Knowledge that Transforms

We study the impact of profit uncertainty on investment and whether or not this response is different in industries that are dominated by small firms versus those that are dominated by relatively larger firms. Our key findings are that the sign of the investment-uncertainty relationship is negative, and that the quantitative negative impact is substantially greater in industries dominated by small firms. These results are robust to accounting for potential endogeneity of the uncertainty measure, alternate procedures for measuring uncertainty, and alternate ways of segmenting industries into small- and large-firm groups.

This paper incorporates a Bayesian learning model into a hedonic framework to estimate the value that residents place on avoiding cancer risks from hazardous-waste sites. We show that residents are willing to pay to avoid cancer risks from Superfund sites before the U.S. Environmental Protection Agency (EPA) releases its assessment (known as the Remedial Investigation) of the site. Residents' willingness to pay to avoid risks actually decreases after the release of the Remedial Investigation, suggesting that the information lowers the perceived levels of risk. This estimated willingness to pay implies a statistical value of cancer similar to the value-of-life estimates in labor market studies.

Researchers using cross-sectional data have failed to produce systematic evidence that teacher salaries affect student outcomes. These studies generally do not account for non-pecuniary job attributes and alternative wage opportunities, which affect the opportunity cost of choosing to teach. When we employ the methodology used in previous studies, we replicate their results. However, once we adjust for labor market factors, we estimate that raising teacher wages by 10% reduces high school dropout rates by 3% to 4%. Our findings suggest that previous studies have failed to produce robust estimates because they lack adequate controls for non-wage aspects of teaching and market differences in alternative occupational opportunities.

This paper reexamines the benefits of pooling and, in addition, contrasts the performance of newly proposed heterogeneous estimators. The analysis utilizes a panel data set from 46 American states over the period 1963 to 1992 and a dynamic demand specification for cigarettes. Also, the forecast performance of the various estimators is compared.

It depends. If volatility fluctuates in a forecastable way, volatility forecasts are useful for risk management (hence the interest in volatility forecastability in the risk management literature). Volatility forecastability, however, varies with horizon, and different horizons are relevant in different applications. Moreover, existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model, and the results can vary not only with the horizon but also with the assumed model. To address this problem, we develop a model-free procedure for assessing volatility forecastability across horizons. Perhaps surprisingly, we find that volatility forecastability decays quickly with horizon. Volatility forecastability—although clearly of relevance for risk management at the short horizons relevant for, say, trading desk management—may be much less important at longer horizons.

In this paper, we examine empirically whether credit plays a role as a nonlinear propagator of shocks. This propagation takes the form of a threshold vector autoregression in which a regime change occurs if credit conditions cross a critical threshold. Using nonlinear impulseresponse functions, we evaluate the dynamics implied by the threshold model. These suggest that shocks have a larger effect on output in the ''tight'' credit regime than is normally the case, and that contractionary monetary shocks typically have a larger effect than expansionary shocks. Finally, using a nonlinear version of historical decompositions, we attempt to determine the relative contribution to output growth of shocks and the nonlinear structure.

The application of spatial econometrics techniques to microlevel data of firms or households is problematic because of potentially large sample sizes and more-complicated spatial weight matrices. This paper provides the first application to actual household-level data of a new generalized-moments (GM) estimation technique developed by Kelejian and Prucha. The results based on this method, which is computationally feasible for any size data set, track those generated from the more conventional maximum-likelihood approach. The GM approach is shown to have the added advantage of easily allowing estimation of a more flexible functional form for the spatial weight matrix.

This paper provides a descriptive analysis of the long- and short-run correlations among saving, investment, and growth rates for 123 countries over the period 1961-94. Three results are robust across data sets and estimation methods: i) lagges saving rates are positively related to investment rates; ii) investment rates Granger cause growth rates with a negative sign; iii) growth rates Granger-cause investment with a positive sign.

We show that subjective poverty lines can be derived using simple qualitative assessments of perceived consumption adequacy based on a household survey. We implement the method using survey data for Jamaica and Nepal. Respondents were asked whether their consumptions of food, housing, and clothing were adequate for their family's needs. The implied poverty lines are robust to alternative methods of dealing with other components of expenditure. The aggregate poverty rates accord quite closely with those based on independent “objective” poverty lines. However, there are notable differences in the geographic and demographic poverty profiles.

ServŽn for useful suggestions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. DOES FINANCIAL REFORM RAISE OR REDUCE SAVING? By Oriana Bandiera*, Gerard Caprio Jr.**, Patrick Honohan* * and Fabio Schiantarelli* (*Boston College, **World Bank) The effect of financial liberalization on private saving is theoretically ambiguous, not only because the link between interest rate levels and saving is itself ambiguous, but also because financial liberalization is a multi-dimensional and phased process, sometimes involving reversals. Some dimensions, such as increased household access to consumer credit or housing finance, might also work to reduce private savings rather than increasing them. Furthermore, the long-term effect of liberalization on savings may differ substantially from the impact effect. Using Principal Components, we construct a 25-year time series index of financial