04-13 The Earnings Quality Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation
Karen Teitel, Shilpa Manaktala, and John D. Phillips
We identify 133 firms that between July and December 2002, announced plans to voluntarily adopt the fair value method of accounting for stock-based compensation. We investigate whether such announcements increased the quality of these firms’ earnings as perceived by market participants. Answering this research question not only provides evidence relevant to the debate surrounding the expensing of employee stock options, but doing so provides evidence that conservative accounting choices in general lead to higher perceived earnings quality. Using two measures of earnings quality, the price-earnings relation and the earnings response coefficient, we find evidence consistent with an increase in perceived earnings quality for these firms relative to a control set of firms that in 2002 did not announce plans to adopt the SFAS 123 stock-based compensation recognition provisions.

04-12 Applying Intermediate Microeconomics to Terrorism
Charles H. Anderton and John R. Carter
The authors show how microeconomic concepts and principles are applicable to the study of terrorism. The utility maximization model provides insights into both terrorist resource allocation choices and government counterterrorism efforts, while basic game theory helps characterize the strategic interdependencies among terrorists and governments.
*Published in Journal of Economic Education, Fall 2006, Vol. 37:4, 442-458.

04-11 Vulnerable Trade: The Dark Side of an Edgeworth Box
Charles H. Anderton and John R. Carter
We examine incentives to seize and defend goods offered for trade in an Edgeworth box economy. Appropriation possibilities generate an equilibrium of coerced redistribution and voluntary trade in a reduced box. Potential mutual gains remain untaken because the prospect of piracy creates a price wedge, wherein the effective relative price is lowered for the exporter and raised for the importer. As the vulnerability of one or both goods increases, the price wedge widens, causing trade to diminish. If vulnerability becomes sufficiently high, then trade and appropriation are driven to zero, or one or both players are rendered indifferent to trade.

04-10 Transition Economies and Globalization: Food System Asymmetries on the Path to Free Markets
Kolleen J. Rask and Norman Rask
Per capita food consumption measured in cereal equivalents follows a well-defined path relative to income in market economies; non-market economies, however, exhibited a very different relationship prior to transition. As part of the transition process, these countries must now remove the asymmetry in the income-food consumption relationship, manifested in diets rich in livestock products, in order to fully integrate their food sectors with global markets. Some countries (Czech Republic, Hungary, Estonia) have essentially completed this task and are now poised to once again increase per capita consumption of livestock products as incomes grow. Others (Belarus, Bulgaria, Kyrgyzstan) retain some of the pre-transition consumption asymmetry and have not adjusted consumption fully to market economy levels. Livestock production has fallen commensurately with consumption, to levels significantly below historical averages. For a variety of structural, institutional and policy reasons, production asymmetries will be more difficult to correct, so production may not rebound as rapidly as consumption. Moreover, for those countries entering or soon to enter the European Union, the distortions of the European agricultural policies as well as the production constraints imposed by accession, which reflect current low output levels, hurt the prospects for future agricultural recovery. These production recovery problems raise concerns that the declining consumption asymmetry will be replaced with a growing production asymmetry.

04-09 Currencies, Identities, Free Banking, and Growth in Early Twentieth Century Manchuria
Thomas R. Gottschang
From 1906 until 1931, Manchuria – Northeast China - was a complex patchwork of Chinese, Japanese, and Russian spheres of control. Since political authority was fragmented, none of the governments was capable of establishing a central bank with a monopoly over the money supply. Multiple currencies were in use, ranging from strings – tiao- of traditional Chinese copper cash, to silver dollars (yuan) from Mexico, China, and Japan, to Russian rubles (which crashed in value after the 1917 Bolshevik Revolution), and miscellaneous paper currencies of varying stability. The modern banks established under national and private auspices to serve the commercial needs of the burgeoning economy found themselves without central regulation, resulting in an unusual situation of competitive “free banking.” This case is interesting as an example of rapid economic growth despite the costs of a chaotic monetary regime. Historical sources, including the Chinese Maritime Customs reports, contemporary yearbooks, and the South Manchuria Railway (Mantetsu) research reports, indicate that the combination of modern and pre-modern currencies and financial institutions managed to serve the needs of the different elements of society, from the tiny household purchases made in copper coins, to large commercial transactions made in silver ingots, or silver dollars, or in silver-backed yuan notes. Furthermore, there were well-established informal credit practices, based to a great extent on personal relations – guanxi – that circumvented much of the need for modern financial instruments.

04-08 Do Policy-Makers Earmark to Constrain their Successors? The Case of Environmental Earmarking
Neva K. Novarro
This paper examines whether legislators earmark funds in order to constrain the spending of future legislators with different preferences. Specifically, panel data is used to estimate the probability a new environmental earmarking law is passed as a function of Democrats holding and subsequently losing majority control of the government. The results of this study do not support this hypothesis. In fact, Democrats with a large majority who subsequently lose this majority power following the next election are found to be less likely to earmark funds for the environment. One possible explanation for this finding may be that competing forces make it more difficult for Democrats to pass legislation earmarking funds for the environment in the years before losing power, even if they have an increased incentive to do so. However, further results of this paper do not support this hypothesis. Rather, the evidence suggests Democrats do not earmark strategically.

04-07 Is Smaller Better? A Comment on "Comparative Economic Impact Analyses" by Michael Mondello and Patrick Rishe
Victor A. Matheson
In a recent article in Economic Development Quarterly, "Comparative Economic Impact Analyses: Differences Across Cities, Events, and Demographics" (November 2004), Michael Mondello and Patrick Rishe examined the economic impact of small, amateur sporting events on host economies. This response to their work suggests four reasons why ex ante economic impact estimates for smaller sporting events may come closer to matching ex post reality than those for "mega-events" including less crowding out, lower hosting costs, higher multipliers, and less incentive for boosters to published inflated figures.
*Published in Economic Development Quarterly, May 2006, Vol. 20:2, pp. 192-195.

04-06 Dueling Jackpots: Are Competing Lotto Games Complements or Substitutes?
Victor A. Matheson and Kent Grote
This paper considers the relationship that exists between two lottery products offered simultaneously in the same state, a smaller lottery game run by the individual state and a larger multi-state game run in coordination with other states. The primary issue is whether the two different products should be considered substitutes or complements for one another. The question is considered from two different perspectives that lead to a conclusion that while the two products do tend to be complements to one another, overall the individually run state lottery games experience a reduction in sales from the presence of the multi-state game.
*Published in Atlantic Economic Journal, March 2006, Vol. 34:1, pp. 85-100.

04-05 The Effects of Labor Strikes on Consumer Demand: A Re-examination of Major League Baseball
Victor A. Matheson
Previous research has concluded that the 1981 and 1994/95 Major League Baseball (MLB) strikes have caused short-term losses in attendance but have not resulted in any long-term effects on attendance. While total attendance at MLB games following the 1994/95 strike has recovered to its pre-strike levels, this has been done only through the construction of new stadiums at an unprecedented pace which cannot continue into the future. After accounting for stadium effects, average MLB baseball attendance has dropped significantly since the 1994/95 strike.
*Published in Applied Economics, June 2006, Vol. 38:10, pp. 1173-1179.

04-04 Mega-Sporting Events in Developing Nations: Playing the Way to Prosperity?
Victor A. Matheson and Robert Baade
Supporters of mega-sporting events such as the World Cup and Olympics claim that these events attract hoards of wealthy visitors and lead to lasting economic benefits for the host regions. Developing countries have become increasingly vocal in demanding a share of the economic benefits of these international games. The specialized infrastructure and operating expenses required to host these events, however, can be substantial. Independent researchers have found that boosters’ projections of the economic impact of sporting events exaggerate the true economic impact of these competitions, and these events are an even worse investment for developing countries than for industrialized nations.
*Published in South African Journal of Economics, December 2004, Vol. 72:5, pp. 1084-1095.

04-03 Padding Required: Assessing the Economic Impact of the Super Bowl
Victor A. Matheson and Robert Baade
Civic boosters generally have estimated the Super Bowl to have an impact of $300 to $400 million on a host city’s economy. The National Football League has used the promise of an economic windfall to convince skeptical cities that investments in new stadiums for their teams in exchange for the right to host the event makes economic sense. Evidence from host cities from 1970-2001 indicates the Super Bowl contributes approximately one-quarter of what the boosters have promised and that the game could not have contributed by any reasonable standard of statistical significance, more than $300 million to host economies.
*Published in European Sports Management Quarterly, December 2006, Vol. 6:4, pp. 353-374. .

04-02 Economic Multipliers and Mega-Event Analysis
Victor A. Matheson
Critics of economic impact studies that purport to show that mega-events such as the Olympics bring large benefits to the communities “lucky” enough to host them frequently cite the use of inappropriate multipliers as a primary reason why these impact studies overstate the true economic gains to the hosts of these events. This brief paper shows in a numerical example how mega-events may lead to inflated multipliers and exaggerated claims of economic benefits.

04-01 In Search of a Fair Bet in the Lottery
Victor A. Matheson and Kent Grote
Although state-operated lotto games have the worst average expected payoffs among common games of chance, because the jackpot can accumulate, the maximum expected payoff is potentially unlimited. It is possible, therefore, that lotto can exhibit a positive expected return. This paper examines 18,000 drawings in 34 American lotteries and finds approximately 1% of these drawings provided players with a fair bet. If it were possible for a bettor to purchase every possible combination, however, most lotteries commonly experience circumstances where such a purchase would provide a positive return with 11% of the drawings providing a fair bet to the player.
*Published in Eastern Economic Journal, Fall 2006, Vol. 32:4, pp. 673-684.

Faculty Research Series 2003 Abstracts

03-04 Convergence of Attitudes in Different Cultures Towards the Budgeting Process
Eng Wu
Globalization, advancement in information technology, and gyrations of national economies has required managers to pursue the appropriate management practices as to ensure the survival of their corporations. Although national cultures have formed the backbones of management practices, cultural diversity has taken a backseat to managers' ambition to advance in an organization (Fish, 1999). Studies see convergence in business approach, organization design, and management norms (Adler, 1997; Vertinsky et al., 1990). This is an empirical study that utilizes a particular management practice - the building of budgetary slack during the budget setting process - to discern between different approaches adopted by managers from different cultures. It is proposed that despite cultural differences, management practices tend to converge in the face of globalization and advancement in information technology.

The study is made up of two parts: the first compares the different managerial behaviors of the US and the Japanese managers during the budget setting process. It is suggested that the cultural differences between these countries prompted managers to adopt different business approaches (Franke, et al., 1991 and Dunk & Perera, 1997). The second part of the study suggests that with the passage of time and the changes in the business environments, management practices in different cultures would converge.

03-03 Deriving Reasonable Range Estimates in Life Care Plan Analysis and Other Forensic Economic Applications
David Schap
When an aggregate range of costs is estimated merely by summing the individual cost category ranges, the result is a reported aggregate range that is unnecessarily broad and thus misleading. The likelihood of occurrence of the extreme values in the range formed by mere arithmetic aggregation is so low that forensic economists would do better to omit such values by truncating their reported aggregate ranges. In searching for a suitable method of truncation, a few intuitively appealing methods are discarded once shown to be either impractical or intractable. Ultimately, a proposed procedure emerges that is methodologically sound and easily applied. The recommended method of truncation yields realistic and defensible aggregate range estimates that are capable of correct interpretation by forensic economists, attorneys, judges and jurors.
*Published in Journal of Forensic Economics, Spring 2004, Vol. 17:1, pp. 39-45.

03-02 Pay for Performance in Volatile Markets
Miles B. Cahill and Alaina C. George
In recent years, literature has suggested that executive compensation schemes conform to principal-agent models of incentive pay. Specifically, when analyzing total compensation (including stock options), executive pay seems to be positively related to the market performance of the corporation's stock. However, such studies were performed during the recent bull market of the 1990s. This paper estimates a model of incentive pay using data from more recent volatile markets of 1999-2001 and finds that the incentive component of executive pay has at least diminished, and has perhaps reversed. Thus, incentive pay may be something of a "fair weather" phenomenon.
*Published in American Economist, Fall 2005, Vol. 49:2, pp. 3-25.

03-01 Determinants of Appalachia's Persistent Poverty
Robert W. Baumann
Appalachians have lower wages, employment rates, and educational attainment than residents elsewhere in the country in each decennial Census since 1940, when schooling and wage information was first collected. Despite educational gains and large federal outlays since the late 1960s, the wage gap has slightly increased over this period from 19 log points in 1940 to 23 in 2000. This level of disadvantage is on par with other studied groups including women (Blau & Kahn, 1997), blacks (Juhn, Murphy, & Pierce, 1991), and Mexican-Americans (Trejo, 1997). Decompositions of the wage gap show faster educational growth outside of the region increases the wage gap from 1940 to 1970. Increasing returns to both observable and unobservable skill, rising income inequality, and unfavorable demand shocks to low-skilled Appalachian labor increases the wage gap from 1980 to 2000.
*Revised version published in Growth and Change, September 2006, Vol. 37:3, pp. 416-443.

Faculty Research Series 2002 Abstracts

02-08 The Transformation of China's Health Care System and Accounting Methods: Current Reforms and Developments
David K.W. Chu and Kolleen J. Rask
This paper is a case study of China’s recent reforms in hospital accounting. We analyze the Chinese health care system in transition to highlight the changing role and nature of accounting services before and after the recent reforms. Prior to reforms, the accounting system provided data solely for government central planning purposes. Reforms were supposed to decentralize hospital decision making, thus signaling a need for a new accounting system that would provide information to managers and resource providers. However, the government continues to maintain control by fixing basic medical service prices at levels below cost while allowing profit margins for pharmaceutical sales and other advanced medical services. This schizophrenic policy of quasi-decentralization/macro-control has resulted in an accounting information system that serves neither the need of managers nor external resource providers. In January 1999, major reforms were instituted in China’s hospital accounting system, creating a more streamlined structure. The legacy of the command economy, however, remains clearly evident in the areas of revenue control and state subsidies. Hospital accounting in China is therefore subject to the ongoing evolution of the government’s health care policy.
*Published in Advances in International Accounting, edited by S.T. Sale JAI (Elsevier Science), Vol. 15, pp. 13-44.

02-07 Two New Uses for a Development Index
Miles B. Cahill
This study introduces two new uses for the development index concept by making use of a variant of the well-known Human Development Index (HDI). Specifically, a modified HDI is estimated using the principal components method of factor analysis. The results will be used to investigate differences in the development process across different regions, and will identify underachieving and overachieving countries for certain key statistics.

02-06 Teaching Chain-Weight Real GDP Measures
Miles B. Cahill
In 1996, the Bureau of Economic Analysis (BEA) changed the method used to calculate measures of real GDP from a Laspeyres or Paasche index to a Fisher ideal index, also called a chain-weight index. Even though this is a significant change in approach and has resulted in extensive revisions of reported statistics, many intermediate-level textbooks treat this topic casually, if at all. This article presents two applications in which this topic can be explored more thoroughly, with the help of spreadsheet software. One exercise introduces the concept of the chain-weight index by comparing it to Laspeyres, Paasche and ideal indexes with the use of utility analysis. The second exercise is a step-by-step process to calculate chain-weight index statistics.
*Published in Journal of Economic Education, Summer 2003, Vol. 34:3, pp. 224-234.

02-05 Reaching Turning Points in Economic Transition: Adjustments to Distortions in the Supply and Demand for Food
Kolleen J. Rask and Norman Rask
Transition economies have historically been important producers of agricultural products. Under central planning, distortions resulted in atypical food consumption and associated production patterns compared to market economies, with low and medium-income populations producing and eating high-income, livestock-rich diets. Using market economy consumption patterns as benchmarks, we identify to what extent various turning points have been reached in food consumption patterns and self-sufficiency ratios as transition economies adjust to market conditions. We develop a model using the concept of cereal equivalent factor values to measure progress and compare and contrast country changes in food consumption and production with a commensurate, resource-use approach.
*Published in Comparative Economic Studies, December 2004, Vol. 46:4, pp. 542-569.

02-04 Is the Human Development Index Redundant?
Miles B. Cahill
It is shown that the component statistics of the HDI are highly correlated with one another. An implication of this correlation is that a wide range of index weights produce indexes that are statistically identical to the HDI. Indexes with only two of the three HDI components are very highly correlated with the HDI. The results can be considered two ways: either the HDI is largely redundant, or the HDI results are robust to a wide range of index weights.
*Published in Eastern Economic Journal, Winter 2005, Vol. 31:1, pp. 1-5.

02-03 How Robust is the Human Development Index?
Miles B. Cahill
The United Nations Development Programme's Human Development Index (HDI) has become a standard international measure of development. However, it has been criticized on several grounds. This paper investigates how robust the HDI is to changing two contentious aspects: the component statistics and the weighting scheme. An alternative index is computed using four times as many component statistics (and only life expectancy in common) and principal components to determine weights. The results are that the alternative index is very closely correlated with the HDI, suggesting the HDI is robust to alternative specifications. However, some advantages of the alternative methodology are detailed.

02-02 The Asian Financial Crisis and Banking Reform in China and Vietnam
Thomas R. Gottschang
The collapse of financial markets and exchange rates across Southeast and East Asia in 1997 and 1998 affected the economies of China and Vietnam much less than those of most other Asian countries. Ironically, the two transitional economies were protected to a great extent by the incomplete nature of their banking reforms and financial market development. The yuan and the dong were not yet traded internationally, securities markets were in very early stages of development, and tax codes, trade regulations, and accounting standards in the two countries did not yet fully conform to international norms. Yet the non-convertibility of their currencies served to shield the Chinese and Vietnamese economies from the sharp declines in exchange rates and securities prices that devastated the incomes of millions of people in Thailand, South Korea, Indonesia, and Malaysia.

This paper examines the implications for future policy reforms in China and Vietnam of the impact of the Asian financial crisis. The relative immunity of the two economies calls into question some central assumptions of conventional economic development theory. It is no longer clear that full currency convertibility should be sought at the earliest opportunity. The experiences of the Asian economies in the late 1990s suggest that emphasis on development of stable, efficient domestic banking systems and mature financial markets should take priority over full integration with international financial markets. This argument has been developed by Pan Yotopoulos in his book, Exchange Rate Parity for Trade and Development (Cambridge, 1996), and merits further consideration with respect to the financial policies of Vietnam and China.

02-01 An Analysis of the Impact of Multiple Environmental Goods on House Prices
Katherine A. Kiel and Jennifer Bowen
In order to be correctly specified, an hedonic model must include all the relevant housing, neighborhood, and environmental characteristics. If the characteristics are correlated with each other, then if they are not included in the regression the coefficients will not be correctly estimated. This paper uses a unique data set to examine how including multiple environmental indicates affects the price estimates of environmental goods. We find that when we include a single indicator as is done in the previous literature, our results are as expected. However, when we include multiple environmental indicators our results are unstable, with some coefficients having the incorrect sign. Our findings suggest that the environmental variables included might be correlated with unobserved variables other than house or neighborhood characteristics, or that the relationships between the included variables might be more complex than previously thought.

Faculty Research Series 2001 Abstracts

01-07 Jointly Estimating the Prices of Environmental Goods: St. Louis as a Case Study
Katherine A. Kiel and Jennifer Bowen
Estimating the benefits of environmental regulations can be very difficult. Since environmental goods are generally not traded in markets, prices and quantities are not directly observed. However, researchers can used revealed preference techniques to uncover the prices individuals implicitly pay for such goods. This paper addresses two interesting questions. It studies the impact of including (or excluding) mulplitle environmental indicators in house value hedonic regressions. It also considers the possibility that environmental indicators are highly correlated with each other (an environmental justice issue) and the effect of that correlation on the estimated coeffients.

01-06 A Repeat Sales Analysis of the Impact of Multiple Environmental Goods on House Prices: St. Louis as a Case Study
Katherine A. Kiel and Jennifer Bowen
Estimating the benefits of environmental regulations can be very difficult. Since environmental goods are generally not traded in markets, prices and quantities are not directly observed. However, researchers can used revealed preference techniques to uncover the prices individuals implicitly pay for such goods. This paper addresses two interesting questions. It studies the impact of including (or excluding) mulplitle environmental indicators in repeat sales regressions. It also considers the possibility that environmental indicators are highly correlated with each other (an environmental justice issue) which makes standard hedonic estimation difficult.

01-05 Financial Failure? The Real Returns to the Blackstone Canal
Jill Dupree
The Blackstone Canal opened in 1828, ran from Worcester, MA to Providence, RI, ceased operation in 1848, and is widely held to be a financial failure, returning $4.10 in dividends on an original investment of $100.00. Yet, the canal is attributed with stimulating the economic success of Worcester and the valley of the Blackstone River, once considered the hardest working river in the United States. This study seeks to reconcile these two opposing view of the value of the canal for three reasons: to identify the true value of investment in the canal to individual investors, to initiate the use of a case study approach in studying the returns to investment that could be applied to other situations where returns to investment are not fully reflected in company financial records, and finally to illustrate how people work within existing legal institutions, in this case water-rights laws to promote economic development and growth. My research thus far has identified investors whose investment returns were exceedingly high once all values of the canal to the individual are considered. This result stands in stark contrast to existing beliefs that the canal was a financial failure. The primary additional value of the canal to these investors was the waterpower that the altered water flow provided. Indirect evidence indicates that the canal may have actually been built for waterpower purposes. The transportation aspect of the canal allowed the investors to obtain the necessary state charters that allowed them to circumvent the existing water-rights laws and build a waterworks project of this magnitude.

01-04 Protection and Revenue: The Motivations for Antebellum Tariff Legislation
Jill Dupree
This paper identifies the relative importance of demands for government revenue and industry protection in shaping tariff legislation during the antebellum period. To do this, a two-limit probit model is estimated for five different products to determine the effectiveness of pressure groups in influencing government decisions to change tariff rates. I find that protection demands were the key factor influencing the structure of tariff legislationwith no influence from revenue demands. In addition, southern industries were more effective than northern industries at gaining protection but faced a higher probability of reductions in protection when their prices were rising.

01-03 Health Care Reform in Transitional China: Its Impact on Accounting and Financial Management
David K.W. Chu and Kolleen J. Rask
In this paper we discuss health care provision in developing countries within a two-track framework of public-private cooperation. China is presented as a case study to illustrate the difficulties facing a developing country that adopts a market-driven health care strategy in the context of transitioning from a command economy to a market economy. Recent reforms in the Chinese health care system and the financial structure which supports it are analyzed. The outcomes in terms of both the benefits and dangers of relying on market mechanisms are evaluated. We conclude that some aspects of the health care system would benefit from an even greater reliance on market forces (e.g., the "two-track" pricing scheme for hospitals and the development of a managerial accounting system), while others are shown to require more government intervention (e.g. equity concerns and basic health services).
*Published in Research in Healthcare Financial Management, August 2001, Vol. 6:1, pp. 1-19.

01-02 A Framework for Developing Spreadsheet Applications in Economics
Miles B. Cahill and George Kosicki
This paper presents a framework for thinking abaout the different types of spreadsheet modeling applications available for teaching economics. Spreadsheet applications are categorized by the degree to which students are involved in the spreadsheet's construction, and the degree to which students are involved in the mathematics of the model. Examples of applications from each category call attention to the high degree of flexibility that instructors have in designing spreadsheet applications, and suggest alternative ways that instructors can tailor applications to fit their specific instructional style and setting. While the costs associated with developing spreadsheet applications are significant, we believe that the costs are manageable, even for instructors who are new to spreadsheets. We conclude that the advantages imparted to students by carefully tailored spreadsheet applications are significant, and we hope to encourage the development and use of such applications.
*Published in Social Science Computer Review, Summer 2001, Vol. 19:2, pp. 186-200.

01-01 An Economic and Social Development Index
Miles B. Cahill
The measurement of economic and social development is one of the most hotly contested subjects in economics. Since the 1970s, it has become evident that it is necessary to use a composite index to capture various aspects of social and human development and to address related issues of inequality. Recently, the United Nations Development Programme (UNDP) (1990) constructed the Human Development Index (HDI), which has since become the standard. The HDI is the unweighted average of three separate indices (formed from four variables) which are designed to measure health and longevity, knowledge and communication, and access to goods. The HDI has been criticized on several grounds, from the choice of data and methods used to transform the data, to the index construction methodology itself.

The main goal of this paper is to utilize a procedure that addresses many of the criticisms of the HDI. Specifically, this study uses a large number of variables to measure a wide spectrum of development characteristics, and employs the principal components procedure to determine the weights of the variables in the index. The principal components tool has been used in the development literature to measure particular components of the development process, and was first suggested by Ram (1982) to measure development as a whole. However, it has not been used to measure development on a large scale. Cahill and Sanchez (1999) applied this procedure to construct an economic and social development index (ESDI) for Latin American countries and U.S. states, and found some statistically different results than the HDI. This paper will construct an ESDI for a much larger sample of countries around the world.

Faculty Research Series 2000 Abstracts

00-07 Endogenous Sustainable Growth
Frank Raymond
First, this paper demonstrates that growth is compatible with Rawlsian justice, even when considering human capital accumulation and heterogeneous natural resources. Second, this result confirms the widely cited, yet disputable, argument offered by Burmeister and Hammond (1977) who apply the standard Lagrangian methodology to a continuum of nonlinear constraints. In fact, legitimate strategies for working with a continuum of constraints are complex. Existence of a general approach remains an open mathematical question. The approach employed herein circumvents this issue by internalizing constraints and demonstrating two sufficient conditions which, with the Peano Existence Theorem, guarantee existence of a maximin path.
*Published in Contirubtions to Theoretical Economics, Vol. 6:1, article 6.

00-06 Establishing the Historical Foundations of Modern Growth Theory: An Inquiry into the Motivation and Methodology of F.P. Ramsey
Frank Raymond
Frank Ramsey's methodology is evident in virtually every modern analysis of intertemporal savings decisions. Unfortunately, his abbreviated lifespan, combined with what was at the time a novel and uniquely mathematical approach, may have contributed to a sometimes obscure legacy. In an effort to trace the catalysts for his work, this paper describes the evolution of the theory of intertemporal savings up to the publication of A Mathematical Theory of Saving (1928). This analysis first describes the evolution of classical interpretations of both the sources and function of savings. Thus equipped, Ramsey's role as a forefather of modern methodology and thought appears more evident.

00-05 Characterizing Interdependent Renewable and Nonrenewable resources: A Stochastic Multi-sector Characterization of Bellman's Principle of Optimality
Frank Raymond
This paper focuses on the interaction of renewable and nonrenewable resources within the context of a stochastic model of optimal control. First, although existence of a multidimensional closed form solution to the general multi-sector Bellman model remains an open mathematical question, this analysis offers a characterization which can also be extended to other applications. Second, three stochastic golden rules with respect to resource exploitation are established. Finally, within the context of coastal development, this analysis explains why renewable resources become increasingly vulnerable to random external shocks as nonrenewable resources are depleted.

00-04 The Impact of Information Problems, Product Differentiation, and Price Leadership on Development Finance in South Asia
John Adams, Hans-Peter Brunner, and Frank Raymond
Despite evidence to the contrary from South Asia, one would expect international credit subsidies to stimulate a reduction in rural interest rates. Previous studies suggest that collusion among formal and informal lenders is responsible for preclusive interest rates and excessive economic rents. This study demonstrates that product differentiation, in conjunction with adverse selection problems and asymmetric and incomplete information, generate cost asymmetries which allow these traits to persist, even within monopolistically competitive financial markets with "horizontal" subsidies. This suggests that policies specifically designed to eliminate collusive behavior will not necessarily improve the conditions for rural credit.
*Published in Review of Development Economics, August 2003, Vol. 7:3, pp. 431-444.

00-03 The Transformation of China's Health Care System and Accounting Methods: Current Reforms and Developments
David K.W. Chu and Kolleen J. Rask
This paper is a case study of China’s recent reforms in hospital accounting. We analyze the Chinese health care system in transition to highlight the changing role and nature of accounting services before and after the recent reforms. Prior to reforms, the accounting system provided data solely for government central planning purposes. Reforms were supposed to decentralize hospital decision making, thus signaling a need for a new accounting system that would provide information to managers and resource providers. However, the government continues to maintain control by fixing basic medical service prices at levels below cost while allowing profit margins for pharmaceutical sales and other advanced medical services. This schizophrenic policy of quasi-decentralization/macro-control has resulted in an accounting information system that serves neither the need of managers nor external resource providers. In January 1999, major reforms were instituted in China’s hospital accounting system, creating a more streamlined structure. The legacy of the command economy, however, remains clearly evident in the areas of revenue control and state subsidies. Hospital accounting in China is therefore subject to the ongoing evolution of the government’s health care policy.
*Published in Advances in International Accounting, edited by S.T. Sale JAI (Elsevier Science), Vol. 15, pp. 13-44.

00-02 Using Principal Components to Produce an Economic and Social Development Index: An Application to Latin America and U.S. States
Miles B. Cahill and Nicolas Sanchez
This paper presents a principal components methodology (based on Ram (1982) and Srinivasan (1994)) for determining the weights for a set of indicators in a composite index of development. The procedure is applied to a 36 variable data set consisting of 1990 data for 19 Latin American countries and corresponding 1990 and 1960 data for the individual U. S. states. GDP is excluded from the index. The paper compares the results to other well-known indices, and uses the combined data set to better understand the level and scope of development in each region and over time.
*Published in Atlantic Economic Journal, September 2001, Vol. 29:3, pp. 311-329.

00-01 New Uses for Spreadsheets in Intermediate Macroeconomics: Dynamic Neoclassical and New Keynesian Models
Miles B. Cahill and George Kosicki
Because modern macroeconomics is by nature dynamic, the mathematics involved are often difficult for undergraduate students to grasp. Unfortunately, numerical examples that are helpful in clarifying other technical areas of economics are very time consuming and even intractable when using pen, paper and calculator. This paper introduces spreadsheet applications that solve a large variety of numerical exercises for two types of dynamic macroeconomic models. These applications revolve around a neoclassical (Solow) growth model, and a new Keynesian IS-LM/AS-AD model. As one of the exercises, the AS-AD model is modified to incorporate the neoclassical assumptions of the permanent income hypothesis and rational expectations.
*Published in Computers in Higher Education Economics Review, August 2001, Vol. 14:2, pp. 7-11.

Faculty Research Series 1999 Abstracts

99-05 The Impact of Neighborhood Characteristics on House Prices: What Geographic Area Constitutes a Neighborhood?
Katherine A. Kiel and Jeffery Zabel
The concept of neighbourhood has been analyzed in many disciplines but there is little consensus on what constitutes a neighbourhood. The theoretical literature in housing economics suggests that neighbourhood characteristics are important in determining the value of a housing unit. Thus, to obtain accurate estimates of the impact of its components on house prices, it is necessary to include neighborhood indicators but the level of aggregation of these variables is unclear.

99-04 Undesirable Facilities, Neighborhood Dynamics and Environmental Equity
Katherine A. Kiel
The question this paper addresses is whether neighborhoods exposed to negative externalities such as an incinerator change differently from those neighborhoods which are not exposed, and if so, in what ways do they change?

99-03 Exploring Economic Models Using Excel
Miles B. Cahill and George Kosicki
This paper presents examples of consumer theory concepts that can be explored more thoroughly, and made more accessible, when spreadsheet software is used as part of the intermediate-level economics classroom. Areas of application are utility functions, income and substitution effects, price indices, measures of welfare change, and the optimal saving rate. A web supplement is available on the Internet and includes spreadsheet examples pertaining to industrial organization and macroeconomics. The examples were chosen to stimulate awareness and discussion of the many classroom uses for four important Excel spreadsheet tools: three-dimensional graphs, iteration, Goal Seek, and Solver.
*Published in Southern Economic Journal, January 2000, Vol. 66:3, pp. 770-792.

99-02 Exchange of Goods or Exchange of Blows? New Directions in Conflict and Exchange
Charles H. Anderton
Although conflict economics has expanded its interest post-Cold War violence, our theme is that conflict potential weaves itself into the decision of consumers, producers, and traders in ways that economists have essentially ignored. This is the lesson of our literature review and of our model, which combines Ricardian trade with the potential for appropriation under ratio and logistic conflict technology. The model shows that economic activities like production and exchange are fundamentally altered in the presence of conflict potential. We also find that arms races, arms control, violence, and technology of conflict exist in non-international forms within the production/exchange economy.
*Published in Defense and Peace Economics, 2000, Vol. 11:1, pp. 55-71.

99-01 Production, Exchange, and Appropriation in a Hawk-Dove Economy
Charles H. Anderton
We derive the payoffs of a hawk-dove game based upon production, exchange, and appropriation possibilities. We then link the evolutionary equilibrium of the game to economy-wide fundamentals: production, volume of trade, security of property, welfare, and the extent of hawks in the economy. Within the model we show how hawk-like behavior can be subdued by the potential of mutually beneficial exchange. The model also identifies the conditions under which appropriation possibilities are so large that hawk-like play comes to dominate the economy. We discover, under certain conditions, that an increase in each agent's productivity in its comparative advantage good reduces production and welfare. When increases in productivity result in less production and welfare, the hawk-dove society is plagued by immiserizing growth. The productivity increases which leads to immiserizing growth occur just prior to a productivity cusp that, if reached, vaults the hawk-dove economy to a dramatically improved state.

Faculty Research Series 1998 Abstracts

98-06 The Strengths and Weaknesses of Factor Analysis in Predicting Cuban GDP
Nicolas Sanchez and Miles B. Cahill
This paper has a dual purpose. At the technical level, it updates the work of Gitanjali Joglekar and Andrew Zimbalist (1989) on the use of factor analysis to estimate per capita Gross Domestic Product (GDP) for Cuba. At the analytical level, it questions the validity of this approach when the underlying economic structure of factor analysis is based on the data of relatively unregulated economies such as those of other Latin American countries. The main conclusion of the paper is that while factor analysis is indeed a powerful predictor of the economic performance of market economies, it tends to overestimate the level of economic activity of command economies, and it fails to take into account subjective (i.e., utility-related) values which are assumed to be an intrinsic part of any measure of economic well being. If this criticism stands, then it follows that other similar studies of Cuban GDP are failing to provide a good measure of economic performance and well being in this island nation.
*Published in Cuba in Transition, 1998, Vol. 8, pp. 273-288.

98-05 Fence Laws vs. Herd Laws: A Nineteenth Century Kansas Paradox
Nicolas Sanchez and Jeffrey Nugent
This paper considers the legal conflict between farmers and cattle raisers over the fencing of animals and crops within the context of Kansas in the 1870s, when counties were given the option to retain the traditional fence laws (requiring crops to be fenced in) or to adopt the herd laws (requiring the restraining of animals by means of herding). Since barbed wire fencing did not reach Kansas until 1875, and a very detailed agricultural census was recorded that year, this study is able to conduct statistical tests of various hypotheses as to why approximately half the counties chose fence laws while the other half chose herd laws. The study pays close attention to the hypotheses suggested by Earl Hayter (an agricultural historian), law and economics specialists, and the property rights theorists. Its main findings are that, while previous hypotheses that use public choice and group interests consideration in explaining the choice of the legal regime are borne out, the traditional conceptual division between farmers and cattle raisers turn out to be overly simplified due to some important complementarities in production between some crops and animal husbandry. Hence, the results demonstrate that a clear distinction needs to be made between corn farmers/cattle producers, on the one hand, and wheat farmers on the other. The empirical findings also challenge the generally accepted role of population desity in determining the legal regime.
*Published in Land Economics, November 2000, Vol. 76:4, pp. 518-533.

98-04 Institutional Change in Transitional Economies: The Case of Accounting in China
Kolleen J. Rask, David K.W. Chu and Thomas R. Gottschang
A major economic mystery of the 1990s is why the transition to market-based systems has been so difficult. Key strategic services such as financial, legal, and accounting services are relatively deficient in transitional economies due to decades of being supplanted by the command structure. China's deliberate path of institutional change, which has allowed strategic services to evolve along with the market structure, stands in sharp contrast to the Eastern European emphasis on liberalization and privatization. Regenerating the professional personnel, legal framework and standards is a difficult task. We offer a detailed case study of the accounting profession in China, illustrating both the necessity and the complexity of the solution.
*Published in Comparative Economic Studies, Winter 1998, Vol. 40:4, pp. 76-100.

98-03 The Relationship Between Aid and Debt: Preliminary Empirical Evidence
Miles B. Cahill and Paul Isely
Preliminary tests are conducted on the Cahill and Isely (1998) model. In this model, the level of external debt is partially determined by foreign aid. Specifically, this model suggests that the level of external debt for an LDC is positively related to GDP and aid, but is negatively related to absorbtion. Preliminary empirical tests find support for this model, despite the fact there are serious data issues. However, support was not found for the proposition that aid is provided to keep LDCs stable. Because they are generally supportive, the results suggest that more detailed testing of the model is warranted. Future tests are outlined to address some of the shortcomings of these preliminary tests.
*Published in The American Economist, Fall 2000, Vol. 44:2, pp. 78-91.

98-02 The Audit Planning Visit: Meeting AECC Objectives in the Audit Classroom
Nancy R. Baldiga
In the traditional cycle approach to the auditing course, students are introduced to the public accounting profession and learn about the audit process by applying auditing concepts to each of the primary business operating cycles. In this article, the author presents a variation to the traditional cycle approach to audit education. The Audit Planning Visit introduces students to auditing concepts such as audit objectives, risk, internal controls, and audit tests and evidence by requiring students to visit a local business and design an audit approach for the purchases/payables, payroll/personnel, inventory/production, or cash cycles. The exercise provides an opportunity for participants to visit a local business, observe a business operating cycle, develop a group oral presentation, and write an individual audit planning memo tailored to that cycle. Evaluations provided by past participants suggest that the exercise effectively integrates Accounting Education Change Commission learning objectives into the standard auditing course. Additionally, students acquire interpersonal and communication skills, improve their understanding of technical auditing concepts, and perceive the exercise as a valuable addition to the traditional curriculum.

98-01 Appropriation, Deterrence, and Trade Policy in a Simple Exchange Economy
Charles H. Anderton
When appropriation possibilities are overlooked, the predictions of standard trade models can be misleading. Trade theorists need a new class of models designed to investigate the effects of appropriation possibilities on exchange. Toward this end we incorporate appropriation possibilities into the simplest model of trade: the Edgeworth box model of pure exchange. The model predicts that exchange will occur between a Defender and an Attacker, but the terms and volume of trade will be considerably different from the standard Edgeworth box. We also discover that when the power of attack is low, a tariff designed to punish Attacker's appropriation causes welfare of both countries to increase and the volume of trade to expand. When the power of attack is high, however, a tariff penalty against appropriation causes the piracy rate to increase and the security of property to fall due to the terms-of-trade effect of the tariff. The model has applications to classical piracy, present-day software piracy, and other markets where exchange, defense, and appropriation are intertwined.
*Abbreviated version published in Economics Letters, April 1999, Vol. 63:1, pp. 77-83.