Download PDF Download

A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 18 No. 3
July 2008
YOUR GENETIC CODE, PLEASE?
There is much promise in the unraveling of the human genetic code. Tailored medical treatments and early detection of ailments come to mind. But when insurance companies take an
interest in your genetic make-up, better watch out. Michael Hoy is doing research on how to
tackle this problem.
(page 2)
KEEPING UP WITH THE JONESES
IFO NEWS
Wanting to earn or possess as much as your neighbour is a widespread feeling. And it does
appear to have some economic effects. Ngo Van Long intends to find out whether “status
consciousness” plays a role in welfare and wealth-distribution.
(page 8)
(p. 4-5)
VENICE SUMMER INSTITUTE
(p. 5)
FEATURED RESEARCHERS
William Branch (p. 3)
Joan Costa-Font (p. 2)
Theo Eicher (p. 3)
Timothy Goodspeed (p. 6)
Michael Hoel (p. 8)
Michael Hoy (p. 2))
Mario Jametti (p. 6)
Kajal Lahiri (p. 6)
Ngo Van Long (p. 8)
Frank Stähler (p. 7)
James Tybout (p. 7)
EURO-ZONE ECONOMIC OUTLOOK
The quarterly joint economic forecast prepared by Germany’s Ifo institute, France’s INSEE
institute, and Italy’s ISAE institute, confirms the slowdown of the area’s economies. GDP
will practically stagnate, industrial production and private consumption will weaken, and
inflation will pick up.
(pages 4-5)
WHITHER WTO?
Does the World Trade Organisation really promote bilateral trade flows? There has been
some room for doubt, and Theo Eicher shows why the doubters may be right.
(page 3)
THE AGGLOMERATION FACTOR
Much has been said about tax incentives as a factor behind location decisions by firms.
But, as Mario Jametti’s research shows, that is not all that matters when it comes to picking up your next business location. Agglomeration does too.
(page 6)
(IR)RATIONAL EXPECTATIONS
We all like to think that we are rational beings, thank you, in particular when it comes to
economic decisions. But, actually, when you put household economic decisions under the
magnifying glass, as William Branch has done, we cannot but concede that we might, just
might, be a tiny bit irrational.
(page 3)
HEALTH-CARE FEDERALISM
Understanding the formation of health behaviour can help to explain many things, from
obesity in children to the most suitable organisation of a health-care system. Joan Costa-Font
will devote part of his research agenda while at CES to this issue.
(page 2)
FDI CHOICES
The choice of FDI, such as greenfield investment or joint ventures, determines market
structures and economic performance to a considerable extent. Frank Stähler is expanding
our understanding of what drives the entry mode of multinational enterprises.
(page 7)
Online version of this issue available at www.cesifo.de
Vol. 18, No. 3 • July 2008
HEALTH PRODUCTION AND HEALTH-CARE FEDERALISM
Costa
Modern European societies are devoting
increasing attention to understanding the
mechanisms that explain the formation of
health behaviour and how best to organise
a health system to improve the health and
health-care outcomes. Joan Costa-Font
will attempt to contribute to this debate
during his stay at CES, focusing in particular on the economic explanation of obesity in children, and on spatial effects.
Among other things, he will examine
whether a child’s obesity is explained by
its parents’ obesity along with the household organisation, namely its parents’
working conditions, education and degree
of affluence. The study draws upon Spanish data from 2005/2003, a country that,
together with Italy, tops the European
overweight and obesity ranking. Preliminary results suggest that children’s obesity increases with parents’ obesity (“child
to adult body mass effects”), even after
undertaking controls for endogeneity.
His second area of research will be to
examine the effectiveness of health-care
federalism in achieving its intended goals.
Particularly, the paper will try to solve the
paradoxical finding that suggests no
empirical association between regional
health expenditures and mortality in the
United States.
Female labour market participation only
exerts an influence for middle-educated
women who could not afford support and
whose opportunity cost of dropping their
jobs would be far too high.
Mr Costa-Font is researching the extent
to which spatial dependence in health
care along with political and fiscal interactions explain regional health expenditures patterns and health outcomes.
He is a Senior Research Fellow in Health
Economics at the London School of Economics and Political Science (LSE), and
has taught economics at the University of
Barcelona, where he was Senior Lecturer
(Professor Titular d’Universitat). He
holds a PhD and a BSc in Economics
from the U. of Barcelona, a MSc in Economics from LSE, a MA in Economics
from Universitat Pompeu Fabra, and both
graduate and undergraduate training in
law (LLM-DEA & LLB, U. of Barcelona)
and a BSc political science from Madrid.
He specialises in health and social economics as well as the political economy of
the European welfare state design.
Joan Costa-Font has published more than
sixty articles in peer-reviewed journals in
economics and public policy, including
Economic Policy, Economic Geography,
Journal of the European Economic Association, World Economy, Urban Studies,
Health Policy, Journal of European
Social Policy, Journal of Health Politics,
Policy & Law, and a number of other
leading journals. Currently, he is co-editing the book “The Economics of New
Health Technologies”, to be published by
Oxford University Press in 2009.
YOUR GENETIC CODE, PLEASE?
Hoy
The debate about whether insurance
companies should be allowed to use
results of genetic tests for underwriting
purposes is both lively and increasingly
relevant, as both technology and lawmaking efforts are progressing rapidly.
Both houses in the US federal government passed on April 24 this year the
so-called Genetic Information Non-discrimination Act (GINA). Many European countries have had similar protections in place for many years.
Michael Hoy, with a number of coauthors, has looked from a number of
angles at the issue of genetic information being used by insurers to risk-rate
premiums and found a rationale for
restricting insurers’ use of such information as a way to provide implicit insurance against future premium risk, while
balancing this advantage against the
costs of adverse selection that result
2
tion from insurers and employers if they
take genetic tests. Thus, it is a challenge
to determine how best to reap the benefits of this potential revolution in health
care. There are also tough decisions
ahead about what tests and technologies
to support through either private or public health insurance and how best to provide the appropriate incentives for takeup of these new technologies. These are
the issues that Mr. Hoy will continue to
investigate while visiting CES.
from allowing individuals to privately
hold such information.
Now the science has moved on quite far
towards finding genetic variants. The
International HapMap Project, a sort of
second phase of the Genomic Revolution, looks finally to lead to the real
promise of vastly improved health care
through genetic therapies and generally
improved understanding of disease.
However, many fear genetic discrimina-
Bulletin
Michael Hoy is a professor in the Department of Economics at the University of
Guelph, Ontario. He received a B.Math
degree from the University of Waterloo in
1975, an MA (Economics) from the University of Guelph in 1975, and a PhD
(Economics) from the London School of
Economics in 1982. His published
research is primarily in the areas of Information Theory, Insurance Markets,
Inequality and Poverty Measurement.
Vol. 18, No. 3 • July 2008
WHITHER WTO?
RATIONAL EXPECTATIONS
Eicher
Branch
Despite the World Trade
Organisation’s apparent success in lowering tariffs
around the globe, initial
empirical trade studies cast
substantial doubt on the
actual effects of WTO membership on bilateral trade
flows.
The controversy seemed
resolved when recent work
showed that the WTO does
indeed exert a strong, positive impact on bilateral trade flows when
researchers correctly account for variations in multilateral trade costs.
Theo Eicher, from the University of
Washington and a research professor at
the Ifo Institute for Economic Research,
reexamines the topic by unifying three
strands of the empirical trade literature:
one branch controls for variations in
multilateral trade costs, another one controls for “natural trading partner”
effects, and the third allows for individual effects of preferential trading agreements (PTA) on trade flows.
Using prominent datasets that have previously been used to show strong WTO
effects, Mr Eicher (together with his
coauthor Christian Henn at the International Monetary Fund) show decisively
that WTO effects vanish after controlling
for the effects of multilateral trade costs,
natural trading partnerships, and PTA
memberships.
This most comprehensive
empirical approach to identifying WTO membership
effects highlights that much
of the trade creation that had
previously been attributed to
the WTO is actually due to
PTAs or due to observed and
unobserved
similarities
among trading partners.
Mr Eicher is also continuing
his work in Munich with
Thomas Strobel at the Ifo
institute that compares US/German productivity determinants. Here a pattern of
lagging information and communications technologies investment in Germany seems to explain its lagging productivity performance since 1990. In the
years since, German labor productivity
has declined in two distinct stages, while
it increased twice in the US.
Theo Eicher is professor and Robert R.
Richards Distinguished Scholar at the
University of Washington. He is also a
Research Professor at the Ifo institute
and an Affiliate Professor at the Ludwig
Maximilians University of Munich’s
economics department, where he teaches a course on Advanced Macroeconomics and Growth.
He received his PhD From Columbia
University in 1994 and currently serves
on the editorial board of the Journal of
Macroeconomics and as associate editor
of the European Economic Review.
IFO AND CESIFO SCIENTIFIC ADVISORY COUNCIL
The Scientific Advisory Council welcomes new members and bids farewell to
some others. Established in 1992, the
Council consists of internationally
respected independent academics and
experts who provide non-partisan, external quality control, and advise the Executive Board and the Administrative Council in the long-term planning of research
and development.
(Humboldt University Berlin), Monika
Schnitzer (Ludwig-Maximilians University of Munich), and Heinrich W.
Ursprung (University of Konstanz and
new Council Vice-Chairman). They join
Council Chairman Robert H. Haveman
(University of Wisconsin-Madison),
Bruno S. Frey (University of Zurich), and
Eric A. Hanushek (Stanford University,
Hoover Institution).
The new members are Robin W. Boadway (Queen’s University London, Canada),
Massimo Bordignon (Università
Cattolica Milan), Michael C. Burda
Retiring are former Chairman A. Razin, former Vice-Chairman K. Sauernheimer, G.
Bertola, B. Huber, H. Lütkepohl, P. Pestieau,
R. Rees, A. Sandmo and H.-J. Vosgerau.
Bulletin
Most economic decisions by households and
firms depend on expectations of future economic
conditions. Most macroeconomic theory and
policy analysis make
strong
assumptions
regarding the manner in
which agents form these assumptions,
typically assuming that expectations are
rational. However, empirical work casts
doubt on the rational expectations
hypothesis.
William Branch, of the University of
California at Irvine, contributes research
to a burgeoning field that investigates the
implications, for the economy, of modeling agents as boundedly rational, that is,
they form their forecasts by learning
from recent data. His most recent work,
which he will continue while at CES,
focuses on the asset market implications
of bounded rationality.
According to Mr Branch, asset markets
have long been a puzzle to macroeconomists. The occasional bubbles and subsequent crashes, excess volatility, among
many other empirical puzzles, are at
odds with the efficient markets and
rational expectations paradigm. Mr
Branch and co-authors show that small
deviations from rational expectations can
explain these puzzles.
In particular, if stock traders are uncertain of the risk and return in stocks and
try to infer their fundamental values
from real-time data, then they may occasionally be led to believe that stocks
have become less risky. Traders will
then trade on these beliefs, and stock
price bubbles will ensue. Eventually,
though, agents will uncover the true
riskiness of the stock, sell off their holdings, and the bubble will crash. Mr
Branch shows that these recurring bubbles and crashes can arise when agents
hold beliefs very close to rational expectations. These recurring bubbles and
crashes exhibit characteristics consistent
with empirical regularities.
William Branch is an Associate Professor of Economics at the University of
California Irvine.
3
Vol. 18, No. 3 • July 2008
IFO NEWS
EURO-ZONE ECONOMIC OUTLOOK
The joint Euro-zone Economic Outlook
forecast, produced in collaboration
between the Ifo Institute, INSEE in Paris
and ISAE in Rome, was released on July 9,
as usual timed to coincide with Eurostat’s
second release of quarterly national
accounts. The joint report contains estimations (for the previous quarter) and shortterm forecasts (for the current and following quarters) for
real GDP, consumption, industrial production,
investment and
inflation in the
Euro-zone.
Euro-zone real
GDP expanded
on a strong note
in Q1 2008, after
the disappointing
performance in
Q4 2007. However, the acceleration clearly overstated
the underlying trend. Real GDP growth is
forecast to slowdown considerably in the
coming quarters, expanding at rates of
0.0% in Q2 and 0.3% in both Q3 and Q4.
Industrial production is losing momentum, thereby reflecting the continuous
downward tendency of business surveys
due to worsening expectations. Private
consumption is expected to grow by
0.2% in Q2 and 0.3% in both Q3 and Q4.
Real disposable income growth is likely
to remain weak as increases in nominal
wages are eroded by high inflation rates.
Investment is expected to expand on a
modest path, with rates of -0.3% in Q2, a
correction of the sharp increase in Q1,
and 0.3% in both Q3 and Q4. On the
assumption that oil prices stabilise at
USD 135 per barrel of Brent and that the
dollar/euro exchange rate fluctuates
around 1.57 over the forecast horizon,
inflation should peak at 4.0% in Q3,
before easing gradually to 3.5% in Q4.
DARKENING GROWTH PROSPECTS
Euro-zone real GDP picked up in Q1
2008, rising by 0.7%, after a disappoint-
4
ing 0.4% in Q4 2007. The expansion was
mainly driven by exceptionally high economic growth in Germany. Economic
growth in France and Italy was also
stronger than in Q4, although more moderate than in Germany, while in Spain it
was markedly poor.
Private consumption expanded modestly
in Q1, mainly hampered by weak real
disposable
income growth.
A recovery of
consumption in
the coming quarters is unlikely to
arise.
Although the situation on the
labour market
r e m a i n s
favourable, the
decline of unemployment
is
loosing momentum. Furthermore, the
gains from slightly accelerating nominal
wages are swept off by high inflation
rates.
Finally, consumer confidence has deteriorated overall, reflecting the worsening
of households’ concerns. Private consumption is therefore expected to expand
by a modest 0.2% in Q2 and 0.3% in both
Q3 and Q4.
Industrial production in the euro zone
increased in Q1 2008 by 0.6%, after 0.2%
in Q4 2007. In Germany production grew
markedly. Also in Italy the rise of production quickened, whereas France posted a more modest growth rate.
and expanding at 0.4% in Q3 and 0.3% in
Q4. The slack expansion of production is
attributed to the unsupportive economic
environment associated with a slowdown
in domestic and foreign demand, less
convenient financial conditions, high
energy prices and the unfavourable dollar/euro exchange rate.
INFLATION CONTINUES TO RISE
Euro-zone headline inflation continued to
accelerate, from 3.4% in Q1 to 3.6% in
Q2, which is the highest rate since the
introduction of the single currency. The
increase reflects the sharp rises in commodity prices and their direct impact on
energy and food components of the HICP.
Under the assumption that the oil price
will stabilize at 135 USD per barrel of
Brent and that the dollar/euro exchange
rate will fluctuate around 1.57 over the
forecast horizon, inflation is expected to
reach a peak in Q3 (4.0%), before it
gradually lowers to 3.5% in Q4 due to a
favourable base effect.
Average HICP inflation should be 3.6%
in 2008, and thus well above the ECB’s
2% reference value for price stability.
Core inflation is expected to increase
slightly in H2 to 1.8%, from 1.7% in
Q2. This forecast is based on the
assumption that second-round effects
on wages will not materialise, but that
there will be some indirect pass-through
on core prices, which, however, will be
partially offset by a demand slowdown
and a delayed effect of the euro
exchange rate appreciation.
INSTITUTIONS INFLUENCE
ECONOMIC GROWTH
Despite the good performance of industrial production at the beginning of the
year, the downward tendency of business
surveys observed in recent months has
continued almost throughout the entire
euro-zone, reflecting expectations of a
slowdown in the coming quarters.
In an international comparison, Australia
has the best institutional growth conditions. In the past 15 years, Australia has
improved seven places, taking over the
top position from the United States, now
in second place, followed by the Netherlands. Germany finished in mid-range,
having fallen from seventh to eleventh
among the 24 observed OECD countries.
Industrial production is expected to
decelerate over the year, stagnating in Q2
in response to the strong increase in Q1,
This is the finding of the recent institutional index for OECD countries calculated by Munich’s Ifo Institute.
Bulletin