Inheritance has a concave effect on the hours worked by British male entrepreneurs

November 20, 2011 § Leave a comment

Author: Dr. Zhongmin Wu, Nottingham Business School

Using data from the British Household Panel Survey (1998 – 2009), Faria and Wu (2012) find that inheritance has a concave effect on the hours worked by male entrepreneurs. Receiving inheritance increases the labor supply of British male entrepreneurs; however this effect becomes smaller for higher inheritances, eventually turning negative. Does inheritance create a disincentive to labor? According to the Carnegie conjecture, the greater the inheritance, the lower the recipient’s labor supply. The usual explanation is that inheritance negatively affects the marginal utility of wealth, regardless of whether the inherited wealth is anticipated or not. Faria and Wu (2012) estimate the labor supply function of nascent entrepreneurs who were unemployed last year. The data used for this research is the British Household Panel Survey (BHPS) from wave 8 to wave 18 (1998 – 2009). The endogenous variable of the model is “Self employed: hours normally worked per week”. The results show that inheritance has a concave effect on the hours worked by male entrepreneurs. This is an important result as it implies that receiving an inheritance has a significant impact on one’s transition from unemployment to entrepreneurship. Receiving an inheritance increases the labor supply of British male entrepreneurs; however this effect becomes smaller for higher inheritances, eventually turning negative. The nonlinear effect peaks on an inheritance value of £41,254, which increases self employed hours worked per week by 8.3 hours (see figure). The results are robust and consistent.

References: Faria J. and Wu Z. (2012) From Unemployed to Entrepreneur: The Role of the Absolute Bequest Motive, Economics Letters, 114 (1), 120 – 123

Figure 1

Posted in economics, Labor economics, Labour economics | Tagged economics, incentives, inheritance, labor supply, Labour supply | Leave a reply

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Weather Forecasting, Orange Juice and Futures

November 20, 2011 § Leave a comment

Author: Professor Leighton Vaughan Williams, Nottingham Business School, Nottingham Trent University.

Over 90% of all US oranges used in frozen concentrated orange juice are grown in central Florida. The reason is that oranges grown in central Florida produce better concentrated orange juice than oranges grown in California, the other major source of oranges in the US.

Clearly this makes the weather in central Florida of critical importance to the market price of orange juice. One would expect, therefore, that the weather forecast for central Florida should be a key factor influencing the price at which orange juice futures trade. But what now if we phrase the issue in reverse? Can we use these orange price futures to actually forecast the weather? And if so, how well do forecasts so obtained compare with the forecasts issued by the official National Weather Service?

A study carried out by Professor Richard Roll of the Graduate School of Management at the University of California sought to find out. In the resulting research paper, called “Orange Juice and Futures”, published in the American Economic Review in December 1984, Roll found what he termed a “statistically significant relation between OJ returns and subsequent errors in temperature forecasts issued by the National Weather Service for the central Florida region.”

In particular, if the closing orange juice futures price is higher than its opening price, we would obtain a more accurate prediction of the weather by adjusting downward the National Weather Service’s weather forecast. This is because a higher futures price implies a smaller crop and colder weather. Correspondingly, if the orange juice futures price is lower than its opening price, we should adjust upwards.

A front-page article in Florida’s St. Petersburg Times, on Monday, October 17, 1983, puts this in some perspective. “The National Weather Service spends $280 million each year predicting the nation’s weather,” it runs, “and it uses some of the niftiest gadgets … to do it. But it may be overlooking the price of orange juice.”

In an interview with the paper, Roll noted how in 1981, when the temperature in central Florida fell into the 20s (Fahrenheit) for four consecutive nights, the price of orange juice futures rose 40%. “They [the traders] have their own meteorologists”, he explained. “They have a bigger incentive than the Weather Bureau itself to predict it correctly.” In particular, if traders can anticipate falling temperatures they can buy before the price goes up and sell after it does.

An important point to note here is that Roll is not implying that the official weather forecasting service is of no value. Indeed, the market might have been a lot less accurate if these forecasts didn’t exist. What Roll’s study does suggest, however, is that the commodity markets add information above and beyond this, which serve to improve forecasting accuracy.

Reference:
Richard Roll, Orange Juice and Weather, The American Economic Review, 74, 5, 1984, 861-880.
Link at: http://www.e-m-h.org/Roll1984.pdf

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November 17, 2011 § Leave a comment

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