ERSA Working Papers released

Half empty, half full and the possibility of agreeing to disagree

By Alexander Zimper, Working Paper 58

Aumann (1976) derives his famous we cannot agree to disagree result under the assumption of rational Bayesian learning. Motivated by psychological evidence against this assumption, we develop formal models of optimistically, resp. pessimistically, biased Bayesian learning within the framework of Choquet expected utility theory.

As a key feature of our approach the posterior subjective beliefs do, in general, not converge to “true” probabilities. Moreover, the posteriors of different people can converge to different beliefs even if these people receive the same information. As our main contribution we show that people may well agree to disagree if their Bayesian learning is psychologically biased in our sense. Remarkably, this finding holds regardless of whether people with identical priors apply the same psychologically biased Bayesian learning rule or not.

A simple example about the possibility of ex-post trading in a financial asset illustrates our formal findings. Finally, our analysis settles a discussion in the no-trade literature (cf. Dow, Madrigal, and Werlang 1990, Halevy 1998) in that it clarifies that ex-post trade between agents with common priors and identical learning rules is only possible under asymmetric information.

Asymmetry and Discrimination in Internet Peering Evidence from the LINX

Alessio D'Ignazio and Emanuele Giovannetti, Working Paper 102

Is the quality of interconnection between Internet operators affected by their asymmetry? While recent game theoretic literature provides contrasting answers to this question, there is a lack of empirical research.

We introduce a novel dataset based on Internet routing policies, and study the interconnection decisions amongst the Internet Service Providers (ISPs) members of the London Internet Exchange Point (LINX).

Our results show that interconnection quality degradation can be significantly explained by asymmetry between providers. We also show that Competition Authorities should focus more on the role played by the “centrality of an operator”, rather than on its market share.

Adaptive Bayesian Analysis for Binomial Proportions

Sonali Das and Sourish Das, Working Paper 103

We consider the problem of statistical inference of binomial proportions for non-matched, correlated samples, under the Bayesian framework. Such inference can arise when the same group is observed a different number of times on two or more inference occasions, with the aim of testing the proportion of some trait. These scenarios can occur when we are interested to infer the proportion of extreme wave height per year, at a certain measuring station, where measurements are made every hour.

Gaps in measurements, either due to a malfunction of the measuring instrument or another reason, can result in an unequal number of observations in different years. For such scenarios, we develop an adaptive Bayesian method, and suggest a heuristic decision procedure to conduct statistical inference. We use the ø-divergence measure to quantify the perturbation of the posterior distribution of the proportion in different time points.

We present a simulation study for frequentist power investigation for both the adaptive Bayesian method, as well as the regular frequentist method, using the Monte Carlo technique. Based on the simulation study of frequentist power, as well as theoretical proof, under certain design, the adaptive Bayesian method is shown to outperform the regular frequentist method.

We administer the developed adaptive Bayesian method to two case studies when the total number of observation instances of the same group are unequal, at different time points of interest.

On attitude polarization under Bayesian learning with non-additive beliefs Alexander Zimper and Alexander Ludwig, Working Paper 104

Ample psychological evidence suggests that people’s learning behavior is often prone to a "myside bias" or "irrational belief persistence" in contrast to learning behavior exclusively based on objective data. In the context of Bayesian learning such a bias may result in diverging posterior beliefs and attitude polarization even if agents receive identical information.

Such patterns cannot be explained by the standard model of rational Bayesian learning that implies convergent beliefs. As our key contribution, we therefore develop formal models of Bayesian learning with psychological bias as alternatives to rational Bayesian learning. We derive conditions under which beliefs may diverge in the learning process despite the fact that all agents observe the same - arbitrarily large - sample, which is drawn from an "objective" i.i.d. process. Furthermore, one of our learning scenarios results in attitude polarization even in the case of common priors.

Key to our approach is the assumption of ambiguous beliefs that are formalized as non-additive probability measures arising in Choquet expected utility theory. As a specific feature of our approach, our models of Bayesian learning with psychological bias reduce to rational Bayesian learning in the absence of ambiguity

Loss leader or low margin leader? Advertising and the degree of product differentiation Witness Simbanegavi, Working Paper 105

This paper attempts to isolate the conditions that give rise to loss leader pricing.

I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.

The OCED Investment News new edition out

The November issue of the OECD's Investment News is currently available. Here is what you can expect:

• Grim outlook for FDI and shifting global investment patterns pg 1-3

As the financial crisis has evolved into a global economic crisis, the outlook for FDI has likewise darkened. On current trend, inflows will be down 13% and outflows by 6% by the end of the year. These declines would be much less severe than those experienced in 2001, when FDI inflows and outflows dropped by 49% and 43%, respectively. However, it seems likely that FDI flows will fall sharply in the second half of 2008 and continue to decline into 2009, especially considering the speed with which the global economic crisis deepened during Q3 and into Q4 of 2008.

• OECD guidance on sovereign wealth funds presented at World Bank/IMF meetings pg 4

The OECD Investment Committee‟s project on "Freedom of Investment, National Security and „Strategic Industries‟" (FOI) has, since early 2006, provided a forum for intergovernmental dialogue on how governments can reconcile the need to preserve and expand an open international investment environment with their duty to safeguard the essential security interests of their people. With the current crisis, it is all the more important to keep capital inflows moving freely. The Investment Committee is treating the issue of recipient country policies toward Sovereign Wealth Funds (SWFs) and other government-controlled investment entities as an integral part of the FOI project.

• China intensifies efforts to promote responsible business conduct in co-operation with OECD pg 4-5

The Chinese government has been intensifying its efforts to promote Responsible Business Conduct (RBC) in co-operation with the OECD. Most recently this involved a Multi-stakeholder Symposium on Government Approaches to Encouraging Responsible Business Conduct jointly organised by the Chinese government and the OECD Investment Committee in Paris on 26-27 June 2008.

• ILO and OECD join forces to promote responsible business conduct pg 6

Every year around June, the National Contact Points (NCPs) of the OECD Guidelines for Multinational Enterprises meet to review their experiences in implementing and promoting the Guidelines. This year, at the invitation of OECD Ministers and the G8, the annual NCP meeting was held back-to-back with a high-level conference on "Employment and Industrial Relations: Promoting Responsible Business Conduct in a Globalising Economy" jointly organised by the OECD and the International Labour Organisation (ILO).

• Selected investment publications pg 7

- Investment Policy Perspectives

- 2008 Annual Report on the OECD Guidelines for Multinational Enterprises: Employment and Industrial Relations

- 2008 Investment Policy Review of China Encouraging responsible business conduct

- OECD Investment Policy Review of Peru

- OECD Benchmark Definition of Foreign Direct Investment

Calendar of events and news in brief pg 8

- 10-11 DECEMBER 2008, KAMPALA, UGANDA NEPAD-OECD Annual High-level meeting on advancing investment policy reform in Africa

- 17 DECEMBER 2008, PARIS, FRANCE Ninth OECD Roundtable on Freedom of Investment, National Security and „Strategic‟ Industries

- 26-27 FEBRUARY 2009, BANGKOK, THAILAND 2nd OECD-South East Asia Regional Forum: Enhancing Competitiveness through Regional Integration

Auditor-General presents his analysis of financial management in national and provincial government departments

Auditor-General (AG), Terence Nombembe, briefed Parliament on the national and provincial government audit outcomes and trends for the 2007-08 financial year, and focused on the analysis of financial management status in government departments and related entities as well as constitutional institutions.

According to the information available at the time of the analysis, the Auditor-General’s coverage comprised of:

• 34 national departments, all of which had been included in the analysis
• 201 national related entities of which 195 (97%) is included in the analysis
• 9 constitutional institutions all included in the analysis
• 120 provincial departments, all except one included in the analysis and
• 122 provincial entities of which 106 (87%) have been included in this analysis.
• Overall, out of the total of 486 departments, institutions and entities, the analysis covered 463 (95%).

Overall, the audit outcomes for the national and provincial government are as follows:

• 9 (2%) received adverse audit opinions
• the reports of 21 (5%) had disclaimers
• 105 (23%) received qualified audit opinions
• the reports of 216 (47%) departments and entities that received unqualified financial opinions had concerns raised on “other matters”
• while 112 (23%) received an unqualified financial opinion without significant concerns on any other matters (referred to as clean audit opinions.

Read the whole press release here.

IASB and FASB create advisory group

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The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) today announced that they will create a global advisory group comprising regulators, preparers, auditors, investors and other users of financial statements.
The advisory group will help to ensure that reporting issues arising from the global economic crisis are considered in an internationally co-ordinated manner.

At their forthcoming joint meeting on 20 and 21 October, the boards will discuss the initial topics for the advisory group to consider. They will also discuss how they can appoint the group and schedule its first meeting expeditiously. The boards will report on the first meeting and will consider the group’s discussions immediately thereafter.
In developing their approaches on issues resulting from the discussions the boards will follow appropriate due process. In the interest of transparency, the advisory group will meet in public session with Webcasting facilities available to all interested parties.

To read the whole press release Download it now

IASB welcomes moves towards IFRSs in North America

Sir David Tweedie, chairman of the International Accounting Standards Board (IASB), welcomed last week’s actions by authorities in Mexico, Canada and the United States regarding their adoption of International Financial Reporting Standards (IFRSs).

Mexico
On 11 November the Mexican Comisión Nacional Bancaria y de Valores (CNBV), together with the Mexican Accounting Standards Board (CINIF), announced that Mexico would adopt IFRSs for all listed entities from 2012. Early adoption for some entities would be permitted from 2008 subject to requirements that will be established by the CNBV.

Canada
Also on 11 November the Canadian Accounting Standards Oversight Council (AcSOC) reconfirmed its support for plans to require Canada’s publicly accountable enterprises to follow IFRSs as issued by the IASB by 2011.

United States
On 14 November the United States Securities and Exchange Commission (US SEC) published for public comment a proposal, titled Roadmap for the Potential Use of Financial Statements Prepared in accordance with International Financial Reporting Standards by U.S. Issuers.
The publication of the roadmap followed a unanimous vote taken by the five SEC Commissioners in August. The proposed roadmap sets out milestones that, if achieved, could lead to the adoption of IFRSs in the United States in 2014. The roadmap also proposes to permit the early adoption of IFRSs from 2010 for some US entities.

Commenting on the announcements, Sir David Tweedie, chairman of the IASB , said:
The recent summit of G20 leaders reaffirmed the need for global accounting standards. This is a goal that the IASB strongly supports. The actions taken last week in Mexico, Canada and the United States are important steps towards achieving that objective.

IMF releases

Here is the latest IMF releases:

Surveys

IMF Urges World Leaders to Counter Global Slowdown
IMF head Dominique Strauss-Kahn urges leaders of the G-20 industrialized and developing economies to take action to help counter the global economic slowdown as ministers from systemically important countries agreed on the need for a coordinated response.

Helping Ukraine Avoid a Hard Landing
A $16.4 billion loan for Ukraine approved by the IMF's Executive Board will help the government strengthen confidence and restore economic stability after the country became the latest victim of the financial crisis sweeping the global economy.

Bosnia and Herzegovina: On the Road to EU Accession
A new agreement signed by Bosnia and Herzegovina opens the door to membership of the European Union. But after years of solid growth and sound policies the country has to prepare for EU accession during a time of global economic turmoil.

IMF Outlines $7.6 Billion Loan for Pakistan
The IMF says it has reached an initial agreement with Pakistan on the key elements of an economic program supported by an $7.6 billion loan to meet the country's serious balance of payments difficulties.

World Leaders Launch Action Plan to Combat Financial Crisis
Leaders of the world's major economies draw up an action plan to combat the burgeoning financial crisis and pull the global economy back from one of the worst downturns in decades, giving the IMF a central role in crisis response and reform of the financial architecture.

Working Papers

StressTesting Household Debt in Korea
Author/Editor: Karasulu, Meral
Summary: Korean household debt has reached 148 percent of disposable income, high by emerging market standards. Most of this debt remains at variable rates, shifting the interest rate risk from better diversified financial institutions to households and increasing their sensitivity to macroeconomic shocks. This paper examines the sources of, and risks from, household debt by employing stress tests on household level panel data. Results suggest that a 100-300 bps increase in interest rates could increase distressed household debt household debt by 8½?17 percentage points (ppt). A drop in real estate prices by 10?30 percent could add another 4 ppt to distressed debt. Ongoing transition to amortizing mortgages in 2008?09 presents additional challenges as interest payments on debt are likely to increase further.


Sovereign Wealth Funds: Current Institutional and Operational Practices
Author/Editor: Hammer, Cornelia; Kunzel, Peter; Petrova, Iva
Summary: While SWFs as a group share broad common institutional and operational practices, these practices also differ considerably reflecting the diversity of these institutions. These differences derive from the nature of the SWF (i.e., their original intent) as well as its legal personality. Thus, while SWF practices will continue to evolve, the fundamental objectives of different types of SWFs will continue to shape their practices going forward.


Creating Sustainable Fiscal Space for Infrastructure: The Case of Tanzania
Author/Editor: Ter-Minassian, Teresa; Hughes, Richard; Hajdenberg, Alejandro
Summary: A common dilemma facing governments around the world is how to meet the sizeable fiscal costs of providing and maintaining infrastructure networks. Over the past decade, developed and developing countries have looked to fiscal rules, budgetary reforms, tax policy and administration measures, public-private partnerships and other innovative financial instruments to raise additional finance for infrastructure investment. This paper looks at the range of options for raising the financing to meet Tanzania's infrastructure needs. It begins with a brief survey of the evidence on the relationship between infrastructure, public investment, and economic growth, and then goes on to consider the case for additional infrastructure investment in Tanzania. The second part of the paper looks at five broad options for mobilizing additional resources to meet Tanzania's infrastructure needs: (i) direct private investment and PPPs, (ii) expenditure reprioritization and efficiency, (ii!
i) domestic revenue mobilization, (iv) external grants and concessional financing, and (v) sovereign borrowing on domestic or international credit markets. The paper concludes with some general recommendations on what combination of the above approaches might be suitable for Tanzania.

Policy Papers
A New Facility for Market Access Countries--The Short-Term Liquidity Facility
Summary: The ongoing financial market turmoil is remarkable for its severity but also for the speed with which shocks have spread across markets and economies. Disruptions in short-term funding in mature markets, deleveraging and contraction of bank balance sheets, and contagion from a systemic loss of confidence are leading rapidly to sharply reduced financial flows to economies far from the origins of the crisis. Market turbulence in advanced economies has thus led to the emergence of short-term external liquidity needs even in emerging market countries with strong underlying domestic policies.
In these circumstances, the Fund's traditional facilities may not always be the optimal means of addressing short-term balance of payments pressures. Stand-By Arrangements (SBAs) have been used flexibly to support members' economic programs where both policy adjustment and financing were needed to address underlying vulnerabilities, buttress market confidence, and facilitate a member's early return to market financing.
This paper proposes a special facility to complement existing instruments by filling a gap in the Fund's toolkit.

2008 Triennial Surveillance Review - Background Information and Statistical Appendix
Summary: Country surveillance constitutes an essential part of the IMF's mandate to oversee the international monetary system and to monitor the economic and financial policies of its 185 member countries. The IMF's Executive Board conducts regularly scheduled reviews of country surveillance (the Triennial Surveillance Review) to consider ways to improve its effectiveness. The 2008 review is the first such review since the Executive Board approved, in June 2007, a new Decision on Bilateral Surveillance. This Decision affirms that the focus of bilateral surveillance is on those policies of members that can significantly influence present or prospective external stability. The review focused on the implementation of country surveillance in the recent past, as presented in the following set of papers:

The overview paper presents the main findings and priority areas for further work.

The review finds that stakeholders hold the quality of IMF surveillance in high regard, but that improvements should focus on risk assessment, integration of macroeconomic and financial sector surveillance, multilateral perspectives (cross-border spillovers and cross-country analysis), and exchange rate assessments.
The priority areas identified in the review served as key background for the preparation of the IMF's Statement of Surveillance Priorities (SSP

The Thematic Findings (Supplement 1) provides supporting analysis on the implementation of bilateral surveillance in the recent past and, particularly, on the appropriateness of its focus and its analytical value added in particular areas, including the overall "health check", exchange rates, financial sector issues, cross-country analysis and cross-border spillover analysis (including a case study of surveillance in the run up to the subprime crisis), the degree of candor and evenhandedness in surveillance, and the effectiveness of its communication

The Background Information paper (Supplement 2) provides further information, including a description of review methodologies, and results including interview findings, surveys of various audiences, and supporting data on the quality of consultation documents

The External Consultant's Report provides an independent view of IMF surveillance in Europe.

Country Reports
Solomon Islands: 2008 Article IV Consultation-Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion
Solomon Islands: Tax Summary and Statistical Appendix
People's Republic of China-Hong Kong Special Administrative Region: Report on the Observance of Standards and Codes--FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

Statement by World Bank Group President Robert B. Zoellick on the Summit of G20 Leaders

"This summit of G-20 leaders and the G-20 meeting of finance ministers last weekend have begun to lay a productive foundation of discussion, input, and agreement.

What matters now are the follow up actions. People are looking to leaders for a global, coordinated and fast response.
If September and October were about coordinated and cooperative monetary policies, then November and December will be increasingly about starting fiscal stimulus. China’s recent $580 billion stimulus package was well timed and shows leadership. Further decisive actions will be needed. Such actions must take into account the interests of the poor and most vulnerable in developing countries.

Last month I called for a reform of the G7 and for a modernized multilateralism to better reflect the realities of the 21st century. It is a positive step forward that leaders of developed economies are now meeting together with leaders from the rising economic powers. But the poorest developing countries must not be left out in the cold. We will not solve this crisis, or put in place sustainable long-term solutions by accepting a two-tier world.

I welcome the reaffirmation by the Heads of Government of the importance of the Millennium Development Goals and their commitment to honor their pledges of overseas aid. If we are going to avert a human crisis, we will have to do more. At $100 billion a year, the amount spent on overseas aid is a drop in the ocean compared to the trillions of dollars that are now being spent on financial rescues in the developed world."

Read the whole statement.

Chairs of High-level advisory group announced

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) announced that Hans Hoogervorst, Chairman of theNetherlands Authority for the Financial Markets (AFM), the Dutch securities regulator and Harvey Goldschmid, former Commissioner of the United States Securities and ExchangeCommission (US SEC) have agreed to co-chair the high-level advisory group formed to consider financial reporting issues arising from the global economic crisis.

Mr. Hoogervorst also serves as Vice-Chairman of the Technical Committee of the International Organization of Securities Commissions (IOSCO) and is a former Minister of Finance in the Netherlands.

Mr. Goldschmid is the Dwight Professor of Law at Columbia University, United States. He served as an SEC Commissioner between 2002 and 2005.The advisory group will comprise of investors, regulators, preparers, auditors and other users of financial statements and will help to ensure that financial reporting issues arising from the crisis are considered in an internationally co-ordinated manner. Further details on the composition of the advisory group and scheduling of meetings will be announced shortly.

It is expected that the work of the advisory group will be completed within a four to six month period.

Recommendations from the advisory group will be jointly considered by the two boards. Any decisions to act upon the recommendations will be subject to appropriate and robust due process. In the interest of transparency, the advisory group will meet in public session with Web casting facilities available to all interested parties.

Europe To See Pension Reform Debate

Policymakers to look at issues of pension fund governance and collective risk taking.

As was the case during the equities markets collapse in 2001, the current financial turmoil will reshape the political debate in Europe over public pension reform and the structure of pension provision.

While all privately funded pensions in Europe will suffer unavoidably in the short term from the general malaise in financial markets and the expected low growth in the real economy, the more important implication of the crisis is that debates will intensify among policymakers and practitioners over the broader issues of pension fund governance and collective risk sharing.

For more on the story, please refer to the original Forbes article.

University news from Africa

WEST AFRICA: Universities agree on regional strategy
The University of Bamako, Ouagadougou University and University Cheikh Anta Diop of Dakar, together with the French Conference of University Presidents, have agreed on a coordinated strategy for higher education and research, to promote a regional partnership between African and French universities and contribute to development of West African scientific communities.

MEDITERRANEAN: Unimed elects Tunisia to presidency
The Mediterranean Universities Union (Unimed) has elected Abderraouf Mahbouli, head of the University of Tunis, as its President, reports La Presse of Tunis. It is the first time a country south of the Mediterranean has headed the union, which has 84 member establishments in 20 countries mostly in the Mediterranean basin.

GLOBAL: Nigerian students scoop award in 'world cup'
Clemence Manyukwe
Nigeria's Obafemi Awolowo University clinched second place in an international higher education competition aimed, among other things, at sharpening student skills by testing their understanding of market economics. More than 1,500 students, academics and business people from 41 countries converged in Singapore last month for the Students in Free Enterprise 'world Cup'.


ZIMBABWE: Student 'bonding' to stem brain drain
Clemence Manyukwe
The Zimbabwean government has introduced a student 'bonding' system in a desperate attempt to stem the brain drain as people flee the ruinous policies of President Robert Mugabe. Under the cadetship scheme, students will not receive a qualification on graduating but only after working for the state for a stipulated period.



EGYPT: Disqualifications, apathy mar student elections
Ashraf Khaled
Hassan Abbas, an arts student at Cairo University, did not know there were student union elections until he saw Islamist students staging a protest against their disqualification from candidate lists. In recent weeks the country's 18 public universities have held student polls marked by widespread apathy as well as fiery protests by ineligible students, particularly from the Muslim Brotherhood - said to be the largest opposition group on Egypt's campuses. Political or religious student groups have been banned from student leadership.

NIGERIA: UK seeks partnerships with local universities
Tunde Fatunde
The National Universities Commission recently ordered the immediate closure of the offshore campuses of foreign universities on Nigerian soil, as they are prohibited under law. The move left hundreds of students stranded, and unable to move to 'legal' institutions that are full - and indeed only able to accommodate 30% of qualified school-leavers. Now the British Council is seeking partnerships between UK and Nigerian universities, with a view to creating wider opportunities for youngsters desperately seeking higher education.

CAMEROON: Crowded start for new year
Jane Marshall
The academic year has started with record numbers of new students in Cameroon but several universities have experienced problems including overcrowding, lack of teachers and even cancellation of a new faculty of medicine just before it was due to open. Newspapers reported that some universities were coping better than others.