Waterloo economics series | 2011

Abstracts of working papers

#11-001 -- Shan Chen, Margaret Insley, Tony Wirjanto (School of Accounting & Finance)

The impact of stochastic convenience yield on long-term forestry investment decisions (PDF)


This paper investigates whether convenience yield is an important factor in determining optimal decisions for a forestry investment. The Kalman filter method is used to estimate three different models of lumber prices: a mean reverting model, a simple geometric Brownian motion and the two-factor price model due to Schwartz (1997). In the latter model there are two correlated stochastic factors: spot price and convenience yield. The two-factor model is shown to provide a reasonable fit of the term structure of lumber futures prices. The impact of convenience yield on a forestry investment decision is examined using the Schwartz (1997) long-term model which transforms the two-factor price model into a single factor model with a composite price. Using the long-term model an optimal harvesting problem is analyzed, which requires the numerical solution of an impulse control problem formulated as a Hamilton-Jacobi-Bellman Variational Inequality. We compare the results for the long-term model to those from single-factor mean reverting and geometric Brownian motion models. The inclusion of convenience yield through the long-term model is found to have a significant impact on land value and optimal harvesting decisions.

#11-002 - Alain-Désiré Nimubona and Horatiu A. Rus

Green technology transfers and border tax adjustments (PDF)


We develop a two-country general equilibrium model of foreign assistance tied to environmental clean-up in the presence of transboundary pollution. The recipient country generates pollution as a by-product in the production of a ‘dirty’ good, which it consumes as well as exports to the donor country. In contrast to the literature which typically treats aid as a monetary transfer, we assume that foreign aid consists in a transfer of environmental technology that lowers the cost of public clean-up in the recipient country. We highlight the fact that the marginal propensities to consume the polluting good in the donor and recipient countries are driving the terms of trade effect at work in our model. The environmental and welfare outcomes are influenced by the direct, terms of trade and abatement effects of the transfer. We show that such tied aid may be Pareto improving if the clean-up effect of the foreign aid is strong enough to compensate for the donor’s monetary and terms of trade losses. We finally analyze the effects of the green transfer combined with an appropriate border tax adjustment. Contrary to intuition, we find that green technology transfers and border tax adjustments are not complements.

Journal of Economic Literature (JEL) classification

F18, F35, O13, Q28


Green aid, technology transfer, border tax adjustments, abatement, transboundary pollution, environment, international trade

#11-003 - Mikko Packalen

Market share exclusion (PDF)


A market share exclusion contract between a seller and a buyer prevents rival sellers from competing for a share of the buyer's purchases. For non-discriminatory contracting we show that, unlike exclusion through exclusive dealing, market share exclusion can be profitable even when buyers coordinate on the best equilibrium in the contract-acceptance subgame. The condition for the profitability of market share exclusion is characterized in terms of straightforward economic concepts. With discriminatory contracting market share exclusion contracts are generally less profitable than exclusive dealing contracts. The motive for employing market share exclusion contracts, which welfare impacts have not been well understood, instead of exclusive dealing contracts, which have been the focus of both theory and policy, may thus often be the avoidance of scrutiny by competition authorities rather than some more direct economic advantage of market share exclusion over exclusive dealing. However, we also show that market share exclusion decreases both buyer and total surplus. Hence, competition authorities should not view exclusion through exclusive dealing as a pre-requisite for the possibility of anti-competitive effects from exclusionary contracting.

JEL classification

L42, K11, K21


Market share exclusion, exclusive dealing, exclusion

#11-004 - Pierre Chaussé

Generalized empirical likelihood for a continuum of moment conditions (PDF)


This paper extends the generalized empirical likelihood method to the case in which the moment conditions are defined on a continuum (CGEL). We show, for the iid case, that CGEL is asymptotically equivalent at the first order to the generalized method of moments for a continuum (CGMM) developed by Carrasco and Florens (2000). Because the system of equations that we need to solve becomes singular when the number of moment conditions converges to infinity, we treat CGEL as a nonlinear ill-posed problem and obtain the solution using the regularized Gauss-Newton method. This numerical algorithm is a fast and relatively easy way to compute the regularized Tikhonov solution to nonlinear ill-posed problems in function spaces. In order to compare the properties of CGEL and CGMM, we then perform a numerical study in which we estimate the parameters of a stable distribution using moment conditions based on the characteristic function. The results show that CGEL outperforms CGMM in most cases according to the root mean squared error criterion.

JEL classification

C13, C30

#11-005 - Avner Ben-Ner (Univeristy of Minnesota), Fanmin Kong (Peking University), Stéphanie Lluis (University of Waterloo)

Uncertainty task environment and organization design an empircal investigation (PDF)


The paper addresses two broad research questions: 1. How do internal uncertainty associated with the task environment and external uncertainty arising from market volatility impact organization design? 2. What are the relationships among various elements of organization design: delegation of decision-making, incentives, monitoring, and internal labor market practices (promotion, training, employment security)? We expand on Prendergast (2002a), who challenged the conventional view of a tradeoff between risk and incentives, and build a single unified framework for answering our two research questions. Using a uniquely rich dataset that contains detailed information about the task environment of core employees and organization design at the individual, group and firms levels in 530 Minnesota firms in the mid 1990s, we first find support for Prendergast's key argument that internal uncertainty (over which employees have control) affects directly the allocation of decision-making and only indirectly incentives (via allocation of decision-making). This confirms similar findings by Foss and Laursen (2005), DeVaro and Kurtulus (2010) and Shi (2011). We also find that internal uncertainty has much impact on organization design through the choice of delegation of decision-making at the employee level, less so at the group level, and very little at the firm level, whereas external (market) uncertainty has little effect on organization design, especially at the individual and group level. Decision-making, monitoring, various internal labor market practices and incentives are strongly related to each other through substitution and complementarity.

JEL classification



Uncertainty, organization design, task complexity

#11-006 - Stephanie Lluis and Brian P. McCall

"Evaluation of the Impact of the Increase in EI Allowable Earnings Pilot Project on Working While on Claim and Job Search Behaviour in Canada"

This paper examines the impact of the change in allowable earnings proposed in a pilot project (WWOC) of the Canadian Employment Insurance system implemented in December 2005 in some Canadian regions on working while on claim behaviour and on job search behaviour. The WWOC pilot is expected to increase the subsidy to low earnings/part-time work. Search theory would predict that, all else equal, individuals would increase their intensity of search for these types of jobs. We find evidence that the WWOC pilot substantially increased the incidence and duration of work while on claim receiving full benefits and reduced the incidence and duration of working while on claim receiving no benefits for both men and women. We also find differences in the impact of the WWOC pilot on the job search behaviour of men. These results suggest that the WWOC pilot significantly encouraged working while on claim in low-paying jobs allowing receipt of full benefits. The WWOC pilot significantly reduced the number of hours looking for a job and reduced the likelihood of looking for only a full-time job (relative to looking for only a part-time job or either). These results are robust to the various robustness check analyses performed.

JEL Classification:
J08, J64, J65