Research with Impact

Research Matters

In this page you will find just a few examples of the sort of impact which our research in consortium institutions generates.

TEAMPEST: Theoretical Development and Empirical Measurement of the External Costs of Pesticides

Pesticides (crop protection agents) are used in agriculture to secure yields, to improve the quality of food and to facilitate harvesting. However, their heavy use in agriculture has resulted in pest resistance (pests are less susceptible to some pesticides), ground and surface water contamination (due to leaching and runoff respectively), as well as possible health problems on farmers (as a result of their exposure during the application of pesticides) and consumers. The TEAMPEST Project aimed to provide an accurate assessment of the external costs of agricultural pesticide use and contribute to the relevant EU policies by developing tools for designing a socially optimal tax and levy scheme aimed at the reduction of pesticide use to its socially optimal level. The project led by Professor Konstandinos Mattas from Aristotle University of Thessaloniki (project coordinator) involved ten universities (one of them being the University of Crete) from nine different European countries. The major objectives of the project were to

Assess the impact of pesticide use on yield, efficiency and productivity
Cast the impact of pesticide use on farm operators and consumers
Estimate the environmental effects induced by pesticide use
Estimate the socially optimal level of pesticide use at the farm level
Design a realistic and effective tax and levy schemes that reduces the use of pesticides to a socially optimal level from the point of view of the policymaker
Assess producers’ willingness to adopt low pesticide use production methods
Study the feasibility of policy schemes for reducing the indirect cost of pesticide use

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METHODOLOGY:

The project involved a consortium of 10 European universities that collaborated in the development of theoretical models to analyze the effects of pesticide use on production, on the consumers and on the environment. At the same time surveys were conducted to empirically assess the effect of pesticides on farmers and on consumers. On the one hand survey data from farm operations was collected regarding pesticide use and health conditions caused by pesticides so as to assess their effect on farmers’ productivity. On the other hand choice experiments were used to elicit consumers attitudes about pesticides and evaluate different marketing strategies for fresh produce such as fruits.

FINDINGS OF PROJECT:

The demand for pesticides was found to be rather inelastic and using taxation for reducing pesticide use would require high levels of taxation. Negative health effects and thus reductions in productivity due to pesticide use were lower for countries where farmers had a higher education level. Consumers are generally uninformed about pesticide residues in agricultural products, but they are willing to pay a premium for organic products and this holds across all income groups.

IMPACT OF PROJECT:

The research has helped improve both the measurement of the external effects of the use of pesticides in agriculture and the understanding of the effects of different policies directed towards a sustainable use of pesticides. A number of policy recommendations implied by the research results have been formulated. These policy recommendations are useful to EU policy makers and include the following:

The use of pesticide taxation as a means towards pesticide use reduction would not be very effective unless the level of the tax is very high.
It is important to promote the use of less toxic pesticides as well as technologies for safe application of pesticides
Create incentives for research on less toxic pesticides and for their production.
Give higher priority to increasing farmers’ education so that pesticides are applied safely.
The marketing of fresh produce (through labeling and packaging) enhances the willingness to pay of consumers for organic products by giving them more information about the differences between similar products (organic, conventional). Therefore, marketing techniques informing consumers are important to promote organic products.

The specialized international workshop “External Costs of Farming Activities” was organized in Chania, Crete, Greece on 2-4 September 2010 bringing together 81 participants who were experts in the area.

CARERA: The Impacts of CAP Reform on the Employment Levels in Rural areas

The Common Agricultural policy suffered a drastic change in 2003 by introducing the decoupling of farm subsidies and the gradual modulation of the decoupled subsidies received by farmers. The analysis of the structural and employment effects of the 2003 CAP reform and rural development measures was the main objective of the project which was led by Professor Konstandinos Mattas from Aristotle University of Thessaloniki (project coordinator). More specifically the project provided a detailed database describing the economic transactions and interconnections between rural economic sectors, conducted surveys about perceptions and intentions of rural stakeholders against the current and future reforms of the CAP and delivered tools for simulating the effects of changes on both the CAP and the rural development scheme.

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METHODOLOGY:

A multidisciplinary approach was adopted by the consortium that grouped eight European Universities. Different methodologies such as Positive Mathematical Programming, Stochastic Frontier Models, a hybrid regional Input-Output model and the econometric analysis of survey data on farmers’ future intentions were applied to selected regions of the European Union.

FINDINGS OF PROJECT:

Regions divert significantly throughout the EU and identical policy measures can bring about different effects. The CAP reform affects the consumption patterns in rural areas and labour allocation between on and off farm activities. For instance, young people and women seem to be more affected by the negative employment effects generated by the CAP reform. Decoupling induces a profit maximizing behaviour in the farming sector that subsequently leads to reductions in labour input. Moreover, gradual subsidy decrease can strengthen competitiveness. Pillar II reduces employment outflows, supports structural changes and counterbalances negative labour effects of Pillar I. In addition, Pillar II funds support substantially regional employment due to a “short run” demand stimulation. Uncertainty about the duration of Pillar II measures along with bureaucracy shrink long-term employment effects. Stakeholder’s perceptions on the effect of CAP reform are different across surveyed countries (i.e., Greece, Hungary, and Netherlands). The evolution of crop prices is a key antecedent for farmers’ decisions to retain farming activities.

IMPACT OF PROJECT:

By applying very different methodologies to assessing the impact of the CAP reform, the robustness of the project results has been ensured. The derived empirical evidence can provide support to policy decision making in future negotiations of CAP reforms as well as in formulating rural development measures.

FOODIMA: EU Food Industry Dynamics and Methodological Advances

The FOODIMA project aimed at developing a concise set of methodological tools suitable for a systematic economic assessment of the EU food chain. The project was led by Professor Konstandinos Mattas from Aristotle University of Thessaloniki (project coordinator). Based on these tools, an evaluation of the structural changes and the economic performance of selected food sectors in representative countries of the enlarged EU was provided, along with a detailed description of the entire European food chain. The major objectives of the project were to Develop novel tools in the food chain analysis by assimilating advanced methodologies into amendable empirical techniques. Provide an in-depth, systematic depiction of the market structure and the regulatory and institutional environment of the food industry within the enlarged EU emphasizing particularly on its interactions with the farm sector. Generate an extensive assessment of the key factors shaping the current position, competitiveness and potential of the EU food industry. Quantify the industry’s contribution to the maintenance of the social and economic cohesion in rural areas.

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METHODOLOGY:

The project involved a consortium of 7 European universities that developed various tools to assess the performance of the food chain. On the one hand game theoretic models were used to analyze (i) the strategic interactions of M&A in the food supply chain, (ii) the trading forms and technology adoption between food manufacturers and retailers and their welfare implications and (iii) the effect of purity standards and labeling laws on the market of conventional, organic and GM products. On the other hand models of TFP (Total Factor Productivity) were used to measure the performance of the food chain and a general equilibrium, regional Input-Output model was constructed to analyze the structure of the rural areas and the socio-economic importance of the food industry.

FINDINGS OF PROJECT:

The level of merger activity in the EU food industry was found to follow a cyclical pattern determined by the cyclical movements in the business and capital markets, while this pattern varies from country to country. An increase in the competition among food manufacturers has a negative impact on the wholesale prices, and subsequently on the final prices. In contrast, an increase in the market size and in the concentration of the food retailing sector tends to lead to an increase in the wholesale prices charged by food manufacturers. The food industry tends to perform better in terms of consumer and total welfare when it is characterized by increased competition both in the food manufacturing and the food retailing sectors, by strong product differentiation, as well as by high product variety and economies of scope. However, when entry in the food manufacturing sector is endogenous, higher product variety decreases the manufacturers’ entry incentives, and thus, it leads to an increase in the upstream concentration. The opposite holds when goods become more differentiated, the economies of scope get stronger and the food retailing sector becomes more competitive. An increase in the competition of the food industry tends to increase both the consumer and the total welfare. However, an increase in the number of food manufacturers could lead to decrease in total welfare when the upstream market is not sufficiently concentrated. A change in the AP (Adventitious Presence) threshold can create winners and losers not only among the consumers but also among the suppliers of the two products. The identity of these winners and losers is determined by the relative cost and utility effects. The very same group could either support or oppose an increase in AP thresholds depending on the particular market conditions (that determine whether such increase would lead to gains or losses). This finding provides some rationalization of seemingly “irrational” behaviours in the marketplace.

IMPACT OF PROJECT:

A number of guidelines related to M&A activity, enhancing innovation adoption and diffusion in the food chain, and the labeling of genetically modified products were derived from the results of the project. Some of the guidelines include the following:

Anti-trust authorities should be more skeptical towards mergers in the food retailing sector than towards mergers in the food manufacturing and processing sector. The latter appear more likely to generate efficiency gains and end up, under certain conditions, leading to an improvement in welfare.
The instruments of policy encompass not only merger regulations and the appropriate sections of the Treaty of Rome but also potential revisions to planning regulations to reduce entry barriers and offices of an ombudsman to protect upstream suppliers.
When merger cases in the food industry are being examined, the examination should encompass some forward looking analysis that takes into account that one merger would be followed by another.The use of pesticide taxation as a means towards pesticide use reduction would not be very effective unless the level of the tax is very high.
Increased incentives for cooperation in R&D among firms in the food chain (e.g. creation of R&D networks and higher tax incentives for activities that involve more than one firm) can promote the innovation adoption.
Merger activity in the processing sector can increase total welfare when the sector is not sufficiently concentrated, while in the retailing sector this is not the case.
Concentration in the retail sector can be detrimental to innovation in the processing sector.
An increase in product differentiation (e.g. better product labeling in both primary and processing sectors) creates incentives to innovate.
Education, training and diffusion of information about new technologies in the processing sector are important factors contributing to innovation adoption.
Bureaucratic procedures hinder response to new consumer trends developing worldwide (health versus convenience, functional foods).
Market research can help identifying new products that take into account changing demographics in most European cities.
The optimal policy for the EU involves an adherence to “as low as technically feasible” purity thresholds while for the optimal policy for the US involves reduced purity standards.

FADNTOOL: Integrating Econometric and Mathematical Programming Models into an Amendable Policy and Market Analysis Tool using FADN Database

The design of effective and targeted CAP measures relies on a proper assessment of the impacts of EU policy changes and market developments on farmers and the whole economy. Uncertainty, instability and price volatility that relentlessly reshape agricultural markets today, call upon the development of new modeling tools able to scrutinize all relevant dynamics while also remaining easy to use and amend. The FADNTOOL project constructed a complete and unique methodological framework custom-built for the FADN database in order to support decision-making in the EU through a novel, easy to use, maintain and update interface, that will facilitate an efficient and operative monitoring of the impact of CAP reforms and market changes. The major objectives of the project were to

Review of the policy modeling literature that is based on FADN data
Develop a procedure to aggregate the supply response model to the regional, national and EU level
Develop a set of different, yet complimentary, models that capture and evaluate different aspects of farmers’ productions decisions and their effects
Develop a stochastic simulation framework for model simulation and policy analysis
Assess the effects of policy reforms on farm structure
Develop a simplified, user-friendly interface for the use of the modeling tools and a complete handbook for all models developed in the project -Apply and estimate the developed models in each EU-27 countryAssess the impact of pesticide use on yield, efficiency and productivity

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METHODOLOGY:

The project, which involved 12 European Universities and/or Institutes and the EU Commission’s JRC, improves and extends existing economic models that make use of the FADN informatics environment by developing a unique modelling framework that (i) encompasses all aspects of farmers' production decisions (ii) targets the single farm but also consistently aggregates to regional, national and the EU level (iii) takes into consideration the effects of uncertainty and risk on farmers' behaviour (iv) can be employed in different market environments, i.e. throughout the EU-27 and (v) can be amended and/or fine-tuned by EU and national FADN units. The project draws upon two major modeling tools (econometric and mathematical programming)

FINDINGS OF PROJECT:

In addition to developing a simplified, user-friendly interface for the use of the modeling tools to support decision-making in the EU some interesting results were obtained in specific applications of the modeling tools developed in the project. With respect to the introduction of decoupled payments (CAP reform 2005) it appears that the hypothesis that agricultural payments are capitalized into land prices in both periods is rejected. A hypothetical scenario removal of import tariffs for sugar in the EU15 countries was investigated and it was found that the welfare effects are small in terms of each country’s GDP because even though EU15 sugar tariffs rates are high, sugar is a very small part of every economy.

IMPACT OF PROJECT:

The project’s final outcome is the construction of a methodological framework comprised of state-of-the-art economic models custom-built for the FADN database that will provide to policy makers an inclusive impact analysis of the effects of alternative policy and market developments scenarios under a real-life, dynamic context. Given the complexity of this framework, a simplified version of the models will be developed, all consistently and operatively joined into an amendable interface that will be user-friendly and easy to operate and still allow for a concise replication of our policy simulation results, capable to target at the efficiency of CAP measures, i.e. the single farm payment, although the whole framework will be also applicable providing some acquaintance with modeling parameterisation. The specialized international Seminar “Developing Integrated and Reliable Modeling Tools for Agricultural and Environmental Policy Analysis” was organized in Chania, Crete, Greece on 15-16 June 2013 bringing together experts in the area.

Business and Consumer Surveys (BCS)

Since May 2008 the Economics Research Centre, in collaboration with RAI Consultants Ltd, has been conducting Business and Consumer Surveys in Cyprus as part of the Joint Harmonised European Union Programme of Business and Consumer Surveys. The objective of the project is to conduct Surveys among firms and consumers to obtain information on their perceptions and expectations about various economic variables. In particular, the Surveys collect data information on firms’ perceptions and expectations about their turnover, production, employment and prices as well as on consumers’ perceptions and expectations about the financial condition of their households, various aspects of the economy such as consumer prices and unemployment and consumers’ intentions to save or spend on major purchases. The data are collected on a monthly basis via interviews with managers/directors of firms in services, retail trade, construction and manufacturing, as well as through telephone interviews with consumers. The ultimate objective of the project is the construction of economic confidence indicators for systematic monitoring and analysis of economic developments (in sectors and the economy as a whole) and for short-term forecasting.

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METHODOLOGY

The data are collected on a monthly basis via interviews with managers/directors of firms as well as through telephone interviews with consumers. The individual data are processed and delivered to the European Commission in a predetermined format according to a Harmonised (across EU and candidate countries) Schedule. Since October 2008 the Economics Research Centre of the University of Cyprus (CypERC) has been producing and publishing a monthly bulletin that analyses the results of BCS in Cyprus (http://ucy.ac.cy/erc/en/publications/bus-cons-surveys). Since February 2012 CypERC has been publishing the bulletin "Economic Outlook" on a quarterly basis (http://ucy.ac.cy/erc/en/publications/economic-outlook). The bulletin presents short-term forecasts for GDP growth and inflation in Cyprus. The forecasts, which are constructed using state-of-the-art econometric techniques, are analysed in conjunction with recent domestic and international economic developments, as well as with the challenges and prospects of the Cyprus economy. The analysis in “Economic Outlook” and the process of constructing the forecasts make extensive use of BCS data for Cyprus, EU, EA as well as for countries with which Cyprus has trade links (e.g. UK and Greece). Furthermore, CypERC (i) has carried out studies for evaluating the information content of BCS data using statistical and econometric techniques as part of a regular monitoring of the quality of BCS data in Cyprus, and (ii) has employed BCS data in the development of models for forecasting macroeconomic variables of the Cyprus economy and in the construction of a domestic activity indicator. CypERC contributed to the task force on the quality of BCS data organised by European Commission (DG-ECFIN, BCS Team) by conducting an empirical analysis for the investigation of the effects of sample size on BCS performance indicators.

FINDINGS OF PROJECT

The key findings of the project is that BCS data can be used in the construction of confidence indicators which contain leading information with respect to changes in activity in sectors and the economy as a whole. Moreover, BCS data are found to be useful in forecasting macroeconomic variables such as GDP growth, inflation as well as output and employment growth in sectors of the economy.

IMPACT OF PROJECT

The main impact of the project is the systematic computation and publication of the economic sentiment indicator for the Cypriot economy and of confidence indicators for services, retail trade, industry, construction and consumers. These indicators are used in the systematic monitoring of economic developments by policy-makers (Ministry of Finance, Central Bank) and private organisations (e.g. banks), and are widely reported in the local press. The results of the project are published in the following two bulletins circulated by CypERC: Bulletin: "Business and Consumer Surveys". The monthly bulletin "Business and Consumer Surveys" presents the main results of Business and Consumer Surveys conducted in Cyprus. The bulletin discusses short-run changes in the business climate (Services, Retail Trade, Construction, Industry) as well as recent trends in consumers' perceptions and expectations about the financial condition of their households and the economy in general. The full text is available in Greek. The bulletin also provides the main results of the Surveys in English. (http://ucy.ac.cy/erc/en/publications/bus-cons-surveys) Bulletin: "Economic Outlook". The bulletin presents short-term forecasts for GDP growth and inflation in Cyprus a quarterly basis. The forecasts, which are constructed using state-of-the-art econometric techniques, are analysed in conjunction with the recent domestic and international economic developments as well as with the challenges and prospects of the Cyprus economy. The full text is available in English. (http://ucy.ac.cy/erc/en/publications/economic-outlook)

Forecasting Cyprus GDP and its Demand Components

The project aims at: (a) constructing short-term forecasts for the growth rate of GDP and the growth rates of GDP demand components − private and government final consumption, gross fixed capital formation, imports and exports − for Cyprus, and (b) developing a composite indicator of economic activity in Cyprus, by exploiting the timeliness and the rich information content of Business and Consumer Survey data. The analysis of the project is based on an extensive database consisting of a large number of domestic and international/foreign macroeconomic and financial variables.

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METHODOLOGY

First, single equation dynamic models, such as Autoregressions and Autoregressive Distributed Lag (ADL) models, as well as Bridge Equations, that link quarterly GDP data with monthly predictors, are estimated. The forecasting performance of these models is evaluated and the usefulness of BCS data for forecasting is assessed. Since single equation dynamic models can only handle a limited number of variables, the large set of predictors in the dataset can be exploited by application of methods for combining forecasts from the abovementioned simple models. Additionally, the framework of Dynamic Factor Models (DFMs) is employed. DFMs can summarise the information in large datasets with a small number of common factors, thus maintaining the parsimony principle in models, while extracting the useful information from a large number of variables. The project applies DFMs to Cyprus data. The forecasting performance of factor augmented ADL models and their forecast combinations is compared to that of a benchmark model and therefore to that of single equation dynamic models. The framework of DFMs will be used to construct a composite economic sentiment indicator for Cyprus, which will be compared to the sentiment indicator published by the European Commission.

FINDINGS OF PROJECT

The results of the project so far show that forecast combinations with weights based on the historical performance of individual forecasts are usually associated with higher forecast accuracy than other combination methods. The analysis also reveals that forecasting GDP growth directly leads to much more accurate forecasts than computing forecasts for the growth rates of all the demand components and subsequently aggregating them to obtain the GDP growth forecast (i.e. bottom-up approach). This finding has implications for the construction of forecasts for GDP and its components that are consistent with the national accounts identity. Forecasts from bridge equations that are associated with superior forecasting performance in very recent quarters (i.e. recent best forecast combination method) are found to yield substantial gains over simple models and other combination methods.

IMPACT OF PROJECT

The systematic computation and publication of forecasts for the growth rate of private and government final consumption, gross fixed capital formation, imports and exports in Cyprus. The systematic computation and publication of a composite indicator of economic activity in Cyprus; the indicator exploits the timeliness and the rich information content of Business and Consumer Survey data and therefore provides leading information for movements in aggregate output in the short run.

Effects of active labour market policies and taxation on labour supply and welfare

The purpose of the project was to investigate the labour supply (participation and hours) behavior of individuals with a view to reaching conclusions with practical implications about policies for increasing employment and welfare among the vulnerable group of the population (individuals oven 50, females, single parents etc.). The theoretical framework for deriving the labour supply function (demand for leisure) was based on the optimising behaviour of individuals in the context of an integrable demand system that includes leisure. The novelty of this approach is that the usual labour supply effects of alternative employment policies are investigated not only from their behavioural (employment) but also from their welfare (deadweight) loss point of view. This is important because policies designed to encourage employment should also pay attention to their welfare effects. For this the results obtained from the econometric analysis were used for the simulation of behavioural and welfare effects of three revenue equivalent income tax system reforms. The goals of the research were:

The extension of existing modelling approaches of the supply function to include not only the behavioural (change in labour market participation and hours of employment) but also the welfare (deadweight) loss associated with the substitution of leisure for labour; thereby, providing more appropriate efficiency criteria for selecting between alternative policies intended to maximize labour supply.
The application of the resulting model to study factors affecting labour market participation and hours-of-employment decisions of individuals in Cyprus and simulate the impact of alternative employment increasing policies.
The improvement of the tax-benefit model developed by the Economics Research Centre of the University of Cyprus (CypERC) so as to measure correctly the effects of alternative policies intended to increase employment among individuals; by making it to take into account of (i) the labour supply responses and (ii) the deadweight loss of these policies.

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METHODOLOGY:

For modelling the labour supply in Cyprus, a specification of the semi-logarithmic labour supply function was used, which allows for backward bending at high wage rates. For the estimation of the optimal supply of hours under a piecewise-linear budget constraint a complete budget constraint maximum likelihood procedure was used assuming that the observed hours are generated by a generalised Tobit model. The results of the estimation were used for the calculation of income and wage elasticities of different groups based on the age and the age of the youngest dependent child of individuals. Also the estimation results were used in assessing the behavioral and welfare effect of alternative, revenue equivalent, employment increasing reforms of the tax and benefit system using simulation techniques. This analysis can point to policies that can be targeted to specific population groups so as to optimize the impact on labour supply and welfare. The simulated tax system reforms were (a) a progressive tax system with income tax allowances, (b) a progressive tax system with family allowances and (c) a proportional taxation.

FINDINGS OF PROJECT:

The labour supply of women is found to be more responsive to income and wage changes than that of men. Also, persons aged between 55 and 64 have much higher elasticity compared to individuals in other age groups. Based on the age of the youngest child, women with very young children (aged less than 12), as well as women with no children, are responsive to changes in their wage rate; while the labour supply of men with similar family characteristics has near zero wage elasticity. Furthermore, men have negative and women positive uncompensated wage elasticities of labour supply. The total (income and substitution) effect of an increase of the wage rate is for men a decrease and for women an increase in labour supply. Based on this, we can conclude that men are on a backward bending whereas women on a positively sloped labour supply curve. The findings of the project suggest that the employment increasing policies for females should differ from those for men. The (uncompensated) wage elasticities among women are positive, therefore in-work benefits that increase the wage rate of women can also increase their working hours, especially among those aged between 55 and 64. In addition women with dependent children less than 5 or between 6 and 12 have more wage elastic labour supply compared to women with older children. This means that in-work benefits offered to women and linked to dependent children can be an effective labour market policy aimed at increasing the working hours of women. Notably, the income elasticity of labour supply is negative among women, as is among men, especially for women between 55 and 64. Overall, policies aimed at increasing the non-labour income of individuals can decrease working hours. From the simulation analysis is found that the “progressive taxation with family allowances” scenario affects mainly the participation rate of women and especially those aged between 55 and 64 or with a dependent child aged less than 5. The “proportional taxation” scenario also affects mainly the participation rate of women but the effect is lower than the decrease under the “progressive taxation with family allowances” scenario and is usually below the 1 percentile point. In addition the “proportional taxation” scenario generates the lower decrease in the working hours of women and in the case of men increase their working hours by on average 0.4 hours. The lowest deadweight loss is generated by the “proportional taxation” scenario; and the highest by the “progressive taxation with family allowances”. In the latter case the deadweight loss is near 40% of tax revenues for males and 70% percent for females. The deadweight loss under the “progressive taxation with family allowances”, although negative, is quite low and close to zero for males and 5 percent for females. In the context of the analysis, on can therefore conclude that there is no “best” tax reform, as the effects on labour supply, equity and efficiency (as measured by deadweight loss) differ between tax regimes. For instance, a country is interested in improving the participation rate, especially of females or individuals over 55, the most suitable tax system is the "proportional with high income allowance" one; while if the country is interested in increasing the working hours of the same age groups the best system is "proportional taxation". On the other hand progressive taxation combined with high income allowance is best for decreasing income inequality; and "proportional taxation", although causing a small decrease in working hours and participation, is best for efficiency as the deadweight loss associated with it is low and mostly negative.

IMPACT OF PROJECT:

The research has helped improve the analysis of labour supply in Cyprus and determine the factors which affect the labour market behavior of individuals in a microeconomic level. Also the results of this project helped in the understanding of the effects of income taxation on labour market participation and working hours in Cyprus. Finally the main conclusions and policy implications of the project can be very useful to policy makers for designing employment increasing programs. The results of the project were published as Economic Policy Papers with titles “Labour Supply in Cyprus” and “Labour Supply and Taxation: A micro-simulation analysis for Cyprus”. Also relevant articles were published in the ERC’s newsletter. With the collaboration of the Department of Labour, Ministry of Labour, Welfare and Social Insurance, a workshop with title “The effects of Active Labour Market Policies on Labour Supply and Welfare” was organized where the results and conclusions of the project were presented. In the workshops officers from the Department of Labour and the Social Welfare Services of the Ministry of Labour, Welfare and Social Insurance, from Human Resource Development Authority of Cyprus, from the Cyprus Chamber of Commerce and Industry as well as representatives of Cyprus Employers and Industrialists Federation and from the Trade Unions SEK, PEO and DEOK.

Dynamics of Automobile Demand

Understanding consumer behavior is an important task of economics. An automobile is the largest item most individuals will ever purchase (besides a home), hence economists have dedicated much effort in analyzing the factors that determine automobile purchase decisions. Important methodological advances in the 1990s have made possible the estimation of rich static demand models for differentiated products like automobiles. More recently, attention has shifted to dynamic aspects of consumer behavior. Durable goods pose a challenge because consumer purchase decisions depend not only on the currently available choices but also on expectations of future choices and their characteristics. They also depend on current holdings of the durable; consumers own a stock of durables which they may expand, shrink or upgrade over their lifetime according to their needs. One of the limitations of existing research is that it relies primarily on aggregate data as there is no information on consumers’ purchasing patterns over their lifetime. The proposed project aims to make a contribution to the literature by exploiting a unique dataset that records every vehicle registered in Cyprus since 1970. As of 1987, the dataset also records transfers of ownership and an identification number for the vehicle’s owner. Thus we can track every vehicle’s entire ownership history and each individuals' automobile holdings over time. We are not aware of any existing work utilizing data of such scope. A comprehensive descriptive analysis of this unique dataset will provide valuable insights into consumer behaviour in durable good markets and will guide us in constructing tractable but also realistic dynamic models of consumer behavior. Such models are important for evaluating the long-term effects – at both the microeconomic and the macroeconomic level – of policies such as taxation, environmental regulation, scrapping subsidies, vehicle inspection regimes, and imports of used automobiles.

New Results on Structural Change Tests: Theory and Applications

The research project has two broad objectives and provides novel results in the literature of structural change or change-point tests. The first objective is to provide two new methods for restoring the non-monotone power problem of a large family of structural breaks tests that have been widely used in econometrics and statistics, as well as to show that these methods have additional contributions and can be extended to: (i) tests for a change in persistence, (ii) partial sums tests of cointegration and (iii) tests for changes in dynamic volatility models. The significance of these methods is demonstrated via the consistency of the long-run variance estimator which scales the change-point statistics, the asymptotic properties of the tests, their finite sample performance and their relevance in empirical applications and policy analysis. The second objective is threefold: First, to show that ignoring structural changes in financial time series yields biased and inconsistent risk management (Value at Risk, VaR and Excess Shortfall, ES) estimates and consequently leads to investment misallocations. Second, to propose methods for evaluating the stability of financial time series sequentially or on-line which can be used as a quality control procedure for financial risk management as well as to show that monitoring implied volatilities yields early warning indicators of a changing risk structure. Moreover we show that model averaging in the presence of structural breaks as well as other model uncertainties involved in risk management estimates, can provide robust estimates of VaR and ES. New results are derived on the optimal weights for model averaging in the context of dynamic volatility models and asymmetric loss functions. Third, we propose a novel way to construct prediction-based change-point statistics that reduce the detection delay of existing sequential tests and provide a probability about the likelihood of a structural change.