Summer Research Program
2005
Director: Prof. Katherine Kiel

Overview
Due to the generosity of the May and Stanley Smith Charitable Trust, in summer 2005 the Economics Department launched its first summer research program in which undergraduate students worked as research assistants on department faculty projects. Eight students and seven faculty members participated, producing a variety of products which resulted in several working papers (see abstracts below). In addition to conducting research, the assistants participated in weekly events that ranged from research discussions and leadership building to graduate school advice and social activities.

Summer 2005 research assistants (L-R):
Patrick Thomson '06, Elisa Gjoka '06, Andrew Feeley '06, Nicole Comi '06
Josh Sebastian '06, Erin Wall '06, Raul Portillo '06, and Megan Peter '07

Abstracts of projects

Principles of Conflict Economics
Professor: Chuck Anderton
RA: Erin Wall

Erin Wall supported me in the early phase of a long term project designed to create a manuscript presenting the major themes and principles of the developing field of conflict economics. As part of the broader social scientific inquiry into peace and war, conflict economics uses economic methods to study nation-state wars, civil wars, and terrorism. Erin's research assistance included: (1) downloading data on nation-state wars, civil wars, terrorism, and militarized interstate disputes; (2) searching for new data sources pertinent to the field; and (3) searching on-line journals for social science articles on interstate war, civil wars, terrorism, arms trade, and proliferation of weapons of mass destruction.

Erin presented a summary of her work at the 2005 Undergraduate Summer Research Symposium (USRS). She is also following this line of research in her Departmental Honors Thesis.

Income Inequality and Economic Freedom
Professor: John Carter
RA.: Elisa Gjoka

This project involves an econometric study of income inequality using data for a sample of 123 countries observed at five-year intervals from 1965 through 2000. The primary research question is whether a tradeoff exists between income equality and economic freedom. Panel methods are used to estimate the effect of economic freedom on within-country income inequality. Control variables include democracy, per capita income, educational attainment, population dispersion and growth, age distribution, and economic organization.

Extraordinary Achievers in Human Development
Professor: Miles Cahill
RA: Megan Peter

The Human Development Index (HDI), published by the United Nations Development Programme (UNDP) in the annual Human Development Report, has become the standard way to measure development, and to compare the level of development between countries. The HDI is an index of four variables: life expectancy at birth, the literacy rate, the combined primary, secondary and tertiary enrollment rate, and GDP per capita. To add these indicators together, the UNDP transforms the variables and assigns each of the broad categories an "equal weight." In its reports, the UNDP has informally highlighted countries that seem to over- or under-achieve in certain categories.

The goal of the summer project was to identify extraordinary achievers in development using a more formal process, and try to understand what drives such performance. The process we used was to calculate an alternative human development index using a statistical procedure called principal components, a type of factor analysis. To our surprise, the weights on the four variables in the HDI assigned by our principal components analysis (to form the resulting index we called the HDIPC) were very close to those chosen ad hoc by the UNDP.

We then tried to determine what factors might have led to extraordinary achievement. While the analysis is in an early stage, we suspect that diet and climate has a major positive impact on life expectancy. War and the AIDS epidemic seems to best explain underachievement in life expectancy in several countries, particularly in southern Africa.

We are writing a paper that will be submitted for publication in an academic journal. Megan presented a summary of the work at the 2005 Undergraduate Summer Research Symposium (USRS).

Inquiry into the existence of systematic bias in U.S. News & World Report rankings
of American liberal arts colleges
Professor: David Chu
RA: Josh Sebastian

The annual US News & World Report edition of rankings of American colleges and universities has become a major source of information for prospective students and parents. Each college is ranked based on a composite score, which is made up of individual scores taken from eighteen variables. One key variable is "Peer Assessment." This variable consists of a score, between 1 and 4, that is awarded to each college by the Dean or Provost's personal assessment of that college's academic reputation. Because this variable is given a 25 percent weight in the composite score, it has a significant influence on the final rankings of every college. The objective of this project is to examine whether systematic bias generally exists in the assignment of the "Peer Assessment" score. In particular, we are interested in examining whether there is systematic bias against religiously affiliated colleges in the assignment of the "Peer Assessment" score.

A data set has been developed which can be used to answer these questions.

The Impact of Wetlands Regulations on Home Owners and their Neighbors
Professor: Kathy Kiel
RA: Nicole Comi

Environmental regulations are put in place to protect human health as well as that of various other species. These regulations can put costs on various individuals and groups, but they are expected to give benefits as well. It is likely that those individuals who bear the costs are not the same as those who receive the benefits. This is a strong possibility in the case of US federal wetlands regulations where regulations can restrict landowners' ability to develop their properties in certain ways which can decrease the value of the regulated properties. However, the regulations also give benefits to nearby neighbors who no longer need worry about increased development in their area. The overall impact must be determined empirically.

In order to ascertain the impact on house prices of wetlands regulations, this study develops and analyzes several data sets. These contain information about the sales prices of single family residences, the houses' characteristics at the time of the sale, and local, state, and federal regulations that impact the properties in several Massachusetts towns over several years. Using house price hedonic regressions that have become standard in the literature we will examine how prices of the properties that fall directly under the regulations are affected, as well as the prices of those properties that are not regulated but have neighbors who are. This will allow us to better understand the true incidence of these regulations in terms of property values.

We have reviewed the literature and developed a model. The components of the data set have been obtained and a system developed to identify the neighbors of properties affected by wetlands regulations in Newton, Massachusetts.

Toxic Sites and Market Clearing: An Event Study
Professor: Kathy Kiel
RA: Patrick Thomson

In many communities throughout the United States, contaminated sites are identified and addressed by the Environmental Protection Agency (EPA). In each of these communities, the EPA presents a plan of action and provides the community with information about progress being made. Previous literature has found there to be a significant disincentive associated with living in close proximity to a contaminated site. This study examines whether the housing market returns to equilibrium as information about the site changes and as learning begins. We examine the housing market surrounding a Superfund site in Woburn, Massachusetts to determine how, if at all, the market recovers from the disamenity the EPA is addressing. We find that throughout the time period, from discovery through the announcement that the site was clean, house prices are negatively impacted by the site. We also find that returns to housing in Woburn are equal to returns in the greater Massachusetts housing market, signifying that a new, lower equilibrium had been reached once information about the site had been incorporated by the market.

We are in the process of writing a working paper that will be submitted to an academic journal and to an academic conference. In addition, Patrick presented a poster at the USRS.

Statutory exceptions to the collateral source rule
Professor: David Schap
RA: Andrew Feeley

The collateral source rule is a common law norm that permits an injured party to collect damages from both the injurer (tortfeasor) and from an accident insurer. Numerous exceptions to the rule have been introduced into statutory law. Examples include exceptions for insurance provided by an employer and for public sector insurance benefits (through Social Security or Workers' Compensation funds). States differ as to which exceptions have been codified in their statutes. The goal of the project was to summarize the similarities and differences of collateral source rule exceptions in the various states.

The work has led to a paper (nearing completion with coauthor Attorney Matthew McCabe) that describes types of collateral source exceptions in the states. A second paper (also with McCabe) has not yet been begun, but the table that forms its foundation is nearly complete at this time, requiring only some reclassifications and final editing.

The Effects of the Mexican Corporate Governance Code on
the Quality of Earnings and its Components
Professor: Karen Teitel
RA: Raul Portillo

The Corporate Governance Code (Code) was established in Mexico in January 2000 to increase investor confidence by encouraging more accurate financial reporting and more transparent disclosure practices by management. In this paper, using a sample of Mexican American Depository Receipts as well as a sample of firms trading only on the Mexican Stock Exchange, we investigate whether the Code has achieved its goal of improving the quality of the firms' financial reporting process. Using persistence and predictability models to assess earnings quality, we find that the persistence of cash flows, working capital accruals and net income as well as the importance of cash flows in predicting next-years earnings significantly increases after the Code was implemented for Mexican American Depository Receipts firms. However, using a measure of abnormal accruals to assess earnings quality, we find abnormal working capital accruals decreases after implementation of the code for firms trading on the Mexican Stock Exchange only. Interestingly, the Sarbanes-Oxley Act passed in July 2002 has a similar goal in the US Our results may give some insight into the potential effectiveness of various provisions of Sarbanes-Oxley due to the economic interdependencies that exist between the US and Mexico.

A paper "The Effects of the Mexican Corporate Governance Code on the Quality of Earnings and its Components" co-authored with Susan Machuga from Central Connecticut State University was presented at the American Accounting Association Annual Meeting on Aug 10, 2005. Raul presented a poster at the USRS.

Excess Endowments at Private Liberal Arts Colleges
Professor: Karen Teitel
RA: Raul Portillo

Endowments at colleges and universities are important. One of the principal responsibilities of college and university presidents is to maintain or grow their endowments. Endowments are used to both finance current operations and to grow the college or university for the future. In addition to operating incentives to maintain or grow endowments, there are external pressures. One external pressure is the use of the endowment per student ratio as part of the annual US News and World Reports ranking of colleges and universities. A higher endowment per student results in a higher ranking.

The internal and external pressures for endowment growth may result in excess endowments at the expense of benefits for students or capital expenditures. Core, Guay and Verdi (2004) investigate agency problems of excess endowment holdings in not-for-profit firms. They find that excess endowments are associated with excessive managerial pay and reduced expenditures on the production of the good or service. These agency problems may result in incentives to maintain the excess endowments. For example, Ehrenberg and Smith (2003) find that richer colleges and universities, as measured by the endowment per student ratio, devote a larger share of alumni giving to further building of endowments versus current operations and capital expenditures.

The purpose of this research project is to apply the excess endowment model developed by Fisman and Hubbard (2002) and used by Core, Guay and Verdi (2004) to private liberal arts colleges to investigate potential agency problems of excess endowments. This research may explain the behavior found by Ehrenberg and Smith (2003). It also may highlight some of the perverse effects of external pressures to build endowments created by college and university ranking systems. We will also investigate some potential mitigating factors present in private liberal arts colleges such as the Board of Trustees and any religious affiliations.

A data set has been created that can be used in this investigation.

Calendar of Program Events

5/23/05 Introductory Meeting for student participants hosted by Prof. Kiel

6/3/05 Workshop: Leadership and team building
Prof. Teitel and Prof. Gilson of University of Connecticut Business School

6/5/05 BBQ and Pool Party hosted by Prof. Baldiga

6/7/05 Workshop: Experimental Economics
Prof. Carter

6/15/05 Seminar: Forensic Economics
Prof. Schap

6/22/05 Talk by Prof. John Cull, Graduate Studies Advisor with science students

6/29/05 Field trip to Museum of Science (with science research students)

7/7/05 Talk by Prof. Melissa Boyle about economics graduate school

7/11/05 Talks by Economics and College Honors students about their current projects, hosted by Prof. Cahill

7/20/05 Hike with students

7/28/05 Reception and baseball game, hosted by Prof. Anderton