Latest publications from CEP

Sequential Exporting

Facundo Albornoz Hector Calvo-Pardo Gregory Corcos Emanuel Ornelas

CEPDP0974. March 2010.Firms need to incur substantial sunk costs to break in foreign markets, yet many give up exportingshortly after their first experience, which typically involves very small sales. Conversely, other newexporters shoot up their foreign sales and expand to new destinations. We investigate a simpletheoretical mechanism that can rationalize these patterns. A firm discovers its profitability as anexporter only after actually engaging in exporting. The profitability is positively correlated over timeand across foreign destinations. Accordingly, once the firm learns how good it is as an exporter, itadjusts quantities and decides whether to exit and whether to serve new destinations. Thus, it is thepossibility of profitable expansion at both the intensive and extensive margins what makes incurringthe sunk costs to enter a single foreign market worthwhile despite the high failure rates. Using acensus of Argentinean firm-level manufacturing exports from 2002 to 2007, we find empirical supportfor several implications of our proposed mechanism, indicating that the practice of “sequentialexporting” is pervasive. Sequential exporting has broad but subtle implications for trade policy. Forexample, a reduction in trade barriers in a country has delayed entry effects in its own market, whilealso promoting entry in other markets. This trade externality poses challenges for the quantification ofthe effects of trade liberalization programs, while suggesting neglected but critical implications ofinternational trade agreements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0974.pdf

The 'Emulator Effect' of the Uruguay Round on US Regionalism

Marco Fugazza Frédéric Robert-Nicoud

CEPDP0973. March 2010.Using a detailed data set at the tariff line level, we find an emulator effect of multilateralismon subsequent regional trade agreements involving the US. We exploit the variation in thefrequency with which the US has granted immediate duty free access (IDA) to its Free TradeArea partners across tariff lines. A key finding is that the US has granted IDA statusespecially on goods for which it had cut the multilateral MFN tariff during the Uruguayround the most. Thus, the Uruguay Round (multilateral) ‘concessions’ have emulatedsubsequent (preferential) trade liberalisation. We conclude from this that past liberalisationsows the seeds of future liberalisation and that multilateral and preferential trade agreementsare dynamic complements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0973.pdf

The Interrelationship between HR, Strategy and Profitability in Service SMEs: Empirical Evidence from the UK Tourism Hospitality and Leisure Sector

Andreas Georgiadis Christos N. Pitelis

CEPDP0972. March 2010.We investigate the strategies, HR attributes and their synergies that are associated withsuperior performance in service SMEs using data from the UK Tourism Hospitality andLeisure (THL) sector. A major advantage of our analysis is that our sample includesinformation also on very small firms which makes results representative of the industry butalso sheds light on a very little investigated area related to the nature of HRM and its linkwith performance of micro businesses. Our results suggest that high-performing SMEs in theTHL sector are managed by more experienced entrepreneurs. Moreover, they employ acombination of technological and know-how firm differentiation strategies together with ahighly skilled workforce, and/or a combination of (product) differentiation strategies basedon quality of service and personal attention to customers, and a generous compensationpackage and attention to employees development.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0972.pdf

Slip Sliding Away: Further Union Decline in Germany and Britain

John T. Addison Alex Bryson André Pahnke Paulino Teixeira

CEPDP0971. March 2010.This paper presents the first comparative analysis of the decline in collective bargaining in twoEuropean countries where that decline has been most pronounced. Using workplace-level data and acommon model, we present decompositions of changes in collective bargaining and workerrepresentation in the private sector in Germany and Britain over the period 1998-2004. In bothcountries within-effects dominate compositional changes as the source of the recent decline inunionism. Overall, the decline in collective bargaining is more pronounced in Britain than inGermany, thus continuing a trend apparent since the 1980s. Although workplace characteristics differmarkedly across the two countries, assuming counterfactual values of these characteristics makes littledifference to unionization levels. Expressed differently, the German dummy looms large.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0971.pdf

Recent Advances in the Empirics of Organizational Economics

Nicholas Bloom Raffaella Sadun John Van Reenen

CEPDP0970. February 2010.We present a survey of recent contributions in the empirical organizational economics, focusing onmanagement practices and decentralization. Productivity dispersion between firms and countries hasmotivated the improved measurement of firm organization across industries and countries. Thereappears to be substantial variation in management practices and decentralization between countries,but especially within countries. Much of the poorer average management quality in countries likeBrazil and India seems due to a “long tail” of poorly managed firms, which barely exist in the US.Many basic economic theories are supported by this new data. Some stylized facts include: (1)competition seems to foster improved management and decentralization; (2) larger firms, skillintensiveplants and foreign multinationals appear better managed and are more decentralized; (3)family owned and managed firms appear to have worse management; (4) firms facing an environmentof lighter labor market regulations, and more human capital intensive organizations specializerelatively more in “people management”. There is evidence for complementarities between ICT,decentralization and management, but the relationship is complex and identification of theproductivity effects of organizational practices remain a challenge for future research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0970.pdf

New Approaches to Measuring Management and Firm Organization

Nick Bloom John Van Reenen

CEPDP0969. February 2010.We detail the methodology that we have been using to quantify managerial andorganizational practices across firms and countries in recent years. This has been used inmany pieces of research at the Centre for Economic Performance. We discuss the pros andcons of such survey tools, describing how our methods lie between the traditional surveysused by economists and the case studies more common in other parts of social science.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0969.pdf

Wholesalers and Retailers in U.S. Trade (Long Version)

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0968. February 2010.International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which U.S. exports and imports flow through wholesalers and retailers versus .producing and consuming firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0968.pdf

Depression Econometrics: A FAVAR Model of Monetary Policy During the Great Depression

Pooyan Amir Ahmadi Albrecht Ritschl

CEPDP0967. January 2010.The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdomsince Friedman and Schwartz (1963). This paper presents evidence on both the surprise and thesystematic components of monetary policy between 1929 and 1933. Doubts surrounding GDPestimates for the 1920s would call into question conventional VAR techniques. We therefore adoptthe FAVAR methodology of Bernanke, Boivin, and Eliasz (2005), aggregating a large number of timeseries into a few factors and inserting these into a monetary policy VAR. We work in a Bayesianframework and apply MCMC methods to obtain the posteriors. Employing the generalized signrestriction approach toward identification of Amir Ahmadi and Uhlig (2008), we find the effects ofmonetary policy shocks to have been moderate. To analyze the systematic policy component, we backout the monetary policy reaction function and its response to aggregate supply and demand shocks.Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicateonly moderate effects. We further analyze systematic policy through conditional forecasts of key timeseries at critical junctures, taken with and without the policy instrument. Effects are again quitemoderate. Our results caution against a predominantly monetary interpretation of the GreatDepression.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0967.pdf

Does Product Market Competition Lead Firms to Decentralize?

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0966. January 2010.There is a widespread sense that over the last two decades firms have been decentralizingdecisions to employees further down the managerial hierarchy. Economists have developed arange of theories to account for delegation, but there is less empirical evidence, especiallyacross countries. This has limited the ability to understand the phenomenon ofdecentralization. To address the empirical lacuna we have developed a research program tomeasure the internal organization of firms - including their decentralization decisions - acrossa large range of industries and countries. In this paper we investigate whether greater productmarket competition increases decentralization. For example, tougher competition may makelocal manager's information more valuable, as delays to decisions become more costly. Sinceglobalization and liberalization have increased the competitiveness of product markets, oneexplanation for the trend towards decentralization could be increased competition. Of coursethere are a range of other factors that may also be at play, including human capital,information and communication technology, culture and industrial composition. To tacklethese issues we collected detailed information on the internal organization of firms acrossnations. The few datasets that exist are either from a single industry or (at best) across manyfirms in a single country. We analyze data on almost 4,000 firms across twelve countries inEurope, North America and Asia. We find that competition does indeed seem to foster greaterdecentralization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0966.pdf

Why is the US so Energy Intensive? Evidence from US Multinationals in the UK

Ralf Martin

CEPDP0965. January 2010.At present the USA is - in per capita terms - the top greenhouse gas polluter among the world’s majoreconomies. This is mirrored by the high energy intensity of all sectors of the US economy includingmanufacturing industries. A potential explanation for the higher energy intensity is lower US energyprice levels. However, common price elasticity estimates are not high enough to explain the observeddifferences between countries. Alternative explanations include firstly geographic or other locationaldifferences and secondly firm specific technology differences between US firms and others. Thisstudy explores this latter possibility by comparing establishments of US firms in Britain with othercomparable firms thereby ruling out locational differences. The findings are that on average US firmsare not more energy intensive when operating in Britain. However, US firms that have only recentlyentered the UK market are found to be significantly more energy intensive at an order of magnitudecorresponding to the between country US-UK gap. This difference vanishes with an increasedduration of stay in the UK; however, with a considerable time lag. This suggests firstly, that barriersto knowledge diffusion are an important concern and secondly, that the long term response to asustained price increase might be stronger than common price elasticity estimates suggest. The studyalso provides, for the first time, estimates of energy price elasticities for the UK on the basis ofrepresentative plant level panel data for the manufacturing sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0965.pdf

On the Origins of Land Use Regulations: Theory and Evidence from US Metro Areas

Christian A. L. Hilber Frédéric Robert-Nicoud

CEPDP0964. December 2009.We model residential land use constraints as the outcome of a political economy game betweenowners of developed and owners of undeveloped land. Land use constraints benefit the former group(via increasing property prices) but hurt the latter (via increasing development costs). More desirablelocations are more developed and, as a consequence of political economy forces, more regulated.Using an IV approach that directly follows from our model we find strong and robust support for ourpredictions. The data provide weak or no support for alternative hypotheses whereby regulationsreflect the wishes of the majority of households or efficiency motives.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0964.pdf

Wage Bargaining and the Boundaries of the Multinational Firm

Maria Bas Juan Carluccio

CEPDP0963. December 2009.Do variations in labor market institutions across countries affect the cross-borderorganization of the firm? Using firm-level data on multinationals located in France, we showthat firms are more likely to outsource the production of intermediate inputs to externalsuppliers when importing from countries with empowered unions. Moreover, this effect isstronger for firms operating in capital-intensive industries. We propose a theoreticalmechanism that rationalizes these findings. The fragmentation of the value chain weakens theunion's bargaining position, by limiting the amount of revenues that are subject to unionextraction. The outsourcing strategy reduces the share of surplus that is appropriated by theunion, which enhances the firm's incentives to invest. Since investment creates relativelymore value in capital-intensive industries, increases in union power are more likely to beconducive to outsourcing in those industries. Overall, our findings suggest that multinationalfirms use their organizational structure strategically when sourcing intermediate inputs fromunionized markets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0963.pdf

Welfare Policy and the Distribution of Hours of Work

L. Rachel Ngai Christopher A. Pissarides

CEPDP0962. December 2009.We examine the distribution of hours of work across industrial sectors in OECD countries.We find large disparities when sectors are divided into three groups: one that produces goodswithout home substitutes and two others that have home substitutes — health and socialwork, and all others. We attribute the disparities to the countries’ tax and subsidy policies.High taxation substantially reduces hours in sectors that have close home substitutes but lessso in other sectors. Health and social care subsidies increase hours in that sector. We computethese effects for nineteen OECD countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0962.pdf

Regional Trade Agreements

Caroline Freund Emanuel Ornelas

CEPDP0961. December 2009.This paper reviews the theoretical and the empirical literature on regionalism. The formationof regional trade agreements has been, by far, the most popular form of reciprocal tradeliberalization in the last fifteen years. The discriminatory character of these agreements hasraised three main concerns: that trade diversion would be rampant, because special interestgroups would induce governments to form the most distortionary agreements; that broaderexternal trade liberalization would stall or reverse; and that multilateralism could beundermined. Theoretically, all of these concerns are legitimate, although there are alsoseveral theoretical arguments that oppose them. Empirically, neither widespread tradediversion nor stalled external liberalization have materialized, while the undermining ofmultilateralism has not been properly tested. There are also several aspects of regionalismthat have received too little attention from researchers, but which are central to understandingits causes and consequences.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0961.pdf

Do Oil Windfalls Improve Living Standards? Evidence from Brazil

Francesco Caselli Guy Michaels

CEPDP0960. December 2009.We use variation in oil output among Brazilian municipalities to investigate the effects of resourcewindfalls. We find muted effects of oil through market channels: offshore oil has no effect onmunicipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDPcomposition. However, oil abundance causes municipal revenues and reported spending on a range ofbudgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, surveybasedmeasures of social transfers, public good provision, infrastructure, and household incomeincrease less (if at all) than one might expect given the increase in reported spending. To explain whyoil windfalls contribute little to local living standards, we use data from the Brazilian media andfederal police to document that very large oil output increases alleged instances of illegal activitiesassociated with mayors.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0960.pdf

Collective Agreements, Wages and Restructuring in Transition

Iga Magda David Marsden Simone Moriconi

CEPDP0959. November 2009.Using a large matched employer-employee dataset, the authors investigate the relationship between collectiveagreements, wages and restructuring in transition in three former centrally planned economies (Czech Republic,Hungary and Poland). They adopt a natural experiment approach and capture the restructuring process triggeredby the launch of transition by means of cohort effects among firms founded before or at different stages of thisprocess which enable them to control for the heterogeneity of firms in different cohorts. They find that the wagepremium associated with different levels of collective agreements depends on restructuring and its timing in thetransition. In early-middle transition firms, industry level agreements protect low skilled wages; whereas in latetransition ones, firm level agreements increase medium and especially high skilled wages. Some cross countrydifferences emerge in the structure of the wage premium as a result of country specific features of restructuring.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0959.pdf

Recovering the Sunk Costs of R&D: the Moulds Industry Case

Carlos Daniel Santos

CEPDP0958. November 2009.Sunk costs for R&D are an important determinant of the level of innovation in the economy.In this paper I recover them using a Markov equilibrium framework. The contribution istwofold. First, a model of industry dynamics which accounts for selection into R&D, capitalaccumulation and entry/exit is proposed. The industry state is summarized by an aggregatestate with the advantage that it avoids the "curse of dimensionality". Second, the estimatedsunk costs of R&D for the Portuguese moulds industry are shown to be important (3.4 millionEuros). They become particularly relevant since the industry is mostly populated by smallfirms. Institutional changes in the early 1990s generated an increase in demand fromEuropean car makers and created the incentives for firms to pay the costs of investment.Trade-induced innovation reinforced the selection effect by which international trade leads toproductivity growth. Finally, using the estimated parameters, simulations evaluate the effectsof changes in market size, sunk costs and entry costs.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0958.pdf

Rates of Return and Alternative Measures of Capital Input: 14 Countries and 10 Branches, 1971-2005

Nicholas Oulton Ana Rincon-Aznar

CEPDP0957. November 2009.We employ the EU KLEMS database to estimate the real rate of return to capital in 14 countries (11in the EU, three outside the EU) in 10 branches of the market economy plus the market economy as awhole. Our measure of capital is an aggregate over seven types of asset: three ICT assets (computers,communications equipment, and software) and four non-ICT assets (machinery and equipment, nonresidentialstructures, transport equipment, and other). The real rate of return in the market economydoes not vary very much across countries, with the exception of Spain where it is exceptionally highand in Italy where it is exceptionally low. The real rate appears to be trendless in most countries.Within each country however, the rate varies widely across the 10 branches, often being implausiblyhigh or low. We also estimate the growth of capital services by two different methods: ex-post and exante,and the contribution of capital to output growth by three methods: ex-post, ex-ante and hybrid.Our implementation of the ex-ante method uses an estimate of the required rate of return for eachcountry instead of the actual, average rate of return to calculate user costs and also employs theexpected growth of asset prices rather than the actual growth. These estimates are derived fromexactly the same data as for the ex-post method, ie without any extraneous data being employed. Forestimating the contribution of capital to output growth, the ex-ante method uses ex-ante profit as theweight, while both the ex-post and the hybrid method use ex-post profit. We find that the threemethods produce very similar results at the market economy level. But differences are much larger atthe branch level, particularly between the ex-post and ex-ante methods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0957.pdf

Networks in the Premodern Economy: the Market for London Apprenticeships, 1600-1749

Tim Leunig Chris Minns Patrick Wallis

CEPDP0956. November 2009.This paper examines the importance of social and geographical networks in structuring entry intoskilled occupations in premodern London. Using newly digitised records of those beginning anapprenticeship in London between 1600 and 1749, we find little evidence that networks stronglyshaped apprentice recruitment. The typical London apprentice did not have an identifiable connectionto his master in the form of a kin link, shared name, or shared place or county of origin. The majorityof migrant apprentices’ fathers came from outside of the craft sector. Our results suggest that themarket for apprenticeship was strikingly open: well-to-do families of all types were able to access awide range of craft and trade apprenticeships, and would-be apprentices had considerable scope tomatch their perceived ability and aptitude to opportunity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0956.pdf

Can Family-Support Policies Help Explain Differences in Working Hours Across Countries?

Urban Sila

CEPDP0955. October 2009.It has been suggested in the literature that taxes and subsidies play an important role inexplaining the differences in working hours across countries. In this paper I test whetherpublic programmes for family support play a role in explaining this variation. I analyse twotypes of policies: childcare subsidies and family cash benefits. I distinguish between peoplewith children and people without children. Childcare subsidies should increase working hoursin the economy and these effects should differ between people with children and peoplewithout children. Public support to families is also expected to decrease the amount of timepeople spend in childcare at home. I test this using household data for a set of Europeancountries and the US. Empirical analysis, however, does not support the family-policyexplanation. The effects of the policies on working hours are weak and insignificant. Inregressions with time spent caring for children as a dependent variable, the estimates of theeffects contradict the predictions of the theory. Furthermore, I don’t find evidence for theexpected differences in effects between parents and nonparents. I conclude that familypolicies are not helpful in explaining the variation in working hours across countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0955.pdf

The Extent of Collective Bargaining and Workplace Representation: Transitions between States and their Determinants. A Comparative Analysis of Germany and Great Britain

John T. Addison Lutz Bellman Alex Bryson André Pahnke Paulino Teixeira

CEPDP0954. October 2009.Industrial relations are in flux in many nations, perhaps most notably in Germany and Britain. That said, comparatively little is known in any detail of the changing pattern of the institutions of collective bargaining and worker representation in Germany and still less in both countries about firm transitions between these institutions over time. The present paper maps changes in the importance of the key institutions, 1998-2004, and explores the correlates of two-way transitions, using successive waves of the German IAB Establishment Panel and both cross-sectional and panel components of the British Workplace Employment Relations Survey. We identify the workplace correlates of the demise of collective bargaining in Britain and the erosion of sectoral bargaining in Germany, and identify the respective roles of behavioral and compositional change.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0954.pdf

How Does Innovation Affect Worker Well-being?

Erling Barth Alex Bryson Harald Dale-Olsen

CEPDP0953. October 2009.We explore the effects of management innovations on worker well-being using private sectorlinked employer-employee data for Britain. We find management innovations are associated withlower worker well-being and lower job satisfaction, an effect which becomes more pronouncedwhen we account for the endogeneity of innovation. This is the case for three different countmeasures of innovation – a global measure of innovation and measures for labour innovationsand capital innovations. The effects are ameliorated when workers are covered by a collectivebargaining agreement.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0953.pdf

US Real Interest Rates and Default Risk in Emerging Economies

Nathan Foley-Fisher Bernardo Guimaraes

CEPDP0952. October 2009.We empirically analyse the appropriateness of indexing emerging market sovereign debt toUS real interest rates. We find that policy-induced exogenous increases in US rates raisedefault risk in emerging market economies, as hypothesised in the theoretical literature.However, we also find evidence that omitted variables which simultaneously increase US realinterest rates and reduce the risk of default dominate the hypothesised relationship. We canonly conclude that it’s not a good idea to index emerging market bonds to US real interestrates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0952.pdf

The Economic Situation of First- and Second-Generation Immigrants in France, Germany and the United Kingdom

Yann Algan Christian Dustmann Albrecht Glitz Alan Manning

CEPDP0951. October 2009.A central concern about immigration is the integration into the labour market, not only of the first generation, but also of subsequent generations. Little comparative work exists for Europe’s largest economies. France, Germany and the United Kingdom have all become, perhaps unwittingly, countries with large immigrant populations albeit with very different ethnic compositions. Today, the descendants of these immigrants live and work in their parents’ destination countries. This paper presents and discusses comparative evidence on the performance of first- and second-generation immigrants in these countries in terms of education, earnings, and employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0951.pdf

The Effect of Bans and Taxes on Passive Smoking

Jérôme Adda Francesca Cornaglia

CEPDP0950. October 2009.This paper evaluates the effect of smoking bans in public places on the exposure to tobacco smoke of non-smokers and contrasts it with the effect of excise taxes. Exploiting data on cotinine - a metabolite of nicotine - as well as state and time variation in anti-smoking policies across US states, we show that smoking bans in public places can perversely increase the exposure of non-smokers to tobacco smoke by displacing smokers to private places where they contaminate non-smokers, and in particular young children. In contrast, we find that higher taxes are an efficient way to decrease exposure to tobacco smoke, especially for those most exposed. We supplement this analysis by showing that bans have little effect on smoking cessation, and present evidence of displacement from public places using data on time use.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0950.pdf

How to Measure Living Standards and Productivity

Nicholas Oulton

CEPDP0949. September 2009.This paper sets out a general algorithm for calculating true cost-of-living indices or true producer price indices when demand is not homothetic, i.e. when not all expenditure elasticities are equal to one. In principle, economic theory tells us how we should calculate a true cost-of-living index or Konüs price index: first estimate the consumer's expenditure function (cost function) econometrically and then calculate the Konüs price index directly from that. Unfortunately this is impossible in practice since real life consumer (producer) price indices contain hundreds of components, which means that there are many more parameters than observations. Index number theory has solved this problem, at least when demand is homothetic (all income elasticities equal to one). Superlative index numbers are second order approximations to any acceptable expenditure (cost) function. These index numbers require data only on prices and quantities over the time period or cross section under study. Unfortunately, there is overwhelming evidence that consumer demand is not homothetic (Engel's Law). The purpose of the present paper is to set out a general algorithm for the nonhomothetic case. The solution is to construct a chain index number using compensated, not actual, expenditure shares as weights. The compensated shares are the actual shares, adjusted for changes in real income. These adjustments are made via an econometric model, where only the responses of demand to income changes need to be estimated, not the responses to price changes. This makes the algorithm perfectly feasible in practice.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0949.pdf

The Returns to Scarce Talent: Footedness and Player Remuneration in European Soccer

Alex Bryson Bernd Frick Rob Simmons

CEPDP0948. September 2009.We investigate the salary returns to the ability to play football with both feet. The majority offootballers are predominantly right footed. Using two data sets, a cross-section of footballersin the five main European leagues and a panel of players in the German Bundesliga, we findrobust evidence of a substantial salary premium for two-footed ability, even after controllingfor available player performance measures. We assess how this premium varies across thesalary distribution and by player position.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0948.pdf

Did the National Minimum Wage Affect UK Prices?

Jonathan Wadsworth

CEPDP0947. August 2009.One potential channel through which the effects of the minimum wage could be directed isthat firms who employ minimum wage workers could have passed on any higher labour costsresulting from the minimum wage in the form of higher prices. This study looks at the effectsof the minimum wage on the prices of UK goods and services by comparing prices of goodsproduced by industries in which UK minimum wage workers make up a substantial share oftotal costs with prices of goods and services that make less use of minimum wage labour.Using sectoral-level price data matched to LFS survey data on the share of minimum wageworkers in each sector, it is hard to find much evidence of significant price changes in themonths that correspond immediately to the uprating of the NMW. However over the longerterm, prices in several minimum wage sectors – notably take-away foods, canteen meals,hotel services and domestic services - do appear to have risen significantly faster than pricesof non-minimum wage sectors. These effects were particularly significant in the four yearsimmediately after the introduction of the minimum wage.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0947.pdf

The Paradox of Performance Related Pay Systems: 'Why Do We Keep Adopting Them in the Face of Evidence that they Fail to Motivate?'

David Marsden

CEPDP0946. August 2009.This paper considers one of the paradoxes of incentive pay used in Britain’s public services,namely that despite much evidence that it does not motivate employees, it continues to bewidely used. It is argued that behind this evidence, there are significant examples in which itsuse has been associated with improved performance. A good part of this is to be explained bythe way performance pay links pay and appraisal, and the pressure this puts on line managersto set clearer goals for their staff. There is also some evidence that the goal setting is theoutcome of a form of integrative, or positive sum, negotiation between individual employeesand their managers, and that it is not just ‘top down’.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0946.pdf

Participation in Organisations: Economic Approaches

Almudena Cañibano David Marsden

CEPDP0945. August 2009.Under the auspices of the debate about high performance work systems, it has been suggestedthat the evidence of positive results is disappointing and that one reason is that there has beena lack of theory. This paper argues that there is indeed a great deal of theory that could beused to reformulate the basic research questions, much of it coming from labour economicsbroadly understood. It includes a meta-survey of research on the effects of participation onperformance since the landmark survey by Levine and Tyson in 1990 which was verypositive. It finds that the evidence is less clear cut now. It is argued that this is due in part toconsideration of a wider range of performance outcomes, improved data and methods, and tothe wider diffusion of such practices compared with the 1980s. It is also suggested that thedebate needs to be widened to include a broader range of participatory structures.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0945.pdf

One Nation Under a Groove? Identity and Multiculturalism in Britain

Andreas Georgiadis Alan Manning

CEPDP0944. July 2009.There is a lot of evidence that identity matters for behavior. There is a widespread belief that societies will function better if they manage to establish a common sense of identity among the population. And there are also contemporary fears that this common identity is threatened in several countries. In this paper we investigate the correlates of various measures of identity in the UK, a country currently greatly concerned about a perceived failure to build a common identity from a collection of diverse cultures. We find that the alleged failure to establish a British identity among ethnic minorities is exaggerated – for most their ethnicity and religion seem no barrier to a British identity. But there is a segment of the white population that clearly feels neglected and alienated, and are hostile to the multicultural agenda.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0944.pdf

Theory of Values

Andreas Georgiadis Alan Manning

CEPDP0943. July 2009.Economists have a well-developed theory of value but the theory of why people hold thevalues they do is rudimentary at best. In spite of the fact that it is common to argue thatvalues are important, most work on values is normative and the positive theory of values isrelatively under- developed. In this paper we propose a simple yet general way to think aboutvalues – they are about how one trades-off one own’s utility against that of others – and arguethat we can draw on the large literature on pro-social behavior for hypotheses on how peoplewill choose values. Then, using data from the UK’s Citizenship Survey we show howmodels of self-interest, fairness, reciprocity and identity, can explain many of the patternsthat we observe in the data across a wide variety of values.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0943.pdf

Trade, Wages and Productivity

Kristian Behrens Giordano Mion Yasusada Murata Jens Südekum

CEPDP0942. July 2009.We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose border effects into a pure border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0942.pdf

Institutions and the Management of Human Resources: Incentive Pay Systems in France and Great Britain

Richard Belfield David Marsden

CEPDP0941. July 2009.Using data from large-scale establishment surveys in Britain and France, we show thatincentive pay for non-managers is more widespread in France than in Britain. We explain thisfinding in terms of the ‘beneficial constraint’ arising from stronger employment protection inFrance, which provides an impulse to develop incentive pay; employer networking activitiesin France, which facilitate joint learning about its development and operation; andgovernment fiscal incentives for profit-sharing, which reduces the cost of its operation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0941.pdf

Inequality and Unemployment in a Global Economy

Elhanan Helpman Oleg Itskhoki Stephen Redding

CEPDP0940. July 2009.This paper develops a new framework for examining the distributional consequences of internationaltrade that incorporates firm and worker heterogeneity, search and matching frictions in the labormarket, and screening of workers by firms. Larger firms pay higher wages and exporters pay higherwages than non-exporters. The opening of trade enhances wage inequality and raises unemployment,but expected welfare gains are ensured if workers are risk neutral. And while wage inequality is largerin a trade equilibrium than in autarky, reductions of trade impediments can either raise or reduce wageinequality.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0940.pdf

Educational Returns, Ability Composition and Cohort Effects: Theory and Evidence for Cohorts of Early-Career UK Graduates

Norman Ireland Robin A. Naylor Jeremy Smith Shqiponja Telhaj

CEPDP0939. July 2009.An increase over time in the proportion of young people obtaining a degree is likely to impacton the relative ability compositions (i) of graduates and non-graduates and (ii) acrossgraduates with different classes of degree award. In a signalling framework, we examine theimplications of this on biases across cohorts in estimates of educational returns. In anempirical analysis, we exploit administrative data on whole populations of UK universitystudents for ten graduate cohorts to investigate the extent to which early labour marketoutcomes vary with class of degree awarded. Consistent with our theoretical model, we findthat returns by degree class increased across cohorts during a period of substantial graduateexpansion. We also corroborate the empirical findings with evidence from complementarydata on graduate sample surveys.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0939.pdf

Life Satisfaction and Relative Income: Perceptions and Evidence

Guy Mayraz Jürgen Schupp Gert G. Wagner

CEPDP0938. July 2009.Using a unique dataset we study both the actual and self-perceived relationship between subjectivewell-being and income comparisons against a wide range of potential comparison groups, enabling usto investigate a broader range of questions than in previous studies. In questions inserted into a 2008module of the German-Socio Economic Panel Study we ask subjects to report (a) how their incomecompares to various groups, such a co-workers, friends, and neighbours, and (b) how important theseincome comparisons are to them. We find substantial gender differences, with income comparisonsbeing much better predictors of subjective well-being in men than in women. Generic (same-gender)comparisons are the most important, followed by within profession comparisons. Once generic andwithin-profession comparisons are controlled for, income relative to neighbours has a negativecoefficient, implying that living in a high-income neighbourhood increases happiness. The perceivedimportance of income comparisons is found to be uncorrelated with its actual relationship tosubjective well-being, suggesting that people are unconscious of its real impact. Subjects who judgecomparisons to be important are, however, significantly less happy than subjects who see incomecomparisons as unimportant. Finally, the marginal effect of relative income on subjective well-beingdoes not depend on whether a subject is below or above the reference group income.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0938.pdf

The Organization of Firms Across Countries

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0937. June 2009.We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregateproductivity through facilitating greater firm decentralization. We collect original data on the decentralization ofinvestment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers inalmost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are muchmore decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitatedelegation by improving co-operation, even when we examine “bilateral trust” between the country of originand location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of lawspecialize in industries that rely on decentralization and allow more efficient firms to grow in scale.Furthermore, even for firms of a given size and industry, trust and rule of law are associated with moredecentralization which fosters higher returns from information technology (we find IT is complementary withdecentralization). Finally, we find that non-hierarchical religions and product market competition are alsoassociated with more decentralization. Together these cultural, legal and economic factors account for fourfifthsof the cross-country variation in the decentralization of power within firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0937.pdf

Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment

Jean-Baptiste Michau

CEPDP0936. June 2009.This paper emphasizes the two-way causality between the provision of unemployment insurance andthe cultural transmission of work ethic. Values affect the size of the moral-hazard problem and, hence,the policy to be implemented. Conversely, when parents rationally choose how much effort to exert toraise their children to work hard, they form expectations on the policy that will be implemented by thenext generation. In this context, I determine the dynamics of preferences across generations and showthat the different cultural traits, i.e. high and low work ethics, are complementary. The model couldgenerate a lag between the introduction of unemployment insurance and a deterioration of the workethic. Relying on a calibration, I argue that it can account for a substantial fraction of the history ofEuropean unemployment since World War II. As this explanation is compatible with the co- existenceof generous unemployment insurance and low unemployment in the 1950s and 1960s, it could be seenas an alternative to the dominant story that relies on the occurrence of large shocks since the 1970s.Supportive empirical evidence is provided.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0936.pdf

Trading Partners and Trading Volumes: Implementing the Helpman-Melitz-Rubinstein Model Empirically

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0935. June 2009.Helpman, Melitz, and Rubinstein (2008)–HMR–present a rich theoretical model to study thedeterminants of bilateral trade flows across countries. The model is then empiricallyimplemented through a two-stage estimation procedure. This note seeks to clarify someeconometric aspects of the estimation approach used by HMR and explore the consequencesof possible departures from the maintained distributional assumptions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0935.pdf

The Century of Education

Christian Morrisson Fabrice Murtin

CEPDP0934. June 2009.This paper presents a historical database on educational attainment in 74 countries for the period1870-2010, using perpetual inventory methods before 1960 and then the Cohen and Soto (2007)database. The correlation between the two sets of average years of schooling in 1960 is equal to 0.96.We use a measurement error framework to merge the two databases, while correcting for a systematicmeasurement bias in Cohen and Soto (2007) linked to differential mortality across educational groups.Descriptive statistics show a continuous spread of education that has accelerated in the second half ofthe twentieth century. We find evidence of fast convergence in years of schooling for a sub-sample ofadvanced countries during the 1870-1914 globalization period, and of modest convergence since1980. Less advanced countries have been excluded from the convergence club in both cases.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0934.pdf

Further Simulation Evidence on the Performance of the Poisson Pseudo-Maximum Likelihood Estimator

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0933. May 2009.We extend the simulation results given in Santos-Silva and Tenreyro (2006, ‘The Log ofGravity’, The Review of Economics and Statistics, 88, pp.641-658) by considering datagenerated as a finite mixture of gamma variates. Data generated in this way can naturallyhave a large proportion of zeros and is fully compatible with constant elasticity models suchas the gravity equation. Our results confirm that the Poisson pseudo maximum likelihoodestimator is generally well behaved.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0933.pdf

On the Existence of the Maximum Likelihood Estimates for Poisson Regression

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0932. May 2009.We note that the existence of the maximum likelihood estimates for Poisson regressiondepends on the data configuration. Because standard software does not check for thisproblem, the practitioner may be surprised to find that in some applications estimation of thePoisson regression is unusually difficult or even impossible. More seriously, the estimationalgorithm may lead to spurious maximum likelihood estimates. We identify the signs of thenon-existence of the maximum likelihood estimates and propose a simple empirical strategyto single out the regressors causing this type of identification failure.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0932.pdf

What if Congress Doubled R&D Spending on the Physical Sciences?

Richard Freeman John Van Reenen

CEPDP0931. May 2009.Many business, academic, and scientific groups have recommended that the Congress substantiallyincrease R&D spending in the near future. President Bush’s American Competitiveness Initiative callsfor a doubling of spending over the next decade in selected agencies that deal with the physical sciences, including the National Science Foundation. We consider the rationale for government R&D spending in the context of globalization and as an investment in human capital and knowledge creation with gestation times far longer than Federal funding cycles. To assess the impact of a large increase in R&D spending on the science job market, we examine the impact of the 1998- 2003 doubling of the NIH budget on the bio-medical sciences. We find that the rapid increase in NIH spending and ensuing deceleration created substantial adjustment problems in the market for researchand failed to address long-standing problems with scientific careers that are likely to deter many young people from choosing a scientific career. We argue that because research simultaneouslyproduces knowledge and add to the human capital of researchers, which has greater value for youngscientists because of their longer future career life span than to older scientists, there is reason for funding agencies to tilt their awards to younger researchers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0931.pdf

The ASEAN Free Trade Agreement: Impact on Trade Flows and External Trade Barriers

Hector Calvo-Pardo Caroline Freund Emanuel Ornelas

CEPDP0930. May 2009.Using detailed data on trade and tariffs from 1992-2007, we examine how the ASEAN Free TradeAgreement has affected trade with non-members and external tariffs facing non-members. First, weexamine the effect of preferential and external tariff reduction on import growth from ASEANinsiders and outsiders across HS 6-digit industries. We find no evidence that preferential liberalizationhas led to lower import growth from non-members. Second, we examine the relationship betweenpreferential tariff reduction and MFN tariff reduction. We find that preferential liberalization tends toprecede external tariff liberalization. To examine whether this tariff complementarity is a result ofsimultaneous decision making, we use the scheduled future preferential tariff reductions (agreed to in1992) as instruments for actual preferential tariff changes after the Asia crisis. The results remainunchanged, suggesting that there is a causal relationship between preferential and MFN tariffreduction. We also find that external liberalization was relatively sharper in the products wherepreferences are likely to be most damaging, proving further support for a causal effect. Overall, ourresults imply that the ASEAN agreement has been a force for broader liberalization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0930.pdf

Anatomy of a Health Scare: Education, Income and the MMR Controversy in the UK

Dan Anderberg Arnaud Chevalier Jonathan Wadsworth

CEPDP0929. May 2009.One theory for why there is an education gradient in health outcomes is that more educatedindividuals more quickly absorb new health-related information. The measles, mumps, andrubella (MMR) controversy provides a case where, for a short period, some publicizedresearch suggested that the particular childhood vaccine could have serious side-effects. Asthe controversy unfolded, uptake of the vaccine by more educated parents decreased relativeto that of less educated parents, turning a positive education gradient into a negative one. Wealso consider the response in terms of uptake of other childhood vaccines and purchases ofalternatives to the MMR.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0929.pdf

Risk Taking and Performance in Multistage Tournaments: Evidence from Weightlifting Competitions

Christos Genakos Mario Pagliero

CEPDP0928. May 2009.We analyze the impact of interim ranking on the risk taking and performance behaviour ofprofessional athletes participating in international weightlifting competitions. Weightliftingcompetitions are multistage tournaments with the unique characteristic that the athletes mustannounce in advance the amount they intend to lift at each stage, thus allowing quantification of theriskiness of their choices. We present two key findings. First, risk taking exhibits an inverted-Urelationship with rank: risk taking increases up to rank six, but athletes then revert to safer strategiestowards the bottom of the ranking. Second, athletes systematically underperform when ranked closerto the top, despite higher incentives to perform well. An athlete is more than 30 percent less likely tolift the announced weight when ranked first than tenth. Athletes also underperform in relatively moreprestigious competitions, when the competition is more intense, and when the potential gain from asuccessful lift is higher. Taken together, these findings suggest that athletes may systematically“choke under pressure”.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0928.pdf

The Distinct Effects of Information Technology and Communication Technology on Firm Organization

Nick Bloom Luis Garicano Raffaella Sadun John Van Reenen

CEPDP0927. May 2009.Empirical studies on information communication technologies (ICT) typically aggregate the“information” and “communication” components together. We show theoretically and empirically thatthese have very different effects on the empowerment of employees, and by extension on wageinequality. If managerial hierarchies are devices to acquire and transmit knowledge and information,technologies that reduce information costs enable agents to acquire more knowledge and ‘empower’lower level agents. Conversely, technologies reducing communication costs substitute agent’sknowledge for directions from their managers, and lead to centralization. Using an original dataset offirms in the US and seven European countries we study the impact of ICT on worker autonomy, plantmanager autonomy and spans of control. Consistently with the theory we find that better informationtechnologies (Enterprise Resource Planning for plant managers and CAD/CAM for productionworkers) are associated with more autonomy and a wider span of control. By contrast, communicationtechnologies (like data networks) decrease autonomy for both workers and plant managers. Ourfindings are robust to using exogenous variation in cross-country telecommunication costs arisingfrom differential regulatory regimes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0927.pdf

Long-Term Health Effects on the Next Generation of Ramadan Fasting During Pregnancy

Reyn van Ewijk

CEPDP0926. April 2009.Each year, many pregnant women fast from dawn to sunset during the Islamic holy month ofRamadan. Medical theory suggests that this may have negative long-term health effects on theiroffspring. Building upon the work of Almond and Mazumder (2008), and using Indonesian crosssectionaldata, I show that people who were exposed to Ramadan fasting during their mother’spregnancy have a poorer general health and are sick more often than people who were not exposed.This effect is especially pronounced among older people, who, when exposed, also report healthproblems more often that are indicative of coronary heart problems and type 2 diabetes. The exposedare a bit smaller in body size and weigh less. Among Muslims born during, and in the months after,Ramadan, the share of males is lower, which is most likely to be caused by death before birth. I showthat these effects are unlikely to be an artifact of common health shocks, correlated to the occurrenceof Ramadan, or o f fasting mainly occurring among women who, irrespective of fasting or not, wouldhave had unhealthier children anyway.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0926.pdf

The Empirics of New Economic Geography

Stephen Redding

CEPDP0925. April 2009.Although a rich and extensive body of theoretical research on new economic geography hasemerged, empirical research remains comparatively less well developed. This paper reviewsthe existing empirical literature on the predictions of new economic geography models for thedistribution of income and production across space. The discussion highlights connectionswith other research in regional and urban economics, identification issues, potentialalternative explanations and possible areas for further research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0925.pdf

Employee Voice and Private Sector Workplace Outcomes in Britain, 1980-2004

Alex Bryson Rafael Gomez Tobias Kretschmer P Willman

CEPDP0924. April 2009.Non-union direct voice has replaced union representative voice as the primary avenue for employeevoice in the British private sector. This paper provides a framework for examining the relationshipbetween employee voice and workplace outcomes that explains this development. As exit-voicetheory predicts, voice is associated with lower voluntary turnover, especially in the case of unionvoice. Union voice is also associated with greater workplace conflict and poorer productivity. Nonunionvoice is associated with better workplace financial performance than other voice regimes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0924.pdf

Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy

Bianca De Paoli

CEPDP0923. April 2009.Can the structure of asset markets change the way monetary policy should be conducted?Following a linear-quadratic approach, the present paper addresses this question in a NewKeynesian small open economy framework. Our results reveal that the configuration of assetmarkets significantly affects optimal monetary policy and the performance of standard policyrules. In particular, when comparing complete and incomplete markets, the ranking of policyrules is entirely reversed, and so are the policy prescriptions regarding the optimal level ofexchange rate volatility.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0923.pdf

Hot and Cold Seasons in the Housing Market

L. Rachel Ngai Silvana Tenreyro

CEPDP0922. April 2009.Every year during the second and thirdquarters (the “hot season”) housing markets in the UKand the US experience systematic above-trend increases in both prices and transactions.During the fourth and first quarters (the “cold season”), house prices and transactions fallbelow trend. We propose a search-and-matching framework that sheds new light on themechanisms governing housing market fluctuations. The model has a “thick-market” effectthat can generate substantial differences in the volume of transactions and prices acrossseasons, with the extent of seasonality in prices depending crucially on the bargaining powerof sellers. The model can quantitatively mimic the seasonal fluctuations in transactions andprices observed in the UK and the US.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0922.pdf

Capital Flows and Asset Prices

Kosuke Aoki Gianluca Benigno Nobuhiro Kiyotaki

CEPDP0921. April 2009.After liberalizing international transactions of financial assets, many countries experiencelarge swings in asset prices, capital flows, and aggregate production. This paper studies howthe adjustment to capital account liberalization depends upon the degree of development of adomestic financial system, and why the economy with an underdeveloped financial systemmay be vulnerable to shocks to the domestic and foreign finance. We construct a model of asmall open economy in which it is difficult to enforce debtors to repay their debts unless thedebts are secured by collateral, and assets usable as collateral for international borrowing aremore restricted than domestic borrowing.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0921.pdf

Unions and Workplace Performance in Britain and France

Alex Bryson John Forth Patrice Laroche

CEPDP0920. April 2009.Using nationally representative workplace surveys we examine the relationship between unionization and workplace financial performance in Britain and France. We find that union bargaining is detrimental to workplace performance in Britain and that this effect is larger when unionization is endogenized. In France, union bargaining is associated with poorer workplace performance but the effect disappears once unionization is treated as endogenous. However, high levels of union density do have a negative impact on workplace performance in France. In Britain the union effect does not rise with union density.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0920.pdf

'The Value of Rude Health': Employees' Well Being, Absence and Workplace Performance

David Marsden Simone Moriconi

CEPDP0919. April 2009.This paper brings new evidence on the relationship between employees' well being, sickness absence and fourdimensions of workplace performance i.e. productivity, efficiency, quality of service and profitability. It uses anew panel dataset with monthly observations over two years for 48 local units of a large multi-site organisationin the logistics sector. It finds that good consultation and communication at the local level are associated withlower absenteeism. It also finds that lower absence is associated with higher efficiency, productivity, quality ofthe service and profitability of the firm. Finally, the authors suggest that the link between workers’ absence andthis firm’s profitability runs through the increased use of replacement labour which raises short-run costs andreduces quality of service.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0919.pdf

Does Relative Income Matter? Are the Critics Right?

Richard Layard Guy Mayraz Stephen Nickell

CEPDP0918. March 2009.Do other peoples’ incomes reduce the happiness which people in advanced countries experience fromany given income? And does this help to explain why in the U.S., Germany and some other advancedcountries, happiness has been constant for many decades? The answer to both questions is ‘Yes’. Weprovide 4 main pieces of evidence. 1) In the U.S. General Survey (repeated samples since 1972)comparator income has a negative effect on happiness equal in magnitude to the positive effect ofown income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfactionas the dependant variable. We also use the Panel to compare the effect of incomecomparisons and of adaptation as factors explaining the stable level of life-satisfaction: incomecomparisons emerge as much the more important. 3) When in our U.S. analysis we introduce“perceived” relative income as a potential explanatory variable, its effect is as large as the effect ofactual relative income – further supporting the view that comparisons matter. 4) Finally, for a panel ofEuropean countries since 1973 we estimate the effect of average income upon average lifesatisfaction,splitting income into two components: trend and cycle. The effect of trend income issmall and ill-defined. Our conclusions relate to time series and to advanced countries only. Theydiffer from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies arelargely cross-sectional and mostly include non-advanced as well as advanced countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0918.pdf

The Impacts of the Climate Change Levy on business: Evidence from Microdata

Ralf Martin Ulrich J. Wagner Laure B. de Preux

CEPDP0917. March 2009.We estimate the impacts of an energy tax – the Climate Change Levy (CCL) – on the manufacturing sectorusing panel data from the UK production census. Our identification strategy builds on the comparison of trendsin outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy afterjoining a so-called Climate Change Agreement (CCA). Since the CCAs stipulate specific targets for energyusage or carbon emissions, this comparison yields a lower bound on the impact of the discount. To address alikely selection endogeneity in CCA participation, we adopt an IV approach that exploits exogenous variation inpollution discharges that determined eligibility for CCA participation. We find robust evidence that CCAparticipation had a strong positive impact on growth in both energy intensity and energy expenditures. Ananalysis of fuel choices at the plant level reveals that this effect is mainly driven by stronger growth inelectricity use and translates into a positive impact on CO2 emissions. We do not find any statisticallysignificant impacts of the tax on employment, gross output or total factor productivity. We conclude that, hadthe CCL been implemented at full rate for all businesses, further cuts in energy use of substantial magnitudecould have been achieved without jeopardizing economic performance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0917.pdf

Convergence of Firm-Level Productivity, Globalisation, Information Technology and Competition: Evidence from France

Paul-Antoine Chevalier Rémy Lecat Nicholas Oulton

CEPDP0916. March 2009.Studies of firm-level data have shown that there is a huge dispersion of productivity across firms evenwhen industries are narrowly defined. So there is a significant opportunity for the least productivefirms to catch up to the most productive. The formers’ convergence could therefore constitute animportant part of productivity growth at the macroeconomic level. This article sheds light on thisconvergence process in the 1990s and the 2000s in France and on some of the factors which canexplain it. Productivity convergence was stronger for labour productivity than for total factorproductivity. But most importantly the speed of convergence has slowed during the course of the1990s, a fact which is explained principally by the acceleration of the productivity of firms on thetechnological frontier. Three possible explanations of these stylised facts are considered:globalisation, information technology, and competition. Globalisation and information technologymay have benefited the most productive firms more and the growth of competition may at the sametime have stimulated the productivity of firms at the frontier while discouraging the convergence ofthe least productive firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0916.pdf

The Importance of Relative Performance Feedback Information: Evidence from a Natural Experiment using High School Students

Ghazala Azmat Nagore Iriberri

CEPDP0915. March 2009.We study the effect of providing relative performance feedback information on performance underpiece-rate incentives. A natural experiment that took place in a high school offers an unusualopportunity to test this effect in a real-effort setting. For one year only, students received informationthat allowed them to know whether they were above (below) the class average as well as the distancefrom this average. We exploit a rich panel data set and find that the provision of this information ledto an increase of 5% in students’ grades. Moreover, the effect was significant for the wholedistribution. However, once the information was removed the effect disappeared. To rule out theconcern that the effect may be driven by teachers within the school, we verify our results usingnational level exams (externally graded) for the same students, and the effect remains.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0915.pdf

Accounting for Research and Productivity Growth Across Industries

L. Rachel Ngai Roberto M. Samaniego

CEPDP0914. March 2009.What factors underlie industry differences in research intensity and productivity growth? Wedevelop a multi-sector endogenous growth model allowing for industry specific parameters inthe production functions for output and knowledge, and in consumer preferences. We findthat industry differences in both productivity growth and R&D intensity mainly reflectdifferences in "technological opportunities", interpreted as parameters of knowledgeproduction. These include the capital intensity of R&D, knowledge spillovers, anddiminishing returns to R&D. Among these parameters, we find that the degree of diminishingreturns to R&D is the dominant factor when the model is calibrated to account for crossindustrydifferences in the US.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0914.pdf

Leader Behavior and the Natural Resource Curse

Francesco Caselli Tom Cunningham

CEPDP0913. March 2009.We discuss political economy mechanisms which can explain the resource curse, in which anincrease in the size of resource rents causes a decrease in the economy’s total value added.We identify a number of channels through which resource rents will alter the incentives of apolitical leader. Some of these induce greater investment by the leader in assets that favourgrowth (infrastructure, rule of law, etc.), others lead to a potentially catastrophic drop in suchactivities. As a result, the effect of resource abundance can be highly non-monotonic. Weargue that it is critical to understand how resources affect the leader’s "survival function", i.e.the reduced-form probability of retaining power. We also briefly survey decentralisedmechanisms, in which rents induce a reallocation of labour by private agents, crowding outproductive activity more than proportionately. We argue that these mechanisms cannot befully understood without simultaneously studying leader behaviour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0913.pdf

Government Transfers and Political Support

Marco Manacorda Edward Miguel Andrea Vigorito

CEPDP0912. March 2009.We estimate the impact of a large anti-poverty program – the Uruguayan PANES – on political support for thegovernment that implemented it. The program mainly consisted of a monthly cash transfer for a period ofroughly two and half years. Using the discontinuity in program assignment based on a pre-treatment score, wefind that beneficiary households are 21 to 28 percentage points more likely to favor the current government(relative to the previous government). Impacts on political support are larger among poorer households and forthose near the center of the political spectrum, consistent with the probabilistic voting model in politicaleconomy. Effects persist after the cash transfer program ends. We estimate that the annual cost of increasinggovernment political support by 1 percentage point is roughly 0.9% of annual government social expenditures.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0912.pdf

Innovation and Institutional Ownership

Philippe Aghion John Van Reenen Luigi Zingales

CEPDP0911. February 2009.We find that institutional ownership in publicly traded companies is associated with more innovation(measured by cite-weighted patents). To explore the mechanism through which this link arises, webuild a model that nests the lazy-manager hypothesis with career-concerns, where institutional ownersincrease managerial incentives to innovate by reducing the career risk of risky projects. The datasupports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitutioneffect between institutional ownership and product market competition (and managerial entrenchmentgenerally), the career-concern model allows for complementarity. Empirically, we reject substitutioneffects. Second, CEOs are less likely to be fired in the face of profit downturns when institutionalownership is higher. Finally, using instrumental variables, policy changes and disaggregating by typeof owner we find that the effect of institutions on innovation does not appear to be due to endogenousselection.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0911.pdf

Peer Effects in Science - Evidence from the Dismissal of Scientists in Nazi Germany

Fabian Waldinger

CEPDP0910. February 2009.This paper analyzes peer effects among university scientists. Specifically, it investigates whether thenumber of peers and their average quality affects the productivity of researchers in physics, chemistry,and mathematics. The usual endogeneity problems related to estimating peer effects are addressed byusing the dismissal of scientists by the Nazi government as a source of exogenous variation in the peergroup of scientists staying in Germany. Using a newly constructed panel dataset covering the universeof physicists, chemists, and mathematicians at all German universities from 1925 until 1938 Iinvestigate peer effects at the local level and among co-authors. There is no evidence for localizedpeer effects, as neither department level (e.g. the physics department) nor specialization level (e.g. alltheoretical physicists in the department) peers affect a researcher's productivity. Among co-authors,however, there is strong and significant evidence that peer quality affects a researcher's productivity.Loosing a co-author of average quality reduces the productivity of an average scientist by about 13percent in physics and 16.5 percent in chemistry.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0910.pdf

The Macroeconomic Role of Unemployment Compensation

Tomer Blumkin Yossi Hadar Eran Yashiv

CEPDP0909. February 2009.The standard motivation for unemployment compensation is consumption smoothing andmost papers in the literature have analyzed trade-offs involving consumption smoothing andmoral hazard. This paper shows how such policy can increase output by enhancing theassignment of workers to jobs in the face of firm productivity heterogeneity and skill-biasedtechnological change. It shows that in order to do so policy needs to be a function of theproperties of the firm’s productivity distribution. The paper undertakes an empiricallygrounded,normative analysis of this issue. The analysis also bears upon the wagedistribution, showing how optimal unemployment compensation policy is affected by wagesand affects them in turn. A key insight emerging from the analysis is that the degree of firmproductivity heterogeneity, in terms of skewness and variance, matters for the design of thetime path of unemployment compensation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0909.pdf

International Trade Integration: A Disaggregated Approach

Natalie Chen Dennis Novy

CEPDP0908. January 2009.This paper investigates the sources and size of trade barriers at the industry level. We derive amicro-founded measure of industry-specific bilateral trade integration that has an in-builtcontrol for time-varying multilateral resistance. This trade integration measure is consistentwith a broad range of recent trade models including the Anderson and van Wincoop (2003)framework, the Ricardian model by Eaton and Kortum (2002) and heterogeneous firmsmodels. We use it to explore trade barriers for manufacturing industries in European Unioncountries between 1999 and 2003. We find a large degree of trade cost heterogeneity acrossindustries. The most important trade barriers are transportation costs and policy factors suchas Technical Barriers to Trade. Trade integration is generally lower for countries that optedout of the Euro or did not abolish border controls in accordance with the SchengenAgreement. Reductions in trade barriers explain about one-half of the growth in trade overthe period 1999-2003 and are therefore a major driving force of the EU Single Market.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0908.pdf

To Leave or Not to Leave? A Regression Discontinuity Analysis of the Impact of Failing the High School Exit Exam

Dongshu Ou

CEPDP0907. January 2009.The high school exit exam (HSEE) is rapidly becoming a standardized assessment procedure foreducational accountability in the United States. I use a unique state-specific dataset to identify theeffect of failing the HSEE on the likelihood that a student drops out early based on a RegressionDiscontinuity design. It shows that students who barely fail the exam are more likely to exit thanthose who barely pass despite being offered retest opportunities. The discontinuity amounts to a largeproportion of the dropout probability of barely-failers, particularly for minority and low-incomestudents, suggesting that the potential benefit of raising educational standards might come at the costof increasing inequalities in the educational system.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0907.pdf

The Margins of US Trade

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0906. January 2009.Recent research in international trade emphasizes the importance of firms’ extensive margins forunderstanding overall patterns of trade as well as how firms respond to specific events such as tradeliberalization. In this paper, we use detailed U.S. trade statistics to provide a broad overview of howthe margins of trade contribute to variation in U.S. imports and exports across trading partners, typesof trade (i.e. arm’s-length versus related-party) and both short and long time horizons. Among otherresults, we highlight the differential behaviour of related-party and arm’s-length trade in response tothe 1997 Asian financial crisis.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0906.pdf

On the International Dimension of Fiscal Policy

Gianluca Benigno Bianca De Paoli

CEPDP0905. January 2009.This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0905.pdf

Economic Geography: A Review of the Theoretical and Empirical Literature

Stephen Redding

CEPDP0904. January 2009.This paper reviews the new economic geography literature, which accounts for the unevendistribution of economic activity across space in terms of a combination of love of varietypreferences, increasing returns to scale and transport costs. After outlining the canonical coreand periphery model, the paper examines the empirical evidence on three of its centralpredictions: the role of market access in deter- mining factor prices, the related home marketeffect in which demand has a more than proportionate effect on production, and the potentialexistence of multiple equilibria. In reviewing the evidence, we highlight issues ofmeasurement and identification, alternative potential explanations, and remaining areas forfurther research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0904.pdf

Change and Continuity Among Minority Communities in Britain

Andreas Georgiadis Alan Manning

CEPDP0903. January 2009.There is widespread concern currently that some ethnic minority communities within Britain,especially Muslim, are not following the stereotypical immigrant path of economic andcultural assimilation into British society. Indeed, many seem to have the impression thatdifferences between Muslims and non-Muslims are widening. In this paper we compare thetwo largest Muslim communities in Britain (Pakistanis and Bangladeshis) with other ethnicminorities to ask the questions ‘are Muslims different?’ and ‘is their behaviour changing overtime?’ The indicators we look at are the gender gap in education, age at marriage,cohabitation and inter-marriage, fertility and the employment of women. In all thesedimensions we find that the Muslim communities are different but we also find evidence ofchange. This is partly because those born in Britain generally have markedly differentbehaviours from those born in the country of origin, but also because there is change withinboth the UK-born and foreign-born communities. The evidence suggests there is, alongalmost all dimensions, a movement towards convergence in behaviour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0903.pdf

Trade, Technology Adoption and Wage Inequalities: Theory and Evidence

Maria Bas

CEPDP0902. December 2008.This paper develops a model of trade that features heterogeneous firms, technology choice anddifferent types of skilled labor in a general equilibrium framework. Its main contribution is to explainthe impact of trade integration on technology adoption and wage inequalities. It also providesempirical evidence to support the model’s predictions using plant-level panel data from Chile’smanufacturing sector (1990-1999). The theoretical framework offers a possible explanation of thepuzzling increase in skill premium in the developing countries. The key mechanism is found in theeffects of trade policy on the number of new firms upgrading technology and on the skill-intensity oflabor. Trade liberalization pushes up export revenues, raising the probability that the most productiveexporters will upgrade their technology. These firms then increase their relative demand for skilledlabor, thereby raising inequalities.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0902.pdf

Service Traders in the UK

Holger Breinlich Chiara Criscuolo

CEPDP0901. December 2008.We provide a novel set of stylized facts on firms engaging in international trade in services, usingunique firm-level data on services exports and imports in the United Kingdom in 2000- 2005. Lessthan 10% of firms trade in services but they can be found in all sectors of the UK economy. While theservices sector accounts for 80% of total exports and imports, the frequency and trade intensity ofservices traders is often higher in sectors such as high- tech manufacturing. Services traders arebigger, more productive and are more likely to be foreign owned or part of a multinational enterprise.These ‘trade premia’ are smaller then for goods traders, however, with the exception of skill intensitywhich is higher among services traders. There are also significant differences between exporters andimporters of services. Furthermore, we show that most firms only export or import a single servicetype and trade with a small number of countries. Trade volume, employment, turnover and valueadded are highly concentrated among a small group of firms trading with many countries and/or inmany services types. These firms are characterised by bigger size and higher than averageproductivity, all of which seem to be principally correlated with more trade along the intensive margin(trade per services and country) .although there are a number of noteworthy exceptions. Interestingly,trade is also concentrated within .rms. The top export and import destination make up 70% of theaverage firm’s total trade and the top services type around 90%. This strong concentration is stillpresent among firms trading with many countries and/or in many products.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0901.pdf

Protection and International Sourcing

Emanuel Ornelas John L. Turner

CEPDP0900. December 2008.We study the impact of import protection on relationship-specific investments, organizationalchoice and welfare. We show that a tariff on intermediate inputs can improve social welfarethrough mitigating hold-up problems. It does so if it discriminates in favor of the investingparty, thereby improving its bargaining position. On the other hand, a tariff can promptinefficient organizational choices if it discriminates in favor of less productive firms or ifintegration costs are low. Protection distorts organizational choices because tariff revenue,which is external to the firms, drives a wedge between the private and social gains tooffshoring and integration.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0900.pdf

Central Bank's Two-Way Communication with the Public and Inflation Dynamics

Kosuke Aoki Takeshi Kimura

CEPDP0899. November 2008.Using a model of island economy where financial markets aggregate dispersed information ofthe public, we analyze how two-way communication between the central bank and the publicaffects inflation dynamics. When inflation target is observable and credible to the public,markets provide the bank with information about the aggregate state of the economy, andhence the bank can stabilize inflation. However, when inflation target is unobservable or lesscredible, the public updates their perceived inflation target and the information revealed frommarkets to the bank becomes less perfect. The degree of uncertainty facing the bank cruciallydepends on how two-way communication works.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0899.pdf

Understanding the Gender Pay Gap: What's Competition Got to Do with It?

Alan Manning Farzad Saidi

CEPDP0898. November 2008.A number of papers have recently argued that men and women have different attitudes andbehavioural responses to competition. Laboratory experiments suggest that these genderdifferences are very large but it is important to be able to map these findings into real worlddifferences. In this paper, we use performance pay as an indicator of competition in theworkplace and compare the gender gap in incidence of performance pay and earnings andwork effort under these contracts. Women are less likely to found in performance paycontracts but the gender gap is small. Furthermore, the effect of performance pay on earningsis modest and does not differ markedly by gender. Consequently the ability of these theoriesto explain the gender pay gap seems very limited.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0898.pdf

Improving Access to Psychological Therapy: Initial Evaluation of the Two Demonstration Sites

David M. Clark Richard Layard Rachel Smithies

CEPDP0897. November 2008.The Government’s Improving Access to Psychological Therapy (IAPT) programme aims toimplement NICE Guidance for people with depression and anxiety disorders. In the firstphase of the programme, two demonstration sites were established in Doncaster and Newhamwith funding to provide increased availability of cognitive-behaviour therapy-based (CBT)services to those in the community who need them. The services opened in late summer2006. This paper documents the achievements of the sites up to September 2007 (roughlytheir first year of operation) and makes recommendations for the future roll out of IAPTservices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0897.pdf

Does Family Control Affect Trade Performance? Evidence for Italian Firms

Giorgio Barba Navaretti Riccardo Faini Alessandra Tucci

CEPDP0896. November 2008.This paper examines whether the export decision of firms is affected by their ownership structure,specifically it looks at whether family control is an obstacle to entering foreign markets. Theunderlying assumption is that family firms are risk averse. Risk aversion may be an obstacle toentering foreign markets, as far as these are perceived as more volatile and risky than the domesticone, particularly when such choice entices bearing relatively high sunk costs. We develop anillustrative theoretical model that shows how the combination between high risk aversion and lowinitial productivity may hinder family firms’ decision to enter foreign markets, particularly distantones. The empirical analysis, based on a detailed panel data set of Italian firms covering the yearsfrom 1995 to 2003, confirms such predictions by showing that family controlled firms do indeedexport less than other type of companies even after controlling for firm heterogeneity in productivity,size, technology and access to credit.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0896.pdf

Why Capital does not Migrate to the South: A New Economic Geography Perspective

Jang Ping Thia

CEPDP0895. November 2008.This paper explains why capital does not flow from the North to the South - the LucasParadox - with a New Economic Geography model that incorporates mobile capital,immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories,the results show that even a small difference in the ex-ante productivity distribution betweenNorth and South can a have significant impact on the location of firms. Despite differences inaggregate capital to labour ratios, wage and rental rates continue to be the same in bothlocations. The paper also analyses the effects of risk on industrial locations, and shows why‘low-tech’ industries tend to migrate to the South, while ‘high-tech’ industries continue tolocate in the North.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0895.pdf

Survival of the Fittest in Cities: Agglomeration, Selection, and Polarisation

Kristian Behrens Frédéric Robert-Nicoud

CEPDP0894. October 2008.Empirical studies consistently report that labour productivity and TFP rise with city size. The reason is that cities attract the most productive agents, select the best of them, and make the selected ones even more productive via various agglomeration economies. This paper provides a microeconomically founded model of vertical city differentiation in which the latter two mechanisms (`agglomeration' and `selection') operate simultaneously. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, and how they interact through the channels of trade. We then uncover stylised facts and suggestive econometric evidence that are consistent with the most distinctive equilibrium features of our model. We show, in particular, that larger cities are both more productive and more unequal (`polarised'), that inter-city trade is associated with higher income inequalities, and that the proximity of large urban centres inhibits the development of nearby cities.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0894.pdf

Motivation and Sorting in Open Source Software Innovation

Sharon Belenzon Mark Schankerman

CEPDP0893. October 2008.This paper studies the role of intrinsic motivation, reputation and reciprocity in driving opensource software innovation. We exploit the observed pattern of contributions – the ‘revealedpreference’ of developers – to infer the underlying incentives. Using detailed information oncode contributions and project membership, we classify developers into distinct groups andstudy how contributions from each developer type vary by license (contract) type and otherproject characteristics. The central empirical finding is that developers strongly sort bylicense type, project size and corporate sponsorship. This evidence confirms the importanceof heterogeneous motivations, specifically a key role for motivated agents and reputation, butless for reciprocity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0893.pdf

Urbanisation and Structural Transformation

Guy Michaels Ferdinand Rauch Stephen Redding

CEPDP0892. October 2008.This paper presents new evidence on urbanization using sub-county data for the United Statesfrom 1880-2000 and municipality data for Brazil from 1970-2000. We show that the twocentral stylized features of population growth for cities – Gibrat’s Law and a stablepopulation distribution - are strongly rejected when both rural and urban areas are considered.Population growth exhibits a U-shaped relationship with initial population density, and onlybecomes uncorrelated with initial population density at the high densities found inpredominantly urban areas. We provide evidence that the explanation for these patterns lies indifferent employment growth dynamics in the agricultural and non-agricultural sectors andthe process of structural transformation away from the agricultural sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0892.pdf

Modern Management: Good for the Environment or Just Hot Air?

Nick Bloom Christos Genakos Ralf Martin Raffaella Sadun

CEPDP0891. October 2008.We use an innovative methodology to measure management practices in over 300 manufacturingfirms in the UK. We then match this management data to production and energy usage information forestablishments owned by these firms. We find that establishments in better managed firms aresignificantly less energy intensive. They use less energy per unit of output, and also in relation toother factor inputs. This is quantitatively substantial: going from the 25th to the 75th percentile ofmanagement practices is associated with a 17.4% reduction in energy intensity. This negativerelationship is robust to a variety of controls for industry, location, technology and other factor inputs.Better managed firms are also significantly more productive. One interpretation of these results is thatwell managed firms are adopting modern lean manufacturing practices, which allows them to increaseproductivity by using energy more efficiently. This suggests that improving the management practicesof manufacturing firms may help to reduce greenhouse gas emissions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0891.pdf

Comparing Willingness-to-Pay and Subjective Well-Being in the Context of Non-Market Goods

Paul Dolan Robert Metcalfe

CEPDP0890. October 2008.In order to value non-market goods, economists estimate individuals’ willingness to pay(WTP) for these goods using revealed or stated preference methods. We compare theseconventional approaches with subjective well-being (SWB), which is based on individuals’ratings of their happiness or life satisfaction rather than on their preferences. In the context ofa quasi- experiment in urban regeneration, we find that monetary estimates from SWB dataare significantly higher than from revealed and stated preference data. Stigma in revealedpreferences, mental accounting in stated preferences and unspecified duration in SWB ratingsmight explain some of the difference between the valuation methods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0890.pdf

Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes

Alberto Galasso Mark Schankerman

CEPDP0889. August 2008.We study how fragmentation of patent rights (‘patent thickets’) and the formation of theCourt of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, andthus the speed of technology diffusion through licensing. We develop a model of patentlitigation which predicts faster settlement agreements when patent rights are fragmented andwhen there is less uncertainty about court outcomes, as was associated with the ‘pro-patentshift’ of CAFC. The model also predicts that the impact of fragmentation on settlementduration should be smaller under CAFC. We confirm these predictions empirically using adataset that covers nearly all patent suits in U.S. federal district courts during the period1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking intoaccount both reduction in duration per dispute and the increase in the number of requiredpatent negotiations associated with patent thickets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0889.pdf

Does Planning Regulation Protect Independent Retailers?

Raffaella Sadun

CEPDP0888. August 2008.Entry regulations against big-box retailers have been introduced in many countries to protectsmaller independent stores. Using a new dataset from the UK, I show that in fact these entryregulations have been associated with greater employment declines in independent storesthey were meant to protect. The reason is that when large retail chains are prevented fromentering a new area with a big-box store, they typically enter instead using a smaller in-townstore format. These smaller format stores compete more directly with independent stores. Tocausally identify this impact I use the changing nature of local political control in the UKfrom 1993 to 2003. Since local politicians directly control planning regulation in the UK, andpolitical parties have very different views on the ideal amount of planning control, thisprovides exogenous variation in the ease of entry for big-box retailers. I estimate that 15% ofthe employment decline experienced by independent retailers between 1998 and 2004 can beattributed to the perverse effect of planning regulation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0888.pdf

Sales and Monetary Policy

Bernardo Guimaraes Kevin D. Sheedy

CEPDP0887. August 2008.A striking fact about prices is the prevalence of ``sales'': large temporary price cuts followedby a return exactly to the former price. This paper builds a macroeconomic model with arationale for sales based on firms facing consumers with different price sensitivities. Even iffirms can vary sales without cost, monetary policy has large real effects owing to sales beingstrategic substitutes: a firm's incentive to have a sale is decreasing in the number of otherfirms having sales. Thus the flexibility of prices at the micro level due to sales does nottranslate into flexibility at the macro level.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0887.pdf

Effort and Comparison Income: Experimental and Survey Evidence

Andrew E. Clark David Masclet Marie-Claire Villeval

CEPDP0886. August 2008.This paper considers the effect of status or relative income on work effort, combining experimental evidencefrom a gift-exchange game with the analysis of multi-country ISSP survey data. We find a consistent negativeeffect of others’ incomes on individual effort in both datasets. The individual’s rank in the income distribution isa stronger determinant of effort than is others’ average income, suggesting that comparisons are more ordinalthan cardinal. In the experiment, effort is also affected by comparisons over time: those who received higherincome offers or enjoyed higher income rank in the past exert lower levels of effort for a given current incomeand rank.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0886.pdf

How Does Shared Capitalism Affect Economic Performance in the UK?

Alex Bryson Richard Freeman

CEPDP0885. August 2008.This paper uses nationally representative linked workplace-employee data from the British2004 Workplace Employment Relations Survey to examine the operation of shared capitalistforms of pay – profit-sharing and group pay for performance, employee share ownership, andstock options—and their link to productivity. It shows that shared capitalism has grown inthe UK, as it has in the US; that different forms of shared capitalist pay complement eachother and other labour practices in the sense that firms use them together more than theywould if they chose modes of pay and work practices independently; and that workplacesswitch among schemes frequently, which suggests that they have trouble optimizing and thetransactions cost of switching are relatively low. Among the single schemes, shareownership has the clearest positive association with productivity, but its impact is largestwhen firms combine it with other forms of shared capitalist pay and modes of organization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0885.pdf

Trading Places: Employers, Unions and the Manufacture of Voice

Alex Bryson Rafael Gomez P Willman

CEPDP0884. August 2008.Using nationally representative workplace data for Britain we show that over the last quartercentury union voice – especially union-only voice – has been associated with poorer climate,more industrial action, poorer financial performance and poorer labour productivity than nonunionvoice and, in particular, direct voice. On the other hand, union-based voice regimeshave experienced lower quit rates than non-union and “no voice” regimes, as theory predicts.Over that time, while the workplace incidence of voice has remained constant, with roughly 8workplaces out of 10 providing some form of voice, there has been a big shift from union tonon-union voice, particularly direct employer-made voice. Thus employers are preparedgenerally to bear the costs of voice provision and manifest a reluctance to engage with theirworkforce without voice mechanisms in place. The associations between non-union voicemechanisms and desirable workplace outcomes suggest that these costs may be lower thanthe benefits voice generates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0884.pdf

The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty

Jang Ping Thia

CEPDP0883. July 2008.This paper presents a model with monopolistic competition, productively heterogeneousfirms, and business cycle aggregate shocks. With firm-specific productive heterogeneity,weaker firms quit when faced with a negative aggregate shock. Consequently, trade does notalways increase firm-level aggregate productivity as negative shocks on the home market canbe compensated for by positive shocks elsewhere. Weaker firms, which would otherwise quitin autarky, can continue to operate by exporting. Despite this, trade can still improve welfarefor risk-averse consumers by reducing aggregate price fluctuations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0883.pdf

When Workers Share in Profits: Effort and Responses to Shirking

Richard Freeman

CEPDP0882. July 2008.This paper summarizes new evidence from the “Shared Capitalism” Project on the extent towhich workers’ earnings depend on the performance of their firm or work group in the USand advanced European countries and on the impact of sharing arrangements on economicbehavior. The evidence shows that: 1) a large and growing proportion of workers are coveredby shared capitalism through worker profit-sharing, bonuses, or worker ownership of shares;2) outcomes for workers and firms are higher under shared capitalism than under other workand pay arrangements; and 3) that worker co-monitoring helps overcome the free riderproblem that arises when part of workers pay depends on the productivity and effort of allworkers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0882.pdf

Organizational Commitment: Do Workplace Practices Matter?

Alex Bryson Michael White

CEPDP0881. July 2008.Using nationally-representative linked employer-employee data for Britain this paper considerswhether employers are able to influence the organizational commitment (OC) of their employeesthrough the practices they deploy. We examine the association between OC and two broad groups ofHRM practices emphasised in two different strands of the literature, namely “High-PerformanceWorkplace Practices” (HPWPs) and practices associated with “Perceived Organizational Support”(POS). We consider their associations with mean workplace-level OC and individual employees’ OC.Although employers may be able to engender greater OC on the part of their employees, the practicesthat do so are not those emphasized in the HPWP literature, with the exception of consultation and theinvolvement of employees in decision-taking. POS practices fare a little better but, again, the findingsare far from unequivocal. Furthermore, those practices that are ‘effective’ in engendering higher OCsuch as tolerance of absence, recruiting on ‘values’ and allowing employees to make decisions, tendto have a fairly low incidence in British workplaces. There is, however, one finding which chimeswith the ideas underpinning the HPWP literature, namely that there are returns to the use of practicesin combination. Analyses of both mean workplace-level OC and individual employee OC find anindependent positive association between OC and the deployment of multiple practices incombination. This evidence is consistent with practices having synergies, as emphasised in some ofthe HPWP literature.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0881.pdf

Minimum Wages and Earnings Inequality in Urban Mexico. Revisiting the Evidence

Mariano Bosch Marco Manacorda

CEPDP0880. July 2008.This paper explores the contribution of the minimum wage to the well documented rise inearnings inequality in Mexico between the late 1980 and the late 1990s. In contrast to theview that sees minimum wages as an ineffective redistributive tool in developing countries,we find that the deterioration in the real bite of the minimum wage is responsible for theentire rise in inequality at the bottom of the distribution. Our result challenges the widespreadperception that trade induced shocks are the single most important factor behind the recentrise in earnings inequality in several less developed economies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0880.pdf

Relative Factor Endowments and International Portfolio Choice

Alejandro Cuñat Christian Fons-Rosen

CEPDP0879. July 2008.This paper presents a model of international portfolio choice based on cross-country differences inrelative factor abundance. Countries have varying degrees of similarity in their factor endowmentratios, and are subject to aggregate productivity shocks. Risk averse consumers can insure againstthese shocks by investing their wealth at home and abroad. In a many-good setup, the change inrelative prices after a positive shock in a particular country provides insurance to countries that havedissimilar factor endowment ratios, but is bad news for countries with similar factor endowmentratios, since their incomes will worsen. Therefore countries with similar relative factor endowmentshave a stronger incentive to invest in one another for insurance purposes than countries withdissimilar endowments. Empirical evidence linking bilateral international investment positions to aproxy for relative factor endowments supports our theory: the similarity of host and source countriesin their relative capital-labor ratios has a positive effect on the source country’s investment position inthe host country. The effect of similarity is enhanced by the size of host countries as predicted by thetheory.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0879.pdf

The Cost of Grade Retention

Marco Manacorda

CEPDP0878. July 2008.This paper uses administrative longitudinal micro data on the universe of Junior High schoolstudents in Uruguay to measure the effect of grade failure on students' subsequent schooloutcomes. Exploiting the discontinuity induced by a rule establishing automatic grade failurefor pupils missing more than 25 days, I show that grade failure leads to substantial drop-outand lower educational attainment even after 4 to 5 years since the time when failure firstoccurred. Complementary evidence based on a change in the regime of grade promotion leadsto very similar conclusions, suggesting that non-random sorting around the discontinuitypoint is unlikely to drive my results.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0878.pdf

A 'New Trade' Theory of GATT/WTO Negotiations

Ralph Ossa

CEPDP0877. June 2008.I develop a novel theory of GATT/WTO negotiations. This theory provides new answers totwo prominent questions in the trade policy literature: first, what is the purpose of tradenegotiations? And second, what is the role played by the fundamental GATT/WTO principlesof reciprocity and nondiscrimination? Relative to the standard terms-of-trade theory ofGATT/WTO negotiations, my theory makes two main contributions: first, it builds on a ‘newtrade’ model rather than the neoclassical trade model and therefore sheds new light onGATT/WTO negotiations between similar countries. Second, it relies on a productionrelocation externality rather than the terms-of-trade externality and therefore demonstratesthat the terms-of-trade externality is not the only trade policy externality which can beinternalized in GATT/WTO negotiations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0877.pdf

Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s

Monique Ebell Albrecht Ritschl

CEPDP0876. June 2008.We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into theGreat Depression after 1929 in a unified framework. The model combines monopolistic productmarket competition with search frictions in the labor market, allowing for both individual andcollective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility ofthis period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly powerin the economy. A shift from individual to collective bargaining presents as a recession, involvingdeclines in output and asset values, and increases in unemployment and real wages. The pro-unionprovisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I,leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Courtdecisions in late 1921 induced a shift back to individual bargaining, leading the economy out of therecession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hooveradministrations enabled a major rise in corporate profits and stock market valuations throughout the1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms toadopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributingsubstantially to the stock market crash. We model the onset of the Great Depression as an equilibriumswitch from individual wage bargaining to (actual or mimicked) collective wage bargaining. Thegeneral equilibrium effects of this regime change are consistent with large decreases in output,employment, and stock prices and moderate increases in real wages.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0876.pdf

Evolution of Locations, Specialisation and Factor Returns with Two Distinct Waves of Globalisation

Jang Ping Thia

CEPDP0875. June 2008.This paper presents an economic geography model with two differentiated sectors that exhibitweaker inter and stronger intra-industry input-output linkages. Labour is also differentiatedaccording to skills in a hierarchy of tasks they can perform. Globalisation occurs in twodistinct phases, leading to the agglomeration of an industry (manufacturing) in the first wave,which is subsequently displaced by the other industry (services) when the second wave ofglobalisation takes place. Because of agglomeration effects, the increase in relativeendowment of a factor may increase its relative wages, leading to more inequality. Withinand between nations inequality can result.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0875.pdf

Product Market Deregulation and the U.S. Employment Miracle

Monique Ebell Christian Haefke

CEPDP0874. June 2008.We consider the dynamic relationship between product market entry regulation andequilibrium unemployment. The main theoretical contribution is combining a job matchingmodel with monopolistic competition in the goods market and individual bargaining. Wecalibrate the model to US data and perform a policy experiment to assess whether thedecrease in trend unemployment during the 1980's and 1990's could be attributed to productmarket deregulation. Under a traditional calibration, our results suggest that a decrease of lessthan two-tenths of a percentage point of unemployment rates can be attributed to productmarket deregulation, a surprisingly small amount. Under a small surplus calibration,however, product market deregulation can account for the entire decline in US trendunemployment over the 1980's and 1990's.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0874.pdf

Resurrecting the Participation Margin

Monique Ebell

CEPDP0873. June 2008.This paper considers a real business cycle model with search frictions in the labor market andlabor supply which is elastic along the participation margin. Previous authors have found thatsuch models generate counterfactually procyclical unemployment and a positively-slopedBeveridge curve. This paper presents a calibrated model which succeeds at generatingcountercyclical unemployment and a negatively-sloped Beveridge curve despite the presenceof a participation margin.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0873.pdf

Wage Setting Patterns and Monetary Policy: International Evidence

Giovanni Olivei Silvana Tenreyro

CEPDP0872. June 2008.Systematic differences in the timing of wage setting decisions among industrialized countriesprovide an ideal framework to study the importance of wage rigidity in the transmission ofmonetary policy. The Japanese Shunto presents the most well-known case of bunching inwage setting decisions: From February to May, most firms set wages that remain in placeuntil the following year; wage rigidity, thus, is relatively higher immediately after the Shunto.Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of thecalendar year. In contrast, wage agreements in Germany are well-spread within the year,implying a relatively uniform degree of rigidity. We exploit variation in the timing of wagesettingdecisions within the year in Japan, the United States, Germany, the United Kingdom,and France to investigate the effects of monetary policy under different degrees of effectivewage rigidity. Our findings lend support to the long-held, though scarcely tested, view thatwage-rigidity plays a key role in the transmission of monetary policy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0872.pdf

Vulnerability of Currency Pegs: Evidence from Brazil

Bernardo Guimaraes

CEPDP0871. June 2008.This paper analyses predictions of a simple model of currency crises in which the peg will beabandoned when the currency overvaluation hits a certain threshold, unknown to the agents.Due to learning about the threshold, some features usually observed in the data and identifiedwith models with multiple equilibria arise in the model. But the model yields distinctivepredictions about the behaviour of the probability and the expected magnitude of a currencydevaluation. The paper identifies the probability and expected magnitude of a devaluation ofBrazilian Real in the period leading up to the end of the Brazilian pegged exchange rateregime, using data on exchange rate options. The empirical results are consistent with modelpredictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0871.pdf

Was Germany Ever United? Evidence from Intra- and International Trade 1885-1933

Nikolaus Wolf

CEPDP0870. May 2008.This paper asks whether Germany was ever an economically integrated area. I explore thegeography of trade costs in a new data set of about 40,000 observations on regional tradeflows within and across the borders of Germany over the period 1885 – 1933. There are threekey results. First, the German Empire before 1914 was a poorly integrated economy, bothrelative to integration across the borders of the German state and internally. Second, thisinternal fragmentation had its origins in administrative borders within Germany, in ageographical barrier that divided Germany roughly along natural trade routes into east andwest, and in a considerable cultural heterogeneity within Germany prior to 1919. Third,internal integration improved along with external disintegration in the wake of the war, partlydue to border changes along the lines of ethno-linguistic heterogeneity and again with theGreat Depression. By the end of the Weimar Republic in 1933, Germany was reasonably wellintegrated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0870.pdf

Mapping Prices into Productivity in Multisector Growth Models

L. Rachel Ngai Roberto M. Samaniego

CEPDP0869. May 2008.Two issues related to mapping a multi-sector model into a reduced-form value-added modelare often neglected: the composition of intermediate goods, and the distinction between valueadded productivity and gross output productivity. We demonstrate their quantitativesignificance for the case of the well known model of Greenwood, Hercowitz and Krusell(1997), who find that about 60% of economic growth can be attributed to investment-specifictechnical change (ISTC). When we recalibrate their model to allow for even a smallequipment share of intermediates, we find that ISTC accounts for almost the entirety of postwarUS growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0869.pdf

Does Regionalism Affect Trade Liberalization Towards Non-Members?

Antoni Estevadeordal Caroline Freund Emanuel Ornelas

CEPDP0868. May 2008.We examine the effect of regionalism on unilateral trade liberalization using industry-level data onapplied MFN tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001.We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN)tariff in that sector. External liberalization is greater if preferences are granted to important suppliers.However, these “complementarity effects” of preferential liberalization on external liberalization donot arise in customs unions. Overall, our results suggest that concerns about a negative effect ofpreferential liberalization on external trade liberalization are unfounded.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0868.pdf

A Tale of Two Countries: Unions, Closures and Growth in Britain and Norway

Alex Bryson Harald Dale-Olsen

CEPDP0867. May 2008.Using linked private sector employer-employee panel data for Britain and Norway weexplore the effects of unionization on workplace closure and employment growth over theperiod 1997-2004. Unions prolonged the life of low-wage workplaces in Britain, whereasNorwegian unions increased (reduced) closure hazards in high (low) waged workplaces.Contrary to earlier studies, unions had no effect on workplace growth in Britain. In Norway,union workplaces experienced 4 percent per annum lower growth. However, the estimation ofa dynamic panel data model for Norway indicates positive long-term causal effects of uniondensity on employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0867.pdf

Multinational Firms, Monopolistic Competition and Foreign Investment Uncertainty

Arunish Chawla

CEPDP0866. April 2008.This is a model of multinational firms, which introduces option value of foreign directinvestment, into a framework of Dixit-Stiglitz type monopolistic competition. Starting from apure trading equilibrium and solving for the optimal investment rule gives a scale-up factorwhich implies existence of a wedge between markup revenues and foreign investment costs.Greater volatility and risk aversion increase this scale-up over foreign investment costsimplying a delay in the exercise of FDI option, while growing market size and nationalincome facilitate early exercise. The model is extended to include a Poisson jump process,which has policy implications for FDI reforms and explains ‘wait and watch’ behaviour ofmultinational firms better than a pure comparative advantage-trade cost framework does.While investment under uncertainty literature is based on the theory of call options, I solve‘FDI option’ as a put option, thereby also enriching the theory of real options.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0866.pdf

Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship

Niko Matouschek P Ramezzana Frédéric Robert-Nicoud

CEPDP0865. April 2008.We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0865.pdf

Union Decline in Britain

David Blanchflower Alex Bryson

CEPDP0864. April 2008.This paper investigates the demise of unionisation in British private sectorworkplaces over the last quarter century. We show that dramatic union decline hasoccurred across all types of workplace. Although the union wage premium persistsit is quite small in 2004. Negative union effects on employment growth andfinancial performance are largely confined to the 1980s. Managerial perceptions ofthe climate of relations between managers and workers has deteriorated since theearly 1980s across the whole private sector, whether the workplace is unionised ornot.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0864.pdf

Policy Uncertainty and Precautionary Savings

Francesco Giavazzi Michael F. McMahon

CEPDP0863. April 2008.In 1997 Chancellor Kohl proposed a major pension reform: he pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law - one that is crucial for our identification strategy - is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke of the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labor market choices: we find evidence of a labor supply response by those workers who can use the margin offered by part-time employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0863.pdf

Delayed Doves: MPC Voting Behaviour of Externals

Stephen Hansen Michael F. McMahon

CEPDP0862. April 2008.The use of independent committees for the setting of interest rates, such as the MonetaryPolicy Committee (MPC) at the Bank of England, is quickly becoming the norm in developedeconomies. In this paper we examine the issue of appointing external members (memberswho are outside the staff of the central bank) to these committees. We construct a model ofMPC voting behaviour, and show that members who begin voting for similar interest ratesshould not systematically diverge from each other at any future point. However, econometricresults in fact show that external members initially vote in line with internal members, butafter a year, begin voting for substantially lower interest rates. The robustness of this effect toincluding member fixed effects provides strong evidence that externals behave differentlyfrom internals because of institutional differences between the groups, and not someunobserved heterogeneity. We then examine whether career concerns can explain thesefindings, and conclude that they cannot.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0862.pdf

Private Sector Employment Growth, 1998-2004: A Panel Analysis of British Workplaces

Alex Bryson Satu Nurmi

CEPDP0861. April 2008.Using nationally representative panel data for British private sector workplaces this paperpoints to the importance of distinguishing between workplace and firm size when analysingemployment growth, and finds that the factors associated with growth differ markedlybetween single independent establishments and those belonging to multi-site firms. Resultsalso differ according to whether one adjusts for sample selection arising from workplacesurvival, and according to whether one distinguishes between growth per se and internal,organic employment growth. We find evidence at the plant level that is consistent withcreative job destruction.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0861.pdf

Tax Cuts in Open Economies

Alejandro Cuñat Szabolcs Deak Marco Maffezzoli

CEPDP0860. March 2008.A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income tax cut is partly - or, depending on parameter values, even completely - offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate the internaional trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0860.pdf

Union Density and Varieties of Coverage: The Anatomy of Union Wage Effects in Germany

Bernd Fitzenberger Karsten Kohn Alexander C. Lembcke

CEPDP0859. March 2008.Collective bargaining in Germany takes place either at the industry level or at the firm level; collective bargaining coverage is much higher than union density; and not all employees in a covered firm are necessarily covered. This institutional setup suggests to distinguish explicitly union power as measured by net union density (NUD) in a labor market segment, coverage at the firm level, and coverage at the individual level. Using linked employer-employee data and applying quantile regressions, this is the first empirical paper which simultaneously analyzes these three dimensions of union influence on the structure of wages. Ceteris paribus, a higher share of employees in a firm covered by industry-wide or firm-level contracts is associated with higher wages. Yet, individual bargaining coverage in a covered firm shows a negative impact both on the wage level and on wage dispersion. A higher union density reinforces the effects of coverage, but the effect of union density is negative at all points in the wage distribution for uncovered employees. In line with an insurance motive, higher union density compresses the wage structure and, at the same time, it is associated with a uniform leftward movement of the distribution for uncovered employees.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0859.pdf

International Trade, Minimum Quality Standards and the Prisoners' Dilemma

Dimitra Petropoulou

CEPDP0858. February 2008.Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0858.pdf

Efficiency Wages and the Economic Effects of the Minimum Wage: Evidence from a Low-Wage Labour Market

Andreas Georgiadis

CEPDP0857. February 2008.We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0857.pdf

Employment Outcomes in the Welfare State

L. Rachel Ngai Christopher A. Pissarides

CEPDP0856. February 2008.We examine the implications of tax and subsidy policies for employment in the "three worlds of welfare", Anglo-Saxon, Continental European and Scandinavian. We argue that home production is key to a proper evaluation of the employment outcomes. Anglo-Saxon low-support policies encourage more overall market employment. Continental transfer polilcies encourage more home production in services with close substitutes at home. Scandinavian policies give incentives to move home production in social services to the market but discourage other service activity. We find support for our claims in sectoral employment data for five representative countries, United States, Britain, France, Italy and Sweden.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0856.pdf

Talking Less and Moving the Market More: Is this the Recipe for Monetary Policy Effectiveness? Evidence from the ECB and the Fed

Carlo Rosa

CEPDP0855. February 2008.This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First we do a comparative study exercise. We find that on monetary policy committee meeting days both the ECB and the Fed can move market rates using either monetary policy or news shocks. However, the response of the long-end of the American term structure to the surprise component of Fed's statements is significantly larger than the reaction of European long-term yields to ECB's announcements. This result is intimately related to the higher transparency of U.S. Fed statements compared to ECB announcements rather than to the different institutional mandate of the two central banks. Second, we investigate the cross-effects i.e. the Fed's ability to move European interest rates and the corresponding ECB's capacity to move American rates. We find that the Fed has been more able to move the European interst rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0855.pdf

Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly

Dimitra Petropoulou

CEPDP0854. February 2008.A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolistic service providers to some contacts but duopolists over contacts they share in their network overlap. the intermediaries' inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0854.pdf

The Ins and Outs of European Unemployment

Barbara Petrongolo Christopher A. Pissarides

CEPDP0853. February 2008.In this paper we study the contribution of inflows and outflows to the dynamics of unemployment in three European countries, the United Kingdom, France and Spain. We compare performance in these three countries making use of both administrative and labor force survey data. We find that the impact of the 1980s reforms in Britain is evident in the contributions of the inflow and outflow rates. The inflow rate became a bigger contributor after the mid 1980s, although its significance subsided again in the late 1990s and 2000s. In France the dynamics of unemployment are driven virtually entirely by the outflow rate, which is consistent with a regime with strict employment protection legislation. In Spain, however, both rates contribute significantly to the dynamics, very likely as a consequence of the prominence of fixed-term contracts since the late 1980s.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0853.pdf

Panic on the Streets of London: Police, Crime and the July 2005 Terror Attacks

Mirko Draca Stephen Machin Robert Witt

CEPDP0852. February 2008.In this paper we study the causal impact of police on crime by looking at what happened to crime before and after the terror attacks that hit central London in July 2005. The attacks resulted in a large redeployment of police officers to central London boroughs as compared to outer London - in fact, police deployment in central London increased by over 30 percent in the six weeks following the July 7 bombings. During this time crime fell significantly in central relative to outer London. Study of the timing of the crime reductions and their magnitude, the types of crime which were more likely to be affected and a series of robustness tests looking at possible biases all make us confident that our research approach identifies a causal impact of police on crime. Implementing an instrumental variable approach shows an elasticity of crime with respect to police approximately -0.3, so that a 10 percent increase in police activity reduces crime by around 3 percent.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0852.pdf

On the Relative Gains to Immigration: A Comparison of the Labour Market Position of Indians in the USA, the UK and India

Jonathan Wadsworth Augustin de Coulon

CEPDP0851. February 2008.While most studies of the decision to immigrate focus on the absolute income differencesbetween countries, we argue that relative change in purchasing power or status, as capturedby an individual’s ranking in the wage distribution, may also be important. This will in turnbe influenced by differential levels of supply, demand and migration costs across the skilldistribution and across countries. Using data on Indian immigrants in the United States andthe UK matched to comparable data on individuals who remained in India, we show that theaverage Indian immigrant will experience a fall in their relative ranking in the wagedistribution compared to the position they would have achieved had they remained in theorigin country. The fall in relative rankings is larger for immigrants to the UK than to theUS, and largest of all for those with intermediate skills.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0851.pdf

HRM Practices and Knowledge Processes Outcomes: Empirical Evidence from a Quasi-Experiment on UK SMEs in the Tourism Hospitality and Leisure Sector

Andreas Georgiadis Christos N. Pitelis

CEPDP0850. February 2008.This paper presents empirical evidence of the relationship between human resources practicesand the effectiveness of a firm to capitalise on investment in knowledge as measured by thereturns to innovation and business development expenditure. The empirical design is basedon exploiting a natural experiment provided by a policy intervention that offers humanresources-related support to small and medium sized enterprises in the UK TourismHospitality and Leisure sector. Our findings suggest that businesses that receive support onthe area of staff training and development, in HR planning and in staff recruitment andretention generate 100%, 86% and 134% more revenue per pound spend on innovation andbusiness development compared to firms that do not receive such services. Thus, in contrastto existing empirical studies in the field, this evidence supports a strong causal link betweenhuman resources and knowledge processes and sheds some light on the “black box” thatdescribes the strategic logic between human resource management and firm performance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0850.pdf

A Swing-State Theory of Trade Protection in the Electoral College

Mirabelle Muûls Dimitra Petropoulou

CEPDP0849. February 2008.This paper develops an infinite-horizon, political agency model with a continuum of politicaldistricts, in which incumbent politicians can improve their re-election probability byattracting swing voters in key states through strategic trade protection. A unique equilibriumis shown to exist where incumbents build a reputation of protectionism through their policydecisions. We show that strategic trade protection is more likely when protectionist swingvoters have a lead over free-trade supporters in states with relatively strong electoralcompetition that represent a larger proportion of Electoral College votes. US data is used totest the hypothesis that industrial concentration in swing and decisive states is an importantdeterminant of trade protection of that industry. The empirical findings provide support forthe theory and highlight an important, and previously overlooked, determinant of tradeprotection in the US Electoral College.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0849.pdf

Information Costs, Networks and Intermediation in International Trade

Dimitra Petropoulou

CEPDP0848. February 2008.This paper presents a pairwise matching model with two-sided information asymmetry toanalyse the impact of information costs on endogenous network building and matching byinformation intermediaries. The framework innovates by examining the role of informationcosts on incentives for trade intermediation, thereby endogenising the pattern of direct andindirect trade. Intermediation is shown to unambiguously raise expected trade volume andsocial welfare by expanding the set of matching technologies available to traders. Moreover,convexity in network-building costs is necessary for both direct and indirect trade to arise inequilibrium while the pattern of trade is shown to depend on the level of information costs aswell as the relative effectiveness of direct and indirect matching technologies with changinginformation costs. The model sheds light on the relationship between information frictionsand aggregate trade volume, which may be non-monotonic as a result of conflicting effects ofinformation costs on the incentives for direct and indirect trade.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0848.pdf

Optimal External Debt and Default

Bernardo Guimaraes

CEPDP0847. February 2008.This paper analyses whether sovereign default episodes can be seen as contingencies ofoptimal international lending contracts. The model considers a small open economy withcapital accumulation and without commitment to repay debt. Taking first orderapproximations of Bellman equations, I derive analytical expressions for the equilibriumlevel of debt and the optimal debt contract. In this environment, debt relief generated byreasonable fluctuations in productivity is an order of magnitude below that generated byshocks to world interest rates. Debt relief prescribed by the model following the interest ratehikes of 1980-81 accounts for a substantial part of the debt forgiveness obtained by the mainLatin American countries through the Brady agreements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0847.pdf

On the Extent of Re-Entitlement Effects in Unemployment Compensation

Javier Ortega Laurence Rioux

CEPDP0846. January 2008.A dynamic labor matching economy is presented, in which the unemployed are either entitled tounemployment insurance (UI) or unemployment assistance (UA), and the employees are eithereligible for UI or UA upon future separations. Eligibility for UI requires a minimum duration ofcontributions and UI benefits are then paid for a limited duration. Workers are risk-averse and wagesare determined in a bilateral Nash bargain. As eligibility for UI does not automatically follow fromemployment, the two types of unemployed workers have different threat points, which deliversequilibrium wage dispersion. Most of the variables and parameters of the model are estimated usingthe French sample of the European Community Household Panel (1994-2000). We show thatextending the UI entitlement improves the situation of all groups of workers and slightly lowersunemployment, while raising UI benefits harms the unemployed on assistance and raisesunemployment. Easier eligibility fo r UI also improves the situation of all groups of workers andfavors relatively more the least well-off than longer entitlement. The re-entitlement effect in Francelowers by 10% the rise in the wage and by 13% the rise in unemployment following a 10% increase inbenefit levels.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0846.pdf

A Simple Model of the Juggernaut Effect of Trade Liberalisation

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0845. January 2008.This paper posits a formal political economy model where the principle of reciprocity inmultilateral trade talks results in the gradual elimination of tariffs. Reciprocity trade talks turneach nation’s exporters into anti-protectionists at home; they lower foreign tariffs byconvincing their own government to lower home tariffs. Due to the new array of politicalforces, each government finds it politically optimal to remove tariffs that it previously foundpolitically optimal to impose. The one-off global tariff cut then reshapes the politicaleconomy landscape via entry and exit – reducing the size/influence of import-competingsectors and increasing that of exporters. In the next round of trade talks governmentstherefore find it politically optimal to cut tariffs again. The process may continue until tariffsare eliminated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0845.pdf

Labor Market Institutions Around the World

Richard Freeman

CEPDP0844. January 2008.This paper documents the large cross-country differences in labor institutions that make thema candidate explanatory factor for the divergent economic performance of countries andreviews what economists have learned about the effects of these institutions on economicoutcomes. It identifies three ways in which institutions affect economic performance: byaltering incentives, by facilitating efficient bargaining, and by increasing information,communication, and trust. The evidence shows that labor institutions reduce the dispersion ofearnings and income inequality, which alters incentives, but finds equivocal effects on otheraggregate outcomes, such as employment and unemployment. Given weaknesses in the crosscountrydata on which most studies focus, the paper argues for increased use of micro-data,simulations, and experiments to illuminate how labor institutions operate and affectoutcomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0844.pdf

Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance

Emma Hall Carol Propper John Van Reenen

CEPDP0843. January 2008.Labor market regulation can have harmful unintended consequences. In many markets, especially for publicsector workers, pay is regulated to be the same for individuals across heterogeneous geographical labor markets.We would predict that this will mean labor supply problems and potential falls in the quality of serviceprovision in areas with stronger labor markets. In this paper we exploit panel data from the population ofEnglish acute hospitals where pay for medical staff is almost flat across the country. We predict that areas withhigher outside wages should suffer from problems of recruiting, retaining and motivating high quality workersand this should harm hospital performance. We construct hospital-level panel data on both quality - as measuredby death rates (within hospital deaths within thirty days of emergency admission for acute myocardialinfarction, AMI) - and productivity. We present evidence that stronger local labor markets significantly worsenhospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals inhigh outside wage areas having to rely more on temporary “agency staff” as they are unable to increase(regulated) wages in order to attract permanent employees. By contrast, we find no systematic role for an effectof outside wages of performance when we run placebo experiments in 42 other service sectors (includingnursing homes) where pay is unregulated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0843.pdf

Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data

Fabrice Defever Farid Toubal

CEPDP0842. December 2007.We investigate the role of a firm’s total factor productivity in its decision to import from theiraffiliates rather than from independent input suppliers. We propose a slightly modifiedversion of the Antràs and Helpman (2004) model. We assume higher fixed costs underoutsourcing and a firm-specific production function. We use detailed French firm-level datathat provides a geographical breakdown of French firms’ import at product level and theirsourcing modes in 1999. We find strong empirical support for the theoretical predictions ofthe model. In particular, high-productivity firms that have a production process intensive insuppliers’ inputs source their inputs through independent foreign suppliers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0842.pdf

What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform

Barbara Petrongolo

CEPDP0841. December 2007.This paper investigates long-term returns from unemployment compensation, exploitingvariation from the UK JSA reform of 1996, which implied a major increase in job searchrequirements for eligibility and in the related administrative hurdle. Search theory predictsthat such changes should raise the proportion of non-claimant nonemployed, withconsequences on search effort and labor market attachment, and lower the reservation wageof the unemployed, with negative effects on post-unemployment wages. I test these ideas onlongitudinal data from Social Security records (LLMDB). Using a difference in differencesapproach, I find that individuals who start an unemployment spell soon after JSAintroduction, as opposed to six months earlier, are 2.5-3% more likely to move fromunemployment into Incapacity Benefits spells, and 4% less likely to have positive earnings inthe following year. This latter employment effect only vanishes four years after the initialunemployment shock. At the same time, earnings for the treated individuals seem to be lowerthan for the non treated, but the confidence intervals around these estimated effects are quitelarge to exclude a wider variety of scenarios. These results suggest that while tighter searchrequirements were successful in moving individuals off unemployment benefits, they werenot successful in moving them onto new or better jobs, with fairly long lasting unintendedconsequences on a number of labor market outcomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0841.pdf

Robustly Optimal Monetary Policy

Kevin D. Sheedy

CEPDP0840. November 2007.This paper analyses optimal monetary policy in response to shocks using a model that avoidsmaking specific assumptions about the stickiness of prices, and thus the nature of the Phillipscurve. Nonetheless, certain robust features of the optimal monetary policy commitment arefound. The optimal policy rule is a flexible inflation target which is adhered to in the shortrun without any accommodation of structural inflation persistence, that is, inflation which itis costly to eliminate. The target is also made more stringent when it has been missed in thepast. With discretion on the other hand, the target is loosened to accommodate fully anystructural inflation persistence, and any past deviations from the inflation target are ignored.These results apply to a wide range of price stickiness models because the market failurewhich the policymaker should aim to mitigate arises from imperfect competition, not fromprice stickiness itself.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0840.pdf

The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?

Christopher A. Pissarides

CEPDP0839. November 2007.I study the cyclical behavior of an equilibrium search model with endogenous job creationand destruction, with focus on the model’s failure to match the observed cyclical volatility ofunemployment. Job creation in the model is influenced by wages in new matches. Isummarize microeconometric evidence on wages in new matches and show that the keymodel elasticities are consistent with the evidence. Therefore explanations of theunemployment volatility puzzle have to preserve the cyclical volatility of wages. I discusssome extensions of the model that can increase cyclical unemployment volatility throughmechanisms other than wage stickiness.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0839.pdf

Inflation Persistence When Price Stickiness Differs Between Industries

Kevin D. Sheedy

CEPDP0838. November 2007.There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change after a shock has dissipated, making inflation persistence much harder to explain.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0838.pdf

Intrinsic Inflation Persistence

Kevin D. Sheedy

CEPDP0837. November 2007.It is often argued that the New Keynesian Phillips curve is at odds with the data because itcannot explain inflation persistence — the difficulty of returning inflation immediately totarget after a shock without any loss of output. This paper explains how a model where newerprices are stickier than older prices is consistent with this phenomenon, even though itintroduces no deviation from optimizing, forwards-looking price setting. The probability ofadjusting new and old prices is estimated using a novel method that draws only onmacroeconomic data, and the findings strongly support the premise of the model.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0837.pdf

Lags and Leads in Life Satisfaction: A Test of the Baseline Hypothesis

Andrew E. Clark Ed Diener Yannis Georgellis Richard E. Lucas

CEPDP0836. November 2007.We look for evidence of habituation in twenty waves of German panel data: do individuals, after lifeand labour market events, tend to return to some baseline level of well-being? Although the strongestlife satisfaction effect is often at the time of the event, we find significant lag and lead effects. Wecannot reject the hypothesis of complete adaptation to marriage, divorce, widowhood, birth of child,and layoff. However, there is little evidence of adaptation to unemployment. Men are somewhat moreaffected by labour market events (unemployment and layoffs) than are women, but in general thepatterns of anticipation and adaptation are remarkably similar by sex.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0836.pdf

Creative Destruction with On-the-Job Search

Jean-Baptiste Michau

CEPDP0835. November 2007.This paper is about the labour market consequences of creative destruction with on-the-jobsearch. We consider a matching model in an economy with embodied technological progressand show that its dynamics are profoundly affected by allowing on-the-job search. We obtainthat the elasticity of unemployment with respect to growth shrinks from 1.63 to 0.13.Moreover, the underlying transmission channels change as the flow of obsolete jobspractically disappears and is replaced by a flow of job-to-job transitions. These effects persisteven if employed job seekers are significantly less efficient in the search process than theunemployed. Thus, we show that, rather than contributing to unemployment, creativedestruction induces a direct reallocation of workers from low to high productivity jobs. Theseresults could be strengthened by assuming that search efforts are unobservable by firmswhich induces more on-the-job search. However, the action of worker is no longer surplusmaximizing and, hence, the worker’s welfare is increasing in the cost of search which acts asa commitment device. Finally, we show that the model could be extended by allowing forvariable search intensity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0835.pdf

Scylla and Charybdis. The European Economy and Poland's Adherence to Gold, 1928-1936

Nikolaus Wolf

CEPDP0834. November 2007.This paper examines the timing of exit from the gold-exchange standard for European countriesbased on a panel of monthly observations 1928-1936 for two purposes: first it aims to understandthe enormous variation in monetary policy choices across Europe. I show that the pattern of exitfrom gold can be understood in terms of variation in factors commonly suggested in thetheoretical literature, which makes it possible to predict with reasonable accuracy the very monthwhen a country will exit gold in the 1930s. Second, I analyse the case of Poland more closelybecause it appears to be an intriguing outlier. Poland did not leave gold until April 1936 andsuffered through one of the worst examples of a depression, with massive deflation and acomplete collapse of industrial production. The estimated model fares worst for Poland, andpredicts an exit even later than April 1936. By closer inspection, the factors that drive thisprediction are the non-democratic character of the regime and a surprisingly high degree of tradeintegration with France. I argue that Poland’s monetary policy was determined by attempts of thePiłsudski regime to defend Poland against foreign (esp. German) aggression. I provide evidencethat strongly supports this view until about mid-1933. Ironically, just when Poland had joined thegold-bloc there were signs of a broad strategic reorientation, which paved the way for an exit in1936.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0834.pdf

Innovation in Business Groups

Sharon Belenzon Tomer Berkovitz

CEPDP0833. November 2007.Using novel data on European firms, this paper examines the effect of business group affiliation oninnovation. We find that business groups foster the scale and novelty of corporate innovation. Groupaffiliation is particularly important in industries that rely more on external finance and have a higherdegree of information asymmetry. We also find that the innovation of affiliates is less sensitive tooperating cash flows. We interpret our results as supporting the ‘bright side’ of business groupinternal capital markets and explain how legal boundaries between group affiliates mitigate theinefficiencies found in internal capital markets of US conglomerates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0833.pdf

Incentives in Competitive Search Equilibrium

Espen R. Moen A Rosen

CEPDP0832. November 2007.This paper analyses the interaction between internal agency problems within firms andexternal search frictions when workers have private information. We show that the allocationof resources is determined by a modified Hosios Rule. We then analyze the effect of changesin the macro economic variables on the wage contract and the unemployment rate. We findthat private information may increase the responsiveness of the unemployment rate tochanges in productivity. The incentive power of the wage contracts is positively related tohigh productivity, low unemployment benefits and high search frictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0832.pdf

U.S. Labor Market Dynamics Revisited

Eran Yashiv

CEPDP0831. November 2007.The picture of U.S. labor market dynamics is opaque. Empirical studies have yielded contradictoryfindings and debates have emerged regarding their implications. This paper aims at clarifying the picture,which is important for the understanding of the operation of the labor market, for the study of businesscycles, for the explanation of wage behavior, and for the formulation of policy. The paper determineswhat facts can be established, what are their implications, and what remains to be further investigated.The main contributions made here are: (i) Listing of data facts that can be agreed upon. These indicatethat there is considerable cyclicality and volatility of both accessions to employment and separations fromit. Hence, both are important for the understanding of the business cycle. (ii) Presenting the business cyclefacts of key series. (iii) Pointing to specific gaps in the data picture: disparities in the measurement of thesizeable flows between employment and the pool of workers out of the labor force, disagreements aboutthe relative volatility of job finding and separation rates across data sets, and the fact that the fit of thegross flows data with net employment growth data differs across studies and is not high. The definitecharacterization of labor market dynamics depends upon the closing of these data gaps.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0831.pdf

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

Laura Alfaro Andrew Charlton

CEPDP0830. November 2007.In this paper we distinguish different “qualities” of FDI to re-examine the relationshipbetween FDI and growth. We use ‘quality’ to mean the effect of a unit of FDI on economicgrowth. However this is difficult to establish because it is a function of many differentcountry and project characteristics which are often hard to measure Hence, we differentiate“quality FDI” in several different ways. First, we look at the possibility that the effects of FDIdiffer by sector. Second, we differentiate FDI based on objective qualitative industrycharacteristics including the average skill intensity and reliance on external capital. Third, weuse a new dataset on industry-level targeting to analyze quality FDI based on the subjectivepreferences expressed by the receiving countries themselves. Finally, we use a two-stage leastsquares methodology to control for measurement error and endogeneity. Exploiting a newcomprehensive industry level data set of 29 countries between 1985 and 2000, we find thatthe growth effects of FDI increase when we account for the quality of FDI.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0830.pdf

Cost-Benefit Analysis of Psychological Therapy

David Clark Martin Knapp Richard Layard Guy Mayraz

CEPDP0829. October 2007.At present six million people are suffering from clinical depression or anxiety disorders, but only aquarter of them are in treatment. NICE Guidelines prescribe the offer of evidence-basedpsychological therapy, but they are not implemented, due to lack of therapists within the NHS. Wetherefore estimate the economic costs and benefits of providing psychological therapy to people notnow in treatment.The cost to the government would be fully covered by the savings in incapacity benefits andextra taxes that result from more people being able to work. On our estimates the cost could berecovered within two years – and certainly within five. And the benefits to the whole economy aregreater still.This is not because we expect the extra therapy to be targeted especially at people withproblems about work. It is because the cost of the therapy is so small (£750 in total), the recoveryrates are so high (50%) and the cost of a person on IB is so large (£750 per month).These findings strongly reinforce the humanitarian case for implementing the NICEGuidelines. Current proposals for doing this would require some 8,000 extra psychological therapistswithin the NHS over the next six years.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0829.pdf

Maternal Smoking During Pregnancy and Early Child Outcomes

Emma Tominey

CEPDP0828. October 2007.We estimate the harm from smoking during pregnancy upon child birth outcomes, using arich dataset on a cohort of mothers and their births. We exploit a fixed effects approach todisentangle the correlation between smoking and birth weight from the causal effect. We findthat, despite a detailed set of controls for maternal traits, around one-third of the harm fromsmoking is explained by unobservable traits of the mother. Smoking tends to reduce birthweight by 1.7%, but has no significant effect on the probability of having a low birth weightchild, pre-term gestation or weeks of gestation. Exploring heterogeneity in the effect on birthweight, it is mothers who smoke for the 9 months of gestation that suffer the harm, whereasthere is an insignificant effect for mothers who chose to quit by month 5. Additionally, thereis evidence of potential complementarity in investment of human capital, as the impact onbirth weight of smoking is much greater for low educated mothers, even controlling for thequantity of cigarettes they smoke. We suggest policy should target the low educated mothers,offering a more holistic approach to improving child health, as quitting smoking is only halfof the battle.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0828.pdf

Testing the "Waterbed" Effect in Mobile Telephony

Christos Genakos Tommaso Valletti

CEPDP0827. October 2007.This paper examines the impact of regulatory intervention to cut termination rates of callsfrom fixed lines to mobile phones. Under quite general conditions of competition, theorysuggests that lower termination charges will result in higher prices for mobile subscribers, aphenomenon known as the “waterbed” effect. The waterbed effect has long beenhypothesized as a feature of many two-sided markets and especially the mobile networkindustry. Using a uniquely constructed panel of mobile operators’ prices and profit marginsacross more than twenty countries over six years, we document empirically the existence andmagnitude of this effect. Our results suggest that the waterbed effect is strong, but not full.We also provide evidence that both competition and market saturation, but most importantlytheir interaction, affect the overall impact of the waterbed effect on prices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0827.pdf

Information Technology, Organization, and Productivity in the Public Sector: Evidence from Police Departments

Luis Garicano Paul Heaton

CEPDP0826. October 2007.We examine how information technology (IT) contributes to organizational change, labordemand, and improved productivity in the public sector using a new panel data set of policedepartments covering 1987-2003. While IT adoption is associated with increasedadministrative and organizational complexity and use of more highly educated officers, ITitself does not appear to enhance crimefighting effectiveness. These results are robust tovarious methods for controlling for agency-level characteristics and the endogeneity of ITuse. IT investments do, however, appear to improve police productivity when complementedwith particular management practices–in this case, those associated with the Compstatprogram.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0826.pdf

Intra-Industry Foreign Direct Investment

Laura Alfaro Andrew Charlton

CEPDP0825. October 2007.We use a new firm level data set that establishes the location, ownership, and activity of 650,000multinational subsidiaries—close to a comprehensive picture of global multinational activity. Anumber of patterns emerge from the data. Most foreign direct investment (FDI) occurs between richcountries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is largerthan commonly thought, even within developed countries. More than half of all vertical subsidiariesare only observable at the four-digit level because the inputs they are supplying are so proximate totheir parent firms’ final good that they appear identical at the two-digit level. We call these proximatesubsidiaries ‘intra-industry’ vertical FDI and find that their location and activity are significantlydifferent to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are notreadily explained by the comparative advantage considerations in traditional models, where firmslocate their low skill production stages abroad in low skill countries to take advantage of factor costdifferences. We find that overwhelmingly, multinationals tend to own the stages of productionproximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0825.pdf

Technological Diversification

Miklos Koren Silvana Tenreyro

CEPDP0824. October 2007.Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find th at for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0824.pdf

The Shimer Puzzle and the Correct Identification of Productivity Shocks

Régis Barnichon

CEPDP0823. August 2007.Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks anampiflication mechanism because it cannot generate the observed business cycle fluctuationsin unemployment given labor productivity shocks of plausible magnitude. This paper arguesthat part of the problem lies with the correct identification of productivity shocks. Because ofthe endogeneity of measured labor productivity, filtering out the trend component as inShimer (2005a) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework with search unemployment, this paper estimates that close to 50% ofthe Shimer puzzle is due to the misidentification of productivity shocks. In addition, I showthat extending the search model with an aggregate demand side remarkably improves theability of the standard search model to match the moments of key labor market variables.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0823.pdf

Search Frictions, Real Rigidities and Inflation Dynamics

Carlos Thomas

CEPDP0822. August 2007.The standard New Keynesian model suffers from the so-called .macro-micro pricing conflict:in order to match the dynamics of inflation implied by macroeconomic data, the model needsto assume an average duration of price contracts which is much longer than what is observedin micro data. Here I show how departing from the standard model’s assumption of aperfectly competitive labor market can help resolve the pricing conflict. I do so by assumingsearch frictions in the labor market. In this framework, labor becomes firm-specific andmarginal cost curves become upward-sloping. This mechanism reduces the slope of the NewKeynesian Phillips curve given a frequency of price adjustment. Conversely, given anestimate of this slope, my model implies shorter price durations than the standard model. Fora plausible calibration and for different slope values, my model consistently delivers pricedurations that are roughly half of those implied by the standard model.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0822.pdf

The Evolution of Inequality in Productivity and Wages: Panel Data Evidence

Giulia Faggio Kjell Salvanes John Van Reenen

CEPDP0821. August 2007.There has been a remarkable increase in wage inequality in the US, UK and many othercountries over the past three decades. A significant part of this appears to be withinobservable groups (such as age-gender-skill cells). A generally untested implication of manytheories rationalizing the growth of within-group inequality is that firm-level productivitydispersion should also have increased. Since the relevant data do not exist in the US we utilizea UK longitudinal panel dataset covering the manufacturing and non-manufacturing sectorssince the early 1980s. We find evidence that productivity inequality has increased. Existingstudies have underestimated this increased dispersion because they use data from themanufacturing sector which has been in rapid decline. Most of the increase in individual wageinequality has occurred because of an increase in inequality between firms (and withinindustries). Increased productivity dispersion appears to be linked with new technologies assuggested by models such as Caselli (1999) and is not primarily due to an increase intransitory shocks, greater sorting or entry/exit dynamics.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0821.pdf

Trust-Based Trade

Luis Araujo Emanuel Ornelas

CEPDP0820. August 2007.Weak enforcement of international contracts can substantially reduce international trade. Wedevelop a model where agents build reputations to overcome the difficulties that thisinstitutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade.We find that the conditional probability that a firm will stop exporting decreases and itsforeign sales increase as the firm acquires greater export experience. The reason is that theinformational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of bothcurrent and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0820.pdf

Productivity, Aggregate Demand and Unemployment Fluctuations

Régis Barnichon

CEPDP0819. August 2007.This paper presents new empirical evidence on the cyclical behavior of US unemploymentthat poses a challenge to standard search and matching models. The correlation betweencyclical unemployment and the cyclical component of labor productivity switched sign at thebeginning of the Great Moderation in the mid 80s: from negative it became positive, whilestandard search models imply a negative correlation. I argue that the inconsistency arisesbecause search models do not allow output to be demand determined in the short run. Ipresent a search model with nominal rigidities that can rationalize the empirical findings, andI document two new facts about the Great Moderation that can account for the large and swiftincrease in the unemployment-productivity correlation in the mid-80s.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0819.pdf

Is Distance Dying at Last? Falling Home Bias in Fixed Effects Models of Patent Citations

Rachel Griffith Sokbae Lee John Van Reenen

CEPDP0818. August 2007.We examine the “home bias” of international knowledge spillovers as measured by the speedof patent citations (i.e. knowledge spreads slowly over international boundaries). We presentthe first compelling econometric evidence that the geographical localization of knowledgespillovers has fallen over time, as we would expect from the dramatic fall in communicationand travel costs. Our proposed estimator controls for correlated fixed effects and censoring induration models and we apply it to data on over two million citations between 1975 and1999. Home bias declines substantially when we control for fixed effects: there is practicallyno home bias for the more “modern” sectors such as pharmaceuticals andinformation/communication technologies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0818.pdf

Measuring Organization Capital in Japan: An Empirical Assessment Using Firm-Level Data

YoungGak Kim Tsutomu Miyagawa

CEPDP0817. August 2007.Globalization and the ICT revolution of the 1990s have forced many firms to reorganize in order tosurvive in a more competitive market. There are several approaches that can be used to assess themeasurement of organization capital since it is unobservable. Using an optimizing firm model andassuming that a firm holds multiple assets as suggested by Yang and Brynjolfsson (2001) andCummins (2005), we examined whether organization capital is accumulated with investment inseveral types of assets. In contrast to Cummins’s (2005) results, we found that the accumulation oforganization capital is associated with investment in R&D assets and marketing assets. Using theseresults and following Basu, Fernald, Oulton, and Srinivasan (2003), we measured the contribution oforganization capital to the conventional TFP growth. The estimation results implied that the growth oforganization capital did not have significant effects on productivity growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0817.pdf

Spend It Like Beckham?Inequality and Redistribution in the UK, 1983-2004

Andreas Georgiadis Alan Manning

CEPDP0816. August 2007.A main activity of the state is to redistribute resources. Models of the political processgenerally predict that a rise in inequality will lead to more redistribution. This paper showsthat, for the UK in the period 1983-2004, a plausibly exogenous rise in income inequality hasnot been associated with increased redistribution. We then explore this further usingattitudinal data. We show that the demand for redistribution, having shown considerablevariation over time, is at an all-time low. We argue that the decline in the demand forredistribution can mostly be accounted for by an increasing belief in the importance ofincentives though changes in preferences over the distribution of income have been importantin some sub-periods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0816.pdf

Freedom Fries

Guy Michaels Xiaojia Zhi

CEPDP0815. July 2007.Do firms choose inputs that minimize their cost of production, ignoring the attitudes of their owners and employees? We examine this question using an episode of worsening relations between the USand France: from February 2002 to March 2003, France's favorability rating in US public opinionpolls fell from 83 percent to 35 percent. Very negative attitudes towards France became common evenamong college educated Americans with high levels of income, so they were likely prevalent amongmanagers. Using data from 1999-2005, we find that the worsening relations reduced US imports fromFrance by about 15 percent and US exports to France by about 8 percent, compared to other Eurozoneor OECD countries. This decline was due in large part to a fall in France's share of the quantity ofinputs traded between the Eurozone and the US; this decline is significant even after we control for changes in the product composition of trade flows. We also find that the decline in trade w as accompanied by a similar drop in both business trips and tourist visitations of US residents to Francecompared to Western Europe. Taken together, our findings suggest that competition cannot eliminatethe effect of attitudes on firms' choice of inputs.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0815.pdf

Trade Liberalization, Outsourcing, and Firm Productivity

Ralph Ossa

CEPDP0814. July 2007.Empirical evidence suggests that trade liberalization increases firm productivity. This paperoffers a novel explanation for this finding. I develop a simple general equilibrium model oftrade in which trade liberalization leads to outsourcing as firms focus on their corecompetencies in response to tougher competition. Since firms are the better at performingtasks the closer they are to their core competencies, this outsourcing increases firmproductivity. Moreover, I also investigate the links between various technological parametersand outsourcing. In particular, I analyze how technological progress, changes in fixed costs,and changes in internal governance costs affect firms’ integration decisions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0814.pdf

Wage Distributions by Bargaining Regime: Linked Employer-Employee Data Evidence from Germany

Karsten Kohn Alexander C. Lembcke

CEPDP0813. July 2007.Using linked employer-employee data from the German Structure of Earnings Survey 2001,this paper provides a comprehensive picture of the wage structure in three wage-settingregimes prevalent in the German system of industrial relations. We analyze wagedistributions for various labor market subgroups by means of kernel density estimation,variance decompositions, and individual and firm-level wage regressions. Unions’ impactthrough collective and firm-level bargaining mainly works towards a higher wage level andreduced overall and residual wage dispersion. Yet observed effects are considerablyheterogeneous across different labor market groups. There is no clear evidence for wagefloors formed by collectively bargained low wage brackets which would operate as minimumwages for different groups of workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0813.pdf

The Effect of Information and Communication Technologies on Urban Structure

Y Ioannides Henry Overman Esteban Rossi-Hansberg Kurt Schmidheiny

CEPDP0812. July 2007.The geographic concentration of economic activity occurs because transport costs for goods, peopleand ideas give individuals and organisations incentives to locate close to each other. Historically, allof these costs have been falling. Such changes could lead us to predict the death of distance. Thispaper is concerned with one aspect of this prediction: the impact that less costly communication andtransmission of information might have on cities and the urban structure. We develop a model whichsuggests that improvements in ICT will increase the dispersion of economic activity across citiesmaking city sizes more uniform. We test this prediction using cross country data and find empiricalsupport for this conclusion.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0812.pdf

The Division of Labor, Coordination, and the Demand for Information Processing

Guy Michaels

CEPDP0811. July 2007.Since Adam Smith’s time, the division of labor in production has increased significantly, whileinformation processing has become an important part of work. This paper examines whether the needto coordinate an increasingly complex division of labor has raised the demand for clerical office workers, who process information that is used to coordinate production. In order to examine this question empirically, I introduce a measure of the complexity of an industry’s division of labor that uses the Herfindahl index of occupations it employs, excluding clerks and managers. Using US data I find that throughout the 20th century more complex industries employed relatively more clerks, andrecent Mexican data shows a similar relationship. The relative complexity of industries is persistent over time and correlated across these two countries. I further document the relationship between complexity and the employment of clerks using an early information technology (IT) revolution that took place around 1900, when telephones, typewriters, and improved filing techniques were introduced. This IT revolution raised the demand for clerks in all manufacturing industries, but significantly more so in industries with a more complex division of labor. Interestingly, recent reductions in the price of IT have enabled firms to substitute computers for clerks, and I find that more complex industries have substituted clerks more rapidly.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0811.pdf

Intergenerational Mobility and the Informative Content of Surnames

Maia Güell José V. Rodríguez Mora Chris Telmer

CEPDP0810. July 2007.We propose an alternative method for measuring intergenerational mobility. Traditional methods based on panel data provide measurements that are scarce, difficult to compare across countries and almost impossible to get across time. In particular this means that we do not know how intergenerational mobility is correlated with growth, income or the degree of inequality. Our proposal is to measure the informative content of surnames inone census. The more information does the surname have on the income of an individual, the more important is background in determining outcomes; and thus, the less mobility there is. The reason for this is that surnamesinform on family relationships because the distribution of surnames is necessarily much skewed. A large percentage of the population is bound to have a very unfrequent surname. For them the partition generated bysurnames is very informative on family linkages. First, we develop a model whose endogenous variable is the joint distribution of surnames and income. Then we explore the relationship between mobility and the informative content of surnames. We allow for assortative mating to be a determinant of both. Then, we use our methodology to show that in a large Spanish region the informative content of surnames is large and consistent with the model. We also show that it has increased over time, indicating a substantial drop in the degree ofmobility. Finally, using the peculiarities of the Spanish surname convention we show that the degree of assortative mating has also increased over time, in such a manner that might explain the decrease in mobilityobserved. Our method allows us to provide measures of mobility comparable across time. It should also allow us to study other issues related to inheritance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0810.pdf

History and Industry Location: Evidence from German Airports

Stephen Redding Daniel M. Sturm Nikolaus Wolf

CEPDP0809. July 2007.A central prediction of a large class of theoretical models is that industry location is not necessarilyuniquely determined by fundamentals. In these models, historical accident or expectations determinewhich of several steady-state locations is selected. Despite the theoretical prominence of these ideas,there is surprisingly little systematic evidence on their empirical relevance. This paper exploits thecombination of the division of Germany after the Second World War and the reunification of East andWest Germany as an exogenous shock to industry location. We focus on a particular economicactivity and establish that division caused a shift of Germany’s air hub from Berlin to Frankfurt andthere is no evidence of a return of the air hub to Berlin after reunification. We develop a body ofevidence that the relocation of the air hub is not driven by a change in economic fundamentals but isinstead a shift between multiple steady-states.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0809.pdf

The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries

Anna Lipinska

CEPDP0808. July 2007.The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior toentering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy.First, I derive the micro founded loss function that represents the objective function of theoptimal monetary policy not constrained to satisfy the criteria. I find that the optimal monetary policy should not only target inflation rates in the domestic sectors and aggregate output fluctuations but alsodomestic and international terms of trade. Second, I show how the loss function changes when themonetary policy is constrained to satisfy the Maastricht criteria. The loss function of such aconstrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the optimal monetary policy violates two criteria:concerning the CPI inflation rate and the nominal interest rate. The constrained optimal policy ischaracterized by a deflationary bias. This results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms) than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. Such a policy leads to additional welfare costs amounting to 30% of the optimal monetary policy loss.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0808.pdf

The Beveridge Curve

Eran Yashiv

CEPDP0807. June 2007.The Beveridge curve depicts a negative relationship between unemployed workers and jobvacancies, a robust finding across countries. The position of the economy on the curve givesan idea as to the state of the labour market. The modern underlying theory is the search andmatching model, with workers and firms engaging in costly search leading to randommatching. The Beveridge curve depicts the steady state of the model, whereby inflows intounemployment are equal to the outflows from it, generated by matching.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0807.pdf

Privatization, Entry Regulation and the Decline of Labor's Share of GDP: A Cross-Country Analysis of the Network Industries

Ghazala Azmat Alan Manning John Van Reenen

CEPDP0806. June 2007.Labor’s share of GDP in most OECD countries has declined over the last two decades. Someauthors have suggested that these changes are linked to deregulation of product and labormarkets. To examine this we focus on a large quasi-experiment in the OECD: theprivatization of many network industries (e.g. telecommunications and utilities). We present amodel with agency problems, imperfect product market competition and worker bargainingwhich makes clear predictions on how the labor share, employment and wages respond toprivatization and other regulatory changes. We exploit cross-country panel data on severalnetwork industries and find that privatization can account for a significant proportion of thefall of labor’s share (a fifth overall, but over half in Britain and France). The impact ofprivatization has been offset by falling barriers to entry, which consistent with theory,dampens profit margins.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0806.pdf

Economic Linkages Across Space

Henry Overman Patricia Rice Anthony J. Venables

CEPDP0805. June 2007.We develop a diagrammatic framework that can be used to study the economic linkagesbetween regions or cities. Hitherto, such linkages have not been the primary focus of eitherthe theoretical or empirical literatures. We show that our general framework can be used tointerpret both the New Economic Geography and Urban Systems literatures to help usunderstand spatial economic linkages. We then extend the theoretical framework to allow usto consider a number of additional issues which may be particularly important for analyzingthe impact of policy. Such policy analysis will also require empirical work to identify thenature of key relationships. In a final section, we consider what the existing empiricalliterature can tell us about these relationships.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0805.pdf

The Returns to Temporary Migration to the United States: Evidence from the Mexican Urban Employment Survey

Benjamin Aleman-Castilla

CEPDP0804. June 2007.Mexican migration to the United States has been a very important issue throughout the twentiethcentury, and its relevance has reached unprecedented levels during the last two decades. Even thoughthere is a huge body of literature that analyses many different aspects of this phenomenon, theeconomic performance of migrants with respect to the Mexican labour markets has received very littleattention. This paper aims at filling this gap by presenting new evidence on the effect that migration tothe United States has on labour market outcomes of Mexican workers. It uses data from the MexicanNational Survey of Urban Labour (ENEU) for the period 1994-2002. Among other advantages, thepanel structure of the survey is ideal for minimizing the problems of self-selection bias that arecommon in most of the alternative data sources. Fixed-effects estimation indicates that Mexicanworkers that migrate temporarily to the United States obtain significantly higher earnings in the U.S.labour market than in the Mexican one during the period of migration. They also tend to work longerhours and face a generally higher likelihood of non employment during the period of return migration.Finally, the gains from temporary migration are lower for more skilled workers and for thosemigrating from the most distant regions in Mexico, relative to the United States.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0804.pdf

Labor Search and Matching in Macroeconomics

Eran Yashiv

CEPDP0803. June 2007.The labor search and matching model plays a growing role in macroeconomic analysis. Thispaper provides a critical, selective survey of the literature. Four fundamental questions areexplored: how are unemployment, job vacancies, and employment determined as equilibriumphenomena? What determines worker flows and transition rates from one labor market stateto another? How are wages determined? What role do labor market dynamics play inexplaining business cycles and growth? The survey describes the basic model, reviews itstheoretical extensions, and discusses its empirical applications in macroeconomics. Themodel has developed against the background of difficulties with the use of the neoclassical,frictionless model of the labor market in macroeconomics. Its success includes the modellingof labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and —when inserted into business cycle models — improved performance of more generalmacroeconomic models. At the same time, there is evidence against the Nash solution usedfor wage setting and an active debate as to the ability of the model to account for some of thecyclical facts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0803.pdf

Jeremy Greenwood and Per Krusell, "Growth Accounting with Investment-Specific Technological Progress: A Discussion of Two Approaches" A Rejoinder

Nicholas Oulton

CEPDP0802. June 2007.The May 2007 issue of the Journal of Monetary Economics published a paper of mine entitled‘Investment-Specific Technological Progress and Growth Accounting’ which critiqued the workof Greenwood, Hercowitz and Krusell. I argued that the Greenwood-Hercowitz-Krusell (GHK)model is a special case of a two-sector, neoclassical growth model with differing rates oftechnical progress in the two sectors; that a version of Jorgensonian growth accounting can beconstructed for this two-sector model and hence for the GHK model; and that there is therefore amapping between the growth accounting concepts of total factor productivity (TFP) growth ineach of the two sectors, and GHK’s concepts of investment specific and neutral technologicalprogress. The same issue of the JME published a response by Greenwood and Krusell (‘GrowthAccounting with Investment-Specific Technological Progress: a Discussion of TwoApproaches’). This paper is a rejoinder to theirs. It attempts to delineate both the common groundand the remaining areas of disagreement.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0802.pdf

Imports and Exports at the Level of the Firm: Evidence from Belgium

Mirabelle Muûls Mauro Pisu

CEPDP0801. June 2007.This paper explores a newly-available panel data set merging balance sheet and international tradetransaction data for Belgium. Both imports and exports appear to be highly concentrated among fewfirms and seem to have become more so over time. Focusing on manufacturing, we find that factspreviously reported in the literature for exports only actually apply to imports too. We note that thenumber of trading firms diminishes as the number of export destinations or import origins increases.The same is true if we consider the number of products traded. With regard to productivitydifferentials, firms that both import and export appear to be the most productive, followed, indescending order, by importers only, exporters only and non-traders. These results point to thepresence of fixed costs; not only of exporting, but also of importing and to a process of self-selectionin both export and import markets. Also, the productivity advantage of exporters reported in theliterature may be overstated because imports were not considered.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0801.pdf

Protection for Sale Made Easy

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0800. June 2007.Formal analysis of the political economy of trade policy was substantially redirected by theappearance of Gene Grossman and Elhanan Helpman’s 1994 paper, “Protection for Sale”.Before that article a fairly wide range of approaches were favoured by various authors onvarious issues, but afterwards, the vast majority of theoretical tracts on endogenous tradepolicy have used the Protection for Sale framework (PFS for short) as their main vehicle. Thereason, of course, is that the framework is both respectable – because its microfoundationsare distinctly firmer than were those of the earlier lobbying approaches – and it is very easyto work with. Despite the popularity of the PFS framework, it appears that no one haspresented a simple diagram that illustrates how the PFS frameworks and explains why it is soeasy. This short note aims to remedy that ommission.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0800.pdf

Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage

Alejandro Cuñat Marc J. Melitz

CEPDP0799. June 2007.This paper studies the link between volatility, labor market flexibility, and international trade.International differences in labor market regulations affect how firms can adjust to idiosyncraticshocks. These institutional differences interact with sector specific differences in volatility (thevariance of the firm-specific shocks in a sector) to generate a new source of comparative advantage.Other things equal, countries with more flexible labor markets specialize in sectors with highervolatility. Empirical evidence for a large sample of countries strongly supports this theory: the exportsof countries with more flexible labor markets are biased towards high-volatility sectors. We show howdifferences in labor market institutions can be parsimoniously integrated into the workhorse model ofRicardian comparative advantage of Dornbush, Fisher and Samuelson (1977). We also show how ourmodel can be extended to multiple factors of production.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0799.pdf

Job Destruction, Job Creation and Unemployment in Transition Countries: What Can We Learn?

Giulia Faggio

CEPDP0798. May 2007.Sixteen years into the transition, the problem of high joblessness has not been solved. Of thethree explanations commonly discussed (i.e. ongoing reallocation; finished reallocation withredundant labour; wrong choice of institutional framework), we concentrated on the ongoingreallocation hypothesis.We show that there is a negative correlation between job creation in the private sectorand unemployment. We also show that long-term unemployment depends on current and pastvalues of short-term unemployment and that this path-dependence fades away as soon as wereach time t-3. We interpret this result as an indication that the process of reallocation startedat the beginning of the 1990s still influences today’s labour market. We address threecomponents of the transition debate: shock therapy versus gradualism; privatization; andpolitical change. Contrary to Godoy and Stiglitz (2006), we do not find gradualism superiorto shock therapy in terms of private sector growth. In addition, we confirm that fullprivatization is positively associated with job destruction in the state sector. Finally, we showthat during early years of democratization the state sector was dismantled more vigorouslythan in other periods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0798.pdf

Chain Indices of the Cost of Living and the Path-Dependence Problem: An Empirical Solution

Nicholas Oulton

CEPDP0797. May 2007.This paper proposes an empirically feasible method for correcting the path-dependence bias of chainindices of the cost of living. Chain indices are discrete approximations to Divisia indices and it is wellknown that the latter are path-dependent: the level of a Divisia index is affected not just by the levelof prices at the two endpoints but also by the path between the endpoints. It is also well-known that aDivisia index of the cost of living is path-independent if and only if all income elasticities are equal toone, a restriction that is decisively rejected by studies of consumer demand. In theory, the true cost ofliving index (or Konüs price index) could be derived by estimating the expenditure function. But thisseems impractical due to data limitations: the number of independent parameters rises roughly inproportion to the square of the number of commodities and consumer price indices contain hundredsof items. This paper shows how this problem can in fact be overcome empirically using a flexiblemodel of demand like the “Quadratic Almost Ideal Demand System”. The proposed method requiresdata only on prices, aggregate budget shares and aggregate expenditure. The method is applied toestimate Konüs price indices for 70 products covering nearly all the UK’s Retail Prices Index over1974-2004, with each year in turn as the base. The choice of base year for utility is found to have asignificant effect on the index, even in the low inflation period since 1990.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0797.pdf

Incentive Pay Systems and the Management of Human Resources in France and Great Britain

Richard Belfield Salima Benhamou David Marsden

CEPDP0796. May 2007.Incentive pay systems have undergone major changes in recent decades. This paper investigates use of incentive pay systems in British and French private sector establishments in 2004, focusing onpayment-by-results, merit pay, and profit sharing, using British and French workplace surveys: WERSand Réponse. Despite the stereotypes of Britain as a deregulated economy and France as a more coordinated social-market economy, French firms make considerably greater use of incentive pay, andparticularly, merit pay. The paper explores the organisational and institutional determinants of this. It finds that personnel economics and management theories explain a significant share of the within country variation in use of incentive pay systems.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0796.pdf

Firms in International Trade

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0795. May 2007.Despite the fact that importing and exporting are extremely rare firm activities, economists generallydevote little attention to the role of firms when discussing international trade. This paper summarizeskey differences between trading and non-trading firms, demonstrates how these differences present achallenge to standard trade models and shows how recent “heterogeneous-firm” models ofinternational trade address these challenges. We then make use of transaction-level U.S. trade data tointroduce a number of new stylized facts about firms and trade. These facts reveal that the extensivemargins of trade – that is, the number of products firms trade as well as the number of countries withwhich they trade – are central to understanding the well-known role of distance in dampeningaggregate trade flows.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0795.pdf

Offshoring: General Equilibrium Effects on Wages, Production and Trade

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0794. May 2007.A simple model of offshoring is used to integrate the complex gallery of results that exist in thetheoretical offshoring/fragmentation literature. The paper depicts offshoring as ‘shadowmigration’ and shows that this allows straightforward derivation of the general equilibriumeffects on prices, wages, production and trade (necessary and sufficient conditions are provided).We show that offshoring requires modification of the four HO theorems, so econometricians whoignore offshoring might reject the HO theorem when a properly specified version held in the data.We also show that offshoring is an independent source of comparative advantage and can lead tointra-industry trade in a Walrasian setting.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0794.pdf

Respect

Alan Manning

CEPDP0793. May 2007.Becker (1974) introduced to modern economics the idea that others care about what othersthink about them and derived many useful insights from this assumption. But he did notprovide a very complete description of the general equilibrium of an economy in whichpeople both demand respect from and supply respect to others. This paper analyzes theequilibrium price of respect, showing how it depends on the distribution of materialendowments and discussing whether we would expect that, as society gets richer, the marketfor respect becomes more or less important. It explains why a demand for respect is a humanuniversal in terms of Becker’s observation that this helps to provide insurance where marketsare absent. Although the demand for respect is universal, the activities that command respecthave enormous cultural diversity – the paper explains how there can be many Nash equilibriaif respect is withheld from those who violate prescribed behaviour. Finally the paperdiscusses where, in a modern economy, respect is demanded and supplied arguing it isprimarily bundled up with other goods and services because of the nature of the costs ofsupplying it.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0793.pdf

Uncertainty and the Dynamics of R&D

Nick Bloom

CEPDP0792. May 2007.Uncertainty varies strongly over time, rising by 50% to 100% in recessions and by up to200% after major economic and political shocks. This paper shows that higher uncertaintyreduces the responsiveness of R&D to changes in business conditions - a “caution-effect” -making it more persistent over time. Thus, uncertainty will play a critical role in shaping thedynamics of R&D through the business cycle, and its response to technology policy. I alsoshow that if firms are increasing their level of R&D then the effect of uncertainty will benegative, while if firms are reducing R&D then the effect of uncertainty will be positive.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0792.pdf

Entry and Asymmetric Lobbying: Why Governments Pick Losers

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0791. May 2007.Governments frequently intervene to support domestic industries, but a surprising amount ofthis support goes to ailing sectors. We explain this with a lobbying model that allows forentry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbyingexpenses to create rents. In expanding industries, entry tends to erode such rents, but indeclining industries, sunk costs rule out entry as long as the rents are not too high. Thisasymmetric appropriability of rents means losers lobby harder. Thus it is not that governmentpolicy picks losers, it is that losers pick government policy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0791.pdf

Culture Clash or Culture Club? The Identity and Attitudes of Immigrants in Britain

Alan Manning Sanchari Roy

CEPDP0790. April 2007.There is economic evidence that diversity has consequences for economic performance (see Alesinaand La Ferrara, 2005). This might have consequences for immigration policy – how many immigrantsto allow into a country and from what cultural background. But, central to such a discussion is thepace of cultural assimilation among immigrants – this under-researched topic is the focus of thispaper. It investigates the extent and determinants of British identity among those living in Britain andthe views on rights and responsibilities in societies. We find no evidence for a culture clash in general,and one connected with Muslims in particular. The vast majority of those born in Britain, of whateverethnicity or religion, think of themselves as British and we find evidence that third-generationimmigrants are more likely to think of themselves as British than second generation. Newly arrivedimmigrants almost never think of themselves as British but the longer they remain in the UK, themore likely it is that they do. This process of assimilation is faster for those from poorer and lessdemocratic countries, even though immigrants from these countries are often regarded as a particularcause for concern. Our analysis of rights and responsibilities finds much smaller differences in viewsbetween the UK-born and immigrants than within the UK-born population.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0790.pdf

Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market

Giorgio Gobbi Roberta Zizza

CEPDP0789. April 2007.The paper investigates the relationship between underground activities and financial deepening. Theaccess to external finance requires entrepreneurs to disclose credible information through formaldocumentation. This requirement may be impossible to oblige to for many informal producers wholack a proper book-keeping of their operations. For the same reason irregular workers may finddifficult to borrow for financing both consumption and housing purchase. Using panel data on Italianregional credit markets we find a strong negative impact of the share of irregular employment onoutstanding credit to the private sector. According to our estimates a shift of 1 per cent of theemployees from regular activities to irregular ones corresponds to a decline of about 2 percentagepoints in the volume of business lending and of 0.3 percentage points in outstanding credit tohouseholds, both expressed as ratios to GDP. Conversely, the feedback effects from financialdeepening to the size of the informal sector are weak and statistically not significant. Through adifference-in-difference approach exploiting the regularisation program for immigrant workerslaunched in 2002 we also identify a negative effect of the irregular labour on banks’ entry decisions inthe local credit markets, now defined in terms of provinces.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0789.pdf

Americans Do I.T. Better: US Multinationals and the Productivity Miracle

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0788. April 2007.The US has experienced a sustained increase in productivity growth since the mid-1990s, particularly in sectorsthat intensively use information technologies (IT). This has not occurred in Europe. If the US “productivitymiracle” is due to a natural advantage of being located in the US then we would not expect to see any evidenceof it for US establishments located abroad. This paper shows in fact that US multinationals operating in the UKdo have higher productivity than non-US multinationals in the UK, and this is primarily due to the higherproductivity of their IT. Furthermore, establishments that are taken over by US multinationals increase theproductivity of their IT, whereas observationally identical establishments taken over by non-US multinationalsdo not. One explanation for these patterns is that US firms are organized in a way that allows them to use newtechnologies more efficiently. A model of endogenously chosen organizational form and IT is developed toexplain these new micro and macro findings.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0788.pdf

The Effect of Marital Breakup on the Income Distribution of Women with Children

Elizabeth O. Ananat Guy Michaels

CEPDP0787. April 2007.Having a female firstborn child significantly increases the probability that a woman’s first marriage breaks up. Recent work has exploited this exogenous variation to measure the effect of marital breakup on economic outcomes, and has concluded that divorce has little effect on women’s average household income. Employing an Abadie (2003) technique that allows us to look at the impact of marital breakup throughout the income distribution, however, we find that divorce greatly increases the probability that a woman lives in a household with income in the bottom quartile. While women partially offset the loss of spousal earnings with child support, welfare, combining households, and substantially increasing their labor supply, divorce significantly increases the odds that a woman with children is poor.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0787.pdf

Seigniorage

Willem Buiter

CEPDP0786. April 2007.In this paper I analyse four different but related concepts, each of which highlights someaspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (the interest bill saved by the authorities on the outstanding stock of base money liabilities), (3) theinflation tax (the reduction in the real value of the stock of base money due to inflation and (4) the operating profits of the central bank, or the taxes paid by the Central Bank to the Treasury.To understand the relationship between these four concepts, an explicitly intertemporalapproach is required, which focuses on the present discounted value of the current and future resource transfers between the private sector and the state. Furthermore, when the Central Bank is operationally independent, it is essential to decompose the familiar consolidated ‘government budget constraint’ and consolidated ‘government intertemporal budget constraint’ into the separate accountsand budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate the financial constraints on the Central Bank’s ability to pursue and achieve an inflation target, and theimportance of cooperation and coordination between the Treasury and the Central Bank when facedwith financial sector crises involving the need for long-term recapitalisation or when confronted with the need to mimic Milton Friedman’s helicopter drop of money in an economy faced with a liquidity trap.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0786.pdf

Productivity Growth, Knowledge Flows and Spillovers

Gustavo Crespi Chiara Criscuolo Jonathan Haskel Matthew Slaughter

CEPDP0785. April 2007.This paper explores the role of knowledge flows and TFP growth by using direct survey data onknowledge flows linked to firm-level TFP growth data. Our knowledge flow data correspond to thekind of information flows often argued, especially by policy-makers, as important, such as within thefirm, or from suppliers, purchasers, universities and competitors. We examine three questions (a)What is the source of knowledge flows? (b) To what extent do such flows contribute to productivitygrowth? (c) Do such flows constitute a spillover flow of free knowledge? Our evidence show that themain sources of knowledge are competitors; suppliers; plants that belong to the same group anduniversities. We conclude that the main “free” information flow spillover is from competitors and thatmulti-national presence may be a proximate source of this spillover.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0785.pdf

The Marginal Utility of Income

Richard Layard Guy Mayraz Stephen Nickell

CEPDP0784. March 2007.In normative public economics it is crucial to know how fast the marginal utility of income declinesas income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and forthe (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectionalsurveys of subjective happiness and two panel surveys. Altogether, the data cover over 50 countriesand time periods between 1972 and 2005. In each of the six very different surveys, using a number ofassumptions, we are able to estimate the elasticity of marginal utility with respect to income. Weobtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in thepopulation. We also examine whether these estimates (which are based directly on the scale ofreported happiness) could be biased upwards if true utility is convex with respect to reportedhappiness. We find some evidence of such bias, but it is small—yielding a new estimated elasticity of1.24 for the combined sample.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0784.pdf

Information Technology, Organisational Change and Productivity Growth: Evidence from UK Firms

Gustavo Crespi Chiara Criscuolo Jonathan Haskel

CEPDP0783. March 2007.We examine the relationships between productivity growth, IT investment and organisational change (∆O) using UK firm data. Consistent with the small number of other micro studies we find (a) IT appears to have high returns in a growth accounting sense when ∆O is omitted; when ∆O is included the IT returns are greatly reduced, (b) IT and ∆O interact in their effect on productivity growth, (c) non-IT investment and ∆O do not interact in their effect on productivity growth. Some new findings are (a) ∆O is affected by competition; (b) US-owned firms are much more likely to introduce ∆O relative to foreign owned firms who are more likely still relative to UK firms; (c) our predicted measured TFP growth slowdown for firms who are not doing ∆O and/or are in the early stages of IT investment compare well with the macro numbers documenting a UK measured TFP growth slowdown.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0783.pdf

Inflation Premium and Oil Price Volatility

Paul Castillo Carlos Montoro Vicente Tuesta

CEPDP0782. March 2007.This paper provides a fully micro-founded New Keynesian framework to study the interactionbetween oil price volatility, pricing behavior of firms and monetary policy. We show that when oilhas low substitutability, firms find it optimal to charge higher relative prices as a premium incompensation for the risk that oil price volatility generates on their marginal costs. Overall, in generalequilibrium, the interaction of the aforementioned mechanisms produces a positive relationshipbetween oil price volatility and average inflation, which we denominate inflation premium. Wecharacterize analytically this relationship by using the perturbation method to solve the rationalexpectations equilibrium of the model up to second order of accuracy. The solution implies that theinflation premium is higher when: a) oil has low substitutability, b) the Phillips Curve is convex, andc) the central bank puts higher weight on output fluctuations. We also provide some quantitativeevidence showing that a calibrated model for the US with an estimated active Taylor rule produces asizable inflation premium, similar to the levels observed in the US during the 70s.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0782.pdf

Why Has the British National Minimum Wage Had Little or No Impact on Employment?

David Metcalf

CEPDP0781. April 2007.A century has passed since the first call for a British national minimum wage (NMW).That remarkable Fabian tract discussed wage setting, coverage, monopsony,international labour standards, inspection and compliance and the interaction betweenthe NMW and the social security system. The NMW was finally introduced in 1999.It has raised the real and relative pay of low wage workers, narrowed the gender paygap and now covers around 1-worker-in-10. The consequences for employment havebeen extensively analysed using information on individuals, areas and firms. There islittle or no evidence of any employment effects. The reasons for this include: animpact on hours rather than workers; employer wage setting and labour marketfrictions; offsets via the tax credit system; incomplete compliance; improvements inproductivity; an increase in the relative price of minimum wage-produced consumerservices; and a reduction in the relative profits of firms employing low paid workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0781.pdf

Monetary Policy Committees and Interest Rate Smoothing

Carlos Montoro

CEPDP0780. February 2007.We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisionsare taken by a single policymaker, considering instead that monetary policy decisions are takencollectively in a committee. We introduce a Monetary Policy Committee (MPC), whose membershave different preferences between output and inflation variability and have to vote on the level of theinterest rate. This paper helps to explain interest rate smoothing from a political economy point ofview, in which MPC members face a bargaining problem on the level of the interest rate. In thisframework, the interest rate is a non-linear reaction function on the lagged interest rate and theexpected inflation. This result comes from a political equilibrium in which there is a strategicbehaviour of the agenda setter with respect to the rest of the MPC’s members. Our approach can alsoreproduce both features documented by the empirical evidence on interest rate smoothing: a) themodest response of the interest rate to inflation and output gap; and b) the dependence on laggedinterest rate; features that are difficult to reproduce in standard New Keynesian models all together. Italso provides a theoretical framework on how disagreement among policymakers can slow down theadjustment on interest rates and on “menu costs” in interest rate decisions. Furthermore, a numericalexercise shows that this inertial behaviour of the interest rate is internalised by the economic agentsthrough an increase in expected inflation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0780.pdf

The Impact of Private Ownership, Incentives and Local Development Objectives on University Technology Transfer Performance

Sharon Belenzon Mark Schankerman

CEPDP0779. September 2007.We study the impact of private ownership, incentive pay and local development objectives onuniversity licensing performance. We develop and test a simple contracting model of technologylicensing offices, using new survey information together with panel data on U.S. universities for1995-99. We find that private universities are much more likely to adopt incentive pay than publicones, but ownership does not affect licensing performance conditional on the use of incentive pay.Adopting incentive pay is associated with about 30-40 percent more income per license. Universitieswith strong local development objectives generate about 30 percent less income per license, but aremore likely to license to local (in-state) startup companies. In addition, we show that governmentconstraints on university licensing activity are .costly. in terms of foregone license income and thecreation of start-up companies. These results are robust to controls for observed and unobservedheterogeneity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0779.pdf

Decomposing the Growth in Residential Land in the United States

Henry Overman Diego Puga Matthew Turner

CEPDP0778. February 2007.This paper decomposes the growth in land occupied by residences in the United States to give therelative contributions of changing demographics versus increases in the land area used by individualhouseholds. Between 1976 and 1992 the amount of residential land in the United States grew 47.5%while population only grew 17.8%. At first glance, this suggests an important role for per-householdincreases.However, the calculations in this paper show that only 24.3% of the growth in residential landarea can be attributed to State level changes in land per household. 37.5% is due to overall populationgrowth, 5.9% to the shift of population towards States with larger houses, 22.7% to an increase in thenumber of households over this period, and the remaining 9.5% to interactions between these changes.There are large differences across states and metropolitan areas in the relative importance of thesecomponents.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0778.pdf

Conflict-Induced Displacement and Labour Market Outcomes: Evidence from Post-War Bosnia and Herzegovina

Florence Kondylis

CEPDP0777. November 2007.This study uses a longitudinal data source to study the effects of conflict-induced displacement onlabour market outcomes for Bosnians in post-war Bosnia and Herzegovina. To account forendogeneity in the displacement status, I exploit the fact that the level of violence in the pre-warresidence likely affected the displacement decision for Bosnians and yet is not associated to economicperformance. I find evidence of positive selection into displacement, i.e. more "able" individuals interms of labour market outcomes are more likely to be displaced, and that displaced Bosnians menand women are less likely to be in work relative to stayers. Interestingly, whereas this translates intohigher unemployment for men, it decreases women's participation with no effect on unemploymentonce selection is accounted for. The informality of the labour market in BiH and the destruction ofnetworks are not only the most plausible candidates to explain the high cost of displacement in termsof labour market outcomes, but they also help rationalise the lack of an effect on participation fordisplaced men. However, differences in selection suggest that the experience of war was highlycontrasted along gender lines and that sociological and cultural factors may also play a significantrole.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0777.pdf

Is Numérairology the Future of Monetary Economics?Unbundling numéraire and medium of exchange through a virtual currency and a shadow exchange rate

W.H. Buiter

CEPDP0776. January 2007.The paper discusses some fundamental problems in monetary economics associated with thedetermination and role of the numéraire. The issues are introduced by formalising a proposal,attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling thenuméraire and medium of exchange/means of payment functions of money. The monetary authoritiesmanage the exchange rate between the numéraire (‘sterling’) and the means of payment (‘drachma’).The short nominal interest rate on sterling bonds can then be used to target stability for the sterlingprice level. The paper puts question marks behind two key bits of conventional wisdom incontemporary monetary economics. The first is the assumption that the monetary authorities defineand determine the numéraire used in private transactions. The second is the proposition that pricestability in terms of that numéraire is the appropriate objective of monetary policy. The paper alsodiscusses the merits of the next step following the decoupling of the numéraire from the currency:doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominalrigidities, monetary economics needs to devote more attention to numérairology - the study of theindividual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0776.pdf

Economics and Politics of Alternative Institutional Reforms

Francesco Caselli Nicola Gennaioli

CEPDP0775. January 2007.We compare the economic consequences and political feasibility of reforms aimed at reducingbarriers to entry (deregulation) and improving contractual enforcement (legal reform). Deregulationfosters entry, thereby increasing the number of firms (entrepreneurship) and the average quality ofmanagement (meritocracy). Legal reform also reduces financial constraints on entry, but in addition itfacilitates transfers of control of incumbent firms, from untalented to talented managers. Since whenincumbent firms are better run entry by new firms is less profitable, in general equilibrium legalreform may improve meritocracy at the expense of entrepreneurship. As a result, legal reformencounters less political opposition than deregulation, as it preserves incumbents’ rents, while at thesame time allowing the less efficient among them to transfer control and capture (part of) the resultingefficiency gains. Using this insight, we show that there may be dynamic complementarities in thereform path, whereby reformers can skillfully use legal reform in the short run to create a constituencysupporting future deregulations. Generally speaking, our model suggests that “Coasian” reformsimproving the scope of private contracting are likely to mobilize greater political support because —rather than undermining the rents of incumbents — they allow for an endogenous compensation oflosers. Some preliminary empirical evidence supports the view that the market for control ofincumbent firms plays an important role in an industry’s response to legal reform.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0775.pdf

Union Organization in Great Britain

Alex Bryson P Willman

CEPDP0774. January 2007.Union membership and density in Britain has experienced substantial decline since 1979. Thefall in private sector membership and density has been much greater than in the public sector.The size of the union sector, measured by employer recognition, has shrunk. Membershipdecline has been accompanied by financial decline. Much of the decline occurred before1997, under Conservative governments. Since 1997 and the return of a Labour government,the position has in some respects stabilized. Currently, unions have a substantially reducedeconomic impact, but a continued, if limited, role in workplace communication and grievancehandling, often as part of a voice regime including non union elements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0774.pdf

The Plant Size-Place Effect: Agglomeration and Monopsony in Labour Markets

Alan Manning

CEPDP0773. January 2007.This paper shows, using data from both the US and the UK, that average plant size is larger indenser markets. However, many popular theories of agglomeration – spillovers, costadvantages and improved match quality – predict that establishments should be smaller incities. The paper proposes a theory based on monopsony in labour markets that can explainthe stylized fact – that firms in all labour markets have some market power but that they haveless market power in cities. It also presents evidence that the labour supply curve toindividual firms is more elastic in larger markets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0773.pdf

The Effect of Trade on the Demand for Skill - Evidence from the Interstate Highway System

Guy Michaels

CEPDP0772. December 2006.Since changes in trade openness are typically confounded with other factors, it has been difficult toidentify the labor market consequences of increased international trade. The advent of the UnitedStates Interstate Highway System provides a unique policy experiment, which I use to identify theeffect of reducing trade barriers on the relative demand for skilled labor. The Interstate HighwaySystem was designed to connect major metropolitan areas, to serve national defence and to connectthe United States to Canada and Mexico. As a consequence – though not an objective – many ruralcounties were also connected to the highway system. I find that these counties experienced anincrease in trade-related activities, such as trucking and retail sales, by 7-10 percentage points percapita. Most significantly, by increasing trade the highways raised the relative demand for skilledmanufacturing workers in counties with a high endowment of human capital and reduced it elsewhere,consistent with the predictions of the Heckscher-Ohlin model.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0772.pdf

Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods

Gianluca Benigno Christoph Theonissen

CEPDP0771. December 2006.This paper addresses the consumption-real exchange rate anomaly. International real businesscycle models based on complete financial markets predict a unitary correlation between thereal exchange rate and the ratio of home to foreign consumption when subjected to supplyside shocks. In the data, this correlation is usually small and often negative. This paper showsthat this anomaly can be successfully addressed by models that have an incomplete financialmarket structure and a non-traded as well as traded goods production sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0771.pdf

Term Limits and Electoral Accountability

Michael Smart Daniel M. Sturm

CEPDP0770. December 2006.Periodic elections are the main instrument through which voters can hold politiciansaccountable. From this perspective term limits, which restrict voters’ ability to rewardpoliticians with re-election, appear counterproductive. We show that despite the discipliningeffect of elections, term limits can be ex ante welfare improving from the perspective ofvoters. By reducing the value of holding office term limits can induce politicians toimplement policies that are closer to their private preferences. Such “truthful” behavior byincumbents in turn results in better screening of incumbents. We show that the combinationof these two effects can strictly increase the utility of voters.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0770.pdf

Multi-Product Firms and Trade Liberalization

Andrew B. Bernard Stephen Redding Peter K. Schott

CEPDP0769. December 2006.This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during tradeliberalization. Firm productivity in a given product is modeled as a combination of firm-level “ability” and firmproduct-level “expertise”, both of which are stochastic and unknown prior to the firm’s payment of a sunk costof entry. Higher firm-level ability raises a firm’s productivity across all products, which induces a positivecorrelation between a firm’s intensive (output per product) and extensive (number of products) margins. Tradeliberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shedmarginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce asmaller range of products after liberalization, they increase the share of products sold abroad as well as exportsper product. All of these adjustments are shown to be relatively more pronounced in countries’ comparativeadvantage industries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0769.pdf

Accounting for Collective Action: Resource Acquisition and Mobilization in British Unions

Alex Bryson P Willman

CEPDP0768. December 2006.The paper uses two data sources to map trends in resource availability for trade unions inBritain. Union resources exist on the one hand in the form of subscription income andaccumulated assets shown in union accounts and, on the other, establishment level resourcesprovided by employers and union members. The paper documents a substantial decline inboth forms of resource across the period 1990 -2004 and attempts to explain both the reasonsfor this decline and its consequences for employee representation in Britain.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0768.pdf

Shifts in Economic Geography and their Causes

Anthony J. Venables

CEPDP0767. December 2006.This paper analyses some of the forces that are changing the spatial distribution of activity inthe world economy. It draws on the 'new economic geography' literature to argue theimportance of increasing returns to scale and cumulative causation processes in shaping theproductivity and comparative advantage of different regions. In the presence of suchincreasing returns there may be persistent spatial disparities in productivity. Economicdevelopment will tend to be 'lumpy', with some regions (countries, or smaller areas such ascities) experiencing rapid growth and others being left behind.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0767.pdf

The Long-Term Consequences of Regional Specialization

Guy Michaels

CEPDP0766. December 2006.What are the consequences of resource-based regional specialization, when it persists over a longperiod of time? While much of the literature argues that specialization is beneficial, recent worksuggests it may be costly in the long run, due to economic or political reasons. I examine this questionempirically, using exogenous geological variation in the location of subsurface oil in the SouthernUnited States. I find that oil abundant counties are highly specialized: for many decades their miningsector was almost as large as their entire manufacturing sector. During the 1940s and 1950s, oilabundant counties enjoyed per capita income that was 20-30 percent higher than other nearbycounties, and their workforce was better educated. But whereas in 1940 oil production crowded outagriculture, over the next 50 years it caused the oil abundant counties to develop a smallermanufacturing sector. This led to slower accumulation of human capital in the oil abundant counties,and to a narrowing of per capita income differentials to about 5 percentage points. Despite this caveat,the gains from specialization were large, and specialization had little impact on the fraction of totalincome spent by local government or on income inequality.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0766.pdf

American Economic Development Since the Civil War or the Virtue of Education

Fabrice Murtin

CEPDP0765. December 2006.This paper is the first empirical framework that explains the phenomenon of fast growthcombined with the demographic transition occurring in the United States since 1860. Ipropose a structural model that unifies those events through the role of education: the keyfeature is that parental education determines simultaneously fertility, mortality and children'seducation, so that the accumulation of education from one generation to another explains bothfast growth and the reduction of fertility and mortality rates. Using original data, the model isestimated and fits in a remarkable way income, the distribution of education and agepyramids. Moreover, some historical data on Blacks, assumed to constitute the bottom of thedistribution of education, show that the model predicts correctly the joint distribution offertility and education, and that of mortality and education. Comparisons with the PSIDsuggest that the intergenerational correlation of income is also well captured. Thus, thismicrofunded growth model based on human capital accumulation accounts for many traits ofAmerican economic development since 1860. In a second step, I investigate the long-runinfluence of income inequality on growth. Because children's human capital is a concavefunction of parental income, income inequality slows down the accumulation of humancapital across generations and hence growth. Simulations show that this effect is large.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0765.pdf

The Impact of Central Bank Announcements on Asset Prices in Real Time: Testing the Efficiency of the Euribor Futures Market

Carlo Rosa Giovanni Verga

CEPDP0764. December 2006.This paper examines the effect of European Central Bank communication on the pricediscovery process in the Euribor futures market using a new tick-by-tick dataset. First, weshow that two pieces of news systematically hit financial markets on Governing Councilmeeting days: the ECB policy rate decision and the explanation of its monetary policy stance.Second, we find that the unexpected component of ECB explanations has a significant andsizeable impact on futures prices. This indicates that the ECB has already acquired somecredibility: financial markets seem to believe that it does what it says it will do. Finally, ourresults suggest that the Euribor futures market is semi-strong form informational efficient.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0764.pdf

The Effect of Trade Liberalization on Informality and Wages: Evidence from Mexico

Benjamin Aleman-Castilla

CEPDP0763. December 2006.This paper studies the impact of NAFTA on informality and real wages in Mexico. Using a dynamicindustry model with firm heterogeneity, it is predicted that import tariff elimination could reduce theincidence of informality by making more profitable to some firms to enter the formal sector, forcingthe less productive informal firms to exit the industry, and inducing the most productive formal firmsto engage in trade. The model also predicts market share reallocations towards the most productivefirms, and an increase in real wages due to the increased labour demand by these firms. Using data onMexican and U.S. import tariffs together with the Mexican National Survey of Urban Labour(ENEU), I find that reductions in the Mexican import tariffs are significantly related to reductions inthe likelihood of informality in the tradable industries. I also find that informality decreases less inindustries with higher levels of import penetration, while it decreases more in industries that arerelatively more export oriented. Finally, I confirm that the elimination of the Mexican import tariffs isrelated to an increase in real wages, and that the elimination of the U.S. import tariff has contributedto the expansion of the formal-informal wage differentials.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0763.pdf

An R&D-Based Model of Multi-Sector Growth

L. Rachel Ngai Roberto M. Samaniego

CEPDP0762. December 2006.We develop a multi-sector general equilibrium model in which productivity growth is drivenby the production of sector-specific knowledge. In the model, we find that long rundifferences in total factor productivity growth across sectors are independent of theparameters of the knowledge production function except for one, which we term the fertilityof knowledge. Differences in R&D intensity are also independent of most other parameters.The fertility of knowledge in the capital sector is central to the growth properties of the modeleconomy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0762.pdf

Job Creation and Job Destruction in the Presence of Informal Labour Markets

Mariano Bosch

CEPDP0761. November 2006.Recessions and policy interventions in labour markets in developing countries arecharacterized not only by changes in the unemployment rate, but also by changes in theproportion of formal or protected jobs. This reallocation between formal and informal jobs islarge and occurs mainly because the job finding rate of formal jobs reacts substantially morethan the job finding rate of informal jobs. This paper presents a search and matching model tocapture this fact. I assume that firms operate the within firm margin of formality, choosing tolegalize only those matches that are good enough to compensate the costs of formality. In thisframework, recessions or stricter regulations in the labour market trigger two effects. Asexpected, they lower the incentives to post vacancies (meeting effect), but also affect thefirms’ hiring standards, favouring informal contracts (offer effect). This new channel shedslight on how the actions of policy makers alter the outcomes in an economy with informaljobs. For instance, attempts to protect employment by increasing .ring costs will reallocateworkers to informal jobs, where job separation is high. They are also likely to increaseunemployment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0761.pdf

Owners of Developed Land versus Owners of Undeveloped Land: Why Land Use is More Constrained in the Bay Area than in Pittsburgh

Christian Hilber Frédéric Robert-Nicoud

CEPDP0760. November 2006.We model residential land use constraints as the outcome of a political economy game between owners of developed and owners of undeveloped land. Land use constraints are interpreted as shadow taxes that increase the land rent of already developed plots and reduce the amount of new housing developments. In general equilibrium, locations with nicer amenities are more developed and, as a consequence, more regulated. We test our model predictions by geographically matching amenity, land use, and historical Census data to metropolitan area level survey data on regulatory restrictiveness. Following the predictions of the model, we use amenities as instrumental variables and demonstrate that metropolitan areas with better amenities are more developed and more tightly regulated than other areas. Consistent with theory, metropolitan areas that are more regulated also grow more slowly.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0760.pdf

The CEP-OECD Institutions Data Set (1960-2004)

William Nickell

CEPDP0759. November 2006.This dataset contains information about the evolution of labour market institutions in twenty OECD countries from 1960 to 2004.The countries in the sample are:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States

Where possible the data refers to West Germany throughout. Note that the temporal coverage of these data differs from series to series and country to country.

The accompanying data can be downloaded at the link above

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0759.pdf

Fat City: The Relationship Between Urban Sprawl and Obesity

Jean Eid Henry Overman Diego Puga Matthew Turner

CEPDP0758. November 2006.We study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0758.pdf

Unemployment and Hours of Work: The North Atlantic Divide Revisited

Christopher A. Pissarides

CEPDP0757. October 2006.I examine the dynamic evolutions of unemployment, hours of work and the service sharesince the war in the United States and Europe. The theoretical model brings together allthree and emphasizes technological growth. Computations show that the very lowunemployment in Europe in the 1960s was due to the high productivity growth associatedwith technological catch-up. Productivity also played a role in the dynamics of hours buta full explanation for the fast rise of service employment and the big fall in aggregatehours needs further research. Taxation has played a role but results are mixed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0757.pdf

Exploring the Detailed Location Patterns of UK Manufacturing Industries Using Microgeographic Data

Gilles Duranton Henry Overman

CEPDP0756. October 2006.We use a point-pattern methodology to explore the detailed location patterns of UKmanufacturing industries. In particular, we consider the location of entrants and exitersvs. continuing establishments, domestic- vs. foreign-owned, large vs. small, and affiliatedvs. independent. We also examine co-localisation between vertically linked industries.Our analysis provides a set of new stylised facts and confirmation for others.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0756.pdf

International Financial Integration and Entrepreneurship

Laura Alfaro Andrew Charlton

CEPDP0755. October 2006.We explore the relation between international financial integration and the level ofentrepreneurial activity in a country. Using a unique data set of approximately 24 million firmsin nearly 100 countries in 1999 and 2004, we find suggestive evidence that internationalfinancial integration has been associated with higher levels of entrepreneurial activity. Ourresults are robust to using various proxies for entrepreneurial activity such as entry, size, andskewness of the firm-size distribution; controlling for level of economic development,regulation, institutional constraints, and other variables that might affect the businessenvironment; and using different empirical specifications. We further explore various channelsthrough which international financial integration can affect entrepreneurship (a foreign directinvestment channel and a capital/credit availability channel) and provide consistent evidence tosupport our results.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0755.pdf

The Impact of Immigration on the Structure of Male Wages: Theory and Evidence from Britain

Marco Manacorda Alan Manning Jonathan Wadsworth

CEPDP0754. October 2006.Immigration to the UK has risen in the past 10 years and has had a measurable effect on thesupply of different types of labour. But, existing studies of the impact of immigration on thewages of native-born workers in the UK (e.g. Dustmann, Fabbri and Preston, 2005) have failedto find any significant effect. This is something of a puzzle since Card and Lemieux, (2001) haveshown that changes in the relative supply of educated natives do seem to have measurable effectson the wage structure. This paper offers a resolution of this puzzle – natives and immigrants areimperfect substitutes, so that an increase in immigration reduces the wages of immigrantsrelative to natives. We show this using a pooled time series of British cross-sectional micro dataof observations on male wages and employment from the mid-1970s to the mid-2000s. This lackof substitution also means that there is little discernable effect of increased immigration on thewages of native-born workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0754.pdf

Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002

Mariano Bosch William Maloney

CEPDP0753. October 2006.This paper applies recent advances in the study of labor market dynamics to a representativedeveloping country with a large unregulated of “informal” sector, Mexico. It finds, first, that theformal salaried sector shows the same procyclical job finding rate and mildly countercyclicalseparation behavior identified in the recent US literature by Shimer (2005a) and Hall (2005). Theunregulated informal sector, however, shows reasonable acyclicality in the job finding ratecoupled with sharp countercyclical movements in the job separation rate, consistent withstandard small firm dynamics and Davis and Haltiwanger (1992 and 1999). The differentialbehavior of regulated and unregulated sectors, and the finding of relative wage rigidity in theformer, sheds suggestive light on the roots of countercyclical job finding behavior in the US.Second, the patterns of worker transitions between all sectors, formal and informal correspond tothe job-to-job dynamics observed in the US and not to the traditional idea of informalityconstituting the inferior sector of a segmented market. That said, the counter cyclical job findingin the formal sector combined with the acyclical job finding in informality does lead to the latterabsorbing relatively more labor during downturns, even as its increased separation rates drivemovements in unemployment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0753.pdf

Individual Employee Voice: Renegotiation and Performance Management in Public Services

David Marsden

CEPDP0752. October 2006.Periodically, the ‘zone of acceptance’ within which management may use its authority to direct employees’ work needs to be adapted to the changing needs of organisations. This article focuses especially on the non-codified elements of employees’ work, such as those commonly the subject of ‘psychological contracts’, and considers the role of individual employee voice in the process of adaptation, and how it relates to more familiar forms of collective employee voice. It is argued that the process can be analysed as a form of integrative bargaining, and applies the framework from Walton and McKersie. Employee voice enters into this process by virtue of consideration of the respective goals and preferences of both parties. The element of employee voice may be very weak when new work goals and priorities are imposed unilaterally by management, and they may be strong when full consideration is given to the changing needs of both parties. Two examples from work on performance management in the public services are used to illustrate these processes. The article concludes with a discussion of the ways in which collective employee voice may help to reinforce individual level integrative negotiation. The article seeks to contribute to the recent work on why employers choose employee voice mechanisms by broadening the range of policies that should be taken into account, and in particular looking at the potential of performance management as one such form.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0752.pdf

Lowering Child Mortality in Poor Countries: The Power of Knowledgeable Parents

Peter Boone Zhaoguo Zhan

CEPDP0751. October 2006.Why do over 20% of children die in some poor countries, while in others only 2% die? Weexamine this question using survey data covering 278,000 children in 45 low-income countries.We find that parents’ education and a mother’s propensity to seek out modern healthcare areempirically important when explaining child survival, while the prevalence of common diseases,along with infrastructure such as improved water and sanitation, are not. Using a GINIcoefficient we construct for treatment services, we find that public and private health systems are“equally unequal”, that is, both tend to favor children in relatively well-off households, andneither appears superior at improving outcomes in very poor communities. These facts contrastwith a common view that a much-expanded public health sector is necessary to reduce childmortality. Instead, we believe the empirical evidence points to the essential role of parents asadvocates for their child’s health. If we can provide better health knowledge and generaleducation to parents, a private healthcare sector can arise to meet demand. We provide evidencethat this alternative route to low mortality is indeed a reason behind the current success of manycountries with low child mortality, including Vietnam, Indonesia, Egypt, and the Indian state ofKerala. Finally, we calculate a realistic package of interventions that target education, healthknowledge and treatment seeking could reduce child mortality by 32%.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0751.pdf

Information and Communication Technologies in a Multi-Sector Endogenous Growth Model

Evangelia Vourvachaki

CEPDP0750. August 2006.This paper investigates the impact of Information and Communication Technologies (ICT) ongrowth in an economy, consisting of three sectors, ICT-producing, ICT-using and non-ICT-using.The benefits from ICT come from the falling prices of the ICT-using sector’s good,which is used for the production of intermediate goods. Their falling prices provideincentives for investment for sectors using them, so the non-ICT using sector experiencessustained growth driven by capital accumulation. Rates of growth across the three sectorsdiffer, but the aggregate economy is on a balanced growth path with constant labour sharesacross sectors. US evidence confirms the model’s predictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0750.pdf

Productivity and ICT: A Review of the Evidence

Mirko Draca Raffaella Sadun John Van Reenen

CEPDP0749. August 2006.We survey the micro and macro literature on the impact of Information and CommunicationTechnologies (ICTs) on productivity. The “Solow Paradox” of the absence of an impact ofICT on productivity no longer holds, if it ever did. Both growth accounting and econometricevidence suggest an important role for ICTs in accounting for productivity. In fact, theempirical estimates suggest a much larger impact of ICT on productivity than would beexpected from the standard neoclassical model that we focus on. We discuss the variousexplanations for these results, including the popular notion of complementary organizationalcapital. Finally, we offer suggestions for where the literature needs to go.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0749.pdf

Assessing the Effects of Local Taxation Using Microgeographic Data

Gilles Duranton Laurent Gobillon Henry Overman

CEPDP0748. August 2006.We study the impact of local taxation on the location and growth of firms. Our empirical methodology pairs establishments across jurisdictional boundaries to estimate the impact of taxation. Our approach improves on existing work as it corrects for unobserved establishment heterogeneity, for unobservedtime-varying site specific effects, and for the endogeneity of local taxation. Applied to data for English manufacturing establishments we find that local taxation has a negative impact onemployment growth, but no effect on entry.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0748.pdf

Pay for Performance Where Output is Hard to Measure: the Case of Performance Pay for School Teachers

Richard Belfield David Marsden

CEPDP0747. August 2006.The introduction of performance-related pay with Performance Management in the state school sector of England and Wales represents a considerable change in the school management system. After 2000, all teachers were subject to annual goal setting performance reviews. Experienced teachers were offered an extended pay scale based on performance instead of seniority, and to gain access to the new upper pay scale, teachers had to go through a ‘threshold assessment’ based on their professional skills and performance. This paper reports the results of a panel survey of classroom and head teachers which started in 2000 just before implementation of the new system, and then after one and after four years of operation. We find that both classroom and head teacher views have changed considerably over time, from initial general skepticism and opposition towards a more positive view, especially among head teachers by 2004. We argue that the adoption of an integrative bargaining approach to performance reviews explains why a growing minority of schools have achieved improved goal setting, and improved pupil attainments as they have implemented performancemanagement. Pay for performance has been one of the measures of organizational support that headteachers could bring to induce changes in teachers’ classroom priorities. We argue that the teachers’ case shows that a wider range of performance incentives than previously thought can be offered to employees in such occupations, provided that goal setting and performance measurement are approached as a form of negotiation instead of top-down.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0747.pdf

Trends in Hours and Economic Growth

L. Rachel Ngai Christopher A. Pissarides

CEPDP0746. August 2006.We study long-run trends in market hours of work and employment shifts across economicsectors driven by uneven TFP growth in market and home production. We focus on thestructural transformation between agriculture, manufacturing and services and on themarketization of home production. The model can rationalize the observed falling or Ushapedpattern for aggregate hours, the shift from agriculture to services and balancedaggregate growth. We find support for the model’s predictions in long-run US data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0746.pdf

Unions, Job Reductions and Job Security Guarantees: the Experience of British Employees

Alex Bryson Michael White

CEPDP0745. August 2006.A national survey makes it possible to examine employees’ awareness of net overallreductions in the size of the workforce along with their awareness of employer policies thatpromise ‘no compulsory redundancies’. Differences are investigated between union and nonunionworkplaces, and between unionised workplaces with high membership density andthose with low-to-medium density. A union presence increases both job reductions and jobsecurity guarantees to employees, and high membership density has some additional effectsin the market sector, but not the public sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0745.pdf

Capital Markets, Ownership and Distance

Wendy Carlin Andrew Charlton Colin Mayer

CEPDP0744. August 2006.This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0744.pdf

Search and Matching Frictions and Optimal Monetary Policy

Carlos Thomas

CEPDP0743. December 2006.I analyze optimal monetary policy in an economy with search and matching frictions in thelabor market and staggered nominal wage and price contracts. In this framework, as opposedto the standard New Keynesian model, preset nominal wages need not have any effect onexisting employment relationships. However, staggered bargaining of nominal wages distortsaggregate job creation and creates inefficient dispersion in hiring rates across firms.Targeting zero inflation (the optimal policy in the standard New Keynesian model) onlymagnifies these distortions. The optimal policy allows for non-zero inflation in response toreal shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against pricestability as the sole goal of monetary policy turns out to be important.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0743.pdf

Co-Opetition and Prelaunch in Standard-Setting for Developing Technologies

Tobias Kretschmer Katrin Muehlfeld

CEPDP0742. August 2006.Firms faced with the decision of whether to standardize or not prior to introducing a newnetwork technology face a tradeoff: Compatibility improves the technology’s chances ofconsumer acceptance, but it also means having to share the resulting profits with othersponsors of the standard. In this paper, we show that even prior to market introduction of anew technology, the timing of decisions is important and that firms have to weigh up thecooperative and competitive elements of pre-market choices. We also show that the option toprecommit to a technology before it is fully developed (as has been the case with theCompact Disc) can be profitable for network technologies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0742.pdf

Dynastic Management

Francesco Caselli Nicola Gennaioli

CEPDP0741. August 2006.The most striking difference in corporate-governance arrangements between rich and poorcountries is that the latter rely much more heavily on the dynastic family firm, whereownership and control are passed on from one generation to the other. We argue that if theheir to the family firm has no talent for managerial decision making, dynastic management isa failure of meritocracy that reduces a firm’s Total Factor Productivity. We present a simplemodel that studies the macreconomic causes and consequences of dynastic management. Inour model, the incidence of dynastic management depends, among other factors, on theimperfections of contractual enforcement. A plausible calibration suggests that, via dynasticmanagement, poor contract enforcement may be a substantial contributor to observed crosscountrydifferences in aggregate Total Factor Productivity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0741.pdf

Strategic Patenting and Software Innovation

Michael Noel Mark Schankerman

CEPDP0740. August 2006.Strategic patenting is widely believed to raise the costs of innovating, especially in industriescharacterised by cumulative innovation. This paper studies the effects of strategic patentingon R&D, patenting and market value in the computer software industry. We focus on two keyaspects: patent portfolio size which affects bargaining power in patent disputes, and thefragmentation of patent rights (.patent thickets.) which increases the transaction costs ofenforcement. We develop a model that incorporates both effects, together with R&Dspillovers. Using panel data for the period 1980-99, we find evidence that both strategicpatenting and R&D spillovers strongly affect innovation and market value of software firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0740.pdf

Uncertainty and Investment Dynamics

Nick Bloom Stephen Bond John Van Reenen

CEPDP0739. August 2006.This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impacteffect of demand shocks on investment. Uncertainty increases real option values makingfirms more cautious when investing or disinvesting. This is confirmed both numerically for amodel with a rich mix of adjustment costs, time-varying uncertainty, and aggregation overinvestment decisions and time, and also empirically for a panel of manufacturing firms.These cautionary effects of uncertainty are large - going from the lower quartile to the upperquartile of the uncertainty distribution typically halves the first year investment response todemand shocks. This implies the responsiveness of firms to any given policy stimulus may bemuch lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0739.pdf

The Early Career Gender Wage Gap

Sami Napari

CEPDP0738. August 2006.In Finland the gender wage gap increases significantly during the first 10 years after labormarket entry accounting most of the life-time increase in the gender wage gap. This paperfocuses on the early career gender wage differences among university graduates andconsiders several explanations for the gender wage gap based on the human capital theory,job mobility and labor market segregation. Gender differences in the accumulation ofexperience and in the type of education explain about 16 percent of the average gender wagegap that emerges during the first 11 years after labor market entry among universitygraduates. Differences in employer characteristics between male and female graduatesaccount about 10 percent for the average early career gender wage gap. In all genderdifferences in background characteristics explain about 27 percent of the average early careerwage differences between male and female university graduates. The most important singlefactor contributing to the gender wage gap is the family type. Women seem to sufferconsiderable larger wage losses due to marriage and children than men.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0738.pdf

Competing Technologies in the Database Management Systems Market

Tobias Kretschmer

CEPDP0737. August 2006.In this paper, we study the dynamics of the market for Database Management Systems(DBMS), which is commonly assumed to possess network effects and where there is stillsome viable competition in our study period, 2000 – 2004. Specifically, we make use of aunique and detailed dataset on several thousand UK firms to study individual organizations’incentives to adopt a particular technology. We find that there are significant internalcomplement effects – in other words, using an operating system and a DBMS from the samevendor seems to confer some complementarities. We also find evidence forcomplementarities between enterprise resource planning systems (ERP) and DBMS and findthat as ERP are frequently specific and customized, DBMS are unlikely to be changed oncethey have been customized to an ERP. We also find that organizations have an increasingtendency to use multiple DBMS on one site, which contradicts the notion that differentDBMS are near-perfect substitutes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0737.pdf

Multi-Product Firms and Product Switching

Andrew B. Bernard Stephen Redding Peter K. Schott

CEPDP0736. August 2006.This paper examines the frequency, pervasiveness and determinants of product switching among U.S.manufacturing firms. We find that two-thirds of firms alter their mix of five-digit SIC products everyfive years, that one-third of the increase in real U.S. manufacturing shipments between 1972 and 1997is due to the net adding and dropping of products by survivors, and that firms are more likely to dropproducts which are younger and have smaller production volumes relative to other firms producingthe same product. The product-switching behavior we observe is consistent with an extended model ofindustry dynamics emphasizing firm heterogeneity and self-selection into individual product markets.Our findings suggest that product switching contributes towards a reallocation of economic activitywithin firms towards more productive uses.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0736.pdf

The Marginal Product of Capital

Francesco Caselli James Feyrer

CEPDP0735. August 2006.Whether or not the marginal product of capital (MPK) differs across countries is a questionthat keeps coming up in discussions of comparative economic development and patterns ofcapital flows. We use easily accessible macroeconomic data to shed light on this issue, andfind that MPKs are remarkably similar across countries. Hence, there is no prima faciesupport for the view that international credit frictions play a major role in preventing capitalflows from rich to poor countries. Lower capital ratios in these countries are insteadattributable to lower endowments of complementary factors and lower efficiency, as well asto lower prices of output goods relative to capital. We also show that properly accounting forthe share of income accruing to reproducible capital is critical to reach these conclusions.One implication of our findings is that increased aid flows to developing countries will notsignificantly increase these countries' incomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0735.pdf

Off-Shoring of Business Services and De-Industrialization: Threat or Opportunity - and for Whom?

Frédéric Robert-Nicoud

CEPDP0734. July 2006.This paper takes a new look at the issue of overseas sourcing of services. In framework in whichcomparative advantage is endogenous to agglomeration economies and factor mobility, thefragmentation of production made possible by the new communication technologies and lowtransportation costs allow global firms (multinational corporations or individual firms active in globalnetworks) to simultaneously reap the benefit of agglomeration economies in OECD countries and oflow wages prevailing in countries with an ever better educated labour force like India. Thus, thereduction of employment in some routine tasks in rich countries in a general equilibrium helps sustainand reinforces employment in the core competencies in such countries. That is, the loss of some jobspermits to retain the ‘core competencies’ in the ‘core countries’. The welfare implications of thisanalysis are shown to be not as straightforward as in a neoclassical world.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0734.pdf

Unions, Within-Workplace Job Cuts and Job Security Guarantees

Alex Bryson Michael White

CEPDP0733. July 2006.Using data from the Workplace Employment Relations Survey 1998, this paper shows thatunionisation increased the probability of within-workplace job cuts and the incidence of jobsecurity guarantees. As theory predicts, both are more prevalent among market-sectorworkplaces with higher union density and multi-unionism. Expectations that these effectswould be more muted in the public sector were also confirmed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0733.pdf

On the Theory of Ethnic Conflict

Francesco Caselli Wilbur John Coleman II

CEPDP0732. July 2006.We present a theory of ethnic conflict in which coalitions formed along ethnic lines competefor the economy’s resources. The role of ethnicity is to enforce coalition membership: inethnically homogeneous societies members of the losing coalition can defect to the winners atlow cost, and this rules out conflict as an equilibrium outcome. We derive a number ofimplications of the model relating social, political, and economic indicators such as theincidence of conflict, the distance among ethnic groups, group sizes, income inequality, andexpropriable resources.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0732.pdf

What Voice Do British Workers Want?

Alex Bryson Richard Freeman

CEPDP0731. July 2006.The problems/need for representation and participation reported by workers vary acrossworkplaces and by types of jobs. Workers with greater workplace needs are more desirous ofunions but their preferences are fine-grained. Workers want unions to negotiate wages andwork conditions and for protection but do not see unions as helping them progress in theircareers. Many workers see no major workplace problems that would impel them to form orjoin unions. Unionism raises reported problems while firm-based non-union channels ofvoice reduce reported problems, but unions that work effectively with management and thosethat have sufficient strength to be taken seriously by management reduce the number ofproblems at union workplaces.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0731.pdf

Patterns of Work Across the OECD

Giulia Faggio Stephen Nickell

CEPDP0730. June 2006.Market work per person of working age differs widely across the OECD countries and therehave been some significant changes in the last forty years. How to explain this pattern?Taxes are part of the story but much remains to be explained. If we include all the elementsof the social security systems like early retirement benefits, sickness and disability benefitsand unemployment benefits, then we can capture some aspects of the overall pattern but stilla lot remains unexplained. The story favoured by Alesina et al. (CEPR DP.5140, 2005) isthat the nexus of strong unions, generous welfare and social democracy implies both hightaxes and pressure in favour of work-sharing in response to adverse shocks. This story,however, falls foul of the simple fact that most Scandinavian countries now do much morework than the French and Germans despite having stronger unions, more generous welfare,higher taxes and more social democracy. Ultimately, we are forced into the position thatthere is no simple story. Some of the broad patterns can be explained but there remaincountry specific factors which are hard to identify but lead to substantial differences from onecountry to another.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0730.pdf

Incentives and Invention in Universities

Saul Lach Mark Schankerman

CEPDP0729. June 2006.Using data on U.S. universities, we show that universities that give higher royalty shares to facultyscientists generate greater license income, controlling for university size, academic quality, researchfunding and other factors. We use pre-sample data on university patenting to control for the potentialendogeneity of royalty shares. We find that scientists respond both to cash royalties and to royaltiesused to support their research labs, suggesting both pecuniary and intrinsic (research) motivations.The incentive effects appear to be larger in private universities than in public ones, and we providesurvey evidence indicating this may be related to differences in the use of performance pay,government constraints, and local development objectives of technology license offices. Royaltyincentives work both by raising faculty effort and sorting scientists across universities. The effect ofincentives works primarily by increasing the quality (value) rather than the quantity of inventions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0729.pdf

The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India

Philippe Aghion Robin Burgess Stephen Redding Fabrizio Zilibotti

CEPDP0728. June 2006.This paper investigates whether the effects, on registered manufacturing out- put,employment, entry and investment, of dismantling the .license raja system of central controlsregulating entry and production activity in this sector .vary across Indian states with differentlabor market regulations. The effects are found to be unequal depending on the institutionalenvironment in which industries are embedded. In particular, following de-licensing,industries located in states with pro-employer labor market institutions grew more quicklythan those in pro-worker environments. Our results emphasize how local institutions matterfor whether industry in a region benefits or is harmed by the nationwide delicensing reform.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0728.pdf

Trade and Growth with Heterogeneous Firms

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0727. June 2006.This paper explores the impact of trade on growth when firms are heterogeneous. We findthat greater openness produces anti-and pro-growth effects. The Melitz-model selectioneffects raises the expected cost of introducing a new variety and this tends to slow the rate ofnew-variety introduction and hence growth. The pro-growth effect stems from the impact thatfreer trade has on the marginal cost of innovating. The balance of the two effects isambiguous with the sign depending upon the exact nature of the innovation technology andits connection to international trade in goods and ideas. We consider five special cases (theseinclude the Grossman-Helpman, the Coe- Helpman and Rivera-Batiz-Romer models) two ofwhich suggest that trade harms growth; the others predicting the opposite.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0727.pdf

Productivity, Exporting and the Learning-by-Exporting Hypothesis: Direct Evidence from UK Firms

Gustavo Crespi Chiara Criscuolo Jonathan Haskel

CEPDP0726. May 2006.Case study evidence suggests that exporting firms learn from their clients. But econometric evidence,mostly using exporting and TFP growth, is mixed. We use a UK panel data set with firm-levelinformation on exporting and productivity. Our innovation is that we also have direct data on thesources of learning (in this case about new technologies). Controlling for fixed effects we have twomain findings. First, we find firms who exported in the past are more likely to then report that theylearnt from buyers (relative to learning from other sources). Second, firms who had learned frombuyers (more than they learnt from other sources) in the past are more likely to then have productivitygrowth. This suggests some support for the learning-by-exporting hypothesis.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0726.pdf

The Timing of Monetary Policy Shocks

Giovanni Olivei Silvana Tenreyro

CEPDP0725. May 2006.A vast empirical literature has documented delayed and persistent effects of monetary policy shockson output. We show that this finding results from the aggregation of output impulse responses thatdiffer sharply depending on the timing of the shock: when the monetary policy shock takes place inthe first two quarters of the year, the response of output is quick, sizable, and dies out at a relativelyfast pace. In contrast, output responds very little when the shock takes place in the third or fourthquarter. We propose a potential explanation for the differential responses based on uneven staggeringof wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show thata very modest amount of uneven staggering can generate differences in output responses similar tothose found in the data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0725.pdf

The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK

Ghazala Azmat

CEPDP0724. May 2006.Tax credits have been a popular way to alleviate in-work poverty. The assumption is typicallythat the incidence is on the claimant workers. However, economic theory suggests noparticular reason to believe that this should be the case. This paper investigates the incidenceof the Working Families Tax Credit in the UK introduced in 1999, which unlike similar taxcredit policies was paid through the wage packet, increasing the connection between theemployer and worker with regard to the tax credit. Using two stage parametric and nonparametriccensored regression methods we find compelling evidence to suggest that (1) thefirm discriminates by cutting the wage of claimant workers relative to similarly skilled nonclaimantworkers when looking at men and (2) there is a spill-over effect onto the wage ofboth groups for both men and women.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0724.pdf

Basic Research and Sequential Innovation

Sharon Belenzon

CEPDP0723. May 2006.The commercial value of basic knowledge depends on the arrival of follow-up developmentsmostly from outside the boundaries of the inventing firm. Private returns would depend onthe extent the inventing firm internalizes these follow-up developments. Such internalizationis less likely to occur as knowledge becomes more general. This motivates the historicalconcern of insufficient private incentive for basic research. The present paper develops anovel empirical methodology of identifying unique patterns of knowledge flows (based onpatent citations), which provide information about whether ‘spilled’ knowledge is reabsorbedby its inventor. Using comprehensive data on the largest 500 inventing firms in the US theclassical problem of underinvestment in basic research is confirmed: spillovers of moregeneral knowledge (and in this respect, more basic) are less likely to feed back to theinventing firm. This translates to lower private returns, as indicated by the effect of the R&Dstock of the firm on its market value.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0723.pdf

Technology, Informationand the Decentralization of the Firm

Daron Acemoglu Philippe Aghion Claire Lelarge John Van Reenen Fabrizio Zilibotti

CEPDP0722. May 2006.This paper develops a framework to analyze the relationship between the diffusion of newtechnologies and the decentralization decisions of firms. Centralized control relies on theinformation of the principal, which we equate with publicly available information.Decentralized control, on the other hand, delegates authority to a manager with superiorinformation. However, the manager can use her informational advantage to make choices thatare not in the best interest of the principal. As the available public information about thespecific technology increases, the trade-off shifts in favour of centralization. We show thatfirms closer to the technological frontier, firms in more heterogeneous environments andyounger firms are more likely to choose decentralization. Using three datasets of French andBritish firms in the 1990s, we report robust correlations consistent with these predictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0722.pdf

Knowledge Flow and Sequential Innovation: Implications for Technology Diffusion, R&D and Market Value

Sharon Belenzon

CEPDP0721. May 2006.It is shown that spillovers can enhance private returns to innovation if they feed back into the dynamic researchof the original inventor (Internalized spillovers), but will always reduce private returns, if theoriginal inventor does not benefit from the advancements other inventors build into the“spilled” knowledge (Externalized spillovers). I empirically identify unique patterns ofknowledge flows (based on patent citations), which provide information about whether“spilled” knowledge is reabsorbed by its inventor. A simple model of sequential innovationwith dynamic spillovers is developed, which predicts that market value and R&Dexpenditures should rise with Internalized spillovers and fall with Externalized spillovers.These predications are confirmed using panel data on U.S. firms between 1981 and 2001. Tothe extent that firms internalize some of the spillovers they create, the classicalunderinvestment problem in R&D will be mitigated and the central role of spillovers inpromoting economic growth will be enhanced.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0721.pdf

What Do Unions Do to CEO Compensation?

Rafael Gomez Konstantinos Tzioumis

CEPDP0720. May 2006.In this paper we estimate the relation between union presence within a firm and CEOcompensation, using a unique panel of publicly listed companies for the period 1992 to 2001.We find that, on average, union presence: 1) is significantly associated with lower levels oftotal CEO compensation; 2) affects the mix of CEO compensation by providing higher levels ofbase pay but much lower stock option values; 3) lowers dispersion across the majorcomponents of CEO remuneration and 4) does not significantly reduce the performancesensitivity of CEO compensation as compared to non-union firms. These results are consistentwith several models of union influence.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0720.pdf

A Gold Rush Theory of Economic Development

Ralph Ossa

CEPDP0719. March 2006.This paper presents a model of social learning about the suitability of local conditions fornew business ventures and explores its implications for the microeconomic patterns ofeconomic development. I show that: i) firms tend to ‘rush’ into business ventures with whichother firms have had surprising success thus causing development to be ‘lumpy’; ii) sufficientbusiness confidence is crucial for fostering economic growth; iii) development may involvewave-like patterns of growth where successive business ventures are first pursued and thengiven up; iv) there is, nevertheless, no guarantee that firms pursue the best venture even in thelong-run.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0719.pdf

The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation

Nick Bloom

CEPDP0718. March 2006.Uncertainty appears to vary strongly over time, temporarily rising by up to 200% aroundmajor shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paperoffers the first structural framework to analyze uncertainty shocks. I build a model with atime varying second moment, which is numerically solved and estimated using firm leveldata. The parameterized model is then used to simulate a macro uncertainty shock, whichproduces a rapid drop and rebound in employment, investment and productivity, and amoderate loss in GDP. This temporary impact of a second moment shock is different from thetypically persistent impact of a first moment shock, highlighting the importance forpolicymakers of identifying their relative magnitudes in major shocks. The simulation of anuncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0718.pdf

Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions

Holger Breinlich

CEPDP0717. March 2006.This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel ofindustrial restructuring in the face of trade liberalization. Using the Canada-United StatesFree Trade Agreement of 1989 as a natural experiment, I show that trade liberalization leadsto a significant increase in M&A activity. I also provide evidence that resources aretransferred from less to more productive firms in the process and that the magnitude of theoverall transfer is quantitatively important. Taken together, these results suggest that M&A isan important alternative to the previously studied adjustment channels of firm andestablishment closure and contraction. This has strong implications for the design ofcompetition policy in the wake of trade liberalizations since M&A may offer a more efficientway of transferring resources than contraction and closure of low productivity firmscombined with internal growth of more efficient firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0717.pdf

Measuring and Explaining Management Practices Across Firms and Countries

Nick Bloom John Van Reenen

CEPDP0716. March 2006.We use an innovative survey tool to collect management practice data from 732 medium sized manufacturingfirms in the US, France, Germany and the UK. These measures of managerial practice are strongly associatedwith firm-level productivity, profitability, Tobin’s Q, sales growth and survival rates. Management practicesalso display significant cross-country differences with US firms on average better managed than Europeanfirms, and significant within-country differences with a long tail of extremely badly managed firms. We findthat poor management practices are more prevalent when (a) product market competition is weak and/or when(b) family-owned firms pass management control down to the eldest sons (primo geniture). European firmsreport lower levels of competition, while French and British firms also report substantially higher levels ofprimo geniture due to the influence of Norman legal origin and generous estate duty for family firms. Wecalculate that product market competition and family firms account for about half of the long tail of badlymanaged firms and up to two thirds of the American advantage over Europe in management practices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0716.pdf

Minimum Wages and Firm Profitability

Mirko Draca Stephen Machin John Van Reenen

CEPDP0715. February 2006.Although there is a large literature on the economic effects of minimum wages on labour marketoutcomes (especially employment), there is hardly any evidence on their impact on firm performance.This is surprising: minimum wages appear to have a significant impact on wages, but only a limitedimpact on jobs, so it is natural to imagine there must be a stronger impact on other aspects of firmbehaviour. In this paper we consider the impact of minimum wages on firm profitability by exploitingthe introduction of a minimum wage to the UK labour market in 1999. We use pre-policy informationon the distribution of wages to construct treatment and comparison groups and implement a differencein differences approach. We show evidence that firm profitability was significantly reduced (andwages significantly raised) by the minimum wage introduction. This emerges from separate analysesof two distinct types of firm level panel data (one on firms in a very low wage sector, UK residentialcare homes, and a second on firms across all sectors). Interestingly, we find no evidence that theprofitability reductions resulted in increases in firm exit, so our findings may be consistent withredistribution of quasi-rents towards low wage employees.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0715.pdf

Do Workers' Remittances Reduce the Probability of Current Account Reversals?

Matteo Bugamelli Francesco Paternò

CEPDP0714. February 2006.The paper combines the literature on financial crises in emerging markets and developing economieswith that on international migrations by investigating whether the increasingly large flows of workers’remittances can help reduce the probability of current account reversals. The rationale for this standsin the great stability and low cyclicality of remittances as compared to other private capital flows:these properties, combined with the fact that remittances are cheap inflows of foreign currencies,might reduce the probability that foreign investors suddenly flee out of emerging markets anddeveloping economies and trigger a dramatic current account adjustment. We find that remittancescan indeed have such a beneficial effect. In particular, we show that a high level of remittances, as aratio of GDP, makes the relationship between a decreasing stock of international reserves (over GDP)and a higher probability of current account crises less stringent. The same occurs, though less neatly,for the positive relationship between an increasing stock of external debt (over GDP) and theprobability of current account reversals. Our results point also to a threshold effect of remittances: themechanisms just described are, in fact, much stronger when remittances are above 3 percent of GDP.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0714.pdf

Union Free-Riding in Britain and New Zealand

Alex Bryson

CEPDP0713. January 2006.The percentage of workers who choose not to join the union available to them at their workplace has been rising in Britain and New Zealand. Social custom, union instrumentality, the fixed costs of joining, employee perceptions of management attitudes to unionization and employee problems at work all influence the propensity to free-ride. Ideological convictions regarding the role of unions also play some role, as do private excludable goods. There is little indication of employer-inspired policies substituting for unionization where unions are already present. Having accounted for all these factors, free-riding remains more common in New Zealand than in Britain.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0713.pdf

Changes in Returns to Education in Latin America: the Role of Demand and Supply of Skills

Marco Manacorda Carolina Sanchez-Paramo Norbert Schady

CEPDP0712. December 2005.Changes in the relative wages of workers with different amounts of education have profound implications fordeveloping countries, where initial levels of inequality are often very high. In this paper we use micro data forfive Latin American countries over the 1980s and 1990s to document trends in men's returns to education, andto estimate whether the changes in skill premia we observe can be explained by supply or demand factors. Wepropose a model of demand for skills with three production inputs, and we allow the elasticity of substitutionbetween the different educational inputs to be different using a nested CES function. Using this model, weshow that the dramatic expansion in secondary school in many countries in Latin America depressed the wagesof workers with secondary school. We also show that there have been sharp increases in the demand for moreskilled workers in the region.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0712.pdf

Unequal Pay or Unequal employment? A Cross-Country Analysis of Gender Gaps

Claudia Olivetti Barbara Petrongolo

CEPDP0711. December 2005.There is evidence of a negative cross-country correlation between gender wage and employment gaps. We arguethat non-random selection of women into work explains an important part of such correlation and thus of theobserved variation in wage gaps. The idea is that, if women who are employed tend to have relatively high-wagecharacteristics, low female employment rates may become consistent with low gender wage gaps simplybecause low-wage women would not feature in the observed wage distribution. We explore this idea across theUS and EU countries estimating gender gaps in potential wages. We recover information on wages for those notin work in a given year using alternative imputation techniques. Imputation is based on (i) wage observationsfrom nearest available waves in the sample, (ii) observable characteristics of the nonemployed and (iii) astatistical repeated-sampling model. We then estimate median wage gaps on the resulting imputed wagedistributions, thus simply requiring assumptions on the position of the imputed wage observations with respectto the median, but not on their level. We obtain higher median wage gaps on imputed rather than actual wagedistributions for most countries in the sample. However, this difference is small in the US, the UK and mostcentral and northern EU countries, and becomes sizeable in Ireland, France and southern EU, all countries inwhich gender employment gaps are high. In particular, correction for employment selection explains more thana half of the observed correlation between wage and employment gaps.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0711.pdf

Apprenticeship in Europe: 'Fading' or Flourishing?

Hilary Steedman

CEPDP0710. December 2005.This paper sets out the extent and defining characteristics of apprenticeship in Europe. Apprenticeship is thensituated within the wider context of European provision for education and training of 16-19 year olds and asimple typology is proposed and explained. The German-speaking dual system countries are characterised ashigh employer commitment countries with minimal integration of apprenticeship into full-time 16-19 provisionand weak links with tertiary education. The UK, the Netherlands and France are characterised as havingrelatively low levels of employer commitment but greater integration of apprenticeship into full-time provisionand stronger links between apprenticeship and tertiary level provision. Recent evidence on the extent to whichboth apprenticeship models improve employment probabilities is reviewed and pressures on the twoapprenticeship models resulting from increasingly competitive global markets and consequent changing skillneeds are examined. A final section discusses whether apprenticeship in Europe can adapt to and survive thesepressures.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0710.pdf

Agricultural Returns and Conflict: Quasi-Experimental Evidence from a Policy Intervention Programme in Rwanda

Florence Kondylis

CEPDP0709. December 2005.In 1997 Rwanda introduced a re-settlement policy for refugees displaced during previousconflicts. We exploit geographic variation in the speed of implementation of this policy toinvestigate the impact of conflict-induced displacement and the re-settlement policy onhousehold agricultural output and on skill spill-over mechanisms between returnees andstayers. We find that returns to on-farm labour are higher for returnees relative to stayers,although the evidence suggests that the policy contributed little additional effect to thisdifferential. More speculatively, these differentials suggest that, upon return from conflictinducedexile, returnees are more motivated to increase their economic performance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0709.pdf

Chinese Unions: Nugatory or Transforming? An 'Alice' Analysis

Jianwei Li David Metcalf

CEPDP0708. December 2005.China has, apparently, more trade union members than the rest of the world put together. But the unions do not function in the same way as western trade unions. In particular Chinese unions are subservient to the Partystate.The theme of the paper is the gap between rhetoric and reality. Issues analysed include union structure, membership, representation, new laws (e.g. promoting collective contracts), new tripartite institutions and theinteraction between unions and the Party-state. We suggest that Chinese unions inhabit an Alice in Wonderland dream world. In reality although Chinese unions do have many members (though probably not as many as the official 137 million figure) they are virtually impotent when it comes to representing workers. Because theParty-state recognises that such frailty may lead to instability it has passed new laws promoting collective contracts and established new tripartite institutions to mediate and arbitrate disputes. While such laws are welcome they are largely hollow: collective contracts are very different from collective bargaining and the incidence of cases dealt with by the tripartite institutions is tiny. Much supporting evidence is presented drawing on detailed case studies undertaken in Hainan Province (the first and largest special economic zone) in 2004 and 2005. The need for more effective representation is appreciated by some All China Federation of TradeUnions (ACFTU) officials. But reasonable reforms do seem a long way off, so unions in China will continue to echo the White Queen:“The rule is, jam tomorrow and jam yesterday – but never jam today” and, alas, tomorrow never comes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0708.pdf

Superstars and Renaissance Men: Specialization, Market Size and the Income Distribution

Richard Walker

CEPDP0707. November 2005.A general equilibrium model of individual specialization is presented in which agents tradeoff the productivity and price implications of producing a narrower range of goods. Agentswith highly specific skills turn out to benefit most from large markets. The model is able toreplicate features of the long-term evolution of the US income distribution, withspecialization-biased technical change and the increase in employed population playing keyroles. Among the results is that, at least along one dimension of ability, the skill premium isincreasing in the relative supply of skills.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0707.pdf

Volatility and Development

Miklos Koren Silvana Tenreyro

CEPDP0706. November 2005.Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possiblereasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii)poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy);and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectorsthey specialize in. We show how to decompose volatility into these four sources, quantify their contribution toaggregate volatility, and study how they relate to the stage of development. We document the followingregularities. First, as countries develop, their productive structure moves from more volatile to less volatilesectors. Second, the level of specialization declines with development at early stages, and slowly increases atlater stages of development. Third, the volatility of country-specific macroeconomic shocks falls withdevelopment. Fourth, the covariance between sector-specific and country-specific shocks does not varysystematically with the level of development. We argue that many theories linking volatility and developmentare not consistent with these findings and suggest new directions for future theoretical work.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0706.pdf

The De-Collectivisation of Pay Setting in Britain 1990-1998: Incidence, Determinants and Impact

A Charlwood

CEPDP0705. October 2005.Overall, collective bargaining coverage has dropped by around fourteen percentage points. This paperinvestigates the causes and consequences of the decline in collective bargaining in Britain between 1990 and1998. One in three workplaces that practiced collective bargaining in 1990 had abandoned it by 1998 and theincidence and coverage of collective bargaining in newer workplaces was lower than in the workplaces theyreplaced. The abandonment of collective bargaining was not associated with an increase in individualisedpayment mechanisms or with the use of ‘high involvement’ HRM practices. Workplaces that abandonedbargaining reported less impressive productivity gains than other workplaces. Male wage inequality rose as aresult of the decline of bargaining coverage and of weaker unions where collective bargaining remained. Higherlevels of job creation in workplaces that abandoned collective bargaining balance these negative outcomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0705.pdf

Evaluating the Economic Significance of Downward Nominal Wage Rigidity

Michael W. L. Elsby

CEPDP0704. August 2005.This paper seeks to contribute to the literature on downward nominal wage rigidity (DNWR)along two dimensions. First, we formulate and solve an explicit model of wage-setting in thepresence of worker resistance to nominal wage cuts - something that has previously beenconsidered intractable. In particular, we show that this resistance renders wage increases(partially) irreversible. Second, using this model, we can explain why previous estimates ofthe macroeconomic effects of DNWR have been so weak despite remarkably robustmicroeconomic evidence. In particular, we show that previous studies have neglected thepossibility that DNWR can lead to a compression of wage increases as well as decreases.Thus, the literature may have been overstating the costs of DNWR to firms. Using micro-datafor the US and Great Britain, we find robust evidence in support of the predictions of themodel. In the light of this evidence, we conclude that increased wage pressure due to DNWRmay not be as large as previously envisaged, but that the data is nevertheless consistent with amodel in which workers resist nominal wage cuts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0704.pdf

Performance Pay for Teachers: Linking Individual and Organisational Level Targets

Richard Belfield David Marsden

CEPDP0703. August 2005.The introduction of performance-related pay and performance management schemes in the maintained, state,school sector represents a considerable change in the school management system. This paper combines theresults of opinion surveys of classroom and head teachers with Department for Education and Skills schoolperformance data to consider the operation and impact of the new system in England since 2000. We find thatteachers’ response to the new system closely resembles that of other groups of public service workers to similarschemes. In particular, teachers appear not to be greatly motivated by the financial-incentive element of thesystem. However, the goal-setting and appraisal aspect of the system is steadily establishing itself in schools,and seems to be giving rise to a better alignment of teacher and school objectives and with those of nationallevelpolicy objectives. We present tentative evidence that improvements in goal setting within schools arepositively related to rising pupil academic performance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0703.pdf

The Growth of Network Computing: Quality Adjusted Price Changes for Network Servers

John Van Reenen

CEPDP0702. July 2005.In this paper we investigate the evolution of quality adjusted prices for servers motivated by two facts.First, the productivity acceleration in the US economy since the mid 1990s is closely linked to spreadof information technology of which networked computing is a large component. Second, the growthof network computing itself has been fostered by the rapid growth in the quality and quantity of thenetwork server market. Like Pakes’ (2003) analysis of the PC market, we show that our preferredversion of the hedonic price index (“complete hybrid”) fell much more rapidly than the standard“matched model” price index (the hedonic index fell on average by about 30% per annum comparedto 17% p.a. for the matched model). This difference is mainly due to the selection bias in the standardmatched model price index due to the exit of obsolete models which would have had the fastest pricefalls.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0702.pdf

The Log of Gravity

Joao Santos Silva Silvana Tenreyro

CEPDP0701. July 2005.Although economists have long been aware of Jensen's inequality, many econometric applicationshave neglected an important implication of it: the standard practice of interpreting the parameters oflog-linearized models estimated by ordinary least squares as elasticities can be highly misleading inthe presence of heteroskedasticity. This paper explains why this problem arises and proposes anappropriate estimator. Our criticism to conventional practices and the solution we propose extends toa broad range of economic applications where the equation under study is log-linearized. We developthe argument using one particular illustration, the gravity equation for trade, and apply the proposedtechnique to provide new estimates of this equation. We find significant differences betweenestimates obtained with the proposed estimator and those obtained with the traditional method. Thesediscrepancies persist even when the gravity equation takes into account multilateral resistance termsor fixed effects

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0701.pdf

The Gender Gap in Early Career Wage Growth

Alan Manning Joanna Swaffield

CEPDP0700. July 2005.In the UK the gender pay gap on entry to the labour market is approximately zero but afterten years after labour market entry, there is a gender wage gap of almost 25 log points. Thispaper explores the reason for this gender gap in early-career wage growth, considering threemain hypotheses - human capital, job-shopping and ‘psychological’ theories. Human capitalfactors can explain about 12 log points, job-shopping about 1.5 log points and thepsychological theories about half a log point. But a substantial unexplained gap remains:women who have continuous full-time employment, have had no children and express nodesire to have them earn about 12 log points less than equivalent men after 10 years in thelabour market.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0700.pdf

Products and Productivity

Andrew B. Bernard Stephen Redding Peter K. Schott

CEPDP0699. July 2005.Firms' decisions about which goods to produce are often made at a more disaggregate level than thedata observed by empirical researchers. When products differ according to production technique orthe way in which they enter demand, this data aggregation problem introduces a bias into standardmeasures of firm productivity. We develop a theoretical model of heterogeneous firms endogenouslyself-selecting into heterogeneous products. We characterize the bias introduced by unobservedvariation in product mix across firms, and the implications of this bias for identifying firm andindustry responses to exogenous policy shocks such as deregulation. More generally, we demonstratethat product switching gives rise to a richer set of industry-level dynamics than models where firmproduct mix remains fixed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0699.pdf

Ex Post Versus Ex Ante Measures of the User Cost of Capital

Nicholas Oulton

CEPDP0698. July 2005.When doing growth accounting, should we use ex post or ex ante measures of user costs tocalculate the contribution of capital? The answer, based on a simple model of temporaryequilibrium, is that ex post is better in theory. In practice researchers usually calculate ex postuser costs by assuming that the rate of return is equalised across assets. But this is only true ifexpectations are correct. A numerical example shows that either ex ante or ex post can becloser to the true measure, depending on the parameters. I propose a hybrid method thatmakes use of elements of both approaches. I test this and the other methods using data for 31UK industries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0698.pdf

You Can't Always Get What You Want: the Impact of the Jobseeker's Allowance

Alan Manning

CEPDP0697. July 2005.In 1996 the UK made major changes to its welfare system for the support of the unemployedwith the introduction of the Jobseeker’s Allowance. This tightened the work searchrequirements needed for eligibility for benefit. It resulted in large flows out of claimantstatus, but, this paper concludes, not into employment. The movement out of claimant statuswas largest for those with low levels of search activity. But, this paper finds no evidence ofincreased job search activity as a result of this change.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0697.pdf

Factor Price Equality and the Economies of the United States

Andrew B. Bernard Stephen Redding Peter K. Schott

CEPDP0696. July 2005.We develop a methodology for identifying departures from relative factor price equalityacross regions that is valid under general assumptions about production, markets and factors.Application of this methodology to the United States reveals substantial and increasingdeviations in relative skilled wages across labor markets in both 1972 and 1992. Thesedeviations vary systematically with labor markets industry structure both in cross section andover time.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0696.pdf

Cities in the Developing World

Henry Overman Anthony J. Venables

CEPDP0695. July 2005.Rapid urbanisation is a major feature of developing countries. Some 2 billion more people arelikely to become city residents in the next 30 years, yet urbanisation has received littleattention in the modern development economics literature. This paper reviews theoretical andempirical work on the determinants and effects of urbanisation. This suggests that there aresubstantial productivity benefits from cities, although unregulated outcomes may well lead toexcessive primacy as externalities and coordination failures inhibit decentralisation ofeconomic activity. Policy should operate both by identifying and addressing these marketfailures, and by seeking to remove institutional obstacles to decentralisation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0695.pdf

The Importance of the Wording of the ECB

Carlo Rosa Giovanni Verga

CEPDP0694. June 2005.This paper analyses the ECB communication, focusing in particular on its transparencydimension. We posit that if the ECB is transparent about its future policy decisions, then weshould be able to forecast fairly well its future interest rate setting behaviour. We find thatthe predicting ability of the European monetary authority’s words, is similar to the oneimplied by market-based measures of monetary policy expectations. Moreover, the ECB’swording provides complementary, rather than substitute, information with respect toeconomic and monetary variables.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0694.pdf

The Employment Effects of the October 2003 Increase in the National Minimum Wage

Richard Dickens Mirko Draca

CEPDP0693. June 2005.There is a growing body of research that measures employment effects of the minimum wageby using longitudinal data on individuals to compare job loss of workers affected by aminimum wage increase with those who are not directly affected. This sort of study requiresgood quality wage data in order to clearly identify these treatment and control groups. Muchof the evidence on the impact of the UK minimum wage uses this technique with poor qualitywage data. This paper examines the impact of the October 2003 increase in the NationalMinimum Wage (NMW) using a much better measure of the wage. We find insignificantnegative effects on the employment retention rates of all adults and, most notably, maleworkers. Analysis of the probability of employment retention across different hourly wagerates also show how sensitive this methodology can be to different definitions of thetreatment and control group.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0693.pdf

Productivity Dispersion, Competition and Productivity Measurement

Ralf Martin

CEPDP0692. May 2005.A startling fact of firm level productivity analysis is the large and persistent differences in both labourproductivity and total factor productivity (TFP) between firms in narrowly defined sectoral classes.The competitiveness of an industry is potentially an important factor explaining this productivitydispersion. The degree of competition has also implications for the measurement of TFP at the firmlevel. This paper firstly develops a novel control function approach to production function and TFPestimation explicitly taking imperfect competition into account. This addresses a number of issueswith the control function approach to productivity estimation. Secondly, applying this new approachto UK data it shows that productivity dispersion on average is about 50 percent higher than withstandard TFP measures. It also shows that accounting for imperfect competition matters for estimatesof the persistence of TFP. Thirdly, the paper finds a negative relationship between competition andproductivity dispersion.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0692.pdf

Immigrants at Retirement: Stay/Return or 'Va-et-Vient'

Francois-Charles Wolff Augustin de Coulon

CEPDP0691. May 2005.where labour considerations no longer matter, the location decisions are expected to dependnot only on a comparison of standard-of-living between the origin and host countries, butshould also be affected by the strength of family relationships. Assuming that migrants derivesome satisfaction from contact and visits with other family members, we suggest thatmigrants may choose a third type of migration move beyond the standard stay/return decisioncalled the ‘va-et-vient’ where individuals choose to share their time across the host and theorigin country. In the empirical analysis, we test the determinants of the location intention atretirement using a recent data set on migrants currently living in France. We found that themigrant’s choice is significantly related to the location of other family members and thatthose determinants vary with respect to the different preferred choices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0691.pdf

Labor and the Market Value of the Firm

Monika Merz Eran Yashiv

CEPDP0690. May 2005.What role does labor play in a firm’s market value? We explore this question using a production-based assetpricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin toinvestment in capital and that the two interact, with the interaction being a crucial determinant of the time seriesbehavior of market value. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring andinvestment decisions and the consequences for firms' value. The model generates a good fit of the data. Wedecompose the estimated market value, thereby quantifying the link between firms' value and gross hiring flows,employment, gross investment flows, and physical capital. We find that a conventional specification -- quadraticadjustment costs for capital and no hiring costs -- performs poorly. Hiring and investment flows, unlikeemployment and capital stocks, are volatile and both are essential to account for market value volatility. A keyresult is that firms' value embodies the value of hiring and investment over and above the capital stock.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0690.pdf

Agglomeration and the Adjustment of the Spatial Economy

Pierre-Philippe Combes Gilles Duranton Henry Overman

CEPDP0689. May 2005.We consider the literatures on urban systems and New Economic Geography to examinequestions concerning agglomeration and how areas respond to shocks to the economicenvironment. We first propose a diagrammatic framework to compare the two approaches.We then use this framework to study a number of extensions and to consider several policyrelevant issues.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0689.pdf

The Costs of Remoteness: Evidence from German Division and Reunification

Stephen Redding Daniel M. Sturm

CEPDP0688. May 2005.This paper exploits the division of Germany after the Second World War and thereunification of East and West Germany in 1990 as a natural experiment to provide evidenceof the importance of market access for economic development. In line with a standard neweconomic geography model, we find that following division cities in West Germany that wereclose to the new border between East and West Germany experienced a substantial decline inpopulation growth relative to other West German cities. We provide several pieces ofevidence that the decline of the border cities can be entirely accounted for by their loss inmarket access and is neither driven by differences in industrial structure nor differences in thedegree of warrelated destruction. Finally, we also find some first evidence of a recovery ofthe border cities after the re-unification of East and West Germany.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0688.pdf

How Does Product Market Competition Shape Incentive Contracts?

Vicente Cuñat María Guadalupe

CEPDP0687. May 2005.This paper studies the effect of product market competition on the explicitcompensation packages that firms offer to their CEOs, executives and workers. We use a largesample of both traded and non-traded UK firms and exploit a quasi-natural experimentassociated to an increase in competition. The sudden appreciation of the pound in 1996implied different changes in competition for sectors with different degrees of openness. Ourdifference in differences estimates show that a higher level of product market competitionincreases the performance pay sensitivity of compensation schemes, in particular forexecutives.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0687.pdf

Product Market Competition Returns to Skill and Wage Inequality

María Guadalupe

CEPDP0686. May 2005.This paper shows that increasing product market competition can have a direct impact on theemployment relationship and on wage inequality. I develop a simple model in which anincrease in product market competition increases returns to skill through the effect ofcompetition on the sensitivity of profits to cost reductions. I then show empirically thatrelative wages increase with competition using a large panel of United Kingdom workerswith complete work histories. I identify the impact of competition on returns to skill in thepanel, using two exogenous measures of competition provided by two quasi-naturalexperiments. Quantile regressions indicate that increased competition also raised returns tounobserved ability.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0686.pdf

New Survey Evidence on Recent Changes in UK Union Recognition

Jo Blanden Stephen Machin John Van Reenen

CEPDP0685. May 2005.This paper reports results from a recent survey we conducted on the union status of over 650firms in the private sector of the UK. Compared to earlier periods, the survey shows that since 1997 there hasbeen a slight fall in derecognition, but a relatively large increase in union recognition. Almost 11% of firmsreport experiencing some new recognition, whilst 7% reported some derecognition. In the late 1980s newrecognitions among similar firms were much lower (3% between 1985 to 1990 according to Gregg and Yates,1991). In our survey, new recognitions were more prevalent in larger firms and in regions and industries whereunion membership was already high. New recognitions were less likely to have occurred in companies withhigher wages, higher productivity and higher capital intensity. The ‘blip up’ in new recognitions is consistentwith the idea that the incoming Labour government had a positive effect on the ability of unions to gainrecognition, either through the 1999 legislation or more indirectly through changing the political climate.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0685.pdf

Capital Mobility and Unemployment Dynamics: Evidence from a Panel of OECD Countries

Giovanna Vallanti

CEPDP0684. April 2005.We use a panel of 20 OECD countries over a 30-year period to estimate the implications ofinternational capital mobility for unemployment. We find that the increase in capital flowssince the mid1980s has contributed to an amplification of the impulse response ofunemployment to country-specific shocks and to a fall in the persistence of unemployment inresponse to the same shocks.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0684.pdf

Rising Trade Costs? Agglomeration and Trade with Endogenous Transaction Costs

Gilles Duranton Michael Storper

CEPDP0683. April 2005.While transport costs have fallen, the empirical evidence also points at rising total trade costs.In a model of industry location with endogenous transaction costs, we show how and underwhich conditions a decline in transport costs can lead to an increase in the total cost of trade.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0683.pdf

Is ECB Communication Effective?

Carlo Rosa Giovanni Verga

CEPDP0682. April 2005.In its Monthly Bulletin of November 2002, the European Central Bank (ECB) stated that themonthly press conference held by its President represents one of its most importantcommunication channels and that it provides a comprehensive summary of the policyrelevant assessment of economic developments. After providing a glossary to translate thequalitative information of the press conferences into an ordered scale, we verify empiricallywhether and to what extent market expectations react to the information released by the ECB.We found that the public not only understand but also believe the signals sent by theEuropean monetary authority.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0682.pdf

Productivity Growth and the Role of ICT in the United Kingdom: An Industry View, 1970-2000

Nicholas Oulton Sylaja Srinivasan

CEPDP0681. March 2005.We use a new industry-level dataset to quantify the role of ICT in explaining productivitygrowth in the UK, 1970-2000. The dataset is for 34 industries covering the whole economy(31 in the market sector). Using growth accounting, we find that ICT capital played anincreasingly important, and in the 1990s the dominant, role in accounting for labourproductivity growth in the market sector. Econometric evidence also supports an importantrole for ICT. We also find econometric evidence that a boom in complementary investment inthe 1990s could have led to a decline in the conventional measure of TFP growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0681.pdf

Crime and Police Resources: The Street Crime Initiative

Stephen Machin Olivier Marie

CEPDP0680. March 2005.In this paper we look at links between police resources and crime in a different way to theexisting economics of crime work. To do so we focus on a policy intervention - the StreetCrime Initiative - that was introduced in England and Wales in 2002. This allocatedadditional resources to some police force areas to combat street crime, whereas other forcesdid not receive any additional funding. Estimates derived from several empirical strategiesshow that robberies did fall significantly in SCI police forces relative to non-SCI forces afterthe initiative was introduced. Moreover, the policy seems to have been a cost effective one.There is some heterogeneity in this positive net social benefit across different SCI policeforces, suggesting that some police forces may have made better use of the extra resourcesthan others. Overall, we reach the conclusion that increased police resources do in fact leadto lower crime, at least in the context of the SCI programme we study.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0680.pdf

The Part-Time Pay Penalty

Alan Manning Barbara Petrongolo

CEPDP0679. March 2005.In 2003, women working part-time in the UK earned, on average, 22% less than women working full-time. Compared to women who work FT, PT women are more likely to have low levels of education, to be in a couple, to have young and numerous children, to work in small establishments in distribution, hotels and restaurants and in low-level occupations. Taking account of these differences, the PT penalty for identical women doing the same job is estimated to be about 10% if one does not take account of differences in the occupations of FT and PT women and 3% if one does. The occupational segregation of PT and FT women can explain most of the aggregate PT pay penalty. In particular, women who move from FT to PT work are much more likely to change employer and/or occupation than those who maintain their hours status. And, when making this transition, they tend to make a downward occupational move, evidence that many women working PT are not making full use of their skills and experience. Women working PT in the other EU countries have similar problems to the UK but the UK has the highest PT pay penalty and one of the worst problems in enabling women to move between FT and PT work without occupational demotions. At the same time, PT work in the UK carries a higher job satisfaction premium (or a lower job satisfaction penalty) than in most other countries. Policy initiatives in recent years like the National Minimum Wage, the Part-Time Workers Regulations and the Right to Request Flexible Working appear to have had little impact on the PT pay penalty as yet although it is too early to make a definitive assessment of the full impact of some of these regulations. The most effective way to reduce the PT pay penalty would be to strengthen rights for women to move between FT and PT work without losing their current job.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0679.pdf

Job Security and Job Protection

Andrew Clark Fabien Postel-Vinay

CEPDP0678. February 2005.We construct indicators of the perception of job security for various types of jobs in 12 European countriesusing individual data from the European Community Household Panel (ECHP). We then consider the relationbetween reported job security and OECD summary measures of Employment Protection Legislation (EPL)strictness on one hand, and Unemployment Insurance Benefit (UIB) generosity on the other. We find that, aftercontrolling for selection into job types, workers feel most secure in permanent public sector jobs, least secure intemporary jobs, with permanent private sector jobs occupying an intermediate position. We also find thatperceived job security in both permanent private and temporary jobs is positively correlated with UIBgenerosity, while the relationship with EPL strictness is negative: workers feel less secure in countries wherejobs are more protected. These correlations are absent for permanent public jobs, suggesting that such jobs areperceived to be by and large insulated from labor market fluctuations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0678.pdf

Evaluating the Performance of the Search and Matching Model

Eran Yashiv

CEPDP0677. February 2005.Does the search and matching model fit aggregate U.S. labor market data? While the modelhas become an important tool of macroeconomic analysis, recent literature pointed to somefailures in accounting for the data. This paper aims to answer two questions: (i) Does themodel fit the data, and, if so, on what dimensions? (ii) Does the data “fit” the model, i.e. whatare the data which are relevant to be explained by the model? The analysis shows that themodel does fit certain specifications of the data on many dimensions, though not on all. Thisincludes capturing the high persistence and high volatility of most of the key variables, aswell as the negative co-variation of unemployment and vacancies. It offers a workable,empirically-grounded version of the model for the analysis of aggregate U.S. labor marketdynamics. The paper provides macroeconomists guidance concerning the relevant “buildingblock” for modelling the labor market, both in terms of the model and in terms of the data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0677.pdf

Catching a Wave: the Adoption of Voice and High Commitment Workplace Practices in Britain: 1984-1998

Alex Bryson Rafael Gomez Tobias Kretschmer

CEPDP0676. February 2005.In this paper we treat workplace voice and systems of high-commitment human resourcemanagement (HCHRM) as technological innovations in order to account for the unevendiffusion patterns observed across establishments. Using British data, the paper finds thatvariables highlighted in the technological diffusion literature are significant predictors of voiceand HRM adoption decisions. Workplace size, size of multi-establishment network, ownershiptype, set-up date and network affects all play a significant role in high-commitment HRMadoption. We also find that union presence, per se, is not an inhibitor to the adoption of highcommitment HRM practices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0676.pdf

Identifying Technology Spillovers and Product Market Rivalry

Nick Bloom Mark Schankerman John Van Reenen

CEPDP0675. February 2005.Government policies to support R&D are predicated on empirical evidence of R&D"spillovers" between firms. But there are two countervailing R&D spillovers: positive effectsfrom technology spillovers and negative effects from business stealing by product marketrivals. We develop a general framework showing that technology and product marketspillovers have testable implications for a range of performance indicators, and exploit theseusing distinct measures of a firm’s position in technology space and product market space.We show using panel data on U.S. firms between 1981 and 2001 that both technology andproduct market spillovers operate, but that net social returns are several times larger thanprivate returns. The spillover effects are also revealed when we analyze three high-techsectors in detail - pharmaceuticals, computer hardware and telecommunication equipment.Using the model we evaluate three R&D subsidy policies and show that the typical focus ofsupport for small and medium firms may be misplaced.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0675.pdf

The Impact of Training on Productivity and Wages: Evidence from British Panel Data

Lorraine Dearden Howard Reed John Van Reenen

CEPDP0674. February 2005.It is standard in the literature on training to use wages as a sufficient statistic for productivity. But there aremany reasons why wages and productivity may diverge. This paper is part of a smaller literature on the effectsof work-related training on direct measures of productivity. We construct a panel of British industries between1983 and 1996 containing training, productivity and wages. Using a variety of econometric estimationtechniques (including system GMM) we find that training is associated with significantly higher productivity.Raising the proportion of workers trained in an industry by one percentage point (say from the average of 10%to 11%) is associated with an increase in value added per worker of about 0.6% and an increase in wages ofabout 0.3%. Furthermore, we find that the magnitude of the impact of training on wages is only half as large asthe impact of training on productivity, implying that the existing literature has underestimated the importance oftraining. We also show evidence using complementary datasets (e.g. from individuals) that is suggestive ofexternalities of training and imperfect competition.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0674.pdf

Inactivity Among Prime Age Men in the UK

Giulia Faggio Stephen Nickell

CEPDP0673. February 2005.Inactivity rates among prime-age men in the UK have risen by at least five times since theearly 1970s whereas unemployment rates are much the same. Furthermore, inactivity isstrongly concentrated among the unskilled and those suffering from a limiting long-termillness or disability. In our analysis of inactivity rates by region and age group we find thatmale inactivity responds negatively to variations in the wages of low level occupations andpositively to fluctuations in incapacity benefit.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0673.pdf

Multinationals and US Productivity Leadership: Evidence from Great Britain

Chiara Criscuolo Ralf Martin

CEPDP0672. January 2005.We study the productivity of US owned plants in the UK. Using a new dataset that identifies foreignand domestic MNEs, we find that UK MNEs are less productive than US affiliates, but as productiveas non US foreign affiliates. We investigate the source of the US and MNE advantage. We findevidence confirming that the MNE advantage is driven by sharing superior firm level assets acrossplants and by cherry picking the better plants in a country. The additional superiority of US firmsseems entirely driven by their particular ability to takeover the best British plants. Thirdly, the studyfeatures a novel approach to TFP calculation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0672.pdf

Profit Share and Returns on Capital Stock in Italy: the Role of Privatisations behind the Rise of the 1990s

Roberto Torrini

CEPDP0671. January 2005.Profit share in Italy has been growing between the mid-1970s and the mid-1990s, remainingstable at historically high levels since than. After dropping in the first half of the 1070s,owing to an unprecedented rapid rise in wages, profit share started to recover. The rise duringthe 1980s involved the entire business sector and was part of this recovery process. Duringthe 1990s profit share continued to grow on average, but with large cross-sector differences.Profit share in manufacturing, which is more exposed to international competition, declined,together with the returns on capital stock, but increased in the rest of the business sector. Weshow that the better performance of the non-manufacturing business sector is mainly due tothe industries most affected by the large-scale privatisations and restructuring of State-ownedcompanies that began in the first half of the 1990s. They led to a rapid growth in total factorproductivity and a deceleration in wages, without a major impact on the market power ofprivatised companies, even those previously in the position of incumbent monopolists. Ourevidence for Italy thus strongly supports the hypothesis that profit share growth during the1990s, which was also observed in other countries, was mainly due to a redistribution of rentsrather than to biased technological change.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0671.pdf

Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

Silvia Ardagna Francesco Caselli Timothy Lane

CEPDP0670. January 2005.We use a panel of 16 OECD countries over several decades to investigate the effects ofgovernment debts and deficits on long-term interest rates. In simple static specifications, aone-percentage-point increase in the primary deficit relative to GDP increasescontemporaneous long-term interest rates by about 10 basis points. In a vector autoregression(VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10years. The effect of debt on interest rates is non-linear: only for countries with above-averagelevels of debt does an increase in debt affect the interest rate. World fiscal policy is alsoimportant: an increase in total OECD-government borrowing increases each country’sinterest rates. However, domestic fiscal policy continues to affect domestic interest rates evenafter controlling for worldwide debts and deficits.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0670.pdf

Can Comparative Advantage Explain the Growth of US Trade?

Alejandro Cuñat Marco Maffezzoli

CEPDP0669. January 2005.We present a dynamic comparative advantage model in which moderate reductions in trade costs cangenerate sizable increases in trade volumes over time. A fall in trade costs has two effects on thevolume of trade. First, for given factor endowments, it raises the degree of specialization of countries,leading to a larger volume of trade in the short run. Second, it raises the factor price of each country’sabundant production factor, leading to diverging paths of relative factor endowments across countriesand a rising degree of specialization. A simulation exercise shows that a fall in trade costs over timeproduces a non-linear increase in the trade share of output as in the data. Even when elasticities ofsubstitution are not particularly high, moderate reductions in trade costs lead to large trade volumesover time. We present further empirical evidence in favour of our approach, documenting the linkbetween trade liberalization and the cross-country divergence of investment shares.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0669.pdf

Is Poland the Next Spain?

Francesco Caselli Silvana Tenreyro

CEPDP0668. January 2005.We revisit Western Europe’s record with labor-productivity convergence, and tentatively extrapolateits implications for the future path of Eastern Europe. The poorer Western European countries caughtup with the richer ones through both higher rates of physical capital accumulation and greater totalfactor productivity gains. These (relatively) high rates of capital accumulation and TFP growth reflectconvergence along two margins. One margin (between industry) is a massive reallocation of laborfrom agriculture to manufacturing and services, which have higher capital intensity and use resourcesmore efficiently. The other margin (within industry) reflects capital deepening and technology catchupat the industry level. In Eastern Europe the employment share of agriculture is typically quitelarge, and agriculture is particularly unproductive. Hence, there are potential gains from sectoralreallocation. However, quantitatively the between-industry component of the East’s income gap isquite small. Hence, the East seems to have only one real margin to exploit: the within industry one.Coupled with the fact that within-industry productivity gaps are enormous, this suggests thatconvergence will take a long time. On the positive side, however, Eastern Europe already has levels ofhuman capital similar to those of Western Europe. This is good news because human capital gapshave proved very persistent in Western Europe’s experience. Hence, Eastern Europe does start outwithout the handicap that is harder to overcome.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0668.pdf

Accounting for Cross-Country Income Differences

Francesco Caselli

CEPDP0667. January 2005.Why are some countries so much richer than others? Development Accounting is a first-passattempt at organizing the answer around two proximate determinants: factors of productionand efficiency. It answers the question “how much of the cross-country income variance canbe attributed to differences in (physical and human) capital, and how much to differences inthe efficiency with which capital is used?” Hence, it does for the cross-section what growthaccounting does in the time series. The current consensus is that efficiency is at least asimportant as capital in explaining income differences. I survey the data and the basicmethods that lead to this consensus, and explore several extensions. I argue that some ofthese extensions may lead to a reconsideration of the evidence.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0667.pdf

Designing Target Rules for International Monetary Policy Cooperation

Gianluca Benigno Pierpaolo Benigno

CEPDP0666. December 2004.This study analyzes a two-country dynamic general equilibrium model with nominal rigidities, monopolisticcompetition and producer currency pricing. A quadratic approximation to the utility of the consumers is derivedand assumed as the policy objective function of the policymakers. It is shown that only under special conditionsthere are no gains from cooperation and moreover that the paths of the exchange rate and prices in theconstrained-efficient solution depend on the kind of disturbance that affects the economy. It might be the caseeither for fixed or floating exchange rates. Despite this result, simple targeting rules that involve only targets forthe growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0666.pdf

Entrepreneurship: Can the Jack-of-All-Trades Attitude be Aquired?

Olmo Silva

CEPDP0665. December 2004.Entrepreneurs are believed to be the ultimate engine of modern economic systems. Yet, the study ofentrepreneurship suffers from the lack of consensus on the most crucial question: what makes anentrepreneur? A recent theory developed by Edward Lazear suggests that individuals mastering abalanced set of talents across different fields, i.e. the Jacks-of-All-Trades (JATs), have a highprobability of becoming entrepreneurs. In this paper, I investigate whether the JAT Attitude is just aninnate ability or a skill that can be trained to enhance individuals’ chances of becoming entrepreneurs.Using panel techniques, I show that changes in the spread of knowledge across different fields do notincrease the probability of becoming an entrepreneur. This suggests that, if the JAT Attitude mattersfor entrepreneurship, it is an innate and time-invariant individual attribute, rather than a skill that canbe acquired.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0665.pdf

Sinking the Blues: the Impact of Shop Closing Hours on Labor and Product Markets

Maarten Goos

CEPDP0664. December 2004.There is a growing consensus among economists that extending shop opening hours createsjobs. While this is probably true in deregulating industries, this paper argues there are somedeficiencies in the existing hypotheses about how exactly deregulation affects employment.First, this paper exploits recent changes in Sunday Closing Laws in the US to find that totalemployment, total revenue and the number of shops increase in deregulating industries andpossibly decrease in non-deregulating industries. Second, a model assuming consumers likeshopping on Sunday, monopolistic competition and low barriers to entry is presented to showhow consumer behavior and retail competition can explain the observed impact ofderegulation on retail labor and product markets and therefore ultimately employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0664.pdf

Productivity Growth and Employment: Theory and Panel Estimates

Christopher A. Pissarides Giovanna Vallanti

CEPDP0663. December 2004.Theoretical predictions of the effect of TFP growth on employment are ambiguous, anddepend on the extent to which new technology is embodied in new jobs. We estimate amodel for employment, wages and investment with an annual panel for the United States,Japan and Europe and find that TFP growth increases employment. For the United StatesTFP growth explains the trend change in unemployment. We evaluate the model and findthat creative destruction plays no part in aggregate unemployment dynamics. The model canexplain up to half of the estimated impact of growth on unemployment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0663.pdf

Financial Globalization and Exchange Rates

Philip R. Lane G Milesi-Feretti

CEPDP0662. December 2004.The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rateadjustment in a world economy that was characterized by widespread restrictions on international capitalmobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for theinternational monetary system. In particular, large gross cross-holdings of foreign assets and liabilities meansthat the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional tradebalance channel. Accordingly, this paper empirically explores some of the inter-connections between financialglobalization and exchange rate adjustment and discusses the policy implications.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0662.pdf

Do Job Security Guarantees Work?

Alex Bryson Lorenzo Cappellari Claudio Lucifora

CEPDP0661. November 2004.We investigate the effect of employer job security guarantees on employee perceptions of jobsecurity. Using linked employer-employee data from the 1998 British Workplace EmployeeRelations Survey, we find job security guarantees reduce employee perceptions of jobinsecurity. This finding is robust to endogenous selection of job security guarantees byemployers engaging in organisational change and workforce reductions. Furthermore, thereis no evidence that increased job security through job guarantees results in greater workintensification, stress, or lower job satisfaction.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0661.pdf

Unions, Performance-Related Pay and Procedural Justice: the Case of Classroom Teachers

Richard Belfield David Marsden

CEPDP0660. November 2004.Performance-related pay (PRP) and performance management (PM) are now a part of the organizationallandscape that unions face in the UK’s public services. While PRP and PM threaten the scope of traditionalunion bargaining activities, they simultaneously offer a new role to unions as providers of ‘procedural justiceservices’ to both union members and employers. We explore the case of the introduction of these systems forclassroom teachers in England and Wales as a means of testing this idea. Our survey evidence shows thatclassroom teachers experiencing the introduction of PRP have expressed a strong demand for such services fromthe teachers’ unions. Further, analysis of the PRP implementation process for classroom teachers indicates thatthe teachers’ unions have progressively assumed a ‘procedural justice role’ since its introduction. Union actionin this regard has led to substantial modification over time of classroom teachers’ PRP and PM. These changeshave addressed many of the concerns of teachers, have created a new institutional role for the relevant unions,and may permit the systems to avoid the operational difficulties they have experienced elsewhere in the UK’spublic services.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0660.pdf

How Special is the Special Relationship? Using the Impact of US R&D Spillovers on UK Firms as a Test of Technology Sourcing

Rachel Griffith Rupert Harrison John Van Reenen

CEPDP0659. November 2004.How much does US-based R&D benefit other countries and through what mechanisms? We test the "technologysourcing" hypothesis that foreign research labs located on US soil tap into US R&D spillovers and improvehome country productivity. Using panels of UK and US firms matched to patent data we show that UK firmswho had established a high proportion of US-based inventors by 1990 benefited disproportionately from thegrowth of the US R&D stock over the next 10 years. We estimate that UK firms’ Total Factor Productivitywould have been at least 5% lower in 2000 (about $14bn) in the absence of the US R&D growth in the 1990s.We also find that technology sourcing is more important for countries and industries who have "most to learn".Within the UK, the benefits of technology sourcing were larger in industries whose TFP gap with the US wasgreater. Between countries, the growth of the UK R&D stock did not appear to have a major benefit for USfirms who located R&D labs in the UK. The "special relationship" between the UK and the US appearsdistinctly asymmetric.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0659.pdf

Motivating Employee Owners in ESOP Firms: Human Resource Policies and Company Performance

CEPDP0658. November 2004.What enables some employee ownership firms to overcome the free rider problem andmotivate employees to improve performance? This study analyzes the role of humanresource policies in the performance of employee ownership companies, using employeesurvey data from 14 companies and a national sample of employee-owners. Between-firmcomparisons of 11 ESOP firms show that an index of human resource policies, nominallycontrolled by management, is positively related to employee reports of co-workerperformance and other good workplace outcomes (including perceptions of fairness, goodsupervision, and worker input and influence). Within-firm comparisons in three ESOP firms,and exploratory results from a national survey, show that employee-owners who participatein employee involvement committees are more likely to exert peer pressure on shirking coworkers.We conclude that an understanding of how and when employee ownership workssuccessfully requires a three-pronged analysis of: 1) the incentives that ownership gives; 2)the participative mechanisms available to workers to act on those incentives; and 3) thecorporate culture which battles against tendencies to free ride.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0658.pdf

Inflation, Inequality and Social Conflict

Christopher Crowe

CEPDP0657. November 2004.This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents’ income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of inflation. Inflation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. Conversely, the use of income tax will be higher in countries with lower inequality and less pro-rich bias. The model also predicts that although inequality and political bias will have an impact on the composition of revenue, it will have no effect on the overall level of government spending (assuming that spending is on public goods only). These results are largely confirmed by the empirical portion of the paper. The paper’s novel features are its simplifications at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives unequivocal comparative statics results under relatively undemanding assumptions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0657.pdf

The Internationalisation of Public Welfare Policy

James Banks R Disney Alan Duncan John Van Reenen

CEPDP0656. November 2004.With increasing globalisation of knowledge, there are increased opportunities to 'learn' from the experience ofpolicy interventions elsewhere. This paper presents evidence on the extent of international convergence inpublic policy, with particular focus on labour, welfare, savings and retirement policy. Questions addressed inthis framework include: to what extent is policy diffusion or convergence a real and relevant phenomenon?What role have economists played in the transfer of policy across national domains? Has policy transfer led to'better' public policy? Are there any practical limitations to policy convergence?

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0656.pdf

The Self Selection of Migrant Workers Revisited

Eran Yashiv

CEPDP0655. October 2004.Work of low-skilled migrant workers from developing countries in developed economies is a growingphenomenon and a key political and economic issue. An extensive literature has found (for the mostpart) that these workers come from the lower part of the skill distribution. This paper revisits theissue, using a self-selection model, a unique data-set on migrant workers as well as on workers thatchose not to migrate (‘stayers’), and direct estimation of the moments of the latent unobserved skilldistributions. The main findings are that there are two dimensions to self-selection: in terms ofobserved skills, a substantial migration premium lures migrant workers, while very low returns toskills in the foreign economy deter skilled workers, leading to negative self-selection. In terms ofunobservable skills, self-selection is found to be positive rather than negative. The latter findingentails substantial increases in mean wages and reduction in wage inequality, relative to randomassignment and to the alternative of not migrating. The analysis also demonstrates that estimates ofskill premia for migrants — an important issue in the immigration literature — are upward biased ifselection is not accounted for. Relevant skills are multi-dimensional, hence assignments in thiscontext are non-hierarchical.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0655.pdf

Disengagement 14-16: Context and Evidence

Hilary Steedman Sheila Stoney

CEPDP0654. October 2004.This paper presents an overview of our current state of knowledge regarding poor motivation of 14-16 year oldschool pupils in the UK. A number of experts in the field from a variety of disciplines presented papers on thistopic to a series of seminars held at the London School of Economics between 2002 and 2003. These papers,summarised here, present evidence from a historical, comparative, and social science perspectives and report theresults of evaluation of government intervention programmes to improve motivation. International comparisons(PISA) show UK disengagement below the OECD average but the UK has the strongest link between socioeconomicdisadvantage and disengagement. We identify a very small ‘out of touch’ group who have practicallylost touch with school and a larger group – around one fifth of the cohort - who could be characterised as‘disaffected but in touch’. Finally, we identify a further group – perhaps 15 per cent of the cohort who gainbetween 1 and 4 GCSE passes at Grades A*-C but who have not reached full potential as a result of loss ofinterest in learning. The ‘out of touch’ group often requires intensive one-on-one mentoring outside the schoolcontext. Evaluation of government intervention programmes has not so far shown an obvious way forward forthe ‘disaffected but in touch’ group, targeted principally by workplace learning measures. For the ‘1-4 Grade C’group, there may be something of a magic bullet - namely better vocational options.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0654.pdf

Globalisation, ICT and the Nitty Gritty of Plant Level Datasets

Ralf Martin

CEPDP0653. September 2004.The net entry contribution to aggregate productivity growth has increased dramatically in the UK over 1990saccording to calculations based on data from the Annual Respondents Database (ARD). Some recent studieshave tried to link this to other structural changes over the same period such as increased globalisation and usageof ICT. I argue that the increase might equally have been caused by a systematic bias that is introduced togrowth decompositions through random survey sampling of the underlying plant or firm panel datasets. Thisbias – despite being a general problem of growth decompositions does not seem to have been noticed in theliterature yet. In the 1990s the Office for National Statistics (ONS) has successively increased the share of plantsin the population of the ARD that are subject to random sampling. I show that this could cause the bias tospuriously increase the net entry contribution. My results show that correcting for the bias makes a substantialdifference: the net entry contribution is about 10 percentage points lower on the corrected series in the 1990s.Surprisingly however, the positive correlation between ICT and net entry share – a main result of earlier studies– becomes more significant.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0653.pdf

Labor Market Institutions, Wages and Investment

Jörn-Steffen Pischke

CEPDP0652. September 2004.Labor market institutions, via their effect on the wage structure, affect the investmentdecisions of firms in labor markets with frictions. This observation helps explain rising wageinequality in the US, but a relatively stable wage structure in Europe in the 1980s. Thesedifferent trends are the result of different investment decisions by firms for the jobs typicallyheld by less skilled workers. Firms in Europe have more incentives to invest in less skilledworkers, because minimum wages or union contracts mandate that relatively high wages haveto be paid to these workers. I report some empirical evidence for investments in training andphysical capital across the Atlantic, which is roughly in line with this theoretical reasoning.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0652.pdf

Evaluating Urban Transport Improvements: Cost Benefit Analysis in the Presence of Agglomeration and Income Taxation

Anthony J. Venables

CEPDP0651. September 2004.There is a substantial empirical literature quantifying the positive relationship between city size and productivity. The paper draws out the implications of this productivity relationship for evaluations of urban transport improvements. A theoretical model is developed and used to derive a wider cost-benefit measure that includes productivity effects. The order of magnitude of such effects is illustrated by calculations in a simple computable equilibrium model. It is argued tht productivity effects, particularly when combined with distortionary taxation, are quantitatively important, substantially increasing the gains that are created by urban transport improvements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0651.pdf

Is There a Market for Work Group Servers? Evaluating Market Level Demand Elasticities Using Micro and Macro Models

John Van Reenen

CEPDP0650. September 2004.This paper contains an empirical analysis demand for “work-group” (or low-end) servers. Servers are at thecentre of many US and EU anti-trust debates, including the Hewlett-Packard/Compaq merger and investigationsinto the activities of Microsoft. One question in these policy decisions is whether a high share of work serversindicates anything about shortrun market power. To investigate price elasticities we use model-level panel dataon transaction prices, sales and characteristics of practically every server in the world. We contrast estimatesfrom the traditional “macro” approaches that aggregate across brands and modern “micro” approaches that usebrand-level information (including both “distance metric” and logit based approaches). We find that the macroapproaches lead to overestimates of consumer price sensitivity. Our preferred micro-based estimates of themarket level elasticity of demand for work group servers are around 0.3 to 0.6 (compared to 1 to 1.3 in themacro estimates). Even at the higher range of the estimates, however, we find that demand elasticities aresufficiently low to imply a distinct “anti-trust” market for work group servers and their operating systems. It isunsurprising that firms with large shares of work group servers have come under some antitrust scrutiny.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0650.pdf

Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab

Rachel Griffith Stephen Redding Helen Simpson

CEPDP0649. September 2004.This paper examines the relationship between foreign ownership and productivity, paying particular attention totwo issues neglected in the existing literature – the role of multinationals in service sectors and the importanceof R&D activity conducted by foreign multinationals. We review existing theoretical and empirical work, whichlargely focuses on manufacturing, before presenting new evidence using establishment-level data on production,service and R&D activity for the United Kingdom. We find that multinationals play an important role in servicesectors and that entry of foreign multinationals by takeover is more prevalent than greenfield investment. Wefind that British multinationals have lower levels of labour productivity than foreign multinationals, but thedifference is less stark in the service sector than in the production sector, and that British multinationals havelower levels of investment and intermediate use per employee. We also find that foreign-owned multinationalsconduct a substantial amount of UK R&D. We discuss the implications of these and other findings for the policydebate on incentives to influence multinational firms’ location choices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0649.pdf

Cities, Matching and the Productivity Gains of Agglomeration

Fredrik Andersson Simon Burgess Julia Lane

CEPDP0648. September 2004.The striking geographical concentration of economic activities suggests that there are substantial benefits toagglomeration. However, the nature of those benefits remains unclear. In this paper we take advantage of a newdataset to quantify the role of one of the main contenders - the matching of workers and jobs. Using individuallevel data for two large US states we show that thicker urban labour markets are associated with moreassortative matching between workers and firms. Another critical condition is required for this to generatehigher productivity: complementarity of worker and firm quality in the production function. Usingestablishment level productivity regressions, we show that such complementarity is found in our data. Puttingtogether the production and matching relationships, we show that production complementarity and assortativematching is an important source of the urban productivity premium.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0648.pdf

Monitoring Colleagues at Work: Profit-Sharing, Employee Ownership, Broad-Based Stock Options and Workplace Performance in the United States

Joseph Blasi Richard Freeman Douglas Kruse

CEPDP0647. August 2004.This study seeks to increase our understanding of worker reactions to shirking by analyzing two new questionson shirking from the 2002 General Social Science Survey (GSS). We developed the questions in order toilluminate the factors that enable some shared capitalist enterprises to overcome the free rider or 1/N dilemma.Our guiding principle is the notion that for profit-sharing, worker ownership, and broad-based stock options toproduce economic benefits, workers must “buy into” shared arrangements and create a workplace culture thatdiscourages shirking.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0647.pdf

Is Seniority-Based Pay Used as a Motivation Device? Evidence from Plant Level Data

Alberto Bayo-Moriones Jose E. Galdon-Sanchez Maia Güell

CEPDP0646. August 2004.In this paper we use data from industrial plants to investigate if seniority-based pay is used asa motivational device for production workers. Alternatively, seniority-based pay could simplybe a wage setting rule not necessarily related to the provision of incentives. Unlike previouspapers, we use a direct measure of seniority-based pay as well as measures of monitoringdevices and piece-rates. We find that firms that offer seniority-based pay are less likely tooffer explicit incentives. They are also less likely to invest in monitoring devices. We alsofind that firms that offer seniority-based pay are more likely to engage in other humanresource management policies that result in long employment relationships. Overall theseresults suggest that seniority-based pay is indeed used as a motivation device.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0646.pdf

Crime and Benefit Sanctions

Stephen Machin Olivier Marie

CEPDP0645. August 2004.In this paper we look at the relationship between crime and economic incentives in a different way to other workin this area. We look at changes in unemployment benefits and the imposition of benefit sanctions as a means ofstudying the way that people on the margins of crime may react to economic incentives. The paper relies on aquasiexperimental setting induced by the introduction of the Jobseekers Allowance (JSA) in the UK in October1996. We look at crime rates in areas more and less affected by the policy change before and after JSAintroduction. In the areas more affected by the tougher benefit regime crime rose by more. These were also theareas with higher outflows from unemployment and particularly to people dropping off the register but not intowork, education/training or onto other benefits. Areas that had more sanctioned individuals also experiencedhigher crime rates after the introduction of JSA. As such the benefit cuts and sanctions embodied in the JSAappear to have induced individuals previously on the margins to engage in crime. Thus there appears to havebeen an unintended policy consequence, associated with the benefit reform, namely higher crime.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0645.pdf

Are European Labor Markets As Awful As All That?

Richard Freeman

CEPDP0644. August 2004.“The standard explanation of why advanced Europe has generated less work per adult thanthe US is that something is seriously amiss with EU labor markets. The theme of this piece issimple. Compared to an ideal competitive market, EU labor markets fall seriously short, butcompared to labor markets in the US and to other markets in advanced capitalist countries,EU labor markets do not live up to their awful press. The variety of labor market institutionsamong EU countries, moreover, reveals a much richer picture of performance and diversitythan the blanket condemnation of inflexibility suggests. I make my case in four propositions,with supporting evidence. My comparisons are with the actual labor market in the US andwith other real world markets, not with the economists’ dream ideal competitive markets. Ireview briefly the evidence that labor markets in the EU have performed worse on thequantity side of the market but better on the price or wage side of the market than the USlabor market, then consider the extent to which differences in outcomes are attributable todifferences in the performance of labor markets.”

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0644.pdf

Comparative Advantage and Heterogeneous Firms

Andrew B. Bernard Stephen Redding Peter K. Schott

CEPDP0643. August 2004.This paper presents a model of international trade that features heterogeneous firms, relativeendowment differences across countries, and consumer taste for variety. The paper demonstrates thatfirm reactions to trade liberalization generate endogenous Ricardian productivity responses at theindustry level that magnify countries’ comparative advantage. Focusing on the wide range of firmlevelreactions to falling trade costs, the model also shows that, as trade costs fall, firms incomparative advantage industries are more likely to export, that relative firm size and the relativenumber of firms increases more in comparative advantage industries and that job turnover is higher incomparative advantage industries than in comparative disadvantage industries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0643.pdf

Spatial Determinants of Productivity: Analysis for the Regions of Great Britain

Patricia Rice Anthony J. Venables

CEPDP0642. July 2004.This paper uses NUTS3 sub-regional data for Great Britain to analyse the determinants of spatialvariations in income and productivity. We decompose the spatial variation of earnings into aproductivity effect and an occupational composition effect. For the former (but not the latter) wefind a robust relationship with proximity to economic mass, suggesting that doubling thepopulation of working age proximate to an area is associated with a 3.5% increase in productivityin the area. We measure proximity by travel time, and show that effects decline steeply with time,ceasing to be important beyond approximately 80 minutes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0642.pdf

Zipf's Law for Cities: A Cross Country Investigation

Kwok Tong Soo

CEPDP0641. July 2004.This paper assesses the empirical validity of Zipf¿s Law for cities, using new data on 73countries and two estimation methods ¿ OLS and the Hill estimator. With either estimator,we reject Zipf¿s Law far more often than we would expect based on random chance; for 53out of 73 countries using OLS, and for 30 out of 73 countries using the Hill estimator. TheOLS estimates of the Pareto exponent are roughly normally distributed, but those of the Hillestimator are bimodal. Variations in the value of the Pareto exponent are better explained bypolitical economy variables than by economic geography variables.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0641.pdf

We Can Work It Out: the Impact of Technological Change on the Demand for Low Skill Workers

Alan Manning

CEPDP0640. June 2004.There is little doubt that technology has had the most profound effect on altering the tasks that wehumans do in our jobs. Economists have long speculated on how technical change affects boththe absolute demand for labour as a whole and the relative demands for different types of labour.In recent years, the idea of skill-biased technical change has become the consensus view aboutthe current impact of technology on labour demand, namely that technical change leads to anincrease in the demand for skilled relative to unskilled labour painting a bleak future for theemployment prospects of less-skilled workers. But, drawing on a recent paper by Autor, Levyand Murnane (2003) about the impact of technology on the demand for different types of skills,this paper argues that the demand in the least-skilled jobs may be growing. But, it is argued thatemployment of the less-skilled is increasingly dependent on physical proximity to the moreskilledand may also be vulnerable in the long-run to further technological developments.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0640.pdf

Monetary Policy and Welfare in a Small Open Economy

Bianca De Paoli

CEPDP0639. May 2004.This paper characterizes welfare in a small open economy and derives the correspondingoptimal monetary policy rule. It shows that the utility-based loss function for a small openeconomy is a quadratic expression in domestic inflation, output gap and real exchange rate. Incontrast to previous works, this paper demonstrates that welfare in a small open economy,completely integrated with the rest of the world, is affected by exchange rate variability.Consequently, the optimal policy in a small open economy is not isomorphic to a closedeconomy and does not prescribe a pure floating exchange rate regime. Domestic inflationtargeting is optimal only under a particular parameterization, where the unique relevantdistortion in the economy is price stickiness. Under a general specification for preferencesand in the presence of inefficient steady state output, exchange rate targeting arises as part ofthe optimal monetary plan.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0639.pdf

White Hats or Don Quixotes? Human Rights Vigilantes in the Global Economy

Kimberly Ann Elliott Richard Freeman

CEPDP0638. May 2004.With the continuing expansion of global economic integration, labor standards in developingcountries have become a hot button issue. One result has been a proliferation of efforts to usethe market to put pressure directly on multinational corporations to improve wages andworking conditions in their overseas operations and to insist that their suppliers do so as well.This paper analyzes the dynamics of these efforts in terms of a 'market for standards' in whichconsumers, stimulated by human rights activists, demand that corporations improve workingconditions in supplier factories. The paper presents evidence that such a consumer demandexists and analyzes the incentives corporations face to respond to it. It examines the nature ofthe critical intermediary role played by activists in stimulating consumer demands andassesses the outcomes in the major anti-sweatshop campaigns of the 1990s. The paper alsoaddresses the limitations of such consumer-based campaigns and the concern expressed bysome that these activist campaigns may do more harm than good, by deterring investment inand trade with poor countries. It concludes with an overall assessment of when ¿doing good¿actually does good.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0638.pdf

Gender Segregation in Employment Contracts

Barbara Petrongolo

CEPDP0637. May 2004.This paper presents evidence on gender segregation in employment contracts in 15 EUcountries, using micro data from the ECHPS. Women are over-represented in part-time jobsin all countries considered, but while in northern Europe such allocation roughly reflectswomen¿s preferences and their need to combine work with child care, in southern Europepart-time jobs are often involuntary and provide significantly lower job satisfaction than fulltimeones. Women are also over-represented in fixed-term contracts in southern Europe, andagain this job allocation cannot be explained by preferences or productivity differentialsbetween the two genders. There is thus a largely unexplained residual in the gender joballocation, which may be consistent with some degree of discrimination in a few of the labourmarkets considered, especially in southern Europe.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0637.pdf

Can a Work Organization Have An Attitude Problem? The Impact of Workplaces on Employee Attitude and Economic Outcomes

Ann Bartel Richard Freeman Casey Ichniowski Morris Kleiner

CEPDP0636. May 2004.In this study we examine whether a workplace can induce good or bad attitudes among its employees andwhether any such ¿workplace attitudes¿ affect economic outcomes. This study analyzes responses ofthousands of employees working in nearly two hundred branches to the emp loyee opinion survey of amajor US bank in 1994 and 1996. The results document the existence and persistence of a genuineworkplace effect in how workers view their jobs and organizations. Employee attitudes differ significantlyacross branches in ways that cannot be explained by branches randomly drawing workers from adistribution of workers with different innate attitudes. Furthermore, newly hired workers adopt thefavourable or unfavourable attitudes that the branches exhibited before they arrived. These workplaceattitudes also have significant effects on economic outcomes. Branches with less favourable attitudes havehigher turnover, lower levels of sales, and lower rates of sales growth than branches where workers havemore favourable attitudes. Less favourable branch attitudes are also a significant predictor of subsequentbranch closings. The study¿s results show that there are happy and unhappy workplaces, as well as happyand unhappy workers, with very different patterns of turnover and productivity in these workplaces.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0636.pdf

Reconciling Workless Measures at the Individual and Household Level: Theory and Evidence from the United States, Britain, Germany, Spain and Australia

Paul Gregg Rosanna Scutella Jonathan Wadsworth

CEPDP0635. May 2004.Individual and household based aggregate measures of worklessness can, and do, offer conflicting signalsabout labour market performance. We outline a means of quantifying the extent of any disparity,(polarisation), in the signals stemming from individual and household-based measures of worklessness andapply this index to data from 5 countries over 25 years. Built around a comparison of the actual householdworkless rate with that which would occur if employment were randomly distributed over householdoccupants, we show that in all the countries we examine, there has been a growing disparity between theindividual and household based workless measures. The polarisation count can be decomposed to identifywhich household groups are exposed to workless concentrations and can also be used to test whichindividual characteristics account for any excess worklessness among these household groups. We showthat the incidence and magnitude of polarisation varies widely across countries, but that in all countriespolarisation has increased. For each country most of the discrepancies between the individual andhousehold workless counts stem from within-household factors, rather than from changing householdcomposition.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0635.pdf

Employment and Taxes

Stephen Nickell

CEPDP0634. May 2004.This paper considers the impact of taxation policy on market work. On the basis of theevidence, we find that a 10 percentage point rise in the tax wedge will reduce overall labourinput provided via the market by around 2 per cent of the population of working age. The taxwedge is the sum of the payroll, income and consumption tax rates.This only explains a minority of the market work differentials across count ries. Muchof the remainder is probably down to the differences in the social security systems supportingthe unemployed, the sick and disabled and the early retired.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0634.pdf

Threshold Effects and Firm Size: the Case of Firing Costs

Fabiano Schivardi Roberto Torrini

CEPDP0633. May 2004.We study the role of employment protection legislation (EPL) in determining firm size distribution. In manycountries the provisions of EPL are more stringent for firms above certain size thresholds. We construct asimple model that shows that the smooth relation between size and growth probability is interrupted inproximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset ofall Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in termsof discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of thethreshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, wecompute the long-run effects of EPL on size distribution. We find that average firm size would increase by lessthan 1% in steady state when removing the threshold; a quantitatively modest effect.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0633.pdf

Two Sides to Every Story: Measuring the Polarisation of Work

Paul Gregg Jonathan Wadsworth

CEPDP0632. May 2004.Individual and household based aggregate measures of joblessness can, and do, offer conflicting signals about labour market performance if work is unequally distributed. Thispaper introduces a simple set of indices that can be used to measure the extent of divergencebetween individual and household-based jobless measures. The indices, built around acomparison of the actual household jobless rate with that which would occur if work wererandomly distributed over the working age population, conform to basic consistency axiomsand can be decomposed to try to identify the likely source of any disparity betweennonemployment rates calculated at the 2 levels of aggregation. Applying these measures todata for Britain, we show that there has been a growing disparity ¿ polarisation - between theindividual and household based jobless measures that are largely unrelated to changes inhousehold structure or the principal characteristics associated with individual joblessness.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0632.pdf

Corporate Ownership Structure and Performance in Europe

Jeremy Grant Thomas Kirchmaier

CEPDP0631. April 2004.In this paper, we show that ownership structures vary considerably across Europe, and that the dominant form ofownership is not necessarily the most efficient one. These findings are in contradiction to similar research basedon US samples. The results also demonstrate that firms without a dominant shareholder tend to outperform theircountry peer groups. We base our analysis on a new and unique dataset of uniform ownership data of the largest100 firms in the five major European economies. We quantify the differences in ownership by comparing threedistinct ownership structures of firms and relating them to performance. For the first time we employ aHodrick-Prescott Filter, a methodology widely used in macroeconomics to isolate the trend growth componentsfrom cyclical fluctuations, to estimate the share price trend of each firm. We take this trend as a good indirectindicator of the quality of governance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0631.pdf

The Impact of an Innovative Human Resource Function on Firm Performance: the Moderating Role of Financing Strategy

J Dawson Neal Knight-Turvey Andrew Neal M West

CEPDP0630. April 2004.The current study examined the impact of the human resource function and financing strategyon the financial performance of 104 UK manufacturing firms. Hypotheses are drawn from aresource-based perspective on human resource management and a financial theoryperspective on capital structure. Results show that an innovative HR function is significantlyrelated to economic performance. However, the relationship between an innovative HRfunction and economic performance was moderated by the firm¿s financing strategy. Firmsobtained higher returns from an innovative HR function when pursuing a low leveraging(debt) financing strategy, a finding consistent with modern finance theory notions that firmspecificstrategic assets provide greatest value when financed primarily through equity asopposed to debt.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0630.pdf

A Statistical Framework for the Analysis of Productivity and Sustainable Development

Nicholas Oulton

CEPDP0629. April 2004.To analyse the consequences of the changing economic structure of the UK, we need aset of statistics broken down by industry that are consistent with the whole economymeasures available from the national accounts. The theory of growth accounting thenprovides a framework in which the contribution of each industry to the national economycan be measured and assessed. This paper identifies the obstacles currently facing aresearcher trying to implement this approach. It makes a number of recommendations forthe improvement of official statistics.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0629.pdf

Short Job Tenures and Firing Taxes in the Search Theory of Unemployment

Vasileios Gkionakis

CEPDP0628. April 2004.This paper studies the effects of firing taxes on the job destruction rate, when probationperiod - or temporary contract - policies are implemented in an otherwise exogenous jobseparation search model. It is shown that contrary to conventional wisdom, firing taxescan amplify the job turnover rate by providing incentives to destroy surviving matches atthe end of the probation period. Moreover, low skill workers are shown to be moreseverely affected while wage inequality across different productivity groups mayincrease.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0628.pdf

Balanced Growth With Structural Change

L. Rachel Ngai Christopher A. Pissarides

CEPDP0627. April 2004.We study a multi-sector model of growth with differences in TFP growth rates across sectorsand derive sufficient conditions for the coexistence of a balanced aggregate growth path, withall aggregates growing at the same rate, and structural change, characterized by sectoral laborreallocation. The conditions needed are weak restrictions on the utility and productionfunctions: goods should be poor substitutes and the intertemporal elasticity of substitutionshould be one. We present evidence from US and UK sectors, that is consistent with ourconclusions and successfully calibrate the shift from agriculture to manufacturing andservices in the United States.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0627.pdf

Organizational Climate and Company Productivity: the Role of Employee Affect and Employee Level

M Patterson P Warr M West

CEPDP0626. April 2004.Consistent with a growing number of models about affect and behaviour and with arecognition that perception alone provides no impetus for action, it was predicted thatassociations between company climate and productivity would be mediated by average levelof job satisfaction. In a study of 42 manufacturing companies, subsequent productivity wassignificantly correlated in controlled analyses with eight aspects of organizational climate(e.g. skill development and concern for employee welfare) and also with average jobsatisfaction. The mediation hypothesis was supported in hierarchical multiple regressions forseparate aspects of climate. In addition, an overall analysis showed that companyproductivity was more strongly correlated with those aspects of climate that had strongersatisfaction loadings. A second prediction, that managers¿ perceptions of climate would bemore closely linked to company productivity than would those of non-managers, was notsupported. However, managers¿ assessments of most aspects of their company¿s climatewere significantly more positive than those of non-managers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0626.pdf

Is There an Impact of Household Computer Ownership on Children's Educational Attainment in Britain?

John Schmitt Jonathan Wadsworth

CEPDP0625. March 2004.If personal computers (PCs) are used to enhance learning and information gathering across avariety of subjects, then a home computer might reasonably be considered an input in aneducational production function. Using data on British youths from the British HouseholdPanel Survey between 1991 and 2001, this paper attempts to explore the link betweenownership of a home computer at ages 15 and 17 and subsequent educational attainment inthe principal British school examinations taken at ages 16 (GCSEs) and 18 (A levels). Thedata show a significant positive associatio n between PC ownership and both the number ofGCSEs obtained and the probability of passing five or more GCSEs. These results survive aset of individual, household, and area controls, including using other household durables and\"future\" PC ownership as proxies for household wealth and other unobservable householdlevel effects. Home computer ownership is also associated with a significant increase in theprobability of passing at least one A level conditional on having passed five and increase inthe probability of successfully completing three or more A levels, conditional on havingpassed at least one A level.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0625.pdf

Do Organisational Climate and Strategic Orientation Moderate the Relationship Between Human Resource Management Practices and Productivity?

Andrew Neal M Patterson M West

CEPDP0624. March 2004.Contingency formulations of Human Resource Management (HRM) theory suggest thatthe effectiveness of HRM practices should vary across firms. This study examinedwhether the relationship between HRM practices and productivity in manufacturingcompanies is contingent upon organizational climate and strategic orientation.Information on HRM, organizational structure, and competitive strategy was collected byinterviewing senior managers, whilst organizational climate was assessed via employeesurveys. Although organizational climate and HRM practices were both positivelyassociated with subsequent productivity, the relationship between HRM practices andsubsequent productivity was stronger for firms with a poor climate.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0624.pdf

Do Friends and Relatives Really Help in Getting a Good Job?

Michele Pellizzari

CEPDP0623. March 2004.Informal contacts are extensively used by both firms and workers to find jobs and fill vacancies. Thecommon wisdom in the economic literature is that jobs created through this channel are of better qualityand pay higher wages than jobs created through formal methods. This paper explores the empiricalevidence for European countries using the European Community Household Panel (ECHP) and discovers alarge cross-country as well as cross-industry variation in the wage differentials between jobs found throughinformal and formal methods. Across countries and industries wage premiums and wage penalties tofinding jobs through personal contacts are equally frequent. This paper argues that such variation can beexplained by looking at firms' recruitment strategies. In labour markets where employers invest largely informal recruitment activities, matches created through this channel are likely to be of average better qualitythan those created through informal networks. A simple theoretical model is used to show that employersinvest more in recruitment for high productivity jobs and for positions that require considerable training.The empirical predictions of the theory are successfully tested using industry-level data on recruitmentcosts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0623.pdf

The Returns to Apprenticeship Training

Steven McIntosh

CEPDP0622. March 2004.This paper uses recent data from the UK Labour Force Survey to estimate the wage gains thatindividuals make on average if they complete an apprenticeship programme. The resultssuggest gains of around 5-7% for men, but no benefit for women. Further analysis extendsthe results by considering the returns by age group, by qualification obtained, by highest priorqualification and by industrial sector. A key finding emerging from this further analysis is theimportance of acquiring qualifications with the apprenticeship, at level 3 or above.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0622.pdf

The Impact of Vocational Qualifications on the Labour Market Outcomes of Low-Achieving School-Leavers

Steven McIntosh

CEPDP0621. March 2004.This paper creates a pseudo cohort of individuals who left school in the mid-1990s, usingLabour Force Survey. The extent of low achievement at school amongst this group isdocumented, and then the impact of such low achievement on labour force status is estimated.The main focus of the paper is then to investigate to what extent unqualified school leaverscan improve their labour market status through the acquisition of vocational qualifications,and how many follow this option. The results show that vocational qualifications at all levelscan improve the employment chances of unqualified school leavers, even once we use paneldata to control for unobserved individual heterogeneity and to ensure that the qualification isacquired before employment is attained. There are also small effects on occupationalmobility, but little impact on wages. However, few unqualified school leavers seem to befollowing this vocational route to qualification achievement.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0621.pdf

The 'Network Economy' and Models of the Employment Contract: Psychological, Economic and Legal

David Marsden

CEPDP0620. February 2004.The emergence of the so-called ¿network economy¿ and the development of project-basedwork pose a fundamental challenge to established methods of regulating the employmentrelationship. There appears to be an unsatisfied demand for its greater use, especially amongemployers, and it is argued that this may be blocked by the lack of suitable contractual forms,such as those that have underpinned the established open-ended employment relationship.Project-based work seeks to retain some of the open-ended flexibility of the standardemployment relationship in relation to its task content but not its duration. The paper arguesthe success of the standard employment relationship owes much to the articulation of itspsychological, economic/incentive, and legal aspects. As yet, this appears to be lacking formore transient forms of relationship.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0620.pdf

Instrumental Variables for Binary Treatments with Heterogeneous Treatment Effects: A Simple Exposition

Alan Manning

CEPDP0619. February 2004.This note provides a simple exposition of what IV can and cannot estimate in a model with abinary treatment variable and heterogeneous treatment effects. It shows how linear IV is amisspecification of functional form and the reason why linear IV estimates for this model willalways depend on the instrument used is because of this misspecification. It shows that if onecan estimate the correct functional form (non-linear IV) then the treatment effects areindependent of the instrument used. However, the data may not be rich enough in practice tobe able to identify these treatment effects without strong distributional assumptions. In thiscase, one will have to settle for estimates of treatment effects that are instrument-dependent.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0619.pdf

Is the Medical Brain Drain Beneficial? Evidence from Overseas Doctors in the UK

Simon Commander Mari Kangasniemi L. Alan Winters

CEPDP0618. February 2004.The ¿beneficial brain drain¿ hypothesis suggests that skilled migration can be good for a sending countrybecause the incentives it creates for training increase that country¿s supply of skilled labour. To work, thishypothesis requires that the degree of screening of migrants by the host country is limited and that thepossibility of migration actually encourages home country residents to obtain education. We studied theimplications of doctors¿ migration by conducting a survey among overseas doctors in the UK. The resultssuggest that the overseas doctors who come to the UK are carefully screened and that only a minority of doctorsfrom developing countries considered the possibility of migration when they chose to obtain medical education.The incentive effect is thus probably not large enough to increase the skills-supply in developing countries.Doctors do, however, remit income to their home countries and many intend to return after completing theirtraining in the UK, so there could be benefits via these routes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0618.pdf

Executive Compensation and Product Market Competition

Vicente Cuñat María Guadalupe

CEPDP0617. February 2004.The aim of this paper is to study the effects of product market competition on the explicit compensationpackages that firms offer to their executives. In order to measure the net effect of competition we use twodifferent identification strategies. The first exploits cross sectoral variation in concentration ratios and thepanel nature of the dataset. The second uses as a quasi-natural experiment the deregulations that occurredin the banking and financial sectors in the nineties and estimates differences in differences coefficients. Ourresults show that a higher level of product market competition increases the performance pay sensitivity ofexecutive compensation schemes, and they hold through a number of performance measures such as stockoptions or bonus. The results are robust to a number of specification checks.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0617.pdf

Timeliness, Trade and Agglomeration

James Harrigan Anthony J. Venables

CEPDP0616. February 2004.An important element of the cost of distance is time taken in delivering final and intermediategoods. We argue that time costs are qualitatively different from direct monetary costs such asfreight charges. The difference arises because of uncertainty. Unsynchronised deliveries candisrupt production, and delivery time can force producers to order components beforedemand and cost uncertainties are resolved. Using several related models we show that thiscan cause clustering of component production. If final assembly takes place in two locationsand component production has increasing returns to scale, then component production willtend to cluster around just one of the assembly plants.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0616.pdf

Comparatively Open: Statutory Information Disclosure for Consultation and Bargaining in Germany, France and the UK

Howard Gospel P Willman

CEPDP0615. February 2004.Information provision is an important part of all mechanisms which give employees voice atwork. This paper considers the law on information disclosure for joint consultation andcollective bargaining in three countries, Germany, France, and the UK, chosen for theirdistinctive legal and institutional arrangements, within a common European Union context. Itis argued that there is coherence between the law and institutions in Germany; in France,despite extensive legal support for information provision, the law and institutions complementone another less; in the UK, there are contradictory approaches and new dilemmasconfronting the traditional system. Although European Directives harmonise statutoryminima, there are few signs of common disclosure practice emerging across the threecountries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0615.pdf

Relative Wage Variation and Industry Location

Andrew B. Bernard Stephen Redding Peter K. Schott Helen Simpson

CEPDP0614. February 2004.Relative wages vary considerably across regions of the United Kingdom, with skill-abundantregions exhibiting lower skill premia than skill-scarce regions. This paper shows that thelocation of economic activity is correlated with the variation in relative wages. U.K. regionswith low skill premia produce different sets of manufacturing industries than regions withhigh skill premia. Relative wages are also linked to subsequent economic development: overtime, increases in the employment share of skill- intensive industries are greater in regionswith lower initial skill premia. Both results suggest firms adjust production across and withinregions in response to relative wage differences.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0614.pdf

Unions and Procedural Justice: An Alternative to the 'Common Rule'

David Marsden

CEPDP0613. February 2004.Can unions substitute a procedural justice role for their traditional reliance on establishing a¿common rule¿? The decline of ¿bureaucratic¿ models of employee management and the riseof performance pay and performance management conflicts with the common rule asmanagement seek to tie rewards more closely to individual and organisational performance.CEP studies of performance pay in the British public services illustrate the potential for aprocedural justice role to ensure that such pay systems are operated fairly, otherwise they riskdemotivating staff. Evidence is presented to show that employees regard unions as effectivevehicles for procedural justice. In this way, management can achieve better operation of theirincentive schemes, and employees may experience less unfairness and poisoned workrelations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0613.pdf

The Union Wage Premium in the US and the UK

David Blanchflower Alex Bryson

CEPDP0612. February 2004.This paper presents evidence of both counter-cyclical and secular decline in the union membership wage premiu m inthe US and the UK over the last couple of decades. The premium has fallen for most groups of workers, the mainexception being public sector workers in the US. By the beginning of the 21st Century the premium remainedsubstantial in the US but there was no premium for many workers in the UK. Industry, state and occupation-levelanalyses for the US identify upward as well as downward movement in the premium characterized by regression tothe mean. Using linked employer-employee data for Britain we show estimates of the membership premium tend tobe upwardly biased where rich employer data are absent and that OLS estimates are higher than those obtained withpropensity score matching.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0612.pdf

Valuing Rail Access Using Transport Innovations

Steve Gibbons Stephen Machin

CEPDP0611. January 2004.In this paper we implement a powerful empirical approach than has not previously been appliedto rail transport evaluation to ascertain how much consumers value rail access. We study theeffects on house prices of a transport innovation that altered the distance to the nearest station forsome households, but left others unaffected. The transport innovation we study is theconstruction of new stations under improvements made to the London Underground andDocklands Light Railway in South East London in the late 1990s. Using the innovation toimplement a quasi-experimental approach studying house price changes in affected versusunaffected areas allows us to avoid the biases inherent in cross-sectional valuation work. Ourevidence on distance-station effects on prices suggests that rail access is significantly valued byhouseholds and that these valuations are sizable as compared to the valuations of other localamenities and services.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0611.pdf

Public Enterprises and Labor Market Performance

Johannes Hörner L. Rachel Ngai Claudia Olivetti

CEPDP0610. January 2004.This paper shows that state control of some industries may have contributed to theincrease in European unemployment from the 1970s to the early 1990s. We develop asimple model with both publicly-run and privately-run enterprises and show that wheneconomic turbulence increases, higher unemployment rates may result in economies thathave a larger public sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0610.pdf

Endowments, Market Potential, and Industrial Location: Evidence from Interwar Poland (1918-1939)

Nikolaus Wolf

CEPDP0609. January 2004.The paper explores the determinants of industry location across interwar Poland. After more than 120 years ofpolitical and economic separation, Poland was reunified at the end of 1918. In consequence, its industry facedmassive structural changes: the removal of internal tariff barriers and improved infrastructure strengthened thedomestic market, while foreign market relations were cut off. Similarly, the geographical dispersion of factorendowments was changed through internal migration and new institutional arrangements (education system,patent laws, etc.). How did these forces interact to determine the location of industry? Did a new interregionaldivision of labour emerge after unification? We survey the dynamics of industrial location between 1925 and1937 and estimate a specification that nests market potential and comparative advantage to quantify theirrespective impact over time. The results point to a role for both, comparative advantage and market potential,but there was a dominating and ever increasing impact of the availability of skilled labour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0609.pdf

Publicity of Debate and the Incentive to Dissent: Evidence from the US Federal Reserve

Ellen E. Meade David Stasavage

CEPDP0608. January 2004.When central banks are transparent about their decision making, there may be clear benefits in terms ofcredibility, policy effectiveness, and improved democratic accountability. While recent literature has focusedon all of these advantages of transparency, in this paper we consider one potential cost: the possibility thatpublishing detailed records of deliberations will make members of a monetary policy committee more reluctantto offer dissenting opinions. Drawing on the recent literature on expert advisors with ¿career concerns¿, weconstruct a model that compares incentives for members of a monetary policy committee to voice dissent whendeliberations occur in public, and when they occur in private. We then test the implications of the model usingan original dataset based on deliberations of the Federal Reserve¿s Federal Open Market Committee, askingwhether the FOMC¿s decision in 1993 to begin releasing full transcripts of its meetings has altered incentivesfor participants to voice dissenting opinions. We find this to be the case with regard to both opinions on shortterminterest rates and on the ¿bias¿ for future policy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0608.pdf

Gender Gaps in Unemployment Rates in OECD Countries

Ghazala Azmat Maia Güell Alan Manning

CEPDP0607. January 2004.There is an enormous literature on gender gaps in pay and labour market participation but virtually noliterature on gender gaps in unemployment rates. Although there are some countries in which there isessentially no gender gap in unemployment, there are others in which the female unemployment rate issubstantially above the male. Although it is easy to give plausible reasons for why more women than menmay decide not to want work, it is not so obvious why, once they have decided they want a job, women insome countries are less likely to be in employment than men. This is the subject of this paper. We showthat, in countries where there is a large gender gap in unemployment rates, there is a gender gap in bothflows from employment into unemployment and from unemployment into employment. We investigatedifferent hypotheses about the sources of these gaps. Most hypotheses find little support in the data and thegender gap in unemployment rates (like the gender gap in pay) remains largely unexplained. But it doesseem to correlate with attitudes on whether men are more deserving of work than women so thatdiscrimination against women may explain part of the gender gap in unemployment rates in theMediterranean countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0607.pdf

The Geography of UK International Trade

Henry Overman L. Alan Winters

CEPDP0606. January 2004.This paper examines how the geography of UK international trade has changed since the UK¿s accession tothe European Economic Community using a newly constructed data set that gives a detailed breakdown ofthe UK¿s imports and exports by both port of entry and exit and commodity. Our results suggest thatbetween 1970 and 1992 overall imports and exports re-orientated in favour of ports located nearer to thecontinent. The vast majority of individual commodities also saw a similar re-orientation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0606.pdf

Looking for HRM/Union Substitution: Evidence from British Workplaces

Stephen Machin Stephen Wood

CEPDP0605. January 2004.In this paper we test the HRM/union substitution hypothesis that human resource management (HRM) practices act as a substitute for unionization. We use British workplace data between 1980 and 1998 which allows us toexamine for the first time whether increased HRM incidence has coincided with union decline.First, we compare changes over time in the incidence of HRM practices across union and non-union sectors, finding little cross-time difference occurring between sectors. Second, we ask whether newer workplaces (strongly shown by other research as more likely to be non-union) have experienced differentiallyfaster HRM incidence; we are unable to find much evidence in support of this. Third, longitudinal changes alsofail to pick up any evidence of faster union decline in workplaces or industries with faster take up of HRMpractices. We find no evidence of HRM substitution operating in the hypothesised way of it replacing unions and conclude that increased HRM incidence does not seem to be an important factor underpinning union decline in Britain.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0605.pdf

Lousy and Lovely Jobs: the Rising Polarization of Work in Britain

Maarten Goos Alan Manning

CEPDP0604. December 2003.This paper argues that skill-biased technical change has some deficiencies as a hypothesisabout the impact of technology on the labor market and that a more nuanced view recentlyproposed by Autor, Levy and Murnane (2003) is a more accurate description. The differencebetween the two hypotheses is in the prediction about what is happening to employment inlow-wage jobs. This paper presents evidence that employment in the UK is polarizing intolovely and lousy jobs and that a plausible explanation for this is the Autor, Levy andMurnane hypothesis.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0604.pdf

Collateral Value and Forbearance Lending

Nan-Kuang Chen Hsiao-Lei Chu

CEPDP0603. December 2003.We investigate the foreclosure policy of collateral-based loans in which the endogenous collateral value plays acrucial role. If creditors are able to commit, then the equilibrium arrangement is more likely to featureforebearance lending by specifying a lower level of liquidation (or roll over all of the loans) relative to the expostefficiency criterion for each realization of the interim signal. The key is that collateral value may drop toolow when banks call in loans by auctioning off borrowers¿ collateral and this makes clearing up non-performingloans less attractive. We attribute the banks¿ leniency as we have observed in Japan during the 1990s to anequilibrium arrangement where banks can commit due to either relationship banking or an implicit lenderborrowercontract, such as the arrangement under Japan¿s main-bank system.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0603.pdf

Is it Good to Talk? Information Disclosure and Organisational Performance in the UKIncorporating evidence submitted on the DTI discussion paper 'High Performance Workplaces - Informing and Consulting Employees'

Helen Bewley Howard Gospel R Peccei P Willman

CEPDP0602. December 2003.The disclosure of information by management to employees varies significantly between workplaces. Theeffects of this variance on organizational performance are analysed using WERS98 data. The results show thatthe impact of information disclosure on organisational performance is more complex than is often assumed inthe literature. Overall, there is a significant impact, both direct and indirect, and this varies depending on thelevel of employee organisational commitment, the type of information disclosed, and the performance outcomeinvolved. On the whole, the positive effects are less in union settings and in situations where unions are strong.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0602.pdf

The Anatomy of Union Decline in Britain: 1990-1998

A Charlwood

CEPDP0601. December 2003.To what extent can the decline in British trade union density between 1990 and 1998 be attributed to decliningopportunities to unionize compared to declining propensity to unionize among workers with the opportunity todo so and to compositional change? This question is answered using data to from both workplaces (from 1990and 1998 Workplace Employee Relations Surveys) and individuals (fro m the British Household Panel Survey).Results show that both falling opportunities and falling propensities to unionize accounted for membershipdecline during this period. Membership fell because unions lacked the power to maintain bargainingrelationships with management, to organize new workplaces, or to uphold the ¿social custom¿ of unionmembership among new workers who took union jobs. However, there was little evidence that declining unionmembership was the result of a change in employee attitudes towards unions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0601.pdf

Unemployment in Britain: A European Success Story

Christopher A. Pissarides

CEPDP0600. December 2003.Unemployment in Britain has fallen from high European-style levels to US levels. I argue that the key reasonsare first the reform of monetary policy, in 1993 with the adoption of inflation targeting and in 1997 with theestablishment of the independent Monetary Policy Committee, and second the decline of trade union power. Iinterpret the reform of monetary policy as an institutional change that reduced inflationary expectations in theface of falling unemployment. The decline of trade union power contributed to the control of wage inflation.The major continental economies failed to match UK performance because of institutional rigidities, despite lowinflation expectations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0600.pdf

Corporate R&D and Productivity in Germany and the United Kingdom

Stephen Bond Dietmar Harhoff John Van Reenen

CEPDP0599. December 2003.This paper analyzes differences in R&D spending and in the impact of R&D on productivity betweenGerman and UK firms. We confirm that German firms spend significantly larger amounts on R&D thantheir UK counterparts, even after controlling for firm size and industry effects. Using a dynamicproduction function approach, we find that the R&D output elasticity is approximately the same in bothcountries, implying a much larger rate of return on R&D in the UK than in Germany. We discuss severalexplanations for this result.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0599.pdf

Buzz: Face-to-Face Contact and the Urban Economy

Michael Storper Anthony J. Venables

CEPDP0598. December 2003.This paper argues that existing models of urban concentrations are incomplete unless grounded in the mostfundamental aspect of proximity; face-to-face contact. Face-to-face contact has four main features; it is anefficient communication technology; it can help solve incentive problems; it can facilitate socialization andlearning; and it provides psychological motivation. We discuss each of these features in turn, and developformal economic models of two of them. Face-to-face is particularly important in environments whereinformation is imperfect, rapidly changing, and not easily codified, key features of many creative activities.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0598.pdf

The Incidence of UK Housing Benefit: Evidence from the 1990s Reforms

Steve Gibbons Alan Manning

CEPDP0597. December 2003.Housing Benefit (HB) in the UK subsidizes the rent of tenants in both the private and publicsectors. Its share in total welfare benefits has risen markedly through time and there iswidespread dissatisfaction with it. But, reform has been very slow. One important issue isthe extent to which the incidence of HB is actually on the tenants. Exploiting two data setsfrom the mid-1990s when the subsidy regime changed for some tenants but not for others,this paper explores the incidence. We find that some of the incidence is on landlords thoughour two data sets differ in the extent to which this is true. We also find evidence in support ofa ¿matching¿ model of the rental market rather tha n a perfectly competitive one.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0597.pdf

The Employment of Married Mothers in Great Britain: 1974-2000

Paul Gregg Maria Gutierrez-Domenech Jane Waldfogel

CEPDP0596. December 2003.This paper analyses the increase in mothers¿ employment in Britain over the period 1974¿2000. The approachconsists of isolating those birth cohorts whose mothers experienced significant increases in employment andrelating those to changes in policies (maternity rights, taxation and childcare). The results suggest thatmaternity rights have induced a change in behaviour, toward returning to work in the first year post-birth,among many mothers who would have otherwise gone back to work when their children were age 3 to 5. Thiseffect has been most marked among better-educated and higher paid mothers and has strengthened as real wageshave risen through time. However, the paper also suggests that the increased labour market experience and jobtenure of mothers as a result of maternity rights legislation has only had a very modest impact on earnings. Thisis as a result of most of the extra experience being part-time which has very low returns.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0596.pdf