AEA Poster Session
Friday, Jan. 4, 2019 7:00 AM - 6:00 PM
Saturday, Jan. 5, 2019 7:00 AM - 6:00 PM
Sunday, Jan. 6, 2019 7:00 AM - 6:00 PM
Uncertainty Shocks and the Great Retrenchment: A DSGE Perspective (F3, F4)
AbstractThis paper investigates the implications of global macroeconomic and financial uncertainty shocks for cross-country banking portfolios and macroeconomic aggregates. To this end, I employ a two-country DSGE framework with leverage-constrained financial intermediaries and endogenous portfolio choice. The countries are assumed to be ex-ante asymmetric which allows me to consider both developed and emerging market economies. The analysis suggests that the "great retrenchment" in capital flows during the financial crisis was caused by a global increase in financial uncertainty. In particular, a rise in financial uncertainty weakens the negative relationship between the stochastic discount factor of home financial intermediaries and the rate of return on domestic assets making them a better hedge against home shocks. Simultaneously, an adverse global financial uncertainty shock tightens the endogenous leverage constraint in both countries and leads ultimately to a worldwide recession. On the other hand, rising macroeconomic uncertainty implies an expansion in cross-border banking and non-synchronized dynamics of macroeconomic variables across countries.
Money Flow in a Dynamic Economy (E0, E5)
AbstractA substantial portion of the economy’s money flows into the savings of large corporations and the super wealthy, driving up stock prices and driving down interest rates creating a permanent liquidity trap and economic instability. Meanwhile, middle class Americans have accumulated little, if any, savings, while getting deeper and deeper into debt in the form of college loans, car and truck loans, mortgages, home equity loans and credit card debt. Monetary policy has kept interest rates low, while fiscal deficit spending and deregulation have tried to make up for insufficient demand for goods and services and in the process have been generating trillions of dollars in federal government debt. This paper proposes changes to economic policy to substantially reduce both government and personal debt and bring our economy back into balance to achieve sustainable growth and more widely shared prosperity. In particular, monetary policy that is designed to stimulate investment does not work when there is inadequate demand. Why add another production line if you can't sell all you are currently producing? As often noted, it is like pushing on a string. This paper proposes the creation of a "My America" prosperity account with the Federal Reserve Bank for everyone over 18 years of age with a social security number. Initially, each account will have one thousand dollars, which could not be withdrawn, but the interest could be withdrawn and any additional money injected into these accounts could also be withdrawn. In addition, individuals can put their own money into their account up to a specified annual limit. Individuals could use their smart phones to access their "My America" accounts to buy anything from any business or individual. When excessive inflation threatens, the Fed can raise the interest rate and increase the annual contribution limit for that year. The result would be money moving out of the general economy into the "My America" accounts to slow demand for goods and services. On the other hand, when the economy slows and recession threatens, the Fed can inject additional money directly into the "My America" accounts that could be immediately withdrawn. Since the Fed would be creating money out of "thin air," this would not involve any additional taxation, nor would it add to the national debt. Individuals would register their smart phones, laptop computers and other such devices with the Federal Reserve, have their face or eyeballs scanned and select a secure password for their account. An unique algorithm would be created for each individual that would be copied onto each of their registered devices. The algorithm would generate a 60-digit alphanumeric password to authorize the withdrawal or addition of funds out of or into their "My America" account. A new 60-digit password would be created by the algorithm for each new transaction. The devices would be block chained together with their "My America" account to move to the next 60-digit password for the next transaction so each 60-digit password would be used only once.
The Effects of Water Right Reforms in the Arid Western United States: Case Studies from Texas and New Mexico (Q2, Q1)
AbstractPrior appropriation doctrine, the primary institution for allocating the right to use water resources in the arid western U.S., has long been criticized for its inflexible transfer and risk sharing mechanisms. In response, some western U.S. regions have implemented water institution reforms that have restructured and reallocated water rights. With the exception of Dabaere & Li (2017) which focuses solely on irrigation decisions, there are scant empirical studies in the economics literature that justify the efficacy of the reforms, including welfare effects. Using a difference-in-difference approach, our paper identifies the economic effects of two increasingly advocated water rights reforms from examples in Texas and New Mexico. These are: 1) the replacement of prior appropriation by correlative rights doctrine in the middle and lower Rio Grande basin (RGB) of Texas; and 2) legislation to implement water banking in both states. While the latter relaxes transfer restrictions for irrigation, the former additionally changes the risk structure. We find ambiguous effects from reform that shifts from prior appropriative to correlative rights doctrine as agriculture gross profits, excluding income redistribution terms, increase in the lower RGB but not in the middle RGB, where hydrological conditions differ. As for water banking legislation, our results show that the effects vary by region. Overall we find that these changes in water right institutions do not necessarily benefit the industry nor guarantee overall social welfare improvement. Additionally, the empirical evidence suggests that legislative details and local hydrologic conditions are essential to effective water rights institutional reforms.
Feel the Burn: Regulation and Impact of Agricultural Straw Burning in China (Q5, Q1)
AbstractThis study investigates the impact of agricultural straw burning on air pollution and health in China during 2013-2015. Using satellite-detected straw burning data, we estimate that 10 additional straw burning points can lead to a 7.62% increase in monthly PM2.5 and a 1.56% increase in mortality. Because there is no impact of straw burning on other pollutants, and farmers do not consider the air pollution impact when they burn straw, burning can serve as an instrumental variable for local air quality in estimating the causal impacts of air pollution on mortality. We find that a 10 µg/m3 increase in PM2.5 will cause a 3.25% increase in monthly mortality. Introducing exogenous variations in wind directions and non-local straw burning does not alter the IV estimates significantly, further ensuring the validity of straw burning as an instrument for air pollution. Specifically, straw burning primarily affects rural residents and causes more rural residents to die from cardiorespiratory diseases, particularly the middle-aged males who are the major labor force in rural areas bear the highest mortality risk. Urban mortality, in contrast, is unaffected by short-term variation in air pollution from straw burning. We further utilize online search and sales for pollution information and defensive equipment as a sensitive signal for public avoidance behavior against straw burning, and detect responses only in autumn but not in summer when smoke is unnoticed, does not affect visibility and hardly triggers any pollution alerts. This supports the approximation to physiological effects of air pollution of our estimates. In autumn, Chinese citizens adopt avoidance behaviors, such as searching and purchasing anti-PM2.5 masks and air filters, reducing outdoor activities and increasing entertainment. The total health and defensive cost of straw burning is substantial. We further evaluate the regulation on straw burning and find that government subsidies can be more effective than command-and-control policies in restraining burning behaviors of farmers. Subsidizing the recycling of straw brings significant health benefits and is estimated to avert 21,400 pre-mature deaths annually. These findings offer important implications for regulations on straw burning in China and other countries with similar issues.
Market-Level Effects of a Large-Scale Public School Choice Reform (I2)
AbstractWe study market-level and distributional effects of a large-scale public school choice reform on education and labor market outcomes. Our identification strategy exploits variation in school choice possibilities across municipalities and over time generated by a nationwide reform that introduced school choice in Finland in the 1990s. Students from all socio-economic backgrounds make choices but the benefits of the choice reform are unequally distributed. School choice benefits higher SES students by improving their GPA and education outcomes. The education and labor market outcomes of lower SES students deteriorate because of displacement and selection effects in their education and occupational choices.
A New Approach to Food Demand System (D1, C6)
AbstractBased on Lancaster’s attribute theory but completely independent of utility theory, we derive—not estimate—a food demand system from a linear programming model with an expenditure minimization objective subject to a series of constraints of nutrient requirements using food consumption data in Canada. Further, this paper empirically verifies the integrability theorem and reveals that the preferences for nutrients can be recovered from the food demand system. Put it another way, consumers buy foods not to satisfy their utility but to obtain nutrition.
Are Theory-based Debt Sustainability Indicators Useful for Predicting Crises? (H6, E6)
AbstractA large literature in empirical public finance applies time series techniques to historical data and draws inference about public debt sustainability of individual countries. These methods include unit root tests on primary deficits, co-integration between revenue and expenditure as well as fiscal reaction functions. In this paper, we take a systematic approach to evaluating the in- and out-of-sample performance of various methods in predicting sovereign debt crises. In a panel-logit regression analysis, we find only very limited benefits for forecasting.
Budget Rules and Political Turnover (P4, C7)
AbstractThis paper studies the welfare implications of a class of budget rules, the ones that determine mandatory spending. I analyze a model with two parties that allocate a fixed budget to private transfers and a public good. Each period a party is chosen to propose an allocation while the other party can accept or reject the proposal. Mandatory spending is modeled in the spirit of dynamic legislative bargaining with an endogenous status quo. The relative taste for public goods defines the level of political conflict in society. I show three results. First, the type of good under mandatory spending is not without loss of generality, as mandatory spending over private goods deliver under-provision of the public good, vis-a-vis the first-best allocation, while the opposite is true for mandatory spending on public goods. This happens because this institution creates a positive intertemporal wedge on the good that is mandatory. Moreover, when political conflict is relatively high, it is welfare superior to have mandatory spending on public goods. However, as the level of political conflict decreases, mandatory spending on private goods may not only become welfare superior, but it may also bring society to the first-best. In fact, net welfare gains are increasing with political conflict when mandatory spending is on private goods. This result highlights that political conflict is not necessary harmful to welfare, specially when there are institutions that prevent expropriation. Finally, I show that net welfare gains have a positive relationship with political turnover, indicating that the common wisdom that more political turnover is better holds true when there is such an institution as mandatory spending.
Climate shocks, lake drying and children’s cognitive skills and violent behavior: Evidence from Chad (J1, I3)
AbstractIn this paper, We empirically investigate how climate shocks and variation in rainfall and temperature affect children’s violent behavior and cognitive skills in Chad, one of the four countries of the Lake Chad Basin. First, We examine if children living in areas with droughts, low rainfall and higher temperature are more likely to have lower cognitive skills and be more violent than their peers. Second, we unravel the key channels/mechanisms through which climate shocks might impact on children’s violent behavior and cognitive ability. We combine the 2014/2015 Demographic and Health Survey of Chad with unique information on household’s geo-localized clusters with the latest DHS geographical covariates data. We found that children living in areas with a higher level of rainfall, longer growing season and less arid soil (humid) tend to have better cognitive skills (higher ability to read, are more likely to follow instructions and less likely to be violent). However, those children are more likely to be easily distracted. This could be explained by the fact that the longer the growing season, the longer the harvest given that crops become mature as the soils are more humid and the lake less dry. Adults mothers and their children might then be required to work on the farm and therefore be distracted as a result.
Potential mechanisms include mother’s years of education and the distance to the main source of water. We find that mothers of children living in humid, high rainfall and longer growing season areas (cluster) tend to complete more years of education and spend less time to collect water. Indeed, a higher mother’s years of education is associated with a higher children’s ability to read and follow instructions. On the other hand, the longer the distance to collect water, the lower the ability of the child to properly read and follow instructions. Our paper makes an unique contribution to the nexus between climate shocks and children’s early childhood development with a focus on two under-researched outcomes: cognitive skills and violent behavior of under five years old.
Confirmation Bias in Social Networks (D8, C1)
AbstractI propose a social learning model that investigates how confirmatory bias affects public
opinion when agents exchange information over a social network. For that, besides exchanging
opinions with friends, individuals observe a public sequence of potentially ambiguous signals and
they interpret it according to a rule that accounts for confirmation bias. I first show that, regardless
the level of ambiguity and both in the case of a single individual or of a networked society, only two
types of opinions might be formed and both are biased. One opinion type, however, is necessarily
less biased (more efficient) than the other depending on the state of the world. e size of both
biases depends on the ambiguity level and the relative magnitude of the state and confirmatory
biases. In this context, long-run learning is not attained even when individuals interpret ambiguity
impartially. Finally, since it is not trivial to ascertain analytically the probability of emergence of
the efficient consensus when individuals are connected through a social network and have different
priors, I use simulations to analyze its determinants. Three main results derived from this exercise
are that, in expected terms, i) some network topologies are more conducive to consensus efficiency,
ii) some degree of partisanship enhances consensus efficiency even under confirmatory bias and iii)
open-mindedness, i.e. when partisans agree to exchange opinions with other partisans with polar
opposite beliefs, might harm efficiency in some cases.
Countercyclical Risks and Portfolio Choice over the Life Cycle: Evidence and Theory (G0)
AbstractI show that countercyclical earnings risk alone can generate moderate stock holdings for young households, while the standard lifecycle models struggle to predict such a realistic age profile of risky share. Moreover, countercyclical earnings risk has quantitatively important effects on saving and portfolio choice decisions over the business cycle. During expansions when expected future earnings growth is high, households save less and also invest a higher share of their financial wealth in the stock market. The opposite holds during recessions. Further negative skewness in the earnings process during recessions additionally reduces households' stock market exposure and consumption. These quantitative predictions are consistent with microeconometric evidence from the Panel Study of Income Dynamics and macroeconometric evidence from the Flow of Funds. Counterfactual simulations using the calibrated model generate wealth inequality dynamics similar to their empirical counterparts.
Econometric Model of Economic Growth, Inflation and International Trade in Russian Federation: What Are the Prospects for Future? (E1, C5)
AbstractThe objectives of the paper are to analyze the macroeconomic trends in Russian Federation, to identify the factors of growth of her economy and to make forecasts for the next two to three years.
The methodological tool is the upgraded version of econometric model which consists of 24 equations and 48 identities that describe the relationships between 84 variables. They consist of 12 exogenous and 72 endogenous variables. Among the firsts there is the capital account balance, the monetary base, economically active population, government consumption index and deflator and export and import prices. The main macroeconomic indicators such as the GDP volume, different price indexes, investment in fixed assets, bank loans and deposits, employment and average wages, exchange rate and volumes of export and import were included as the endogenous variables.
The parameters of the equations were estimated by ML – ARCH and by OLS methods. The quarterly data for Q1 1999 – Q4 2017 were used as a sample.
The main result is that under the assumption of the same economic policy and foreign economic conditions the average annual growth rate of Russian economy for 2018-19 years will be 1.5% while the inflation is falling to 2.3 % annually but investment will decline.
Active monetary policy increases the economic growth only slightly but helps to improve investment with a weak impact on inflation. Freezing government purchases has a strong positive impact on the economic growth and investment while reducing the inflation.
Such outcome is the result of reduction of total factor productivity of Russian economy and of inadequate investment. The model demonstrates strengthening of impact of internal factors on Russian economy but its dependence on import and on the world economy in general is still strong.
Financial Advice, Gender and Wealth: Risk Tolerance, Knowledge and Confidence in Advised and Self-Directed Wealthy Investors. (G4, G2)
AbstractWe use a sample of advised and self-directed wealthy individuals to examine
gender differences in the self-perceived investment risk tolerance, knowledge and confidence,
and portfolio allocations made to the risk free asset, cash. The results reveal that investors
who engage financial advisors judge themselves to have higher levels of risk tolerance and
hold 15% points less cash in their portfolios than those who manage their own investments.
Controlling for investor characteristics, we show that women perceive themselves to have
lower risk tolerance than men and demonstrate this by holding 5% points more cash in their
portfolios. However, we do not replicate lower levels of investment knowledge and confidence
among this sample of wealthy women. Furthermore, we show that the gender of the advisor
matters, but only for female investors. Women who select male advisors increase their cash
holdings by on average 14% points and feel significantly less knowledgeable and confident
about their investment decisions. This paper makes a broad contribution to practices that
involve advice within financial domains with findings that challenge the blanket assumption
that women are more conservative investors than men. The results suggest that more attention
should be paid to the interaction between advisors and investors as a driver of gender
bias in investor attitudes and behaviour in the wealth management industry.
Fueling the Credit Crisis (E3, E5)
AbstractThe 2008 financial crisis started with subprime loan losses in the U.S. shadow banking sector, but it is unclear why this led to a credit contraction from traditional banks. I study the macroeconomic implications of these spillovers in the modern financial market, highlighting a novel contagion channel that is operative regardless of direct connections between banks. A subprime loan loss forces shadow banks into a fire sale of mortgage loans. This depresses housing prices, inducing prime loans to default. The unexpected prime loan default, by raising the volatility in mortgage returns, endogenously activates traditional banks’ value-at-risk constraints, generating a market-wide lending freeze. This channel qualitatively explains why traditional banks did not fill the credit gap created by the shrinking shadow banking sector, but instead cut lending. A quantitative dynamic general equilibrium model shows that capturing both banking sectors’ credit contraction amplifies the aggregate credit loss during the Great Recession by a fifth. Using bank-level data and regional variation, I provide empirical support for the channel. Banks’ unwillingness to lend also accounts for the observed rise of excess reserves. Analysis of this channel suggests that tighter regulation on traditional banks in normal times, by shifting lending to shadow banks, may hurt traditional banks in crises.
Heterogeneous Spillovers Of Housing Credit Policy (E4, R3)
AbstractWe study the spillovers from government intervention in the mortgage market on households’ consumption. After an expansionary mortgage market operation, the consumption response of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases consumption inequality of mortgagors. We explain these facts through the lens of a life-cycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while a reduction in interest rates shifts this wealth towards consumption. Increase in wealth is bigger for those with a larger mortgage - this exacerbates consumption inequality.
Institutional Investor Behavior in X-CAPM (G2, G4)
AbstractThis study aims to model institutional investor behavior in the XCAPM model under the premise of reflecting a more detailed decomposition of investor types in equity markets. We explore the behavior and its impact in the model, esp. on pricing and on key financial ratios. We observe that the prevalence of the institutional investor counteracts extrapolator’s effects, resulting in lower volatility of price dividend ratio, lower predictive power of changes in consumption for future price changes and lower equity premium.
Intergenerational Transmission of Education: Evidence from the World War II Cohorts in Europe (J0, I0)
AbstractWorld War II was the deadliest in history. This partly reflects the fact that, unlike most previous wars, it directly targeted the civilian population, children included. While it has been shown that the war had long-term effects on those directly exposed to it, there is no evidence on whether its effects extended to subsequent generations. Our paper aims to fill this gap by documenting the intergenerational effects of World War II in terms of human capital accumulation. We use rich and unique data on linked generations from the Survey of Health, Ageing and Retirement in Europe (SHARE) and detailed historical data on military operations for the period 1936--1945. Our analysis considers parents born between 1926 and 1949 who suffered the war during their childhood or adolescence, that is, they were exposed to major war events or personally experienced war-related hardship. We show that parents who suffered the war ended up with less schooling than parents who did not, and that their children have lower educational attainments than the children of parents who did not suffer the war. Our reduced form results allow us to derive instrumental variables estimates of the coefficient of intergeneration transmission of education which show that the effect of parental education is stronger for mothers than for fathers. They also show that the mother's education matters more for daughters than for sons.
Mixing or Separating Genders in Higher Education? Evidence from a Natural Experiment in Iran (I2)
AbstractNumerous research on single-sex education has produced inconsistent results, mainly due to methodological issues and selection biases. The current research attempts to contribute to the vast literature on single-sex education by addressing the dearth of research on the effect of gender separation policy in the context of higher education, as well as in the context of Muslim-majority countries where, ironically, single-sex education is more prevalent.
Although higher education is mainly not separated by gender in Iran, following a resurgence of the debate over single-sex education in recent years, some Iranian public universities implemented the policy of gender separation at classroom level. In 2011, one of the largest public universities in Tehran started to exclusively offer single-sex classrooms without a pre-announcement to the public. As a result, students who selected to study in this university in 2011 were not aware that they would participate in classrooms merely with those of their own sexes. Exploiting such a natural experiment, this paper investigates the causal impact of single-sex versus mixed classrooms in higher education on students’ achievements.
Initial naïve estimates show an ostensibly large effect of mixing genders in classrooms (+0.30 standard deviation for males and -0.23 standard deviation for females). However, using appropriate controls for socioeconomic status and incoming test score as a measure of ability reveals that participation in mixed classrooms improves males’ first-year GPA by 0.14 standard deviation, while it decreases females’ performances by 0.12 standard deviation. Using a difference-in-difference approach increases the effect in size and significance for males (0.17 standard deviation), while it decreases the impact on females’ attainments to non-significant. Findings also show that the positive effect of mixed classrooms is larger for males from lower socioeconomic status and with higher levels of ability. In contrast, females from higher social class and with lower ability levels are more negatively affected by attending mixed classrooms. Interestingly, coming from a more religious family seems not to affect the impact of the policy on educational outcomes.
Although the current paper found that the policy of separating classrooms by gender at universities is beneficial for females and harmful for males in terms of their achievements, the question whether the Iranian government should widen the scope of the policy in terms of the number of public single-sex universities or mixed universities with separated classrooms is still open. Future studies with additional data on various aspects need to evaluate the impact of the policy in the long term, and on key social outcomes beyond educational performances.
Targeting Using Ex-post Information in the Microcredit Market (O2, G2)
AbstractAccess to credit is increasingly information-driven, as lenders begin to rely more on credit scores and their associated algorithms to evaluate borrower credit-worthiness. In this environment, the combination of wide variation in returns to capital and low data availability because of poor market engagement may hamper the ability of small and medium entrepreneurs to access credit. We test whether the rich monitoring data generated by many anti-poverty programs can be used to fill the data gap and assess the credit-worthiness of poor entrepreneurs. The context for our study is the “Targeting the Ultra-Poor (TUP)” program administered by BRAC in Bangladesh, which offered productive assets and two years of training to poor women followed by an encouragement to take a loan from its microfinance program. We find that households who applied for loans and were approved by BRAC are the better-off group among all the beneficiary households. We show that the screening by BRAC and the self-selection by borrowers contributes to targeting successful borrowers in the BRAC-microcredit market. We finally show that subjective indicators of borrower quality are important predictors of loan approval by BRAC. We conclude that data collected from anti-poverty programs can be used to identify high-potential borrowers and that the credit market outcomes can be improved with a highly-intensive monitoring or subjective assessments.
The Complicated Effects of the Vietnam Lottery Draft and Military Service on Self-Reported Health Revisited (I1, C3)
AbstractWe examine the long-term health effects of the U.S. Vietnam War military service and the Vietnam War draft lotteries using nonparametric bounds. The data used is a restricted version of the National Health Interview Survey 1974-2013. We find a deteriorating health effect of the military service on the draft volunteer veterans in 1997-2005 and 2006-2013. Considering that the draft volunteers take more than 70% of the total Vietnam veterans in all of our survey year samples, the estimated military service long-term effect on the volunteer veterans adds to the previous studies’ finding of effect on the draft compliers estimated by the Instrumental Variable method. We also examine any direct effects of the draft lotteries independent of military service on the draft avoiders.
The Legacy Effect of WWII Massacres on China's External Trade Pattern (N4, F1)
AbstractWe study the legacy effect of historical conflict on contemporaneous trade. Using new data on the regional dispersion of civilian deaths due to massacres in the Sino-Japanese war (1931-45), we find that local conflict intensity predicts international trade patterns of Chinese corporations three generations later. We further explore the transmission mechanism of collective war memory. Conflict intensity correlates with measures of anti-Japanese sentiments inferred from survey data and it appears to be transmitted both through war dramas in the mass media as well as official commemorations. The trade-inhibiting local war memory has a stronger explanatory power on import response and is highly subject to the length of exposure time.
The Political Economy of Multilateral Lending to European Regions (F5, G2)
AbstractWe study the political economy of allocation decisions within a major state investment bank. Our focus is the European Investment Bank (EIB), "The Bank of the EU", which is the largest multilateral lending institution in the world. We use administrative data on all EIB project loans aggregated at the level of European regions. We exploit information on the regions of origin of about 500 national representatives at the EIB's Board of Directors since 1959, the decisive body for loan approvals, and show that upon appointment the probability to send back a loan to their region of origin increases by 14-19 percentage points on the extensive margin. We find evidence that this effect is driven by favoritism rather than an information advantage they have about their regions of origin.
When Birth or Death Hits Home: House Prices, Rents and Demography in Paris and Amsterdam, 1400-present (R3, N3)
AbstractThis paper compiles and exploits more than six centuries of historical data on house prices, rents and demographics from Paris and Amsterdam to identify the causal effect of urban demographic change on the housing market. First, we provide descriptive evidence that house and rent prices increased as urban population expanded over the long-run, although only in limited amounts. Prices responded stronger when population declined. Second, consistent with models of age-dependent housing demand, we document that a one percent increases in the current five year birth-rate increases house prices about 25 years later by 5% and rent prices by 1.5-2.5%. Third, exploiting outbreaks of the plague as an exogenous shock to population, we identify a short-term annual elasticity of population on rent prices of about 1.25. Evidence from VAR models suggests the impact is even stronger for house prices.
Women's Suffrage and Political Polarization (N4, D7)
AbstractThe dynamics of political polarization in the US have been extensively discussed in recent years. Despite the emerging literature that attributes the recent increase in polarization to the concurrent change in some socio-economic factors, the forces that could potentially bring it down are not well understood. This paper documents an unobserved fact that links women's suffrage in the US to the drop in polarization in the early 20th century. Using a state-level bi-annual panel data from 1870 to 1940, I find that women's suffrage resulted in the decline of polarization. On average, polarization in states that granted women the voting rights was about 13.5% lower. The result is robust to a variety of checks. By including individual fixed effects, I find that around half of the overall effects come from incumbent politicians changing their behavior in response to suffrage laws. Furthermore, I investigate the heterogeneous effects in parties and chambers. The observed convergence between the two parties was primarily driven by the Democrats acting "more Republican", and the effect was larger for House Representatives than Senators.
A Blessing or a Curse: The Role of Benefit Offerings in the Startup’s Early-Stage External Financing (M1)
AbstractAccess to financial capital is an important determinant of new firm survival and success. Drawing upon the literature on human capital and signaling theory, a series of hypotheses were proposed to disentangle the complex relationships among entrepreneurial human capital, a startup’s benefit offerings and the probability of its obtaining early-stage external financing. Analysis of the results obtained on a sample of 2791 firms in a longitudinal panel dataset support most of the hypotheses. In particular, a startup’s collective benefit offerings have an accelerating positive effect on the probability of its obtaining early-stage external capital. These findings imply that entrepreneurial human capital and a startup’s benefit offerings signal the startup’s underlying quality, which in turn affects investor decisions.
A Contradictory View on Survivability in Agriculture (Q1, R0)
AbstractRecent US Department of Agriculture (USDA) outlook concludes the nation’s farm sector is in a healthy condition based largely on the low debt-to-asset ratio. The sector’s debt outstanding continues to grow despite five consecutive years of declining real net farm income.
We argue the validity of using national financial indicators such as the debt-to-asset ratio to assess financial stress in agriculture is highly problematic. While those farms with little or no debt on their balance sheets can withstand rising interest rates, declining commodity prices and stronger dollar, highly leveraged producers may not be as fortunate, causing increasing credit risk for agricultural lenders.
Dynamic stochastic simulation of selected representative farms is used to assess the probability of loan default associated with different leverage positions. Our results reveal a more pessimistic view, suggesting farms with heavy or even median debt loads may face severe financial stress, particularly if interest rates continue to rise. Agricultural lenders may face higher loan loss reserves and increased writing offs. Understanding the depth of the problem as opposed relying on national financial indicators can benefit all stakeholders in agriculture.
Adaptive Theory: Limited Neural Resource, Attention and Risk Taking (D8, D9)
AbstractThis paper presents a new descriptive theory for decision making under risk, called adaptive theory, which deals with how the brain adapts the distribution of limited neural resources to encode subjective utility(SV) for efficient use in different contexts. This distribution affects the relative utilities between each payoff, and finally determines the brain's risk attitude. We propose that the adaptation of distribution can be divided into two dimensions, the location and the degree of neural resources concentration. By introducing four assumptions on the distribution, this paper studies how those two dimensions vary according to contexts, and finally determines risk attitude. By specifying these two parameters as a function of payoffs, our theory provides a novel and unified account of a large number of empirical phenomena. Our theory also yields new predictions that distinguish it from prospect theory and the salience theory. In addition, the implications of our theory may provide new directions for decision theories based on the concept of decision utility.
Amazon Mechanical Turk Workers Provide Consistent and Economically Meaningful Data (C9, C8)
AbstractWe explore the consistency of the characteristics of individuals who participate in studies posted on Amazon Mechanical Turk (AMT). The primary individuals analyzed in this study are subjects who participated in at least two of eleven experiments that were run on AMT between September of 2012 to January of 2018. We demonstrate subjects consistently report their age, gender, subjective willingness to take risk, and impulsiveness. Further, subjective willingness to take risk is found to be significantly correlated with decisions made in a simple lottery experiment with real stakes - even when the subjective risk measure is reported months, sometimes years, in the past.
An Integrated Macroprudential Stress Test of Bank Liquidity and Solvency (G2, G1)
AbstractWe develop a macroprudential stress test of banks which integrates liquidity and solvency risks, and estimates the change in both based on the evolution of financial distress within the banking system. We estimate this evolution of financial distress using a new measure of systemic distress called DisressRank which incorporates idiosyncratic and systemic risks in the banking system network. We apply the stress test framework to the U.S. banking system and identify the systemic vulnerability of individual banks and the resilience of the system as a whole to economic risks. We also use this framework to identify and monitor systemic interdependencies between banks.
Are Financial Information Technologies Making the Rich Richer? (G0, O0)
AbstractThe recent financial information technology revolution has made information acquisition cheaper than ever before and has promised to completely restructure capital markets. The internet of things, machine learning, AI algorithms trained on big data sets, and so on, have started a revolution in global access to knowledge and lowered many different costs of trading (ie. commission fees, research fees, delegation fees, etc.). I build a noisy rational expectations model of the stock-market in order to understand how these developments affect who, what, and how investors trade. I show that improvements in financial information technologies explain the large rise in passive investing and the retrenchment of small investors from stock-markets. Moreover, contrary to mainstream beliefs, new financial information technologies do not automatically translate into more equal outcomes.
Are Financially Constrained Firms Susceptible to a Stock Price Crash? (G1, G3)
AbstractThis study investigates whether and how financial constraints on firms affect the risk of their stock prices crashing. We hypothesize that financial constraints increase future stock price crash risk via both bad-news-hoarding and default-risk channels. The results confirm our conjecture and are robust to using a dynamic panel generalized method of moments (GMM) estimator and two quasi-natural experiments to control for potential endogeneity. Cross-sectional analyses reveal that the positive relation between financial constraints and future crash risk is more prominent for firms with high abnormal accruals or with weak corporate governance and less pronounced for firms that commit tax avoidance or have a high credit rating. Additional analysis shows that financial constraints are associated with crash risk as far as three years ahead. Overall, our study provides the implications of financial constraints on future extreme negative stock returns and should be of interest to investors as well as other stakeholders concerned about firms’ creditworthiness and viability.
Bank Funding Costs and Capital Structure (G3)
AbstractIf bail-in is credible, risk premia on bank securities should be decreasing in loss absorbency junior to and equal with them in the creditor hierarchy. We find that banks with more equity and less subordinated debt have lower risk premia on both, and banks with more subordinated and less senior unsecured debt have lower senior unsecured risk premia. For percentage point changes to an average balance sheet, our baseline estimates imply that these reductions would offset two thirds of the higher cost of equity relative to subordinated debt and one third of the spread between subordinated and senior unsecured debt.
Board Gender Diversity and Firm Performance: Evidence from Chinese Firms (G3, J2)
AbstractThis paper identifies a causal effect of board gender diversity on firm performance using Chinese listed firms. Our identification is based on the differential effect of a historical event, the education system disruption during China’s Cultural Revolution and the subsequent resumption, as an exogenous shock to the supply of male and female directors. By building an instrument utilizing this shock for board gender diversity, we find that one standard deviation increase in board female ratio can lead to 4.78% standard deviation increase in ROA. Moreover, we find evidence that only more than two females in the board can affect corporate decision-making, supporting the critical mass theory.
Bond Finance, Bank Finance, and Bank Regulation (E5, G2)
AbstractA dynamic general equilibrium model of bank regulation that omits bond financing is imprecise because such a model prevents firms from raising credit via alternative channels, and thus artificially lowers the price elasticity of demand for bank loans. In this paper, I build a continuous-time macro-finance model in which firms can use both bond credit and bank credit. Risky firms appreciate bank credit because banks are efficient at liquidating assets for troubled firms. However, risky firms must pay a risk premium for banks' exposure to aggregate risks. This paper shows that a model that does not allow for bond financing overestimates both the welfare benefits of tightening bank capital requirements and the rate at which the banking sector recovers after a recession. In addition, I show that the optimal bank regulation highly depends on the efficiency of the bankruptcy procedure in an economy and the risk profile of its real sector.
Capital Income Taxation with Parental Incentives (D1, H2)
AbstractThis paper develops a politico-economic theory of nonlinear capital taxation with preference
differences between parents and children in time-prference. Those differences form the
basis of intergenerational conflicts over the kids’ saving decisions. Parents could directly
affect the kid’s saving by leaving paternalistic parental transfers if they are sufficiently rich.
Also, parents indirectly affect the kids’ savings through capital taxation since the government’s
objective reflects the will of the all livening people. The main finding is that the marginal
capital taxes are regressive if parents could use parental transfers, while those are progressive
if they could not.
Climate Change Induced Inter-Province Migration in Iran (C2, O1)
AbstractWe use Iran’s national census data, covering the period 1996-2011, to empirically examine the existence of a relationship between inter-province migration and province-level climate, proxied by average levels of annual temperature and precipitation. Using a gravity equation and allowing for spatial correlation, we find that migration flows are significantly affected by both. This effect consistently persists over different specifications and implies that a rise in temperature and a drop in precipitation act as significant push factors. That (i) we focus our analyses on internal migration in a single county which excludes other major types of migration; (ii) the country has become increasingly vulnerable to climate change and has had a recent history of significant internal migration; and (iii) all the other relevant explanatory variables which are jointly included with climate variables turn out to have the expected impacts on migration flows, render our evidence robust and call for policy intervention.
Cognitive Biases and Consumer Confidence (E7, E3)
AbstractWe investigate how two cognitive biases affect consumer sentiment. When consumers are systemically affected by cognitive biases, indexes of consumer sentiment can complement objectively defined macroeconomic variables, because they cannot be reduced to averages of either macroeconomic or financial state variables. We show that the peak-end rule and herding influence the index of consumer sentiment published by the University of Michigan. Both biases affect respondents' assessment of changes in their financial position over the past year. First, assessments are more strongly related to extreme detrimental monthly changes during the year than to changes over the whole year, which corresponds with the peak part of the peak-end rule. We rule out that these extremes proxy for risk. Second, the assessments of the past year are positively related to other respondents' expected changes for the coming year on top of their assessment of the past year, which corresponds with irrational herding. Because of these biases, indexes of consumer sentiment are relevant for understanding consumer behavior and for macroeconomic and financial forecasting. They explain why consumer sentiment is more volatile than other macro variables and why it is susceptible to feedback loops.
Combining Factor Models and External Instruments to Identify Uncertainty Shocks (C3, E6)
AbstractStructural VAR models require two ingredients: (i) Informational sufficiency, and (ii) a valid identification strategy. These conditions are unlikely to be met by small-scale recursively identified VAR models which are commonly used to explore the real and nominal effects of uncertainty shocks. I propose a Bayesian Proxy Factor-Augmented VAR (BP-FAVAR) to jointly address both issues. I find that real economic activity drops and rebounds following an identified uncertainty shock. The price reaction, while negative in the short run, is indistinguishable from zero after six months. Informational insufficiency issues, while detected by a statistical test, do not qualitatively alter these results.
Consumption Inequality across Heterogeneous Families (D1, E2)
AbstractHow much of consumption inequality across households is due to preference heterogeneity and how much due to wage and wealth inequality? This paper studies the link from wage to consumption inequality within a lifecycle model of consumption and family labor supply. Its distinctive feature is that households have general heterogeneous preferences over consumption and labor supply. The paper shows identification of the joint distribution of unobserved household preferences separately from the observed distributions of incomes and outcomes. Estimation on data from the Panel Study of Income Dynamics in the US reveals substantial heterogeneity in consumption preferences. Such heterogeneity accounts for approximately 52% of consumption inequality in recent years.
Coordination of Hours within the Firm (H2, J2)
AbstractAlthough coworkers are spending an increasing share of their working time interacting with one another, little is known about how the coordination of hours among heterogenous coworkers affects pay, productivity and labor supply. In this paper, we use linked employer-employee data on hours worked in Denmark to first document evidence of positive correlations between wages, productivity and the degree of hours coordination -- measured as the dispersion of hours -- within firms. We then estimate labor supply elasticities by exploiting changes made to the personal income tax schedule in 2010. We find that hours coordination is associated with attenuated labor supply elasticity and spillovers on coworkers not directly affected by the tax change. These spillovers lead to a 3.3% decrease in tax revenues from the 2010 tax reform, and if ignored, they induce substantial downward bias in estimates of the labor supply elasticity. We explain these findings in a framework in which differently productive firms choose whether to coordinate hours in exchange for productivity gains, leading more productive firms to select into coordinating hours and to pay compensating wage differentials.
Credit Market Frictions and the Linkage Between Micro and Macro Uncertainty (E3, G2)
AbstractThis paper proposes a quantitative general equilibrium model with credit market frictions to explain the observed comovement between micro uncertainty (dispersion of firm-level outcomes) and macro uncertainty (volatility of aggregate economic variables), and their countercyclicality. An increase in firm cash flow dispersion leads to more firms receiving bad cash flows and claiming default on debt. Thus, credit frictions get more severe and the shock amplification associated with credit frictions get magnified. As a result, the economy becomes more volatile and macro uncertainty increases. Augmenting the model with recursive preferences is important to quantitatively explain the comovement between micro and macro uncertainty. Consistent with the model predictions, I find that in the data, micro uncertainty, based on the dispersion of firm stock returns or sales growth, positively predicts future credit spreads.
Credit Rating, Post-earnings-announcement Drift, and Arbitrage from Transient Institutions (G1, G4)
AbstractThis study first establishes a robust link between credit rating and post-earnings-announcement drift (PEAD). I find strong evidence that PEAD is more salient for firms with low credit ratings. This finding is consistent with the notion that investors are inclined to underreact to earnings news from low-credit-rating firms that are characterized by high uncertainty of future asset fundamentals. The credit rating effect on PEAD is unexplained by traditional information uncertainty proxies such as earnings volatility, cash flow volatility, accrual quality, firm age, idiosyncratic volatility, and analyst forecast dispersion. I further investigate whether transient institutions exploit the differential of PEAD among different rated firms in their arbitrage trades. The results reveal that transient institutions tend to focus their arbitrage on low-credit-rating firms which are featured as abundant in arbitrage profits. However, the existence and concentration of PEAD in low-credit-rating firms implies that transient institutions fail to arbitrage away PEAD among low-rated firms and that the arbitrage strategy is riskier than expected by the transient institutions.
Crops and Conflict in Sub Saharan Africa (D7, Z1)
AbstractOur study explores whether specific crops are associated with higher levels of conflict across sub-Saharan Africa and if such phenomena can be explained by the “rice theory of culture”. The rice theory claims that rice cultivation fosters greater cooperation among people and thereby reduces conflict. We combine 0.5 X 0.5 degree geo-referenced conflict data from the Armed Conflict Location and Event Data Project (ACLED) for the period of 1997-2016, and the Spatial Production and Allocation Model (SPAM) crop data for 2014. We use the proportion of land area dedicated to irrigation technology as an indicator for the level of social cooperation. We also include a wide range of controls such as income, population, ethnicity, country, religion, absolute value of latitude, elevation, ruggedness of terrain, and soil fertility from other datasets available for the region. We use linear probability models and standard errors clustered by grids to estimate our results. We find that contrary to the rice theory of culture, wheat cultivation is associated with a lower probability of conflict in sub-Saharan Africa. Furthermore, it appears that maize, pearl millet, and cassava are also associated with a lower probability of conflict compared to rice cultivation. In addition, the greater the area of land dedicated to irrigation technology in the cultivation of maize, the lower the probability of conflict. This is consistent with the notion that irrigation fosters social cooperation and leads to a lower probability of conflict. We conclude that while rice is the most important crop for east and south Asia, maize is the dominant crop of at least a quarter of sub-Saharan Africa. Therefore, we conclude that the maize phenomena of sub-Saharan Africa is tantamount to the rice theory for Asia. As a result, greater coordination efforts shown in irrigating and growing maize lowers the probability of conflict in sub-Saharan Africa.
Cultural Impediments to Learning to Cooperate: An Experimental Study of High- and Low-Caste Men in Rural India (C7, Z1)
AbstractWe report experimental findings on how individuals from different cultures solve a repeated coordination game of common interest. The results overturn earlier findings that fixed pairs are almost assured to coordinate on an efficient and cooperative equilibrium. Subjects in the prior experiments were US university students, whereas the subjects in our study are men drawn from high and
low castes in rural India. Most low-caste pairs quickly established an efficient and cooperative convention, but most high-caste pairs did not. The largest difference in behavior occurred when a player suffered a loss because he had tried to cooperate but his partner did not: In this situation, high-caste men were far less likely than low-caste men to continue trying to cooperate in the next period. Our interpretation is that for many high-caste men, the loss resulting from coordination failure triggered retaliation. Our results are robust
to controls for education and wealth, and they hold by subcaste as well as by caste status. A survey we conducted supports the ethnographic evidence that more high-caste than low-caste men prefer to retaliate against a slight. We find no evidence that caste differences in trust or self-efficacy explain the caste gap in cooperation in our experiment. Our findings are of general interest because
many societies throughout the world have cultures that lead individuals to (mis)perceive some actions as insults and to respond aggressively and dysfunctionally.
Derivative Litigation and Board Effectiveness: Evidence from Delaware's Judicially-led Reforms in 2003 (K2, G3)
AbstractThis research examines Delaware's judicially-led reforms in 2003 and their effects on corporate governance. In response to the Sarbanes-Oxley Act, Delaware courts adjusted their corporate law jurisprudence, moving to a more restrictive application of the business judgment rule and more vigorous enforcement of officer and director fiduciary duties. By lowering the procedural hurdles to derivative litigation (e.g., the demand requirement, and special litigation committee), the courts allowed more shareholder derivative lawsuits to survive pretrial motions to dismiss.
Using a sample of 2153 publicly-traded firms from 1999 to 2007 and the difference-in-differences method, we find that following the 2003 reforms, Delaware chartered corporations have exhibited higher CEO pay-for-performance sensitivity and greater CEO turnover-performance sensitivity than have non-Delaware firms. These results suggest that shareholder litigation rights have important governance effects. Empowering shareholders to pursue derivative litigation provides high-powered incentives to directors to improve their corporate governance decisions.
Do Corporate Insiders Trade on Future Stock Price Crash Risk? (G3, G1)
AbstractWe explore whether firm managers trade on future stock price crash risk. This depends on both managers’ ability to assess future crash risk, and whether the expected payoff is greater than the expected costs associated with potential reputation loss and litigation risk. We find that insider sales are positively associated with future crash risk, which is consistent with managers’ trading on crash risk for personal gain. We also find that managers take advantage of high information opacity to pursue crash-risk-based insider sales more aggressively, but are less able to capitalize on this in the case of financial constraints or post-SOX. Our results suggest that market participants can use insider sales in ex ante assessing future stock price crash risk, and in appraising the likelihood and extent of the insider bad news hoarding which induces crash risk.
Do Gendered Languages Fail Women in Math? (A1, J7)
AbstractDoes addressing both women and men in the masculine - a prominent grammatical practice in gendered languages - affect their performance? Using a large random representative sample of the native Hebrew speaking adult population in Israel, we show that when addressed in the masculine, women meaningfully decreased their performance in math. These effects were stronger among participants who acquired the Hebrew language early rather than later in life, suggesting that it is the extent of language proficiency that generates one's sensitivity to being addressed in the masculine or in the feminine. Similar but smaller effects were found when men were addressed in the feminine compared to the masculine. In addition, when women were addressed in the masculine, their effort levels declined and they reported feeling that ‘science is for men’ more than when addressed in the feminine. Three additional studies explored the role of gender stereotypes in creating the effects of the masculine and feminine address on performance. Whereas addressing women in the masculine in stereotypically male-type tasks (study 1) and gender-neutral-type tasks (study 3 and 4) decreased their performance, it improved their performance in female-type tasks (study 2). The results of our study demonstrate the powerful role of language in activating stereotypes and cultural beliefs and the powerful role of stereotypes and cultural beliefs in affecting actual performance.
Do People Make Up for a Missed Meal with High-Calorie, Less Healthful Meals? (I1, Q1)
AbstractIt is generally recommended that individuals refrain from skipping meals as this may result in an increase in energy intake at succeeding meals. In fact, some scholars have shown that individuals’ attention to food changes depending on whether the individual is hungry or satiated. Moreover, other studies have found that the longer an individual went between meals, the more calories they consume at the next meal, and the lower the quality of that meal. These findings suggest that the healthfulness of food choices may be significantly influenced by the individual’s state of food deprivation.
In this paper, we use the two days of dietary intake data from five rounds of the National Health and Examination Survey (NHANES), covering 2007-16, to examine whether individuals who skip breakfast consume a less nutritious and higher calorie lunch.
After controlling for the number of snacks, the time between the last meal and lunch, whether lunch was consumed at home or away from home, calories from beverages, and whether it was a weekend, we find that people who eat breakfast consume 32.2 (6 percent) fewer calories at lunch. We also find that those who eat breakfast have a lunch that is more healthful.
Do Remittances Compensate for the Negative Impact of Migration on Children's Schooling? (F2, O1)
AbstractThis paper examines the direct impact of remittances on the school attendance of children ages 14-18. Drawing data from Albania, the main objective is to understand the schooling choices of migrant households when faced with an abrupt shock to remittance inflows. The proposed methodology consists of two parts. First, to avoid potential bias from selection into migration, the analysis is restricted to households with at least one migrant abroad. Second, identification relies on the unexpected onset of the 2008 global financial crisis and the heterogeneous unemployment shocks which ensued across countries where Albanian migrants were living at the time. Formally, the change in the unemployment rate from 2007 to 2008, which varied markedly between destination countries, is used as an instrument for receipt of remittances. Results indicate that households with migrants in destinations where the unemployment rate increased were less likely to receive remittances and in turn less likely to have children attending school. Specifically, the likelihood of attendance increases by 5-6 percentage points when the probability of remittance transfers increases by 0.1. Results are robust to various specifications.
Does It Matter When Your Smartest Peers Leave Your Class? (I2, J0)
AbstractElite schools in Hungary cherry pick high achieving students from general primary schools. The geographical coverage of elite schools has remained unchanged since 1999, when the establishment of new elite schools stopped. We exploit this geographical variation in the immobile Hungarian society
and estimate the impact of high achieving peers leaving the class on student achievement, behaviour, and aspirations for higher education. Our estimates indicate moderate but heterogeneous effects on those left
behind in general primary schools.
Does the Capital Market Encourage Small Business Lending by U.S. Banks? (G2, L2)
AbstractThis paper addresses the problem of slow recovery of small business lending (SBL) by measuring how the new regulations imposed by Dodd-Frank Act of 2010 and its relief plan in 2015 altered the capital market incentives for banks to lend to small businesses. By constructing and analyzing a top-tier publicly-traded bank holding company-level data spanning 2001--2017, I find that, overall, the capital market evaluates SBL as a profitable opportunity for community banks but an unimportant or nonprofitable asset for larger banks. Since Dodd-Frank Act of 2010, for banks with assets of more than \$50 billion, financial performance proxied by Tobin's Q ratio would decrease by about 2 percentage point (p.p.) for a 1 p.p. in SBL/assets ratio, and systemically important banks were penalized more severely, which contributed to the slow recovery of SBL. Contrarily, smaller banks with assets under \$50 billion were encouraged for SBL throughout the sample period, with an average of 0.16 p.p. increase of Tobin's Q ratio for a 1 p.p. increase of SBL/Assets at margin. Moreover, the regulatory relief plan for smaller banks in 2015 further improved their financial incentives for SBL.
Economic Analysis of Private Involvement in Public Good Provision (H4, E6)
AbstractThis paper provides both theoretical and empirical analyses of private participation in the provision of public goods. A model of incomplete contracting between the government and the private sector is used to analyze how the importance of private investment and the allocation of ownership rights affect the degree of economic inefficiency. The empirical analysis uses panel data on 136 developing countries over the period 1990-2016. The impact of private participation through public-private partnership (PPP) arrangements on economic output and growth across different sectors of the economy is studied. This enables identification of the types of PPP arrangements in each sector that are most strongly associated with growth. The results suggest that for goods with a greater degree of impurity or projects with a higher technological content, engaging the private sector in public good provision results in a better economic performance. But the results also indicate the existence of an ambiguity regarding how the allocation of private ownership rights over an asset, affects economic performance, for different degrees of impurity of the public good.
Economic Uncertainty and Fertility Cycles: The Case of the Post WWII Baby Boom (J1, D1)
Using the US Census waves 1940-1990 and Current Population Surveys 1990-2010, we look at how economic uncertainty affected fertility cycles over the course of the XXth century. We use cross-state and cross-cohort variation in the volatility of income growth to identify the causal link running from uncertainty to completed fertility. We find that economic uncertainty has a large and robust negative effect on fertility. This finding con- tributes to the unraveling of the determinants of the post-WWII baby boom. Specifically, the difference in economic uncertainty endured by women born in 1910 compared to that faced by women born in 1935 accounts for between 45% and 61% of the one child variation across these cohorts. We hypothesize that a greater economic uncertainty increases the risk of large consumption swings, which individuals mitigate by marrying later, postponing fertility, and ultimately decreasing their completed fertility.
Effects of Vietnam's Two-Child Policy on Fertility, Son Preference, and Female Labor Supply (J1, J2)
AbstractIn 1988, facing a total fertility rate of over four births per woman, the Vietnamese government introduced a new policy that required parents to have no more than 2 children. Using data from the Vietnam Population and Housing Censuses from 1989, 1999, and 2009, I apply a differences-in-differences framework to assess the effects of this policy on family size, son preference, and maternal labor supply. There are three main findings. First, the policy decreased the probability that a woman has more than two children by 15 percentage points (50%) for women aged less than 30 in 1989 and by 7 percentage points (11.5%) for women aged 30-39 in 1989. The policy reduced the average number of living children by 0.2 births per woman (10%). Low-educated women and women in rural areas were more affected by the policy. The policy had no effects on mothers’ age at first birth. Second, the policy decreased the proportion of sons in each family by 1.2 percentage points (2.4%). Third, the policy increased women’s labor force participation by 1.3 percentage points (1.5%).
Estimating the Impacts of Changes in Weather Circadian Rhythms on French Agricultural Production (D2, Q1)
AbstractThis study analyzes the impact of changes in stochastic (soil and climatic) and non stochastic (farm managed) inputs on the production of a representative sample of 2076 French field crop agricultural farms between 1990 and 2015. The study quantifies the production impact by decomposing output changes over time via Luenberger indicators, through econometric estimation of a second-order flexible parametric technology. This decomposition method provides an empirical parametric measure of the impact of soil and climate, of non stochastic inputs, of technological change, and of heterogeneity, on changes of farm output.
The present contribution extends to a directional distance function (Chambers, Chung, Färe, 1996) context the methods developed by Färe, Grosskopf, Norris, Zhang (1994) and Kumar and Russell (2002) and is based on the intuition by Guarda, Rouabah, Vardanyan (2013).
The usual agricultural technology is augmented to include soil characteristics (soil carbon and pH) and weather stochastic inputs (rainfall and thermal exposure), in addition to non stochastic farm managed inputs and technological change.
The importance of this methodology is in quantifying how much of output change is due to soil and climate, to technological change, to farm-managed inputs, or to structural heterogeneity among farms.
Ultimately, this process of attribution of the changes in output from year to year is fundamental to make policy-relevant statements about the relative importance of different inputs to changes in output.
Expanding formal health insurance with mandate and subsidy: rationales and evidence from Massachusetts (I1, H2)
AbstractWhat is the proper scope of social insurance, and what motivates government mandate and subsidization of health insurance? This paper explores two rationales: adverse selection in insurance premium, and the social cost of uncompensated care. I assess both rationales as potential justification of the 2006-2007 insurance expansion in Massachusetts. I derive and calculate the motivating benefits relative to the cost of expanding insurance with policy incentives. I find adverse selection alone can justify the mandate penalty in this context, and the social cost of uncompensated care justifies the subsidy generosity with small-to-zero premium benefit. Incremental expansion is desirable from a pure efficiency standpoint, and becomes more desirable with equity.
Female Representation on Corporate Boards: An Analysis of Increasing Representation Since the 2008 Financial Crisis (G3, J1)
AbstractSince the 2008 Financial Crisis, the share of corporate board seats held by women in the S&P 1500 has
steadily increased from 12% to 19% in 2017. To study this phenomenon, I first run a regression to test for a break in trend after the Crisis and find that the trend rate doubles. I then test for two potential mechanisms driving the result. I first estimate a probit model for the probability a newly-appointed board member is a woman, showing that newly-appointed board members were more likely to be women after the Crisis. Next, I estimate a Cox hazard model for leaving a board which shows that women are less likely to leave the board than their male counterparts overall, but they are no less likely to leave after the Crisis. The analyses support increased representation due to an increased probability of women being added to the board after the Crisis without an increase in hazard.
Finance and Health: Evidence from Macro Panel Data (G2, I1)
AbstractThis paper examines the relationship between health and financial development in Sub-Saharan Africa. The results using the fixed-effects and two-step generalized method of moments estimators indicate significant relationships between health and financial development. All health indicators, at the exception of out-of-pocket expenditure, are positively associated with financial development. The out-of-pocket health expenditure is negatively associated with financial development. Furthermore, we fit the model with an autoregressive distributed lag specification to allow rich dynamics in a way financial development adjusts to changes in health conditions. We then apply the pooled-mean group estimator. While the results indicate that a long-run relationship coexists between health and financial development, no strong evidence seems to appear in the short-run. Overall, the results suggest that good health increases total saving and fosters financial development, especially in the long-run.
Gender Inequality and Economic Growth: Evidence from Industry-Level Data (O1, J1)
AbstractWe study whether higher gender equality facilitates economic growth by enabling better allocation of a valuable resource: female labor. By allocating female labor to its more productive use, we hypothesize that reducing gender inequality should disproportionately benefit the industries that are typically more female-dominated. Specifically, we exploit within-country variation between industries to test whether the industries that have a larger share of female labor in their total employment grow relatively faster in countries with ex-ante lower gender inequality. To the extent that different industries have different gender compositions, due to, for example, industry-specific relative marginal product of labor (MPL), the test allows us to identify the causal effect of gender inequality on industry growth in value-added and labor productivity. We provide strong empirical support for our hypothesis in a large sample of emerging and developing countries over the period of the 1990s. Our estimates show that there is a positive growth differential of 1.7% in value-added (1.3% in labor productivity), between industries with high and low female share in total employment, when they are located in a low gender inequality country compared to a country with high gender inequality. The results are economically and statistically significant, and unlikely to be driven by outliers, measurement error, omitted variables and reverse causality. Our findings thus suggest that gender inequality has a causal effect on real economic outcomes.
Heterogeneous Bank Responses to Loan Guarantee Expansion: Evidence from the U.S. Small Business Administration (SBA) (G2, H8)
AbstractUS Small Business Administration (SBA) temporarily expanded its loan subsidy program from 2009 to 2010 in an effort to stimulate loans to small businesses. We explore the heterogeneous bank responses following this policy change. Using a novel data that merges the quarterly bank-level call report to the subsidized loan data, we first show that big banks prefer to issue many loans of small size while small banks issue few loans of bigger size. Then, we show that small banks—especially those that were part of SBA's Preferred Lender Program—increased both the extensive (number of loans) and the intensive (average loan size) margin the most. Then, we show that these big banks that make up the majority of the loan volume were particularly inelastic in increasing loan supply in response to this positive policy shock. This has strong policy implications given that a sizable amount of taxpayer's money was used to fund this temporary expansion.
How Do Financial Expertise and Networks Affect Investing? Evidence from the Governance of University Endowments (G1, G3)
AbstractThis paper studies how investment expertise and networks of university board members are linked to endowment investment performance. Harnessing detailed information on 11,019 board members for 579 universities, we find that more expertise in alternative assets (hedge funds, private equity and venture capital) and larger professional networks lead to higher allocations to alternatives and better investment results, even after controlling for risk. Expertise and networks appear particularly important in private equity and venture capital which are especially difficult to analyze and manage. The improved investment performance comes through a number of channels: capturing higher returns that can accompany alternative assets in general, greater ability to select or have access to high performing managers and being able to use direct funds rather than funds of funds which impose an extra layer of fees. Our results suggest that endowments directly benefit from having experts in alternative investments serving on university boards.
How Will Hukou Reform Affect the City System in China? (O2, R0)
AbstractThis paper applies the novel spatial dataset, China Spatial Administrative Unit Coding System (CN-SAUCS), constructed by Yijiao Liu (“Distinguishing Places and Populations in China: A Comprehensive Geo-Coded Dataset of Census and Administrative Hierarchy”, 2018) to quantify the consequences of hukou reform trials prior to the national 2014 hukou reform Opinions on Further Reform of the Hukou System, on migration flows to different types of destinations in China. The 2014 reform was designed to encourage migration to small or medium size cities, and away from large urban centers. By using a discrete choice model, estimates show that there is more than one possible strategy of hukou reform that will achieve this goal, while also revealing general preferences of Chinese migrants: people prefer richer places that are closer to their original hukou registration locations. Migrants may find places that have already undergone reform more attractive, even if they are geographically further. However, those zones are generally less affluent at the beginning stages of implementing reform and opening-up migration policies.
Identifying Strategic Weather Forecast Bias: Case of Typhoon in Southeast Asia (M3, D8)
AbstractThis paper investigates the bias in typhoon forecasting caused by the strategic decisions of the weather observatories instead of technological limitations. We develop a model of strategic typhoon forecasting assuming that the observatory minimizes the expected cost of misreporting. The model predicts that the observatory’s forecasting path would be biased towards the region where the observatory serves. We utilize the data of forecasted and realized typhoon paths from 2009 to 2017 from the Hong Kong Observatory and the Central Weather Bureau(Taiwan). We overcome the identification difficulty by focusing only on the situation where two relatively small regions with similar but independently operated observatories are affected by the same typhoon. The direction difference of the bias rules out the possibility that the bias is merely a technological limitation. The empirical results also show that the bias would be more substantial if the typhoon is stronger and when the path is more uncertain, which confirms the model’s prediction. Our results are robust in similar data such as typhoons between Taiwan and Japan. Our study also shed light on media bias which shares the same economic principles, but the bias is not as objectively measured.
Improving Estimation Precision of Treatment Effects: A Robust Averaging Estimator (C1, C4)
AbstractIn many economics researches such as estimation of treatment effects, some nuisance component of the model, such as propensity score, sample selection mechanism, needs to be specified and estimated, but is itself not the object of interest. Estimates of treatment effects based on any particular parametric specification of the nuisance component may be biased when the parametric component is misspecified. On the other hand, estimating nuisance component nonparametrically is likely to inflate the standard error and attenuate the power. We propose an averaging estimator that is a convex combination of the parametric based and the nonparametric based estimators of the treatment effects, with the data-driven weight being the sample analog of the infeasible optimal constant weight that maximizes the estimation precision (i.e. minimizes the mean squared errors) of the averaging estimator. Using the subsequence techniques developed by Andrews and Guggenberger (2006), Andrews, Cheng, and Guggenberger (2011) and Cheng, Liao, and Shi (2018), we show that the the proposed averaging estimator weakly improves the estimation precision over the nonparametric based estimator uniformly over a large class of true underlying models. This uniform dominance result holds whether the parametric specification of the nuisance component is correctly specified, locally misspecified or severely misspecified, making it a robust estimator. The simulation studies support our theoretical findings. And we apply our estimator to an empirical question to illustrate its performance.
In My Pastor I Trust! Pentecostalism Expansion and Maternal Health Outcomes: Evidence from Nigeria (N3, O1)
AbstractIn this paper, we exploit exogenous variations in the intensity of missionary activities across districts in Nigeria to explain differences in maternal health outcomes. We focus on two set of maternal health indicators: maternal death (Mortality) and skilled attendance at birth (Reproductive Practices). We Combine multiple waves of the Afro-barometer survey with the latest 2013 Demographic and Health Survey (DHS) of Nigeria; we find that descendants of citizens that have been living in areas with a greater exposure to missionary activities are more likely to give birth with an unskilled or traditional health practician and mainly in another space than the hospital. Most importantly, We find that the negative impacts on maternal health outcomes mainly work through a greater trust of women toward religious leaders.
Our findings have important implications for policy makers, mostly as they highlight the prominent place of religious leaders in the African society as well as their potential role in providing a health behavioral change among women. Our findings are consistent with the rising importance attributed to the worship of God by most Africans today. Our paper makes a unique contribution to the nexus between religion and maternal health in a country which has set to reduce the maternal mortality to less than 70 per 100,000 live births by 2030.
Intensive and Extensive Margins of Utilization: Evidence from in vitro Fertilization Treatment (H0, I1)
AbstractHow do increases in the accessibility of expensive medical treatments affect patients’ utilization behaviour, and what are the resulting effects on healthcare costs? We investigate utilization responses on both the intensive and extensive margins to more generous coverage to state-level mandates that required private health insurance plans to cover in vitro fertilization (IVF) –an expensive infertility treatment. Patients undertaking IVF face high costs and low success rates, and can increase their probability of success by transferring more embryos per IVF cycle. However, this significantly increases the likelihood of multiple births, which are risky for both mothers and infants and associated with high healthcare costs. More generous coverage for IVF could reduce the number of embryos that patients wish to transfer per cycle. However, if expanded access causes extensive margin effects, drawing new patients with lower probabilities of success into the system, this could actually lead to an overall increase in embryos transferred and a corresponding increase in multiple births. We exploit variation across states and time in the generosity of mandated IVF coverage in a Generalized Synthetic Control model to empirically quantify the causal impacts of the number of covered cycles on multiple births. We find that more generous coverage increases multiple birth rates. Furthermore, we show that more generous coverage has intensive margin effects for younger patients, reducing the number of embryos they transfer, but also has sizeable extensive margin effects for older patients with lower probabilities of success. These results are mirrored by a significant decrease in adoptions to the older patients. Our findings have important implications for designing policy interventions to increase the accessibility of new expensive medical treatments.
Investing, Busy and Fast (G4)
AbstractPeople have limited attention, especially when getting busy. They also possess a capability of fast thinking that requires little, if any, attention. Are people more prone to fast thinking when their attention becomes more limited, e.g., due to escalated busyness? We examine this issue using novel non-experimental data from an online peer-to-peer lending market in China. From over 4.6 million investment decisions, we document a substantial amount of instant loan bids (i.e., those confirmed within only a few seconds) which help identify the fast-thinking mode in real economic decision-making. We find that bids placed within busy working hours with more attention constraint are associated with a significantly higher likelihood of being instant, suggesting that limited attention increases the propensity of fast thinking.
Is There News in Inventories? (E3, E2)
AbstractInventories are an important, highly volatile and forward looking component of the business cycle. Despite this, inventories have been largely neglected by the literature on TFP news shocks that argues these shocks are important drivers of macroeconomic fluctuations. We use standard VAR identification to document a new fact: in response to TFP news, inventories move procyclically along with the other major macroeconomic aggregates. While unconditionally in the data inventories co-move strongly, conditionally on TFP news shocks our finding is not self-evident. Conventional views would suggest, news about higher future productivity future provides incentives to run the current inventory stock down and increase stockholding in the future when productivity is high. We provide evidence that this substitution effect is dominated by a demand effect due to which firms increase inventories in response to sales in light of rising consumption and investment. Our empirical fact corroborates the view that TFP news shocks are important drivers of macroeconomic fluctuations. However, it imposes a challenge to existing theoretical frameworks as they fail to reproduce the procyclical inventory movements in response to TFP news shocks. We suggest this comovement puzzle can be solved through extending a standard framework with intangible capital.
Less Competition, More Meritocracy? (D0, M0)
AbstractUncompetitive contests for grades, promotions, and job assignments, which feature lax standards or consider only limited talent pools, are often criticized for being unmeritocratic. We show that, when contestants are strategic, lax standards and exclusivity can make selection more meritocratic. Strategic contestants take more risks in more competitive contests. Risk taking reduces the correlation between selection and ability. By reducing the noise engendered by strategic risk taking, dialing down competition can produce outcomes that better conform with the meritocratic ideal of selecting the best and only the best.
Local Economic Spillover Effects of Stock Market Listings (G1)
AbstractWe show that IPOs have non-trivial positive spillover effects on local labor markets, business environments, consumer spending, real estate, and migration. We mitigate endogeneity concerns about unobserved heterogeneity with restrictive geographic fixed effects coupled with a matching procedure. We show that it is the listing decision, which encompasses both a wealth and liquidity shock, that induces economic spillovers. Conditional on an IPO occurring, we estimate that an additional $10 million in IPO proceeds is associated with an extra 41 jobs and 0.7 new establishments locally.
Macroeconomic Effects of Government Spending Shocks: New Narrative Evidence from Canada (E6, H3)
AbstractThis paper examines the macroeconomic effects of government spending shocks in Canada for the period of 1949 - 2012. We use the narrative record, mostly the budget speech, to identify the size, timing, and principal motivation for all planned major government spending changes. To achieve identification, we consider those changes that are unrelated to the contemporaneous movements in the economy. The estimation, using our newly constructed data series on news of future government spending changes or the government spending shocks, shows that the government spending multiplier for Canada ranges from 0:91 to 1:52.
Macroprudential Policies in a Low Interest-Rate Environment (E5, G2)
AbstractIn this paper, we analyze the use of macroprudential policies in a low interest-rate environment,
where an occasionally-binding zero lower bound (ZLB) reinforces financial frictions to give rise to
greater economic instability. We calibrate a DSGE model with collateral constraints and a monetary
policy rule that is subject to the ZLB for a low interest-rate world. We find that the occasionally
binding ZLB creates additional scope for macroprudential intervention. Under perfect coordination
between monetary and macroprudential policies, the optimal policy mix calls for independence between the two policies when interest rates are high. However, in the low interest-rate environment,
macroprudential policy is more intertwined with monetary policy.
Modeling Social Learning As Epidemics Using Twitter Data (E7, D8)
AbstractAn important debate in macroeconomics is how people form expectations. Rational expectations and adaptive learning approaches assume that all agents in the economy are as good as econometricians. In reality, most people learn by talking to their neighbors, relatives, and friends. However, obtaining data on expectations is extremely difficult. Most of the surveys of expectations are limited to a few economic variables like inflation, unemployment etc. This paper proposes a new way of modeling social learning by using an epidemiological model. Twitter data is used as a proxy for people talking to each other. Disease and expectations both spread infectiously among people before dying out. Predicting the trend of spread of expectations is important for policy formation. Least squares estimation is used to estimate the speed of transmission of both economic and non-economic news items among people. The estimates obtained by fitting Twitter data on the epidemiological model are compared to the rate of spread of different epidemics. How quickly and effectively does news spread is another question of interest. Fast transmission of news implies that people adjust their expectations quickly vs. slow transmission that implies sticky information. The results suggest that economic news spreads relatively slowly, and there is heterogeneity in person to person learning. Information transmission on twitter spreads like the flu which changes its course over a period of time. However, unlike epidemics, each person has a different probability to spread news due to the presence of influencers on Twitter.
JEL Codes: D84, E70
Keywords: Social Learning, Twitter, News Transmission, Person to Person Learning.
Monetary Policy in Hong Kong: How Much Scope Is There for Independence? (E4, E5)
AbstractThe standard trilemma analysis argues that if an economy has a credible fixed exchange rate and perfect capital mobility, it will lose monetary autonomy unless it adopts capital controls. Hong Kong has been known for its credible currency board against the USD. Although Hong Kong has no major capital controls and capital mobility is high, it may be less than perfect. This would allow sterilized foreign exchange interventions and therefore the possibility for some degree of monetary independence in the short run. The extent of such possible short-run monetary autonomy is the subject of this research. Previous work on this issue for Hong Kong has focused on estimating interest rate relationships with the U.S and found these to be quite high suggesting that Hong Kong has little or no effective monetary autonomy. We update such analysis and again find strong relationships but that for some estimation is significantly less than 1. The major innovation of our paper is to focus instead directly on the Hong Kong monetary authorities’ ability to sterilize and find evidence that it is substantial despite high capital mobility as indicated in the estimated offset coefficients.
Mortgage Debt, Hand-to-Mouth Households, and the Monetary Policy Transmission (E5, E2)
AbstractUsing a representative sample of credit card holders from a Chinese commercial bank with a 10% credit card market share, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgagors in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgagors increased their monthly credit card spending by 7.2% after the 230bps mortgage rate reduction announced in September 2008. We find a significant spending response both immediately after the announcement and during the post-reset period. The credit card delinquency rate also decreased after the mortgage rate reset. Subsequent to an interest-rate-increase episode, mortgagors symmetrically reduced their credit card spending. Hand-to-mouth consumers experienced a pronounced spending increase, even among those with a high credit limit, and their response was concentrated in the post-reset period. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume (MPC) of 0.40-0.51 through credit card spending.
Occupational Routine Intensity and the Adjustment to Job Loss: Evidence from Mass Layoffs (J2, O3)
AbstractAgainst the background of falling employment shares in routine-intensive occupations, this paper empirically assesses how differences in the degree of occupational routine intensity affect the impact of job loss on a worker’s subsequent employment biography. Using data on mass layoffs in Germany between 1980 and 2010, we find that experiencing such an event persistently reduces earnings for all affected workers, but that this effect increases with the degree of initial routine intensity. Decomposing the change in earnings reveals that this effect is driven by similarly sized reductions in the number of days in employment and the wage level. Moreover, we find that a higher degree of routine intensity reduces subsequent employment in higher-quality jobs, while being associated with increased occupational and reduced regional mobility.
Partisan Shocks and Financial Markets: Regression-Discontinuity Evidence from National Elections (H0, E6)
AbstractWe estimate the effect of partisan electoral victories on share prices, exchange rates, and sovereign bond yields and spreads. Using existing data on parliamentary elections and newly collected data on presidential elections, we obtain a sample of 929 worldwide national elections in the post-WWII period, in which main parties/candidates can be classified on the left-right scale based on existing sources and monthly financial data are available. To achieve causal identification, we employ a dynamic regression-discontinuity design, thus focusing on close electoral outcomes. We find that left-wing electoral victories cause significant and substantial short-term decreases in stock market valuations and in the US dollar value of the domestic currency, while the response of sovereign bond markets is muted. Effects at longer time horizons (6 to 12 months) are very dispersed, signaling large heterogeneity in medium-run outcomes. Stock market and exchange rate effects are stronger and more persistent in elections in which the left's proposed economic policy is more radical and in developing economies.
Privacy Concerns in Insurance Markets: Implications on Market Equilibria and Social Welfare (D6, D8)
AbstractTelemonitoring devices can be used to screen consumer characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. Nevertheless, some consumers value their privacy and dislike sharing private information with insurers. In a second-best efficient Miyazaki-Wilson-Spence (MWS) framework, we allow consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as social welfare. We find that information disclosure can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare. Yet, if all consumers are offered cross-subsidizing contracts, the introduction of a screening contract decreases or even eliminates cross-subsidies. Given the prior existence of a cross-subsidizing MWS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis informs the discussion on consumer protection in the context of digitalization. It shows that new technologies challenge cross-subsidization in insurance markets, and it stresses the negative externalities that digitalization has on consumers who are unwilling to take part in this development.
Shadow Banking and Market Discipline on Traditional Banks (E5, G2)
AbstractWe present a model in which shadow banking arises endogenously and undermines market discipline on traditional banks. Demandable deposits impose market discipline: Without shadow banking, traditional banks optimally pursue a safe portfolio strategy to prevent early withdrawals. Shadow banking constitutes an alternative banking strategy that combines high risk-taking with early liquidation in times of crisis. In equilibrium, shadow banks expand until their liquidation causes a fire-sale and exposes traditional banks to liquidity risk. Higher deposit rates in compensation for liquidity risk deter early withdrawals, undermining market discipline on traditional banks. Constrained-optimal policy interventions deter entry into shadow banking.
Social Norms and Competitiveness: My Willingness to Compete Depends on Who I am (supposed to be) (D1, D9)
AbstractWomen often respond less favorably to competition than men. In this paper, we test for the effects of social norms on willingness to compete. Subjects compete in two-person teams. In the treatment, one team member is randomly assigned the role of “breadwinner”, and the other person is randomly assigned as the “supporter”. There are no real differences between the roles in our experiment, except for the framing. These two roles have opposite social norms for competitiveness, reminiscent of gender roles in western society. In the baseline, subjects compete in two-person teams without role assignment. We find women’s willingness to compete significantly increases when they are assigned as breadwinners compared to women in the base- line or female supporters. We also find that there is no gender gap in willingness to compete between female breadwinners and males in the baseline. The increase in willingness to compete is mainly contributed by high-ability women. Males are also affected by the role assignment; male supporters are less likely to enter the tournament than male breadwinners. We argue that the changes in willingness to compete are mainly driven by the social norms implied by the two roles.
Station Heterogeneity and the Dynamics of Retail Gasoline Prices (L2, R3)
AbstractRetail gasoline markets feature high cross-sectional price dispersion and asymmetric cycles in price dynamics, two puzzling phenomena that have gone unrelated largely because the literature defines price cycles at the market level. The aim of this paper is to identify different pricing strategies---indicated by cycling behavior---at the gas station level, measure their consequences for price-level variability, and explore their determinants. We use daily, station-level gas prices in the U.S., and propose a new cycling indicator that overcomes issues with the existing one. Our results uncover a high degree of heterogeneity in pricing strategies within retail gasoline markets, even among gas stations in close proximity, and regardless of the brand. We exploit this intra-market variation in cycling behavior as an identification strategy, before unavailable, for the estimation of a cycle-induced price gap of -3.43 cents, which makes the pricing strategy one of the most significant determinants of price dispersion. With respect to the reasons that motivate cycling behavior, we rule out conventional forms of collusion and show that some testable predictions of the theory of Edgeworth cycles do not hold. We contribute to the explanation of cycling heterogeneity by showing that a station’s choice of a pricing strategy is related to the type of consumer targeted: non-cycling stations aim to attract inelastic consumers, while cycling stations target price-sensitive, search-intensive consumers.
Technological Diffusion, Productivity Dispersion, and So-called Allocative Inefficiency (O4, D2)
AbstractMany studies have found high productivity dispersion in emerging economies. This paper explores the role of technological diffusion. It develops a growth model with heterogeneous firms and simulates the dynamics of its productivity distribution during a catch-up process. Firms in the model economy learn about new technology from the world frontier. Their learning speeds differ. When they start to catch up to the frontier, fast learners get close to the frontier in a short time while slow learners remain close to their original low productivity. Consequently, productivity dispersion increases. Furthermore, when adjustment costs exist, marginal productivity is correlated with productivity, so its dispersion also increases. The economy appears more inefficient. After a long learning period, slow learners ultimately narrow the gap to frontier. In the new steady state, the economy once again appears efficient even without reductions to adjustment costs. The result suggests that cross-country differences in productivity dispersion can be a consequence of the different stages of development.
Technology, Skills, and Globalization: Explaining International Differences in Routine and Nonroutine Work Using Survey Data (J2, O1)
AbstractTechnology and globalisation drive the shift away from manual and routine cognitive work, and towards non-routine cognitive work. Studies on the task content of work usually use the US database O*NET, and it is still unknown how the task content of occupations differs between countries. We create measures of non-routine cognitive analytical and personal, routine cognitive and manual task contents that are consistent with Acemoglu & Autor (2011) measures based on O*NET, but are worker-specific. We apply them to 42 countries at various development level that are covered by PIAAC, STEP and CULS surveys. We find that the relationship between routine intensity of tasks and development level is inverse-U shaped. Tertiary education, computer use, literacy skills, and work in professional or managerial jobs are negatively related to the routine task intensity. The higher is the ICT capital stock per worker, the number of robots per worker, and the participation in global value chains, the lower is the routine task intensity, especially in high-skilled occupations. In most countries, the structure of worker and job characteristics is more conducive to routine work than in the US. However, most of cross-country differences routine task intensity can be attributed to differences in computer use in the workplace.
The Company You Keep: Economic Freedom, Preference-Policy Mismatch, and Satisfaction with Life (P0, H8)
AbstractWe examine the interaction between individual preferences for markets and state-level economic freedom as it relates to Satisfaction with Life (SWL). Fundamental tenets of economic freedom assert that societies free of excessive government involvement are wealthier and, ultimately, happier; individuals who are allowed to pursue self-interest are argued to be more motivated and more productive, and so society as a whole is better off. Though there is substantial empirical evidence that freer societies are wealthier, the evidence connecting economic freedom and happiness is less clear. We explore the relationship between economic freedom and SWL at the individual level. We examine differences between personal preferences for free markets and state policy and how this ‘preference-policy mismatch’ is related to SWL. We then briefly examine the relationship between preference-policy mismatches and individual voting behavior, including implications for Tiebout sorting. This study is the first to focus on individual economic ideology, i.e. individual level of support for free markets, and SWL in the United States. Combining individual and state level data we offer improvements to prior studies in a number of areas including an enhanced measure of life satisfaction, a richer basis for examining left-right differences than simple political identification, and an examination of the effect of preference-policy mismatches on satisfaction with life. We find significant relationships between SWL and individual support for markets, state-level economic freedom, and preference-policy mismatch. Further, preference-policy mismatch is positively associated with self-reported voting frequency. We find little support for Tiebout sorting.
The Effect of Switching Costs on Prices: An Application to the Peruvian Mobile Phone Market (L9, D4)
AbstractBased on a game theoretical model I previously developed and using consumer panel data, I present some evidence of the effect of the unlocked-handset policy (a reduction on switching costs), recently implemented in Peru, on demand and prices. Average prices declined since mid 2014, and the switching rate rocketed since the implementation of the policy in January 2015. To retain consumers and attract rival’s consumers, companies responded also with very low on-net prices through their “private network" with unlimited minutes, which may have increased the network effects in the market.
From my estimation, I found a significant negative effect of switching costs on demand for voice traffic (which suggest a positive effect of the unlocked-handset policy on demand) and positive network effects on the demand. The policy, by reducing consumer switching costs, would have generated an increase of 39.7% in the minutes consumed by switchers. Moreover, any change of consumer status (company or consumption plan) is associated with 31.2% increase in minutes consumed. I also found that, with lower significance level, the policy would have induced a reduction of per-minute prices by 9.4%.
The Growing Shadow of Patent Litigation: Patentability Uncertainty and Strategic Reactions (O3)
AbstractDuring the past 1.5 decades, patent litigation has almost 10-fold while patent grants are about doubled. I document new patterns in patent grants and infringement litigation, utilizing all patent litigations filed in the U.S. during 2000-2017 and aggregate U.S. patent grants in 2000-2015. I find that patent litigation rises across all technological categories, and the litigation explosion is primary driven by sectors with abstract technologies. Albeit the computer/communication sector is the primary sector of rising patent litigation, drug and medical device patents have the highest litigation growth rate adjusted by patents granted. I use an inventor-infringer game to capture new features of the phenomena. I then utilize high-profile Supreme court cases and technological categorization in patent classes to test model predictions. I argue that legislative uncertainty in patentability is a primary driver of the rising patent litigation.
The Independent Woman-Locus of Control and Female Labor Force Participation (J2)
AbstractWhile the majority of economic studies on female labor force participation rely on monetary incentives to explain the labor supply decision of women, the research on non-monetary and psychological factors is still relatively scarce. Based on earlier findings from labor economics, this paper focuses on the role of locus of control (LOC) in the explanation of a woman's participation decisions. LOC is a personality trait that measures an individual's belief about the causal relationship between one's own behavior and its consequences for life and is hence a crucial determinant of subjective expectations about monetary and non-monetary rewards for one’s own efforts. In this paper, LOC is thus theoretically assumed to affect participation probabilities via differences in the relative importance and expected size of monetary and non-monetary incentives for market production. The implications of the theoretical idea are tested using German survey data from the SOEP in a reduced form approach, finding a strong indication of a significantly positive effect of an internal LOC on a woman’s probability of being available for market production. LOC adds explanatory power in addition to commonly known traditional socio-economic determinants of participation. Additionally, the relationship is found to be strongly heterogeneous with respect to determinants of underlying monetary and non-monetary incentives such as family status, existence and age of children as well as cohort and region of living. These findings strongly support the hypothesis that internal women put a higher weight on social purpose and economic identity as non-monetary incentives to work and thus gain higher marginal utility from participation above and beyond monetary incentives.
The Macroeconomic Effects of Social Security Contributions and Benefits – Evidence from Germany (E6, H2)
AbstractWe construct a novel narrative dataset of legislated social security shocks for Germany. The dataset covers major changes in benefits and social security contributions for pensions, health care, long-term care and unemployment insurance on the German federal level over 1974q1 to 2013q4. We estimate the multiplier effects of the narratively identified shocks in a proxy SVAR framework and compare them with estimates found via traditional top-down identification. We find social security multipliers for Germany between 0.5 and 1.5. The GDP response to changes in contributions fades relatively quickly, while expenditures imply somewhat more persistent and slightly stronger effects.
The Role of Historical Resource Scarcity in Modern Gender Inequality (N3, J1)
AbstractWe propose that historical resource scarcity played a role in the evolution and/or strengthening of gender norms inimical to women, cultures that persist to this day. Consistently, we find that nations’ historical resource endowments, measured by the availability of arable land and ancestral arable land, are each negatively related to their present levels of gender inequality, measured by the United Nations Development Programme’s gender inequality index (GII). Investigating the effects of historical resource scarcity on different dimensions of the GII, we find that it is significantly, negatively associated with reproductive health (maternal mortality ratio and adolescent birth rate) and labor market outcomes (female-male labor force participation gap), but not with the indicators of women empowerment as measured by women’s share in parliament and gender educational attainment gap. Further, we find that this relationship also holds at sub-national level and show that the respondents of the World Values Survey residing in sub-national regions with ancestral lands better suited to agriculture are less likely to hold the opinions that men ought to have more right to scarce jobs and that men make better political leaders than women.
The Role of Social Norms in Old-Age Support: Evidence from China (D6, J1)
AbstractThe norm of families providing support to the elderly is common in developing countries without comprehensive pension coverage and is important; it is usually gender-specific. This paper studies the inter-generational transmission of this social norm in China, focusing on the same-gender transmission channel. The mechanism behind this transmission is that parents, by their provision of support to their own parents, shape their children's preference for same-gender old-age support. Given that the gender ratio of Chinese children is not random, I use an interaction term of the timing of the ban on sex-selective abortions in China and the gender of the first-born child as the instrumental variable for the gender of the children to alleviate possible endogeneity from the unbalanced gender ratio. The empirical results, using two Chinese datasets, show that parents with more same-gender children provide more support to their ageing parents than parents with cross-gender ones. The father effect is more significant in rural subsamples, and the mother effect is seen mainly in the urban ones. The urban-rural difference in the results may indicate a normative shift accompanying economic and demographic changes.
The Scramble for Africa and the Origins of Financial Underdevelopment: Theory and Evidence (G2, N2)
AbstractThis research theoretically and empirically investigates to what extent the partitioning of Africa during the Scramble for Africa which happened during the Berlin Conference of 1884-1885, has had a long-lasting effect on contemporary levels of financial development across countries and ethnic groups. Using differentiated products in the banking system a la Salop (1979), it shows that partition increased the distance between households/firms and banks, which led to more differentiated banks in terms of ethnicity; this negatively affects the equilibrium loan rate. Empirically, it uses the multilevel Bayesian method and shows that using private credit that the probability that the variable of partitioning captured by the Scramble of Africa is between -27.08 and -18.97 is 0.95, while using liquid liabilities and banks assets the coefficient lies between -24.01 and -16.73; and -17.11 and -11.34, respectively. In addition, it establishes a negative and significant association between ethnic financial inclusion and ethnic partitioning. Moreover, it finds that a one-unit change in ethnic partitioning decreases access to financial services as measured by financial inclusion by 61%.
Too Much Energy: The Perverse Effect of Low Energy Prices (O1, Q4)
AbstractBased on large nationally representative samples of manufacturing plants in two of the largest developing countries (Indonesia and Mexico), this paper provides novel evidence that an increase in energy prices does not necessarily worsen economic performance. We find that an increase in fuel prices results in higher productivity and profits by providing incentives to invest in more efficient and productive capital equipment. Our estimates imply that a ten percent increase in fuel prices would lead to a 3% increase in total factor productivity for Indonesia and 1.2% for Mexico. We conclude that policies based on carbon taxes or subsidy reforms can not only be used to achieve environmental goals, but also to improve economic performance.
Uncertainty and the Return-Risk Tradeoff (G1, E7)
AbstractThe Merton’s (1973) Intertemporal Capital Asset Pricing Model (ICAPM) implies that the conditional risk should contain the unspanned Knightian uncertainty component which may be very important when interest rate is not sufficient to describe the investment state, but the conventional risk–return tradeoff tests only consider the spanned risk component and end up with inclusive findings.Borrowing a machine-learning based index of economic policy uncertainty (EPU) from Baker, Bloom and Davis (2016) who design this index to capture the Knightian uncertainty in macroeconomic,monetary, political, fiscal, national security, sovereign credit, international trade, and currency areas,we detect a significant EPU–return tradeoff relation. Further empirical analyses suggest that more than 60% of this EPU–return tradeoff should be attributed to the Knightian uncertainty while less than 10% of it can be attributed to the spanned risk. More interestingly, we find that expected stock return is significantly positively related to conditional risk as suggested by Merton when this EPU index is employed as the proxy of the conditional risk, and this tradeoff is mainly attributed to the component of Knightian uncertainty–return tradeoff rather than the component of spanned risk–return tradeoff.Using this EPU index, we find that the risk–return tradeoff exists in corporate bond markets. Overall,our analyses suggest that the Knightian uncertainty unspanned by capital market risks plays a very important role in detecting a positive risk–return tradeoff relationship.
Useful Government Consumption and the Long-Run Effect of Aid on Output (F3, O5)
AbstractForeign aid finances both public consumption and investment in developing countries. However, its long-run impact on output in recipient countries remains ambiguous. We show in a tractable general equilibrium model that when public consumption substitutes for private consumption in an Edgeworth Pareto sense, aid earmarked for public consumption decreases the marginal utility of private consumption and raises the marginal disutility of labor. This induces a simultaneous fall in private consumption and labor supply thereby diminishing and potentially, outweighing the positive effect that aid-financed public investment has on output. In contrast, Edgeworth complementarity between private and public consumption reinforces the positive effect of aid-financed public investment. This is because aid allocated to public consumption raises the marginal utility of private consumption and reduces the disutility of labor. These results have important implications for policies regarding aid allocation as well as ongoing studies that examine aid effectiveness in general equilibrium models
Verifiability and Fraud in a Dynamic Credence Goods Market (C7, D8)
AbstractComplementary to the existing literature that extensively studied credence goods markets in static settings, we develop a dynamic model in which a durable good breaks down stochastically after treatments, and the customer meets the expert recurrently. We assume that the minor treatment alleviates the symptom of the major problem but fails to cure it, increasing the future failure rate. In contrast to the literature, we show that the truth-telling equilibrium never exists under the verifiability assumption, because the standard equal-margin condition fails. In our dynamic setting, the expert has a stronger incentive to undertreat since undertreatment induces more future business. But on the other hand, the customer becomes less willing to pay for the minor treatment for fear of increased future payments. Therefore, depending on the relative magnitude of these two opposing forces, either undertreatment or overtreatment can emerge as an optimal equilibrium. Surprisingly, the expert's incentive to undertreat weakens as the increment of failure rate rises.
Violence and Investor Behavior: Evidence from Terrorist Attacks (I3, G4)
AbstractWe use terrorist attacks as a natural experiment to examine the effect of violence on investors’ trading behavior in the stock market. Using a large-scale dataset of daily trading records of millions of investors, we find that investors located in the areas more affected by the attacks tend to trade less and perform worse compared with their peers. This effect does not seem to be driven by the changes in asset fundamentals, risk preferences, lack of attention, local bias, or trader experience, but instead by the impairment of cognitive ability due to fear and stress after exposures to violence.
What Makes an Employer-Entrepreneur? (J2, L2)
AbstractAs the policy debate on entrepreneurship increasingly centers on those who create jobs, it is important to better understand which observable variables influence the first hiring decision and the later survival as an employer. Using the German Socio-economic Panel (SOEP), which includes personality traits, we therefore analyze the transitions between the labor-market states of employees, the nonemployed, employers, and nonemployer entrepreneurs. While human capital variables positively influence the hiring decision and the survival as an employer in the same direction, we observe that none of the personality traits unfold the same influence on these two outcomes. Moreover, we reveal that personality traits matter more for survival as an employer than for the hiring decision with some traits even unfolding a revolving door effect.
Who Takes the Leash? The Price Discovery of China's Index Futures with Policy Breaks (G1, G4)
AbstractChina is catching up on its development in financial markets. In 2010, China introduced its first stock index futures contract, the CSI 300. In a few years, the CSI 300 became one of the most actively traded index futures in the world. It is essential for market participants, including hedgers, speculators and policy makers, to understand the behavior and the dynamic of prices and returns in index futures markets. This study investigates the long-term equilibrium in price series, the short-term interaction of market returns and their dynamic interactions with policy breaks.
Our results show the cointegration relationship is not stable over the whole data period. While the cash price dominates the price discovery, the long-term equilibrium between price series can be strengthened by contractionary policies. The expansionary policies on the other hand, could cut the leash between the two markets. While wiped out 95% of the CSI 300 contracts trading volume, the extreme restrictions on futures trading adopted in 2015 did bring back the market rationality. We also found that it is hardly possible to manipulate the index cash market by shorting the index in futures market.
Why Does the WTO Prohibit Export Subsidies But Allow Import Tariffs? (F1, F5)
AbstractWe apply the commitment theory (Maggi & Rodriguez-Clare, 1998) to explain why WTO member countries have agreed to prohibit export subsidies but allow non-zero import tariffs. We argue that the economic rents from export subsidies cannot be contained exclusively within lobby groups because new firms can enter the growing export sector and freely benefit from export subsidies without paying political contributions. In contrast, the free-rider problem does not exist in import-competing sectors because existing firms receive negative profits and are exiting the sectors. We show that a government would agree to allow import tariffs but completely prohibit export subsidies when (i) the government's bargaining power is sufficiently large and (ii) the free-rider problems in its export sectors are severe.
A Complete Folk Theorem for Finitely Repeated Games (C7)
AbstractAbstract: I analyze the set of pure strategy subgame perfect Nash equilibria of any finitely repeated game with complete information and perfect monitoring. The main result is a complete characterization of the limit set, as the time horizon increases, of the set of pure strategy subgame perfect Nash equilibrium payoff vectors of the finitely repeated game. The same method can be used to fully characterize the limit set of the set of pure strategy Nash equilibrium payoff vectors of any the finitely repeated game.
A Heterogeneous Evolutionarily Stable Population of Moral and Selfish Individuals: Exploring the Diversity of Preferences (C7)
AbstractWhy do individuals display considerable disparity in their preferences?
We examine the hypothesis that the answer could lie in an evolutionary process.
Our analysis builds on recent works in evolutionary game theory showing the superiority of a given type of preferences, homo moralis, in fitness games with assortative matching.
In this paper, we go beyond the classical definition of evolutionary stability by looking at the coexistence of individuals with distinct preferences in a population.
After introducing an assortment matrix for non-uniformly matched interactions, we establish the characteristics of an evolutionarily stable population.
We then prove the existence of a heterogeneous evolutionarily stable population in 2 x 2 symmetric fitness games under constant assortment and we characterize the conditions for this existence.
Finally, we show that an evolutionarily stable population made of both selfish and moral individuals exists in a prisoner's dilemma.
A Portfolio Based Measure of Economic Uncertainty (G1, E3)
AbstractFinancial uncertainty and macroeconomic uncertainty are commonly proxied separately by the volatility of stock returns or key macroeconomic variables, respectively. We propose a portfolio-based measure (PBMEU) that aims to capture aggregate uncertainty in both financial markets and the macroeconomy. Our measure focuses on the volatility of a broad market portfolio including stocks, bonds, and commodities, where correlations between these individual markets have significant implications for the consequences of shocks to the real economy. When there are significant and persistent economy-wide shocks, the PBMEU produces higher level of uncertainty than the sum of financial and macroeconomic uncertainties, and in turn yields more significantly negative effect on the macroeconomy. This asymmetric effect cannot be ascertained by the commonly used proxies such as VIX, economic policy uncertainty of Baker et al. (2015) and aggregate uncertainty of Jurado et al. (2015).
A Semantic Analysis of Monetary Shamanism: A Case of the BOJ's Governor Haruhiko Kuroda (E5)
AbstractThis paper examines whether statistical natural language processing techniques have been useful in
analyzing documents on monetary policy. A simple latent semantic analysis shows a relatively good
performance in classifying the Bank of Japan (BOJ)’s documents on its governors’ policy and the
impact without human reading. Our results also show that Governor Haruhiko Kuroda’s
communication strategy changed slightly in 2016 when the BOJ introduced the negative interest rate
policy. This change in 2016 is comparable to the one from the transition from Masaaki Shirakawa to
Kuroda. In spite of the intention, the BOJ had a misjudgment in the communication strategy.
Active Learning Fosters Financial Behavior: Evidence from Rural Uganda (D1, I0)
AbstractWe conduct a randomized field experiment to study the effects of two financial education interventions offered to small-scale retailers in Western Uganda. The treatments contrast “active learning” with “traditional lecturing” within standardized lesson-plans. We find that active learning has a clear positive impact on savings and investment outcomes, but weaker effects on financial literacy and debt-related outcomes, in contrast to precisely estimated insignificant impacts of lecturing. The active learning intervention is superior as it works via three mechanisms, i.e. increased financial literacy, self-control, and financial confidence, while lecturing only affects financial confidence.
Agricultural Commercialization and Food Security in Rural Economies: Malawian experience (O1, Q1)
AbstractThis paper contributes to the debate on the nutrition related outcomes of cash crop adoption by using a model with essential heterogeneity and a semi-parametric estimation technique. The model explicitly frames non-separability between production and consumption decisions of farming households providing an original test of separability. The empirical application is run using Malawian data. The results imply rational anticipations and decision process of agrarian households relative to the crop portfolio choice, disparate strength of market barriers faced by the farmers, non-separability between production and consumption decisions and a weak transmission from agricultural incomes to higher food expenditures and better diet.
Alcohol Use, Assault & Non-fatal Injury: RD Evidence from the MLDA (K4, I1)
AbstractWhile it has long been observed that alcohol consumption is a risk factor for both violence and injury, the economics literature has until recently contained minimal persuasive evidence regarding the causal nature of these relationships. This study provides uses a regression discontinuity (RD) framework to examine how rates of arrest for aggravated and other non-sexual assault, along with injury treated in hospital emergency rooms (ER), change at age 21, the U.S. minimum legal drinking age (MLDA), relative to prior and subsequent age trends. I rely only on publicly available annual data in which arrests, from the FBI for 1991–2015, and injuries, from the CDC for 2001–2015, are each reported by year of age. RD estimates indicate that among males, relative to the counterfactual in which legal drinking status does not change at age 21, reaching the MLDA increases arrest rates for aggravated assault by 8% and for other non-sexual assaults by 7%, while also raising non-fatal assault injury rates by 12%. These effects are robust to varying the degree of OLS and local regression age polynomials, bandwidth length, and kernel function. In contrast, analogous effects are absent among females, at other ages, and for offenses and injury intents that are less plausibly connected with alcohol use. Injury rates increase at age 21 particularly for patients treated and released, rather than hospitalized or transferred for specialized care, and when caused by being struck, as opposed to a gunshot or having been cut/pierced. Consistent with two recent studies using a RD framework with administrative data on exact birthdates, these results suggest that additional assaults and corresponding non-fatal injuries represent criminal justice and public health costs of alcohol consumption that would be exacerbated by lowering the MLDA.
Allocation of Education, School District Policy and Housing Market Efficiency (D6, H2)
AbstractUnder school district policy, school choice is predetermined by the consumption of affiliated housing. The paper examines possible inefficient outcomes produced by a competitive Walrasian equilibrium, where consumers differ in two dimensional preferences on house-school bundles in an exchange economy. Desirable matches on two dimensions, sometimes cannot be simultaneously achieved: both matches between school qualities and student abilities, and matches between housing qualities and marginal utilities of house consumption, should be positive and assortative, to make it socially efficient. We seek for an optimum reallocation rule that produces the second best outcome: an equalization of housing qualities that amplifies the prominence of schooling, creates an incentive for the high ability type to consume the high quality school at the extensive margin, thus increasing the expected educational outcome by perfect matches in schooling, but creating a potential distortion in consumption of houses within the intensive margins. At optimum, the desirability of such equalization on one dimension (housing) is greater, provided that housing demand is less elastic, or the value produced by efficient matches on another dimension (schooling), is sufficiently high.
Ambiguity and Information Processing in a Model of Intermediary Asset Pricing (G2, D8)
AbstractThis paper incorporates ambiguity and information processing constraints into a model of intermediary asset pricing. Financial intermediaries (specialists) are assumed to possess greater information processing capacity. Households purchase this capacity, and then delegate their investment decisions to specialists. The delegation contract is constrained by two frictions: (1) As in He and Krishnamurthy (2012), an incentive constraint arises from a moral hazard problem, which takes the form of a minimum capital requirement, and (2) Because households can invest for themselves at any time, continued delegation is subject to a participation constraint that depends on the underlying heterogeneity in channel capacity. At the same time, both households and specialists have a preference for robustness, reflecting ambiguity about risky asset returns. Ambiguity takes the form of endogenously determined pessimistic drift distortions (Hansen and Sargent (2008)). When volatility increases, so does ambiguity, since it becomes more difficult to discriminate among models. Importantly, these endogenous drift distortions produce heterogeneous beliefs. In our model, ambiguity is scaled by the inverse of time preference, and we assume specialists are more patient. Hence, given their longer investment horizons, specialists have a stronger preference for robustness. As a result, when volatility is high specialists become relatively pessimistic, and this tightens the capital constraint and accelerates the onset of a financial crisis.
Anomaly Discovery and Arbitrage Trading (G0, G1)
AbstractWe advance a new implication of anomaly discovery and arbitrage trading. The discovery of an anomaly attracts arbitrageurs to exploit it by trading opposite directions in its long and short legs. Changes in arbitrageurs' wealth then make arbitrageurs repeatedly enter and unwind their long-short positions. The two mechanisms imply that (1) the post-discovery correlation between the long and short legs of the anomaly decreases and (2) such decrease rises with arbitrageurs' wealth volatility. The decrease in correlation brings diversification benefits to ordinary investors for holding the long and short legs together, particularly so when wealth volatility is high. Using a stylized model, we support our correlation-reduction intuitions. Empirical tests on a comprehensive set of 99 anomalies, hedge fund trading, and short selling provide economically sizable evidence to support our hypotheses.
Our results are important for understanding the complex roles of arbitrageurs in anomalies, mispricing, and financial markets. Conventional wisdom holds the view that arbitrageurs exploit ordinary investors’ mistakes through buying underpriced assets and (short) selling overpriced assets. We show that such long-short trading can also introduce diversification benefits to ordinary investors who cannot differentiate between underpriced and overpriced assets and thus end up holding both types of assets. This diversification effect is particularly important as it is stronger sometimes at a time when diversification is particularly needed, i.e., when the wealth volatility of investors is high. This long-short based diversification effect thus serves as a counteracting force to other effects of hedge fund/quant fund trading that may drive up correlation in the financial system during times of market turbulence.
Are Adolescents Addicted to Smartphones? A Perspective Using the Rational Addiction Model (I1, J1)
AbstractThis empirical study shows how people use their smartphones by employing the rational addiction model of Becker and Murphy (1988). The analysis uses micro-level panel data on the monthly usage of smartphone applications (so-called “apps”) derived from 10,337 users in South Korea, from 2012 to 2016. We find that smartphone users are “addicted” to mobile phone apps, in the sense that their prior usage has significantly influenced their current use. Nonetheless, people in the sample seem to use their smartphones in a forward-looking manner, adjusting consumption over time to maximize their utility. However, the study’s result rejects the conventional belief that younger individuals behave more myopically than older ones. Furthermore, only the mother’s smartphone use was found to generate a positive externality for her children.
Are Bond Ratings Informative? Evidence from Regulatory Regime Changes (G2, K2)
AbstractUsing the Dodd-Frank's repeal of credit rating agencies’ (CRAs) exemption from Regulation FD, we test
the explanations as to whether CRAs provide new information to the market, and if so, why? We
find that significant stock price responses to both Credit Watch placements and actual rating
changes disappear after the repeal, whereas bond price responses to credit events remain
significant. These results are stronger at the investment-speculative boundary. Our evidence
supports the private information and rating-contingent regulatory hypotheses but does not support
the explanation that CRAs’ reputation allows them to provide quality certification on the values of
firms they rate.
Are risky banks rationed by corporate depositors? (D4, G1)
AbstractWe analyze auctions of unsecured money market deposits of firms to banks via a FinTech intermediary. In each auction, only the firm observes the banks and their interest rate bids and decides where to deposit its funds. We observe that deposit interest rate bids increase monotonically with banks’ risk and that firms in general prefer higher deposit interest rates. However, our results show that the selection of firms of where to deposit is concave in bid interest rate in line with the notion of credit rationing in Stiglitz and Weiss (1981). We find this confirmed on the intensive as well as on the extensive margin. Risky banks eventually exit the market, and re-enter when their risk decreases again in the long-term. Relatedly, we observe that risky banks exit when the interest rate they have to offer increases above the interest rate charged by the central bank. This has important implications for banks’ access to unsecured corporate funding, central bank liquidity provision and the understanding of deposit markets as well as Fintech in general.
Asset Pricing and Risk Sharing with Limited Enforcement and Heterogeneous Preferences (G1, D5)
AbstractI introduce heterogeneous preferences (heterogeneity in risk aversion and time discount factor) into a two-agent endowment economy with enforcement constraints and aggregate and idiosyncratic income risk (Alvarez and Jermann (2001 RFS)), and study the corresponding asset pricing and risk sharing implications. I show that the relative time discount factor and the interaction between heterogeneous risk aversion and aggregate risk affect the evolution of the relative Pareto weight of agents over time. I demonstrate that preference heterogeneity can generate a positive equity premium with only idiosyncratic risk present, since the conditional pricing kernel is time-varying depending on which agent is the marginal pricer. I use a recursive Lagrangian method to solve a calibrated model and show that preference heterogeneity boosts the mean and volatility of equity premium quantitatively, when the more risk averse and/or the more patient agent cannot trade away most of his income risk with the other agent because of enforcement constraints.
Bank Lending and Maturity: The Anatomy of the Transmission of Monetary Policy (E5, G2)
AbstractThis paper studies the effect of monetary policy decisions on banks’ loan issuance and maturity decisions by decomposing demand and supply side effects using a unique matched firm-bank-loan level granular database. Changes in the policy rate impact both credit and maturity channels - an increase of 100 basis points reduces commercial loan volumes by 1.6% and maturities by 1.2% - but the effects are asymmetric across different policy stances; tighter monetary policy has a larger effect on both. Bank heterogeneities play a role as small banks, banks with weaker capital structures, weaker liquidity structures, and weaker access to foreign funding are more sensitive to policy changes. Participation and domestic private banks show higher maturity sensitivities whereas state and domestic private banks show higher sensitivities in credit volume. Loans issued in domestic currency show larger volume responses, but FX-denominated loans show larger responses in maturities. Compared to the previous literature which uses quarterly survey data, we find stronger effects on the maturity channel which we tie to the granularity of our monthly credit registry data.
Banks reflect these changes by lesser magnitudes to firms with which they have longer established relationships and by larger magnitudes to riskier firms. A quasi-experimental analysis of the intense use of a collateral guarantee scheme which supported SME lending shows that the long-run negative relationship between monetary policy rates and maturities have reversed; maturities lengthened despite the tight monetary policy stance. These results highlight the importance of both the monetary policy stance and the financial regulatory process on banks’ risk taking behavior, search-for yield appetites, identify areas of potential systemic risk buildup, and finally policy design and coordination.
Banks Make Sterilized FX Purchases Expansionary (E5, G1)
AbstractIn the most recent wave of capital inflows, 2009-2012, many emerging markets have resorted to sterilized FX purchases as a way to mitigate exchange rate appreciation. The literature on the effectiveness of sterilized FX interventions to alter the exchange rate is large and inconclusive, but there is scant mention to expansionary effects of FX sterilized purchases other than the effect of possible exchange-rate depreciation on net exports. Nevertheless, many emerging markets’ central banks have complained that the (fully sterilized) capital inflows have fueled large credit expansions, creating credit bubbles and inflation. We show that, indeed, when the banking sector is duly considered, sterilized FX purchases became expansionary, via a credit channel. The mechanism is the following: under massive sterilized FX purchases, the aggregate banking sector balance sheet increases, with the asset side absorbing the bonds used to sterilize the money expansion generated by the sterilized FX purchase. Since interest rate, the return on bonds, does not change, a portfolio balance effect stimulates banks to increase loan supply and lower their augmented bond holdings. Bond sales by the banks, to make cash to increase loans, pressure the interest rate up. To keep the interest rate from rising, the central bank increases money supply. Higher loan supply increases loans and output. In the new equilibrium, the interest rate is kept constant, while the quantity of money and loans increase, as well as output. Recent Brazilian evidence is reviewed, showing that this effect is empirically relevant. Therefore, when duly considering the banking sector, independently of their effect in preventing nominal appreciation, FX sterilized purchases generally boost credit, activity and inflation.
Behavioral Bias in Haze: Evidence from Air Pollution and the Disposition Effect in China (G4, M5)
AbstractInspired by the recent health-science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary dataset obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, we find that air pollution significantly increases investors’ disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Our results have the important normative implication that air pollution could incur severe indirect (social) costs associated with enhanced cognitive biases.
Belief Update and Mispricing (D8, G1)
AbstractWe developed a theory of belief updating of information regarding the existence of private information in stock markets. This belief updating is close to a true Bayesian process. This quasi-Bayesian information updating process can eventually converge to the true value similar to the true Bayesian process but at a slower pace, when private information does not exist. It causes asset mispricing. We experimentally examine whether subjects’ behavior is consistent with this quasi-Bayesian updating model.
We consider two uncertainties in our theoretical model: uncertainty of the asset value and uncertainty of the existence of informed traders. Our model has three types of market participants: a market maker, informed traders, and noise traders. Assuming that the market maker uses Bayesian type updating, he updates his asset value belief through transactions. We consider two types of markets: one with informed traders and one without. The market maker does not know which market he is facing, meaning that he does not know whether or not informed traders exist. Thus, the market maker also updates his belief about the existence of informed traders through transactions.
In our theoretical examination, we find that (1) when the market maker does not know the existence of informed traders and informed traders exist, the asset price monotonically converges to the fair value on average, and (2) when a market maker does not know of the existence of informed traders and informed traders do not exist, the asset price systematically deviates from the fair value, causing asset mispricing. This situation is close to the information mirage. However, after the market maker sufficiently updates his belief, he adequately finds the non-existence of informed traders. Asset mispricing then shrinks, and the stock price converges to the fair value. We also confirm this process using numerical simulations and experiments.
Benefits of Diversification in Agriculture: Evidence from Malawi (O1, Q0)
AbstractWe use data from a farmers’ survey in Malawi to compare two agricultural technologies: monoculture maize and crop diversification (maize-legume intercrop). We match farmers locations with data on rainfall and air temperature to test whether more biodiverse agriculture is better at absorbing weather shocks, and hence adaptation to the climate change. The data make it possible to compare variation not only over time, but also over different plots within the same time period, which helps reduce omitted variable bias. The instrumental variable method is used to eliminate rainfall measurement error. For a number of specifications, and controlling for fertilizer use, crop diversification is both more productive than monoculture maize and more resistant to weather shocks. Although we are not able to identify the average population effect, we build a model to show that the effect we identify is likely to prevail if the Malawian government decides to shift the focus of its agricultural subsidy at the margin from fertilizer to legume seeds and education. In particular, a reform that cuts fertilizer use by 10% (e.g. reducing the price subsidy) would be yield-neutral, but more sustainable, if agricultural land used for maize-legume intercrop is expanded by about nine percentage points.
Beta Ambiguity and Security Return Characteristics (G1, D8)
AbstractWe develop a model to study the cross-sectional properties of asset returns in the presence of ambiguity in the distribution of asset returns. In our model, the cross-sectional expected returns can be described by a three-factor model, capturing risk, mean ambiguity and variance-covariance ambiguity, respectively. Expected returns include a mean ambiguity premium, a variance-covariance ambiguity premium, as well as the standard risk premium. The expected returns exhibit cross-sectional characteristics consistent with the empirical fact that the overall beta-return relation and IVOL-return relation are both negative, but the beta-return relation is negative and stronger among overpriced stocks while positive and weaker among underpriced stocks, and the IVOL-return relation is negative and stronger among overpriced stocks but positive and weaker among underpriced stocks.
Beyond Piketty: A New Perspective on Poverty and Inequality in India (I3, H8)
AbstractMuch of the literature has focused on how overall inequality in income distribution (frequently measured by the Gini coefficient) undermines the “trickle down” effect on poverty. In other words, the higher the inequality in the income distribution, the lower is the growth elasticity of poverty. However, with the publication of Piketty’s magnum opus (2014), and a subsequent study by Chancel and Piketty (2017) of evolution of income inequality in India since 1922, the focus has shifted to the income disparity between the richest 1% (or 0.01 %) and the bottom 50 %. The present study extends this argument by linking it to poverty in India. Based on the India Human Development Survey 2005-12- a nationwide panel survey-we examine the links between poverty and income inequality, especially in the upper tail relative to the bottom 50 %, state affluence (measured in per capita income), and their interaction or their joint effect. Another feature of our research is that we analyze their effects on the FGT class of poverty indices. The results are similar in as much as direction of causality is concerned but the elasticities vary with the poverty index. The growth elasticities are negative and significant for all poverty indices but small (in absolute value)-especially for the poverty gap squared. In all three cases, the disparity between the income share of the top 1 % and share of the bottom 50 % is associatedwith greater poverty. These elasticities are much higher than the (absolute) income elasticities except in the case of the poverty gap. The largest increase occurs in the HCR, followed by the poverty gap squared. Not only do the poorest benefit the least from growth but also suffer a great deal from rising
Blessing or a Curse? The Long-Term Effect of Natural Resource Booms on Education and Living Conditions (O1, H3)
AbstractIs natural resource abundance a blessing or a curse for a country? While there is ample descriptive evidence that suggests that countries with an abundance of natural resources underperform in terms of economic growth, it is not clear if these relations are causal and how persistent are the effects of natural resource shocks. The effects on human capital of those affected by natural resource shocks could last for the rest of their lives affecting their long-term welfare and living conditions. I exploit drastic changes in altitude and administrative individual-level data to estimate the long-term effect of the oil boom of the 1970s on educational attainment, wealth and living conditions in the context of a developing country. I find that college completion decreases 21% with respect to the baseline. The affected individuals still work in low-skill occupations 40 years after the boom. I find no significant effect on home and vehicle ownership, suggesting that the affected cohorts did not fare worse in life. Finally, I find a significant increase in fertility, which implies potential inter-generational effects by lowering parents’ education.
Business Cycle, Income, and Mortality (I1, E3)
AbstractThe association between mortality and business cycle is inconclusive. Most macro level studies find mortality to be pro-cyclical whereas micro level studies suggest the opposite. The consensus among these studies, however, is on the use of unemployment rate as a proxy for cyclical variations in economic activity. This study builds upon these findings by implementing an alternative proxy – per capita income – to better understand such a mediating relationship. Using state level annual data of the United States during 1968-2016, this study finds a negative association between state per capita income and mortality rate. Contrary to the findings of macro level studies, this analysis suggests that mortality declines during expansions. The results are robust to the inclusion of both old and new proxies for the business cycle.
Can a Rising Relative Female Labor Supply Explain the Fall in Gender Wage Gap?: A Study on Long-run Substitutability Between Men and Women (J2, J3)
AbstractUsing a variable elasticity of substitution (VES) framework, this study estimates the long-run elasticity of substitution between US male and female workers that is the slope of the inverse demand curve for male workers relative to female workers. Our 2SLS approach exploits possible exogenous sources of changes in state employment induced by the national employment growth. We find that the long-run elasticity of substitution between male and female workers is close to 1.7 and the estimate is robust across a wide range of model specifications. Using this estimated elasticity of substitution parameter, we find that about 7% fall of the gender wage gap can be explained by a steep increase in relative female labor supply during the period 1980-2014.
Central Counterparty Capitalization and Misaligned Incentives (G2, G3)
AbstractCentral Counterparties (CCPs) are systemic nodes in financial markets. Incentive regulation on
CCPs becomes crucial for financial stability. I investigate incentives and optimal regulation of
a profit-driven CCP with limited liability. Conditional on available capital, the CCP fine-tunes
collateral requirements to balance fee incomes against counterparty risk. High collateral reduces
potential default losses, but leads to foregone profitable trades. Limited liability creates a wedge
between the CCP’s collateral policy and the socially optimal solution to this trade-o. However,
regulators can use capital requirements to close the wedge, unless clearing fee exceeds a threshold.
China, Japan and the United States Stock Markets and the Global Financial Crisis (F3, E0)
AbstractIn this paper, while focusing on the impact that the global financial crisis had on the stock markets of China, Japan, and the United States, the stock-price volatilities and linkage between these three countries are analyzed. In addition, the relationships between macroeconomic variables (real-economy variables and monetary-policy variables) and stock price volatility in each country are investigated.
The main contribution of this paper is as follows. I use the exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model to calculate stock price volatility in China, Japan, and the United States, and estimate the covariance between the stock markets. In addition, in order to consider the influences of the global financial crisis, I analyze the relationships between stock prices, while comparing them over different periods. Furthermore, I consider the effects of real-economy variables and monetary-policy variables on changes to stock price volatility in each country.
The estimation results of the EGARCH model revealed that although China’s stock price volatility was far greater than those of Japanese and US stock prices, China was less affected by the global financial crisis in 2007 than Japan and the United States. For China, stock price volatility was greater in the early 1990s, shortly after the stock market had been established, than in 2007 when the global financial crisis occurred. Furthermore, it has been revealed that the linkage of Chinese, Japanese, and US stock prices has increased since the global financial crisis. Moreover, Granger causality testing revealed China’s real-economy variables and monetary-policy variables do not affect China’s stock price volatility.
Choosing Whom to Collaborate: A Relational Model of International Armament Collaboration (F5, C8)
AbstractWith soaring R&D expenses and the complexity of technology involved, more countries are seeking international armaments collaboration (IAC) to share the costs of weapon procurement. Although firms of different nationalities constantly collaborate to create values that each alone could not, security implications distinguish IAC from conventional inter-firm strategic alliance. This study develops a relational model of IAC to elucidate the determinants of IAC along the dimensions of alliance relations and technological complementarity. We argue that although the uncertainty of losing strategic advantage to partners-turn-adversaries cannot be underwritten by IAC contracts, states can mitigate such appropriation risk by prioritizing close allies for collaboration with whom they share overlapping defense ties to the greatest extent. On the other hand, there exist little incentive for IAC when the core competencies of potential partners do not complement each other. Thus, while the density of security ties predisposes the formation of IAC links (or the lack thereof) between allies, technological complementarity in core competencies tends to draw certain pairs of partners into particular forms of collaboration more so than others even within the same IAC program. To parse out these dual dynamics underlying IAC formation, we employ social network analysis with generalized linear latent and mixed models (gllamm), treating each state’s IAC decision as first picking partners from a pool of potential candidates based on pairwise attributes before choosing forms of collaboration with partners. Our analysis suggested that when alliance relations constitute a significant positive correlation in partner selection, states tend to establish more exploratory forms of IAC with partners that requires greater degree of military technology transfer. We reinforced our analysis with latent Dirichlet allocation on the document networks of 366 IAC programs and found significant clustering between security alliances and terms that describe exploratory forms of IAC.
Climate Change Legislation and Social Values: Do They Complement or Substitute Each Other in Reducing Carbon Emissions? (Q5, K3)
AbstractThe 1997 Kyoto Protocol resulted in a surge in laws addressing various aspects of climate change in different countries. There are now over 1,200 laws worldwide that address aspects of climate change, up from approximately 50 laws in 1997. Literature suggests that the formulation of climate change legislation (CCL) is endogenous in various domestic and international drivers (e.g., political structure, framework legislation, and international treaties or the climate change actions taken by other countries). We contribute in literature by first investigating effect of CCLs on CO2 emissions, where CCL data comes from a unique dataset “Climate Laws of the World” maintained by Grantham Research Institute at LSE. We find some evidence of association between lower CO2 emission and endogenously determined number of CCLs. Next, we adjust country-wise CCLs for the quality of law using World Bank’s “Worldwide Governance Indicators”, which further confirms the association.
Finally, we consider existing social values as the behavioral motivation behind practices influencing lower emissions using data from different waves of the World Value Survey. After identifying another association between values and lower CO2 emissions, we particularly investigate whether quality-adjusted CCLs and social values complement or supplement each other in lowering CO2 emissions. Although we could not establish a general conclusion, we identify that levels of income and development and types of government influence their type of relationship. In particular, CCLs and values are substitutes in higher income countries and complements in lower income countries.
Based on these findings, we conclude that the success of climate change legislation in reducing CO2 emissions will partly depend on those laws being consistent with existing social values especially in the case of lower income countries.
Closing the Vaccination Gap – Heterogenous Effects of Immunization Campaign in Kenya (I1, C5)
AbstractImmunization has been considered one of the most effective interventions for achieving the goal of health and well-being for people. Vaccines are effective in saving the lives of children and estimated to prevent diseases causing nearly 25 percent of deaths under the age of five, saving more than 6 million children every year.
Despite evident expansion of vaccine coverage worldwide, some segments of the population in many developing countries, particularly in sub-Saharan Africa, are not receiving recommended vaccinations. Africa has the lowest rate of childhood vaccination worldwide, presenting an important case study to find ways to improve vaccine uptake.
Recognizing the importance of increasing vaccine uptake, several public interventions have been made. For example, in Kenya the government established a multi-year plan for enhancing nationwide immunization service and recommends children receive certain types of vaccines. Immunization campaigns were also initiated to recommend and subsidize vaccine uptake in the country.
Understanding the effects of immunization campaigns that influence individual decisions to vaccinate can help policymakers determine drivers to successfully reduce the vaccination gap among the target population. We employ recent machine learning techniques for program assessment, to understand how different subgroups respond to the immunization campaigns to vaccinate. Socio-economic panel data were collected by WSU from 2014 to 2017 that covers western Kenya and combined with CDC’s Household Morbidity Surveillance. We propose an identification strategy based on the immunization campaigns, local household behavior and market conditions, as well as structure of the data itself. We also adopt a difference-in-difference approach to investigate the impacts of campaign efforts. By understanding the factors that are tied to respondents’ decision to vaccinate their children, our results offer policymakers insights on ways to improve targeting mechanism of future vaccination programs.
Cognitive Functioning in Older Adults: A Life Span Health Production Function Approach (I1)
AbstractLife-course theory postulates that our ultimate health outcomes are, in part, a response to an accumulation of advantages and disadvantages that begin early in life. Using 2012 Health and Retirement Study data on 9,221 older adults, we quantify how childhood factors contribute to “cognitive achievement”, directly and indirectly through their effects on mediating adult outcomes. We estimate “cognitive achievement” as the output of a production function, produced by childhood health and socioeconomic-status, adult socioeconomic achievements, health habits and pertinent demographics, adopting simultaneous equations mediation model to quantify the direct and indirect effects of childhood factors. We find that favorable childhood conditions significantly improve cognitive achievement, both directly and indirectly, mediated through education, income, and wealth. Our findings complement available research by showing that cognitive achievement is a function of childhood, adult and later-life factors. The pathways from childhood factors to cognitive achievement, however, could be more complex than previously reported.
Collateral Value and Strategic Default: Evidence from Auto Loans (D1, G2)
AbstractThis paper identifies the link between collateral value and strategic default incentives. Using novel auto loan market data, I exploit how unanticipated changes in vehicle import taxes and changes to loan-to-value restrictions impact borrowers strategic behavior incentives. These shocks affect the value of the underlying asset but are not related to underlying borrower characteristics or their ability to repay. I estimate that a 10% increase in the collateral value corresponds to a 25% drop in default rate. Consistent with the strategic default hypothesis, I also find a stronger effect for borrowers with higher outstanding loan balances and no significant impact on the prepayment rate.
Commonality in Liquidity in Transatlantic Multilateral Trading Facilities (G1, F3)
AbstractWe use the introduction of transatlantic multilateral trading systems (MTFs), namely, Turquoise and NYSE-Arca-Europe, to examine the impact of changes in market structure on commonality in liquidity. We find that the introduction of transatlantic MTFs increases the co-movement of stocks’ liquidity with transatlantic liquidity, while the co-movement with the home market liquidity does not increase. We also find that the higher the MTF trading volume or the number of MTFs trading a stock, the stronger the effect. Further, we find that the commonality in liquidity remains unchanged for a matched control sample of stocks that do not trade on MTFs
Commute Mode and Residential Location Choice (R0, H4)
AbstractPublic transportation infrastructure projects are major government investments that affect not only individuals’ travel mode choices, but also residential locations in the long-term. To analyze the impacts of public transportation projects, accounting for the effect on households’ residential location decisions, I develop a discrete choice model of commute mode and residential location, in which households have heterogeneous preferences for neighbourhood characteristics and both the time and financial commute costs. I estimate this model for the Vancouver, BC region with micro-data from Statistics Canada’s National Households Survey and commute times calculated with geographic information (GIS) data. The preference estimates imply the opportunity cost of time spent commuting, or the value of travel time savings, is 15.26 dollars per hour for the mean-income household; there is significant heterogeneity in this value across household income. Using the estimated model, I simulate households’ residential and commute mode decisions under a proposed public transportation infrastructure project and analyze the change in public transportation use, income segregation, consumer surplus, and the total value of travel time savings.
Comparing the Effects of Defined Benefit Pensions and Current Pay on Retention (J3, J2)
AbstractFederal, state, and local governments continue to reduce the cost of their defined benefit pensions by decreasing annuity payments and having employees contribute a larger portion of their salaries towards them, thus reducing those workers’ current pay. Cuts to pension benefits and reductions in current pay can hamper the performance of a workforce by reducing its human capital through lower retention. We compare the effects of such reductions in compensation using over 30 years of administrative data on federal workers that span substantial changes in their salary schedules and pension structure. We estimate that the average elasticity of job tenure with respect to employer’s cost is 1.5 for current pay and 0.8 for pension benefits. Two factors cause the elasticity for current pay to be nearly twice the magnitude of the elasticity for pensions. First, cuts in the pension lead to fewer resignations than similar cuts in current pay. Second, cuts in pension benefits cause many workers to delay retirement, presumably because they must work longer to accrue a sufficient amount of retirement income. Using information on workers’ performance ratings, we find suggestive evidence that the effect on retention is heterogeneous with cuts in compensation affecting higher-rated workers more, thus potentially intensifying the effect of reductions in compensation on the workforce’s human capital.
Condoning Corruption: Who Votes for Corrupt Political Parties? (D7, P1)
AbstractElecting corrupt politicians remains much a problem around the world, yet little is known about the factors that determine the election of corrupt politicians. This paper explores the factors that affect an individual's decision to vote for her preferred party even if that party was involved in corruption. It finds that a number of individual characteristics such as the age, education, income, sex, and political leaning (moderate versus extreme) influence the electorates’ decision to condone corruption by their preferred political party. The study also finds that corruption may have a weakening effect on democracy as some voters choose to abstain from voting if their preferred party was involved in a corruption scandal. The study goes on to explore the factors that determine an individual’s likelihood of abstaining from voting even when a non-corrupt alternative is available. Education, sex, political leaning, exposure to bribery, the prevalence of corruption in politics, among other factors, are found to affect the likelihood of abstaining from corruption (as opposed to voting for another established party that was not involved in corruption).
Consumption Response to Minimum Wages: Evidence from Chinese Households (J3, E2)
AbstractThe paper evaluates the impact of the Chinese minimum wage policy on consumption of low
income household for the period 2002-2009. Using a representative household panel, we find
that the consumption response to minimum wage hike is increasing in the minimum wage
share of household income. In particular, we find that poorer households fully consume
their additional income. The large consumption effect is driven by households with at
least one child, while childless poor households save two thirds of a minimum wage hike.
The expenditure increase is concentrated in health care and education with potentially
long-lasting benefits to household welfare.
Contract Farming in Agriculture and Host Country Effects: Development Policy Insights from Alternative Models on Land Deal (Q1, O2)
AbstractEmpirical literature on the effect of Contract Farming (CF) on economic development of a Less Developed Economy (LDC) is divided on the basic issue of concern for the policy makers in LDCs: should CF be encouraged, and if so, under what circumstances? Broadly, there are both intermediate (yield, price etc.) and ultimate (mainly household income and food security) benefits. However, the implication of the outcomes on welfare are not unidirectional. For instance, in most cases yield per hectare and household income of farmers increased along with rise in prices of crops. Also, there is no homogeneity in the sample of crops or the country of occurrence. Since most of these contracts are private in nature with a clear objective of profit maximization, the estimates could have self-section biases, which is rarely controlled for. Additionally, these are mostly in the nature of treatment/control group studies (though not RCTs). A fundamental issue is that spillover effects bias outcomes in these methods and it should be controlled for. This implies that there is virtually no empirical literature on spillover effects. Looked at it differently, these studies conclude that in the absence of spillover effects CF appears to be conditionally beneficial to LDCs. Given this background, this paper researches: what are the nature of these conditions? To what extent do spillover effects relax them? Constructing a three-sector-four-factors general equilibrium model: agricultural with contract farming, traditional agriculture, and manufacturing, we derive the conditions under which it is conducive for low-income farmers. The objective is to prescribe a clear set of recommendations to the governments of the LDCs that are experimenting with CF on the nature of priors that they need to ensure for significantly increasing the probability of net benefit from CF.
Convergence of Homicides in the United States (I1, K4)
AbstractPlenty of studies have explored the association between the homicide rate and the transitory economic conditions. This study emphasizes the long term trends – convergence of homicide rate. Using a nearly five-decade (1968-2016) state-level annual homicide-rate data that is obtained from the Centers for Disease Control and Prevention (CDC), this study provides the evidence of convergence of homicide rates in the contiguous United States. Region-wise, the speed of convergence seems to be highest in the West, followed by the Midwest, and the South, but no statistically significant evidence of convergence is being shown in the Northeast. The findings have important policy implications for homicide intervention in the United States.
Cooperation and the Value of Social Connections: Evidence from the Chinese Banking Sector in the 1930s (N2, G3)
AbstractThe modern Chinese banking industry had become the vanguard of growth in the Republic period (1910-1949), in which property rights and contract enforcement were a luxury. We examine whether one type of inter-banking connections, namely interlocking directorate, contributes to the overall performance of modern Chinese banks by utilizing the social network tools. We ﬁnd characteristics of banks, which share directors with other banks, are signiﬁcantly different compared to those of unconnected counterparts. The empirical results elucidate a high positive correlation between bank’s proﬁtability and its connections with rivals through interlocking directors. The outcome provides a reasonable explanation for the success of Chinese banking sector in the 1930s.
Corporate Debt Overhang and Investment: Firm-level Evidence (F3, G3)
AbstractThis paper investigates empirically the linkages between corporate debt overhang and investment activity at the firm-level for a cross section of emerging markets (EM). It analyzes the extent to which future profits are put at risk by high levels of debt and may discourage investment, as well as firm vulnerabilities that may sharpen the debt-investment link. Using balance sheet data from a broad set of EM firms, our results suggest that corporate debt overhang imposes a sizable effect on investment at the firm-level. The magnitude of this effect varies across firms along different dimensions, including size of the firm and leverage. We also find evidence of a threshold effect, in which debt overhang discourages investment more severely under high levels of overhang.
Corruption and Economic Growth Revisited (O4, E2)
AbstractWhile literature finds many channels through which corruption can hurt economic growth, the link proved hard to establish in empirical cross-country studies. In this paper we show that part of the explanation of this puzzle is that there is a reverse causality: everything else equal, exogenously-driven economic growth can increase corruption. The reason is that the boost to output increases tax revenue, and hence pool of resources that corrupt public officials can embezzle. We show the workings of this channel in a simple stylized model, which is then accompanied by numerical simulations in a dynamic general equilibrium overlapping-generations model, which allows for corruption and tax evasion. We also present empirical evidence, which supports our findings.
Corruption, Political Instability and Firm-Level Export Decisions (F1, K4)
AbstractIn this paper I use South Asian firm-level data to examine the effect of corruption (political instability) on firm-level export decisions and whether the impact of corruption (political instability) on firm’s export decision depends on political instability (corruption). This study uses the IV probit model to analyze the data collected by the World Bank. The results confirm that both corruption and political instability increase the likelihood that a firm enters the foreign market. Also, political instability (corruption) reduces the impact of corruption (political instability) on firm-level export decisions. In addition, this analysis yields meaningful policy implication regarding political instability, corruption and a firm-level decision entering the foreign market in developing countries.
Coupled Lotteries - A New Method to Analyze Inequality Aversion (D6, D9)
AbstractWe develop and implement a new method to analyze inequality aversion: two
peers are endowed with two identical binary lotteries and the only choice they
make is whether they want to play out the lotteries independently or with perfect
positive correlation. The choice has no other eect than (dis)allowing for
possible inequality. We implement the method in a survey in rural Thailand.
Choosing positive correlation is related to being more risk averse, having social
status concerns and -opposing previous literature- being male. We conclude
that our method facilitates a simple and incentive-compatible measurement of
inequality aversion in experiments and surveys.
Criminal Justice Under Fiscal Pressure (K4, H7)
AbstractWe look at how fiscal pressure affects local criminal justice expenditure and activity. We use the exogenous formulary allocations of the 2009 American Recovery and Reinvestment Act, exploited in Wilson 2012 as our instrument. High stimulus and low stimulus regions show no significant differences in underlying crime rates, but we find that low stimulus states reduce expenditure on policing and corrections. To understand how these savings are achieved we evaluate arrest data across high and low stimulus states. Arrests for DUI and burglary fall in low stimulus states relative to high stimulus states, while arrest rates for violent crime stay the same. Arrests for drug possession fall in low stimulus states with strong protections against asset forfeiture, but stay constant in high stimulus states as well as low stimulus states with limited protections. Finally, fine collection rates increase in low stimulus states. The results are consistent with local government decision makers who respond to fiscal pressure by shifting resources away from activities with diffuse or hard to realize benefits. The analysis contributes to the research on "Debtor's Prison" policies on the use of aggressive fines to fund local governments, as well as understanding regional impacts of the Great Recession.
Cross-Country Spillovers from Macroprudential Regulation: Reciprocity and Leakage (E3, F4)
AbstractIn a globally interconnected banking system, there can be spillovers from domestic macroprudential policies to foreign banks and vice versa, for example, through the presence of foreign branches in the domestic economy. The lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to those banks with lower regulatory levels, a phenomenon known as "leakage." This may decrease the effectiveness of macroprudential policies in the pursuit of financial stability. To explore this topic, I consider a two-country DSGE model with housing and credit constraints. Borrowers can choose whether to borrow from domestic and foreign banks. Macroprudential policies are conducted at a national level and are represented by a countercyclical rule on the loan-to-value ratio. Results show that when there are some sort of reciprocity agreements on macroprudential policies across countries, financial stability and welfare gains are larger than in a situation of non reciprocity. An optimal policy analysis shows that, in order to enhance the effectiveness of macroprudential policies, reciprocity mechanisms are desirable although the foreign macroprudential rule does not need to be as aggressive as the domestic one.
Debt Burden and Collateral Constraint in a Fixed-Interest-Rate Model (E3, E5)
AbstractChina's nominal interest rate has long been regulated by the government, resulting in its adjustment lagging behind price fluctuations. When nominal interest rate is fixed at a certain level, higher inflation implies lower real interest rates and thus higher demand, generating even higher inflation, and vice versus. The economy is driven into a vicious inflationary or deflationary spiral, which can only be stopped by quantity control and administrative measures.
We prove that unique equilibrium exists in a New Keynesian model with a transiently fixed interest rate, in which monetary policy switches from fixed to flexible interest rate regime after a finite time period. We augment the model with a borrowing constraint a la Kiyotaki and Moore (1997), and investigate the interaction between fixed interest rate and borrowing constraint.
We show that the countercyclical change of real interest rate causes the countercyclical change of debt burden, amplifying the financial acceleration effect, which adds positive feedback in the model propagation mechanism.
Under fixed nominal interest rate, a fall of inflation rate increases real interest rate, which decreases the value of collateral assets and increase external finance premiums. This constrain the ability of firms to obtain new loans, with depressing effects on investment and ultimately on output. The fall in output brings deflationary pressures, which, in turn, increases the real interest rate under fixed nominal interest rate.
A decrease in current price level also raises the real value of the current debt and redistributs wealth from debtors to savers, which reduces short-run investment of fims and decreases aggregate demand. This is due to a Fisher effect through which prices affect the real value of nominal debt, which is the main channel of Fisher's 'Debt-Deflation' theory.
Determinants of Teaching Quality: Evidence from the University of Colorado 2008 to 2016 (I2)
AbstractPublicly available student evaluations of teaching quality are used by students to select their
courses, by faculty to improve their teaching, and by universities when determining promotion
and salary for faculty. This study uses data from the University of Colorado’s faculty course
questionnaire (FCQ) from 2008 to 2016 to estimate an empirical model that relates teaching
quality to professor and class characteristics and to the method of instruction. Results show a
striking degree of homogeneity in student FCQs across time, campuses and disciplines, but
some heterogeneity across classes and professors. All else held constant, FCQs are lower in
large classes, online classes, and classes that have been evaluated with an online survey.
Tenure-track and tenured faculty have lower FCQs relative to instructors. Female teachers also
have lower FCQ’s relative to male teachers, but the difference is relatively small. Interestingly,
our results suggest that females could eliminate their two to three percent quality discount when
they co-teach with a female. However, when they co-teach with a male, their quality discount
rises to about four to six percent.
Diversification and Systemic Creditor Runs (G2, D8)
AbstractDiversification through pooling and tranching securities is supposed to mitigate creditor runs in financial institutions by reducing their credit risk. However, many financial institutions holding diversified portfolios experienced creditor runs in the recent financial crisis of 2007-2009. We present a theoretical model to explain this puzzle. In our model, because financial institutions all hold similar (diversified) portfolios, their behavior in the asset market is clustered: they either sell their assets at the same time or collectively do not sell. Such clustering behavior reduces market liquidity after an adverse shock and increases the possibility of a creditor run. We show that diversification, while making the financial system more robust against small shocks, increases the possibility of a systemic crisis in the case of a larger shock; diversification, inducing stronger strategic complementarities across institutions, also makes a self-fulfilling systemic crisis (multiple equilibria) more likely. Because individual institutions typically over-diversify in the competitive equilibrium compared with the social optimum, there is room for a regulation.
Do Brokerages Benefit from All-Star Females? (J1, G0)
AbstractThis paper shows a positive correlation between the representation of senior female analysts (i.e., all-star females) and outcomes of brokerages. A larger number of all-star females in a brokerage increases the future performance of the brokerage. Using deviation from the steady-level female composition in brokerages as an instrumental variable, I show that analysts who work in brokerages with at least one all-star female experience a higher (lower) likelihood of promotion (demotion) in the next year. Finally, a higher representation of all-star females in brokerages that are largely male-dominated, narrows the promotion gap for other female analysts.
Do Cash Holdings Cause Agency Problems? (G3)
AbstractWe use random variation in firm cash levels to test two theories of optimal corporate cash holdings. The first, Jensen (1986), suggests that firms should minimize cash holdings to minimize agency conflicts. Alternatively, firms can afford to take risky but profitable long-term projects if cash holdings are higher.
We use the exercise of the overallotment option during an IPO (initial public offering) as a quasi-random cash infusion to a firm. Exercise of the overallotment option does not affect the investment opportunity set of a firm. Yet, it provides us with variation in cash across years and industries. While the exercise of the overallotment option is not exogenous, we use several placebo tests to rule out potential confounders.
We find that firms receiving cash due to the exercise of the overallotment option are more likely to make an acquisition following the IPO. Moreover, the announcement returns regarding acquisitions are lower for firms which did not inform the market about their potential acquisitions in the prospectus. That is, firms which made an “unplanned” acquisition see lower announcement returns after the cash infusion.
Our main contribution is to provide large-sample evidence that excess cash can cause firms to behave suboptimally. By focusing on the correlation rather than causality, prior evidence has generally ignored the endogeneity of cash policy: managers may be choosing levels of cash holdings that enable them to extract private benefits with the cash playing no causal role. Two prior papers, Blanchard, Lopez-de-Silanes and Shleifer (1994) and von Beschwitz (2017), have used exogenous cash windfalls to study the same question. Our proposed research setting gives us a larger sample size than BLS (1994), who examine only 11 companies, and a more robust control group than von Beschwitz (2017) as well as the ability to control for time fixed-effects.
Do Chinese Government Foreign Student Scholarships Target Natural Resources in Africa? (O1, F5)
AbstractAs China-Africa trade and investment have experienced an exponential growth in recent years, numerous western politicians such as Hillary Clinton and Rex Tillerson warned Africa that China is practicing “a new form of colonialism” in Africa, whereby it utilizes its foreign aid to gain access to Africa’s rich natural resources. However, existing research are hampered by both lack of official and authoritative data on China’s development aid and the endogeneity of the Chinese data. This article examines the relationship between the endowment of natural resources and the number of foreign student scholarship given by Chinese Government to African countries, which is one of the most important components of China’s foreign aid. We use new discoveries of oil, gas and mineral fields in an African country, which are reasonably exogenous, to instrument for the quantity of natural resources in a 2SLS setup. Instrumental variables neatly eliminate the endogenous problems that prevail in previous studies and we find no evidence that Chinese aid targets natural resources in Africa. On the contrary, political factors such as diplomatic relationship with Taiwan and competition with the aid provided by the USA are significant predictors in the allocation of Chinese aid to African countries. The results are robust to different measures of Chinese access to natural resources in Africa, including the amount of production, the value of exports, the value of Chinese imports, Chinese shares of an African country’s export or African shares of China’s import. These findings thoroughly reveal the intent behind China’s foreign aid and responded to the fierce controversy on this issue in the world.
Do Federal Grants Crowd Out Local Spending? Evidence from Title I (H7, I2)
AbstractThe Title I program accounts for 25-35% of all federal funding to the average school district. Many studies have consistently found insignificant effects of Title I on student outcomes (Puma et al., 1993; Van der Klaauw, 2008; Matsudaira et al., 2012). One potential – and understudied – cause of such an effect may be that receiving Title I funds causes state and local governments to offset funding they would otherwise have provided, leading to a negligible change in school spending levels. Indeed, finding that Title I crowds out state and local spending would lend evidence against the existence of the “flypaper effect” (see, e.g., Hines and Thaler, 1995; Knight, 2001).
This paper examines whether receiving Title I funds crowds out state and local spending, using data spanning fiscal years 2002-16 and the universe of school districts in the United States. I employ a novel identification strategy exploiting multiple discontinuities in the Title I funding formula. In particular, Title I grants are subdivided into four categories, and a school district is only eligible to receive a given subgrant if its poverty count if above a given threshold. I use a regression discontinuity design (RDD) to compare outcomes for districts with poverty levels slightly above and below the cutoff, yielding the causal effect of receiving federal grants on state and local spending levels. The presence of multiple thresholds also yields multiple local treatment effects spanning different types of “compliers”. Finally, I examine the dynamic nature of crowd-out effects by disentangling the impact of first-time eligibility for a subgrant from that of eligibility in subsequent years through a dynamic RDD. Results suggest that receiving Title I grants leads to insignificant changes in total expenditures, driven by crowding out of local revenues and crowding in of state revenues two to three years after grant receipt.
Do High School Sizes Matter for Risky Behaviors and Mental Health of Low-Income Teenagers? Evidence from New York City (I1, I2)
AbstractWe evaluate the impacts of small high school on youth risky behaviors in New York City, with rich student-level administrative and survey datasets and Medicaid claim data. We use distance between student residence and school to instrument for endogenous school enrollment, using two-sample-instrumental-variable approach which combines enrollment information from the educational administrative data with information on outcomes from the Medicaid claim data. We find that girls enrolled in old small schools (opened before 2003) are less likely to ever get pregnant and substance use disorders between age 15-18. Boys in old small schools are less likely to be diagnosed with mental and substance use disorders. We also find weak positive effects of new small school enrollment on the likelihood of violence, for both girls and boys. Utilization of contraception treatment and access to school-based health facilities do not explain the findings. A close look at school characteristics imply that smaller schools size, and the correlated higher per student expenses and lower student-teacher ratio contribute to the success of old small schools, and lower teacher quality potentially explains the disparity between new and old small schools.
Do People Move as Molecules? - Modeling Political Uncertainty by Geometric Brownian Motion (E6, D8)
AbstractAfter Black and Scholes (1973) used Geometric Brownian Motion (GBM) in mathematical finance to model stock prices, GBM has been widely used in asset pricing and other financial fields. For example, Postali and Picchetti (2006) used GBM as a proxy for the movement of oil prices; He (2009) explored optimal executive compensation by assuming that firm size follows GBM. Brownian motion gives us a good way to better understand political environment changing and model the movement of uncertainty. The concept of this paper is to set people as molecules and political outcomes as particles. The way that one behaves under the overall political environment is based one's individual knowledge. Like original conception of Brownian Motion, people (molecules) behave (move) with uncertainty, which results in the movement of political outcomes (particles). Baker, Bloom and Davis (2016) create an index of economic policy uncertainty based on newspaper coverage frequency. The index fluctuation indicates that the movement of political uncertainty can be modeled by GBM. Hassett and Metcalf (1999) investigated whether random tax policy discourages investment. In this paper, GBM was used to describe tax policy uncertainty. The goal of this paper is to model the overall political uncertainty based on the basic conception of Brownian Motion and GBM.
Do Reward and Reprimand Policies Reduce Electricity Distribution Losses? (D0, O1)
AbstractElectricity distribution losses due to theft and non-repayment of bills are costly burden for the power sector, causing it a significant financial losses and poor service delivery. Pakistan has been facing a chronic power shortage crisis, which likely have a large consequence for its economy. To discourage electricity theft, the main power supply company in the city of Karachi started the reward and reprimand policy, where the low loss areas were exempted from outages, while the medium and higher loss areas were subjected to proportionally more outages. Under this policy, electricity feeders were classified as very high, high, medium, or low loss based on average losses in the past twelve months using fixed cutoffs. To incentivize loss reduction, the distribution company periodically updated this classification. Furthermore, the company also involved communities to build peer pressure to combat the societal menace of power theft. Using monthly data at the electricity feeder level from July 2012 to December 2015, we study the effect of this unique policy on curbing electricity distribution losses. We utilize information about the cutoffs used to categorize the feeders into different outage regimes in a regression discontinuity framework. Multiple thresholds in the data allow us to examine the effectiveness of this policy in reducing electricity losses and improving repayments in the subsequent months.
Does Generation Matter for Entrepreneur Types?: Four Generations of Entrepreneurs (J1, L2)
AbstractThis study for the first time explores eight entrepreneur types across four generations of entrepreneurs: Traditionalists, Boomers, Gen-Xers, and Millennials. It adopts hierarchical age-period-cohort (HAPC) models, in which multilevel mixed-effects logistic regression models are used with random period effect controls and comparison between two neighboring generations at the same age spans. The empirical study relies on monthly Current Population Survey data across 11 years (2006-2016). When controlling for age, period, and other demographic and socioeconomic factors, limited generation differences are identified: Gen-Xers are more likely than Boomers to be novice (versus non-novice) and unincorporated (versus incorporated) entrepreneurs at the ages of 44-51; Boomers are less likely than Traditionalists to be incorporated entrepreneurs (versus unincorporated entrepreneurs) at the ages of 63-70. No difference is found between millennials and Gen-Xers.
Does Language Serve as a Signal of Social Networks in Job Search? Evidence from China (M5, Z1)
AbstractWider cross-region networks help to firms to expand their nationwide market, especially when the costs of overcoming regional barriers to exchange information are high, and when cultural and institutional differences are large. Firms, in order to broaden their social connections, would prefer job applicants whose social networks are different from their own. This paper examines the relation between the complementarity between job candidate and firms’ social networks and their job searching outcomes. Following Falck et al (2012), one’s social connection is measured by his or her dialectal background. Utilizing a novel database, we find that dialect indeed act as the signal of social network, and even more, its role as signal is even stronger when we focus on growing firms, and on sales positions where the job performance is highly depended on the working place. The present study sheds light on the importance of individual dialectal background in firm’s hiring decisions, and broadens the understanding on the relationship between labor diversity and firm’s productivity.
Does Medicaid with Substance Abuse Treatment and Prevention Coverage Reduce the Opioid Epidemic? Empirical Evidence from Medicaid Expansion (I1, I3)
AbstractThe United States is facing an unprecedented opioid epidemic. In 2015, over 2 million people had a prescription opiate addiction. The epidemic has resulted in increased health care services utilization and a surge in opioid overdose deaths throughout the country. The cause and mechanism for the rapid rise in overdose are not well documented. There is little evidence on the impact of access to health insurance on abuse of prescription drugs and opioid overdose deaths. The goal of this study is to shed light on the relative contribution of changes in the availability and use of drugs that may be caused by increases in access to health insurance.
To our knowledge, this paper will employ for the first time the drug overdose data from one of the largest national repository and surveillance system- the National Poisson Data System of the American Association of Poison Control Centers ranging from 2011 to 2017. We use the Affordable Care Act’s Medicaid expansion as an exogenous shock to the geographic supply of opioids by income and insurance coverage rates at the county level to investigate the causal impact of access to health insurance on drug overdose, and severity of abuse outcomes for the non-elderly population. Using a difference-in-difference and triple difference-in-difference (DDD) model that compares states that did and did not expand Medicaid with geographic variation in income and uninsured rates across different counties, we find that access to health insurance contributes albeit small increases in drug abuse. We also observe the impact of expanding access to substance abuse treatment and preventions.
Does Regulation Drive United States Health Care Spending? (I1, K2)
AbstractThe United States spends twice as much on health care per capita as most other rich countries. I estimate the extent to which this “excess” spending is due to interest-group-driven regulation. Regulations considered include restrictions on the supply of doctors and other health practitioners, restrictions on healthcare facility construction, and mandates on what health insurance plans must cover. I use data on US health spending from the National Health Expenditure Accounts, together with cross-country data from OECD Health Statistics.
Does Uber Reduce Public Transit Use in the United States? (R4, R2)
AbstractThe rise of Uber and other transportation network (or ride-hailing) companies in recent years has jolted and revolutionized urban transportation across the globe. Most noticeably, the increased use of ride-hailing services has resulted in a precipitous fall in the demand for taxi cab services in major cities, prompting protests by taxi cab owners/operators and even an outright ban by some governments or courts. The rapid adoption of Uber and other ride-hailing services also gives rise to more empirical and policy questions on the declining trend of public transit ridership in the U.S. The impact of Uber on urban public transit needs to be carefully evaluated in light of the potential implications of any future policy changes in transit funding and planning. This study examines the effect of Uber and transit effectiveness on public transit ridership in the U.S. using top 50 agency-level data from 2007 through 2015. We find that (1) transit effectiveness of both bus and rail transits declined over the study period; (2) Uber’s availability only significantly affected rail transit ridership in a positive way; (3) transit effectiveness was highly significant for rail transit, and when examining its effect year-by-year, rail transit effectiveness trumped Uber’s availability; (4) Uber is neither a complement nor a substitute of bus transit.
Dumping on Free Trade, Optimal Antidumping Duties, and Price Undertakings: Welfare Implications in a Two-Market Equilibrium Analysis (F1, F1)
AbstractIn this paper, we develop a two-market equilibrium model of trade to show that dumping is welfare deteriorating to an exporting country when its firm dumps a low-quality product at a price below that in its local market and is charged with an antidumping (AD) duty by an importing country. An optimal AD policy is shown to be Pareto superior to an importing country when its firm sells a competing product of higher quality. Our two-market analysis allows for preference heterogeneity in consumer choices, as well as the endogenous decisions of product quality by duopolistic firms in the home and foreign countries (which are a DC and an LDC due to their income differentials). We find that it is welfare improving for an LDC to restrain its exporting firm not to dump its product and pay an AD duty, but to set the price of the product to be identical that in its local market. The latter option is a price undertaking from which the LDC welfare is higher than its welfare in the case of dumping and an AD fine. From the perspective of global welfare, defined as the aggregation of social welfare of the DC and LDC trading partners, we show the Pareto superiority of the AD policy.
Economic Shocks and the Back-To-School Decision: Evidence from 900,000 GMAT Scores (J2)
AbstractWe contribute to the literature on returns to graduate education with a study of the relationship between the state of local labor markets, and the decisions to take the usual first step towards a graduate business degree - the Graduate Management Admissions Test (GMAT). Our data, the census of all GMAT scores by US residents over eight years, cover the economic downturn of 2007-2008 and the next six years of recovery. With test-taker zipcode information in the data, we match the pattern of test-taking by candidates to narrowly-defined data on local job markets. We explore whether candidates are more likely to take the GMAT during periods of positive, negative or no local economic growth. We also explore whether conditional on taking the exam, candidates are more likely to send their test scores to MBA programs in areas with positive local economic growth.
Effect of Parental Employment Status on Child Care (D1, J1)
AbstractParents allocate a significant budget of time and income on raising children. Becker (1988) treats children as self-produced goods by a family using two key ingredients - parental time and parental income. Exogenous factors such as an unfavorable change in the business cycle, causing a loss of employment of the parent, will affect both parental income and parental time. Existing literature shows that parental unemployment has detrimental long-term effects on children’s development.
This paper attempts to find evidence to support the hypothesis that a change in business cycle, affecting individuals’ employment status, affects the time parents choose to spend with their children. I use state level unemployment rate as an indicator for business cycle changes. My study focuses on the short-term impact of unemployed parents in their time investment. Using an instrumental variable approach, I study if individuals who were laid-off or have been unemployed reallocate the time that was spent at work by spending more time with their children.
Using the American Time Use Survey (ATUS), I divide the total time an individual has in a day into 5 categories – with children, at work, for leisure, for household chores, and during job search. ATUS is a panel data which provides detailed time use information from 2004-2016 of respondents. Unfavorable business cycle conditions, measured in terms of a rise in unemployment rate affects an individual's time diary. I find that unemployed individuals spend seven percent of their gained time with their children, ten percent for job search and over sixty percent at leisure. Race place a significant role in the change in time diaries due to unemployment. The magnitude of impact is higher for white parents as compared to black parents.
Effectiveness of Food Voucher Program: A Field Experiment Approach in South Korea (D9, I3)
AbstractThough the Korean government implements various projects to support low-income households, it is questioning that such projects effectively improve diet and nutrition of the group. As cash support scheme, a typical assistance scheme in South Korea, does not guarantee recipients to increase their expenditure on food (crowding-out effect), the need for a food voucher program has been consistently raised by policymakers. In this background, a Korean version of Supplemental Nutrition Assistance Program (SNAP) has recently been designed and a pilot program is scheduled to take place in mid-2018. The pilot program will run for 3 months for 1,200 recipients each in two regions (rural versus urban). This study investigates the changes in food expenditure and basket composition of low-income households participating in a pilot food voucher program and identifies the most effective program design using a unique administration data obtained from the pilot program. The pilot program generates an important opportunity to evaluate each policy alternatives and identify the most effective option in a field experiment environment. The policy alternatives to be considered include 1) cash versus voucher versus price assistance, 2) limited food category versus unlimited, 3) limited supermarket list versus unlimited, and so on. We also adopt the concepts of behavioral economics (e.g., stigma-alleviating voucher design and loss-aversion behavior of the participants) in order to derive the most effective policy design.
Effects of the ACA on Elderly Workers (I1, J2)
AbstractThis paper examines effects of the ACA on elderly workers using a difference-in-difference design that compares the change in employment before and after the ACA between age group 60-64 relative to age group 65-69. The ACA increases employment of age group 60-64 by 1.0 percentage point, a 1.9 percent increase relative to the pre-ACA mean. The employment growth is mainly attributable to high-income subgroups who are rarely income eligible for Medicaid even after stop working, suggesting the individual mandate is likely the primary reason for the employment growth. Under the mandate, some people choose to delay retirement to either maintain employer sponsored health insurance (ESHI) or pay for the penalty. Consistent with this mechanism, I find significant increases in full-time employment, salaried employment, and ESHI coverage.
Efficient Lying: Community Leadership, Trust and Accountability (O1, D9)
AbstractThis study analyzes community leadership in the light of the recent literature on lying aversion. Following Acemoglu and Robinson (2006) and Acemoglu et al. (2014), we see the accountability of political leadership as a crucial dimension of institutional quality. At the same time, however, excessive accountability at the community level might also constrain leaders in their ability to influence outcomes to the better for society. Particularly when decisions are taken under strategic uncertainty, positive misinformation might help a community to coordinate on a better outcome. In a society where people are less connected, information spread about leader behavior and, hence, accountability is lower. Based on data from an artefactual field experiment conducted in rural Kenya, we hypothesize that there is more scope for information manipulation in less connected communities. Further, under the assumption that agents fully trust the information that their leader provides, there is no efficiency difference depending on the connectedness of a community if the leader reports truthfully. However, if the leader can exploit the scope for positive information manipulation in a less connected community, efficiency is higher. On the contrary, if trust in the information that the leader provides is imperfect, efficiency in a less connected community can be below that of a more connected community, independently of whether the leader actually manipulates information or not.
Electoral Quotas, Redistribution, and Entrepreneurship: Evidence from India (O1, D7)
AbstractOver the past half-century, constitutionally mandated political representation of historically disadvantaged groups have become prevalent in democratic societies – most notably, through explicit quotas or political reservations of electoral constituencies for ethnic/indigenous minorities and women. How effective are electoral quotas in improving economic outcomes of targeted populations? This question is of central concern in this paper.
Two stylized facts can be drawn from prior research – First, electoral quotas are effective in aggregating policy preferences of disadvantaged groups with regards to ‘low spillover goods’. Second, despite welfare gains, there are no effects on socio-economic development indicators of disadvantaged groups.
However, the proximal mechanisms through which political representation impacts economic activity are unclear. To address this challenge, this study proposes political favoritism as a mechanism through which quotas impact group outcomes. Using firm-level micro data from Economic Census of India and matching firm’s location to electoral constituency level data on political reservations, following Asher and Novosad (2017), this study examines the effects of political reservations on industry-firm activity based on social group identity of the firm’s owner.
To estimate the effects of political reservations on entrepreneurship and group economic activity, the study employs two instrumentation strategies – first a matched-pair approach at the electoral-constituency-level to estimate an average treatment-on-the-treated estimator, and secondly a regression discontinuity design balanced on close electoral outcomes at the constituency-level to estimate an local-area-average-treatment-effect estimator.
Results indicate a null-effect of constitutionally mandated political representation on various economic outcomes of the under-represented (SC and ST) groups in India. In striking contrast, however, the results show heterogeneous effects based on institutional priors emphasizing the role of economic growth in redistribution of electoral quotas; especially in the case of developing countries.
Eliciting Risk Attitudes, Measuring Risk Aversion, and Estimating Risk Premiums Using Indirect Utility Functions: A Laboratory Experiment (D9, G4)
AbstractDuality theory in modern microeconomics suggests that (direct) utility function (DUF) and “indirect” utility function (IUF) are dual to each other, meaning that, when one is known, it can be used to theoretically derive the other. As a result, duality theory implicitly suggests that the degree of risk-aversion (or -seeking) that a given (rational) subject exhibits in the context of DUF must be equivalent to the degree of risk-aversion (or -seeking) elicited through the context of IUF. However, the accuracy of this theoretical prediction remains an empirical question, which can be tested in a lab experiment. We also examine whether there are interpretable behavioral aspects to any gap that may be observed between the two approaches. Our approach relies on elicitations that use payoff-based lottery choices (which is based on DUF and uncertainty about payoffs) versus their equivalent price-based lottery choices (which is based on IUF and uncertainty about prices).
We have designed an experiment that enables us to elicit risk attitudes, measure the degrees of risk aversion, and estimate risk premiums by using indirect utility functions. To do so, we have adopted the frameworks of three popular Multiple Price List (MPL) designs in the area of experimental economics, including Holt and Laury (2002), Binswanger (1980), and the Certainty-vs.-Uncertainty design which has been applied in different forms by a number of scholars in the field. We compare these three designs for the elicitation of risk preferences. These designs have been the subject of many experimental and empirical studies, but literally all of them have used these designs in the context of DUF. However, in our experiment, we use all the three MPL designs as our elicitation procedures, each of which has two contextual versions – a version with a DUF context and another with an IUF context.
Empirical Analysis and Forecasting of Multiple Yield Curves (G1, C4)
AbstractThe turmoil in the money market during the financial crisis of 2007/2008 was marked by spiking interbank spreads. Even after the crisis spreads remained at high levels opening a new era of interest rate markets characterized by multiple tenor-dependent yield curves. In this paper we suggest a consistent and stable approach for bootstrapping of multiple yield curves which we apply to market data over the time period 2005–2017. Based on the resulting time series of daily tenor-dependent yield curves we provide an in-depth empirical analysis of pre- and post-crisis term structures of interest rates. Finally, we develop tractable dynamic factor models to forecast tenor-dependent term structures of interest rates. Our methodology takes into account crosstenor
dependencies and generates extremely precise predictions for the discount as well as for the risky yield curves for various forecasting horizons. In particular, it outperforms the standard benchmark approach of random walk predictions.
Employment and Participation after the Crimea Crisis (J7, Z2)
AbstractWe examine how the employment and participation of Ukrainian and Russian citizens changed after the Crimea crisis. Particularly, we focus on professional Ukrainian football players working in Russia and professional Russian football players working in Ukraine. De facto, the annexation of the Crimea in 2014 changed neither the employment rights of Ukrainian nor of Russian workers. Thus, neither employment nor participation should be affected. We use a simple regression to analyze the time frame from 2012 – 2017 in both Russia and Ukraine. Our empirical results show that both, the number of employees and their active participation, significantly decreased after the annexation. Our results have important policy implications for employees, employers, and policy makers in both Ukraine and Russia.
Employment Cyclicality by Firm Size, Wage, Productivity and Age in Brazil (J2, J4)
AbstractThe important debate about how economic fluctuations affect employment reallocation in heterogeneous businesses is currently open in the literature. This debate is relevant as it matters for the understanding of the labor market dynamics, and for devising labor policies that aim at dampening employment fluctuations. The theoretical literature suggests that job-to-job flows reallocate workers from low productivity to high productivity firms and often this pattern is tested assuming that firm size, wages and productivity are positively related. This paper constructs a unique monthly linked employer-employee data based on Brazil’s Annual Manufacturing Survey (PIA) and Annual Social Information Report (RAIS) and contributes to this debate by providing direct empirical evidence on whether workers relocate from low productivity to high productivity firms by using Total Factor Productivity (TFP). This is an important contribution as so far, the literature used a simpler and crude proxy for TPF given by the revenue labor productivity. Results produced by classifying firms by employment size, wage or productivity show different responses of employment growth rates to business cycles. The relationship between these variables is not as strong as suggested in some influential studies and thus a direct productivity measures should be used. When Total Factor Productivity is used to rank firms, results suggest that employment in high productivity firms are more cyclically sensitive to unemployment. Besides, results suggest that workers move up the productivity ladder by moving from new firms with low productivity to old firms with high productivity.
Endogeneity of the Inflation Target (E5, E3)
AbstractUnder inflation targeting, central banks set an inflation target in advance and then try to make an actual inflation reach the target. However, central banks may have an incentive to adjust the target endogenously to previous or expected inflation rates to close the gap between the actual inflation rate and the target. This study examines the issue of inflation target endogeneity by using various empirical methods with a sample of 19 inflation-targeting countries. Empirical results show that an increase in actual or expected inflation rate has a significantly positive effect on the inflation target of the next period. The result further suggests that endogeneity of the inflation target is more evident in central banks with low credibility or weak performance than in those with high credibility or strong performance. Finally, we construct a simple theoretical model to illustrate that the endogeneity of the inflation target can lead to equilibrium indeterminacy and an increase in the volatility of the inflation rate.
Estimate Relative Factor Shares of Capital, Labor, and Energy of Iraq Economy (F0, E2)
AbstractOil is considered one of the strategic resource in Iraq. The economy of Iraq is mainly dependent on oil, and the same sector takes up much of the budgetary allocation to finance oil production, leaving little money for capital expenditure. According to a 2012 report by the International Energy Agency (IEA), Iraq is the third-largest oil exporter in the world (Birol and et al., 2012).The report expounded on possible strategies for navigating the Iraq oil industry amidst numerous political, economic, and social challenges. Evidence shows that economies of less developed nations with abundant mineral and oil deposits often collapse due to the concentration on oil production and negligence of other crucial aspects (Birdsall and Subramanian, 2004). Therefore, economists wrote articles on the need for saving Iraq from an impending resource curse that will ruin the nation if the oil industry is managed poorly. Unfortunately, after looking carefully at the literature, there is no paper dealing with estimating the interaction effect between capital, labor, and energy for the Iraqi economy. The integration of labor and capital in Iraq is vital for the economy to grow. While the interaction of capital, labor, and energy is critical, the policymakers in Iraq determine how capital and labor can substitute energy without damaging the economy. Therefore, this study submits that interactions and substitution of labor, capital, and energy will keep changing as the Iraq economy grows.
Estimating the Causal Relationship Between Hospital Costs and Quality Measures (I1)
AbstractThis paper evaluates the relationship between hospital cost and quality. The Department of Health and Human Services collects quality information from hospitals and produces a number of quality measures that are publicly available through its Hospital Compare project. The purpose of providing these quality measures is to increase transparency and accountability in the healthcare system. Another area where these quality measures could be useful is in quality adjusting hospital prices in the Consumer Price Index (CPI) and the Producer Price Index (PPI). Currently, the PPI makes some use of these measures, but the methodology used may be problematic as the relationship between the quality measures and hospital costs is unknown. Once the relationship between the quality measures and costs are better understood, it will be possible to revise the existing PPI methods.
The causal relationship is identified using the instrumental variable technique of Doyle, Graves, Gruber, and Kleiner (JPE 2015) and Doyle, Graves, and Gruber (NBER working paper 2017). They develop an instrument for hospital selection based on plausibly exogenous assignment to different ambulance companies (which have different preferences for hospitals). This paper uses Medicare claims data for the years 2011-2015. Data on hospital admissions is contained in the Inpatient file, and ambulance billing data are contained in the Outpatient and Carrier files. The claims data are linked to hospital specific cost (hospital cost reports) and quality data (Hospital Compare). Preliminary results suggest a relationship between cost and quality but is sensitive to the cost and quality measures used.
Evaluating the Time-varying Impact of Economic Data on the Accuracy of Stock Market Volatility Forecasts (G1, E4)
AbstractI assess the time-variation in predictive ability arising from the inclusion of macroeconomic and financial data in a GARCH-MIDAS model for stock market volatility. I consider whether the relative forecasting performance is affected by the state of the business cycle or the financial market environment. Results suggest predictive ability varies significantly over time, especially over very long horizons, suggesting forecast model selection should be based on time-varying considerations. In particular, the term spread improves forecasting performance over long horizons, and overall models including macroeconomic data are useful in recessions and in low volatility periods. Models driven by financial data perform surprisingly poorly, while forecast combination methods perform well in many periods.
Evaluating Welfare and Economic Effects of Raised Fertility (H5, J1)
AbstractIn the context of the second demographic transition, many countries consider rising fertility through pro-family polices as a potentially viable solution to the fiscal pressure stemming from longevity. However, an increased number of births implies private and immediate costs, whereas the gains are not likely to surface until later and appear via internalizing the public benefits of younger and larger population. Hence, quantification of the net effects remains a challenge. We propose using an overlapping generations model with a rich family structure to quantify the effects of increased birth rates. We analyze the overall macroeconomic and welfare effects as well as the distribution of these effects across cohorts and study the sensitivity of the final effects to the assumed target value and path of increased fertility. We find that fiscal effects are positive but, even in the case of relatively large fertility increase, they are small. The sign and the size of both welfare and fiscal effects depend substantially on the patterns of increased fertility: if increased fertility occurs via lower childlessness, the fiscal effects are smaller and welfare effects are more likely to be negative than in the case of the intensive margin adjustments.
Experimental Evidence on Gender Bias in Educational and Occupational Choices (D1, J7)
AbstractGender occupational segregation is one of the most stable and common phenomena of the labor markets all over the world. Since differences in occupational choices between women and men cannot be fully explained by external circumstances, in this study we focus on the role of gender beliefs in shaping labor market and educational decisions. In particular, we test whether beliefs and norms related to the choice of occupation are transmitted from parents to children, and therefore, whether parents' convictions affect actual choices of their children.
Using vignette experiment technique, we tested participants gender beliefs related to a choice of occupation by presenting them several stories of female and male fictional characters. In each story, a character was considering two occupations that differed by features typical for feminine and masculine jobs (such as risk aversion, social preferences, and competitiveness). Treated group was additionally incentives by the information on parents expectations or information on gender pay gaps in such occupations.
We collected results for a heterogeneous group of participants in terms of fields of study or performed occupations, but mostly among young adults who are just about to decide on their future career. Preliminary results suggest that the role of parents' attitude towards the choice of occupation (gender beliefs) plays a significant role in their children perception of occupations that should be chosen by a woman and by a man.
Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel (F3, F4)
AbstractFULL PAPER: http://www.robertkollmann.com/KOLLMANN_manuscript_BizCycleSynch_2018.pdf
ABSTRACT: The 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.
Explaining Job Polarization: The Role of Heterogeneity in Capital Intensity (E2, J2)
AbstractWe propose a new perspective that job polarization stems from the interaction of the decrease in the relative price of capital goods, the heterogeneity in capital intensity of job task production, and the complementarity of job tasks in final goods production. First, we construct a measure of occupation-level capital intensities and document that the tasks of middle-skill workers tend to be more capital intensive. Second, we build a task-based model with two goods sectors and three job tasks, where the job task production differs in capital intensity and how a worker's skill is utilized. The model demonstrates that when there is technological progress in investment technology, employment shifts away from capital-intensive tasks, and the relative wages are driven down, implying that a decreasing price of capital goods predicts job polarization. A quantitative analysis suggests that the model can account for approximately one-half of the employment polarization and approximately one-half of the upper tail of the wage polarization in the U.S. between 1980 and 2010.
Explaining the Irrelevance of Labor Market Shocks in the Financial Accelerator Model (E3, E4)
AbstractShocks originating in the labor market, modeled either as shifts in the disutility of labor or as exogenous variations in wage mark-up are important (and in some cases even dominant) drivers of economic fluctuations in the most well-known models of the business cycle (cf. Smets and Wouters, 2007; Galí, Smets and Wouters, 2011; Justiniano, Primiceri and Tambalotti, 2013). However, the same labor market disturbances play a minor role in the state of the art New Keynesian model with financial frictions estimated by Christiano, Motto and Rostagno (2014) which includes a financial accelerator mechanism into an otherwise standard monetary model of the business cycle. In Christiano, Motto and Rostagno (2010), the authors mention that the portion of the forecast error variance decomposition for any observable variable explained by the labor market shock was negligible and that "while the irrelevance of labour supply shocks in our baseline model is very interesting in its own right, we do not study it further in this paper".
The objective of our paper is precisely to study why do labor market shocks lose importance in the financial accelerator model and compare the transmission mechanism implied by the theoretical model with the one implied by a simple VAR model identified with a minimum amount of sign restrictions, which imposes very little structure on the data.
We find that the irrelevance of labor market shocks in the financial accelerator model relies on those shocks generating a procyclical external finance premium, in contrast with the unconditional correlation in the data and with the conditional empirical evidence provided by our estimated VAR. Moreover, the VAR highlights also the tenuous link between external finance premium and leverage, a central feature of the financial accelerator model.
Exporter and Importer Effects on Trade Flows: A Three-way Model (F1, C3)
AbstractThis paper examines trade flows in China, Japan, Korea and ASEAN countries by applying a three-way gravity model. Recent evidence indicates that the proper econometric specification of a gravity panel with time variation would be one in three dimensions with exporter, importer, and business cycle effects. This paper applies different specifications of a gravity type model under a three-way framework, which then leads us to the effects of countries’ characteristics on trade flows. Specifically, this research reports three key results. First, we demonstrate that inter-industry trade explains the most of ASEAN-Asia trade flows. Second, the largest exporter and importer effects are found in Singapore. Whilst both Japan and China exhibit great exporter effects, their importer effects are insignificant. Finally, we examine the impact of ASEAN Plus Three (APT) and measure the pairwise trade potentials of China, Japan and Korea to the rest sample counties and shed light on policy making.
Exports and FDI Entry Decision: Evidence from Japanese Foreign-Affiliated Firms (F1, F2)
AbstractWhy do aggregate foreign direct investments (FDIs) fall with distance? To answer this question, we examine the behavior of Japanese multinational enterprises (MNEs). We are interested in FDI entry decision given export experience in foreign markets. We postulate that one of the firms’ strategies is learning the foreign market potential by exporting first, followed by establishment of foreign affiliates if expected profitability is high enough. We propose a theoretical model and test it empirically using firm-level data from two basic surveys of Japanese companies: the Basic Survey of Japanese Business Structure and Activities and the Basic Survey on Overseas Business Activities for the period 1995-2015. We control for export experience, intra-firm trade and productivity of Japanese MNEs, and find that the probability of FDI entry decreases in distance. We conclude that trade costs shape outward FDI activity in addition to learning by exporting, intra-firm trade and productivity channels. Our tentative explanation suggests that trade costs limit firms' ability to reveal the foreign market demand. As a result, they may exit the foreign market before realizing the potential of profitability.
External Imbalances between China and the United States: A Dynamic Analysis with a Life-cycle Model (F3, E2)
AbstractThis paper uses a life-cycle model to study the role of population ageing and the low level of pension income in retirement as drivers of China's persistent trade surplus vis-a-vis the United States. In the model, the fast increase of life expectancy coupled with relatively low pension expenditures can help explain China's high savings, the persistent trade surplus and the accumulation of a sizeable net foreign asset position. The model predicts a positive net foreign asset position and trade balance for China for most years in the simulation period even though its high productivity growth has a strong negative impact on the trade balance.
Family-Provided Old-Age Support and Health Shocks: Evidence from Senior Chinese Households (I3, I1)
AbstractThis paper uses a household fixed effects model to examine the role of the family in providing informal insurance mechanisms and the response of inter-family transfers to health shocks. Using data from the China Health and Retirement Longitudinal Study (CHARLS), we test the hypothesis that financial and time transfer from relatives are used as informal insurance mechanisms when elderly individuals experience adverse health shocks. We employ a measure of health that indicates the difficulty level of performing activities of daily living for senior households to first address how health status impacts elderly labor productivity. We find that health adversely effects labor market outcomes for elderly individuals. Next we use the health measure to determine if family provide support, both through time and money, in the face of adverse health shocks. Our results suggest that family members do provide assistance to the elderly. And finally we look at public transfers and welfare to determine if public transfers are crowded out by family-provided support or if the welfare of households is affected by poor health. Our findings indicate that private, family-provided, transfers received by senior households in response to a health shock do not crowd out public transfers and those households experience no changes in per capita consumption of non-medical goods and services.
FDI Spillovers on Corporate Social Responsibility: The Channel of Labor Mobility (M1, F2)
AbstractThis paper examines the spillover effects of foreign direct investment (FDI) on corporate social responsibility (CSR) of domestic firms, with a focus on the channel of labor mobility. Based on previous literature on CSR and nationwide survey data of Chinese privately-owned enterprises, we first employ factor analysis to develop several measures of CSR activities, including environmental protection, monetary donation, employee welfare, and product quality improvement. We then test whether and how FDI affects CSR of Chinese firms by applying both the OLS and propensity score matching (PSM) estimation methods. After controlling for various entrepreneurial and firm characteristics, our results show that firms run by entrepreneurs who have management experience in multinational enterprises (MNEs) investing in China conduct more CSR activities compared with firms run by entrepreneurs without such experience. We further explore the possible mechanisms of the labor mobility channel and find that MNE management experience may enhance the self-assessment of social status, the international vision, and the management skills of entrepreneurs, which help increase their firms' uptake of CSR activities.
Fields of Study Choices and the Reproduction of Gender Inequalities (J1, J3)
AbstractThis paper contributes to the understanding of the sources of labor market gaps between men and women. One major cause of wage and employability differentials is horizontal segregation, which in turn is to a considerable extent a consequence of earlier segregation in education (horizontal, by field, and vertical, by attainment). In particular, women are still underrepresented in the STEM fields, and overrepresented in fields with subsequent prospects of relatively lower wages.
We examine gender differences in the choices of fields of study by undergraduates in Germany. We thus investigate an indirect mechanism of the reproduction of gender inequalities, i.e. through the influence of men’s and women’s fields of study choices. Already in school age, career plans exhibit marked gender differences (Sikora and Pokropek 2011). Besides stereotypes and gender inequality reproduced in society at large, it has been shown that gender-specific parenting may influence girls’ career expectations and aspirations, and thus their educational choices (Brenøe 2018).
Using panel data from a representative survey of school-leavers provided by the German Centre for Higher Education Research and Science Studies (DZHW) and employing the method developed by Ferreira and Gignoux (2011), we disentangle the relative relevance of gender for intended as well as realized fields of study choices, controlling for performance in school, socio-economic background, migrant/racial background and a number of other variables. We find mixed evidence on the gender-specific impact of these factors in shaping young people’s choice of field of study.
Brenøe, A.A. (2018): „Sibling Gender Compotion and Participation in STEM Education", Working Paper.
Ferreira, F.H.G and Gignoux, J. (2011). “The measurement of inequality of opportunity: Theory and an application to Latin America”. Review of Income and Wealth 57(4): 622-657.
Sikora, J. and Pokropek (2011): “Gendered Career Expectations of Students: Perspectives from PISA 2006”, OECD Education Working Papers 57.
Financial Cycles, Credit Bubbles and Stabilization Policies (E4, E5)
AbstractThe run-up of financial bubbles followed by financial crashes is a (sadly) frequent phenomena in modern economies. The building up of the bubble as well as its crash usually sets a number of amplification mechanisms linked to the presence of financial frictions and spillovers effects in the real economy (especially in terms of consumption and investment decisions). Indeed, "procyclicality" is a relevant feature of financial cycles for macroeconomists and policymaking: hence the focus on business cycle fluctuations and financial crises (Borio et al. (2001), Danielsson et al. (2004), Kashyap and Stein (2004), Brunnermeier et al. (2009), Adrian and Shin (2010)).
In this paper we formalize the processes of bubble creation and asset price inflation to provide a setting for the analysis of monetary policy and efficacy of regulatory instruments. In particular, we consider a real (or rational) trigger of the bubble (financial innovation) and an (irrational or behavioral) extrapolation of past loan growth into the future asset price. Hence, the size of loan portfolio is linked to expectations of future loan value with a positive feedback mechanism in the bubble variable coming from the pricing at the loan trading stage.
We test several measures on whether they can effectively reduce the impact of a financial bubble. We find that a macroprudential rule which reacts to the credit-to-GDP gap proves to be the most effective measure to prevent a bubble from growing. A central bank intervention against the financial bubble ("leaning against the wind") has according to our findings only a minor effect. We thereby provide a rationale for the use of counter-cyclical capital buffers.
Financial Fraud and Investor Awareness (D9, G4)
AbstractDishonest firms often commit financial fraud by offering unrealistically high-return products to exploit naive investors. In our experiment and survey, the eye-opening financial education program can significantly reduce investors' tendency to invest in fraudulent products, especially among those who are risk-averse. This suggests that investors purchasing fraudulent products is due to their unawareness of the firm's choice of default, rather than their risk-seeking preferences.
Based on our experimental and empirical findings, we construct a model with unaware investors in which firms strategically choose to behave honestly or not. We study how firms' incentive in committing financial fraud and disclosing information are affected by price competition, education programs, and other regulatory instruments such as interest rate ceiling and legal punishment. Price competition facilitates financial fraud since the honest firm's market power and profitability decreases. Competition also reduces the honest firm's incentive to unshroud because unshrouding affects the dishonest firm's profit, thus induces it to deviate and compete with the honest firm. Similarly, public education programs, as well as other regulatory policies, will crowd out the honest firm's incentive to disclose information and thus may not be welfare-improving.
Financial Traders Network and Systemic Risk Spillover Channels (G1, G4)
AbstractIn this paper I estimate the financial network among 8 types of traders across 5 different capital markets, which are stock, stock derivative, bond, bond derivative, and foreign exchange derivative market. The causal relationship between two traders are identified with nonlinear granger causality and each trader's connectedness measure is obtained by the network structure. In order to overcome the limit of VAR which most of previous literature assumes and reflect real trading decision making procedures, expectation forecasting of traders' net trading volume on next day is included in analyses. Expectation forecasting
values are predicted with LSTM (Long Short Term Memory) which is one of the most popularly used machine learning method.
In addition, the systemic risk spillover channels are investigated using network measures. I model 3-phased systemic risk spillover channel which is the link of the volatility of financial indexes, traders network measure and traders daily net trading volumes. I find that given the shock of financial indexes, 3 traders among 40 traders become central and another 3 traders rapidly lose their influence regardless of the sort of financial indexes. Secondly, when the shock is given in those traders network measures, the traders in different markets are shown to have more sensitive responses. Finally with the shock on the sensitive traders daily net trading volumes, strong auto-correlation between impulse and response as well as the phenomenon which traders from different markets respond actively, are also found. These are the evidences of systemic risk spillover channels through traders. This research can contribute to the previous research in that the financial networks which reflect real trading environments are estimated, and that machine learning methods are applied to network estimation. Furthermore, the results of systemic risk spillover channels can be helpful to policy makers including financial regulators and practitioners.
Firm Entry, Excess Capacity and Endogenous Productivity (E3, L1)
AbstractSluggish firm entry over the business cycle causes measured TFP to vary endogenously in response to technology shocks. This arises because in the short-run absence of entry, incumbent firms utilize excess capacity and thus scale economies. To show this result, we develop a tractable business cycle model of dynamic firm entry, imperfect competition and endogenous sunk costs that qualitatively replicates many firm-dynamics, business-cycle facts. In this parsimonious setup, we derive a theorem that imperfect competition and dynamic firm entry are necessary and jointly sufficient conditions for endogenous, procyclical productivity fluctuations. The theorem applies to a growing number of macro models that incorporate dynamic firm entry and imperfect competition, such that profits are nonzero in the short run but arbitraged in the long run.
Fishing Ban (Q2, H7)
AbstractFor sustainable fishery, China has implemented the world's first large-scale seasonal fishing bans, which prohibit commercial fishing in the Chinese Exclusive Economic Zone (EEZ) for several months in the summer. Given the difficulties in patrolling a vast ocean, it is unclear whether such fishing bans are effective. In this paper, I investigate this question using a novel dataset, which records marine vessels at nights and is derived from remote sensing imageries from a new-generation weather satellite program. Using a regression discontinuity in time design, I find that the start of fishing bans reduced the number of boat detections by about 72% and the subsequent lifting of fishing ban increased the detected boats by 78%. However, there is no spatial discontinuity around the EEZ border during and outside the ban periods. Moreover, more boats were detected inside the Chinese EEZ near its border with the Vietnamese EEZ when the Chinese fishing bans were effective than when not. Since Vietnamese EEZ was more intensively fished than the nearby Chinese EEZ, such spatial pattern close to the EEZ border suggests that Vietnamese fishermen fished in the Chinese EEZ during the ban periods.
Forecasting the Great Recession in 2008: The State of the Economy Exposed in the Publications of the American Economic Association (G0, E3)
AbstractAlthough the prediction of economic trends is hard, it is a routine work for the policymakers for development planning. The macroeconomic variables are interrelated and the forces of these variables do not always behave in a systematic pattern, so that the research findings vary. The researchers do not agree on all the causes and consequences of economic crisis and growth, even after the event occurred. The proper policy suggestions depend on predicting the economic situation based on past and present trends with a future outlook. The current research work is to see the economic trend and outlook analyzed in the publications of the American Economic Association (AEA) before the Great Recession in 2008. The research findings show that the economic situations of the United States and the world were progressive in terms of macroeconomic indicators before 2008 which are explained by the AEA published papers with an informative future assessment. The macroeconomic picture portrays by the researchers help to look into the future economic situation.
Future Availability and Present Choice (D0)
AbstractConsider a tourist who must decide where to visit in a foreign city. She might visit a historic temple instead of her preferred option, Disneyland, if she anticipates that the next time she is in that city the temple may have been demolished and replaced by a mall. This behavior may arise from the anticipation of future regret. Once the temple is gone, she may feel regret for not seeing it. The possibility of future regret affects one's present choices. We attribute such changes in preferences to "fear of missing out”.
Our representation theorem builds upon subjective state-dependent preferences in the spirit of Kreps  and Gul-Pesendorfer . In particular, we show that first period preferences in a two-period choice problem can be represented as the maximization of the function
u(x) - p(x)v(x)
over the set of alternatives x from the choice set X. Here, u(·) is the standard utility function. It represents preferences if the choice is to be made only once (i.e., preferences in a one-period world). p(x) is the probability that the alternative x will not be available in the second period. The function v(x) captures the disutility one gets by not choosing alternative x which disappears in the second period.
One interpretation of our theorem is that our decision maker maximizes her utility knowing that there is a possibility of making the wrong decision with the correct option no longer available. If the tourist from the earlier example chooses to visit Disneyland and the temple is destroyed, she feels regret. This differs from a preference for variety as, if there was a guarantee that the temple would never be destroyed, the tourist would never visit. It is only the threat of destruction and the associated fear of regret that drives the tourist to visit.
Getting High or Getting Low? (R1, R3)
AbstractThe legalization of cannabis is a hotly contested policy topic. While beneficial to some, the outlets dispensing cannabis may create a negative externality for others. This paper studies the external effects of coffeeshops – Dutch cannabis sales facilities – on local house prices. Controlling for hedonic property characteristics, we use distance to coffeeshops as a measure for proximity to externalities. We employ a difference-in-difference analysis around a change in regulations, leading to exogenous coffeeshop closings.
Our results are surprising but complementary to similar studies, documenting that closings have negative effects on property values. We further document a coffeshop-proximity discount of around -1.2 to -2.5 percent, increasing with closeness. Both findings are robust to several sub-tests, and show that coffeeshops are generally located in lower priced areas, but closings devalue these areas further. We find a relation between coffeeshop post-closing circumstances and closing effects, where long-term vacancy leads to higher discounts, suggesting that closing effects are related to the withdrawal of retail activities.
Global Ownership and Hierarchies of Firms. That Which is Essential is Invisible to the Eye (F3, G3)
AbstractIn this contribution, at first, we introduce an algorithmic game theory framework to study how investors can exploit pyramidal structures to introduce wedges between ownership and control of companies. Then, we apply it to a dataset of 53.5 million of companies operating in 208 countries in 2015. Among others, we detect a strong concentration of corporate power, as less than 1% of parent companies collect more than 100 subsidiaries, but they are responsible for more than 50% of global sales. Therefore, we show that the role of indirect control, i.e., through middlemen subsidiaries, is relevant in 15% of domestic and 54% of foreign subsidiaries. Among foreign companies, cases emerge of blurring nationality, when control paths cross more than one national border, in the presence of multiple passports (19.1%), indirectly foreign (24.5%), and round-tripping subsidiaries (1.33%). Finally, we relate indirect control strategies to country indicators of the institutional environment. We find that pyramidal structures arise less likely in the presence of good financial and contractual institutions in the parent's country, as these foster more transparent forms of corporate governance. Instead, parent companies choose indirect control through countries of subsidiaries that have better financial institutions, possibly because it is easier to coordinate decisions from remote. Finally, we find that offshore financial centers are preferred jurisdictions for middlemen subsidiaries, probably due to a lower taxation and a lack of financial disclosure.
Governing Global Value Chains: Evidence from Automotive Trade Data (F2, L6)
AbstractA large literature finds that global value chains are a key source of competitive advantage for firms and for nations (Gereffi, Sturgeon, etc.). Most analysis of these chains is based on small datasets. Our paper draws on confidential microdata from the Longitudinal Firm Trade Transactions Database (LFTTD),for the auto industry 2007-2012. LFTTD links the universe of U.S. import transactions to the firms that make these transactions. Unlike previous analyses, our data contains information about every component or finished vehicle that a vehicle manufacturer imports into the United States. We can identify the automaker that imported the good and the foreign manufacturer that supplied it, in very detailed 10-digit HTS categories (e.g., ‘Vulcanized gaskets, washers and other seals’ or ‘Mountings, fittings and similar articles, of base metal’).
Using this data, we examine two theories of vertical governance:
1)Transaction-focused theories (Williamson, 1975; Joskow, etc) analyze supplier/customer relations on a transaction-by-transaction basis. They typically assume that all firms undertaking a transaction with similar attributes govern the transaction in the same way. For example, the theory predicts that firms would always buy a simple commodity part from many suppliers, with little loyalty to any one supplier. In contrast, purchase of a component characterized by firm-specific investment would be governed by long-term contracts with a few suppliers.
2) Organization-focused views (Dyer; Jacobides; Helper and Henderson) argue that attributes of the transactors affect governance; in the limit, these theories imply that a firm governs relationships with all its suppliers in the same way (e.g., Toyota is cooperative in every transaction with its suppliers).
We observe the value of transactions conducted with foreign suppliers, how many suppliers of a given component an OEM trades with, and how frequently an OEM switches suppliers of that component.
Our analysis provides support for both theories.
Government Spending Multipliers and Imperfect Asset Substitution (E6, H6)
AbstractAvoiding the myriad of mechanisms proposed in the literature, this paper shows that a sufficiently large, yet empirically likely, degree of imperfect substitutability between short- and long-term bonds induces a positive consumption multiplier in small-scale New Keynesian models. This tractable mechanism works through the manipulation of a term premium introduced via a simple portfolio adjustment cost. Furthermore, the model shows that the government’s financing decision may be extremely important to the efficacy of fiscal policy. Financing fiscal spending with short-term debt produces positive consumption multipliers, whereas long-term debt financing diminishes this effect.
Haircuts and Repo Rates (E4, G1)
AbstractThe paper is focused on developing a model to analyze the interconnections between the repo market and financial stability. The shadow banking system and the interbank repo market played an important role in the 2007-2009 financial crisis. The repo market is essentially a market for loans collateralized with securities. The transactions in the repo market usually involve overcollateralization, i.e., there is a margin between the market value of the collateral and the amount of the loan. The research addresses several issues: How is the margin determined? Which is the relation between margins, repo rates, and the probability of default of the counterparties? The research analyzed the dynamics of the skewness and dispersion of the cross-section distribution of haircuts (i.e., margins) for different types of collateral and the results in the case of US Treasury Strips as collateral show that during the autumn on 2012 there was a large widening of the distribution of haircuts, most probably due to the “fiscal cliff” issue in USA at that period. Also, it focused on establishing a closed form solution for repo rates and haircuts. The main advantage of this model is that, having an endogenous haircut and repo rate, it allows us to understand the failure of the shadow banking system and the contagion effects that arise, since default triggers more default. When we have a borrower that defaults, the portfolio of the lender becomes less liquid, since she would rely on less cash and more collateral. This makes her more likely to default because, other things being equal, she reaches her debt limit faster. Thus, counterparty default may be contagious in this setting. Initial simulations show that the borrower whose probability of default is higher secures repo contracts that have higher rates and higher margins, which is in line with empirical observations.
Herding and Stochastic Volatility (G1, C6)
AbstractIn this paper we develop a one-factor non-affine stochastic volatility option pricing model where the dynamics of the underlying is endogenously determined from micro-foundations. The interaction and herding of the agents trading the underlying asset induce an amplification of the volatility of the asset over the volatility of the fundamentals. Although the model is non-affine, a closed form option pricing formula can still be derived by using a Gauss-Hermite series expansion methodology. The model is calibrated using S&P 500 index options for the period 1996-2013. When its results are compared to some benchmark models we find that the new non-affine one-factor model outperforms the affine one-factor Heston model, the non-affine one-factor log-normal model and it is competitive with the affine two-factor double Heston model.
History-Based Choice between Consumption Streams (D8)
AbstractThe empirical and experimental research reveals that an agent may manifest preferences which differ from the classical economics postulates. A few of such manifestations are utility from anticipation, preferences for improvement, preferences for happy endings and memorable consumptions. This paper studies those phenomena by static choices within a dynamic context. This research provides an axiomatic framework and a model which rationalizes such decisions; furthermore, it shows that there is an additive utility function which represents the preferences with those specifications.
Home Equity Withdrawal via Credit Card Borrowing-Micro Evidence from China (R2, D1)
AbstractThis paper studies the housing wealth effect on consumption in China and explores the channel via which this effect works. We feed household-specific house prices to a representative agent framework with Life-Cycle/Permanent Income Hypothesis, and examine how the MPC out of house price varies with the degree of credit constraint. Results show that households exhibit a MPC of 9%-14% to house price changes and the sensitivity increases with the degree of constraint, a result implying a credit channel. We further find that the credit channel is funded by non-bank private credits, instead of bank credits as often found in U.S. This is partly due to the absence of a bank credit market for mortgage equity withdrawals in China. We also show how precautionary savings lead to an under estimation of the credit channel. The paper adds to the literature by showing the presence of a credit channel of the housing wealth effect that works without bank credits and co-exits with precautionary savings motives.
How Do Bonus Cap and Malus Affect Risk and Effort Choice?: Insight from a Lab Experiment (M5, J3)
AbstractWe conduct a lab experiment to examine how bonus caps and malus affect individuals’ choices of risk and effort. We find that bonus which rewards individuals proportionally to realised investment returns but does not penalise negative returns encourages greater risk-taking, while bonus cap and malus mitigate risk-taking. However, the difference in risk-taking between the bonus cap and malus treatment groups and the proportional bonus group weakened significantly when the participants’ bonus was made conditional on hitting an absolute or relative performance target. We also find some evidence that the bonus cap discourages project search effort relative to the proportional bonus, whereas the difference in the levels of effort between the malus group and the proportional bonus group was not statistically significant.
How Does Losing a Job Affect Investments in Health? The Effect of Job Loss on Preventive Care Utilization (I1, J6)
AbstractInvestments in health may provide long-term societal benefits through both decreasing expenditures on health care and increasing the productivity and positive externalities generated through good health. The utilization of preventive care services provides a measure of individuals’ long-run investments in their health. Experiencing a job loss may alter these investments through several channels, including a change in health insurance coverage and the perceived pay-off to the investment. The sign of the overall effect of job loss on preventive care is ambiguous, as the various channels have potentially opposing effects. Furthermore, the effect of losing health insurance coverage is itself theoretically unclear because of the moral hazard consequences of having health insurance coverage. Although losing health insurance coverage increases the cost of preventive care, it also increases the cost of future ill health. Thus, job losers may increase use of preventive care, which reduces the probability and severity of illness in the future.
This paper examines the short-run effects of losing a job on individuals’ long-term health investments, as measured by their use of preventive care. Using the Medical Expenditure Panel Survey, I employ models controlling for time-invariant unobservable individual characteristics and baseline health status and utilization proclivities. Additionally, I impose an employment stability restriction to increase the comparability of the job losers and job keepers in the sample. I find a statistically significant negative effect of job loss on the use of certain preventive care services. An analysis of subsamples of those who held employer-sponsored or any private health insurance prior to job loss suggests that a change in health insurance coverage may be a partial driver of this effect. Gender appears to play a role for certain services, and experiencing a job loss post-Affordable Care Act increases the utilization of some preventive care services.
How Labor Unions Affect Firm Value: Evidence from Political Contributions in the United States (G3, J5)
AbstractThis paper investigates the relation between political engagement by special interest groups (corporations and labor unions) and corporate stock returns in the United States. Exploiting two opposing interventions affecting the legality of soft-money political contributions from unions and corporations, our first results show that abnormal returns around the ban (repeal) of soft-money contributions are positively (negatively) related to unionization. These results suggest that political spending by labor unions has a meaningfully deleterious effect on the value of unionized corporations. To counter-engage labor unions in the political arena, our second results show that unionized firms provide more support (i.e., hard-money contribution) for Republicans.
Overall, our paper makes two contributions. Our first results contribute to the literature on the effects of labor unions on firms value. For example, Lee and Mas (2012, QJE) document that the establishment of a new labor union reduces the firm equity value. We bolster this line of research by offering a specific economic channel, union political spending, for why labor unions have a negative impact on firm value.
Our second results contribute to the debate on whether corporate political contributions are shareholder value-maximizing or merely represent a manifestation of the manager-shareholder agency problem. Notably, our setting allows us to specify a test of the investment hypothesis in which we compare two groups where the treatment group is presented with a partisan political challenge (i.e., labor unions) that is of significantly lesser concern to the control group. This allows us to form and test expectations regarding a corporations donation activity based on an investment motive. Conditional on this specific political problem, our findings are consistent with the notion that corporate financial contributions to politicians at least in part reflect an investment motive (see, e.g., Cooper et al. (2010, JF) rather than a mere reflection of owner-shareholder agency problem.
Identity and the Self-Reinforcing Effects of Norm Compliance (D9, C9)
AbstractWhen making social decisions (e.g. voting, donating, etc.), individuals consider the normative expectations of the groups with which they identify. These expectations are injunctive social norms, shared beliefs about what constitutes appropriate behavior for members of the identity group, and individuals’ choices reflect trade-offs between adherence to these norms and their other preferences. Using an incentivized lab experiment, we show that when individuals pay a personal cost as a consequence of avoiding a group norm violation, they subsequently view the norm as stronger and become more willing to punish/reward others with the same identity for violating/complying with the norm than if they did not experience such a cost. Further, such individuals view other norms associated with the identity as stronger. In this way, costly compliance with a norm may be self-reinforcing.
Illegal Drugs and Public Corruption: Crack Based Evidence from California (K4, D7)
AbstractDo illegal drugs foster public corruption? To estimate the causal effect of drugs on public corruption in California, we adopt the synthetic control method and exploit the fact that crack cocaine markets emerged asynchronously across the United States. We focus on California because crack arrived here in 1981, before reaching any other state. Our results show that public corruption more than tripled in California in the first three years following the arrival of crack cocaine. We argue that this resulted from the particular characteristics of illegal drugs: a large trade-off between profits and law enforcement, due to a cheap technology and rigid demand. Such a trade-off fosters a convergence of interests between criminals and corrupted public officials resulting in a positive causal impact of illegal drugs on corruption.
Impact of Chilean Maternity Leave Expansion on Female Labor Market Outcomes & Gender Discrimination (J7, J3)
AbstractThere are important gender differences in the labor market, and in the case of Chile these differences are particularly large. In 2003, the labor force participation gender gap was 40 percentage points and the gender pay gap conditional on schooling and experience was approximately 35 percentage points. One possible explanation to these gaps is maternity. Maternity leaves seek to facilitate maternity, but at the same time impose higher costs of hiring women, especially childbearing age women. The effects of maternity leave benefits on labor market outcomes have been widely studied for developed countries, especially European countries. However, there is little evidence for less developed countries. In 2011, Chile increased the paid maternity leave period from 18 weeks to 30 weeks. This paper studies the policy's impact on mothers of young children’s labor market attachment, and if this policy has any additional impact on labor market discrimination against women. Using a difference-in-differences approach, I find robust evidence that the aforementioned policy increased labor market attachment of mothers of infants by increasing both employment and labor force participation by 5 percentage points. However, this policy seems to have had an unintended effect: it reduced labor force participation of women of childbearing age by 3 percentage points and their employment by 2.4 percentage points, while it had no effect on the gender pay gap.
Impact of the Change in Payments on the Actual and Perceived Behaviors of Medical Care Providers (I1)
AbstractPrior literature established the link between a person aging out of a parent’s insurance coverage at age nineteen and a significant decrease in insurance coverage of those nineteen-year-old young adults.
Using the regression discontinuity framework, this paper furthers that research by establishing that although there was no change in the total income received by the medical care providers treating young adults who have aged out of their parent’s insurance, there was a significant change in the amounts received from various sources that comprise the total payment.
I examine the impact of the change in the provider’s payments mix by the source on the providers' behavior (supply-side) and on the patients’ perception of the providers’ behavior (demand-side), using a 14-year sample of unmarried young adults from the Medical Expenditure Panel Survey (MEPS).
I find that although there is a statistically significant change in the sources of the total payments received by medical care providers from patients crossing the threshold of age nineteen, medical care providers do not change their actual treatment decisions. However, the patients do perceive a statistically significant negative change in the behavior of their medical care providers. They are significantly less satisfied with the behavior of their health care providers.
Patients' satisfaction with their health care is important to payers, hospital administrators, physicians, and patients. It is important because it captures the patients' experience of health care other than the direct effects on health. It also acknowledges the role of the patient as a partner in health care. In addition, these changed perceptions may affect trust and follow up in the treatment plan.
Impacts of Healthy Diets on Mental Health and Wellbeing: Is Perception a Relevant Mediator in This Relationship? (I1, D9)
AbstractThe relationship between healthy diet and physical health is well-documented in the literature, particularly its positive effects on disease prevention, weight and physical functioning. However, there are fewer studies exploring an association between healthy diet and psychological outcomes such as well-being, depression and anxiety. Moreover, one’s perception on her diet might affect her eating behavior as well as psychological outcomes. For instance, if people perceive a dish as healthy, it can have positive effects on their physical and emotional health despite its lack of real nutritional value. Using first-difference model, three waves of Understanding Society Survey, which are longitudinal data sets for a representative UK population, are utilized. Healthy diet is measured by portion of fruit and vegetables consumed per day, whereas one’s perception on healthy diet is proxied by two questions, i.e. participants were asked to rate from a scale 0 to 10 if they could stick with a healthy diet and their views on the benefits of eating healthy in the long run. Our results indicate that consuming more fruit and vegetables has a positive impact on well-being even after controlling for socioeconomic factors and other health behaviors such as physical activity, smoking and alcohol consumption. Nevertheless, the perception and interlink between perception and actual diet do not robustly affect mental health or well-being significantly.
Impacts of Online Platforms: Competition, Market Value, and Implications for Welfare and Measurement (O3, G0)
AbstractIn the digitization era, new business models have arisen and many of them embodied into different types of online platforms. Online platforms, mostly created and run by young companies, are asset-light but have grown fast and deeply disrupted many industries. In this paper, we propose an analytical framework to examine how the introduction of an online platform affects a firm’s value, investment behavior in organizational capital, and performance. The initial data cover the hotel and transportation industries in both Japan and the U.S. for the period of 2002 to 2015. Several preliminary findings are: First, we measure the intangible assets of platform participating companies and their non-participating counterparts in both Japanese and U.S. hotel and transportation industries. Second, platform participating firms have a higher degree of organizational capital intensity and accumulated a higher stock of organizational capital. Third, the creative destruction of online platforms has been shown in the comparison of the estimated depreciation rates of organizational capital between the two groups. Moreover, as shown in the hotel industry, the number of google search for the word, "Airbnb," gradually increased from 2012, and this rising pattern is similar to the time trends of the depreciation rates of the organizational capital of the non-platform participating incumbents. Fourth, by using a machine learning technique, we show that the shock of online platforms caused a negative impact on the stock prices of existing non-platform participating incumbents but a positive impact on their platform participating counterparts. Additionally, as shown in the Japanese platform-participating company, Park 24, our computational outcome indicates that most of its increase in market capitalization is due to a change in the depreciation rate of its organizational capital. Lastly, based on our ridesharing service study, we propose a new way to indirectly measure the welfare impacts of online platforms.
In Utero Exposure to Civil Conflict: Nicaraguan War and its Long-Term Effects on Socioeconomic Outcomes (J2, N3)
AbstractWe examine the Nicaraguan Civil conflict in the seventies that ended up with the overthrown of the Somoza dictatorship and the start of the Sandinista Revolution. Nicaragua between 1977 and 1979 experienced high rates of war confrontation. After the announcement of the Sandinista National Liberation Front (FSLN, by its acronym in Spanish) in November of 1977, the country had undergone a civil war which ended up with a range of 30,000-50,000 casualties. The escalated confrontation allows us to examine the long-term effects of the war-related conflict on the subsequent generation’s socioeconomic outcomes. In particular, this paper aims to identify whether in-utero exposure to the civil conflict in Nicaragua has a negative impact on individual’s labor and marriage market outcomes. We exploit the variation in timing of and geographical exposure to the civil conflict during the last year of the dictatorship. We construct novel data which combine full population information of the 2005 Nicaraguan National Census, the World Health Organization historical mortality data, and the Correlates of War. Exploiting differences across regions and across cohorts, our preliminary findings indicate that the civil conflict negatively affected those who exposed to the conflict in utero. In particular, the long-term consequences of the war decreased educational attainment, formal employability, and thus reducing lifetime earnings, especially for females. The exposure to the civil conflict also seems to decrease marriage probability.
Incentive-Enhancing Preferences in Higher Education: Motivation, Personality, and Learning (I2, A2)
AbstractI use a randomized, controlled trial to test the efficacy of a goal-setting exercise to affect undergraduate student outcomes as mediated by their personal motivation—extrinsic versus intrinsic—and the mediating role (if any) played by personality traits and other characteristics. Motivation—extrinsic versus intrinsic—has been linked to differing responses with respect to policy changes that alter individual incentives. In addition, personality traits have been demonstrated to be reliable predictors of success (by many measures) across a wide variety of domains, including higher education. Researchers have found a wide variety of academic and non-academic measures to be reliable predictors of success in higher education, and that simple a simple goal-setting exercise contributes to improved student-level outcomes as measured by GPA. A large sample of first year students at a regional, state university are surveyed to collect individual measures that have been demonstrated to correlate with student success or failure. (To my knowledge, no other study has yet to collect and analyze data regarding both types of motivation—extrinsic versus intrinsic—and personality traits.) These students are randomly assigned to either a treatment group or control groups, and the treatment group is assigned a short series of goal setting exercises that have been shown to improve student outcomes in previous research. Economics educators understanding of the role that incentives play in undergraduate education might be improved if more is understood about the mediating effects of students’ motivation and personality traits.
Incentives for Girls and Gender Bias in India (D1, O1)
AbstractWhile it is well known that gender gaps in India are driven by the presence of high son preference, the underlying causes of son preference are not well understood. I argue that an important determinant of son preference is the high future costs of girls in India. I link changes in these costs to gender bias by analyzing the Bhagyalakshmi program introduced in the state of Karnataka, India in 2006. Bhagyalakshmi provides households with large monetary benefits at the birth of daughters. Using geographic variation in exposure to the program together with temporal variation in a difference-in-differences and triple difference framework, I show that a decrease in the future costs of girls because of the Bhagyalakshmi program increases the female-to-male child sex ratio. Further, I find that reductions in future costs of girls reduces the girl deficit at birth and girl deficit after birth. I also find that girls do better in the long-run as evidenced by improvements in nutritional outcomes. My analysis shows that changing the high future costs of girls through economic incentives can reduce behaviours emanating out of son preference such as sex-selective abortions, son-biased fertility stopping and excess female mortality.
Inertia and Public Bureaucracy: The Imprint of the Bureaucrat (H4, D6)
AbstractWe investigate the mechanism that explains the rigid policy preferences of bureaucrats stemming from the past imprints of the organization, which causes persistence allocative inefficiency. In particular, we develop a theoretical framework that synthesizes insights from the theory of organizational imprinting in conjunction with neo classical rational actor framework to model inertial preferences of bureaucrats. In order to pinpoint the sources of inefficiency we explicitly model how inertia may arise if bureaucrat’s choices are constrained by inertial tendencies. Our analysis indicates: the status quo bias not only restricts the choice set and prevents bureaucrats from choosing more socially desirable policies even if they wanted to. But it also can prevent them from choosing socially less desirable policies in that case inertia can be socially desirable.
Our analysis produces two main results: First, the presence of inertia induces bureaucrats to make non-optimal choices despite the availability of superior alternatives in the choice-set. Moreover, the choice of sub-optimal strategies emerges as a rational response to institutional and psychological constraints imposed by imprinting. Second, in case of inertia a utility maximizing bureaucrat will over (under) provide public services depending on the initially chosen budgetary mix. As a result there will be persistent social welfare losses. Furthermore, we investigate under what conditions inertia applies or, more exactly, under which conditions the role of inertia is large or small. For example, the inertia only applies when initial conditions tend to alter the set of feasible choices of the bureaucrats. This happens when a bureaucratic feature becomes institutionalized or when there are economic or psychological costs involved in changing the status quo. The greater the degree of institutionalization and the larger are the costs, the greater will be inertia.
Inferring the Shadow Rate from Real Activity (E5, E6)
AbstractWe estimate a shadow rate consistent with the paths of time series capturing real activity. This allows us to quantify the real effects of unconventional monetary policy in terms of equivalent short-term interest rate movements. We find that large-scale asset purchases and forward guidance had significant real effects equivalent of up to a four percent reduction in the federal funds rate.
Influenced Preferences: Consumption under Uncertainty (D8)
AbstractThis work studies the impact of uncertainty on an agent's decision-making process in an interdependent preference context. Mainly, it analyses the influence of society on the agent's consumption level when the agent is uncertain about the consumption level of the society. This issue is modeled in a hypothetical economy with two consumers and one good, where one of the consumers is the decision maker (DM), and the other is a peer. The principal outcome of this research confirms that when there is uncertainty about the peer's consumption level, then the inequity averse DM increases her consumption level.
Information and Inequality (E0, O0)
AbstractThis paper studies wealth inequality in a continuous-time Blanchard/Yaarimodel with idiosyncratic investment returns. Its key innovation is to assume that individuals can buy information. Information reduces uncertainty about the unknown mean investment return. If the coefficient of relative risk aversion exceeds unity, reduced estimation risk encourages investment in higher yielding risky assets. As a result, endogenous information acquisition amplifies wealth inequality. Relatively wealthy individuals buy more information, which leads them to invest more in higher yielding assets, which then makes them even wealthier.
The model’s empirical implications are studied using monte carlo simulations and perturbation approximations. I first calibrate the model to match the top 1% wealth share in the US economy in 1980, assuming information is prohibitively expensive. I then suppose the cost of information suddenly declines. The cost is calibrated to match the observed increase in the share of risky assets in household portfolios between 1983and 2013. It implies that less than 1% of wealth is used to buy information, even for the wealthiest individuals. The model predicts the steady state top 1% wealth share rises from 23.9% to 32.9%. Data from the hedge fund industry and the Survey of Consumer Finances are used to confirm several of the model’s key predictions concerning portfolio and information choice.
Information Presentation and 401(k) Plan Choices (J3, G4)
AbstractThis paper presents the results of an experiment using both a Qualtrics panel of new employees and a sample of business school students that is designed to examine how information presentation and complexity impact retirement savings behavior. In this experiment participants first were provided with either a long or short description of a hypothetical employer-sponsored 401(k) plan. Then they were asked whether they would enroll in the hypothetical plan and, if so, what percentage of their salary they would contribute. If they chose to contribute, they were asked how they would like to allocate their contribution between stocks and bonds. Participants were offered the option to stick with pre-assigned default options such as a 4% contribution and a 50-50 stocks and bonds split. The hypothesis is that providing concise information with helpful recommendations would improve choices over providing lengthy and detailed information. However, controlling for demographic and other factors, this hypothesis was not supported by the data, for either the new employees or the business school students. Thus, the data suggest that simplifying the presentation of retirement plan information to employees is unlikely to result in vastly improved retirement planning choices.
Interest Rates, Revealed Preferences, and the Open Economy (F4, E2)
AbstractWe apply the weak axiom of revealed preferences (WARP) in the context of a small open-economy model. According to WARP, certain changes in net exports and net foreign asset positions should be ruled out. For example, a country which has initially run a trade deficit, should remain doing so following a drop in the exogenous interest rate. Similarly, a country which has run a surplus should maintain it if the interest rate goes up. The argument also applies to shifts in the sign of net foreign asset position. It holds for both an endowment economy and a production economy.
Using these restrictions, we test the model on an aggregate panel data for 22 developed economies.
The results suggest that WARP violations tend to concentrate around the two oil crises, suggesting an important role of terms of trade and commodity shocks in small open economy models.
Intersectoral Linkages: Good Shocks, Bad Outcomes? (D4, D6)
AbstractAssessing the welfare effects of economic shocks is of paramount importance in many applied fields of economics. One important issue is to understand whether shocks that directly affect only a single sector are magnified or dampened in a general equilibrium context. How do, for example, productivity-improving shocks in one industry affect overall welfare when sectors are linked? Are there always welfare gains?
First, we propose a general multisector model that nests many of the approaches used in the applied literature. We derive a `welfare multiplier'—a statistic that tells us which share of the direct gains of the positive sector-specific shock materializes in general equilibrium—and establish precise conditions under which welfare-improving intra-sectoral shocks are magnified or dampened in the aggregate. The magnitude and the sign of the welfare multiplier crucially hinge on complementarity or substitutability between goods in consumers' preferences. Under gross complementarity, the welfare effects are magnified ceteris paribus if the shock affects the sector that has a less elastic price index; whereas they are dampened if goods are gross substitutes.
Second, we show that a CES preferences and a monopolistically competitive market structure guarantee that a positive sector-specific shock always translates into aggregate welfare gains. We show that even small departures from the CES-monopolistic competition paradigm can substantially alter welfare statements. The intuition is that a positive shock to one sector—followed by a reallocation of budget towards that sector—forces firms out of other sectors. If that effect is strong enough, welfare can decrease because the negative effects of higher prices and less variety in the sectors not exposed to the shock dominate the positive price and variety effects in the sector subject to the shock. This is, for example, likely to occur when the sector not exposed to the shock is oligopolistically competitive and sufficiently `granular'.
Intertemporal Elasticity of Substitution with Leisure Margin (E2, D9)
AbstractThis paper investigates whether leisure time definitions matter in the estimation of the intertemporal elasticity of substitution of consumption (IES) by using a utility specification that allows interaction between consumption and leisure time. We find that the IES estimated using a narrowly defined leisure measure that excludes quasi-leisure activities is larger than that estimated using nonmarket time. The discrepancy is largely driven by the substitution of consumption and several leisure components over the lifecycle. This finding is robust in alternative specifications and holds well for subsamples of higher socioeconomic status. Our results demonstrate the inseparable nature of consumption and time allocation.
Is India's Employment Guarantee Program Successfully Challenging Her Historical Inequalities? (O2, J3)
AbstractBy providing 100 days of guaranteed employment to every rural household, the National Rural Employment Guarantee Act (NREGA) can challenge the hegemony of the landed elite as major employers in the Indian countryside and raise market wages which have long been depressed. This paper shows that the impact of NREGA is conditioned and complicated by historical inequalities in agricultural landownership which have persisted since the colonial period. I find that in the lean season of agriculture, the program is highly successful in raising wages and generating more public employment in districts that were not characterized by historically high levels of socio-economic inequality. In these districts, the increase in public employment crowds-out labor primarily from domestic work, reflected in increased women's participation in the program. However, high inequality in landownership adversely impacts the bargaining power of workers and the enforcement of their entitlements under NREGA. This is most evident when I examine the impact of NREGA on rural wages. I find that in districts where land is concentrated in the hands of relatively few large landowners, private agricultural wages declined despite NREGA, whereas they remain largely unchanged in districts that have more equitable land distribution. These findings are consistent with the hypothesis that NREGA has not become a credible alternative to private employment in regions with high land inequality.
Job to Job Switching and Wage Growth: Some New Empirical Evidence (E3, J3)
AbstractEconomists often focus on the unemployment rate to predict wage growth. However, while unemployment has decreased substantially in the US in recent years, wage growth has not responded as much as we could expect according to a wage Phillips curve relationship. In this paper we show that job to job transitions are a better predictor than the unemployment rate for wage growth at any horizon in the context of a Bayesian VAR. We investigate whether the relationship between job to job transitions and the unemployment rate has changed over time and we explain the drivers of these changes. Finally, building on Moscarini and Postel Vinay (2018), we investigate non-linearities between job to job transitions and wage growth in a non-linear version of our VAR model.
Labor Market Power and Firm Financial Flexibility (G3, J0)
AbstractUsing a novel database representing the near-universe of US online job postings, we examine the role of firms’ labor market power on financial flexibility and corporate policy. Validating our measure, within a county-occupation, high labor market power is associated with lower posted wages. The measure is associated with lower cash holdings and market beta, and higher Tobin’s Q and profitability. The relation is stronger in industries that are labor intensive, which have high worker mobility, and low rates of unionization and attributable to market-share over high skill jobs. High labor market power firms react less to passages of enforcement of non-compete laws, which we use as a difference-in-differences strategy. The result is consistent with the idea that high labor market power firms are less exposed to shocks in the labor market.
Land Inequality and the Provision of Public Works (H4, J2)
AbstractDoes existing inequality hinder redistributive policies that aim to help the poor? This paper answers this question in the context of a widely used redistributive policy in developing countries--public works schemes. Using district-level data on land ownership distribution and the implementation of the National Rural Employment Guarantee Scheme in India, I find robust evidence that the concentration of land ownership reduces public works provision. This relationship could be explained by a mechanism through which public works schemes raise agricultural wages in the private labor market, thereby incentivizing big landlords to use their political power to oppose this program. To address the potential endogeneity due to unobservables and measurement error, I leverage a historical institution in India, the land revenue collection system established by British colonial rulers during 1750-1861, to construct an instrumental variable for land inequality. Due to the concentration of post-independence land reforms enacted in landlord-dominated areas, those areas have lower land inequality today than the previously non-landlord dominated areas. The IV estimates suggest that a 1 percent increase in land inequality (as measured by Gini coefficient) would lead to a 3-6 percent decrease in public job provision. To exclude the possibility that the higher provision of public jobs in more equal areas is driven by a higher demand for public jobs, I show that more equal areas have higher agricultural wages in the private labor sector. This paper provides the first empirical evidence that the concentration of landownership, a proxy for political power, is a hurdle to the provision of public employment, suggesting power asymmetries could hinder policies aimed at promoting equity.
Let’s Go Girls! A Randomized Controlled Trial Study on Breaking Down Menstrual Barriers in Bangladesh (I3, O2)
AbstractAround the time of menarche, the gap in academic achievement and psychosocial health between girls and boys in LMIC substantially widens to the detriment of girls. This seems to be partially caused by girls’ poor ability to practice Menstrual Health Management (MHM). Poor MHM is also a challenge in Bangladesh, where 40% of girls reportedly miss three days of school during their menstrual period. We conduct a cluster randomized controlled trial of the impact of a complex intervention facilitating MHM in Bangladesh.
We recruited 149 co-education schools from a relatively poor and (semi-)rural district in Bangladesh. Schools were randomized into three groups: i) receiving the school program (MHM-friendly sanitation facilities, and teacher training); ii) the school program and the household program (parental education); iii) a control group. The primary beneficiaries are schoolgirls in grades 6-8. The program will last for 3 years, and the primary outcomes are academic attainment and psychosocial outcomes of schoolgirls and MHM attitudes of parents. Secondary outcomes include MHM knowledge, attitudes and practices, mobility, and teenage pregnancy (measured by surveys). School records will provide data for all girls in all schools; surveys will be administered to a subsample of schoolgirls. Subset of parents will take Implicit Association Tests. Data collection took place at baseline (2017), and planned midline (2019) and endline (2022). We will analyse both the short-term and long-term effects of both treatment arms and in addition, we will conduct cost-effectiveness evaluations and a process evaluation of the entire intervention.
Even though MHM programs are popular, there is very limited evidence on such programs. We aim to reduce these knowledge gaps by providing rigorous evidence. Different to most evaluations of public health programs, we evaluate a complex intervention and will include cost-effectiveness analysis for both treatment arms.
Limits to Monetary Policy Transmission at the Zero Lower Bound and Beyond: The Role of Nonbanks (G0, E5)
AbstractWe study monetary policy transmission during the zero lower bound (ZLB) period in the United States and the negative interest policy rate (NIPR) period in Europe in the markets for syndicated corporate term loans. A typical borrowing cost of such a loan is a sum of an index rate, a loan spread, and various fees. In anticipation of the ZLB and NIPR periods, binding interest rate floors on the index rate have been introduced en masse in loan contracts. Nonbank lenders, which tend to target nominal yields, appear to play a key role in contracting in these guaranteed returns with better-known, repeat borrowers. Because
floors set an effective "zero" lower bound at 100 basis points, the relationship between monetary policy and borrowing costs has become more tenuous than in the past, in particular in the United States. In addition, as floors tend to be introduced in leveraged, covenant lite loans of larger sizes, financial stability risks may have increased. However, borrowers appear to be able to term out loans, pushing back potential rollover risk.
Liquidity Constraints, Storage Costs, and Consumer Stockpiling (E2, H3)
AbstractThis paper quantifies the impact of liquidity constraints on consumers’ stockpiling behavior. Specifically, this paper focuses on to what extent and why consumers’ stockpiling behavior differs depending on with or without liquidity constraints. Liquidity constrained consumers may have fewer opportunities to take advantage of intertemporal price changes, which may have a substantial impact on welfare. To explore this notion, this paper uses the episode of Japan’s consumption tax hike on April 1, 2014, from 5 to 8 percent. This episode is convenient to me since consumers expected prices to increase on April 1, so that they had a strong incentive to stockpile storable goods before the tax hike. By using scanner data with consumer IDs, I present a surprising fact; a non-negligible fraction of consumers increased purchases of storable goods before the tax hike while reducing purchases of non-storable goods, suggesting that non-wealthy consumers could not afford to buy both goods so that they had to sacrifice a portion of non-storable goods purchases. Based on this observation, I test a hypothesis that liquidity constraints play an important role in stockpiling. My empirical methodology to identify liquidity constrained consumers differs from the methodologies in previous studies. Though these studies often use income to identify constrained consumers, I use the price paid by each consumer as an indicator of liquidity since the consumer-level price should be orthogonal to storage costs that determine the level of unconstrained consumers’ stockpiling. The main findings of the paper can be summarized as follows. First, I find evidence that wealthy consumers (i.e., consumers who choose high-end products) do not face liquidity constraints in their stockpiling while less wealthy consumers’ stockpiling is indeed constrained by liquidity they have available. Second, I find that at least 36 percent of the consumers are subject to liquidity constraints.
Macroeconomic Adjustment in the Euro Area (E6, F3)
AbstractMacroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be identified in a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs. Reading through the overall findings, there are reasons to believe that an incomplete Eurozone institutional setup contributed to aggravate the crisis through higher uncertainty.
Managing Externalities of Internet Security under Information Asymmetry and Uncertainty with Scoring Rules (D6, D8)
AbstractThe challenges of Internet security have been rapidly increasing in significance as more of the world's economy and social interactions depend on the Internet for communication, thus attracting greater social resources. However, issues of incentive in Internet security have not been carefully considered. The incentive of the agent who designs and invests in a security system may not be fully aligned with social efficiency because such an investment will exert positive externalities on society and such misalignment will generally lead to underinvestment. One challenge of addressing such externalities is the uncertainty about how secure a system is, because some of its potential failure may not be known until it is attacked. The best knowledge on it is a subjective belief from an expert who knows the design of the system. Another challenge is the existence of information asymmetry, where the design of a security system is known by the agents who design or invest in it and not publicly revealed. To address these challenges, we consider a third party, to which the agents can opt to report their belief about the security of their systems, that scores the agents who report based on their reports and the ex post observations of the performance of the systems. These scores will influence agents' payoff either directly, through monetary subsidies and penalties, or indirectly, through some reputation system, and thus provide them additional incentives. The design of such scoring rules is extending typical mechanism design to the cases with uncertainty. We propose a game-theoretic network contagion model, where the agents decides how to design their security systems, with endogenous network formation, where opting to report serves as a signal of having relatively good security. We discuss the design of scoring rules in this context and show the second-best efficiency can be achieved.
Marriage, Divorce and Sorting: A Reassessment of Unilateral Divorce Laws (UDLs) (J0, K0)
AbstractI evaluate the impact of unilateral divorce laws (UDLs) on the risk of divorce through two distinct channels- the direct effect on divorce of married couples (divorce effect), and the effect on divorce through marital sorting (sorting effect). The Divorce effect affects divorce of any married couples, while the sorting effect is only experienced by couples that married under UDLs. I estimate the effect of UDLs on the risk of divorce of a marriage cohort based on when they married and how long they have married. I define two types of divorce rates to measure marriage stability. The first is cumulative risks of divorce that includes all divorces of a cohort within certain years of marriage, and the second is hazard risks of divorce that measures likelihood of divorce of a cohort in each single year of marriage. My results indicate that UDLs have profound impact on marriage stability through the sorting effect. The sorting effect significantly increases cumulative risks of divorce within different length of marriage, while the divorce effect is only significantly associated with increasing risks of divorce within 9 years and has no effect in other years . I find that 5% of the increase in cumulative risks of divorce within 9 years of marriage are due to the sorting effect, while only 2% is caused by the divorce effect. In addition, bad marriages dissolve faster due to changes in marital sorting. The sorting effect increases divorce in each of the first 5 years of marriage by 4.5%, while there is zero divorce effect. In addition, I find that 31% of the initial increase in initial increase in the overall divorce rate identified in previous studies is due to the sorting effect.
Marry One to Be One: The Effect of Assimilation on Immigrants' Wages (J1, J6)
AbstractSuccessful assimilation of immigrants into their host country improves immigrants'
labor market outcomes and consequently benefits the host country. I use marriage
between an immigrant man and a German woman (intermarriage) as a measure of
assimilation. Married immigrant men might benefit even more from intermarriage than
either single men or those married to other immigrants through legal benefits, host country-specific
human capital spillovers, network externalities, and improved access
to capital markets. I use the German Socio-Economic Panel to estimate the effect of
intermarriage on immigrant men's wages. After controlling only for observables, I find
that the additional benefit of intermarriage is 4 percentage-points, whereas, this benefit
increases to 12.9 percentage-points once I correct for endogeneity, self-selection, and
reverse causality using an instrumental variables approach. The finding in this paper
that increasing immigrants' association with Germans benefits immigrants' wages and
consequently the economy is important for policy makers
Missing Middles in Developing Countries: The Role Corruption and Tax Regulation (H2, Z0)
AbstractWhat factors drive the missing middle phenomenon (over-representation of small and large size firms over
middle size firms) in developing countries is an unsettled question. The studies that supported (or refuted) the notion had typically searched for the presence (or absence) of a bimodal distribution. However, all firm size distribution of all countries are rightly skewed, often approximated by a log-normal distribution which is in unimodal distribution, and so searching for bimodal distribution is futile. Rather, we need a counterfactual distribution to compare two distributions, especially for the midsize. Using the data from the World Bank Enterprise Survey of more than 100 countries, the current study estimates the missing middle using developed countries distribution as a counter-factual and then comparing that distribution with the distribution of firm size for developing countries. The study finds that there is about 5-7% under-representation of mid-size firms in the developing countries and the results are valid for most developing countries studied, and robust to other techniques (such as kernel density) used to estimate missing middle. Then study tries to explain the potential causes. The study finds limited evidence of bunching at Value Added Tax threshold suggesting that tax policy is not driving that missing middle. Rather the uneven obstacles faced by the mid-size firms, especially in countries with poor institutions (more corrupt government ocials), is found to be a significant predictor of the missing middle. The findings suggest that corruption represses the growth of mid-size firms in the developing countries.
Modeling Non-Normal Corporate Bond Yield Spreads by Copula (G3, C1)
AbstractThe existing literature assumes normality and linearity in the analysis of what explanatory variables affect yield spreads. However, our data analysis shows that (1) yield spreads and some explanatory variables do not follow the normal distribution and (2) relations between yield spreads and some explanatory variables are not necessarily linear. Therefore, we use the Gaussian copula regression method with Weibull marginal distributions for variables to relax the assumptions of normality and linearity. To our knowledge, this is the first application of the copula marginal regression model to bond market data. In addition, we employ several copula functions to test for the tail dependence between yield spreads and other explanatory variables. We find stronger tail dependence in the joint upper tail for the relation between equity volatility and yield spreads, among others. This result indicates the positive effect of equity volatility on yield spreads in the upper tail is greater than that in the low tail. This finding should be useful to practitioners, such as investors. By relying on better-fitting, more meaningful statistical models, this paper contributes to the extant literature on how corporate bond yield spreads are determined.
Modelling Involuntary Part Time Employment as the New Temporary Layoff (J2, J6)
AbstractThose who are employed part time for economic reasons are oft thought of as individuals who are working at a local fast food establishment while waiting for something more suitable to come along. This notion is actually quite far from reality. Those who are employed part time for economic reasons are highly likely to be employed by the same employer and performing the same job description as they were prior to being placed on reduced hours and are highly likely to return to full-time hours with the same employer and job description in the next month. In addition, the ratio of those employed part time for economic reasons to the civilian unemployment rate has been rising since the early 2000s, reaching a plateau of roughly 75 percent by mid-2014. These facts suggest a structural change in the U.S. economy that needs to be considered when examining the amount of slack in the labor market and the implications thereof. This structural shift may be driven by the supply side, the demand side or both. I find that internet penetration, measured at the state level, has a strong impact on the likelihood that someone experiences part-time employment for economic reasons. The internet has changed many things about the United States economy, and the structural shift with respect to part-time employment for economic reasons is one of them.
Money Aggregates and Determinacy: A Reinterpretation of Monetary Policy During the Great Inflation (E3, E4)
AbstractShould a policy rule include money? Including money exerts policy inertia and increases
inflation aversion. In a New-Keynesian model with trend inflation, these features guarantee
price determinacy even when the Taylor principle is not satisfied. Novel Greenbook
data confirm money aggregates as U.S. Federal Open Market Committee policy
objectives, enabling monetary policy to insulate the U.S. economy from self-fulfilling
fluctuations despite positive trend inflation. A high response to inflation and low trend
inflation guarantees determinacy post-1982. Cross-country applications highlight the
superiority of the rule with money. Raising the inflation target from 2 percent to 4
percent violates the Taylor principle; including money resolves this issue.
Motivated Beliefs, Socially Responsible Consumption and Markets (D9, L1)
AbstractThe production of most consumption goods causes negative externalities, which many people find “bad”. On the other hand, supply of “better”, but typically more expensive alternatives is growing. Stated preferences for such alternatives and actual market shares, however, typically diverge from each other. This paper proposes “self-deception” of consumers as one explaining factor for this gap if there is uncertainty about the presence of externalities. In the model, there are two single-product firms offering a “good” and a “bad” product, respectively, where the latter eventually causes negative externalities on third-parties or on consumers’ future-selves and is cheaper to produce. Consumers are heterogeneous regarding their negative valuation for such externalities and can choose both a product and motivated beliefs about potential externalities that trades off anticipatory utility against cognitive distortion as in Spiegler’s (2008) version of Brunnermeier and Parker (2005). Firms anticipate this when competing for consumers. I find that for relatively low prices of the “bad” product, some consumers tend to exploit moral wiggle room and deceive themselves about the presence of externalities. This leads to a competitive advantage for the “bad”-product firm. Further, I find the following when allowing consumers to get costlessly informed about the presence of externalities: Consumers willing to buy the “bad” but cheap product, tend to avoid information in order to deceive themselves. Interestingly, there are consumers expecting to buy the “good” product in order to prevent certain externalities although it is relatively expensive relative to their valuation. Hiding behind uncertainty they prefer the cheaper “bad” product, which is closely related to Grossman and van der Weele (2017). This yields relevant policy implications: Pure information provision might not effectively support products inducing less negative externalities. Reducing the price difference by taxes or subsidies in addition, however, can support market shares of “better” products.
Moving to Jobs: The Role of Information in Migration Decisions (J6, D8)
AbstractMigration is a human capital investment that allows individuals to encounter more favorable labor markets. This paper exploits county-level variation in exposure to news about labor markets impacted by fracking, to show that access to information about potential labor market opportunities affects migration. I use pre-fracking newspaper circulation rates and content from national news outlets to capture exogenous variation in exposure to news about fracking in a particular destination. I then isolate the effect of news exposure by comparing migration flows to the same destination from differentially exposed origin counties. Exposure to newspaper articles about fracking increased migration to the areas mentioned in the news by 2.4 percent on average. News exposure also increases commuting to fracking counties. Exposure to TV news has a similar impact, and positive news about fracking increases migration more than negative news. As further evidence that news matters, Google searches for the term fracking and the names of states specifically mentioned spike after TV news broadcasts about fracking. Migration responses to news about fracking are largest from counties experiencing weak labor markets, suggesting these areas see the largest benefits to information provision.
Multivariate Bayesian Predictive Synthesis in Macroeconomic Forecasting (C1, E3)
AbstractWe develop the methodology and a detailed case study in use of a class of Bayesian predictive
synthesis (BPS) models for multivariate time series forecasting. This extends the recently introduced
foundational framework of BPS to the multivariate setting, with detailed application in
the topical and challenging context of multi-step macroeconomic forecasting in a monetary policy
setting. BPS evaluates– sequentially and adaptively over time– varying forecast biases and
facets of miscalibration of individual forecast densities, and– critically– of time-varying interdependencies among them over multiple series. We develop new BPS methodology for a specific
subclass of the dynamic multivariate latent factor models implied by BPS theory. Structured dynamic
latent factor BPS is here motivated by the application context– sequential forecasting of
multiple US macroeconomic time series with forecasts generated from several traditional econometric
time series models. The case study highlights the potential of BPS to improve of forecasts
of multiple series at multiple forecast horizons, and its use in learning dynamic relationships
among forecasting models or agents.
National Financial Literacy Initiatives, Financial Inclusion, and Savings Behavior: Evidence from Zambia and Malawi (G2, O1)
AbstractThe Bank of Zambia (BOZ) launched annual national financial literacy campaigns named “Financial Literacy Week” beginning in 2013 to stimulate the savings behavior and the pace of financial inclusion of its citizens. To evaluate the impact of the outreach, I gathered a random sample of 3,990 individuals in Zambia and Malawi for periods before and after its launch. Comparing the trend of savings activity in both countries allows me to assess the incremental impact, if any, of the financial education campaign in Zambia. I find that outreach has boosted the pace of savings for the general Zambian population relative to that of Malawi. More specifically, less educated (high school completion or less) groups in Zambia have generally increased savings activity; Zambian women are utilizing informal channels to save their money due to access constraints to formal financial institutions; and the BOZ should tailor outreach to target the savings behavior of poor individuals, who are centrally located in rural areas.
Nonlinear Causal Relationship between Shale Oil Price and Employment in the United States: Evidence from a Nonlinear ARDL Approach (O1, D4)
AbstractIn recent years, horizontal drilling and hydraulic fracturing techniques, combined with the higher crude oil prices, have led to rapid increases in oil extraction from shale formations like the Bakken Formation. The production of shale gas in the U.S. increases since 2000 from about 300 billion cubic feet to 14.24 trillion cubic feet in 2016. The Bureau of Labor Statistics reported that 178,700 people were employed in oil and gas industries in February 2017, indicating 1 percent increase in oil and gas employment compared to 2016. In turn, a change of shale oil prices also may have an impact on employment in the U.S. from a change of shale oil sales. Considering difficulties in dismissing shale sectors’ employee during the period with low shale oil prices, asymmetry shale price effect on employment in the U.S. is expected. However, there are few studies for examining asymmetry in shale oil prices and employment in the U.S. based on our best knowledge. In this paper, we use monthly time-series data to examine the causal relationship between prices of shale oil, economic growth, and employment rate in the U.S from 2007 to 2016 considering possible asymmetries in shale oil prices. In this regard, we employ Nonlinear Autoregressive Distributed Lag (NARDL) model to take the non-linear relationship into account in the casual setting. Our approach will fill a gap in the previous and existing literature for shale oil prices and employment by testing a possible asymmetry. Our results will give policy implications to the U.S. government who can deal with employment instability from a fluctuation of shale oil prices.
Old Soldiers Never Die? CEO Age, Future Focus and the Riskiness of Corporate Policies (G3, G4)
AbstractPrior theoretical (e.g., MacDonald and Weisbach, 2004) and empirical studies (e.g., Serfling, 2013) generates consistent predictions on the negative relation between top managers' age and risk-taking behavior. We present the prediction that although risk-taking behavior decreases as chief executive officers become older, once CEOs' future focus – which is associated with thinking primarily about what the future holds and with envisioning of future events (Wallace, 1956; Bluedorn, 2002) – is factored in, the impact of CEO age on risk-taking behavior is small. For measuring top managers' future focus, we used 'management discussion and analysis (MD&A)' section of annual reports since they significantly reflect top management’s attention. We created the 10-K sample by downloading all 10-K, 10-K405, 10KSB, 10-KSB, and 10KSB40 documents that were filed on the US Securities and Exchange Commission’s (SEC) EDGAR website (www.sec.gov) between January 1994 and December 2016. We then examine the MD&A section (Item 7) of the 10-K for measuring future focus by psycholinguistic methods using computerized text analysis (LIWC; Linguistic Inquiry and Word Count) and matched with ExecuComp sample from 1994-2010 (N=13,568). The preliminary analyses reveal that 'older-but-high-future-focus' CEOs increase firm risk through more risky investment policies. Specifically, the 'older-but-high-future-focus' CEOs invest more in research and development at corporate level, make more diversifying acquisitions, manage companies with more diversified operations, and maintain higher operating leverage. Furthermore, the 'older-but-high-future-focus' CEOs are more likely to choose the younger executive as the next most influential executive. Although older CEOs prefer less risky investment policies, we document results suggesting that CEO age and firm risk preferences tend to be mediated by psychological mechanisms, here, time perspective of top managers. Overall, our results imply that prior researches on CEO age and risk preferences may need to account the relevant psychological mechanisms to provide plausible explanations.
On Becoming an O-SII (“Other Systemically Important Institution”) (G2, G1)
AbstractHow do financial markets react to the disclosure of the list of Other Systemically Important Institutions by the European Banking Authority? With an event study of bank stock prices we document that the immediate reaction of the stock market is negative. However within a few days investors change their perception, both in the case of euro zone and non-euro zone banks. CDS spreads react similarly, increasing first before decreasing. Abnormal returns are more negative for banks with more interest income or that are foreign held, and in countries with more banking activity restrictions, independence of supervisory authority or fiscal capacity.
On the Effectiveness of Loan-to-Value Regulation in a Multiconstraint Framework (E3, R2)
AbstractModels in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.
On the Virtue of Being Regular and Predictable: A Structural Analysis of the Primary Dealer System in the United States Treasury Auctions (G2, L5)
AbstractThis paper analyzes the policy question of whether the US Treasury should maintain the current security distribution mechanism of the primary dealer system in the Treasury primary market to achieve the debt management objective of lowest funding cost over time in the current economic environment of increasing borrowing needs and the Federal Reserve monetary policy normalization.
We study the data of 3790 auctions of Treasury securities issued between May 2003 and February 2018 (gross total issuance: $100.5 trillion). We document recent declines in primary dealer activities and find lower dealer activities statistically lead to higher auction high rate volatilities and bid dispersions after controlling bid-to-cover and the year effect, which can be a concern for bidder participation, smoothing of the government budget, and financial stability.
We then develop a theoretical model of the Treasury auctions primary dealer system consistent with the recent Treasury ODM and other findings that primary dealers bid more aggressively than indirect bidders and indeed they often bid just above indirect bidders' bids at the last minute of the auction.
In an equilibrium, a dealer observes the indirect bidders' bids, pools the information contained in their bids with its own information, adjusts the bids to match their bids, thus reduces bids and rate dispersion ("information pooling channel.") But at the same time, a primary dealer is required to route the indirect bidder's bids to the auctioneer ("the competition channel."). Thus, the primary dealer system will achieve the balance between auction stability and the competition in comparison with other mechanisms.
We then quantify these effects in a general model using the structural estimation and the novel asymptotic approximation method that does not depend on equilibrium selection and normality of bidder values distribution. A counterfactual analysis finds that these volatility reduction and competition effects are indeed significant in Treasury auction
Opportunity Cost, Market Expectations and Post-primary Schooling: Evidence from Ghana (I2)
AbstractDespite the significant improvement in primary school enrollment in sub-Saharan Africa over the past decades, post-primary enrollment rates remain low. We examine the effect of opportunity cost of schooling, monetary cost and foregone wages, on post-primary school enrollments. We further look into how household’s expectations about formal and informal market returns to education affect their decisions to enroll children into secondary and tertiary schools. Using district variations in food price inflation over the period 2005-2012, and wage deviations to obtain exogenous variations in opportunity cost of children’s schooling, our findings confirm the overall deterrent effect of opportunity cost on enrollment. Our decomposition analysis further suggests that while the monetary cost is the major constraint on secondary schooling, especially among girls, the forgone wages significantly impede boys’ tertiary schooling. We also find that expectations about the informal market is the main driver of secondary school enrollment, while formal market expectations affect tertiary school enrollment. Finally, our results demonstrate heterogeneous effects of opportunity cost and market expectations across, household poverty status, and among rural-urban dwellers. Our findings call for government subsidies to improve girls’ secondary schooling, while improvement in labor market returns to education in the formal economy would have a positive impact on tertiary education.
Optimal Languages (D8, C7)
AbstractThis paper studies how languages are shaped by the cognitive costs that using them involves. We introduce a new continuous approach to characterize the optimal resolution of the tradeoff between the precision of a language and the complexity of the structures it uses, and its dependence on the information the language is used to describe. Notably, when the cost of communication is endogenized using information theory, all words in an optimal language are equally precise, and their precision is independent of the distribution of states.
Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency (F1, F6)
AbstractThe objective of this paper is to determine the optimal trade policy for employment in a Heckscher-Ohlin framework for a country that is characterized by labor-market search-and-matching frictions. The results suggest that (i) a country that has an inefficient level of unemployment experiences welfare losses from free trade if the size of trade volume is not sufficiently large; (ii) having unemployment is not sufficient to justify a use of trade policy, because free trade is still optimal when the labor market is constrained-efficient; and (iii) a small country that has inefficiently high unemployment should use trade policy to raise the domestic prices of labor-intensive goods; this result is independent of the country’s comparative advantage.
Optimism or Over-Precision? What Drives the Role of Overconfidence in Managerial Investment Decisions? (G4, G4)
AbstractOverconfidence can be viewed as having two dimensions: optimism and over-precision. Extant empirical studies focus mostly on the former due to the difficulty in measuring the latter. This study develops accessible empirical measures to disentangle these two dimensions through a novel exploitation of earnings forecasts issued by firm managers. These measures capture appreciably different aspects of the link between overconfidence and managerial decisions. In terms of investment, CEOs displaying excess precision are more likely to scale up investment in real assets (especially via mergers and acquisitions); firms with more optimistic CEOs display no such proclivity. On the financing side, more optimistic CEOs and overly precise CEOs share a higher propensity to issue debt.
Our study provides three contributions to the existing behavioral corporate finance literature. First, and most importantly, we develop a new set of proxies for overconfidence based on management earnings forecasts that distinguish precision bias from optimism. This approach will help to advance empirical analysis on managerial precision bias, which is linked to a wide range of corporate decisions in various existing theoretical models. Second, supplementing existing findings that CEO optimism plays an important role in investment decisions, we document that precision bias plays (at least) an equally important role, especially in acquisition decisions. Our findings suggest that ignoring the distinction between these two facets of overconfidence may lead to inaccurate conclusions. Third, this study provides empirical evidence for the role of precision bias in corporate financing decisions. Specifically, firms with overly precise CEOs are more likely to issue debt than otherwise similar firms.
Ownership Stake and Sweat Equity Homophiles in High Tech Entrepreneur Teams (M1, L2)
AbstractWhile entrepreneur teams are particularly important to new high-tech entrepreneurs and firms, high tech entrepreneur teams’ labor division strategy and its impact on firm performance is unclear. The paper addresses the association between high tech entrepreneur teams’ ownership share (called ownership stake), efforts contribution (called sweat equity) and the new firm performance (measured by return on assets). Relying on the nationally representative confidential Kauffman Firm Survey data, the study theoretically models and empirically tests the difference and interaction between the majority entrepreneur who has the higher share of the firm ownership versus the minority entrepreneur who has the lower share of the firm ownership in each dyad high tech entrepreneur team. A three stage theory is hypothesized and empirically tested through three stage least square models. Either entrepreneur’s demographic and socioeconomic background, as well as firm attributes, is found to affect a high tech entrepreneur team’s ownership stake distribution; this is further found to affect those entrepreneur teams’ sweat equity distribution. However, with different motivation between majority and minority entrepreneurs, the ownership distribution affects their sweat equity differently. More importantly, our study found that the minority entrepreneur’s effort level has a particularly strong effect on those new firms’ performance. The study has implications on new high-tech firms’ entrepreneurial and management strategy.
Partial Identification in Repeated Games with Imperfect Public Monitoring (L1, C1)
AbstractThis paper introduces repeated games with imperfect public monitoring to empirical industrial organization, and explores partial identification of model primitives. Game theoretic models used in the existing empirical industrial organization literature assume that firms' actions are perfectly observed, and yet important problems such as collusion feature imperfect monitoring. Under the assumption that firms play a perfect public equilibrium, I combine the incentive compatibility constraints with the limit payoff set of perfect public equilibria to deliver bounds on the structural parameters. Simulation exercise of repeated duopoly competition shows that the identified set can be quite informative despite minimal structural assumptions, unknown public signal distributions and mis-measured firms' actions.
Patients Cost-sharing, Opioid Utilization and Drug Abuse Related Emergency Room Visits: Evidence from Medicare Part D (I1, D9)
AbstractIn this paper I provide a new evidence on the effect of patients cost-sharing--a demand side policy change--on opioid drugs use and drug abuse related emergency room visits. The exogenous source of variation comes from the closure of Medicare Part D coverage gap and the variation in the length of contracts among first time Medicare eligible individuals. The effects are estimated at two different levels. First, I estimated the effect of closing the donut-hole on opioid drug use and drug abuse related emergency room visits among medicare beneficiaries. Second, linking medicare beneficiaries with non-medicare eligible co-residences, I evaluate its spillover effect on non-medicare beneficiaries drug abuse related emergency room visits. The result indicates that closing Medicare Part D's coverage gap increases opioid use by 10.7 percentage points at 5% level of statistical significance. Its effect on both Medicare beneficiaries and younger co-residences drug abuse related emergency room visits, however, is not statistically significant.
Patriotism in an Overlapping Generations Model (E0, E6)
AbstractIndividuals who are more patriotic are proud to be the citizen of their country. This proud glow may reduce the optimal corruption of the country. In the paper, we analyze the impact of patriotism on country’s corruption in an overlapping generations structure. The primary question which we try to answer is whether the corruption of the country decreases if citizens of that country become more patriotic. We confirm this prediction empirically by a multivariate analysis with instrumental variable estimation. We did robustness checks to tackle predicted endogeneity problem of patriotism. We have found that patriotism score has a negative impact on country’s corruption.
Paying for Private School Education: Maternal Employment and Savings over the Lifecycle (J1, D1)
AbstractWomen with children face a well-known trade-off between working, which allows greater monetary investments in children, and spending more time with the child. This paper builds and estimates a dynamic life cycle model of female labor supply to investigate how the option of private schooling affects this trade-off. The model extends existing work on female labor supply and children by incorporating private versus public schooling choice, allowing for risk aversion and savings, and nesting within the model a child ability production function. Results of the structural estimation show that mother’s time with the child and private schooling are complements and that the availability of private schooling leads to more work and more saving among less educated women. However, more educated women drop out of the labor force and increase the time they spend with their child when the child is going to private elementary school. In addition, I estimate the price elasticity of private school enrollment to be -0.25. Policy simulations show that targeted private school subsidies to low income and less educated mothers can reduce inequality in children’s outcomes. Moreover, by inducing women to increase their labor supply to be able to top up subsidies and send their children to private schools, targeted subsidies can help women at the margin accumulate higher assets and experience wage growth of up to 20 percent over the life cycle.
Policy Rules for Capital Controls (F3, F4)
AbstractThis paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. The analysis shows that past emerging-market policy systematically responds to both mercantilist (trade competitiveness) and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to mercantilist concerns by using both instruments - inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find evidence that that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to competitiveness concerns.
Political Competition and Public Investment: Evidence from Regression Discontinuity Estimates Away from the Threshold (H7, D7)
AbstractA link between reelection probability and politicians’ behavior is deeply rooted in the political economy literature. Specifically, many models predict a relationship between public investment and the probability of being reelected. However, whether a higher reelection probability increases or decreases investment is controversial. I make use of the relationship between margin of victory at the previous election and reelection probability and of the fact that the margin of victory plays an essential role in Regression Discontinuity Designs targeted to close elections. Specifically, I extrapolate Regression Discontinuity estimates generated at the threshold to situations with larger margins of victory. I find that larger margins of victory lead to larger probabilities of reelection and a shift in the expenditure composition towards public investments. Therefore, the paper additionally suggests that close election Regression Discontinuity estimates of political control on public policy cannot be generalized to elections away from the threshold.
Political Networks, Working Experience, and Economic Performance: Evidence from China (H1, H7)
AbstractIn this paper, I study the impact of networks and experience of top local leaders on economic growth. Employing the detailed data of top provincial and prefecture leaders in China between 1995 and 2014, I find that political networks and working experience are the important determinants on the promotion of local leaders. Using a difference-in-difference estimation method, I find that local leaders that having connections with central leaders are more likely to get promoted. While politicians with working experience as top leaders are more likely to have better economic performance during their tenure. This finding is robust to various sensitivity tests. My study adds evidence to a growing literature emphasizing the role of political incentives of government officials in promoting local economic growth.
Preferences over Wealth: Experimental Evidence (E2, D1)
AbstractWe run an intentionally simple lab experiment on intertemporal spending and saving decisions under borrowing constraints with 180 students of various disciplines. Due to a positive discount factor and linear utility, the payout-maximizing behavior would be to spend any periodical income or initial wealth instantaneously. While about half of the participants behave optimal, we find a robust pattern where participants on average tend to form and maintain a stock of wealth of about 2 standard deviations of the uncertain periodical income or about 2.5\% of the expected lifetime income. Our findings are particularly strengthened by three further patterns: first, both "rich" and "poor" subjects starting from very different initial wealth conditions tend to approach the same buffer stock after a smooth trajectory phase; second, agents that face higher costs of saving plausibly hold a smaller buffer stock, pointing to optimizing behavior at the margin, but some additional utility from holding savings; third, participants run down their wealth stock in the final period when the lifetime income process is fully determinate.
In an additional regression exercise we show that agents' marginal propensity to consume significantly falls with the current level of wealth. Moreover, participants that describe themselves as more risk-averse and less impulsive and those that are more concerned with their own economic situation are more likely to maintain a wealth stock.
We rationalize this pattern with a simple precautionary buffer-stock saving model.
Present-Biased Preferences and Academic Achievements (D9, I2)
AbstractThis study measures students’ degree of present-biased preferences, as captured by “the number of days delayed,” or “delay.” “Delay” is the difference between the day that a student indicated that he or she would start working on a homework assignment, and the day that he or she actually started working on that assignment.
Regression results demonstrate that “delay” is negatively associated with homework score, grade in principles of micro-and-macroeconomics, and cumulative GPA. In addition, students do not update their priors about their own behavior.
Processing Trade, Domestic and Foreign Firms, and the Differential Impact of the Great Recession: Evidence from Chinese Customs Data (F6)
AbstractSubstantial presence of foreign invested firms contributed greatly to China’s export growth. Evidence prior to the Great Recession (GR) show that most of the rise in Chinese exports happened due to the foreign invested firms. Another important aspect of China’s rapid export growth is processing trade – since the 1990s, the dynamics of trade in China has been characterized by the dramatic increase in processing trade.
A marked change was under way following GR in the types of firms engaged in processing trade – the domestic firms stepped in as the foreign invested firms kept losing ground. With increasing production fragmentation, exporting firms rely less on domestic inputs for production and, globally, the domestic content of exports has been declining sharply. The case of Chinese firms, however, has been the converse where the domestic content of exports has risen secularly.
Against the backdrop of these remarkable developments we study the impact of GR on Chinese exporting firms. We employ disaggregated trade data from China’s General Administration of Customs. This data records firm-level transactions information with details that include firm ownership, highly disaggregated product categories, as well as types of trades that is for different types of processing.
We estimate differential impacts of GR on private domestic firms and foreign invested firms. We also identify processing trade intensity as one possible factor associated with the fall in exports due to GR as well as the slow pace of recovery in the aftermath. Overall, processing trade, in which foreign firms were typically engaged to a greater degree than domestic firms, led the export growth of China prior to great recession (GR). But subsequently, the firms with greater processing trade intensity suffered more due to GR. We exploit the longitudinal nature of the data spanning almost a decade (2003-2011) to establish these causal links.
Product Market Competition and Entrepreneurial Activity: Evidence from U.S. Households (F6, R2)
AbstractUsing a unique panel dataset of U.S. households, we analyze the effects of increased import competition due to globalization on household entrepreneurial activity. We find strong empirical support (during 1993-2006) for the theoretical predictions that higher penetration of low-cost imports reduces entry by domestic entrepreneurs in the tradable sector, especially for less wealthy and less educated individuals, but has positive spillover effects on entrepreneurial activity in the non-tradable sector. Our results are robust to the alternative hypotheses of latent shocks to U.S. industries and local regions, collateralization effects of the housing boom, and feedback effects between imports and business activity.
Production and Credit Networks: When Does Trade Credit Amplify Shocks? (E3, G3)
AbstractFirms depend heavily on trade credit. This paper introduces a trade credit network into a structural model of a production network economy. In the empirical analysis of the model, we find that trade credit is an elusive insurance: as long as a firm is financially unconstrained and times are good, more trade credit enhances sales stability and insures against shocks to the firm's suppliers. However, if a firm becomes financially constrained or times are bad, trade credit fails to insure against supplier shocks. Moreover, if the firm is low on cash, trade credit propagates shocks from a supplier to its customer.
Productivity & Trade in the United Kingdom (J2, F1)
AbstractThe UK’s rate of productivity growth has slowed considerably since the onset of the economic downturn in 2008. While a range of explanations for this weak performance have been proposed, the role of trade has been largely overlooked.
This paper resolves this gap, presenting the first dataset which links administrative customs data with information from UK business surveys. Drawing on official surveys of firm performance, employment and prices – including product-level export and import prices – we estimate the effect of exporting and importing on firm-level productivity.
Our results document the dependence of UK industries on different export markets and the exposure of their supply chains to future changes in UK trading relations. We examine the extent to which the UK’s aggregate trade deficit is reflected in individual firm balances – which is critical for determining the extent and speed of trade-shock transmission through the economy – and consider how the European sovereign debt crisis affected the productivity of firms with different exposure to this market. Finally, we explore the causal effect of trade intensity through an identification strategy which uses exogenous exchange rate shocks and firm-level variation in the contracted currency of invoicing.
The paper provides insights into UK trade since the onset of the economic downturn, and provides important background as the UK prepares to establish a new set of global trading relations. It also demonstrates for researchers the potential of combining administrative and survey datasets and introduces a new database for economic research in the UK.
Productivity and Firm Dynamics (E3, E0)
AbstractEntry of new firms and the exit of old are considered to accompany new technologies and productivity. Many economic policy measures are introduced to support entry of firms in hope for higher productivity in the future.
This paper studies the effects of neutral and investment-specific technology shocks on creation and destruction of firms at the same time as it looks at the effects of entry and destruction shocks on the two types of productivity. for the US economy in the post-WWII sample using a VAR model.
Neutral technology shocks lead to an increase in the number of new firms and a drop in the failures in a very short run, but the effect reverses after two years and the number of new firms starts decreasing and the number of failures increasing. Positive investment-specific technology shock only impacts firm turnover after a few years after the shock and then it results in a cut in the number of new firms and an increase in failures. A shock to firm entry is however accompanied by an increase in the investment-specific productivity and a drop in firm failures is related to an increase in neutral productivity.
The paper brings together literature on the effects of technology shocks of Gali (1999) and Fisher (2006) and firm dynamics of Bilbiie, Ghironi and Melitz (2012) offering new stylised facts on the relationship between firm turnover and productivity. Moreover, the paper shows that the use of firm turnover can help to identify technology shocks. The paper also shows that a relatively standard new-Keynesian dynamic stochastic general equilibrium model that is augmented with the possibility that entry and exit can relate to future dynamics of investment-specific and neutral technology shocks can match empirical evidence well. Results leave room for economic policies that support entry of new firms.
Putting Preference for Randomization to Work (D9, C9)
AbstractA sense of conflict is commonly experienced when people have the freedom to choose, ranging from the insignificant decisions such as daily dress choice to the important ones such as family planning. Such conflict often leads to the behavioral biases of indecisiveness, inertia, and procrastination. Here we examine the usage of coin flipping to help resolve the conflict in the setting of donation. In a randomized field experiment, we find that coin flipping increases donation when choice is under conflict due to choosing between two similar charities, but not when matching fund is provided to one of the two charities. A laboratory experiment replicates the observed patterns and further sheds light on the underlying psychological mechanism. More generally, our results point to the power of randomization for conflict resolution when facing difficult decisions.
Quality Versus Quantity: What Does Matter More for Tenure in Economics? (I2, J0)
AbstractEach school has its own bar for tenure in Economics, and it depends on many criteria. This study estimates the impact of quality publications in tenure in economics. Since in economics there is no standard way to classify quality publications, we use different definitions such as top 5, top 10 and top 20 ranked journal publications. We construct a dataset using CVs from untenured faculties went up for tenure in 1970 to 2017 at the top 90 ranked universities in the US. To address the endogeneity of top quality publications due to omitted variables, we use time variations of the total number of publications in the top-ranked economics journals as our instrument. We find that the impact of top quality publications on the probability of getting tenure is almost twice than the total number of publications in top 30 ranked schools and the effects get smaller in the middle ranked schools. As expected, in the 70-90 ranked schools the number of publications matter more than the quality.
Quantifying Negative Externalities of Energy Infrastructure Using Wellbeing and Hedonic Price Data: Evidence from Biogas Plants (C2, Q4)
AbstractThe welfare economic rationale for using renewable electricity generation is clear: it avoids negative externalities of conventional power plants, especially greenhouse gas emissions. However, renewable electricity generation is not free of negative externalities itself. We identify negative externalities of biogas power plants on residents’ subjective well-being and evaluate this effect monetarily. Subjective well-being as a dependent variable is an established alternative in the evaluation of environmental externalities.
Our empirical strategy builds upon a difference-in-differences design that exploits variation in biogas installations across space and time. Depending different treatment radii, we assign individuals to the treatment group if a biogas plant was newly constructed within this radius, otherwise they become part of the control group. A buffer radius ensures a clear distinction between both groups. We ensure a credible identification of the causal effect by including a rich set of socio-economic control variables and controlling for self-selection. To strengthen the common-trend assumption, we apply state-of-the-art matching techniques: spatial matching and propensity-score matching. Using wind data enables us to disentangle the externality of odor emissions from other externalities. Complementary, we apply a hedonic approach to assess the effect of biogas plants on housing prices.
We constructed a new and comprehensive panel data set which contains characteristics of private German households from the German Socio-Economic Panel Study and of biogas plants from the German Network Agency. The wind data are taken from the MERRA-2 data set, and the CORINE land cover inventory provides land cover data.
Results show a negative effect of a newly constructed biogas plant on subjective well-being. The effect declines with an increasing radius and becomes statistically insignificant for radii larger than 750 meters. Affected residents are willing to pay about 100 EUR per year to avoid a biogas plant close by. This underlines also the economic significance of the results.
Real Estate Asset Bubbles and Monetary Policy: The Channel between Central Bank’s Balance Sheet and Firms’ Balance Sheets (E5, G0)
AbstractIn the US, after the Global Financial Crisis, the Fed’s unconventional monetary policy of purchasing mortgage-backed securities amid the policy rate reaching the zero bound has been claimed as the main driver for the rising prices in the property market. On the other side of the world, housing prices have been increasing even more dramatically in China in the past decade. One mainly suspected channel is the easing monetary policy: The interest rate did not drop much, but the Central Bank has flooded credits to firms, which in turn have been invested by firms in the housing market rather than in production activities in the real sector. Taking advantage of a recently developed new bubble date-stamping approach, we first trace the start/end and the size of bubbles at the city level. We then examine the role of the monetary policy in the form of changes in the balance sheet of the central bank on determining the housing price development by differentiating the degree of co-movements between the balance sheets of firms located in the cities where housing bubbles are detected and the balance sheet of the central bank. We find that Chinese firms played an important role in channeling the credits from the central bank to the property markets, especially in cities with strong state-owned enterprises and state-owned banks. The same finding cannot be observed among US firms.
Recessions, Asset Prices Bubbles, Monetary Cycles and Yield Curve: The One Framework to Rule Them All (E3, E4)
AbstractThe changing nature of the relationship between business cycles, asset prices and policy actions raises question about the usefulness of traditional forecasting approaches, such as yield curve and monetary cycles to predict recessions and asset prices bubbles. That is, some of the major challenges in this economic cycle are the fed funds rate’s recovery from the lowest level, low inflation environment, weak economic recovery and all-time high equity indices. Moreover, some of these factors may block inversion of the yield curve and reduce effectiveness of the monetary cycles to predict recessions and asset bubbles. Therefore, we need new tools which predict recessions/asset bubbles accurately in different economic regimes.
This paper proposes a new framework that identifies a threshold between the fed funds rate and the 10-year Treasury yield and when the threshold is breached the risk of a U.S. recession in the near future is significant. In addition, the threshold is a reliable predictor of peaking in the S&P 500 index and, therefore, helps to predict asset prices bubbles. Our framework predicted most recessions and asset bubbles before the yield curve inversion point/monetary cycles approach and, therefore, serves as a more effective tool in predicting recessions and asset bubbles.
In conclusion, our method has predicted all the recessions since 1955 with an average lead time of 17 months. Furthermore, the framework has predicted all the major peaks in the S&P 500 index (asset prices bubbles) during the same time period with an average lead time of 15 months. Given the robust performance of our framework, we suggest decision-makers watch for a recession during 2018 and mid-2019 (17 months from December 2017) as well as peaking of the equity indices (busting of the asset prices bubble) during the same time period.
Relations Between Higher Education Structure and Industrial Structure in China-An Empirical Analysis based on National-scale Survey Data (2009-2017) of Chinese College Graduates (J0, I2)
AbstractChina has experienced a transformation of economy over the last ten years in which industrial structure gradually optimizes and upgrades. Nowadays, the service industry has become a major source of China's economic growth and absorbs most college graduates (most graduates went to Finance and IT industry in 2017, with 12.9% and 11.8% respectively). And the wage gap that exists between industries is an expanding trend. China has also seen a dramatic expansion of opportunity for higher education in the last decade. And the mismatch between the education structure and China’s industrial structure is noticeable, leading to the main reason behind employment dilemma.
We develop an analytical framework of “Higher education structure -Industrial structure -Economic development” and also use the “zipper allocation model” to explain the resource allocation between the demand side and supply side. The main sources of data in this empirical study are policy documents, literature and the China Statistical Yearbook, as well as national-scale survey data (2009-2017) of college graduates in China.
We find that higher education’s response to societal and economic needs is noticeable but lagging behind. And due to the segmentation of China’s labor market, the conditions between regions and industries are distinct. IT & finance industry and more prosperous regions attract most graduates while other less-developed areas suffer from a loss of human resources and “Reverse subsidies”(As we estimate, in 2009, Eastern areas in China had an influx of 233,641 graduates from other areas, meaning 4.75 billion yuan subsidies from less-developed region) ,which has definitely widened the developing gap within regions in China.
We expect that our research could raise social awareness of the global implication of structuring and reforming national higher education system. We also provide suggestions for government promoting a balanced allocation of resources and establish a more efficient and equitable labor market.
Remittances and Financial Inclusion: Evidence from Nepal (G2, D1)
AbstractSince 2008, Nepal has been consistently ranked as one of the top ten remittance recipient countries in the world when remittances are measured as a proportion of gross domestic product (GDP). In fact, among the countries receiving remittances as a share of GDP, Nepal stood second in 2016, first in 2015, and third in 2013 and 2014. However, despite these facts, the empirical evidence on how remittances impact financial inclusion - households' access to and use of formal financial services - in Nepal remains scarce. One reason for lack of such study in Nepal is data availability. Moreover, the findings in the existing literature on the impact of international remittances on financial inclusion is not unanimous. Against this background, this study fills three gaps. First, we use a unique micro-level data from a large household survey undertaken by Government of Nepal and International Organization for Migration from November 2015 through June 2016. Second, following Knapp and Seaks (1998), we use biprobit model to test the endogeneity of our main explanatory variable - household remittances. Third, we use the approach of Oster (2016) to test the robustness of our findings to omitted variable bias.
Following the previous literature, we use the instrumental variables approach, the instrument being “the proportion of households receiving international remittances in the municipality”. While we find this instrument to be relevant in explaining household remittances, the result from the endogeneity test shows that our main explanatory variable, household remittances, is not endogenous. Hence, we use a univariate probit model since estimates from this model are consistent when there is no endogeneity problem. The findings from univariate probit regressions show that remittance recipients are less likely to have deposit accounts at formal financial institutions and also less likely to receive loans from formal financial institutions.
Rent Seeking in Spine Surgery: Do State Certificate of Need Programs or the Strength of the Corporate Practice of Medicine Doctrine Influence the Site of Surgical Care? (I1, L5)
AbstractCertificate of Need programs (CONP) and the strength of the Corporate Practice of Medicine doctrine (CPMD) could enable rents for incumbent hospitals by limiting competition. Private practice spine surgeons partner with commercial insurers to move common procedures, e.g. spinal decompressions or anterior cervical fusions (ACDFs), from hospital inpatient to ambulatory surgery centers (ASCs) reducing procedure cost by as much as 65%. This research used 2009-2015 national claims data on 1,018,171 procedures to determine if the CONP or the CPMD strength influence the choice of higher vs lower cost surgical settings. CONPs in 25 states are a barrier to opening ASCs. The common law, CPMD, prevents corporations from practicing medicine by employing physicians. Hypotheses tested are that CONPs and a weak CPMD lead to fewer procedures in lower cost settings. Results confirm that states with weak CPMDs, patients are 59% less likely to have an ACDF in an ASC and patients in states with a CONP are 40% less likely to have an ACDF in an ASC.
Resistance to Colonization and Post-Colonial Economic Outcomes (N0, O1)
AbstractAn extensive literature in development economics has analyzed the relationship between colonial institutions and present-day outcomes for former colonies. However, this literature ignores the formative experience of resistance to colonization and violence at colonization that was inherent in most colonial situations, and how that initial colonial experience shaped the relationship between colonizer and colony and the institutions thus established. This study analyzes the relationship between resistance to colonization by the native population and present-day economic outcomes. I show that former colonies with a history of resistance to colonization have 50%-70% lower GDP/capita today, compared to former colonies that were colonized without resistance. Potential mechanisms are considered, and ethnic group functionalization is identified as a likely explanation. An analysis of case studies of colonization conditions shows that groups who were stronger economically, politically, and militarily before colonization were more likely to resist colonization. If there is a direct positive relationship between pre-colonial conditions and post-colonial outcomes, it would work against the effects I find here. An analysis using pre-colonial population density supports this finding.
Rethinking Free-Riding and Tragedy of the Commons (C7, D0)
AbstractThe leading explanation for over-usage and depletion of common-pool resources, phenomena documented extensively at the aggregate level, is free-riding. This paper is the first to directly test, and falsify, the free-riding hypothesis with real-world data at the micro-level. First, we develop testable comparative statics by solving a general dynamic game. Second, we test these predictions on a unique large-scale dataset of groundwater usage in the American Midwest. We find strong and robust evidence rejecting free-riding. Contrary to predictions, positive interaction effects based on reciprocation are robustly identified. Our results suggest new perspectives on tragedy of the commons and their governance.
Revisiting External Imbalances: Insights from Sectoral Accounts (F3)
AbstractCurrent account imbalances play a key role in shaping current macroeconomic debates in advanced economies. This paper seeks to shed new light on these imbalances and their subsequent adjustment by analyzing their domestic counterpart in the national accounts: the net financial balances of the household, government, corporate, and banking sector. We re-examine through this lens: (i) the standard medium-term covariates of the current account balance, (ii) its adjustment in the aftermath of the global financial crisis, (iii) and episodes of persistent external imbalances. Our results challenge the widespread view that the household sector plays a central role in current account patterns. In fact, we find that corporates (and to a lesser extent the public sector) account for a large share of the dynamics of the current account balance. In our analysis of external adjustment, our results are consistent with an expenditure reduction channel operating primarily through improvements in the corporate net balance. Our findings provide guidance for the inclusion of domestic sectoral balances in future theoretical and empirical analysis of global imbalances.
Road Congestion and Public Transit (R4, H3)
AbstractWe estimate the external congestion cost of motor vehicle travel in a large city, while accounting for the presence of hypercongestion, i.e. a phenomenon whereby congestion decreases throughput. This feature makes estimation of road supply (travel time - throughput) relations challenging, because the supply curve is not a function and because of endogeneity issues. We focus on Rome, Italy, which is characterized by heavy congestion and a large share of public transit service being provided by buses that share the road with cars. To deal with endogeneity problems when estimating road supply relations, we propose two instrumental variable approaches: one based on hourly variation in travel demand, the other exploiting shocks to public transit supply during labor strikes. We show that the external congestion cost is substantial: on average it equals about 60% of the private (time) user cost per kilometer. We find that about one third of the external cost is borne by travelers in buses that do not run on dedicated lanes. We also show that hypercongestion accounts for about 40 percent of congestion-related welfare losses. We demonstrate that the marginal congestion relief benefit of public transit supply is large for motor-vehicle travelers as well as bus travelers. We also find that providing dedicated bus lanes reduces bus travel time by about 30 percent. Our results suggest that substantial welfare gains can be obtained by policies that eliminate hypercongestion, introduce road pricing, improve public transit and construct dedicated bus lanes.
Sentiment in Central Banks' Financial Stability Reports (G1, G2)
AbstractWe use the text of financial stability reports (FSRs) published by central banks to analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which classifies words into positive and negative based on the sentiment conveyed by these words in FSRs. With this dictionary, we construct financial stability sentiment (FSS) indexes for 35 countries between 2005 and 2015. We find that central banks' financial stability communications are mostly driven by developments in the banking sector. Moreover, the sentiment captured by the FSS index explains future movements in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that the sentiment in central banks' communications deteriorates just prior to the start of banking crises.
Shares of Rule-of-Thumb Consumers Around the World: A Meta-Analysis (E2, C8)
AbstractI examine 2835 estimates of excess sensitivity in consumption reported in 136 published studies that employ data from 110 countries. I document significant cross-country variation in estimates that remains intact after controlling for differences in study design. I show that three country-specific characteristics can explain this heterogeneity: the level of secondary education, firing practices and ease of access to loans. These results present evidence in favor of three alternative explanations for observing excess sensitivity: myopia (lower levels of education are associated with less consumption smoothing), precautionary saving (consumers in countries with weaker firing regulation are exposed to more income risk, which in turn affects their consumption patterns) and liquidity constraints (unconstrained individuals do better job smoothing their consumption). To address model uncertainty, I employ both Bayesian and Frequentist Model Averaging and demonstrate robustness of these results controlling for 45 other study-level characteristics.
Shifting Shorelines: The Transition from Working Waterfronts to Leisure Destinations in the Northeastern United States (Q5, D0)
AbstractAs fish populations stocks have shifted in size and distribution over the past several decades, many former fishing communities in the Northeastern United States have transitioned to leisure destinations. Instead of a "working waterfront" of commercial fishing vessels, fishers, and associated businesses, these communities have seen an increase in second homes, restaurants, and retail establishments. While these latter establishments may bring economic benefits, concern is often raised about the loss of a "way of life" for these formerly fishing-oriented locations. Such changes have been documented in a range of academic research and policy documents, most often focused on strategies for planning for multiple uses of waterfront areas that facilitates an ongoing fishing heritage location. As these communities have declined, there has also been recent effort to reinvigorate a fishing-based economy in certain locations. This paper focuses on the transition from fishing-oriented to leisure-oriented communities along the coast of the Northeastern United States (CT, NY, MA, ME, NH, and RI) over the period of 1980-2015. Using Census data on NAICS industry groupings, as well as employment, income, and demographic data in combination with data on housing values and second-home ownership, we assign coastal communities to three categorical bins: (1) leisure-oriented; (2) fishing-oriented; or (3) neither leisure nor fishing orientation. Time-series analysis is then used to document whether there has been a shift in the proportion of communities falling into these categories in the target Northeastern states and if there have been any geographical locations that represent transition "hot spots." We then focus on case study locations in Long Island, NY and Southeastern CT and MA to evaluate whether or not initiatives to rejuvenate a fishing sector in these locations will be feasible given current costs-of-living in these leisure-oriented communities in combination with expectations about profitability from commericial fishing and aquaculture.
Shock Transmission Through Shared Directors: Evidence from Bank Enforcement Actions (G2, G3)
AbstractUsing a unique dataset of 1478 U.S. bank enforcement actions (EAs) issued between 1998 and 2014, we document that bank shocks spill over into the real sector through shared directors. Non-banks that share a director with enforced banks experience significantly negative abnormal returns around EA issuance. Their stock prices fall more when director resources are likely constrained and when the shock is more severe. Following enforcement, shared directors participate less on corporate boards. Our results are unlikely to be driven by an impaired credit relationship between bank and corporate, by director reputational damage, or by endogenous director selection. These findings suggest that shared directors could also transmit larger banking sector shocks such as monetary policy changes or regulatory reforms into the real sector.
Slow Focus: Belief Evolution in the United States Acid Rain Program (Q5, L2)
AbstractThis paper explores firm behavior in a new environment by examining private electric utilities' beliefs about sulfur dioxide allowance prices following the implementation of the U.S. Acid Rain Program in 1995. The Acid Rain Program was the first large-scale effort to limit pollution using a cap-and-trade approach and it exposed the heavily regulated electric utility industry to a wholly novel market for pollution permits. I estimate private utilitiesâ beliefs about allowance prices over the period from 1995 to 2003 using a three-dimensional, continuous-state dynamic model of allowance trades, coal quality, and pollution reduction investment. A maximum simulated likelihood estimator accounts for measurement errors in a state variable. Applying new dynamic programming acceleration methods vastly reduces the computational burden. I find that firms initially underestimate the role of market fundamentals as a driver of allowance prices, and believe in an overly flat allowance price trajectory. Smaller firms, and firms facing less competitive pressure, exhibit more biased beliefs. Over time, firms' beliefs appear to converge toward the true stochastic process of allowance prices. Improving beliefs and reducing price volatility have important implications for firm values, aggregate emissions and compliance costs. Dynamics and beliefs can make cap-and-trade programs more efficient than emission taxes.
Speaking the Same Language - The Effect of Foreign Origin Teachers on Students’ Academic Achievement (I2, J1)
AbstractEducational attainment is a crucial determinant of labor market performance. Evidence of racial biases among native non-minority teachers and a constant immigrant-native gap in educational attainment have initiated debates about disadvantages for students with foreign ancestries. Several studies have found adverse effects of teacher-student demographic mismatches in gender and race; but less is known about the impact of teachers with foreign ancestries. In this study, I investigate whether assignment to a same-ethnicity teacher causally affects students’ academic achievement and teachers’ perceptions of student performance, holding constant both observed and unobserved factors related to academic outcomes. Exploring variation in teachers’ ethnicity within student and subject, due to student mobility and teacher turnover, I analyze the mechanisms underlying the negative effect of teacher-student demographic mismatches. Contrary to previous studies, I am able to distinguish between teacher bias effects and role model effects. Further, I am the first to estimate heterogeneous effects by type of teacher-student match; a complete match corresponds to a shared foreign ancestry between teacher and student, while a partial match refers to different foreign ancestries. My findings add to a growing literature on the role of teacher-student demographic mismatches in perpetuating educational attainment gaps.
Strategic or Illiquid Mortgage Default? Evidence from Household Bank Account Data (G2, R2)
AbstractWhich mattered more for mortgage default during the financial crisis: liquidity or negative equity? I construct a new individual-level data set of linked bank account and mortgage loans to examine whether borrowers in Ireland defaulted because of negative equity or because they could not afford to pay. The evidence shows that mortgage default in Ireland from 2012-2015 is best characterised by the double-trigger model of default. I estimate a probability of default model using a regression forest, a non-parametric estimator that uncovers a highly non-linear pattern of default that is consistent with double-trigger theory. Borrowers only begin to default in large numbers when bank account balances approach zero and in negative equity. Though they are few, some borrowers with large bank account balances default when in large levels of negative equity. Borrowers in large levels of negative equity and with empty bank accounts are predicted have a 35% annual default probability, suggesting a large role for moral and social obligations
to continue paying.
Strengthening the Writing Component in Upper Level Economics Electives (A2)
AbstractWriting-intensive economics courses do more than just improve students’ writing skills. They help students to develop their critical thinking, understand the material, and create original economic models. Finally, they improve students’ ability to express their ideas in writing and to write in the style of the economics discipline, thus preparing them for the writing they will do in graduate school and their future employment. This paper presents a design for the structure and assessment of research paper assignments in an upper level economics elective with a significant writing component. Writing component design focuses on what graduating economics majors should be able to do with the knowledge they acquire in the major and on their ability to create original analysis and empirical models in courses with and without an econometrics prerequisite. Using teaching evaluations data from eight public finance sections taught between Fall of 2012 and Spring of 2017, an ordered probit model estimates the value of the following improvements to enhance writing quality of student papers: (1) instructor blogging that helps students to select a current topic for the research paper; (2) grading rubrics that help with the structure of the paper as well as the requirements; (3) working with UT Libraries to create a literature review guide; (4) the contribution of the university writing center that helps students enhance the quality of their writing (rather than economic content). Preliminary empirical results show that grading rubrics enhance general instructor ratings as well as quality of the writing component. Funded writing consultants from the university writing center significantly enhance students ratings of the writing component.
Structural Change of Stock Price Growth and Monetary Policy Response (E3, E4)
AbstractAbstract: In this paper, we analyze the structural change of stock price growth and its macroeconomic effects by building a regime-shifts DSGE model and discuss whether monetary policy should respond to stock price volatility. The results show that when the policy authority releases a signal of stock price adjustment, main economic and financial variables will reach their equilibrium level over the target period if market participants expect the signal to be credible, and vice versa. In addition, we also find that during the regime-switching process of stock price growth, a proper response of monetary policy to stock price volatility would effectively reduce economic and financial volatility, resulting in a lower loss of social welfare. However, if monetary policy responds too much to stock price volatility, economic and financial stability will be undermined, leading to a much greater loss of social welfare.
Structure Demand Estimation of the Response to Food Safety Regulations in the Japanese Meat Market (F1, I1)
AbstractSince their implementation in 1995, the Agreements on the Application of Sanitary and Phytosanitary Measures and Technical Barriers to Trade of the World Trade Organization have played an increasingly important role in the conduct of international negotiations. This study employs the method of moments estimator proposed by Berry, Levinsohn, and Pakes (1995) and Nevo (2001) to estimate the effect of Japanese pesticide residue standards on poultry consumption with a particular focus on the maximum residue limits (MRLs) on pesticide and veterinary drugs. The results confirm that more stringent MRLs on pesticide and veterinary drugs enhance the demand for poultry imports by ensuring higher food safety. The results shed light on Japanese consumers’ robust preference for food safety. Further counterfactual experiments of alternative MRLs show that the demand-enhancing effect may vary among the exporting countries, and appears to be more prominent for imported poultry from developed countries. The own- and cross-price elasticities further indicate the sensitivity of imported poultry meat to the change in domestic poultry price.
Student Status & Local Labor Market Conditions (I2, J2)
AbstractThis paper estimates how the decision to classify oneself as a student, rather than employed, out of or unable to work, a homemaker or retired, responds to changes in metropolitan area/division and micropolitan area (MMSA) unemployment rates (URs). We analyze data from SMART, which for each year from 2002–2016 includes all BRFSS observations from MMSAs with at least 500 completed interviews that year. Identification is achieved by comparing MMSA changes within the same census division while accounting for MMSA-specific income and cubic time trends, the latter to model the expansion-recession-expansion sequence observed during the period. For the 232 sample MMSAs represented in multiple years, a one percentage-point UR increase is predicted to raise the likelihood that an 18–29-year-old is a student by 4.0%. This result is robust to using successively more-balanced panels of fewer MMSAs that are sampled more frequently, down to just the 61 MMSAs observed in all years, and to restricting comparisons to same-state MMSAs, eliminating state-specific business cycle policy responses as mechanisms. However, the impact falls by 60 percent and becomes insignificant when URs, fixed effects and trends are specified at the state rather than MMSA level, suggesting that labor market opportunities serving as alternatives to further schooling are relatively localized. URs have strong negative effects on employment status, but have small and/or insignificant relationships with other current status categories, completed education, age, race, ethnicity and gender. Effects are proportionately largest for ages 24–29, high school graduates without further education, whites, and in MMSAs with high average URs, but are similar by gender and only slightly and insignificantly larger during the Great Recession.
Superstition and Real Estate Prices: Evidence from a Machine Learning Name Classifier (D3, R2)
AbstractWe investigate the impact of superstition on prices paid by Chinese home buyers. Chinese consider 8 lucky and 4 unlucky. Lacking explicit buyer ethnicity identifiers, we use the machine learning technique to develop a binomial name classifier, an approach applicable to any data set containing names, that allows for falsification tests using other ethnic groups, and mitigates ambiguity from transliteration of Chinese characters into the Latin alphabet. Chinese buyers pay 1-2% premiums for addresses including an 8 and 1% discounts for addresses including a 4. These results are unrelated to unobserved property quality; no premium exists when Chinese sell to non-Chinese. The persistence of superstitions reflects the extent of cultural assimilation.
Systemic Risk in Insurance and Reinsurance: Lessons from Risk Model Homogeneity (C6, G2)
AbstractWe develop a multi-agent model of the insurance and reinsurance sectors and study systemic risk arising from risk model homogeneity. Risk models are accurate only up to a certain degree. In particular, they may err with respect to the correlation of risk events. With a small but significant probability, they would therefore lead to the insolvency and bankruptcy of the company. If all insurance companies use the same risk model, bankruptcies in the insurance sector would happen in clusters. This results in structural problems for the entire sector. Nevertheless, the number of risk models employed in the insurance sector remains very small. Risk models are research-intensive and must be carefully maintained. Official accreditation, a densely connected professional network and cautious attitudes in the face of considerable potential losses add to the entry barriers in this field.
We characterize systemic risk as it results from the number and diversity of risk models, from the statistical properties of damages and claims, and from the somposition of the insurance and reinsurance sectors. We investigate the contributions of proportional reinsurance, excess of loss reinsurance, and of special purpose vehicles such as cat bonds in alleviating systemic risk. Firm level and financial data is used for calibrating the model.
We consider current and proposed insurance regulation and evaluate it in the light of the results of the model. To complement this, we provide some insights from historical cases of catastrophe insurance (hurricane, maritime, earthquake, flood, etc.).
Team Contest and Information Feedback: A Field Experiment (C9, D0)
AbstractOrganizations often use contests or relative performance measures to encourage efforts from their agents. We study different information feedback structures when contestants are competing in teams. We conduct a randomized control trial that assigns contest participants to different information treatment groups in an electricity saving contest, and test whether revealing ranking information within and/or across teams to players during a contest affects contestants' efforts. Exploiting a very rich dataset that includes real-time hourly electricity usage at the individual room level for residence halls of a major university, our results suggest that ranking information matters: on average, providing both inter- and intra-ranking information to contest participants extracted the most efforts from them. We also find heterogeneous effects across gender and user types. The heterogeneous effects are consistent with the hypothesis that ranking information affected contest participants' efforts through changing their prior beliefs about the relationship between efforts and winning probabilities. Heavy users were more likely to save electricity when they were given information leading them to believe that they were in a team with an average position during the contest, while light users reduced their efforts when their beliefs were updated in a similar way.
The Causal Impact of Local Pollution on the Health and Well-being of Individuals (Q5, D6)
AbstractThe proper implementation of public policies determined to reduce local pollution demands the correct valuation of contemporary exposure values. One particular issue while implementing pollutant-reducing-strategies is that most of these require the fulfillment of targeted economic costs usually faced with opposition by those sectors carrying the weight of execution. Thus, it is necessary to perform accurate and ubiquitous valuations of the status-quo disadvantages of exposure, and therefore, evaluate the societal benefits of implementation.
This article identifies the causal effect of local pollution on subjective well-being and monetarily valuates its economic impact through the use of the life satisfaction approach. To construct credible causal relations between exposure to local pollutants and variation in well-being we use data from the German Socioeconomic Panel Study (SOEP), the German Environmental Agency, MERRA2 project from NASA, EUROSTAT, and own technical information on German fossil-fuel power plants.
Identification originates from the use of geo-coded data on the location of pollution monitoring stations and geo-coded household micro-data from the SOEP. We exploit spatial and temporal variation in exposure by assigning household-level measures of pollution with inverse distance weighting (IDW) techniques. Notably, we modify traditional IDW techniques by incorporating wind speed and direction to draw geographical ellipses around each household and through geospatial techniques weight each monitoring station according to its relation to these climatological variables.
The first step in identification is the use of OLS regressions with fixed-time and individual-effects. Then, we proceed to use power plants proximity, one of the primary sources of local pollutants in urban areas, to construct a difference-in-differences design. Treatment individuals are those in a pre-specified radius around the power plant, and control individuals are those unexposed to electricity plants. Furthermore, we use the installation of retrofit technologies as an instrumental variable to enhance the strength of our identification strategy.
The Character Skills of Immigrants (J1, J4)
AbstractWe use novel data on a representative sample of the U.S. population to examine how immigrants and second-generation immigrants compare to natives on non-cognitive character skills as measured by a common taxonomy of personality. Our findings reveal that immigrants and second-generation immigrants tend to have higher levels of openness to experience and agency than natives. Additionally, second-generation immigrants have higher levels of conscientiousness than natives. The findings are especially salient since character skills have been shown to influence labor market outcomes. Next, we examine the role of character skills differences on earnings by immigrant generation. Our earnings estimates reveal that non-cognitive skills have approximately as much explanatory power as schooling, yet non-cognitive skills have a modest impacts on the earnings differences of immigrants and second-generation immigrants vis-a-vis natives.
The Consequence of Intellectual Property Rights on the Production of University Scientists (O3)
AbstractWe investigate how the patent system impacts science, asking whether patent rights restraints the production of science. Our identification strategy is based on a unique setting: the introduction of patents rights for software inventions in the US. Indeed, in 1996, the US patents and trademark Office (USPTO) has changed its guidelines, now explicitly recognizing software as patentable. We investigate the consequence of this change on the production of computer science by university scientists.
Using extensive data on publications in the field of computer science from 1989 to 2004, we identify the consequence of the USPTO change via a difference-in-difference strategy in which European scientists are used as counterfactuals.
We find that the introduction of patents rights for software inventions in the US lead to a significant decline in the production of public science by US university scientists, both in quantity and quality. The drop is of about 24% in overall publications, the decline being stronger for journal articles than for conference proceedings. We find a decline of similar magnitude in terms of publications in top journals and for the number of publications at the top of the citations distribution. These results are robust to placebo tests and other robustness checks.
Turning to the mechanisms, we find a pattern that is consistent with a simple model of allocation of time between working on patents or publications. According to this model, the scientists with the highest incentives to allocate more time to working on patents are the ones at the lower tail of the quality distribution since they have the lowest opportunity cost. Complementary results confirms this prediction: the decline in publications being of 31% and 12% for US scientists being at the bottom and top of the citations distribution before the change.
The Cost of Being Different (H3, D6)
AbstractGovernment policies cannot possibly address the unique needs of every individual in an equitable manner. The diversity of individual social and economic attributes forces public decision makers to strike a hard compromise between maximizing the efficiency of public resource use and spontaneously maximizing the equity of their impacts on individuals. We assume a distribution of human attributes and social norms whereby the opportunity cost of satisfying the needs of individuals and population groups possessing unusual preferences is very high and any attempts at seeking to satisfy those unusual needs are widely decried. We further assume varying degrees of plasticity of attributes, in that individuals can modify their own attributes at varying cost to themselves but little or no cost to society.
Against this backdrop, we show that with adequate information, through socialization, there is substantial incentive for individuals with unusual attributes to self-normalize, reducing the cost to society and to themselves, if the unusual attributes are undesirable from the standpoint of social norms. If the unusual attributes are based on deeply held beliefs, the incentive to self-normalize is strongly resisted regardless of the degree of plasticity of the attributes. The results of this paper have implications for public policy at various levels of government.
The Effect of Breaks on Student Productivity: Evidence from Physical Education (I2)
AbstractA growing body of literature suggests that the timing of student learning can be an important determinant of student success, with students performing better in morning classes rather than afternoon classes. We explore how the timing of physical education (PE) classes during the school day may be used to boost student productivity when schools are faced with constraints which limit their ability to place all students in core academic subjects in the mornings. PE causes a break from academic learning. This can be disruptive if students are actively engaged but it can also help fatigued students rebound. We develop a simple theoretical model of these competing effects that predicts that the disruptive effect dominates in the morning and the rebounding effect dominates in the afternoon. Using data from 2003-2012 on student schedules and learning outcomes from a large school district in a state that requires 400 minutes of PE every ten days for students in the sixth through eighth grades, we provide evidence that the timing of breaks matters in the non-linear way suggested by theory for a composite math test given at the end of the year. There is less clear evidence that a break caused by PE matters for English tests.
The Effect of Corruption on Firm Investment in the Presence of Missing Data (D7, L2)
AbstractDespite the growing literature on the effect of corruption on different aspects of the economy, there has been little attention to the effect of corruption on firm investment. This paper aims to fill the gap by investigating the relationship between firm bribe payment and their investment. Besides, The empirical literature fails to address two main sources of the biases in the analysis - sample selection and missing observations - and the general IV method employed in these studies suffer from endogeneity of the instrumental variables. Using multiple imputation approach with Heckman sample selection model, this paper finds that corruption has a differential effect on the firms across their size distribution with it mostly hurting the smaller firms and that OLS and IV estimates would lead over-estimation of the parameters.
The Effect of Local Pollution on the Cognitive Productivity of Judges: A Case Study of the Mexican Judiciary (Q5, J0)
AbstractThis paper concentrates on labor consequences of exposure to local pollutants, specically in a topic that has not received much attention and that requires further consideration: the cognitive consequences of exposure. As societies change from industry-based economies to service-based nations, the aggregated value of cognitive work increases, and thus, the analysis of pernicious variables is of utmost importance for the implementation of public policies.
The goal of this article is to analyze the effect of local pollution hourly measures on the cognitive efficiency of judges part of the Mexican judiciary system. For this, we use time measured data on initial hearings to infer if exposure to local pollutants increases average resolution time. Data comes from state wise judiciaries, the Mexican Institute of Climate change, MERRA 2 project of NASA, and the National Center for Energy Control.
First, we obtain time values to the second of the beginning and end of the hearing process. We merge this data with environmental measurements collected by monitoring stations in several cities around the country and exploit spatial and temporal variation in exposure by assigning courthouse-level measures of pollution with inverse distance weighting (IDW) techniques. Distinctly, we modify traditional IDW techniques by incorporating wind speed and direction to specify geographical ellipses around each courthouse and through geospatial techniques weight each monitoring station according to its relation to these climatological variables.
To infer causality, we use time and individual fixed-effects regressions and increase the robustness of the econometric design by using city-wide environmental alerts, the location, and power production of fossil-fuel electricity-plants, one of the main emitters of local pollution, as instruments in a secondary regression specification. Initial results point to an effect of Particle Matter 10 and 2.5 and Nitrous Dioxide in the time judges take to reach a verdict.
The Effects of Immigration Restriction Laws on Immigrant Segregation: Evidence from the Early Twentieth Century United States (N9, R1)
AbstractSeveral immigration restriction laws, passed in the background of anti-immigration populism in the early 1920s, put an end to the period of “open borders” in the U.S. Did immigration restriction laws affect immigrant segregation in the U.S.? Using both the linked county and individual sample constructed based on five decennial censuses from 1900 to 1940, I focus on the Italian immigrant population---the then largest immigrant population and was the main target of immigration laws---and study trends in immigrant segregation. I introduce a “control group”, which contains immigrants that were less or not restricted, to control for other social, economic, and migratory trends occurring at the same time in the U.S., such as rapid urbanization and African-American migration in the early twentieth century. I create a simple model to show that immigration restriction laws should cause the decline in immigrant-native segregation for the restricted group (in this paper, Italians). Specifically, the model shows that the decline in segregation should be related to the decline in new immigration. Moreover, even if immigration laws are not against old immigrants, return migration could also account for changes in segregation, but the effects of internal migration are theoretically undetermined without assuming the form of immigrants’ utility function. Empirical results based on the linked county panel dataset suggest that all immigrant groups experienced similar trends in segregation before 1920, and the degree of Italian segregation indeed became relatively lower after immigration laws were made. I observe similar results based on the linked individual panel dataset. The relatively declining trend in Italian segregation was mainly due to the low in-migration rate. Selective return migration after the 1920s might also partially explain trends in immigrant segregation.
The Effects of Permanent and Temporary Foreign Aid on Fiscal Decisions: Empirical Evidence from Sub-Saharan Africa (F3, O2)
AbstractBecause foreign aid is mostly managed by recipient governments, understanding how it affects the recipient governments’ fiscal decisions provides insights in how foreign aid works. The literature has examined the recipient governments’ fiscal responses to different aid modalities. Yet, this paper argues that whether aid receipts are permanent or temporary is an important, overlooked determinant of the fiscal responses to aid. I present a theoretical framework that shows that permanent and temporary aid have different effects on the choice between taxes and debt issuance. Empirically, I focus on foreign grants received by sub-Saharan Africa over the period 1990 – 2016, and I separately identify the fiscal responses to permanent and temporary grants. I show that failing to distinguish between permanent and temporary aid shocks may result in misleading estimates of the fiscal responses. Both types of inflows generate fiscal responses that are meaningfully different on the components of expenditure, taxation and domestic borrowing. Results provide guidelines for designing foreign aid programs to developing countries.
The Effects of Political Competition on the Generosity of Public-Sector Pension Plans (H7, J4)
AbstractIn politically competitive jurisdictions, there can be strong electoral incentives to increase the generosity of public pensions and pander to public-sector voters as long as pension underfunding is permitted. I examine this hypothesis using panel data for 2,000 municipal pension plans from Pennsylvania. The results suggest that as a municipality becomes more politically competitive, it tends to have pension plans that are more generous. An increase in the level of political competition by one standard deviation leads to an increase in the annual average retirement benefits of about $470–620 per retiree. The effects of political competition are pronounced in municipalities which have a higher proportion of less informed voters and are absent for defined contribution plans and pension plans offered by municipal authorities. Instrumental Variable (IV) estimates generated using demographic characteristics of the population as instruments corroborate these findings.
The Efficient Teaching Methodologies in Culturally Diverse Class Room and Improvisation with New Technology (A2, F6)
AbstractThe diversity in classrooms worldwide has seen a sharp increase with an inflow and outflow of students from different countries and others studying abroad. With such a stark contrast to what was known years ago, this change must be responded with equitable treatment and proactive learning, especially in how to improve teaching styles for classrooms of all ethnic backgrounds. Of note, in American classrooms, predominantly foreign students are at a marked disadvantage. I will discuss methods of fashioning educational spaces suitable for multi-cultural students. Efforts to be made should be inclusive of activities that do not suffer due to a language barrier and curriculum not contingent upon concepts unfamiliar and limiting in nature. Implementing such practices in culturally diverse classrooms will improve student development and reinforce a positive attitude toward societal diversity among not only educators, but students as well.
The FOMC Minutes, Inflation, Interest Rates and Recessions: Can Machine Learning Decipher the Link? (E5, E3)
AbstractRecent developments in the machine learning techniques open doors to explore new ways of forecasting near term outlook of major macroeconomic variables. One such example is to utilize the FOMC’s minutes to forecast GDP, unemployment, inflation and interest rates. That is, the FOMC regularly provides forecasts for GDP, inflation and unemployment along with a long term fed funds rate’s outlook. However, past studies have confirmed that the FOMC tends to over-forecast GDP/Inflation and interest rates and under-forecast unemployment rate. Our proposed framework would improve forecasts of such variables and therefore help to design effective policies.
We utilize the FOMC minutes to forecast inflation, unemployment, GDP and fed funds rates. The reason to utilize the FOMC minutes as predictors in a forecasting framework is that the FOMC minutes discusses risks to their forecasts as well as other key developments in the economy such as financial/housing outlooks. Therefore, the minutes contain useful information about the current and near term economic outlook. The recent advancements in the machine learning (text mining and natural languages processing analysis for example) help to extract that information from the FOMC minutes. In addition, that information can be utilized as predictors in a model to forecast key economic and financial variables.
We utilize traditional model based forecasts of the target variables as a benchmark and one-year ahead forecast as forecast horizon. We employ several different competing approaches in the contest. That is, (1) the FOMC forecast, (2) a model utilizes FOMC minutes-based predictors and (3) FOMC’s minutes along with other predictors.
Our initial results suggest that the FOMC’s minutes along with other predictors beat (provide better forecasts than) all other approaches. Basically, the minutes does contain important information which improve forecasts of macro variables.
The Highs and Lows of Medical Marijuana Legalization (K4, I1)
AbstractStarting with California in 1996, twenty-nine states and the District of Columbia have legalized medical marijuana. Studies of the impact of these laws provide useful and timely evidence for state policymakers as they consider whether to legalize recreational marijuana. We investigate whether medical marijuana legalization affects substance use and criminal behavior among young adults. Using data from the National Longitudinal Survey of Youth 1997 Cohort, we apply a difference-in-difference approach to isolate the causal effect of medical marijuana legalization on individual-level criminal behaviors and consumption of substances, such as alcohol, marijuana, and hard drugs. The NLSY97 follows approximately 9,000 individuals, born between 1980 and 1984, from 1997 to the present. The panel nature of this data set allows us to analyze self-reported criminal behavior over time, including whether the respondents consumed and/or sold marijuana or other hard drugs, whether they engaged in petty crimes such as property damage or theft, and whether and how many times they were arrested.
Previous studies of the effects of medical marijuana laws provide some evidence that legalizing marijuana is associated with increased substance abuse but not higher crime rates. This paper is one of the few that provide causal estimates of the effect of medical marijuana legalization on substance use and criminal behavior, and to the best of our knowledge, is the first paper to analyze the effect of these laws on individual-level, self-reported criminal behaviors other than substance use. This provides insight into criminal behavior that may go undetected by law enforcement.
The Impact of State-Level Earned Income Tax Credits on Food Security (I3, H3)
AbstractThis paper investigates the impact of state-level earned income tax credits on food security. While the federal Earned Income Tax Credit has been subject to extensive research, due to the fairly recent increase in the popularity of state-level EITCs among state policy makers, there is very little research examining the impact of state-level EITCs. This paper contributes to filling this void. The appeal of EITCs are the clear labor supply incentives, and US food security policy (the Supplemental Nutrition Assistance Program in particular) has been criticized for disincentivizing labor force participation. Therefore, investigating the extent to which wage subsidies contribute to ensuring food security is an important research question. The empirical strategy in this paper uses variations in timing of the implementation of state-level EITC policies, as well as variations in generosity and refundability between states that have implemented ETICs, in order to estimate the impact on various measures of food security. I propose a model that decomposes the impact of the EITC into a direct income effect due to the credit, as well as an indirect effect due to the credit’s impact on labor market outcomes. The main data for this study come from the Current Population Survey’s (December) Food Security Supplement for the years 2001-2016. In addition to individual demographic data, this supplement includes several measures of individual and household food security. In order to control for other state-level policies related to food security, I make use of the USDA SNAP policy database. The results show that the direct income effect due to state-level EITC does not have a significant lasting impact on food security. However, the EITC’s impact on labor supply on the extensive and intensive margin contributes to statistically and economically significant increases in several measures of food security among low income households.
The Indebted Hand-to-Mouth (E2, I3)
AbstractSome group of households those who have debts in liquid assets and in illiquid assets, which I refer to as indebted hand to mouth (I-HtM), did not get any attention yet in economic modeling and empirical studies. I use SCF and PSID data for U.S.A to document the share of such households and their demographic characteristics. I find that about 1 % of households (more than 3 million people) are I-HtM. As the SCF data is not longitudinal, I use PSID data to find their consumption responses to transitory income changes (MPC), and compare them to other HtMs. I also investigate the food, nonfood, durable and nondurable consumption responses of the I-HtM to the unexpected income shock. I split the nonfood item into education, health, transportation, childcare and utilities, and measure the responses for each of the item to the sudden income shock. The portfolio configuration of the I-HtM suggests that they may have a lower MPC out of transitory income changes than rich households, a prediction for which I find empirical support in PSID data. I also find that there is variation in MPC when I consider the individual consumption item. Moreover, I-HtM smooth their consumption like the N-HtM (who hold both the liquid and illiquid assets). Because, I-HtM need to pay the mortgage payments and other debts for long time though their asset’s (e.g. housing) value declines over time and/or their income falls.In addition, I use various policy simulations from different models to show the effects of fiscal stimulus policies on aggregate, food, nonfood, durable and nondurable consumption expenditure of I-HtM. This study may help policy makers design appropriate fiscal policies like changing tax rate or providing subsidy for a specific consumption item to increase the purchasing power of I-HtM and to investigate the effectiveness of these policies.
The Labor Market Impacts of Stricter Disability Insurance Eligibility: Evidence from the UK Work Capability Assessment (I3, J2)
AbstractIn the United Kingdom and elsewhere, there has been increased concern about receipt of disability insurance by individuals who are able to work. The Work Capability Assessment was initially enacted by the Department for Work and Pensions (DWP) in 2008, assessing new claims to Employment and Support Allowance (ESA), however claims increased following its introduction, in part due to the Great Recession. Amid concerns that those able to work were receiving ESA as well as broader discussions of austerity and welfare reform in Britain, eligibility requirements were tightened; between 2011 and 2016, the majority of Incapacity Benefit and Income Support recipients were reassessed using the amended WCA. The WCA has garnered widespread criticism for lack of consideration of individuals’ barriers to employment, and many disabled people were incorrectly assessed as ‘fit for work.’ Do claimants anticipate and respond to more stringent eligibility requirements by returning to work? This paper employs a fixed effect design using Understanding British Society panel data to analyze the labor market impacts of revisions to the Work Capability Assessment (WCA) initiated under the Coalition government.
The Limit of Arbitrage in the Bitcoin Crypotocurrency Protocol (D4, G0)
AbstractThe Bitcoin crypo-currency protocol is considered to be an innovation in the global payment system. The protocol is decentralized and does not require a trusted central bank nor the single administrator. The protocol preserves the anonymity of participants: the transactions records are linked only with an electronic address. Bitcoin transactions have grown significantly in recent years. Nevertheless, its market value is extremely volatile, exposing users to serious exchange rate risk with the fiat currency. Then the research question is: Why is it that bitcoin price is so volatile? Can any market design improve the efficiency of the bitcoin price formation?
The current Bitcoin crypo-currency protocol employs a consensus algorithm with public key cryptography to ensure that everyone agrees on the order of transactions ("proof of work.") The algorithm requires nodes in the network to continuously attempt to produce packages of transactions ("blocks"). A current design requires ten minutes on average to complete a transaction.
We first consider that in a decentralized and anonymous mechanism, positive delays are necessary for an efficient transaction. Since the protocol does not have the trusted central administrator, market participants have to communicate and agree on transactions among themselves. It is necessary to make block creation computationally costly to prevent sybil attacks from remaking the entire blockchain.
We then consider the pricing consequence of the necessary trade execution delay extending a model of Shelifer and Vishney (1997) among noise traders, arbitrageurs, and investors in arbitrage funds. Trade delay leads to the price movement risk during arbitrage activities. This risk discourages the arbitrage activity that can lead to higher price volatility. The heightened volatility can further reduce arbitrage trading and worsen mispricing.
In summary, without any credible and trusted central banking system nor institutions that hold market participants accountable for their transactions, the currency system can be inherently unstable.
The Long-run Impact of Historical Shocks on the Decision to Migrate: Evidence from Irish Migration (N9, F2)
AbstractThis study investigates how negative historical shocks can explain migration in the long-run. We construct a unique dataset based on the 1901 and 1911 Irish Census data and a selection of the Ellis Island Administrative Records which allow us to test whether the Great Irish Famine (1845-1850), one of the most lethal starvation in history, has shaped the decision of migrating to the USA in the following 60 years. We control for several set of individual and geographical characteristics and we find that the Irish Famine was an important significant driver of individuals’ migration choices. Instrumental variable analysis based on the exogenous spread of the potato blight provides consistent results. The results are supported by various instrumental variables regressions based on the exogenous movement of the potato blight. We are also interested in understanding how the potential long-run impacts of the famine can impact the decision of migrating. The mechanism we have in mind and would like to test is that the migration networks formed soon after the famine still have the driving force two generations afterwards. More in detail, during the 50-70 year period followed by the Famine, we believe that the Irish counties hurt most had more short-term migration, which created even more migration due to the network effect and there has been an accumulated network effect. We suppose that county level inequality has resulted in bigger network effects for counties hurt most. Furthermore, there might have been a famine-induced increase in county level inequality. This has resulted in more migration from the counties that have been hurt most and "trapped" in a bad economic situation, resulting in more emigration.
The More You Do, The Worse You Feel - The Causal Effect of Multitasking on Work-Related Mental Health (I1)
AbstractTechnological change facilitates the development of task complementarities as efficiency gains in performing one task can be carried over to another task. To exploit these complementarities, firms change their job design from specialization to multitasking, i.e. jobs consist of a higher number of different tasks. In this paper, I use technological change on the company level to instrument employee multitasking to estimate the causal effect of multitasking on work-related mental health. The data comes from two cross sectional surveys on the German working population. The prevalence of work-related mental health problems increases with multitasking, and I find evidence for a causal effect: a one standard deviation increase in multitasking increases the risk for any work-related mental health problem by 0.35 standard deviation. OLS underestimates the causal effect by about one half to one third.
The Origins of Financial Development: How the TseTse Fly Continues to Influence Modern Finance (N5, G2)
AbstractWe assess how the TseTse fly, a unique feature of African ecology that transmitted a parasite lethal to livestock and had enduring effects on human subsistence strategies, continues to influence modern financial systems. After showing that the suitability index of TseTse fly helps account for overall financial development, household access to credit, and firm access to finance, we evaluate two potential mechanisms linking the TseTse fly to modern finance—ethnic fragmentation and precolonial centralization.
First, as emphasized by Alsan (2015), ethnic groups were more likely to rely on hunting and gathering in the TseTse-infested areas and more likely to break into small bands to avoid conflict over resources. This subsistence strategy in turn solidified narrow ethnic identities through limiting inter-ethnicity mixing and development of similar culture. When food was scarce, they tended to further split into subgroups. This resulted in ethnic fractionalization that in turn stymied the development property rights protection and contract enforcement institutions (Easterly and Levine, 1997), formed weak social cohesion that tends to have deleterious effects on the development of institutions conducive to inter-clan transactions and created unfamiliar counterparties and intertemporal exchange that impede financial development. To assess this mechanism, we examine whether the TseTse fly is positively associated with ethnic fragmentation today.
Second, foraging societies function as isolated bands without authority above the local level (Alsan, 2015). Herbst (2000) stresses that low population density and high transportation costs caused by the TseTse fly are two major impediments to state-building in Africa. As shown by Gennaioli and Rainer (2007) and Michalopoulos and Papaioannou (2013, 2014) that precolonial political centralization is positively correlated with modern development, we thus explore the connection between the TseTse fly and precolonial political centralization.
We discover that the TseTse fly is strongly, positively related to ethnic fragmentation and negatively related to precolonial centralization.
The Present Value of Corporate Profits: A Forecasters' Survey Perspective (G1, E3)
AbstractThis paper estimates the present value of corporate profits in the United States from 1984 to 2018. For valuation, the long-range forecasts of professional forecasters are used for for pre-tax corporate earnings and long-term Treasury note yields, sourced from the Blue Chip Economic Indicators survey. The appraised value of corporate earnings can point out in real time at periods where market prices are in excess of valuations implied by earnings and interest-rate outlook. Interestingly, the market participants' forecasts interpret most of the earnings fluctuations as permanent, missing of the cyclical fluctuations. The over-reaction to transitory shocks and
changes in long-term outlook of earnings and interest rates can explain
substantial portion of variance of the observed stock market prices.
The Prospect of Adult-SSI Participation and Investments among Transition-Age Youth with Disabilities (I3, J2)
AbstractSupplemental Security Income is a means-tested program that assists people with
disabilities. In order to be eligible for SSI, applicants must have limited economic
resources and must be determined by the Social Security Administration to be disabled.
The SSA considers an adult to be disabled if she has a health impairment that
prevents her from performing a substantial gainful activity. Individuals with health
impairments but with relatively good health and/or earning potential are less likely to
be deemed disabled by the SSA, and less likely to be eligible for benefits, than individuals
with poorer health or lower earning potential. This research studies whether the
SSI eligibility rules lead families of youth with disabilities to strategically modify their
investments in their children's health and human capital so as to increase the youth's
chances of SSI eligibility in adulthood. For this purpose I develop a two-period model
to explore the dynamics of health and human capital investments of families who seek
to secure the future eligibility of their children. Using data from the NLTS-2, I estimate
a system of simultaneous equations for a family's labor supply and health and human
capital investments which considers the probability of Adult-SSI participation. I find
that when it is unclear whether a child will receive Adult-SSI benets in the future,
families are 21.39% less likely to invest in the human capital of their youth than when
it is almost certain the youth will not receive benefits, and 14.02% less likely than those
families whose predicted probability of benefits reception is almost one. These results
suggest that some families choose to decrease human capital investments in order to
increase their children's chances of being eligible for SSI as adults. I find no evidence
of forgone health investments as a result of strategic behavior among these families.
The Rainbow of Credits: Evidence from Male and Female Same-sex Mortgages (G4, K4)
AbstractThis paper examines Male and Female same-sex home buyers (Gay and Lesbian) differences in mortgage lending deny rate and lending cost in the U.S.A for Boston area in 1990 and the United States from 1980 to 2016. Even after controlling for credit score and other key risk factors, male same-sex home buyers are 105 percent more likely to be denied in mortgages and they have high-cost mortgages for home purchases even the mortgages are approved. However, the effects are much weaker for Female same-sex borrowers. Male same-sex borrowers are treated differently in the mortgage lending than Female borrowers. The increased incidence of high-cost mortgages is attributable to both across lenders and differential treatment of similarly qualified borrowers by lenders. The vast majority of the same-sex borrower differences across lender cannot be explained by borrowers’ credit risk and other economic factors.
The Real Effects of Government Intervention: Firm-Level Evidence from TARP (G2, E5)
AbstractTen years after the 2008-09 financial crisis, there are still extensive debates among politicians and pundits about the effects of the US government’s first and largest intervention during that period of turmoil, the Troubled Asset Relief Program (TARP). One central concern of these debates is whether the intervention had a positive impact on the real economy, one of the key intentions of the program. Although many economists and regulators have examined the impacts of TARP on the financial sector, there is little academic research about its ultimate effects on the real economy. The central question of this paper is whether, beyond the banking system, the over $200 billion dollars of capital provided by TARP impacts activities of non-financial firms through the bank lending channel. Existing theoretical and empirical evidence does not provide clear guidance as to what we should expect. This paper investigates the real and financial effects of TARP on individual firms. Firms borrowing from banks that participate in TARP increase long-term debt and have more cash holdings and working capital after the Program compared to firms borrowing from banks that do not participate in TARP. But, there is no significant impact of TARP on corporate investment, employment, or R&D. We conclude that TARP exerts significant influence on firms’ liquidity and financial decisions, yet its impact on firms’ real activities is limited.
The Return to College Admission in China: A Fuzzy Regression Discontinuity Analysis (I2)
AbstractThis paper studies the return to college education in China by exploiting students whose scores of national college entry exam(Kaogao) close to the cutoff of college admission score. As college admission depends mostly on scores of entrance exam, I employ a fuzzy regression discontinuity framework using the scores of college entry exam as running variable and having a college education as treatment status. Employing dataset of Chinese Household Income Project (CHIP2013), I find that compared to students below the cutoff, those who have one score higher than the cutoff could significantly increase their college admission by 26 percent. The second stage of fuzzy regression discontinuity found college education brings 62 percent higher wage per hour. To address the problems of confounders, I add experience and years of schoolings in the regression as well as including the year of college education and price effect, I test different cutoff as a placebo test to exclude the running variable endogenously determined. I test the continuity of other covariables except for cutoff variable. Relative to the OLS and IV approach, I find the return to college education in China is underestimated in conventional studies.
The Role of Shadow Banking for Financial Regulation (E1, G2)
AbstractMacroprudential policies for financial institutions have received increasing
prominence since the global financial crisis. These policies are often aimed at the
commercial banking sector, while a host of other non-bank financial institutions, or
shadow banks, may not fall under their jurisdiction. We study the effects of tightening
commercial bank regulation on the shadow banking sector. For this purpose,
we develop a DSGE model that differentiates between regulated, monopolistically
competitive commercial banks and a shadow banking system that relies on funding
in a perfectly competitive market for investments. After estimating the model using
euro area data from 1999 – 2014 including information on shadow banks, we find
that tighter capital requirements on commercial banks increase shadow bank lending,
which may have adverse financial stability effects. In a counterfactual analysis we
compare how a macroprudential policy implemented before the crisis on all financial
institutions, or just on commercial banks, would have dampened the leverage cycle.
The Role of Tax Evasion, Liquidity Preference, and Borrower Sophistication in Strategic Default (D1, K3)
AbstractWe exploit the introduction of a moratorium and a new personal bankruptcy process that protect primary residences from foreclosure in Greece, to identify homeowners that default on their mortgages despite ability to pay. Using proprietary data from a large bank, we conservatively estimate that 28\% of defaults in primary residence mortgages are strategic, which corresponds to over 5 billion euros in non-performing loans for the Greek banking system. Our findings suggest that prior engagement in moral hazard behavior, in the form of tax evasion, the existence of adverse liquidity shocks, and borrower's level of financial and legal sophistication are significantly and positively related to strategic default behavior.
The Secret Behind The Tortoise and the Hare: Information Design in Contests (D4, C7)
AbstractI analyze the optimal information disclosure problem under commitment of a “contest designer” in a class of binary action contests with incomplete information about the abilities of the players. If the contest designer wants to incentivize the players to play in equilibrium a particular
strategy profile, she can design an information disclosure rule, formally a stochastic communication mechanism, to which she will commit and then use to “talk” with the players. The main tool to carry out the analysis is the concept of Bayes Correlated Equilibrium recently introduced in the literature. I find that the optimal information disclosure rules involves private information revelation (manipulation), which is also cost-effective for the designer. Furthermore, the optimal disclosure rule involves asymmetric and in most cases correlated signals that convey only partial information about the abilities of the players.
The Tangible and Intangible Consequences of Corporate Fraud (G3, G1)
AbstractUsing information on class action lawsuits in the period 1996-2016 covering 1,249
cases and 888 individual firms, I analyze the determinants of allegations and economic
outcomes. Firms are more likely to be indicted if they are smaller, have a high level
of investment, and have a bad stock market performance. Markets react negatively
to lawsuits: firms may lose up to $1.3 billion or 23% of their market value around
the start of the litigation procedure. This effect is more pronounced for firms that
end up paying a settlement. I find no reversal in returns in the period after the filing,
at significant court events or throughout the entire court procedure. Cross-sectional
results indicate that firms with more resources to spend on litigation experience a
smaller market reaction. Indicted firms significantly readjust their operations and
their investor base changes as well. Finally, I find that a trading strategy based on
fraud allegations yields a significant four-factor alpha of 3.7% per year.
The Threat of Hedge Fund Driven Shareholder Activism - Empirical Evidence from the Introduction of Stewardship Codes in the United Kingdom and the Netherlands (G3)
AbstractBased on a large sample of hedge fund activist investments across 9 European countries between 2000 and 2014, we analyze the effects of the threat of hedge fund driven shareholder activism on corporate financial and strategic decision making. Applying a difference-in-differences approach, we exploit the introduction of the UK Stewardship Code and the Dutch Guidelines of Best Practices for Engaged Share-Ownership as exogenous positive shocks to the risk of activist intervention.
Both cross-country and within-country analyses provide empirical evidence that corporate managers respond to the increasing threat of hedge fund driven shareholder activism by increasing payouts to investors, and by reducing the industrial diversification of the firm's activities. The results suggest that the presence of hedge fund activism functions as a disciplining mechanism to mitigate agency conflicts. Institutional ownership is a determinant of the risk of hedge fund activism intervention. However, higher institutional ownership alone does not explain the degree to which firms respond to the introduction of the stewardship codes.
The empirical results are robust to a variety of alternative specifications and placebo tests.
The United States Census Undercount of Native-Born Children: Estimates, Correlates, and Implications (J1, H5)
AbstractWith the approach of Census 2020, the accuracy of the U.S. decennial census in measuring the country’s population has received increasing attention from government officials and the general public. While the implications of census undercount for political representation and the allocation of federal funds have been documented, less is known about the effects of undercount on social science research using Census data. One group known to suffer from high levels of undercount in previous censuses is children. I estimate undercount of native-born children aged 0-10 in the 1980, 1990, and 2000 censuses using a variant of Demographic Analysis (DA), a technique long employed by the Census Bureau to evaluate census measurement of the entire U.S. resident population. Focusing on native-born children allows demographic population estimates to rely more on relatively accurate birth and death records, and less on unreliable measures of international migration. In addition, I draw my census estimates of population from the 5 percent PUMS rather than the full 100 percent counts, as the PUMS serves as the major source of census data used by researchers. While my results broadly correspond with the Census Bureau’s estimates of undercount, I show that the PUMS undercounts infants under age 1 in 1990 by 20 percent for non-blacks and 30 percent for blacks. Infants born to younger and less educated mothers are more likely to be undercounted. I also compute undercount by state of birth, a statistic not reported by Census, and show undercount rates vary widely by state of birth. States with the highest non-black undercount tend to be those with high Hispanic populations, but many of these same states also have the highest levels of black undercount. My results have important implications for the interpretation of research using census data, particularly
The Wolves of Wall Street: Managerial Attributes and Bank Business Models (G2, G3)
AbstractWe show that compensation and other manager characteristics that attract public scrutiny in the banking industry only account for a small amount of heterogeneity in bank business models. Instead, idiosyncratic manager-specific effects (or ‘styles’) explain substantial differences in policy choices, risk and performance across banks. We combine manager styles and derive manager profiles that also reflect managers’ personal risk preferences, predict whether managers will be appointed as CEO, and match managers with boards based on risk appetite. Our results suggest that attempts to rein in bank risk-taking by targeting readily observable manager characteristics will be extremely challenging.
Time Series Forecasting using Functional Partial Least Square Regression with Stochastic Volatility Exponential Smoothing (G1, C1)
AbstractOur approach is based on the functional partial least squares (FPLS) model, which is capable of avoiding multicollinearity in regression by efficiently extracting information from the high-dimensional market data. By using its well-known ability, we can incorporate auxiliary variables that improve the predictive accuracy. We provide an empirical application of our proposed methodology in terms of its ability to predict the conditional average log return and the volatility of crude oil prices via exponential smoothing, Bayesian stochastic volatility, and GARCH (generalized autoregressive conditional heteroskedasticity) models, respectively. In particular, what we call functional data analysis (FDA) traces in this article are obtained via the FPLS regression from both the crude oil returns and auxiliary variables of the exchange rates of major currencies. For forecast performance evaluation, we compare out-of-sample forecasting accuracy of the standard models with FDA traces to the accuracy of the same forecasting models with the observed crude oil returns, principal component regression (PCR), and least absolute shrinkage and selection operator (LASSO) models. We find evidence that the standard models with FDA traces significantly outperform our competing models. Finally, they are also compared with the test for superior predictive ability and the reality check for data snooping. Our empirical results show that our new methodology significantly improves predictive ability of standard models in forecasting the latent average log return and the volatility of financial time series.
Tobacco Sales Prohibition and Teen Smoking (I1, K4)
AbstractWe examine how the staggered introduction of minimum pruchase age laws across Europe and Switzerland affected smoking behavior. Using several comprehensive datasets, we find that teenage smoking did not change because of the introduction of these laws. We discuss two mechanisms: the forbidden fruit effect and the stringency of the laws. While we do not find that attitudes towards the attractiveness of smoking changed, we show evidence that these laws are difficult to enforce thoroughly.
Trade Liberalization, Technology Upgrading, and Environmental Outcomes: Evidence from China's Accession to the WTO (Q5, F1)
AbstractMuch concern has been raised over whether trade causes environmental damage in low-income developing countries. In this paper, we estimate the impact of trade liberalization on environmental performance using firm-level data. By adopting Brandt et al (2017)'s approach that uses the tariff rates from the accession agreement as instruments, we find that lowering input tariff leads to higher average SO2 emissions (9-11%) which is largely due to scale effects and composition effects while lowering output tariff has a weak negative effect on SO2 emissions. Given that we have unique and detailed firm-level information, we then trace through in detail the mechanisms through which trade liberalization contributes to technology upgrading. We find that the decrease of import tariff has a net negative effect on SO2 generation intensity which means the extent of free trade increase, the production becomes cleaner. We also find that compared to firms in non-treated cities, firms in cities with a more stringent environmental regulation increase less pollution intensity when the import tariffs decrease, which is consistent with the theory.
Uncertain Futures: An Evaluation of the Boston Youth Credit Building Initiative (G4, I3)
AbstractSince the financial crisis there has been renewed interest in providing financial education programs, including financial coaching, that are intended to improve consumer financial decision making, with a special emphasis on developing financial skills among youth. Yet prior studies evaluating the impact of financial education programs on outcomes have been mixed and to date there exists little robust evidence that financial coaching programs improve economic knowledge, decision making, or well-being. Using a randomized control trial, we estimate the causal effects of the Boston Youth Credit Building Initiative based on individual level data from a combination of administrative credit reports, survey responses, and focus group discussions. We find that the program improves credit scores by 65 points (12 percent) and raises the likelihood of having a “good” credit rating (661-780) by 10 percentage points. As a result, participants are 5 percentage points more likely to have a car loan and on average pay an interest rate of 3 percent compared to 9 percent for the control group. These improvements are driven by a combination of greater knowledge and enhanced self-efficacy that lead to improved financial habits such as using a mix of both revolving and installment credit and decreasing the likelihood of adverse events such as delinquencies and collections—findings that are also confirmed by our focus groups. The impacts persist beyond the end of the program and are greater for younger participants, African-Americans, males, and those living in low-income households. Our results provide the first direct evidence that financial coaching can have a meaningful impact on low-income young adults who are either working or enrolled in a workforce development program. These outcomes can inform policymakers seeking to incorporate financial capability into youth workforce development programs as required by the Workforce Innovation and Opportunity Act of 2014.
Uncertain Technology (E3, D8)
AbstractBased on the micro-level financial analysts' forecast data, we find cross-section evidence that uncertainty, measured by mean disagreement among forecasters, is greater in industries that experience more rapid investment specific technological change (ISTC). We also find time-series evidence that, in an estimated VAR model, uncertainty in high-ISTC industries have stronger impact on industrial production and stock market than low-ISTC industries. Motivated by these empirical evidence for ISTC as being the source or conduit of uncertainty, we develop a stochastic general equilibrium model with imperfect information and learning about ISTC and total factor productivity (TFP). We then estimate the structure and shock parameters using Bayesian technique to match the time series of model-generated output, consumption, and hours worked to their counterparts observed for the US economy. Given the estimated model, we find that business cycle statistics generated by our model fit the US data better than a standard model without uncertain technology. Next, We explore the quantitative role of technology uncertainty in the transmission of the unobserved technology and noise shocks. We find that the economy with uncertain technology responds more strongly to changes in TFP than that without such uncertainty. In addition, the response to an ISTC shock is less volatile but more persistent. Third, a "noise" shock changes agents behavior persistently, even though the underlying fundamentals governing the economy remain unchanged. The quantity of noise is non-trivial: the noise shock accounts for 10% and 41% of variation in output and investment respectively. Our model with uncertain technology also provides a solution to the Barro-King "co-movement" puzzle without resort to other bells and whistles suggested in the literature: the introduction of uncertain technology alone generates a correlation of 0.60 between consumption and investment, close to the data-suggested value of 0.74, and significantly improves over the -0.48 implied by standard models.
Uncertainty, Liquidity, and Financial Cycles (E1, G0)
AbstractThis paper provides a continuous time heterogeneous agents DSGE model to shed light on the role of uncertainty and liquidity for the inconsistency between macroeconomic fluctuations and financial cycles. Physical capitals have less liquidity than their corresponding equities. In the recession, risk-averse entrepreneurs have low net worth. They will disinvest and hold more financial assets. This leads to more funds flowing into financial system so that a financial booms but a slow economic recovery. During the prosperity period, however, high net worth of entrepreneurs leads to high investment demand and high equity prices.
Unconventional Monetary Policy and Households' Financial Portfolio Choices (E5, D1)
AbstractI use survey data on Italian households' financial portfolios to examine how the unconven-
tional monetary policy tools implemented by the European Central Bank offect families' asset
allocation choices. I first disentangle any household change in financial wealth into its active
saving component and its passive saving component (capital gains) using financial indexes.
Then, I employ a two-step model to estimate the impact of unconventional measures on
portfolio rebalancing, focusing on two asset categories, safe and risky, and on three different
households' groups. In order to identify the effects of unconventional monetary policy I
exploit households' cross sectional heterogeneity in the exposure to unconventional monetary
policy due to their heterogeneous portfolio composition, while unconventional monetary
policy is measured through assets valuation effects induced by ECB's announcements. The
empirical analysis shows that unconventional monetary policy affects portfolio composition in
a direction that is consistent with the portfolio rebalancing channel, i.e. reducing the exposure
to safe assets and increasing the investment in risky assets for the two richest household
groups, while it triggers a negative rebalancing of both safe and risky assets for households
belonging to the poorest group.
Uncovering Discrimination in Switzerland: Evidence from a Field Experiment with Sports Clubs (J7, Z2)
AbstractThe aim of this research is to gain insights how Swiss language groups are accepted and integrated outside their native language habitat. For this purpose, we use sport as a laboratory and gather a dataset that allows us to answer the following questions:
Do Swiss people suffer from discrimination when they move inside the country but outside their native German-, French-, Italian-, or Romansch-speaking part?
Do foreigners who move to Switzerland and speak the native language suffer from discrimination? For example, does an Austrian citizen suffer from discrimination when he moves to the Germanspeaking part of Switzerland?
Do foreigners who move to Switzerland and do not speak the native language suffer from discrimination?
We find that Swiss citizens do not suffer from discrimination when they move outside their native language habitat. However, foreigners are statistically significantly effected and suffer from discrimination.
The results of the research (and especially on the questions) have important policy implications regarding integration for Switzerland and for other European countries as well. Successfully integrating heterogeneous groups is a major challenge and point of discussion for all European countries. Accordingly, this research could help identify possible solutions.
United States and Euro Area External Adjustment: The Role of Commodity Prices and Emerging Market Shocks (F3, F4)
ABSTRACT: The trade balances of the US and, especially, of the Euro Area (EA) have improved markedly after the Global Financial Crisis. 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, contributed to the EA trade balance surge. Commodity prices also affect the transmission of Emerging Market shocks to the US and EA. Emerging Markets productivity growth has muted 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-region (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 can be key drivers of advanced countries’ trade balances and terms of trade.
Authors: Massimo Giovannini (EC, JRC), Stefan Hohberger (EC, JRC), Robert Kollmann (ECARES-ULB & CEPR), Marco Ratto (EC, JRC), Werner Roeger (EC, DG-ECFIN) and Lukas Vogel (EC, DG-ECFIN) [EC: European Commission]
United States Internal Migration Networks, Energy Use, and Emissions (R0, Q5)
AbstractClimate change as a result of carbon emissions is a highly studied and diverse topic in the economics literature. It has been established that a significant proportion of US carbon emissions come from household energy use, and that urban structure plays a prominent role in how much energy house-holds consume. Cities vary greatly in per household levels of emissions, with the dirtiest cities having nearly twice the per-household emissions as the cleanest ones. This paper extends the literature by using historic internal migration data to examine the role migration plays in the total emissions for the U.S. Given the recent popularity of local green regulations, it is highly unlikely that emissions will be optimally taxed when considering location decisions.
The purpose of this paper is to examine the role migration plays in the total carbon emissions in the U.S. It does this by using city pairs constructed from data on MSA emissions and MSA to MSA migration data. Each MSA will thus have different migration effects, for both out- and in- migration, due to their place in the migration network and the greenness of the cities in their part of the net-work.
Results suggest that current regulations on housing and zoning, as indicated by the Wharton Regulation Index, increase the national carbon footprint significantly by incentivizing households to locate in high-emissions locations. Results also show that certain cities, including Atlanta, Houston, and Washington DC, contribute mightily to the national annual carbon footprint from in-migration. Other cities, such as New York City, Los Angles, and San Francisco, are extremely carbon-saving in in-migration. If policy makers are interested in national carbon emissions, then they must consider not only the effect of incentives and regulations on average emissions at the local level, but also the migration effect from city to city migration.