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tinbergen institute

magazine 6

Fall 2002

Game theory: Not for proving theorems but for real play Globalisation & development: Do we know anything? Health and demographics An interview with Maarten Lindeboom

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Institute for economic research of Erasmus Universiteit Rotterdam, Universteit van Amsterdam and Vrije Universiteit Amsterdam. tinbergen institute

magazine 6

In this issue

Fall 2002

Game theory: Not for proving theorems but for real play

In depth

Globalisation & development: Do we know anything? Health and demographics An interview with Maarten Lindeboom

Tinbergen Magazine is published by



In depth


Institute for economic research of Erasmus Universiteit Rotterdam, Universteit van Amsterdam and Vrije Universiteit Amsterdam.

Game theory: Not for proving theorems but for real play

Highlighting ongoing research at Tinbergen Institute for policymakers and scientists.

by Jacob K. Goeree


Globalisation & development: Do we know anything? by Joseph Francois


Up close Health and demographics

Up close

An interview with Maarten Lindeboom by Dirk Brounen


In short Papers in journals


Discussion papers





In short

Papers in journals, discussion papers and theses that have appeared in the last half year



tinbergen institute


tinbergen magazine 6, fall 2002








Broadly speaking, a game is an interactive situation in which the incentives of every player depend on the player’s own actions and those of others. Games have been used to model a wide variety of environments, such as collective action problems, market pricing, auctions, committee voting, contract law negotiations, and military conflicts. The Nash equilibrium, which has been the central solution concept in game theory since its introduction about fifty years ago, is (along with supply and demand) one of the most commonly used theoretical constructs in economics. Game theory is increasingly being applied in political science, management, behavioural psychology and other social sciences. Indeed, it has finally gained the central role envisioned by von Neumann and Morgenstern – to the extent that in some areas of economics (e.g., industrial organisation) virtually all of the recent theoretical developments are applications of game theory. Critics, however, outspokenly oppose theories based on the classical “rational choice” assumptions of perfect decisionmaking (no errors) and perfect foresight (no surprises), especially when these assumptions are used to describe behaviour in complex interactive situations. This scepticism is reinforced by evidence from laboratory experiments with financially motivated subjects, which often produce data patterns that are systematically biased away from rationalchoice predictions. Economists have started to take these criticisms seriously, and recent theoretical research has focused on developing models that more accurately describe actual human behaviour.

A social dilemma

Game theory: Not for proving theorems but for real play ●

Jacob K. Goeree ●

Jacob Goeree, TI alumnus, is currently Research

Fellow of the Tinbergen Institute and Professor of Economics at the Universiteit van Amsterdam, where he received his Ph.D. in 1997. Previously, he held a position at the University of Virginia and a visiting position at the California Institute of Technology.


A particularly striking example of the contrast between economic intuition and the cold logic of game theory is found in the “traveller’s dilemma.” This social dilemma is based on a story in which two travellers while on vacation purchase identical souvenirs, which are then lost on their return trip. The airline asks them to make independent claims for compensation, and in anticipation of excessive claims, makes the following announcement: “We know that the souvenirs were identical, and we will entertain any claim between 80 and 200 Euros, but you will each be reimbursed at an amount that equals the minimum of the two claims. If the two claims differ, we will also pay a small reward, R, to the person making the smaller claim and we will deduct an equal-sized penalty from the reimbursement to the person making the larger claim.”

tinbergen magazine 6, fall 2002

Since the travellers file their claims separately, each will be tempted to “undercut” any agreed-upon common claim (such as the souvenir’s true value). For example, suppose the penalty and reward parameter, R, is equal to ten Euros. A common claim of 200 yields 200 for both, but a deviation by one person to 199 would profitably raise that person’s payoff to 199 + 10. The incentive to undercut the other’s decision by one Euro implies that the maximum claim of 200 is never an optimal choice, irrespective of one’s beliefs about the other’s claim. Consequently, a rational person must assign zero probability to a choice of 200. But once 200 is ruled out as a possibility, 199 can be ruled out on the same grounds; and this logic can be repeated until the only beliefs that can be held by rational players are that the claims will be 80. In fact, as long as R > 1, the minimum claim of 80 is the unique Nash equilibrium, despite the fact that both would be better off by claiming a higher amount. The implausibility of this prediction becomes apparent when one considers very low values of the penalty/reward parameter. Capra, Goeree, Gomez, and Holt (1999) conducted an experiment based on this game, using randomly matched subjects who made independent claims in a sequence of ten periods. With R = 50, the average claim was close to the Nash prediction of 80 in the final 5 rounds, but with R = 10, the average claim started high and moved away from the Nash prediction, ending up at 186 for the last five rounds. The frequency of actual decisions for the final five rounds is indicated in Figure 1 by the dark blue bars for R = 50, and by the light blue bars for R = 10. The orange bars show the frequency of claims for an intermediate treatment, with R = 25. These treatment differences contrast sharply with the Nash prediction of 80, independent of R.

Figure 1. Claim frequencies in a traveller’s dilemma with R = 50 (dark blue), R = 25 (orange), and R = 10 (light blue).


In Ten Little Treasures of Game Theory and Ten Intuitive Contradictions, Goeree and Holt (2001) report a variety of games that span the standard categories: static and dynamic games with complete and incomplete information. For each game, the treasure is a treatment in which behaviour conforms nicely to predictions of the Nash equilibrium (or relevant refinement). A change in the payoff structure, however, produces a large inconsistency between theoretical predictions and observed behaviour. These contradictions are generally consistent with simple economic intuition. The “Ten Treasures” paper was meant to provoke theorists and to demonstrate the need for a generalisation of the Nash equilibrium: a theory that explains Nash-like behaviour in some contexts and deviations from the equilibrium in others. (The New York Times and BusinessWeek recently disseminated the results of the paper among a wider audience, presumably because its publication coincided with the release of A Beautiful Mind, the hit movie about Nash’s life.)

A statistical equilibrium concept The idea of bounded rationality– that agents have limited ability to evaluate their environments– has been around for decades (the term was coined by Nobel Prize winner Herb Simon). No real attempt was made to use the idea to generate formal equilibrium predictions until recently, however, when McKelvey and Palfrey (1995) incorporated decision error into an analysis of games. To see how this is done, suppose that there are two decisions, D1 and D2, with associated expected payoffs pe1 and pe2. Under perfect rationality, the decision with the higher expected payoff is always chosen. Bounded rationality can be modelled by adding a random element in the expected-payoff comparison. In particular, suppose the probability of choosing D1 is Pr(D1) = Pr(pe1 -

35 30 25 20 15 10 5 0 80














p 2 > m e) e

where e is a random variable with mean zero, and m is an “error parameter” that determines the importance of the error term. If m is small enough, the effects of errors vanish and the decision with the highest payoff is always chosen (fully rational behaviour). If m is large enough, all decisions are equally likely to be selected, irrespective of their expected payoffs (fully random behaviour). McKelvey and Palfrey (1995) use this idea to define a statistical generalisation of the Nash equilibrium, in which choice probabilities are positively but not perfectly related to expected-payoff differences. For example, using a logistic distribution for e yields the familiar logit form widely used in empirical work. In this case, the above choice probability reduces to

exp(pe1/m) Pr(D1) = exp(pe1/m) + exp(pe2 /m)

Nash prediction 0.04




0 80










Claim Figure 2. Logit equilibrium densities for the traveller’s dilemma with R = 50 (dark blue), R = 25 (orange), and R = 10 (light blue).





where the denominator ensures that the choice probabilities sum to one. This way of modelling players’ choices is akin to econometric “discrete choice” models, which are used to describe how consumers select one of several alternatives. Here it is often assumed that consumers’ utilities from different products are given by a deterministic part (which possibly depends on consumer and product characteristics) plus unobservable noise terms representing consumer heterogeneity. An important difference, however, is that in econometric models of consumer choice the noise term of one person will not affect the decision probabilities of others. This is no longer true in an interactive context such as a game. Observe that the second equation above does not provide an explicit solution for the choice probability because a player’s expected payoffs depend on her beliefs about the choices of others. Rather, the equation gives an equilibrium consistency condition: the belief probabilities that determine expected payoffs on the right should match the choice probabilities determined by the logit rule on the left. Consider a situation in which the costs of “overshooting” the optimal decision are lower than the costs of “undershooting.” Then a player may believe that her rivals are more likely to show an upward bias in decisions. This bias affects a player’s expected payoffs and, in turn, her choices via the logit rule. In some games, the endogenous effects of such biases may be reinforcing in a way that creates a “snowball” effect that moves decisions well away from Nash predictions. Consider Figure 2, for example, which shows logit equilibrium densities for the different treatments of the traveller’s dilemma experiment, using an error parameter estimated from the pooled data. Note that the theoretical densities pick up the general location of the data frequencies in Figure 1, with the colours used to match predictions and data for each treatment. There are discrepancies, but the logit equilibrium predictions are obviously superior to the Nash prediction of 80– independent of the reward parameter R. In particular, the logit equilibrium is able to pick up the most salient feature of the data (i.e. that a reduction in the penalty/reward parameter raises claims). The logit equilibrium model has been used to explain “anomalous” data from many different situations of economic interest, including rent-seeking, public goods provision, bargaining, imperfect price competition, co-ordination games, and auctions (see the papers referenced below).

tinbergen magazine 6, fall 2002

Outlook Game theory is the closest thing to a unifying theory in social science, and it evokes some of the strongest antagonism as well. Critics argue that people are not perfectly rational, and that experimental support for game theory is at best mixed. Selten, who shared the Nobel Prize with Nash, remarked: “Game theory is for proving theorems, not for playing games.” Indeed, the internal elegance of traditional game theory is appealing, and it has been defended as a normative theory about how perfectly rational people should play games with each other, rather than a positive theory that predicts actual behaviour. It is natural to separate normative and positive studies of individual decision making, which allows one to compare actual and optimal decision making. This normative-based defence is not convincing for games, however, since the best way to play a game depends on how others actually play, not on how some theory dictates that rational people should play. In an interactive context, biases can have reinforcing effects that drive behaviour well away from Nash predictions. Economists are starting to explain such deviations using computer simulations and theoretical analyses of error-prone decision making. The resulting models have empirical content that makes them relevant “for playing games, not just for proving theorems.”

References Anderson, S.P., J.K. Goeree, and

Capra, C.M., J.K. Goeree R. Gomez,

offer bargaining games, European

C.A. Holt (1998a), Rent seeking

and C.A. Holt (1999), Anomalous

Economic Review, 44, 1079-1089.

with bounded rationality: An anal-

behavior in a traveler’s dilemma?

ysis of the All-Pay Auction, Journal

American Economic Review, 89(3),

Goeree, J.K. and C.A. Holt (2001),

of Political Economy, 106(4), 828-


Ten little treasures of game theory


and ten intuitive contradictions, Capra, C.M., J.K. Goeree, R. Gomez

American Economic Review, 91(5),

Anderson, S.P., J.K. Goeree and C.A.

and C.A. Holt (2002), Learning and


Holt (1998b), A theoretical analysis

noisy equilibrium behavior in an

of altruism and decision error in

experimental study of imperfect

Goeree, J.K., C.A. Holt and S.K.

public goods games, Journal of

price competition, International

Laury (2002), Private costs and

Public Economics, 70(2), 297-323.

Economic Review, 43(3), 613-636.

public benefits: Unravelling the

Anderson, S.P., J.K. Goeree and C.A.

Goeree, J.K. (1997), Applications of

behavior, Journal of Public

Holt (2001), Minimum-effort coor-

Discrete Choice Models, Ph.D. the-

Economics, 83(2), 257-278.

dination games: Stochastic poten-

sis, Universiteit van Amsterdam.

effects of altruism and noisy

tial and logit equilibrium,” Games

Goeree, J.K., C.A. Holt and T.R.

and Economic Behavior, 34(2), 177-

Goeree, J.K. and C.A. Holt (1999),

Palfrey (2002), Quantal response


Stochastic game theory: For playing

equilibrium and overbidding in

games, not just for doing theory,

private-value auctions, Journal of

Anderson, S.P., J.K. Goeree and C.A.

Proceedings of the National Academy

Economic Theory, 104(1), 247-272.

Holt (2002), The logit equilibrium:

of Sciences, 96, 10564-10567.

A perspective on intuitive behav-

McKelvey, R.D. and T.R. Palfrey

ioral anomalies, Southern Economic

Goeree, J.K. and C.A. Holt (2000),

(1995), Quantal response equilibria

Journal, 69(1), 21-47.

Asymmetric inequality aversion

for normal form games, Games

and noisy behavior in alternating-

and Economic Behavior, 10, 6-38.









Joseph Francois

Globalisation & development: Do we know anything? ●

Joseph Francois is Professor

of Economics at the Erasmus Universiteit Rotterdam. He received a Ph.D. from the University of Maryland. Currently, he is a Research Fellow of the Tinbergen Institute and CEPR and director of the European Trade Study Group. Francois has

The word globalisation evokes strong images: Protesters in turtle suits in Seattle at a failed WTO ministerial-level meeting, small children weaving carpets in South Asia, French farmers releasing livestock on highways, McDonald’s restaurants blighting the urban landscape, and men in dark suits with identical IMF briefcases bearing more bad news for yet another Latin American government on the edge.

also served as research economist with the World Trade Organization and as director of research for the U.S. International Trade Commission.

While almost everyone has opinions about globalisation, getting them to agree on a definition is difficult. For some, globalisation is simply increased economic integration, measured by trade and investment flows. Others view globalisation as a more sinister phenomena involving growth in the power of the multinational enterprise, manipulation of capital markets, the destruction of local culture under the assault of Hollywood, and worsening living standards under the inexorable erosion of


labour’s bargaining power. Depending on the perspective, globalisation has been presented as either a global panacea, or a cultural and economic pandemic. Economists as prominent as Joseph Stiglitz (Nobel Prize winner in economics in 2001) and Maurice Allais (Nobel Prize winner in economics in 1988) have lamented loudly (and publicly) about the dangers of globalisation.1 In light of this background, the goal of this essay is rather mundane, and deals with a narrow aspect of globalisation. In particular, it explores the role of two aspects of globalisation– the integration of goods markets through trade, and the cross-border integration of financial markets. Are these good or bad for developing countries? The study begins by outlining some of the basic trends at issue, and then discussing the evidence on the economic implications of these aspects of the globalisation process.

tinbergen magazine 6, fall 2002

The miracles of compound interest

Figure 1: A comparison of growth in South East Asia and Sub-Saharan Africa

The reason why establishing links between trade (and any economic policy) and growth is important is that compound interest works. For example, the experience since the 1950s has been that a number of East Asian developing countries, comprising a group of relatively open developing economies, have grown rapidly, while more closed countries have fared less well. The most striking contrast is between the developing countries in Sub-Saharan Africa, and those of South East Asia. This is illustrated in Figure 1 (based on data from the World Bank’s World Development Indicators database), which presents average per capita income in Sub-Saharan Africa and in East Asia, in constant dollars. It is clear that the economies of countries in both of the regions are heterogeneous. Even so, the basic pattern in South East Asia has been one of dramatic growth. Consider that per capita income in Thailand was comparable to income in Sub-Saharan Africa in 1960. Yet, by 1999, incomes in Thailand were over five times those in Sub-Saharan Africa, on average. Even in the depths of the recent financial crisis, incomes in South East Asia were greater by far. Over the long run, the miracles of compound interest can open economic chasms between different countries and regions.

Has the empirical literature really taught us anything? Why do we see such differences in Figure 1? Reflecting a surge in interest in trade and openness in the late 1980s and early 1990s, the World Bank (1987) and the IMF (1993) examined growth across a broad sample of developing countries for the decades of the 1960s, 1970s, and 1980s. Their reports highlight apparently striking differences in economic growth between strongly outward- and strongly inward-oriented countries (as much as six percentage points a year). More recently still, the World Bank (2001) argued that a similar pattern holds for the 1990s. (The World Bank’s most recent assessment pointed to political conflict as another critical factor in growth performance.) The 1980s and 1990s witnessed a significant shift among developing countries toward outward orientation. Average tariffs applied by developing countries were reduced from 32 percent in the first half of the 1980s to 15.6 percent by the second half of the 1990s. This compares to a current average of 3.5 percent in the industrial economies. Merchandise exports of the larger low-income countries grew at 14.1 percent annually through the 1990s, while per capita GDP for these same larger low-income countries grew at an annual rate of 6.9 percent. While growing slower, the least developed countries in aggregate saw a turnaround, with exports growing by 3.2 percent, and GDP per capita growing at a rate of 0.8 percent (compared to growth of -0.6 in the 1980s). Excluding countries affected by conflict, growth across all developing countries accelerated over this period from 0.5 percent to 1.5 percent per year. Yet the industrial countries (the most open economies in our global sample) did even better than the developing country average, growing 2.2 percent annually in per capita GDP terms. Industrial country merchandise exports grew by 6.8 percent per year in this period.

At first glance, the apparent correlation between trade orientation and economic performance seems to offer a compelling argument for embracing the global economy


tinbergen magazine 6, fall 2002

growth (the straight line) and actual (residual) growth performance in the sample, given openness. It is obvious that critical differences remain unexplained. However well the South East Asian economies have done, their performance does not fit the basic pattern linking openness and growth. Rather, these countries remain outliers– even after we control for openness. The message from the data in the figure is that some countries and economies, particularly in South East Asia, have done particularly well – even allowing for the general degree of openness and macroeconomic stability, while others have deviated badly from the overall pattern.

At first glance, the apparent correlation between trade orientation and economic performance seems to offer a compelling argument for embracing the global economy. On closer examination, however, the linkages are not as clear-cut as was argued a decade ago. Illustrating this point, figure 2 shows the relationship between adjusted growth rates and a measure of the degree of openness for 84 countries (over the period 1986-95). We say the data for growth are “adjusted,” in that we are technically presenting residual growth rates. These represent “unexplained” growth, after controlling for correlation with a number of factors (except for openness) emphasised in the cross-country growth literature. The distribution of the data seems to indicate a positive relationship between openness and growth. We should be hesitant, however, to draw sweeping conclusions from the crosscountry data. Consider the figure again. The two lines at the bottom indicate predicted

Figure 2: Expected and actual growth rates


Reflecting a reasonable concern that we need to know why such linkages may exist if we are to prescribe policy, the empirical literature is now undergoing a highly critical (and necessary) review. Recent criticism of the trade and growth literature is directed at the conclusions we can safely draw from studies based on comparison across countries. Edwards (1993) first raised concerns by arguing that the basic approach of cross-country studies abstracted away from important factors better identified through studies of historical episodes. Raising many of the same points in a later paper, Rodriguez and Rodrik (2001) argue that we should not be comforted, but rather worried, by the apparent ability of disparate measures to capture the “same” relationship between openness and growth. These papers conclude, on the basis of such longer-term historical experience, that the role of trade has been overblown. For example, the trade policy regime may be correlated with the overall soundness of economic policies, which in turn determines growth. Indeed, studies that control for other variables find a less pronounced, although still significant, impact of the trade regime.

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Frankel and Romer (1999), in their attempt to correct for many of the empirical problems found in the earlier literature, also dealt with some of the concerns of Rodriguez and Rodrik. Their estimates suggest that the impact of trade is substantial, even though the exact magnitude of the effect remains uncertain. They find that the larger the country, the higher the income. At roughly the same time, Baldwin and Sbergami (2000) made what should have been (in retrospect) an obvious point– but one that was missed in a hundred published papers. The relationship that emerges from both models with growth and imperfect competition models is necessarily complex. In mathematical terms, it is non-linear and non-monotonic. Yet, the econometric literature generally treats this relationship as being rather simple– in fact, rather as if it were linear or log-linear. Therefore, a cross-country regression using highly protected and moderately protected nations in its sample might find no statistically significant relationship between trade and growth, even if such a relationship really existed. Baldwin and Sbergami then proceed

with empirics that include non-linear effects, and find that imposition of linearity leads to only three out of ten openness proxies being statistically relevant. This supports Edwards, and Rodrigues and Rodrik. Yet when one allows for non-linearity, the impact of trade on growth is significant for seven out of ten proxies. The bottom line is that even the criticisms of the econometrics in this literature have been misspecified.

Financial sector openness Not surprisingly (given the seemingly perpetual chain of financial crises linking Mexico, Brazil, Russia, South East Asia, Argentina, etc.), a growing area in the international finance literature involves capital market liberalisation and financial flow restrictions. A new twist on this literature is the role of financial sector openness– not so much in terms of capital flows, but rather in terms of foreign bank participation in domestic markets. For example, Claessens and Glaessner (1998) show that barriers to financial services trade have hindered the development of financial markets in East Asia. Claessens, Demirgüç-Kunt and Huizinga (1998), moreover, show that greater foreign presence reduces profit margins for domestic banks in developing country financial sectors. Eschenbach, Francois, and Schuknecht (2000), and Francois and Eschenbach (2002), offer evidence for the 1980s and 1990s that open financial sectors consistently yield better growth performance. In the case of developing countries, this may amount to a difference of 0.5 percent growth per annum.

Evidence for the 1980s and 1990s suggests that open financial sectors consistently yield better growth performance Figure 3 (taken from Francois and Eschenbach) illustrates the relationship of financial sector openness and growth. The figure presents average growth rates in the 1990s for low-, medium-, and high-income countries, mapped against relative degrees of financial sector openness. The OECD countries in the sample tend to have the most open financial service sectors, so that the question of gains from liberalisation can also be viewed as one particularly relevant for developing countries. The figure and the related empirics dramatically illustrate the differences in financial openness mapped to differences in growth.


tinbergen magazine 6, fall 2002

Why the anguish? If open economies do better, and if engaging in globalisation is therefore “good,” why is there such anguish? Yes, the literature, in general, points to a positive link between openness and development. And yes, the growth in global economic integration has benefited developing countries. One can even argue that the continued engagement of developing countries is critical if they are to benefit from globalisation (see Francois 2001). Yet, misgivings exist at the highest levels of governmental and intergovernmental institutions, academia, and in nongovernmental organisations. One suspects, for example, that the IMF, in its heart-ofhearts, believes that it did something wrong in South East Asia. The World Bank still wonders why it can’t make a dent in Africa. And the leadership of South East Asia openly expresses doubts about the benefits of trade, even though they are the collective “openness and growth” poster-child for economists. Part of the puzzle is reflected in Figure 2. After 20 years of research, we can now keep a straight face and say that policy matters– sometimes. Yet we still do not understand what else happened in the outlier countries (including all of South East Asia). Moreover, we have missed a basic point. Policy matters, but so does politics. It has proven difficult, and often impossible, to make permanent changes to national policy sets in developing countries. Argentina is arguably where it is now not because of what the IMF and the World Bank told them to do,


but because every time the Washington bureaucrats left, they went back to their old ways. With the exception of Chile, sustainable political equilibria were at odds with the pursuit of Washington-consensus type policies in Latin America. And for South East Asia, one of the culprits may be imperfect financial markets. Information sets are far from complete, and crises can be self-fulfilling. In such a world, we must question whether advice to developing countries may have been not merely useless, but also misguided, or even wrong. If California and the United Kingdom can botch-up privatisation and market-based policies, why should we expect these policies to work any better in developing countries? We still don’t know why we see the full cross-country patterns we do, or why it is so hard for individual countries to break with the pack and move up to a different policy cohort. The global economy plays a role in these questions, but its part is limited. This leaves the research agenda in the area rather full of not only unanswered, but also badly answered, questions.

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Allais, M. (1999), La mondilisation: la destruction

1 During the closing days of the Uruguay Round of

des employs et de la croissance: l’évidence

GATT negotiations, Allais fretted in the French media

empirique, Editions Clement Juglar: Paris. ISBN 2-

about the dangers of trading with countries that do


not share the same cultural values. This is manifested in his more recent, almost humorous attack on

Baldwin, R.E. and F. Sbergami (2000), Non-linearity

“mondiliast” policies, wherein Allais argues that free

in openness and growth links: Theory and evi-

capital movements, floating exchange rates, and

dence, forthcoming CEPR discussion paper, present-

free trade (even within Europe) are eroding the

ed at the 2nd European Trade Study Group confer-

French economy from within. (Allais 1999). More

ence, Glasgow, September.

recently, Stiglitz has been pushing his book, Globalization and Its Discontents. Stiglitz’s criti-

Claessens, S., A. Demirguc-Kunt, and H. Huizinga

cisms are much more on the mark, and are not

(1998), How does foreign entry affect the domestic

really about globalization per se, but about bad

banking market?, Washington: World Bank Mimeo.

advice and the mismanagement of the process by the IMF and World Bank. See Eichengreen (2002) for

Claessens, S. and T. Glaessner (1997), The internationalization of financial services in Asia, World Bank PRWP no. 1911. Edwards, S. (1993), Openness, trade liberalization, and growth in developing countries, Journal of Economic Literature 31(3) (September): 1358-1393. Eichengreen, B. (2002), The globalization rules: An economist reports from the front lines, Foreign Affairs July/August. Eschenbach, F., J.F. Francois, and L. Schuknecht (2000), Financial services trade and competition, in S. Claessons and M. Jansen, editors, The Internationalization of Financial Services, Kluwer: the Hague, ISBN 9-041-19817-2. Francois, J. and F. Eschenbach (2002), Financial sector competition, services trade, and growth, Tinbergen Institute discussion paper, TI02-089/2. Francois, J. (2001), The Next WTO round: Northsouth stakes in multilateral trade negotiations, Adelaide: CIES and Tinbergen Institute. ISBN 0-86396-474-5. Frankel, J.A. and D. Romer (1999), Does trade cause growth? American Economic Review June 89 (3), pages 379-399. Rodriguez, F. and D. Rodrik (2001). Trade policy and economic growth: a sceptic’s guide to the crossnational evidence. NBER Macroeconomics Manual 2001, edited by B.S. Bernanke and K. Rogoff. Stiglitz, J. (2002), Globalization and its Discontents, New York: W. Norton. ISBN 0-393051-24-2. IMF (1993), Trade as an engine of growth, in World Economic Outlook, May, 70-80. World Bank (1987), The World Development Report 1987, Oxford University Press. World Bank (2001), Global Economic Perspectives and the Developing Countries, Washington, DC.


a condensed overview of the Stiglitz book.

Up close

Health and demographics

An interview with Maarten Lindeboom Maarten Lindeboom, Professor of Economics at the Vrije Universiteit in Amsterdam, has published international

By Dirk Brounen cutting-edge research in labour economics and applied econometrics. He is currently focusing on the interdependencies between demographics and health economics. In addition to his being a fruitful researcher, Lindeboom is also heavily involved in teaching as Director of graduate studies at the Tinbergen Institute.


What led you to focus your attention on health economics? I have always been involved in research relating to retirement systems from a labour economics perspective. You cannot study this subject in the Netherlands without realising the tremendous impact of the demographic aging process that is currently changing our society. The demographic composition of society is of great relevance for economic and political power. Relatively young populations, for example, which are credited with the ability to adapt more flexibly to changing economic conditions, contain more economic growth opportunities. The European population is aging swiftly, as a result of the postwar baby boom, and low fertility- and mortality rates. When incorporating health into this discussion, we see the emergence of a fascinating field of research – with questions that demand academic rigor and answers that entail great value for society.

tinbergen magazine 6, fall 2002

Economic conditions existing at the time a person is born have been shown to have long-lasting health effects

Are you referring to the diminishing health of older people and aging societies as a whole? Yes, but there is more. Research in the last few years has revealed some interesting relationships between health and economics, particularly regarding birth rates. My research shows that the economic conditions existing at the time a person is born have been shown to have long-lasting health effects. Apparently, there exists some sort of long-term GDP-effect on the quality of health. For instance, the Dutch generation that was born at the end of the Second World War is still associated with remarkably poor health. This type of research1 was novel, in that it focused on the effects of economic circumstances on health outcomes, both in the long- and short term. For most of the last century only demographic scientists and epidemiologists were interested in these phenomena. Their research was largely of a descriptive nature. Fortunately, economists have increased their interest in demographic issues, and have broadened the field by questioning why these phenomena appear, for example. It is important to understand the causalities that exist in health economics.


What kind of causalities have you found regarding older generations? My new research project analyses the interrelationships between working and health at older ages. Aging in the demographic sense is becoming more important every day. If you divide the population that enjoys retirement benefits by the total working population in the Netherlands, you currently end up with a ratio of around 37%. Recent estimates predict that by the year 2050 this number will have increased to 60%. This trend is ongoing in most European countries, while in the US the trend towards ageing is remarkably weaker. The difference lies in birth rates, which are close to 1.1 in many European countries; in the US, however, families are still composed of over two children, on average2. So, especially for European countries some great challenges lie ahead. In order to stabilize the economic system, the ever-increasing older generation must continue to work for a longer period than in the current situation. Around thirty years ago the average participation rate of people over 60 years old was around 90%, both in the US and Europe. In the US, this number has fallen to 60%, which has become a major matter of concern for the federal government. Over the same period of time, for some European countries the participation rate has fallen to around 30%. This should obviously trigger even more severe concern in Europe.

the older generation must continue to work for a longer period How should the government act, according to your research? Currently, the Dutch government is considering different methods to increase the participation rates of older generations. Diminished retirement benefits and privatised pension plan systems are meant to encourage the older generation to continue their employment, instead of retiring early. The effects of this type of decision on a per-

tinbergen magazine 6, fall 2002

son’s physical condition have not been included in this political dilemma. It is a given fact that health expenses tend to rise with age. It is therefore also important to understand the effects of employment at more advanced ages on personal health. Until now very little research has been devoted to these effects. There are methodological difficulties with this kind of work because it will in general be difficult to identify the different underlying causal mechanisms that may be at work. In addition, it is also hard to measure health empirically. Usually, one uses simple responses to direct questions concerning an individual’s health. There are good reasons to believe that responses to these questions contain large and systematic biases. For instance, people out of work may be inclined to overstate health problems in order to justify their economic position3. This can have severe consequences for estimates of behavioural models of the labour market and for Quality of Life (QALY) measures in health economics. In a recent paper with Portrait and Deeg (2001) we follow a different route by including a large set of health test scores in the analysis and applying new statistical data reduction techniques to obtain a more sophisticated taxonomy of health conditions for older persons. We subsequently specify models that relate economic and social conditions to the health outcomes at advanced ages4. How advanced is our knowledge regarding the health-driving factors? Of course there is a strong biological component, but health-related behaviour, work and especially income are also very important factors. This is not surprising, since wealth enables a person to invest in his or her health, thereby exerting some sort of control in the health outcome. Also of great importance is the effect of foreseen and unforeseen shocks – like widowhood, for example. Consider the direct and indirect effects of widowhood. The direct effects are obvious. As for the indirect effects, we note that a person’s life partner provides a substantive part of health care at advanced ages, and loss of that partner will probably dramatically effect the functioning and well being of the surviving spouse. Furthermore, the loss of a partner is often associated with poverty, which can also explain a diminishing state of health. Since health is of great importance for society – not only because of humane reasons, but also because of the economic consequences – understanding health effects should be part of government policy5. Returning to the subject of retirement and health, we recently initiated a project that applies this sophisticated taxonomy method in order to analyse the interrelation-


ships between employment and health at older ages. The government should be aware of the indirect effects of any new policy that aims at increasing participation rates among the older generations. Our research aims to quantify the implications of employment on health at various ages for different types of jobs and employment profiles in order to quantify a health cost per unit. Currently, it is hard to predict what will be the effects of employment; both positive and negative effects exist, we know, but we are unsure which will prevail. Perhaps some people with certain jobs should be encouraged to extend their employment, while others would be better off with early retirement. In that case you are returning indirectly to your initial research on retirement, by adding socially optimal timing. Indeed, different overlaps will evolve. But health economics offers other applications as well. By quantifying health using the taxonomy method, and by determining important drivers of health, we also obtain information that may lead to improved organisation of health care services. Dutch health care services are currently co-ordinated by ‘regional indication centres’. Dutch citizens often have to wait a long time before they receive necessary medical care. The blame for these long waiting lists can partially be ascribed to the poor underlying organization. This ‘rationing’ of health services is also an important driver of personal health. Better understanding of the variation in well being across regions and groups could help improve this organization. A person’s health

tinbergen magazine 6, fall 2002

is not a simple function of income; more forces appear to be at work. If we compare income and health distributions internationally, we find some interesting results. There exists a strong association between income inequality and health inequality across countries. There is a positive gradient between income and health in European countries, but sometimes the differences between these countries are too large to believe. Furthermore, for developing countries there exists a negative relationship between income and health (i.e. those with better incomes are worse off). Thus, income may not only have a direct causal effect on health, but may also play a role in how health status is measured and reported6. Greater attention has been paid recently to the issue of income-related inequalities in health, the measurement of health and the cross-population comparability of results. Clear practical interest has been shown from policy makers of international bodies like the World Health Organisation and the World Bank, and the international scientific community has identified a number of challenging economic and statistical methodological issues on the forefront. Currently, a group of world class economists are focussing their attention on these issues. Needless to say that this triggers excitement and energy for the academic years to come.

Notes 1 See Blackwell, D.L., M.D. Hayward, and E.M. Crimmins, 2001, Does childhood health affect chronic morbidity in later life? Social Sciences and Medicine, and Kerkhofs, M. and M. Lindeboom (1997), Age-related health dynamics and changes in labour market status, Health Economics. 2 See, for instance, the August 24, 2002 issue of the Economist. 3 See, for instance, Kerkhofs, M. and M. Lindeboom, 1995, Subjective health measures and state dependent reporting errors, Health Economics. 4. See Portrait, F., M. Lindeboom, and D. Deeg (2001), Life expectancies in specific health states: results from a joint model of health status and mortality of older persons., Demography, V38(4), pp525-536. 5 For a more detailed discussion, see Lindeboom, M. F. Portrait, and G.J. van den Berg, 2002, The effect of conjugal bereavement on health and mortality, Mimeo, Vrije Universiteit. 6 For a more detailed discussion, see Wagstaff, A. and E. van Doorslaer, 2000, Equity in health care financing and delivery, in A.J. Culyer and Newhouse (eds), Handbook of Health Economics, North Holland, 1803-62.


Address change effective from 19 December 2002

_______________ Tinbergen Institute Amsterdam Roetersstraat 31 1018 WB Amsterdam The Netherlands ____________________________________

Phone: +31 (0)20 551 3500 Fax: +31 (0)20 551 3555

tinbergen magazine 6, fall 2002

papers in journals

Auction efficiency The theoretical literature typically divides auctions into two categories. In private value auctions, bidders know with certainty their own value, but are unsure about the valuations of others (e.g. the sale of a painting). In common value auctions, the object is worth the same to all bidders, who possess different information about its true value (e.g. the auctioning of oil drilling rights). Real-world auctions, however, exhibit both private- and common value elements. In recent spectrum auctions, for example, the different cost structures of bidding firms constituted a private value element, while the uncertain demand for the final product

added a common value facet. When both private and common values play a role, auctions are not necessarily efficient– in the sense that the firm with the lowest costs may not win the license. For instance, a highcost bidder with an overly optimistic conjecture about the common value may outbid a lower-cost rival. This study reports a series of first-price auction experiments to determine the extent of inefficiency that results with financially motivated bidders. While some bidders fall prey to the winner’s curse, subjects weigh their private- and commonvalue information roughly the same way as rational bidders, and observed efficiencies are close to predicted levels. Increased competition and a reduction in uncertainty about the common value positively affect revenues and efficiency. A clear policy implication: governments should actively gather information regarding the value of licenses, for example, and should publicly release such information to all bidders, thereby enhancing efficiency.

Goeree, J.K., and T. Offerman, 2002, Efficiency in auctions with private and common values: An experimental study, American Economic Review, 92(3), pp. 625-643.

Dispensing with distributional assumptions Testing for long-term co-movements in economic time series, also known as cointegration testing, is common practice in contemporary econometrics. Most tests make use of simple parametric assumptions about the distributions of error terms in the cointegrating model. The testing procedure developed in this study, however, makes it possible to simultaneously estimate the error distribution semi-nonparametrically and perform the cointegration test. To gain efficiency, the study uses the semi-nonparametric approach rather than a fully adaptive approach. The semi-nonparametric estimate of the density builds on a Student t-distribution multiplied by a squared polynomial of flexible degree. Varying the degree of the polynomial yields an arbitrarily close approximation to a huge class of empirically relevant densities (e.g. exhibiting skewness and/or excess kurtosis). The simulations demonstrate that the test has good size and power properties over a broad class of distributions for the error terms, certainly in comparison to other available tests. The results remain intact if model uncertainty is introduced in the lag order of the cointegrating time-series model. The main conclusion following from the paper is that the usual parametric assumptions on error distributions may be dispensed with; the cost will be only increased computational complexity, but the gain will be great in terms of overall size, power, and flexibility properties.

discussionpapers Explaining the imbalance Why does centralisation of policy making often lead to disappointing results? To take the EU as a case in point, most people feel that some policies shaped in Brussels have overshot their original goals. Examples are the Common Agricultural Policy and EU funding for regional development. In contrast, there is only limited progress in areas where many would argue in favour of close European co-operation – in immigration, defence, and environmental policy, to name a few. This paper develops a political-economic model to explain this imbalance. It is argued that differences between national benefits and national costs of central policies give nations an incentive to misrepresent their preferences at the central bargaining table. When most of the cost of policy is shared through a common budget, a common pool problem arises. Governments overstate their preferences, which results in excessive spending. If it is difficult to share large parts of the costs (e.g., assimilation costs of immigration, casualties of war, diminished competitiveness of polluting industries), governments are overly conservative in central negotiations. As a result, underprovision of public goods persists. The paper argues that intensifying co-financing in some policy domains (e.g. EU agricultural policy) and setting up central compensation funds for non-shareable costs in others (e.g. asylum policies) may help to improve the outcomes of EU decision making.

Boswijk, H.P., and A. Lucas, Semi-nonparametric cointegration

By Robert A.J. Dur, (EUR), and

testing, 2002, Journal of Econo-

Hein J. Roelfsema, (Utrecht

metrics, 108(2), pp. 253-280.

University), Why does centralisation fail to internalise policy externalities? TI02-056/3


tinbergen magazine 6, fall 2002

Sunflower Management

and Capital Budgeting A sunflower always turns toward the sun, seeking nourishment for its survival. Many managers in organisations behave in a similar fashion, looking up to their bosses, trying to figure out what they are thinking, so that they can match their actions to the expectations and beliefs of their bosses. Such behaviour is called “sunflower management”. Why do people behave like this, and what are the consequences of such behaviour for how capital is allocated in organisations? The answer to this question lies in the interaction of managerial career concerns and project delegation. In organisations, it is often necessary to engage in costly delegation of the assessment of ideas to take advantage of the specialised skills of those at lower levels or simply to aggregate multiple independent assessments of ideas. Those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of the abilities of those who are delegated the task of assessing these ideas. This commingling of the assessment of the idea with the assessment of the individual agent generates a tendency for the agent to ignore his own information and instead tends to confirm the superior’s prior belief.

Beyond characterising the effects of sunflower management on the delegation process, this analysis also reveals implications of sunflower management for the use of centralised versus decentralised capital budgeting systems, and helps to explain why firms may over-invest capital even when managers have no innate preferences for “empire building”. The optimal degree of decentralisation of capital budgeting seems to depend on the interaction between the direct cost of project delegation (which can also be interpreted as the direct cost of decentralisation), the marginal value of information generated via delegation, and the career concerns of those generating this information. As career concerns increase, the marginal value of information generated at lower levels in the organisation decreases, and decentralisation becomes less attractive.

By Arnoud W.A. Boot (UvA), Todd T. Milbourn (Washington University, St. Louis) & Anjan V. Thakor (University of Michigan Business School) “Sunflower management and capital budgeting” TI02-059/2


Delegation or Voting The real world is full of situations characterised by asymmetric and privately held information. Researchers studying such situations typically take the distribution of private information as given, often for good reasons. In many cases information is asymmetric because the privately held piece of information relates to preferences. Economists typically regard preferences as innate or otherwise beyond the scope of economic inquiry. In other situations it seems less warranted and somehow unnatural to invoke preferences as a reason for taking the distribution of private information as exogenous. The area most in need of a relaxation of the assumption of an exogenously specified distribution of private information is the area of collective or group decision making. One consequence of endogenizing information is that collective decision-making procedures should be evaluated not just in terms of their capacity to aggregate private information, but also in terms of the incentives

they provide to acquire this information. In a decision problem in which a project can be accepted or rejected once information about its quality has been acquired (or not), this paper compares the performance of a delegation structure with that of two voting procedures. Delegation makes one’s acceptance decision pivotal by definition. In a voting procedure, on the other hand, the decisiveness of one’s vote depends on the other agent’s vote. This contrast affects the decision to acquire information.

By Otto H. Swank and Bauke Visser (EUR) “Delegation or voting” TI02-005/1

tinbergen magazine 6, fall 2002

Volatility Forecasting The increasing availability of financial market data at intraday frequencies has not only led to the development of improved ex-post volatility measurements, but has also inspired research into their potential value as an information source for longer horizon volatility forecasts. This study explores the forecasting value of these high frequency series in conjunction with a variety of volatility models for returns on the Standard & Poor’s 100 stock index. Two socalled realised volatility models are considered. These model directly the cumulative squared intraday returns. An unobserved components model models actual volatility as an autoregressive moving average process. An autoregressive fractionally integrated moving average model allows for long memory in the logarithms of realised volatility.


How to get rid of the second-hand car Adverse selection and the used-car market This study compares the predictive abilities of these realised volatility models with those of daily time-varying volatility models, such as Stochastic Volatility (SV) and Generalised Autoregressive Conditional Heteroskedasticity (GARCH) models, which are both extended to include the intraday volatility measure. For forecasting horizons ranging from one day to one week, the most accurate out-of-sample volatility forecasts are obtained with the realised volatility and the extended SV models; these models contain information inherent in the high frequency returns. In the absence of the intraday volatility information, we find that the SV model outperforms the GARCH model.

by Eugenie Hol (ING Bank) and Siem Jan Koopman (VU) “Stock index volatility forecasting with high frequency data” TI02-068/4

All discussion papers can be downloaded via


It’s difficult to buy a good quality second-hand car. This is due to the existence of bad quality cars, and the fact that a buyer is not able to distinguish between good and bad qualities. It is thus even more difficult to sell a good quality used car: because a prospective buyer does not know the true quality of the automobile, the price he or she wants to pay might be well below the seller’s own valuation. Hence, only the lowest quality cars, if any, can be traded. This has come to be known as the adverse selection problem. In a dynamic world, however, once cars of the lowest qualities are sold, relatively better qualities are left; these can be traded later on. It turns out that in a variety of settings (including different demand structures, depreciation, entry of new buyers and sellers etc.) a dynamic trading process exists that allows trading any initial quality distribution. Lower qualities trade earlier, while higher qualities wait longer. Higher and higher qualities are traded as time goes by; once all qualities are sold, an equilibrium dynamic starts all over again, resulting in cyclical patterns of prices, qualities and trade volume. The efficiency of such a dynamic market (in comparison with the static equilibrium) is fully determined by the initial quality distribution. Some distributions generate higher social welfare in static settings, while others, like the underwater part of an iceberg, yield much greater welfare having been allowed to trade in time.

Thesis: “Essays on adverse selection: A dynamic perspective” by Vladimir Karamychev. Published in the Tinbergen Institute Research Series #275

tinbergen magazine 6, fall 2002

Risky Business One of the issues currently discussed widely in the Dutch media are the potential threats of NIMBYs (“Not in My Backyard” kinds of development) to homeowners. A new center for accommodation of asylum seekers could lower the values of surrounding homes, as might the noise generated by new airport runways or new highway lanes. By studying the impact of such developments on house prices, one could also estimate financial compensations to homeowners. Survey techniques are inappropriate for this study, since their results are sensitive to surveyed biased homeowners and survey framing. The analysis of actual house prices is more objective. Since differences in property quality and location explain a large part of the variation in house prices, prices first have to be homogenized by estimating a hedonic equation with “spatial” regression. Houses in Amsterdam will generally be more expensive than those in Rotterdam, while no variables reflecting property or location quality account for this price difference. This study, one of the first to apply this approach in order to analyze NIMBYs, concludes that the presence of asylum seeker centers does not significantly influence the prices of surrounding properties, but that houses in noisy areas could sell for 11 percent less than similar properties elsewhere. These results reflect a booming housing market; a stable or declining market might well reveal stronger price impacts.

Discussion papers Institutions and Decision Processes 02-042/1 Maarten C.W. Janssen, Rob van der Noll, Erasmus Universiteit Rotterdam, Electronic Commerce and Retail Channel Substitution 02-048/1 Bauke Visser, Erasmus Universiteit Rotterdam, Complexity, Robustness, and Performance 02-069/1 Andrea Galeotti, Erasmus Universiteit Rotterdam, Sanjeev Goyal, University of London and Erasmus Universiteit Rotterdam, Network Formation with Heterogeneous Players 02-079/1 Cees Diks, Universiteit van Amsterdam, Detecting Serial Dependence in Tail Events 02-082/1 Mehari Mekonnen Akalu, Erasmus Universiteit Rotterdam, Evaluating the Capacity of Standard Investment Appraisal Methods 02-083/1 Mehari Mekonnen Akalu, Erasmus Universiteit Rotterdam, A Monte Carlo Comparison between the Free Cash Flow and Discounted Cash Flow Approaches

Financial and International Markets 02-043/2 Mehari Mekonnen Akalu, Erasmus Universiteit Rotterdam, Measuring and Ranking Value Drivers 02-044/2 Bas Jacobs, Universiteit van Amsterdam, and CPB Netherlands Bureau for Economic Policy Analysis,

Thesis: “Housing market risks” by Marcel Theebe. Published in the Tinbergen Institute Research Series #283

Optimal Taxation of Human Capital and Credit Constraints 02-045/2 Bas Jacobs, Universiteit van Amsterdam, and CPB Netherlands Bureau for Economic Policy Analysis, Optimal Income Taxation with Endogenous Human Capital


02-046/2 Arjen Siegmann, André Lucas, Vrije Universiteit

274 PAUL BOSELIE (13/06/02), Human resource management, work systems and

Amsterdam, Explaining Hedge Fund Investment

performance: a theoretical-empirical approach.

Styles by Loss Aversion

275 VLADIMIR KARAMYCHEV (03/05/02), Essays on adverse selection: A dynamic



Paul A. de Hek, Universiteit van Amsterdam,

276 BERT MENKVELD (25/04/02), Fragmented markets: Trading and price discovery.

Endogenous Technological Change under

277 DAWIT ZEROM GODEFAY (15/05/02), Nonparametric prediction: Some selected topics.


278 THOMAS DE GRAAFF (31/05/02), Migration, ethnic minorities and network externalities.


279 ASLAN ZORLU (23/05/02), Absorption of immigrants in European labour markets.

Marina Bakanova, Cath. University of Leuven, and

The Netherlands, United Kingdom and Norway.

World Bank, Lúcio Vinhas de Souza, Erasmus

280 BAS JACOBS (14/05/02), Public finance and human capital.

Universiteit Rotterdam, and ECARES, Free University

281 PHORNCHANOK CUMPERAYOT (27/06/02), International financial markets:

of Brussels, Trade and Growth under Limited

Risk and extremes.


282 EMOKE BAZSA-OLDENKAMP (14/06/02), Decision support for inventory systems


with complete backlogging.

Lúcio Vinhas de Souza, Erasmus Universiteit

283 MARCEL THEEBE (04/06/02), Housing market risks.

Rotterdam, and ECARES, Free University of Brussels,

284 VJOLLCA SADIRAJ (11/06/02), Essays on political and experimental economics.

Integrated Monetary and Exchange Rate Framework


tinbergen magazine 6, fall 2002

Labour, Region and Environment

02-055/2 Ruta Aidis, Universiteit van Amsterdam, Why less?


The Gendered Aspects of Small- and Medium-sized

Raymond Florax, Henri de Groot, Reinout Heijungs,

Enterprise (SME) Ownership under Economic

Vrije Universiteit Amsterdam, The Empirical


Economic Growth Literature



Arnoud W.A. Boot, Universiteit van Amsterdam,

Raymond Florax, Henri de Groot, Master-point, Vrije

Todd T. Milbourn, Washington University in St.

Universiteit Amsterdam, Ruud A. de Mooij, CPB

Louis, John M. Olin School of Business, Credit

Netherlands Bureau for Economic Policy Analysis,

Ratings as Coordination Mechanisms

and OCFEB, Meta-analysis: A Tool for Upgrading


Inputs of Macroeconomic Policy Models

Arnoud W.A. Boot, Universiteit van Amsterdam,


Todd T. Milbourn, Washington University in St.

Sjoerd Beugelsdijk, Tilburg University, Henri L.F. de

Louis, John M. Olin School of Business, Anjan V.

Groot, Vrije Universiteit Amsterdam, and Anton

Thakor, University of Michigan Business School,

B.T.M. van Schaik, Tilburg University, Trust and

Sunflower Management and Capital Budgeting

Economic Growth



Arnoud W.A. Boot, Universiteit van Amsterdam,

Josse Delfgaauw, Robert A.J. Dur, Erasmus

Todd T. Milbourn, Washington University in St.

Universiteit Rotterdam, Signaling and Screening of

Louis, John M. Olin School of Business, Anjan V.

Workers’ Motivation

Thakor, University of Michigan Business School,


Evolution of Organizational Scale and Scope

André van Stel, Erasmus Universiteit Rotterdam,


and EIM Zoetermeer, Henry van Nieuwenhuizen,

Thierry Post, Erasmus Universiteit Rotterdam, Haim

Dutch Ministry of Social Affairs and Employment,

Levy, The Hebrew University of Jerusalem, Does

Knowledge Spillovers and Economic Growth

Risk Seeking Drive Asset Prices?



André van Stel, Erasmus Universiteit Rotterdam,

Leo de Haan, De Nederlandsche Bank, Amsterdam,

and EIM Zoetermeer, David Storey, University of

Jeroen Hinloopen, Universiteit van Amsterdam, and

Warwick, and EIM Zoetermeer, The Relationship

Delft University of Technology, Ordering the

between Firm Births and Job Creation

Preference Hierarchies for Internal Finance, Bank


Loans, Bond and Share Issues: Evidence from Dutch

Robert A.J. Dur, Erasmus Universiteit Rotterdam,


Hein J. Roelfsema, Utrecht University, Why does


Centralisation fail to internalise Policy Externalities?

Jan Marc Berk, De Nederlandsche Bank, Amsterdam,


and Vrije Universiteit Amsterdam, Job Swank, De

Paulo A.L.D. Nunes, Jeroen C.J.M. van den Bergh,

Nederlandsche Bank, Amsterdam, and Erasmus

Vrije Universiteit Amsterdam, Measuring the

Universiteit Rotterdam, Regional Price Adjustment

Economic Value of a Marine Protection Program

in a Monetary Union

against the Introduction of Non-Indigenous Species


in the Netherlands

Olivier F. Morand, University of Connecticut, Kevin


L. Reffett, Arizona State University, Existence and

C.N. Teulings, P.A Gautier, Erasmus Universiteit

Uniqueness of Equilibrium in Nonoptimal Unbounded

Rotterdam, Search and the City

Infinite Horizon Economics



Erik T. Verhoef, Vrije Universiteit Amsterdam, Inside

Manjira Datta, Arizona State University, Leonard J.

the Queue

Mirman, University of Virginia, Olivier F. Morand,


University of Connecticut, Kevin L. Reffett, Arizona

Jos van Ommeren, Arno van der Vlist, Peter

State University, Monotone Methods for Markovian

Nijkamp, Vrije Universiteit Amsterdam, Transport-

Equilibrium in Dynamic Economies

related Fringe Benefits



Jan Marc Berk, De Nederlandsche Bank, and Vrije

Jos van Ommeren, Piet Rietveld, Vrije Universiteit

Universiteit Amsterdam, New Economy, Old Central

Amsterdam, Why do Firms reimburse Job Applicants’


Relocation Costs?



Wilfred J. Ethier, University of Pennsylvania,

Jasper Dalhuisen, Peter Nijkamp, Vrije Universiteit

Globalisation: Trade Technology, and Wages

Amsterdam, Enhancing Efficiency of Water Provision

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02-073/3 Mauro Mastrogiacomo, Rob Alessie, Maarten Lindeboom, Vrije Universiteit Amsterdam, Retirement Behaviour of Dutch Elderly Households

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Jan Rouwendal, Wageningen University, and Vrije Universiteit Amsterdam, Rob Alessie, Vrije Universiteit Amsterdam, House Prices, Second

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Mortgages and Household Savings - an Empirical Investigation for the Netherlands, 1987-1994

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02-090/3 Edwin Leuven, Hessel Oosterbeek, Randolph Sloof, Chris van Klaveren, Universiteit van Amsterdam, Worker Reciprocity and Employer Investment in Training

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Frank Kleibergen, Universiteit van Amsterdam, Two Independent Pivotal Statistics that test Location and Misspecification and add up to the Anderson-Rubin Statistic

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02-066/4 Stan van Hoesel, Maastricht University, H. Edwin Romeijn, University of Florida, Dolores Romero

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Polynomial Time Algorithms for Some Multi-level Lot-sizing Problems with Production Capacities 02-067/4 Wilco van den Heuvel, Albert P.M. Wagelmans, Erasmus Universiteit Rotterdam, A Note on Ending Inventory Valuation in Multiperiod Production Scheduling 02-068/4 Eugenie Hol, Siem Jan Koopman, University of

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tinbergen magazine 6, fall 2002

Tinbergen Research Institute Four themes distinguish Tinbergen Institute’s research programme: I. Institutions and Decision Analysis II. Financial and International Markets III. Labour, Region and the Environment IV. Econometrics and Operations Research Each theme covers the whole spectrum of economic analysis, from theoretical to empirical research. Stimulating discussions on theories, methodologies and empirical results arise from the interaction of the Institute’s faculty – comprised of approximately 96 research fellows. These fellows are faculty members with excellent track records in economic research, active in organising research activities, teaching graduate courses and supervising Ph.D. students. Discussion Papers Research is pre-published in the institute’s own Discussion Paper Series. Download discussion papers at (section ‘Publications’). E-mail address for correspondence: Tinbergen Graduate School The Tinbergen Graduate School enrols about 145 students in two programmes. One leads to a Master of Philosophy in economics, and the other to a Ph.D. in economics. Master of Philosophy programme Tinbergen Institute’s intensive Master’s programme leads to a Master of Philosophy in economics. Both those students aiming for a Ph.D. in economics, as well as those pursuing careers in top consulting- or policy advice organisations, stand to benefit from the excellent preparation offered by the programme. Core courses are offered in the following: microeconomics, macroeconomics, mathematics for economists, econometrics, advanced econometrics, and organisation. Specialised courses are offered in the following: international trade and development, monetary economics, finance, labour economics, public economics, microeconomic theory and game theory. Ph.D. programme Four years of solid training in the principles of economics and econometrics (based on lectures, workshops, seminars and examinations), as well as the successful completion of a supervised doctoral thesis, provide the basis for Tinbergen Institute’s Ph.D. programme. The programme’s first year coincides with the master’s programme. Ph.D. theses are published in the Institute’s Research Series.


For information on admission requirements, application procedure, and scholarships, visit, or contact Board A.G.Z. Kemna (Chair), S. Goyal, J.-W. Gunning, J. Hartog, J.J.M. Kremers. General Director C.N. Teulings Director of Graduate Studies M. Lindeboom Research Programme Co-ordinators Institutions and Decision Analysis: J.K. Goeree, G. van der Laan Financial Economics and International Markets: C.G. de Vries, E.C. Perotti Labour, Region and the Environment: J.C.J.M. van den Bergh, H. Oosterbeek Econometrics: S.J. Koopman, R. Dekker Scientific Council D.W. Jorgenson (Harvard University, Chair), M. Dewatripont (CORE), P. de Grauwe (Leuven University), D.F. Hendry (Oxford University), R.C. Merton (Harvard University), D. Mortensen (Northwestern University), S. Nickell (Oxford University), T. Persson (Stockholm University), L. Wolsey (CORE) Social Advisory Council C.A.J. Herkströter (Chair), R.G.C. van den Brink (ABN-AMRO), H.J. Brouwer (DNB), M.J. Cohen (Mayor of Amsterdam), F.J.H. Don (CPB), C. Maas (ING), F.A. Maljers, I.W. Opstelten (Mayor of Rotterdam), A.H.G. Rinnooy Kan (ING), H. Schreuder (DSM), J. Stekelenburg, R.J. in ’t Veld, P.J. Vinken, L.J. de Waal (FNV) Editorial Board Tinbergen Magazine B. Bierut, D. Brounen, S. Manzan, E. Mendys, R. Mosch, A.C.P. van der Ploeg, C.N. Teulings How to subscribe? Address for correspondence/ subscriptions: Tinbergen Institute Rotterdam, Burg. Oudlaan 50, 3062 PA Rotterdam, The Netherlands. E-mail: Address changes may be sent to the above e-mail address.

tinbergen institute

In this issue

Game theory: Not for proving theorems but for real play

Globalisation & development: Do we know anything?

Health and demographics An interview with Maarten Lindeboom

Papers in journals

Discussion papers



Tinbergen Institute Magazine highlights ongoing research at Tinbergen Institute for policymakers and scientists.

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