Download full text)

The evolution of markets and the revolution of industry: A unified theory of growth

by Klaus Desmet and Stephen L. Parente
This paper puts forth a unified theory of growth that captures a number of relevant features of countries’ transitions from stagnant, predominantly rural economies to vibrant, industrialized economies that have been overlooked by the literature. In our theory, increasing variety of consumer goods and increasing firm size, which are the consequence of a gradual expansion in the market, sow the seeds for process innovation and an economy’s take-off. We demonstrate this mechanism in a dynamic general equilibrium model calibrated to England’s long-run development, and explore how various factors affected the timing of its take-off.

Created: 2009/05/25

JEL-Codes: 014; 033; 041; N33

Keywords: unified growth theory; industrial revolution; innovation; competition; market revolution

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM and the Bank of Spain Excellence Programmes

IMDEA WP No. 2009-05  (Download full text)

Decentralization of social protection expenditure and economic growth in the OECD

by Roberto Ezcurra and Andrés Rodríguez-Pose
This article examines the effect of the degree of decentralization of social protection expenditure on economic growth, using panel data for twenty OECD countries over the period 1990-2005. Our results show a positive impact of the subnational share of total government expenditure in social protection on economic performance. This finding is robust to the inclusion of additional explanatory variables in the analysis and is not driven by any specific country.

Created: 2009/05/25

Keywords: decentralization; social protection expenditure; economic growth; OECD countries

Forthcoming in Publius

IMDEA WP No. 2009-04  (Download full text)

Does decentralization matter for regional disparities? A cross-country analysis

by Andrés Rodríguez-Pose and Roberto Ezcurra
This paper looks at the relationship between fiscal and political decentralization and the evolution of regional inequalities in a panel of 26 countries -- 19 developed and 7 developing -- for the period between 1990 and 2006. Using an instrumental variables method, it finds that whereas for the whole sample decentralization is completely dissociated for the evolution of regional disparities, the results are highly contingent on the level of development, the existing level of territorial inequalities, and the fiscal redistributive capacity of the countries in the sample. Decentralization in high income countries has, if anything, been associated with a reduction of regional inequality. In low and medium income countries, fiscal decentralization has been associated with a significant rise in regional disparities, which the positive effects of political decentralization have been unable to compensate. Policy preferences by subnational governments for expenditure in economic affairs, education, and social protection have contributed to this trend.

Created: 2009/05/14

JEL-Codes: H11; H71; R11

Keywords: fiscal decentralization; political decentralization; regional disparities; territorial inequality; fiscal redistribution

Published in Journal of Economic Geography 10(5), September 2010: 619-644

IMDEA WP No. 2009-03  (Download full text)

A dynamic theory of fidelity networks with an application to the spread of HIV/AIDS

by Roland Pongou and Roberto Serrano
We study the dynamic stability of fidelity networks, which are networks that form in a mating economy of agents of two types (say men and women), where each agent desires direct links with opposite type agents, while engaging in multiple partnerships is considered an act of infidelity. Infidelity is punished more severely for women than for men. We consider two stochastic processes in which agents form and sever links over time based on the reward from doing so, but may also take non-beneficial actions with small probability. In the first process, an agent who invests more time in a relationship makes it stronger and harder to break by his/her partner; in the second, such an agent is perceived as weak. Under the first process, only egalitarian pairwise stable networks (in which all agents have the same number of partners) are visited in the long run, while under the second, only anti-egalitarian pairwise stable networks (in which all women are matched to a small number of men) are. Next, we apply these results to find that under the first process, HIV/AIDS is equally prevalent among men and women, while under the second, women bear a greater burden. The key message is that anti-female discrimination does not necessarily lead to higher HIV/AIDS prevalence among women in the short run, but it does in the long run.

Created: 2009/04/10

JEL-Codes: A14; C7; I12; J00

Keywords: fidelity networks; anti-female discrimination; stochastic stability; HIV/AIDS; union formation models

IMDEA WP No. 2009-02  (Download full text)

The productivity advantages of large cities: Distinguishing agglomeration from firm selection

by Pierre Philippe Combes, Gilles Duranton, Laurent Gobillon, Diego Puga and Sébastien Roux
Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal firm selection model and a standard model of agglomeration. Stronger selection in larger cities left-truncates the productivity distribution whereas stronger agglomeration right-shifts and dilates the distribution. We assess the relative importance of agglomeration and firm selection using French establishment-level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.

Created: 2009/02/20

JEL-Codes: C52; R12; D24

Keywords: agglomeration; firm selection; productivity, cities

IMDEA WP No. 2009-01  (Download full text)

Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

by Diego Puga and Daniel Trefler
Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old style product cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

Created: 2009/01/27

JEL-Codes: F1

Keywords: international trade; low-wage country innovation

Published in Journal of Development Economics, 91(1), January 2010: 64-76

IMDEA WP No. 2008-12  (Download full text)

Immigration and cumulative causation: Explaining the ethnic and spatial diffusion of Spain's immigrant population 1997-2007

by Rickard Sandell
This research argues that it is possible to explain the immigration intensity of close to 3 million immigration events in Spain by means of cumulative causation. In addition, it proposes that the theory of cumulative causation not only explains the intensity of migration but also the spatial and ethnic diffusion of the arriving immigrants. Thus, the research reported here significantly expands the explanatory scope of this approach. At the core of my argument is the innovative notion that to be able to take full advantage of the social capital made available by past immigrants, and which according to the theory of cumulative causation would make immigration more likely, it is not sufficient to be socially linked to past migrants, it is also essential for new immigrants to accept to live close to where past immigrants settled before them. The empirical analysis shows conclusively that the intensity of Spanish immigration is indeed subject to location specific cumulative causation, and that when present location specific cumulative causation gives rise to geographical and ethnic concentration of the immigrant population.

Created: 2008/12/30

IMDEA WP No. 2008-11  (Download full text)

Bargaining, coalitions and externalities: A comment on Maskin

by Geoffroy de Clippel and Roberto Serrano
We first observe that two of Maskin's results do not extend beyond three players: we construct a four-player partition function with non-positive externalities whose unique solution is inefficient, as well as a four-player characteristic function that has a unique efficient solution for each ordering of the players, but for which the payoff vector obtained by averaging these solutions over the different orderings does not coincide with the Shapley value. On the other hand, we reinforce Maskins insight that externalities may play a crucial role in generating inefficiency. Many existing solutions on how to share profits assume or derive the property of efficiency. Yet we argue that players may have an interest to choose with whom to bargain. We illustrate how this may trigger inefficiency, especially in the presence of externalities, even if bargaining among any group of agents results in an efficient distribution of the surplus they can produce. We also provide some sufficient conditions for efficiency.

Created: 2008/11/20

JEL-Codes: C7; D62

Keywords: externalities; coalition formation; Shapley value

IMDEA WP No. 2008-10  (Download full text)

Bigger is better: Market size, demand elasticity and innovation

by Klaus Desmet and Stephen L. Parente
This paper proposes a novel mechanism whereby larger markets increase competition and facilitate process innovation. Larger markets, in the sense of more people or more open trade, support a larger variety of goods, resulting in a more crowded product space. This raises the price elasticity of demand and lowers mark-ups. Firms, therefore, become larger to break even. This facilitates process innovation as larger firms can amortize R&D costs over more goods. We demonstrate this mechanism in a standard model of process and product innovation. In doing so, we question some important results in the new trade and endogenous growth literatures.

Created: 2008/10/27

JEL-Codes: F12; L11; O31

Keywords: trade; population; price elasticity; competition; innovation; firm-size; scale effects; Dixit-Stiglitz; Hotelling

Published International in Economic Review 51(2), May 2010: 319-333

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme

IMDEA WP No. 2008-09  (Download full text)

Mountains in a flat world: Why proximity still matters for the location of economic activity

by Andrés Rodríguez-Pose and Riccardo Crescenzi
Thomas Friedman (2005) argues that the expansion of trade, the internationalization of firms, the galloping process of outsourcing, and the possibility of networking is creating a 'flat world': a level playing field where individuals are empowered and better off. This paper challenges this view of the world by arguing that not all territories have the same capacity to maximize the benefits and opportunities and minimize the risks linked to globalization. Numerous forces are coalescing in order to provoke the emergence of urban 'mountains' where wealth, economic activity, and innovative capacity agglomerate. The interactions of these forces in the close geographical proximity of large urban areas give shape to a much more complex geography of the world economy.

Created: 2008/10/15

Published in Cambridge Journal of Regions, Economy and Society 1(3), July 2008: 371-388

IMDEA WP No. 2008-08  (Download full text)

Fiscal decentralization and economic growth in Central and Eastern Europe

by Andrés Rodríguez-Pose and Anne Krøijer
The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having significantly negative to significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency

Created: 2008/10/10

Keywords: fiscal decentralization; economic growth; efficiency; devolution; Central and Eastern Europe

Published in Growth and Change 40(3), September 2009: 387-417

IMDEA WP No. 2008-07  (Download full text)

Family types and the persistence of regional disparities in Europe

by Gilles Duranton, Andrés Rodríguez-Pose and Richard Sandall
This paper examines the association between one of the most basic institutional forms, the family, and a series of demographic, educational, social, and economic indicators across regions in Europe. Using Emmanuel Todd’s classification of medieval European family systems, we identify potential links between family types and regional disparities in household size, educational attainment, social capital, labor participation, sectoral structure, wealth, and inequality. The results indicate that medieval family structures seem to have influenced European regional disparities in virtually every indicator considered. That these links remain, despite the influence of the modern state and population migration, suggests that either such structures are extremely resilient or else they have in the past been internalized within other social and economic institutions as they developed.

Created: 2008/10/08

JEL-Codes: J12; O18; R11

Keywords: institutions; family types; education; social capital; labor force

Published in Economic Geography 85(1), January 2009: 23-47

IMDEA WP No. 2008-06  (Download full text)

Agglomeration and cross-border infrastructure

by Diego Puga
This paper deals with the effects of cross-border transport infrastructure in the presence of agglomeration economies. Cross-border infrastructure is more likely to increase than to decrease inequalities between and within regions, and has not helped regional convergence in Europe. Under-investment due to spillovers, coordination failures, and the inadequacy of networks originally designed for national markets provide a role for supranational institutions. Hub-and-spoke networks tend to increase urban primacy while cross-border transport connections tend to reduce it. Improvements in transport and communication allow firms to separate innovation, management and production, increasing efficiency and urban interdependence.

Created: 2008/06/24

JEL-Codes: R40; R12

Keywords: transport; cross-border infrastructure; agglomeration; urban specialization

Published in European Investment Bank Papers 13(2), July 2008: 102-124

IMDEA WP No. 2008-05  (Download full text)

Labour pooling as a source of agglomeration: An empirical investigation

by Henry G. Overman and Diego Puga
We provide empirical evidence on the role of labour market pooling in determining the spatial concentration of UK manufacturing establishments. This role arises because large concentrations of employment iron out idiosyncratic shocks and improve establishments' ability to adapt their employment to good and bad times. We measure the likely importance of labour pooling by calculating the fluctuations in employment of individual establishments relative to their sector and averaging by sector. Our results show that sectors whose establishments experience more idiosyncratic volatility are more spatially concentrated, even after controlling for a range of other industry characteristics that include a novel measure of the importance of localized intermediate suppliers.

Created: 2008/06/23

JEL-Codes: R30; R12

Keywords: labour market pooling; spatial concentration

Published in Agglomeration Economics, edited by Edward L. Glaeser, 133-150. Chicago, IL: University of Chicago Press, April 2010

IMDEA WP No. 2008-04  (Download full text)

Some reflections on the economics of prosecutors: Mandatory v selective prosecution

by Nuno Garoupa
Mandatory prosecution is inefficient according to legal economists. We argue that when prosecutors are fairly insulated from their performance or are highly risk averse mandatory prosecution is better than selective prosecution. This result has important implications for comparative law since mandatory prosecution generally prevails in civil law jurisdictions whereas selective prosecution is typical of common law jurisdictions.

Created: 2008/02/07

JEL-Codes: K4

Keywords: prosecutors; mandatory prosecution; selective prosecution; civil law; common law

Published in International Review of Law and Economics

IMDEA WP No. 2008-03  (Download full text)

The scope of criminal law and criminal sanctions: An economic view and policy implications

by Roger Bowles, Michael Faure and Nuno Garoupa
This paper considers why some harm-generating activities are controlled by criminal law and criminal sanctions while others are subject to some other mechanism such as civil law, administrative law, regulation or the tax system. It looks at the question from the perspective of the law and economics approach. We seek to identify the comparative benefits of using the criminal law relative to other enforcement mechanisms and – more broadly – why certain specific behaviours are criminalized. The paper argues that an economic approach emphasizing the relative merits of alternative legal instruments for bringing about harm reduction can provide an explanation for a number of recent legal developments. It argues also that the willingness of legislators to combine the use of sanctions traditionally used in one area of the law with sanctions from other areas is more readily explicable in economic terms than in other terms.

Created: 2008/02/07

Published in Journal of Law and Society 35(3), September 2008: 389-416

IMDEA WP No. 2008-02  (Download full text)

Why plea-bargaining fails to achieve results in so many criminal justice systems: A new framework for assessment

by Nuno Garoupa and Frank H Stephen
The economics of plea-bargaining is largely over-optimistic and contrasts with legal scholarship on the topic. We have shown that part of the reason is that it still relies heavily on the 'efficient prosecutor' model and only recently has started looking at the possible advantages of judicial scrutiny. As a consequence, the economics of plea-bargaining has largely failed to influence the debate in Europe and around the world. Further, it was unable to predict the relative failure of Italy (and possibly France), although there is an ex post rationalization (bargaining as an inadequate solution to delays in trial rather than as a device to generate prosecutorial efficient allocation of resources). This paper proposes a new approach based on viewing the contract, which is at the heart of the plea-bargain, as being located in a wider nexus of relationships involving parties who are not directly (or effectively) represented at the bargaining table. By looking in detail to the contract between defendant and his lawyer, the role of the prosecutor, and third party effects, we have provided a richer model that is more skeptical of the efficiency of plea-bargaining. We also point out that a successful transplant of plea-bargaining from the United States to civil law jurisdictions such as France and Italy will very much depend on a reform of criminal procedure that addresses the agency costs we have identified.

Created: 2008/02/07

Published in Maastricht Journal of European and Comparative Law 15(3), September 2008: 319-354

IMDEA WP No. 2008-01  (Download full text)

Information transmission and core convergence in quasilinear economies

by Yusuke Kamishiro and Roberto Serrano
We study core convergence in interim quasilinear economies with asymmetric information, concentrating on core notions in which information is transmitted endogenously within coalitions and the incentive constraints are relevant. Specifically, we shall focus on the credible core and randomized mediated core concepts. We consider independent replicas of the basic economy: independent copies of the economy in which each individual's utility only depends on the information of the individuals who belong to the same copy. We provide an example in which core convergence does not obtain for the Dutta-Vohra credible core and for Myerson's randomized mediated core. On the other hand, we establish a positive convergence result for a refinement of Myerson's core for which information disseminates across coalitions within a given random blocking mechanism. Under some conditions, this core converges to the set of incentive compatible ex-post Walrasian allocations.

Created: 2008/02/06

JEL-Codes: C71; C72; D51; D82

Keywords: core convergence; information transmission; coalitional voting mechanisms; mediation; rational expectations equilibrium

IMDEA WP No. 2007-22  (Download full text)

The use of derivatives in the spanish mutual fund industry

by José M. Marín and Thomas A. Rangel
We study the use of derivatives in the Spanish mutual fund industry. The picture that emerges from our analysis is rather negative. In general, the use of derivatives does not improve the performance of the funds. In only one out of eight categories we find some (very weak and not robust) evidence of superior performance. In most of the cases users significantly underperform non users. Furthermore, users do not seem to exhibit superior timing or selectivity skills either, but rather the contrary. This bad performance is only partially explained by the larger fees funds using derivatives charge. Moreover, we do not find evidence of derivatives being used for hedging purposes. We do find evidence of derivatives being used for speculation. But users in only one category exhibit skills as speculators. Finally, we find evidence of derivatives being used to manage the funds' cash inflows and outflows more efficiently.

Created: 2007/10/28

JEL-Codes: G11;G2

Keywords: mutual funds; derivative use; risk management

IMDEA WP No. 2007-21  (Download full text)

Firms vs. insiders as traders of last resort

by José M. Marín and Antoni Sureda-Gomila
We explore the role of corporate insiders vs. firms as traders of last resort. We develop a simple model of insider trading in which insiders provide price support, as well as liquidity, in security markets. Consistent with the model predictions we find that in the US markets insiders’ trading activities have a clear impact on return distributions. Furthermore, we provide empirical evidence on insiders transactions and firm transactions affecting returns in a different manner. In particular, while insiders' transactions (both purchases and sales) have a strong impact on skewness in the short run and to a lesser extent in short run volatility, company repurchases only have a clear impact on volatility, both in the short and the long run. We provide explanations for this asymmetry.

Created: 2007/10/28

JEL-Codes: G11; G12; G14; G18

Keywords: insider trading; liquidity; short-horizon variance; autocorrelation; skewness

IMDEA WP No. 2007-20  (Download full text)

The dog that did not bark: Insider trading and crashes

by José M. Marín and Jacques Olivier
This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the “dog that did not bark” effect). We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution.

Created: 2007/10/28

JEL-Codes: D82; G11; G12; G14; G28

Keywords: insider trading; rational expectations equilibrium; trading constraints; volatility; crashes; short- sales constraint

Published in Journal of Finance 63(5), October 2008: 2429-2476

IMDEA WP No. 2007-19  (Download full text)

Cross-border M&As and the changing economic geography of Europe

by Andrés Rodríguez-Pose and Hans-Martin Zademach
This paper investigates the patterns of corporate mergers and acquisitions (M&As) involving firms located in the EU25 as well as in the four EFTA countries between 1998 and 2003. It first uncovers the 'cross-border balance' of M&As across European states, before identifying, through quantitative multiple regression analysis and insights from qualitative, interview-based research, the extent to which the spatial perspective sheds light onto the factors that may explain the detected levels and patterns of corporate takeovers across Europe. The results indicate that the traditional motives of access to new and core markets, the effects of geographical proximity, and the internalisation of 'localised capabilities' (proxied by a skilled and innovative labour pool) represent the key drivers of European M&As. Institutional factors, such as European integration, assessments of country risk, or language barriers, as well as structural factors (e.g. unemployment or education) appear to be - at least at the intra-European scale - less influential.

Created: 2007/09/24

Keywords: mergers & acquisitions; theory of the firm; spatial proximity; agglomeration economies; localised capabilities; economic integration; Europe

Published in European Planning Studies 17(5), May 2009

IMDEA WP No. 2007-18  (Download full text)

Mapping the European regional educational distribution: Educational attainment and inequality

by Andrés Rodríguez-Pose and Vassilis Tselios
The geography of education, especially at sub-national level, is a huge black box. Basically nothing is known about the distribution of educational attainment and inequality across regions in Europe. This paper addresses this gap in the literature by mapping educational attainment and inequality in 102 regions in western Europe, using data extracted from the European Community Household Panel (ECHP) covering more than 100,000 individuals over the period 1995-2000. The results of this Exploratory Spatial Data Analysis (ESDA) reveal a strong correlation between levels of educational attainment and inequality across regions in Europe. Regions with similar educational conditions tend to cluster, often within national borders. In addition a North-South and an urban-rural dimension is evident. Northern regions and large European metropoli have not only the most educated labour force, but also the lowest levels of inequality. Educational inequality seems to be, in any case, a fundamentally within region phenomenon. 90 percent of the educational inequality in Europe takes place among individuals living in the same region.

Created: 2007/09/24

Keywords: educational attainment; educational inequality; regions; exploratory spatial data analysis; Europe; urbanisation; EU North-South divide

IMDEA WP No. 2007-17  (Download full text)

Education and income inequality in the regions of the European Union

by Andrés Rodríguez-Pose and Vassilis Tselios
This paper provides an empirical study of the determinants of income inequality across regions of the EU. Using the European Community Household Panel data-set for 102 regions over the period 1995-2000, it analyses how micro-economic changes in human capital distribution affect income inequality for the population as a whole and for normally working people. The different static and dynamic panel data analyses conducted reveal that, while the relationship between income inequality and income per capita is positive, the relationship between income inequality and educational attainment is not clear. Across European regions high levels of inequality in educational attainment are associated with higher income inequality. This may be interpreted as the responsiveness of the EU labour market to differences in qualifications and skills. The above results are robust to changes in the definition of income distribution. Other results indicate that population ageing and inactivity are sensitive to the specification model, while work access and latitude are negatively associated to income inequality. Urbanisation has a negative impact on inequality, but for the population as a whole only, and the relationship between unemployment and income inequality is positive. Female participation in the labour force is negatively associated with inequality and explains a major part of the variation in inequality. Finally, income inequality is lower in social-democratic welfare states, in Protestant areas, and in regions with Nordic family structures.

Created: 2007/09/24

Keywords: Income inequality; educational attainment; educational inequality; regions; Europe

Published in Journal of Regional Science 49(3), August 2009: 411-437

IMDEA WP No. 2007-16  (Download full text)

Implementation in adaptive better-response dynamics

by Antonio Cabrales and Roberto Serrano
We study the classic implementation problem under the behavioral assumption that agents myopically adjust their actions in the direction of better-responses within a given institution. We offer results both under complete and incomplete information. First, we show that a necessary condition for assymptotically stable implementation is a small variation of (Maskin) monotonicity, which we call quasimonotonicity. Under standard assumptions in economic environments, we also provide a mechanism for Nash implementation which has good dynamic properties if the rule is quasimonotonic. Thus, quasimonotonicity is both necessary and almost sufficient for assymptotically stable implementation. Under incomplete information, incentive compatibility is necessary for any kind of stable implementation in our sense, while Bayesian quasimonotonicity is necessary for assymptotically stable implementation. Both conditions are also essentially sufficient for assymptotically stable implementation. We then tighten the assumptions on preferences and mutation processes and provide mechanisms for stochastically stable implementation under more permissive conditions on social choice rules.

Created: 2007/08/22

JEL-Codes: C72; D70; D78

Keywords: implementation; bounded rationality; evolutionary dynamics; mechanisms

IMDEA WP No. 2007-15  (Download full text)

El uso de sistemas dinámicos estocásticos en la Teoría de Juegos y la Economía

by Roberto Serrano
Este breve artículo glosa algunas de las aplicaciones recientes de sistemas dinámicos estocásticos a la Teoría de Juegos y la Economía. El modelo que se describe con más detalle demuestra que la única asignación estocásticamente estable de un proceso de intercambio entre coaliciones sujeto a errores en la toma de decisiones es la asociada al equilibrio de mercado. Resultados como éste proveen una nueva fundamentación a un concepto central en la Teoría Económica.

Created: 2007/06/19

Published in Matematicalia 3(4-5) October-December 2007

IMDEA WP No. 2007-14  (Download full text)

Robust virtual implementation with incomplete information: Towards a reinterpretation of the Wilson doctrine

by Georgy Artemov, Takashi Kunimoto and Roberto Serrano
We consider robust virtual implementation, where robustness is the requirement that implementation succeed in all type spaces consistent with a given payoff type space as well as with a given space of first-order beliefs about the other agents' payoff types. This last bit, which constitutes our reinterpretation of the Wilson doctrine, allows us to obtain very permissive results. Our first result is that generically, if there are at least three alternatives, any incentive compatible social choice function is robustly virtually implementable in iteratively undominated strategies. Further, we characterize robust virtual implementation in iteratively undominated strategies by means of incentive compatibility and measurability. Our characterization is independent of the presence of monetary transfers or assumptions alike, made in previous studies. Our work also clarifies the measurability condition in connection to the generic diversity of preferences used in our first result.

Created: 2007/05/27

JEL-Codes: C72; C78; D82

Keywords: Wilson doctrine; mechanism design; robust virtual implementation; iteratively undominated strategies; incentive compatibility; measurability; type diversity

IMDEA WP No. 2007-13  (Download full text)

The geographical processes behind innovation: A Europe-United States comparative analysis

by Riccardo Crescenzi, Andrés Rodríguez-Pose and Michael Storper
The United States and European Union differ significantly in terms of their innovative capacity: the former have been able to gain and maintain world leadership in innovation and technology while the latter continues to lag. Notwithstanding the magnitude of this innovation gap and the political emphasis placed upon it on both sides of the Atlantic, very little systematic comparative analysis has been carried out on its causes. The empirical literature has emphasised the structural differences between the two continents in the quantity and quality of the major 'inputs' to innovation: R&D investments and human capital. The very different spatial organisation of innovative activities in the EU and the US – as suggested by a variety of contributions in the field of economic geography – could also influence innovative output. This paper analyses and compares a wide set of territorial processes that influence innovation in Europe and the United States. The higher mobility of capital, population, and knowledge in the US not only promotes the agglomeration of research activity in specific areas of the country but also enables a variety of territorial mechanisms to fully exploit local innovative activities and (informational) synergies. In the European Union, in contrast, imperfect market integration, and institutional and cultural barriers across the continent prevent innovative agents from maximising the benefits from external economies and localised interactions, but compensatory forms of geographical process may be emerging in concert with further European integration.

Created: 2007/04/27

Published in Journal of Economic Geography 7(6), November 2007: 673-709

IMDEA WP No. 2007-12  (Download full text)

Social capital, rules, and institutions: A cross-country investigation

by Thomas Farole, Andrés Rodríguez-Pose and Michael Storper
Research on the institutional foundations of economic development emphasizes either rulebound systems of exchange or informal bonds between individuals and within small groups. This corresponds to a classical division in social science, between the forces of society and those of community. This cleavage largely ignores their interactions, which are likely to shape the institutions that underpin economic development in decisive ways. This paper operationalises and tests how the interaction of the forces of community (or social capital) and society (or rules) impact three types of institutions: those involved in problem solving, those that shape microeconomic efficiency and those that influence social policy, across fiftyeight countries. We find that both community and society are important determinants across all institutional domains, and are in many cases mutually reinforcing, but that different specific aspects of community and society are most relevant to different institutional domains. Instrumental associationalism, whether formal or informal, and a robust rules environment are the most important determinants of positive institutional outcomes.

Created: 2007/04/27

IMDEA WP No. 2007-11  (Download full text)

Fiscal decentralisation, efficiency, and growth

by Andrés Rodríguez-Pose, Sylvia A. R. Tijmstra and Adala Bwire
Much of the recent worldwide trend towards devolution has been driven by the belief that fiscal decentralization is likely to have a positive effect on government efficiency and economic growth. It is generally assumed that the transfer of powers and resources to lower tiers of government allows for a better matching of public policies to local needs and thus for a better allocation of resources. These factors, in turn, are expected to lead to an improvement in regional economic performance, if subnational authorities shift resources from current to capital expenditures in search of a better response to local needs. This paper tests these assumptions empirically by analysing the evolution of subnational expenditure categories and regional growth in Germany, India, Mexico, Spain, and the USA. We find that, contrary to expectations, decentralisation has coincided in the sample countries with a relative increase in current expenditures at the expense of capital expenditures, which has been associated with lower levels of economic growth in countries where devolution has been driven from above (India and Mexico), but not in those where it has been driven from below (Spain). The paper hypothesises that the differences in legitimacy between the central or federal government and subnational governments in top-down and bottom-up processes of devolution may be at the origin of the diverse capacity to deliver greater allocative and productive efficiency and, eventually, greater economic growth by devolved governments.

Created: 2007/04/26

Keywords: devolution; fiscal decentralisation; subnational expenditure; economic growth; Germany; India; Mexico; Spain; United States

Published in Environment and Planning A 41(9), September 2009: 2041-2062

IMDEA WP No. 2007-10  (Download full text)

The evolution of bidding behavior in private-values auctions and double auctions

by Rene Saran and Roberto Serrano
We apply stochastic stability to study the evolution of bidding behavior in private-values second-price, first-price and k-double auctions. The learning process has a strong component of inertia but with a small probability, the bids are modified in the direction of ex-post regrets. We identify essentially a unique bid that will be used by each type in the long run. In the second-price auction, this is the truthful bid. In the first-price auction, bidding half of one’s valuation is stable. The stable bid in the k-double auction is a toughening of the Chatterjee-Samuelson linear equilibrium strategy. If we add a friction in changing one’s bid, then truth-telling behavior is also obtained in the first-price and k-double auctions. Intuitively, the stochastically stable bid minimizes the maximal regret.

Created: 2007/04/10

JEL-Codes: C73; C78; D44; D83

Keywords: stochastic stability; ex-post regret; second-price auction; first-price auction; k-double auction

IMDEA WP No. 2007-09  (Download full text)

Ruggedness: The blessing of bad geography in Africa

by Nathan Nunn and Diego Puga
There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events. Looking at terrain ruggedness, we are able to estimate the importance of these two channels. Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income. However, in Africa rugged terrain afforded protection to those being raided during the slave trades. Since the slave trades retarded subsequent economic development, in Africa ruggedness has also had a historical indirect positive effect on income. Studying all countries worldwide, we find that both effects are significant statistically and that for Africa the indirect positive effect is at least as large as the direct negative effect. Looking within Africa, we also provide evidence that the indirect effect operates through the slave trades.

Created: 2007/03/01

JEL-Codes: O11; O13; N50; N40

Keywords: terrain ruggedness, slave trades, Africa, geography, economic development

Forthcoming in Review of Economics and Statistics

IMDEA WP No. 2007-08  (Download full text)

An economic index of riskiness

by Robert J. Aumann and Roberto Serrano
Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a "duality" axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is homogeneous of degree 1, monotonic with respect to first and second order stochastic dominance, and for gambles with normal distributions, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others in the literature.

Created: 2007/02/28

JEL-Codes: C00; C43; D00; D80; D81; E44; G00

Keywords: riskiness; risk aversion; expected utility; decision making

Published in Journal of Political Economy 116(5), October 2008: 810-836

IMDEA WP No. 2007-07  (Download full text)

Arrow's impossibility theorem: Two simple single-profile versions

by Allan M. Feldman and Roberto Serrano
In this short paper we provide two simple new versions of Arrow's impossibility theorem, in a world with only one preference profile. Both versions are extremely transparent. The first version assumes a two-agent society; the second version, which is similar to a theorem of Pollak, assumes two or more agents. Both of our theorems rely on diversity of preferences axioms, and we explore alternative notions of diversity at length. Our first theorem also uses a neutrality assumption, commonly used in the literature; our second theorem uses a neutrality/monotonicity assumption, which is stronger and less commonly used. We provide examples to show the logical independence of the axioms, and to illustrate our points.

Created: 2007/02/28

JEL-Codes: D60; D70; D71

Keywords: Arrow's theorem; single-profile

Published in Harvard College Mathematics Review 2(2), December 2008: 46-57

IMDEA WP No. 2007-06  (Download full text)

Bargaining

by Roberto Serrano
This article is a survey on bargaining theory. The focus is the game theoretic approach to bargaining, both on its axiomatic and strategic counterparts. The application of bargaining theory to large markets and its connections with competitive allocations are also discussed.

Created: 2007/02/28

JEL-Codes: C7

Published in Steven N. Durlauf and Lawrence Blume (eds.), The New Palgrave Dictionary of Economics, 2nd edition, London: McMillan

IMDEA WP No. 2007-05  (Download full text)

Nash program

by Roberto Serrano
This article is a brief survey on the Nash program for coalitional games. Results of noncooperative implementation of the Nash solution, the Shapley value and the core are discussed.

Created: 2007/02/28

JEL-Codes: C7

Published in Steven N. Durlauf and Lawrence Blume (eds.), The New Palgrave Dictionary of Economics, 2nd edition, London: McMillan

IMDEA WP No. 2007-04  (Download full text)

Marginal contributions and externalities in the value

by Geoffroy de Clippel and Roberto Serrano
Our concern is the extension of the theory of the Shapley value to games with externalities. Using the standard axiom systems behind the Shapley value for an arbitrary exogenous coalition structure leads to the identification of bounds on players’ payoffs around an "externality-free" value. In endogenizing the coalition structure, we analyze a two-stage process of coalition formation in whose second stage our axiomatic results are applied. We find reasons to explain inefficient coalition structures, and provide sufficient conditions for efficiency.

Created: 2007/02/28

JEL-Codes: C7; D62

Keywords: externalities; marginal contributions; Shapley value; Pigouvian transfers; coalition formation

Published in Econometrica 76(6), November 2008: 1413-1436

IMDEA WP No. 2007-03  (Download full text)

Multiple equilibria as a difficulty in understanding correlated distributions

by Anirban Kar, Indrajit Ray and Roberto Serrano
We view achieving a particular correlated equilibrium distribution for a normal form game as an implementation problem. We show, using a parametric version of the two-person Chicken game and a wide class of correlated equilibrium distributions, that a social choice function that chooses a particular correlated equilibrium distribution from this class does not satisfy the Maskin monotonicity condition and therefore can not be fully implemented in Nash equilibrium.

Created: 2007/02/28

JEL-Codes: C72

Keywords: correlated equilibrium distribution; implementation; monotonicity

Published in Games and Economic Behavior 69(1), May 2010: 189-193

IMDEA WP No. 2007-02  (Download full text)

Decomposing the growth in residential land in the United States

by Henry G. Overman, Diego Puga and Matthew A. Turner
This paper decomposes the growth in land occupied by residences in the United States to give the relative contributions of changing demographics versus increases in the land area used by individual households. Between 1976 and 1992 the amount of residential land in the United States grew 47.5% while population only grew 17.8%. At first glance, this suggest an important role for per-household increases. However, the calculations in this paper show that only 24.3% of the growth in residential land area can be attributed to State-level changes in land per household. 37.5% is due to overall population growth, 5.9% to the shift of population towards States with larger houses, 22.7% to an increase in the number of households over this period, and the remaining 9.5% to interactions between these changes. There are large differences across states and metropolitan areas in the relative importance of these components.

Created: 2007/02/19

JEL-Codes: R14; O51

Keywords: land use; population growth

Published in Regional Science and Urban Economics 38(5), September 2008: 487-497

IMDEA WP No. 2007-01  (Download full text)

Fat city: The relationship between urban sprawl and obesity

by Jean Eid, Henry G. Overman, Diego Puga and Matthew A. Turner
We study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided.

Created: 2007/02/19

JEL-Codes: I12; R14

Keywords: urban sprawl; obesity; selection effects

Published in Journal of Urban Economics 63(2), March 2008: 385-404