Finance Commons^™

An Alternative View To The Cause Of Market Failures: A Dynamic Approach, Salvador Contreras

School of Economics and Finance Faculty Publications

This paper presents an alternative view to the cause and size of market failures. The work here suggest that the size of the market failure is not man made per se but rather given a full set of initial conditions it is endogenous to the dynamical forces at play. It is shown that the level and variance of market failures is tied to the location of the steady state (i.e. level of development). The paper finds that only changes to the location of the steady state produces changes to the potential level of the market failure. This paper …

Estimating Dynamic Demand For Airlines, Diego Escobari

School of Economics and Finance Faculty Publications

This paper uses an original panel dataset with posted prices and sales to estimate a dynamic demand. We find that consumers become more price sensitive as time to departure nears which is consistent with having lower valuations. This result provides empirical support to a key theoretical implication in Deneckere and Peck (2012)—high-valuation consumers purchase earlier. We also find that the number of active consumers increases closer to departure.

Highlights

• We use an original dataset with posted prices and sales to estimate a dynamic demand.

• The estimates are consistent with agents forming expectations.

• We find that high-valuation consumers …

Price Discrimination Through Refund Contracts In Airlines, Diego Escobari, Paan Jindapon

School of Economics and Finance Faculty Publications

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.

Highlights

• We show how an airline screens consumers who are uncertain about their travel.

• The theory explains how an airline sets refundable and non-refundable prices. …

Gender And Business Outcomes Of Black And Hispanic New Entrepreneurs In The United States, Marie T. Mora, Alberto Davila

School of Economics and Finance Faculty Publications

In light of the growing numbers of women of color in the entrepreneurial sector in the United States, employing public-use microdata from the 2007 Survey of Business Owners, this study finds that new firms owned by black and Hispanic women were more likely to cease operations than those owned by their male counterparts or by non-Hispanic whites, even when controlling for other owner- and firm-level characteristics and labor market conditions. These differences occurred despite the existence of public programs designed to help female and minority entrepreneurs, raising the question of efficiency of the current policy infrastructure in the United States.

The Choice Of Airport, Airline, And Departure Date And Time: Estimating The Demand For Flights, Diego Escobari, Cristhian Mellado

School of Economics and Finance Faculty Publications

This chapter estimates the demand for flights in an international air travel market using a unique dataset with detailed information not only on flight choices but also on contemporaneous prices and characteristics of all the alternative non-booked flights. The estimation strategy employs a simple discrete choice random utility model that we use to analyze how choices and its response to prices depend on the departing airport, the identity of the carrier, and the departure date and time. The results show that a 10% increase in prices in a 100-seat aircraft throughout a 100-period selling season decreases quantity demanded by 7.7 …

Ceo Networks And Bank Risk Taking, Dave Jackson, Fang Fang

School of Economics and Finance Faculty Publications

We investigate the impact of CEO networks on bank risk during the recent financial crisis and test whether CEO networks have a bearing on CEO insider trading at the onset of the crisis. We construct a unique dataset of CEO networks based on 97 bank CEOs' social ties, which allows us to assign a Social Network (SN) score to each CEO. Our results provide evidence that CEO networks in 2006, the year prior to the financial crisis, are related to bank risk-taking ex post during the financial crisis. We also find that after controlling for bank and other CEO characteristics, …

Asymmetric Price Adjustments In Airlines, Diego Escobari

School of Economics and Finance Faculty Publications

This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, whereas negative cost shifts have no effect. The asymmetry is also explained by summer travel but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses. …

The “Price Puzzle” Under Changing Monetary Policy Regimes, Andre V. Mollick, Adolfo Sachsida

School of Economics and Finance Faculty Publications

This paper examines the “price puzzle”, the rise in the price level following a contractionary monetary policy shock, using monthly US data from 1960 to 2006. Deviating from the standard practice is including commodity prices to “solve the puzzle”, our benchmark VAR contains output, prices, the federal funds rate and M1 money stock, while the augmented VAR includes the 10-year long bond yield. Splitting the sample at October of 1979, we find very contrasting patterns and rationalize them under the changing relationship between money and the funds rate across periods. First, the price puzzle is confined to the pre-Volcker period. …

Imperfect Detection Of Tax Evasion In A Corrupt Tax Administration, Diego Escobari

School of Economics and Finance Faculty Publications

This article models the imperfect detection of tax evasion motivated by the existence of a corrupt tax administration. Consistent with previous literature, fines and audit probabilities both have a positive effect on compliance. Moreover, the model shows that they have a negative effect on the bribes paid to corrupt tax officials. More corruption decreases compliance levels, giving honest auditors incentives to work harder to detect evasion. Giving inspectors a share of the detected evasion (tax farming) makes auditors work harder; however, increasing their wages reduces their exerted effort to discover evasion. Higher compliance can as well be achieved by hiring …

Demand Shifting Across Flights And Airports In A Spatial Competition Model, Diego Escobari, Sang-Yeob Lee

School of Economics and Finance Faculty Publications

This paper investigates the nature of day-to-day competition between flights using a unique panel data set on prices and inventories. We use instrumental variables methods and several spatial autoregressive models (SAR) to estimate price reaction functions. The primary source of product differentiation is departure time. After controlling for flight-specific characteristics and various sources of price dispersion, we find important evidence of demand shifting between competing flights. Most of the shift is being captured by flights scheduled to depart within a 3-hour window. We find no evidence of demand shifting between airports.

Does Inflation Targeting Matter For Output Growth? Evidence From Industrial And Emerging Economies, Andre V. Mollick, Rene Cabral, Francisco G. Carneiro

School of Economics and Finance Faculty Publications

This paper examines the effects of inflation targeting on industrial and emerging economies’ output growth over the “globalization years” of 1986-2004. Controlling for trade openness and two indicators of financial globalization, the authors find systematic positive and significant effects of inflation targeting on real output growth. In dynamic models, the findings show strong output persistence in industrial economies, in which partial and full inflation targeting regimes have a positive long-run impact on growth. In emerging markets, only full inflation targeting policies have any output effect in the long-run. The results suggest that strict inflation targeting is needed to make the …

The Impact Of Tarp Bailouts On Stock Market Volatility And Investor Fear, Daniel Huerta, Daniel Perez-Liston, Dave Jackson

School of Economics and Finance Faculty Publications

The Emergency Economic Stabilization Act of 2008 was the response of the Federal government to the economic crisis of 2007-2009. Within this act, the Troubled Asset Relief Program (TARP) was the mechanism to attempt to stabilize the financial market through the injection of liquidity into troubled firms. This paper examines the effect of TARP bailouts on stock market volatility and investor fear. Using an event study methodology, we find evidence of a significant decrease in stock-market volatility on the day of bailouts, and the day after. Additionally, findings show that the VIX, a proxy of investor fear, significantly declines on …

North–South Trade Liberalization And Returns To Skill In The South: The Case Of Mexico, Gautam Hazarika, Rafael Otero

School of Economics and Finance Faculty Publications

This study examines the effect of North American Free Trade Agreement (NAFTA), an instance of North–South trade liberalization, on returns to skill in Mexico. Mexico is abundant in low-skill workers relative to the US and Canada, and so, by the Heckscher–Ohlin–Samuelson trade model, NAFTA ought to have raised the relative earnings of low-skill workers, that is, lowered returns to skill in Mexico. Analysis of Mexican labour micro-data yields the finding that while returns to skill in industries producing tradeables have risen, ceteris paribus, since Mexico embarked upon trade liberalization by joining the GATT in 1986, this rise was less …

Battese-Coelli Estimator With Endogenous Regressors, Levent Kutlu

School of Economics and Finance Faculty Publications

We provide a framework for dealing with the endogeneity problem in the Battese-Coelli estimator for productive efficiency measurement.

Capital And Labor Mobility And Their Impacts On Mexico’S Regional Labor Markets, Rene Cabral, Andre V. Mollick, João Ricardo Faria

School of Economics and Finance Faculty Publications

This paper studies the effects of capital and labor mobility on real wages across Mexican states for the period 1997–2006. Employing dynamic panel data methods, we find: (1) strong positive effects on real wages from foreign direct investment (FDI) and from migration; (2) domestic and foreign migration provide similar wage effects; and (3) alternative partitions indicate that real wages are more sensitive to FDI-related fluctuations across states with relatively lower wages and migration levels. Overall, these results provide support that real wages respond positively to fluctuations in capital flows and labour movements as predicted from the theory.

Foreign Portfolio Investment Inflows To The United States: The Impact Of Investor Risk Aversion And U.S. Stock Market Performance, Peter V. Egly, David W. Johnk, Daniel Perez Liston

School of Economics and Finance Faculty Publications

This paper examines the relationship of net foreign portfolio investment inflows, namely corporate bonds and stocks, to two pull factors; investor risk aversion and the US stock market. Using a vector autoregressive model, we find that positive shocks to the stock market elicit an insignificant response to the net corporate bond inflow and a significant short term positive response to the net corporate stock inflow. The net corporate stock inflow does not respond to risk aversion, while bond inflows do exhibit a significant midterm response to an increase in risk aversion. Consistent with previous empirical findings, the results show that …

Hyperbolic Systems Modeling Currency Hoarding, Elena Quercioli, Jeffrey Rauch

School of Economics and Finance Faculty Publications

We introduce and analyse linear systems of hyperbolic partial differential equations that model the replacement and hoarding of currency. The goal is to deduce the hoarding behavior from observations of circulating bills. The large time asymptotics of the models is identified in all cases. The mathematical analysis is novel, partly because of nonstandard boundary conditions. To identify parameters we suggest the measurement of the age histogram of notes, the rate of growth, and the retard in wear of notes due to hoarding. In our models that suffices to identify all but one quantity.

An Empirical Examination Of Firearm Users In Brasilia, Df, Adolfo Sachsida, Andre V. Mollick, Mario Jorge Cardoso De Mendonca

School of Economics and Finance Faculty Publications

This paper relates individuals’ characteristics to the probability of possessing firearms: a) inside the home; b) outside the home; and c) inside and outside the home. Extending the literature on the demand for firearms whose focus is on the first trait, we collected survey data on 2,045 random individuals of Brasília, Brazil, in 2002. The multinominal logit model yields several new results. First, while we do find that a person’s educational level negatively affects the likelihood that an individual will use arms only outside his or her home, education does not affect the probability of an individual possessing a gun …

China’S Exports And The Oil Price, João Ricardo Faria, Andre V. Mollick, Pedro H. Albuquerque, Miguel A. Leon-Ledesma

School of Economics and Finance Faculty Publications

The increase in oil prices in recent years has occurred concurrently with a rapid expansion of Chinese exports in the world markets, despite China being an oil importing country. In this paper we develop a theoretical model that explains the positive correlation between Chinese exports and the oil price. The model shows that Chinese growth can lead to an increase in oil prices that has a stronger impact on its export competitors. This is due to the large labor force surplus of China. We then examine this hypothesis by estimating a reduced form equation for Chinese exports using Rodrik (2006)’s …

Productivity Effects On Mexican Manufacturing Employment, Andre V. Mollick, Rene Cabral

School of Economics and Finance Faculty Publications

We examine the effects of labor productivity and total factor productivity (TFP) on employment across 25 Mexican manufacturing industries from 1984 to 2000. Employing panel data methods, several interesting findings emerge. First, we observe a strong and positive impact of NAFTA on employment. Second, productivity exerts a procyclical, positive effect on employment but this effect becomes smaller after NAFTA. Third, partitions of our sample according to capital-labor intensity suggest that industries which are less capital-intensive were affected negatively on impact by NAFTA but that productivity impacted employment positively after NAFTA. In contrast, more capital-intensive industries display these results in reverse.

5 Women's Status And Children's Food Security In Pakistan, Basudeb Guha‐Khasnobis, Gautam Hazarika

School of Economics and Finance Faculty Publications

This chapter examines the role of women's intra-household status relative to men's in children's food security in Pakistan. Data from the 1991 Pakistan Integrated Household Survey (PIHS) yield a measure of evidence of a positive relation between women's intra-household status and children's food security.

Productivity Effects On Mexican Manufacturing Employment Before And After Nafta, Andre V. Mollick, Rene Cabral

School of Economics and Finance Faculty Publications

A vast literature employs vector autoregressions (VAR) methods in order to capture whether innovations in productivity lead to increases or decreases in employment for U.S. manufacturing. Studying 25 Mexican manufacturing industries with annual data from 1984 to 2000, we examine labour productivity (value added per employee) and total factor productivity (TFP) effects on Mexican manufacturing employment. We find that productivity measures vary considerably in Mexico. Making use of panel data methods that control for sector specific effects, the business cycle and real wages, interesting results emerge. First, there are strong positive impacts of TFP (without and with human capital) on …

Mexican Northern Border Municipalities, Financial Dependence And Institutions, Jorge Ibarra Salazar, Andre V. Mollick

School of Economics and Finance Faculty Publications

Mexican northern border municipalities have experienced economic and populational growth rates that are much higher than other Mexican regions resulting in higher demand for public services and infrastructure. The different institutional framework, both fiscal and legal, faced by municipalities in every Mexican State might impact the fiscal behavior of local governments. This article examines whether border municipalities are more financially dependent on central authorities due to the high demand for public services in their jurisdictions and their inability to obtain sufficient funding. Several econometric models are estimated for 300 Mexican municipalities in the year 2000. A strong and negative relationship …

La Ley De Concursos Mercantiles En México: Algunas Reflexiones A Cuatro Años De Su Entrada En Vigor [The New Bankruptcy Law In Mexico: Some Reflections Since Enacted 4 Years Ago], Armando R. Lopez-Velasco, Leonardo E. Torre Cepeda

School of Economics and Finance Faculty Publications

• La función de una ley de quiebras consiste en maximizar el valor de empresas que llegan a caer en situaciones de insolvencia. Su buen funcionamiento es esencial para la operación eficiente del mercado de crédito y, por ende, para el crecimiento y desarrollo sostenido de la economía.

• Una ley de quiebras debe ser modificada cuando se presentan, simultáneamente: (i) una restricción crediticia que impide que empresas potencialmente rentables reciban los fondos necesarios para financiar sus inversiones, (ii) retrasos en el cierre de empresas que deben ser liquidadas y (iii) costos elevados por retrasar la reorganización o liquidación de …

Foreign Trade And The Gender Earnings Differential In Urban Mexico, Gautam Hazarika, Rafael Otero

School of Economics and Finance Faculty Publications

This paper examines the effect of foreign trade induced product market competition, upon workplace gender discrimination in urban Mexico as measured by the gender earnings differential. More than 3 decades ago, Becker (1957) argued that labor market discrimination was economically inefficient in that discriminating firms must forego a quantity of profit. Thus, firms with more market power, i.e., firms facing less competition, may be likelier to discriminate. It therefore follows that competition in product markets may reduce discrimination in labor markets. The spread of foreign trade has traditionally been a major factor in increased product market competition. Hence, Becker's thesis …

Access To Credit, Plot Size And Cost Inefficiency Among Smallholder Tobacco Cultivators In Malawi, Gautam Hazarika, Jeffrey Roger Alwang

School of Economics and Finance Faculty Publications

Using data from the Malawi Financial Markets and Household Food Security Survey, this paper examines the effect of access to credit from formal sources, and tobacco plot size, on cost inefficiency among Malawian smallholder tobacco cultivators. Farm-specific cost inefficiency is estimated within the framework of stochastic frontier analysis. Access to credit is measured as the sum of household members' self-reported credit limits at credit organisations, arguably a truer measure of an exogenous credit constraint than credit program participation or actual loan uptake. It is found that tobacco cultivation is significantly less cost inefficient per acre on larger plots. While access …

Schooling Costs And Child Work In Rural Pakistan, Gautam Hazarika, Arjun Bedi

School of Economics and Finance Faculty Publications

A conventional argument in the child–labour debate is that improvements in access to schools are an effective way to reduce the labour force participation of children. It is argued that schooling competes with economic activity in the use of children's time, and enhanced access to schools, interpretable as reduction in schooling costs, may raise school attendance at the expense of child labour. In this article, we draw a distinction between child labour within the household (intra-household) and child work in the labour market (extra-household), and examine the separate effects of schooling costs upon these two types of child labour in …

Mercado Telefónico En México: Diez Años Después De La Privatización De Telmex Privatización De Telmex [The Telephone Market: 10 Years After The Privatization Of Telmex], Leonardo E. Torre Cepeda, Armando R. Lopez-Velasco

School of Economics and Finance Faculty Publications

• El sector de las telecomunicaciones en México experimentó una profunda transformación durante la década de los años noventa: el monopolio público telefónico fue privatizado (1990), se emitió una nueva ley del sector (1995), se creó un nuevo ente regulador (1996) y se abrió a la competencia el segmento de larga distancia (1997).

• El cambio estructural en el sector trajo consigo avances importantes en materia de densidad, calidad y precios de los servicios. Sin embargo, estos avances han sido insuficientes para impedir que en México sigamos contando con una baja densidad telefónica y precios elevados de los servicios, en …