From Which Side to the Steady State of the Augmented Solow Model? The Role of Country-Specific Total Factor Productivity Growth Rates

The human capital-augmented Solow model (Mankiw et al., 1992) has been criticized by Cho and Graham (1996) by stating that half of all countries converge to their steady state from above, i.e. from income levels above those obtained in their steady state. This is clearly at odds with the general idea that countries approach their steady state from a backward position. In this paper we will argue that this result is primarily due to the assumption of an identical exogenous rate of technological progress for all countries. Once different rates of technological progress are introduced into the model, the number of countries approaching their steady state from above is reduced to a number more in line with what the augmented Solow model would predict. However, for a sample consisting of 98 non-oil countries, the assumption of constant returns to scale has to be rejected. For the non-oil sample our analysis thus both supports and challenges the human capital-augmented Solow model. For a more limited sample consisting of 22 OECD countries, the results clearly support the augmented Solow model by both reducing the number of countries converging from above their steady state to zero and by accepting the assumption of constant returns to scale.mathematical economics and econometrics ;

The Influence of Negative Newspaper Coverage on Consumer Confidence: The Dutch Case

This paper studies the empirical relationship between the real economy, consumer confidence and economic news coverage in national newspapers for the Netherlands during the period 1990-2008. Media-attention for economic developments Granger-causes consumer confidence, with more negative news decreasing consumer confidence; this result holds when controlling for the real economy (stock-market). This suggests that in line with many popular concerns negative news is among factors influencing the hardness of the landing of the current credit-crisis, whereas positive news might have been a contributing factor in the build-up of asset- and housing bubbles.Consumer Confidence;Media;VAR-analysis.

WP 98 - The graying of the median voter

Analyzing 30 OECD-countries in 1980-2005, this paper documents the association of an aging electorate with retirement spending. The fi rst result is that an increase in the age of the median voter of one year is associated with an increase of 0.25 percentage points in retirement spending relative to GDP. The second result is that aging does not lead to higher benefi ts per retiree. Both results also hold for health care costs, which are frequently assumed to be positively associated with aging as well. Together, the results contradict the main prediction of median voter models that imply that an older median voter successfully pushes for higher individual benefi ts. If anything, a graying median voter is associated with less generous pensions. These results are reinforced when health care costs are considered with a time trend proxying for technological change. Absent a time trend, health care costs –both relative to GDP and per inhabitant– are positively infl uenced by the age of the median voter. JEL classifi cation: C23; H55; J18 Key words: aging; retirement; political economy *Nederlandse samenvatting (Dutch summary)* Deze studie onderzoekt de relatie tussen vergrijzing en pensioenuitgaven in 30 OECD-landen voor de periode 1980 en 2005. Ten eerste blijkt dat een toename van de leeftijd van de mediane kiezer met een jaar gerelateerd is aan een 0.25 procentpunt hogere pensioenuitgaven als deel van het BNP. Ten tweede laat de studie zien dat vergrijzing niet samengaat met hogere pensioenuitkeringen per gepensioneerde. Beide resultaten gaan ook op voor kosten voor de gezondheidszorg, waarvan ook vaak wordt verondersteld dat zij samengaan met vergrijzing. Samengenomen betekent dit dat geen steun wordt gevonden voor de voorspelling dat oudere kiezers in staat zijn pensioenuitgaven te verhogen, zoals verondersteld wordt in mediane kiezer modellen. In plaats daarvan gaat de vergrijzende kiezer samen met mindere genereuze pensioenen. Het toevoegen van een tijdtrend als controle voor de invloed van technologische verandering op gezondheidskosten is cruciaal: zonder deze trend zijn gezondheidszorguitgaven –zowel als deel van het BNP als per inwoner– wel positief gerelateerd aan de leeftijd van de mediane kiezer.

Voters' Commitment Problem and Welfare-Program Reforms

This paper proposes that reforms by vote-seeking governments and the existence of reform-adverse voters are logically compatible. This results from a commitment problem on the part of voters. Due to economic voting voters cannot credibly commit to reelect a non-reforming government during a recession. The empirical implication of this voter commitment mechanism is that governments only adopt visible welfare-program reforms during economic lows, which is what the empirical political-economic literature has established.Commitment;Political Economy;Reform;Welfare-Programs

WP 99 - Pension fund governance. The intergenerational conflict over risk and contributions

Many pension funds have a mismatch between assets and liabilities, taking more risks than securing liabilities implies. This puts .xed claims of retirees at risk. For the cases with and without macro-risk, this paper analyses the implications of this asset-liability mismatch for welfare, contribution policy and pension fund governance. The first result is that borrowing against human capital can be optimal if young workers are borrowing constrained. However, then contributions need be raised in case of underfunding. This implies that the ex ante risk level cannot be separated from the contribution policy ex post. An optimal governance structure addresses this; otherwise a risk immunization policy -with the pension fund taking less risk- is second-best. In the presence of macro-risk it is not optimal to avoid losses for retirees. Optimal intergenerational risk sharing then implies retirees bear risks. The price and allocation of risk are determined endogenously with the result that losses are shared by higher contributions and lower pensions. This case applies in particular to large and nation-wide funds in a closed economies where the working participants coincide with tax-payers who underwrite “riskfree” government bonds. _JEL classification: D74; G11; G23; G32_ *Nederlandse samenvatting (Dutch summary)* Veel pensioenfondsen nemen meer risico dan nodig is om aan de verplichtingen te voldoen. Dit betekent dat deelnemers met een gemaximaliseerde aanspraak op het fonds -slapers en gepensioneerden- een verhoogde kans lopen om bij onderdekking gekort te worden op die aanspraak. Omgekeerd hebben werkende deelnemers en mogelijk de sponsor het voordeel dat zij de opbrengsten van het risicovolle beleid ontvangen in de vorm van premiekorting maar de verliezen deels kunnen afwentelen. Zo een zogenaamde “asset-liability mismatch” kan optimaal zijn, maar is dat onder een belangrijke voorwaarde. Bij onderdekking dienen de premies verhoogd te worden; premiebeleid en risicobeleid hangen op deze wijze nauw samen. Feitelijk lenen jongere van oudere deelnemers met menselijk kapitaal als onderpand. Indien dit niet mogelijk is omdat premies niet kunnen stijgen, dan is een alternatieve, sub-optimale oplossing om het risico te beperken. Deze resultaten gelden zowel in een situatie waarin het pensioenfonds klein is en geen invloed heeft op kapitaalmarkten als in de situatie waarin een groot pensioenfonds de prijzen beïnvloedt en er risico.s zijn op macroniveau die het fonds niet kan vermijden. Dit laatste geval onderscheidt zich wel in een ander opzicht. Het is dan niet optimaal dat gepensioneerden geen (macro)risico lopen; dat betekent namelijk dat actieve deelnemers inefficient veel risico lopen. Het is dan optimaal dat het risico gedeeld wordt door een combinatie van hogere premies en lagere uitkeringen in geval van onderdekking.

Technology, Knowledge Spillovers and Changes in Skill Structure

This paper investigates and compares the changes in skill structure in six OECD countries (Finland, France, Germany, Japan, the United Kingdom and the United States) in the period 1975-1995 using new OECD data on employment by skill level and type. For all countries evidence is found that technical change is skill-biased in the sense that it favors high-skilled labor. In particular white-collar high-skilled workers have profited from recent technical change. However, rather than employees literally working on R&D it are workers who supervise and use the implemented parts of the advancements of R&D that profit from increased R&D efforts. In addition, the results are extended by stressing the importance of knowledge spillovers on changes in employment shares between high-skilled and low-skilled workers.labour economics ;

The Diffusion of Informal Knowledge and Innovation Performance: A sectoral approach

This paper tries to quantify the effect of diffusion of informal knowledge on the innovative performance of European firms using data derived from the 3rd Community Innovation Survey. When firms are asked whether or not they have introduced new products or processes, they were also asked to which degree such innovations were developed in-house. These degrees were captured by the CIS variables InPdtW and InPcsW. These variables ranged from 1 (Mainly done by the firm) to 3 (Mainly done by other enterprises). The focus of this paper is to investigate the impact of diffusion of informal knowledge. We combine the previous variables with another variable which reflects firms that were not doing any formal collaboration with other institutions. If an innovative firm has no formal collaboration arrangements and the innovation has not been done mainly by the firm, then diffusion of informal knowledge is considered to be the main driver of the innovation. The idea is that informal channels are accessible to all firms. This paper tries to quantify the impact of such flows of knowledge on firms' innovation performance. To do this, a two step procedure is followed: -In a first step, a latent variable for diffusion of informal knowledge is defined and estimated based on firms' characteristics. -In a second step, the latent diffusion variable is introduced as a regressor in a probit/tobit model.Knowledge flows, innovation, dynamic equations, sectoral innovation, CIS

Why the Dutch pension system is not a role model for the UK

David HollandersThe UK should not look to the Dutch when thinking about how to improve pension policy, argues David Hollanders. Suboptimal governance, high costs and decreasing benefits has characterised the Dutch system of late. Nevertheless, the Dutch system serves as a good example for why collective action is a necessary antidote against deregulated financial institutions