Institutions, Wages and Inequality : The Case of Europe and its Periphery (1500-1899)

This paper explores the long-run relationship between institutions and wage outcomes in Europe and its periphery. I find that cities that exercised stronger institutional protection of private property experienced : (i) higher levels of both skilled and unskilled real wages, as well as (ii) lower levels of inequality as measured by the skilled-unskilled wage ratio. While the first result corroborates existing work on the positive growth effects of better institutions, the second finding is more novel to the literature. Some explanations are proposed for how stronger institutions can cause an increase in the relative supply of skilled workers, thus lowering wage inequality.institutions, Wage inequality, European cities

Subsides for FDI : Implications from a Model with Heterogeneous Firms

This paper analyzes the welfare effects of subsidies to attract multinational corporations, in a setting where firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct costs of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that the welfare gain from a subsidy to variable costs is larger than from a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the ineciently low output levels stemming from each firm's mark-up pricing power.FDI subsidies, Heterogeneous Firms, fixed versus variable cost subsidies, import subsidies

Subsidies for FDI: Implications from a Model with Heterogeneous Firms

This paper analyzes the welfare e®ects of subsidies to attract multinational corporations, in a setting where ¯rms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct costs of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection e®ect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that the welfare gain from a subsidy to variable costs is larger than from a subsidy to the ¯xed cost of conducting FDI, since a variable cost subsidy also raises the ine±ciently low output levels stemming from each ¯rm's mark-up pricing power.FDI subsidies; heterogeneous firms; fixed versus variable cost subsidies; import subsidies.

Estimation and Testing for Partially Nonstationary Vector Autoregressive Models with GARCH: WLS versus QMLE

Macroeconomic or financial data are often modelled with cointegration and GARCH. Noticeable examples include those studies of price discovery, in which stock prices of the same underlying asset are cointegrated and they exhibit multivariate GARCH. Modifying the asymptotic theories developed in Li, Ling and Wong (2001) and Sin and Ling (2004), this paper proposes a WLS (weighted least squares) for the parameters of an ECM (error-correction model). Apart from its computational simplicity, by construction, the consistency of WLS is insensitive to possible misspecification in conditional variance. Further, asymmetrically distributed deflated error is allowed, at the expense of more involved asymptotic distributions of the statistics. Efficiency loss relative to QMLE (quasi-maximum likelihood estimator) is discussed within the class of LABF (locally asymptotically Brownian functional) models. The insensitivity and efficiency of WLS in finite samples are examined through Monte Carlo experiments. We also apply the WLS to an empirical example of HSI (Hang Seng Index), HSIF (Hang Seng Index Futures) and TraHK (Hong Kong Tracker Fund)Asymmetric distribution; Cointegration; LABF models; multivariate GARCH; price discovery; WLS

Unpacking Sources of Comparative Advantage : A Quantitative Approach

This paper develops an approach for quantifying the importance of different sources of comparative advantage for country welfare. To explain patterns of specialization, I present a multi-country trade model that extends Eaton and Kortum (2002) to predict industry trade ows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments and institutional strengths. I estimate the model parameters on a large dataset of bilateral trade ows, presenting results from both a baseline OLS approach, as well as a simulated method of moments (SMM) procedure to account for the prevalence of zero trade ows in the data. I apply the model to explore various quantitative questions, in particular how much distance, Ricardian productivity, factor endowments, and institutional conditions each matter for country welfare in the global trade equilibrium. I also illustrate the shift in industry composition and the accompanying welfare gains in policy experiments where a country raises its factor endowments or improves the quality of its institutions.Comparative Advantage, bilateral trade flows, Gravity, Ricardian model, Factor Endowments, institutional determinants of trade, simulated method of moments

On prediction errors in regression models with nonstationary regressors

In this article asymptotic expressions for the final prediction error (FPE) and the accumulated prediction error (APE) of the least squares predictor are obtained in regression models with nonstationary regressors. It is shown that the term of order $1/n$ in FPE and the term of order $\log n$ in APE share the same constant, where $n$ is the sample size. Since the model includes the random walk model as a special case, these asymptotic expressions extend some of the results in Wei (1987) and Ing (2001). In addition, we also show that while the FPE of the least squares predictor is not affected by the contemporary correlation between the innovations in input and output variables, the mean squared error of the least squares estimate does vary with this correlation.Comment: Published at http://dx.doi.org/10.1214/074921706000000950 in the IMS Lecture Notes Monograph Series (http://www.imstat.org/publications/lecnotes.htm) by the Institute of Mathematical Statistics (http://www.imstat.org

"The People Want the Fall of the Regime": Schooling, Political Protest, and the Economy

We examine several hypotheses regarding the determinants and implications of political protest, motivated by the wave of popular uprisings in Arab countries starting in late 2010. While the popular narrative has emphasized the role of a youthful demography and political repression, we draw attention back to one of the most fundamental correlates of political activity identified in the literature, namely education. Using a combination of individual-level micro data and cross-country macro data, we highlight how rising levels of education coupled with economic under-performance jointly provide a strong explanation for participation in protest modes of political activity as well as incumbent turnover. Political protests are thus more likely when an increasingly educated populace does not have commensurate economic gains. We also find that the implied political instability is associated with heightened pressures towards democratization.

Schooling and Political Participation Revisited

We investigate how the link between individual schooling and political participation is affected by country characteristics. We introduce a focus on a set of variables - namely factor endowments - which inuence the relative productivity of human capital in political versus production activities. Using micro data on individual behavior, we nd that political participation is more responsive to schooling in land-abundant countries, and less responsive in human capital-abundant countries, even while controlling for country political institutions and cultural attitudes. We develop these ideas in a model where individuals face an allocation decision over the use of their human capital. A relative abundance of land (used primarily in the least skill-intensive sector) or a scarcity of aggregate human capital will increase both the level of political participation and its responsiveness to schooling, by lowering the opportunity cost of production income foregone. In an extension, we further consider the problem of how much schooling a utility-maximizing ruler would choose to provide. An abundance of land tends to increase political participation ex post, and hence will lead the ruler to discourage human capital accumulation, a prediction for which we find broad support in the cross-country data. Our model thus offers a framework which jointly explains patterns of political participation at the individual level and differences in public investment in education at the country level.education, Human Capital, Political participation, Voting, Factor Endowments, culture, State provision of schooling

“The People Want the Fall of the Regime”:Schooling, Political Protest, and the Economy

We examine several hypotheses regarding the determinants and implications of political protest, motivated by the wave of popular uprisings in Arab countries starting in late 2010. While the popular narrative has emphasized the role of a youthful demography and political repression, we draw attention back to one of the most fundamental correlates of political activity identified in the literature, namely education. Using a combination of individual-level micro data and cross-country macro data, we highlight how rising levels of education coupled with economic under-performance jointly provide a strong explanation for participation in protest modes of political activity as well as incumbent turnover. Political protests are thus more likely when an increasingly educated populace does not have commensurate economic gains. We also find that the implied political instability is associated with heightened pressures towards democratization.