Tim Worrall • Professor of Economics • The University of Edinburgh

IV Working Papers

Current Papers

Portfolio Sales and Signaling

By: Spiros Bougheas and Tim Worrall

Abstract: A common practice of banks has been to pool assets of different qualities and then sell a fraction of the newly created portfolios to investors. We extend the signaling model for single sales of risky assets to portfolio sales. We identify conditions under which signaling at the portfolio level dominates signaling at the single asset level. In particular, when banks have better information about loan types on their books, and some commitment power to sales, can profit by pooling assets whilst retaining a skin in the game.

Date: February 2017

Keywords: Securitization • Skin in the game • Signaling • Tranching

JEL Classification: D82 • G21 • G23

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Currency Areas and Voluntary Transfers

By: Pierre M. Picard and Tim Worrall

Abstract: This paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries. We show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area. We show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values. In particular, we show that in a simple two country model and for a plausible set of economic parameter values, a currency area is optimal.

Date: May 2015

Keywords: Monetary union • currency areas • fiscal federalism • limited commitment • mutual insurance

JEL Classification: F12 • F15 • F31 • F33

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Stochastic Stability of Monotone Economies in Regenerative Environments

By: Sergey Foss, Vsevolod Shneer, Jonathan Thomas and Tim Worrall

Abstract: We introduce and analyse a new class of monotone stochastic recursions in a regenerative environment which is essentially broader than that of Markov chains. We prove stability theorems and apply our results to two canonical models in recursive economics, generalising some known stability results to the cases when driving sequences are not independent and identically distributed. We also revisit the case of monotone Markovian models (or, equivalently, stochastic recursions with i.i.d. drivers) and provide a simplified version of the proof of a stability result given previously by Dubins and Freedman (1966) and Bhattacharya and Majumdar (2007).

Date: January 2015 (Revised February 2016)

Keywords: Monotone Economy • Markov Chain • Stochastic Recursion • Driving Sequence • Renegerative Sequence • Existence and Uniqueness of a Stationary Distribution • Stochastic Stability • Bewley-Huggett-Aiyagari Model • Risk-Sharing Model

JEL Classification: C61 • C62

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Is a Policy of Free Movement of Workers Sustainable?

By: Pierre M. Picard and Tim Worrall

Abstract: This paper studies the costs and benefits of the adoption of the policy of free movement for workers. For the countries to agree on uncontrolled movement of workers, the short run costs must be outweighed by the long term benefits that result from better labour market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are impatient and less risk averse workers, when production technologies display decreasing returns and when countries trade a share of their products.

Date: March 2014 (Revised March 2015)

Keywords: Migration • labour market flexibility • sustainable plan

JEL Classification: F22 • J61

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Dynamic Relational Contracts under Complete Information

By: Jonathan P. Thomas and Tim Worrall

Abstract: This paper considers a long-term relationship between two agents who both undertake a costly action or investment that together produces a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. Two cases are considered: (i) where agents are risk neutral and are subject to limited liability constraints and (ii) where agents are risk averse, have quasi-linear preferences in consumption and actions but where limited liability constraints do not bind. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. In the risk-neutral case, there may be an initial phase in which one agent overinvests and the other underinvests. However, both actions and surplus converge monotonically to a stationary state in which there is no overinvestment and surplus is at its maximum subject to the constraints. In the risk-averse case, there is no overinvestment. For this case, we establish that dynamics may or may not be monotonic depending on whether or not it is possible to sustain a first-best allocation. If the first-best allocation is not sustainable, then there is a trade-off between risk sharing and surplus maximization. In general, surplus will not be at its constrained maximum even in the long run..

Date: January 2014, Revised January 2016

Keywords: Risk sharing • limited commitment • self-enforcement • relational contracts

JEL Classification: C61 • C73 • D86 • D91 • L14

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Sustainable Migration Policies

By: Pierre M. Picard and Tim Worrall

Abstract: This paper considers whether countries might mutually agree a policy of open borders, allowing free movement of workers across countries. For the countries to agree, the short run costs must outweighed by the long term benefits that result from better labour market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are less risk averse workers and when countries trade more. More surprisingly, we find that some congestion costs can help. This reverses the conventional wisdom that congestion costs tend to inhibit free migration policies.

Date: September 2011

Keywords: Migration • limited commitment • self-enforcement • repeated games

JEL Classification: F22 • J61 • R23

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Dynamic Relational Contracts with Credit Constraints

By: Jonathan P. Thomas and Tim Worrall

Abstract: This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.

Date: March 2010

Keywords: Credit constraints • limited commitment • self-enforcement • relational contracts

JEL Classification: C61 • C73 • D86 • D91

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Research Notes

Watch Out for Winners and Losers: Odd-Implied Brexit Sentiment and FTSE Returns

By: Costas Milas, Tim Worrall and Robert Zymek

Abstract: Using changes in Brexit sentiment implied in betting odds, we investigate which companies' stock returns underperform relative to the market following a rise in the perceived likelihood of Brexit (relative "Brexit losers"), and which companies outperform the market (relative "Brexit winners"). We find evidence for such abnormal returns for 103 out of 618 companies in the FTSE All-Share Index. According to our results, 81 companies record negative abnormal returns, marking them out as possible relative Brexit losers; 22 companies record positive abnormal returns, suggesting they are possible relative Brexit winners. Therefore, for every one relative Brexit winner there are four relative Brexit losers.

Date: June 2016

Keywords: Brexit • Betting Markets • Abnormal Returns • FTSE All-Share Index • Political Economy

JEL Classification: G12 • G18 • D72 • P16

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Watch out for the impact of Scottish independence opinion polls on UKs borrowing costs

By: Costas Milas and Tim Worrall

Abstract: As the date of the Scottish independence referendum approaches, the debate of both sides of the campaign has increasingly focused on the economic consequences for an independent Scotland and the Rest of the UK. Perhaps surprisingly, very little (if any) attention has been given to the implications of Scottish independence polls for current economic developments and in particular what Scottish opinion polls imply for current borrowing costs in the UK. This note tests the impact of opinion poll results on the spread between the UK 10-year government bond yield and the UK 5-year government bond yield over and above the impact of other economic fundamentals. We estimate that a 12 percentage point increase in the Yes rating relative to the No rating increases the 10-year borrowing costs relative to the 5 year borrowing costs by up to 24 basis points.

Date: April 2014

Keywords: Opinion Polls • Term Structure • Political Economy

JEL Classification: G12 • G18 • D72 • P16

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Older Working Papers

Cost Padding in Regulated Monopolies

By: Spiros Bougheas and Tim Worrall

Abstract: This paper considers a regulated monopoly that can pad or falsify its costs to increase its cost reimbursement from a regulator. The firm can also engage in a cost reducing investment before it enters into a regulatory contract. The investment in cost reduction determines the firm type and the paper derives the optimum incentive compatible falsification contracts and an equilibrium for the type distribution. It shows that at the optimum price setting regulation is relaxed and the regulator tolerates some cost padding. There is under-investment in cost reduction and investment is distorted away from the cost minimizing level. It also shows that where there is an equilibrium type distribution it is continuous and there are no mass points.

Date: January 2009

Keywords: Cost padding • costly state falsification • endogenous screening

JEL Classification: D82 • L43 • L52

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Dynamic Relational Contracts with Consumption Constraints

By: Jonathan P. Thomas and Tim Worrall

Abstract: This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.

Series: Keele Economics Research Papers, No. 2007/16, December 2007

Keywords: Consumption constraints • relational contracts • self-enforcement

JEL Classification: C61 • C73 • D74 • D92 • L22

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Evaluating the Performance of UK Research in Economics

By: Nicholas Vasilakos, Gauthier Lanot and Tim Worrall

Abstract: This paper reports on available bibliometric evidence on the performance of UK research in economics. It examines some standard and non-standard sources of bibliometric evidence and in particular evidence from the ISI and EconLit databases and the Repository of Papers in Economics (RePEc). It also reports on research capacity of UK economics and some non-bibliometric sources of evidence.

Series: Keele Economics Research Papers, No. 2007/10, August 2007

Keywords: Research evaluation • bibliometrics

JEL Classification: A10 • I23

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Limited Commitment Models of the Labour Market

By: Jonathan P. Thomas and Tim Worrall

Abstract: We present an overview of models of long-term self-enforcing labour contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support.

Series: Keele Economics Research Papers, No. 2007/11, September 2007

Keywords: Labour contracts • self-enforcing contracts • business cycles • unemployment

JEL Classification: E32 • J41

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Unemployment Insurance under Moral Hazard and Limited Commitment: Public vs Private Provision

By: Jonathan P. Thomas and Tim Worrall

Abstract: This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.

Series: Keele Economics Research Papers, No. 2002/20, October 2002

Keywords: Social insurance • moral hazard • limited commitment • unemployment insurance • crowding out

JEL Classification: D61 • H31 • H55 • J65

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Historical Curiosities

Informal Insurance Arangements in Village Economies

By: Ethan Ligon, Jonathan P. Thomas and Tim Worrall

Series: Keele Working Paper Series in Economics, No. 97/08, August 1997

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Risk Sharing in Village Economies

By: Tim Worrall

Series: Keele Working Paper Series in Economics, No. 98/15, June 1998

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Mutual Insurance, Individual Savings and Limited Commitment

By: Ethan Ligon, Jonathan P. Thomas and Tim Worrall

Series: Keele Working Paper Series in Economics, No. 98/14, December 1998

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Informal Insurance Arangements in Village Economies

By: Jonathan P. Thomas and Tim Worrall

Series: Liverpool Research Papers in Economics and Finance, No. 9402, November 1994

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Asymmetric Information, Investment Finance and Real Business Cycles

By: Brian Hillier and Tim Worrall

Series: Liverpool Research Papers in Economics and Finance, No. 9313, October 1993

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The Welfare Implications of Costly Monitoring in the Credit Market

By: Brian Hillier and Tim Worrall

Series: Liverpool Research Papers in Economics and Finance, No. 9310, April 1993

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Foreign Direct Investment and the Risk of Expropriation

By: Jonathan P. Thomas and Tim Worrall

Series: Keil Working Paper No. 411, February 1990

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Debt with Potential Repudiation

By: Tim Worrall

Series: Sonderforschungsbereich 178, Universität Konstanz, Diskusionsbeiträge, Serie-II, No. 69, June 1988.

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Income transfers to LDC's under asymmetric information: A two country model

By: Jonathan P. Thomas and Tim Worrall

Series: Sonderforschungsbereich 178, Universität Konstanz, Diskusionsbeiträge, Serie-II, No. 38, November 1987.

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Income Fluctuation and Asymmetric Information: An Example of a Repeated Principal-Agent Problem

By: Jonathan P. Thomas and Tim Worrall

Series: University of Reading Discussion Paper in Economics, Series A, No. 194, November 1987

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Debt with Potential Repudiation: Short-Run and Long-Run Contracts

By: Tim Worrall

Series: University of Reading Discussion Paper in Economics, Series A, No. 186, June 1987

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Income Fluctuation and Asymmetric Information

By: Jonathan P. Thomas and Tim Worrall

Series: University of Western Ontario, Mimeo, December 1985 (Revised March 1986)

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Self-Enforcing Wage Contracts

By: Jonathan P. Thomas and Tim Worrall

Series: University of Cambridge, Economic Theory Discussion Paper No. 74, April 1984

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Implicit Contracts and Asymmetric Information

By: Tim Worrall

Series: University of Liverpool Discusion Papers in Economics, No. 46, February 1983

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Wage Indexation: A Microeconomic Approach

By: Tim Worrall

Series: S.S.R.C. Research Project on the International Transmission of Fluctuations in Economic Activity, Secular Growth and Inflation. Department of Economic and Business Studies, University of Liverpool, Working paper no. 8303, February 1983.

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