Doctor of Philosophy / Department of Economics / Steven P. Cassou, Wayne Nafziger / This dissertation comprises three essays in open economy and international macroeconomics. The first essay investigates the propagation mechanism of real exchange rate shocks to key real sectors that constitute U.S. foreign trade. The analysis is carried out by decomposing the U.S. trade balance into agriculture, manufacturing and services and evaluating how these sectors respond through the monetary policy channel to a shock in the real exchange rate. A VAR model is constructed using quarterly data of the U.S. foreign trade from 1976Q2 to 2005Q1. The results show that a shock to the real exchange rate has a greater impact on manufacturing and services net trade relative to agriculture. Moreover, the results also indicate, at the sectoral level, that exports are more sensitive to the real exchange rate shocks than are imports. These results are important to researchers using dynamic stochastic general equilibrium (DSGE) models of small open economies because they show transmission features of real exchange rate and monetary policy disturbances to key sectoral components of exports, imports and the trade balance. The second essay employs a dynamic stochastic general equilibrium framework to an open economy setting in order to investigate the mechanism through which the key sectors of agriculture, manufacturing and services are affected by shocks in the real exchange rates. The essay investigates exchange rate movements as deviations from purchasing power parity, disregarding the changes in the prices of non-tradable goods relative to tradable goods among countries. The results suggest that exchange rate movements are a function of structural parameters that constitute the three sectors of agriculture, manufacturing and services such as labor shares and the elasticity of substitution between domestic and foreign goods. The third essay examines the key forces driving innovation among entrepreneurs of ICT (information and communications technology) firms within Bangalore, India’s leading software city. The essay employs the multinomial logistic technique on qualitative variables related to education, social strata, experience, and diaspora of Indian software entrepreneurs to show empirically their relevance in explaining Schumpeterian innovation in the Indian software industry. This study not only looks at the impact of years of schooling on innovation, but also the types of education received by an entrepreneur, such as technical or commercial type of education, whether the last degree was received from India or from abroad and whether the entrepreneur attended the Indian Institute of Technology. The empirical results indicate that, the level of education, in terms of number of years of schooling and types of education received by an Indian software entrepreneur are statistically significant in explaining innovation in the Indian software industry. The results also show that, more years of experience in the software industry by an entrepreneur, increases the probability that they become innovators and reduces the likelihood of imitation. Moreover, the likelihood of adaptation is invariant to years of experience in the industry. We also investigate whether exposure to foreign technology increases the likelihood of innovation in the industry by examining three types of diaspora networks, that is, living abroad, working abroad and being a CEO abroad at least 6 months before establishing a software company in India. The results suggest that this foreign exposure increases the likelihood of innovation and reduces imitation and adaptation. Among studies of Indian entrepreneurs examining caste, this study is unique in that caste has no statistical significance in explaining entrepreneurship.

Doctor of Philosophy / Department of Economics / Yang M. Chang / There have been considerable discussions about why countries have interests in forming preferential trade agreements (PTAs), which typically take the forms of a “free trade area” (FTA) with Rules of Origin (ROO) and a “customs union” (CU) (World Bank, 2005). This dissertation contains three essays with three different models of trade under oligopoly to analyze various issues on preferential trade agreements. The first essay examines welfare implications of forming preferential trade arrangement (PTAs) between two asymmetric countries that differ in their market sizes. Key findings are as follows. First, when market size asymmetry between two countries is not too large and ROO requirements are not too restrictive, the formation of an FTA with effective ROO can be welfare-improving to both members. Second, the formation of a PTA is more likely to emerge between countries of similar in their market sizes, ceteris paribus. Third, compared to the pre-PTA equilibrium, there are greater reductions in external tariffs under an FTA than under a CU such that a non-member country is relatively better off under the FTA. The second essay presents a three country model of trade under Bertrand price competition to analyze differences in welfare implications between an FTA with ROO and a customs union (CU). It is shown that the maximum limit of ROO requirements over which there are welfare gains from trade for FTA members depends crucially on the degree of substitutability of final goods (or the intensity of product market competition). It is also found that member countries and their final-good exporters are better off in a CU than in an FTA. There are greater reductions in external tariffs under an FTA than under a CU such that a non-member country is relatively better off under the FTA. The third essay presents a three country model of FTA with Cournot quantity competition and derives the maximum enforceable level of ROO over which there are welfare gains from trade to each member country. It is shown that ROO and external tariffs are strategic complements such that the higher is the regional input restrictions, the higher is the external tariff necessary to induce firms to fully comply with ROO requirements. It is also shown that an FTA with effective ROO has a positive effect on the final-good trade. But the trade-diverting effect does not occur in the final-good sector.

Master of Arts / Department of Economics / Yang M. Chang / This paper studies economic factors that affect a multinational’s decision between serving a foreign market via foreign direct investment (FDI) and setting up a joint venture (JV) with a local firm in the host country. The factors that we consider include the substitutability of products produced by competing firms, as well as the hotly debated intellectual property rights (IPRs) protection. In a simple North-South framework, we show that JV is the equilibrium market structure when the degree of R&D spillover is moderate, products are considerably substitutable, and IPRs strong. The government of South needs to maintain a minimum level of IRP to encourage an effective JV. For increasing social welfare, the South also needs to have a policy that limits foreign ownership in a JV.

Doctor of Philosophy / Department of Economics / Yang M. Chang / The first essay develops a simple sequential-move game to characterize the endogeneity of third-party intervention in conflict. We show how a third party’s “intervention technology” interacts with the canonical “conflict technologies” of two rival parties in affecting the sub-game perfect Nash equilibrium outcome. From the perspective of deterrence strategy, we find that it is more costly for a third party to support an ally to deter a challenger from attacking (i.e., to maintain peace), as compared to the alternative case when the third party supports the ally to gain a disputed territory by attacking (i.e., to create war), ceteris paribus. However, an optimally intervening third party can be either “peace-making,” “peace-breaking,” or neither depending on the characteristics of the conflict and the third party’s stake with each of the rival parties. The second essay develops a simple model to characterize the role that an intervening third party plays in raising the cost of rebellion in an intrastate conflict. Extending the Gershenson-Grossman (2000) framework of conflict in a two-stage game to the case involving outside intervention in a three-stage game, we examine conditions under which an outside party optimally intervenes such that (i) the strength of the rebel group is diminished or (ii) the rebellion is deterred altogether. We also find conditions in which a third party optimally intervenes at a level insufficient to deter rebellion. Such behavior, which improves the incumbent government’s potential to succeed in conflict, is often overlooked in conflict studies evaluating the effectiveness of intervention. One policy implication of the model is that an increase in the strength of inter-governmental trade partnerships increases the likelihood that third-party intervention acts to deter rebellion. In the final essay, a simple model of a college basketball season is constructed to examine the existence of conference bias in college basketball’s Ratings Percentage Index. Given the nature of the RPI formula and the hierarchical structure of college basketball’s 31 conferences, we expect the RPI to be biased against teams playing a difficult conference schedule. The model verifies that, even in a perfect world where teams play to expectation and can be transitively compared based on revealed performance level, the RPI does not necessarily provide an ordinal mapping from revealed team ability level to the real number line. This result has important implications on NCAA tournament selection and seeding.

Doctor of Philosophy / Department of Economics / Lloyd B. Thomas Jr / Dennis L. Weisman / This dissertation has focused primarily on the relationship between aggregate private output and a measure of the public fixed capital stock for the U.S. economy using two different approaches for the years 1947-2005. The study starts with a brief survey of the existing literature on the relationship between private output and public capital and continues with an analysis of data on some macroeconomic variables related to private output and public capital. It employs a production function approach to provide empirical estimates and analyze its econometric problems, and continues with a vector autoregression (VAR) model. It uses two criteria, the Akaike Information Criterion and the Schwartz Bayesian Criterion, to compare the performance of the two models tested. There are several differences between this study and the existing literature. The most important difference is that each of the other studies uses only a single approach to analyze the relationship between the public capital stock and private economic growth while this study uses two different methodologies to analyze the same relationship and tests the two models using the same aggregate macroeconomic annual data on the U.S. economy from 1947 to 2005. This study represents the first attempt to provide estimates of the elasticities of private output with respect to the private capital stock, private labor stock, public nonmilitary capital stock, and public core infrastructure capital stock by employing two different approaches so that the comparison of the elasticities resulting from the two different approaches can be most meaningful. Moreover, this study also represents the first attempt to provide estimates of the marginal products of the above four inputs. Second, the studies that employ a production function approach are ad hoc and so is the production function approach of this study, but the production function approach section of this study is the only one having an explicit capital evolution equation for both the private and the public capital stock. All of the other studies using annual data use aggregate macroeconomic data on related variables for less than thirty years while this study employs aggregate data from 1947 to 2005 (fifty nine years). Lastly, the other production function studies are incomplete in the sense that they either do not attempt to deal with some major econometric problems such as a common trend (resulting in a spurious correlation) and the direction of the causation or when they do acknowledge major econometric problems, they do not do anything to correct them. This study, on the other hand, will try to detect major econometric problems. Once the problem is detected, the study will employ measures to deal with the problem. Major findings of this study are as follows. First, the causation runs from the public fixed capital stock to private output rather than in the other direction. Second, most of the studies in the existing literature report a positive impact of the private fixed capital stock on private output that is too small to be credible, whereas they report a positive impact of the public fixed capital stock on private output that is too large to be credible. However, the estimates of this study suggest not only a positive impact of the public capital stock on private output that seems credible but also a positive and very large impact of the private capital stock on private output. Third, the results of several joint hypothesis tests conducted show that there is enough sample evidence to claim that not only that the private sector operates under constant returns to scale in all inputs, private and public, for the years 1947-2005 but also that the private fixed capital stock is more important to the aggregate private production process than either of the two measures of the public fixed capital stock.

Master of Agribusiness / Department of Agricultural Economics / Michael R. Langemeier / With increased focus on food safety and protection, the Food & Drug Administration (FDA) has examined the possibility of removing the exemption for elevators pertaining to Good Manufacturing Practices (GMPs). The objective of this thesis was to determine the extent to which Kansas Elevators have adopted GMPs. To accomplish the objective of this thesis, information from an online survey completed by 42 elevators was summarized and analyzed. The information that was collected focused on the general classification of the elevators, grain safety programs, pest control programs and procedures, operational methods and personal practices, and maintenance of the facilities and equipment. Correlation coefficients were computed to determine if there were any significant correlations between elevator characteristics and GMPs. The study found that many of the elevators surveyed do not comply with the GMP requirements, and would require more resources in order to do so. Little connection was made between classification information such as size, location, or number of employees and GMP implementation. The significant correlations found were between HACCP and Pest Management, and HACCP and Traceability. The main limitation of this thesis was the small number of survey participants.

Doctor of Philosophy / Department of Economics / Yang M. Chang / Concerns over the possible loss of government revenue resulting from tariff reductions under trade liberalization have triggered many developing countries to opt for a strategy of raising destination-based consumption taxes on tradable goods. The first essay analyzes the welfare effects of a coordinated tariff reduction and domestic tax reform when the objective of a reforming country is to keep its government revenue unchanged. Assuming imperfect competition in an import-competing industry, we find that revenue-neutral reform involving tariff reduction and an increase in domestic tax rate may reduce domestic welfare under plausible assumptions. It also discusses the scenario in which the reforming country's objective is to keep domestic profit (or production) unchanged. We further identify the conditions under which a profit-neutral tariff and tax reform may be welfare-improving or welfare-deteriorating. The second essay uses a reciprocal-dumping model to examine the welfare effects of the Byrd Amendment (i.e., the Continued Dumping and Subsidy Offset Act, or CDSOA). It analyzes the differences in optimal tariffs set by the home and foreign governments when the home (i.e., the U.S.) government redistributes anti-dumping duties to its domestic firm under the new trade law, as compared to the traditional antidumping policy under which these duties are government revenues. We derive conditions under which the CDSOA may raise or lower the price of an import-competing good in the U.S. market. The results show that the CDSOA is an instrument of protectionism and strictly improves the home country welfare when markets are less competitive than in Cournot equilibrium. We find that under the same market characteristics, the new trade law strictly reduces foreign country welfare. The CDSOA's welfare effect is shown to be ambiguous, however, when markets are more competitive than Cournot. The third essay modifies the model presented in Essay 2 to allow for the scenario in which the foreign country strategically responds to the home country's CDSOA law by adopting similar trade law. The results show that the foreign country is able to enhance its national welfare when the import-competing markets are less competitive than in the Cournot equilibrium. We also discuss whether it is welfare-improving for the U.S. to voluntarily repeal the Byrd Amendment and restore the traditional antidumping policy, considering that, otherwise, its trading partner may also adopt the CDSOA law. We find that it is still in the best interest to the U.S. not to revoke the Byrd Amendment when markets are less competitive than Cournot. When markets are more competitive than Cournot, however, repealing the Amendment may turn out to be socially welfare-improving.

Master of Agribusiness / Department of Agricultural Economics / Christine Wilson / During the past two decades, there has been major consolidation in the grain handling industry. Staying competitive in today’s environment involves finding projects that add value from a strategic geographic standpoint and a revenue generation standpoint. This study examines several economic factors regarding growth opportunities of facility assets that exist in Northern Kansas, and what the associated cost structure would look like based on a business feasibility study. This study researched the county production by volume and acreage devoted to crop production as well as bid structures and freight spreads of competitors currently in the region today. It also involved researching the margin structures, and it considered a strategic decision about the size of facility that could be built on the existing margin opportunity. Several economic theories were used to derive the feasibility of this research and measure the profitability of the project. Farmer sentiment was polled and a focus group was assembled to understand the opportunity that Scoular may have in the region. The results found a region that provides a steady volume of crop production and margins that are typical of those that Scoular is experiencing in other regions of the state. The research also found the farmers of this geography, receptive to more competition entering the market place.

Doctor of Philosophy / Department of Economics / Yang-Ming Chang / Innovation is development of new ideas that leads to better solutions to current problems. From an economic standpoint, innovation is the engine of economic growth. The appearance of innovation is not uniform in the market, and neither are its affects. The development of new products and technology is significant in any industry. As a result, understanding the path of progress within an industry is necessary to maximize the benefit from innovation. The focus of this research is to further understand the relationship between producers, consumers, and the environment, in the context of innovation. Three scenarios are evaluated. First, innovation evaluated in the context technology intensive industries with product differentiation. Using an optimal control approach with product differentiation and firm outlook we examine conditions that maximize social welfare. When firm(s) have the same discount rate regardless of market structure, a monopoly will develop more innovative products. However, it is shown that competition may increase innovation if firms alter their outlook in a duopoly market structure. Next, influence of consumers on producer adoption of clean technology is evaluated. A spatial model is developed to analyze welfare implications of environmental policies in a competitive market with production and consumption heterogeneity. Consumers with heterogeneous preferences choose between non-green and certified green products, while firms with heterogeneous production costs decide whether to engage in green production. In order for green products to be recognized by consumers, firms must join a green club. The number of green firms, environmental standard, and overall welfare under the market solution are all found to be socially sub-optimal. Finally, producer innovation in markets characterized by public policy due to emission concerns is evaluated. Using a dynamic approach, we derive a firm’s optimal R&D investment strategy to develop clean technology. Explicitly allowing for the cumulative nature of R&D shows that emissions per unit of output are lowest when the firms cooperate in R&D, and show that a profit-maximizing merged entity will never choose the most efficient investment strategy in clean technology, which has implications for emission tax policy and environmental innovation to improve overall welfare.

Doctor of Philosophy / Department of Economics / Steven P. Cassou / Although geographic proximity is not enough to imply similar social, political and economic outcomes, the Portuguese and Spanish development experiences have been quite alike since the 15th century and in particular during the post-WWII period. Since 1950, both countries went through significant market transformations, ranging from democratization to market liberalization and adhesion to the European Union. However, even today, these economies, and in particular Portugal, do not rival those of the more developed European countries. This dissertation contributes to the growing body of literature on the Iberian economies by presenting three essays that employ modern macroeconomics tools to further our understanding about the growth and development experiences of these countries. The first essay provides a detailed growth accounting exercise and reconciles the results with the political and socioeconomic context of the 1950-2004 period. Since Total Factor Productivity is identified as the main engine of growth, the second essay explores a quantitative measure for the level of barriers that each country faced in the process of adopting new technologies. The numerical experiments suggest that Spain had consistently lower barriers than Portugal and that the gap has been increasing since the establishment of the European Single Market. The last essay investigates the role of fiscal policy and, specifically, if distortionary taxes on capital and labor income may have been a key factor behind the observed volatility for factor inputs. The simulation results derived from several potential scenarios support this conjuncture. Additionally, the last essay contributes by offering a time series for the levels of effective tax rates on labor and capital income in the Iberian economies over the 1975-2004 period.