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Series 2004
04-01. Lobato,
I. N., and C. Velasco "Optimal
Fractional Dickey-Fuller Tests for Unit
Roots" 
Abstract: This article studies
the fractional Dickey- Fuller (FDF) test
for unit roots recently introduced by Dolado,
Gonzalo and Mayoral (2002). Apart from the
analogy with the Dickey-Fuller test, the
main motivation for their method relies
on simulations since these authors do not
provide any justification for their particular
implementation of the FDF test. In order
to give additional rationale to the test,
we frame the FDF test in a model where a
nuisance or auxiliary parameter is not identified
under the null hypothesis. Within this framework
we investigate optimality aspects of the
class of tests indexed by this auxiliary
parameter and show that the test proposed
by these authors is not optimal. In addition,
we propose feasible FDF tests with good
asymptotic and finite sample properties.
04-02. Maurer, N., and A. Gomberg
"When the State
is Untrustworthy: Public Finance and Private
Banking in Porfirian Mexico"
Abstract: All sovereign governments
face a commitment problem: how can they promise
to honor their own agreements? The standard
solutions involve reputation or political
institutions capable of tying the hands of
the government. Mexico's government in the
1880s used neither solution. It compensated
its creditors by enabling them to extract
rents from the rest of the economy. These
rents came through special privileges over
banking services and the right to administer
federal taxes. Returns were extremely high:
as long as creditors believed that the government
would refrain from confiscating all their
assets (let alone repaying their debts) less
than twice a decade, they would break even.
04-03. Sadka, J., and J. L. Negrín
"Full vs. Light-Handed
Regulation of a Network Industry"
Abstract: The access pricing problem
emerges when a vertically integrated firm
(the incumbent) provides an essential service
in the upstream market, to an entrant. Both
firms produce a final service and compete
in the downstream market. The standard treatment
of this problem has been to add the access
price to the list of instruments available
to a regulator who maximizes a social welfare
function. Motivated by the international
trend to reduce the number of prices set
by regulation, we use a light handed regulation
approach in which the only tool available
to the regulator is the access price, and
where retail prices are set by quantity
competition in the downstream market. In
this setup, we find that a regulator seeking
to maximize total market surplus will set
an access price that subsidizes the entrant,
so that entrants that are less efficient
than the incumbent firm can survive in the
market. We then compare the outcomes of
the full regulation model with those of
the light-handed regulation model, in terms
of final prices, firm profits, and consumer
surplus. When the regulator faces incomplete
information about entrant firms' costs and
cannot offer a menu of contracts to potential
entrants, we find examples in which light
handed regulation can dominate full regulation.
04-04. Martinelli, C., and R.
Sicotte "Voting
in Cartels: Theory and Evidence from the
Shipping Industry"
Abstract: We examine the choice of
voting rules by legal cartels with enforcement
capabilities in the presence of uncertainty
about demand and costs. We show that cartels
face a trade-off between the commitment
advantages of more stringent majority requirements
and the loss of flexibility resulting from
them. Expected heterogeneity in costs or
demand conditions leads away from simple
majority toward more stringent rules, while
larger membership to the cartel leads away
from unanimity toward less restrictive rules.
Evidence from the shipping conferences of
the late 1950s largely supports our model.
With few firms, the rule favored by heterogeneous
conferences is unanimity. In larger cartels,
the favored rule is either 2/3 or 3/4-majority
rule.
04-05. Lobato, I., S. Pratap, and A. Somuano
"Debt Composition
and Balance Sheet Effects of Exchange Rate
Volatility in Mexico: A Firm Level Analysis"
Abstract: We use Mexican firm-level
data to study the role of currency mismatches
in exacerbating the negative effects of a
devaluation in the corporate sector and to
investigate what drives Mexican firms to borrow
in foreign currency. Our results show that
large firms and exporters tend to borrow more
heavily in foreign currency. The presence
of foreign currency denominated debt poses
a significant risk to balance sheets at the
time of devaluation. Our findings suggest
that in Mexico, the balance sheet effects
of a devaluation far outweigh the competitiveness
effects.
04-06. Pratap, S., and C. Urrutia "Firm
Dynamics, Investment, and Debt Portfolio:
Balance Sheet Effects of the Mexican Crisis
of 1994"
Abstract: We build a partial equilibrium
model of firm dynamics under exchange rate
uncertainty. Firms face idiosyncratic productivity
shocks and observe the current level of the
real exchange rate each period. Given their
current level of capital stock, firms make
their export decisions and choose how much
to invest. Investment is financed through
one period loans from foreign lenders. The
interest rate charged by each lender is set
to satisfy an expected zero-profit condition.
The model delivers a distribution of firms
over productivity, capital stocks and debt
portfolios, as well as an exit rule. We calibrate
the model using data from a panel of Mexican
firms, from 1989 to 2000, and analyze the
effect of the 1994 crisis on these variables.
As a result of the real exchange rate depreciation,
the model predicts: (i) an increase in the
debt burden, (ii) an increase in exports,
and (iii) a large decline in investment. These
real effects are consistent with the evidence
for the Mexican crisis.
04-07. Elbittar, A., A. Gomberg, and
L. Sour "Group
Decision-Making in Ultimatum Bargaining:
An Experimental Study "
Abstract: Many rent-sharing decisions
in a society are result from a bargaining
process between groups of individuals (such
as between the executive and the legislative
branches of government, between legislative
factions, between corporate management and
shareholders, etc.). The purpose of this
work is to conduct a laboratory study of
the effect of different voting procedures
on group decision-making in the context
of ultimatum bargaining. An earlier study
(Bornstein and Yaniv, [2]) has suggested
that when the bargaining game is played
by unstructured groups of agents, rather
than by individuals, the division of the
payoff is substantially affected in favor
of the ultimatum-proposers. Our theoretical
arguments suggest that one explanation for
this could be implicit voting rules within
groups. We propose to explicitly structure
the group decision-making as voting and
study the impact of different voting rules
on the bargaining outcome.
04-08. Martinelli, C., and R.
Escorza "When
Are Stabilizations Delayed? Alesina-Drazen
Revisited"
Abstract: In an influential article,
Alesina and Drazen (1991) model delay of
stabilization as the result of a struggle
between political groups supporting reform
plans with different distributional implications.
In this paper we show that ex ante
asymmetries in the costs of delay for the
groups will reduce the probability of conflict
and will lead to a shorter expected delay.
Accurate common information about the cost
of delay may lead to no delay at all. In
an asymmetric conflict, a wider divergence
in the distributional implications of reform
will reduce the probability of conflict
but will lead to a longer expected delay.
04-09.
Rojas, J. A., and C. Urrutia, "Social
Security Reform with Uninsurable Income
Risk and Endogenous Borrowing Constraints"
Abstract: We study the aggregate
effects of a social security reform in a
large overlapping generations model where
markets are incomplete and households face
uninsurable idiosyncratic income shocks.
We depart from the previous literature by
assuming that, because of lack of commitment
in the credit market, the borrowing constraint
in the unique asset is endogenously determined
by the agents' incentives to default on
previous debts. We find that a model with
exogenous borrowing constraints overestimates
the positive effect of reforming social
security on the capital stock and the saving
rate, compared to our model with endogenous
borrowing limit. The reason is that, in
the latter, the size of precautionary savings
is smaller because after the reform the
incentives to default on previous debts
are lower and consequently households face
more relaxed borrowing limits. Adding retirement
accounts to the basic model does not change
these conclusions, although the quantitative
importance of endogenizing borrowing constraints
is reduced.
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