SIEPR Discussion paper No. 498
A Historical Analysis of Monetary Policy Rules
John B. Taylor
March 1998

This paper examines several episodes in U.S. monetary history using the framework of an interest rate rule for monetary policy. The main finding is that a monetary policy rule in which the interest rate responds to inflation and real output more aggressively than it did in the 1960s and 1970s, or than during the time of the international gold standard, and more like the late 1980s and 1990s, is a good policy rule. Moreover, if one defines "policy mistakes" as deviations from such a good policy rule, then such mistakes have been associated with either high and prolonged inflation or drawn out periods of low capacity utilization.

SIEPR Discussion paper No.98-6
"The Contribution of Public Science to Industrial Innovation: An Application to the Pharmaceutical Industry"
Andrew A. Toole
June 1999

This paper has been revised and is now listed as SIEPR Discussion Paper No. 00-007

SIEPR Discussion paper No.99-1
Is Public R&D a Complement of Substitute for Private R&D? A Review of the Economic Evidence
Paul A. David, Bronwyn H. Hall, and Andrew A. Toole
September 1999

Is public R&D spending complementary and thus “additional” to private R&D spending, or does it substitute for and tend to “crowd out” private R&D? Conflicting answers are given to this question. We survey the body of available econometric evidence accumulated over the past 35 years. A framework for analysis of the problem is developed to help organize and summarize the findings of econometric studies based on time series and cross-section data from various levels of aggregation (laboratory, firm, industry, country). The findings overall are ambivalent and the existing literature as a whole is subject to the criticism that the nature of the “experiment(s)” that the investigators envisage is not adequately specified. We conclude by offering suggestions for improving future empirical research on this issue.

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SIEPR Discussion paper No. 00-043
“Old Economy” Inputs for “New Economy” Outcomes: Cluster Formation in the New SiliconValley
Timothy Bresnahan, Alfonso Gambardella, AnnaLee Saxenian and Scott Wallsten
June 2001

SIEPR Discussion paper No. 99-21
Telecommunications Privatization in Developing Countries: The Real Effects of Exclusivity Periods
Scott J. Wallsten
May 2000

The telecommunication sector around the world has been undergoing dramatic reforms since the 1980s. Developing countries have been privatizing state-owned firms and slowly introducing competition into the telecom sector. We have a good theoretical understanding of the effects of telecom privatization and some empirical work is beginning to emerge, as well. In general, privatization, especially when combined with effective regulatory institutions, improves telecom service. However, we have almost no empirical information on the real effects of the details of the privatization transaction. In particular, many countries grant the privatized telecom firm a multi-year exclusivity period; that is, the government allows the newly-privatized firm to operate as a monopoly for some number of years. The exclusivity period is typically granted to increase the sale price of the firm and thus government revenues. While private investors are almost certainly willing to pay more for firms that can earn monopoly profits, a monopoly is less likely to improve service than is a firm operating in a competitive environment. As a result, the exclusivity period may boost government revenues at the cost of delaying improvements in telecom services to the population. Largely because data is scarce, to date no empirical studies have attempted to systematically estimate the effects of these exclusivity periods. In this paper I use an original, new dataset to explore the real effects of exclusivity periods. The Infrastructure Privatization Database is jointly sponsored by Stanford University and The World Bank to analyze the impact of regulatory institutions and privatization policies on utility performance. Using this combination of firm- and country-level cross-section and panel data, I estimate the effect of exclusivity periods on firms’ sale prices and also on sector performance in terms of network penetration. The results confirm conventional wisdom: exclusivity periods significantly increase the sale price of the firm, but substantially decrease network growth.

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SIEPR Discussion paper No. 99-17
Executive Compensation and Firm Performance: Big Carrot, Small Stick
Scott J. Wallsten
March 2000

The statistical link between executive compensation and firm performance is well established. I explore two features of the relationship that have not yet been addressed empirically. First, does the relationship itself change depending on firm performance? I find that, on average, executives are rewarded in good years but are not punished in bad years. This result is consistent with a model that attempts to induce risk-taking behavior by rewarding good performance and limiting downside punishment. Second, does the relationship change with the executive’s rank in the company? I find that the top executive’s compensation is most strongly linked with performance, the second-highest ranking executive less so, and the third-highest even less. This result is consistent with linking compensation to performance only to the extent that the employee has some direct influence on it.

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SIEPR Discussion paper No. 491
What Accounts for the Variation in Retirement Wealth among U.S. Households?
B. Douglas Bernheim, Jonathan Skinner, Steven Weinberg
September 1997

Household survey data consistently depict large variations in saving and wealth, even among households with similar socio-economic characteristics. Within the context of the life cycle hypothesis, families with identical lifetime resources might choose to accumulate different levels of wealth for a variety of reasons, including variation in time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, income replacement rates, and so forth. These factors can be divided into a small number of classes, each with a distinctive implication concerning the relation between accumulated wealth and the shape of the consumption profile. By examining this relation empirically, one can test for the presence or absence of these particular explanations for differences in wealth. Using the Panel Study of Income Dynamics and the Consumer Expenditure Survey, we find very little support for life cycle models that rely on the above factors to explain wealth variation. The data are, however, consistent with "rule of thumb" or "mental accounting" theories of wealth accumulation.

SIEPR Discussion paper No. 04-035
The Political Economy of Law: Decision-Making by Judicial, Legislative, Executive and Administrative Agencies
MatMcCubbins, Roger Noll, and Barry Weingast
August 2005

SIEPR Discussion paper No. 05-006
The Impact of "Deregulation" on Regulator Behavior: An Empirical Analysis of the Telecommunications Act of 1996
Gregory L. Rosston, Scott J. Savage, Bradley S. Wimmer
January 2006

SIEPR Discussion paper No. 98-4
The ABC's of Universal Service: Arbitrage, Big Bucks and Competition
Gregory L. Rosston and Bradley S. Wimmer
April 1999

The introduction of competition requires a re-thinking of policies. Current proposals for a new universal service, however, contain many problems that create artificial incentives that will cause firms to waste money and do not necessarily reward firms that best serve customers. The problems are inherent in the methods to collect taxes to fund the universal service programs and the manner in which universal service funds will be disbursed. The majority of these problems stem from attempts to create artificial regulatory and jurisdictional distinctions and will only disappear when regulators and politicians realize the efficiency and consumers are better served in a competitive environment by an economically rational system of transparent subsidies rather than the web of implicit cross subsidies. In this paper, we examine the sources for these inefficient distortions and propose changes to the current and proposed programs that will better achieve a goal of universal service with a minimum of distortion in the marketplace. Distortions arise from arbitrary categorizations of services. For example, services are labeled "interstate" or "intrastate." Because each jurisdiction imposes its own taxes, firms have an incentive to reconfigure their service offerings simply to minimize taxation. Both tax rates and distribution mechanisms create incentives for wasteful arbitrage. There are two ways to cure the problem: to prevent arbitrage through regulation or to reduce the incentive for arbitrage by minimizing the level of taxes. We argue that the second solution will be much better for communications competition and universal service.

SIEPR Discussion paper No. 99-8
Winners and Losers from the Universal Service Subsidy Battle
Bradley S. Wimmer and Gregory L. Rosston
December 1999

The FCC recently adopted a new universal service plan to comply with the mandates of the Telecommunications Act of 1996 and the introduction of competition that make implicit cross-subsidy no longer viable.

The new universal service plan uses a detailed forward-looking cost model to estimate the cost of providing service for each of 12,493 wire centers across the country. Based on the model, the Commission will provide new universal service funding to 7 states. If states adopt a similar plan to fund high cost areas, it will cost about $1.7 billion more per year than a targeted subsidy to low-income households.

Combining the results of the universal service cost model with U.S. Census demographic data allows analysis of what different groups receive universal service subsidy if the states adopt similar plans. Less than 20 percent of households with incomes under $20,000 per year would receive any subsidy dollars — the other 80 percent of these low-income households would pay into the system. At the same time, many high income households would receive support. As expected, Blacks, Hispanics and Asians are less likely than Whites and Native Americans to receive high cost support because they tend to live in more urban areas.

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SIEPR Discussion paper No. 99-18
The "State" of Universal Service
Gregory L. Rosston and Bradley S. Wimmer
April 2000

The introduction of competition forces regulators to address the historical practice of using of implicit cross subsidies to maintain uniformly low local telephone service rates. The Federal Communications Commission recently adopted rules to remove a portion of these implicit subsidies by adopting an explicit universal service program. This program, however, only addresses a small portion of the problem and leaves to the states problems associated with intrastate cross subsidies. In this paper we examine several alternative universal service programs that states may adopt. Overall, we find that universal service programs that base subsidy dollars on the cost of providing service have little effect on telephone penetration rates and result in large taxes, which distort market outcomes and drive those paying into the system from the network. Large universal service programs also cause competitive distortions. Furthermore, we find that cost-based mechanisms do an equally poor job when we use normative criteria, such as the effect the programs have on the distribution of income.

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SIEPR Discussion paper No. 483
Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
September 1996

We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of the reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.

SIEPR Discussion paper No. 484
Regulatory Pricing Rules To Neutralize Network Dominance
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
November 1996

This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.

SIEPR Discussion paper No. 98-3
Early Twenthieth Century Productivity Growth Dynamics: An Inquiry into the Economic History of "Our Ignorance"
Paul A. David and Gavin Wright
March 1999-Revised April 1999

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. This development contributed substantially to the absolute and relative rise of the domestic economy's aggregate TFP residual, which is observed when the "growth accounts" for the first quarter of the twentieth century are compared with those for the second half of the nineteenth century. Two visions of the dynamics of productivity growth are germane to an understanding of these developments. One emphasizes the role of forces affecting broad sections of the economy, through spillovers of knowledge and the diffusion of general purpose technologies (GPT's). The second view considers that possible sources of productivity increase are multiple and idiosyncratic. Setting aside possible measurement errors, the latter approach regards sectoral and economy-wide surges of the TFP growth to be simply the result of which carried more weight than others. Although there is room for both views in an analysis of the sources of the industrial TFP acceleration during the 1920's, we find the evidence more compelling in support of the first approach. The proximate source of the TFP surge lay in the switch from declining or stable capital productivity to a rising output-capital ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The 1920's saw critical advances in the electrification industry, the diffusion of a GTP that brought significant fixed capital-savings. But the same era also witnessed profound transformations in the American industrial labor market, followed the stoppage of mass immigration from Europe; rising real wages provided strong impetus to changes in workforce recruitment and management practices that were underway in some branches of the economy before the War. The productivity surge reflected the confluence of these two forces. This historical study has direct relevance for policies intended to increase the rate of productivity growth. In many respects, the decade of the 1920's launched the US economy on a high-growth path that lasted until the 1970's. If we hope to return to the growth performance of that era, we would be well advised to understand how it began.

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SIEPR Discussion paper No. 03-002
Private Capital Flows and Default Risk
Mark L. J. Wright
September 2003

SIEPR Discussion paper No. 02-040
Urban Structure and Growth
Esteban Rossi-Hansberg and Mark L. J. Wright
August 2003

SIEPR Discussion paper No. 01-017
Predicting Currency Crises With a Nested Logit Model
Kit Ming Yan
July 2002

SIEPR Discussion paper No. 06-014
Growth and Poverty Reduction Under Globalization: The Systematic Impact of Exchange Rate Misalignment
Yasuyuki Sawada and Pan A. Yotopoulos
December 2006

SIEPR Discussion paper No. 04-037
Corner Solutions, Crises, and Capital Controls: A Theory and an Empirical Analysis on the Optimal Exchange Rate Regime in Emerging Economies
Yasuyuki Sawada and Pan A. Yotopoulos
August 2005

SIEPR Discussion paper No. 01-023
Currency Substitution, Speculation and Crises: Theory and Empirical Analysis
Yasuyuki Sawada and Pan A. Yotopoulos
March 2002

SIEPR Discussion paper No.99-5
Currency Substitution, Speculation, and Financial Crises: Theory and Empirical Analysis
Yasuyuki Sawada and Pan A. Yotopoulos
November 1999

We extend the "fundamentals model" of currency crisis by incorporating the currency substitution effects explicitly. In a regime of free foreign exchange markets and free capital movements the reserve (hard) currencies are likely to substitute for the local soft currency in agents' portfolia that include currency as an asset. Our model shows that, controlling for the fundamentals of an economy, the more pronounced the currency substitution is in a country, the earlier and the stronger is the tendency for the local currency to devalue. This is especially true if indebtedness, public and private, fail to decrease as currency substitution occurs. Moreover, the use of the required reserve ratio is indicated as an adjustment device to moderate short-term capital inflows and control the level of indebtedness.

The model is implemented by constructing a currency-softness index. Two empirical findings emerge. First, there is a negative relationship between the currency-softness index and the degree of nominal exchange rate devaluation. This indicates that soft currency countries have a systematic tendency to have under-valued currency. Second, there is a systematic negative relationship between the softness of a currency and the level of economic development. The policy recommendations of the paper refer to the means of achieving "moderately repressed exchange rates," and thus helping diffuse the pressure for devaluation of soft currencies that is exogenously determined through the opportunities afforded for currency substitution in a globalization environment.

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SIEPR Discussion paper No.99-4
Free Currency Markets, Financial Crises and the Growth Debacle: Is There a Causal Relationship?
Pan A. Yotopoulos and Yasuyuki Sawada
November 1999

The paper develops an alternative hypothesis that attributes collateral responsibility for the recent spate of financial crises to a basic flaw of the architecture of the international financial system, free markets for foreign exchange. A valid positional distinction between reserve/ hard and soft currencies, based on reputation, accounts for the systematic substitution of the former currencies for a country's soft currency in liquid asset holdings. The result of this "asymmetric reputation" in an environment of free currency markets is the systematic devaluation of soft currencies. Moreover, bubbles, devaluations and financial crises, far from being self-correcting monetary phenomena, can lead to sharp contractions in the economy through the misallocation of resources in competitive devaluation trade, as opposed to comparative advantage trade. In a case that is parallel to asymmetric information and incomplete credit markets, the appropriate policy intervention in asymmetric-reputation driven incomplete currency markets is maintaining mildly repressed exchange rates. The operational definition of "mild" is imposing restrictions on currency substitution, whether it is home-grown or it is the result of foreign financial capital taking short positions on the local currency.

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SIEPR Discussion paper No. 489
The Rise of the Middle Class and China's Future Food Deficit
Scott D. Rozelle, Pan A. Yotopoulos, Jikun Huang
 April 1997

 On of the most closely watched debates by researchers on China's food economy addresses the question: Will China be able to produce most of what it needs to feed itself in the 21st century? The preponderance of evidence from research favors the viewpoint that China will essentially be able to feed itself even though future imports of grains will most likely rise. This conclusion, to the extent that it is based on historical data, may not reflect the new pressures on the food economy that emanate from structural changes in China as a result of rapidly rising wealth, urbanization, marketization, and technological change. Notable among the neglected structural factors that change the contours of the demand for food is the graduation of consumers from poverty to the middle class (Yotopoulos, 1985). This has a twofold impact on demand. First, the income elasticity for livestock products is higher than for food grains (which means as income rise, more grain is demanded). Second, the switch in classes, from one with a food grain-based diet (and low consumption of grains) to another with a higher level of consumption of grain-intensive livestock products, also creates a large jump in total demand for grains. The size of the additional demand depends on the number of people who graduate to improved diets and on the difference between the old standard at which they were consuming and the new. While the income elasticity of demand is accounted for in projections, the graduation effect of the switch in classes is often overlooked.

The purpose of this paper is to revisit the debate on the impact of China's development at home and in the world by systematically exploring the implications of China's rapid growth of income, the structure of that income growth (or the pattern of inequality), and the competition of consumers for food and feed. Using a set of structural parameters estimated by the authors from primary and secondary data, a supply and demand modeling framework projects the future balance of China's major grain commodities, while explicitly examining the impact of the new food-feed paradigm. An upward revision of projected demand increases the potential for short-term grain deficits that could lead to abrupt price rises. The concatenation of these events will almost certainly not starve the world; but it is likely to create serious food security problems for those inside and outside China who rely on food markets and who are not in a position to pay high prices for food in the short run.

SIEPR Discussion paper No. 06-032
China’s Competition Policy Reforms: The Antimonopoly Law and Beyond
Bruce M. Owen, Su Sun, Wentong Zheng
April 2007

SIEPR Discussion paper No. 03-040
Antitrust in China: The Problem of Incentive Compatibility
Bruce M. Owen, Su Sun, Wentong Zheng
September 2004