Economics Department: Working Papers Series
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The Economics Department at Baylor Univeristy welcomes you to the site of its new working paper series. All papers in the series are available on-line in PDF format. We recommend using the latest version of Adobe Reader, which can be downloaded free of charge from Adobe's Web site.
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Item Capital Regulation, Heterogeneous Monitoring Costs, and Aggregate Loan Quality(2005-08-13T17:55:46Z) Kopecky, Kenneth; VanHoose, David D.This paper develops a banking-sector framework with heterogeneous loan monitoring costs. Banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure. After analyzing an unregulated banking system, we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks. To gauge the impact of capital requirements, we define loan ‘quality’ in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population. We find that binding capital requirements unambiguously increase the market loan rate and reduce aggregate lending, but, in all but one case, have an ambiguous effect loan ‘quality.’ Equally important, we show that capital requirements create a misallocation of monitoring activity within the banking system. These results suggest that the benefit/cost ratio of capital requirements is not necessarily greater than unity.Item Do We Really Understand Home Ownership Rates? An International Study(2005-08-13T17:12:19Z) Gwin, Carl R.; Ong, Seow-EngThis paper attempts to fill two gaps in the homeownership literature identified by Dietz and Haurin (2003): homeownership in less developed countries and the effects of race, ethnicity and income on tenure choice. We use United Nations data from 1993 and 1998 to offer a cross-country analysis of the determinants of homeownership rates. Consistent with the previous literature, this study confirms that 1. The price-to-rent ratio is an important factor in tenure choice and 2. Increases in income are associated with increases in the percentage of consumers who choose to own. However, these relationships seem to hold generally only for higher income developed countries. In contrast to the previous literature that finds race and ethnicity account for a significant portion of the differences in U.S. homeownership rates, this study finds no evidence that these determinants account for differences across countries. We investigate the rule of law and find it is closely correlated with income measures which may indicate that countries with stronger laws encourage higher homeownership rates. Finally, capitalist / (formerly) communist regime differences do not appear to explain cross country differences in homeownership rates. The paper offers insights from the international evidence for the potential of selected policies to increase domestic homeownership rates and identifies several avenues for future international homeownership research.Item Does Consumer Search Matter for Firm Markups?(2005-08-13T17:08:44Z) Gwin, Carl R.This study investigates the relationship between consumer search costs, inflation, and firm markups in retail trade by employing actual measures of search cost. Consistent with theory, results indicate that markups can be higher if search costs are higher and increases in inflation lead to increases in markups if search costs are sufficiently high. Two competing hypotheses on the link between inflation and markups, namely consumer search costs and alternatively long-term seller/buyer contracts, are then evaluated. As long-term contracts are rare in retail trade, this study's results make it hard to justify studying how inflation impacts firm markups without considering search costs.Item Existence of Equilibriuim in Welfare-enhancing Free Trade Areas(2005-08-13T17:05:39Z) Grinols, Earl L., 1951-; Silva, Peri A.Proving the existence of equilibrium having specified properties is often synonymous with proving the result in trade theory. The Grandmont-McFadden proposition that any autarkic allocation can be replaced by a Pareto superior free trade equilibrium involving domestic transfers only depends on an existence proof, for example. Comparable proofs for free trade areas have not been provided to date because unharmonized tariffs imply goods prices that vary by member country and require potentially complicated rules of origin that block standard proofs. This paper fills this gap by providing the missing proof that starting from an arbitrary world trade equilibrium, a free trade area equilibrium can be found involving domestic transfers only that is at least as satisfactory for every consumer as the original allocation.Item Global Patent Protection: Channels of North & South Welfare Gain(2005-08-13T16:58:35Z) Grinols, Earl L., 1951-; Lin, Hwan C.Much of the dynamic literature on intellectual property protection (IPP) arrays goods along a segment of the real line, one endpoint of which expands with innovation. A single margin of innovation brings computational clarity, but implies that the innovating region cannot reassign its research and development efforts among multiple sectors. This leads to special results. This paper expands innovation to two dimensions and re-examines the question of North and South intellectual property protection. The model includes many of the features of earlier models but predicts avenues of cooperation and mutual interest that were previously unavailable. For example, the South may benefit from equal or even higher standards of IPP protection than in the North, and it is possible that the North gains from differentially weaker IPP enforcement in the South. The source of the different conclusions is traced to different channels of welfare influence that support the findings. Monopoly power is less important in explaining them than resource shifting between innovation sectors. Key features not previously found include the ability of lower Southern IPP to spur innovation of Northern goods and to make available greater resources for Northern production of current consumption.Item Openness, Central Wage Bargaining, and Inflation(2005-08-13T17:49:37Z) Daniels, Joseph P.; Nourzad, Farrokh; VanHoose, David D.This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase but then results in an inflation dropoff, (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence, and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970-1999 provides generally strong and robust empirical support for all three of these predictions.Item Openness, the Sacrifice Ratio, and Inflation: Is there a Puzzle?(2005-08-13T17:45:15Z) Daniels, Joseph P.; VanHoose, David D.The standard time-inconsistency-based explanation for the negative correlation between openness and inflation requires an inverse relationship between the sacrifice ratio and openness, but Daniels et al. (forthcoming) have provided evidence that controlling for central bank independence reveals a positive relationship. This paper embeds the time-inconsistency approach within a model of a multisector, imperfectly competitive, open economy. In this setting, greater openness raises the sacrifice ratio but reduces the inflation bias. Thus, failure to observe an inverse relationship between openness and the sacrifice ratio does not necessarily imply that the time-inconsistency approach is irrelevant to understanding the openness-inflation relationship.Item Pharmaceuticals, Prescription Plans, and Promoting Progress(2005-08-13T17:41:49Z) Grinols, Earl L., 1951-; Henderson, James W.Monopoly response to buyers who pay fraction c of the product cost is to raise the buyer price for the initial quantity q0 from p0 to 1/c p0, and adjust to a different price and quantity only if profits are thereby raised further. A 25% prescription drug plan co-payment provision, for example, magnifies the pharmaceutical patent holder’s profits more than a fourfold increase in price at the original output would do. This is detrimental to the adoption and use of prescription drug plans. In addition to the appearance of abusing a prescription drug program, the inducement to patentable pharmaceutical research and development (R&D) cannot be optimal both before and after such a plan’s institution. Possibly it is optimal in neither. This paper describes an efficient incentive plan for R&D that does not depend on monopoly and thus is not an impediment to co-pay provisions that might be part of a prescription drug plan.Item Religious Freedom and State Religion in an Interational Panel(2005-08-13T17:37:13Z) Gwin, Carl R.; North, Charles Mark, 1964-This paper explores the determinants and implications of church-state relationships. A theoretical model of a government’s decision to establish, or disestablish, a state church is developed and then tested with data from a 65-year panel of 31 countries. We also examine the effects of state religion and legal protection of religious freedom on religious attendance and religious pluralism. We show that, due to economies of scale in the provision of religious services, governments are most likely to establish a state religion in countries with homogeneous populations. We further show that heterogeneity of religious preferences reduces the likelihood of a state religion, that state religions undermine the overall religiosity of the population in religiously pluralistic countries, and that religious freedom protection increases religious attendance and spurs increases in religious pluralism. The overall implication of our model and empirical findings is that state religion is inherently self-destructive when religious freedom is guaranteed.Item Religious Pluralism and Religious Adherence in U.S. Counties: Assessing the Reassessment(2005-08-13T17:24:19Z) North, Charles Mark, 1964-; Staha, Melissa B.We conduct an empirical test of the relationship between religious pluralism and religious participation in U.S. counties using a fixed-effects panel estimation technique. The empirical technique allows us to control for unobserved heterogeneity across counties resulting from various cultural and historical factors. Contrary to prior cross-sectional research on the 1980 and 1990 Glenmary U.S. counties data, we find a significantly positive relationship between pluralism and participation from panel estimation on the same data. However, we also explain how changes between 1980 and 1990 in the composition of denominations in the Glenmary samples can generate a false positive relationship with the panel estimator. The results show the importance for future research on pluralism and participation of data that have a consistent denominational composition across time.Item Unemployment Duration under Wrongful Discharge Law(2005-08-13T17:28:26Z) Nicholson, Kristin A.; North, Charles Mark, 1964-In the 1970’s and 1980’s, courts in most U.S. states adopted some type of common law wrongful discharge cause of action. The various causes of action for wrongful discharge are generally placed into three categories: public policy, implied contract, and good faith. This paper examines the effects of state-level wrongful discharge actions on the duration of unemployment spells. We use individual data from the March supplements to the Current Population Survey for 1979- 2000, refining the sample in various ways to correct for shortcomings inherent in CPS data on unemployment spell duration. Results indicate that judicial adoption of wrongful discharge law lengthened the duration of unemployment spells. For the broadest sample of workers, all three types of wrongful discharge law lengthened unemployment spells. However, when the analysis is limited to workers who can be matched across their two years of participation in the survey, only the implied contract action has a significant effect. In addition, we look for the presence of differential insider/outsider effects, as have been found in studies of European employment protection legislation, but we find only limited evidence of such effects.Item Within-child Associations between Changes in Family Income and Changes in Externalizing and Internalizing Problems(2005-08-13T18:00:15Z) Dearing, Eric; McCartney, Kathleen; Taylor, Beck A.Within-child associations between family income and child externalizing and internalizing problems were examined using longitudinal data from the NICHD Study of Early Child Care and Youth Development (n = 1,132). Variations in income effects were estimated as a function of whether families were poor, whether mothers were partnered or not, and the number of hours mothers and their partners were employed. For all study children, increases in family income were associated with decreases in externalizing problems, although the estimated benefits of gains in income were greatest for children who were chronically poor. For both externalizing and internalizing problems, income gains were most strongly associated with problem decreases when chronically poor children’s mothers were partnered and employed.