The intent of this dissertation is to reconcile the observed actions of profit-maximizing agents who buy analysts' or econometric forecasts. This will entail a discussion of the shortcomings of magnitude error measures as indicators of profits, and the development of a more important role for directional accuracy as a forecast criterion. The case against the literature's use of magnitude errors, and in favor of directional accuracy, proceeds from consideration of how forecast purchasers use the forecasts: to prepare for change, so as to make profits (or avoid losses). Essentially the argument is that the predicted direction of change represents more important information to the purchaser than the predicted magnitude of change The plan of investigation is to measure the ex post performance of actual interest rate and GNP forecasts of different types, not only in terms of magnitude errors (Root Mean Squared Error, Average Absolute Error, and the Theil U statistic) and in terms of directional accuracy, but where possible to calculate an actual profit rule from using forecasts. Following this, the correlations among profits, directional accuracy, and the magnitude error measures are determined. The statistical significance of the correlations, and the probabilities of the observed significant correlations for different evaluators will provide evidence regarding how well the various evaluation criteria reflect actual use profitability The results of the investigation are that profitability is not strongly associated with the magnitude error measures, but profitability is strongly associated with directional accuracy. This outcome casts serious doubt on the validity of nearly all the existing literature on forecast evaluation. Once the evidence of a strong profits & directional accuracy link is coupled with the results indicating analyst and econometric forecasts have greater directional accuracy than other forecasts, it becomes apparent that the profits of analyst and econometric forecasts (despite their worse performance in magnitude error terms) must be greater as well. The superior profitability of the analyst and econometric forecasts is consistent with their on-going purchase by economic agents. As a consequence it appears that the traditional view in the literature is misguided / acase@tulane.edu

acase@tulane.edu

acase@tulane.edu

This study uses a field method to examine the effects of a group compensation plan on labor productivity, product quality, and organizational performance, in three independent subunits of the same manufacturing plant. More specifically, the study investigates whether the use of two budget-based incentives, a group output-target based scheme and a gain-sharing scheme offered in combination, motivates production teams to improve economic performance in this manufacturing setting. The output-target based scheme is a linear budget-based incentive that rewards individual team performance, providing a cash bonus when quantity meets or exceeds a target and a low (penalty) wage when quantity or product quality falls short of a target. The gain-sharing scheme (also a budget-based scheme) rewards production teams for achieving plant-level quarterly targets for labor productivity and product quality. After controlling for numerous factors that influence labor productivity and product quality in a multivariate regression model, I find that the combination of incentives schemes is associated with improvements in performance. Labor productivity increases by sixty eight percent and the defects rate decreases by ninety five percent following implementation of the incentive scheme. I also found a reduction in absenteeism and turnover, as well as improvements in the percentage of work orders completed on schedule. Although I cannot attribute the observed performance improvements to a specific scheme, nor discern whether the improvements are causally linked in some proportion to greater worker effort, improved peer monitoring, improved team cooperation, or better strategy development (i.e., worker learning); the empirical results of the study suggest that team (and group) performance is enhanced through the use of standard-based incentives contracts. Moreover, the results suggest that both schemes offered jointly with mechanisms to prevent free-riding and promote worker learning (timely performance feedback) create synergies in this particular setting that motivate production teams to improve performance. These findings suggest that this combination is effective in motivating group effort, promoting cooperation, and encouraging peer monitoring within and across production teams. All these factors leading to improvements of the firm's economic performance.

This dissertation offers an investigation of the current issues in economics of the international airline industry. The two broad issues considered are deregulation of and consolidation on the international airline markets. The process of deregulation has been and will probably remain gradual. Moreover, restrictions are often removed in such a way that players are forced to play by different rules. In this context, I measure price effects of asymmetric entry barriers at London's Heathrow airport. I find that such entry restriction decreases the fares of the affected carriers. Concurrently, I find that the airport dominance effect, shown to exist for the US domestic market, applies to the international routes as well. On the basis of my results, I suggest the following danger in the process of the gradual deregulation of international aviation. Given the strong political influences and the current industry structure, we may end up getting locked into situations, where a carrier that dominates an airport may obtain preferential treatment on the respective international routes. This can prevent entry by the more efficient carriers and/or keep the less efficient airlines in operation. As far as airline consolidation is concerned, I develop a new model of price competition between international airline alliances and test its predictions. The primary focus is on the price effects of codesharing (connecting the partner airlines' networks) and antitrust immunity (allowing the partner airlines to jointly set fares across the unified network). I show theoretically that antitrust immunity may not have negative price effects in addition to that of codesharing. This finding is contrary to what has been suggested previously. Empirical analysis confirms the theoretical predictions.

The thesis shows two possible ways in which intergenerational redistributions associated with a reform from a comprehensive income tax to a direct consumption tax are affected when the standard models studying this phenomenon are extended. The usual models studying the welfare impact of a direct consumption tax reform on transitional generations use numerically simulated overlapping generation general equilibrium models with strict life-cycle savers and a single production sector. The models examine the welfare impact of moving from a comprehensive income tax to either an expenditure tax or a wage tax; business taxes are ignored and assumed to "pass through" to individuals. One important result of these studies is that the expenditure tax reform results in large steady state welfare gains at the cost of imposing substantial welfare losses on the initial elderly generations. In marked contrast, a wage tax reform creates welfare gains to the elderly generations but results in lower steady state welfare gains (or even losses). This thesis tests the robustness of these conclusions under two important conditions ignored by these models. First, the thesis incorporates an explicit business sector in these models and studies the impact of implementing the two above described consumption taxes with an additional reform of replacing the business income tax with a business cash flow tax. Intergenerational redistributions are altered and difference in steady state welfare gains are much smaller under such consumption tax reforms. Second, the thesis shows how practically feasible transition rules can lower intergenerational redistributions without affecting the final steady state values. A variety of transition rules, both in business and individual sectors, are studied in this context.

This dissertation consists of four chapters. In the first chapter, a review is made of the research on international reserve demand in the last decade. The next three chapters offer alternative models of reserve demand. One motive for why foreign currencies are held by national central banks (NCBs) is to intervene in the foreign exchange market. A primary goal of the last three chapters is to incorporate such an intervention motive in modeling demand for foreign exchange reserves by the public sector. Another goal--more fully studied in the last chapter--is to assess the effects of exchange controls on demand for reserves. Disequilibrium regime-switching econometrics is the modeling framework employed. This methodology allows for the possibility that a different demand regime may be in effect in periods when the NCB is a net buyer of foreign currencies as compared to periods when it is a net seller. To deal with the effects of constant changes in the exchange control environment--which could alter demand behavior--a robust method is used which weighs down observations from periods where the standard model performs poorly. Some evidence is found that market intervention changes the response of demand for foreign reserves with respect to trade and the opportunity cost. This effect is not uniform across countries however. National demands for foreign reserves are also found to vary. Furthermore, the period where the model performs poorly are not characterized chiefly by heavy exchange controls but by political/economic shocks and uncertainty. Shocks and uncertainty alter demand for foreign currency reserves while exchange controls appear to be ineffective.

The simple market efficiency hypothesis implies that prediction errors, such as forward less spot exchange rates, will be orthogonal to elements of the information set. One can therefore test for market efficiency via ordinary least squares by regressing the prediction errors on pieces of information available at the time the predictions are made and checking if the intercept term and slope coefficients are jointly equal to zero. Two econometric complications have to be dealt with when testing for market efficiency in the above manner. The first complication arises from the fact that multi-period-ahead predictions lead to an inter-temporal band structure for the covariance matrix. This complication can be handled by employing Hansen's Generalized Method of Moments (GMM) estimate which takes explicit account of the band structure of the covariance matrix. The second complication arises from the fact that the disturbances in the regression may also be heteroskedastic. Insofar as heteroskedasticity might adversely affect inference, we propose a White-type test that indicates whether or not a covariance matrix correction for heteroskedasticity is necessary. The test essentially checks if the difference between the homoskedastic and heteroskedastic consistent forms of Hansen's GMM estimate tend towards zero. Monte Carlo experiments examining the performance of the proposed test show that at least in large samples, the White-type test works well under a variety of heteroskedastic specifications. By actually applying the above procedures to test the simple foreign exchange market efficiency hypothesis, we find that for particular regression specifications and data sets, it does not make a practical difference whether we base inferences on the homoskedastic or the heteroskedastic consistent forms of Hansen's GMM covariance estimate. For other data sets and regression specifications, however, we are able to reject market efficiency only if we use the appropriate form of Hansen's GMM estimate as determined by the White-type test.

This dissertation focuses on the heterogeneous production technologies in banking and finance within the context of efficiency-analyses. The first essay studies the cost efficiency of Turkish banking industry. Studies of bank efficiency tend to draw conclusions from pooled estimates, assuming that all banks in a sample use the same technology, or estimates based on a priori classifications of the banks. It is well known that efficiency rankings may be corrupted if banks that use different technologies are pooled together in estimating the technological frontier with respect to which inefficiency is estimated. We model unobserved heterogeneity in banking technologies as a mixture model, and investigate the efficiencies of 53 Turkish banks using likelihood-based stochastic frontier analysis for the period 1990--2000. Our likelihood-based analysis finds no evidence of heterogeneity along the state vs. private and Islamic vs. conventional dimensions. The estimated classifications and mixture components have intuitive ex post institutional explanations. The second essay investigates the labor efficiency of Turkish banks for 1990--2000 by using a flexible translog functional form where the demand for labor is a function of loans, deposits, number of branches, total fixed assets and a time variable. The model allows for the possibility that at any point banks' observed employment may not be optimal. We expand the labor-use model by utilizing the EC (Estimation-Classification) estimator to obtain data-driven identification of bank-technology-classes in our sample. The third essay uses a set of semiparametric efficient (SPE) estimators for a panel data of 32 developing countries to investigate the effect of sources of external financing on production efficiency. The idea of production frontiers for firms in a given industry is applied in a macroeconomic context in which countries are producers of output (GDP) given inputs (capital and labor) and some external factors (i.e. debt, equity and foreign direct investment (FDI) stocks). Using two recent datasets, we are able to investigate the individual impact of foreign liabilities, namely debt, equity and FDI, on production efficiency. The estimates indicate that FDI plays a more prominent role of promoting production efficiency than debt or equity financing for developing countries.

This thesis deals with market rules that define the price and the generation schedule in electricity markets. The research has focused on three approaches: Pool Cost Minimization (PCM) with marginal pricing, Consumer Payment Minimization (CPM), and mixed Pool Cost/Consumer Payment Minimization (PCM/CPM). Each method is examined from the perspective of the solution characteristics and the relevant economic principle, together with numerical examples. Especially in the CPM method, several fundamental theoretical results are obtained regarding the nature of the minimum consumer payment and the corresponding generation schedule. In addition, some generator bidding strategies are studied with respect to PCM and CPM so as to identify how Gencos can obtain a competitive advantage.