This dissertation consists of three essays on economic theories of signaling and behavior. The first essay presents a model of indirect speech as a costly signal of quality. The model explains the tendency of people to use language that is more confusing that necessary by showing that indirect speech is rational when outside options are invisible and related to quality in a matching environment. The second essay explores the relationship between conspicuous consumption and population density. The returns to conspicuous consumption are higher in denser areas for several reasons, and the returns to high-quality agents of signaling visibly can support the existence of dense cities by themselves. The third essay develops a model of “semi-conspicuous” consumption. Wealthy agents who are also socially well-connected signal discreetly, credibly signaling both quality and connectedness. Wealthy agents who are not well-connected signal more conspicuously, and poor agents do not signal.
Posts Tagged ‘General’:
Post-communist capitalism: The politics of institutional development
This dissertation contains three essays on economic transition and institutional change in Central and Eastern Europe. The first paper analyzes patterns of economic coordination in Estonia and Slovenia, two post-socialist countries in Central and Eastern Europe, and argues that Estonia and Slovenia are good examples of liberal and coordinated market economies as defined in the Varieties of Capitalism literature. The main focus is on industrial relations and wage bargaining, but other areas studied by this literature are considered as well. The paper also explores the origins of these institutions by examining the interaction of inherited institutions and strategic policy choices, esp. the effects of privatization and monetary policy on formalizing coordination. The chapter also considers some general implications of this analysis for the study of post-socialist transition and comparative capitalism. The second paper seeks to explain the diversity in economic governance and industrial relations across the eight transition countries that became members of the EU in 2004. It argues that three different models of economic governance emerged in the 1990s—a liberal market economy model associated with pluralist interest representation), a coordinated model associated with corporatist interest representation) and a mixed model, in which social pacts played a significant role. The paper accounts for this variation by developing a theory based on networks. It seeks to demonstrate that two factors—the degree to which the communist system fostered horizontal network ties and the degree to which ownership reform preserved and promoted network ties—can account for the type of economic governance prevalent in each country. The four case studies of Slovenia, Hungary, the Czech Republic and Estonia are used to explore the causal mechanisms. The third paper examines the development of trade policy in Poland and Estonia from the early 1990s until EU accession in 2004. The paper also develops a typology of historical sequences based on two dimensions—extraordinary politics and path breaking—to categorize the policy evolution and processes of change in these countries. It examines why both countries liberalized trade during a period of extraordinary politics at the outset of the transition process, but why this only led to a critical juncture and sustained liberalization in Estonia. The paper suggests that policy change during periods of extraordinary politics are best understood by examining the structure of executive politics and the process of preference formation, whereas the sustainability of trade policy reform is best understood by analyzing interests and institutions.
The microeconomics of hard times: A study of the effect of the 2002 Argentinean crisis on households and firms
This is an empirical study of how consumers and firms adjust their behavior during hard economic times. I use micro household data from the 2002 Argentinean large devaluation. A large devaluation is mainly a big negative income shock, triggered by a highly inflationary process. The first chapter of this study identifies five stylized facts of the aftermath of the devaluation. The second chapter estimates the evolution of a multi-product demand system for the soft drink category, providing some relevant applications and policy implications. The third chapter studies the role of liquidity constraints in the purchasing pattern within a month.
Pathways of local economic development: Tales of cities in the United States and South Korea
Local economic development may be defined as increases in the “local economys capacity to create wealth for local residents.” With current unlimited competitiveness in the international market, cities have become not only a place to produce goods but also a spatial consideration for current and future workers everyday lives. However, not every city can achieve its desired economic success, and the pathways toward economic prosperities are diverse. How to accomplish the desired level of economic development and what to develop are two different but intertwined issues that should be understood based on political, economic, and social conditions in localities. Variations in local economic development have been explained by the international, national, and local contexts. These political and economic contexts are shaped by the nation states political structure, the structure of industry in localities, and determining local governance structure. What are the determinants of the type of local economic development in the manufacturing industry cities in different political settings? This research focuses on the impacts of political and economic contexts of cities and their local economic development pathways, conducting in-depth case studies of industrial cities in the United States and South Korea: the City of Detroit, the City of Pittsburgh, Ulsan Metropolitan City, and the City of Pohang. The research is validated by the process-tracing method with document research and archive research, including various years of government reports, organizations special reports, annual White papers, census data, and each citys statistical data. Determinants of local economic development in two different political settings can be understood with international market force, characteristics of political institutional structure, and the role of asset specificity in the region. International market change provides a more direct impact on a single dominant industry-oriented city such as Detroit than on cities of fragmented industry structure like Pittsburgh. Korean cases show a mixed picture of interplay among international market forces, national government, and industry structure, which differs from the United States. While the decentralization process in Korea provides positive opportunities to enhance the local capacity to Ulsan Metropolitan City for overcoming the international marketforce, the same process can be a constraint in the city of Pohang due to its single dominant industry structure. The nature of national political institutions influences the variation in local economic development patterns. In general, the federal system as compared to a unitary system) tends to create more competition among local governments for government resources. With the insight of transaction cost approach, characteristics of asset specificity in a region explain the diverse impact of each asset specificity in the region. Level of asset specificity plays a negative role in the local governments flexible decision making on local economic development. Traditionally, in top-down development approaches and bottom-up development approaches— but even bottom-up development approaches— it is hard to ignore the role of the higher level of governments. Some localities more rely on the higher level of government support in order to reorganize and enhance the local economy. Asset specificity is not fixed and constantly transforms based on the mobility of capital and labor. If asset specificity is high in a region, firms do not want to move from the region unless they are willing to accrue substantial cost, and thus asset specificity becomes a strong bargaining tool when the relationship with local government needs to be negotiated. In the case of the developmental state, asset specificity in certain a locality is heavily embedded over time due to the national economic development plan. For example, Ulsan and Pohang had been designated as “targeted” growth poles for national economic development over three decades with specific manufacturing industries such as automobile, petrochemical, shipbuilding, and steel industry.
Constructing the People’s Home: The Political and Economic Origins and Early Development of the “Swedish Model” (1879–1976)
When Marquis Childs published his book The Middle Way in 1936, he laid the foundation that inspired the quest for an efficient welfare state. The Folkhemmet, or “peoples home,” initiated by the Social Democrats symbolized the “Swedish Way” and resulted in a generous, redistributive welfare state system. By the early 1970s, experts marveled at Swedens performance because the Swedish model managed to produce the second-wealthiest economy as measured by per capita GDP with virtually no cyclical unemployment. This dissertation demonstrates that capitalist and pre-industrial cultural forces dominated Swedish economic policy development throughout the years that the Social Democrats constructed Folkhemmet. The Swedish economy operated as a variety of capitalism that infused unique traditional cultural characteristics into a “feudal capitalism.” The system was far more market-oriented, deregulated, and free from direct government ownership or control than most assumed then or now. A process of negotiation and reason, mixed with pragmatism and recognition of valuing opportunity over principles, drove Swedish modernization. Eventually, the entire society became commoditized through gender equalization efforts, resulting in greater individualism and an increased breakdown of informal communal or collective functions. Gradually, the nature of individual initiative and incentive within capitalism undermined Folkhemmets goals and aspirations. Modernization dismembered traditional Swedish households and values as the economy experienced increasingly higher taxes and long-term industrial decline. Post-industrial jobs financed by government taxes eventually choked the supply of foreign direct investment, as well as domestic capital investment levels. When the private sector ceased to produce enough jobs to fund the highly taxed system, Folkhemmet experienced a crisis. The creation of public sector jobs intended mainly to push more women into the workforce resulted in numerous inefficiencies and financial problems. High taxation accelerated the decomposition of traditional civic relations. Moral hazards taxed honesty and eroded the common trust that had enabled the formation of this unique method of economic policymaking. What Childs initially communicated was a process of policy development dictated by gradualism and moderation, not a political system that could be transplanted across the globe. Thus, his “middle way of politics” should have been phrased the “moderate way of policy making.”
Essays on China’s Macro-economy and Credit Market
In the past two decades, the world has witnessed an unprecedented growth of GDP in China. And the growth has largely been driven by the surging current surplus, which results in large international reserves accumulation. The effect of this gigantic build up of reserves has been a source of growing public attention in the context of the debate on global imbalances. A common argument is that the culprit of global imbalances is a result of exchange rate manipulation by the Chinese authorities, which peg the RMB to the dollar at a low value. Chapter one looks at the real exchange rate movement in China and in other foreign currency inflow countries during the period with massive international reserves accumulation. In this chapter, we introduce the idea of “sterilization by the people”, which refers to the concept of increasing money demand partially offsetting the effect of increasing money supply. And we find that “sterilization by the people” plays a dominant role in mitigating the real exchange rate appreciation pressure in China. This finding is consistent with the high savings rate, largely in the form of M2 in China. Further development of the financial system and improvement of the social safety net may reduce peoples demand for the monetary balance and lead to the real exchange rate appreciation to a new equilibrium. Chapter two analyzes Chinas business cycle by linking its credit market with the real economy. To be more specific, it studies the role of credit market imperfection and sectoral asymmetry as means through which shocks to the real economy are propagated and amplified. Most Chinese firms finance their investment by internal funds, which explain the high and ever-growing corporate savings in the recent decade. This is due to the lack of access to the external funds, in other words, credit constraints. With its credit constraint more binding, the non-tradable sector experiences larger fluctuation in investment and output than the tradable sector. Hence, we observe the non-uniform credit market imperfection and unbalanced business fluctuation across sectors. Both chapter one and two are centered on the macroeconomic consequences of the high savings rate in China. Chapter three analyzes its potential drivers. It is found that the high savings rate is mainly contributed to the high corporate savings that result from the growing enterprise profits and low dividend payout. And the credit market imperfection is mainly responsible for firms dependence on internal financing, particularly for the small private firms.
Dancing with his “Lesser Evil” -Mao’s China from 1962-68 and the road to rapprochement with the United States
In the 1960s, a growing number of opinions from scholars, experts in international affairs and policymakers in the United States advocated for a policy adjustment toward Communist China. The military and political conundrum resulted from the Vietnam War and the still ongoing confrontation with the Soviet Union prompted Washington to develop a conciliating relationship with Beijing. China was cool to U.S. overtures to rapprochement, with anti-U.S. imperialism remaining a main foreign policy orientation, but adjusted its policy at the end of the decade. Many factors contributed to Beijing’s final positive response to U.S. overtures, both from the U.S. side and the Chinese side. This study illustrates how the political infighting in the central leadership of the Chinese Communist Party influenced Chairman Mao Zedong’s view of the relationship among Washington, Moscow and Beijing, and accordingly shifted China’s foreign policy from allying with the Soviet Union to rapprochement with the United States.
Essays on Cooperation and Social Insurance
I used information collected in field experiments in the Greater Accra region in Ghana to assess the effects of religion identity, using priming techniques, on altruism and trust. We use standard versions of the dictator and trust game, and primed participants for religion using pictures. We find that priming for religion decreases the average amount sent by dictators and investors, and that it makes the religious affiliation of the other player a key determinant of behavior, with inter-group biased behavior as a result. We also analyze the insurance provided by the U.S. social security and income tax system within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. We consider two reforms: a piecemeal reform that optimally chooses the social security benefit function and a radical reform which eliminates the entire social insurance system and replaces it with an optimal tax on lifetime earnings. The radical reform outperforms the piecemeal reform and achieves nearly all of the maximum possible welfare gain when wages differ permanently over the lifetime. When wage shocks match properties in U.S. data, the piecemeal reform outperforms the radical reform.
Essays in the macroeconomics of emerging countries
This dissertation is a collection of essays with the main objective of estimate and understand macroeconomic behavior of emerging countries by the lenses of modern tools in general equilibrium modeling. In the first chapter, I study whether structural parameters of Small Open Economy Real Business Cycle models are constant when applied to Emerging Markets data. Using data from Argentina, I estimate a small open economy model with trend shocks and working capital constraints, augmented with time varying parameters. I find that so called “structural” parameters suffer substantial changes in the period 1983–2008. Structural instabilities arise from both technological and financial sources. Given these findings, I inquire which are the features of the data that parameter drifts capture. I review emerging markets facts and find parameter instabilities play a key role in addressing for the variability observed in the data. In the second chapter, I study policy changes in emerging countries. Motivated by the repeated stabilization programs implemented by emerging economies during the last 30 years, I develop a dynamic stochastic general equilibrium model with Markov-Switching to study fiscal and monetary policies in emerging economies. I estimate the model for Mexico and find strong evidence of policy changes. Two Regimes are identified. The Active Monetary Policy Regime AMP), in which monetary and fiscal policies respond to inflation and government debt, respectively； and the Active Fiscal Policy Regime AFP), in which fiscal policy does not respond to government debt and monetary policy does not respond to inflation. AMP holds during short periods of time after macroeconomic crises during the 80s and 90s, and for a long period after 2002. The rest of the periods, AFP is in effect. I find that switches from AFP to AMP have strong stabilization effects at the cost of high output losses. Moreover, credibility in the persistence of the regime change is key to assess the effectiveness of the stabilization program.
Essays in international business cycles
This dissertation consists of two chapters on international business cycles. In the first chapter, I revisit the problem of the anomaly of terms of trade dynamics. First, I empirically analyze the effect of a US aggregate labor productivity shock on the US terms of trade using a Vector Autoregression VAR) and Maximum Forecast Error Variance identification. I find that the shock appreciates the terms of trade of the US. Next, using a non-homothetic preference, I explain the dynamics of the terms of trade in response to a positive aggregate productivity shock theoretically. Using a model with endogenous markup and heterogeneous firm-specific productivities, the appreciation of the terms of trade can be generated even under a complete asset market assumption. Unlike previous studies, I explain the dynamics of the terms of trade through a new channel, which is the channel of relative cutoff firm-specific productivity that determines the optimal export decisions of the firms. Depending on the asset market structure, two competing effects, i.e., the income effect and the markup effect, have different implication to terms of trade dynamics. Under the assumption of financial autarky, the income effect is bigger than the markup effect and the terms of trade depreciates in response to a positive aggregate productivity shock. However, if we allow for the trade of state-contingent or non-state contingent bonds, the markup effect also comes into play and the terms of trade appreciates, which is in line with the empirical findings. In the second chapter, I study the international transmission effects of the news about the Total Factor Productivity TFP hereafter) of the US to the Canadian and Japanese economy. First, using the Vector Error Correction Model VECM), the impulse responses of Canadian and Japanese macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country real business cycle RBC) model with investment adjustment cost and the preference which eliminates the wealth effect on hours worked to generate booms in Canadian and Japanese variables in response to news about future US TFP. I find that international macroeconomic comovements can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian or Japanese TFP to the US news shock is important in order to generate the boom observed in the empirical analysis. Estimated value of the preference parameter indicates that eliminating the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explain the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
