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A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 14 No. 3
July 2004
WHAT PRICE THIS ASSET?
Financial assets traded internationally usually have a different price at each location. Who or
what determines these prices? Michael Melvin has taken a microscope to the issue. (page 3)
DISSECTING EDUCATION
IFO NEWS
(p. 4)
CESIFO DISTINGUISHED
AFFILIATES
(p. 8)
TAPES FISCAL FEDERALISM
CONFERENCE
(p. 5)
MUNICH ECONOMIC SUMMIT
(p. 2)
HANS MÖLLER SEMINARS
(p. 3)
With Germany –among other countries– still shuddering from the dismal results obtained in the
PISA study, finding the root causes of the malaise and the factors that may contribute to improving student performance are priority undertakings. Eric Hanushek and Alessandro Balestrino are tackling the problem from two different angles.
(pages 5 & 8)
A NATION OF GREAT SIZE...
When a dragon awakes, the entire neighbourhood sits up and pays attention. Well, China is
economically waking up, and how to deal with it, in particular, how to integrate it into the
regional and world economy, is a major question.That’s Yin-Wong Cheung’s turf. (page 6)
...AND THE SIZE OF NATIONS
Does it make better economic sense to have a few big countries or many small ones? In these
times of “deepening integration” and musings over common markets, political economists such
as Enrico Spolaore have their hands full.
(page 2)
FEATURED RESEARCHERS
Jonas Agell (p. 7)
Alessandro Balestrino (p. 5)
Markus K. Brunnermeier (p. 5)
Yin-Wong Cheung (p. 6)
Armin Falk (p. 8)
Piero Gottardi (p. 6)
Eric Hanushek (p. 8)
Kai Konrad (p. 7)
Ngo Van Long (p. 7)
Jean-Marie Lozachmeur (p. 8)
Jim Malley (p. 8)
Michael Melvin (p. 3)
Enrico Spolaore (p. 2)
Jonathan Temple (p. 3)
STILL HOLDING UP
The world economy is growing at the fastest pace in fifteen years, with Germany (just)
being towed along. Check out the findings of the April Ifo World Economic Survey in the
Ifo News section.
(page 4)
MANAGERS’ COMPENSATION
What with Enron and Mannesmann and the NYSE’s Richard Grasso, designing appropriate
managers’ compensation has become something of an art form. Piero Gottardi is one of the
foremost thinkers in this hot field.
(page 6)
TRADERS’ TRICKS
Not only managers, but also stock traders have come under close scrutiny of late. Do they
exacerbate stock market bubbles by riding along instead of blowing the whistle on time? Yes,
says Markus Brunnermeier.
(page 5)
GROWTH AND FLUCTUATIONS
Do electoral considerations influence economic performance? You bet. Jim Malley is developing a model to precisely measure that link.
(page 8)
Online version of this issue available at www.cesifo.de
Vol. 14, No. 3 • July 2004
MUNICH ECONOMIC SUMMIT 2004
This year’s Munich Economic Summit,
the third thus far, had an exclusive boutique quality to it: a small, highlydemanding circle of people gathered to
examine premium wares in an intimate
atmosphere. The emphasis was placed
–rather than on celebrity-sounding
names– on high-calibre experts leading
their respective fields, which made for
quite a lively exchange of opinions.
While the heads of EU member governments hammered together a draft European Union Constitution in Brussels, the
nearly 150 participants in the Munich
Economic Summit –held on June 18–
went one step further and discussed the
risks that implementing such constitution could pose to the economies of the
member countries.
A welcome speech by BMW Foundation
Herbert Quandt’s Kai M. Schellhorn and
an introduction by Ifo President HansWerner Sinn set the tone and scope for
the day’s discussions: would the European-style welfare state be able to sur-
The liveliest Summit thus far
vive the influx of immigrants from the
new entrant countries? The constitution,
after all, grants immigrants ample social
rights. The proposed strategies were to
leave immigration policy to the individual states, and to have the home country
of unemployed immigrants foot the bill
for their welfare until they find a job.
The second panel, expertly moderated by
The Economist’s John Peet, delved into
Further info on this and previous summits at
www.munich-economic-summit.com
the question of whether immigration
should be delayed or restricted, in order
to avoid experiencing a stampede that
could swamp the invididual labour markets. After what proved to be the most
animated discussion in the entire summit,
the experts were of the opinion that
restricting immigration would have more
disadvantages than the other way around:
most European countries need immigrants for their economic performance to
perk up. What can be done is to restrict
welfare entitlements for a given period to
allow for the respective labour markets to
reform accordingly. This, as it happened,
was the topic of the third panel.
Surprisingly, there was no shortage of
benchmark candidates: the Netherlands
and its low unemployment rate, Ireland
and its enviable growth rate, Finland and
its productivity-furthering consensus. In
the end, all agreed that liberalisation is
not hopeless. It only lacks leadership.
The Summit ended with a gala dinner in the
Kaiser’s Room of the Munich Residence.
SIZE OF NATIONS AND ECONOMIC PERFORMANCE
Spolaore
National states are
among the most
important political
institutions in the
world, but their
borders have usually been considered as “given”
(unexplained) by
economists. Only
recently have economists started to focus
on questions such as: What determines
the number and size of nations? How do
national borders change over time? What
are the economic consequences of border redrawing? Does it make better economic sense to have a few big countries
or many small ones? The focus on
national borders as important “endogenous” variables is a natural development
within the growing field of contemporary
political economy, as political economists' main goal is to understand political institutions and behaviour with the
tools of modern economic analysis.
2
Enrico Spolaore, Kutayba Alghanim
Assistant Professor of Political Economy
at Brown University, has contributed to
the recent literature on the number and
size of nations with numerous publications, both theoretical and empirical,
including his recent book The Size of
Nations (MIT Press, Dec. 2003), coauthored with Alberto Alesina. In this
work Spolaore argues that the size of
nations is determined by a trade-off
between the benefits of scale and the
costs associated with more heterogeneous populations, and shows how both
benefits and costs are affected by political and economic variables. For example, increasing international economic
integration, by reducing the economic
importance of a country’s domestic market, reduces the benefits of a larger size
and therefore goes hand in hand with
separatism and political disintegration.
While visiting CES, Spolaore gave three
lectures, covering issues such as the rela-
Bulletin
tionship between democratisation and
break-up of countries, economic integration and political disintegration, and
war, peace and the size of nations. While
at CES he also gave a seminar presentation on his related research on the relationship between political borders and
long-term income per capita and growth,
which he has been pursuing jointly with
Romain Wacziarg.
Spolaore holds a Ph.D. in Political Economy from the University of Sienna, Italy,
and a Ph.D. in Economics from Harvard
University, where he received a National
Science Foundation-sponsored doctoral
fellowship from the Harvard-MIT
Research Training Group in Positive
Political Economy. After graduating he
obtained a Human Capital and Mobility
Fellowship from the European Commission and spent a year at the European Center for Advanced Research in Economics
in Brussels. From September 2004 he will
be at Tufts University in Boston.
Vol. 14, No. 3 • July 2004
INTERNATIONAL FINANCIAL MARKET MICROSTRUCTURE
Melvin
What causes exchange rates to
fluctuate? Where is
the share price of
stocks traded in
multiple locations
determined?
To
understand
the
behaviour of international financial
asset prices, it has
proven helpful to
take a microscope
to the issue and
study prices and
their determinants
at the level of the
individual trader.
Temple
its shares to be traded in the U.S.; and
understanding the
determinants
of
traders’ use of “icebergs” or hidden
limit orders with an
application to trading on the Frankfurt
stock exchange.
Michael Melvin
CES visitor in October
Michael Melvin
has been an active
participant in the microstructure approach
to the foreign exchange market and global
equity markets. His current foreign
exchange research includes the following:
the choice of trading venue foreign
exchange dealers are confronted with in
the face of growing popularity of electronic brokerages as an alternative to traditional bilateral direct dealing; explaining the
fall and rise in the value of the euro as a
result of Bayesian learning about ECB policy; and exchange rate dynamics during
important policy meetings.
During his time at
CES, Melvin will
continue
his
research in these
areas and offer lectures on international financial market
microstructure.
Current equity market research includes
delving into where price is discovered for
European firms that are also traded in the
U.S.; the effects on rival firms in the
home market when a non-U.S. firm lists
Michael Melvin is
Professor of Economics and Dean’s Council Distinguished Scholar at Arizona State University. He also serves as the co-editor of the
Journal of International Money and
Finance, the leading scholarly journal in
its field. He holds a Ph.D. from UCLA
and has been a visiting scholar at the
Federal Reserve Board and the International Monetary Fund. He was a Fulbright Senior Scholar and visiting professor at the University of Frankfurt and
has also been a visiting professor at the
Kellogg Graduate School of Management, Northwestern University; Anderson Graduate School of Management,
UCLA; Pacific Asian Management Institute, University of Hawaii; and Department of Economics, UC San Diego.
HANS-MÖLLER SEMINARS
RESEARCH SEMINARS
13 July 2004
12 July 04
Thomas Steger
(ETH Zürich)
Matthias Polborn
University of Illinois
A Rational Choice Model of Informative
Positive and Negative Campaigning
20 July 2004
Markus Brunnermeier
Princeton University
Topic will be posted at
http://www.vwl.unimuenchen.de/ls_marin/hmoeller1.html
SHARING THE BENEFITS
Economic Growth under Factor
Reallocation Costs
19 July 04
Marco Caliendo
(University of Frankfurt)
info at www.vwl.uni-muenchen.de/ls_rady/
seminar.html
Bulletin
Analysing economic growth is no trivial
matter. For every answer economists
cobble together, a score of further questions immediately crop up: Are the benefits of economic growth widely shared?
Can growth alleviate the underemployment that characterises many developing
countries? What are the links between
labour market institutions and aggregate
productivity? What are the potential
costs of misallocation of resources
across sectors? To answer them successfully, economists need to develop new
theoretical and empirical models.
Jonathan Temple, a Professor of Economics at the University of Bristol and
CESifo guest in August, has focused his
research on this area. Drawing on ideas
from development economics and trade
theory, he has developed models that can
be used to understand the distributional
impact of different types of growth, the
interaction of economic growth and
labour markets, and the role of resource
reallocation in aggregate productivity
growth. With Ludger Woessmann, head
of Ifo’s Human Capital and Structural
Change department he is developing
empirical growth models that incorporate
a role for labour reallocation and structural change. Overall, this research has
potential lessons for policy, and perhaps
especially for the development of progrowth policies that are also “pro-poor”.
Temple obtained his Ph.D. from the University of Oxford, and holds undergraduate and Masters degrees in Economics
from the University of Cambridge. He is
currently the holder of a Philip Leverhulme Prize Fellowship.
FACULTY NEWS
• Appointment: Joachim Winter, now at the
University of Mannheim, accepted a C3
professorship at the Ludwig-Maximilians
University. He will occupy the Empirical
Economics chair, succeeding Prof. Stephan
Klasen. He will take up his new post in the
winter semester 2004/5.
• Award: Georg Gebhardt has received the
doctoral thesis award for his degree dissertation
“Venture Capital, Takeovers, and TimeVarying Returns” by the Münchner Universitätsgesellschaft (Munich University Society).
3
Vol. 14, No. 3 • July 2004
IFO NEWS
WORLD ECONOMY:
STABILISATION ON THE CURRENT
FAVOURABLE LEVEL
The World Economic Survey (WES) indicator for the world economic climate
maintained in April the high level reached
in January 2004. At 110.1 (1995 = 100), it
Just don’t look down now
is above its long-term average (19902003: 93.0). Although the expectations for
the coming six months have weakened
slightly, the assessments of the current situation have again improved somewhat.
The experts polled by the Ifo Institute
expect the world economy to grow by
3.4% this year, in contrast to the 2.1%
foreseen in the April 2003 survey. On the
whole, the new survey findings confirm
that the world economy is in a much better condition than twelve months ago.
However, growth differs substantially
from region to region: Whereas the economic recovery in western Europe is seen
as moderate with no indications for
growth acceleration, the economic climate indicator in Asia has strengthened
further. The North American upswing is
still judged to be robust.
The increase in consumer prices will average 2.8% worldwide in 2004. In the euro
area an inflation rate of just under the 2%level is expected (1.8%), which matches
the target of the European Central Bank
fairly precisely. For the US the WES
experts see price increases in 2004 match-
4
ing that of 2003 (2.3%), thus remaining
clearly within the 2.5% ceiling considered
tolerable by the Federal Reserve.
The experts expect a further stabilisation
of the US currency in the coming six
months. Only in such Asian countries as
Japan, Singapore, India and Taiwan do
the experts anticipate a further
weakening of the
US dollar.
All in all, the
world economy
continues to recover. Growth is
intensifying in
Asia and remains
robust in the US.
Europe is lagging
remarkably far
behind but can
also look to a
modest recovery.
GERMANY TOWED ALONG BY THE
WORLD ECONOMY
The world economy is currently growing
at the fastest pace in fifteen years. The
main impulses are from the robust
upswing in Asia and the US, as confirmed
by Ifo’s World Economic Survey. In the
US the economy is being stimulated by an
expansive monetary and fiscal policy that
is almost unprecedented. Here, Ifo
expects the economy to expand by 4.7%
in 2004 and 3.4% next year. The recent
hikes in prices for oil and commodities
will not dampen the upswing, as they are
primarily due to the demand boost that
has accompanied growth.
The German economy is being towed
along by the international trend, but its
many structural problems prevent it from
fully participating in the world economy
upswing. These problems are caused by
exogenous factors, such as German firms’
loss of interest-rate advantages under the
euro and the loss of relative advantages of
its own larger domestic market in the
wake of European integration. Endogenous factors also play a role, such as the
financial costs of German unification and
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the well-known deficits in the German
labour and social systems.
For Germany, Ifo estimates that real GDP
in the first half of 2004 grew over the
comparable period last year by 1.6%. On
average for 2004, economic growth will
be 1.7%, although it must be kept in mind
that some 0.5% is attributable to the
unusually large number of working days.
The mainstay of economic growth is
exports, although investment in plant
and equipment is now gradually expanding, and private consumption could
recover this year and next.
The labour market situation remains
tricky, as the business conditions of the
enterprises have become more and more
uncoupled from the labour market. High
labour costs have induced the enterprises
to engage in rationalisation and outsourcing to other countries. Employment will
continue to decline, with a slight improvement not coming until the end of the year.
Government finances continue to be
marked by the weak recovery and the failure to consolidate the budget. The deficit
this year will be approximately euro 79 billion, or 3.6% of GDP, exceeding the Maastricht limit for the third time running. The
national debt will be 67% of GDP at the
end of 2004 and 66% at the end of 2005.
IFO ANNUAL MEETING
The 55th Annual Meeting of the Ifo
Institute was a success. Czech President
Václav Klaus gave an impressive speech
on the Implications of the European
Enlargement for Europe. In his view,
while enlargement is a signal for the end
of the post-communist era, he does not
foresee radical changes resulting from it,
such as huge financial benefits for the
more developed accession countries.
Another highlight was the tax reform discussion with prominent speakers: Paul
Kirchhof, former constitutional judge,
Friedrich Merz, deputy chairman of the
CDU/CSU-Bundestagsfraktion,
HansWerner Sinn, president of the Ifo institute,
and Wolfgang Wiegard, chairman of the
German Council of Economic Experts.
Vol. 14, No. 3 • July 2004
FAMILY AND EDUCATION
Balestrino
In most countries,
education has long
been a responsibility
of the government
–despite the fact that
education is hardly a
public good. Understanding the process
of human capital
accumulation is key for answering
important questions about productivity,
growth and the pattern of inequality.
Alessandro Balestrino, Professor of
Public Economics at the University of
Pisa, has been actively involved in this
research field since the 1990s. He has
mostly used a household economics
approach, in which the interaction
between family members is explicitly
modelled. In fact, the well-know failures
of the credit market that prevent children
from borrowing against their future
income for funding their educational
investment turn the family into the main
source of financial support. One line of
approach has dealt with the “co-operative conflict” between parents and children in the decisional process leading to
human capital accumulation; alternatively, the focus has been on the interaction
between parents.
It is argued that the need for corrective
policy action lies in the inherent inefficiency of the intra-family arrangements,
which in turn is due to the impossibility
of reaching binding agreements among
family members. This sort of argument is
developed in both its normative and positive implications for public policy, and
covers both taxation and spending issues.
It can also be generalised to other publicly provided goods (such as care for the
elderly or preventive health-care), thus
yielding a rationale for the existence of
the welfare state as a collectively rational
response to inefficient family provision.
Balestrino, who holds a Ph.D. in Economics from the University of Siena, has
published in leading economics journals.
He studied also in Florence and Oxford,
and is currently Chairman of the Joint
Sub-Faculty Board of the Undergraduate
and Graduate Programmes in Government Studies of the Faculty of Political
Sciences at the University of Pisa.
TAPES FISCAL FEDERALISM
CONFERENCE
was also welThe implications
come.
that differences in
tax and expendiWhile each paper
ture programmes
was discussed by
across jurisdictwo formal distions have for the
cussants,
the
location of real
ample time allotand
financial
ted for debate
activity, as well as
gave all particithe consequences
pants a chance to
of such mobility The organisers, Hans-Werner Sinn (CESifo, left),
take part in what
and migration for
and Roger Gordon (NBER, right)
turned out to be a
governments, rank
very lively discussion. Well into the
high on the Public Economics research
evenings, at the conference dinners and
agenda nowadays.
during social activities, discussions kept
going unabated. Undoubtedly, the conIn order to bring together economists
ference succeeded in bringing together
from North America and Europe to diseconomists from both sides of the
cuss these issues, CESifo hosted this
Atlantic to exchange their ideas and fosyear’s Trans-Atlantic Public Economics
tering co-operation.
Seminar (TAPES) jointly with the
National Bureau of Economic Research
Papers from the conference will be con(NBER) at the CESifo Conference Censidered for a special issue of the Journal
tre in Munich. On May 20-22, 2004, thirof Public Economics, subject to the norty participants –including Tim Besley,
mal refereeing process. For those who do
Dennis Epple, Roger Gordon, Jim Hines
not want to wait until publication of this
and Jim Poterba– from ten countries met
special issue, the papers presented can
to analyse twelve papers on fiscal federalso be downloaded from our TAPES
alism, six each from North America and
conference site (www.cesifo.de/home ->
Europe. The emphasis was laid on
Conferences & Events -> Past Conferempirically oriented research by younger
ences; papers are in PDF-format).
authors, but applied theoretical research
UH
PUNCTURING BUBBLES
Brunnermeier
Somehow, we had sort of suspected it: sophisticated traders
prefer to ride a stock market
bubble rather than to attack it,
thereby making bubbles persist. Now this has been confirmed by Markus K. Brunnermeier’s research on stock
market bubbles, limits to arbitrage, financial and liquidity
crisis, and behavioural finance.
An Assistant Professor in the
Department of Economics and member of
Princeton’s Bendheim Center for Finance
and the International Economics Section,
Brunnermeier shows in his work on
financial crisis and risk management that
“predatory trading” exacerbates a liquidity crisis and can cause systemic risk. His
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current research proposes a
shift away from the rational
expectations paradigm towards
“optimal expectations.”
During his visit at CES he will
continue his work on liquidity.
It shows the linkage between a
security’s market liquidity
–i.e., the ease of trading the
security– and dealers’ funding
liquidity –i.e., their ability to
obtain funds. Both liquidity
concepts reinforce each other and give
rise to a multiplier effect: Improved funding of dealers enhances their trading
activity and makes markets more liquid.
This in turn improves the collateral values
of assets, which again eases funding
restriction of the dealers.
5
Vol. 14, No. 3 • July 2004
MANAGERS’ COMPENSATION
Gottardi
Designing managers’ compensation so as
to simultaneously retain precious talent
and properly safeguard shareholders’
interests is no trivial exercise. That’s
where the work of Piero Gottardi, Professor of Economics at the University of
Venice, comes in handy.
He has devoted part of his research to the
analysis of the interrelation between contractual arrangements and the structure of
existing markets. He has investigated the
design of executive compensation when
managers have access to anonymous
hedging instruments in financial markets.
It has been observed that managerial hedging undermines incentives in executive
pay schemes, significantly alters the executives’ effective ownership of the firm,
and hence has adverse effects on performance. At the same time, disclosure rules
regarding managerial transactions of
hedging instruments are relatively lax, and
only few of their trades are effectively disclosed to investors and shareholders.
Moreover, financial markets have proved
quite effective in designing instruments
which overcome regulation and tax
schemes. While little data exist, off-therecord interviews with investment bankers
reported in the press suggest that the market for executive hedging instruments is
sizable. In this situation, monitoring of
managers’ portfolios, even if costly, can
nonetheless help to align shareholders’ and
managers’ objectives within an optimal
incentive compensation scheme.
Another line of his recent research concerns the role of social security in
enhancing intergenerational risk sharing.
More precisely, the fact that agents are
unable to trade before being born so as to
insure against the shocks affecting them
in the initial phase of their lifetime generates a natural form of market incom-
pleteness. In this
situation, a Pareto-improving
pay-as-you-go
social
security
system may be
welfare improving, if we use an
ex-ante welfare
criterion, even
when agents can
find in the market
a sufficiently rich set of financial assets
so as to insure against all possible risks
and the presence of long-lived assets
ensures the economy is dynamically efficient. What are then the effects of the
introduction of social security on the
prices of long-lived assets and the level
of output?
Gottardi obtained his Ph.D. in Economics
at the University of Cambridge in 1991.
In addition to his post at the University of
Venice, he is an associate editor of the
Journal of Economic Theory and the
Journal of Public Economic Theory.
WATCHING THE DRAGON AWAKE
Cheung
cooperation since the turn of the millennium. During his visit at CES, Cheung
will continue his recent research project
on integration between China and selected Pacific Rim economies.
The last quarter-century has witnessed
the re-emergence of China in the international economic arena. Not only is China
becoming rapidly integrated into the
global economy, but its weight in world
economic affairs is also changing the
landscape of the international economic
nexus. The integration of this populous
country will have profound effects upon
the efficiency of resource allocation and
the efficacy of macroeconomic policy, a
fact that is keeping economists awake at
night in east and west alike.
Few economists are as well placed as
Yin-Wong Cheung to shed some light
into the shape of things to come in this
respect. A professor of economics at the
University of California, Santa Cruz,
Cheung straddles comfortably the cultural divide between China and the rest of
the world, being equally at home in
either quarter.
Cheung has sought to overcome the fact
that there is no perfect empirical measure of economic integration by using
some well-founded parity conditions in
international finance, in addition to
6
Yin-Wong Cheung
measures based on flows in assets,
goods, and services, to evaluate the
degree of real and financial integration
between China and some selected Pacific
Rim economies. He has also assessed the
desirability of a currency union in the
Pacific Rim. This assessment is of particular interest given the enthusiasm displayed by East Asian economies in promoting regional trade and financial
Bulletin
In addition to the above issues, Cheung’s
research interests include econometric
theory, international finance, macroeconomics, and learning theory. On testing
for purchasing power parity, for instance,
Cheung demonstrated the imprecision of
a typical real exchange rate persistence
measurement and investigated the
sources of persistence. In addition to
drawing inferences from existing economic data, he generated some survey
data on foreign exchange markets to
investigate some issues in exchange rate
economics. His work on the finite sample
critical values is incorporated in the
econometrics package TSP.
After graduating from the University of
Pennsylvania in 1990, Cheung joined the
University of California in Santa Cruz.
He serves in several editorial boards and
has recently been conferred the Guest
Professorship from Shandong University.
Vol. 14, No. 3 • July 2004
PLAYING DIFFERENTIAL GAMES
OBITUARIES
Long
Internet service providers
grant customers access to
their servers for a monthly
fee. How would such fees be
set if new subscribers had
rational expectations about
future congestion at each
firm? Do firms make more
profits if customers have
greater valuation of time loss
due to congestion?
analyse problems in industrial organisation and in capital
flight when agents care about
both consumption and wealth
per se. In a joint paper with
Didier Laussel and Maxime
de Montmarin (accepted for
publication in the International Journal of Industrial
Organization), Long modelled the behaviour of rival
firms that sell services subject to congestion.
One good way to find that
out is to analyse a suitably
Ngo Van Long
formulated differential game,
So, the answer Long found to
which happens to be one of
the second question at the
Ngo Van Long’s foremost specialties.
beginning of this article, somewhat surprisingly, is in the affirmative. The reason,
A professor of Economics at McGill Unihe explains, is that when firms compete in
versity, Montreal, Canada, Long’s
prices, greater congestion cost tends to
research interests lie on modelling situasoften price competition.
tions where economic agents choose
strategic behaviour in a dynamic context,
Ngo Van Long is James McGill Professor
in which the state of the system (such as
of Economics at McGill University, Monthe stock of customers’ goodwill, the
treal, Canada. He obtained his Ph.D. at the
stock of pollution, etc.) is changing over
Australian National University, where he
time, partly due to the actions of the
taught for more than a decade (1975agents. He expounded methods for analy1988). He has held visiting positions at
sis of such differential games in his recent
Harvard University, Mannheim Universico-authored book Differential Games in
ty, University of Toulouse, Kobe UniverEconomics and Management Science
sity, Hitotsubashi University, and CES
(Cambridge University Press, 2000).
(1996). He serves as co-editor of the
Canadian Journal of Economics, associHis research agenda while at CES will be
ate editor of the Review of International
to formulate differential games that
Economics and the International Game
involve the building up of social trust, and
Theory Review, and is a member of the
to analyse conditions under which there
editorial board of the Journal of Environexists a multiplicity of equilibrium stratemental Economics and Management, the
gy profiles in such games.
European Journal of Political Economy,
Long has used differential games to
and the Australian Economic Papers.
NEW RESEARCH AREA CO-ORDINATOR
The Employment
and Social Protection Area of the
CESifo Research
Network has a new
co-ordinator. As of
July, Kai Konrad
(left) took over from
Jonas Agell (right),
now one of the editors of the Scandinavian
Journal of Economics. Agell described his
stint as co-ordinator as a “fascinating
experience” that was both professionally
and personally rewarding for him.
From these pages,
we wish his successor, who is also
Director of the Market Processes and
Governance Unit at
the Social Science Research Center
Berlin (WZB) and Professor of Economics at the Free University of Berlin, the
best success and fun in this new task.
Bulletin
Dieter Bös
An active member of the
CESifo Research Network
right from the start, Dieter
Bös died on 20 June,
2004. Many in the CESifo
community
had
the
pleasure of working with him at the
University of Bonn, where he was
employed, and meeting him at several of
our conferences.
He was an outstanding economist, with
the gift of making issues understandable
without abandoning precision. In
particular, his seminal contributions to
public enterprises economics and
privatisation rank as cornerstones of our
understanding of public economics. In
1973 he took over the leading position in
the former German-language Journal of
Economics/ Zeitschrift für Nationalökonomie and turned it into an international platform.
With admirable courage he fought
against cancer and continued to hold his
lectures even up until two weeks before
passing away. We owe him much and we
will remember him with warmth.
Wilhelm Krelle
The
most
important
German economist of his
generation, Wilhelm Krelle
died the same week as
Dieter Bös. He was 87. His
long and productive life
saw him develop his price
theory in 1960 and do much writing,
including many books, his outstanding
production theory, and a myriad articles on
macro- and microeconomic problems. He
made great contributions to our discipline.
Starting as a natural scientist, Krelle was
something like the German Samuelson,
using rigorous mathematical tools to
analyse economic problems. He exerted a
substantial influence in all of us. As was
typical for his generation, he published
most of his work in German, thus
receiving less international recognition
than he deserved.
Wilhelm Krelle was an honorary member
of the CESifo Research Network from its
very beginning.
Hans-Werner Sinn
7
Vol. 14, No. 3 • July 2004
STUDYING STUDENT PERFORMANCE
GROWTH AND FLUCTUATIONS
Hanushek
Malley
The German preoccupation with the PISA study
findings is warranted.
Substantial
evidence
points to the importance
of skills for individual
productivity. More importantly, the skills of workers directly affect the
growth of nations and
thus the future well-being
of society. As a result, a country that can
improve its schools will reap future
rewards, while a country that lets its
schools slip will forego substantial
future income.
These relationships have been studied by
Eric Hanushek, a senior fellow at the
Hoover Institution of Stanford University. His work on the subject has investigated differences in cognitive skills both
within and across nations. These findings
justify national attention to student performance, but they do not indicate what
determines the differences that are seen.
While visiting CES,
Hanushek will work with
Ludger Woessmann to
delve more deeply into
international differences
in student performance.
Specifically, they intend
to use the several different
international tests given
over the past decade to
investigate how individual differences and governmental policy
interact to affect student outcomes.
Hanushek has a Ph.D. in Economics from
the Massachusetts Institute of Technology. He has previously taught at the US Air
Force Academy, Yale University, and the
University of Rochester. He has also been
Deputy Director of the U.S. Congressional Budget Office and a Senior Staff
Economist at the President’s Council of
Economic Advisors. He has produced a
dozen books and over 100 professional
articles on the economics and finance of
education and on other subjects.
CESIFO DISTINGUISHED AFFILIATES
For the third year running,
the CESifo Distinguished
Affiliate award was granted
at the CESifo Area Conference on Public Sector Economics, held on 7-9 May.
This year’s prize went jointly
to Jean-Marie Lozachmeur
(left), University of Toulouse, for his paper
Disability Insurance and Optimal Income Taxation and to Armin Falk (right), University of
Bonn, for his paper Charitable Giving as a Gift
Exchange – Evidence from a Field Experiment.
According to the awarding committee, comprised of Helmuth Cremer, Rick van der
Ploeg and Peter Sørensen, both papers rated
excellent in all respects.
Jean-Marie Lozachmeur extended the wellknown two-period theory of optimal taxation
developed by Peter Diamond and Jim Mirr-
Bulletin
lees to allow for optimal
disability
insurance.
Agents’ productivity and
health status are not observable, but age and earnings
are. Lozachmeur demonstrated that disability insurance should be conditioned
on past earnings.
Armin Falk showed, on the basis of a highly
original field experiment on donations to
charity, that people are as motivated by gift
exchange as by “warm glow”. Ten thousand
people received solicitation letters to donate,
with no gift, a small gift or a slightly larger
gift randomly assigned. People with a gift
gave up to 75% more to the charity. Gift
exchange is thus important, not only in the
laboratory but also in the field. This insight
reflects reciprocity and has crucial implications for the welfare state.
SÜ
Political and technological
shocks undoubtedly influence business cycles.
Developing models to
analyse this influence lies
squarely within Jim Malley’s fields of interest,
which also include monetary and fiscal
policy evaluation using dynamic stochastic general equilibrium (DSGE) models.
A Professor of Economics at Glasgow
University, Malley plans to work on two
projects while at CES. One, in collaboration with Campbell Leith, involves the
further development and estimation of
DSGE models under varying assumptions
regarding distortions in goods and factor
markets. Existing research by Malley and
Leith theoretically accounts for nominal
inertia in both price and wage setting, as
well as for habits in consumption, and
provides estimates for the US and Europe
which imply significant differences in the
responses to monetary policy between the
two economies. The natural extension to
this work involves estimating models
which allow for the simultaneous evaluation of both monetary and fiscal policy.
Regarding the latter, they will attempt to
quantify the distortionary effects on equilibrium output and prices resulting from
alternative tax and spending policies.
The second project, in collaboration with
Apostolis Philippopoulos and Ulrich
Woitek, seeks to further explore the link
between elections, fiscal policy and economic growth and fluctuations. Existing
research by these authors, using a DSGE
model augmented with electoral uncertainty and competition, predicts that forward-looking incumbents, with uncertain
prospects of re-election, find it optimal to
follow relatively short-sighted fiscal policies, which in turn lower economic
growth. Their existing research will be
extended by developing a growth model
which allows for uncertainty in both productivity and electoral outcomes so as to
econometrically assess the contribution
that each makes to cyclical variation in
aggregate output.
Munich Society for the Promotion of Economic Research (Münchener Gesellschaft zur Förderung der
Wirtschaftswissenschaft, CESifo GmbH) is the international platform of Ludwig-Maximilians University and the Ifo
Institute for Economic Research.
President and CEO: Hans-Werner Sinn
Address: CESifo, Poschingerstr. 5, 81679 Munich (Germany)
Telephone +49 (89) 9224-1410, Fax: +49 (89) 9224-1409
Chief Editor: Silke Uebelmesser (SU), CESifo Editor: Julio C. Saavedra (JS). Ifo News Editor: Annette Marquardt (AM).
Contributors: Ulrich Hange (UH) and Silke Uebelmesser (SÜ).