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tinbergen institute

magazine 7

Spring 2003

What determines the enormous variation in the wealth of nations? The economics of poverty Shocks, trends and cycles in the twentieth century

Tinbergen Magazine is published by




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

magazine 7

In this issue

Spring 2003

What determines the enormous variation in the wealth of nations?

In depth

The economics of poverty Shocks, trends and cycles in the twentieth century

Tinbergen Magazine is published by



In depth


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

What determines the enormous variation in the wealth of nations?

Highlighting ongoing research at Tinbergen Institute for policymakers and scientists.

Coen Teulings


The economics of poverty Jan Willem Gunning


Shocks, trends and cycles in the twentieth century Herman K. van Dijk


In short Papers in journals


Discussion papers




In short

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




tinbergen magazine 7, spring 2003

This first issue of Tinbergen Magazine in 2003 has a special celebratory character. 12 April 2003 marks the hundredth anniversary of the birth of Jan Tinbergen. This will be celebrated in the Tinbergen week, from April 7 to April 11 2003 at the Erasmus Universiteit Rotterdam, Jan Tinbergen’s home base during his long and distinguished scientific career. Jan Tinbergen’s fundamental scientific insights were combined with a strong commitment to furthering justice in the world and the well being of all its population. This double commitment made Jan Tinbergen a source of inspiration whose influence ranges far beyond just the scientific community. Marking the anniversary in style, quite a long list of diverse activities has been scheduled during the Tinbergen week. This year, students have organized their yearly business week along the special theme: Development: social and economic interests. Ruud Lubbers, former Dutch prime minister and at present High commissioner of the UN Refugee Agency, will give the Mandeville lecture. Jan Pronk, former Dutch minister of development and previously involved in many UN activities, will give a public lecture, Tinbergen, inspirator and idealist. Both Ruud Lubbers and Jan Pronk were students of Tinbergen. A group of eight Nobel Prize winners will discuss the progress and future of economics as a social science. And finally, there will be a major scientific conference focusing around three central themes in Jan Tinbergen’s scientific work–the econometrics of business cycles, the policy analysis of growth and education, and poverty. Today’s leading scientists have been invited to discuss their recent progress on these themes.


This issue of Tinbergen Magazine opens with three papers that give an overview of some of the recent progress on these three themes. Whereas some of Tinbergen’s work has lost its relevance for today’s scientific work, other parts of his work– on assignment and hedonic models, for example– are still highly relevant for today’s scientists in the discipline. This is a remarkable accomplishment in a field that evolves so quickly. For more information on the Tinbergen week, see








Coen Teulings ●

Coen Teulings is general director of Tinbergen Institute. His research interests include labour economics, particularly education, and income distribution.

What determines the enormous variation in the wealth of nations? Why is Europe so much richer than Africa? Why has Argentina, one of the richest nations of the world at the beginning of this century, declined so dramatically? Why have the fortunes of Sri Lanka and Taiwan–two countries with about the same wealth only just after World War II–been so different? Taiwan’s GDP per head grew by an incredible rate of 6.1% per year, while Sri Lanka’s productivity almost stagnated at a rate of 1.8% per year. Or consider North and South Korea, separated at the end of World War II, the latter now ten times richer than the former. And finally, consider a question that has raised substantial interest in the aftermath of September 11th: what explains the economic decline of Islamic culture during the past 500 years? These are obvious questions, with great practical relevance. If politicians knew the answers, they would install policies to improve the wealth of their nations, wouldn’t they? Tremendous progress on these issues has been made in the last 25 years. Theories of


endogenous growth have revealed the mechanisms by which current growth creates the conditions for future growth. Human capital was found to play a role, next to physical capital in the old growth theory. And the theory of institutions and property rights has proven to be relevant for growth.

The role of geography An obvious explanation for the differences in prosperity between nations is their geographical location. A broad and easily accessible contribution to this literature is Jared Diamond’s (1997) Gun, Germs and Steel. Diamond asks himself why Europe, and its offspring in North America and Australia, runs the world. He seeks the answer in the entire history of mankind over the past 13,000 years and shows how geography favored Eurasia, the only large connected landmass, above other continents. His book provides beautiful insight for economists equipped with modern training of examining issues of causality by means of natural

tinbergen magazine 7, spring 2003

experiments. The crossing by the Indians of the Bering Strait, some 12,000 years ago, and their subsequent separation from Eurasia by the rising sea level, provides the best natural experiment imaginable. On a much smaller scale, the colonization of the islands in the Pacific provides similar experiments. These natural experiments suggest that scale matters for subsequent growth. These ideas have been taken up by Gallup, Sachs and Mellinger (1999). They show how differences in a country’s prosperity can be adequately explained by geographical factors, like access to open sea (either directly or via navigable rivers) and the distance from the equator. The open sea provides cheap transport, while tropical climates suffer from diseases like yellow fever and malaria. Their regressions show a large impact of these factors: access to open sea raises GDP growth by 1%. The worrisome fact is that most people live in regions with unfavorable geography, and even worse, that population growth is the highest in these regions. The authors stress that these results do not necessarily imply only a direct effect of geography on wealth. Favorable geography might have created the initial level of wealth that generated the initial conditions for subsequent growth, as predicted by endogenous growth theories.

Geography or institutions? These ideas have not remained undisputed. A large literature (see e.g. Hall and Jones (1999)) has pointed out the importance of institutions protecting property rights– the rule of law, the absence of corruption, a constitution and political stability. Hall and Jones refer to these institutions as social infrastructure. In the absence of an adequate social infrastructure, prospective investors (fearing expropriation) are reluctant to take risks. Simple regressions show the relevance of these factors. There is a causality issue here: do good institutions generate growth, or does growth create good institutions? In a recent paper, Acemoglu, Johnson and Robinson (2002) develop an interesting hypothesis. They observe that from 1500 onwards, Europeans conquered the whole world. The effect of their occupation, however, differed between countries. In some places the European presence remained marginal. They set up fortresses along the coast to draw profits from the hinterland, by trade or by robbery, but left the people alone. In other places the Europeans really settled. Whether or not they settled depended on whether they could physically survive the local climate and the diseases that came with it. Where they survived they set up institutions similar to those at home in Europe. One study (Acemoglu et al.) used the percentage of casualties among the first settlers as an


indicator of the effect of institutions on GDP. Their results show a strong effect of institutions on GDP. Their regressions cast some doubt on the validity of the conclusions of Gallup et al. regarding the role of geography. Open access to sea and a temperate climate might well be proxies for conditions that were favorable for European settlers, and thereby conducive for the introduction of European institutions. In a later paper, Acemoglu and Johnson (2001) develop a related theory regarding the fortunes of newly conquered territories in America. The regions in America that were most prosperous at the time of European invasion (the Aztec empire in modern Mexico and the Inca empire in modern Peru) are now the poorest. Acemoglu and Johnson put forward the theory that this reversal of fortunes is due to the type of institutions that the

Europeans set up: where there was a lot of property that could be profitably robbed, institutions were geared to that purpose; where there was nothing to take, Europeans set up institutions that enabled them to generate wealth themselves.

Human capital, inequality and growth Another factor that has received a lot of attention is human capital. A simple Walrasian model predicts that the effect of a one-year increase in the average educational level of the workforce on the level of GDP


will be equal to the Mincerian rate of return to human capital, or from the point of view of the firm, the relative cost of the marginal unit of education of the workforce (see Heckman and Klenow (1997)). Since wages are equal to (marginal) productivity, the effect of an additional year of education on a worker’s wage rate (the private return to education, about 8 % per year) should be equal to the effect of an increase in every worker’s education on total output (the social return). Or, after first differencing, there should be a relation between the growth of GDP and the growth of education. However, Barro and Lee

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(1993) showed that empirically there is a relation between the growth of GDP and the level (but not the growth) of education. This finding is not consistent with a standard Walrasian human capital model, but is in line with endogenous growth models. Krueger and Lindahl (2001) show that Barro and Lee’s conclusion is partly driven by problems of measurement error, which contaminates regression coefficients towards zero. This problem affects more heavily variables in first differences than in levels. However, Krueger and Lindahl’s evidence suggests that the long-run social rate of return is six times the private return–an incredible difference. Teulings and Van Rens (2001) offer a more complete reconciliation of the evidence. Their argument goes back to an idea by Jan Tinbergen (1956, 1975) that was first implicitly formulated in his groundbreaking 1956 paper on hedonic pricing. Technological progress, which makes production processes more complex, raises the demand for human capital and therefore the private return, which subsequently raises income inequality. A greater supply of education is the only force that can offset this trend. This is Tinbergen’s race between education and technology. Teulings and Van Rens do indeed document a strong negative relation between education and income inequality (see Figure 1). This relationship generates the impression that there is endogenous growth, because countries with a higher educational level are better equipped to benefit from new technologies. A second issue raised by Teulings and Van Rens relates to the discussion of geography and institutions. Since the latter two factors are largely fixed, countries with favorable geography and institutions start with higher wealth. Part of this wealth is invested in human capital. There is thus reverse causality, from GDP to education. When we fail to correct for this reverse causality, we overestimate the effect of education on GDP. Accounting for this problem reduces the long-run social return to a more realistic number of about three times the private return. Even then, education remains an incredibly important factor in explaining the post-war growth in productivity. Teulings and Van Rens estimate the long-run effect of the actual increase in the average educational level of the world’s workforce on productivity growth to be about 2.7% per year–35% more than the productivity growth actually observed. This implies that those countries that did not invest in human capital actually lost a substantial share of their GDP. This information helps to explain the huge differences in the post-war history of Taiwan versus Sri Lanka.


References Acemoglu, D. (2002), Technical change, inequality, and the labor market, Journal of Economic Literature, vol.40 no.1, pp. 7-72. Acemoglu, D. (2002), Why not a political Coase theorem? Social conflict, commitment and politics, NBER Working Paper, nr 9377. Acemoglu, D. and S. Johnson (2001), Reversal of fortune: Geography and institutions in the making of the modern world income distribution, mimeo, MIT, Cambridge. Acemoglu, D., S. Johnson and J.A. Robinson (2001), The colonial origins of comparative development: An empirical investigation, American Economic Review, vol.91 no.5, pp. 1369-1401. Barro, R.J. and J.W. Lee (1993), International Comparisons of Educational Attainment, Journal of Monetary Economics, vol.32 no.3, pp.363-394. Diamond, J. (1997), Gun, germs and steel, A short history of everybody for the last 13,000 years, Random House, London, ISBN 0-224-03809-5. Gallup, J.L., J.D. Sachs and A.D. Mellinger (1999), Geography and economic development, NBER Working Paper, nr 6849. Hall, R.E. and C.I. Jones (1999), Why do some countries produce so much more output per head than others? Quarterly Journal of Economics 10, pp. 463-483. Heckman, J.J. and P.J. Klenow (1997), Human capital policy, mimeo, University of Chicago. Krueger, A.B. and M. Lindahl (2001), Education for growth: Why and for whom? Journal of Economic Literature, vol.39 nr.4 (Dec.). Teulings, C.N. and T. van Rens (2001), Education, growth and income inequality, Tinbergen Institute discussion paper 02-001/3, Amsterdam/Rotterdam. Tinbergen, J. (1956), On the theory of income distribution, Weltwirtshaftliches Archiv, pp. 156-173. Tinbergen, J. (1975), Income Distribution: Analysis and Policies, Amsterdam: North Holland.






Jan Willem Gunning





Jan Willem Gunning is professor of development

economics at Vrije Universiteit Amsterdam. His research interests include poverty dynamics, growth theory and trade policy.

The economics of poverty Like a number of others in the field of economics I deserted the subject of my education, physics, under the influence of the phenomena of poverty– to begin with, in my own country. Jan Tinbergen (1984, p. 315)

The concern with poverty that made Tinbergen switch from physics to economics remained his prime motivation for the rest of his life. After his early work on business cycle theory and econometrics, he focused increasingly on the economics of poverty in developing countries. Indeed, rumour has it that he would have preferred to receive the Nobel Prize for his work on development rather than for his pioneering role in econometrics. If Tinbergen were alive today he would probably be surprised by the direction that development economics has taken. The aid and trade policies of rich countries are no longer seen as the most important determinants of poverty in developing countries (as they often were in his days). The focus has shifted from the external environment of developing countries to their domestic policies and institutions. Whereas poverty research used to be primarily theoretical and macroeconomic, it is now typically microeconomic and empirical.


Improved data availability has changed the field beyond recognition. For example, research on the links between growth and inequality has been transformed by the availability of panel data of reasonable quality for a large number of countries (Deininger and Squire, 1996). The biggest change, however, is in the availability of micro data.

If Tinbergen were alive today he would probably be surprised by the direction that development economics has taken.

tinbergen magazine 7, spring 2003

Economists have invested heavily (often against strong opposition from the social sciences) in the collection of survey data for individual households or firms. Policy makers in developing countries, donor agencies and NGOs in rich countries have long peddled their pet remedies (“education for girls”, “bank credit for small firms”) without much empirical basis. Their preconceptions are now increasingly being challenged by micro research based on these new data sets. Macro research has focused on the link between economic growth and poverty reduction. This work has started to dismantle the idea that growth bypasses the poor. The elasticity of the income of the bottom 20% with respect to mean income appears to be close to unity: the poor are not left behind, but their income grows at about the same rate as mean income (Dollar and Kraay, 2002). This finding offers little comfort, however: at that rate, poverty may persist for a very long time and the elasticity is substantially lower than 1 in some of the poorer countries. In policy circles there now is much discussion on how growth can be made “propoor” (more effective in reducing poverty). Researchers tend to emphasize that the search for widely applicable recipes for propoor growth is like looking for the Holy Grail. What eventually succeeds is likely to be highly location and time specific. This is where microeconomics comes in. Modern poverty research often involves empirical testing of micro models. These models describe for individual households or firms what incentives they face to initiate growth. Why doesn’t a particular type of farm household adopt an existing, superior technique? Or why does a certain firm refrain from investing in what appears to be a profitable export activity? The answers offered by the models are wide-ranging: indivisibilities may make the superior technique unattainable in the presence of capital market imperfections; a manufacturing firm may not wish to make investments that are difficult to reverse when it considers the continuation of current government policies to be unlikely; if good institutions for contract enforcement do not exist, a firm may steer clear of a given profitable activity because it requires dealing with unreliable suppliers; in the absence of insurance markets farm households exposed to climatic risk may prefer to hold their savings in liquid form rather than invest. Microeconometric research tries to test such explanations. The models used may involve multiple equilibria: poor households may thus be stuck in a stable, inferior equilibrium. A common theme in this work is the importance of financial markets and the con-


ditions under which these will not emerge simultaneously. The micro research has led to rigorous analysis of the economic functioning of institutions: formal and informal arrangements for contract enforcement, credit, and social security. In this area economists, geographers and social scientists– bien étonnés de se trouver ensemble – have started to collaborate fruitfully. For example, Dekker and Hoogeveen (2002) use household survey data to demonstrate that the institution of bride wealth in rural Zimbabwe functions as an insurance substitute: dormant contingent claims of the bride’s parents on their son-inlaw are activated when the creditors experience a negative shock. The microeconometric approach has brought excellent scholars into the field. It has also attracted media attention. When the New York Times recently described this new development (“Small-Picture Approach to a Big Problem: Poverty,” August 20, 2002), it correctly noted an important implication of the microeconomic poverty work: “big picture paradigms” leading to one-size-fits-all policy prescriptions are giving way to highly specific diagnoses and remedies. All in all, it’s less grandiose, but more effective. Where is poverty research going? Four new developments may be noted. First, there are now techniques to combine the detailed information collected in household surveys such as the Living Standard Measurement

tinbergen magazine 7, spring 2003

Surveys (typically for rather small samples) with census data, which are much less comprehensive but do have national coverage (Elbers et al., 2003). LSMS data are used to estimate poverty (measured by household consumption) as a function of variables that (unlike consumption) are covered by the census, e.g. simple wealth indicators such as characteristics of the dwelling and access to water, sewage and electricity. The estimated relation can then be used to predict poverty for each of the census households, making poverty estimates representative at a much lower level of aggregation than is possible with LSMS data. If the disaggregation is spatial, this amounts to poverty mapping, where poverty incidence is estimated for small geographical units. The poverty map shown here for Ecuador gives the spatial distribution of poverty for two common poverty measures: the headcount (which gives the percentage of the population below the poverty line) and the poverty gap (which takes into account the distance from the poverty line– i.e. the depth of poverty). Such poverty maps are beginning to improve the targeting of interventions. During a recent cholera epidemic in


South Africa, for example, authorities were able to target preventive information on poor communities because poverty maps showed that the epidemic spread along streams, but skipped relatively well-off locations. A second development is that panel data allow the estimation of dynamic models of poverty. It is a well-documented fact that a large component of poverty in developing countries is transient (people moving in and out of poverty) rather than structural. Poor households are exposed to very large shocks (reflecting greater exposure to extreme weather conditions, price volatility, illnesses etc.), and a lack of well-developed financial markets may lead to temporary spells of poverty. In addition, household responses to risk may make it difficult to escape from poverty through growth. For example, diversification (a typical response of rural households to risk) lowers mean incomes (by eliminating the gains from specialisation); this may well lead to lower investment and growth. In much of the literature the effect of risk is analysed in an essentially static framework. Conversely, the empirical analy-

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sis of growth typically proceeds as if agents face no risk. To combine the two, one needs to model growth under uncertainty. This has remained (since the 1960s) limited to very special cases, however, and there have been few serious empirical applications. Recent methodological advances in the area of estimation by simulation, as well as the availability of panel data sets, are changing this. It is now possible to analyse the dynamics of poverty as the outcome of investment decisions taken under uncertainty by estimating stochastic growth models on micro data (Elbers, Gunning and Kinsey, 2002). This approach may help to improve the design of anti-poverty programs: since structural and transient poverty call for very different policy responses, it is important to disentangle the contributions of growth and risk in the dynamics of poverty.

Structural and transient poverty call for very different policy responses. It is important to disentangle the contributions of growth and risk in the dynamics of poverty. In poverty research there is now growing concern, in both academic and policy circles, about the exposure of poor households to risk– concern about potential poverty (vulnerability) rather than the actual poverty recorded in survey data. There have been rather unconvincing attempts to identify vulnerable households from cross-sectional data (e.g. by making the heroic assumption that household consumption is generated by a

stationary distribution). Now that dynamic models can be estimated, it is fairly easy to generate vulnerability estimates by micro simulation without the need to invoke the stationarity assumption. While computationally demanding, this approach is not very data intensive. Although still in its infancy, the approach seems to offer the prospect of much better targeting by identifying the households most at risk of falling into poverty. A final development is the insight that while designing effective policy interventions is clearly necessary for eliminating poverty, it is not sufficient. If policy makers have no incentives to adopt these interventions (as is, unfortunately, the case in many of the poorest countries), poverty will persist. Some poverty research is therefore now beginning to investigate the political economy of reform. Some years ago a famous tracking survey in Uganda established that only about a third of the money allocated to primary schools in the central government budget actually arrived at the schools. Shocked by this finding, the government adopted a simple remedy: whenever money was sent, the amount was posted in a central location in the village. Parents used this information to lobby for disbursement of the money. This process of empowerment through information proved effective: when the tracking survey was recently repeated, it found that over 80% of the funds arrived. If policy makers have no incentives to adopt effective interventions, poverty will persist. Some poverty research is therefore now beginning to investigate the political economy of reform. Poverty research is now applying the best techniques of economic research to one of the world’s most vexing problems– very much in the Tinbergen tradition.

References Deininger, K. and L. Squire (1996), A new data set

Elbers, C., J.W. Gunning and B. Kinsey (2002),

for measuring income inequality”, World Bank

Convergence, shocks and poverty: Micro evidence

Economic Review, vol. 10, pp. 565-591.

of growth under uncertainty”, TI Discussion Paper 35/2.

Dekker, M. and H. Hoogeveen (2002), Bride wealth and household security in rural Zimbabwe,

Elbers, C., J.O. Lanjouw and P. Lanjouw (2003),

Journal of African Economies, vol. 11, pp. 114-

Welfare in villages and towns: Micro-measurement


of poverty and inequality”, Econometrica, vol. 71, pp. 355-364.

Dollar, D. and A. Kraay (2002), Growth is good for the poor, Journal of Economic Growth, vol. 7, pp.

Tinbergen, J. (1984), Development cooperation as a


learning process, in G.M. Meier and D. Seers (eds.), Pioneers in Development, Baltimore: Johns Hopkins University Press.







Herman K. van Dijk



Herman Koene van Dijk,

professor of econometrics, is the director of the Econometric Institute. His research interests include development of Bayesian estimation methods using analytical methods and Monte Carlo techniques, and applications of neural networks in economics.

Shocks, trends and cycles in the twentieth century The “business cycle” is a concept of key interest for all economic actors and policy makers. Ever since the seminal work on the statistical testing of business cycles by Jan Tinbergen (1939) and the empirical analysis by Burns and Mitchell (1946), the cyclical behavior of many economic variables has been measured and modeled at the international level, the national level, the industry level and in the financial sector. Consumption, savings and production decisions of the private sector, and monetary and fiscal policy decisions of the banking and government sectors, are based on forecasts of the future developments of economic variables, which to a large extent depend on the state of the business cycle. The characterization of the business cycle and the analysis of


its properties have been the subject of innumerable studies. Tinbergen’s research on key features of the business cycles in the years before the Second World War may be characterized as data driven. Several theories on periodic movements in economic variables existed, but extensive empirical research was lacking. In the period before World War II, Tinbergen’s statistical contribution was pioneering. He also worked on model building and tried to find explanatory variables for the business cycles. Given the lack of good data for many countries, and the events of World War II, that was no easy task. Some details on Tinbergen’s work in that early period may be found in Tinbergen and Polak (1949).

tinbergen magazine 7, spring 2003

Figure 1 (a) Natural logarithm of real GDP per capita in the US (straight line) and deterministic trend (dashed line):

Economists today can extend some features of Tinbergen’s study with much longer series of economic data from many more countries. This note discusses three issues:

(b) Natural logarithm of real GDP per capita in the US


(straight line) and stochastic trend (dashed line), (c) Residuals of deterministic trend model (straight line)

2 3

and stochastic trend model (dashed line)

Figure 1a

Figure 1b

Figure 1c


The relevance of deterministic trends versus stochastic trends and their effect on the cycle, The importance of shocks versus cycles, The existence of long-run nonlinear trends.

Until the 1970s many economists argued that the long-term growth path of the economy was exponential, and that deviations from this path lead to temporary cyclical deviations. These deviations might be reduced in length and amplitude by a sensible counter-cyclical policy. This was also Tinbergen’s approach. Where the interaction of consumption, investment, output and employment was studied, the models were Keynesian. The practice of counter-cyclical policy was to use government expenditures to stimulate investment and consumption in a recession in order to create employment. In this context, stochastic shocks have a temporary effect. However, there also exists the Schumpeterian view that stochastic shocks, mostly due to the introduction of new technology, have a permanent effect and are the driving force of western economies based on the market mechanism (a view also supported by Lucas (1977)). The two different views may be explained using a simple time series model in which output is connected to its own lagged values. The two views are shown in Figure 1. In case (a), a linear trend gives a good indication of the increase in log of real GNP per capita in the US in the twentieth century. In case (b), however, a “stochastic trend” describes the variation in the series much better than the linear deterministic trend. As a result, case (c) suggests that there was no major business cycle in the 1930s. The depression of the thirties can now be considered a consequence of unexpected shocks (for more details and a technical explanation, see Schotman and Van Dijk (1991)). The important point to note is that Tinbergen makes a plea in his 1939 book for a thorough analysis of the business cycle using explanatory variables and adequate time series models and methods. His plea is still relevant today. One may also extend the Tinbergen analysis and argue that the business cycle was overvalued in the twentieth century. The occurrence of a few large shocks (issue (2)) influenced economic behavior and growth more than the cycles. Figure 2 clearly shows that the devastation due to World Wars I and II had a profound effect on the time series behavior of real Gross Domestic Product per Capita for Germany and Japan. This leads us directly to issue (3). In order to describe long-run behavior (economic behavior over a century), it would seem better to make use of nonlinear growth patterns. The dotted nonlinear lines shown in Figure 2 were obtained from a “neural network” analysis (see Kaashoek and Van Dijk (2002)). These nonlinear patterns indicate that the constant growth for the twentieth century may not be an adequate description. It also indicates that both Germany and Japan had a

tinbergen magazine 7, spring 2003

Figure 2. Natural logarithm of real GDP per capita (straight line) and orbit time series of nn(1,1,1) neural networks with lagged GDP as input (dashed line)

‘Wirtschaftswunder’ for a number of decades, but that the current slowdown of these economies may be part of a lower long-run growth process. Western economies in the twenty-first century will certainly not be able to repeat automatically the high growth of the post WW II period. Note that the dashed lines appear to be linear for several countries. However, the long-run effects (which can be obtained by solving nonlinear difference equations) indicate a sizeable difference.


Despite the abundance of theoretical and applied research on business cycles, many questions remain for which no definite answer has yet been found. Three important open issues are the following: 1

Is there a common (“world”) business cycle across countries, how can it be measured, and what is its importance? Is there a convergence of cycles of EMU countries? Are business cycles “contagious” (transmitted across countries, regions and industries)?

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References Burns, A.F. and W.C. Mitchell (1946), Measuring Business Cycles, NBER, New York. Kaashoek, J.F. and H.K. van Dijk (2002), Neural network pruning applied to real exchange rate analysis, Journal of Forecasting, 21, 559-577. Lucas, R.E. (1977), Understanding business cycles, In: R.E. Lucas, 1989, Studies in business Cycle Memory, Basil Blackwell, Oxford. Schotman, P. and H.K. van Dijk (1991b), On Bayesian roots to unit roots, Journal of Applied Econometrics, 6, 387-401. Tinbergen, J. (1939), Statistical Testing of Businesscycle Theories. Volume 1: A method and its application to investment activity. Volume 2: Business cycles in the United States of America, 1919-1932. Geneva: League of Nations. Tinbergen, J. and J.J. Polak (1949), The Dynamics of business cycles, A study in economic fluctuations, University of Chicago Press.



What role does economic policy play in causing or countering asymmetries in business cycles? What is the role of leading indicators in, for example, forecasting business cycle turning points?

The conference “On the Wealth of Nations, extending the Tinbergen heritage� will certainly lead to a lively discussion of, and perhaps some answers to, several of these questions.


tinbergen magazine 7, spring 2003

papers in journals

Peter P. Wakker (UvA) and his co-authors received the 2002 publication award of the Decision Analysis Society for their paper, “Unstable Preferences: A Shift in Valuation or an Effect of the Elicitation Procedure?” Before, the paper won the 2001 publication award of the Dutch Medical Technology Association. The paper It has often been debated which utility is more relevant for making optimal decisions, the decision utility of a client facing future outcomes, or the experienced utility of someone else who is already experiencing the outcomes (Kahneman, Wakker, & Sarin, Quarterly Journal of Economics 1997). The former person is the one to decide, but the latter person knows better. In the health domain, experienced utilities are usually believed to exceed decision utilities. This paper provides a method for measuring the discrepancies between the two kinds of utility, and also develops a design that can detect the causes of the discrepancies; this makes it easier to decide which utility is best for assisting in the decision-making process. The method is applied to the measurement of the wellbeing of patients undergoing radiotherapy treatment. Jansen, Sylvia J.T., Anne M. Stiggelbout, Peter P. Wakker, Marianne A. Nooij, Evert M. Noordijk and Job Kievit (2000), “Unstable Preferences: A Shift in Valuation or an Effect of the Elicitation Procedure?” Medical Decision Making 20, 62-71. Further information can be found at

All discussion papers can be downloaded via


Speculative currency attacks

On the Composition of Committees

This paper studies the consequences of extending Krugman’s seminal (1979) model of balance of payments crises and, particularly, its linear variant of Flood & Garber (1984) with coordination problems among currency speculators in a multi-country, multi-period setting. Assuming that speculators select one currency at a time for their attack– given that there are several candidates that more or less face the same kind of problems – and that individual speculators lack sufficient resources to attack successfully a fixed exchange rate, coordination among speculators is essential for a focal point to emerge. While a speculator’s short position in an overvalued currency contributes to provoking the collapse of the currency, it is also the medium through which he or she ‘communicates’ with other speculators. The time required for a focal point (or successful coordination) to emerge proves to be negatively related to the following: the difference in initial beliefs about currency weakness, the degree of communication perfection, and the fundamental imbalance. This time is positively related to the number of currencies vulnerable to an attack. The added value of this model extension is that it allows the occurrence of several stylized facts of crisis situations: overvaluation, exchange rate jumps, speculation profits, and contagion.

The use of committees is widespread. In politics, organisations and universities small groups often assist decision makers with collecting information. A common rationale for the existence of committees is that their efforts allow decisions to be based on more and/or better information. However, delegating the collection of information to committees may raise three agency problems. First, committee members are required to put effort into information collection. Second, committee members must try to find the proper pieces of information. Third, committee members have the latitude to manipulate certain pieces of information. Using a game-theoretic model, this paper explores the consequences of these agency problems for the composition of committees. Committee members with strong preferences regarding the decision are willing to incur high costs of searching to convince the decision maker. However, as preference outliers have an incentive to manipulate information, outliers can convince the decision maker only by providing verifiable information. The communication of non-verifiable information requires credibility, which is attained if committee members have preferences similar to those of the decision maker. Additionally, members attuned to the decision-maker will tend to collect the pieces of information the decision maker wants them to collect. Our paper thus identifies the conditions under which various types of committees are optimal from the decision makers’ point of view.

Dennis P.J. Botman & Henk Jager (UvA), 2002, Coordination of speculation, Journal of International Economics, 58, 159-175.

By Klaas J. Beniers, Otto H. Swank (EUR), On the Composition of Committees, TI03-006/1


tinbergen magazine 7, spring 2003

The Economic Value of Flexibility This paper develops an economic theory of “flexibility”, which is interpreted as the discretion or ability to make a decision that others may disagree with. It is a question of divergent beliefs regarding the optimal course of action, with insufficient time or objective data for beliefs to converge. The paper shows that flexibility is essentially an option for the decision maker, and can be valued as such. The value of the flexibility option decreases in relation to the extent to which the decision maker’s future decision-relevant opinion is correlated with the opinions of others who may be able to impede the decision. The paper argues that flexibility has in principle nothing to do with agency or asymmetric information problems. Our ‘theory of flexibility’ applies to cases in which there is full alignment between principal and agent. What is essential is that differences in interpreting the same information set could give rise to disagreement, and hence give value to flexibility. While related, our notion of flexibility is also quite distinct from the debate on rules versus discretion (e.g. Kydland and Prescott, 1977). To argue that flexibility drives economic decisions in a significant way, the paper examines several applications to gain insights into various economic phenomena. The applications considered are the following: the entrepreneur’s choice of flexibility in the initial mix of financing raised, the use of flexibility to understand differences in security design and the firm’s securityissuance decision, the impact of flexibility on the use of collateral in lending,

the role of flexibility in capital budgeting decisions, the effect of flexibility considerations in the design of contracts in a principal-agent setting, the interpretation of “power” and conformity in organizations in the context of flexibility, and the choice between private and public ownership in the context of flexibility.

By Arnoud W.A. Boot (UvA) and Anjan V. Thakor (University of Michigan Business School), The Economic Value of Flexibility when there is Disagreement, TI03-002/2

Has the Euro increased Trade? A major economic motive driving the process towards Economic and Monetary Union (EMU) in Europe was the widespread view that EMU would enhance trade between the participating countries. The euro would, for instance, eliminate (nominal) exchange rate risk, making trading profits less risky, so that risk-averse traders would increase trade. Moreover, the euro would reduce intra-EMU foreign exchange transaction costs.

Given the importance of the EMU project and the serious costs involved in achieving EMU, many researchers analyzed the validity of the view that the euro (more precisely, EMU) would stimulate trade. Until the introduction of the euro in 1999, however, there was no data on EMU. Authors therefore used nonEMU data to obtain an indirect indication of the EMU effect on trade. The results, however, were ambiguous. Now that the euro has been around for a few years, researchers can make more informed attempts to estimate the EMU effect directly with data that include EMU observations. Using a dynamic panel model for annual bilateral exports, we find that the euro has significantly increased trade, with an effect of 4% in 1999, cumulating to around 40% in the long run. The estimates might be useful to countries like the UK, for example, in the national debate on whether or not to join the eurozone.

By Maurice J.G. Bun, and Franc J.G.M. Klaassen (UvA), Has the Euro increased trade? TI02-108/2

Earnings risk and demand for higher education Most studies on investment in (higher) education ignore the fact that such an investment entails large risks. Individuals about to begin a program of higher education know little about their abilities, whether or not they will succeed in their training and where in the earnings distribution they will end up after leaving school. This study develops a model that points to the key parameters in deciding whether or not to embark upon an educational program: additional income generated later as a result of the education, additional earnings uncertainty and risk attitude. Risk-averse individuals will shy away from higher education if it increases earnings risk; for persons with lower risk aversion this effect will be dampened. Data from Spain are used to test the model. An individual’s decision to participate in an educational program is assumed to be related to the earnings consequences observed by the individual in his or her environment. In most cases earnings risk seems to decline for the higher educated in comparison to those with a secondary education. The study reveals that if earnings risk associated with higher education increases, then individuals will be less inclined to enroll. But if the parental household is less risk averse, as measured by expenditures on lottery tickets, this effect is significantly reduced.

Joop Hartog, (UvA); Luis Diaz Serrano, University of Barcelona, Earnings risk and demand for higher education, TI02-122/3


tinbergen magazine 7, spring 2003


Integrating immigrants

Economists have been exploring migration issues (especially migration as an equilibrium mechanism) since the 1930s. The spatial dimension has often been neglected, however, which defies empirical evidence showing that the size of the group of former immigrants has always been one of the largest pull factors for new immigrants. This force of attraction has led to the existence of large immigrant communities in all big cities over the world. Important causes behind these concentrations of immigrants include diminishing migration and adaptation costs and certain information asymmetries. Concentrations of immigrants, in the long run, could create different forms of human capital accumulation compared with the indigenous population. For example, such concentrations may lead to fewer incentives to invest in the native language, thereby hampering integration. This thesis first focuses on the economic forces driven and created by immigrant clustering. In so doing, it provides a general theoretical framework for the source of immigrant clustering and its consequences for group average growth of human capital among clustered immigrant groups. Thereafter, the thesis explores the effects of immigrant clustering in the Netherlands on the immigrant’s educational attainment, employment probabilities and language proficiency. The empirical results suggest that especially language proficiency is the most important determinant for the socioeconomic success of a migrant. The way an immigrant’s social network is constructed also seems to determine his or her socioeconomic status. No evidence was found, however, that space (or in other words ethnic clustering) significantly affects the dynamics of an immigrant’s human capital in the Netherlands.

Thesis: ‘Migration, Ethnic Minorities and Network Externalities’ by Thomas de Graaff. Published in the Tinbergen Institute Research Series #278.


Optimal Timing The essays presented in this volume cover topics in both industrial organization and corporate finance. In each area, timing is the key choice in the strategic decisions of firms. The first essay explores the launching of a new product in a duopoly with competitive advantage: depending on the level of competitive advantage and the level of uncertainty, there are different optimal entering strategies, ranging from pre-emption to avoiding direct competition. The second essay examines the advantage of partial exit from an investment as a strategy to overcome negative synergies between the investment and the main firm activity. The third essay develops a model that explains two empirical puzzles regarding IPOs, namely the hot issue phenomena and the different under-pricing strategies of venture capitalists over time.

Such a diversity of topics underscores how relevant and conclusive the timing issue is in widely differing issues in economics and finance.

Thesis: “Optimal timing of strategic financial decisions” by Silvia Rossetto. Published in the Tinbergen Institute Research Series #300

292 JOOST ARDTS (31/10/02), All is well that begins well: A Longitudinal Study of Organisational Socialisation. 293 J.E.M. VAN NIEROP (20/12/02), Advanced Choice Models. 294 DANIËL VAN VUUREN (22/10/02), The Market for Passenger Transport by Train. An Empirical Analysis. 295 ADA FERRER CARBONELL (17/01/03), Quantitative Analysis of Well-being with Economic



285 JOOST LOEF (26/09/02), Incongruity between

297 JESSE D. LEVIN (23/10/02), Essays in the

Ads and Consumer Expectations of Advertising.

Economics of Education.

286 JEDID-JAH JONKER (19/09/02), Target Selection

298 EELKE WIERSMA (16/01/03), Non-financial

and Optimal Mail Strategy in Direct Marketing.

Performance Measures: An Empirical Analysis of a Change in a Firm’s Performance Measurement

287 SILVIA CASERTA (04/10/02), Extreme Values in


Auctions and Risk Analysis. 299 MEHARI MEKONNEN (23/01/03, Project for 288 WENDLY DAAL (18/10/02), A Term Structure

Shareholder Value: A Capital Budgeting Perspective.

Model of Interest Rates and Forward Premia: An Alternative Monetary Approach.

300 SILVIA ROSSETTO (29/11/02), Optimal Timing of Strategic Financial Decisions.

289 HSIANG-KE CHAO (12/12/02), Representation and Structure. The Methodology of Econometric

301 PIETER VAN FOREEST (22/11/02), Essays in

Models of Consumption.

Financial Economics.

290 JASPER DALHUISEN (24/10/02), The Economics

302 ARJEN H. SIEGMANN (07/01/03), Optimal

of Sustainable Water Use, Comparisons and Lessons

Financial Decision Making under Loss Averse

from Urban Areas.


291 PAUL DE BRUIN (10/09/02), Essays on Modelling

303 ALBERT VAN DER HORST (13/02/03),

Nonlinear Time Series.

Government Interference in a Dynamic Economy. 304 PAOLO RUSSO (19/12/02), The Sustainable Development of Heritage Cities and their Regions: Analysis, Policy, Governance.

Papers in Journals by TI fellows Bartelsman, E.J., 2002, Discussion of matching

Boswijk, H.P. and L.A., 2002, Semi-nonparametric

demand and supply in a weightless economy:

cointegration testing, Journal of Econometrics,

Market-driven creativity with and without IPRs,

108(2), 253-80.

De Economist, 150(4), 405-08. Broersma, L. and F.A.G. den Butter, 2002, An exploBerk, J.M., 2002, Consumers’ inflation expectations

rative empirical analysis of the influence of labour

and monetary policy in Europe, Contemporary

flows on wage formation, Applied Economics,

Economic Policy, 20(2), 122-32.

34(13), 1583-92.

Biais, B. and E. Perotti, 2002, Machiavellian privati-

Buurman, J. and P. Rietveld,, 2002, Spatial differ-

zation, American Economic Review, 92(1), 240-58.

ences in rural land prices, a hedonic pricing approach, Jahrbuch fur Regionalwissenschaft/Review

Bosman, R. and F. van Winden, 2002, Emotional hazard in a Power-to-Take experiment, Economic Journal, 112(476), 147-69.


of Regional Research, 22(2), 105-22.

tinbergen magazine 7, spring 2003

Carree, M., et al, 2002, Economic development and

Franses, P.H. and R. Paap, 2002, Censored latent

business ownership: An analysis using data of 23

effects autoregression, with an application to US

OECD countries in the period 1976-1996, Small

unemployment, Journal of Applied Econometrics,

Business Economics, 19(3), 271-90.

17(4), 347-66.

Claessens, S. and S. Djankov, 2002, Privatization

Franses, P.H. and A.L. Montgomery, eds, 2002,

benefits in Eastern Europe, Journal of Public

Econometric models in marketing, Advances in

Economics, 83(3), 307-24.

Econometrics, vol. 16, ix, 350.

Cramer, J. S., et al., 2002, Low risk aversion

Franses, P.H. and M. McAleer, 2002, Financial

encourages the choice for entrepreneurship:

volatility: An introduction, Journal of Applied

An empirical test of a truism, Journal of Economic

Econometrics, 17(5), 419-24.

Behavior and Organization, 48(1), 29-36. Franses, P.H., M. van der Leij, R. Paap, 2002, Danielsson, J., B.N. Jorgensen and C.G. de Vries,

Modeling and forecasting level shifts in absolute

2002, Incentives for effective risk management,

returns, Journal of Applied Econometrics, 17(5),

Journal of Banking and Finance, 26(7), 1407-25.


Davis, J.B. and P. Zong, 2002, Household own-

Frijters, P. 2002, The Non-parametric identification

consumption and grain marketable surplus in

of lagged duration dependence, Economics Letters,

China, Applied Economics, 34(8), 969-74.

75(3), 289-92.

Diecidue, E. and P.P. Wakker, 2002, Dutch books:

Gahvari, F. (Reviewer), 2002, Review of:

Avoiding strategic and dynamic complications, and

Environmental taxation and the double dividend,

a comonotonic extension, Mathematical Social

Journal of Economic Literature, 40(1), 221-23.

Sciences, 43(2), 135-49. Gautier, P.A., 2002, Non-sequential search, screening Dijk D., van, P.H. Franses and R. Paap, 2002, A non-

externalities and the public good role of recruitment

linear long memory model, with an application to

offices, Economic Modelling, 19(2), 179-96.

US unemployment, Journal of Econometrics, 110(2), 135-65.

Gautier, P.A., 2002, Unemployment and search externalities in a model with heterogeneous jobs

Dijk, D., van, T. Terasvirta, and P.H. Franses, 2002,

and workers, Economica, 69(273), pages 21-40.

Smooth transition autoregressive models-A survey of recent developments, Econometric Reviews, 21(1),

Gautier, P.A., G.J. van den Berg, J.C. van Ours and


G. Ridder, 2002, Worker turnover at the firm level and crowding out of lower educated workers,

Dobbelsteen, S., J. Levin and H. Oosterbeek, 2002,

European Economic Review, 46(3), 523-38.

The causal effect of class size on scholastic achievement: Distinguishing the pure class size

Giersbergen, N.P.A., van, and J.F. Kiviet, 2002, How

effect from the effect of changes in class composi-

to implement the bootstrap in static or stable

tion, Oxford Bulletin of Economics and Statistics,

dynamic regression models: Test static versus

64(1), 17-38.

confidence region approach, Journal of Econometrics, 108(1), 133-56.

Droste, E., C. Hommes and J. Tuinstra, 2002, Endogenous fluctuations under evolutionary pres-

Gilboa, I., D. Schmeidler and P.P. Wakker, 2002,

sure in Cournot competition, Games and Economic

Utility in case-based decision theory, Journal of

Behavior, 40(2), August, 232-69.

Economic Theory, 105(2), 483-502.

Fase, M.M.G., 2002, Notes and communications:

Goeree, J.K., C.A. Holt and T.R. Palfrey, 2002,

Inflation differentials and their convergence in

Quantal response equilibrium and overbidding in

EMU, De Economist, 150(2), 211-17.

private value auctions, Journal of Economic Theory, 104(1), 247-72.

Francois, J. and D. Nelson, 2002, A geometry of specialisation, Economic Journal, 112(481), 649-78.

Goeree, J.K., C. A. Holt and S. K. Laury, 2002, Private costs and public benefits: Unraveling the

Franses, P.H. M. van der Leij and R. Paap, 2002,

effects of altruism and noisy behavior, Journal of

Modelling and forecasting level shifts in absolute

Public Economics, 83(2), 255-76.

returns, Journal of Applied Econometrics, 17(5), 601-16.


tinbergen magazine 7, spring 2003

Goeree, J.K., and T. Offerman, 2002, Efficiency in

Kerkhof, J. and A. Pelsser, 2002, Observational

auctions with private and common values: An

equivalence of discrete string models and market

experimental study, American Economic Review,

models, Journal of Derivatives, 10(1), 55-61.

92(3), 625-43. Keyzer, M., 2002, Labeling and the realization of Groot, H.L.F. de and R. Nahuis, 2002, Optimal

cultural values, De Economist, 150(4), 487-511.

product variety and economic growth: The trade-off between internal and external economies of scale,

Kremers, H., P. Nijkamp and P. Rietveld, 2002,

Journal of Economics (Zeitschrift fur National-

A Meta-analysis of price elasticities of transport

okonomie), 76(1), 1-32.

demand in a general equilibrium framework, Economic Modelling, 19(3), 463-85.

Gustafsson, S.S., C.M.M.P. Wetzels, and E. Kenjoh, 2002, Postponement of maternity and the duration

Kovenock, D. and C.G. de Vries, 2002, Fiat exchange

of time spent at home after first birth panel; Data

in finite economies, Economic Inquiry, 40(2), 147-57.

analyses, comparing Germany, Great Britain, the Netherlands and Sweden, Public Finance and

Laan, G. van der, and H. Houba, 2002, One-seller/

Management, 2(2), 218-44.

two-buyer markets with buyer externalities and (im)perfect competition, International Game Theory

Hartog, J., E. Leuven, and C. Teulings, 2002, Wages

Review, 4(2), 141-64.

and the bargaining regime in a corporatist setting: The Netherlands, European Journal of Political

Laan, G. van der, D. Talman, and Z. Yang, 2002,

Economy, 18(2), 317-31.

Existence and welfare properties of equilibrium in an exchange economy with multiple divisible and

Hartog, J., A. Ferrer-i-Carbonell and N. Jonker, 2002,

indivisible, commodities and linear production

Linking measured risk aversion to individual

technologies, Journal of Economic Theory.

characteristics, Kyklos, 55(1), 3-26. Leeuwen, M.J. van and B.M.S. van Praag, 2002, The Heijden, E.C.M., van der, J.H.M. Nelissen and

costs and benefits of lifelong learning: The case of

H.A.A. Verbon, 2002, Should the same side of the

the Netherlands, Human Resource Development

market always move first in a transaction? An

Quarterly, 13(2), 151-68.

experimental study, Journal of Institutional and Theoretical Economics, 158(2), 344-67.

Lijesen, M.G., P. Rietveld and P. Nijkamp, 2002, How do carriers price connecting flights? Evidence from

Hinloopen, J., 2002, Price regulation in a spatial

intercontinental flights from Europe, Transportation

duopoly with possible non-buyers, Annals of

Research: Part E: Logistics and Transportation

Regional Science, 36(1), 19-39.

Review, 38(3-4), 239-52.

Hyung, N. and C.G. de Vries, 2002, Portfolio diversi-

Lindeboom, M., F. Portrait and G.J. van den Berg,

fication effects and regular variation in financial

2002, An econometric analysis of the mental-health

data, Allegemeines Statistisches Archiv/Journal of

effects of major events in the life of older individuals,

the German Statistical Society, 86(1), 69-82.

Health Economics, 11(6), 505-20.

Janssen, M.C.W., 2002, Catching Hipos: Screening,

Lucas, A., R. van Dijk, and T. Kloek, 2002, Stock

wages, and competing for a job, Oxford Economic

selection, style rotation, and risk, Journal of

Papers, 54(2), 321-33.

Empirical Finance, 9(1), 1-34.

Janssen, M.A. and W. Jager, 2002, Stimulating diffu-

Marrewijk, C. van, 2002, International trade and the

sion of green products: Co-evolution between firms

world economy, Oxford University Press.

and consumers, Journal of Evolutionary Economics, 12(3), 283-306.

Martin, S. 2002, Do military exports stimulate civil exports?, Applied Economics, 34(5), 599-605.

Janssen, M. and E. Rasmusen, 2002, Bertrand competition under uncertainty, Journal of Industrial

Martin, S., 2002, Spillovers, appropriability and

Economics, 50(1), 11-21.

R&D, Journal of Economics (Zeitschrift fur Nationalokonomie), 75(1), 1-32.

Janssen, M.C.W. and S. Roy, 2002, Dynamic trading in a durable good market with asymmetric informa-

Martin, S., 2002, Sunk cost and entry, Review of

tion, International Economic Review, 43(1), 257-82.

Industrial Organization, 20(4), 291-304.


tinbergen magazine 7, spring 2003

Mooij, R.A. de and C.J.M. van den Bergh, 2002,

Ubbels, B. and P. Nijkamp, 2002, Unconventional

Growth and the environment in Europe: A guide to

funding of urban public transport, Transportation

the debate, Empirica, 29(2), 79-91.

Research: Part D, Transport and Environment, 7(5), 317-29.

Moraga-Gonzalez, J.L. and N. Padron-Fumero, 2002, Environmental policy in a green market,

Verhoef, E.T., 2002, Second-Best congestion pricing

Environmental and Resource Economics, 22(3), 419-47

in general networks: Heuristic algorithms for finding second-best optimal toll levels and toll points,

Moraga-Gonzalez, J.L. and S. Goyal, 2001, R & D

Transportation Research: Part B: Methodological,

networks, Rand Journal of Economics, 32(4), 686-707.

38(8), 707-29.

Morgan, M.S., 2002, Symposium on Marshal’s

Verhoef, E.T. and P. Nijkamp, 2002, Externalities in

tendencies: 1: How models help economists to

urban sustainability: Environmental versus localiza-

know, Economics and Philosophy, 18(1), 5-16.

tion-type agglomeration externalities in a general spatial equilibrium model of a single-sector mono-

Offerman, T., 2002, Hurting hurts more than helping

centric industrial city, Ecological Economics, 40(2),

helps, European Economic Review, 46(8), 1423-37.


Paelinck, J. H. P., 2002, A multiple gap approach to

Verhoef, E.T., 2002, Second-best congestion pricing

spatial economics, Annals of Regional Science,

in general static transportation networks with elastic

36(2), 219-27.

demands, Regional Science and Urban Economics, 32(3), 281-310.

Portrait, F., M. Lindeboom and D. Deeg, 2001, Life expectancies in specific health states: Results from

Viaene, J.M. and I. Zilcha, 2002, Capital markets

a joint model of health status and mortality of

integration, growth and income distribution,

older persons, Demography, 38(4), 525-36.

European Economic Review, 46(2) 301-27.

Post, G.T., L. Cherchye and T. Kuosmanen, 2002,

Viaene, J.M. and I. Zilcha, 2002, Public education

Nonparametric efficiency estimation in stochastic

under capital mobility, Journal of Economic

environments, Operations Research, 50(4), 645-655.

Dynamics and Control, 26(12), 2005-36.

Pradhan, M. and N. Prescott, 2002, Social risk man-

Vlist, A.J., van der, P. Rietveld and P. Nijkamp, 2002,

agement options for medical care in Indonesia,

Residential search and mobility in a housing market

Health Economics, 11(5), 431-46.

equilibrium model, Journal of Real Estate Finance and Economics, 24(3), 277-99.

Rietveld, P. and R. Roson, 2002, Direction dependent prices in public transport: A good idea? The back

Vuuren, D., van and P. Rietveld, 2002, The off-peak

haul pricing problem for a monopolistic public

demand for train kilometres and train tickets: A

transport firm, Transportation, 29(4), 397-417.

microeconometric analysis, Journal of Transport Economics and Policy, 36(1), 49-72.

Rietveld, P., 2002, Why railway passengers are more polluting in the peak than in the off-peak,

Wakker, P.P. and H. Zank, 2002, A simple preference

Environmental effects of capacity, management by

foundation of cumulative prospect theory with

railway companies under conditions of fluctuating

power utility, European Economic Review, 46(7),

demand, Transportation Research: Part D, Transport


and Environment, 7(5), 347-56. Schaik, A.B.T.M. van and H.L.F. de Groot, 2002, Macroeconomic consequences of downsizing, Economic Modelling, 19(3), 331-52. Swank, O.H., 2002, Budgetary devices for curbing spending prone ministers and bureaucrats, Public Choice, 111(3-4), 237-57. Ubbels, B., P. Rietveld, and P. Peeters, 2002, Environmental effects of a kilometre charge in road transport: An investigation for the Netherlands, Transportation Research: Part D: Transport and Environment, 7(4), 255-64.


Discussion papers

03-005/1 Klaas J. Beniers and Robert A.J. Dur, Erasmus

Institutions and decision processes

Universiteit Rotterdam, Product Market Competition and Trade Union Structure



Tibor Neugebauer, University of Hannover, Anders

Klaas J. Beniers and Otto H. Swank, Erasmus

Poulsen, Aarhus School of Business, and Arthur

Universiteit Rotterdam, On the Composition of

Schram, Universiteit van Amsterdam, Fairness and


Reciprocity in the Hawk-Dove Game 03-007/1 02-098/1

Cees Diks, Roy van der Weide, Universiteit van

Klarita Gërxhani, and Arthur Schram, Universiteit

Amsterdam, Continuous Beliefs Dynamics

van Amsterdam, Tax Evasion and the Source of Income

03-009/1 Marco J. van der Leij, Erasmus Universiteit


Rotterdam, Competing Transport Networks

Jordi Brandts, Instituto de Análasis Económico (CSIC), Barcelona, Spain, Tatsuyoshi Saijo, Institute of Social and Economic Research, Osaka, Japan, and

Financial and International Markets

Arthur Schram, Universiteit van Amsterdam, How Universal is Behavior?

02-089/2 Joseph F. Francois, Erasmus Universiteit Rotterdam


and CEPR, and Felix Eschenbach, Erasmus

Jean Derks, University of Maastricht, Gerard van der

Universiteit Rotterdam, Financial Sector

Laan, Vrije Universiteit Amsterdam, and Valeri

Competition, Service Trade, and Growth

Vasil’ev, Sobolev Institute of Mathematics, Novosibirsk, Russia, On Harsanyi Payoff Vectors


and the Weber Set

Wouter J. den Haan, University of California at San Diego, CEPR, NBER, The Comovement between Real


Activity and Prices in the G7

Arthur J.H.C. Schram, Universiteit van Amsterdam, Experimental Public Choice

02-107/2 Siem Jan Koopman and André Lucas, Vrije


Universiteit Amsterdam, and Pieter Klaassen, ABN-

E. Algaba, J.M. Bilbao, Escuela Superior de

AMRO Bank NV and Vrije Universiteit Amsterdam,

Ingenieros, Sevilla, Spain, R. van den Brink, Vrije

Pro-Cyclicality, Empirical Credit Cycles, and Capital

Universiteit Amsterdam, and A. Jiménez-Losada,

Buffer Formation

Escuela Superior de Ingenieros, Sevilla, An Axiomatization of the Banzhaf Value for Cooperative


Games on Antimatroids

Maurice J.G. Bun and Franc J.G.M. Klaassen, Universiteit van Amsterdam, Has the Euro increased



Matthijs van Veelen, Vrije Universiteit Amsterdam, Altruism, Fairness and Evolution: The Case for


Repeated Stochastic Games

Jeffrey D. Gramlich, University of Hawai’i, and University of Michigan, Piman Limpaphayom,


Chulalongkorn University, Thailand, and S. Ghon

Josse Delfgaauw and Robert Dur, Erasmus

Rhee, University of Hawai’i, Taxes, Keiretsu

Universiteit Rotterdam, From Public Monopsony to

Affiliation, and Income Shifting

Competitive Market 02-115/2 02-123/1

Rosita P. Chang, Sang-Hyop Lee and S. Ghon Rhee,

Josse Delfgaauw and Robert A.J. Dur, Erasmus

University of Hawai’I, and Sean F. Reid, University of

Universiteit Rotterdam, From Public Monopsony to

New Haven, One-Way Arbitrage-Based Interest Parity

Competitive Market: More Efficiency but Higher Prices

02-125/2 Joseph Francois, Erasmus Universiteit Rotterdam,


and Will Martin, World Bank, Formula Approaches

Gerard van der Laan, Vrije Universiteit Amsterdam,

for Market Access Negotiations

Dolf Talman, Tilburg University, and Zaifu Yang, Institute of Mathematical Economics, University of


Bielefeld, Perfection and Stability of Stationary

Arnoud W.A. Boot, Universiteit van Amsterdam, and

Points with Applications to Non-cooperative Games

Anjan V. Thakor, University of Michigan Business School, Disagreement and Flexibility - A Theory of Optimal Security Issuance and Capital Structure




Arnoud W.A. Boot, Universiteit van Amsterdam, and

Joop Hartog, Universiteit van Amsterdam, and Luis

Anjan V. Thakor, University of Michigan Business

Diaz Serrano, University of Barcelona, Earnings Risk

School, The Economic Value of Flexibility when there

and Demand for Higher Education

is Disagreement 03-004/3 03-008/2

James Albrecht, Georgetown University; Pieter

Jeroen Hinloopen, University of Amsterdam, Cartel

Gautier, Erasmus University Rotterdam; Susan

Stability with Subjective Detection Beliefs

Vroman, Georgetown University, Equilibrium Directed Search with Multiple Applications

Labour, Region and Environment Econometrics 02-091/3 Edwin Leuven and Hessel Oosterbeek, Universiteit


van Amsterdam, A New Approach to estimate the

J.B.G. Frenk, Erasmus Universiteit Rotterdam, G. Kassay,

Wage Returns to Work-related Training

Babes Bolyai University, Cluj, and V. Protassov, Moscow State University, Moscow, On Borel Probability


Measures and Noncooperative Game Theory

Roberto Patuelli, Ravenna, Eric Pels, and Peter Nijkamp, Vrije Universiteit Amsterdam,


Environmental Tax Reform and Double Dividend

Rutger van Oest, Philip Hans Franses, and Richard Paap, Erasmus Universiteit Rotterdam, A Dynamic


Utility Maximization Model for Product Category

Sjef Ederveen, CPB Netherlands Bureau for


Economic Policy Analysis, The Hague, Henri L.F. de Groot, Vrije Universiteit Amsterdam, and Richard


Nahuis, CPB Netherlands Bureau for Economic

Maurice J.G. Bun and Jan F. Kiviet, Universiteit van

Policy Analysis, The Hague, Fertile Soil for

Amsterdam, On the Diminishing Returns of Higher-

Structural Funds?

order Terms in Asymptotic Expansions of Bias



Jan Rouwendal, Vrije Universiteit Amsterdam, Speed

Maurice J.G. Bun and J.F. Kiviet, Universiteit van

Choice, Car Following Theory and Congestion Tolling

Amsterdam, The Effects of Dynamic Feedbacks on LS and MM Estimator Accuracy in Panel Data Models

02-103/3 Rutger Hoekstra and Marco A. Janssen, Vrije


Universiteit Amsterdam, Environmental

Siem Jan Koopman and Charles S. Bos, Vrije

Responsibility and Policy in a Two Country Dynamic

Universiteit Amsterdam, Time Series Models with

Input-Output Model

a Common Stochastic Variance for Analysing Economic Time Series

02-109/3 Guido Fioretti, IASG, Firenze, ICER, Torino, CSC,


Siena, Individual Contacts, Collective Patterns - Prato

Gianni Amisano, University of Brescia, and

1975-97, A Story of Interactions

Massimiliano Serati, Cattaneo University, What goes up sometimes stays up: Shocks and Institutions as


Determinants of Unemployment Persistence

Peter Nijkamp and Chiara Maria Travisi, Vrije Universiteit Amsterdam, and Gabriella Vindigni,


University of Catania, Pesticide Risk Valuation in

J.S. Cramer, Universiteit van Amsterdam,

Empirical Economies

The Origins of Logistic Regression



Jos van Ommeren, Vrije Universiteit Amsterdam,

Nicole Jonker, De Nederlandsche Bank, Hans van

and Michiel van Leeuwenstein, CPB Netherlands

Ophem and Joop Hartog, Universiteit van Amsterdam,

Bureau for Economic Policy Analysis, The Hague,

Dual Track or Academic Route for Auditors

New Evidence of the Effect of Transaction Costs on Residential Mobility

02-124/4 Rutger van Oest, Richard Paap and Philip Hans Franses,


Erasmus Universiteit Rotterdam, A Joint Framework

France Portrait, Rob Alessie and Dorly Deeg, Vrije

for Category Purchase and Consumption Behavior

Universiteit Amsterdam, Disentangling the Age, Period, and Cohort Effects using a Modeling



Frank Kleibergen, University of Amsterdam; Richard Paap, Erasmus University Rotterdam, Generalized Reduced Rank Tests using the Singular Value Decomposition


tinbergen magazine 7, spring 2003


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tinbergen magazine 7, spring 2003

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), J.-W. Gunning, J. Hartog, J.J.M. Kremers, C.G. de Vries. 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, A Galeotti, S. Manzan, 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 magazine 7, spring 2003

In this issue

What determines the enormous variation in the wealth of nations?

The economics of poverty

Shocks, trends and cycles in the twentieth century

Papers in journals

Discussion papers