AEA Poster Session
Friday, Jan. 5, 2018 8:00 AM - 5:00 PM
Saturday, Jan. 6, 2018 8:00 AM - 5:00 PM
Sunday, Jan. 7, 2018 8:00 AM - 5:00 PM
Ambiguous Economic News and Heterogeneity: What Explains Asymmetric Consumption Responses? (E2, E3)
AbstractIn this paper we study the asymmetric consumption behavior from an informational perspective. This is to study whether consumers are neutral to the type of news they receive. We test the hypothesis that consumers react more to bad news than to good news using the PSID by analyzing the response of households' consumption to news on aggregate future income. We find that, over the whole sample, the size of consumption responses is larger following negative (bad) news than positive (good) news.
At a Cost: The Real Effect of Transfer Pricing Regulations
AbstractUnilateral implementation of anti-proﬁt shifting rules may have negative impact on real investment and domestic revenue when multinational ﬁrms (MNCs) respond by reducing their presence in the local economy. This paper uses a unique panel data on domestic and multinational companies in 27 countries during 2006-2014 and ﬁnds that MNC affiliates reduce their investment by around 11 percent following the introduction of transfer pricing regulations. There is no signiﬁcant reduction in total investment by the MNC group, suggesting that these investments are most likely shifted to other low-tax countries. Tightening of transfer pricing regulations approximates about 23 percent increase in the ``TPR-adjusted'' corporate tax rate or 15 percent increase in the ``TPR-adjusted'' user cost of capital.
Exchange Rate Dynamics and International Business Cycles with Trade Shocks (F4, F3)
AbstractStandard macro models fail to explain why real exchange rates are volatile and disconnected from macro aggregates. This paper presents a simple two-country, two-traded-good Real Business Cycle model that can solve this puzzle. The model assumes productivity shocks and "trade shocks", modeled as exogenous shifts in a country’s local spending bias. These trade shocks capture, in a reduced form way, preference/technological shifts between domestic and imported goods, and changes in trade costs/protectionism. Estimated trade shocks exhibit wide cyclical fluctuations that are weakly correlated across OECD countries.
The paper shows that trade shocks are a powerful source of fluctuations in the real exchange rate and in the trade balance. A positive shock to a country’s local spending bias appreciates the country’s real exchange rate and boosts its output. By contrast, a positive productivity shock depreciates the real exchange rate (while also raising domestic output). A model with simultaneous productivity shocks and trade shocks can generate a realistic correlation between real activity and the real exchange rate, i.e. a correlation that is close to zero. Trade shocks also help to explain the empirical volatility of the real exchange rate and the trade balance.
The Complementarity of Health Information and Health IT For Reducing Opioid-Related Mortality and Morbidity (O3, I1)
AbstractIn response to the opioid crisis, each U.S. state has implemented a prescription drug monitoring programs (PMPs) to provide health providers with patients’ controlled substance prescription information. I study whether health information technology (IT) complements the availability of restricted patient information in PMPs to reduce opioid-related mortality and morbidity. I construct a novel data set that records state health IT policies that facilitate PMP data interoperability, including cross-system integration and interstate data sharing. Utilizing difference-in-difference methods, I find that health IT policies reduce opioid-induced mortality and morbidity when combined with drug monitoring programs. The reductions are most substantial in states that created PMPs but never mandated their use. The impacts are strongest for the most vulnerable groups – middle-aged and low- to middle-income patients and are robust when stratified by age, income, location, and insurer type. The total benefits from improved interoperability far exceed the associated costs.
The Impact of the Dodd-Frank Act on Rating Change Announcements: Evidence from the Stock and Option Markets (G1, C5)
AbstractTaking news reflected in the stock market or the options market as a benchmark for public information, this paper examines whether credit rating agencies (CRAs) have become more expedient information providers after the enactment of Dodd-Frank in July 2010. Applying the traditional event studies methodology, we find a persistent negative price impact in the stock market prior to rating downgrades. This pattern became less pronounced after the passage of Dodd-Frank, implying deteriorating informational efficiency of the stock market. While the stock market can only anticipate rating downgrades, in a regression framework we find the options market respond to both downgrades and upgrades. Improved price discovery in option markets can be the result of a greater information search by market participates, given the superiority of options as a speculative vehicle. Before the Dodd-Frank, there is a downward (upward) pattern on Call-Put Implied Volatility Spreads before, at and after rating downgrades (upgrades), implying that option traders anticipate as well as respond to positive and negative credit news. After the Dodd-Frank, we find markets only anticipate but do not react to news. Evidence from the stock and options market, taken together, suggest that the CRAs did not provide more timely information to the market after the Dodd-Frank.
Agglomeration and Innovation: Across Industries and Geographical Scales
AbstractMost of the innovative activities around the world occur in urban agglomerations. Studies using the OLS estimator to quantify the effect of agglomeration on innovation are complicated by two forms of selection bias: self-selection (more innovative firms self-select into agglomerations) and natural selection (less innovative firms are forced out of agglomerations due to tougher competition). Prior studies also aggregate industries and geographies at high levels, and mask the heterogeneous effects across more detailed industries and various geographical sizes. I use a continuous quantile estimator, and contrast the results from the full sample with the new firm sample to eliminate the two forms of selection bias. Taking together the restricted version of the QCEW establishment data and the USPTO patent data for the state of Maryland, 2004-2013, I apply the corrected estimates to 34 groups of industries and geographical scales ranging from one mile to 20 miles in radius. Agglomeration on average encourages patent filings by 3%, but the effect varies from zero to 18% by industries and geographical scales. I deliver a complete ranking of industries by the effect of agglomeration on innovation, which can help design efficient industrial policies.
Air Travel Fares and the September 11 Security Charge: A Lesson of Tax Incidence (H2, L9)
AbstractTax incidence is a well-studied topic in public economics and in industrial organization. However, little work focuses on the taxes in the US airline industry. This paper investigates the relationship between airfare and the September 11 Security Service Charge, which experienced the first increase on July 21, 2014, since its imposition back in 2002. We test two theoretical hypotheses: (1) September 11 Security Charge is being over-shifted onto passengers, and (2) such tax incidence decreases as competition increases. We contribute to the literature by providing fresh evidence of tax incidence in the airline industry, and demonstrating heterogeneity of the pass-through rates in some products. Consistent with existing literature, on average, evidence of over-shifting of the tax is found: every one-dollar increase in the tax results in approximately a three-dollar increase in the fare. Segmenting the dataset based on market structures reveals that tax incidence decreases as competition increases, which is consistent with theoretical predictions. Premium cabin passengers surprising do not bear as much incidence as coach passengers. Non-direct services and one-way itineraries bear more incidence compared to direct services and roundtrip tickets, respectively. Our results are robust to accommodating industry-wide structural changes, instrumenting potentially endogenous fleet choice, and altering market
definitions. We call for future mechanisms to potentially contain this over-shifting behavior.
Ambient Air Pollution and Hospital Admissions: Evidence From South Korea (I1, Q5)
AbstractThis paper estimates the effects of ambient air pollution on respiratory-related hospitalization in South Korea (c.2006-2015). I find that both PM10 and O3 have the significant effects on the risk of respiratory diseases. Specifically, a 10 mg/m3 increase in PM10 leads to an increase in respiratory daily hospital admissions by 1.9% and a 0.01 ppm increase in O3 increases hospitalization for respiratory diseases by 2.4%. Both alerts for PM10 and O3 significantly reduce hospital admissions. Results are consistent with the hypothesis that respiratory hospital admissions do not increase linearly and monotonically as air pollution concentrations rise, and previous estimates that do not take the avoidance behavior into account are underestimated. This study also finds that those two types of air pollutants have differential significant impacts: O3 has larger impacts on patients with chronic respiratory diseases, while PM10 has greater impacts on non-chronic respiratory patients. Therefore separate policies may be needed to address both pollutants.
Asset Prices, Wealth Inequality and Background Risk with Durability and Habits (G1, D3)
AbstractIn an exchange economy with identical agents, except for their initial endowment, we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate, when there is a single durable good and the agents’ preferences are habit forming. We measure inequality by introducing a mean preserving transfer of endowment. This creates the departure from an egalitarian distribution of wealth. Preferences are modeled either as external or internal habits. For our calibrations we introduce two and three classes of wealth, in a simple two period setting. We also explore the effects of the addition of a small uninsurable labor income risk. It seems that wealth inequality is important for all versions of the model.
Competition and Favoritism in Bank Loan Markets (G2, L1)
AbstractThis paper analyzes costly favoritism related to physical attractiveness and gender in bank loan markets using a market structure-based method. The rationale is that a concentrated market provides more space for loan officers to discriminate against a certain group of borrowers. Using several unique datasets and online maps containing information on market structure and household finance, we find that loan officers prefer good-looking people and males in relatively risky commercial/industrial loan markets. On the other hand, females and especially young good-looking females have an advantage in mortgage loan markets. Although the disadvantage of bearing and raising children cannot be easily disentangled from discrimination in labor markets, it does not pose an issue in mortgage loan markets. We interpret these different patterns of favoritism as a result of differential risk levels associated with the two types of loans.
Consumption Patterns Among OECD Countries: Demand System Estimation for Panel Data With Random Effects (C3, D1)
AbstractA promising approach to gain efficiency in comparative demand systems analysis is to combine the sample information from the time-series dimension with that from a cross-section. However, the use of cross-country panel-time series data is further complicated in demand system analysis by multiple equations and cross-equation restrictions on the system. In this paper, we propose a Seemingly Unrelated Regressions (SUR) estimator with random effects. Cross-section dependence across included countries is non-trivial and will be addressed.
We aim to analyze food consumption patterns across time for countries with different income levels. Utilizing multi-stage budgeting, we develop and use two extended versions of Working’s (1943) model on panel-time series data from the Organization for Economic Co-operation and Development (OECD) between 1985 and 1999. We develop and use the CBS-Florida model, where the price components, real expenditure, and Divisia volume index are deflated by their geometric means. Consequently, we analyze the demand for nine broad categories of goods in the first-stage budgeting and eight detailed sub-categories of food in the second-stage budgeting.
Estimated model parameters are used to compute income and price elasticities, which in turn allow for direct comparison of food consumption patterns across lower, middle, and higher-income countries. Finally, we illustrate the usage of these elasticities to simulate spillover impacts of a country- or group-specific policy across other OECD countries under diﬀerent scenarios.
Contests with a non-convex strategy space (C7, F5)
AbstractWe characterize the Nash equilibria of a class of two player contests with non-increasing return to effort and a possibly uncertain non-convex strategy space. We show that our analysis can shed light on behavior in international conflicts. For instance, it may explain why, some attempts to reduce international conflicts were successful while others have failed.
Control Systems in the Italian National Health Service and the Maintaining of the Principles of Universality, Equality and Equity: Avoiding Discrimination and “Exit” Phenomena. (I1, K3)
AbstractThe Italian National Health Service (NHS) was responsible in 2015 for a public health spending equivalent of 14% of the total Italian public spending. It is funded from general taxation as health is treated as merit good.
In recent years the Italian NHS has been subject to many restrictions to contain spending and rationalize the activity in the name of the efficiency and the effectiveness.
The measures at national level and for each Regional Health Service (independent with the implementation of the health federalism in 2001) have been drawn up in accordance with the founding principles of the NHS in 1978: Universality, Equality and Equity. But the application in specific contexts "has put a strain on the needs of citizens", as emphasized in the "Report on the status and prospects of the NHS, in view of the sustainability of the system and to ensure the principles of universality, solidarity and equity "of May 2015 drawn up by the Standing Committee - Hygiene and Health of the Senate of the Italian Republic.
The paper analyzes precisely the system of existing control mechanisms on the implementation at the local level of the national and regional measures to contain spending and rationalize the activity of the NHS. The paper evaluates the effectiveness or the "inability" of the control mechanisms to guarantee citizens the rights deriving from the principles of the NHS and to avoid discrimination and “exit” phenomena.
The context of the study is the Regional Health Service of Emilia-Romagna with the measures adopted after 2010 to deal with the problems of waiting lists and the control of spending that in the area of the Bologna Local Health Authority it has meant the redirecting of the services of early detection of breast cancer toward the screening of public health (poster at ASSA 2017).
Discontinuous Evolution of Housing Shares in Households' Portfolios (E2, R2)
AbstractHousing assets earn higher long-run returns, expand the borrowing limits and save rental expenditures, so households save more in liquid wealth to lower the housing shares when the lagged values are high and save less in liquid wealth to raise the housing shares when the lagged values are low, to satisfy the intertemporal consumption allocations. However, the probabilities to adjust housing assets jump up when the lagged shares cross the thresholds of an optimal region due to the fixed costs, which leads to discontinuities and kinks in the evolution of housing shares around the thresholds. I empirically estimate the thresholds in the jumps of average probabilities of making transactions and the magnitudes of the kinks around the thresholds, showing households infrequently change housing assets to smooth consumption given variations in average portfolio returns and total wealth.
Economic Leadership and Growth
AbstractEconomies governed by former economics students grow faster than economies governed by leaders with other education backgrounds; a result which is most evident for presidents. Faster growth (average growth) occurs during an economic leader’s first year (entire tenure), primarily through investment. When focusing on close elections which “quasi-randomize” economic leadership, I find a large effect that is robust controlling for a leader’s advanced education. Investors seem to hasten their activity in anticipation of their economic leader’s eventual reduction of the top personal income-tax rate. Overall, the findings suggest that economic leaders improve short-term growth through the anticipation of policy changes.
Education, Demographic Transition, Gender and the Business Cycle: New Developments and Future Prospects in Mexico's Labour Force Participation Rate (J4, J1)
AbstractWe study the labour force participation in Mexico since 2005. Using data at the individual level, we find that behind the apparent stability of the Mexican labour force participation rate (LFPR) there are deep transformations affecting the labour force. While the ongoing ageing of the labour force had modest effects so far, changes in the educational level were more important although with a differentiated impact by gender. There is strong evidence of positive effects on labour participation for females; however, for males this result is not clear-cut. We show that for males the prevalence of the informal market has distorted the effects of education in their decision to participate in the labour market. In addition, we re-examine the role of the business cycle on the LFPR using new data and non-parametric methods recently proposed in the literature. We find that in line
with the evidence of other countries, the LFPR in Mexico tends to be pro-cyclical.
Endogenous Skill Choice as Source of Productivity Dispersion
AbstractQuantitative evidence shows an upsurge in manufactured products intensive in technology. This paper offers an empirical analysis of product sophistication and quality upgrading of exports from countries such as China, Mexico, and India. Technical progress has differential impacts on productivities across sectors contingent on skilled labor shares. At the macro level, given the overall human capital stock of a region and structural congruence with the trading partners, apart from the motives of comparative advantage, the regions participate in trade to reap the technological bonus out of trade flows. We offer empirical evidences of skill distribution and evolution of workforce in these countries during 1990-2015 and link this to internationalization, innovation, and export intensity. Also, we associate these variables to digitization and entrepreneurial capability index. We find that there is relationship between globalization, capital market integration and skilled-unskilled labor intensities. Based on the background statistical evidence, we propose a theoretical model formalizing the nexus between embodied technology transfer, human capital and Total Factor Productivity Growth. Capturing these benefits requires an appropriate mix of skilled and unskilled labor, which is recognized by the firm in its production decisions. Assuming skilled labor as the harvester of new technology, the ratio of skilled and unskilled wage bills, as a measure of skill intensity, proxies absorption capacity of that sector. Sectors with higher skilled labor intensity will have an advantage in extracting the trade-mediated technology spillovers. The “optimal” level of skilled labor makes the best use of the technological bonus reflected in higher productivity.
Feedback, Investment, and Social Value of Financial Expertise (D8, G1)
AbstractWe examine how an informational feedback loop between bilateral security trading and firm investment endogenously affects information production. A trader's acquisition of information about a firm's investment opportunity can create an endogenous trade surplus that materializes only if trade may potentially break down. Because an exogenous private gain to trade is lost if trade is disrupted, however, the trader may not acquire such socially valuable information. Consequently, the firm, which makes its investment decision based on the trading outcome, may take socially destructive actions to induce the trader to acquire the information. Welfare-enhancing policies are examined.
Formalization and Welfare in a Dualistic Economy: A General Equilibrium Analysis with Application to Indonesia (O1, R1)
AbstractThis paper presents a novel general equilibrium model of formal and informal sectors of a dualistic developing economy, to enable both supply-side and demand-side analyses of formalization and welfare. In a multi-region setting with perfect labor mobility, a consumer taste for diversity, skill heterogeneity, and regional disparity in regulatory and trade costs, high-skill entrepreneurs self-select to pay the regulatory costs in the formal sector to trade globally and lower-skill entrepreneurs choose the informal sector to trade locally to avoid the regulatory costs. In equilibrium, formalization reflects the balance between consumption diversity, which expands with local informal entrepreneurship, and productivity, which increases with formal-sector employment. The equilibrium accounts for the sectoral disparity in entrepreneur skill, labor productivity, and firm size documented in La Porta and Shelifer (2014). It further accounts for the concurrent rises in education, export, and formalization and for regional sorting of formal entrepreneur skill found in Indonesia. An extended model is calibrated to Indonesia data to show the impact of an income-tax-rate reduction on formalization, welfare, and regional tax revenue.
Key Words: Informality; Human Capital; Trade; Welfare; Development; Indonesia.
Reference: La Porta, R. & Shleifer, A., 2014. Informality and Development. Journal of Economic Perspectives, 28(3), pp.109–126.
How Costly are Privatizations for Workers? (J0, H0)
AbstractThe world is in the midst of the fourth privatization wave, with record dollar amounts raised in both developed and developing countries. We show using rich Swedish registry data covering two decades that privatizations increase unemployment incidence for workers by a fifth relative to peers that remain state employed. Privatizations are, however, only costly for workers if they take place during recessions. These results shed new light on the welfare costs of privatizations and on how they can be mitigated.
Immigration and the Macroeconomy: The Role of Non-job Related Immigration (E3, J6)
AbstractIn this paper we investigate the macroeconomic consequences of immigration from non-Western countries on the Norwegian economy over the period 1990-2016. Most immigrants from non-western countries immigrate to Norway to join family members who immigrated earlier or as asylum seekers. These immigrants are characterized by low participation rate to the labor market upon arrival and thus have a very different profile from immigrants from Western countries who mainly come to Norway already with a job. Our analysis is feasible since, unlike for many other countries, a quarterly series for non-Western immigration is available since the beginning of the 1990s in Norway. Therefore, we use this series in a VAR model identified through sign restrictions to uncover the macroeconomic consequences of non-job related immigration on the Norwegian economy. More specifically, we investigate the impact on the labor market and the state of public finances. The identification scheme reflects the fact that most of these workers do not enter immediately into the labor market. In that sense the identification scheme is very different from the one used in Furlanetto and Robstad (Assa meetings 2017) where we investigated the effects of immigration from Western countries. We find that non-Western immigration is largely driven by the immigration shock and thus responds very little to the state of the economy. An immigration shock increases slightly unemployment on impact and has a negative effect on the state of public finances. However, the medium-run effects of the shock are very limited.
Local Labor Markets and Health at Birth (I1, J1)
AbstractHealth outcomes at birth strongly predict later-life health, education and labor market outcomes. However, the effect of economic downturns on newborns’ health outcomes has attracted increased scientific interest only recently in the wake of the global financial crisis. We provide new insights into this important topic, by examining the impact of local labor market conditions on health at birth in Germany for the period 1998-2014. Our analysis is based on a high-quality panel data set, that we generate by matching county-level labor market data with patient level hospital register data, birth register data, pollution data, and regional statistics. The existing literature hints towards a positive relationship between the local unemployment rate and newborns’ health in developed countries. In contrast, our results indicate a pro-cyclical relationship between the economic conditions and newborns’ health outcomes. Recessions lead to an increase in health problems that have their origin in the perinatal period, while congenital defects and the neonatal mortality rate seem to be unaffected. Moreover, we observe a slightly lower birth weight and ponderal index when the local unemployment rate during pregancy rises. These results are supported by estimations with a shift-share employment rate, predicted by a counties’ industry composition in 1996 and national industry-specific employment changes. Potential transmission channels include selection of less healthy individuals into parenthood, in-utero selection, environmental pollution, increased maternal stress and worse health related behavior of pregnant women during recessions. Our heterogeneity analysis suggests more pronounced effects among newborns born to low SES-mothers.
No Double Standards: Quantifying the Impact of Standard Harmonization on International Trade (F1, F6)
AbstractDivergent product standards have been categorized as a major obstacle to international trade. This paper quantities the heterogeneous trade effects of harmonizing standards on product entry and exit as well as export sales. Using a novel and comprehensive database on cross-country standard equivalences, we identify standard harmonization events at the document level. To link the standard data to international product trade flows, we create a new correspondence table between International Classification for Standards (ICS) and Harmonized System (HS) codes. Our results show that, on average, standard harmonization leads to a 0.5% increase in export sales. This effect is driven by an increase in the intensive margin, a decrease in prices and an increase in the quantities sold. We show that these results are compatible with a theoretical framework where standard harmonization leads to higher fixed costs as companies have to adapt to the new standards, but simultaneously variable trade costs are reduced, thus increasing overall trade flows.
Nonpecuniary Costs of Adult Morbidity: Evidence From Children in Indonesia
AbstractIn many developing countries, the burden of adult morbidity is greater than in developed countries. Households with morbidity shocks are faced with the cost of the medical care and the loss in income due to lower labor productivity. Educational outcomes of children may also be affected by the morbidity of parents as the households reallocate their resources over the period of illness. Using two waves (2007, 2014) of Indonesian Family Life Survey data, this paper investigates the effects of parental morbidity on schooling of children in Indonesia. Studies on this nonpecuniary cost of adult morbidity are rare in the literature despite its significance in future wellbeing of people in developing countries. This paper is distinguished from existing studies in that it takes into account duration and severity of morbidity in the estimation of morbidity effects. It also estimates the long-term effect of parental morbidity on the relative educational achievement of young children (7-15 years old), using a measure of schooling observed in 2007 and seven years later. The results show that girls with one additional year of paternal chronic illness achieve approximately one month lower educational levels than their same age cohort between 2007 and 2014. Furthermore, girls achieve roughly 4 months lower education levels than their age cohort when their fathers become unable to perform one of the basic activities of daily living (ADLs) in the same period. However, this paper finds no evidence that morbidity of parents affects schooling of children through the channel of intrahousehold labor substitution.
Peer Effects, Free-Riding and Team Diversity (M5, J0)
AbstractWe estimate the effects of peer contemporary and peer permanent productivity to understand if behavior at the workplace is affected by point-in-time performance or a high/low productivity signal. We exploit unique field panel data on cargo warehouse agents consolidating freight onto pallets with the help of a forklift. Shift composition is haphazard and team size of up to 20 agents depends on export demand. We find evidence for both types of peer effects only in teams with more than 9 agents: agents free-ride when working with high permanent-productivity peers whereas they increase performance when working with high current-productivity agents. By estimating heterogeneous effects we find that free-riding is highest when all peers belong to the nationality that comprises the majority and has on average the highest permanent productivity. Moreover, agents consider peers' point-in-time performance to be more important than peers' permanent productivity. In order to exploit efficiently the benefits of peer contemporary effects, production should take place only in large enough teams with sufficient diversity in nationality backgrounds.
Social Norms and Teenage Smoking: The Dark Side of Gender Equality
AbstractThis paper is the first to provide evidence that cultural attitudes towards gender equality affect behaviors with potentially adverse health consequences for female, but not for male, teenagers. Namely, descending from more gender-equal societies makes girls relatively more prone to smoke than boys. Using data from over 6,000 second-generation immigrant teenagers sharing culture and institutions from one host country but coming from 45 different countries of ancestry, we find that the higher the degree of gender equality in the country of ancestry, the higher the likelihood that immigrant girls smoke relative to boys, even after we control for parental, sibling, and peer smoking. Importantly, we uncover similar patterns when analyzing other risky behaviors such as drinking, getting drunk, smoking marijuana, or getting into fights. This reinforces the idea that more gender-equal social norms may come at an extra cost to women’s health, as they increasingly engage in risky behaviors (beyond smoking) traditionally more prevalent among men.
Stock Market Cross-Section Skewness and Business Cycle Fluctuations
AbstractUsing U.S. data from 1926 to 2015, I document that the cross-section skewness of the distribution of financial firms’ returns, i.e., financial skewness, closely tracks business cycles and predicts economic activity better than well-known bond spreads, uncertainty measures, and other cross-section moments. I also find that financial skewness anticipates financial firms’ asset quality and credit market conditions, such as banks’ asset returns and loan growth. Finally, I identify financial skewness shocks using vector autoregressions and a dynamic stochastic general equilibrium model and show that these shocks are important drivers of business cycles, while dispersion shocks become unimportant. This paper’s results are consistent with capital markets uncovering information about economic fundamentals through a channel not much explored by the macro-finance literature. Financial firms diversify away uninformative idiosyncratic risks through their asset portfolio choice, retain cleaner exposures to the overall quality of projects undertaken in the economy, and then signal the quality distribution of these projects through stock markets.
The E-Monetary Theory (E4, E5)
AbstractWe develop a dynamic model with two types of electronic money: reserves for transactions between bankers and zero-maturity deposits for transactions in the non-bank private sector. Using this model, we assess the efficacy of unconventional monetary policy during the Great Recession. After quantitative easing, keeping the interest on reserves at zero too long will create deflation. The central bank can get out of the ``low rate and deflation'' trap by ``raising rate and raising money supply''.
The Impact of Second-generation Biofuels on Market Structure and Social Welfare (L1, Q4)
AbstractEthanol and biodiesel are mainly derived from food crops. Since these first-generation biofuels are controversially discussed (e.g., food-fuel debate), second-generation biofuels (such as from dedicated energy crops) are increasingly promoted. Moreover, oil companies tend to backward integrate into biofuel production. One reason is security of supply. Alternatively, we show that second-generation biofuels – as a competing input – can create upstream specialization incentives and shifts in the distribution of rents that are counteracted by vertical integration.
To analyze whether second-generation biofuels lead to vertical integration between biofuel producers and oil companies, we provide a game-theoretical model with interlocking relations. In particular, we consider a vertically related industry with two biofuel producers and two oil companies. The biofuel producers incur convex production costs and decide whether to stick with first-generation biofuels or to switch to second-generation biofuels (either completely or partially). The oil companies make take-it-or-leave-it offers to the biofuel producers and compete in quantities.
If only first-generation biofuels are produced, the oil companies will choose exclusive supply relations to extract all rents from the biofuel producers. Due to the convexity of the biofuel-production costs, this is efficient and there are no merger incentives. If both first- and second-generation biofuels are produced, one of the biofuel producers will specialize in first-generation biofuels and the other one in second-generation biofuels. Both biofuel producers will supply both oil companies. In this way, the biofuel producers can earn positive profits. However, this perfect asymmetric input specialization is inefficient. Moreover, the rent-shifting induces a merger wave, such that the market structure with second-generation biofuels will be full (pairwise) vertical integration. While full vertical integration leads to welfare-optimal input provision (where both biofuel producers offer first- and second-generation biofuels), it comes along with exclusive supply relations. Thus, the quantities remain suboptimal due to input foreclosure and convex costs.
The Information Content of the Term Structure of Risk-neutral Skewness (G1, G0)
AbstractThis study seeks to reconcile an ongoing debate about the price effect of risk-neutral skewness (RNS) on individual stocks by considering the maturity dimension. We document positive stock return predictability from short-term skewness, consistent with an informed trading/hedging demand, and negative predictability from long-term skewness, consistent with skewness preference. A term spread on RNS captures the different information sets from both the long- and short-term contract markets, resulting in even stronger predictability. The decile portfolio exhibiting the highest spread underperforms the decile portfolio with the lowest spread by 19.32% per year after controlling for common benchmarks. The term structure of RNS predicts firms’ future earnings surprises and price crashes, consistent with informed trader demand for short-term options. This information difference between the short- and long-term options explains the difference in the pricing of their RNS, providing a potential resolution to the empirical debate.
The Path to an Economics PhD
AbstractWe examine the pre-graduate school characteristics of PhD students graduating from the top
50 American economics programs. For PhD students coming from American undergraduate institutions, attending a highly ranked undergraduate institution is strongly associated with graduating from a highly ranked PhD program, as is having research assistant experience between undergraduate and graduate school. For both American and international PhD students, having a master’s degree is not associated with graduating from a highly ranked PhD program. Without research assistant experience, women from American undergraduate institutions graduate from lower ranked PhD programs than men. Women also receive significantly more benefit than men from majoring or minoring in math rather than in economics. Students from liberal arts colleges do worse than students from national universities, i.e. non-liberal arts, non-regional, ranked universities. Students from American undergraduate institutions who major or minor in math or in both economics and math graduate from significantly better ranked PhD programs than do students who major or minor in economics but not math.
The Role of Stock-Flow Adjustment during the Global Financial Crisis (F3, F6)
AbstractWhile the recent contraction of current account imbalances that followed the Global Financial Crisis is well documented, we analyse the increasing divergence of the net international investment position in the post-crisis period. Thereby, we decompose the change in the international net investment position into capital flows and valuation effects. We find that the increasing imbalances are significantly driven by capital flow imbalances. On the other hand, we find that the stock-flow adjustment moved in a stabilising direction: On average, countries with a 1 percent of GDP lower net international investment position in 2007 experienced higher capital gains in the size of 0.22 percent of 2013 GDP in the post-crisis period. Thus, the accumulation of net foreign imbalances was significantly decelerated by the stabilising effect of changes in valuation while the continuing divergence in stock positions was driven by cross-border capital flows.
Analysing the stock-flow adjustment by each asset class separately, we find that this pattern was mainly driven by stabilising changes in the valuation of portfolio equity. This is recorded at the market prices which emphasises the role of the domestic stock market for international risk sharing. We show that because stock markets moved in a pro-cyclical direction in the post-crisis period, countries with a lower output were able to generate relatively more valuation gains through their portfolio equity liabilities.
Wealth Effects (Plural) and U.S. Consumer Spending (E2, E5)
AbstractIn recent years, the combination of large reductions in household indebtedness, revived access to consumer credit (credit not secured by real estate) and recovering asset prices have helped bolster U.S. consumer spending, and will likely continue to do so. The housing wealth effect, an important amplifier and propagator during the boom years, is estimated to be about 60% of what it was in the mid-2000s.
We estimate a two equation non-linear state space, model of aggregate U.S. consumption and refinancing, We use an expectation-augmented Ando-Modigliani style consumption function and treat the housing wealth (collateral) effect as an unobserved state. The conventional estimate of the wealth effect on aggregate consumption is 3 percent. In practice, however, wealth effects vary by type of asset. Liquid assets such as bank deposits are more spendable than illiquid assets such as pension contributions. Likewise, consumer and mortgage debt, which can be regarded as negative liquid assets, have large depressing effect. Housing wealth or collateral effects are also likely to vary over time as credit is liberalized or tightened.
Our research suggests that the wealth effect of liquid financial assets (almost 8%) is far greater than that of illiquid financial assets (about 1.5%), which explains why falling equity prices do not generate larger cutbacks in aggregate consumer spending. The estimated housing wealth effect varies over time and captures the ability of consumers to tap into their housing wealth. It rose steadily from about one percent in the early 1980s to a peak of over 3.8 percent in the mid-2000s. By 2015, it had halved to about the same level as that of the mid-1900s. It has since recovered to about 2.3%. During the subprime and housing booms, rising house prices and housing wealth effects propagated and amplified expansion of consumption and GDP. During the bust, these effects notably reversed.
What Determines the Direction of Technological Progress? (O3, O4)
AbstractWhat determines the direction of technological progress is one of the central questions that economics needs to answer. The current paper tries to answer this question by introducing a small but fundamental generalization of Acemolgu (2002). The extended model argues that although changing relative factor prices (as suggested by Hicks 1932) and the relative market size (as argued by Acemoglu 2002) indeed affect the direction of technological progress in the short run, in the long run that direction depends only on the relative supply elasticities of primary factors with respect to their prices. Moreover, it is biased towards enhancing the effectiveness of the factor with the relatively smaller elasticity. The troubling property of the neoclassical growth model discovered by Uzawa (1961), whereby balanced growth is reconcilable only with purely labor augmenting technological progress, is due solely to an implicit assumption that the capital supply elasticity is infinite.
A Conjecture On Asymmetric Technical Change (E2, O3)
AbstractRecent empirical evidence for the U.S. points to a non-increasing share of labor in income and complementarity between capital and labor. According to standard macroeconomic theory, the preceding configuration of facts implies that productivity growth should be labor-augmenting. Analyzing post-war U.S. data, we however find that technical progress is rather evenly distributed across capital- and labor-intensive industries. To reconcile standard theory with the evidence, we stress inflation measurement errors in the data. If aggregate inflation is annually overstated by as little as a third of a percentage point, technical progress is already over 50 percent higher in labor-intensive industries than in capital-intensive industries.
A Darwinian Model of Parental Altruism (D1, D0)
AbstractMotived by the “marriage squeeze” story in China and the “dowry evil” in Hindu countries, this study develops a two-period OLG model by incorporating intergenerational transfer from altruistic parents to children. The transfer links the household budget to marriage market: As long as marriage friction increases, parents have to consume less to accumulate enough transfer in order to strength children’s attractiveness in the marriage market, so the whole family could have a better chance to reproduce biologically. Counter-intuitively, the increase in marriage friction eventually leads to larger consumption scale. The reason is that the positive income effect resulted from altruistic transfer from parents always dominates. The marriage market in China provides an ideal ground to test the model, as the oversupply of males born in 1980s intensifies the marriage friction among families with grooms after 2010. From 60 thousands of lawsuits over family and marriage dispute, data about bride price, a particularly important form of parental transfer in Chinese culture, is collected and displays consistent observations with theoretical predictions. On the one hand, bride price goes up dramatically after 2010. On the other hand, Chinese household consumption rate begins to increase correspondingly. This study emphasizes both the altruistic and the competitive role of parental transfer and can help to understand its long-run effect on saving and consumption.
A Theory of Crime and Vigilance (D4, K4)
AbstractWe develop a novel equilibrium theory of crime. Potential victims choose how vigilantly to guard their property, while potential criminals choose whether to attempt a crime. Criminals randomly encounter potential victims. Potential victims can deter an attempted crime: the deterrence rate rises in vigilance and acts as a market-clearing price in the unique equilibrium. Many predictions are counterintuitive due to equilibrium feedback effects, and most new about the crime rate, attempted crime rate, deterrence, and vigilance expenses. For example, the crime rate is hump-shaped in legal penalties and in property values. We also show that the equilibrium levels of crime and vigilance may be above or below their efficient levels, and provide simple policies for restoring efficiency. Finally, we analyze the relative effect of "neighborhood watch" on both the equilibrium and efficient levels of crime and vigilance.
Access to Treated Water In Utero and Childhood Well-being: Evidence From Rural China
AbstractThis paper examines the impacts of in utero access to treated water on childhood health. We exploit the variation in the timing of tap water connection across communities imposed by a major drinking water program in rural China. Using data extracted from the China Family Panel Studies 2010, we find that prenatal access to treated water significantly raises 2-11 year-old children’s height by 0.239 standard deviations and reduces the probability of at least three doctor visits the previous year by 9.0 percentage points. The height increase is likely to be more for children of less educated mothers. Event study estimates confirm that prenatal period is the crucial window for the impact on health. Mechanism analysis suggests that the health benefits may stem from the improvement in drinking water quality, rather than the increase in water quantity.
Adaptation to Natural Disasters through the Agricultural Land Rental Market: Evidence From Bangladesh (Q5, Q1)
AbstractWe examine the effects of natural disaster on agricultural households who make rent-in or rent-out transactions in the land rental market. Our econometric approach accounts for the effects of disaster-exposure both on the adjustments in the quantity of operated land (i.e. extensive margins) and agricultural income conditional on the land quantity adjustments (i.e. intensive margins). Using a household survey dataset from Bangladesh, we find that farmers were able to ameliorate their losses from exposure to disasters by optimizing their operational farm size through transactions in the land rental market. We also find that although larger farmers receive higher total benefits, rent-in transactions help especially the smallholder farmers to either overcome or reduce their losses. These results suggest that the land rental market may be an effective instrument in reducing disaster risks, and post-disaster policies should take into account this role more systematically. Finally, our results are robust to alternative definition of exposure, alternative estimation method, and alternative definitions of welfare measures.
An Empirical Inquiry on the Ecological Genesis of Foreign Direct Investment in the North American Wood Products Industry (Q2, F4)
AbstractThe study investigates the devastation of forests due to a sudden pine beetle outbreak in Canada to estimate the effect of foreign direct investment in the US by Canada on the export of wood products from Canada to the US. The strategic acquisition of the southern US sawmills by Canadian producers since 1990, has influenced the economic decision-making in the North American wood products industry. In this context, the study throws light on the largely debated issue on international trade economics on whether FDI substitutes or complements export. Considering the total volume of wood products harvested in Canada as an instrument for the flow of exports from Canada to the US, the study estimated significant positive impacts of wood products exports on the flow of FDI from Canada to the US. When the effect of export is controlled for, the US-Canada exchange rate, GDP of Canada and the bilateral Tariff imposed on export of wood products from Canada to the US.
Awareness of Tobacco Tax Policy and Public Opinion on Tobacco Tax Reform in Taiwan (H2)
AbstractThe main purpose of this paper is to investigate the general public’s awareness of tobacco tax policies and their opinions on tobacco tax reform in Taiwan. To learn whether people are cognizant of tobacco tax policies and their preferences toward policy reform, we conducted a nationwide telephone survey in October 2016.We find that factors influencing people’s tobacco policy awareness include smoking status, number of smokers in the household, gender, age, education, marital status and working status. In particular, compared to their counterparts, smokers, males, and individuals with more years of schooling are more likely to be knowledgeable about tobacco tax policies. Most respondents know that the cigarette price contains an excise tax earmarked for specific programs (known as tobacco health and welfare surcharge), but fewer respondents recognize that this price also contains an excise tax for general use. Moreover, most people are not sure about the exact tax amount applied to cigarettes and cannot tell the differences between a general excise tax and an earmarked tax. Around 29% of respondents support a tax hike on tobacco products, and 96% of them are non-smokers. In terms of the use of excise tax revenue, 66% of respondents support that revenue should be limited to a specific use. In light of the fact that many people support non-price tobacco policies, we suggest that the government adopt diversified programs to curb tobacco consumption, in addition to increasing tobacco taxes. Finally, due to the fact that an earmarked tax is relatively inflexible and may cause inefficiency, we recommend that the government regularly examine whether the use of such a tax is desirable.
Bank Competition, Firm Ownership, and Margins of Innovation (G2, O3)
AbstractThis paper investigates the effect of bank competition on innovation and how the effect is dependent on the ownership structure of the firms. Combining the data of Chinese manufacturing firms with bank branching information in 2006 and 2007, we find that: first, intensified bank competition has a positive impact on the probability of investing in R&D of State-Owned Firms (SOFs), but not Private Firms (PFs); second, increased banking competition only enhances the level of investment in R&D of PFs. These results are stable to a series of robustness checks. Then we build a model to explain the empirical results. The model relies on the assumptions that: SOFs are less likely to default; asymmetric information on the riskiness of R&D exists between firms and banks; banks compete with each other in a Bertrand-Edgeworth game in the loan market.Under these assumptions, in equilibrium, only PFs face credit rationing. We numerically solve the model and obtain results that are consistent with our empirical findings. The counterfactual experiments show that the welfare gains are much more sensitive to banking deregulation when the loan guarantee provided to SOFs are removed.
Benefits From Non-competing Persuaders (D8, C7)
AbstractThis paper shows that biased persuaders can provide better information to a decision maker due to cooperative, and not competitive, motives. I study Bayesian persuasion games with persuaders who all want a decision maker to take the same action unconditionally. While the optimal information policy from a unique persuader never benefits the decision maker, I show that this is not the case when there are multiple identical persuaders. Despite the fact that all persuaders share a common goal, there always exist strict equilibria in which they endogenously design highly informative policies that benefit the decision maker. The benefit of an additional non-competing persuader is as high as the value difference between full information and no information. The persuaders’ motivation to provide extra information is cooperative; the extra information helps offset their colleagues’ potential negative news. Consequently, a highly informative equilibrium not only benefits the decision maker, but also can result in a high payoff for the persuaders. In particular, when the persuaders’ information is intrinsically imperfect, their payoff can be maximized in an equilibrium with highly revealing information policies.
Can an Economic Structural Model Support Hypothetical and Experimental Evidence? Preference Parameters Before and After the Great East Japan Earthquake (D9, D1)
AbstractThis study proposes the measurement error robust Euler equation approaches to estimate households' preference parameters before and after a large-scale disaster, namely the Great East Japan Earthquake of 2011. Our finding supports other studies using hypothetical and experimental data that suggest experiencing a large-scale disaster changes individuals' risk and time preferences. Furthermore, revealed households’ consumption and asset allocation behavior fitted in a life-cycle consumption model exhibits that a large-scale disaster affects households facing different future risks of similar disasters differently even if they are not physically damaged by the disaster.
Common Factors of Commodity Prices
AbstractIn this paper, we extract common factors from a large cross-section of commodity prices, including fuel and non-fuel commodities. We decompose each commodity price series into a global (or common) component, block-specific components and a purely idiosyncratic shock. We find that the bulk of the fluctuations in commodity prices is well summarized by a single global factor. This global factor is closely related to fluctuations of global economic activity and its importance in explaining commodity price variations has increased since the 2000s, especially for oil prices.
Cross-Country Analysis of African Entrepreneur Behavior Towards Debt, Equity, and Gender Diversity
AbstractThe African continent is home to 1.216 billion people across 54 different nations,
32.6% of which live on less than a dollar a day (World Bank 2016). Quadrini (2000)
and other economists have proposed that entrepreneurship is a key driver to
economic growth and social mobility in these regions. This study conducts a multination
analysis of early-stage entrepreneurial ventures to determine if there is a
negative impact of having a female founder in a business, and if there are particular
countries that are associated with a higher dependence on certain financing systems.
It is found that ventures with gender diversity are associated with lesser amount of
equity financing, and female-led companies are subject to more restricted debt and
lending practices. Companies founded in Uganda and South Africa have a tendency
to attract more equity financing, while companies founded in Kenya and South
Africa have larger total debt financing, which may signal the maturity of the
banking sector in these nations.
Delegation at the United States Federal Appellate Courts: The Power to Remand as a Double-edged Sword (K4, K0)
AbstractDelegation in U.S. federal courts, in the form of remands, can ameliorate the moral hazard problem of lower court judges who deviate from higher court policy. However, the deterrent effect of remands as a source of additional effort costs might be partially circumvented by delegation powers endowed to mid-level judges. Our empirical assessment suggests that cases remanded by the Supreme Court to appellate courts have a higher likelihood of being subsequently remanded to district courts, implying that appellate courts circumvent the deterrent effect of Supreme Court remands by transferring the effort costs to district courts. We then analyze whether this effect originates from legitimate case-relevant reasons or from moral hazard, by exploiting variations in ideological distances between court levels.
Disease and Demographic Development: The Legacy of the Black Death (J1, O0)
AbstractThis paper provides an empirical investigation of the hypothesis that population shocks
such as the outbreak of the Black Death affected the timing of the onset of the demographic
transition. According to theoretical arguments in the literature, population shocks are likely
to have led to a shift in the Malthusian equilibrium and eventually provided the ground for
the demographic transition. The analysis uses disaggregate data from Germany and exploits
geographic variation in the exposure to medieval plague shocks. The findings document that
areas with greater exposure and more severe plague outbreaks exhibited an earlier onset of the
demographic transition. Additional analyses confirm this finding for data from France. The
results are consistent with the predictions of the unified growth literature and provide novel
insights into the largely unexplored empirical determinants of the historical transition from
stagnation to growth.
Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates From 130 Studies Say 'Probably Not' (E2, D1)
AbstractWe show that three factors combine to explain the mean excess sensitivity reported in studies estimating consumption Euler equations: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and the households under examination do not face liquidity constraints, the literature implies no evidence for the excess sensitivity of consumption to income. Hence little remains for pure rule-of-thumb behavior. The results hold when we control for 45 additional variables reflecting the methods employed by researchers and use Bayesian model averaging to account for model uncertainty. The estimates of excess sensitivity are also systematically affected by the order of approximation of the Euler equation, the treatment of non-separability between consumption and leisure, and the choice of proxy for consumption.
Econometric Model of Russian Federation: What is the Price of Growth?
AbstractThe paper describes econometric model of the Russian economy which is tailored to analyze current trends in Russian economy and to forecast its dynamics for the next years. Its other task is to show how different factors and policy instruments affect the main macroeconomic variables under various scenarios of the external economic situation and of economic policy options.
The model consists of 32 equations and 75 identities that describe the relationships between 107 variables. They consist of 15 exogenous and 92 endogenous variables. Among the firsts there is the capital account balance, the Bank of Russia’ key loan rate, the monetary base, economically active population, government consumption deflator and export and import prices. The main macroeconomic indicators such as the GDP volume, different internal price indexes, investment in fixed assets from different sources of financing, bank loans and deposits, employment and average wages, and the ruble-to-dollar exchange rate and volume of export and import were included as the endogenous variables in the model.
The parameters of the most of equations were estimated by ML – ARCH method and some of them by OLS. The quarterly data for Q1 1999 – Q4 2016 (that is, 72 points) were used as a sample.
The model showed that in the basic variant of the forecast in which the dynamics of exogenous variables will be the same as it was in the previous three years the average annual growth rate of Russian economy for 2018-19 years will be negative while inflation remains as strong as about 7 % annually.
Under the assumption of the restoration of export prices the average annual GDP growth doesn’t increase. Active monetary policy although increases the GDP growth though at the expense of slightly higher inflation. Freezing of prices of government purchases has a strong positive impact on the economic growth while reducing the inflation.
The model demonstrates a relative weakening of impact of external economic factors on Russian economy and strengthening the role of internal ones.
Effects of Information Channels across Skill and Product Quality Groups: Evidence from Trade-Migration Nexus (F1, F2)
AbstractOver the last few decades, increasing international integration has ignited academic debates on the association between international trade and international immigration; particularly, the information channel through which immigrants can potentially influence host-country trade flows. However, the heterogeneity in skill level of the immigrants and increasing diversification in terms of both origin and destination countries have added complexity to this issue. This paper examines the effect of such changes in patterns in the immigration flow on north-south trade channel. We extend the Eaton-Kortum (2002) model for disaggregated product qualities and incorporates ethnic network in the model to establish the theoretical link between the immigration flow and trade volume. We test the causal inference between international immigration networks of different skill levels and trade volumes across different product quality levels. In addition, the paper also explores the potential indirect effects of immigrants in generating exports with their origin country utilizing other ethnic groups common to both origin and destination country in question. For the empirical estimation, we use a panel dataset of 19 high-income OECD countries and 99 low-income countries over the period of 1990-2005; sourcing from the UN Comtrade, and the IAB Brain-Drain Data along with the Export Quality Data developed by IMF. Controlling for unobserved heterogeneity and potential endogeneity, our empirical investigation yields the following results: (i) high-skilled ethnic networks have a stronger direct impact on aggregated bilateral trade; (ii) high-skilled ethnic networks trigger more high quality trade than low-skilled ethnic networks and vice versa; (iii) there is a positive indirect effect of secondary ethnic networks of third party nature on trade, and this effect is stronger for low quality products and more so through low-skilled migrants.
Existence and Uniqueness of Solutions to Dynamic Models With Occasionally Binding Constraints
AbstractWe present the first necessary and sufficient conditions for there to be a unique perfect-foresight solution to an otherwise linear dynamic model with occasionally binding constraints, given a fixed terminal condition. We derive further results on the existence of a solution in the presence of such terminal conditions. These results give determinacy conditions for models with occasionally binding constraints, much as Blanchard and Kahn (1980) did for linear models. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates, even when agents believe that the central bank will eventually attain its long-run, positive inflation target. This illustrates that a credible long-run inflation target does not render the Taylor principle sufficient for determinacy in the presence of the zero lower bound. However, we show that price level targeting does restore determinacy providing agents believe that inflation will eventually be positive.
Financial Stability With Sovereign Debt (G2, E6)
AbstractWhich of government guarantee or financial regulation is the best way to prevent banking crises under links between the government and banks? I study this question by extending a model of financial intermediation to have a government which issues and may default on debt. Three channels connect the government and banks: First, a credit crunch occurs reduces real economic activities, and the tax capacity shrinks. Second, the government may guarantee deposits to help banks in liquidity shortage. The smaller tax capacity and additional expenditures worsen the debt sustainability. Third, unsustainable debts incur valuation losses to debt holders. I study government guarantee, liquidity regulation and a mix of them in this framework, and determine fiscal costs of them. I find conditions for each policy to prevent banking crises. The guarantee is more likely to be effective in economies having higher investment return and smaller debt. In other cases, it may be complemented by liquidity regulation to prevent crises. However, only liquidity regulation will be effective in some other cases.
Firm-level Shocks and Labor Flows
AbstractWe analyze how labor floows respond to idiosyncratic shifts in firm-level pro duction functions and demand curves using very detailed Swedish micro data. Shocks to firms physical productivity have only modest e¤ects on firm-level employment decisions. In contrast, we document rapid and substantial employment adjustments through both hires and separations in response to firm-level demand shocks. The choice of adjustment margin depends on the sign of the shock: Firms adjust through increased hires if these shocks are positive and through increased separations if the shocks are negative.
Forbearance Patterns in the Post-crisis Period (G2, G0)
AbstractUsing supervisory loan-level data on corporate loans, we show that banks facing high levels of non-performing loans relative to their capital and provisions were more likely to grant forbearance measures to the riskiest group of borrowers. Further dissecting this phenomenon, we find that risky borrowers are more likely to get an increase in the overall limit or the maturity of a loan product from a distressed lender.
As a second step, we analyse the effectiveness of this practice and show that borrowers who received forbearance measures are more likely to default. Our evidence also suggests that forbearance and new lending are substitutes for banks, as high shares of forbearance are negatively correlated with new lending to the same group of borrowers.
Having the Right Mix: The Role of Skill Bundles for Comparative Advantage and Industry Performance in Global Value Chains (F1, F0)
AbstractThis study investigates the role of countries’ overall skills endowment on their trade comparative advantage. It tests the theoretical model of Ohnsorge and Trefler (2007) who argue that it is the bundling of various skills at the worker level and their joint distribution that matter for industry and trade specialisation. This departs from the literature assuming that workers are endowed with only one type of skills, which are generally measured by educational attainment. To test the predictions of the model, this paper uses information on cognitive skills assessed within the OECD Survey of Adult Skills (PIAAC) and data from the OECD-WTO Trade in Value Added (TiVA) database. Results show that workers' skills bundles and their distribution have a larger effect on specialisation than countries’ endowment of capital
per employee or the relative endowment of workers possessing different levels of education. Furthermore, this study tests the model of Bombardini et al. (2012) for a large cross-section of countries and finds evidence that the within-country dispersion of skills significantly affects specialisation patterns.
Health Services as Credence Goods: A Field Experiment (I1, L0)
AbstractAgency problems are a defining characteristic of health care markets. We present the results from a field experiment in the market for dental care: A test patient who does not need treatment is sent to 180 dentists to receive treatment recommendations. We vary the level of information and socio-economic status of the patient and collect measures of market conditions. We observe an overtreatment recommendation rate of 28% and a striking heterogeneity in treatment recommendations. Excess capacities, measured by waiting for the next possible appointment, are associated with significantly more overtreatment. Results furthermore suggest a complex role of patient socio-economic status.
Household Wealth and the Net International Investment Position (F3, F4)
AbstractAggregate household wealth dynamics are closely associated with fluctuations of the economy. However, the linkages between household wealth dynamics and cross-border financial holdings have remained unexamined. Thanks to the recent assembly of an essential dataset, this paper assesses these co-movements in selected advanced economies. We establish that increases in net household wealth are associated with deteriorations of the Net International Investment Position (NIIP). This pattern is primarily driven by valuation changes in wealth (mostly through house price appreciation). Overall, we find that capital gains on household wealth are strongly related to the accumulation of net external debt liabilities, a key indicator of financial vulnerability.
Impact of Colombia’s Subsidized Health Insurance on Preventative Care Utilization
AbstractAn econometric analysis was conducted to evaluate the impact of enrollment to Colombia’s subsidized health insurance regime on the utilization of preventative services (annual doctor and dentist visits) using instrumental variables to correct for endogeneity. This study used the 2015 Encuesta Nacional Calidad de Vida (ECV) survey to conduct a two-stage least square regression (2SLS) with instrumental variables to estimate the program’s effect among a sample population of N=40,292. The instrumental variables that were examined consisted of: (1) the proportion of individuals that were eligible for affiliation to the Sistema de Identificación de Beneficiarios (SISBEN) I and II by department for the year 2011 and (2) affiliation to Familias en Acción. The first instrumental variable is relevant because categorization into SISBEN I & II are associated with the probability of eligibility and affiliation to the subsidized regime and have no direct effect on preventative care utilization. This association is explained by the municipalities’ ability to adjust eligibility cutoffs to the subsidized regime according to the amount of federal funding that the municipalities receive annually. Likewise, Familias en Acción was selected as an instrumental variable because it’s a conditional cash transfer program that also uses the SISBEN index to determine eligibility to the program. The results of our analysis found that the naïve regression underestimated the programs’ effect (0.340; p<0.01), as enrollment to the subsidized regime had a larger positive effect 0.809 (p<0.01) on preventative care utilization compared to the uninsured after removing endogenous variables as part of our sensitivity analysis. These findings suggest that affiliation to subsidized health schemes can increase an individual’s decision to utilize preventative services.
Implied Volatility Duration and the Early Resolution Premium (G1, D0)
AbstractWe introduce Implied Volatility Duration (IVD) as a new measure for the timing of the resolution of uncertainty about future stock returns. A short IVD implies an early resolution of uncertainty in expectation. Portfolio sorts indicate that investors demand on average about seven percent return per year in exchange for a late resolution of uncertainty, and this premium cannot be explained by standard factor models. We find that the premium is higher in times of increased economic uncertainty and low market returns. In a general equilibrium model, we show that the expected excess returns on long IVD stocks can only exceed those of short IVD stocks if the investor's relative risk aversion exceeds the inverse of her elasticity of intertemporal substitution, i.e., if she exhibits a `preference for early resolution of uncertainty' in the spirit of Epstein and Zin (1989). Our empirical analysis thus provides a purely market-based assessment of the relation between two preference parameters, which are notoriously hard to estimate.
Insider Trading and Voluntary Nonfinancial Disclosures (G1, G3)
AbstractVoluntary nonfinancial disclosure of product and business expansion plans occurs frequently in practice and is an important vehicle by which managers convey corporate information to outsiders, but little is known about how managerial opportunistic incentives affect the choice of such nonfinancial disclosures. This study examines whether managers strategically time, and make selectivity in, their voluntary nonfinancial disclosures for self-serving trading incentives. I find strong and robust evidence that managers manipulate the timing and selectivity of their nonfinancial disclosures to maximize trading profits. Specifically, managers tend to disclose bad (good) news on product or business expansion information before purchasing (selling) shares. My results contribute to understanding managers'use of nonfinancial disclosure strategies for fulfilling personal trading incentives, and should be of interest to boards of directors, which monitor and restrict opportunistic disclosures and insider trading within a firm.
Interest Rate Dynamics, Variable-Rate Loan Contracts,and the Business Cycle (E4, E3)
AbstractThe interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the loan has a variable-rate component. In addition, Bayesian estimation of our benchmark DSGE model on US data 1975-2010 shows that movements in investment driven by animal spirits are quantitatively important and result in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium.
Interest Rate Liberalization and Bank Liquidity Creation：Evidence From China (G1)
AbstractBased on the panel data of 145 banks in China over 1997-2015, this paper empirically studies the relationship between interest rate liberalization and bank liquidity creation. The results show that there is a nonlinear relationship between interest rate liberalization and bank liquidity creation. With the improvement of interest rate liberalization, bank liquidity creation increases first and then decreases. This conclusion is robust after overcoming endogeneity problem, changing the proxy variable, and considering the influence of bank heterogeneity. Further, we investigate the influencing mechanism based on the mediating effect tests, and find that the interest rate liberalization affects bank liquidity creation through bank risk taking. This paper provides some enlightenment for China to further promote interest rate liberalization reforms.
Interest Rate Volatility And Macroeconomic Dynamics: A Cross-Country Analysis (E4, E3)
AbstractWe examine the relation between real interest rate volatility and aggregate fluctuations for 27 countries. Compiling a new dataset, we find that stochastic volatility outperforms Markov-switching in representing interest rates. Volatility is high and persistent. Internationally, however, we find substantial heterogeneity. While advanced countries are typically less volatile, some advanced economies are more volatile than emerging markets. Volatility increases with the level of spreads, correlating negatively with GDP, consumption and investment. We build and show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity plays an important role in distinguishing the effects of volatility shocks.
Investor Responses to NAFTA’s Cross-border Trucking Provisions (F2, F5)
AbstractWe investigate the response of US trucking firms to the removal of barriers to cross-border trucking under NAFTA. This was done via a program implemented in 2007, cancelled in 2009, and reinstated in 2011. We find that, unsurprisingly, the program’s start resulted in lower stock returns, particularly for border firms. However, later policy changes indicate that investors, and particularly those investing in US multinationals, viewed the pilot as beneficial. We use a model of endogenous exporting to show that this can arise from incorrect expectations of import competition
Is Prompting Participants to Plan Successful? Field Evidence From MOOCs (I2, C9)
AbstractMassive Open Online Courses (MOOCs) have become popular and appear to be a promising, innovative tool for lifelong learning. But, as shown by various studies, many participants drop out from their MOOC. Therefore, based on behavioral insights, we investigate how prompting participants to plan increases completion rates. We conduct a randomized controlled trial on a MOOC-platform in two courses. Overall, we find no significant effects of the planning prompt on course completion. However, our results suggest heterogeneous effects of the planning prompt that may be off-setting. A more precise targeting of certain participant groups, who seem to benefit from planning prompts, may be a way forward.
Just One Step Further: Geographic Mobility and the Gender Wage Gap (J6, J7)
AbstractUsing the German SOEP-geocode data we aim to explore in a first step returns to continuously measured mobility, which provide a more precise picture than performing such an analysis based on a binary migration measure. These returns can be seen as mobility premiums which have been of sufficient size to exceed mobility costs and to induce geographic mobility. We are able to show that these returns to mobility vary between the sexes. In the second step, we focus on the subgroup of job changers and examine to which extent the usually observed gender wage gap for this specific subgroup is driven by unaccounted spatial sorting patterns resulting from gender-specific returns to mobility. Our results suggest that controlling for continuously measured mobility does not reduce the unexplained part of the gender wage gap for job changers.
Lying Opportunities and Incentives to Lie: Reference Dependence Versus Reputation (D0, D8)
AbstractRecent experiments on lying behavior show that the lying frequency in case of low outcomes increases in the ex-ante probability of high outcomes. This finding is in line with models consisting of internal lying costs and external reputation costs, but also with models combining internal lying costs and loss aversion. To compare the explanatory power of these two approaches, we manipulate the ex-ante probability that lying is possible at all. We show theoretically that the reputation model predicts that the lying frequency decreases in the probability that lying is possible, while the loss aversion model suggests the opposite. Our experimental results strongly support the reputation model. From an applied perspective, our results suggest that safeguards for reducing the probability that lying is possible may (partially) backfire.
Marriage and Biology (J1, J2)
AbstractSince only women can give birth, only female infidelity can put householders at risk of raising alien genetic material. This means that husbands have more to lose from their partners’ infidelity and therefore have a stronger interest in deterrence than their wives do. If men earn most of the household’s market income, they are more able to withhold consumption opportunities from a spouse than if the roles were reversed. This paper develops a simple model to capture these incentives. It is consistent with several widely-observed phenomena and also produces novel testable implications.
Measures of Participation in Global Value Chains and Global Business Cycles (F1, E3)
AbstractThis paper makes two methodological contributions. First, it proposes a framework to decompose total production activities at the country, sector, or country-sector level, to different types, depending on whether they are for pure domestic demand, traditional international trade, simple GVC activities, and complex GVC activities. Second, it proposes a pair of GVC participation indices that improves upon the measures in the existing literature. We apply this decomposition framework to a Global Input-Output Database (WIOD) that cover 44 countries and 56 industries from 2000 to2014 to uncover evolving compositions of different production activities. We also show that complex GVC activities co-move with global GDP growth more strongly than other types of production activities.
Measuring Financial Inclusion in Mexico Through a Multidimensional Index (G0, O5)
AbstractThe paper measures the degree of financial inclusion of individuals
using a multidimensional index using data regarding access to and use of
Using a two-step principal component analysis to construct the index
based on data from the 2012 wave of the Mexican National Financial
Inclusion Survey, results indicate that the access dimension is the main
determinant of inclusion, and that there are important inclusion gaps
between rural and urban dwellers.
From a public policy perspective, the findings suggest that efforts
should focus on fostering access to financial services in rural areas.
Modeling Fluctuations in the Global Demand for Commodities
AbstractIt is widely understood that the real price of globally traded commodities is determined by the forces of demand and supply. One of the main determinants of the real price of commodities is shifts in the demand for commodities associated with unexpected fluctuations in global real economic activity. There have been numerous proposals for quantifying global real economic activity. We discuss which criteria a measure of global real activity must satisfy to be useful for modeling industrial commodity prices, we examine which of the many alternative measures in the literature are most suitable for applied work, and we explain why some popular measures are inappropriate for modeling commodity prices. Given these insights, we reexamine in detail the question of whether global real economic activity has declined since 2011 and by how much. Drawing on a range of new evidence, we show that the global commodity price boom of the 2000s appears to have been largely transitory. Our analysis has important implications for the design of structural models of commodity markets, for the analysis of the transmission of commodity price shocks to commodity-importing and exporting economies, and for commodity price forecasting.
Monetary Policy and Private Investor Trading (E5, D1)
AbstractUsing investor fixed effects panel regressions, we examine the impact of monetary policy decisions of the ECB between 1999 and 2015 on German private investors on a daily basis. Differentiating for expected and unexpected monetary policy changes, the period of the financial crisis, and the zero lower bound, conventional and unconventional announcements as well as investor sophistication and wealth we find strong evidence for investor reactions to monetary policy. The direction of these trades depends on the time period and investor characteristics. The inverse relation found for capital markets holds for conventional decisions before the zero lower bound period, however it reverses afterwards. While wealthy investors drive results of the whole group, buying with expansive monetary policy before interest rates approach the zero lower bound, unsophisticated investors leave the equity market in connection with monetary loosening after the start of the financial crisis. Relating this observation with media coverage on the ECB, the latter effect might be attention-based.
Money Supply, Capital Market Factors, and Farmland Return Prediction: An Artificial Neural Network Approach (Q1, G0)
AbstractFarmland value slightly increased in 2017 even though farm income was still under stress. This development suggests the rate of return required by investors for farmland asset has been reduced. A similar phenomenon has been observed in the equity market which also suggests reduced equity risk premium. One possible explanation for the decreasing required rate of return is an increased money supply caused by the Federal Reserve's large-scale asset purchases. Previous research suggests that the money supply affects several macroeconomic risk factors through different transmission channels, which in turn influence investor behaviors and asset returns. This article examines the predictive power of these risk factors for farmland asset returns. Both linear and neural network models are used and the forecast accuracy is compared across different models. The results indicate that farmland return prediction is significantly improved by adding capital market excess return as an explanatory variable. Adding additional risk factors, however, does not improve the prediction with the sample used in this study.
Multi-prize for Multi-task: Externalities and the Optimal Design of Tournaments (J3, D6)
AbstractThis paper studies multi-task tournaments in which each agent undertakes two tasks with one of them creating externalities on the performances of the agent as well as other competing agents on the other task. We discuss the design of optimal tournament for achieving the social optimum in the presence of such externalities. In particular, we show that it is difficult to use a single-prized tournament to achieve social optimum, while task-specific, multi-prized tournaments can achieve socially optimal outcomes.
Noise and Violent Crime: Evidence From Exogenous Variation in Aircraft Flight Paths (J0, Q5)
AbstractNoise pollution affects countless millions of people around the world and has long been recognized as a public health concern and a major externality of economic activity. While many epidemiologists attempted to analyze the health consequences of noise and highlighted its effects on cardiovascular diseases and sleep disturbances, the behavioral effects of noise have attracted little attention. In this paper, I analyze the effect of noise exposure on violent criminal behavior. The hypothesis put forward is that noise exposure induces biological stress responses which in turn facilitate criminal activity by limiting self-control in cognition. The empirical analysis uses noise monitor data and individual crime records from police statistics. Noise effect estimations are often plagued by omitted variable bias from self-selection of individual with adverse outcomes into noisy neighborhoods. I use a novel instrumental variable strategy to circumvent endogeneity in the estimation. My instrument exploits a peculiarity in flight paths around airports that forces aircrafts to land from the opposite direction on certain days. Controlling for year, week, day and district fixed effects, I find that a one decibel increase in noise levels increases the rate of assaults by 3 percent. The effect is driven predominantly by male adult victims, assaults during daytime and assaults occurring outside of the domestic domain. The noise-triggered assaults are additional crimes which do neither only turn attempted assaults into action nor substitute for other crimes. There is also no evidence for a harvesting effect that would decrease crime rates on neighboring days. My results imply that environmental factors like noise can affect decision making in a meaningful way and inform policy makers of societal costs from short-term variation in noise exposure.
Noise-Ridden Lending Cycles (D8, E4)
AbstractThis paper builds on a neoclassical investment model to study the effect of imperfect information on the lending behavior of financial intermediaries. We first develop the intuition in partial equilibrium, where a risk-neutral competitive lender has limited knowledge of the current state of the economy. Non-fundamental noise shocks lower the equilibrium interest rate on risky credit as the lender is willing to extend more loans, which leads to higher ex-post default. We then estimate a simplified general equilibrium version of the neoclassical investment model and find that noise shocks account for a substantial portion (40-60%) of the forecast error variance of the credit spread in our theoretical model.
On-the-job-training as a Signal: Why Low Skilled Employees Invest Less in Further Training (J2, M5)
AbstractStudies of on-the-job training have shown that low skilled workers participate less in further training. In this paper, we develop a signalling model of training and show that low ability employees choose not to sign up for training that is aimed at improving low ability workers because of the negative signal training participation conveys about their initial ability. We argue that training can increase human capital when workers’ prior knowledge matches the level of the training course. Consequently, employers can use observed training participation as information about the quality of their employees when job performance is partly unobservable. Employees will therefore incorporate this signalling value of signing up for training courses of different levels into their decision. As a result, sorting into training is inefficient: programs aimed at low ability workers will be underutilized, while programs aimed at the top will be overused. We show that offering training has spillover effects: introducing advanced courses increases participation in basic courses, and improves sorting efficiency. The intuition behind this result is that introducing an advanced training program stimulates employees at the high end of the ability distribution to sign up for advanced training. This, in turn, decreases the negative signal associated with signing up for basic training, as the average ability of those who do not take any training decreases. We discuss the implications of these results for optimal training provision and program evaluation. Finally, we make several testable predictions that will allow us to discriminate between our signalling model and alternative explanations of on-the-job training participation for assessing the validity of our model.
Operationalizing Amartya Sen’s Capability Approach Through Capability-equivalent Income (D6, I3)
AbstractEconomic conditions that have a strong impact on individual well-being and freedom are sometimes not reflected in income. Amartya Sen proposed the Capability Approach to capture the welfare impact of such non-income economic condition. However, empirical applications of the capability approach are commonly expressed in reduced form which is not suitable for conducting welfare analysis wherein the distribution of preferences and choice constraints across households are separately identified and accounted for. Using the random utility theory, we incorporate capability into the job market choice set, as well as to the utility through disposable income and leisure. In this approach, we can transform capability to the traditional concept of income, which yields the equivalent utility or welfare as if there were no capability constraints. We deliberately chose Cambodia for the empirical analysis, because the civil war and genocide that occurred in the 1970s in the country can be considered a “natural shock”. These events have resulted in a high proportion of war-related disabilities, which can be considered as a source of capability constraint. By incorporating disability-associated constraints on the job choices and the disability-induced utility difference with respect to income and time spent on leisure, we show that capability disadvantages can be converted to a form of income through the compensation variation, which we denote as capability-equivalent income. We simulate a transfer program where disabled individuals are compensated with capability-equivalent income through an income tax to the top 20% earners. We find that inequality would be mitigated, and the overall welfare of the whole society would improve by 4%.
Pretty Vacant: Using Online Job Vacancies to Understand Mismatch and its Effects on United Kingdom Productivity Growth (J2, J6)
AbstractWeak UK productivity growth is an enduring puzzle of the post-crisis period. Mismatch between the unemployed and job vacancies has previously been implicated as a driver of this phenomenon. We examine this hypothesis using a new dataset of 15 million online job adverts posted between 2008 and 2016. Our data are better correlated with the aggregate vacancy statistics than the JobCentre Plus data used in previous studies. We estimate the extent of occupational and regional mismatch, and their effects on productivity growth in light of both the increasing dispersion in productivity and the level of heterogeneity in matching efficiency. We find, contrary to previous work, that occupational mismatch cannot explain the enduring productivity puzzle. We also find that although regional mismatch is unlikely to have been the cause of the productivity puzzle, unwinding it could provide a significant boost to productivity growth. Finally, motivated by the fact that mismatch indices are typically increasing in the level of market disaggregation, that the level of disaggregation is an open question, and that official classifications do not perfectly capture the barriers within the UK labour market, we develop a ‘bottom-up’ aggregation of vacancies using machine learning algorithms which group jobs with similar job descriptions.
Product Repositioning and Competition (D4, L1)
AbstractWe show that when facing an uncertain demand, a company may intentionally choose a technology that makes it harder to reposition its product in the future, even though a more flexible technology is available at no additional cost. Rigidity can be valuable because it commits a firm to competing more aggressively, which forces its rival to stay away from favorable positions in the product space. We demonstrate that rigidity is valuable only when the rival is using a flexible technology, and the value increases with demand uncertainty. Interestingly, rigidity softens price competition in some demand realizations such that, on expected terms, it can benefit not only
the rigid firm itself but also its flexible rival, leading to a win-win
outcome. Even the consumers may gain from equilibrium rigidity because, in some other demand realizations, it intensifies price competition and results in positions that better match consumers' tastes.
Quality Information and Urban Consumer Sorting: Evidence from the Restaurant Industry in New York City (L8, D8)
AbstractThis paper identifies potential channels through which quality information can affect consumer demand for restaurants by exploiting New York Times restaurant reviews. First, positive reviews can lead consumers to believe that the product is of high quality, thereby increasing demand (vertical sorting). Using the number of very localized taxi drop-offs as a proxy of restaurant demand, I find that consumer responses are statistically significant only when reviews are positive: a 4.6% increase in taxi passengers, or approximately $1,560 weekly sales growth. Second, media information can increase product awareness, which improves a match between heterogeneous consumers and products (horizontal sorting). By inferring diners’ characteristics from destinations of post-dining taxi trips, I empirically show that demographic characteristics of locations affect restaurant choices; in response to non-positive reviews, a 10% larger share of black or Hispanic residents in a restaurant tract attracts 7.3% more black or 10.7% more Hispanic diners, respectively. The results imply that quality information could boost sales not only by signaling product quality but also by informing consumers about existence and characteristics of products.
Reducing Debt Improves Psychological Functioning and Changes Decision-making in the Poor (D1, I3)
AbstractWe study how changes in indebtedness and resources affect psychological functioning and decision making. Highly indebted low-income households in Singapore benefited from a one-off, unanticipated debt relief program worth several months’ household income. We measured household finances, anxiety, cognitive functioning, and economic decision making pre- and post- debt relief. Debt relief significantly improved cognitive functioning and reduced anxiety, risk aversion, and present bias. We test the hypothesis that poverty-induced impairments in psychological functioning alter economic decision making. Reducing cognitive bandwidth taxes by eliminating debt accounts significantly reduces present bias, but changes in absolute scarcity, performance in inhibitory control tasks and anxiety are unrelated to economic decision making. Interventions targeting cognitive bandwidth taxes could be more effective at alleviating poverty than providing untargeted transfers.
Regulatory Integration of International Capital Markets (G3, K2)
AbstractI examine the financial and real effects of regulatory integration of international capital markets using a unique policy plan by the European Union, which creates a common European market for financial services and capital, through, e.g., passporting rights. For identification, I exploit the bilateral and staggered nature of laws that are passed at the European level but are implemented by national governments. Over its implementation, regulatory integration leads to large increases in external financing, investment and employment for publicly listed firms. These results highlight the importance of regulatory integration of international capital markets for firms’ financing decisions and real outcomes.
Road to Export: Evidence From China's National Trunk Highway System (R4, F1)
AbstractThis paper investigates how improvement of domestic transport infrastructure promotes export, exploiting China's National Trunk Highway System (NTHS) built during 1998-2008. To address endogeneity concerns, we calculate the least-cost network linking all the targeted cities based on geographic characteristics. We find that counties connected to the highways or closer to the highways experienced more rapid export growth during 1998-2008. We estimate how the NTHS highways reduced transport costs from each county to seaports, and find that the cost reduction is positively correlated with export growth. In contrast, reduction of costs from counties to land border ports, which few export goods travel through, is not related with export growth. These findings suggest that highways facilitated export by decreasing domestic transport costs. In addition, the effect of highways is more significant for counties exporting goods with higher wight-value ratio.
Shortening the Potential Duration of Unemployment Benefits and Labor Market Outcomes: Evidence From a Natural Experiment in Germany (J2, J6)
AbstractThis paper explores the effects of a major reform of unemployment benefits in Germany on the labor market outcomes of individuals with some health impairment. The reform induced a substantial reduction in the potential duration of regular unemployment benefits for older workers. This work analyzes the reform in a wider framework of institutional interactions, which allows us to distinguish between its intended and unintended effects. Our results provide causal evidence for a significant decrease in the number of days in unemployment benefits and increase in the number of days in employment. However, they also suggest a significant increase in the number of days in unemployment assistance, granted upon exhaustion of unemployment benefits. Transitions to unemployment assistance represent an unintended effect, limiting the success of a policy change that aims to increase labor supply via reductions in the generosity of the unemployment insurance system.
Skilled Immigration, Firms, and Policy (F2, J2)
AbstractThis paper studies the macroeconomic general equilibrium effects of skilled immigration and skilled immigration policy changes in the U.S. by explicitly taking into account the role of firm demand for foreign skilled labor. To this end, I develop a two-sector dynamic stochastic general equilibrium model with monopolistically competitive firms and heterogeneous workers. Unlike most previous studies that view immigration as a supply-induced shock, the paper models skilled labor immigration as an endogenous response to an increase in firm labor demand in the receiving economy. The model is calibrated to mimic the U.S. economy with its current immigration policy: Firms face hiring costs and there is an occasionally binding cap on the foreign skilled workers that can be hired each period. The results indicate that a less restrictive skilled immigration policy via an immigration cap increase leads to heterogeneous effects on skilled and unskilled workers --- unskilled domestic workers gain but skilled domestic workers lose. However, the magnitude of the welfare impacts depends on the state of the economy at the time of the cap change and also on the structure of the labor market (presence of search frictions). This paper also evaluates the welfare and efficiency gain from moving toward an alternate skilled immigration policy with a market-driven allocation of permits for hiring skilled foreign workers. Such a policy increases welfare and brings the economy's allocation closer to the social planner's first-best allocation.
Stock Versus Mutual Insurers: Long-term Convergence or Dominance? (L2, L1)
AbstractI find evidence for convergence of stock and mutual insurers in an analysis of metatechnology efficiency estimated by data development analysis in the US and EU in 2002–2015. This result may emphasize that even though the organizational forms tended to dominate in different market segments in the past as documented by extant literature, due to recent changes in the economic context (particularly, elimination of state aids for the mutual organizational form and introduction of risk-based capital standards) the production processes inevitably converge over time. Different to previous studies focusing on the expense preference and efficient structure hypotheses, I explicitly consider the dynamics of stock and mutual insurer’s technology and efficiency.
Structural Reform waves and economic growth (E6, O4)
AbstractAt a time of sluggish global growth, calls for more structural reforms in both advanced and emerging countries are multiplying. However, estimations of the short- and medium-term impact of these reforms on GDP growth remain methodologically problematic and still highly controversial. We contribute to this literature by making a novel use of the Synthetic Counterfactual Method to estimate the impact of 23 wide-reaching structural reform packages (including both real and financial sector measures) rolled out in 22 countries between 1961 and 2000. Our results suggest that, on average, reforms started having a significant positive effect on GDP per capita only after five years. Ten years after the beginning of a reform wave, GDP per capita was roughly 6p.p. higher than counterfactual. However, average point estimates mask a large heterogeneity of outcomes. Benefits tended to materialise earlier, but overall to be more limited, in advanced economies than in emerging markets. These results are robust to a variety of alternative specifications, placebo and falsification tests, and to different indicators of reform.
Synergies among Water, Sanitation and Social Programs and Their Effects on Child Health Outcomes: Evidence from Urban and Rural Panama (I3, O1)
AbstractSocial policies in the last decade have emphasized the use of Conditional Cash Transfer (CCT) programs. These programs transfer money to targeted household, typically impoverish, if they satisfy certain conditions, such as school attendance, growth control and vaccinations (Rawlings & Rubio, 2005). While these programs have been successful in increasing household consumption levels and poverty reduction, evidence on improvement in final outcomes is mixed. For example, studies show that households take their children to preventive checkups, but that has not always led to better child nutritional status (Fiszbein et al., 2009). These findings might suggest that to maximize their potential effects on the accumulation of human capital, CCTs should be combined with other programs such as water and sanitation, given that the literature shows that access and appropriate use of water and sanitation improve child health (Fewtrell et al. 2005; Fink, Bunther & Hill, 2011). This is an area of research that has not yet being explored.
We use a nationally representative sample of about 1,700 Panamanian indigenous children under five years of age gathered in 2014 to study the effects of their CCT ‘Red de Oportunidades’ program. Using an instrumental variable approach, we examine the differential effect of participating in the CCT program and having adequate water and sanitation infrastructure. Our results show that CCT participation and water treatment decreases diarrhea prevalence and stunting. Similarly, CCT participation and high quality floor decreases diarrhea prevalence, days of diarrhea and stunting. This might be explained because having adequate water and sanitation infrastructure reduces household’s exposure to germs and worms that cause intestinal diseases. Thus, access to improved sanitation and clean water – and the better use of the infrastructure – could strengthen the impact of the CCT on child health outcomes.
Talent Discovery, Layoff Risk and Unemployment Insurance (D8, D6)
AbstractIn talent intensive jobs, workers’ performance is informative about their
quality, allowing higher productivity and expected wages. But such learning
also implies greater layoff risk. Firms can insure employees against such risk by
providing severance pay, if workers cannot resign from their employers. This
implements efficient production and risk sharing. When instead workers can resign,
private insurance can no longer be provided, and more risk-averse workers
will choose less informative jobs. This lowers expected productivity and wages.
Public provision of unemployment insurance corrects this inefficiency, enhancing
employment in talent-sensitive industries. This efficiency gain cannot be
obtained by forbidding layoffs.
The Cost Burden of Negotiated Sales Restrictions of School District Bonds: A Natural Experiment Using Heterogeneous State Laws (H7, K2)
AbstractShould legislation restrict the use of negotiated sales of municipal bonds? What are the costs of such a restriction? We estimate the effects that the restrictions on negotiated sales have on gross spreads and reoffering yields by comparing the bond issues of unrestricted school districts to the bond issues of school districts that are bound by law to use competitive sales. We develop a standardized way of classifying a bond's statutory security, and use this classification to obtain a sample of comparable bonds. The classification is informative, parsimonious, and scalable. We classify the statutory security of 42,493 new-money bonds, and collect the statutory sales provisions and amendments thereof of 40 states. Restrictions on negotiated sales increase gross spreads by $1.03 for every $1000 of par value. Restrictions also increase reoffering yields for maturities up to 20 years, and decrease them for longer maturities.
The Currency Dimension of the Bank Lending Channel in International Monetary Transmission (E5, G2)
AbstractWe investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral cross-border lending flows of 27 BIS-reporting lending banking systems to borrowers in over 50 countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the target country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies, suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
The Effect of Childhood Savings Accounts on Household Spending (H3, I3)
AbstractIn 2005, the U.K. implemented the Child Trust Fund (CTF) to improve the life chances of children born into poverty. The introduction of the CTF, and the abrupt ending of the program in 2011 as part of the austerity measures under the Cameron government, provides a unique natural experiment to test how parents respond to a large-scale financial investment in children. Using data from the U.K. Living Costs and Food Survey, this paper explores whether parents alter their spending patterns in response to the CTF and whether this responses differs by socioeconomic status (SES). I find that while low SES households do not demonstrate the largest changes in their expenditures in response to the Child Trust Fund, middle SES households with eligible children significantly alter their expenditures to increase parental investments. These results suggest that for some households, child savings accounts increase parental investments.
The Effects of After-school Programs on Maternal Employment (J1, J2)
AbstractThis paper evaluates the impact of a massive expansion of after-school programs (ASPs) on the labor market participation of mothers with primary school children in the West German context of relatively low full-time employment rates. Using an instrumental variables approach we exploit regional and temporal variation in the provision of federal ASP starting grants by a nationwide investment program. Results suggest that additional ASP places had no effect on working hours or the employment probability of mothers with primary school children.
The Extent and Nature of Downward Nominal Wage Flexibility: An Analysis of Longitudinal Worker/Establishment data from Korea (E3, J3)
AbstractAnalysis of a special dataset constructed from the Survey on Labor Conditions by Type of Employment finds strong evidence against downward nominal wage stickiness during the 2008-2009 through 2012-2013 period, which was a period of low inflation and low economic growth. Our analysis finds at least one in every four job stayers experienced nominal wage cuts from one year to the next, and few experienced nominal wage freezes. The extent of downward nominal wage flexibility is somewhat greater in Korea than in Great Britain or the United States, which have the most flexible labor markets among OECD countries. Our analysis at the establishment level uncovers the nature of this downward nominal wage flexibility. The observed downward flexibility does not result from a fraction of employers cutting most of their workers' wages, but from a majority of employers, larger employers in particular, cutting a fraction of their workers' wages fairly routinely. The size of nominal wage reductions is substantial. In addition, employers tend to `choose' high wage earners for wage cuts.
The Gender Gap in Wage Expectations: Do Females Trade Off Higher Earnings for Lower Earnings Risk? (I2, J3)
AbstractSeveral studies show that females start with lower earnings expectations than males, even before entering the labor market and that this partly translates into the actual gender wage gap through effects on educational choice and the formation of reservation wages. This study examines the gender gap in expected earnings and provides evidence for a novel explanation. Building on the theoretical reasoning of compensating differentials proposing that the labor market compensates higher earnings risk with higher average earnings, this study investigates whether the gender gap in expected earnings can be explained by individuals anticipating this form of risk compensation. Under the assumption that individuals self-select into college majors and occupations (partly) based on anticipated compensation for earnings risk, we should be able to uncover this relationship based on students' ex ante expectations, i.e. before students actually choose and thereby self-select into a specific education and/or field of study. Relying on a unique dataset on German high school graduates in which we elicited information on the entire distribution of expected earnings, I document that already at high school graduation females expect to earn considerably less than their male counterparts. At the same time, females expect lower earnings risk. In a decomposition exercise including a rich set of covariates capturing alternative explanations, I show that over three-quarters of the gender gap in expected earnings is attributable to differences in expected earnings risk. This suggests that females have lower earnings expectations because they expect to trade off higher earnings for lower earnings risk. While the results of this study cannot be interpreted as causal evidence, they shed light on why women make different choices regarding education and careers, thereby enhancing our understanding of the observed gender wage gap.
The Impact of Durable Goods on Child Outcomes: Evidence From China (J1, I3)
AbstractThis paper uses a time allocation framework to examine how the presence of household durable goods impacts child outcomes. I use micro-level data from the China Health and Nutrition Survey (CHNS) to test the hypothesis that the presence of time-saving household appliances caused a decrease in time allocated to housework, increase in school enrollment rates, and decrease in labor force participation rates for children aged 12-18 in China over the last two decades. To control for endogeneity of household durable goods, I instrument household ownership of each time-saving appliance by the average ownership rate of that appliance among households with no children living in the same community. I estimate that living in a household that owns a washing machine: (1) decreases the average time dedicated to housework by 78 minutes per week, (2) increases the probability of being enrolled by 12 percentage points, and (3) decreases the probability of being employed by 48 percentage points.
The Impact of Institutions on Innovation (O4, O3)
AbstractWe study the impact of inclusive institutions on innovation using novel, hand-collected, county-level data for Imperial Germany. Exploiting the timing and geography of the French occupation of different German regions after the French Revolution as an instrument for institutional quality, we find that the number of patents per capita was more than twice as high in counties with the longest occupation as in unoccupied counties. Conservative social norms and low financial development weaken the impact of institutions on innovation. The results suggest that innovation is a quantitatively plausible channel for the previously documented effect of institutions on economic prosperity.
The Performance Effects of Gender Diversity on Bank Boards (G2, G3)
AbstractPrevious literature has shown mixed results on the role of female participation on bank boards and bank performance: some papers find that more women on boards enhance financial performance, while others find negative or no effects. Applying Instrumental Variables methods to data on approximately 90 U.S. bank holding companies over the 1999-2015 period, we argue that these inconclusive results are due to the fact that there is a non-linear, U-shaped relationship between gender diversity on boards and various measures of bank performance: female participation has a positive effect once a threshold level of gender diversity is achieved. Furthermore, this positive effect is only observed in better capitalized banks. Our results suggest that continuing the voluntary expansion of gender diversity on bank boards will be value-enhancing, provided that they are well capitalized.
The Role of Inflation Target Adjustment in Stabilization Policy
AbstractHow and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement?
We answer these questions quantitatively with a standard New Keynesian model that includes cost-push type shocks which create a trade-off between inflation and output gap stabilization.
We show that this trade-off leads to a non-trivial welfare cost under a standard Taylor rule, even with optimized policy coefficients.
We then propose an additional policy tool of an inflation target rule and find that the optimal target needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock.
The inflation target rule, combined with a Taylor rule, significantly reduces fluctuations in inflation originating from the cost-push shocks and mitigates the policy trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.
The welfare implications of the inflation target rule are more pronounced under a flatter Phillips curve.
Too Hot to Handle: The Effects of High Temperatures During Pregnancy on Adult Welfare Outcomes
AbstractThis paper studies the long-term effects of high temperatures during pregnancy on later outcomes for Chinese adults. We find that adults who experienced a one-standard-deviation more high-temperature days (about 36 days) during pregnancy attain 0.56 fewer years of schooling, have a higher risk of being illiteracy by 6.47%, are 17.25% standard deviations lower for word-test score, and are 0.85 cm shorter. The impacts are concentrated in the first and second trimesters. Additionally, income effects are one important channel to explain the adverse effects of hot weather. Back-of-the-envelope predictions suggest that by the end of the 21st century, ceteris paribus, losses in education years and height will be 0.14-0.54 years and 0.21-0.84 cm, respectively, caused by global warming.
Trade Liberalization and Domestic Vertical Integration: Evidence From China (F1, L2)
AbstractIn this study, we examine the effects of trade liberalization on domestic mergers and acquisitions (M&As) in China. In particular, we focus on domestic backward vertical integrations in which a domestic upstream firm (target) is acquired by a domestic downstream firm. Our analysis takes China’s accession to the WTO (2001) as a quasi-natural experiment for trade liberalization. We find that a decrease in tariffs on the target industry’s outputs reduces vertical integrations, but a decrease in tariffs on the target industry’s inputs increases vertical integrations. The result is obtained using the difference-in-differences technique and is robust to various specifications of the model and measurement. We build a hold-up model with an upstream supplier and a downstream buyer to provide insights to the empirical finding that the existence of underinvestment is the key to understanding the effects of tariff reductions on firms’ organizational choices.
Unemployment and Online Labor (J4, L0)
AbstractWe analyze whether regional unemployment drives higher participation in online labor markets in the US at the extensive and intensive margin. Online labor markets experienced a rapid growth in recent years. In contrast to traditional, localized offline labor markets, they allow for long-distance transactions and offer workers access to a potentially ‘global’ pool of labor demand. We analyze detailed data from a large online labor platform for microtasks, and show that, with an increase in commuting zone-level unemployment, more individuals join the platform and become active in fulfilling tasks. At the intensive margin, our results show that with higher unemployment rates, online labor supply becomes more elastic. Detailed analyses by the hour of the day reveal that our results are driven by an increase in platform activity during standard working hours. However, we also find that the effect does not lead to a permanent increase in platform participation. Overall, our results thus suggest that individuals turn to online labor markets in periods of low local labor demand. At the same time, the evidence shows that online labor markets, at least for microtasks, cannot be considered as a substitute for offline labor yet.
US and Euro Area External Adjustment: the Role of Commodity Prices and Emerging Market Growth (F4, F3)
AbstractThe trade balances of the US and, especially, of the Euro Area (EA) have improved markedly after the Global Financial Crisis. This is widely viewed as reflecting weak domestic demand and deleveraging by domestic agents. This paper challenges that conventional view. The paper highlights the key role of commodity prices as drivers of US and EA trade balances. The sharp post-2012 fall in commodity prices, and the post-crisis Euro depreciation, explain the bulk of the EA trade balance surge. Commodity prices also play a key role for the transmission of Emerging Market shocks to the US and EA. Emerging Markets productivity growth has a negative effect on EA GDP, when the effect of Emerging Markets growth on commodity prices is taken into account. The methodological contribution of this paper is the Bayesian estimation of a three-regions (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, world commodity prices reflect global demand and supply conditions (market clearing). The broader lesson of this paper is that Emerging Markets and commodity prices are key drivers of advanced countries’ trade balances and terms of trade.
Authors: Massimo Giovannini (European Commission, JRC); Stefan Hohberger (European Commission, JRC); Robert Kollmann (Université Libre de Bruxelles & CEPR); Marco Ratto (European Commission, JRC); Werner Roeger (European Commission, DG-ECFIN); Lukas Vogel (European Commission, DG-ECFIN)
Well Begun Is Half Done: Initial R&D Competence and Firm Growth (G3)
AbstractWe examine the effects of initial R&D competence on innovation strategies and firm growth. Using project-level drug development data for entrepreneurial pharmaceutical firms, we show that R&D performance persists over long periods, suggesting initial conditions largely determine the cross-sectional variation in R&D successes. We find that firms with high initial competence are exploitative in their best segment and exit through an IPO earlier or receive greater amounts of venture capital funding. By contrast, firms with low initial competence are explorative, diversifying into multiple segments. Medicare Part D legislation as an exogenous shock to diversification incentives suggests a likely causal relationship. Our results are consistent with firm initial skills (versus luck) leading to different innovation strategies and growth.
What Does Insurance Subsidy Do in a Mandate Reform? Evidence From Massachusetts (I1, H2)
AbstractWhen adverse selection is inherent in insurance pricing and subsidy is tied to premium, universal coverage raises efficiency in both insurance pricing and transfer, and is socially desirable. Subsidy is full for redistributive purposes. Hence there is potential for ACA-like reforms to improve welfare. Actual subsidy, however, depends on the behavioral responses to policy incentives, and how well private valuation and costs align with social counterparts. I quantify the welfare impact of subsidy dollars based on outcome variation in response to subsidy generosity. I find in the Massachusetts case that the social cost of financing new enrollment tends to outweigh the incremental benefit to new enrollees, but accounting for infra-marginal efficiency gain in pricing and transfer, the return to subsidy is positive even at modest risk aversion.
What Does the Communist Party of China Care About the Most? Evidence From Its Official Newspapers (D7, H7)
AbstractThis study concentrates on the decision-making process of the Communist Party of China. According to relevant text analysis of the articles published on the Party’s official newspapers, we examine the interdependence of the three primary concerns of the Party, delivering economic prosperity, cracking down corruption, and maintaining social stability, across 31 provinces between 2000 and 2015. We compute the frequency of the articles discussing each of the three issues and argue that the frequencies can serve as the proxies for the Party’s concerns in these areas. For instance, a higher frequency of articles published on a provincial, official newspaper discussing economic policies implies that the Party’s has more economic concerns in that province than anywhere else. The evidence indicates that the Party did put enhancing economic growth before the other two. What comes after economic prosperity is anticorruption, which is only affected by the Party’s economic concerns. Maintaining social stability is the last one among the three on the Party’s priority list. Our findings suggest that the Party is very rational in its policy-making process.
Who Bears the Burden of Local Income Taxes?
AbstractWe study the distributional effects of local income taxes. Our model features imperfectly mobile renters who differ in their income, their housing expenditure share, and their valuation for a public good financed by a linear local income tax. Estimation is based on micro-level rental prices, taxpayer counts in different income brackets and municipal income taxes in Switzerland, whose institutional setting allows us to instrument local tax rates. We embed reduced-form tax-base and rental-price elasticities in a structural estimation of non-homothetic preferences for local public goods. We find strong evidence of tax capitalization in rental prices and a hump-shaped relationship between household income and public-good preferences. We conclude that even with proportional taxation the burden of local income taxes is borne almost entirely by landlords and renters in the top income quintile.
Women’s Bargaining Power and Children’s Schooling Outcomes: Evidence From Ghana
AbstractWe use data from Ghana to examine the link between women’s bargaining power and children’s schooling outcomes. We employ a principal component analysis to compute women’s bargaining power using their education, earnings and age, and examine its effect on schooling outcomes such as late enrollment, grade repetition, and the intensity of grade repetition. Using age at first marriage and age at first job to identify women’s bargaining power, we find a significant association between bargaining power and late school enrollment as well as grade repetition. Our results show that girls tend to benefit more from the mother’s bargaining power compared to boys, which reflects, in part, the large matrilineal society in Ghana. Further investigation on the plausible channels suggests that children’s grade progression is associated with women’s relative education and earnings, while women’s relative age influences late enrollment.
A Community Based Randomized Controlled Trial on an Educational Intervention to Promote Retirement Saving Among Hispanics
AbstractWe design and pilot an educational intervention based on the tenets of behavioral economics to promote financial planning for retirement through opening a retirement account among low and middle income Spanish-speaking Hispanics between 30 and 60 years of age. We study the effect of the intervention on the primary outcome of opening a government- sponsored retirement plan, myRA, and secondary outcomes of mental and physical health. We conduct a randomized control trial with a waiting list control group (143 participants total). The treatment group (69 participants) received an initial educational intervention (with collection of baseline data), and a follow up workshop in six months is planned for this group (follow up workshops starting in April of 2017). The control group (74 participants) attended an initial workshop where we collected baseline data and informed participants in this group that they will receive the educational intervention in six months. We find that among participants in the treatment group, 91 percent want to start saving for retirement, 83 percent commit to open a myRA account in 6 months, 20 percent start the process during the class, and only 9 percent end up with an account number assigned the day of the workshop. Our study shows that while study participants are highly motivated to open a myRA account after the educational intervention, they face significant barriers towards opening a myRA account. Our study is one of its kind since it is one of the first community based interventions to promote retirement saving among low and middle income Hispanics. We provide insights for programs that aim at promoting retirement saving such as California Secure Choice retirement saving program that will be operational in 2019.
A Comparative Study on the Path of Transformation and Upgrading of Resource-based Industrial Clusters and Manufacturing Industrial Clusters (O4)
AbstractThis paper takes China's resource-based industrial clusters and manufacturing industrial clusters as the research object. Adopting the panel data from 2005 to 2014 and using the threshold regression method, this paper analyses and finds out the best timing for the transformation and upgrading of the industrial clusters and manufacturing industrial clusters. Furthermore, the research designs a path of the transformation and updating of resource based industrial clusters and manufacturing industry cluster. This paper Probes into the internal path of transformation and upgrading from the cluster itself according to the characteristics of local industrial clusters. The research shows that the optimal scale threshold value of the transformation and upgrading of resource-based industrial clusters, traditional manufacturing clusters and high-end manufacturing clusters are 1.192, 0.695 and 1.374. The research puts forward that the transformation and upgrading of resource-based industrial clusters is mainly based on the internal path, such as the transformation and upgrading of the resource based industrial cluster from the extractive industry cluster to the resource-based manufacturing cluster in the inner part of resource-based industrial clusters and the transformation and upgrading from the low-end resource-based industrial clusters based on the resource consumption to modern innovative industrial clusters with the high technology as the core competitiveness for the whole of resource based industrial clusters. Both the internal path and the external path are advisable for the transformation and upgrading of traditional manufacturing clusters. The internal path is specifically the transformation and upgrading from the low-cost industrial clusters based on traditional manufacturing industry to the modern innovative industrial clusters based on the high technology.And the external path is the transformation and upgrading of traditional manufacturing clusters embedded in the global value chain. The transformation and upgrading of high-end manufacturing clusters is mainly based on the external path, such as the transformation and upgrading of producer-driven high-end manufacturing clusters embedded in global value chain.
A Model of Labor Supply, Fixed Costs and Work Schedules (J2, E2)
AbstractWe develop a three-dimensional labor supply framework, distinguishing between hours worked per day, days worked per week and workweeks. Individuals make labor supply choices given heterogeneous schedule-dependent fixed costs of work. We show that the three margins are not perfect substitutes. Leisure on days not worked in a workweek has the largest weight in preferences, leisure on weeks off has the smallest weight.
We use the model to evaluate a number of policies. In our framework, the intertemporal elasticity of labor supply is around 0.2, within the standard range of micro elasticities. Hours worked per day is the most elastic margin of labor supply whereas weeks worked is the least elastic. We produce a large range of elasticities for the same set of model parameters by varying work schedules and degrees of attachment to the labor force. The less attached workers have a significantly higher elasticity of labor supply which can explain the differences between ”macro” and ”micro” elasticities. Seemingly similar workers with the same weekly hours have different elasticities of labor supply if they allocate their time differently. Those who work fewer days have higher elasticity.
We calibrate the model to analyze changes in labor supply in response to policies that generate changes in fixed costs of work, affect schedule flexibility, and policies that set restrictions on weekly hours. We show that fixed costs of work affect response to each policy and determine associated losses.
A Neighborly Welcome? Charter School Entrance and Public School Competition on the Capital Margin
AbstractIn 1999, the Utah State Legislature allowed charter schools to enter and be administered under the broad oversight of school districts. The structure of the Utah Charter School provides a natural experiment to study a unique way that traditional public schools compete against new charter schools. Using data from the 1992-2012 waves of the Common Core of Data, we estimated fixed effect models to measure the increase in capital expenditures by traditional public schools when faced with competition by new charter schools. We find that total capital outlay and spending on improving existing structures increases with charter competition, but new construction and instructional spending does not increase at a statistically significant level. We also conduct a placebo experiment that strengthens our empirical findings.
A Rational Rush Theory of Financing Innovations (G1, O3)
AbstractWe propose a theory of rational "Rush", emphasizing the quantity of rational over-investment in contrast to the theory of irrational price “Bubble”. We illustrate an important friction when financing breakthrough innovations: non-excludability and spillover of uncertain knowledge due to imperfect IPR (Intellectual Property Rights, e.g. patent) protection. Facing a limited supply of new projects with uncertain return, investors make decisions about when and how many projects to invest. Investors' preemption motive will distort their incentives for patient learning about project return, thus inducing them to "rush in" to finance uncertain projects massively at a premature stage. A small positive news shock regarding the project return can greatly amplify over-investment and result in large social inefficiency. On the other hand, information externality creates free-rider motive, which can also make under-investment possible. Our empirical finding based on sectoral Venture Capital investment shows that weak IPR protection lead to excessively high investment level and more procyclicality. Broader patent rights should be granted when the uncertainty of innovation is high, although the “Rush” prevention can induce more patent race at the early R&D stage, i.e. Rush-Race shifting.
A skeptical appraisal of the bootstrap approach in fund performance evaluation (G2, G1)
AbstractIt has become standard practice in the fund performance evaluation literature to use the bootstrap approach to distinguish “skills” from “luck”, while its reliability has not been subject to rigorous statistical analysis. This paper reviews and critiques the bootstrap schemes used in the literature, and provides a simulation analysis of the validity and reliability of the bootstrap approach by applying it to evaluating the performance of hypothetical funds under various assumptions. We argue that this approach can be misleading, regardless of using alpha estimates or their t-statistics. While alternative bootstrap schemes can result in improvements, they are not foolproof either. The case can be worse if the benchmark model is misspecified. It is therefore only with caution that we can use the bootstrap approach to evaluate the performance of funds and we offer some suggestions for improving it.
A Tale of Two Cities: An Examination of Medallion Prices in New York and Chicago (L5, L8)
AbstractThis paper examines the institution of taxicab medallions in two of the largest cities of the U.S.: New York and Chicago and changes in the prices of those medallions during the period 2009-2016 (for New York City) and 2007-2016 (for Chicago). We document a drop of roughly 50% in the prices of these medallions in New York and roughly 80% in Chicago from their peak in 2013/2014 to the present. We also find that medallion prices are positively correlated with taxicab revenues and negatively correlated with (a) proxies for the intensity of adoption of Uber and Lyft in both cities and (b) the interest rate on medallion loans.
A Test of the Relationship Between Air Pollution and Exports: The Case of China (F1, Q5)
AbstractThis study estimates the effects of exports on air pollution in China. To avoid endogeneity issues, we use an instrumental variable strategy, which relies on the exogenous shock to export brought about by the Great Recession and the fact that most exports from China are produced in coastal provinces. In our empirical work, we employ data collected by the National Bureau of Statistics of the People’s Republic of China. Sulphur Dioxide, Nitrogen Dioxide and Smoke & Dust at the province level over 13 years from 2003 to 2015 are used to measure air pollution, and are related to measures of provincial exports such as export intensity (exports as a fraction of GDP). The econometric model utilizes a two-stage IV regression. In the first stage, export intensity is instrumented using the exogenous variation from the Great Recession and coastal location. Then the predicted export intensity from the first stage is used as the regressor in the second stage regression explaining air pollution. For all three air pollutants, the results show that pollution decreases more for coastal provinces following the Great Recession than it does for inland provinces. Hence, air pollution improves as export intensity declines.
Access to Medicines and European Market Integration (I1, F1)
AbstractIn this paper we document a process of fast price convergence in the European market for pharmaceutical products in nominal and real terms. We find that price convergence is associated with longer delays for country launches of new and innovative drugs. For our purpose, we exploit census data sourced from IMS Midas on product sales, prices and launches in fifteen EU countries. In fact, the EU is a peculiar case where free circulation of goods coexists with pricing policies designed and implemented by single Member States. Multinational producers can adopt a strategy for launching new drugs selectively by country, taking regulation by country as a determinant of a sequence. Eventually, country delays tend to be higher for innovative and first-in-class chemical compounds. Our results suggest that inefficiencies arise in presence of fragmented regulation and market integration. A policy of differential pricing at the EU-level is suggested, in order to take into account both therapeutic value and willingness to pay at the country level, but preventing launch strateging by multinational producers.
Against All Odds: Job Search During the Great Recession (E2, J6)
AbstractThe unemployed in the United States appear to allocate time to job search activities regardless of the state of the economy. Drawing on the American Time Use Survey between 2003 and 2014, I document that the unemployed increase their search intensity only slightly if at all during recessions. Roughly, 30 minutes in a week is the additional search intensity attributed to the unemployed in response to the Great Recession. While their search intensity depends on a number of factors that would predict otherwise, such as the odds of finding work, one argument shows promise.: the search costs that accumulate over an expected long period of unemployment make a job more valuable during recessions. I estimate the elasticity of the value of a job to changes in labor productivity to be at least -0.67 and at most -0.04. I point out some implications of this argument for our understanding of business cycles and for the design of unemployment insurance policy.
Ageing Poorly? Accounting for the Decline in Earnings Inequality in Brazil, 1995-2012
AbstractThe Gini coefficient of labor earnings in Brazil fell by nearly a fifth between 1995 and 2012, from 0.50 to 0.41. The decline in earnings inequality was even larger by other measures, with the 90-10 percentile ratio falling by almost 40 percent. Although the conventional explanation of a falling education premium did play a role, an RIF regression-based decomposition analysis suggests that the decline in returns to potential experience was the main factor behind lower wage disparities during the period. Substantial reductions in the gender, race, informality and urban-rural wage gaps, conditional on human capital and institutional variables, also contributed to the decline. Although rising minimum wages were equalizing during 2003-2012, they had the opposite effects during 1995-2003, because of declining compliance. Over the entire period, the direct effect of minimum wages on inequality was muted.
Aggregate Effects of Financial Repression (O4, G2)
AbstractThis paper revisits the relationship between financial repression and productivity growth from a novel perspective: structural transformation. We find that financial repression can induce productivity growth through growth-enhancing structural transformation in the short term, but the effect is negative in the long run as structural transformation becomes growth-reducing. It implies that the role of financial repression policy should be evaluated with the evolvement of structural transformation.
First, we present the following empirical findings. The patterns of structural transformation and TFP growth paths differ between economies with and without financial repression. Specifically, manufacturing sector keeps growing and service sector does not grow significantly or remains flat in financially repressed economies, and financial repression induces higher TFP growth in an early stage of economic development, but this effect fades away in the long run. Besides, by decomposing productivity growth into the contribution of within-sector productivity change and structural transformation, we find that financial repression affects productivity growth through a growth-enhancing structural transformation in the short term and a growth-reducing structural transformation in the long term.
Second, we employ a multi-sector general equilibrium model to formalize the argument by endogenizing productivity growth of the service sector. We assume the agricultural and manufacturing sectors have exogenous productivity growth rate, while the service sector’s productivity growth depends on the human capital level. As more capital flows into manufacturing sector under financial repression, the aggregate labor income is lower than that when capital allocation is not directed towards manufacturing sector because it is less labor-intensive. As human capital can only be accumulated through labor income, the slower human capital accumulation in the manufacturing sector results in slower productivity growth. Thus, the structural transformation becomes growth-reducing as the labor stays in the less productive manufacturing sector.
Agricultural Fires and Cognitive Function: Evidence from Crop Production Cycles (I1, Q5)
AbstractThe use of controlled burning to clear agricultural land is a common practice in many parts of the world. This practice constitutes an important source of air pollution from agriculture. By exploring crop production cycles in China, this paper examines the impact of air pollution from agricultural fires on human cognitive health by linking household health survey data with fire points from remote sensing. The analysis shows a significant negative impact of fire points on cognitive health: respondents (aged 55 and above) in counties with high frequencies of fire points have scores 5.1% lower in a general cognition test, and recall 11.8% fewer objects in the delayed memory test. This impact is detected among respondents living in downwind counties but not the upwind counties. The cognitive impact from agricultural fires implies additional health costs from climate change that increases wildfire risks.
Alcohol-Induced Deaths & the Minimum Legal Drinking Age (I1, J1)
AbstractUsing regression discontinuity based on annual 2007–2015 U.S. averages and age in years, I estimate how reaching the minimum legal drinking age affects alcohol-induced mortality, for which a death certificate ICD-10 code reflects alcohol as a direct cause. At age 21, the alcohol-induced death rate jumps by 30–50%, simultaneously with large alcohol use increases. Estimates from 1999–2006 are similar, closely replicating previous findings using age in days. Comparable effects are absent at other ages, on population size, and for other leading causes of death. Among deaths with alcohol mentions, effects are significant for motor vehicle accidents (MVA) and alcohol-induced underlying causes, but not suicides or drug-induced causes. Unlike in earlier years, effects are insignificant for non-alcohol MVAs and suicides. Estimates are robust to various local and OLS regression specifications, evident among both genders, and proportionately large among non-Hispanic whites and non-MSA residents, for alcohol poisoning, and during the Great Recession.
An Empirical Assessment of Tax Evasion in the Brazilian Origin-based VAT Using Interstate Trade Flows (H7, H2)
AbstractSeveral developing countries have adopted the value added tax (VAT) in the last decades. Despite this increased interest on the VAT, very few studies focused on the origin-based VAT and its effect on intra-national trade flows. In this paper, I study the case of the Brazilian origin-based VAT (ICMS) that has different rates depending on the exporting and the importing states. This difference in rates creates an incentive to tax evasion by misstating the destination state of the shipment. I employ a gravity-model specification and inter-state trade flow data for the 1980s and 1990s to estimate the elasticity of export volumes between two states with respect to the origin-based VAT rate by making use of the 1989 inter-state VAT rate change that occurred in Brazil. In the absence of VAT evasion, such elasticity has to be zero; however, I precisely estimate it to be -0.42. Moreover, exploiting the geographical nature of the VAT rate differences and the shape of the Brazilian states, I am able to identify the states that are more likely to experience inter-state VAT evasion due to destination misstatement. My estimates indicate that tax evasion on such states lead to reported trade flows that are 0.7% below the predicted level by the gravity equation, which clearly indicates the presence of inter-state tax evasion. Furthermore, accounting for this type of evasion reduces the magnitude of the estimated VAT rate elasticity by 25%, bringing it closer to zero. This paper’s results imply that destination misstatement represents a large share of inter-state VAT evasion in Brazil, albeit there are other evasion mechanisms also taking place in Brazil.
Are Europeans the link between historical malaria and underdevelopment? (O1, N0)
AbstractThis paper reexamines the causal link between institutional quality and economic development using "Malaria Endemicity” measure in comparison to settler mortality. This measure allows us to expand the sample of countries to test the relationship, as well as to perform a placebo test of the causal link through colonial history. While we do not disprove the previous reported results, we do find a common global effect of early malaria environment on income through institutional quality, regardless of colonial history.
Asset Prices and Optimal Monetary Policy Rules (E5, E4)
AbstractWe construct a New Keynesian DSGE model that features financial frictions, investment frictions, long-run productivity risk and Epstein and Zin (1989) preferences.
The model successfully reproduces key features of both asset prices and macroeconomic
quantities such as consumption, investment, and output. Under this set up, we examine the implications of different monetary policy rules where the central bank responds
to inflation, output and asset prices in the presence of productivity shocks, monetary
policy shocks and financial shocks. This paper contributes to the current debate on
how central bankers ought to respond to asset price volatility, in the context of an
overall strategy for monetary policy.
Asymmetric Effects of FOMC Announcements: Short Selling and Stock Returns (G1, E4)
AbstractThis paper documents that the effects of FOMC announcements in the cross-section of stock returns are asymmetric. Although the aggregate returns are higher on days with FOMC announcements, we find stocks with high (i.e., above mean) short interests, which are more likely overpriced, earn up to 63% (annualized) higher returns than other stocks around FOMC announcement days. This return reverses in half a year time. The pattern is not observed during the pre-Greenspan period or in other macroeconomic announcements. We test two important channels indicating that FOMC announcements may impede short sellers from attacking overpricing. First, short squeeze dramatically intensifies on announcement days, which refrain short sellers from shorting. Second, short constraints also increase. Using the short legs of 105 anomalies to proxy for overpricing alternatively, we find similar results. Overall, our results enhance our understanding of why FOMC announcements affect stock returns and whether and how the Fed may exacerbate overpricing in stock markets.
Austerity, Inequality, and Private Debt Overhang (E6, D6)
AbstractUsing panel data of 17 OECD countries for 1980-2011, we show that the distributional consequences of fiscal consolidations crucially depend on the presence of private debt overhang. Specifically, we find that austerity leads to a severe and significant increase in income inequality when private debt is high. A 1% of GDP reduction in the primary deficit translates into a rise in income inequality of 2 percentage points in high private debt states. In contrast, when private debt is low, the inequality effects of fiscal consolidations are found to be small and statistically indistinguishable from zero. Thus, an estimation approach that abstracts from private debt-dependence may well lead to wrong policy conclusions. Our results imply that policy makers who are concerned about inequality should consider the level of private indebtedness when deciding if the time is right for implementing fiscal austerity measures.
We conduct various robustness checks that confirm our findings. In particular, we take into account possible anticipation effects due to fiscal foresight, we consider alternative ways of defining periods of private debt overhang, and we restrict our sample to the period before the Global Financial Crisis. Moreover, we rule out that our results are driven by the state of the business cycle. Inequality significantly increases in periods of private debt overhang, irrespective of whether the economy is experiencing a boom or a slump. Likewise, in booms and slumps, austerity has no discernible distributional consequences when private debt is low.
We explore three different channels through which private debt-dependent distributional consequences of fiscal consolidations can be rationalized: the earnings heterogeneity channel, the income composition channel, and the savings redistribution channel.
Bank Accounts For The Unbanked: Evidence From a Big Bang Experiment (O0, D1)
AbstractOver 2 billion individuals around the world are unbanked. How they can be brought into the formal financial system is a question of policy and academic interest. We provide evidence on this question from India’s PMJDY program, a “big bang” shock that supplied bank accounts to virtually all of its 260 million unbanked. We analyze the uptake and the extent and nature of activity in the new PMJDY accounts using transactional data from bank account statements. While the newly included individuals are typically poor, unfamiliar with banking, and do not undergo literacy or other training, transaction levels nevertheless increase as accounts age and converge or exceed levels in non-PMJDY accounts of similar vintage. Usage is led by active transactions and is aided but not entirely explained by benefit transfer programs. The results suggest that the unbanked have unmet (possibly latent) demand for banking, or that the supply of banking perhaps stimulates its own demand.
Bank Interventions and Firm Innovation: Evidence from Debt Covenant Violations (G3)
AbstractWe examine the effect of bank interventions on corporate innovation and firm value via the lens of debt covenant violations. Bank interventions have a significantly negative effect on innovation quantity, but no significant effect on quality. The reduction in innovation quantity is concentrated in innovation activities that are unrelated to the violating firm’s core business, leading to a more focused scope of innovation investment and ultimately an increase in firm value. Human capital redeployment appears a plausible underlying mechanism through which bank interventions refocus innovation scope and enhance firm value. Our paper sheds new light on the real effect of bank financing.
Bank Runs and Asset Prices: The Role of Coordination Failures for Determinacy and Welfare (G2, G1)
AbstractWe consider the stability of financial systems. We study a general equilibrium model where banks provide liquidity insurance and interact on asset markets. Coordination failures among depositors can cause simultaneous asset market crashes and bank runs. In equilibrium, the share of banks which expose themselves to bank runs and the volatility of asset prices is endogenous. There can be multiple equilibria and even indeterminacy. A financial system in which all banks are risky can exist if the probability of coordination failures is sufficiently small. The asset price will drop to or below the physical liquidation value of assets when a coordination failure triggers a bank run. However, if the probability of such crises approaches zero, the liquidity insurance offered by banks converges to the first best. Financial systems in which all banks are safe can exist and equilibrium asset prices are deterministic if the probability of coordination failures is sufficiently large. Such stable financial systems never offer the efficient liquidity insurance. We take economies with multiple equilibria as a starting point to compare financial systems. The advantage of this approach is that all parameters are constant, and the only difference between economies is the endogenous stability of their financial systems. This allows to identify the pure effects of financial stability on the real economy. Financial systems differ according to the value of the liquidity insurance they offer. They also differ with respect to the aggregate reserve ratio in the banking sector. Hence, different financial systems obtain different amounts of funds from consumers and allocate those funds differently. We provide an example of an economy which grows stronger with a stable financial system than with a banking sector consisting of both risky and safe banks. Accordingly, financial stability is not necessarily the price to pay for stronger growth.
Banking and Growth: Evidence From a Regression Discontinuity Analysis
AbstractThis paper investigates banking expansion and economic growth. Contrary to theoretical, cross-country and historic evidence from the US, several recent microeconomic studies from developing country settings do not find enduring banking effects. I exploit exogenous expansion of bank branches in India, driven by a previously unstudied policy reform from 2005. Iterating a regression discontinuity design, I trace branch growth before and after the reform along with responses from the real economy. I find strong causal evidence that the expansion of financial intermediation led to positive outcomes in both agriculture and manufacturing, and confirm growth in local GDP using nightlights data.
Bargaining in an Ongoing Exchange With Renegotiation (C7, J3)
AbstractI develop a theory of wage determination in a novel bargaining environment with features found in the labor market. A buyer and a seller produce repeatedly in a dynamic stochastic environment with the possibility of renegotiation and no credible commitment to a state-dependent schedule of wages. I show that the introduction of renegotiation allows for wage dynamics, but does not change the theoretical formulation of the bargaining outcome as compared to a one-time Nash bargain over wages, as is commonly applied to wage setting in models of labor search and matching. I model a bargaining game of alternating offers and show that as the time between counteroffers goes to zero, there is a single equilibrium wage in each state of the world. This equilibrium wage is Nash's bargaining solution in which the surplus to be shared is a weighted combination of the surplus from exchange over an instant and the surplus from exchange over the duration of the match. As with single shot bargaining, the relative weight of each formulation of the surplus depends on the relative importance of delay versus match breakdown. I conclude by proposing a method for endogenizing worker and firm bargaining power in the Nash bargaining solution.
Barriers to Price Convergence (F4, F3)
AbstractThis paper investigates the existence of convergence clubs in the cross-country price mechanism for 96 individual goods retail price levels across 40 countries available semi-annually for 1990-2010, using a nonlinear factor model and threshold regression tools. To our knowledge, this is the first paper to find strong evidence for club convergence of retail prices. These clubs emerge due to the interaction of traded and non-traded factors. For example, countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income. Moreover, we find an asymmetry in the extent that arbitrage opportunities related to international trade are exploited, with low initial price regime countries exhibiting faster convergence from below than high initial price regime countries exhibit from above, consistent with less resistance to exporting than to importing due to political economy considerations. We interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks.
Bayesian Belief Update and Mispricing : Theory and Experiment (G1, D8)
AbstractThis paper explores stock mispricing in an asymmetric information environment. We consider two uncertainties in our model, uncertainty of the asset value and the existence of informed traders. Our model has three types of market participants: a market maker, informed traders, and uninformed traders. Assuming the market maker uses Bayesian learning, he updates his asset value belief through transactions. There are two types of markets, one with informed traders and one without. The market maker does not know whether informed traders exist or not. The market maker also updates his belief about the existence of informed traders through transactions. We find that (1) when the market maker does not know of the existence of informed traders and informed traders actually exist, the asset price monotonically converges to its fair value, and (2) when a market maker does not know of the existence of informed traders and informed traders actually do not exist, the asset price systematically deviates from its fair value causing asset mispricing. However, after the market maker sufficiently updates his belief, he adequately finds the non-existence of informed traders. This situation represents the information mirage that literature found in asset market experiments. Our model contributes alternative explanation about stock mispricing process. We also confirm this process using numerical simulations and experiments.
Below the Zero Lower Bound: A Shadow-rate Term Structure Model for the Euro Area
AbstractWe propose a shadow-rate term structure model for the euro area yield curve from 1999 to mid-2015, when bond yields had turned negative at various maturities. Yields in the model are constrained by a lower bound, but - as a special feature of our specification - the bound is allowed to change over time. We estimate that it has first ranged marginally above zero, but has decreased to -11 bps in September 2014. We derive the impact of a changing lower bound on the yield curve and interpret the impact of the September 2014 ECB rate cut from this perspective. Our model matches survey forecasts of short rates and the decline in yield volatility during the low-rate period better than a benchmark affine model. We estimate that since mid-2012 the horizon when short rates are expected to exceed 25 bps again has ranged between 18 and 62 months.
Beyond the Profane: Schooling and the Sacred (D1, I2)
AbstractThe secularization thesis has been a source of contentious debate in the social
sciences. Education has often been proposed as one mechanism that causes societies to
become less intense in religious beliefs, yet descriptive studies exploring the relationship
between education and religion have often found mixed results. I use within family variation
in education from twins and siblings, to explore how changes in education influence
measures of religiosity, spirituality, and investments in faith. Using data from the National Survey of Midlife Development, I find that an additional year of education reduces the intensity of religious
beliefs and spirituality, but raises religious giving, attendance, and other faith based investments. Overall, the paper shows that although education increases religiosity, it moderates beliefs and changes how individuals invest in faith.
Body Weight and Internet Access: Evidence from the Rollout of Broadband Providers
AbstractObesity has become an increasingly important public health issue in the United States and many other countries. Hypothesized causes for this increase include declining relative cost of food and a decreasing share of the population working in labor-intensive occupations. We hypothesize that the Internet, via increased information and expansion of peer networks, may also influence the obesity rate. Theoretically, increases in information should lead to more optimal consumer choices. At the same time, greater networking opportunities available through the Internet may result in peers having greater influence over positive or negative health behaviors. While the information effect could decrease the likelihood of obesity, peer effects on health behaviors may work in either direction. We use the rollout of broadband Internet providers as a plausibly exogenous source of variation in Internet use to identify the effects. We show that greater broadband coverage increases body weight and has both positive and negative effects on modifiable adult health behaviors including exercise, smoking, and drinking. These effects are strongest for white women.
Boomer Entrepreneurs: Age and Type (J1, L2)
AbstractThis study categorizes novice versus existing boomer entrepreneurs, necessity versus opportunity boomer entrepreneurs, full-time versus part-time entrepreneurs, and incorporated versus unincorporated boomer entrepreneurs. This research defines, distinguishes, and measures the above types of boomer entrepreneurs, investigates the probabilities of each type of boomer entrepreneurs, examines factors driving their entrepreneurial activities, and estimates the economic impact created by those different categories of boomer entrepreneurs. Monthly individual level Current Population Survey data across 2006-2015 is used for the empirical study.
Bridging the Gap in the New Minimum Wage Research (J2, J4)
AbstractI attempt to reconcile the differing conclusions found in the New Minimum Wage Research which have caused so much economic and political controversy. However, rather than simply investigating what the minimum wage effect is, I instead focus on understanding why previous research has found such contradictory results.
To do this I: (1) Conceptualize what the demand function for low-skill labor should look like (2) Identify and evaluate the assumptions implicitly contained in the “canonical model” typically used to study the minimum wage (3) Propose an alternate econometric model which offers the flexibility to match the shape of my conceptual low-skill labor demand function, and (4) Compare the explanatory power of my proposed model with that of the “canonical model.”
My preliminary results indicate that the standard econometric model used to estimate the effect of the minimum wage may be a causal factor behind the disparate results found in the New Minimum Wage Research. The “canonical model” fits the data to a demand function of the wrong curvature, fails to account for the path-dependent nature of the low-skill labor demand function, and ignores identifying information, potentially creating bias in the estimated effect.
Additionally, I find strong evidence that the minimum wage employment effect varies substantially across time and space. This means that previous research may have used non-comparable individuals as counterfactuals, further inhibiting the ability to estimate a consistent and accurate effect of the minimum wage. This finding aligns with other researchers who have postulated that the effect of the minimum wage likely varies by region, labor market, or timing of the increase (Addison, Blackburn, & Cotti, 2013; Allegretto, Dube, Reich, & Zipperer, 2013, 2017; Card & Krueger, 1995; Clemens, 2015; Ehrenberg, 1992; Neumark, 2002; Neumark, Salas, & Wascher, 2014b, 2014a; Sabia, 2014).
C-Sections and Lawyers’ Fees: The Effects of Contingency Fee Reform on Maternal and Infant Health (I1, K2)
AbstractIn November 2004, Nevada enacted a limit on contingency fees for lawyers in medical malpractice cases. Generally, such limits are thought to change the composition of liability cases as they induce lawyers to drop more frivolous cases in favour of ones involving death and serious injury. Inadvertently, obstetricians faced a greater fear of litigation. Using a simple theoretical model, I illustrate that following the reform, obstetricians are predicted to perform more C-sections on low income patients who rely on contingency fee attorneys, whereas high income patients are better able to hire lawyers on an hourly basis. Applying synthetic control methods, I analyze how limiting contingency fees affects both physician procedural use of C-sections, as well as infant mortality. I find a 2.8 percentage point increase in the C-section rates of high school dropout patients, which translates to a ten percent increase after the reform. There is no statistically significant difference in C-section rates after the enactment of the reform on patients with at least a college degree, and further, no statistically significant effect on infant mortality. Limiting contingency fees in medical malpractice cases induces obstetricians to engage in defensive medicine by performing more C-sections on low income patients, illustrating that tort reform can alter physician procedural patterns, albeit in heterogeneous ways.
Can a Call Center Help School Principals to Complete Tasks at Deadlines? Some Evidence from the Dominican Republic (I2, J0)
AbstractAn official email was sent by the Ministry of Education's Director of Evaluation to a list of 1008 school principals requesting to complete a task by a deadline. The communication informed them about the online availability of the School’s National Test Report (http://forms.minerd.gob.do/FormDECE/default.aspx), with instructions to download it and to complete tasks related to the report (analyze it and socialize it). Related to socialization, a PowerPoint template was also sent to prepare a presentation that principals had to send to the call center on a specific deadline.
Once these e-mails were sent, the call center tried to verify the reception of the official communication by calling as many principals as possible. Due the typical problems faced by a call center in achieving the target population, only 82.94% of principals received at least one pretreatment call.
Experiment: 353 principals distributed in 36 school districts randomly chosen were assigned the following treatment: sending an additional e-mail to remind the official requirement and deadline, with an additional follow up by phone-call to confirm that they received the reminder. The control group was composed of the remaining 655 school principals distributed in 69 school districts.
Results: at deadline, 65.15% of principals in the treatment group completed the task, while 30.68% in the control group completed the task.
This research highlights that the levels of non-compliance is a problem to which solutions should be sought with various potential mechanisms of persuasion, incentives, monitoring, and follow-up. In particular, it shows that the follow-up of principals through a call center, seems to help improve aggregate task completion at deadlines.
Can a Common Currency Foster a Shared Social Identity Across Different Nations? The Case of the Euro (D7, Z1)
AbstractFostering the emergence of a "European identity" was one of the declared goals of the euro adoption. Now, years after the physical introduction of the common currency, we investigate whether there has been an effect on a shared European identity. We use two different data sources in order to assess the impact of the euro adoption on the fostering of a self-declared European Identity. Firstly, we use over 20 years of detailed Eurobaromater data to analyse over 20 European countries using flexible difference-in-differences modelling. Secondly, we use a unique Euro coin diffusion dataset that tracks the diffusion of non-French Euro coins across French regions after the 2002 Euro introduction. In both cases We find that the effect of the euro is statistically insignificant although it is precisely estimated. This result holds important implications for European policy makers. It also sheds new light on the formation of social identities.
Can Agricultural Subsidies Prevent HIV?
AbstractCurrent focus on HIV prevention has exclusively focused on the role of expansion of access to antiretroviral drugs (ARVs), behavior change campaigns, voluntary counseling and testing and male circumcision. However, despite such prevention efforts evidence for uncontroversial and dramatic effects of such programs in Africa are lacking with no single solution agreed upon. In this paper, we propose and evaluate a novel strategy for HIV prevention: offering fertilizer subsidies to farmers in low-income agrarian settings. Agricultural input subsidies have long been used to promote smallholder farmers’ use of inputs, to increase wages, to reduce food prices and to promote economic growth. Malawi’s Farm Input Subsidy Program gave large-scale input subsidies targeting mostly maize but also tobacco production, and current evaluations show positive impacts on real income crop yields as well as indirect benefits on wages of low income farmers. Adults may respond to the subsides by temporarily giving more incentive to stay at the farm and not migrate in search for work which in turn may lower the risk for HIV. Another mechanism is that the supply of for transactional sex may go down as women may have lesser need to obtain transfers from their male partners. Using data from the Malawi Longitudinal Study of Families and Health, we use differences in differences methods to exploit phased rollout of the subsidy program across space and time. Our results show that FISP reduced prevalence of HIV particularly for those less than 50. These results are robust to inclusion of broad set of SES and age covariates as well as to use of individual fixed effects to control for unobservables, highlighting that FISP lead to reduction in HIV prevalence in Malawi. Our paper then discusses alternate mechanisms which may be driving our estimates.
Capacity and Output Choices: The Effect of Firm Heterogeneity and Demand Uncertainty in Oligopoly (L1, D4)
AbstractThis article considers firms' capacity investment decisions in the presence of cost heterogeneity and output flexibility. Capacity constraints allow larger firms attain more market power as smaller rivals get constrained. We find that demand volatility increases capacity investment of a low-cost firm, because its value function is convex in the state of demand due to output flexibility. As capacities are strategic substitutes, investments of rival firms are reduced. This enhances industry concentration, which reduces social welfare. Antitrust authorities should take more care when deciding about cost-reducing mergers if the economic environment is uncertain.
Casting Light on Energy Efficiency - Evidence on Consumer Inattention and Imperfect Information (D1, Q4)
AbstractWe investigate consumer inattention and imperfect information regarding the financial benefits of energy-efficient lighting using a randomized controlled trial with 1,084 observations. Results suggest that subjects generally know about cost savings of LED bulbs - the central lighting technology of the future - but largely underestimate the magnitude of these savings. As a result, stated willingness-to-pay for an LED bulb increases on average by 2.53€ through the provision of information on expected lifetime costs. Additional evidence hints at further consumer confusion about attribute differences between lighting technologies.
Cheap Guns, Young Men, and the 1960s Crime Wave (K4, I0)
AbstractFrom the mid-1960s to early 1970s the United States experienced a rapid increase in all crimes. Between 1966-1968 the homicide rate jumped up by 60%, and all other measures of crime show similar growth over that period. In this paper we present evidence that the advent of very cheap handguns (less than $250 in 2017 prices) played a central role in this. Using a novel dataset of handgun prices as listed in the Gun Digest annual magazine we document that the real price of the cheapest handguns fell by 15% in the mid-1960s, and continued to fall well into the 1970s. Linking this to data on gun imports and US production we show that this was at the same time that gun sales increased significantly. At the same time that prices at the bottom end of the market fell, proxies for gun access among young men show a substantial increase. From 1963 and 1964 the gun suicide rate for black males aged 15-24 increased by 40%. This increase in gun suicide was the beginning of a decade-long increase in the gun homicide rate (victimization) for young black males. A few years later a similar increase in gun suicides, and then gun homicides, began among young white men. By the late 1960s the increase in violence had spread to the overall population. Regressions using county level data on homicides and suicides show that one standard deviation increase in the gun suicide rate for young men leads to an increase in the overall county homicide rate of 1/15th of a standard deviation.
Cognitive and Economic Development (O4, I1)
AbstractLife expectancy has a robust correlation with economic growth in cross-country data. We show that this correlation is due to child mortality, not adult mortality. We investigate whether malnutrition and disease which compromise cognitive development are responsible for the correlation of child mortality with economic growth. Cognitive deficiencies reduce peoples' economic capabilities throughout their lives, and make investments in education less productive. In an economic growth model we distinguish three consequences of poor health: mortality, morbidity, and cognitive impairment, showing that cognitive impairment is likely to have by far the largest economic impact. We use cross-country data to show that indicators of cognitive development such as IQ have strong correlations with economic growth.
Collaboration Incentives: Endogenous Selection into Single and Coauthorships by Surname Initials in Economics and Management (J3, C7)
AbstractMany prior studies suggest that alphabetical ordering confers undeserved professional advantages on authors with earlier surname initials. However, these studies assume that authors select into coauthorships without regard to the incentives identified. We consider the alternative and develop a model of endogenous selection into single and coauthorships for economics, which uses alphabetical ordering. We then test it with authorship data from economics, with management (which does not use alphabetical ordering) as a benchmark. We predict that lower “quality” authors with earlier surnames would be less desirable as coauthors, whereas higher quality authors with later surnames would have a lower desire to coauthor. Both types of authors are therefore more likely to single-author. Furthermore, higher quality authors with earlier surnames should have more and better coauthoring options. Consistent with our predictions, we find citation ranks increases on surnames for single-authored works and decreases by almost the same amount for coauthored in economics, both absolutely and compared to management. Also as predicted, this effect is driven by lower-tier journals in which there is likely a thinner market for coauthors. Furthermore, we show that the disadvantage to authors with later surname initials is not corrected for but rather worsened by nonalphabetical ordering, due to adverse selection for second-authors who accept nonalphabetical ordering. Our findings show that despite the innumerable considerations that go into the decision to coauthor, the arcane difference in the share of credit determined by surname initial do affect the choices of academic economists to collaborate.
Commodity Prices Shocks and Poverty Reduction in Chile
AbstractThis paper examines the local economic impact on poverty of large increases in metal-mining products prices in Chile. Using household data from 1998 to 2013, and exploiting differences in municipalities’ exposure to changes in prices, we find evidence of a reduction in poverty rates following the positive terms of trade shock of 2003. According to our estimations, the increase in minerals' price experienced between 2003 and 2009 reduced poverty by more than 2 percentage points in municipalities relatively exposed to the commodity boom –with at least 7% of employment working in the metal-mining sector– in comparison to municipalities with no exposure to the boom. In addition, we explore some of the mechanisms explaining the reduction in poverty. We find significant effect of higher products prices on wages and employment, especially for unskilled workers and those in metal-mining industries.
Contract Design in China's Rural Land Rental Market: Contractual Flexibility and Rental Payment (Q1, O1)
AbstractEstablished in the late 1990s, China's rural land rental market is now revolutionizing agriculture by upgrading smallholder production to factory farming. However, there is little empirical evidence on recent developments in this market, in particular on the design of rental contracts, which profoundly affects participants' welfare and agricultural production. I study rental contracts as outcomes of bargains over two contractual terms: contractual flexibility and rental payment. The theory I present shows which equations should be estimated in an empirical test of the bargaining process. The empirical structure indicated by my theory is markedly different from that in existing empirical contributions, which helps to explain why those contributions obtain seemingly inconsistent results. I conducted a survey in 2014 capturing current developments in the market. Applying the survey data to the theoretically justified empirical model, I draw two empirical conclusions in addition to providing support for my characterization of the bargaining mechanism. First, the renting-in agents' ownership of enterprises and their social proximity to the renting-out partners decrease contractual flexibility and increase rental payment, indicating that entrepreneurship within a village social network promotes agricultural development and village prosperity. Second, the rental payment offered to the renting-out agents with long-term non-agricultural employment is higher than that offered to the renting-out agents with short-term or temporary employment, suggesting a potential increase in income inequality within the village.
Coordination of Hours With the Firm (J2, H2)
AbstractTeamwork has become increasingly important in many firms, yet little is known about how coordination of hours among heterogeneous coworkers affects pay, productivity and labor supply. In this paper we propose a framework where differently productive firms choose whether or not to coordinate hours in exchange for productivity gains. In this framework, we show that more productive firms select into coordinating hours and pay compensating wage differentials, leading to attenuated labor supply responses and spillovers from tax changes. Next, we bring the model predictions to the data using linked employer-employee registers in Denmark. We first document evidence of positive correlations between wages, productivity and the degree of hours coordination - measured as the dispersion of hours - within firms. We estimate that hours coordination can explain around 4% of the variance of firm-level wages. We then estimate labor supply elasticities using changes to the personal income tax schedule in 2010 which affected high-wage earners differently. We find evidence of higher labor supply elasticity in firms with lower hours coordination. Furthermore, we find evidence of spillover effects on hours worked by coworkers not directly affected by the reform that are consistent with our model of firm level coordination of hours.
Corrupt Reserve Prices (K4, H5)
AbstractThis article develops a methodology to identify corruption in procurement auctions. Prices can be manipulated to influence the allocation of contracts and/or capture public funds. We estimate reserve prices exploiting within procurer variation and then we analyze whether sellers' identity is an important determinant. In the absence of corruption, sellers' identity should not have an effect as reserve prices are determined before the actual implementation of auctions. The methodology to detect corruption is applied on Russian public procurement of gasoline in 2011–2014. We give supporting evidence for our corrupt indicator by showing that potentially corrupt sellers have a higher likelihood of winning auctions and the auctions are characterized by low competition. Furthermore, we find that overpriced reserve prices are translated to contract prices but competition generally sterilizes the effect of reserve price manipulation and increased competition in combination with electronic auctions can even fully offset the effect of reserve price manipulation on final prices and lower procurement costs.
Credit Risk Transfers and Financial Fragility
AbstractUsing a model with cross-sectional heterogeneity in household risk, location-specific shocks, and the availability of hard versus soft information, we analyze FinTech as a new set of lenders with: lower operating costs; screening technologies that cannot process soft information; and a originate-to-distribute model. We derive a set of predictions about cross-sectional lending patterns. Then we take those predictions to the data. We show that the income and house price volatility of a location correlates with FinTech lending, and we compare lending standards and mortgage rates for FinTech and non-FinTech lenders. We evaluate the implications of FinTech in mortgage markets for wealth and homeownership inequality.
Crimes Against Women in India: Evaluating the Effects of a Representative Police Force (K4)
AbstractIt is widely reported that crimes against women in India have been increasing over the last few decades. Although this finding by itself is difficult to confirm because of bias in crime reporting, it is often perceived that law and order in India perform poorly for many reasons including poor infrastructure, large and varied demography, and cultural attitudes shaping the police system. In 2014, the Ministry of Women and Child Development urged all states to enforce a 33% reservation for women in the police force, when women actually comprised a mere 6.1% of the total police force in India. Although intuitively this might seem as a measure to reduce violence against women, there is no empirical evidence on the performance of police in India on this front. In this paper, I evaluate the effects of increasing women's participation in the police force on crimes against women in India. I use state-level yearly data from 2001 to 2012 and also explore rank-wise effects of the police force on different forms of crimes against women. I deal with the issue of reporting bias by focusing on arrests instead of reported incidences. Results suggest that increasing women's representation at particular ranks have a significantly positive impact on arrests made for crimes against women, with no evidence on any impact on other crimes. Heterogeneity in the effect sizes and policy implications are also discussed.
Cross-validation Based Model Selection on Generalized Method of Moments (C5, L4)
AbstractStructural estimation is one of the most important methodologies in empirical economics nowadays. Arguably, however, its biggest weak point is on the model selection. That is, the model to be estimated is chosen by researchers based on their intuition, and the structural estimation itself does not directly be tested it from the data. In this paper, we offer a new approach to this problem that helps researchers to identify the best model specification from the data. Our idea is to apply the cross-validation method, which is a method commonly used in other areas such as machine learning, in evaluating the predictive power of the model.
The main idea behind CV is to split the data into multiple portions. As a result, it separates the data to train a model and the one to validate the performance of the model. This splitting of data helps us to avoid over-fitting. The strength of cross-validation method is its applicability. Essentially, it can be applied to any case as long as two "models" explain the same set of data. Our algorithm applies to incredibly wide variety of situations that empirical economists face. Examples include testing model assumptions such as forward-looking vs myopic consumers, or competitive vs colluded market, equilibrium selection when multiple exist, comparison of estimation algorithms, such as MPEC approach vs Fixed Point algorithm on demand estimation.
Our econometric contribution is to prove the consistency of cross-validation algorithm: That is, the algorithm identifies a correctly specified model from mis-specified models. When the data size increases, the probability of choosing the correct model approaches to 1. By Monte Carlo simulation, we show that our algorithm outperforms other non-splitting methods such as GMM-AIC or GMM-BIC both in a simple linear models and more complicated structural econometric models.
Dealer Networks in the World of Art (L1, L2)
AbstractWe apply network theory to the setting of common value auctions within the market for fine art. Using a unique historical data set, we investigate the drivers of strategic network formation between agents and the effect of network structure on artwork prices. Our results show that the number of direct links as well as similarities in specializations across dealers who are bidding at an auction and sellers of artwork are both strong predictors for link formation and artwork prices. While a higher number of direct linkages helps dealers to fetch artworks at lower prices, a relatively higher specialization increases the winning bid. This supports the conjecture that bargaining power and reduced information asymmetries are the main influencing forces for network formation as well as the strategic bidding behavior of market players.
Debt Overhang and Productivity Growth (E4, E5)
AbstractThe financial crisis and recession of 2007-2009 in the U.S. is often thought to be related to the “over-indebtedness” of households. We develop a theory that rationalizes why households may have borrowed too much. In our model aggregate productivity growth follows a persistent regime-switching process. When the economy is the high growth regime, there is more borrowing based on expectations of higher future income. However, when the economy switches back to the low growth regime, some households would have borrowed “too much” given contemporaneous income levels–the hallmark of debt overhang. In our
calibrated model, we find that the expectations of high productivity can explain one-third of the run up in debt that we observed before the crisis. We also examine the impact of central bank policies on the process of deleveraging.
Demand and supply of microcredit in presence of selection (I3, O2)
AbstractWe study whether BRAC as a microcredit lender uses household performance in a livestock transfer intervention as a signal of creditworthiness to improve targeting in a subsequent microcredit program. We use a data set from a Randomized Control Trial (RCT) based livestock transfer administered by BRAC in Bangladesh where beneficiary households were also encouraged to take loan at the end of the intervention. We find that risk-adjusted income and efficiency in the livestock activity explain subsequent demand and supply of microcredit from BRAC. BRAC uses both observable and unobservable characteristics of beneficiary households to reduce adverse selection in the microcredit program. Our study shows the potential of economies of scale and indicates that pure machine-based credit scoring model may not be the best alternative option in the microcredit sector.
Democracy and Credit “Democracy Doesn`t Come Cheap” but at Least Credit to Its Corporations Will Be (G2, P5)
AbstractDoes democratization reduce the cost of credit?
In democracies there are on average more inclusive institutions and better protection of property rights, there is reduced social conflict and political risk, information flows more freely, and its citizens are more financially literate. However, firms in autocracies might more easily form monopolies or have extensive state support, while intra-firm organizational structures are usually simpler; these might positively affect firm outcomes. In sum, whether democracy decreases or increases loan rates for its corporations is an empirical question we aim to address in our research.
Using global syndicated loan data from 1984 to 2014, we show that democratization (observed at the country-year level) has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls (especially systemic risk, political and financial stability), to the instrumentation with regional waves of democratization (after fully controlling for regional dynamics), and to a large battery of sensitivity tests. From a constitutional perspective, the competitiveness of executive recruitment (equal opportunities of all people to be elected in office) and the competitiveness of participation (a multi-party democratic system and associated freedom of expression) are at the forefront of the effect of democracy on loan spreads.
Our findings are the first to highlight efficiency in loan pricing as an important channel through which a positive effect of democracy on economic activity can be established. In this sense, our research documents the comparative advantage in obtaining cheaper credit of firms operating in democratic countries vis-à-vis those in less democratic or authoritarian countries. Therefore, we identify an important way in which corporations benefit from democratic development.
Determinants of Returns in Markets for Congestion Revenue Rights
AbstractThis paper develops a multifactor pricing model for Financial Transmission Rights (FTRs) in order to study the determinants of abnormal returns in the California markets for Congestion Revenue Rights (CRRs). Using the developed framework, our analysis tests various GARCH model specifications, includes a number of new explanatory variables, and characterizes the outcomes by their mix of market participant types: ‘financial’ vs. ‘physical’. We find that a large number of analyzed CRRs have abnormal returns, and the majority of those returns are positive. We further find that market concentration is the only independent variable that is widely significant in explaining CRR returns besides the market portfolio’s excess return. This suggests that the abnormal returns may be at least partially driven by the lack of competition on many transmission paths that we are able to analyze. We also find that financial participants dominate the market for CRRs by bidding significantly larger volumes at higher prices than physical generation and load participants.
Dietary diversity in early life: Evidence from 67,241 infants aged 6-24 months in 39 developing countries
AbstractMalnutrition in early childhood has severe long-term physical and economic costs. Critically, much of this malnutrition emerges at around 6 months of age when children are first introduced to monotonous diets low in protein and various micronutrients. The causes of low quality diets in young children are not well understood. Economic evidence has substantially focused on the income and price dimensions of household food/calorie demand, while nutritionists have focused on nutritional knowledge and under-emphasised the economic dimensions. To explore the determinants of children’s diets more systematically, this paper first reviews the extensive economic literature on consumers’ demand for diversity (Bennett’s law), health production functions and nutritional knowledge, intra-household decision making, and farm household models that emphasise non-separability of decision making in the presence of market failures. To test the predictions of this literature we link Demographic and Health Survey (DHS) data on dietary diversity for 67,241 children aged 6-23 months from 39 developing countries to household socioeconomic characteristics and community level indicators of climate and infrastructure. Multivariate regressions uncover strong support for linear “Bennett curves” linking greater diversity to household wealth, but also large and nonlinear associations with parental education, access to health services, infrastructure and climate, and modest associations with an indicator of women’s empowerment. These results yield important insights for dietary diversification strategies.
Digital Innovation and the Distribution of Income (L1, D3)
AbstractIncome inequalities have increased in most OECD countries over the past two to three decades; particularly the income share of the top 1% has soared. In this paper we argue that the increasing importance of digital innovation – new products and processes based on software code and data - has increased market rents, which benefit disproportionately the top income groups. In line with a Schumpeterian vision, innovation gives rise to rents from market power and scale economies. This is magnified with digital innovation, in which the intangible component (the source of rents) is much larger than in traditional manufacturing innovation. Highly concentrated market structures ("winner-take-all") allow rent extraction. In addition, digital innovation tends to increase risks because even only marginally superior products can take over the entire market, hence rendering market shares unstable. Instability commands risk premia, hence higher expected revenues, for investors. Market rents accrue mainly to investors and top managers and less to the average workers, hence increasing income inequality. Market rents are needed to incentivize innovation and compensate for its costs, but beyond a certain level they become detrimental as rent seeking then substitutes to innovation in business strategies. Public policy may stimulate innovation and welfare by eliminating ex ante the market conditions which allow rent extraction that comes from anti-competitive practices.
Diversity Investing (G3, G1)
AbstractTop management team diversity matters for stock returns. We develop a new text-based measure of team diversity and apply it to a sample of over 70,000 top executives in U.S. firms from 2001 to 2014. Buying firms with diverse teams and selling firms with homogenous teams (a strategy we call “diversity investing”), outperforms most leading asset pricing anomalies over our sample period on a value-weighted basis. Two drivers of diversity returns are greater profitability of diverse firms and mispricing by unsophisticated investors.
Do Central Banks Respond Timely to Developments in the Global Economy?
AbstractOur analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, inflation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.
Do Comparisons of Fictional Applicants Measure Discrimination When Search Externalities Are Present? Evidence from Existing Experiments
AbstractResearchers commonly use fictional applicants to measure discrimination. However, such experiments can confound discrimination against an individual’s characteristics with employers’ responses to the composition of the applicant pool. Such confounding occurs when one applicant’s characteristics affect another applicant’s likelihood of success. I find evidence of such spillovers using data from several existing experiments. Applicants randomly assigned to compete against higher quality applicant pools receive more callbacks. Under one reasonable set of assumptions, adjusting for applicant pool composition increases measured discrimination by 19% on average. Such confounding can be eliminated by avoiding experimental designs that stratify treatment assignment by vacancy.
Do Criminally Accused Politicians Affect Economic Outcomes? Evidence From India (O1, I3)
AbstractWe study the causal impact of electing criminally accused politicians to state legislative
assemblies in India on the subsequent economic performance of their constituencies. Using
data on the criminal background of candidates running for state assembly elections and a
constituency-level measure of economic activity proxied by intensity of night-time lights, we
employ a regression discontinuity design that controls for unobserved heterogeneity across con-
stituencies and find 22-percentage point lower yearly growth in the intensity of night-time lights
arising from the election of a criminally accused politician. These eects are driven by serious,
financial and the number of criminal charges and appear to be concentrated in the less devel-
oped and more corrupt Indian states. Similar ndings emerge for the provision of public goods
using data on India's major rural roads construction program.
Do Fed Forecast Errors Matter?
AbstractThere is a large literature evaluating the forecasts of the Federal Reserve by testing their rationality and measuring the size of their forecast errors. There is also a substantial literature and debate on the impact of the Fed’s monetary policy on the economy. We know little, however about the impact of the Fed’s forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Fed based on the assumption that it follows a forward-looking Taylor rule. The shock can be viewed as analogous to a monetary policy shock. However, it differs from a monetary policy shock in that it is completely unintended by the Fed rather than simply unanticipated by the public. We investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the absolute magnitude of the forecast error shock is large, the impact of the shock on the macroeconomy is quite small.
Do Immigrants Have a Chance to Integrate? Natives' Attitudes Towards Immigrants During the Balkan Wars (J6, D7)
AbstractNot to suffer from prejudice and discrimination are important factors for the integration and assimilation of immigrants. This puts public attitudes towards immigrants especially on the map in times of a high inflow of immigrants. The a priori reactions to such an inflow are ambiguous. The contact theory argues, that the higher the interaction with immigrants, the less it exists prejudice and discrimination among natives. On the contrary, potential competition in the labor market or higher tax payments might lead to increased public concerns. In this paper, I explore how the proportion of foreigners in one's region affects attitudes towards immigration and political preferences. Using multiple data sources of social surveys, I exploit an instrumental variable strategy based on immigrants from former Yugoslavia during the Balkan Wars in the 1990s. Using this kind of Mariel-Boatlift style immigration experiment, I follow at first Angrist and Kugler (2003), which used the distance to Sarajevo as an instrument for immigrants in European countries. This setting allows the analysis of an exogenous variation in immigrant levels, which were similar in size and effect than the today’s European refugee crisis. Providing within-country evidence from Germany, I find that an increase in the proportion of immigrants in a region causes the public to be less concerned towards the influx of asylum seekers and immigrants in general. This effect appears to be driven to a large extent by an overall more positive view on the economic development of the country. Extreme right-wing political views or a general interest in politics do not play any role. These overall findings verify the basic results of the contact theory and suggest that the more natives could potentially get in touch with immigrants, the more they reduce prejudice and give immigrants the chance of integration.
Do Racial Wage Gaps, Poverty and Low Labor Market Opportunities Induce Hate Crime? (J3, K4)
AbstractSince post-9/11, the overall hate crimes including the religious motive based crimes in the US have increased. This study investigates whether there is any direct link between the racial wage gaps, poverty, inequality and low labor market opportunities with the increasing trend of hate crimes. Specifically, we want to test the hypothesis whether a long-standing feelings of indignity and frustration, ignorance and the increasing racial segregation can lead to hate crimes. We use the data from National Prisoner Statistics Codebook, FBI Uniform Crime Reports, and IPUMS to create a state level panel data from 1995 to 2015 and separately analyze the impact of racial wage gaps, poverty, inequality and low labor market opportunities on different types of hate crimes such as crimes against person, crimes against property and crimes against society. We find that 1 percent increase in average racial wage gap and poverty increase two types of hate crimes such as simple assault and intimidation about 1 and 7 percent respectively. We did not find any economically significant impact of those factors on any types of crimes against property and crimes against society.
Do the Olympic Games Make People in the Host City Happier? Quantifying the Intangible Impacts of the Olympics Using Subjective Well-Being Data (I3, Z2)
AbstractThe Olympic Games are the most watched sports event in the world, and cities are paying substantial amounts to host the event. We show, exploiting the 2012 Olympic Summer Games in London as a quasi-natural experiment, that hosting the Olympics has a positive impact on subjective well-being in the host city during the event. The magnitude of the effect is equivalent to moving from the bottom to the fourth income decile, everything else held constant. But it does not last very long: it is gone within a year, i.e. there is no legacy. We find that the aggregated, estimated willingness-to-pay in order to host the Olympics is only slightly more than half of the projected costs, and only about a tenth of the actual costs. These conclusions are based on a difference-in-differences design and a novel international panel of more than 26,000 individuals who were interviewed in London, Paris, and Berlin during the summers of 2011, 2012, and 2013, that is, before, during, and after the event. The results are robust to controlling for a rich set of observables, including macroeconomic and meteorological conditions, selection into the survey and attrition, and the choice of the counterfactual. They also withstand a series of placebo tests. We complement existing evidence which shows that hosting the Olympic Games has a negligible economic impact on the host city by showing their intangible impact.
Do Unfunded Obligations of Public-sector Pension Plans Get Capitalized Into House Prices? (R3, H7)
AbstractThis paper examines the degree to which unfunded obligations of public-sector pension plans are capitalized into house prices. While there has been a growing focus on the size of unfunded pension obligations of state and local governments, especially in light of recent municipal bankruptcies, the impact of these obligations on local housing markets has been far less analyzed. Given the large number of local pension plans from the state of Pennsylvania, we turn to the state and look at two of its largest population centers. The first involves the Philadelphia MSA that includes Philadelphia and its four suburban counties while the second market encompasses all municipalities in Allegheny County surrounding Pennsylvania’s second largest city, Pittsburgh. Using data from the Decennial Census of 1980, 1990, and 2000 on house prices, we find no evidence that suggests capitalization of unfunded pension obligations into house prices across a range of specifications, including specifications that include municipal fixed effects. Furthermore, given Pennsylvania’s system of local government, school district boundaries do not overlap with municipal boundaries and we show that our results are robust to including school district fixed effects where the identifying variation comes from comparing house prices in municipalities that all lie within the same school district.
Does Corruption Affect Firm Growth? Evidence From Bangladesh (O0, O4)
AbstractLiterature is clearly divided on the effect of corruption on growth. Recently, some studies using sophisticated econometric tools, have concluded that the effect of corruption is indeterminate, for example, Shaw et al. (2011)’s re-examination of the seminal work of Mauro (1995), using better econometric tools, finds no effect of corruption on economic growth or investment. It means that causal relation between corruption and growth is still ambiguous and needs further empirical investigations on new or different perspectives. One important investigation, on these perspectives, was considered important, which is, to investigate if the effect of corruption varies between sectors or industries.
This study examines the impact of the corrupt behaviour of government officials on firm growth in the manufacturing industrial sector of Bangladesh. Two different data sets have been used in this study: the first is collected by the author and the second is taken from Bangladesh Enterprise Survey conducted by the World Bank. The investigation is done in a quantitative analysis using OLS and IV regressions. Our study shows that the impact of corruption is industry-specific and that the impact of corruption on firm growth in Bangladesh is positive in a sector where bribery is systematic and when the industry enjoys a huge demand from the export market. This impact is seen to be negative if the whole industrial sector is captured in the sample. This study helps us to conclude that it is not appropriate to make a blanket premise that impact of corruption is negative or positive. To have an understanding of the impact of corruption we must have an insight in the industry- especially the system of bribery prevailing in the industry.
Does it work to pay to be green? Evidence from Brazil's Bolsa Verde Program (O1, Q2)
AbstractWhether and how policies can induce conservation at the optimal levels remain an open question. We evaluate the impact of Brazil's Bolsa Verde (BV) - a cash transfer program conditional on forest conservation - as a case study. The program provides both financial and social incentives for conservation and we test the relative strengths of both. We link spatial data on deforestation and remaining forest with the socioeconomic characteristics of eligible areas. We find less deforestation in eligible areas with beneficiaries. We also show that the number of recipients in a priority area is important for how effective the program is in reducing deforestation. In terms of mechanisms, financial incentives do not drive the success of BV, which is equally effective in relatively poorer and nonpoor areas. Instead, our results suggest that the BV contract, which makes all recipients liable for the forest cover in their areas of residence as a group, contribute to the success of BV by encouraging group conservation and monitoring.
Does Multiculturalism Work? Language, Friendship Homophily, and Well-being of Immigrants in Canada (J6, H4)
AbstractMulticulturalism is under attack in its birthplace, Canada. I revisit the connection between the two pillars of Canadian multiculturalism, namely acceptance of English and French as the official languages and equal respect of all cultural groups. A unique dataset, the 2002 Canadian Ethnic Diversity Survey, is used to analyze how learning more languages affects ethnic composition of people's social networks, which I propose as an indicator for social integration of new immigrants. I find that learning the official languages or learning more languages in general increases the ethnic diversity of a person's network. The well-being, attitudes, and social behavior are related to ethnic composition of immigrants' networks. The findings are generally in favor of advocates for multiculturalism.
Does Trade Reduce Infant Mortality? Evidence From Sub-Saharan Africa (O1, I1)
AbstractThis paper investigates the impact of a trade policy, the African Growth and Opportunity Act (AGOA), on infant mortality and fleshes out the likely mechanisms. Empirically, it is difficult to identify causal effects, as trade policy is likely to be endogenous to other socio-economic factors that also affect development. This paper derives a causal estimate by developing a micro panel dataset across countries and exploiting within-mother variation in survival of infants. The effect of trade policy on infant mortality will be gauged by studying the varying exposure between the children born to same mothers but exposed to the trade policy or not in both policy-affected and non-affected countries. I find that the policy reduces infant mortality by about 9% of the sample mean. Dynamics of mortality reveal that there exists no effect prior to AGOA being implemented, corroborating that the decrease in infant mortality is due to AGOA. I also identify channels through which the mortality reduction operates including increasing health seeking behavior, increased possession of assets, and increased maternal labor supply in non-agricultural sectors. Disaggregation reveals heterogeneity of treatment at the country and individual level. The effect of AGOA on infant survival is stronger for countries that export large amounts of agricultural goods and mineral ores as compared to oil exporting countries. Results suggest that infant mortality falls more for socially disadvantaged women. Infant deaths fall more for employed women than unemployed women, hinting towards spurring employment in export sectors.
Does TV Consumption Make People Unhappy? Evidence From a Natural Experiment on the German Public (I3, D1)
AbstractEconomists interpret the fact that watching television is the most time-consuming human activity besides work as an example for irrational behavior. This relies on the popular but false belief that research has provided convincing evidence on the negative well-being effects of watching TV. We therefore question this notion by analyzing the implications of a large-scale natural experiment on the German public, in which households in various regions of Germany received commercial television by chance via terrestrial frequencies.
The happenstance that we exploit took place in the mid-1980s when Germany lifted a ban on private television. While the legalization of private television brought up new free channels that increased consumption significantly, citizens in many areas of the country did not watch any of these new programs due to reception problems, as the responsible public institution failed to establish satellite or cable TV in a timely manner. Hence, the officials of the emerging TV channels looked for other ways to reach the German households, and they found a way that establishes our natural experiment: terrestrial frequencies of transmitter stations that were built in the 1960s and that by chance were still open. We are the first to exploit original data from the official records for all of Germany’s TV transmitters in the late 1980s and merge technical calculations on the reach of each station’s signal with longitudinal data from the German Socio-Economic Panel (SOEP) study.
Analysing time-use data, we confirm that TV consumption indeed increased significantly in those regions for which we determine the opportunity to watch additional TV programs. Contrary to common belief but in line with standard utility theory, the increase in TV watching on the second stage of our IV approach led to people becoming significantly happier with their lives, which is robust to a series of sensitivity checks.
Duration Dependence as an Unemployment Stigma: Evidence from a Field Experiment in Germany (J6, J7)
AbstractBased on a correspondence experiment covering 3,124 fictitious job applications, the paper identifies and quantifies duration dependence in Germany, with a particular emphasis on company and vacancy characteristics as potential determinants. The experiment reveals that duration dependence manifests itself in a sharp decline of 26% to 35% in callbacks when an individual has been unemployed for 10 months, pointing to the existence of an unemployment stigma for Germany. The results are driven by labor market tightness, companies’ access to applicants and screening behavior related to company size, with no evidence for an unemployment stigma determined by the contract type.
Dynamic Expert Incentives: Complementarity and Substitutability in Information Acquisition (D8)
AbstractWe consider a model of dynamic expertise, in which two experts with the same bias exert efforts over time to discover the state of the world and are able to send verifiable messages about the discovery to a decision maker. We propose a definition of strategic complementarity and substitutability in this setting and find that the experts' information acquisition decisions are always substitutes when the experts are homogeneous, but sometimes complements when the experts are heterogeneous.
Dynamics of Informal Care, Employment and Retirement - Implications for Inequality in Old Age (I1, J2)
AbstractInformal caregivers provide valuable services to elderly persons with long-term care needs. However, the literature suggests that informal care has effects on labor marked outcomes, such as employment or retirement. Additionally, there might be linkages between those outcomes that are important for long run effects. Even after a care spell has ended, individuals who have reduced labor supply are confronted with a lower job-offer probability and stay unemployed or retire early because they cannot find a new job. At the same time, caring people who are just before the legal retirement age might choose to leave their job into unemployment, knowing that they will retire once it is legally possible. In this paper I contribute to the literature by identifying those dynamic linkages, with a special focus on retirement benefits.
I set up a dynamic structural single agent model which is solved by dynamic programing and estimated by maximum likelihood. In this model agents can make discrete decisions about their labor supply, their retirement state and whether they want to provide informal long-term care to a relative. Each choice yields a payoff in the current period but also affects future payoffs due to the transition of state variables. The agents are expected to make decisions based on their current as well as future discounted utility. The model is estimated using the years 2001 - 2014 of the German Socio-Economic Panel Study (SOEP).
Preliminary results suggest that the existence of a relative in need of care reduces the probability of German women to participate in the labor marked. This has adverse effects on later pension benefits and increases the probability of poverty in old age.
Earnings of Mexican Immigrants in the United States: Analysis of Legal Status and Wage Disparities (J6, J7)
AbstractThis paper draws on human and social capital theory to examine the determinants of earnings of Mexican immigrants in the U.S. The purpose of this study is to understand how Mexican immigrants fare in the labor market in the U.S. and how those earnings are determined. Using a longitudinal data from the Mexican Migration Project (MMP), I used a wage regression to predict the log of the real value of wages earned by Mexican immigrants in the U.S. during their last trip. In addition to the earnings function, this study provides a descriptive analysis comparing the experiences of undocumented versus documented immigrants in the U.S. using variables not previously available. The results of the earnings functions provided information on the individual characteristics that contribute most to higher earnings. The factors that contribute the most to higher earnings were working in skilled labor, participation in religious or social organizations and English proficiency. Results suggest that there is a wage penalty for being undocumented in the U.S., preventing undocumented individuals from earning more money doing the same jobs as documented individuals. Summary statistics point to the fact that immigration status would not only increase wages, but would also contribute to more immigrants opening back accounts, establishing credit, filing taxes and spending more money overall.
Economic Impacts of Brain Drain in Developed and Developing Countries (O0, F6)
AbstractThe impact of brain drain on developing countries, such as India, has a negative effect not just on the developing countries themselves but also on larger and more developed countries. Brain drain is the emigration of highly trained people from a particular country into another country where they are able to find better opportunity. These individuals are educated in their native countries but generally seek work in foreign nations as they find it more desirable, either because of higher living standards, better wages, or both. Essentially, once educated, they feel they can live a better life elsewhere. This emigration can make it difficult for a country to maintain a high intellectual standard, as many of its educated and most intelligent people leave. Educated people are key to creating a more educated and professional society. For example, if all of a country’s best doctors leave, it will be difficult for new doctors to get the best education and work experience, as well as for a patient to get the best treatment.
Effect of Southwest-Airtran Merger on Product Quality and Options (L1)
AbstractThis paper empirically investigates the change on product quality and options due to the merger between two low-cost carriers: Southwest and Airtran, by using the difference in difference methodology. Product quality is measured by the percentage ratio of nonstop flight distance to the product’s itinerary flight distance between origin and destination. We find that product quality is negatively affected by the merger in the routes where Airtran operated before the merger but Southwest did not, but such effect decreases with higher pre-merger concentration level. In terms of product options, the merging airlines offered more products with intermediates stops after merger in the routes where only Southwest of merging airlines had pre-merger operation, but this effect is negatively affected by the pre-merger concentration level. The offering of nonstop products remains unchanged over pre- and post-merger periods.
Effects of Inequality on Growth: Aggravation from Aggregation? (O0, C0)
AbstractThis paper demonstrates that empirical studies of the effects of inequality on growth that rely solely on macro data may provide misleading results. I provide a simple mathematical example that illustrates the effects of aggregating data from the level of the household in this case. I then explore the impact of income inequality on economic growth in rural China using both village-level and household-level data. Although the results obtained from village-level data find that inequality reduces growth, consistent with the macroeconomic literature, the results derived from household data tell another story: income inequality is positively associate to income growth for household with low initial income level. But such association will become weaker with the increase of household income. Such seemingly contradictory results agree with the predictions of my mathematical example and suggest that the political economy can explain the inequality-growth nexus in rural China.
Electricity and Education (I2, Q4)
AbstractThis paper presents empirical evidence on the impact of modern energy access and reliability of energy supply on education outcomes, specifically school enrollment and test scores using two waves of India Human Development Survey, a nationally representative survey of Indian households. Electrification studies have generally focused only on the estimating the impact on two development indicators - employment and household income. This research estimates the impact of electrification on educational outcomes, more specifically, school enrollment and exam scores. To best of our knowledge, this is first study that aims to understand the impact of electrification on development aspects beyond employment and income. The findings of this study will provide a fuller picture of benefits from electrification. The relationship between energy access and education outcomes is not direct and consists of several steps that are confounded by various factors; primary among them are the ones that determine electricity access in India. Thus, taking into account the endogeneity of supply and quality of electricity in India, we estimate the relationship using the repeated cross section data that spans two time periods, 2004-2005 and 2011-2012. Our preliminary findings are:
1) The children of households that have access to electricity are more likely to enroll in school.
2) The children of households that have access to electricity significantly perform better than children from households that have no access to electricity.
These findings suggest that the electricity has important effects on both school enrollment and test scores.
Employee Incentives in Microfinance Institutions: Examining the Importance of Diversification and Profit Status (M2, M5)
AbstractNonprofits across the economy are being pressured to take on the human resource management practices of for-profits, including the use of pay-for-performance. However, the use of pay-for-performance and competitive salaries is thought to conflict with the nonprofit business model, due to multidimensional organizational objectives and the effect of monetary incentives on intrinsically motivated employees. In this project, I examine whether performance-based pay can be effective if nonprofit employees are driven by both the intrinsic value of the mission and a relational contract with the firm, wherein performance-based pay serves as a signal of organizational mission, rather than an effort-inducing financial incentive. I hope to analyze this issue using a detailed firm level survey, supplemented by interviews and a survey of individual employees as a subset of the organizations. The context of this paper is the microfinance industry, with additional, publicly available firm-level data that includes observations on both for-profit and nonprofit firms and variables that capture both financial and social goals. In preliminary analysis, I find that nonprofit organizations, on average, pay employees less and utilize a lower level of performance-based pay. Further, nonprofit organizations that target lower income borrowers reward employees on more dimensions than other microfinance firms. Even controlling for the products and services that firms offer, some differences in employee compensation between for-profit and nonprofit organizations remain. This preliminary result suggests that neither the explanation of intrinsic motivation of employees nor the distinct products and services offered completely explain the different salary structures in nonprofit organizations; rather different incentive dimensions may be used to signal the nonprofits’ goals.
Endogenous Build-up of the Systemic Risks (G2, G1)
AbstractOur paper attempts to explain how systemic risks arise endogenously in the financial system. Our model shows that banks have the incentives to build up commonality in the assets due to the interaction between short-term debt and the firesale spillovers. Investors have incentives to discipline the bank’s behaviors by shortening the debt maturity. However, whether or not the investors will continue to rollover depends on the resale value relative to continuation value. The expected resale value of assets is smaller if the correlation among assets is higher. Therefore, those banks with weak fundamentals have the incentives to create asset correlations, and thus firesale spillovers, to prevent the short-term debtors from stopping rollover.
The model is dynamic and set in continuous time. There is a continuum of banks, and each of them can invest in one asset at each time. There are a fixed number of types of assets and the manager of the bank can choose the asset type. On the liability side, the debt has a stagger structure and is held by a continuum of risk-neutral creditors. Upon default, the liquidation value of the bank’s assets is determined endogenously from a downward-sloping aggregate demand for liquidated assets. If there are more assets in the reselling market, the expected value will be lower. On the asset side, the bank value is observable to both creditors and the manager. The choice of asset commonality is endogenously decided, and the manager can switch between strategies costlessly at any point. In equilibrium, we show that our model has a threshold strategy where the manager will choose a higher level of asset correlation if the bank’s fundamental is lower than some critical value. We also consider several extensions to this model, such as the role of market liquidity condition and leverage restriction.
Endogenous Growth, Industry Churn and Scale Effects (O4, O3)
AbstractThe appropriate way to model endogenous growth without scale effects remains a puzzle when theoretical models are confronted by contradictory empirical evidence. Jones (1995) started the debate about appropriate techniques to remove scale effects from models of endogenous growth. The assumption that ideas become harder to find as technology progresses implies semi-endogenous growth theories where long run growth is unaffected by research effort. Alternatively, second generation models negate scale effects by allowing the number of varieties to expand, retaining fully endogenous growth for improvements at the firm or sector level. Recent empirical evidence (Bloom et al., 2017) highlights how innovation productivity is declining, appearing to contradict these second generation models. This paper develops a model where innovation becomes progressively more difficult in each sector, but scale effects are removed by allowing the economy to expand with population, indirectly maintaining fully endogenous growth by industry churn. As a result, economies with support for R&D indirectly experience higher rates of growth due to greater industry churn rather than greater productivity improvements in each sector. This offers a new perspective on the long standing scale-effects puzzle by creating a model with semi-endogenous growth properties at the sector level, but indirect fully endogenous growth by industry churn in the aggregate economy, reconciling this seemingly contradictory empirical result that ideas are becoming 'harder to find'. The model also provides a theoretical basis for recent empirical findings on the effect of aging and automation on innovation and growth (Acemoglu and Restrepo, 2017).
Energy Economics: Does the Low Oil Prices Set Stage for China's Refined Oil Pricing Reforms? (Q4, D5)
AbstractThe reform of price system is the key to the success of the reform of China’s market economy. The international oil price has continued to fall over the past few years, and it is generally recognized that low oil price has created new opportunities for China's refined oil pricing reforms. Currently, most organizations have predicted that this decline trend will end soon. Therefore, it is urgent to evaluate whether this moment is a good time to perform such a deregulation in China. In this study, we established a dynamic CGE model and employed this model to simulate the economy-wide impacts of deregulation of domestic refined oil pricing mechanism from 2017 in China, after taking into account different future oil price trends including slight, moderate and sharp bounce. Results show that the sharper the future oil price bounce is, the greater positive effect the pricing reform from 2017 can bring to China’s economic growth. Moreover, this positive effect will increase slightly as time goes by. However, if the bounce is slight, reforming the price regulation of refined oil now could instead hinder economic growth to some extent, although this impact will decrease over time. As for the international competitiveness effects, under all the three future oil price scenarios, deregulation of the domestic refined oil pricing will stimulate China’s total export, especially when the bounce is slight. And these benefits are enjoyed by most sectors. Regarding the distributional effects, the disposable income of both urban and rural households will increase in all three scenarios when relaxing the domestic price controls on refined oil. Nevertheless, the rural-urban gap will widen, especially under the slight oil price bounce. This unfavorable impacts, however, will gradually decrease in the long run.
Evaluating Policies in a Dynamic Context When Agents Anticipate Policy Change: The Case of Indoor Smoking Bans (I1)
AbstractIn this paper, I examine how the introduction of indoor smoking bans affects individual smoking behavior using panel data from the National Longitudinal Survey of Youth 1997. This paper addresses two main questions. First, are indoor smoking bans an effective policy tool for reducing smoking, and do individuals anticipate the introduction of the smoking bans? I find that indoor smoking bans are generally effective at reducing the probability that an individual smokes. Also, there appears to be some evidence that individuals are able to anticipate and adjust their behavior prior to the introduction of an indoor smoking ban. Individuals adjust their behavior in response to the implementation of city and county level smoking bans in their state of residence but outside of their own county of residence. I interpret this response as individuals adjusting their beliefs as to the likelihood of a future state level ban, as individuals are unlikely to be directly affected by these bans. The identification strategy commonly used to identify the effect of indoor smoking bans is to use the variation in the timing of the introduction of indoor smoking bans across states. Since smoking is a dynamic behavior, the decision to smoke depends upon the individual’s expectations of future states of the world. Therefore, individuals may start to adjust their behavior prior to the implementation of the policy, and their behavior may change little upon actual implementation. By taking into account this additional channel through which smoking bans influence smoking behavior, I find that indoor smoking bans may have a much larger impact than what has typically been found in the literature.
Evaluating Professor Value-added: Evidence From Professor and Student Matching in Physics (J2, I2)
AbstractThis paper estimates a professor's value added to a postgraduate student's research achievement growth using unique panel data on matched advisor-advisee pairs in a world-leading physics graduate program. To address an identification problem related to the endogenous selection of advisors and advisees, we use professor turnover and estimate a semi-parametric lower bound of the variance in advisor quality affecting advisee research performance. We find that advisor quality, operationalized as the ability to enhance an advisee's research achievement, varies substantially. A one-standard-deviation increase in professor quality results in a 0.54-standard-deviation increase in a doctoral student's research achievement growth, increasing the number of first-authored papers that are published in top journals by 0.64 at the doctoral level.
Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases (E5, E4)
AbstractThis paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. We investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. We then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a high-frequency window around Federal Reserve announcements, allowing us to identify the separate contributions of each shock to the effects of the announcement. Our estimates correspond closely to narrative elements of the FOMC announcements. Our estimates imply that although forward guidance at times had significant effects on short-term interest rates, LSAP was far more important in influencing inflation and output.
Exogenous Shocks, Financial Volatility and Endogenous Growth - Bayesian DSGE-GARCH-VAR Model with Finite Mixtures of Financial Shocks (E3, C1)
AbstractThis paper formulates a two-country dynamic stochastic general equilibrium - generalised autoregressive conditional heteroskedasticity (DSGE-GARCH) model, where economic agents display financial diversification behaviour and financial markets exhibit volatility clustering characteristics. The DSGE-GARCH model not only features short-term market frictions and long-term capital accumulation simultaneously, but also accommodates the non-linearities and the non-normalities introduced by financial markets. The DSGE-GARCH model is estimated using the Bayesian methodology based on U.S. and Australian data. The non-linear financial volatility structure is log-linearised and the non-normal financial shocks are approximated using finite mixtures of shocks, which transforms the DSGE-GARCH model into the state space representation and makes the application of Kalman filter feasible. The estimated DSGE-GARCH model generates the priors to estimate the Bayesian Vector Autoregressive (BVAR) model. The resulting DSGE-GARCH-VAR model’s forecasting performance is compared with other BVAR models under different priors. The paper finds that shocks of consumption, investment, human capital, price mark-up and stock market volatility are the dominant exogenous forces that trigger short-term economic fluctuations, while research and development, education and training, investment, extraction and drilling, inter-country spillovers are the major endogenous contributors that drive long-term economic growth. Although stock market return shocks generate negligible effects on macroeconomic dynamics, stock market volatility shocks exert significant impacts on macroeconomic fluctuations. As forecast horizon increases, the contribution of nominal shocks increase and the contribution of real shocks decrease in final production growth’s forecast error variance decomposition. Final production growth’s transitional dynamics exhibits relatively higher sensitivity to states and shocks of investment, government spending and interest rate compared with other endogenous states and exogenous shocks. Based on out-of-sample root mean squared forecast errors and two-sample Kolmogorov-Smirnov tests, DSGE-GARCH-VAR (2) model with stochastic search variable selection in mean - stochastic search variable selection in error covariance prior is the optimal model in both 4-Quarter and 8-Quarter forecasts, although Diebold-Mariano tests suggest insignificance of the outperformance.
Explaining International Business Cycle Synchronization (F3, F4)
AbstractThe business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded-good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively.
This paper has appeared as CEPR Discussion Paper 1191, March 2017 (Centre for Economic Policy Research, London):
Explaining the Changes in Earnings Level and Inequality in Indonesia: Market vis-a-vis Non-market Forces (J3, J7)
AbstractThe study seeks explanation on persistent wage inequality despite the presence of improvement in real wage, thus questioning the inclusiveness of economic growth in the context of lower-middle income country. We took the case of Indonesia, utilised a rich household survey, and applied a set of decomposition techniques. Our key findings suggest: rising minimum wage and declining returns to education are the key to reduction in overall wage inequality by levelling the playing field; Yet, the net effect is balanced out by the higher wage premium of manufacturing and service sector after the global financial crisis; Nevertheless, the rising occupational wage gap is yet to worsen wage inequality in Indonesia as it continues to experience pre-mature deindustrialization and the manufacturing sector is still largely dominated by the 'low-tech' products. This leads to policy implication that economic growth has been thus far non-inclusive and relying on minimum wage as a stand-alone tool to level the playing field is an overstatement. More importantly, it is not only about the number but the quality of human capital and whether it responds to the demand-side that will matter to improve workers’ earnings.
Export Incentives and Global Value Chains (F1, O1)
AbstractNowadays global value chains (GVCs) play central role in trade flows. This paper argues that GVCs can play important role in transmission of national trade policy effects across borders. More specifically, this study examines how domestic export incentives can affect foreign countries` exporters in the presence of GVCs. Existing theoretical literature suggests that in addition to straightforward negative “competition for market share” effects, there can be positive effects, which propagate via backward and forward GVCs linkages (trade in inputs). To our knowledge, this paper is the first one that empirically tests these effects. In particular, using recent trade data for BRICs countries (Brazil, Russia, India and China) this study shows that in the GVCs world there can be both negative and positive effects of domestic export incentives for foreign export as theory predicts. According to our framework, positive effects propagate via GVCs linkages.
Factor Pricing, No Arbitrage, and Product Market Competition (G0, C6)
AbstractProduct market competition decreases firm value sensitivity to the
fundamental factors, such as input or output prices or the market, because
the competitors can partially exploit any favorable change in these factors.
We hypothesize further that the sensitivity to the factors affects the
equilibrium returns and derive the new empirical predictions. We show that
firm entry and exit lead to the lower unconditional returns. The asset
pricing anomalies, such as value and size effects, are less pronounced with
competition. In the limiting case of perfect competition, the negative
relation between competition and firm risk obtains by no arbitrage. The
empirical tests confirm the link between competition and firm risk. The
advantage of our approach is that the relation between competition and
expected returns holds for any asset composition or priced factor.
Fear of Harassment, Physical Mobility, and Women's Labor Force Participation: Incomplete Agglomeration Benefits From Public Transit Investments in Lahore, Pakistan
AbstractInvestments in urban public transit create productivity benefits through labor market thickening, emergence of specialized clusters, and improvements on worker-firm matching. But the distributional impacts of bus rapid and mass transit interventions in cities of the global South are understudied, particularly in societies where social norms restrict women's participation in economic activity. Women's perception of safety, based on real or feared harassment and victimization in urban public spaces further hampers their engagement in high productivity employment. Transit planners often do not accommodate women's specialized transport needs in design and operations of services, and law enforcement agencies are either simply unaware of or unwilling to act about harassment. We document the economic impacts of feared harassment by collecting real-time data on perceived risk of crime and harassment with a custom built smartphone application, with sampling based on the city's 280,000 cases strong crime database. Respondents, both male and female commuters relying on bus rapid transit and other modes, were recruited from a 2016 household transport survey to provide hundreds of data points customized to locations and times. We find that despite the introduction of subsidized women-only public transit options, women's access to urban public spaces remains limited, which directly hampers their access to better paying jobs. A combination of factors particularly lax enforcement, household and childcare responsibilities, and local norms regarding women's "proper" role in society were found to be mainly responsible for the status quo.
Financial Contagion and Diversification of Insurance Activities (G2, G1)
AbstractInsurance companies are important counterparties in numerous financial transactions and thus might contribute to financial contagion. Since the core insurance activities, life and non-life business, naturally exhibit a low degree of correlation, they enable diversification of business activities. We motivate the impact of this diversification effect on financial contagion both theoretically and empirically. Our results imply that, on average, a fraction of roughly 60\% life business minimizes contagion risk. This fraction tends to increase with an insurer's investment volatility, leverage ratio, and the scope of active reinsurance assumed. We argue that business diversification effects are more pronounced for insurers compared to banks since different insurance claims are loosely correlated. Our findings have important implications for the design of macro-prudential policies.
Financial Deglobalisation in Banking?
AbstractWe take issue with the idea that global banking is retrenching. Viewing global aggregates from a consolidated perspective using BIS international banking statistics, we argue that the retrenchment of international banking is largely confined to European banks responding to factors that are cyclical in nature, such as credit losses and the need to deleverage, rather than structural. A panel analysis of foreign bank affiliates by location allows us to identify nationality and location as distinct drivers. The nationality of the bank holding the claim emerges as a stronger factor than local economic conditions or the local funding model. It would be mistaken to accept purely national regulatory approaches on the premise that global banking is already retrenching when banks headquartered in most jurisdictions continue to expand their foreign claims.
Financial Frictions, Entry and Growth: A Study of China (O0, E2)
AbstractThis paper investigates the role of business deregulation and financial reform in both credit and stock market in explaining the rapid growth of China in the past twenty years. A dynamic general equilibrium growth model with heterogeneous consumers and firms is developed. Quantitative results using firm-level data show that structural reforms that facilitated business formation and growth lead to significantly higher aggregate output. The reason is resource reallocation resulting from stronger market competition, in particular caused by a massive influx of new firms. Policy analysis shows that further reform is still very effective.
Financial Investments Through the Life Cycle and Individual Risk Aversion: An Application To Private Retirement Systems (J3, D9)
AbstractI frame this paper in the setting of contributory retirement systems. I develop a dynamic model of individual lifetime behavior and jointly estimate a set of correlated dynamic equations for wealth-related decisions (employment, occupation, investment, and savings), observed risk aversion, observed length of the planning horizon, and other characteristics that an individual may value independently of wealth (family and health). In the estimable model, I allow correlation through observed and unobserved permanent and time-varying individual heterogeneity. I use the first four waves (2002-2009) of the Chilean Survey of Social Protection (EPS), a dataset that contains observed measures of risk aversion for a representative sample of the population over time and captures Chile's long history with contributory retirement systems. In an empirical model that allows risk preferences to be an endogenous determinant of investment decisions for retirement, I propose alternative time-varying default investment schemes showing that, over seven years, slightly riskier investment strategies may increase individual asset accumulation by eight percent or more. I find that individuals tend to quickly react to riskier investment strategies, despite the observed inertia in their behavior. This shows that their risk tolerance affects their optimal behavior and optimally influences their inertia in investments. Increases in mandatory contribution rates by three and five percent generate statistically significant increases in asset accumulation of 10 and 16 percent, respectively, without generating crowd-out effects in financial investments. Other policy experiments show that employment opportunities women with children who are currently not employed to hold a part-time job, generate a mean significant increase by 10 percent in asset accumulation, over 7 years. It is found that other characteristics such as health status and family characteristics also have a significant effect on wealth accumulation.
Firm Turnover and Inflation Dynamics (E3, E2)
AbstractPolicies that increase competition are often associated with decreasing inflation and dangerous in a low interest rate environment as lead to zero lower bound or aggravate the zero lower bound problem as in Eggertsson et al. (2014). This paper shows that the shocks to the cost of creating firms that lead to more firms are inflationary.
To study the role of firm turnover in inflation the paper augments a medium scale sticky price and sticky wage New Keynesian DSGE model, a version of Uhlig (2009) and Smets and Wouters (2007), with endogenous firm entry and stochastic exogenous exit. The creation of firms is labour intensive and the number of firms is determined by free entry condition as in Bilbiie et al. (2012).
In the model the number of firms enters the Phillips curve and influences markup dynamics, so the main competition channel that is stressed in Eggertsson et al. (2014) has the same direct impact. However, when it is cheap to create firms, the number of new firms goes up and inflation increases as labour intensive creation of firms pushes up the demand for labour. Gradually, when the number of firms is high and the firm creation goes down again, does inflation fall, as stressed by the standard mechanism for an increasing number of firms. Moreover, these entry cost shocks are empirically important in the variance of inflation, they explain about a half of the inflation variance and about a quarter of variance in hours worked over the business cycle frequencies and in-sample decomposition of the data.
Formal Search and Referrals From a Firm's Perspective (J6)
AbstractThis paper investigates a variety of search channels used by firms in the recruiting process. We focus on the formal channel (internet postings, newspaper ads, public and private employment agencies) and informal hiring by means of referrals. In particular, we analyze how the choice of the search channel depends on firms' characteristics. To investigate this relationship we propose a model based on a search and matching equilibrium framework of Mortensen and Pissarides with two job search channels, a formal channel and referrals, endogenous job creation by firms and optimal choice of the advertising intensity through the formal channel. Firms have heterogeneous productivities and workers use both search channels simultaneously to send their applications. Our model predicts that more productive firms face higher foregone profits and advertise their open positions more intensively. This means that larger firms receive more applications beyond referrals, grow faster and become larger in the equilibrium. We test theoretical predictions from the model by using the IAB Job Vacancy Survey, a representative survey among human resource managers in Germany. Based on the finding that firm size and productivity are positively correlated we show empirically that larger firms invest more effort into formal search activities, especially for positions requiring a university degree, and that larger firms are less likely to hire an applicant by referral than smaller firms. Finally, we find that the impact of the firm size on the probability of referral hiring drops down once we control for the higher search effort of larger firms. In our preferred specification, the contribution of the firm size is 19% of the R-squared, whereas the contribution of the formal search effort is equal to 46%. This shows that our theoretical model uncovers the true mechanism behind the negative relationship between the firm's size and the propensity of referral hiring.
Forming Dietary Habits in Childhood: A Field Experiment With Low Income Families (I1, I0)
AbstractWe conduct a randomized controlled experiment with 285 low income families with young children. Families were assigned either to a control group or one of two treatments. For both treatments families followed a specific dietary protocol for twelve consecutive weeks. In the first treatment, families received food groceries at home for twelve consecutive weeks and were asked to cook specific recipes designed by a nutritionist for five meals each week. The second treatment and protocol consisted of regulating the time of dietary intake: families were asked to eat their meals (not provided) at regular times; adults were to avoid snacks between meals; children were provided with healthy snacks to eat at regular times between meals. We collected measures of dietary intake, height, weight, self-reported measures of food preferences, and biomarkers using blood samples. Overall, we find limited results of dietary change due to treatment. Both in the short run and long run (one year after), we find that the measures based on self-reports suggest very few changes in dietary intake and composition which is echoed by no changes found in BMI. Contrasting results are however found with an incentivized snack choice task. Even “strong” interventions such as the first one, do not necessarily deliver positive changes in dietary choices. We also find support for a relationship between food preferences and food intakes, but low support for a relationship with BMI.
From Common to Private Property: Explaining the Emergence of Property Rights (D0, Q1)
AbstractThe importance of property rights has been extensively studied in literature on property rights and organization and economic development. Research on this topics has shown that secure property rights have a positive effect on investment (Galiani and Schargrodsky, 2010; 2011), as well as in human capital accumulation (Galiani and Schargrodsky, 2010; 2011; Geddes, et. al., 2012) and land values (Alston, Libecap and Schneider, 1996). In addition, securing property rights shifts electoral preferences towards right wing political parties (de Janvry, 2014), and fosters migration from agricultural communities by delinking land use from land tenure (de Janvry, et. al., 2015). However, due to the lack of data regarding voluntary major shifts in property rights, the study of how property rights emerge has been understudied (Leonard and Libecap, 2016).
This paper aims to contribute to the literature by examining how economic and geographical factors affect the emergence of property rights. In particular, I estimate a dynamic discrete choice model of voluntary adoption of property rights. To do so, I use a dataset of 32,000 Mexican communities over 25 years. I take advantage of two land reforms that enabled a voluntary major shift in property rights institutions, where some communities decided to shift from common to private property, while others not. To my knowledge, this is the first structural estimation of communities’ preferences regarding property rights. Through the estimates from the structural model, I compute the probability of the transition of property rights from common to private property, and the effect of property rights on the agricultural production of these communities. The insights from this estimation are relevant because they allow to assess counterfactual scenarios on how the roll out of the program and its design could have had different results in the development of the agricultural sector of the country.
From Playground to Boardroom: Endowed Social Status and Managerial Performance (G3)
AbstractBy matching a CEO's place of residence in his or her formative years with U.S.
Census survey data, I obtain an estimate of the CEO's family wealth and study
the link between the CEO's endowed social status and firm performance. I find
that CEOs born into poor families outperform those born into wealthy families, as
measured by a variety of proxies for firm performance. There is no evidence of higher
risk-taking by the CEOs from low social status backgrounds. Further, CEOs from
poor families are better able to preserve the firm's human capital during periods of
financial distress and demonstrate greater ability to develop successful innovation.
As a result, such CEOs perform better in firms with high R&D spending.
Gender Beliefs and Occupational Plans: The Role of Parents (I2, D1)
AbstractPsychology and sociology literature suggests that the fact that women are less likely to work in STEM occupations may be caused by gender beliefs related to differences in math and science abilities. In this study we test whether particularly parents' revealed gender beliefs are associated with their children's plans of the future occupation. We use High School Longitudinal Study data - nationally representative survey conducted among American 9th graders, their parents and teachers. We find strong correlation between parents' gender related beliefs and planning to work in STEM fields in the future for both boys (positive effect) and girls (negative effect). The effect of parents' beliefs seems to be more important than the effect of own beliefs and, more importantly, is much larger than the effect of math and science achievements of high-school pupil. The results of this study suggest that common stereotypical beliefs that women, in general, are less capable to study and work in STEM fields may be especially harmful for girls who have high achievements in math and science, but may be discouraged from choosing STEM occupation in the future.
Generalized Stability of Monetary Unions under Regime Switching in Monetary and Fiscal Policies
AbstractEarlier studies on the equilibrium properties of standard dynamic macroeconomic models have shown that an inflation-targeting central bank imposes strict budgetary requirements on fiscal policy needed to obtain a unique and stable equilibrium. The failure of only one fiscal authority within a monetary union to meet these requirements already results in non-existence of equilibrium and an unstable monetary union. We show that such outcomes can be averted if fiscal authorities can make a credible commitment to switch to more sustainable fiscal regimes in the future. In addition, we illustrate how alternative policy measures, such as fiscal bailouts and debt monetization by the central bank, also broaden the range of policy stances under which monetary unions are stable.
Government-backed Mortgage Insurance in a New-Keynesian Model With Moral Hazard (E6, E4)
AbstractWhat are the macroeconomic and policy implications of government-backed mortgage default insurance? A New-Keynesian DSGE model with heterogeneous lenders and borrowers and information frictions is constructed and calibrated to answer this question. The model endogenizes the moral hazard implications of government-backed mortgage insurance and shows that insurance results in weaker lending standards, higher mortgage origination to low-quality borrowers, more frequent mortgage defaults and greater housing market exuberance. But the model also identifies a positive effect of mortgage insurance in reducing the adverse selection in securitization markets, which results in cheaper and more stable mortgage funding. For this benefit of mortgage insurance to outweigh its moral hazard costs, mortgage insurance needs to be complemented with sufficiently strict minimum lending standards.
Has the Fed Responded to Stock Prices and House Prices? A Time-varying Analysis (C3, E4)
AbstractIn this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again and ii) only episodically took real stock price growth into account.
Health & Working Time: A Macroeconomic Perspective on the American Puzzle (I1, J2)
Today, Americans work substantially more than Europeans and are in much poorer health despite greater medical expenditure. We provide another rationale for the Amer- ican mortality disadvantage around age 60 by relying on the negative effect on health of long hours of work. To do so, we introduce health capital in an exogenous growth model with elastic labor supply impacting its depreciation rate. We remain agnostic as to why Americans work much than Europeans, but model the difference with pref- erences for leisure for convenience. Longer hours of work make individuals devote a larger fraction of their resources to health care which may not be sufficient to offset the extra depreciation of their health capital stock, provided the returns to medical investments are not high enough. We then calibrate the model for the US to assess how much of the difference in both mortality rates and health care expenditure come from excess labor supply. We build a counterfactual using the hours of work in UK in 2015. In the baseline counterfactual, the US will spend as much as less 2.6% of GDP in medical expenditures and will experience 143 deaths per 100,000 people less, that is respectively one half and one quarter of the actual deviations with the UK.
Hedge Fund Fee Structure and Risk Exposure: Theory and Empirical Evidence (G2)
AbstractWe solve in closed form the optimal investment strategy of an infinitely lived risk neutral hedge fund manager compensated by a management fee and a high water mark (HWM) contract. We show that the fraction of asset under management (AUM) allocated in equity is a convex increasing function of the distance AUM to the HWM (DAH). The higher the management fee, the larger the risk exposure, reflecting a diversification and revenue smoothing effect. Conversely, the larger the incentive fee, the more conservative the investment strategy: Frequently beating by a small amount the HWM (small step policy) is optimal as it mitigates the ratchet feature of the HWM.
We test the empirical implications of our model; our sample consists of 39,509 observations from 7,277 funds of monthly observations of returns over the 1976-2013 period. Our benchmark regression aims at investigating the relationship between risk behavior – namely the volatility of realized monthly returns – and the DAH, the square of the DAH, the management and the incentive fees while controlling for age and the fund past returns. Empirical evidence supports the convex and increasing relationship between risk taking and DAH. Contrary to our model prediction, the incentive fee has a positive effect on risk behavior. Empirical findings corroborate our model predictions regarding the management fee impact. However, the magnitudes of these effects are small: one standard deviation increase in management fees is associated with a 6% higher return standard deviation, the effect of incentive fees being an order of magnitude smaller. Finally, our results are robust to controlling for fund and year fixed effects that capture time-invariant fund characteristics (manager, strategy, localization.) An extension of the model introduces fund termination triggered by a large AUM drawdown. Risk exposure is found to be either a decreasing or a hump-shaped in the DAH.
Heterogeneity of the Marginal Propensity to Consume: Evidence From Germany (E2, H2)
AbstractUnderstanding of how consumers respond to income changes – the marginal propensity to consume (MPC) – is of particular relevance for policy makers evaluating the macroeconomic impact of tax and labor market reforms or stabilization policies. Recent papers based on US data found a significant influence of fiscal stimuli on household consumption and economic activity (Broda and Parker, 2014). Jappelli and Pistaferri (2014) support this finding based on Italian survey data and additionally find evidence for the MPC to be heterogeneous – declining in the income and wealth position of households. These findings are in contrast to the standard life-cycle model, which would predict a homogenous MPC of close to zero, but consistent with precautionary saving motives (Kimball, 1990), credit constraints (Deaton, 1991), heterogeneous planning horizons (Laibson, 1997) or saving being a luxury good (Carroll, 1998).
In the present paper, we empirically test the heterogeneity of the MPC based on German survey data. We use responses to a hypothetical question in the German Socio-economic Panel (SOEP) where households are asked about what fraction of an unexpected transitory reimbursement equal to their monthly earnings they would spend or save. The average MPC in our sample is about 0.34 and thus significantly different from zero. We find substantial heterogeneity in the distribution as households with low cash-on-hand exhibit a much higher MPC than wealthy households. By using different proxy variables for the precautionary motive and credit constraints, we also attempt to identify the causes of MPC heterogeneity. Although we find evidence for both effects, the correlation between MPC and cash-on hand does not alter, which might be interpreted as evidence in support of the hypothesis that saving is a luxury good.
Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality (D2, L2)
AbstractHow do firms set prices when faced with an uncertain market? Analyzing the pricing strategies of used car dealers using online data and interviews, we find that dealers employ an aspiration level heuristic similar to a Dutch auction. At the same time, the aggregate market is well described by a model of equilibrium price dispersion. Unlike the equilibrium model, the heuristic correctly predicts systematic pricing characteristics such as high initial price, price stickiness, and the “cheap twin paradox.” We also find first evidence that heuristic pricing performs well compared to the equilibrium strategy.
Hidden Protectionism? Evidence From Non-tariff Barriers to Trade in the United States (F1, F6)
AbstractCan the enforcement of product standards be protectionism in disguise? This paper
estimates the costs of non-compliance with U.S. product standards, using a new database on
U.S. import refusals from 2002 to 2014. We find that import refusals decrease exports to the
United States. This trade reducing effect is driven by developing countries and by refusals
without any product sample analysis, in particular during the Subprime Crisis and its
aftermath. We also provide evidence that given product standards have been enforced more
strictly during the crisis. These results are consistent with the existence of counter-cyclical,
hidden protectionism due to non-tariff barriers to trade in the United States.
High-stakes Test, Elite Universities and Students’ Expectation: A Case Study in China (I0, I2)
AbstractHigh-stakes testing has become increasingly popular in selecting high school graduates into higher education institutes. This is particularly common in accessing the elite universities. Proponents of the tests believe that high-stakes testing provide an important incentive for students to improve their performance. However, opponents argue that it, in fact, discouraged students who failed the test in all aspects. Without concrete empirical evidence, it would hard to justify how high-stakes test affects students' outcomes.
To provide some concrete evidence on the impact of high-stakes test on student's outcomes, we conduct our empirical study with 22 universities in Hunan province in China. China's college entrance exam (CEE) has been implemented more than 30 years, and it could the most challenged high-stakes test in China to get access the elite universities. We had collected more than 16-thousands students' high-stakes test results, their later matriculation information, and their expectations after enrolled into different tire universities. To explore how this high-stakes test affecting students' outcomes, we used both regression discontinuity design (RDD) and matching method to provide some solid evidence.
We find that high-stakes test has a significant heterogeneous effect among high school graduates. Significant positive effects on students' grade could be observed on students with lower expectation and low academic performance. However, significant negative effects could also be observed with students who have a high expectation but low performance. Other non-academic performance outcomes are also observed. In general, elite higher education system placed a much higher competition among all graduates, where high-stakes test leads this competition focusing on grades.
Hippocratic Paradox: A Mathematical Economic Analysis of Medical Decision-making (I0, C5)
AbstractThe Hippocratic Oath and its derived four principles --- nonmaleficence, beneficence, respect for patient's autonomy, and justice --- are the moral foundations of medical decision-making. However, they are found self-contradictory in both theory and practice, which leads to hard cases confronted by the U.S. Supreme Court. This paper aims to resolve such paradoxes. It offers a topological approach to identify all possible contradictions in the form of cyclic rankings. This approach has achieved success in other areas of economics such as social choice (e.g., Arrow's and Sen's impossibility theorems) and voting theory and can provide new interpretations in medicine and partial resolutions. Our paper is the first mathematical economic analysis of the Hippocratic Paradox. It identifies the cause and source of conflicts in medical decision-making, which are commonly concerned across other disciplines including medicine, ethics/moral philosophy, and law. By tracing where all such possible conflicts come from, we predict paradoxical situations. And then by modifying the relative positions of problematic regions, that is, by remedying the extent of some principles, this study can help health professionals escape from fatal self-contradictions while making crucial decisions.
Household Decision Making with Violence: Implications for Transfer Programs (D1, I3)
AbstractI study how intimate partner violence responds to transfers to women, and whether this response depends on the transfer being in-kind or in-cash. To this end, I develop and estimate a model of household decision making in the presence of in-kind and cash transfers, in which the weights of the husband and the wife in household utility are endogenously determined through violence. Only men can inflict violence to increase their relative weight, but violence destroys female labor productivity. Under this framework the utility gains the husband can appropriate through violence are lower when the transfers are in-kind. As a result, in-kind and cash transfers have different effects. I estimate the model using data from a randomized controlled trial in Ecuador which provides transfers to poor families, either in-kind or cash. The results indicate that, on average, violence destroys 4% of female productivity with a market value of 10 dollars a month. Violence also reduces the female relative weight in the household utility by 10%. A cash transfer equivalent to 10% of the average household income would reduce the prevalence of violence from 17% to 10%. However, if the the same transfer were in-kind, violence would decline by 3 additional percentage points. This differential effect amplifies with the size of the transfer.
Houses Divided: A Model Of Intergenerational Transfers, Differential Fertility and Wealth Inequality (E1, E2)
AbstractIncreasing income and wealth inequality in the United States has prompted a renewed focus on the causes of inequality. One of the major puzzles of this phenomenon is that wealth inequality is much more pronounced than income inequality. This paper contributes to the literature by studying the impact on wealth inequality from savings, bequests, and fertility differences between the rich and the poor using an overlapping generations model. We find that bequests have a significant impact on wealth inequality, while the fertility difference between the rich and the poor amplifies the impact of bequests, as it increases the disparity between bequests received by each child. In addition, we find that life-cycle saving and anticipated bequests interact with each other, and this interaction is important for understanding wealth inequality in the United States.
How Do Economic Shocks Affect Family Mental Health Spending? (I1, D1)
AbstractA negative economic shocks may impose two opposing influences on mental health spending: pressure to decrease spending due to liquidity constraints, and pressure to increase spending due to worsening mental health status. Using two-year panel data from the Medical Expenditure Panel Survey (MEPS) for the period 2004 to 2012, we examine the effect of economic shocks on mental health spending by families with children. Specifically, we focus on the effect of changes in family income, employment status, and health insurance status over the two-year observation period within each MEPS panel.
Since a substantial proportion of the population does not use mental health care and the distribution of spending is positively skewed we estimate a series of two-part model with probit in the first part and generalized linear model (GLM) with a log link and gamma variance function in the second part. To control for unobserved heterogeneity across families in the sample we apply the two-part model using the correlated random effects (CRE) framework.
The results indicate that family mental health spending strongly responds to employment shocks and that these employment effects are consistent with hypothesis that indicates that loss of economic status may have adverse impact on the mental health status of family members. We also find that families reduce mental health care spending in response to an adverse economic shocks. Mothers in two-parent families where a member lost health insurance coverage tend to spend less on mental health care. Similarly, negative income shocks in single-mother families decrease the amount of ambulatory mental health spending and the amount of mental health care spending allocated toward mothers.
This paper contributes to the literature on health care spending response to economic shocks as well as to the literature on consumption response to economic shocks.
How Does Occupational Concentration Pattern of Asian and Hispanic American Affect Their Earnings (J1, J2)
AbstractAsian and Hispanic American population are enlarging disproportionately in the past decade. In this paper, I combined US decennial census data 1980, 1990 and 2000 with American community survey data (2008-2012) and examined how occupational concentration and the associated underlying crowding effect and spillover effect influence Asian/Hispanic American labor market outcome. After controlling for occupational, racial and geographic fixed effect and individual demographic characteristics, I found that occupational concentration positively influenced Asian American whereas the influence on Hispanic American is negative. If a native-born Asian American chooses an occupation where the share of his/her co-ethnic people is 1 percentage higher, his/her wage will rise by 8.28%. For an immigrant Asian American, one percentage rise in his/her co-ethnic share in the occupation he/she chooses will result in a 5.03% rise in wage. For native-born Hispanic Americans, one percentage rise in their co-ethnic will result in 0.65% decline in their wage. For immigrant Hispanic American, the decline in wage is 2.68%.
How Institutions Shape Preferences (D0, K1)
AbstractI investigate how a major change in property rights over land affects cooperation and trust preferences in a society where agricultural land is the main households' asset.
The reform consists of registering customary tenure rights over agricultural land that are traditionally characterized by collective property and informal possession. With the reform, registered plots acquire a new legal status akin to private ownership, making it possible to claim property in court and sell or use them as collateral.
Identification capitalizes on the randomized control-trial implementation of the reform over hundreds of villages in West Africa. Using a public lottery, a sample of 300 villages where the land reform was implemented were selected from a pool of 576 eligible villages sharing customary rights. Those villages not selected as of today maintain the customary land tenure.
I conduct lab-in-the-field experiments collecting data on cooperation and trust choices on a sample of 221 individuals across 13 villages of the lottery pool seven years after the reform implementation.
Results suggest that the institutional reform significantly increases participants' pro-sociality. Subjects in treated villages contribute 40$\%$ more in a public good game and increase the amount sent by 35$\%$ in a trust game compared to the control group.
How to Explain Corporate Investment Heterogeneity in China’s New Normal: Structural Models with State-owned Property Rights (L2, E2)
AbstractAs the key to Chinese economic growth, corporate investment behavior is studied based on the view of state-owned property rights. Its structural model by DiD analysis demonstrates that the year, 2013, is the set-off point of China’s ‘New Normal’ since the high confidence in China’s developmental state was broken. I find that the expansion of investment improves corporate financial performance by 3%, but does not play a positive role on solving social employment. Objective functions shift differently in private-owned enterprises (POEs) and state-owned en- terprises (SOEs), which results in heterogeneity of investment behavior. Empirical tests provide the evidence that POEs expanded investment much more than state-owned enterprises SOEs did. The percentage of expanding investment for SOEs and POEs is 43.3% and 51.1%, respec- tively, in transitional period, which is 33.3% and 39.5% in the New Normal. Mechanisms of impact on corporate investment are explored by 3-stage structural models for non-matched con- trol group and nearest neighbor PSM matched control group. Although investment inefficiency of SOEs are concerned, executive stock ownership and equity finance could be exotic methods to stimulate efficient investment of SOEs. Investment efficiency of POEs has been recovered in the New Normal but POEs have shifted away from ‘profit-driving’ they used to be in the old normal.
Human Capital and Optimal Income Taxes in a Life-cycle Model With Heterogeneous Agents (E6, H2)
AbstractWe study a life-cycle model with heterogeneous agents of discrete skill types. In the model, unobservable skills evolve over time through endogenous human capital investment, rather than via stochastic shocks. Our main findings are as follows. First, even though our model has no uncertainty and thus no insurance motive, the capital wedge is positive. Next, the labor wedge is neither always positive nor constant over time, but is negative in first period and ambiguous before the terminal period of the life cycle. Finally, these wedges can be implemented as linear taxes on capital and labor, along with lump-sum taxes, in the competitive market and there is a welfare gain from the second-best optimal mechanism, with the gain increasing in the gap of agents’ skills.
Hysteresis and Fiscal Policy
AbstractEmpirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy - the consumption equivalent change in welfare for one dollar change in public spending - is positive (negative) in the presence (absence) of hysteresis. The main benefit of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.
Impact of Gender Wage Gap on State Migration (J3, J6)
AbstractThe interstate migration affects state level gender wage gap because of location based sorting in labor market. Similarly, gender wage gaps also affect an individual's decision to migrate because it has a direct negative impact on household income expect the single men. This study examines the causal impact of state level gender wage gap on individuals' interstate migration decisions. To address the simultaneity between gender wage gap and migration, we use state level political variables as instruments for gender wage gap in the traditional 2SLS estimation method. Using the IPUMS, we create a state level panel data from 1980 to 2014. We show that high gender gap adversely affect the probability of interstate migration for married couple more than the single men and women. The 2SLS results are consistent with the two way fixed effects model. We also decompose the impact of gender wage gap on migration probabilities of different subgroups based on race and gender in last three decades and find that impact of gender gap on interstate migration was higher in the 1980s and 1990s compare to 2000-2014. We perform various robustness checks to examine the validity of our results.
Impact of Oil Price Changes on Stock Returns of United Kingdom Oil and Gas Companies: A Wavelet-based Analysis (G1, C5)
AbstractThe relationship between oil and stock is important because oil is the key production
input for most industries and stock market performance, to some extent, reflects the
economic conditions. However, the relationship between oil price and stock prices of
oil and gas industry companies is more complex because oil plays the roles as both
costs and profits for this kind of company. Unlike previous research of the relationship
between oil and oil and gas companies using randomly chosen data frequencies and
only based on time domain, we examine the impact of oil price changes on stock
returns of UK oil and gas companies through various time scales during the sample
period from June 19, 1996 to December 30, 2016 by using both continuous wavelet
transform and discrete wavelet transform. We found the following several important
results: First, the dependence between oil and UK oil and gas companies’ stocks
is weak in the short term but higher in the medium-run and long-run. Second, the
Granger causality running from oil to stock on daily basis is limited but the significant
bidirectional Granger causality relations running between the oil price and oil and
gas stock prices can be observed at scale 3, 4 and 5. Moreover, the oil price shocks
at these scales have significant negative and positive effects on stock prices of UK oil
and gas companies. Third, the short term oil price risk is weak, which means that
short-term UK oil and gas industry investors can still diversify their portfolios’ risk
by adding oil, however, the long-term investors should be more concerned about oil
Industrialization and the Demand for Mineral Commodities (Q3, N5)
AbstractThis paper uses a new data set that begins in 1840 to investigate how industrialization affects the derived demand for mineral commodities. The data-set set includes consumption and real prices of five base metals as well as real manufacturing output for 15 industrialized and currently industrializing countries. I establish that there is substantial heterogeneity in the long-run effect of manufacturing output on demand across five commodities. A one percent increase in per capita manufacturing output leads to an about 1.5 percent increase in aluminum demand and a roughly 1 percent rise in copper demand. Estimated elasticities for lead, tin, and zinc are below unity. My results suggest that the experience of Japan' and South Korea's industrialization, for example, may be used to infer the impact of China's industrialization on demand for metals. The results imply substantial differences across commodities with regard to future demand. Adjustment to equilibrium takes 7 to 13 years, which helps explain the long duration of commodity price fluctuations.
Inflation Expectations and the Price at the Pump (E3, E5)
AbstractConsumer inflation expectations are positively correlated with gas prices. The optimal monetary policy response to energy price fluctuations depends on whether inflation expectations are excessively sensitive to gas prices, perhaps due to their high volatility and salience. I use multi-horizon microdata to study the dynamics of consumers' gas price and inflation expectations. Consumers do not "overweight" gas prices in their perception of inflation, relative to the expenditure share of gas. They believe gas price inflation is negatively autocorrelated and feeds into core inflation moderately. The impact of gas prices on inflation expectations fades quickly with forecast horizon. Fluctuations in gas prices are unlikely to de-anchor inflation expectations.
Innovation: The Bright Side of Common Ownership?
AbstractA firm’s incentives to innovate deteriorate when other firms benefit from its R&D activities without incurring a cost. We theoretically show under which conditions common ownership of firms can mitigate this impediment to corporate innovation, and test the model’s empirical predictions. We show that common ownership increases R&D when technological spillovers, as measured by firms’ distance in technology space, are large relative to product market spillovers, as measured the firms’ distance in the product market. Otherwise, costly innovation would lead to more business stealing which is detrimental for common owners and thus common ownership decreases innovative activity. Our results help inform the debate about the welfare effects of increased levels of common ownership concentration of U.S. firms.
Insurgency, Investment and Tillage: Evidence From Two Conflicts in India (E2, O1)
AbstractIn contrast to the “Lucas Paradox”, capital flows to India accelerated with an annual average growth of 144 percent between 1991 and 2014. Even more puzzling, this was despite two internal on-going civil conflicts. Since rebels use terror as a key tool in the pursuit of their goals, foreign investors generally avoid countries with high economic and political risks. On the other hand, country governments can raise expenditures on security from higher tax revenues to suppress insurgency. This theoretical ambiguity in the relationship between rebellion and economic outcomes is also resonated in the empirical evidence. Poor economic performance can itself fuel conflict from grievances, then an economic outcome may be both a root cause and a consequence of rebellion. Hence, identification of the underlying mechanism is challenging with reverse causality between political instability and economic outcomes. We address endogeneity by exploiting regional and soil peculiarities to detect patterns of violence and foreign capital receipts across Indian states. We find significantly large negative effects of 50-60 percent on net foreign investment for a 1 percent increase in insurgency. Further results suggest that low intensity domestic rebellion is a major threat to the movement of international capital compared to insurgency from transnational terror. This paper improves on the existing literature in number of ways. First, while some studies construct “synthetic” counterfactual, our study is the first to tackle endogenous selection issue by exploiting the exogenous variation in soil texture to instrument rebellion in assessing how different conflict-types affect the location of foreign capital receipts. Second, we are the first to analyse the economic consequence of different conflict-types within a single large democracy characterized by considerable spatial heterogeneity. Third, if domestic attacks are correlated with transnational terror incidents then a distinction between domestic terror and transnational terror is important to estimate unbiased results.
Intensive and Extensive Margins of Adjustment (E3, E3)
AbstractMany believe the extensive margin is an important propagation and amplifying channel for productivity shocks. This paper argues that this amplification mechanism depends crucially on the specification of the entry costs. Using the Melitz, Bilbiie and Ghironi (2012) framework I show that when technology shocks affect only the production sector the model fails to generate any effect on the extensive margin. When technology shocks affect both the production and entry sector, the impact on the extensive margin depends on risk aversion parameter in the utility function and the mobility of labor across the production and entry sector. In particular, high values for risk aversion and low substitutability of labor across sectors both dampen the effects on the extensive margin and increase the importance of the intensive margin in propagation of shocks.
Interactions of Financial and Real Frictions Along the Business Cycle (E3, E4)
AbstractWe model the interactions of financial frictions and real frictions along the business cycle, using a DSGE model calibrated for the US economy, with heterogeneous households, banks, firms, a housing market, and wage bargaining. The model features labor and investment frictions, in the form of convex costs, and financial frictions, in the form of credit constraints and the risk of banks diversion of funds. In addition, there are price frictions and habits in consumption.
We examine technology, monetary policy, and credit shocks. We look at the response to these shocks of real aggregate variables, financial market variables, housing market variables, and labor market variables.
We find that the interactions of real frictions and financial frictions have important implications for the effects of financial shocks on the macroeconomy.
Interest Rate Risk Sharing in the Supply of Corporate Loans (G2, E4)
AbstractUsing loan-level data from the Mexican credit registry, this study investigates the association between non-maturity deposits' (NMDs) time slotting and banks' lending to firms. Banks following a standard approach (SA) cannot allocate NMDs beyond the 2-year maturity bucket. There is no defined cap for banks with an internal model (IM). Exploiting within bank variation in the NMDs' classification, I find that SA banks grant less fixed rate loans and of shorter maturity than IM banks, and some also charge a premium and reduce the volume of such loans. The higher constraints to hedge the sensitivity of fixed rate loans lead SA banks to transfer more interest rate risk to firms. As the yield curve becomes steeper, SA banks increase the supply of fixed rate loans, a behavior suggestive of market timing. Even though some SA banks retain a slightly larger maturity gap between assets and liabilities, there are no differences in interest rate risk exposure.
Internal and External Hiring
AbstractOne of the most important decisions employers regularly face when filling job vacancies is whether to hire from the inside or recruit externally. Empirical investigations of this subject have been challenged by data limitations. The best data for questions surrounding hiring are often personnel records, but such data typically lack important information on what external hires were doing before they entered the firm and began appearing in the personnel records. In particular, information about their prior work histories provides crucial information to employers that tends to be unobservable to researchers working with such data. Other problems with personnel records is that analysis samples are narrow (e.g., often restricted to a single firm), and it is unclear to what extent results can be generalized.
Using a large, linked, employer-employee panel data set from Finland, we examine the role of work history as a determinant of internal-versus-external hiring decisions. The data allow construction of detailed work histories. Moreover, measures of (job-specific) individual workers performance are inferred from annual bonuses and found to match well the empirical properties of actual worker performance ratings from other data sets. Results show that workers who are externally hired into a given position typically held the same job in their previous firm. External hires also have stronger observable indicators of ability in terms of prior career success. Compared to internally promoted workers, external horizontal transfers have stronger work histories but weaker job performance in the year preceding the transfer.
International Transfer Pricing and Tax Avoidance: Evidence From the Linked Tax-Trade Statistics in the United Kingdom
AbstractThis paper employs unique data on export transactions and corporate tax returns to study transfer pricing by UK multinational firms. It finds that firms manipulate their transfer prices to shift profits to lower-tax destinations. The extent of transfer mispricing intensified after the 2009 UK tax reform from a worldwide to a territorial corporate tax system, with firms shifting more profits into low-tax jurisdictions. Transfer price manipulation increases in a firm’s R&D intensity, is more prevalent for core products of a firm, and is mainly concentrated in countries with low to medium corporate tax rate lower than the UK.
Investment in Productivity and the Long-run Effect of Financial Crises on Output (E3, E2)
AbstractNearly 10 years after the failure of Lehman Brothers, U.S. per capita GDP remains over 10% behind its long-term trend. Why has the financial crisis had such a long-term negative effect? Recent models suggest that a shortfall in productivity-enhancing investments during financial crises temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on U.S. corporations responsible for 54% of all industrial research and development. Exploiting quasi-experimental variation in firm-level exposure to the 2008-9 financial crisis, I show that tight credit reduced investments in productivity-enhancement, and has significantly slowed down output growth between 2010 and 2016. For a one-standard deviation increase in exposure to the crisis, the growth rate of productivity-enhancing investments falls by 8 percentage points. This reduction, in turn, led to a reduction in output growth by 2.8 percentage points. Other types of investments, such as in physical capital, do not explain the lack of medium-term growth. A partial-equilibrium aggregation exercise suggests output would be 12% higher today if productivity-enhancing investments had grown at pre-crisis rates. A dynamic business cycle model with endogenous growth is used to translate the results to a general equilibrium setting.
Investor Clientele and Style Changing Behavior in Mutual Funds (G2, G1)
AbstractThis paper examines different clienteles’ reactions to style changing behavior of mutual funds. Using the granularity of daily mutual fund data, we show that heterogeneity in investors’ sophistication levels strongly relates to heterogeneity in responses to style changing behavior. The empirical approach that we apply to several proxies of investors’ sophistication level indicates that less sophisticated investors reward style-changing behavior by an increase in fund flow, while more sophisticated investors punish this behavior by redemption. We show that style changing behavior has different impact on various types of fund performance measures. More specifically, style deviation has a strong positive impact on the simple fund performance measures, which are used by less-sophisticated investors, while it has no significant impact on more advanced fund performance measures. Our empirical findings also report that less-sophisticated investors drive the aggregate investors’ reactions to the style deviation. Overall, we argue that a comparison of the fund flow-style changing relationship, by accounting for investor’s sophistication level, allows for a more complete picture of an investor’s response to the changes in mutual funds’ investment style behavior.
Is the United States Phillips Curve Convex? Some Metro Level Evidence (E3, E5)
AbstractInterest in the possible convexity of inflation Phillips Curve waxes and wanes as the economy nears or moves away from full employment. If the Phillips Curve is convex then, as unemployment falls below the natural rate of unemployment (NRU), the upward pressure on inflation rises increasingly. If the Phillips Curve is convex and the unemployment rate is close to the NRU, monetary policy makers should act pre-emptively and raise rates sooner rather than later, ceteris paribus.
It is difficult to identify convexity using aggregate data covering the Great Moderation period, so I exploit the greater variation in inflation at the metro level. I estimates linear and non-linear, inflation expectations augmented Phillips Curves using core CPI inflation and unemployment data from the mid-1980’s for a panel of 27 large U.S. metros. Inter alia, heterogeneous dynamic panel data models with multiple unobserved common factors are estimated.
Labor market slack is always significant, even though the fit of linear and non-linear Phillips curves is similar. Simulations of a simple, three equation IS-PC-MR suggest that the degree of non-linearity is modest. For example, a short-term shock that reduces the unemployment rate by one percentage point might boost core CPI inflation by 30 basis points (bps) in a linear model and less than 40 bps in a non-linear mode. If inflation expectations adjust modestly, the effects might be 15 bps higher.
I’m Just a Soul Whose Intentions are Good: The Role of Communication in Noisy Repeated Games
AbstractWe let participants indicate their intended action in a repeated game experiment where actions are implemented with errors. Even though communication is cheap talk, we find that the majority of messages were honest (although the majority of participants lied at least occasionally). As a result, communication has a positive effect on cooperation when the payoff matrix makes the returns to cooperation high; when the payoff matrix gives a lower return to cooperation, communication reduces overall cooperation. These results suggest that cheap talk communication can promote cooperation in repeated games, but only when there is already a self-interested motivation to cooperate.
Job Security and Employment Prospects of the Unemployed and Participants in Active Labor Market Programs (J6, H8)
AbstractWe use a reform in the Swedish employment protection legislation (EPL) that decreased dismissal costs for small firms only, to investigate the effect of EPL on the propensity to hire workers that were previously unemployed or in active labor market programs (ALMPs). The results indicate that less stringent EPL increased the share of workers hired from unemployment, with no discernible effect on worker transitions from employment to unemployment. We also find that the hiring of workers from various types of active labor market programs increased, and more so in those targeted toward disadvantaged groups. To our knowledge, this is the first study to examine the link between the stringency of EPL and employers’ recruitment of previous participants in ALMPs. Taken together, these results suggest that there was less screening of new hires by firms after the reform, and that liberalization of EPL mitigates the negative employment consequences of adverse selection into unemployment and ALMPs.
Labor Market Effects of Medical Innovation: The Case of Prostate and Breast Cancer
AbstractCancer is one of the most common causes of death, but mortality rates have been declining due to improved treatment options. The numbers of available drugs for the treatment of breast and prostate cancer, have doubled in the last two decades. With lower mortality rates and better treatment options, cancer patients may be less likely to withdraw from the labor force after their diagnosis. We test this hypothesis using administrative data from Canada, allowing us to precisely measure both the type and timing of the cancer diagnosis as well as pre- and post-diagnosis labor market status and annual earnings.
To estimate the causal effect of innovation in cancer treatments on labor market outcomes, we employ a triple-differences strategy. Specifically, we compare the labor market outcomes in the treatment group (cancer patients) and the control group (individuals never diagnosed with cancer) before and after the diagnosis (placebo diagnosis in the case of the control group). We then take a third difference across various measures of innovation. First, we compare labor market outcomes by decade, which is a rough proxy for general progress in treatment effectiveness. Second, we use the cumulative number of drugs available in the year of the diagnosis as a measure of innovation.
Our results show overall moderately positive effects of cancer treatment innovation on the employment status of cancer patients. Among breast cancer patients, we find the largest effects among women aged 35 to 44. Among prostate cancer patients, men of all age groups benefit from the additional treatment options. Second, we use the lagged cumulative number of available drugs to proxy for innovation, finding that an additional drug increases the propensity to work by about 0.3 percentage points among young breast cancer patients and by about 0.4 percentage points among prostate cancer patients in their 50s.
Labor Mobility and Monetary Policy
AbstractA mobile labor force may help cushion the effects of regional shocks when conventional stabilization mechanisms are unavailable. The optimal currency area literature has therefore stressed the importance of labor mobility as a precondition for monetary union. But only a few studies formally link labor mobility to macroeconomic adjustment and policy. To help fill this gap in the literature, we study monetary policy implications of cyclical labor flows across two distinct regions sharing trade links and a common monetary authority. In our model, workers may participate in the labor markets of both regions as native and migrant workers, respectively. The share of unemployed workers crossing the regional border in search of a job is chosen optimally by households. Employment is then determined through a standard search and matching process in regional labor markets. Hence, migration flows are driven by fluctuations in the relative labor market performance across the monetary union as households allocate workers to equalize expected net gains from participation in the two regional labor markets. In this environment, we first study the implications for macroeconomic dynamics for a given monetary policy. We show that labor mobility can be an additional channel for cross-regional spillovers as well as a regional shock-absorber. Second, we characterize the optimal monetary policy problem for the common monetary authority. We quantify welfare costs from deviating from optimal policy, and we compare policy prescriptions with those arising without labor mobility. Third, we analyze the implications of labor mobility for the costs and benefits of a monetary union. In particular, we study how cross-regional labor mobility affects the costs of renouncing independent monetary policy. Whilst directly applicable for large currency areas such as the US and the euro area, our analysis is also informative for countries with strong regional features such as Canada and the UK.
Land Acquisition and Corporate Investment in India– Impact of the Historical Land Ceiling Legislations
AbstractThere is a growing debate about land acquisition for infrastructure and industries in densely populated countries. In this context, the present paper assesses the impact of historical land ceiling legislations largely implemented during 1960-85 to ensure distributional equity on corporate investment in India. We argue that the implementation of the land ceiling legislations had increased the transaction costs of buying land and also the price premium firms pay when acquiring land, thus inducing firms to invest less in land and capital. The detrimental ceiling effect is more pronounced when the ceiling size is more restrictive as for the most fertile land. Arguing that the variation in land ceiling size across the Indian states over time was largely independent of the state authorities, our results support the conjecture that more restrictive land ceiling size has led to lower investment in both fixed and total capital output ratios at the state-level (1960-85). Further analysis of firm-level (1996-2012) data confirms that the ceiling effect persists in the long run, thus identifying an unintended consequence of historical land ceiling legislations for investment and economic growth in India.
Lending Without Creditor Rights, Collateral, or Reputation—The “Trusted-assistant” Loan in 19th Century China (G2, N2)
AbstractThis paper considers a private contracting mechanism that supported efficient debt
contracting in a setting where legal enforcement was impossible, borrowers lacked both
collateral and reputation, and borrower cash flows were unobservable—the “trusted-assistant
loan,” a lending mechanism used in nineteenth century Qing China to finance the acquisition
of Imperial administrative posts. Our model of trusted-assistant lending mechanism
shows that it is a renegotiation-proof implementation of efficient state dependent financing.
The empirical analysis shows that the employment of trusted-assistant finance and the
performance of trusted-assistant loans conforms roughly with the predictions of the model.
Less is Too Much: Afghan Child Health and In Utero Exposure to Conflict
AbstractAlthough a large body of research has tested Barker’s fetal origins hypothesis, no extant study addresses the persistent detrimental effect of in utero exposure to conflict in countries experiencing protracted conflict. I therefore estimate the impact of in utero conflict exposure in Afghanistan on weight for age z-score (WAZ) by applying instrumental variable regression to cross-sectional information on children aged 0-59 months merged with data on district-level fatalities during the intrauterine period. Although like previous research, I find an overall negative effect of violence on WAZ, the effect of exposure to an extra fatality during the gestation period is stronger for children born in districts where long-term conflict is on average comparatively lower. I attribute these heterogeneous effects to the fact that households living in environments of constant conflict have developed more effective coping strategies. Conversely, households living in comparatively safer areas may be disadvantaged because of their inexperience in mitigating the negative effects of the violence that has spread across the country in recent years. I support this result by testing and rejecting negative homogeneous effects of short term conflict on households’ wealth alternatively according to the long term level of conflict and the per capita opium poppy cultivated area per district.
Lifetime Earnings Inequality and Income Redistribution Through Social Security (H5, H2)
AbstractThe Social Security Amendments of 1977 fixed the replacement rates, i.e. the ratio of public pension benefit and worker's average lifetime earnings. These replacement rates haven't changed since then. Since adoption of the Amendments, however, cross-sectional earnings inequality has increased and population has become older. If the government decided to amend Social Security now, how would it change the policy and by how much did increased earnings inequality and population aging contribute to the change? I introduce into Huggett (1996) a government, who decides on the Social Security tax rate and a replacement rate schedule, which I model as a flexible parametric class characterized by two parameters. The government assigns different weights to households depending on their age and average lifetime earnings. I first calibrate the model to 1977 and recover those weights. I find that the government must have put more weight on young and earnings-rich households. Then I simulate the model during 1977-2017 accounting for the changes in earnings inequality and demographics. Applying the same weights in 2017, I find that the Social Security tax rate drops by 2 percentage points but the replacement rate for earnings-poor workers increases by 6 times as compared to the status quo policy.
Liquidity from Two Lending Facilities
AbstractDuring financial crises, central banks use emergency lending facilities to provide liquidity to the banking sector. Using an unexpected leak of bank names that confidentially borrowed from one of two lending facilities during the Great Depression, we develop a model of banks' endogenous choice of facility to evaluate whether banks used their assistance to meet funding
needs. We find that banks' choice of facility after the leak allowed market participants to identify banks most desperate for emergency assistance. We shed light on how to design lending facilities that attract banks that are less likely to use emergency assistance for excessive risk-taking.
Machinery Subsidies and Rice Farmers’ Adoption of Mechanized Planting Technology: Evidence From Hunan Province in China (D1, Q1)
AbstractThe machinery subsidy in China increased from 70 million yuan in 2004 to 18.6 billion yuan in 2017, which tends to promote production efficiency and competitiveness and speed up the agricultural modernization. These subsidies increased the mechanization of staple crops, while the modes of agricultural production achieved historical leaps from manpower to mechanization. However, the mechanization level in rice planting are still low in the major producing areas. For instance, both the sown area and the production of rice rank first among all provinces in China. Yet, only 25% of sown area in Hunan employed machinery in the plantation of paddy rice, which is lower than 40% nationally and let alone 95% in the northeast. We will examine the reasons resulting in the low mechanization level of rice plantation in Hunan from the perspectives of policies, technology and economy. Most literature explored farmer machinery technology adoption from the macro level of policy, technology supply and demand. This paper employs logit model to explain the decision of farmer’s machinery technology adoption using the household survey data in Hunan. The major factors include the demographics of household labor, the operational scale, the ratio of paddy rice among all crops, the machinery subsidy, geography and environment. This research will provide a more comprehensive understanding of machinery technology adoption in china and the effectiveness of machinery subsidy.
Market Evolution, Bidding Strategies, and Survival of Art Dealers (L1, N0)
AbstractWe show the value of expertise during the evolution of a market characterised by asymmetric information. Using a unique historical data set we show how market dynamics encourage entrants. Our results provide evidence that better informed dealers pay about 24% more for an artwork of the same quality than less informed dealers. Additionally, our results indicate that informed dealers are more likely to survive in the market. Our evidence supports the conjecture that, in common value auctions, when information asymmetries are present, dealers with better information benet. These results have important implications for maintaining and sustaining competitive advantage.
Marrying Up: Trading Off Spousal Income and Spousal Height (D1, J1)
AbstractCouple’s heights tend to match. However, whether such matching is for the sake of height or the many desirable traits associated with stature (e.g., income) is unclear. We contribute to this literature by randomly assigning heights and incomes to 360 unique artificial profiles on a major online dating website in China. We then recorded nearly 800 “visits”—clicks on abbreviated profiles, which include height and income information, from search engine results. Supporting the preference basis for assortative matching on height, taller men preferred taller women. Men were indifferent to women’s incomes, but women preferred higher income men. Surprisingly, instead of finding that women also have assertive preference for mate height, women's willingness to trade mate height for mate income (marginal rate of substitution--MRS for height) form a U-shaped frontier on their own heights. For short and medium men, a small increase in height makes them much more attractive to short women, a moderate difference for medium, and a negligible difference for tall women. However, for tall men, the reverse ranking of MRSs among women. We confirm these finding with CFPS survey data of married couples using Chiappori et al.’s (2012) method for multidimensional matching, which we extend to heterogeneity across women of different heights by applying Vella (1993). The MRS of short wives is significantly higher than medium, but not significantly higher than tall. Short early mothers drive the difference. Only the earliness of their marriages and childbirth increase on husband’s height. Our evidence suggests that short women are matching non-assortatively, and that, to increase the height of their children.
Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income (C8, E0)
AbstractWe use a preanalysis plan to analyze the effect of measurement error on economics research using the fact that the Bureau of Economic Analysis (BEA) both revises its gross domestic product (GDP) data and also publishes a second, theoretically identical estimate of US output that only differs from GDP due to measurement error: gross domestic income (GDI). Using a sample of 23 models published in top economics journals, we find that reestimating models using revised GDP always gives the same qualitative result as the original publication. Estimating models using GDI instead of GDP gives a different qualitative result for 3 of 23 models (13%).
Measuring Tariff Costs Embodied in Product Prices (F1)
AbstractIn the context of global value chain, ex-factory prices include tariff costs levied by multiple countries, which alone could shift producers’ competitiveness across countries. We introduce a measure, the embodied tariff, to capture the total tariff costs in products. In empirical parts, we calculate the embodied tariff for 35 sectors in 41 economies covering 1996-2011. The embodied tariff is noticeably heterogeneous across countries and sectors, but displays an overall declining pattern. This declining trend is a result of the fact that decreasing global customs tariff level’s effect prevails over increasing international production fragmentation. Meanwhile, we find that a nation’s customs tariff level is largely reflected in the embodied tariffs of its own products, which leads to competitive disadvantage. Applying our accounting framework to China’ WTO access, we find that China disproportionally benefit from bilateral customs tariff cuts with her trade partners.
Measuring Trust in Institutions: A Lab-in-the-field Study Using Time Preference Elicitation (C9, D8)
AbstractTrust is an important driver of economic interactions. We propose a novel way
of experimentally measuring trust in institutions which draws on the experimental
method used to elicit time preferences. Our method enables the elicitation of levels of
trust towards institutions in an incentivized way and is not identified by the participants
as a measure of trust. In contrast to other measures of trust, it is provided in
the meaningful metric of subjective probability of trustworthiness of the trustee. We
are measuring trust in two institutions, a formal Philippine microfinance institution
and informal local money lenders. In our preferred specification, it implies subjective
probabilities of payment completion of 0.60 and 0.54 for the formal and the informal
institution, respectively, relative to the control treatment with payment securement.
The trust in the formal institution is robustly measured to be significantly higher
than in the informal institution. Unincentivized survey measures indicate a much
stronger difference in the same direction, suggesting that survey measures are driven
by other factors such as preferences. Additionally, we exploit the random variation
generated by our experiment to examine whether a higher level of trust in the formal
institution leads to a change in financial behavior. Savings in the formal institution
increase significantly when the promise of future payment is fulfilled.
Microeconomic Impacts of Public Transit: Evidence From Lahore, Pakistan
AbstractImprovements in urban transport affect not just the market for transport but the markets for labor, real estate and services in a city. These micro-level impacts of such investments are little studied, particularly in developing countries. In this paper, we provide a credible causal estimate of the effect of a new urban mass transit line in Lahore, Pakistan on labor and housing markets and the organization of local economic activity. We use areas which were slated for transit routes that either have not yet been built (planned lines) or were removed from the plans (cancelled lines) as a comparison group for areas connected by transit. Within such areas, we sample areas that were comparable on observables at two points in time before the transit was built, and collect data on household and neighborhood outcomes three years after transit was introduced. We find that the transit caused workers to switch from other modes to public transit and reduced average commute times to work. We do not see significant changes in work on labor force participation or job choice, but we do find evidence that local transit stops increased the proportion of renters in nearby areas and increased the activity of small local businesses.
Migrating Extremists (N4, H8)
AbstractWe show that migrating extremists can shape political landscapes toward their ideology in the long run. After WWII, Nazis moved from Soviet to US occupied regions in Austria. Regions that witnessed a Nazi influx exhibit significantly higher vote shares for extreme right-wing parties in post-war times, but not before WWII. Phonebook entries from 1942 allow to trace back current party affiliation to Nazi migration. We can exclude channels, such as general migration, denazification and occupation policies, and bomb attacks. Our results suggest to increase efforts in order to control the impacts of migrating extreme ideologists within segregated communities.
Milking the Milkers: A Study on Buyer Power in the Dairy Market of Peru (L4)
AbstractThe literature on imperfect competition suggests two conditions facilitating the exercise of
buyer market power: the existence of an inelastic and upward-sloping supply, and the existence
of high concentration in purchases. In this study, we use monthly aggregate data (from
1999-2014) of the raw milk market in Peru. We test whether these conditions hold, by analyzing
the market and estimating the supply elasticity. The results suggests the existence of buyer
power in raw milk market since an inelastic raw milk supply and a highly concentrated market
is verified. Our assessment is reinforced with the role played by the existing market power
of the firms at the downstream segment and the existence of entry barriers to that market
Money for MetroCards: How a New Card Fee Made Transit Riders Invest More and Lose More (L1, E4)
AbstractPrepaid cards have become an increasingly prominent form of payment for many industries and public services providers. Some controversy has emerged because merchants are critical of the card fees, challenging both structure and level, and heated debates among researchers, practitioners, and policymakers have ensued. While the academic literature has so far focused on fees that are proportional to the transaction values or fixed per-transaction fees, the effect of a card activation fee is not clear, especially in monopolistic markets. In this paper, I show how a card activation fee for prepaid transit cards induced riders to put more money on cards and lose more when these cards expired. In 2013, the New York City Metropolitan Transportation Authority (MTA) imposed a $1 card fee (card activation fee) on new purchases of prepaid cards (MetroCards) used to collect subway and bus fares. Using a novel dataset with transaction-level deposit and card use information, I show that the fee caused riders to put more money on new MetroCard purchases, particularly those in low-income neighborhoods and those who used cash or debit (rather than credit) cards. As a result, the net monthly outstanding balance from transit card deposits increased dramatically, with riders lending an extra $150 million, on an annual basis, to the MTA. Moreover, over $20 million of the increased balances in the first year were never redeemed and escheated to the MTA when these cards expired. The leading explanation highlights the importance of the cost of effort to remember to carry the same card. I pose a structural model to calibrate the effect of a card activation fee. Counterfactual simulation predicts that a card activation fee of $4.35 will maximize the MTA's profit. These findings have implications for fiscal policy designs and fee structures of prepaid card industry.
Monopoly Emission Taxation and Compliance When Consumers Are Green (H2, D4)
AbstractWhen regulators can control the environmental quality by imposing emission taxes and when consumers make environmentally-conscious decisions by purchasing products associated with lower level of emission, the profit-maximising, polluting monopolist faces certain dilemmas: whether to choose a more environmentally-friendly low-emission technology to stimulate demand and pay lower emission taxes but incur higher production costs; or to choose an inferior but low-cost technology and pay higher emission taxes? Moreover, should he try to achieve the `best of both worlds’ by claiming to have produced output with an eco-friendly technology to boost consumers’ demand whilst evading taxes and saving on production costs? These are the problems we address in this paper: we analyse monopolist’s optimal level of emission and incentives for (emission) tax evasion when consumers are green. Producing low-emission eco-friendly product is costly for the monopolist: the marginal production cost is a continuous and inverse function of the level of emission. Heterogeneous consumers are characterised by an environmental awareness parameter proportional to the emission level that is distributed uniformly over a certain range: lower the value of this parameter, greener is the consumer. Consumers, however, cannot verify the environmental attributes of the product (except for reading the labels!). We find several strong results. First, despite the strong demand effect stemming from consumers’ side, green consumerism alone cannot guarantee the socially-optimal emission level. Second, even with perfect observability, the 2nd best optimal tax can be higher, equal or lower than the Pigouvian tax (in contrast to Barnett 1980 (AER)) depending upon the degree of consumers’ awareness. Third, higher the degree of awareness, stronger is the deterrent effect of audit strategies on monopoly tax evasion. A strong policy implication emerging from our analysis is, therefore, given the government’s budget constraint, resources should be allocated to promoting environmental awareness rather than to costly auditing.
More Teachers, Smarter Students? Potential Side Effects of the German Educational Expansion (I2, H7)
AbstractIn this paper, I evaluate potential side effects of the educational expansion in Germany on the
learning outcomes of today’s students. The educational expansion was a demand shock in
the labor market of teachers, which could have thus encouraged individuals with different
teaching abilities to eventually become teachers. I find that replacing a non-affected teacher
with an educational expansion teacher leads to a 2 percent reduction in students’ test scores.
Explorative analyses suggests that these teachers are more extrinsically rather than intrinsically
motivated. The results highlight that monitoring and investing in quality is important
for future extensions of public institutions.
Multi-dimensional Pass-through, Incidence, and the Welfare Burden of Taxation in Oligopoly (L1, H2)
AbstractThis paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. First, in the case of symmetric firms, we show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through are expressed using elasticities and curvatures of demand and inverse demand. These results also apply to symmetric oligopoly with multi-product firms. Second, we present a generalization with the tax revenue function specified as a general function parameterized by a vector of tax parameters. We analyze multi-dimensional pass-through, generalizing the results of Weyl and Fabinger (2013), and show that it is crucial for evaluating welfare changes in response to changes in taxation. Finally, we generalize our results to the case of heterogeneous firms, as well as to the case of changes in both production costs and taxes.
Native American Household Demand for Internet Access
AbstractThe incidence of in-home Internet subscriptions varies across households with Native American households less likely than households in the rest of the population to purchase Internet services. With the growing use of the Internet for information, education, job hunting, and other activities the lack of this universality has, potentially, serious consequences for households not subscribing to the Internet. Using descriptive statistics and logistic regression models for predictive analysis (of household personal computer, smart phone, and Internet subscription purchasing behavior) and Oaxaca-Blinder logistic decomposition models, we find that the growth in the country’s Internet subscriptions may have peaked and exhibited a small decline between 2012 and 2015; technology adoption has reached the third stage of the S-curve often exhibited in new technology adoption. Internet technology adoption in Native American households, however, may not have fully reached into the third stage. The economic models results suggest that household income, education attainment of the head of household, and geographical location of the household each contribute to the lower take-up rate in the absolute in both time periods, as well as the catch-up that took place between 2012 and 2015 for Native American households.
Negative Interest Rates, Excess Liquidity and Bank Business Models: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area
AbstractIn June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less
on wholesale funding. The nature and scope of the adjustment depends on banks’ business models.
New Evidence on National Board Certification as a Signal of Teacher Quality (I2, J8)
AbstractUsing longitudinal data from North Carolina that contains detailed identifiers, we estimate the effect of having a National Boards for Professional Teaching Standards (NBPTS) teacher on academic achievement. We identify the effects of an NBPTS teacher exploiting multiple sources of variation including the traditional lagged achievement models, twin and sibling effects, and aggregate grade level variation. Our preferred estimates show that students taught by National Board certified teachers have higher math and reading scores by 0.04 and 0.01 of a standard deviation. We find that an NBPTS math teacher increases the present value of students’ lifetime income by $48,000.
News, Noise and Oil Price Swings (E3, Q4)
AbstractIn this paper, we propose to interpret oil price fluctuations as a result of changes in expectations about future developments in oil fundamentals (i.e. oil production). However, agents only receive a noisy signal about possible changes in future oil production. Therefore, we distinguish between "news", which has an impact on both oil prices and fundamentals, and "noise", which has no impact on fundamentals but only a temporary impact on prices.
We identify the news shock and the noise using a dynamic rotation with VAR models. We consider two VAR specification: the three variable VAR used in Kilian (2009), a richer specification that includes seven variables.
We find that a large part of oil price swings is attributable to shocks that do not have any effect on oil production or global demand indexes. We interpret this shock, through the lenses of a simple imperfect information rational expectations framework, as a noise shock in the oil market.
Non-renewable Resources, Extraction Technology, and Endogenous Growth (O3, Q3)
AbstractWe develop a theory of innovation in non-renewable resource extraction and economic growth. Firms increase their economically extractable reserves of non-renewable resources through R&D investment in extraction technology and reduce their reserves through extraction. Our model allows us to study the interaction between geology and technological change, and its effects on prices, total output growth, and the resource intensity of the economy. The model accommodates long-term trends in non-renewable resource markets -- namely stable prices and exponentially increasing extraction -- for which we present data extending back to 1792. We also calibrate the model to an extensive historical data-set for the international copper market. The paper finds that over the long term, development of new extraction technologies balances the increasing demand for non-renewable resources.
Nonparametric Identification of Production Functions and Testing for Hicksian-neutral Productivity Shocks (L6, C1)
AbstractHicksian-neutral technology implies the substitution pattern of labor and capital in a production function is not affected by technological shocks, first put forth by John Hicks in 1932. This paper considers identification and estimation of fully nonparametric firm-level production functions and then empirically test the Hicksian-neutral productivity in the U.S. manufacturing industry during the period from 1990 to 2011. Firstly, I extend the “proxy” variable approach to fully nonparametric settings and propose a robust estimator of average output elasticities in non-Hicksian neutral scenarios. Secondly, I show that the Hicksian-neutral restriction can be converted to the additive separability between observed inputs and unobservables. Empirical results suggest that there is substantial heterogeneity in the nonparametric output elasticities over various counterfactual input amounts. I also find that there were periods in the 90s when the non-Hicksian technological shocks occur which coincides with the mass adoption of computing technology. However, the productivity has thereafter become Hicksian-neutral into the 2000s. Controlling for sector-specific effects mitigate this problem but not all of them.
Obvious Mistakes in a Strategically Simple College-admissions Environment
AbstractAround the world, a growing number of students are assigned to schools through centralized clearinghouses that employ strategically simple mechanisms. Using administrative data, we provide direct field evidence that, in spite of the fact that the Hungarian college admissions process uses a strategically simple mechanism, a large fraction of the applicants employ a dominated strategy. These applicants make obvious mistakes: they forgo the option for a tuition waiver worth thousands of euros, even though this behavior has no benefit. In many cases, obvious mistakes are costly, as applicants would have received the tuition waiver had they asked for it. Obvious mistakes are more common among applicants with low academic achievement and high socioeconomic status. Our difference-in-differences design exploit exogenous variation in program selectivity, created by a reform that reduced the number of funded positions in certain fields of study. Our estimates indicate that a rise in program selectivity substantially increases the likelihood of obvious mistakes, especially among high socioeconomic status applicants and low-achieving applicants. Costly mistakes transfer tuition waivers from high to low socioeconomic status applicants and increase the number of students attending college. Taken together, our findings suggest that students facing lower expected cost of making an obvious mistake are more likely to err.
On the Economics of Health in Homes
AbstractThe effects of outdoor climate and air pollution on health outcomes have been well documented, but in developed countries, individuals spend most of their time indoors, particularly in their own home. This paper investigates the relationship between indoor housing conditions and occupant health, using a detailed longitudinal dataset of some 25,000 German households. The analysis shows that individuals living in poorly-maintained homes tend to report a higher number of health issues, after controlling for socio-economic status and health-affecting lifestyle choices. Those individuals also experience a 12-percent increase in their demand for healthcare, as reflected in the number of visits to the doctor. We document significant heterogeneity in the detrimental effect of poor housing quality on the demand for health care -- the effects are strongest for women, who visit their doctor up to 22 percent more often if they live in poorly maintained homes. For age groups over 51 years, occupants of homes needing a major renovation visit the doctor about 30 percent more often as compared to those living in homes with a good condition. The results have implications for policymakers, who are increasingly seeking for prevention of disease as means to reduce the burden of rapidly increasing healthcare costs.
On the Interaction of Growth, Trade and International Macroeconomics (F4, O3)
AbstractStandard economic theories have severe difficulties in simultaneously explaining a number of key aggregate empirical facts: i) there are substantial differences in capital-labor ratios across space and time ii) despite continuously increasing capital-labor ratios, both factors still earn non-negligible shares in income iii) labor hours per capita are rather stable amid expanding consumption possibilities iv) price levels are higher in more developed countries v) there are no large gains from factor-proportions trade vi) the world trade-to-output ratio increases over time. I argue that standard economic theories ignore the vast improvements in goods quality and new products. I present an augmented standard model that incorporates these features and can jointly rationalize these six empirical facts.
On the Use of Hypothetical Price Data to Estimate Hedonic Models (Q5, Q0)
AbstractHedonic models of housing prices have proven to be a viable method for eliciting the economic value of amenities provided at or near the home that are not traded in a market setting (e.g., because of public good characteristics, natural monopoly, or due to other market failures). Nevertheless, few studies have applied the hedonic pricing method in developing countries, presumably because accurate data on housing prices is hardly available. As an alternative to the lack of housing price data, some hedonic valuation studies have used hypothetical data on housing prices reported by home owners to estimate the value of housing attributes, environmental amenities, and public services. However, home owners may misestimate the value of their home when they have little market experience and when there are few houses with similar characteristics that can be used as a basis for comparison when determining house values. This is certainly the case of developing countries, where housing markets tend to be underdeveloped and housing units are often self-built over long periods of time. Therefore, value estimates for amenities provided at or near the home may be biased when hypothetical data is used.
This paper investigates potential biases in implicit values of housing attributes and public services derived using hedonic models of hypothetical housing prices reported by home owners. Using data from a random sample of 4,800 urban households in Guatemala (reported in the 2014 Living Standards Measurement Survey), we estimate endogenous switching regression models of rental prices to compare implicit prices estimated using rental prices reported by home renters against values estimated using hypothetical rental prices reported by home owners. Our results show that home owners may misestimate the implicit value of some housing attributes and public services.
On the Virtue of Being Regular and Predictable: A Structural Analysis of the Primary Dealer System in the United States Treasury Auctions (G2, L5)
AbstractThe United States Treasury market is the crown jewel of the US and the world economy. There are $12.5 trillion in marketable securities outstanding, and primary dealers trade an average of around $500 billion every day. This paper studies a policy question whether the current primary dealer system should be maintained to achieve the debt management objective of lowest cost over time in a current economic environment after the financial crisis.
The novelty of the paper over previous literature (Boyarchenko, Lucca, and Veldkamp (2016) and Hortacsu, Kastl, and Zhang (2016)) are as follows. First, this paper quantifies the structural change in the Treasury market by examining the primary market data of 3444 auctions (total issuance $89.41 trillion) between May 2003 to November 2016. Second, this paper develops a novel model of primary dealer system that rationalizes the finding of US Treasury (2012) that primary dealers bid more aggressively than others. Third, this paper develops a new method of counterfactual analysis with the asymptotic approximation to compare with the direct bidding system (the standard uniform price auction) and the syndicate bidding system.
We find that primary dealers bidding activities have declined and the investment funds activities have increased. Drivers of these changes are dealers' lower risk-taking, the regulatory changes increased the demand for short-term Treasury as HQLA and HQC, and "electrification." These structural changes could increase the volatility of bids and so auction yields.
We find that the primary dealer system achieves the balance between information pooling and competition. The counterfactual analysis based on structural estimation shows that the volatility of the primary dealer system funding cost is 23.2% lower than the direct bidding system, and 64.0% lower than the syndicate bidding system. At the same time the primary dealer system achieves a similar level of auction revenues.
Optimal Seniority of Last Resort Loans
AbstractWe show that tighter mortgage lending standards after the Great Recession have led to higher housing rents. U.S. banks, especially those deemed systemically important, have increased their propensity to deny mortgage applications, particularly among FHA loan applicants and black and Hispanic borrowers. Tighter standards have increased demand for rental housing and led to higher rents, depressed homeownership rates, greater construction of multifamily housing, and lower rental vacancies. These effects are stronger in MSAs with barriers to using online lending platforms, such as age and internet accessibility, and where regulations inhibit competition among alternative lenders.
Payback Scheme in First-price Sealed-bid Auctions: An Experimental Study (C9, D4)
AbstractFirst-price sealed bid auction is a widespread auction format to allocate resources. A common finding is that bidders bid over the risk neutral Nash equilibrium prediction. While this behavior is generally considered to be due to risk aversion, a growing number of papers show that an additional explanation could also play a role: loss aversion. In this paper, we design a payback scheme in first-price auctions where loss aversion can be tested directly. In this payback scheme, before the auction starts, the bidders are given a fixed amount of money to bid. Only the winner keeps the money and the losers need to pay the money back to the seller. We provide and compare the risk aversion and loss aversion equilibrium bidding models and expected revenue in first-price auctions in two cases: with and without the payback scheme. The model predicts that the risk neutrality and loss neutrality play the same role in bidding strategy. The scheme can increase the seller’s revenue only if the bidders are loss averse. In a series of experiments, we compare the revenue and efficiency of these two designs. We find that, in terms of revenue, the payback scheme can generate more revenue only if the money given to the bidders is smaller than a critical value. However, the payback scheme has no influence on efficiency. Moreover, our design also allows us to identify the stability of risk preferences and loss aversion attitudes within bidders by comparing measures obtained from two institutions: first-price auctions and lotteries. The results suggest that elicited preferences are not stable across different institutions.
Peers and Motivation at Work: Evidence From a Firm Experiment in Malawi
AbstractThis paper sheds light on the nature of workplace peer effects by analyzing an experiment with a tea estate in Malawi. We randomly allocate tea-harvesting workers to locations on fields to estimate the impact of peers on worker performance. Using data on daily productivity, we find strong evidence of positive effects from working near higher-ability peers. Our estimates show that increasing the average of co-worker ability by 10 percent increases own-productivity by about 0.5 percent. We find nonlinearities in the magnitude of peer effects across the distribution of own-ability: peer effects are the largest for the lowest ability workers. Since workers receive piece-rates and there is no team production, peer effects in our setting are not driven by production or compensation externalities. In additional analysis, we find evidence against learning or worker socialization as mechanisms. Results from an incentivized choice experiment suggest instead that peer effects in this context are driven by co-workers as a source of “motivation.” When given a choice to be re-assigned, the majority of workers want to be assigned to be near a fast (high-ability) coworker, even if switching is assigned an explicit cost. In open-ended survey responses, workers with demand for high-ability peers state that working near faster peers provides motivation to work harder.
Pensions and Sovereign Default (E6, F3)
AbstractThis paper studies the effect of public pension obligations on a government's decision to default. In the model, the government can renege on its pension promises but suffers a cost from losing the trust of households about future pensions. Large pension promises act as a commitment device for debt because they require the government to have regular access to credit markets. The government's decision to default is driven by its total obligations, not just its debt. This otherwise deterministic economy has an endogenous cycle in which periods of high spending and increasing debt are followed by periods of pension reform and debt reduction. The model successfully produces high debt in excess of 100% GDP without default and back-loaded pension cuts that match salient features of recent reforms in six EU nations.
Political Connections and the Value of Property Rights (G3, K1)
AbstractWe study the impact of nominal changes in property rights on firms with different
political connections. Specifically, we examine a policy experiment in Shenzhen,
China in which the local government grants land titles to the current users. We find
that the strengthening of property rights leads to increased investment for title
recipients on average, but only those politically connected firms benefit from the
reform. Given that politically connected firms are less productive than unconnected
firms, our findings are consistent with the view of regulatory capture that institutional
reforms can exacerbate resource misallocation due to preferential treatment to
Political Uncertainty, State Ownership, and Credit Reallocation: Evidence From the Chinese Anti-corruption Campaign
AbstractWe provide a novel empirical finding that the recent anti-corruption investigations in China are associated with credit reallocation from state-owned enterprises (SOE) to privately-owned, non-SOE firms. Our evidence suggests that industry specific competition effect dominates the contagion effect for non-SOE peers. This credit reallocation effect is more concentrated in short-term debt versus long-term debt and in bank loans versus corporate bonds, with higher investment efficiency and market share. The credit shifting towards non-SOE firms is also consistent with a supply-side explanation that we corroborate using an exogenous shock to the banking industry. Our findings imply that the anti-corruption campaign in China is beneficial to the economy due to more efficient credit allocation.
Prudential Policies and Their Impact on Credit in the United States (G2, G1)
AbstractWe analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks—banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.
Pushed Into Necessity? Gender Gaps in the Labor Market and Entrepreneurship of Women (J1, L2)
AbstractTheoretical literature on entrepreneurship hints that labor market inequality may constitute a relevant push factor for necessity self-employment, as opposed to aspirational self-employment. Empirical evidence was thus far weak, because of methodological and data limitations. We put into empirical test the conjecture that the extent of gender inequality in the labor market constitutes a pushing factor for necessity self-employment among women. We focus on women and measure labor market inequality by the means of adjusted gender wage and gender employment gap, comparable for a large selection of countries. We employ a large collection of the estimates of the gender employment and gender wage gap. We match these estimates with the rich and comprehensive data from Global Entrepreneurship Monitor (GEM), which is used widely for the studies of self-employment. Combining these two rich sources of data made it possible to analyze the case of 26 different countries, including advanced market economies, catching up and developing countries.
We relate explicit, empirical indicators of gender inequality to the decisions concerning self-employment across genders in a large number of countries, thus providing comprehensive evidence concerning the relationship between labor market inclusivity and the necessity and aspirational self-employment for women, relative to men. We find that, higher scope of unexplained employment and wage inequality is associated with higher necessity self-employment among women. Although the effect is statistically significant and robust, it does not seem, however, to be economically large. Exploiting the fact that richness of the data permits separation into declared motivations for becoming self-employed, we also contribute to the debate on the drivers of aspirational self-employment. We find that labor market inequality between men and women has no explanatory power in the aspirational self-employment.
Quantifying the Size and Composition of Black Markets: A Case Study in Syrian Antiquities (F5, C5)
AbstractThe black market in Syrian antiquities has recently risen to international prominence because of its possible connection to terrorist organizations, as well as the irreparable damage to scientific knowledge being caused by widespread looting. Understanding the market’s composition and supply channels is important for optimizing counter-terrorism efforts, allocating limited resources to protect cultural heritage sites, and designing international regulations to mitigate antiquities trafficking. This paper outlines a method for using visible (publicly available) data to impute characteristics of the invisible black market. The method follows a growing trend to use “big data” and machine learning to answer important policy questions. Our data consist of comprehensive archaeological excavation records and thousands of detailed market sales records. We develop a text-categorization procedure to standardize the sales record descriptions. This categorization produces hundreds of variables that are input to a hedonic regression algorithm to match objects between two new datasets, thereby allowing us to impute market prices for excavated objects. We then extrapolate the archaeological data to nearby looters' pits to impute their contents and value. This method provides the first scientifically-based estimate of the potential value and composition of the black market.
We calculate that our case study sites would be worth a few million dollars each; based on this, we contextualize previous estimates of the value of the antiquities trade (and particularly the revenues made by terror groups). We discuss several policy-relevant insights that revise our understanding of the antiquities supply chain, the most at-risk sites in the region, and the potential revenue flows to different groups. We further discuss how these results might be extended to the rest of the Syria/Iraq region, and whether the basic framework might apply to other black markets.
Quantifying the Social Benefit of Bail-in Measures Using Option-pricing Techniques (G2, L2)
AbstractThe paper considers a simple continuous-time model of the banking firm in which the social benefit of bail-in measures such as contingent convertibles is approximated as the resulting reduction in the actuarially fair contribution to a resolution fund. The framework assumes that the assets of the financial institution follow a geometric Brownian motion and that the non-equity liabilities, including insured deposits, uncovered bonds, and contingent convertibles arrive at a constant rate with exponentially distributed maturity or lifetime. Using methods from option price theory, this type of model can be solved explicitly. The model is calibrated using data on UK and Swiss banks.
Racial Discrimination Against Afro-Americans in the Executive Labor Market: The Case of Head Coaching in College Basketball (J7, L8)
AbstractIn this paper we examine how the number of African American and White American coaches in college basketball evolved. Our sample ranges from 1892 until 2015. We find that the number of African American coaches steadily increased since 1950. However, two separate industry in college basketball exist; one that is regulated and one that isn't. When we separate our analysis based on the regulation we find statistically significant differences between the coaches. Unregulated colleges and universities consistently discriminate against African American coaches. We show (by using the Oaxaca-Blinder decomposition) that only a minor fraction of this difference is due to different pre conditions of the coaches. Thus, a significant difference between regulated and unregulated institutions exists. Furthermore, we find that our results are not clustered spatially and are time consistent. Our results have important policy implications for the regulation of college sports.
Rating Under Asymmetric Information (G1, G3)
AbstractWe study a dynamic signaling game where a firm, by its decision to stay solvent, signals its quality to a rating agency with the rating feeding back into the firm’s cost of capital. Observing the firm’s true cash flow blurred by a persistent measurement error, the error-minimizing rating agency learns dynamically through the firms solvency decision. Firms with higher measurement error default earlier, inducing directional learning by successively eliminating overestimated measurement errors. In a partially separating perfect Bayesian equilibrium in Markov strategies, the firm employs a measurement-error dependent cut-off strategy. We discuss the extensive economic consequences of such a learning mechanism.
Re-evaluating the Returns to Language Skills Using Latent Factor Methods (J1, C1)
AbstractPast studies have established a large wage premium for immigrants who learn the language of their destination country. However, these measurements are usually based on self-reported ordinal measures of language fluency, which are problematic and inconsistent in several ways. Using detailed survey data from France, this paper documents such inconsistencies, constructs more robust latent factor measures of language fluency using several different measures of language skill, and re-evaluates the economic effects of language fluency. The wage premium for language is found to be larger than previously thought, while education and neighborhood concentration are found to be weaker determinants of language fluency than past studies would imply. To provide a benchmark for constructing latent factors with other data sets, the paper classifies the sources of systematic between-group differences in survey responses; birthplace and tenure are the most important sources of such differences. Overall, the large differences between the distributions of self-reported survey responses and the estimated latent traits cast doubt on the empirical validity of studies that rely on raw survey data to measure language skills.
Real Interest Rate and Real Exchange Rate in Emerging Markets (F4, E3)
AbstractWhat is the main driving force of real business cycle in small open emerging market economies? In this paper, we investigate this issue from the perspective of a stylized fact that is often ignored in the literature – the significant comovement between the real exchange rate and real interest rate at business cycle frequency. Using the Bayesian estimation method and data from both Mexico and Argentina, we show that a standard RBC small open economy model with both tradable and non-tradable sector fails to generate the observed negative comovement and the countercyclical real interest rates. This is mainly because to replicate the real exchange rate dynamics, technology shocks in non-tradable sectors are identified as the major driving force of business fluctuations. But once we introduce deviation from law of one price in tradable goods - imperfect substitution between home and foreign traded goods into the standard two-sector model, surprisingly this modified model can replicate the real exchange rate dynamics and the comovement of real interest rate with other macroeconomic aggregates, especially the real exchange rates well. We find that this is due the dominant role of country premium shocks in explaining the real business cycle in emerging markets.
Reason for Migration and Health Outcomes of Migrants in the United Kingdom
AbstractUnderstanding immigrant health trajectories is important from a policy maker’s perspective as health is a fundamental factor of economic productivity and health care costs comprise a large share of government expenditures (Grossman 1972, Garcia-Gomez et al., 2010)). Immigrants enter the host country under different migration routes (e.g. work, study, family, asylum) and we would expect health outcomes to vary by entry route given the differences in selection criteria. This paper first provides stylised facts on health outcomes across groups of immigrants differentiated by their reason(s) for migrating to the UK and also compares these outcomes to those of natives. In the spirit of Chiswick et al. (2008), we examine whether there is any convergence in health outcomes across groups over time. We contribute to previous studies by analysing a richer set of health outcomes and by exploiting the large and heterogenous flows of immigrants to the UK over the last few decades. Consistent with previous studies, we find that more recent cohorts of migrants have better health outcomes, but health outcomes deteriorate with duration of stay in the country. Migrants who moved to the UK to claim asylum report the highest rate of lasting health problems, followed family reunification migrants. Migrants who entered the UK as students report the lowest rate of labour market inhibiting health problems, while those who migrated to claim asylum are more likely to have their labour market outcomes inhibited by mental health or depression. We further go on to examine what might explain differences in the observed health outcomes across groups, the association between changes in health outcomes and the economic integration trajectories of the different groups, and whether there are differences across gender and/or age groups. Finally, we discuss how these results compare with the evidence from other countries and regions.
Reconsidering Prior Appropriative Water Rights in the Western United States with Heterogeneous Multiple Users and Risk Management (Q2, K3)
AbstractOur paper demonstrates that prior appropriation doctrine (PAD), the prevalent water rights institution in the western U.S., provides a more efficient mechanism for allocating risk under stochastic water supply than do proportional sharing institutions, previously deemed superior. Burness & Quirk (B&Q, 1979) show that PAD is inefficient since it imposes unequal risks among water rights holders, assumed to be identical, and recommend an equal proportion scheme. Bennett, Howe, & Shope (BHS, 2000) relax the identical-user assumption in a two-user model and suggest a mixed contract, which is intrinsically a multi-proportion scheme. Although recent field studies and a lab experiment illustrate cases in which water institutions permitting unequal risk enable heterogeneous users to hedge against risk, we are unaware of a generalized theoretical model comparing PAD and proportion schemes in risk management.
Our paper shows that, with multiple heterogeneous water users, the BHS scheme is not ex ante implementable without a market or truth-telling mechanism. We then show that, with heterogeneous users, PAD water allocation more closely approximates a market outcome. Our theoretical model shows further that PAD performs better in a competitive water market with stochastic supply, supporting risk management. That is, in a proportion scheme, variance of water received is inseparable from the desired expected water, while PAD, distinguished by a maximum amount of water receivable and a priority for receipt of water, provides for a wide risk management portfolio. Thus, PAD users can select the variances for water received separately from expected quantities of water. A policy implication is that municipal and industrial users facing minimum water supply constraints would purchase excess water shares in a proportion scheme, while in PAD could purchase a senior priority for a desired amount of water. Our paper provides a generalized analysis of western water right institutions’ efficiencies and risk management potential.
Regional Innovation Policy in Taiwan and South Korea: The Impact of Science Parks on Small and Medium-Sized Enterprises’ Productivity Distributions
AbstractIn this paper the effectiveness of regional innovation policy creating science parks is evaluated by analysing productivity variations of small and medium-sized enterprises (SMEs) via a regional economics approach. Using 3-digit NAICS firm-level panel data for Taiwan and South Korea, we study the effect of dominance of SME-network model in Taiwan and the scale-based technological development model in South Korea on the efficiency of science park SMEs in each country. Science parks created to support innovation and regional growth often target productivity gains associated with agglomeration economies. However, spatial proximity of firms also stimulates selection, whereby less competitive firms are forced to exit, and hence a cluster of high-productivity, surviving firms is observed at the regional level. Empirical studies further show that either high or low-productivity firms or both may spatially sort into a region. Using methodological inspiration from Combes et al. (2012) and Forslid and Okubo (2014), productivity distributions for firms in cities and science parks are simultaneously analyzed to identify the impact of agglomeration and selection effects while controlling for the self-selection into a region through two-stage Heckman (1979) selection model. To control for the effect of unobserved heterogeneity and resultant productivity variations on spatial sorting behavior of firms, the percentile-wise probability of location is estimated for science park’ SMEs. The results indicate heterogeneity in location choice of SMEs and impact of policy across the two countries. The impact analysis of policy incentives on firm-productivity through regression and matching techniques indicates the need for homogeneity in national and regional level policies.
Regrets in Stated Choice Models: the Role of Status Quo and Nudging by Choice Alternatives (Q2, Q0)
AbstractThis paper examines the regret minimization behavior vis-a-vis random utility maximization in willingness-to-accept (WTA) stated choice experiments. We advance the existing random regret minimization (RRM) model by developing a status-quo specific RRM (SQ-RRM) model that accounts for differences in regrets generated by deviations from the status-quo (SQ) and deviations from given alternatives. We find that these differences are significant and that regret minimization in general dominates random utility maximization. Further, the extent of regret minimization depends on decision makers’ characteristics and the certainty associated with their decision. We find non-trivial differences between the predicted acceptance rates of conservation programs based on the SQ-RRM versus RUM estimates. Under RUM, decisions to accept or reject a conservation program depend only on the program’s own attributes, independent of those of suboptimal alternative programs. In contrast, under SQ-RRM, the decisions on a conservation program depend on the comparative advantages of this program relative to all other alternative programs. This finding suggests that, under regret minimization, the choice sets provided to decision makers can affect their WTA values and adoption decisions, and policy makers can nudge decision makers towards adopting conservation programs by providing carefully chosen suboptimal programs in the same choice sets.
Regulation and the Labor Supply of Criminals: A Study Using Local City Arrest Data (J2, J4)
AbstractUnemployment generated by a regulatory shock to labor markets may lead to spillover effects in illegal labor markets. In particular, high-risk or low-skill individuals who face strict budget constraints may seek alternative forms of illegal employment in addition to or as a substitute for savings or public assistance. I employ city crime data and state level changes in the minimum wage for Chicago and New York City to test the effect of state minimum wage increases on the
number and percent of crimes which may generate income. I focus on the minimum wage as a regulatory shock which may generate spillover effects to illegal labor markets. I find a positive relationship between increases in state minimum wages and increases in crime, as well as increases in the different types of crimes. I include several specification tests to which the results are robust. My preliminary results suggest that regulatory shocks to legal labor markets have a significant effect on crimes which can generate income.
Regulation, Competition, and Price Dispersion: Evidence From the Airline Industry (L5, L1)
AbstractCompetition is considered as one of the factors affecting price dispersion. However, we show that competition is not an exogenous shock to price dispersion, but rather it is endogenously associated with the changes in the regulation. That is, competition is only one of the channels in which the regulation affects price dispersion.
We also identify product quality and re-shuffling of the scheduled departure times as other channels. We suggest a noble estimation strategy when analyzing the treatment effects via a difference-in-differences model. Moreover, we propose a new instrumental variable set when addressing the endogeneity issue between competition and price dispersion.
Regulatory Growth Theory (O3, K2)
AbstractThis research explores and quantifies the downside of technological innovations, especially the negative externality of an innovation interacting with the stock of existing innovations. Using two novel datasets, we make a novel empirical finding that the varieties of innovation-induced risks (e.g. varieties of side effects caused by FDA-approved new drugs) is quadratic in the number of innovations (e.g. number of FDA-approved new drugs) that caused these risks. Based on this new empirical finding, we further develop a Regulatory Growth Theory: a new endogenous growth model with increasing varieties of innovation-induced risks and with a regulator. I model both the innovation-induced risk generating structure and the regulator's endogenous response. This new theory can help to interpret several empirical puzzles beyond the explanatory power of existing models of innovation and growth: (1) skyrocketing expected R&D cost per innovation; (2) decreasing ratio of Qualified Innovations (i.e. Regulator-approved innovations) to the number of total patents and (3) exponentially increasing regulation over time. Greater expenditures on regulation and corporate R&D are required to assess the net benefit of innovation because of "Risk Externality": negative interaction effects between innovations. Theoretically, this new "Risk Externality" effect we propose counteracts the crucial “Knowledge Spillover” effect in the Endogenous Growth models. The rise of regulation versus litigation, and broader implications for regulatory reform are also discussed.
Reputation Dynamics in a Market for Illicit Drugs (L1, K4)
AbstractWe analyze reputation dynamics in an online market for illicit drugs using a novel dataset of prices and ratings. The market is a black market, and so contracts cannot be enforced. We study the role that reputation plays in alleviating adverse selection in this market. We document the following stylized facts: (i) There is a positive relationship between the price and the rating of a seller. This effect is increasing in the number of reviews left for a seller. A mature highly-rated seller charges a 20% higher price than a mature low-rated seller. (ii) Sellers with more reviews charge higher prices regardless of rating. (iii) Low-rated sellers are more likely to exit the market and make fewer sales. We show that these stylized facts are explained by a dynamic model of adverse selection, ratings, and exit, in which buyers form rational inferences about the quality of a seller jointly from his rating and number of sales. Sellers who receive low ratings initially charge the same price as highly-rated sellers since early reviews are less informative about quality. Bad sellers exit rather than face lower prices in the future. We provide conditions under which our model admits a unique equilibrium. We estimate the model, and use the result to compute the returns to reputation in the market. We find that the market would have collapsed due to adverse selection in the absence of a rating system, and that the market is providing more information about seller quality than a profit-maximizing monopolist would.
Reserve Requirements as a Financial Stability Instrument (E5, F4)
AbstractMany emerging countries have been actively using reserve requirements as a macroprudential policy tool. Following Glocker and Towbin (2012), we present a model in which reserve requirements are used as an additional tool to monetary policy to pursue price stability and financial stability objectives. We extend the model so that reserve requirements can be used to reduce the probability of scenarios of financial turbulence and excessive credit growth. Then, using a cost-benefit analysis framework as in Behn et al (2016), we estimate the impact of reserve requirements on a group of real and financial variables and on the likelihood of financial distress for a sample of emerging countries that have been actively using this policy tool. We quantify (i) the costs in terms of output losses due to higher reserve requirements and (ii) the benefits in terms of lower probability of financial distress.
Revisiting the Persistence of Population Shocks: Why Do Studies Reach Such Different Results? (J6, R1)
AbstractThis paper studies the persistence of a large, unexpected, and very unevenly population shock,
the inﬂow of eight million ethnic Germans from Eastern Europe to West Germany after World War II.
Using detailed census data, we show that the migration-induced population shock was very persistent across counties within the same local labor market, but was only transient across local labor markets. Our ﬁndings are consistent with locational fundamentals determining population patterns across but not within local labor markets. They might also explain the disparate results in the literature that test for the importance of locational fundamentals in explaining the spatial distribution of economic activity.
Robin Hood on the Grand Canal: Economic Shock and Rebellions in Qing China, 1650-1911 (O1, N4)
AbstractSocial scientists have long pondered the effects of economic shocks on social conflicts. Despite the recent literature that has employed exogenous variation in climate changes or global prices to identify the causality, the findings are still inconclusive. This paper uses the abandonment of China's Grand Canal -- perhaps the largest infrastructure project in the pre-modern world -- in 1826 as a natural experiment to study the link between economic shocks and social conflicts. Using a dataset covering 575 counties from 1650 to 1911, we have found that negative economic shocks significantly generated social instability: in the period of post-abandonment, the annual frequency of rebellions was 0.0094 higher in counties bordering the canal than those that are not. The magnitude of the effect accounted for a 124% increase relative to the sample mean and was robust across various specifications. We then compare the relative explanatory power of alternative explanations, and conclude that the reform was most likely to arouse rebellions by reducing opportunity cost of the rebels, specifically through the interruption of access to trade in urban areas.
Securitization and Aggregate Investment Efficiency (G2, E5)
AbstractThis paper studies the efficiency of competitive equilibria in economies where the expansion of investment is facilitated by securitization. We show that the use of se- curitization is generally associated with constrained inefficient aggregate investment, thereby justifying regulatory intervention in markets for securitized assets. We examine the effectiveness of three policy instruments to address this inefficiency: ex-ante capi- tal / leverage requirements, skin-in-the game (retention) requirements and initiatives to improve transparency in the securitization process. We find that leverage/capital restrictions and improved transparency can increase welfare in our environment, but that forcing originators to hold additional skin-in-the game can never increase welfare.
Securitization and Cross-border Spillovers From Macroprudential Policy (F4, E5)
AbstractThis paper puts forward a two-country two-period general equilibrium model with fragmented mortgage and capital markets and heterogeneous banks. I extend Goodhart et al. (2013) model by allowing for securitization and by varying risk aversion across banks in two countries. In such a set-up I test the cross-border propagation from capital and loan-to-value (LTV) regulation. I find that the re-optimization of bank balance sheets in response to a macroprudential policy innovation is crucial in determining the magnitude of cross-border spillovers. I also find that by means of securitization banks may shift risk across borders in response to re-balancing the macroprudential policy stance between the two countries, thereby weakening the effectiveness of the policy (securitization channel). In particular, an uncoordinated LTV policy may lead to unintended results as banks increase their originate-to-distribute activity in response. In this way an asymmetric policy innovation is leaked across borders.
Self-Driving Cars and the City: Long-Run Effects on Land Use, Welfare, and the Environment (R4, R0)
AbstractThis paper considers the widespread adoption of electric, shared, autonomous vehicles (AVs). Numerical simulations suggest falling transportation costs and changing center-city land use patterns will reshape the urban form of the city, with several primary consequences. The most likely scenarios suggest substantial household welfare increases, suburbanization, and increased household energy consumption, calling into question claims that autonomous vehicles will save energy.
Shades of Gray: Director Classification Revisited (G3, K2)
AbstractWe demonstrate that a measure of a board’s functioning independence should incorporate both the
varying roles played by its gray directors and its decision on whether to classify former employee
directors as independent or gray. We first find increasing corporate fraud when former employees serve as
gray directors. By contrast, other “outside” gray directors who are bankers/consultants are less associated
with fraud. We also find that fraud is even more likely when boards aggressively classify a former
employee as an independent director. We provide additional evidence of increasing internal agency
conflict of a board with former employees from CEO turnover.
Shari'a Law and Economic Growth (O1, Z1)
AbstractI use the synthetic control method (Abadie and Gardeazabal, 2003) to identify the causal effect of Shari’a Law on a country’s economic growth. I compare GDP per capita levels for Mauritania to a synthetic counterfactual, finding that, relative to the constructed control, the treated country experiences a large wealth loss. In particular, if Mauritania would not have introduced Shari’a Law within its legal system in 1980, it would have had an 8.70% higher GDP per capita, as computed in 1991. To generalize these results, I study the effects of the introduction of an ornamental constitution including a Shari’a as a Source of Legislation clause on Saudi Arabia’s economic growth. Baseline results hold, providing support for the generalizability of these findings. All in all, this paper identifies for the first time the existence of large economic costs associated with the introduction of Shari’a Law within a legal system, which should be carefully considered by countries experiencing a process of political Islamization.
Should bank capital requirements be less risk-sensitive because of credit constraints? (E4, G2)
AbstractWe consider optimal capital requirements for banks' lending activities when the potential trade-off between financial stability and economic
(productivity) growth is taken into account. Both sides of the trade-off are affected by banks' credit allocation, which in turn is affected by the risk weights used to set capital requirements on bank loans. We nd that when firms are credit constrained, the optimal risk weights are flatter than those that are only set to safeguard against bank failures and their social costs. When risky borrowers are also more productive, the 'flattening' effect is amplified. A quantitative evaluation of the model using US corporate loan data suggests that the welfare cost of a purely risk-based rule may be small and equivalent to getting the level of capital requirements wrong by 1 percent.
Sir! I'd Rather Go to School, Sir!
Abstract96 out of 99 countries that experienced internal armed conflict between 1946 and 2014 are developing countries. Moreover, at least one side of all 122 interstate armed conflicts in the same period has been a developing country. This indicates that having a strong yet relatively inexpensive army is critical for the state in these countries. Conscription is one popular solution. Despite the prevalence and importance of conscription, its different aspects and consequences have remained largely under-researched. This paper tries to shed light on an aspect of military service in one of the most under-studied countries, Iran. The research question is whether the fear of conscription entices young men to get more education against their will. The paper uses a discontinuity in the military service law in Iran to answer this question. Iranian males become eligible for military service when they reach 18 and are most typically drafted without omission. But, between 2000 and 2010, sole sons whose fathers' age was over 58 at the time of son's eligibility were exempted from the service. Sole sons whose fathers' age was a bit below the threshold were not eligible for this exemption, but could have exploited a loophole: they could have attended school until their fathers' age reached or surpassed the threshold, in order to obtain exemption upon leaving school. This study shows that, as a result of this, there is a discontinuity in education levels of sole sons at the father's age of 59; sole sons whose fathers' age was below the threshold were 13 percentage points (20 percent) more likely to attend college than those whose fathers' age was above it. This exogenous increase is used to estimate returns to college education. The important policy implications of these results are discussed.
Skill Misallocation and Education Quality (I0, E2)
AbstractRecent studies show that education quality explains up to 30 percent of the cross-country income gap (Erosa et al, 2010; Manuelli and Seshadri, 2014). Investment in education strongly responds to perceptions of labor market conditions (Hastings et al, 2015). The question of this paper is to what degree the labor market mismatch between skills and job requirements or a skill misallocation can explain the variation in education quality.
I illustrate the potential effect of skill misallocation on education quality by constructing a labor market signaling model, in which firm owners receive noisy signals of workers' human capital. The noise in human capital signals reduces the sensitivity of equilibrium wages to actual human capital, but increases their sensitivity to easily observable years of education. Households in response apply less unobservable learning effort, resulting in lower education quality. Moreover, the better sorting of students into education levels by ability can have a negative effect on education quality if skill misallocation is high.
I use two different approaches to test for the relationship between misallocation and education quality. First, I use self-reported future occupations of students from PISA 2015 dataset to construct a novel measure of expected skill misallocation. Skill misallocation measure is equal to the variance of future occupational ranking (ISEI), which is not explained by students' cognitive and non-cognitive skills. The paper demonstrates that countries with poor predictive power of skills for occupational ranking have lower education quality. Second, I use the New Immigrant Survey dataset to measure correlations in wages and occupations before and after immigration. I show that migrants from countries with low education quality have a higher probability to switch occupations, and their home wages have a lower predictive power for US wages, controlling for domestic GDP per capita and occupation.
Slowdown: Losses in Dynamism in the Aircraft Industry
AbstractThe inevitability of technological progress is one of the most widely-held beliefs of our era and the dizzying variety one sees whenever one goes shopping, particularly for technologically advanced goods, is thought to be evidence of that continuing progress. Yet there is one very important field in which technological progress appears not only to have stagnated, but reversed. Examining the technical and commercial reality of modern aviation, there are three objective markers of slowdown. First, forty years after its introduction, supersonic flight is no longer available for civilians, neither in commercial nor private jets. Second, commercial flight times have not only failed to get shorter, they actually take longer than they did in the past. Third, state-of-the-art military airplanes today can no longer reach the speed and altitude records set four decades ago. While flight today is safer, cheaper, and more widespread than in the past, it has become slower, and jet-makers are strangely not even interested in exploring ways of making it faster. An investigation of the economic reasons behind this slowdown pinpoints a culture which has moved from valuing achievement and enterprise to prioritizing safety and cost-reduction, thus moving from making faster airplanes to making more affordable planes with lower emissions. The political influence of incumbent jet-makers allowed them to place barriers to supersonic flight and eliminate market competition over speed. The receding state of the art in aviation acts as both an object lesson and a warning for the state of economic dynamism overall, and the paper concludes with discussing wider societal implications.
Smog in Our Brains: Gender Differences in the Impact of Exposure to Air Pollution on Cognitive Performance
AbstractThis paper studies the effects of contemporaneous and cumulative exposure to air pollution on cognitive performance for people over age 10. By merging a longitudinal Chinese national sample at the individual level with local air-quality data according to the exact time and locations of interviews, we find that contemporaneous and cumulative exposure to air pollution impedes both verbal and math scores of survey subjects. Interestingly, the negative effect is stronger for men than for women. In particular, the gender difference is more salient among the old and less educated in both verbal and math tests.
Socio-Economic Gaps in University Enrollment: The Role of Perceived Pecuniary and Non-Pecuniary Returns (J0, I0)
AbstractStudents from low socio-economic backgrounds are significantly less likely to go to university compared to students from more advantaged backgrounds with similar levels of skills. While traditional models emphasize the role of credit constraints in explaining the socio-economic gap in university attendance, we investigate to what extent the gap can be explained by differences in beliefs about the pecuniary and non-pecuniary benefits of university education. For this purpose, we elicit students' beliefs about the benefits of attending university as well as their intentions to go to university in a sample of 2,540 secondary school students in England. Our analysis proceeds in three steps. First, we document that relative to high socio-economic status students, students with low socio-economic status perceive both the pecuniary and non-pecuniary returns to university to be significantly lower. Second, we derive and estimate a choice model which allows us to investigate the relative importance of different factors. For both low and high socio-economic status students, the perceived non-pecuniary benefits can explain a large share of the variation in intentions to go to university. Amongst the non-pecuniary outcomes, expected job satisfaction, parental approval, and perceptions about social life during the 3-4 years after finishing secondary school are most important. Third, we perform a decomposition analysis and find that 49% of the socio-economic gap can be explained by differences in beliefs across socio-economic groups, and that 37% can be explained by differences in beliefs about the non-pecuniary returns alone.
Son-preference and the Demographic Transition
AbstractInfant mortality in India has fallen by 41% over the past two decades and fertility is down to 2.4 children per woman, but this apparent progress is obscured by the practice of sex-selective abortion contributing to a severe sex ratio imbalance. We develop a quantity-quality model of fertility in which parents choose overall fertility as well as the gender composition of their children. Model simulations demonstrate that son preference increases fertility, but that sex selection reduces fertility in the presence of son preference (i.e. when females are valued less than males). In other words, the model predicts that sex selection has contributed to India’s falling fertility rate. Son preference is partially endogenized to reflect how relative scarcity of females raises their value even while social norms and lack of economic opportunities lessen their value. These competing factors lead to an equilibrium in which females may or may not eventually be valued equal to males. The results suggest that effectively banning sex-selective abortions, a law that the India government has failed to successfully enforce, could actually hinder India’s demographic transition, reduce quality investment in girls, and slow human capital accumulation and economic growth. Instead, improving economic opportunities for women and enforcing laws that protect their right to inherit property will increase the value placed on daughters, thereby improving the sex ratio and human capital investment in all children.
Spatially Heterogeneous Effects of a Public Works Program (I3, J4)
AbstractMost research on the labor market effects of the Mahatma Gandhi National Rural Employment Guarantee Scheme focuses on outcomes at the district level. In this paper, I show that such a focus masks substantial spatial heterogeneity: treated villages located near untreated districts see smaller increases in casual wages than treated villages located farther from untreated districts. In fact, while there is a large wage increase towards the interior of treated districts, the effect of the program completely disappears at the border of treated and untreated districts. In addition, I present suggestive evidence that this spatial heterogeneity is driven by worker mobility rather than program leakage or pre-program trends. I then demonstrate that while there is no effect of the program on overall private-sector employment at the district level, a district-level focus again obscures intra-district heterogeneity. Finally, by exploiting the difference in wage changes over space, I estimate that increases in consumption are driven predominately by the increase in wages, as opposed to work available through the program itself. A back-of-the-envelope calculation suggests that around 87 percent of consumption gains are attributable to the wage increase, while only 13 percent of the gains are attributable to direct program employment. These results support the argument that increasing prevailing rural wages is an effective poverty-fighting tool in developing countries.
Statistical Discrimination, Occupational Sorting, and Career Opportunities (J7, J3)
AbstractThis paper studies the wage effects of statistical discrimination against female workers due to their weaker labor force attachment and analyzes how child-care subsidies can improve allocation efficiency. We first show that statistical discrimination exists by extending the method of Altonji and Pierret (2001) using Japanese data. We then construct a model that incorporates a screening mechanism and simulate the equilibrium wage outcome under different levels of child-care subsidies. The results indicate that decreasing child-care subsidies could increase women’s labor force attachment and productivity. Such counter-intuitive implications are attributed to the equilibrium shifts from pooling to separating, wherein employers can discern individual women’s labor force intentions and make human capital investments more efficiently.
Stock Return Dependence and Product Market Linkages (G1, C3)
AbstractWe study the implications of inter-firm product market linkages for dependence among the daily stock returns of US publicly traded firms using a spatial econometric regression. Firms’ stock returns are affected by those of their rivals, major customers (i.e. those that represent 10% or more of the firms’ revenue), potential customers and potential suppliers. All the effects are the strongest contemporaneously and diminish rapidly thereafter. Furthermore, the effects of rivals and major customers vary with various characteristics related to the product market network. We document the co-existence of contagion effect and competitive effect among rival firms. Positive (negative) dependence on the returns of rivals imply that contagion (competitive) effect dominates. Competitive effect is found to dominate contagion effect in highly concentrated industries, while contagion effect becomes stronger in industries with higher product market fluidity. The effect of major customers is larger for firms that depend on their major customer(s) for a larger portion of sales and whose products are similar to the products of other firms. This suggests that concentrated customer base and weak product uniqueness may lower firms’ bargaining power and increase the sensitivity of their stock returns to large customers. Furthermore, we show that a firm’s stock return is more sensitive to the negative return shocks than to the positive return shocks of linked firms.
Strategies in Poverty Reduction: Financial Leverage in China (O1, Y8)
AbstractFinancial resources are frequently used for poverty reduction in developing countries. In China, "risk reserve funds" are created by local governments with fiscal anti-poverty transfers, in order to encourage commercial banks to make loans to the poor. This paper analyses this poverty reduction method by economic models, and finds that with financial leverage, anti-poverty cost is lower when market interest rate is restricted, and poor people's welfare and social welfare is higher whatever interest rate is. It is also shown that financial leverage model is suitable when loan's market interest rate is low or marginal cost is high. We consider two tiers of asymmetric information. One tier is the "adverse selection" between the poor and the bank; another tier is the "moral hazard" between the bank and local government. We find that the financial leverage should be adjusted in order to stimulate banks' effort when asymmetric information presents.
Strategy For Lenders By Modelling Competitions: Mortgage Default Versus Restructuring And Prepayment Versus Defeasance (G1, R3)
AbstractWe build a two-stage competing risk model for pricing four types of early termination options written on commercial mortgages: default vs restructuring and prepayment vs defeasance as two pairs of competitions. It is the first study to consider restructuring as a “competitor” with default. The key feature of our model is to introduce collateral underlying property market supply constraints into a property price process which would determine values of early termination options. Our simulations find out greater probability to restructure mortgages by replacing constant payment mortgages or interest only mortgages with graduated payment mortgages and to prepay in cash. We also prove that tightening property supply constraints pushes up values of default, restructuring and prepayment by pricing their analogous options: default (a series of compound European Call on Put options), mortgage restructuring (an exchange option between mortgages with different cash flow structures), prepayment in cash (a series of compound European Call on Call options), and defeasance (an exchange option of more liquid assets with less liquid ones) in different scenarios. Therefore, we suggest controlling property supply constraints as an alternative risk management measure for mortgage markets.
Subchapter S Election and Bank Risk Taking (G2, H2)
AbstractSubchapter S corporations are flow-through entities that avoid double taxation of corporate profit and dividends. Given the features of pass-through taxation, S-corporation owners face incentives to pay out a higher proportion of income as dividends and not to accumulate retained earnings as equity, leading to higher leverage of the bank’s balance sheet. Consequently, electing the S-corporation status not only increases the after-tax income of owners but also changes the riskiness of investment, which may influence the risk-taking appetite of bank owners. The Small Business Job Protection Act of 1996 for the first time allowed financial institutions to elect the Subchapter S corporation status. Taking advantage of this change as a quasi-natural experiment, this paper examines how banks that elect the S-corporation status evolve vis-à-vis other corporate banks that remain C corporations. Using longitudinal data that cover the universe of all commercial banks and savings institutions insured by the FDIC, I estimate changes in bank growth, composition of revenue sources and portfolio compositions after the conversion using the difference-in-differences method. Between 1997 and 1999, banks that elect the S corporation status become more leveraged. In response, they grow less aggressively in revenues and total assets while relying more heavily on interest income rather than more volatile fee incomes. With respect to portfolio compositions, S-corporation banks exhibit a higher loan-to-assets ratio and generally safer compositions of assets and liabilities. I also find strong negative relationship among S-corporation banks between the past leverage ratio and growth rates and portfolio compositions suggesting higher leverage leads to slower growth and safer asset compositions. In sum, S-corporation banks operate more conservatively and rely on traditional banking and maintain safer asset portfolios as the balance sheets become highly leveraged. The results indicate the importance of risk considerations
Supplementing a Stick with a Carrot Does not Always Help. A Study of Restaurant Hygiene Regulation in New York City (L2, L5)
AbstractThis paper uses hygiene inspection data for New York City restaurants to investigate their opportunistic behavior around the grade score threshold and estimates the elasticity of hygiene scores with respect to violation fines. The paper also estimates the monetary value of having a grade-A reputation. Additionally, the paper presents simulation results that suggest increasing violation fines or increasing inspection frequency improves restaurant hygiene.
Sweet Blood: Can Rapid Economic Growth Trigger Type 2 Diabetes?
AbstractIn this paper the fetal origins hypothesis guides research into possible explanations for the recent surge in type 2 diabetes in the United States, especially in southern states, and in poor and middle income developing countries. According to the hypothesis, some biological structures built in utero and in early childhood such as the endocrine pancreas, are a form of biological human capital that persists throughout life and cannot be updated with larger capacities in light of new environmental conditions. Forced by evolutionary challenges the body constructs the endocrine pancreas (and other organs) in anticipation of adult needs for survival and reproduction. Overbuilding is biologically inefficient because construction and maintenance such as replacement of worn-out cells, requires nutritional resources that could be used for survival in times of crisis.
Consistent with this idea, data from the Helsinki Birth Cohort, which tracks the life histories of nearly 9,000 individuals as studied by David Barker and colleagues, show that Individuals most at risk to adult type 2 diabetes were small at birth and then gained considerable weight by the eve of adolescence. Low birth weight signals that development in utero anticipated a lean world created by poor net nutrition of the mother, while obesity at age 11 indicates the child inhabited a lush world replete with food and little or modest exercise. This type of unbalanced physical growth stresses the endocrine system, creating vulnerability to type 2 diabetes, chronic disease that usually appears when people are aged 50-65.
In light of biological theory and empirical evidence, rapid economic growth out of poverty could trigger type 2 diabetes by creating unbalanced physical growth in cohorts born just prior to rapid growth if they enjoyed prosperity as adults. The long history of poverty preps development in utero to optimize organs such as the pancreas for a lean world, which stresses the metabolic system under lush net nutrition. It would be desirable to investigate this mechanism using intergenerational individual level data. Unfortunately this evidence is sparse, and so here I make a case for collecting this information by analyzing aggregate data organized by birth cohorts. Evidence from states of the U.S. and countries around the world shows that the current prevalence of type 2 diabetes is systematically higher in places that began rapid growth several decades earlier.
Technological Change, Business Cycle and the Wage Structure (E2, E3)
AbstractWe study how technological change and business cycle shape the wage structure. Controlling for institutional and demographic changes, we examine patterns of skill prices and real wages between 1961-2012. Return to schooling is weakly countercyclical and positively correlated with technological change. Return to experience is countercyclical and negatively correlated with technology. Wages of unskilled inexperienced workers are positively correlated with technological change and business cycle. To explain these findings, we extend the capital-skill complementarity framework to incorporate schooling, experience, vintage capital equipment and new capital equipment. Our model generates the observed profiles of skill prices if vintage-capital-skill complementarity assumptions hold.
The Common Sources of Business Cycles in Trans-Pacific Countries and the United States? A Comparison with NAFTA (F4, E3)
AbstractThis article investigates how strongly the US economy is integrated into the Trans-Pacific (TP) region, which consists of 15 selected countries that covers the Americas, Oceania, and Asia. We select 13 macroeconomic variables that are widely used in the literature and collect time series data for all countries for the period of 1991Q3-2014Q4. We then apply the principal component analysis to construct a set of variables that represents the TP region as a whole. Next, using the factor-augmented vector autoregression (FAVAR) approach, we decompose the variance of each US variable into three types of factors, i.e., US-specific, TP-specific, and US/TP common factor. We show that on average close to half of the total variation of the individual variables can be explained through the US/TP common factor, showing a high degree of integration of both regions. In order to further examine the source of co-movements of variables in both regions, we employ a two-country open economy DSGE model that incorporates “common shocks” that symmetrically affect each region (Aysun, 2016). The results, consistent with FAVAR analysis, illustrate the importance of common shocks for the two regions.
The Deep Roots of Rebellion: Evidence From the Irish Revolution (D7, N3)
AbstractThis paper analyzes whether radical and negative historical shocks shape cultural norms and have long-run causal effects on political events like rebellions. More precisely, we test whether the Irish Famine (1845-1850), one of the biggest tragedies of modern history, changed political attitudes and contributed to increase the probability of joining the Irish movement of independence against British rule during the Irish revolution over the period 1913-1921. We construct a novel dataset of Irish historical data, by matching the 1911 Irish Census (which contains more than 4 million individuals) with the official list of veterans from the Irish Military Archives. First, by combining different historical data sources, we are able to identify the individual characteristics and determinants of those who voiced their discontent and actively participated in the Irish movement of independence against British rule. We find that rebels are more likely to be male, young, catholic and literate. Second, we explore whether the Great Irish Famine played a role in the probability of joining rebellion activities. Controlling for the level of economic development and other potential concurring factors, we provide evidence of inter-generational transmission of rebellion generated by the great Irish Famine as an exceptional legacy of rebellion during the movement of independence. Finally, robustness checks based on instrumental variable technique constructed using the natural and exogenous dispersion of the potato blight (i.e., the disease which caused the Famine), confirm our results.
The Determinants of Coagglomeration: Evidence From Functional Employment Patterns
AbstractLocations differ horizontally in the industry mix they host and vertically in the value-chain functions they perform. Since industry pairs should coagglomerate the functions that interact intensively across industries, analyzing horizontal and vertical patterns can improve our understanding of agglomeration mechanisms. We find that different functions within the same industry pairs display substantially different coagglomeration patterns. While production coagglomerates at longer distances, management and research coagglomerates at short distances. These patterns are consistent with our findings that buyer-supplier links and local labor pools are important for production, whereas they matter less for management and research that rely on shared knowledge. Our results provide support for agglomeration theories and show that extant estimates of average effects based on total employment mask substantial heterogeneity.
The Effect of Early Childhood Education on Youth Adverse Health Behaviors
AbstractIn this paper, we investigate the association between early childhood education and adolescent's smoking and drinking behavior using the data from the National Educational Longitudinal Study (NELS). The NELS follows around 25,000 high schools students from their 8th grade in 1988 to adulthood and contains rich set of information on risky behaviors such as smoking and drinking as well as individual, family and school characteristics. We obtain probit estimates of the association between early childhood education and youth smoking and drinking using various regression model specifications that controlled for a variety of observed characteristics. However, the simple probit estimation suffers from the endogeneity problem arising from parents’ self-selection of schools for their children. To address this self-selection problem, we employ an instrumental variable estimation in our probit regression. We use the ratio of students in pre-K to number of children 5 years old or below in a state in 1979. Our results suggest that students with early childhood education are less likely to smoke compare to the teens without such early interventions. We, however, do not find any such association for the drinking behavior by the adolescents.
Given the increasing use to vapor or e-cigarette by the teens in recent year according to CDC, our results have significant policy implications. Our findings show that there are external health benefits other than higher academic achievement by the pupils receiving early childhood education.
The Effect of Participation in School Sports on Academic Achievements: Evidence From China (I1, I2)
AbstractThere is a positive, well-documented correlation between physical activities and educational outcomes. In this paper, we attempt to understand to what extent this relationship is causal. We exploit the high school sports reform pilot program in Shanghai that generated sharp across-cohort differences in school sports participation. Using regression discontinuity methods, we find a causal impact of participation in school-based sports on academic achievements. Our results indicate that participation in school sports for two years increases standardized test scores in Chinese and English by 0.2 to 0.5 standard deviations. In addition, we find that boys benefit more from school sports than girls, as do students enrolled in team sports rather than individual sports.
The Effect of Self-employment on Income Growth: Washington, DC 2006-2014 (H2, J0)
AbstractThis study both identifies factors that can predict future self-employment for individuals, and, utilizing a difference-in-difference approach, estimates the income bonus or penalty that District of Columbia residents receive when they decide to become self-employed. Most studies of self-employment rely on surveys which can suffer from selection bias, response rates, sample limitations, and other sampling issues. I use administrative individual income tax data from the District of Columbia’s Office of Revenue Analysis (ORA) and the US Internal Revenue Service (IRS) from 2006-2014 and find that negative wage and salary income shocks are associated with becoming self-employed in the following year. Additionally, I find significant heterogeneity in outcomes among those who become self-employed. Income gains are concentrated among those who were in the top income decile before becoming self-employed, while lower deciles tend to experience significant and persistent pretax income losses after becoming self-employed. These systemic differences may point to differing motivations which drive the decision to become self-employed.
The Effects of Ethnic Chinese Minority on Vietnam's Regional Economic Development in the Post-Vietnam War Period (O1, N4)
AbstractThis paper examines the impact of the Hoa, an ethnically Chinese, economically
dominant minority, on regional economic development in Vietnam. To address the
endogeneity of the geographical distribution of the Hoa, we use an important
historical episode: the rapid deterioration in Sino-Vietnamese diplomatic relationship
that led many ethnic Chinese to flee abroad, particularly to the refugee camps in the
Guangxi province of China, in 1979. We find that the effects of proximity to the
refugee camps on the share of ethnic Chinese in 1989 were more pronounced for
provinces that had a larger presence of the ethnic Chinese population in 1979. We
also find strong correlations between the 1989 share of ethnic Chinese (instrumented)
and contemporary indicators of economic performance. The results suggest that the
ethnic Chinese minority had positive economic impacts on Vietnam’s regional
economies and that the post-Vietnam War exodus of ethnic Chinese was likely to
have had long-term negative economic impacts.
The Effects of Foreign Competition on Network Hiring (F6, D2)
AbstractThe process through which firms find workers is an important determinant of productivity in the developing economies. This paper investigates a previously unexplored macroeconomic effect of foreign competition on network hiring. Using a rich panel dataset of Vietnamese SMEs, this paper shows that as foreign competition increases a firm is more likely to hire through personal contacts or referrals. Firms increasingly hiring through their network can explain a significant part of the productivity gains associated with foreign competition. This result has shown to be robust across various specifications. A matching model is presented to explain this behaviour.
The Effects of Transportation Infrastructure on Export Participation and Composition (F1, O1)
AbstractUsing a newly developed firm-heterogeneity computable general equilibrium (CGE) model in GTAP, which explicitly models consumers’ love-of-variety, endogenous changes in the number of firms, and trade-induced productivity changes, we examine the trade effects of an improvement in the quality of transportation infrastructure on the existing exporters (intensive margin) and the number of new varieties being traded (extensive margin). Trade facilitation in this CGE model is incorporated as an efficiency change in the use of factor inputs required to cover the fixed and variable trade costs. To do this, we link the logistics performance index (LPI: infrastructure quality) to the trade-augmenting technical changes that reduce fixed and variable trade costs in order to analyze the variety, average industry productivity and scale (output per firm) effects of trade facilitation. In order to calibrate the required shock on the technical changes (partial equilibrium effects) that mimic the change in the LPI, we econometrically specify the export volume based on a two-part model. The first stage estimates the effect of infrastructure reforms on the probability that we observe a positive trade flow. And, the second stage estimates the effect of infrastructure reforms on the trade volume conditional on export participation. We then implement a targeted shock in the LPI of low income South and East Asia region and compare its trade implications across sectors (extensive and intensive margins, and factor returns and reallocation) that vary in terms of time sensitivity of intermediate inputs, and decompose the welfare impacts. Consistent with the partial equilibrium analysis (Baniya, 2017), we find that time sensitive processed industries have larger export, scale and productivity gains due to transportation infrastructure reforms. However, less time sensitive primary goods and higher value added industries contract, and factors returns to land and natural resources that are used abundantly in primary sectors fall.
The Equilibrium Term Structure of Equity and Interest Rates
AbstractWe develop an equilibrium asset pricing model with Epstein-Zin recursive preferences that accounts for major stylized facts of the term structure of bond and equity risk premia. While the term structure of bond risk premia tends to be upward-sloping on average, the term structure of equity risk premia is known to be downward-sloping. The equilibrium asset pricing model with long-run consumption risks has difficulty in matching these stylized facts simultaneously. The standard calibration of these models follows Bansal and Yaron (2004) in which agents prefer the early resolution of uncertainty and have the inter-temporal elasticity of substitution greater than one; this calibration implies an upward-sloping term structure of equity risk premia and a downward-sloping term structure of real bond risk premia. Although it is shown that the standard model can match a downward-sloping term structure of equity risk premia by amplifying the short-run risk of dividend growth, it does not fully reconcile the model with empirical evidence implying an upward-sloping average yield curve and a downward-sloping term structure of Sharpe
ratios of dividend strips. We extend a standard model in two dimensions. First, we incorporate time-varying market prices of risks by allowing marginal utility of consumption to be nonlinearly dependent on risk factors. Second, we endogenously determine expected cash flows and expected inflation as potentially nonlinear functions of risk factors. With these extensions, our model can match the average slope of both bond and equity risk premia together with the term structure of Sharpe
ratios of dividend strips. At the same time, the model generates the behavior of the aggregate stock market return in line with the data.
The Federal Reserve as a Start-up: New Evidence From the Daily Discount Ledger From 1914 – 1917
AbstractHow did the U.S. central bank, the Federal Reserve, operate in its founding years? Previous research primarily focused on aggregate consequences of the Fed’s founding, yet to date little empirical work has been done to reveal details of the underlying operational mechanism—discount lending, along policy relevant dimensions such as seasonality, volumes, and maturity. We analyze a unique daily discount ledger from the Federal Reserve Bank of Dallas containing all discount transactions from 1914 - 1917. Details identify the transacting commercial bank, underlying collateral, location, size, and maturity of the discounted loan. Our initial findings reveal, first, that the operationalized discount rate was persistently above the floor published for the district. Second, we document an acceleration of the number and total volume of transactions. At the same time the average amount of transactions is little changed. However, we do find two distinct episodes that saw a clustered rise in the average volume of discounting. Third, maturity and the amount of the discounted collateral exhibit a negative relationship—the smallest size decile has nearly twice the remaining time to maturity compared to largest size decile. Fourth and finally, detailed transaction-by-transaction ledger data allows us to reveal important, otherwise hidden intra-week patterns. The average volume of transactions is markedly larger on Fridays, suggesting a role for the Fed to ensure liquidity over weekends. Saturday transaction volumes and maturities are substantially lower than during regular weekdays. These noticeable intra-week volume and maturity patterns suggests that the Fed helped the liquidity of banks’ balance sheets and permitted banks to carry less liquid assets.
The Impact of Affirmative Action on Occupational Segregation by Gender in South Africa (J7)
AbstractThis paper studies the impact of an affirmative action policy on occupational segregation by gender in South Africa. We estimate treatment effects of the Employment Equity Act of 1998, the Black Economic Empowerment Act in 2003 and the Codes of Good Practice in 2007 on (Black) female employment in high-skilled occupations using individual level, repeated cross-section data of 21 years. The findings based on difference-in-difference-in-difference identification strategy show that the probability of Black female employment in high-skilled occupations increased after 2003, however it decreased after 2007. Overall the effects are quite small. We offer several explanations and policy implications for these effects.
The Impact of China's Rare Earth Policy on Downstream Industries (F1)
AbstractThis paper discusses the impact of China's rare earth policy on downstream industries. When China implemented the tough restriction on rare earth exporting in 2010, it caused a significant price gap between the domestic and foreign markets. Chinese rare earth downstream industries enjoy cost advantages relative to their foreign competitors. First, this policy has stimulated export values of Chinese rare earth downstream products relative to other similar products. The market share of Chinese rare earth downstream products also increased. The increase of export values is mainly due to the price rather than quantity. Second, this policy is only effective in the short term. The benefit almost disappeared in 2013. Third, more Chinese downstream firms break into the international market due to cost advantages.
The Impact of Edison: Thomas Edison's Contribution to Economic Growth (O4, N1)
AbstractThomas Edison, the most prolific inventor of our time, held 1,093 patents in the United States and 2,332 patents worldwide. The incandescent light bulb, the world's first electric utility, and the modern research laboratory are only a few of Edison's innovations that have had a tremendous impact on the world economy. As the subject of many books and biographical studies, Thomas Edison's life and his innovations have been examined in detail. However, there is no systematic study of the economic impact of Edison's research and innovations. Therefore, in this paper, we aim to examine the impact of Thomas Edison's inventions on world economic growth from 1900 to 2010. Employing a Growth Accounting framework, R&D stock estimates and R&D output elasticities, we evaluate the economic impact of seven "technology groups" for which Edison's research made significant contributions. We conduct counterfactual experiments for each technology group, measuring the cumulative growth effect of technological change. Our analysis suggests that Edison's research and innovations can account for about 6–10% and 8–13% of 2010 U.S. and world economic output, respectively.
The Impact of Increased Ethanol Production on Corn, Crude Oil and Beef Prices: A Threshold Vector Error Correction Model Approach (Q4, Q1)
AbstractAccording to Renewable Fuel Association (RFA), U.S. ethanol production has increased from 1,465 million gallons in 1999 to 14,340 million gallons in 2014 due to increased ethanol production facilities. U.S. corn production into ethanol also has increased from 6% in 1999 to 36% in 2014; corn is the main source of ethanol production in the U.S. Corn is also one of the major feeding crops to livestock. The increased ethanol production can affect corn prices, and in turn, may affect meat prices. During the period 1999 to 2014, there is an increasing co-movement among corn prices, beef prices, and ethanol production. Most previous studies focus on price relationships among fossil fuel, crops, and bio-energy prices. The main objective of this study is to investigate the U.S. corn-ethanol-oil-meat price system based on the increased ethanol production. This study employs monthly times-series data for corn, ethanol, oil, and beef prices from 1999 to 2014. Since beef is one of the major meats in U.S, this study focuses on beef as a representative for all meats. Utilizing the threshold vector error correction model (TVECM), this study examines the long-run relationship among corn, ethanol, oil, and beef prices. In addition, this study evaluates price transmission patterns by considering possible threshold nonlinearities in prices and ethanol production level. The analysis of this study contributes not only to finding possible price transmission among ethanol, feeding crop, and meat prices, but also provides useful intuitions to government policy makers as well as economic agents.
The Impact of Liquidity and Capital Regulations on the Banking System (E4, G2)
AbstractI extend the classical Diamond-Dybvig (1983) model so that households can not only deposit in banks but also directly buy their equities. In addition, the banks choose to invest in safe assets or risky projects to maximize the profits of shareholders. I explore how the capital and liquidity regulations affect the bank run risk, and discuss how they change the behaviors of banks and households. After comparing two regulations in the competitive equilibrium, I show that the capital regulation helps to reduce the bank run risk, while the liquidity regulation has an opposite effect. Furthermore, both regulations will reduce the investments in the economy. Capital regulation is a milder tool because it does not change the liquidity ratio of the banks. In contrast, the liquidity regulation increases the banks’ capital ratio and lowers the social welfare.
The Impact of Local Labor Market Conditions on Commuting Patterns (J6, R0)
AbstractThere is a large body of evidence suggesting that long commutes are detrimental to mental and physical health, as well as general subjective well being. However, commuting times are not exogenous; rather, they are the result of individual decisions made in the process of participating in housing markets and labor markets. As such, changes in economic variables that affect the labor and housing markets will directly impact commuting behavior. The substantial literature on commuting behavior is explicitly concerned with the spatial distribution of employment opportunities, but variations in local labor market conditions over time have been largely ignored. This paper fills this important gap in the literature. This paper shows that, conditional on employment, there are systematic differences in the average commuting time of workers in different sectors of the economy across the business cycle. Using data from the American Time Use Survey combined with data on sector-level local labor market conditions from the Bureau of Labor Statistics for the years 2006-2015, this paper investigates the heterogeneous response in time allocated to commuting when local labor market conditions change. Different sectors are differently affected by business cycles, and there are important structural differences in labor market flexibility as well as job-switching costs between sectors in the economy. This paper focuses on the time period before, during, and after the Great Recession, and it is the first empirical study to directly investigate the way in which differences in labor market characteristics or job-switching costs affect commuting behavior. As such the paper informs public policy at the intersection of public health, labor market, and transportation economics.
The Impact of School Accountability on Racial Diversity of Peer Groups (I2, J1)
AbstractSince school accountability programs were introduced to promote public school performance, numerous studies document the effect of the policies on student achievement. However, the literature provides us limited knowledge, focusing on student test scores. In this paper, I address the question of whether and how test-based accountability changes racial diversity of student population in schools, thereby expanding our understanding of school accountability. The accountability policies create school stigma on low performing schools by revealing information on school performance, which could make parents incentivized to choose another quality school (Billings, Brunner and Ross, 2014; Figlio and Lucas, 2004; Hart and Figlio, 2015). If some racial groups of parents could more respond to the stigma, the racial composition of low performing schools could change. To test this, I employ the longitudinal administrative data of North Carolina covering K-8 grades. Exploiting the proportion of black student enrollment as a measure of racial diversity in schools, I examine the state accountability, ABC program, in the difference-in-difference framework. I compare low performing schools and similar schools facing no stigma over time to test if low performing schools under the stigma experience an increase in the proportion of black student enrollment even more than the control group. Additionally, I exploit within-school variation in the likelihood of students to leave between blacks and whites. Comparing differences in the outcome in low performing schools to differences in the control group in the triple-differences framework, I indirectly test if racial diversity in low performing schools is affected through student mobility. This paper provides a unique understanding of test-based accountability by examining its impact on racial demographic of students in schools, which will ultimately contribute to studying school diversity and integration policies.
The Impact of the CEO Pay Ratio on Firm Value
AbstractThe pay gap between the CEO and the average employees has been subject of much media and political attention. In this study, we examine the consequences of the CEO-employee pay ratio on firm value over the 1997 to 2014 period. Using linear, nonlinear, and piecewise, regression analysis we find that the relationship between firm value and the CEO pay ratio is concave, which is consistent with elements of both tournament theory, and social comparison and equity theory. This is also consistent with there being an optimal pay ratio, or inflection point, beyond which increases in the pay ratio decreases firm value. We then show that the relationship between the pay ratio and firm performance differs systematically by firm characteristics, i.e., in firms with a greater need for collaboration and information sharing the optimal ratio is lower. In our final analysis we decompose the pay ratio into that within the executive suite, and that between the executive suite and the rank and file. We show that pay disparity within the executive suite has little effect on firm value, rather it is the pay disparity between the named executive officers and the rank and file that drive our results. Our results are robust to controlling for the endogenous nature of pay ratios and a variety of other sensitivity tests.
The Impact of Wage Inequality on Crime (J3, K4)
AbstractSince the late 1970s, a historically unprecedented increase in prison population have made the United States the highest incarceration rate country in the world. Some of the growth in prison population is attributable to changes in federal criminal justice policy during the previous three decades. Because convicted individuals have very limited job opportunities in the US labor market, some of the growth is also attributable to steep increase in income inequality. We use the data from National Prisoner Statistics Codebook, FBI Uniform Crime Reports, and IPUMS from 1995 to 2015 to estimate the impact of wage inequality on state level crime rate. To estimate the distributional effect of wage inequality, we use different measures such as 90/10, 90/50 and 50/10 percentile wage gaps in addition to gini coefficient. This study shows that 1 percent increase in 50/10 and 90/10 percentile wage gap cause about 0.05 and 0.02 percent increase in property crime (burglary, larceny, and auto theft). We do not find any economically significant impact of different measures wage inequality on violent crime (murder and non-negligent homicide, forcible rape, robbery, and aggravated assault).
The Influence of Norms on Choosing College Major: Evidence From Poland (I2, J2)
AbstractHere is a typical explanation of the choice of college major: the utility of choosing a major comes, first, from the present value of the student’s expected future earnings, had she chosen this major, and, second, from how interesting she finds this major. Choosing a major, she maximizes the sum of these two kinds of utility (Montmarquette et al., 2002; Arcidiacono et al., 2012). But consider a student in the last row of your lecture theatre. Always on his phone, he seems pained having to attend any classes. Moreover, he is majoring in a field whose graduates struggle to get a well-paid job. The typical explanation seems to fail here.
To account for this behavior, I invoke the framework of identity economics (Akerlof & Kranton, 2000; 2002; 2010) and extend students’ utility function to include a third element: utility gained from observing the norm “study!”—or the s-norm for short. Therefore, students enroll in college partially because they think one ought to have a college degree, regardless of any additional perks that come with it. In the paper, I present an empirical study testing this hypothesis.
First, I construct a model of college major choice including the motivation arising from the s-norm. Second, I present the data from a representative sample of 1081 Polish undergraduates. I justify the questionnaire I used to collected the data, and I briefly describe the hierarchical clustering algorithm used to group majors into categories. Third, I present the results obtained with robust regression and the multinomial logit model. They confirm my hypothesis: students are partially motivated by the s-norm. The stronger this motivation, the less likely a student will choose a STEM major. I also show that the data suggests a link between a student’s motivation from the s-norm and her cultural capital.
The Information Content of Short-term Options (G1, C5)
AbstractWe document that the implied variance of daily and weekly maturities strongly predict next month's realized variance. We introduce the HAR-IV model that jointly uses the daily, weekly and monthly implied variance to predict realized variance. The HAR-IV model outperforms the HAR-RV model both in- and out-of-sample. An investor would pay up to 3.887% per year to switch from the timing strategy based on the HAR-RV model to the strategy based on the HAR-IV model. Our results are robust to heteroscedastic measurement errors.
The Long-run Effects of Labour Market Polarization: Evidence From German Micro Data (J6, J2)
AbstractThe past four decades have witnessed dramatic changes in the structure of employment. In particular, the rapid increase in computational power has lead to large scale reductions in employment in jobs that can be described as intensive in routine tasks. These jobs have been shown to be concentrated in middle skill occupations. A large literature on labour market polarisation characterises and measures these processes at an aggregate level. However to date there is little information regarding the individual worker adjustment processes related to routine-biased technological change. Using an administrative panel data set for Germany we follow workers over an extended period of time and provide evidence of both the short term adjustment process and long-run effects of routine task intensive job loss at an individual level. Our findings suggest that employment stability is much lower in jobs dominated by routine tasks; furthermore, reemployment probabilities of routine workers have deteriorated strongly since the mid-1990s. Even five years after a transition to nonemployment, there are still significant differences in employment probabilities between workers having previously worked in different task categories. Job-upgrading to nonroutine cognitive jobs is uncommon. Together this paints a picture of a process of structural change that causes acute welfare losses for a specific group of individuals in the labour market.
The Long-run Impacts of Same-race Teachers (I2)
AbstractBlack primary-school students matched to a same-race teacher perform better on standardized tests and face more favorable teacher perceptions, yet little is known about the long-run, sustained impacts of student-teacher demographic match. We show that assigning a black male to a black teacher in the third, fourth, or fifth grades significantly reduces the probability that he drops out of high school, particularly among the most economically disadvantaged black males. Exposure to at least one black teacher in grades 3-5 also increases the likelihood that persistently low-income students of both sexes aspire to attend a four-year college. These findings are robust across administrative data from two states and multiple identification strategies, including an instrumental variables strategy that exploits within-school, intertemporal variation in the proportion of black teachers, family fixed-effects models that compare siblings who attended the same school, and the random assignment of students and teachers to classrooms created by the Project STAR class-size reduction experiment.
The Long-term Effects of A Temporary Corporate Income Tax Cut and Deferral: Evidence From Vietnam (H2, O1)
AbstractGovernments often use a temporary corporate income tax cut and deferral policy to encourage investment, despite a potential decrease in tax revenue. Yet, to my knowledge, no formal study has evaluated the effects of a temporary corporate income tax cut, tax deferral, or the combination of the two. This paper studies the causal impacts of a corporate income tax cut and deferral during the Great Recession in Vietnam. Vietnam implemented the policy in 2009 and at the end of 2008. I compare firms just below and above the eligibility threshold, based on assets and employment. To address concerns about possible manipulation around the threshold, I use criteria in the year before the policy was announced. To address concerns about possible differences between control and treatment firms, I use a firm panel data from 2004 to 2014 to show that the two groups were similar in pre-policy years. Results vary depending on the type of firm. Capital stock of eligible domestic firms that were less than 5 years old increased by 65% in the year after the policy ended and stayed high thereafter, consistent with relaxation of credit constraints. Eligible foreign-owned firms reported a large increase in profits both during the policy year and in the two years after the policy in 2010 and in 2011. This increase has dissipated since 2012. I find no evidence that profits of foreign-owned firms increased because of changes in real factor inputs, such as labor or capital. Instead, multinational firms likely shifted reported profits to take advantage of the policy. The continuation of the high profits in the two years after the policy ended suggests that foreign-owned firms may have experienced friction from profit-shifting across borders. Finally, tax payments by foreign-owned firms that took advantage of the policy increased.
The Macroeconomic Effects of Monetary Policy in a Small-Open Economy: Narrative Evidence from Canada
AbstractWe use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy innovations and estimate the effects of monetary policy in Canada. We find that a one percentage point increase in our new shock series leads to a 0.7 per cent decrease in real GDP and a 0.4 per cent fall in the price level. We show that it is crucial for these results to take into account the structural break in the conduct of monetary policy caused by the introduction of inflation targeting in 1992. Moreover, we provide evidence that spillovers from U.S. monetary policy shocks lead to a very similar drop in Canadian GDP and a rise in the short run of the price level.
The Minimum Legal Drinking Age, Alcohol Use & Injury (I1, I2)
AbstractThis study provides two new pieces of evidence on effects of reaching the
minimum legal drinking age (MLDA), both using a regression discontinuity (RD)
framework with publicly available data on age in months for 1997–2014 National
Health Interview Survey (NHIS) respondents. First, it examines direct effects on
various forms of alcohol use, adding nearly a decade-worth of more recent data
and offering new estimates by gender. Second, it reveals new results indicating a
sharp increase in the likelihood of recent injury or poisoning requiring medical
attention, particularly among females, supplementing the recent finding of effects
on hospitalization and emergency room (ER) visits.
The Organization of Global Supply Networks (L2, F2)
AbstractIn this contribution, we introduce a network approach for the organization of global production across national borders, after improving on industry-level metrics proposed in the previous literature. First, we show and argue that several characteristics of global production processes would be lost in the analysis when assuming that they could be proxied as simple linear sequences. Hence, we propose an index that assesses the relevance of any input for the target output, including its role as ‘input of inputs’. Thereafter, we exploit a firm-level dataset for the top 100 multinational enterprises sourced from UNCTAD (2016), which collect altogether about 55,000 affiliates located worldwide in a variety of industries. Results show that the relevance of an input in oriented technological networks is also a good predictor for: i) the weight of affiliates active in the input industry after their integration within corporate boundaries; ii) the probability that an input industry is actually integrated within corporate boundaries; iii) the number of affiliates that are active in that input industry.
The Perception of Dependence, Investment Decisions, and Stock Prices
AbstractHow do investors perceive dependence between stock returns? And how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Subjects rather assess the frequency of comovement by applying a simple counting heuristic. Consequently, they diversify more when the frequency of comovement is lower even if correlation is higher. Building on our experimental findings, we conduct an empirical analysis of 1963-2015 US stock returns revealing a robust return premium for stocks with high frequencies of comovement with the market return.
The Push for Renewables in India: A Real Options Approach (Q4, G0)
AbstractThe recent Indian government has announced plans to add 175 GW of renewable energy capacity to the electricity sector in India by 2022. This comprises capacities of 100 GW of Solar, 60 GW of Wind and 15 GW from other renewable sources such as Small Hydro, Biomass and Urban and Industrial Waste to Energy. India has one of the highest solar radiations in the world and the western states of Gujarat and Rajasthan could lead the way for solar installations in India. However, a stated objective of the Indian government has been to reduce its growing coal import bill: the annual coal import bill rose from US $ 12.4 Billion in 2011-12 to more than US $ 14.5 Billion in 2013-14. For 2014-15, about 75.61 % of the total electricity generated was from coal while the share of imported coal was 10.28 %. The share of wind and solar in total electricity generation was 5.31 %. The main question addressed in this paper is if India can replace the share of imported coal with greater use of wind and solar technologies in total electricity generation. We use a real options approach and use stochastic world coal prices as a source of uncertainty to see if India should make more investments in wind and solar such as to replace imported coal completely as a source of electricity production. We find the social planner solution entails a positive value to waiting before making the switch (wind and solar replacing imported coal) at a `trigger' price of US $ 51.83 per ton of coal. Including pollution from coal fired power plants, we can state that India would do better by improving thermal efficiency of existing coal fired plants and investing greater amounts in renewable energy sources.
The Rainbow of Credit: On Lending Discrimination to Same-sex Borrowers and Its Spillover Effect (G2, J1)
AbstractUsing the Home Mortgage Disclosure Act (HMDA) national data from 1990 to 2015, augmented by the classical 1990 Boston Fed data and Fannie Mae Loan Performance data, we propose a method to identify potentially homosexual borrowers and test whether their perceived homosexual status affects the approval, cost, and performance of the mortgages for which they apply. The results reveal that, in contrast with otherwise comparable loan applicants, the gross approval rate for potentially homosexual applicants is about 3% to 8% lower. Furthermore, conditional on being approved, their financing cost is about 0.02% to 0.2% higher. This is equivalent to a total of $8.8 million to $88 million more interest/fees per year paid by same-sex borrowers nationwide. Meanwhile, we find no evidence that the homosexual status is associated with higher default risk. Finally, we find that when the share of a county’s same-sex population increases by 1%, the loan approval rate to the non-same-sex loan applicants reside in that county drops by 0.8%. The pattern of potential lending discrimination is persistent over time.
The Relationship Between Employer-provided Health Insurance and Wages (I1, J3)
AbstractThe theory of compensating differentials implies that jobs which provide higher benefits will pay lower wages, all else being equal. We test whether this theory holds for employer-provided health insurance in the United States. Using data from the Medical Expenditure Panel Survey (MEPS), we estimate how wages change for individuals who gain or lose employer-based health insurance as they switch jobs. We find no evidence to support the theory of compensating differentials. In fact, we estimate that those switching to jobs with health insurance also see wage increases, while those switching to jobs without health insurance see wage decreases.
The Risk Premium on Balance Sheet Capacity (G2, G1)
AbstractWe show that exposure to shocks to the balance sheet capacity of US securities broker-dealers carries a significant risk premium. We construct a novel measure of dealer risk appetite and show that it is priced in the cross-section of expected stock excess returns; even after controlling for benchmark risk factors (MKT, SMB, HML, RMW, CMA, MOM and VOL). We document that risk appetite, median book-to-market ratio, the term spread and the difference in market and average excess returns are, independently and jointly, statistically significant predictors of future market excess returns. Armed with these four return-forecasting factors, we estimate dynamic pricing models with constant betas and time-varying prices of risk. We document significant time-variation in the intermediary risk premium and show that it has a natural macro-financial interpretation. In particular, we show that, unlike the premiums on benchmark factors, it is highly procyclical and gets extraordinarily compressed during periods of stock market exuberance such as that of the late-1990s. We find significant macroeconomic information embedded in the intermediary risk premium. Specifically, we show that the intermediary risk premium is both a significant contemporaneous correlate and a significant predictor of quarterly innovations in the US growth rate. We further show that the time-varying intermediary risk premium dwarfs the premiums on benchmark factors. Finally, we construct a factor mimicking portfolio for risk appetite and show that it sports a Sharpe ratio at least twice as large as benchmark factor portfolios.
The Role of Contingent Capital Structure in Signaling and Information Disclosure (G0)
AbstractThis paper advocates two novel advantages of contingent convertible securities in capital structure in (1) signaling, and (2) information disclosure. First, in order to signal his type, the good banker should be punished for poor performance and rewarded otherwise. Since the banker knows better about events occurring in the near future (i.e., the interim states) than final cash flows to be realized in the distant future, the former are better performance indicators, thereby providing contingent securities with additional signaling power. Nevertheless, this advantage needs to be supported by a positive cost of misreporting interim states. Second, even if misreporting is costless, contingent capital structure still has an advantage over non-contingent capital in its ability to mitigate ex-post information asymmetries, since it has more degrees of freedom in setting payoffs to finely tune the issuer's truth-telling incentives. This paper thus sheds some new light on the design of CoCos and the regulation of contingent capital.
The Roman Origins of Modern Migration (F2, J6)
AbstractSome of the factors that affect the location choices of new immigrants, such as the existence of ethnic networks and cultural diversity of the destination city, may have deep historic roots. In order to better understand the determinants of modern migration in Europe, this paper conducts an empirical analysis to find out which historical characteristics of European cities contributed to immigration. The analysis reveals that the presence of historic Roman roads and forts increases the share of immigrants in modern cities. These structures contributed to migration both by enhancing economic opportunities and affecting cultural values of their residents. Individual-level regressions reveal that the presence of the Roman legacy has positive effect on residents' attitudes towards immigrants.
The Short Squeeze: The "Invisible" Cost of Short Sales (G1)
AbstractWe study a risk-neutral trader’s decision to short an overpriced stock. A short squeeze occurs when a sudden increase in the price of a stock escalates due to the short sellers’ heightened demand for the stock to cover their existing short positions. We model how the potential squeeze limits the short position before the short-sale constraint becomes binding. Using the CRSP data, we empirically confirm the model prediction that the probability (cost) of a short squeeze is higher (lower) for stocks with greater liquidity. Short squeezes thus serve as an “invisible” cost of short sales, limiting the scope of arbitrage.
The Skewness of the Price Change Distribution: A New Touchstone for Sticky Price Models.
AbstractWe present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970’s onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality than existing menu cost models.
The Socioeconomic Ceiling and Perceived Employability in Higher Education: Evidence From South Korea (I2, J0)
AbstractThe study presents empirical evidence on the existing socioeconomic ceiling in employability and higher education, particularly for the lower socioeconomic group. South Korea has experienced a severely stratified higher education system and the layers of employment. Substantially, we argue that opportunities for students entering the job market depend heavily on the school reputations and parental socioeconomic status. In the study, therefore, we examined if parental education and income levels are associated with the perceived employability of college students in accordance with the theories of class ceiling (Friedman, S. & Laurison, D., 2015) and concerted cultivation (Lareau, A., 2011).
For the purpose of the study, we collected 875 subjects from 11 different colleges from September to December in 2016 and divided them into three groups—top, middle, and bottom—based on students’ KSAT scores and the school reputation in South Korea. Nested regression models were used to examine the effects of the 1) ascribed status, 2) achieved status, and 3) schools’ career supportive factors on perceived employability.
The research outcomes revealed there exist educational and social inequalities that an individual can hardly overcome solely with his/her efforts. Also, the stratified higher education system in South Korea tend to reinforce the hidden barriers, or the socioeconomic ceiling. Although students from the lower socioeconomic group may secure admission into colleges in South Korea, this does not necessarily mean that all students have the equal opportunities to build necessary skills for employments. The results are significant in that they have shown the differences in acquiring information and skills significantly stem from parental socioeconomic status, and the students’ socioeconomic factors affect not only their academic achievements but also the perception of employability even before entering the job market.
The Transition to a Mixed Pension System in a Small Open Economy (H5, F4)
AbstractThe paper investigates the macroeconomic and welfare effects of a gradual transition from a pay-as-you-go (PAYG) pension system to a mixed system comprising a PAYG pillar and a fully-funded (FF) pillar. The analyzing framework consists of an overlapping generations (OLG) model with lifetime uncertainty characterized by perpetual youth households. Agents engage in educational activities at the start of their life, create human capital that is used during the working period to rent it to firms, and, later on in life, retire and are paid a pension benefit. The constructed
model allows for a hump-shaped human capital age profile and for a realistic method for computing pension benefits using a pension point scheme. Several pension reforms are simulated in the context of a calibrated version of the model. The findings indicate that, when accompanied by an increase in retirement age, the shift to a mixed pension system is Pareto improving and alleviates the burden of public debt.
Too Much of a Good Thing: Misallocation, Farm Size and Agricultural Chemical Use in China (O4, Q1)
AbstractDeveloping countries on average use fewer agricultural intermediate inputs than developed countries. A notable exception is the agricultural chemical use in China. China uses much more agricultural chemicals per Ha than developed countries, which has caused severe environmental degradation and public health damage.
This paper studies how policy distortions in China amplify agricultural chemical use by distorting the farm size distribution in China. Using various agricultural surveys, we document a strong negative correlation between agricultural chemical use per Ha and farm size. Farms smaller than 1 Ha uses 2-4 times more agricultural chemicals per Ha than those larger than 5 Ha. This relation is robust after controlling for household and regional characteristics.
Agriculture in China is characterized by small farms: the average farm size is 0.6 Ha in China, while the world average is 6 Ha and the U.S level is 170 Ha. Two policy distortions contribute to the pervasiveness of small farms. One is restrictions on the transfer and transaction of land rights, which distort the land allocation across rural households. The other is the Hukou system, which imposes large barriers on the movement of labor out of agriculture, and distorts the allocation of labor between agricultural and non-agricultural sectors.
To quantify the importance of policy distortions for agricultural chemical use, we develop a multi-sector general equilibrium model with farms heterogeneous in their size. The model further features agricultural chemical use, and labor and land market distortions. We show that these distortions force high-productivity households to operate farms smaller than the efficient levels, allowing too many small farms to survive in the economy. As a result, these distortions lead to both lower agricultural productivity and higher agricultural chemical use.
Trade Costs of Sovereign Debt Restructuring: Does a Market Friendly Approach Improve the Outcome? (F1, F3)
AbstractSovereign debt restructurings have been shown to influence the dynamics of imports and exports. This paper shows that the impact can vary substantially depending on whether the restructuring takes place preemptively without missing payments to creditors, or whether it takes place after a default has occurred. We document that countries with post-default restructurings experience on average: (i) a more severe and protracted decline in imports, (ii) a larger fall in exports, and (iii) a sharper and more prolonged decline in both GDP, investment and real exchange rate than preemptive cases. These stylized facts are confirmed by panel regressions and local projection estimates, and a range of robustness checks including for the endogeneity of the restructuring strategy. Our findings suggest that a country’s choice of how to go about restructuring its debt can have major implications for the costs it incurs from restructuring.
Traffic and Crime (R4, J1)
AbstractWe study the link between crime and emotional cues associated with unexpected traffic. Our empirical analysis combines police incident reports with observations of local traffic data in Los Angeles from 2011 to 2015. This rich dataset allows us to link traffic with criminal activity at a fine spatial and temporal dimension. Our identification relies on deviations from normal traffic to isolate the impact of abnormally bad traffic on crime. We find that traffic above the 95th percentile increases the incidence of domestic violence, a crime shown to be affected by emotional cues, but not other crimes. The results represent a lower bound of the psychological costs of traffic; an externality that is not typically quantified in contrast to pollution, health impacts and lost time that have been established in the literature.
Trickle-Down Education? Effects of Elite Public Colleges on Primary and Secondary Schooling Markets in India (I2, H5)
AbstractWe present some of the first estimates of the effects of public expenditure in higher education on primary and secondary schooling markets. Exploiting the rollout of elite public colleges in India, we find that public investment in college infrastructure increases years of education as well as educational attainment among school-age children. These gains in schooling are driven by a larger role played by private schools as more for-profit schools enter regions with new elite colleges, and students switch from public to private schools. We present suggestive evidence that new elite public colleges led to focal investments in roads, water and electricity services, reducing setup costs for private schools, and travel costs for school-going children.
Trumponomics, Asymmetric Animal Spirits and Income Inequality (E2, E6)
AbstractTrumponomics calls for individual and corporate tax cuts along with an infrastructure spending boost. One major reaction to these expectations has been all-time highs for U.S. equity indices. Some say that “animal spirits” are at play. Are animal spirits good for the economy? The answer is complicated. For example, following the Great Recession, the Federal Reserve went to extraordinary lengths to support asset prices and bolster household finances and consumer spending. These efforts were met with muted results—asset prices rebounded but consumer spending has been slow to recover. In addition, slower personal spending growth along with rising income inequality may suggest that animal spirits produce asymmetric effects on the economy.
Our work quantifies animal spirits by constructing an index using information from major sectors of the economy. We stress that a better gauge of animal spirits would include information from major sectors and not just be based on one (in this case, financial) sector. The effect of both monetary and fiscal policies on animal spirits is also estimated. Furthermore, we estimate the effect of policy changes on major variables (personal spending, employment, S&P 500 Index and inflation for example) to analyze whether the effect is asymmetric.
Our analysis suggests that the effect of the proposed Trump individual tax cut on personal spending is smaller than those of the Reagan/Bush tax cuts. On the other hand, the estimated effect of the Trump corporate tax cut on the financial sector is highest compared to the Reagan/Bush tax cuts. Our analysis suggests a further rise in income inequality in the U.S. as most policies tend to favor the financial sector more than personal spending/income. In sum, Trumponomics may increase income inequality in the U.S.
Trust and the Effectiveness of Land Use Policies: Perception, Attitude and Behavior of Rural Residents in China (Q1, R5)
AbstractPolitical trust has a significant impact on rural residents’ participation in local governance, support to government policies, and contributions to public goods. In general, high political trust can improve the effectiveness of local governance by engaging individuals in the design and implementation of public policies. However, However, existing studies on the effectiveness of land use policies in China mainly focus on the dynamics between local and central governments. This approach inevitably overlooks the attitude and behaviors of rural residents. To bridge this gap in the literature, this paper is set up to verify whether villagers’ trust in local governments influence the effectiveness of land use policies.
We investigate four aspects of the effectiveness of land use policy in China: land tenure security, land-related investment, willingness to participate and corporate in land market reforms, and land-related disputes and petitions. We conducted a large-scale questionnaire survey across five provinces in January 2016. Overall, rural residents in China exhibit a much higher level of particularized trust (e.g., trust towards acquaintances or friends) than general trust (e.g., trust of strangers). Political trust plays a significant role in enhancing the effectiveness of land use policies. Our empirical findings improve understanding of the role of trust in the public policy domain. The paper also provides policy recommendations to promote sustainable urbanization and rural development in China through improving the effectiveness of land use policies.
Two Birds with One Stone: Female Labor Supply, Fertility, and Market Childcare (J1, D1)
AbstractThe correlation between the female labor force participation rate (FPR) and the total fertility rate (TFR) in developed countries has switched from negative to positive. This paper provides a structural explanation of the change in the TFR-FPR correlation via increasing substitutability between mother's direct childcare and indirect market care. Analysis of a life-cycle model of married women's labor supply and fertility decisions shows that the FPR increases, whereas the TFR is U-shaped with regard to substitutability. The dynamic relationship between the FPR and the TFR depends on the relative strength of behavioral and composition effects: greater substitutability allows working women to have more children but it also attracts less productive women to enter the labor force, who trade childbirths for labor supply. The findings imply that raising substitutability to a sufficiently high level can achieve two seemingly conflicting goals-increasing female labor force participation and fertility rates.
Understanding Monetary Policy and its Effects: Evidence From Canadian Firms Using the Business Outlook Survey (D2, E5)
AbstractThis paper shows (i) that business sentiment, as captured by survey data, matters for monetary policy decisions in Canada, and (ii) how businesses perspectives are affected by monetary policy shocks. Measures of business sentiment (“soft data”) are shown to have systematic explanatory power on monetary policy decisions over and above typical Taylor rule variables. Stronger (weaker) survey results lead to higher (lower) policy rates over the period of study (1993-2016). Moreover, we study the effects of monetary policy shocks on firms’ business perspectives using data from the Bank of Canada’s quarterly Business Outlook Survey. The monetary shocks are defined as the fitted residuals of the Taylor rule. Overall, the results are in agreement with the qualitative effects of monetary policy shocks described in the literature. For instance, an unanticipated tightening in monetary policy a year ago (or more) results in firms reporting tighter lending conditions today, as well as slower expected dynamics of future sales, wage growth, and output prices. The results are qualitatively similar whether shocks are derived from a standard Taylor rule (“hard data”) or from an alternative Taylor rule (“soft data”).
Understanding the short, medium and long term consequences of recessions on occupational transitions (J6, E3)
AbstractThis paper studies the effect of recessions on occupational transitions via the channel of job loss and assesses the repercussions of such job loss on the workers re-employability and career destination. Using the Sample of Integrated Labour Market Biographies (SIAB), a rich daily record of social security data from Germany for the period 1975 to 2010 and German business cycle chronology, I classify occupations into four broad categories and perform a difference in differences evaluation. I analyse how workers’ pre -job loss occupations influence their job finding rate and occupational probabilities up to 18 months after the end of a recession. The results are threefold: i. Occupations at the bottom of the skill distribution, the manual professions, experience higher probability of job loss than cognitive professions in recessions. I argue this is due to labour hoarding ii. Workers in manual occupations are approximately 11 percentage points less likely to find a job 18 months after the recession ends relative to those in cognitive occupations. I rationalize this behaviour with firms’ substitution of ‘cheap’ labour with technologies and the recruitment of skilled workers in low skilled occupations. iii. Production and operative occupations face higher probability of switching.
Unemployment and Credit Risk (G1, E3)
AbstractThis paper studies the credit risk implications of labor market fluctuations, by incorporating defaultable debt into a textbook search model of equilibrium unemployment. In the model, the present value of cash flows that firms extract from workers simultaneously drives unemployment dynamics and credit risk variation. The model generates fat right tails in both unemployment and credit spreads, and their strong comovement over the business cycle, in line with the historical U.S. data from 1929 to 2015. Quantitatively, the model reasonably replicates the level, volatility and cyclicality of credit spreads. Taken together, the paper highlights labor market fluctuations as an important macroeconomic driver of credit risk variation.
Unification for Natural Disasters Risk Diversification: Evidence From Warlords Period of China (Q5, N4)
AbstractIn this paper we argue that the unification of China is caused by the increased requirement for diversifying natural disaster risk cross-sectionally. In a calibration based on historical natural disaster data and CRRA utility function, we find the benefit of unification of China is much more significant than that of Europe and India, which have been fragmented throughout the history. In terms of empirical analysis, we use a special period during which China was fragmented by a series of political failures and fell into the control of warlords between 1917 and 1928. In addition, we find that the sensitivity of famine and social riot to natural disaster is much more significant than previous unified period, with those standalone regions associated with higher sensitivities than those affiliated to a larger warlords factions. In sum, our result highlights the role of environment in shaping the border of countries.
Universal Health Coverage for the Poor: A Cost-Benefit Analysis of Mexico's Seguro Popular
AbstractUsing unique experimental data, this paper compares the benefits and costs of Seguro Popular, Mexico's health insurance program for the poor. I find that insurance sharply reduced health spending, particularly at the right tail of the distribution, generating gains equal to 21% of program cost. A stylized utility model indicates that less exposure to health-spending risk produced enough welfare to cover almost a quarter of program cost. Overall utilization does not increase, while some types of utilization rise for those with chronic illness. Although these data suggest possible improvements in self-reported health, no beneficial effects are found for chronic diseases like obesity and diabetes. Analyzing supply, I find evidence for contraction in staffing levels and non-significant declines in other forms of health infrastructure. To explain these results, I note that Seguro Popular was under-funded compared to what its designers intended. These findings highlight both the benefits of health coverage and how supply-side responses can mitigate positive effects.
Urban Commuting Behavior and Time Allocation of Married Women (R4, R2)
AbstractThis study examines the relationship between commuting time and hours of work using about 190,000 samples of microdata on transportation in the Kyoto-Osaka-Kobe metropolitan area in Japan. Empirical findings show that both commuting time and work hours of women over the age of thirty are significantly shorter than those of men, while there is insignificant difference between sexes under 25-29 years old. My research investigates a theoretical model which focuses on the time allocation in a day among work hours, commuting time and housekeeping and leisure time. The model provides a theoretical explanation why both commuting time and work hours of married women with many household responsibilities are shorter. Based on my findings, the disutility of longer commutes must be compensated by higher wage income. Therefore, commuting time gets longer with the increase in hours of work on which the revenue gained per commuting is dependent. The results of my empirical analysis show that commuting time of women has a strong significant association with household compositions such as presence of young children under 5 years of age and number of family members. On the other hand, men’s commuting time is not affected by family characteristics at all. My results indicate married women encounter bigger constraints of travel-to-work areas and commuting time due to household responsibilities. Women living in the suburbs particularly suffer from those restrictions because commuting time to the CBDs gets longer and employment opportunities close to the residence are fewer in suburban areas. My findings suggest policies which alleviate constraints of commuting are crucial to expand travel-to-work areas and job opportunities of married women with heavy household responsibilities.
Urban Land Values Across China: State-ownership and Political Connection (G3, R3)
AbstractThis paper studies the land purchase behavior across firm types in China. Exploiting a comprehensive dataset of land transactions, combined with firm-level financial and corporate governance information, we examine the role played by state-owned enterprises (SOEs) in shaping the decade-long Chinese housing boom and the divergence in urban land values across cities. Specifically, we compare the land purchase outcomes between SOEs and private firms, and look for firm-level determinants of such differences. Conditional on firm characteristics and city-year fixed effects, we find that state-owned firms are purchasing more expensive land parcels, and more so in higher tier cities, rather than lower tier ones. Further analyses show that within the private real estate sector, firms with political connections also tend to purchase land parcels with higher value. Our findings suggest that political favoritism has substantial implications to the overall housing inequality and regional development in China.
Using Aggregate Market Data to Estimate Patent Damages (O3, L9)
AbstractIntellectual property and its protection is one of the most valuable assets for entrepreneurs and firms in the information economy. This article describes a method for measuring patent value with aggregate market data and the BLP model. We apply the method to United States smartphones. The data fit the demand specification well as judged by the estimated positive preferences for smartphone characteristics. The demand estimates and recovered marginal costs produce sensible simulations of equilibria prices and shares from several hypothetical patent infringements. In one simulation, the presence of near field communication (NFC) on the dominant firm’s flagship smartphone results in a 26 percent increase in profits per phone. This estimate provides a starting point for negotiating royalty rates or the potential damages from unauthorized use of NFC technology.
Value-added Trade, Exchange Rate Pass-through and Trade Elasticity: Revisiting the Trade Competitiveness (F4, F1)
AbstractConventional trade theory predicts that exchange rate increases (devaluation) will decrease export costs, thus increase exports. On the other hand, imports become more expensive. When the exports of a country are produced using imported intermediary inputs, then the effectiveness of exchange rate policy becomes complex. This paper measures exchange rate pass-through (ERPT) for value-added trade, where intermediate inputs are shared among countries in a back-and-forth manner for producing a single final product. Our proposed back-and-forth production process assumes that intermediate inputs are imported and which was exported as raw materials or intermediate inputs, initially. Estimation of pass-through was done using the World Input-Output Database (WIOD), the World Economic Outlook (WEO), and the OECD statistics. Empirically estimated findings suggest that ignoring the value-added trade will cause a systematic upward bias in the estimation of ERPT. From empirical investigation, it is also evident that there exists substantial heterogeneity in pass-through rates across sectors: sectors with high-integration into global market functions with a lower rate of pass-through in comparison to sectors with less integration. Additionally, we also decomposed our trade elasticity into two effect: own price and price index effect. We found that there is a substantial heterogeneity both in own price and cross-price elasticities across sectors and countries.
Variations in Naturalization Premiums by Country of Origin (J6, J3)
AbstractOne of the first steps in the naturalization process is obtaining permanent residence visa, a.k.a. a “green card.” Current US immigration policy utilizes a quota system for visa issuance. The Department of State issues a maximum of 226,000 family-preference visas and 144,000 employment-based visas per year. Furthermore, no more than 7 percent of the visas may be issued to natives of any one independent country. Thus, immigrants from the largest source countries experience wait times of several years before being able to acquire visas, thereby significantly slowing the time to obtaining citizenship. If returns to citizenship vary by source country, this system of visa allocation can result in an inefficient distribution of visas. This study uses the 2013 American Community Survey to explore differences in the returns to obtaining US citizenship for immigrants from the four largest source countries relative to all other immigrants. We find that Chinese, Mexican, and Filipino immigrants face a wage penalty prior to naturalization, while Indian immigrants experience higher wages than other immigrants. Naturalization more than offsets the wage penalty for Chinese immigrants and partially offsets the wage penalty for Mexican and Filipino immigrants. However, naturalized Indian immigrants earn significantly less than non-naturalized Indians.
Warranty, Seller Reputation, and Buyer Experience (D8, L1)
AbstractInformation asymmetry, one of the most serious `frictions' in markets, reduces confidence in trading between sellers and buyers. Owing to this importance, an extensive amount of literature has discussed the use of different market instruments to signal the quality of products and services and to improve trading opportunities. However, most of the previous studies have focused on the signaling effects of a single instrument. Because of this, a host of fundamental questions remain unanswered, such as, how do the instruments substitute for one another when there exist multiple signaling instruments? How does such substitutability differ across different types of sellers? How do buyers, especially those with different levels of market experience, respond to the existence of multiple signaling instruments?
Among market signaling instruments, the most discussed are seller reputation and warranty. In this study, we investigate several hypotheses related to how warranty, seller reputation, and buyer experience determine buyers' willingness to pay in an online auction market. Our findings show that the existence of a warranty significantly generates a price premium, but the magnitude decreases when the seller has a more established reputation. Further, in contrast to private sellers, professional dealers, who are the `repeated-game players' in the market, benefit less from a warranty, and moreover its substitutability for seller reputation becomes insignificant. In addition, a more established buyer with greater experience is willing to pay less for a warranty or for a professional dealership.
This study not only allows us to assess what sellers and buyers will gain and lose as a result of the signaling mechanisms, but it can also help us better understand the relationships between different signaling instruments (mechanisms). Furthermore, such knowledge can aid in the design of marketplaces, providing useful implications for the creation of reputation rating systems as well as information disclosure policies.
Welcome! We Have a New Menu: Measuring Product Responses to Competition
AbstractThis paper measures the response to new competition using a novel longitudinal dataset of restaurant menus in New York City. We use a technique from computer science to obtain a scalar measure of the pairwise distance between restaurants in product characteristic space based on differences in menu text. This particularly detailed measure of characteristic space allows for precise measurement of price and product changes in the menu of incumbent restaurants responding to entry. We address the endogeneity of location choice by matching "treated" incumbent restaurants facing competition from a new entrant with a "control" group of incumbent restaurants that have similar menus and location characteristics but no new competition. Our results indicate that restaurants facing additional competition do not adjust their prices, menu items, or quality of service. We seek to provide some of the first evidence on the response to competition in markets with substantial product differentiation, many firms, and rapid turnover.
Welfare Consequences of Rising Wage Risk in the United States: Self-selection into Risky Jobs and Family Labor Supply Adjustments (E2, D1)
AbstractWe investigate the welfare consequences of the rising wage volatility in the United States from the early 1970s to the 2000s. Several important questions are jointly addressed for an effective assessment of the welfare cost caused by the increased wage shocks: whether the increased wage shocks were or were not anticipated, whether they resulted from heterogeneous workers’ risk choice, and whether the affected individuals were or were not insured against the changes. We provide a quantitative assessment of the welfare cost using an augmented general equilibrium model with incomplete markets. Heterogeneous risk preferences, job heterogeneity in wage risk, and gender differences in wage dynamics constitute unique features of the model. Analytical results show that the measured welfare cost is substantially overstated by neglecting heterogeneity in risk preferences and workers’ risk choice. Family labor supply adjustments are more effective, compared to the borrowing and saving mechanism, in reducing the welfare cost of the increased wage shocks, particularly permanent shocks. Family labor supply adjustments, however, can reduce the welfare cost more effectively when the borrowing and saving behavior is allowed. It is also found that wives increase their labor supply substantially in response to anticipated increases in husbands’ permanent wage shocks, and this ‘added-worker’ effect is mostly accounted for by the extensive margin of wives’ labor supply adjustments. These results survive a series of robustness tests.
Welfare Effects of Fiscal Policy in Reforming the Pension System (H3, E6)
AbstractWe provide a systematic evaluation of the ways to finance pension system reform: in a single economy calibrated to match the characteristics of the US, with time-varying demographics, productivity growth and idiosyncratic income shocks we introduce a partially funded defined contribution system instead of a universal pay-as-you-go defined benefit system. While the economic profession has developed standards as to how OLG models should be built to evaluate pension system reforms, there is much less consistency about how these reforms are financed. Some papers adjust downwards benefits; others increase contributions to maintain pension system balancing. Another group of papers change the taxes or public debt in response to pension system imbalance. These modelling choices are likely to induce welfare and macroeconomic effects on their own, amplifying or attenuating the effects of the reform itself.
Depending on the selected fiscal closure, the magnitude of the aggregate welfare effects differ by a factor of as much as 100, with the majority of the outcomes falling into the range of roughly 0.3-0.7% of the lifetime income, admittedly a broad range of outcomes. Earlier literature argued that welfare effects of pension system reforms such as ours become negative in models with idiosyncratic income shocks. This result does not seem to be general, though. Our simulations show that regardless of the starting point (fiscal closure in the baseline scenario), there is always a fiscal closure for the reform scenario which yields welfare gains form reform. There is also always a fiscal closure for the reform scenario which gains sufficient political support to be democratically chosen. However the welfare improving closures are not identical to politically favored closures.
What Accounts for Racial and Ethnic Differences in Credit Use? (J1, G2)
AbstractAccess to credit is an important tool to promote households’ financial resiliency and wellbeing. Despite its potential benefits, use of credit varies widely across the population. Differences by race and ethnicity are particularly striking and are present even after accounting for many household demographic, socioeconomic, and credit characteristics. This paper uses nationally representative survey data to examine the extent to which households’ attitudes and perceptions toward banks, income volatility, geographic proximity to bank branches and alternative financial services providers, and local area population attributes can explain remaining racial and ethnic differences in use of bank credit (e.g., credit cards) and nonbank credit (e.g., payday loans). Understanding these disparities has important implications for consumers and for public policy.
We find that observable household demographic and socioeconomic characteristics account for a substantial portion of the raw disparities in credit use. Above and beyond these characteristics, local area population attributes are the only additional controls that meaningfully account for remaining disparities. However, the residual racial and ethnic disparities generally remain statistically and economically significant. We discuss factors that we believe are likely to contribute to these residual disparities, including unobserved supply-side factors (e.g., marketing of credit cards) and remaining differences across households in tastes and preferences for credit.
What Can Student Exiting Behavior Tell Us About School Quality in New York City?
AbstractAs more families opt out of standardized testing in K-12 education, traditional test-based metrics of school quality become less reliable. In this paper, we define and study an alternative indicator of school quality: the student transfer rate. We develop a theoretical model to identify the assumptions we are making when interpreting the student transfer rate as a measure of school quality. We then apply our definition and model to student-level data from New York City, calculating the transfer rate for every school for the last 12 years. We study both the validity and reliability of the transfer rate. After controlling for student and school characteristics, we find that the transfer rate is correlated with other measures of school quality and reasonably stable over time.
When Holmstrom And Milgrom Meet Laibson: Moral Hazard With Time-inconsistency And Naivety (D8, D9)
AbstractThis paper considers a Holmstrom-Milgrom's moral hazard model with a time-inconsistent agent with a quasi-hyperbolic discount function. Some standard insights of this model for a time-consistent agent no longer hold when the agent has intertemporal impatience. The principal has an incentive to "early contracting" when facing a quasi-hyperbolic agent, i.e., to sign the contract but postpone the work task to next period. A "signing bonus", which is given to the newcomer before the task is performed, may become optimal when the agent's risk aversion coefficient is very large. While when it is very small, a "full delegation" contract may become optimal; that is, the risk-neutral principal may find it optimal to sell the risky project to a risk-averse but short-run impulsively impatient agent and just get a fixed dividend for herself. When the amount of time that the agent spends working on the project becomes longer, the signing bonus will be less frequently seen but full delegation becomes more probable. Finally, the principal prefers the agent to be naive; though the effort level induced and the profits earned from a naive agent are higher than a sophisticated time-inconsistent agent, they are still inferior to those of a time-consistent agent.
Whose Income is Hump Shaped? (J3, J6)
AbstractThe average age profile of income is “hump” shaped, but that average profile can be decomposed into groups of typical profiles. While some profile groups exhibit the standard hump shape, large groups have either a decreasing average profile or a U-shaped average profile. Previous research has decomposed the aggregate age profile of income by defining subpopulations on the basis of level of education and occupation. In contrast, this study defines subpopulations on the basis of the similarity of individual age profiles of income. This distinction can be compared to asking whether the less educated are relatively poor (previous studies) vs. asking whether the relatively poor are less educated (this study). Since lack of education is both a cause and an effect of poverty, an understanding of both analytical approaches provides a more nuanced perspective on the nature of poverty. In the same way, I describe the demographic characteristics of income-profile groups, where previous studies have described the income-profile characteristics of demographic groups.
Why There Is Large Energy Consumption Variations Between China and Other Countries: Perspective From the Final Demand Side (Q4, O5)
AbstractDifferent countries follow various energy consumption patterns, not only directly due to scale factors such as economic scale and population size, but also attributable to the underlying variation of the economic structure, including industrial structure and final demand structure. Different from most of existing researches, this study focuses on the final demand side and analyzes the energy consumption variation across the world, aiming to explore China’s heightened status in energy consumption as well as its increment compared to that of other countries. This study employs a multiregional input-output model to calculate energy consumption embodied in various types of final demand and energy consumption multiplier for 40 economic entities between 1995 and 2009. Our main finding is that the large energy consumption variation between China and other countries was caused by energy consumption driven by gross fixed capital formation, because of higher investment rate and energy intensity of investment in China than other countries.
Within Occupation Wage Dispersion and the Task Content of Jobs (J3, J2)
AbstractThe relation between income inequality and technological progress has many chapters, of which the most recent corresponds to the task content of jobs. Proponents of this theory suggest that falling prices of computational power coupled with the increasing power of computers leads to an increasing substitution of workers with computers and a hollowing of the middle of the income distribution. In spite of the increasing importance of the theory to explain changes in the employment structure, some assumptions from the model remain untested, particularly in the characterization of tasks.
In this research, we fill this gap by analyzing the relation between wage dispersion and the task content of jobs. Theory depicts routine tasks as standardized tasks, with little room for individual initiative. By contrast, non-routine tasks are more closely linked to individual productivity. Consequently, wage dispersion within occupations should be greater in occupations with a bigger share of non-routine tasks.
We test this hypothesis using matched employer-employee data from Europe. For all EU countries, we obtain estimates of wage dispersion (unconditional and conditional on workers' characteristics) for each occupation and relate them to measures of task content. The results indicate that non-routine intensive occupations present greater wage dispersion, even after controlling for several confounding factors, such as changes in employment structure and individual characteristics. Empirical analysis is then consistent with the theoretical characterization.