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When to Quit Under Uncertainty? A real options approach to smoking cessation
Get PDFThis paper models the decision to quit smoking like an investment decision where the quitter incurs a sunk withdrawal cost today and forgoes their consumer surplus from cigarettes (invests) and hopes to reap an uncertain reward of better health and therefore higher utility in the future (return). We show that a risk-averse mature smoker who expects to benefit from quitting may still rationally choose to delay quitting until they are more confident that quitting is the right decision for them. Such a decision by the smoker is due to the value associated with keeping their option of whether or not to quit open as they learn more about the damage that smoking will have on their future utility. Policies which reduce a smoker’s uncertainty about the damage that smoking with have on their future utility is likely to make them quit earlier
The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises
No full textEmpirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995-2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997-98 Asian crisis and the 2007-09 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times
Optimal taxation and the skill premium
Get PDFThe stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium
and the progressivity of the tax system are endogenously determined, with
the latter being optimally chosen by a benevolent government. We find that
optimal policy delivers both a progressive tax system and model predictions
which are generally consistent, except for the 1980s, with the stylized facts
relating to the skill premium and progressivity. To capture the patterns in
the data over the 1980s requires that we adopt a government policy which
is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium
Finite Horizon Learning
Get PDFIncorporating adaptive learning into macroeconomics requires assumptions
about how agents incorporate their forecasts into their decision-making. We develop a theory of bounded rationality that we call finite-horizon learning.
This approach generalizes the two existing benchmarks in the literature: Eulerequation
learning, which assumes that consumption decisions are made to satisfy the one-step-ahead perceived Euler equation; and infinite-horizon learning, in which consumption today is determined optimally from an infinite-horizon optimization problem with given beliefs. In our approach, agents hold a finite
forecasting/planning horizon. We find for the Ramsey model that the unique
rational expectations equilibrium is E-stable at all horizons. However, transitional dynamics can differ significantly depending upon the horizon
North Sea Oil and Genuine Saving in the Scottish Economy
Get PDFThe World Bank has published estimates of sustainability of consumption paths by adjusting saving rates to take account of the depletion of non-renewable resources. During the period of North Sea oil production Scotland has been in a fiscal union with the rest of the UK. The present paper adjusts the World Bank data to produce separate genuine saving estimates for Scotland and the rest of the UK for 1970-2009, based on a ‘derivation’ principle for oil revenues. The calculations indicate that Scotland has had a negative genuine saving rate for most of the period of exploitation of North Sea oil resources, with genuine saving being positive in the rest of the UK during this period
Native language, spoken language, translation and trade
Get PDFWe construct new series for common native language and common spoken language for 195 countries, which we use together with series for common official language and linguis-tic proximity in order to draw inferences about (1) the aggregate impact of all linguistic factors on bilateral trade, (2) whether the linguistic influences come from ethnicity and trust or ease of communication, and (3) in so far they come from ease of communication, to what extent trans-lation and interpreters play a role. The results show that the impact of linguistic factors, all together, is at least twice as great as the usual dummy variable for common language, resting on official language, would say. In addition, ease of communication is far more important than ethnicity and trust. Further, so far as ease of communication is at work, translation and inter-preters are extremely important. Finally, ethnicity and trust come into play largely because of immigrants and their influence is otherwise difficult to detect
Time Variation in the Dynamics of Worker Flows: Evidence from the US and Canada
Get PDFVAR methods have been used to model the inter-relationships between inflows and outfl ows into unemployment and vacancies using tools such as impulse response analysis. In order to investigate whether such impulse responses change over the course of the business cycle or or over time, this paper uses TVP-VARs for US and Canadian data. For the US, we find interesting differences between the most recent recession and earlier recessions and expansions. In particular, we find the immediate effect of a negative shock on both in ow and out flow hazards to be larger in 2008 than in earlier times. Furthermore, the effect of this shock takes longer to decay. For Canada, we fi nd less evidence of time-variation in impulse responses
The Growth in Inter-connectedness in the Scottish Economy, 1998-2007; a disaggregated analysis
Get PDFThe measurement of inter-connectedness in an economy using input-output
tables is not new, however much of the previous literature has not had any explicit
dynamic dimension. Studies have tried to estimate the degree of inter-relatedness for
an economy at a given point in time using one input-output table, some have compared
different economies at a point in time but few have looked at the question of how interconnectedness
within an economy changes over time. The publication in 2010 of a
consistent series of input-output tables for Scotland offers the researcher the
opportunity to track changes in the degree of inter-connectedness over the seven year
period 1998 to 2007.
The paper is in two parts. A simple measure of inter-connectedness is
introduced in the first part of the paper and applied to the Scottish tables. In the second
part of the paper an extraction method is applied to sector by sector to the tables in
order to estimate how interconnectedness has changed over time for each industrial
sector
Rationalising ‘Irrational’ Support for Political Violence
Get PDFThis paper provides a rationale for group support for political violence when violence does not provide a material benefi t. A theory of fairness is adopted to demonstrate that although group violence may not be the equilibrium of a material game it may be a fairness equilibrium in a game containing psychological payoffs. For this to happen the
material stakes must be perceived as low and psychological payoffs are expressive. Although the material stakes are actually high, members of each group may choose expressively to support the use of violence because the probability of being decisive is low. The paper also considers the possibility of peace emerging as a fairness equilibrium. This can only happen if each group perceives the other as making some sacrifi ce
in choosing peace
The Impact of Population Ageing on the Labour Market: Evidence from Overlapping Generations Computable General Equilibrium (OLG-CGE) Model of Scotland
Get PDFThis paper presents a dynamic Overlapping Generations Computable General Equilibrium (OLG-CGE) model of Scotland. The model is used to examine the impact of population ageing on the labour market. More specifically, it is used to evaluate the effects of labour force decline and labour force ageing on key macro-economic variables. The second effect is assumed to operate through age-specific productivity and labour force participation. In the analysis, particular attention is paid to how population ageing impinges on the government expenditure constraint. The basic structure of the model follows in the Auerbach and Kotlikoff tradition. However, the model takes into consideration directly age-specific mortality. This is analogous to “building in” a cohort-component population projection structure to the model, which allows more complex and more realistic demographic scenarios to be considered