TImag13-spring2006

tinbergen institutetinbergentinbergen institute institute

magazine

The new director of CPB

An interview with Coen Teulings

Making the invisible hand visible

Why TV game shows have economists glued to their television sets

Spring 2006

Tinbergen Magazine is published

by Tinbergen Institute, the Institute

for economic research of Erasmus

Universiteit Rotterdam, Universteit

van Amsterdam and Vrije

Universiteit Amsterdam.

magazinemagazine13

Up close

In depth

Letters from Alumni

In shortReferences

tinbergen magazine 13, spring 2006

2

In this issueUp close



Tijmen Daniëls 2

In depth


Pieter Gautier 7


Thierry Post 10

Letters from Alumni

Clive Jie-A-Joen, Ernst & Young 13

In short

Papers in journals 14

Discussion papers 14

Thesis 16

References 18

tinbergen institute

magazine





Spring 2006

Tinbergen Magazine is published

by Tinbergen Institute, the Institute

for economic research of Erasmus

Universiteit Rotterdam, Universteit

van Amsterdam and Vrije

Universiteit Amsterdam.

13

Highlighting ongoing research at Tinbergen Institute for policymakers and scientists.




Allow me to congratulate you on your new position as Director of CPB Netherlands Bureau for Economic Policy Analysis. CPB conducts economic analyses for the Dutch government. Is your new job of a political or of an academic nature?

It’s definitely not a political job. CPB provides advice to Dutch politicians— primarily to the government, but also to the parliament. CPB’s strength is to advise on the basis of academic arguments.

If you ask people working at CPB what they like about their jobs, the answer is invariably that this is the place where you can consider policy questions in a fundamental way. CPB has to respond to concrete questions from the Dutch ministries. CPB’s answers, formulated on the basis of its own economic research and the international literature, are translated into conclusions that are relevant for economic policy. This is what makes CPB a unique institute; there are not many places in the world where economic arguments find their way into policy in such a structured manner.

Up

clo

se

As of May 1, 2006, Coen Teulings is the

new Director of CPB Netherlands Bureau

for Economic Policy Analysis.

Having served on CPB’s Advisory Board

from 2001-2004, Teulings is well

acquainted already with the research

institute. Prior to this appointment,

Teulings served as general director of

Tinbergen Institute (1998-2004) and of

SEO Economic Research (2004-May 2006).

Despite these demanding positions, Coen

Teulings is also Professor of Economics at

UvA and an active researcher.

By Tijmen Daniëls

3

Questions of economic policy are often related to political disagreements.

CPB should anticipate political disputes. When you find yourself in the position of a referee when political parties have already entrenched themselves, you are too late. In such a situation it is hard to avoid choosing sides. And you shouldn’t— unless it is absolutely clear that one of the parties is talking nonsense from an economic point of view. CPB thus has to pre-empt disputes and formulate its position based on economic arguments before things turn into a political quarrel.

You are an academic economist, but also active in the Dutch Labour party. Do you find that your political views have guided your research interests?

Foremost, I would like to stress that it’s an honour that our current coalition, consisting of VVD, CDA and D66, appointed me as CPB director. This is evidence that the political preferences of the CPB director are unimportant.

But the question was whether my political preferences have played a role in my research. Perhaps they have, to some extent. Now that I am growing older, political convictions have become a less important driver in my research. My early research concentrated on income inequality. I am still concerned with this question, in my work with Robert Dur. One could say that this is a leftist’s question, but in fact it isn’t. Our concern is how you can find an efficient mode of redistribution, given that you do want to redistribute income. This, of course, is still highly relevant today.

Some of my more recent research is on privatisation, and thus might be called ‘liberal’. I am convinced that the current process of curtailing the central role of the government will continue— even though some people in the Netherlands claim that the momentum for privatisation has disappeared. The current developments are essentially more about decentralisation, rather than privatisation. The gains to be reaped are welcome, whatever your position on the political spectrum.

Perhaps you could also describe some of your current research.

I’m currently working on a very nice project: the marriage market. A compelling argument can be made that there should be economies of scale to search; search should be easier in places where you have lots of people together. Strikingly, almost all of the empirical research seems to establish the

Over time, political

convictions have become

a less important driver

in my research.


�

contrary. Together with Pieter Gautier and Michael Svarer, I have shown that economies of scale are indeed present on at least one ‘market’: the marriage market.1

Something else that has kept me busy, in collaboration with Miguel Portela, is the return on education. We use new methods to look for externalities. Although the literature seems to think that these should not be present, there seem to be many problems with explaining some basic empirical observations. Specifically, we are trying to determine whether there is a relation between the level of education in neighbouring countries and GDP. Indeed, we find that there is.

Another thing that I’m still working on is wage formation. We ask why it is that when you remain in a specific job for a given period, you tend to earn more than you would if you switched jobs. Our argument is that this has to do with insider/outsider effects, and your company offering you a promotion after a given period of time. The increase in wage is, in part, simply economic rents. We show that in rapidly growing firms (where there are many rents to be gained) wages increase quickly— but that this is not the case for firms that are not growing.

Finally, I’m also involved with the Dutch research institution NETSPAR (Network for Studies on Pensions, Aging and Retirement). Within NETSPAR, I am involved with generational accounting. This, of course, is directly relevant to CPB’s work.

When I glanced at a list of your present and past research, one theme that stood out was that you appear to look for refinement of standard neoclassical thinking. A recent paper in the Review of Economic Studies argued that unemployment benefits might be efficient in some circumstances, whereas textbook economics would perhaps assert the opposite.

Although everything I do is always based on hard-core economic principles, I do look for the modern variety of these principles. Modern-day economics has paid a great deal of attention to market failures. Economists know that they are there. Market failure does not, however, automatically legitimate government intervention. Yet, one must take some account of the problems that market failures present. The paper you mentioned, dealing with the labour market, points to a case in which there are many market failures, and identifies some things that could be mended by sound policy.

CPB uses economic models to predict the effects of policy on the economy. Do these models give sufficient attention to market failure?

I think so. In MIMIC, one of the important CPB macroeconomic models, search frictions are explicitly included. And wage formation, for instance, is not modelled in a neoclassical vein, but is based on bargaining power. At CPB, researchers also look at how bargaining power might vary between parties. Of course it’s hard to say whether this is sufficient. But I suppose the true test is whether CPB’s models feature the really important market failures. This question will have to be approached on case-by-case basis.

Still, there has been some critique from political parties in the past that the models used by CPB do not conform to their perceptions of how the economy operates.

When I was still active in the Green party, we had a discussion on whether we should ask CPB to evaluate our political programme. Virtually all parties do this nowadays. I was actively involved in this discussion, and thought it was a good

It’s important to have an impartial institute that judges whether a

party’s programme is financially feasible, so that discussions can

concentrate on the political arguments and not on the financial side.


�

idea— that it would be beneficial both to our political party and to the country. In my view, political disputes should be about political preferences. So it’s important to have an impartial institute that judges whether a party’s programme is financially feasible, so that discussions can concentrate on the political arguments and not on the financial side. This development has improved the quality of discussions on economic policy. The left parties are nowadays content with CPB’s role.

But now these parties simply write their programmes in such a way that they perform well in the CPB evaluations.

Yes, of course! Everyone wants to look good.

At the time of this interview, you are serving as director of SEO, an institute that conducts research financed by external parties on a project basis. Here, you must also have been confronted with principals that desire favourable research results. Has this ever led to conflicts of interests between the principal and SEO, the agent who wants to uphold scientific standards?

Personally, I have never really been involved any such disputes. But there’s no denying that our organization has faced them. Conflicts about scientific standards are sometimes very explicit and may be dealt with easily by simply confronting the principal. But the problem is more difficult to manage when the conflict of interest lurks just below the surface— in cases where the principal hires you to make his case look attractive. We try to deal with this in the right way, but it would be naive to claim that it’s never a problem.

One aspect is particularly important to keep in mind: namely, that it is not easy to argue what would be the right approach to conflicts of interest. An article written by Tirole and Dewatripont discussing advocacy argues that one approach— not necessarily the most efficient— is that of the impartial referee. A referee in a conflict has no incentives to bring out all of the arguments because he will always have to balance the arguments of both sides. A person advocating the interests of just one party does have this

incentive. Thus, in some cases it’s efficient to have advocates rather than a referee, and at SEO we recognize this. When we take on this role, however, we state this clearly in our report. Moreover, we would never put forward arguments that we do not stand behind.

CPB has only one principal: the Dutch government. What does this mean for CPB’s position?

The government is a monster with many heads, so it’s a bit naive to think that there is ‘just one’ government. But CPB plainly cannot assume the role of the advocate. CPB is a referee, and sometimes a referee is what is needed.

One of your predecessors, Gerrit Zalm,

is now the Minister of Finance. What are your ambitions?

Well, I’m excited about my new job and also extremely honoured to follow in his tracks as director of CPB. And although I can’t help wondering sometimes what the next step will be, for now my place is at the helm of CPB.

Thank you for your time.

References

Teulings, C.N., and P.A. Gautier, The right man for

the job. Review of Economic Studies 71, 2 (2004),

553–80.

Dewatripont, M., and J. Tirole, Advocates. Journal

of Political Economy 107, 1 (1999), 1–39.

Notes

1 In his article, also published in this issue, Pieter

Gautier discusses this finding more extensively.

When there is a conflict of interest, advocates can

be more efficient than an impartial referee.


6

�


empirical evidence. The fact that “rich” wage equations typically leave 70% or more of the variation in compensation across workers unexplained, suggests, however, that the “law of one price” does not hold. Gautier and Teulings (2006) derive a search model with two-sided heterogeneity that predicts that log wages are concave in appropriately normalised worker and job characteristics. They empirically explore this result, and estimate that output in the US is about 25% lower than it would have been in the absence of frictions. This output loss is about the same as the theoretical predictions in Gautier, Teulings and van Vuuren (2005), where we allow for two-sided heterogeneity and on-the-job search. There are two key factors that matter for the nature of the decentralised (search) equilibrium: matching and wage determination. Both are discussed below. Once we have gone through the effort of solving the equilibrium, we can use those models to answer important efficiency questions.

The matching processIn the random search literature

(e.g. Pissarides, 2000), the rate at which workers meet vacancies is determined by an exogenous matching technology, and workers and jobs are homogeneous. Gautier (2002) extends this framework to a model with two worker- and job types in order to identify which types of shocks could explain the actual changes in wage dispersion and unemployment rates between different skill

I remember from my first economics class in high school that my teacher drew a supply and a demand curve and explained that the point at which both curves intersect defines the equilibrium price and quantity. I liked this simple and powerful model that could be used to study the effects of minimum prices and demand and supply shocks. Moreover, I understood it— at least, I thought I understood it. Later, I realised that I did not really understand how prices are determined, and how supply and demand interact in a decentralised market. Thumbing through past issues of TI Magazine, I noted that people became interested in some research programme or other because they felt dissatisfied with certain core axioms, such as rationality and expected utility. I found the most dissatisfying of all of the standard axioms the idea of the invisible hand or the hypothetical auctioneer. This led me to peruse the work of the pioneers in equilibrium search— Mortensen (1982), Diamond (1971), Burdett and Judd (1983) and Pissarides (2000), who were explicit about the meeting process and the way in which prices are determined.

My research focuses mainly on the labour market— a market where frictions are relatively large compared to, for example, financial markets. Equilibrium search theory is, however, also relevant for the goods market, the housing market and the marriage market.

Studying markets with search frictions would be less useful if there was no


Pieter Gautierl

l Pieter Gautier is associate

professor and Vidi Scholar at

Vrije Universiteit Amsterdam.

I n d e p t h


one specification to another. This critique does not apply to directed search models. In directed search models, firms can ex ante “communicate” with workers through the wage they offer. Albrecht et al. (2006) show that directed search could also lead to wage dispersion because some workers receive multiple offers and some don’t. This is a different source of wage dispersion than the wage-posting model of Burdett and Mortensen (1998), where the matching technology and vacancy supply is exogenous, but where workers can search on the job. This model was structurally estimated by Van den Berg and Ridder (1998).

Efficiency The great benefit of formulating

equilibrium models is that one can carry out welfare analysis. One of the key questions in the search literature is thus whether decentralised labour markets can arrive at (constrained) efficient outcomes. The answer is important for motivating active labour market policies such as introducing a minimum wage or optimal unemployment insurance. The general view is that if search is random, the market equilibrium is not efficient; if search is directed, the market works fine. The intuition is as follows. In undirected search models with wage bargaining, efficiency requires that the marginal contribution of a worker to the matching process (the elasticity of unemployment in the matching function) is equal to his share in the matching process (the Nash bargaining parameter). This so-called “Hosios” condition only holds by coincidence (see Hosios, 1990). When there is IRS in the contact technology, Teulings and Gautier (2004) show that both workers and firms are not choosy enough. Optimal UI benefits are positive because they can act as a search subsidy. Directed search models typically do generate efficiency because the marginal rate of substitution between labour market tightness and wages is the same for workers and firms. Albrecht et al. (2006) show, however, that this result depends on the (often implicit) assumption in the literature that workers can apply to only one

groups in a number of OECD countries. Teulings and Gautier (2004) consider a continuum of worker and job types. Our main contribution is that we characterise the equilibrium, derive its efficiency properties and precisely decompose the losses due to search frictions into: (i) unemployment, (ii) vacancy cost and (iii) mismatch. The contact technology is still exogenous in this framework, but it is separated from the endogenous matching decision. Basically, a match is acceptable if its total value exceeds the total option value of continued search. Recently, there has been strong renewed interest in directed search models (i.e. Burdett, Shi and Wright, 2001), in which firms offer a price together with a probability of service. One big advantage of this framework is that it provides a micro-foundation for the matching function.

A great deal of empirical work has focused on the matching process. The bulk of the literature explores cyclical variation in labour market tightness to estimate empirical matching functions. Recently, a number of papers have explored cross-regional differences in labour markets to get an idea of the returns to scale in the matching process (see Gautier and Teulings, 2003). Intuitively, it seems easier to find a vacancy or a marriage partner in Amsterdam than in the rural North of the Netherlands. Underneath this intuition lies the notion that there are increasing returns to scale (IRS) in the contact process. However, as the scale of the market increases, agents also become choosier. Gautier, Svarer and Teulings (2005) present evidence that big cities are marriage markets: singles move to the city, and after they marry they move out. Even couples that never have kids are more likely to leave the city than singles, and we also observe that divorcees move back to the city.

Wage formation The second important factor in search

models is wage or price determination. In labour market models with undirected search, wages are typically determined through Nash bargaining. Outcomes depend on the exact specification of the bargaining game, but there are no theoretical reasons to prefer

Intuitively, it seems easier to find a vacancy or a marriage partner

in Amsterdam than in the rural North of the Netherlands.

Underneath this intuition lies the notion that there are increasing

returns to scale (IRS) in the contact process.


�

job at a time. If workers apply to multiple jobs, it is possible that a firm’s candidate has other offers. We show that efficiency requires full ex ante competition (as in Burdett et al., 2001), and full ex post competition (i.e. Bertrand competition) for the workers with multiple offers. The problem is, however, that when there is full ex post competition, a firm that posts a slightly lower wage than the rest of the market would hardly lose any applicants because the most important motivation to apply is the hope of winning the jackpot by getting multiple offers. This drives the equilibrium wage to zero and eliminates ex ante competition. The only way to get full ex ante competition is to allow firms to collude, by allowing for offer-beating strategies, for example— but then ex-post competition is too low. In both cases, firms open too many vacancies. Gautier and Wolthoff (2006) extend this model to allow for heterogeneous firms. Workers now face a complicated portfolio problem. We show that this leads to a second source of inefficiency caused by the fact that workers choose their portfolio of applications such that they maximise the productivity-weighted probability of receiving multiple offers, whereas a social planner maximises the productivity-weighted number of matches.

To conclude, modern search theory has successfully made the invisible hand more visible. This is still a lively research area that combines the rigor of microeconomics and game theory with the dynamics and equilibrium focus of macroeconomics. Since everything can be stated in terms of observable variables, it is also suitable for structural estimation and policy simulations. This research area has something to offer for everyone.

References

Albrecht, J.W, P.A Gautier and S.B. Vroman (2006),

Equilibrium directed search with multiple

applications, Review of Economic Studies,

forthcoming.

Burdett, K. and K.L. Judd (1983), Equilibrium price

dispersion, Econometrica, vol. 51 (4), pp. 955-969.

Burdett, K. and D. Mortensen (1998), Wage

differentials, employer size, and unemployment,

International Economic Review, vol. 39, pp. 257-273.

Burdett, K., S. Shi and R. Wright (2001), Pricing

and matching with frictions, Journal of Political

Economy, vol. 109, pp. 1060-1085.

Diamond, P.A. (1971), A model of price adjustment,

Journal of Economic Theory, vol. 3, pp. 156-168.

Gautier, P.A. (2002), Search externalities in a model

with heterogeneous jobs and workers, Economica,

vol. 273 (1), pp. 21-40.

Gautier, P.A. and C.N. Teulings (2003), An empirical

index for labor market density, Review of Economics

and Statistics, vol. 85 (4), pp. 901-908.

Gautier, P.A. and C.N. Teulings (2006), How large

are search frictions? Journal of the European

Economic Association, forthcoming.

Gautier, P.A., C.N. Teulings and M. Svarer (2005),

Marriage and the city, TI discussion paper 05-015/3.

Gautier, P.A., C.N. Teulings and A. van Vuuren

(2005), On-the-job-search and sorting, TI

discussion paper 05-070/3.

Gautier, P.A. and R.P. Wolthoff (2006), Simultaneous

search with heterogeneous firms and ex post

competition, TI discussion paper 06-032/3.

Hosios, A. (1990), On the efficiency of matching

and related models of search and unemployment,

Review of Economic Studies, vol. 57, pp. 279-298.

Mortensen, D. (1982) Property rights and efficiency

in mating, racing and related games, American

Economic Review, vol. 72, pp. 968-979.

Pissarides, C. (2000), Equilibrium Unemployment

Theory, 2nd ed., MIT Press, Cambridge, MA.

Teulings, C.N and P.A. Gautier (2004) The right man

for the job, Review of Economic Studies, vol. 71 (2),

pp. 523-580.

Van den Berg, G.J. and G. Ridder (1998), An

empirical equilibrium search model of the labor

market, Econometrica, 66, 1183-1222.

The only way to get full ex ante competition is to allow

firms to collude, by allowing for offer-beating strategies,

for example— but then ex-post competition is too low.


�


10

include “Card Sharks” (Gertner, 1993), “Jeopardy!” (Metrick, 1995), “Illinois Instant Riches” (Hersch and McDougall, 1997), “Lingo” (Beetsma and Schotman, 2001), “Hoosier Millionaire” (Fullenkamp et al., 2003) and “Who Wants to be a Millionaire?” (Hartley et al., 2005). The key advantage is that the decision problems generally are simple, and that large, real monetary amounts are at stake. Arguably, the behaviour of game-show contestants may not be representative for behaviour outside the studio. Contestants may be infl uenced, for example, by social pressure from the audience, remarks and directions by the game-show host and the unique event of being on national TV. Still, if the decision problems are suffi ciently simple and the amounts at stake are suffi ciently high, we may expect that the choices refl ect the contestants’ risk preferences.

In a recent study (Post et al., 2004), we analysed the decisions made in the international blockbuster show “Deal or No Deal”, which has a number of particularly favourable design features for studying risky choice. The stakes are very high and wide-ranging: with a maximum prize of €5,000,000 and an average prize of roughly €400,000 (in the Dutch edition, called Miljoenen Jacht), the game show can send contestants home as multimillionaires— or practically empty-handed. Unlike other game shows, “Deal or No Deal” involves only simple stop-go decisions that require minimal skill, knowledge or strategy. In addition, the probability distribution is simple and known with near-certainty.

The game starts with 26 numbered briefcases containing hidden money amounts

The theory of risky choice is one of the cornerstones of economics. In recent years, the classic expected-utility theory (EUT) has been challenged by frame-dependent theories such as prospect theory (PT; Kahneman and Tversky, 1979). Empirical research in this fi eld is often plagued by problems of joint hypotheses and improper stimuli for the subjects. This has led some researchers to analyse the behaviour of contestants in TV game shows, which often involve simple decision problems and large monetary stakes.

In everyday life, people face many risky choice problems, often involving large stakes. Examples include choosing pension plans, buying and selling homes, selecting mortgages and buying insurance. Unfortunately, studying these decisions is plagued by the joint hypotheses problem: We generally do not directly observe risk preferences because the probability distribution in many cases is not known to the subjects, and the subject’s beliefs are not known to the researcher.

A large part of the empirical research therefore relies on laboratory experiments or classroom experiments. The key advantage of such experiments relative to real-life data is the possibility to control the probability distribution of the choice alternatives and to ensure that the subjects are aware of the distribution. Nevertheless, experiments generally use hypothetical stakes or small real stakes, and subjects may not be suffi ciently motivated to act optimally and reveal their true preferences and beliefs.

One way to overcome this incentive problem is to use TV game shows as natural experiments. Examples of game show studies

Thierry Postl

lThierry Post is professor

of fi nance, and director of

business economics studies,

at Erasmus University. The

study was recently covered

on the front page of the Wall

Street Journal (www.wsj.com)

on January 12, 2006, and on

National Public Radio (www.

npr.com) on March 3, 2006.

Coverage is planned for ABC

News 20/20 in May 2006.


I n d e p t h

11


that range from €0.01 to €5,000,000 (in the Dutch edition); see also Figure 1. The contestant selects one of the briefcases, which is not to be opened until the end of the game. The game is played over a maximum of nine rounds, during each of which a “banker” tries to buy the briefcase from the contestant by making him an offer. If the contestant accepts the offer (“Deal”), he walks away with this sure amount and the game ends; if the contestant refuses the offer (“No Deal”), play continues and he enters the next round. Prior to each offer, the contestant obtains information about the unknown prize in his briefcase by choosing one or more of the remaining briefcases to be opened. The numbers of briefcases to be opened in the nine rounds are, respectively, 6, 5, 4, 3, 2, 1, 1, 1, and 1, and so the number of remaining prizes decreases from 26 to 20, 15, 11, 8, 6, 5, 4, 3 and finally to 2. If the contestant rejects all offers, he receives the prize in his own briefcase at the end of the game.

Our study analyses episodes from Belgium, Germany and the Netherlands in 2002-2005. These editions are selected for the diversity in the stakes; the initial stakes in the German edition are roughly 15 times smaller than those in the Dutch edition, and the Belgian edition falls somewhere in between. Apart from the initial stakes, the game formats are comparable. The contestants from the three European countries also seem comparable in terms of their cultural and economic background.

We first investigate the contestants’ decisions using the classic EUT. We estimate the Arrow-Pratt coefficient of relative risk aversion (RRA) for every individual contestant based on his observed Deal/No Deal decisions during the game, using a constant relative risk aversion (CRRA) model. Next, we try to explain the cross-sectional differences in risk attitudes with characteristics of the contestants and the state-of-the-game they face. The analysis shows that risk attitudes differ widely across the contestants, some exhibiting strong risk aversion (RRA > 4) and others being risk seeking (RRA < 0). The differences can be explained in large part by the outcomes experienced by the contestants in the previous rounds of the game. Most notably, risk aversion generally decreases after prior expectations have been shattered by unfavourable prior outcomes. Contestants facing a large reduction in the average remaining prize during the game may even

become risk seeking; they reject offers that exceed the average and thus enter “unfair gambles”.

Witness Frank, the 36-year old male contestant in the Dutch episode aired on January 1, 2005. Table I shows the gambles presented to him in rounds 6 through 9, and the decisions he made; the photo on page 12 is a screenshot from round 9. Recall that Dutch contestants start with an expected prize of nearly €400,000. In round 7, after several unlucky picks, Frank opens the briefcase with the final remaining large prize (€500,000) and he sees the expected prize tumble from €102,006 to €2,508. The bank then offers him €2,400, or 96 percent of the average of remaining prizes. Frank rejects this offer and play continues. In the subsequent rounds, Frank deliberately chooses to enter unfair gambles, to finally end up with a briefcase worth only €10. Specifically, in round 8 he rejects an offer of 105 percent of the expected prize and in round 9 he rejects a certain €6,000 in favour of a 50/50 gamble of €10 and €10,000. We feel confident in classifying such decisions as risk-seeking behaviour, because they involve single, simple, symmetric gambles with relatively large amounts at stake. Also, unless we are willing to assume that Frank would always accept unfair gambles of this magnitude, the only reasonable explanation for his choice behaviour seems a reaction to his misfortune experienced during the game.

Frank is no exception, and illustrates a general pattern: risk aversion falls after the elimination of valuable briefcases shatters earlier expectations. This path-dependent pattern occurs in all editions of the game, despite sizeable differences in the initial stakes across the editions. Thus, losers seem less risk averse than winners, irrespective of the amounts at stake.

Path-dependence is not consistent with EUT, and points in the direction of frame-dependent choice theories such as PT. More specifically, our findings seem consistent with the “break-even effect” (Thaler and Johnson, 1990): decision makers become more willing to take risk due to incomplete adaptation to previous losses. In PT, this effect arises when the reference point sticks to the earlier, more favourable situation, placing relatively many outcomes in the domain of losses, where decision makers are risk seeking. If contestants are sufficiently

Our findings seem consistent with the “break-even effect” of

Prospect Theory: decision makers become more willing to take risk

due to incomplete adaptation to previous losses


12

risk seeking in the domain of losses, they may even accept “unfair gambles” to escape these losses. Indeed, a simple version of the PT with a sticky reference point equal to the highest bank offer during the game yields surprisingly good predictions of the

“Deal”/“No Deal” decisions in our sample. These results suggest that phenomena such as framing and path-dependence are also relevant when large, real monetary amounts are at stake.

“Frank” This screenshot is taken from the Dutch

episode of January 1, 200�. The centre frame shows

the game show host and contestant Frank. All possible

prizes are listed in the left and right panels. Prizes

that are eliminated in earlier rounds are shown in dark

grey, and remaining prizes are in bright yellow. The

bar on the top of the screen shows the bank offer.

This example demonstrates the two options open to

the contestant in the ninth game round, after opening

2� briefcases in the previous eight game rounds: (i)

accept a bank offer of €6,000 or (ii) continue to play

with the remaining two briefcases, one of which is the

contestant’s own.

Remaining Prizes (€) Exp. Prize (€)

Offer (€) Offer (%)

Deal/ No Deal

Round 0.50 10 20 10,000 500,000

6 x x x x x 102,006 75,000 74% No Deal

7 x x x x 2,508 2,400 96% No Deal

8 x x x 3,343 3,500 105% No Deal

9 x x 5,005 6,000 120% No Deal

10 x 10 – – –

Table I

Example “Frank” The table shows the gambles presented to contestant Frank and the “Deal”/“No Deal” decisions

made by him in rounds 6 through �. This particular episode of the show was aired on Dutch television on January 1,

200�. In round �, Frank deliberately enters an “unfair” gamble by rejecting a bank offer of €6,000 or 120 percent of

the average of the remaining prizes.

References

Beetsma, R.M. and P.C. Schotman, (2001), Measuring

risk attitudes in a natural experiment: Data from

the television game show ‘Lingo’, Economic Journal,

111(474), 821-48.

Fullenkamp, C., R. Tenorio and R. Battalio, (2003),

Assessing individual risk attitudes using field

data from lottery games, Review of Economics and

Statistics, 85(1), 218-26.

Gertner, R., (1993), Game shows and economic

behavior: Risk-taking on card sharks, Quarterly

Journal of Economics, 108(2), 507-21.

Hartley, R., G. Lanot and I. Walker, (2005), Who

really wants to be a millionaire: Estimates of risk

aversion from game show data, working paper,

University of Warwick.

Hersch, P.L. and G.S. McDougall, (1997), Decision

making under uncertainty when the stakes are

high: Evidence from a lottery game show, Southern

Economic Journal, 64(1), 75-84.

Kahneman, D. and A. Tversky, (1979), Prospect

theory: An analysis of decision under risk,

Econometrica, 47(2), 263-91.

Metrick, N., (1995), A natural experiment in

‘Jeopardy!’, American Economic Review, 85(1), 240-53.

Post, Th., M. Van den Assem, G. Baltussen and R.

Thaler, 2004, Deal or No Deal? Decision making

under risk in a large-payoff game show. Available at

SSRN: http://ssrn.com/abstract=636508

Tenorio, R. and T.N. Cason, (2002), To spin or not to

spin? Natural and laboratory experiments from ‘The

Price is Right’, Economic Journal, 112(476), 170-95.

Thaler, R.H. and E.J. Johnson, (1990), Gambling

with the house money and trying to break even:

The effects of prior outcomes on risky choice,

Management Science, 36(6), 643-60.

13


Letters from Alumnilife after the PhD thesis defense

Transfer pricing is a multidisciplinary subject occupying the time and talents of (tax) lawyers, accountants and economists. You basically provide advice to multinational enterprises in determining arm’s length transfer prices from a tax viewpoint, or assist companies in case they face a transfer-pricing audit from a tax inspector. The fun part of this process is that you need to analyse the supply chain structure of a multinational enterprise, which means you speak to the operational people of the company and learn about industries.

At the end of my PhD thesis research, I faced the choice of doing a post doc or going into consultancy. Doing a post doc would have been a “safe” choice, since I did not see myself as a consultant at the time. I fi nally decided to leave the university and go forth into the uncertain world. Now, about nine years on, I am still working in transfer pricing tax consultancy— and I enjoy it. Every project is diff erent. Every multinational enterprise is diff erent. And a great advantage of having a PhD is that clients and colleagues somehow respect you more.

Besides working at Ernst & Young, I also teach (together with a tax inspector!) transfer pricing at the LLM programme International Taxation of Leiden University since 1999, and supervise students in writing a thesis on transfer pricing. The experience you gain by working on real-life cases helps you a lot in teaching. It is fun to see students warming to the subject after a couple of lectures. Furthermore, teaching forces you to go back to the basics. Considering the importance of the subject of transfer pricing for multinational enterprises, it is strange, actually, that the subject is dealt with so briefl y during your graduate studies.

Anyway, there is a life after your PhD thesis defence. The most important aspect is that you can do the thing that you like. In my case, it is working in transfer pricing: consulting, writing articles and lecturing.

lClive Jie-A-Joen

graduated in 1997

from TI with a thesis

entitled “Strategic

trade policy,

multinational fi rms,

and vertically related

industries”.

Transfer PricingClive Jie-A-Joenl

Ernst & Young

One thing I regret about my PhD thesis is that I did not entitle it “Transfer Pricing”. Ever since my thesis defence at Erasmus Universiteit Rotterdam, my work has centred on the area of transfer pricing. I currently work at the transfer pricing / tax eff ective supply chain management group of Ernst & Young in the Netherlands as a transfer pricing economist.

Transfer pricing is concerned with the determination of arm’s length prices for transactions of goods, services and intangible property between associated enterprises. Tax authorities in the various countries in which a multinational enterprise is located are afraid that profi ts are shifted to low tax countries through manipulation of the transfer price. Essentially, the tax authorities would like to have a fair share of the cake. OECD Member countries have therefore agreed that the arm’s length principle is the international transfer pricing standard to be used for tax purposes. A multinational enterprise must therefore set arm’s length prices, which would have been agreed upon between unrelated parties engaged in the same or similar transactions under the same or similar conditions.


1�

Economics: An emerging small world

It is often argued that due to a series of technological and economic developments— such as the deregulation of airlines and telecommunications, the rise of facsimile technology and the Internet— it is becoming cheaper for individuals to form and maintain more distant ties. This in turn, it is claimed, will reduce the ‘distance’ between people and will make the world ‘smaller’.

This article examines this argument by analysing the evolution of social distance amongst economists who publish in journals, during the period from 1��0 to 2000. While the number of economists has more than doubled, a giant component comprising more than �0 percent of the authors has emerged and the distance between authors, which was already small, has declined significantly. The key to understanding the short average distances is the observation that economics is spanned by a collection of inter-linked ‘stars’. A ‘star’ is an economist that writes with many other economists who, for the most part, have few co-authors and generally do not write with each other.

These results are striking and lead to certain questions

about the process of network formation. In particular, there is a need to understand better the economic determinants of co-authorship and how the inter-linked star architecture evolves. The findings also raise questions about the impact of social interaction on scientific discovery and the diffusion of knowledge— issues slated for future work.

l l l l l l

Goyal, S., M.J. van der Leij and

J.L. Moraga-Gonzalez (2006),

“Economics: An emerging small

world”, Journal of Political

Economy, 11�(2), �03-�12.

l l l l l l

Coordination of expectations in asset pricing experiments

Do stock prices reflect economic fundamentals or can “market psychology” affect asset prices significantly and cause persistent deviations from fundamentals? Do investors hold rational expectations about future prices or can herding behaviour cause (temporary) bubbles in asset prices? These questions have hounded financial economists already for decades.

This paper presents asset pricing laboratory experiments with human subjects to investigate how individuals form expectations and whether or not aggregation of individual beliefs enforces convergence to the fundamental price. The only task assigned to the subjects is to predict the price of a risky asset for �0 periods. Each market consists of six subjects. The realised market price is computed as the market-clearing price, with constant supply and demand derived from mean-variance maximisation, with the subjects’ predictions as price

expectations. The realised market price thus depends upon the average individual forecasts. If all subjects would behave in a fully rational manner, the realised market price would be equal to a constant fundamental price.

Two typical outcomes are observed in the experiments: (1) slow convergence to the constant benchmark fundamental price, and (2) persistent price oscillations for �0 periods. In all experiments, strong coordination on a simple common strategy occurs. In the stable case (1), coordination on a naive (the forecast equals the last observed price) or adaptive (a weighted average of the last price and the last forecast) strategy occurs. In case (2), however, coordination on a trend following strategy occurs, where the price forecast equals the last observed price plus a fraction of the last observed price change.

These laboratory experiments suggest that persistent deviations from benchmark fundamentals can arise— even in a simple stationary environment, and that— even without knowing other strategies— strong coordination on a behavioural trend following strategy typically arises. The experiments suggest a behavioural explanation of observed large swings in asset prices.

l l l l l

Hommes, C., J. Sonnemans,

J. Tuinstra and H. van de

Velden, 200�, Coordination of

expectations in asset pricing

experiments, Review of Financial

Studies 1�, ��-��0.

l l l l l l

Competition and Entry in Banking: Implications for Stability and Capital Regulation

A key public policy issue concerning the banking sector is how competition and regulation affect the functioning of financial institutions and the stability of the banking system. Specifically, what is the interaction between competition and the effectiveness of regulation?

This paper poses two questions: i) how does capital regulation affect endogenous entry; and ii) how do changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? These issues are unquestionably important. The increasingly competitive and dynamic environment of banking puts severe strains on the viability and effectiveness of regulation. Competition also affects directly the behaviour of the players in the industry. More competition could induce banks to take more risks, which could undermine the stability of the industry. Simultaneously, there is some concern about the impact of capital regulation on the competitive dynamics, including level-playing-field issues.

The approach in this study deviates from the existing literature in that it recognises the fixed costs associated with the monitoring technologies of banks. These costs make market share and scale important for the banks’ cost structures. The most striking result is that increasing (costly) capital requirements can lead to

papers in journals

discussion papers

1�


more entry into banking— essentially, by reducing the competitive strength of lower quality banks. This insight complements certain observations by practitioners and policymakers, who have sometimes argued that the real contribution of the existing Basel I capital requirements is that they have raised capital levels across the industry and, in doing so, have improved the stability of the financial system. This study shows that discouraging weaker players is an important aspect of the link between capital requirements and the quality of the industry.

The paper also shows that competition improves the monitoring incentives of better quality banks and undermines the incentives of lower quality banks, and that— precisely for those lower quality banks— competition typically compromises the effectiveness of capital requirements.

The analysis is generalised along a few dimensions, including an analysis of the effects of asymmetric competition (i.e. one country that opens up its banking system for competitors, but not vice versa). The key result here is that higher capital requirements always encourage entry of existing banks in a previously closed low quality banking market: that is, they make such entry more profitable. The study also analyses how the threat of entry affects domestic merger incentives.

l l l l l l

By Arnoud W.A. Boot (UvA)

and Matej Marinc̆ (University

of Ljubljana), Competition and

Entry in Banking: Implications for

Stability and Capital Regulation,

TI DP06-01�/2

l l l l l l

Status-seeking in violent subcultures and the double dividend of zero-tolerance

While social norms that condemn criminal behaviour are adhered to by a large part of the population, they are not universally shared. Some subcultures actually glorify criminals. Violent subcultures are a case in point. In his famous book Code of the Street, Elijah Anderson finds that residents of Philadelphia’s poor inner-city neighbourhoods are confronted with a local hierarchy based on ‘toughness’ in which a reputation for being willing and able to fight earns respect among peers. ‘Toughness’ has also been identified in many other studies as a source of considerable status in street corner groups, gangs and hooligan groups.

This paper examines the effects of penalties for violent acts when people care about their social status for being ‘tough.’ The results show that, if people care enough about their social status, there is a double dividend of zero-tolerance policing in that it reduces both minor offences and more serious violent crime.

The reason for this result is as follows. When minor offences are punished harder, some individuals are deterred from committing those acts, and instead choose not to take action. Since these individuals are relatively ‘gutless’ individuals (i.e., at the bottom of the toughness distribution), the signaling value of committing a minor offence increases. This makes committing a minor offence more attractive for people who would otherwise commit more severe crime. If people care sufficiently about status, this effect dominates the standard substitution effect of zero-tolerance— and thus stiffer penalties for minor offences reduce crime across the board.

The policy implications of the model are well in line with the ‘zero-tolerance’ or ‘broken windows’ approach to crime fighting that has been pursued in New York City and, since recently, in several other US cities. Unlike existing arguments, the argument in this paper for a double dividend of zero-tolerance policing holds even in the long run— when criminals are perfectly informed about both enforcement policies and public tolerance of crime in their neighbourhood.

l l l l l l

Reference: Anderson, Elijah,

1��, Code of the Street;

Decency, violence and the moral

life of the inner city, W.W. Norton

& Co., Inc., New York, NY.

By Robert Dur (EUR), Status-

seeking in violent subcultures

and the double dividend of zero-

tolerance, TI DP 06-00�/1

l l l l l l

Periodic seasonal Reg-ARFIMA-GARCH models for daily electricity spot prices

This paper develops new time-series models for daily electricity spot prices. Price formation on electricity markets is complex, as it depends on the short-term characteristics of energy supply and demand. Electricity demand depends on weather variables, seasons in the year, day-of-week effects and holidays. Electricity supply- and demand functions determine the specific behaviour of electricity prices encountered in empirical work. This behaviour differs from market to market, and depends primarily on the method of power generation: hydropower, power generated from coal or gas, or nuclear power. The paper improves upon existing models in capturing the memory characteristics, which are important in derivative pricing and real option analysis.

The study considers novel periodic extensions of dynamic long-memory regression models with time-varying volatility for the analysis of daily electricity spot prices. An approximate maximum likelihood estimator is developed for these models. The methods are implemented for recent time series of 1,200 to �,�00 daily price observations. Apart from varying persistence, varying volatility and extreme observations in prices, a novel empirical finding is the importance of day-of-the-week periodicity in the memory characteristics of electricity spot prices.

The modelling framework has been particularly effective for the longest time series of prices from the


16

Nord Pool power exchange of Norway. These prices are partly explained by daily aggregate consumption figures, to capture the demand side, and by weekly water reservoir levels, to incorporate supply effects in the hydropower generation. Even with these effects taken into account, however, the prices are still long memory— i.e., they revert only slowly to equilibrium levels.

For the daily prices of three European emerging electricity markets (EEX in Germany, Powernext in France, APX in the Netherlands), which are less persistent due to the absence of hydropower generation, day-of-the week periodicity is also shown to be highly significant.

l l l l l l

By Siem Jan Koopman (VU),

Marius Ooms (VU) and M.A.

Carnero (University of Alicante),

Periodic seasonal Reg-ARFIMA-

GARCH models for daily

electricity spot prices, TI DP0�-

0�1/�

l l l l l l

Do employers prefer temporary employment contracts?

During the last few decades, the use of temporary employment has grown tremendously. For employers, temporary contracts offer ways to avoid hiring and firing costs. Severance payments are nonexistent for temporary contracts. And temporary work agencies reduce search costs by instantaneously providing workers to firms. But what exactly makes direct-hire temporary workers attractive for some employers and temporary agency contracts more attractive for others? Why don’t all firms hire workers on the same basis?

In its analysis of the attractiveness of temporary contracts for employers, this paper first determined the distinguishing characteristics of employment contracts (attributes). Next, a sample of 1000 employers was asked to describe a vacancy in their organisation. They were shown ten random combinations of contract attributes, and were asked how attractive these imaginary contracts were for their vacancy (this type of analysis is known as conjoint analysis). Results show the dominance of attributes that reduce worker turnover versus attributes that reduce hiring or firing costs per worker. This illustrates the importance of investment costs. A firm invests in a new employee in several ways, most notably by providing (firm-specific) human capital, but also by incurring costs of advertisement, interviews and paperwork. These costs are irreversibly lost if the worker leaves the firm.

Temporary contracts do not reduce turnover, but enhance it. The attractive feature of temporary-work

arrangements is that they reduce firing costs, and sometimes also hiring- and quit costs per worker. Compared to the turnover-reduction strategies, these

costs were found to be of minor importance in hiring decisions. This explains why temporary contracts are used only in situations with extreme fluctuations in demand or for screening purposes. When used for screening purposes, a fixed-term contract is explicitly contracted with the intention of becoming permanent at the end of its term. In that case, expected duration is not so much shorter than for indefinite contracts. It is these contracts that are most popular on the Dutch labour market.

l l l l l l

By Marloes de Graaf-Zijl

(UvA), The attractiveness of

temporary employment to reduce

adjustment costs, TI DP200�-

121/3

l l l l l l

Monetary policy: Decision making and implementation

According to the recent book by Professor Alan S. Blinder, The Quiet Revolution; Central Banking Goes Modern, “…one of the hallmarks of the quiet revolution in central banking practice has apparently been a movement towards making decisions by committee, whereas previously a dictatorial central bank governor was more of the norm” (p. 3�). Since interest rate decisions are no longer taken by a single governor, a number of issues arise— related, for example, to an efficient aggregation of diverse preferences of monetary policy committee (MPC) members, their beliefs about models of the economy and its likely future development. These topics are addressed in the first part of this thesis.

The theoretical results can be (loosely) applied to answer some questions on group dynamics originating from experimental findings and/or empirical stylised facts. Why do majority decisions tend to evolve into unanimous decisions? Why do committee members dissent (or not) with the chairman or the majority view? Why can a committee perform better than a sum of its parts?Majority decisions have a high probability of being correct, and that is why members that care about the accuracy of the collective decision may choose to follow the majority view. The same logic applies if the chairman has unparalleled expertise. Finally, committee members can exchange information and aggregate it, thereby obtaining a highly accurate estimate of the state of the economy.

theses

1�


Better information naturally results in better decisions, the accuracy of which may far exceed the average performance of individual committee members.

The second part of the thesis investigates another institutional aspect of monetary policy making: the control of short-term interest rates. The following questions are answered: What mix of monetary policy instruments can efficiently implement collective policy decisions? Why can short-term market interest rates be comparably well controlled by a central bank intervening in the market daily and a central bank intervening only once a week?

The study shows what level of required reserves (relative to the size of autonomous factors) provides a sufficient liquidity buffer to allow the central bank to intervene in the market less frequently and still obtain a high control of the interest rate. This result not only explains the excellent performance of the operating framework of the European System of the Central Banks, but also provides a rationale behind the current change in the framework of the Bank of England.

l l l l l l

Reference: Blinder, Alan S., 200�,

The Quiet Revolution; Central

Banking Goes Modern, Yale

University Press, New Haven, CT.

Thesis: “Essays on the making

and implementation of monetary

policy decisions” by Beata Bierut.

Published in the Tinbergen

Institute Research Series #36�

l l l l l l

Protecting the poor in Indonesia When an economic crisis hits, a primary policy concern in developing countries is how social services can be protected and, in particular, how access to health and education for the poor can be maintained. Using the Indonesian Social Safety Net (SSN) as case study, this dissertation investigates the effectiveness of targeted demand-side interventions in health and education as a tool to protect access to these services for the poor in times of crisis— when policymakers are faced with severe information and time constraints.

The SSN was implemented in 1�� in response to the Southeast Asian economic crisis, and included a scholarship programme targeted to children from poor households, and a health card programme entitling poor households to free primary healthcare.The scholarships were effective in keeping children in school and relieved the pressure on households to draw on the labour of their children. The programme reduced child labour amongst recipients by 2� percent, while 13 percent of the recipients would have dropped out of school if they had not received a scholarship. Nevertheless, a large part of the funds was allocated to students who would not have dropped out of school. Furthermore, priority should have been placed with protecting primary school enrolment, where the scholarships seem most effective, and with providing support for children from the poorest households in the transition from primary to secondary schooling.

The effect of the health cards was compared with the effect of a supply-side impulse in the form of extra budgetary support to public healthcare facilities. Healthcare utilisation by the poor is responsive to the health card price subsidy, but was not affected by increased public spending. Utilisation by the non-poor was mainly supply driven, while the health card only lead to substitution of private for public care. This emphasises that in the absence of clear incentive mechanisms for healthcare providers, general increases in public spending are relatively ineffective in reaching the poor.

l l l l l l

Thesis: “Health, education and

economic crisis: Protecting the

poor in Indonesia” by

Robert Sparrow. Published in

the Tinbergen Institute Research

Series #3�3

l l l l l l


Theses

362 JURJEN KAMPHORST (04/11/2005), Networks

and learning.

363 ERIC PORRAS MUSALEM (10/11/2005) Inventory

theory in practice: Joint replenishments and spare

parts control.

364 MARIA ABREU (25/11/2005), Spatial

determinants of economic growth and technology

diffusion.

365 SIMONA BAJDECHI-RAITA (07/12/2005), The

risk of investment in human capital.

366 ANTOINE VAN DER PLOEG (10/02/2006),

Stochastic volatility and the pricing of financial

derivatives.

367 RENÉ VAN DER KRUK (19/12/2005), Hedonic

valuation of Dutch wetlands.

368 PHONGTHORN WRASAI (22/12/2005), Agency

problems in political decision making.

369 BEATA BIERUT (16/02/2006), Essays on the

making and implementation of monetary policy

decisions.

370 ERNESTO REUBEN PARÍS (16/02/2006), Fairness

in the lab. The effects of norm enforcement in

economic decisions.

371 GERT-JAN LINDERS (14/02/2006), Intangible

barriers to trade: The impact of institutions, culture,

and distance on patterns of trade.

373 ROBERT SPARROW (16/03/2006), Health,

education and economic crisis: Protecting the poor

in Indonesia.

374 MARK KOETSE (14/03/2006), Determinants of

investment behaviour: Methods and applications of

meta-analysis.

Papers in TI-ranked journals and

chapters in books published

TI Fellows 2005-2006

AA-ranked journalsBerg, G.J. van, M. Lindeboom and F. Portrait, 2006,

Economic Conditions Early in Life and Individual

Mortality, American Economic Review, 96(1), 290-302.

Perotti, E.C. and E.L. von Thadden, 2006, The Political

Economy of Corporate Control and Labor Rents,

Journal of Political Economy, 114 (1), 145-175.

Goyal, S., M.J. van der Leij and J.L. Moraga-Gonzàlez,

2006, Economics: An Emerging Small World, Journal

of Political Economy, 114 (2), 403-412.

A-ranked journalsBleichrodt, H., J. Doctor and E. Stolk (2005), A

Nonparametric Elicitation of the Equity-Efficiency

Trade-Off in Cost-Utility Analysis, Journal of Health

Economics, 24(4), 655-78.

Bovenberg, A.L. and B. Jacobs (2005), Redistribution

and Education Subsidies are Siamese Twins, Journal

of Public Economics 89(11-12), 2005-35.

Bertola, G., S. Hochguertel and W. Koeniger (2005),

Dealer Pricing of Consumer Credit, International

Economic Review, 46(4), 1103-42.

Bloemen, H.G. (2005), Job Search, Search Intensity

and Labor Market Transitions: An Empirical Analysis,

Journal of Human Resources, 40(1), 231-69.

Bun, M.J.G. and M.A. Carree (2005), Bias-Corrected

Estimation in Dynamic Panel Data Models:

Correction, Journal of Business and Economic

Statistics, 23(3), 363.

Dur, R. and O.H. Swank (2005), Producing and

Manipulating Information, Economic Journal,

115(500), 185-99.

Hommes, C. J. Sonnemans, J. Tuinstra and H. van de

Velden (2005), Coordination of Expectations in Asset

Pricing Experiments, Review of Financial Studies, 18,

955-980

Plug, E. and W. Vijverberg (2005), Does Family

Income Matter for Schooling Outcomes? Using

Adoptees as a Natural Experiment, Economic

Journal, 115(506), 879-906.

Sluis, J. van der, M. van Praag and W. Vijverberg

(2005), Entrepreneurship Selection and

Performance: A Meta-analysis of the Impact of

Education in Developing Economies, World Bank

Economic Review, 19(2), 225-61.

Soetevent, A.R. (2005), Anonymity in Giving in a

Natural Context--A Field Experiment in 30 Churches,

Journal of Public Economics. 89(11-12), 2301-23.

1�

B-ranked journalsAyres, R.U. and J.C.J.M. van den Bergh (2005), A

Theory of Economic Growth with Material/Energy

Resources and Dematerialization: Interaction of

Three Growth Mechanisms, Ecological Economics,

55(1), 96-118.

Abdellaoui, M. and P.P. Wakker (2005), The

Likelihood Method for Decision under Uncertainty,

Theory and Decision, 58(1), 3-76.

Bleichrodt, H. and L. Eeckhoudt (2006), Willingness

to Pay for Reductions in Health Risks when

Probabilities are Distorted, Health Economics, 15(2),

211-14.

Bos, C.S. and A. Justel (2005), On Model Selection

Criteria as a Starting Point for Sequential Detection

of Non-Linearity, International Journal of

Forecasting, 21(4), 749-54.

Boswijk, H.P. and J.A. Doornik (2005), Distribution

Approximations for Cointegration Tests with

Stationary Exogenous Regressors, Journal of Applied

Econometrics, 20(6), 797-810.

Dalen, H.P. van and A.P. van Vuuren (2005),

Greasing the Wheels of Trade: A Profile of the Dutch

Transaction Sector, De Economist, 153(2), 139-65.

Dalen, H.P. van and K. Henkens (2005), The

Rationality behind Immigration Policy Preferences,

De Economist, 153(1), 67-83.

Dalen, H.P. van and A. Klamer (2005), Is Science a

Case of Wasteful Competition?, Kyklos, 58(3), 395-414.

Dari-Mattiacci, G. and F. Parisi, (2005), Rents,

Dissipation and Lost Treasures: Rethinking Tullock’s

Paradox, Public Choice, 124(3-4), 411-22.

Dari-Mattiacci, G. and G. de Geest (2005), Judgment

Proofness under Four Different Precaution

Technologies, Journal of Institutional and

Theoretical Economics, 161(1), 38-56.

Dijk, D. van, D.R. Osborn and M. Sensier (2005),

Testing for Causality in Variance in the Presence of

Breaks, Economics Letters, 89(2), 193-99.

Dijkgraaf, E. and H.R.J. Vollebergh (2005), A Test

for Parameter Homogeneity in CO2 Panel EKC

Estimations, Environmental and Resource Economics,

32(2), 229-39.

Ferrer-i-Carbonell, A. (2005), Income and Well-Being:

An Empirical Analysis of the Comparison Income

Effect, Journal of Public Economics, 89(5-6), 997-1019.

Francois, J.F., M. McQueen and G. Wignaraja (2005),

European Union-Developing Country FTAs: Overview

and Analysis, World Development, 33(10), 1545-65.

Giuliodori, M. and R. Beetsma (2005), What Are the

Trade Spillovers from Fiscal Shocks in Europe? An

Empirical Analysis, De Economist, 153(2), 167-97.

Heide, C.M. van der, J.C.J.M. van den Bergh and E.C.

van Ierland (2005), Extending Weitzman’s Economic

Ranking of Biodiversity Protection: Combining

Ecological and Genetic Considerations, Ecological

Economics, 55(2), 218-23.

Fok, D., D. van Dijk and P.H. Franses (2005),

Forecasting Aggregates Using Panels of Nonlinear

Time Series, International Journal of Forecasting,

21(4), 785-94.

Fok, D., D. van Dijk and P.H. Franses (2005), A

Multilevel Star Model for U.S. Manufacturing Sectors,

Journal of Applied Econometrics, 20(6), 811-27.

Franses, P.H. and D. van Dijk (2006), A Simple Test

for PPP among Traded Goods, Applied Financial

Economics, 16(1-2), 19-27.

Garcia-Ferrer, A., J.G. de Gooijer, P. Poncela and E.

Ruiz (2005), Introduction to Nonlinearities, Business

Cycles and Forecasting, International Journal of

Forecasting, 21(4), 623-25.

Herpen, M. van, M. van Praag and K. Cools (2005),

The Effects of Performance Measurement and

Compensation on Motivation: An Empirical Study,

De Economist, 153(3), 303-29.

Hoedemakers, T., G. Darkiewicz and M. Goovaerts

(2005), Approximations for Life Annuity Contracts

in a Stochastic Financial Environment, Insurance:

Mathematics and Economics, 37(2), 239-69.

Hyung, N. and P.H. Franses (2005), Forecasting Time

Series with Long Memory and Level Shifts, Journal

of Forecasting, 24(1), 1-16.

Jacobs, B. and J. Theeuwes (2005), Innovation

in The Netherlands: The Market Falters and the

Government Fails: Summary of the 2004 Annual

Meeting Papers of the Royal Netherlands Economic

Association, De Economist, 153(1), 107-24.

Janssen, M.C.W., V.A. Karamychev and P. van

Reeven (2005), Multi-store Competition: Market

Segmentation or Interlacing?, Regional Science and

Urban Economics, 35(6), 700-714.

Keyzer, M.A., M.D. Merbis, I.F.P.W. Pavel and C.F.A.

van Wesenbeeck (2005), Diet Shifts towards Meat and

the Effects on Cereal Use: Can We Feed the Animals

in 2030? Ecological Economics, 55(2), 187-202.

Kirman, A. and J. Tuinstra (2005), Bounded Rationality,

Heterogeneity and Market Dynamics, Journal of

Economic Dynamics and Control, 29(4), 595-600.

1�


Laeven, R.J.A., M.J. Goovaerts and T. Hoedemakers

(2005), Some Asymptotic Results for Sums of

Dependent Random Variables, with Actuarial

Applications, Insurance: Mathematics and

Economics, 37(2), 154-72.

Mooij, R.A. de (2005), Will Corporate Income

Taxation Survive?, De Economist, 153(3), 277-301.

Ommeren, J. van and P. Rietveld (2005), The

Commuting Time Paradox, Journal of Urban

Economics, 58(3), 437-54.

Terasvirta, T., D. van Dijk and M.C. Medeiros (2005),

Linear Models, Smooth Transition Autoregressions

and Neural Networks for Forecasting Macroeconomic

Time Series: A Re-examination, International Journal

of Forecasting, 21(4), 755-74.

Verhoef, E.T. (2005), Second-Best Congestion Pricing

Schemes in the Monocentric City, Journal of Urban

Economics, 58(3), 367-88.

Vermaat, J.E., F. Eppink, J.C.J.M. van den Bergh,

A. Barendregt and J. van Belle (2005), Aggregation

and the Matching of Scales in Spatial Economics

and Landscape Ecology: Empirical Evidence and

Prospects for Integration, Ecological Economics,

52(2), 229-37.

Vollebergh, H.R.J. and C. Kemfert (2005), The

Role of Technological Change for a Sustainable

Development, Ecological Economics, 54(2-3), 133-47.

Vries, C.G. de (2005), The Simple Economics of Bank

Fragility, Journal of Banking and Finance, 29(4), 803-25.

Wagener, F.O.O. (2005), Structural Analysis of

Optimal Investment for Firms with Non-concave

Revenue, Journal of Economic Behavior and

Organization, 57(4), 474-89.

Zorlu, A. and J. Hartog (2005), The Effect of

Immigration on Wages in Three European Countries,

Journal of Population Economics, 18(1), 113-51.

TI-ranked (chapters of) books published TI Fellows:Atzema, O., P. Rietveld and D. Shefer, eds. (2005),

Regions, Land Consumption and Sustainable Growth:

Assessing the Impact of the Public and Private Sectors,

New Horizons in Regional Science series, pp. x, 213,

Cheltenham, U.K. and Northampton, MA: Elgar.

Discussion Papers

Institutions and Decision Analysis05-104/1

Jeroen Hinloopen, UvA, The Pro-collusive Effect

of Increasing the Repose Period for Price Fixing

Agreements

05-106/1

Gerard van der Laan, VU, Dolf Talman, CentER,

Tilburg University, Zaifu Yang, Yokohama University,

Solving Discrete Zero Point Problems with Vector

Labeling

05-114/1

P. Jean-Jacques Herings, Maastricht University,

Gerard van der Laan, VU, Dolf Talman, Tilburg

University, The Component Fairness Solution for

Cycle-free Graph Games

05-122/1

Jeroen Hinloopen, UvA, Charles van Marrewijk, EUR,

Comparing Distributions: The Harmonic Mass Index

06-001/1

Stefano Ficco, Vladimir Karamychev and Peran van

Reeven, EUR, A Theory of Procedurally Rational

Choice: Optimization without Evaluation

06-004/1

Hendrik P. van Dalen, EUR and NIDI, The Hague, Who

Carries the Burden of Reproductive Health and AIDS

Programs? Evidence from OECD Donor Countries

06-005/1

Robert Dur, EUR, Status-Seeking in Violent Subcultures

and the Double Dividend of Zero-Tolerance

06-008/1

Marco van der Leij, EUR, Sanjeev Goyal, EUR and

University of Essex, Strong Ties in a Small World

06-010/1

Silvia Dominguez Martinez, Otto H. Swank, EUR,

A Simple Model of Self-Assessments

06-012/1

Rob van der Noll, CPB Netherlands Bureau for

Economic Policy Analysis and EUR, The Welfare

Effects of Discrimination in Insurance

06-013/1

Rob van der Noll, CPB Netherlands Bureau for

Economic Policy Analysis and EUR, Competition for

a Prize

06-014/1

Yannis M. Ioannides, Tufts University, Medford, MA,

Adriaan R. Soetevent, UvA, Wages and Employment

in a Random Social Network with Arbitrary Degree

Distribution

20


06-016/1

Sebastian Buhai, EUR and Aarhus School of Business,

Marco van der Leij, EUR, A Social Network Analysis of

Occupational Segregation

06-019/1

José Luis Moraga-González, Groningen University,

Matthijs R. Wildenbeest, EUR, Maximum Likelihood

Estimation of Search Costs

06-022/1

Keisuke Sato, Yoshitsugu Yamamoto, University

of Tsukuba, Japan, A Study on Linear Inequality

Representation of Social Welfare Functions

06-026/1

Hendrik P. van Dalen, EUR and NIDI, Kène Henkens,

NIDI, When the Quality of a Nation triggers

Emigration

06-028/1

Harold Houba, VU, Quan Wen, Vanderbilt University,

Nashville, TN, Perfect Equilibria in a Negotiation

Model with Different Time Preferences

06-029/1

Cars Hommes, UvA, Interacting Agents in Finance

06-030/1

Cars Hommes, UvA, Sebastiano Manzan, University

of Leicester, Testing for Nonlinear Structure and

Chaos in Economic Time. A Comment.

06-034/1

Jurjen Kamphorst, Faculty of Law, Leiden University,

Gerard van der Laan, Faculty of Economics and

Business Administration, VU, Learning in a Local

Interaction Hawk-Dove Game

Financial and International Markets

05-091/4

Marius Ooms, VU, Siem Jan Koopman, VU, and M.A.

Carnero, University of Alicante, Periodic Seasonal

Reg-ARFIMA-GARCH Models for Daily Electricity Spot

Prices

05-100/2

Charles van Marrewijk, EUR, General Geographical

Economics Model with Congestion

05-102/2

Enrico Perotti, UvA, Ernst-Ludwig von Thadden,

Mannheim Universität, The Political Economy of

Corporate Control

05-105/2

Leon Bettendorf, EUR, Elbert Dijkgraaf, SEOR-ECRI

and EUR, The Bicausal Relation between Religion and

Income

05-110/2

Jan Frederik Slijkerman, EUR, Dirk Schoenmaker, VU

and Ministry of Finance, The Hague, Casper de Vries,

EUR, Risk Diversification by European Financial

Conglomerates

05-111/2

Floris Heukelom, UvA, The Origin of Prospect Theory,

or Testing the Intuitive Statistician

05-113/2

Floris Heukelom, UvA, Gigerenzer the Decided: A

Tale of Difficult Distinctions

05-115/2

Erik Feijen, Enrico Perotti, UvA, World Bank and

CEPR, The Political Economy of Financial Fragility

06-002/2

Stijn Claessens, UvA and World Bank, Erik Feijen,

UvA, Does Campaign Finance imply Political Favors?

06-006/2

Joseph Francois, EUR, Henrik Horn, IIES, Stockholm,

Antitrust in Open Economies

06-007/2

Joseph Francois, EUR, Julia Woerz, WIIW, Vienna,

Rags in the High Rent District: the Evolution of Quota

Rents in Textiles and Clothing

06-009/2

Thierry Post, Guido Baltussen, Martijn van den

Assem, EUR, Deal or No Deal? Decision-making

under Risk in a Large-payoff Game Show

06-011/2

Arnoud W.A. Boot, UvA, Radhakrishnan Gopaian,

Anjan V. Thakor, Market Liquidity, Investor

Participation and Managerial Autonomy: Why do

Firms go Private?

06-015/2

Arnoud W.A. Boot, UvA, Matej Marinč, University

of Ljubljana, Competition and Entry in Banking:

Implications for Stability and Capital Regulation

06-023/2

Siem Jan Koopman, Roman Kräussl, André Lucas,

André Monteiro, VU, Credit Cycles and Macro

Fundamentals

06-024/2

André Monteiro, VU, Georgi V. Smirnov, University of

Porto, André Lucas, VU, Nonparametric Estimation

for Non-Homogeneous Semi-Markov Processes: An

Application to Credit Risk

06-025/2

Andreas Schabert, UvA, Central Bank Instruments,

Fiscal Policy Regimes, and the Requirements for

Equilibrium Determinacy

21


Labour, Region and Environment05-099/3

Sebastian Buhai, EUR and Aarhus School of Business,

Coen N. Teulings, UvA, Tenure Profiles and Efficient

Separation in a Stochastic Productivity Model

05-107/3

Giovanni Russo, IRES FvG, Trieste, Aura Reggiani,

University of Bologna, Peter Nijkamp, VU, Spatial

Activity and Labour Market Patterns

05-108/3

Ruud A. de Mooij, CPB and EUR, Sjef Ederveen, CPB,

Explaining the Variation in Empirical Estimates of Tax

Elasticities of Foreign Direct Investment

05-116/3

Monique de Haan, UvA, Birth Order, Family Size and

Educational Attainment

05-119/3

Marloes de Graaf-Zijl, SEO, UvA, The Anatomy of Job

Satisfaction and the Role of Contingent Employment

Contracts

05-120/3

Marloes de Graaf-Zijl, UvA, Compensation of On-call

and Fixed-term Employment: the Role of Uncertainty

05-121/3

Marloes de Graaf-Zijl, UvA, The Attractiveness of

Temporary Employment to Reduce Adjustment Costs

06-003/3

E. Dijkgraaf, EUR, R.H.J.M. Gradus, EUR, Ministry

of Social Affairs, The Hague, and VU, Deregulating

Sunday Shop Policies

06-017/3

Michiel Evers, EUR, Ruud A. de Mooij, CPB and EUR,

Daniel J. van Vuuren, CPB and EUR, What explains the

Variation in Estimates of Labour Supply Elasticities?

06-018/3

Philip de Jong, Wilms & Goudriaan Public Economics

BV and UvA, Maarten Lindeboom, VU, IZA, HEB

and Netspar, Bas van der Klaauw, VU, SCHOLAR,

IFAU, IZA and CEPR, Screening Disability Insurance

Applications

06-020/3

Roberto Patuelli, VU, Aura Reggiani, University of

Bologna, Peter Nijkamp, VU, Uwe Blien, Institut für

Arbeitsmarkt und Berufsforschung (IAB), Nuremberg,

New Neural Network Methods for Forecasting Regional

Employment: An Analysis of German Labour Markets

06-021/3

Rob Euwals, CPB, IZA, CEPR, Daniel J. van Vuuren,

CPB and VU, Ronald P. Wolthoff, VU, Early Retirement

Behaviour in the Netherlands: Evidence from a Policy

Reform

06-031/3

Ghebreegziabiher Debrezion, Eric Pels, Piet Rietveld,

VU, The Impact of Rail Transport on Real Estate Prices:

An Empirical Analysis of the Dutch Housing Market

06-032/3

Pieter A. Gautier, Ronald P. Wolthoff, VU,

Simultaneous Search with Heterogeneous Firms and

Ex Post Competition

06-033/3

Teresa Bago d’Uva, University of York, Eddy van

Doorslaer, EUR and Netspar, Maarten Lindeboom,

VUA, HEB, IZA and Netspar, Owen O’Donnell,

University of Macedonia and Netspar, Somnath

Chatterji, World Health Organization, Does Reporting

Heterogeneity bias the Measurement of Health

Disparities?

Econometrics05-101/4

Carlo Altomonte, Bocconi University, Milan, Enrico

Pennings, EUR, Testing for Marginal Spillovers from

Foreign Direct Investment

05-103/4

Michel Beine, University of Luxemburg and Free

University of Brussels, Charles S. Bos, VU, Sebastian

Laurent, University of Namur, and CORE, The

Impact of Central Bank FX Interventions on Currency

Components

05-109/4

Arijit Mukherjee, University of Nottingham and the

Leverhulme Centre for Research in Globalisation

and Economic Policy, UK, Enrico Pennings, EUR,

Unionization Structure, Licensing and Innovation

05-112/4

Jan F. Kiviet, UvA, Judging Contending Estimators

by Simulation: Tournaments in Dynamic Panel Data

Models

05-117/4

Borus Jungbacker, Siem Jan Koopman, VU, On

Importance Sampling for State Space Models

05-118/4

Frits Bijleveld, Jacques Commandeur, SWOV

Institute for Road Safety Research, Netherlands,

Phillip Gould, Monash University, Melbourne, Siem

Jan Koopman, VU, Model-based Measurement of

Latent Risk in Time Series with Applications


22

23


Colophon

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TImag13-spring2006