A note on fixed and flexible-term contracts

Engel et al. (1997 2001 2007) have proposed flexible-term contracts as a solution to suboptimal renegotiation of public-private partnerships. We show that whenever the uncertainty lasts over more than two periods, flexible-term contracts have a drawback. The expected duration of a flexible-term contract can be higher than the (certain) duration of a fixed-term contract, the difference being directly proportional to the volatility of the project

Transparency, Recuitment and Retention in the Public Sector

Although performance measurement systems are likely to have significant recruitment and retention consequences these have received much less attention that the individual incentive effects. This paper explores these recruitment and retention consequences in organizations, such as those in the public sector, which are characterized by rigidities in pay. We clarify when performance measurement increases the cost of recruiting and retaining public sector employees and when it does not. Within the same framework, we also show that traditional practices such as tenure based pay and ports of entry can be rationalized as an optimal response to rigidities in pay.performance measurement, disclosure, sorting, wage compression, public sector

Comparing discrete choice models: some housing market examples

Introduction: Since the mid nineteen seventies there has been strong interest within variolls branches of social science in the adaptation of the discrete choice modeling methodology towards a wide range of research problems. This has required recognition of a wide variety of alternative decision-contexts (Landau et a1. 1982) and behaviour-patterns (Lerman, 1979), and has also raised general issues concerning the variable extent to which individual or subgroup choices may be restricted by spatial and temporal constraints. Further interest has been expressed about the spatial and temporal transferability of alternative discrete choice models (Atherton and Ben-Akiva, 1976: Galbraith and Hensher, 1982). This substantive diversification has been accompanied by a variety of technical and methodological refinements of the multinomiallogit (MNL) and multinomial probit (MNP) models, ranging from new estimation procedures (Hausman and Wise, 1978) to the development of less-restrictive, computationally tractable discrete choice model forms (for example, Williams, 1977: Daly and Zachary, 1978). Faced with both a wider selection of methodological tools and a broader spectrum of substantive enquiry, there exists a clear need for formal comparison procedures which the analyst can call upon to evaluate a given model specification or framework. In this paper, I attempt to review briefly some trends amongst recent housing choice studies which employ discrete choice modeling methods. A new procedure is then presented (Hubert and Golledge, 1981; Halperin et al. 1984) which may be used to compare discrete choice models specified and/or structured in accordance with different a priori hypotheses. It is argued that this method fills a gap between existing discrete choice model comparison-procedures which are inapplicable to 'nonnested' model specifications, that is, to competing discrete choice models which comprise totally different variable specifications and that such procedures can usefully aid selection of the discrete choice model most appropriate to any given decision context

The importance of economic expectations for retirement entry

This paper analyses how strongly anticipated economic circumstances might impact on individuals retirement decisions. Abstract We estimate hazard rates of retirement entry as a function of the option value of work. The individuals’ expectations about the future economy are incorporated in the option value of work, through which they can impact on the timing of retirement entry. In a scenario where individuals expect a strong upturn, the annual hazard rate of retirement entry (average 8.4%) is reduced by 6.0% or half a percentage point compared to a scenario where they expect a downturn. Had individuals been able to anticipate the Global Financial Crisis, the mere expectation of this downturn would have increased retirement entries by 8.7%

A note on fixed and flexible-term contracts

Engel et al. (1997 2001 2007) have proposed flexible-term contracts as a solution to suboptimal renegotiation of public-private partnerships. We show that whenever the uncertainty lasts over more than two periods, flexible-term contracts have a drawback. The expected duration of a flexible-term contract can be higher than the (certain) duration of a fixed-term contract, the difference being directly proportional to the volatility of the project.public-private partnerships

Retirement expectations, pension reforms and their impact on private wealth accumulation

We estimate the effect of pension reforms on households' expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of intense Italian pension reforms as a source of exogenous variation in expected pension wealth. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits expectations of the age at which workers expect to retire and of the ratio of pension benefits to pre-retirement income between 1989 and 2002. We find that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth, particularly by workers that are better informed about their pension wealth. Klassifikation: E21, H5

When herding and contrarianism foster market efficiency: a financial trading experiment

While herding has long been suspected to play a role in financial market booms and busts, theoretical analyses have struggled to identify conclusive causes for the effect. Recent theoretical work shows that informational herding is possible in a market with efficient asset prices if information is bi-polar, and contrarianism is possible with single-polar information. We present an experimental test for the validity of this theory, contrasting with all existing experiments where rational herding was theoretically impossible and subsequently not observed. Overall we observe that subjects generally behave according to theoretical predictions, yet the fit is lower for types who have the theoretical potential to herd. While herding is often not observed when predicted by theory, herding (sometimes irrational) does occur. Irrational contrarianism in particular leads observed prices to substantially differ from the efficient benchmark. Alternative models of behavior, such as risk aversion, loss aversion or error correction, either perform quite poorly or add little to our understanding

Productivity and the welfare of nations

We show that the welfare of a countryís infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare differences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries

Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes

The purpose of this paper is to present an exercise where we identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net tax revenue. Empirical applications of optimal taxation theory have typically adopted analytical expressions for the optimal taxes and then imputed numerical values to their parameters by using "calibration" procedures or previous econometric estimates. Besides the restrictiveness of the assumptions needed to obtain analytical solutions to the optimal taxation problem, a shortcoming of that procedure is the possible inconsistency between the theoretical assumptions and the assumptions implicit in the empirical evidence. In this paper we follow a different procedure, based on a computational approach to the optimal taxation problem. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the labour supply choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. We then identify optimal tax rules – within a class of 9-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. The parameters to be determined are an exemption level, four marginal tax rates, three "kink points" and a lump sum transfer that can be positive (benefit) or negative (tax). We explore a variety of social welfare functions with differing degree of inequality aversion. All the social welfare functions imply monotonically increasing marginal tax rates. When compared with the current (1994) tax systems, the optimal rules imply a lower average tax rate. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.Labour supply; optimal taxation; random utility model; microsimulation

INVESTMENT IN SOIL CONSERVATION IN NORTHERN ETHIOPIA: THE ROLE OF LAND TENURE SECURITY AND PUBLIC PROGRAMS

Soil erosion seriously threatens the future agricultural productivity of Ethiopia's highlands. In analyzing the determinants of soil conservation investments there, this study goes beyond the conventional physical factors to examine institutional, social capital and public program effects. The double hurdle statistical analysis from 250 farms in the Tigray region reveals different causal factors for soil conservation adoption versus intensity of use. The determinants of adoption of soil conservation measures vary sharply between stone terraces and soil bunds. Physical propensity toward erosion (e.g., slope, slope shape and soil texture) and land suitability for conservation helped determine conservation investments in all cases. But institutional and social determinants of investment differed importantly between bunds and terraces. Long-term investments in stone terraces were associated with secure land tenure, labor availability, proximity to the farmstead, and learning opportunities via the availability of food-for-work projects. By contrast, short-term investments in soil bunds were strongly linked to insecure land tenure and the absence of food-for-work projects. Farm beneficiaries of public soil conservation programs were less likely to invest privately in either type of conservation practice. Social capital, as measured by farmer perception of community pressure to curb soil erosion, did not contribute significantly to either kind of conservation investment. The intensity of stone terrace adoption (measured as meters of terrace per hectare) was determined by expected returns but not by capacity to invest. Higher intensity of stone terrace construction was favored by fertile-but-erodible silty soils in (rainy) highland settings that offered valuable yield benefits from soil conservation. Intensity of terracing was also greater in remote villages where limited off-farm employment opportunities made construction costs relatively low. Previous research has highlighted the need for public policy interventions to supplement private incentives to make soil conservation investments in erosion-prone mountain areas. Our results highlight the importance of the right kind of public interventions. Direct public involvement in constructing soil conservation structures on private lands appears to undermine incentives for private conservation investments. When done on public lands, however, public conservation activities may encourage private soil conservation by example. Secure land tenure rights clearly reinforce private incentives to make long-term investments in soil conservation.Land Economics/Use,