SOVEREIGNS,UPSTREAM CAPITAL FLOWS,AND GLOBAL IMBALANCES

We construct measures of net private and public capital flows for a large cross‐section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign‐to‐sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find that (i) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries' productivity growth, (ii) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign, (iii) net public debt financed by private creditors is positively correlated with growth, (iv) public savings are strongly positively correlated with growth, whereas correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.     

A POLITICAL ECONOMY THEORY OF FISCAL POLICY AND UNEMPLOYMENT

This paper presents a political economy theory of fiscal policy and unemployment. The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production. Such policies are fiscally costly, but can be financed by issuing government debt. Policy decisions are made by a legislature consisting of representatives from different political districts. With the available policies, it is possible for the government to completely eliminate unemployment in the long run. However, with political decision making, the economy always has unemployment. Unemployment is higher when the private sector experiences negative shocks. When these shocks occur, the government employs debt‐financed fiscal stimulus plans which involve both tax cuts and public production increases. When the private sector is healthy, the government contracts debt until it reaches a floor level. Unemployment levels are weakly increasing in the economy's debt level, strictly so when the private sector experiences negative shocks. Conditional on the level of workers employed, the mix of public and private output is distorted.     

REPATRIATION OF DEBT IN THE EURO CRISIS

With the beginning of the Euro Crisis, the long‐standing trend of European financial integration reversed. Investors unwound cross‐border positions of debt obligations and increased holdings of locally issued debt. In other words, debt obligations were repatriated. We use data on bank portfolios to document three new empirical regularities of the financial disintegration: (i) repatriation affected mainly debt of crisis countries; (ii) repatriation affected mainly public debt; (iii) the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the Euro area. We read these results in light of standard theories of cross‐border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt.     

SYSTEMIC AND IDIOSYNCRATIC SOVEREIGN DEBT CRISES

The theoretical literature on sovereign defaults has focused on adverse shocks to debtors' economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center, such as the European Sovereign Debt Crisis in the aftermath of the US Subprime Crisis in 2008. Crises in the financial centers are rare disasters and, thus, their effects on the periphery can only be captured by examining long episodes. In this paper, we examine sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger losses for investors.     

Understanding Public Sector Debt: Financial Vicious Circle under the Soft Budget Constraint

The article explains why debt of public sector organizations grows beyond the sustainable level by focusing on the principal-agent relationship under the soft budget constraint. Specifically, this article explores the extent to which factors affect the level of public sector debt in the context of quasi-autonomous non-governmental organizations (quangos) in Korea over the past two decades (1993–2012). The findings from the panel data analysis suggest that the level of public sector debt increases as an outcome of the financial vicious circle created by the soft budget constraint: a knock-on effect of the moral hazard of quangos as well as the opportunistic behavior of political principals. Public sector debt is positively associated with agency-specific factors as well as the factors related to the political incentives such as policy preferences and electoral considerations. However, macroeconomic factors made little difference to the general pattern of the evidence.     

The impact of venture capital on investee companies: evidence from Spain

This paper examines the impact of venture capital investors on the financial structure of investee companies and the factors relevant to their capital structure, differentiated according to the investor’s public or private nature. This paper contributes to our understanding of the beneficial effects of such investors in response to the funding needs of SMEs and the decisions taken in this respect. The empirical analysis shows that, on average, these investee companies have a lower level of short-term debt than the average Spanish company. It is suggested that the debt structure is related to the growth opportunities presented, the business sector, the geographic location and the duration of the venture capital participation. These results, which are more significant in the case of companies receiving funds from public investors, highlight the effectiveness of the economic function of venture capital.     

The value of audit quality in public and private companies: evidence from Spain

This paper compares the value of audit quality, proxied by the selection of a big N auditor, to the external claimholders of private and public companies. Although the combination of a lower ownership concentration of public companies, the greater demand for financial information quality about these companies and their higher litigation risk can result in the expectation that audit quality should be more valuable for public than for private companies, the greater information asymmetry between the managers and the external stakeholders and the unavailability of alternative mechanisms for monitoring the managers can make external audit more valuable for the external claimholders of private companies. In this paper, we test these two competing views by analysing if banks and lenders take into account auditor selection in the formation of the cost of debt. Our results support the second view: we find that only private companies obtain a lower cost of debt when they are audited by a high-quality auditor. These results are robust to both endogeneity and unobserved firm-specific heterogeneity.     

Employment Policy,the Crowding‐out Effect and Imperfect Competition

This paper presents a macroeconomic model with imperfect competition in the commodity market, and uses it to address how the commodity market’s structure is related to the efficacy of government employment policies. It is found that job creation in the public sector may lead to a decrease in output and an increase in prices. In particular, these adverse side‐effects will be alleviated when competition in the goods market is less perfect. We also find that public‐sector job creation definitely has a positive effect on total employment, though it may crowd out private‐sector employment.     

Models for decision-making in the public sector

The public sector is composed of a heterogeneous selection of undertakings which, for a variety of economic, political and historic reasons, are under direct government control. The considerable differences between these undertakings, combined with a paucity of common characteristics, has resulted in a variety of decision-making techniques being employed. In many cases there is an affinity with private sector firms, and techniques technically akin to the profit maximisation model are adopted although social welfare considerations supplant notions of financial returns. As with the private sector, textbook models are frequently abandoned to make way for more pragmatic criteria when informational or computational problems become severe. Additional to these undertakings using techniques parallel to those of the private sector, there are others for which specific decision-making models have been developed. These are mainly in areas where effective demand is considered inappropriate as a method of allocation and appraisal. Finally, there is some evidence that, as the multi-dimensional nature of public sector decisions becomes more widely accepted, the notion of satisficing is gradually gaining acceptance replacing that of maximising.     

PhD Graduates with Post‐doctoral Qualification in the Private Sector: Does It Pay Off?

Abstract. In this paper, we address the question of the early careers of French PhD graduates in science and engineering sciences in 1996. Post‐doctoral training was initially developed for PhD graduates wishing to embark on a career in the public sector. However, a large proportion of post‐doctorate graduates turn to the private sector, and in particular to occupations that do not involve research. The question we raise is that of the wage premium on post‐doctoral training. To control for selection bias arising in the case where unobservable elements are correlated between participation and wages, we first estimate a treatment effect model. The main finding is that when selection bias is not controlled for, post‐doctoral participation increases earnings; however, when selection bias is controlled for, the participation in a post‐doctoral programme has no positive effect. With regards to this finding we show that post‐doctoral programmes play much more the role of a signal in the first stage of a career. This finding is also reinforced when we use a bivariate selection rule to control for the endogenous nature of having been recruited in the private sector.     

SMUGGLING HUMANS: A THEORY OF DEBT‐FINANCED MIGRATION

We introduce financial constraints in a theoretical analysis of illegal immigration. Intermediaries finance the migration costs of wealth‐constrained migrants, who enter temporary servitude contracts to repay the debt. These debt/labor contracts are easier to enforce in the illegal than in the legal sector of the host country. Hence, when moving from the illegal to the legal sector becomes more costly—for instance, because of stricter deportation policies—fewer immigrants default on debt. This reduces the risks for intermediaries, who are then more willing to finance illegal migration. Stricter deportation policies may thus, ex ante, increase rather than decrease the flow of illegal migrants. Furthermore, stricter deportation policies worsen the skill composition of immigrants. While stricter border controls decrease overall immigration, they may result in an increase of debt‐financed migration. We also show that there are complementarities between employer sanctions and deportation policies. We use available evidence to check the empirical consistency of the theory. (JEL: J61, K42, O17)     

THE POLITICAL COLOR OF FISCAL RESPONSIBILITY

We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left‐ (pro‐public goods) and right‐leaning (pro‐private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left‐leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time‐series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries. (JEL: D72, E62, H41, H62, H63)     

Public Sector Wage Premium in Canada: Evidence from Labour Force Survey

Although previous research has pointed to a public/private sector wage gap for men and women in Canada, the extent of this gap has not been measured in recent years. Using data from the Canadian Labour Force Survey for September 2008, and using an endogenous switching regression framework to control for self‐selection, I find that both men and women earn a wage premium in the public sector in Canada, although the premium is higher for women. The pure wage premium or economic rent that public sector workers receive relative to their counterparts in the private sector is $1.09, or 5.4 per cent for men and $3.15, or 20 per cent for women. An analysis of selection in the pubic/private sector reveals that public sectors workers are ‘positively selected’ on observables and consist of the ‘cream of the crop’.     

Financial Reporting,Private Disclosure and the Corporate Governance Role of Financial Institutions

This paper explores how large UK financial institutions (FIs) pursued a private corporate governance agenda with their portfolio companies. It also investigates the role of financial reporting in private and public corporate governance. The case financial institutions argued that the limited quality of public information, especially in financial reports, was a major constraint on their ability to act in fund management and corporate governance roles. However, the financial reporting cycle determined a private institutional and company meeting cycle and this created opportunities for private information collection and for governance influence by FIs. In addition, the perceived limitations of public governance mechanisms such as voting encouraged private governance approaches. As a result, the case financial institutions had the incentive and the means to improve the quality of their sources of corporate information and to obtain a competitive edge over other financial institutions and the market through their direct contact with companies. Despite the limitations of public information, the paper reveals how public disclosure in financial statements and the financial reporting cycle played a central role in corporate governance. Public sources of information were combined with private sources to create a financial institutional knowledge advantage. The institutions used this knowledge to diagnose problem areas in strategy, management quality, and the effectiveness of the board, and their impact on financial performance. The financial reporting cycle meant that the quasi insider financial institution had the access opportunity and the joint public/private insight to influence companies across a wide corporate governance agenda and in a range of corporate circumstances. The case institutions exploited these private access and knowledge advantages for investment purposes and for Cadbury style corporate governance purposes. Thus, the private governance process was critically dependent on the FI knowledge advantage, which in turn relied on both financial reports and private disclosure. This wide ranging governance behaviour by institutions corresponds to recommendations subsequently made by the Hampel report in 1998 concerning UK corporate governance. The paper ends by exploring how the private institutional and company meeting agenda can suggest new directions for financial reporting and public disclosure and how this can further improve public and private corporate governance.     

SOVEREIGN DEBT RELIEF AND ITS AFTERMATH

This paper studies sovereign debt relief in a long‐term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920–1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978–2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras, averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We then analyze the aftermath of debt relief and conduct a difference‐in‐differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write‐offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings. (JEL: E6, F3, N0, H6)     

PUBLIC DEBT UNDER LIMITED PRIVATE CREDIT

There is a conventional wisdom in economics that public debt can serve as a substitute for private credit if private borrowing is limited. The purpose of this paper is to show that, while a government could in principle use such a policy to fully relax borrowing limits, this is not generally optimal. In our economy, agents invest in a short‐term asset, a long‐term asset, and government bonds. Agents are subject to idiosyncratic liquidity shocks prior to the maturity of the long‐term asset. We show that a high public debt policy fully relaxes private borrowing limits and is suboptimal. This is because agents expecting such a policy respond by investing less than is socially optimal in the short asset which can protect them in the event of a liquidity shock. The optimal policy is more constrained and it induces a wedge between the technological rate of return on the long asset and the rate of return on bonds. In such a regime, agents subject to liquidity shocks are also borrowing constrained, and this expectation of being borrowing constrained induces them to invest the optimal level in the short asset.     

Public–private versus public ownership and economic performance: evidence from Italian local utilities

In the last century local public services have often been reformed. The declared outcome of the most recent reforms is the privatization and liberalization of the sector. However, in almost all European countries, the privatization of local public services has been only partial, because local governments have sought to privatise a minority stake in the public owned-companies, while remaining committed to retaining public ownership and control over the longer-term as a means of protecting public interest. The phenomenon of mixed public–private companies emerged as a result of this process. In this context, the article investigates whether differences in financial performance can be found between public–private companies and totally public-owned enterprises. Empirical quantitative studies on this particular topic are quite lacking at the moment. The present study tries to fill this gap through an empirical analysis on a sample of 623 Italian local utilities. The results of the study suggest that there are differences in economic performance between local utility companies with varying degrees of public ownership. In particular, public–private utilities show better economic performance than publicly owned firms, especially in terms of profitability. The results also seem to suggest that the majority private ownership is not necessary for better performance. In other terms, public–private partnership—and not private majority ownership—seems to be the key point for good performance.     

A New Look at the Public Wage Premium in Italy: The Role of Schooling Endogeneity

This paper uses a sample of male workers to estimate public and private wage structures and the public wage premium for Italy. Results from a model with endogenous sector and schooling suggest that public employees have on average lower unobserved wage potentials in both sectors than private employees, but work in the sector where they benefit from a comparative wage advantage. Schooling is positively correlated with wages in both sectors, and controlling for that is crucial to get more reliable estimates and predictions. The associated average unconditional public wage premium is 12 per cent. The net premium is 9 per cent, but not statistically significant.     

SOVEREIGN DEBT RESTRUCTURINGS: PREEMPTIVE OR POST‐DEFAULT

Sovereign debt restructurings can be implemented preemptively—prior to a payment default. We code a comprehensive new data set and find that preemptive restructurings (i) are frequent (38% of all deals 1978–2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post‐default renegotiations. The model improves the fit with the data and explains the sovereign's optimal choice: preemptive restructurings occur when default risk is high ex ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions.