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.     

Biopharmaceutical and chemical firms’ R&D disclosure,and cost of equity: The impact of the regulatory regime

Based on the proprietary costs theory, this paper aims to survey whether the regulatory regime (mandatory versus voluntary) of research and development (R&D) narrative disclosures impacts, by the means of a reduced information asymmetry, on the cost of equity capital. In order to construct a disclosure index to investigate the extent and the comprehensiveness of R&D information, the methodology adopted was the content analysis of 77 biopharmaceutical and chemical listed companies’ management reports from eight Western European countries across the period 2005–2009. Hence, we obtained an (unbalanced) panel data of 309 observations. The cost of capital has subsequently been regressed on the disclosure index. Results confirm a larger amount of R&D disclosures whereas information is more regulated, but they do not confirm an inverse relation with the cost of capital.     

Do more equal slices shrink the cake? An empirical investigation of tax-transfer reform proposals in Italy

A crucial issue in efficiency-equality evaluations of tax reforms resides in the possibility that the level as well as the distribution of welfare may change, where the household-specific measures of welfare capture the value of income as well as the value of leisure. A better-designed redistribution and income support system may not only foster equality but also improve the configuration of incentives and by this route contribute in its turn to efficiency. This paper presents an empirical analysis of the welfare effects for married couples of replacing the Italian tax system by three alternative hypothetical reforms: a flat tax, a negative income tax, and a work fare scheme. We employ a microeconometric model of household labour supply that represents partners simultaneous choices, allows for constraints in the choice of hours of work, and is sufficiently flexible to capture a large variety of supply responses. These features appear to be crucial in the evaluation of reform effects. The results suggest that there is scope for improving upon the current system under both the efficiency and the equality criterion. The benefits from the reforms, however, come from unexpected directions since the largest labour supply contribution come from poor and middle class households whereas rich households appear to be much less responsive to changes in the tax rates. The simulation results reveal that a crucial role in shaping the results is played by the relatively higher behavioural responsiveness of married women living in low and average income households.All correspondence to Ugo Colombino. We would like to thank Tom Wennemo for skilful programming assistance, Anne Skoglund for technical assistance and word processing, K.A. Breke and E. Holmøy and an anonymous referee for useful comments. Special thanks to Dino Rizzi (University of Venezia), who provided us with a program written by him for the simulation of the direct and inverse 1993 tax-transfer rules (Rizzi 1996). Part of the paper was written when Aaberge and Strøm were visiting ICER and the Department of Economics in Torino. ICER is gratefully acknowledged for providing financial support and excellent working conditions. Ugo Colombino gratefully acknowledges financial and organisational support from Statistics Norway and the Department of Economics in Oslo, and from the Italian Ministry of University and Scientific Research (MURST research grants 1998 and 2000). Responsible editor: Alessandro Cigno.     

Decomposing the age effect on risk tolerance

The importance of investment portfolio allocation has become more apparent since the onset of the late 2000s Great Recession. Individual willingness to take financial risks affects portfolio decisions and investment returns among other factors. Previous research found that people of different ages have dissimilar levels of risk tolerance but the effects of generation, period, and aging were confounded. Using the 1998–2007 Survey of Consumer Finances cross-sectional datasets, this study uses an analytical method to separate such effects on financial risk tolerance. Aging and period effects on financial risk tolerance were statistically significant. Implications for researchers and financial planning practitioners and educators are provided.     

Strategy versus sincerity in mean voting

This paper focuses on the mean vote procedure for choosing the quantity of a public good, a social choice rule that selects the mean of the quantities voted for. The available theoretical models of mean voting give rise to conflicting predictions about the extent of the strategic bias that might arise in the individual vote. An experiment has been run in order to assess whether the participants disclose their (induced) preferences in voting or whether they strategically manipulate their vote, and in the latter case, which variables impact upon the likelihood of strategic bias and to what extent.     

Financial forecasts during the crisis: Were experts more accurate than laypeople?

The main goal of this paper was to examine the accuracy and confidence of financial forecasts during the 2009/2010 crisis. The study was carried out in February 2009 in Poland. The participants represented two groups: financial analysts and laypeople (people without knowledge or skills in finance). All participants were asked to forecast future stock market performance and foreign exchange rates. Additionally, they marked their confidence on a 100-point scale. The results showed that the forecasts significantly differed from the real values. In forecasting both the stock market and the currency exchange market, the prediction error significantly differed from zero. Even if the participants were optimistic in making the directional stock market forecasts, they were pessimistic when making point index predictions, which suggests a judgmental paradox. The experts were slightly better than the non-experts in predicting the stock market. However, their accuracy was generally not better in the exchange market forecasts. The next step of the analysis focused on the confidence factor. The results of this part of the research showed that the laypeople were less confident than the experts in all the judgments.     

Financial literacy and retirement planning in the Netherlands

The complexity of financial decisions that households now face has increased to unprecedented levels. At the same time, households seem to lack the financial knowledge to cope with these decisions, including how to save and invest adequately for retirement. In this paper, we examine the relationship between financial knowledge and retirement planning in the Netherlands. For this purpose, we have designed a module on financial literacy and planning for the De Nederlandsche Bank (DNB) Household Survey. We find a strong and positive relationship between financial knowledge and retirement planning; those who are more financially knowledgeable are more likely to plan for retirement. Using information on economics education acquired in school, we show that the nexus of causality goes from financial literacy to planning rather than the other way around.     

Paying for no reason? (Mis-)perceptions of product attributes in separate vs. joint product evaluation

Consumer decision-making involves the evaluation of options either in isolation or in relation to other alternatives present at the environment. According to Hsee’s evaluability hypothesis, it is easier to evaluate product attributes when they are juxtaposed (i.e., presented jointly) than when they are presented in isolation from each other. Recent research has provided some support to the evaluability hypothesis for the attribute of perceived product quantity. The present research tests the hypothesis in relation to the attribute of perceived fairness. In two experiments, we show that when participants evaluate products in isolation from each other, they err in their judgment of product quantity, and, consequently, they mis-attribute fairness to the seller. In a third experiment, we further show that the inclusion of constant yet unfair price information does not affect the fairness and price judgments. These findings provide evidence for the psychological plausibility of the evaluability hypothesis for the attributes of fairness and product quantity. Moreover, they suggest that isolated product evaluation may be systematically suboptimal for consumers, even when pricing information is included. Therefore, effective consumer decision-making will benefit by allowing the joint evaluation of alternatives.     

Cognitive and motivational structure of sustainability

In this paper the cognitive and motivational perceptual structure of sustainability of light users of sustainable products are empirically compared to the Brundlandt definition and the Triple-P-Baseline definition of sustainability. Results show that light users cognitively can distinguish between the social and temporal dimensions of the Brundlandt definition, as well as the People, Planet and Prosperity dimensions of the Triple-P definition of sustainability. In the motivational structure of light users of sustainable products, all attributes that do not offer direct and personal benefits are collapsed into a single dimension. This single dimension explains purchases more parsimoniously than a more complex structure, and is itself explained by a set of psychographic predictors that appears to be related to identity.Theoretical implications are that research into consumers’ cognitive understanding of abstract constructs may fail to predict purchase behaviour of light users, because their motivational structure is not related to this understanding. Practical implications are that focusing on sustainability as a container construct that incorporates various approaches to sustainable development matches with motivations of light users and thus may induce them to purchase more sustainable products.     

Frequency of price increases and perceived inflation. An experimental investigation

The effect of frequency of subjective experience of price increases on perceived inflation, i.e. the subjective experience of general price development, is investigated. The paper presents a two-phased psychological model of perceived inflation: first, information about product price increases is gathered in daily purchase. Second, these are integrated into one perceived inflation judgment. In the integration phase, the complexity of the task should trigger heuristic processing: higher frequency of price increases should enhance their availability and thus perceived inflation. Participants simulated purchases in two scenarios. Frequency of products with increased prices was varied while overall expenditure increases as well as relative price increase of individual products were balanced. Experiment 1 presented a high frequency condition with a majority of increased prices relative to previously learned reference prices and a low frequency condition with a majority of stable prices. Experiment 2 balanced cognitive effort for product price change estimation over conditions by replacing absolutely stable prices with slightly increased prices. As predicted, perceived inflation was higher with high frequencies of increased prices, while price increases of individual products were judged correctly. Experiment 3 ruled out the alternative hypothesis that presentation duration, which in the previous experiments correlated with presentation frequency, might have been the determining factor.