Browsing by discipline "Taloustiede"

Innovations can be seen as an engine of long-term economic growth. Firms conduct research and development (R&D) activities to create new production technology, methods or products in order to rival their competitors. In addition to benefiting the inventor, new innovations have considerable positive externalities through knowledge spillovers. However, the socially optimal level of innovations may not be achieved, because firms can underinvest in R&D if they are not compensated for the positive externalities produced by their R&D activities. Public R&D programs aim to encourage innovation by compensating firms for the positive externalities that they produce. Finland’s recent public efforts on fostering innovation have been globally high by many indicators. Nevertheless, the effectiveness of these efforts has been relatively little scrutinised. This thesis studies the effectiveness of Finnish R&D program in fostering innovation outputs at the firm level. Firm-level patent statistics are used as a proxy for the innovativeness of a firm. A major contribution of this thesis is the comprehensive database that has been constructed and employed for the analysis. The database includes firm-level innovative characteristics for all the Finnish firms during a ten-year sample period, altogether covering more than two million observations for over 400 000 firms. Most of the studies on the effectiveness of the Finnish R&D program rely on the assumption that the researcher has full information on the relevant innovative characteristics that affect a firm’s program eligibility. This thesis addresses the program selectivity concern by employing an instrumental variable approach that exploits regional variation in public R&D funding stemming from the European Regional Development Fund (ERDF) aid regulations. The estimates suggest that when the program selection bias is neglected, program participation is associated with around 10 percentage point increase in patenting probability among active patentees, whereas for all firms, the increase in patenting probability is only around 0.1 percentage points. However, the instrumental variable estimates do not confirm any significant causal effect of R&D program on patenting. This thesis highlights the importance of accounting for the selection bias induced by the R&D program selection criteria. The public R&D agency is found to select firms strongly based on the same characteristics that are highly associated with innovation within firms. Therefore, it is important to ask if some of the supported firms might have had conducted their R&D projects even in the absence of the public support. Analysing the R&D program’s selection criteria plays a major role in scrutinising the effectiveness of public R&D subsidies and in the further development of public innovation policies.

There has been a lot of discussion on the downsides of cash during the 2010’s, while the new payment innovations during this same decade have provoked speculation that cash use will decrease considerably, potentially even disappear, in the upcoming years. However, cash is still used quite extensively, and to my knowledge, no systematic review on drivers of cash use has been made to date. The purpose of this thesis is to fill this gap by providing literature reviews both on the theory explaining cash use and the empirical evidence on the drivers of cash use. Additionally, Finland will be used as an illustration to study the relevance of the existing theories and empirical evidence in an environment where practically no barriers on switching completely from cash use to card use exist. The theoretical models explaining the choice between cash and cards at points of sale are built on assumptions that the pecuniary and/or non-pecuniary costs of cash and cards use differ. Particularly, cards are assumed to be more expensive than cash in some regard, which explains the cash choice. Behaviour wise, cash use is associated with lower transaction value, lower income, higher amounts of cash in the wallet and using cash to monitor liquidity. In empirical literature, factors that affect the payment instrument choice at point of sale are traditionally divided into four categories: payment instrument attributes, transaction specific characteristics, demographic factors and habit. Three out of the four theoretical models presented in this thesis seem relevant in explaining cash use in the view of the empirical evidence, although alternative explanations for the observed behaviour can also be found. Also, several other drivers of cash use are identified. Additionally, as making payments is a very frequent action, it is suggested that habit might have a bigger role in the payment instrument choice than is traditionally assumed, with several of the drivers being potentially a manifestation of habitual behaviour. A considerable limitation of the existing literature is that it focuses solely on explaining and analysing cash use for transaction purposes at points of sale. However, cash is also used for person-to-person transactions and as a store of value, and the reasons for cash use probably differ a lot in these other two use cases. Due to well-developed infrastructure, and cheap and fast card payments, many of the drivers of cash use identified by theoretical models and empirical evidence cannot explain cash use in Finland. In 2016 Finnish people used cash to pay small transactions, to control spending, because they perceived it to be easy to use, when they obtained it from another person or out of habit. Due to the quickly growing popularity of contactless card payments and the mobile phone applications for making easy person-to-person transactions, it is likely, that in future cash will decrease remarkably and it is mainly driven by the need to control spending, difficulty in using electronic payment instruments and habit.

Disability imposes personal suffering but also economic consequences for individuals, employers, and the society. Finding an optimal method for disability prevention can be considered beneficial and increasingly important for a country with a prominent public sector and a weakening labor force participation rate like Finland. Previous studies show evidence of the effectiveness of worksite health promotion programs that target care for employees who face a high risk for disability. Evidence shows positive cost-effectiveness of targeted occupational health interventions in preventing short-term disability but a wider benefit-cost analysis of targeted occupational health interventions with a view on both short-term and long-term disability prevention has not previously been conducted. This study untangles the treatment effect of targeted occupational health interventions on societal net benefits resulted from disability prevention. Short-term disability as a concept is viewed through sickness absence, and long-term disability is represented by the disability benefits granted by the Finnish disability benefit system. The costs of disability preventing actions are limited to health care utilization. The research setting of this study has been observational, and the empirical analysis is conducted as a retrospective review of prospectively collected register data. The data registers cover health and disability related information of over 20,000 employees in Finland. In the main analysis, 1,679 treated employees identified with a high risk for disability are compared to 2,107 untreated high-risk employees. The benefit-cost analysis is constructed with the Average Treatment Effect framework combined with Net Benefits framework. The treatment of the framework of this study is an attendance to a targeted, pre-planned health check after an occupational health survey. The outcome of the framework is the net benefits that result from prevention of sickness absence workdays and granted disability benefits, and the investment costs resulted from health care utilization. The results are formed with Analysis of Covariance. Other methods to conduct the empirical analysis include polynomial regression, Multiple Imputation of Chained Equations, Propensity Scores, and Inverse Probability Weighting. The results of this study show that targeted occupational health interventions are likely to impose positive net benefits to the society. The Average Treatment Effect on the net benefits of high-risk employees, 1,875 euros with a 95% confidence interval from -759 to 4,509 euros (p-value: .155) (ANCOVA), can be considered worthwhile to the society. In the research setting, the net benefits were in practice gained from the prevention of long-term disability. The treatment was not effective on the costs of short-term disability or the total health care utilization costs per employee. Sensitivity analyses indicate that targeted occupational health interventions are not on average effective when predicted to employees without a disability risk.

The main thesis of economies of agglomeration is that by increasing the density of employment, economic benefits will follow. In this research, this hypothesis is tested in the context of the Nordic countries by studying if the increases in the employment density affect the regional productivity. This effect between the employment density and regional productivity is called the agglomeration effect. The theoretical background of this effect lies in three fundamental concepts: economies of scale, labor pooling and knowledge spillovers. Cities have their origins in the economies of scale and ag- glomerations of people they comprise of form a fertile base for effective matching between employers and employees. The denser these production centers are populated, the easier it is for the spillovers of innovation and ideas to happen. This study uses a linear ordinary least squares (OLS) model to estimate this effect. The data consists of 70 regional observations and the model comprises of employment density as the explanatory variable, varying number of education level control variables and dummy variables for different countries. Endogeneity of the explanatory variable is also assessed but as the proposed instrument, the total land area of the included regions, proves to be invalid for this particular geographic region, the OLS estimates will serve as the final results. In the previous studies conducted in Europe and in the USA, the magnitude of the agglomeration effect has been found to be between 4.4 and 6 %. This study’s estimates tell the effect to be between 2.1 and 2.9 % in the Nordic countries that is lower than the corresponding values for the aforementioned regions. This result is discussed to stem from the unique geographical and political characteristics of the Nordic regions.

The aim of this study is to better understand how globalization affects growth and inequality. In order to do so, a growth model based on innovation driven economic growth featuring heterogeneous workers and firms is built to analyse growth and inequality first in autarky equilibrium and then in trading equilibrium. This model includes two sectors: manufacturing and research and development (R&D). Sorting and matching of heterogeneous workers and firms takes place in this model. High ability workers sort into the R&D sector, inventing new intermediate goods, and low ability workers sort into the manufacturing sector, assembling consumption goods. Matching of workers with firms within the sector takes place so that the most able worker in the R&D sector matches with a firm having the highest level of technology and earns the highest income. The least able worker in the R&D sector matches with a firm having the lowest level of technology in the R&D sector, earning the lowest income in the R&D sector. The same kind of matching takes place in the manufacturing sector. Endogenous cutoff ability level determines which workers sort into the manufacturing sector and which workers sort into the R&D sector. Income inequality rises from this heterogeneity of workers and firms. The built model is used to analyse how policy choices and technology parameters such as productivity in manufacturing, capacity to innovate, R&D support, manufacturing technologies, trade barriers, and knowledge spillovers affect growth and inequality in autarky and in trading equilibrium. This model shows that globalization speeds up growth, but it comes hand in hand with greater inequality. Also, policy choices and technology parameters have different effects on growth and inequality in autarky equilibrium than in trading equilibrium. For example, Hicks-neutral differences in manufacturing productivity between two countries result in equal growth rates in autarky as well as in trading equilibriums. Differences in government support for R&D activity increases growth more in a country were support is more ample also resulting in greater inequality in autarky equilibrium. In trading equilibrium, differences in government support for R&D activity induces more unequal wage distribution in a country supporting R&D activity more ample, but long-run growth rate is equal. This model does not comply with Kuznets U-shaped curve between growth and inequality.

In most countries there is today more than ever an ongoing discussion about public debt. The purpose of this paper is to highlight the effects of public debt on exercising fiscal policy and the consequences of public debt for the society. As a base this paper first deals with a situation where individuals of one generation live for two periods. A framework for that is developed. This framework is then extended to four multi-period versions. I first extend the framework to one with overlapping generations and inter-generational transfers of wealth. This extension is then modified to take into account transaction costs of the collection of taxes. Next I take into account the distortion effects of the taxation. Then I deal with the pricing of public debt and the final extension describes what is required for a fiscal policy to be considered sustainable. The basic framework shows that with public expenses being kept constant, periodic changes in taxes do not affect the wealth and the consumption of individuals. However, their savings will change in order to balance the variation in taxes. The extension with overlapping-generations implies that if the wealth transfer is positive, changes in public debt will have no effect on the consumption and the net wealth of the individual. If the transfer is zero, there will be an effect, just as in the case with transaction costs connected to the tax collection. It turns out that with distortionary taxation the optimal taxation policy is to keep the periodic tax burden constant. I then show that future budget surpluses are needed to finance public debt and that knowledge of the past affects the present budget surplus and the evaluation of the present public debt. Finally I prove that limiting the public debt to the present value of future increases of the real GNP is a sustainable fiscal path. With perfect capital and labour markets, public debt does not have an impact on the wealth of the society and its individuals. However, in reality the capital and the labour markets are not perfect and there are different transaction costs and negative effects of taxation. Under these circumstances, increased public debt clearly negatively impacts the net wealth. Public debt also creates fiscal requirements on the economic development of the society. The amount of public debt can equal the present value of all future budget surpluses, but cannot exceed the discounted future increases of the real GNP.

This thesis examines the effect of investment-specific technological change on the capital replacement decision and depreciation by extending Mukoyama’s (2008) study on endogenous depreciation. When allowing investment-specific technological progress to be described either as a fall in the price of capital or as a growth in the relative productivity of new capital, and capital stock to be determined by the producer’s optimization, there arise a method to describe obsolescence as a part of depreciation and capital evolution. The following three key results are shown when assuming that scrapped capital stock has no value. First, the optimal replacement policy is stationary. Second, the acceleration of investment-specific technological progress accelerates capital replacement, hence also obsolescence. Third, whether investment-specific technological progress is modelled as a fall in the price of capital or as a growth in the relative productivity of new capital, does not impact on the optimal replacement policy. A quantitative exercise shows that the first two results seems to hold even if the scrapped capital stock has some positive value. However, if scrapped capital has some value, then the two approaches to model investment-specific technological progress are no longer equivalent. The adoption of the capital replacement problem for describing depreciation is a promising approach. Even though there does not exist a closed-from solution for the optimal replacement interval, it can be solved (in the stationary case) as a root of a relative simple transcendental function. The rate of depreciation can be explicitly solved, also in the case of non-stationary replacement policy, but that is computationally more difficult. Physical depreciation (wear and tear) can be disentangled from obsolescence insofar as either one is known. Thus, the results still rely on the estimate of physical depreciation.

The aim of this paper is to show that increasing trade and having strict environmental policy are not mutually exclusive. I examine how the increase of trade under general oligopolistic equilibrium model affects environmental taxation. In particular, I show that with common assumptions, growth in trade increases environmental taxes. In Neary’s (2015) general oligopolistic equilibrium model, there is a continuum of sectors in which the firms compete in Cournot manner. The firms in each sector are identical, having market power in their own sector, but not at the level of the whole economy. The sectors are otherwise identical, but open sectors trade with a foreign country, while the rest of the sectors are closed. There are two identical countries which I call Home and Foreign. An environmental policy maker has perfect knowledge of the markets and the firms’ behavior. Because there is no abatement technology in the model, the policy maker sets a tax at the first and firms react to it at the second stage. The main result is that with general assumptions, increasing trade leads to increasing environmental tax. When the transaction costs of trade decrease, environmental taxes increase in the closed sectors, but decrease in the open sectors, the less, the larger the proportion of trading sectors in the economy is. When new sectors are opened to trade, then, provided that the share of domestic pollutant and the marginal environmental damage are sufficiently high, environmental taxes increase both in open and closed sectors. The main sources of the study are Neary (2015), which presents the general oligopolistic equilibrium model used in the analysis, and Richter (2015), which constructs strategic environmental policy in that setup.

Investors tend to allocate large shares of their portfolios to their domestic equity. Domestic equity seems to attract investors all around the world more than foreign equity does. This phenomenon, usually called equity home bias, seems to persist even if many international capital market restrictions have been lifted. In this thesis I examine this topic from three different points of view. The first part examines what are the benefits of international diversification of equity portfolios. I study this issue by using historical stock market index data and related literature. I conclude that the lack of international diversification of equity portfolios is suboptimal for risk averse investors in a theoretical framework, as we assume that there are efficient markets, similar taxes and costs. The second part examines the observable level of equity home bias across nations. I answer this question by presenting calculated EHB-values from a research article and compare these values with gross domestic product per capita values and a variable indicating capital market restrictions. I find both of these values to be significant explainers for EHB-value. In the third part, I analyse the cause of equity home bias with the aid of academic studies in the fields of behavioral finance and cognitive psychology. I present possible behavioral and institutional explanations and evaluate the plausibility of those. I conclude that the institutional explanations are likely to explain a significant proportion of equity home bias in developing countries, while the behavioral ones provide a more plausible explanation in developed countries, as the institutional explanations cannot explain as much of the equity home bias in developed countries.

Equity volatility and corporate bond yields reflect the embedded risks in an underlying corporation and general market conditions. In this research the bond yield is replaced by the price of credit default swap as a more company specific risk measure. The goal of this thesis is to develop a prediction model for credit default swap prices utilizing equity volatility. The empirical research data consists of companies in the European Stoxx 600 Index covering years between 2000 and 2014. The former literature has shown simultaneous movement between the volatility and credit default swap prices utilizing a linear regression model. These results are repeated in this thesis, but the prediction power of the volatility is questionable due to a low coefficient of determination. According to the results of vector autoregressive modelling in this and the former research, there exists Granger causality between the time series of equity volatility and credit default swap prices. Consequently, the vector autoregressive model is applied to an investment strategy developed in this thesis. The investment strategy is shown to be profitable with certain assumptions at least in this research data. The assumptions concern liquidity and limited data set. The investment strategy is verified with different volatility calculation periods and sampling frequencies.