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August 2011, 2011 KDI Journal of Economic Policy Conference

Globalization, Human Capital and Inequality

Hosted by KDI-KAEA | 2011-08-09 | 394 Page

  • Chapter 1Integrating Personality Psychology into Economics

    This paper reviews the problems and potential benefits of integrating personality psychology into economics. Economists have much to learn from and contribute to personality psychology. What can economists learn from and contribute to personality psychology? What do we learn from personality psychology? Personality traits predict many behaviors—sometimes with the same or greater strength as conventional cognitive traits. Personality psychology considers a wider array of actions than are usually considered by economists and enlarges the economist’s way to describe and model the world. Personality traits are not set in stone. They change over the life cycle. They are a possible avenue for policy intervention. Personality psychologists lack precise models. Economics provides a clear framework for recasting the field. Economics now plays an important role in clarifying the concepts and empirical content of psychology. More precise models reveal basic identification problems that plague measurement in psychology. At an empirical level, “cognitive” and “noncognitive” traits are not easily separated. Moreover, personality psychologists typically present correlations and not causal relationships. Many contemporaneously measured relationships suffer from the problem of reverse causality. Economists can apply their tools to define and estimate causal mechanisms. In addition, psychological measures have substantial measurement error. Econometric tools account for measurement error, and doing so makes a difference. Economists formulate and estimate mechanisms of investment—how traits can be changed for the better. There are major challenges in integrating personality psychology and economics. Economists need to link the traits of psychology with the preferences, constraints and expectation mechanisms of economics. We need to develop rigorous methods for analyzing causal relationships in both fields. We also need to develop a common language and a common framework to promote interdisciplinary exchange. There is a danger in assuming that basic questions of content and identification have been answered by psychologists at the level required for rigorous economic analysis. In explaining outcomes, how important is the person? How important is the situation? How important is their interaction? I address these issues in this paper.

  • Chapter 2‘학교교육 수준 및 실태 분석 연구: 중학교’ 자료를 이용한 사교육비 지출의 성적 향상 효과 분석

    본 논문은 한국교육개발원의 ‘학교교육 수준 및 실태 분석 연구: 중학교’ 자료를 이용하여 중학교 3학년 학생에 대한 사교육비 지출이 어느 정도의 성적 향상효과가 있는지를 추정한다. 사교육비의 내생성을 통제하기 위해 본 논문은 도구변수법과 비모수 구간추정법(nonparametric bounds analysis)을 사용한다. 분석 결과, 두 방법에서 공통적으로 사교육비 지출의 증가가 유의미한 정도의 성적 향상으로 연결된다는 확실한 증거가 발견되지 않는다. 도구변수법의 결과에 의하면, 10% 높은 사교육비 지출은 국어, 영어, 수학 성적을 각각 약 1.24%, 1.28%, 0.75% 향상시킨다. 구간추정법에서는 국어, 영어, 수학 과목에서 모두 10% 증가된 사교육비 지출의 효과가 0보다 크다는 증거를 찾기 어렵다. 본 논문의 실증 결과는 내생성을 통제한 여타의 연구들과 비슷한 결과를 보여준다.

  • Chapter 3Education and Globalization on Income Inequality: Cross-Country Evidence

    This study examines the effects of education and globalization on income inequality using cross-section data. We confirm the existence of the Kuznets inverted-U curve for the relationship between income level and income inequality. However, the inverse U-shaped curve lacks robustness when additional variables are used in the model. The empirical results show that educational variables play an important role for better distribution of income. Our findings indicates that a higher level of educational attainment of the population has an equalizing effect on income distribution, while the larger the dispersion of educational attainment among the population, the greater the income inequality. The dispersion of schooling among the population has a much greater dis-equalizing effect on income inequality than previous studies have suggested. It is also found that the higher the level of globalization, the more unequal income distribution, while freedom, whether economic freedom or political freedom, has marginal effects on income inequality.

  • Chapter 4Should I Marry Again?

    In the last several decades, the prevalence of remarriages, coupled with fertility in remarriage, has resulted in increasing complexities in family structure. Studies have considered child rearing, division of labor,sharing consumption among others as gains from marriage, regardless of first or subsequent marriages. This paper recognizes additional benefit of marriage, unique in subsequent marriages. If (1) the quality of children is uncertain when parents invest in children’s human capital, and (2) the quality distributions of two step siblings of the same biological mother (or father) are less correlated than two children from an intact family, due to genetic inheritance, a parent has an incentive to hedge risk in terms of children’s qualities, and diversify the parent’s portfolio of children by having children in remarriage. We show that a child born after parents' remarriage in a reconstituted or blended family receives less human capital investment than a child in an intact family as long as parents have a motive for precautionary saving. The paper theoretically identifies and empirically tests socio-economic variables that increase this benefit of remarriage and describes who will be more likely to remarry.

  • Chapter 5Stereotypes and Inequality: A Structure of Identity Choice

    When identity is exogenous and if the ability distributions within groups are the same, then inequality of group reputations in equilibrium can only arise if there is a positive feedback between group reputation and individual human capital investment activities (Arrow, 1973; Coate and Loury, 1993). When group membership is endogenous, the logic of individuals’ identity choices leads there to be a positive selection of higher ability individuals into the favored group. As a result, ability distributions within distinct groups can endogenously diverge, reinforcing incentive-feedbacks. We develop the theoretical framework that can examine the positive selection and the endogenous group formation, and examine the existence and stability of stereotyping equilibria. We show inequality deriving from stereotyping of endogenously constructed social groups is at least as great as the inequality that can emerge between exogenously given groups. Also, the model implies that the equal state is not sustainable when the society has enough fraction of members whose identity choice cost is sufficiently low.

  • Chapter 6The Dynamics of Income Inequality in Korea

    This paper reviews the trends of income inequality in Korea and examines the sources of income inequality from 1998 to 2008. The findings confirm the importance of earned income as a major component in total income. It was found that an increase in transfer income reduces the income inequality most significantly among all income sources. The findings have important policy implications. In order to raise the overall economic status, policy efforts should be exerted to create more stable employment opportunities with better compensation. Also called for is more active policy intervention to increase the transfer payment. The nature of tax policy is also important. Despite the government’s claim that the recent tax cuts are not for the rich, to the extent that the tax cuts are implemented differently across income distribution in favor of the rich, the income inequality will persist. It is encouraging that in 2010, the Gini coefficients, quintile ratios, and relative poverty rates all improved for the first time since 2006. However, it is too early to tell whether or not this improvement was a temporary result from the active government intervention with transfers and tax cuts. To continue this improving momentum, the pressing policy challenge now is more than implementing stronger economic policies for growth and redistribution. What is urgently needed is to reduce the prevalent uncertainty and to create social and public consensus to share the economic pain and gain. Given the importance of transfer income to reduce the inequality, some form of tax raise may be inevitable. The social consensus to share “the pain and gain” will lighten the potential tax resistance from the rich and induces the poor to be more patient. Conscientious political leadership based on reality and feasibility is also needed since the public policies based on populism only retard individual incentives and further exacerbate the income inequality. For policies to be implemented successfully, they need to be supported by sufficient resources and adequate coordination with other relevant policy aspects. If and only if these prerequisites are met, economic and public policies to reduce labor market inequality and polarization will work, and the lower and the poor class will feel the “trickle-down” effect.

  • Chapter 7The Impact of Mortgage Securitization on the Housing Bubble and Subprime Mortgage Crisis: A Self-organization Perspective

    The subprime mortgage crisis has been analyzed from many different perspectives. The securitization of subprime mortgages has emerged as the leading cause of the subprime mortgage crisis. This securitization is a complex process that involves a number of different players (Ashcraft and Schuerman, 2008). Securitization of subprime mortgages, which are a part of mortgagebacked securities (MBSs) also led to further complexity by the introduction of collateralized debt obligations (CDOs) and credit default swaps (CDSs). MBSs, CDOs and CDSs became sources of adverse selection and moral hazard which have contributed significantly to the current subprime mortgage crisis. Securitization of mortgages also made the mortgage market global, which provided opportunities for homebuyers in the U.S. to draw funds from all over the world. Our study investigates the impact of securitization of mortgages on mortgage rates, the housing bubble and the subprime mortgage crisis. The study found that securitization of mortgages has an inverse relationship with mortgage rates and that securitization of subprime mortgages triggered the housing bubble in 1995. The housing bubble contributed to the construction boom and economic growth while it was expanding, but it caused catastrophic adverse effects on the U.S and global economies when it popped. We found that an application of the self-organization principle in biology and thermodynamics to the analysis of the current housing bubble provides insight in the current subprime mortgage crisis and other bubbles in general. This study may offer a fresh new perspective for policy makers.

  • Chapter 8Real Estate Investors, the Leverage Cycle and the Housing Market Crisis

    We explore a mostly undocumented but important dimension of the housing market bubble and bust: the role played by real estate investors. Using unique credit report data, we document large increases in the participation of investors, especially in the states that experienced the largest housing boom-bust cycle, where at the peak almost half of purchase mortgage originations were associated with investors. Consistent with Geanakoplos' theory of the leverage cycle, we identify a shift toward optimistic buyers, identified here as \"buy and flip\" investors. During the house price boom these \"flippers\" showed an increased willingness and ability -- facilitated in part through apparent misreporting of their intentions to occupy the property -- to take on increased leverage. After home prices began to drop, investors defaulted at a much higher rate than single-home owners, representing over 30% of aggregate delinquent mortgage balances. Our findings have important implications for the design of policies to address the deleterious consequences of the current crisis and to limit future occurrences of housing market bubbles. The U.S. economy is still recovering from the financial crisis that began in the fall of 2007. The collapse of house prices across many markets was a precipitating factor in the financial crisis and adverse feedback effects between financial markets and the real economy led to the most severe recession in the post-war period. Extraordinary interventions by fiscal and monetary authorities both in the U.S. and abroad were required in order to prevent a complete collapse of global markets and the potential onset of another great depression. Attention has shifted from containing the financial crisis to examining its causes and designing policies to limit both the likelihood and the severity of a similar crisis in the future. Given the central role that housing played as a catalyst to the crisis, it is important to better understand the determinants of the dynamics of house prices and of subsequent mortgage defaults over this recent cycle. While house prices were rising in many parts of the country over the period leading up to the crisis, these increases were particularly pronounced in four states- Arizona, California, Florida and Nevada (the “bubble” states). Figure 1 shows the path of house prices in the US, the bubble states as a whole, and in each of these states from 2000 Q1 to 2010 Q4.Over the period from 2000 to 2006 average house prices more than doubled in each of these states. The pace of house price appreciation accelerated starting in 2004. The peaks in prices across the four states occurred within a couple of months of each other in mid-2006. Following the turn in the markets, house prices declined rapidly in each state with much of the earlier gains given back within just two years.1 This rapid run-up and then crash in house prices exacted a terrible cost to homeowners, financial firms and to the economy. Current estimates are that around 23 percent of active mortgages are “under water” in that the balance on the mortgage exceeds the current value of the house.2 As of 2010 Q4, nearly 2.8 million homes have gone through foreclosure, and another 2 million homes are in the process of foreclosure.3 Serious delinquencies continue to add new homes to the foreclosure pipeline over time. Nationally distress sales represent around half of all repeat-sale transactions. These distress sales continue to exert downward pressure on house prices making it more difficult for housing markets to recover. A focus on residential mortgage finance in order to understand what the determinants were of the house price and mortgage default dynamics generated over the recent cycle would inform efforts to enhance financial stability. A more robust system of residential mortgage finance should aim to limit the degree to which house prices rise and fall over a credit cycle. Reducing the amplitude of the house price swings will limit the potential for collateral damage created by housing markets for the real economy.

  • Chapter 9Optimal Provision of Loans and Insurance against Unemployment from Lifetime Perspective

    In an earlier paper, we showed that integrated individual accounts, allowing individuals to borrow against future pensions when they are unemployed, can be welfare increasing, because it allows increased intertemporal consumption smoothing without attenuating incentives to search. Here, we examine from a lifetime perspective how the optimal mix between publicly provided unemployment insurance (UI) and loans against pension accounts changes over time in a model where unemployment may occur in any period. We show that, if the incidence of unemployment is relatively low when old, i) the optimal mix for the young entails a positive amount of loans regardless of its incentive costs; ii) the amount of consumption for those unemployed young is greater than for those unemployed old while the converse may be true in the absence of borrowing; iii) the optimal mix entails more loans and a smaller UI benefit for the young than for the old. We demonstrate that there will be incentives to save excessively in good states as well as to borrow excessively from the market when unemployed. Individuals and markets do not take into account the externalities such actions: they affect search, and thus the magnitude of UI payments and loan defaults. Finally, we show how non-market groups can improve welfare through loan-cosigning, which may be voluntarily provided within the group, as it allows them to smooth their incomes with lower incentive costs, and while the income sharing is less effective than market pooling, the incentive benefits dominate. Current UI programs have benefits that are typically dependent only on recent employment history, and do not have any loan provisions. Thus, this paper suggests that there is considerable scope for reforms that allow better intertemporal smoothing and risk mitigation while simultaneously improving search incentives.

  • Chapter 10The Effects of Free Trade Agreements and Fair Trade for All

    The goal of this paper is to obtain more reliable quantitative estimates of the treatment effects of Free Trade Agreements (FTA) on trade flows. In particular, we are interested in examining whether the benefits of FTAs will be greater for rich countries than poor countries. In previous studies, FTAs were often treated as an exogenous variable, and a static model specification has been employed. However, as member countries choose to participate in an FTA, the endogeneity issue of FTAs must be addressed empirically. Furthermore, the persistence effect of trade flows can be modeled more effectively in a dynamic specification. We found that FTAs can increase bilateral trade flows by 174% ~ 220% in the long-run when we adopt a dynamic panel model with proper estimation methods while controlling for the contemporaneous endogeneity and the feedback effect. In addition, we found that the difference in the benefits of FTAs on trade flows between rich (bigger) and poor (smaller) countries is rather small or insignificant.

  • Chapter 11Floating Exchange Rates and Macroeconomic Independence

    In this paper, we investigate the nature of macroeconomic interdependence and the empirical validity of the insulation property of floating exchange rates in Japan vis-à-vis the U.S. We employ the method of cointegration and error correction modeling due to Johansen to test various hypotheses related to international transmission and movement of interest rates and goods prices. When monetary independence is measured as long-term freedom to manage the domestic interest rate, it seems to have increased during the more recent period of floating exchange rates. However, there is little evidence that capital controls before 1980 contributed to it in Japan.

  • Chapter 12Uncovered Interest Parity Puzzle: Asymmetric Responses

    This paper estimates UIP slope parameter using a large number of cross-country bilateral exchange rates. The exchange rates analyzed here include a broad spectrum of developed and developing countries. Based on the empirical evidence, short-term(one month) UIP holds well and UIP puzzle is largely observed in the key currencies. We introduce the key currency bias to explain the empirical failure of UIP. UIP fails more often when a key currency is involved in the bilateral exchange rate relationship especially when the key currency offers higher return on capital than when only non-key currencies are involved. This paper presents an empirical evidence for a statedependent asymmetric response in exchange rate changes depending on the direction of the forward premium.

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