The future research plan for RUESG concerning the research over the years 2004-2007
This year is the twelfth year of operation for the Research Unit on Economic Structures and Growth (RUESG). RUESG has been selected by the Academy of Finland as a unit in the national programme for Centres of Excellence in Research for the years 2002-2007. RUESG has three goals: (i) to conduct top-level research in selected areas of economics, (ii) to train selected graduate students in their PhD studies and (iii) to occasionally provide expertise on economic policy problems in Finland.
The research areas of the Unit are:
Team I: Taxation, labour economics and resource economics (Director and team leader, professor Erkki Koskela)
Team II: Industrial economics and real option theory (team leader, professor Rune Stenbacka)
Team III: Time series econometrics (team leader, professor Pentti Saikkonen)
In what follows we proceed as follows. First, we briefly characterize the research plans of team leaders. Second, we also briefly outline the planned research of fellows and graduate students in RUESG.
Team leaders:
Team I: Erkki Koskela’s research is focused on four topics in economics. (I) Equilibrium unemployment and its various potential determinants concerning the interaction between imperfections in labour, capital and product markets and the potential role of profit sharing. (II) Optimal labour and capital taxation under imperfectly competitive labour market. (III) Research about Finnish economic development and (III) Several new topics in forest economics.
Collaboration on the issues associated with the topic (I) will take place in various ways both with professor Rune Stenbacka (team leader) and Heikki Kauppi (university lecturer in the University of Helsinki and a fellow of RUESG). We have several new research topics exploring the potential determinants of unemployment and policy schemes under European conditions where there have been changes in the degree of competition both in the product markets, capital markets and in labour markets. For example, the share of profit sharing has increased in many European countries. Concerning the topic (II) optimal labour and capital taxation issues. This will be studied with professor Ronnie Schöb (Magdeburg University, Germany) and with Dr. Leopold von Thadden (moving to European Central Bank from Deutsche Bundesbank). This is also a new and interesting area of research, due to changes in market behaviour in Europe. (III) Research about Finnish economic development during the last twenty years deals with the ‘Finnish paradox’, i.e. the issue of simultaneous high growth and high unemployment. This is the joint project with professor Seppo Honkapohja (Bank of Finland), Dr. Willy Leibfritz (OECD) and Dr. Roope Uusitalo (Research Institute of Labour Economics, Helsinki). Finally, concerning the topic (IV), i.e forest economics, Erkki Koskela have several research projects both with the professors Gregory S. Amacher (Virginia Tech, USA), Markku Ollikainen (University of Helsinki) and Luis Alvarez (Turku School of Economics and Business Administration). We have a plan to write a graduate textbook about forest economics with Amacher and Ollikainen. With professor Luis Alvarez (Turku School of Economics) the plan is to study policy design under stochastic circumstances with stochastic interest rates, timber prices and forest stand value, and where landowners are risk averse.
Team II: Rune Stenbacka’s research focuses on the following topics: (I) The interaction between imperfection in labour, capital and product markets and their implications for equilibrium unemployment. To an increasing extent economists have argued that labour market frictions and wage rigidities do not constitute sufficiently rich explanations of the poor employment performance in European countries. Rune Stenbacka will conduct studies on the following themes in primary cooperation with Erkki Koskela: (a) profit sharing and equilibrium unemployment with negotiated compensation, (b) capital intensity and equilibrium unemployment, and (c) negotiated wages, product market imperfections and equilibrium unemployment. (II) The research cooperation with professor Thomas Gehrig (University of Freiburg) explores the relationship between endogenous switching costs, relationship formation and market performance within the framework of oligopolistic models. (III) The research co-operation with professor Oz Shy (University of Haifa) represents a long-term research project investigating how firms can use their design of organizational production mode as a strategic instrument. (IV) Applications of real options: The research cooperation with professor Luis Alvarez applies a real option approach to explore 1. the design of organizational mode (outsourcing versus in-house production); 2. the timing and terms of takeovers. One of the Ph.D.-students (Toni Nordlund, RUESG) prepares his Ph.D.-thesis with a focus on R&D competition within the framework of a real options
Team III: Pentti Saikkonen has completed his work on the stability of nonlinear GARCH models and nonlinear autoregressions with GARCH errors. In the latter models, Saikkonen has obtained the first practically applicable results on geometric ergodicity and existence of moments. Based on these results Saikkonen has started to develop a related asymptotic estimation theory. Another work he has completed deals with dynamic binary response models and their application to predicting U.S. recessions. As a new project, Saikkonen has started to study noncausal autoregressive models which seem to provide a promising approach for modeling expectations.
RUESG reseachers:
Professor Luis Alvarez's (Turku School of Economics and Business Administration) research during the year 2007 has focused in three
different general topics. The first topic is the analysis of how Knightian
uncertainty and ambiguity affects the optimal timing of irreversible
decisions of a risk neutral but uncertainty averse decision maker. The
second topic has been the analysis of strategic interaction on optimal
timing policies both within a zero sum game setting as well as on a more
general non-zero-sum game framework. Along the lines of year 2007 the third
topic has been the applications of stochastic control theory in economics
and finance. In these studies the main objective has been to develop new
techniques for analyzing and solving stochastic control problems of
potentially discontinuous processes with an emphasis on Levý-diffusions.
Alvarez collaborates with Erkki Koskela and Rune Stenbacka.
Professor Seppo Honkapohja (University of Cambridge) continued his research on the implications of adaptive
learning for the conduct of macroeconomic policy during his visit to RUESG.
His work focused on two topics (i) economic policies to combat liquidity
traps in economies with sticky prices and (ii) anticipated fiscal policy
and adaptive learning. In addition, he worked on a revision of an earlier
paper "Near-rational exuberance". Finally, Seppo also worked on revisions
of the book manuscript "Economic Prosperity Recaptured: The Finnish Path
from Crisis to Fast Growth", which is joint work with Erkki Koskela, Willi
Leibfritz and Roope Uusitalo.
Professor Markku Lanne's (University of Jyväskylä) research activities concentrated on applied financial and macroeconometrics. In a joint project with Helmut Lütkepohl (European University Institute, Florence) he continued studying new ways of identifying structural vector autoregressive (SVAR) models by making use time-variation in error variance. With Pentti Saikkonen he studied the noncausal autoregressive models and proposed methods of testing whether economic time series exhibit forward-looking or backward-looking dynamics. These methods were applied to U.S. inflation, and the results lend support to forward-looking behaviour. In a joint project with Katja Ahoniemi (Helsinki School of Economics), he considered modelling and forecasting the implicit stock return volatility. In this study, a new bivariate mixture multiplicative error model was proposed and successfully applied to modelling jointly the volatilities implied by put and call options written on a Japanese stock market index. In a joint project with Helinä Laakkonen (University of Jyväskylä), he studied the importance of the phase of the business cycle on the effect of macroeconomic news announcements on exchange rate volatility. With Jani Luoto (University of Jyväskylä) he employed Bayesian econometric methods to study the robustness of the previous findings concerning the risk-return relationship in the U.S. stock market with respect to the exact specification of the GARCH model used. In January he was appointed professor of empirical macroeconomics at the University of Helsinki.
University Lecturer Heikki Kauppi's research in 2007 focused on two topics (i) the determinants of EU budget allocations (with Mika Widgrén) and (ii) dynamic modeling of discrete time series variables. One paper within project (ii) develops forecasting procedures based on a dynamic extension of the multinomial logit model and applies them for predicting the decisions of the Federal Reserve to change its target for the federal funds rate. Kauppi is currently working on extensions to dynamic binary response models and on their empirical applications. One study examines the stability of the predictive content of the yield curve for US recessions.
Lic. (Econ.) Elias Einiö visited the department of economics at University College London during the spring term 2007. He started a new project on evaluating the effects of public R&D subsidy programs on private R&D efforts. He also continued to working with the project "Skill-biased technical change in Finnish manufacturing". During the year he gave several seminar presentations including a presentation in Royal Economic Society's Annual Conference.
Lic. (Econ.) Helena Holopainen's research interest is in the fields of economics of organizations and contract theory applied especially to the analysis of corporate governance and ownership structures. She is going to defend her dissertation titled as “Essays on corporate governance, stakeholders, and restructuring” in the end of January, 2007. The dissertation consists of an introductory essay and three theoretical papers. The first paper analyzes how the employees’ incentives to acquire human capital can be reconciled with the shareholders’ ability to implement organizational changes and, in particular, how the shareholders’ choice of production technology affects the need to use specific governance mechanisms to this end. The second paper analyzes the role of owners’ monitoring ability for the allocation of authority within the firm and the choice of firm’s business strategy. The focus of the third essay is the board of directors and how the presence of (incumbent or former) CEO on the board affects the nature of CEO succession process. From the beginning of July, 2006 Helena Holopainen has visited the research department of Bank of Finland where she works on issues related to the supervision of financial conglomerates.joined RUESG in the beginning of September 2004. She received her licentiate degree in the fall 2002. Her research interest is in the fields of economics of organizations and contract theory applied to the analysis of corporate governance and ownership structures. She continues to work on her dissertation under the heading “Corporate governance, human capital and structural changes in organizations”.
M.Sc. (Econ.), Mikael Juselius was on leave of absence during spring 2007 from the RUESG while holding a position as an acting lecturer in economics at the Swedish School of Economics and Business Administration. He also defended his PhD thesis on June the 15th 2007. During the fall semester he was held a position a as research visitor at the Bank of Finland. During 2007 he completed two working paper manuscripts, "Cointegration implications of Linear Rational Expectations Models", during the research visit, and in collaboration with Niklas Ahlgren, "The Likelihood Ratio Test for Cointegration Rank and the Initial Condition". I addition, he worked on a research project on how to measure oligopoly conduct in collaboration with Staffan Ringbom and Moshe Kim.
Lic. (Stat.), Leena Kalliovirta's research focused on nonlinear time series econometrics, in particular, misspecification testing. Kalliovirta completed her project "Quantile Residuals for multivariate models" and started to work with her third essay "Quantile Residuals and their empirical distribution function". In autumn she visited the University of Copenhagen, Department of Mathematical Sciences for three months. Kalliovirta also presented her work at the 18th EC2 Meeting in Faro, Portugal. .
Lic. (Econ.), Michal Kempa served as a visiting researcher at the Bank of Finland during the first half of the year 2007. During his stay he completed 3rd essay of his thesis “What determines commercial banks demand in the interbank market”. The paper extends his previous model of the interbank market and is published as a bank of Finland discussion paper in 2008. The second half of the year he was working on his last paper, “Liquidity crisis in the interbank market” where he identifies key elements of the crisis at the financial markets that occurred in 2007 and their impact on the implementation of the monetary policy.
Dr. and Docent (in philosophy) and Lic. (Econ.) Ilkka Kiema has worked during 2006 on his dissertation on the economics of intellectual property rights. One of its two main parts is concerned with commercial piracy, and an extensive paper by Kiema on this topic was accepted for publication in the Journal of Econonomic Behavior and Organization in May, 2007. After finalizing this paper, Kiema has mostly worked on the other main part of his dissertation, the analysis of imperfect intellectual property rights within endogenous growth theory. Kiema produced an extensive paper on this topic and submitted it to the Journal of Economic Behavior and Organization in September, 2007. During the rest of the year Kiema has worked on and almost finalized a shorter and less ambitious paper, which is concerned with the analysis of network externalities within the framework of his model of commercial piracy.
Dr. Topi Miettinen's MPhil (Econ, UCL), M. Sc (Econ, Helsinki) research consists of three main topics. First, I study how pre-play
negotiation and communication in general affects the outcome when players
suffer from guilt when breaching an agreement. Given the properties of
guilt identified by social psychology, I study pre-play negotiation in
several important classes of games, (1) which outcomes players are able to
commit to; (2) whether it is easier to commit to efficient outcomes; (3)
how changes in the underlying game affect the outcome. I also show that
impatience may improve players equilibrium payoff in this context unlike
suggested earlier. In information transmission contexts, guilt provides a
rationale for more informative even if misleading language. This research
is prescribes both theoretical and experimental methods.
Second, I study learning in games when cognitive skills limit how finely
players restore data and handle it when building expectations about the
behavior of others. I study whether steady states coincide with a Nash and
other equilibria while allowing for changes in what players observe at
each round of play and how conjectures about opponent’s play are
constructed. I build up upon the Analogy-based expectation equilibrium
(Jehiel, 2005) by letting the fineness of data management depend on
players’ observations and adding own payoff observations to each players’
data. The equilibrium concept becomes a generalization of the Self-
confirming equilibrium (Fudenberg, Levine, 1993) and a refinement of the
Analogy-based expectation equilibrium. In many important cases, there are
such equilibria which depart from both concepts. Within this research
agenda, I also study the relationship between various equilibrium concepts
with a learning foundation and provide foundations for some concepts which
have previously lacked one.
Third I study lobbying in networks. Previously, the theoretical research
on lobbying has ignored the vitality of a good network in order to
effectively influence a decision maker. Yet, building up well functioning
relationship requires time and investment from the two parties. This is
time-consuming and costly for both, not just the lobbyist. I study the
role of political parties in restricting access of potential candidates to
politicians who may be pivotal in making a decision over a nomination or a
public project: one can only belong to only one party at a time and thus
political parties provide exclusivity and reduce incentives to build up a
network. The conclusion is that political parties may good or bad for
welfare. Within this research agenda, I also study a more general rent-
seeking model where network and relationship also matter unlike in
previous studies.
Lic. (Econ.) Toni Nordlund has been continuing research on optimal investment under uncertainty and imperfect information. The paper Optimal Dynamic Management of R&D under Uncertainty (HECER Discussion Paper No 174/July 2007) investigates optimal R&D investments in an industry where technological progress is associated with leapfrogging and the demand fluctuates randomly (innovation rent is uncertain). The paper Optimal Market Entry under Uncertainty and Asymmetric Information applies real options in strategy to investigate optimal entry into a competitive market when there is both uncertainty and asymmetric information among the investors over the market profitability. The paper Optimal Acquisition of Investment Information under Uncertainty investigates the optimal acquisition of incremental information in the context of an irreversible investment opportunity that involves payoff uncertainty.
Lic. (Econ.) Janne Tukiainen started to work in RUESG 1.3.2007. Previously he worked as a GS-fellow in FDPE and was visiting ECARES in Brussels until 31.1.2007. Janne has been working on all the three essays of his thesis. The first essay, under the title: "Testing for Common Costs in the City of Helsinki Bus Transit Auctions" was accepted for publication in the International Journal of Industrial Organization 24.12.2007. In his second essay he is developping a test for detecting collusion based on entry decisions. He applies this test to auction data on snow removal from school yards in Helsinki. Janne has presented this essay in eight workshop, seminars and conferences during year 2007, three of them abroad. In his third essay Janne is conducting empirical analysis of entry decisions in auctions where bidders operate under different information paradigms.
Lic. (Econ.) Jouko Verho's continued to work on his dissertation on empirical topics in labour economics. He finished a study with Roope Uusitalo on the effect on unemployment benefits on unemployment duration in Finland. He also started second collaboration project with Per Johannsson and Tuomas Pekkarinen to analyse relation between workplace accidents and business cycle in Sweden. In addition, he participated in several international seminars and conferences.
Dr Timo Vesala was a post-doctoral fellow in RUESG until he started as economist in Tapiola Asset Management Ltd. in the mid April 2007. During his last months as a member of RUESG Vesala’s research was primarily focused on modelling strategic bargaining in search markets, as well as examining the implications of asymmetric information in decentralized market environments. Part of this research agenda was conducted in collaboration with Professor Klaus Kultti (University of Helsinki) and Dr. Juuso Vanhala (Bank of Finland), Professor Markku Lanne (University of Helsinki) and Dr. Ville Mälkönen (Government Institute for Economic Research). He also participated in a research project examining the effects of Basel II Accord on the efficiency and procyclicality of bank lending. This line of research was conducted in collaboration with Dr. Esa Jokivuolle (Bank of Finland). In 2007 Timo Vesala served as the chairman of the Finnish Society for Economic Research.
Dr. Juha Virrankoski's research focused mainly on matching models in labour markets. His article “Search Direction and Wage Dispersion” (with Marja-Liisa Halko and Klaus Kultti) was accepted for publishing in International Economic Review. The article studies equilibrium market structure and wage distribution in a model where job seekers and vacancies can either send or receive wage offers. Article “Who Searches?” (with Klaus Kultti, Antti Miettunen, and Tuomas Takalo) was accepted for publishing in Japanese Economic Review. The article considers whether buyers contact sellers or vice versa. He presented paper “Equilibrium Unemployment Duration in an Urn-Ball Model of the Labour Market” (written with Klaus Kultti and Antti Miettunen) in the European Meeting of the Econometric Society in Budapest and submitted it to Economics Letters. Virrankoski continued studying intermediate institution in labor market with Marja-Liisa Halko and the microeconomics of monetary exchange with Klaus Kultti.
Lic (Econ) Tommi Vuorenmaa's finished his third and final Ph.D. thesis essay called ”Decimalization, Realized Volatility, and Market Microstructure Noise” while visiting Princeton University in USA. The empirical results of this essay show how the New York Stock Exchange (NYSE) tick size reduction from sixteenths of a dollar to one cent in January 2001 affected stock market volatility and microstructure noise on the NYSE. The results also shed light on how well certain popular non-parametric volatility estimators based on the idea of subsampling and averaging perform relative to each other. After his return in autumn, the Ph.D. thesis was submitted to University of Helsinki for official examination.