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AEA Poster Session

Poster Session

Friday, Jan. 6, 2017 – Monday, Jan. 9, 2017

Hyatt Regency Chicago, Columbus Hall
Hosted By: American Economic Association

"Should I Stay or Should I Go?" The Effect of Demographic Change on Labor Force Participation and Wages (J2, J1)

Michael Johannes Boehm
,
University of Bonn
Christian Siegel
,
University of Exeter

Abstract

We propose a model in which rising supply of experience reduces experienced workers' relative wages, and also negatively and systematically impacts their labor market participation. We then quasi-experimentally investigate the existence of these effects, using variation across US local labor markets (LLMs) over the last 50 years and instrumenting experience supply by the LLMs' age structures a decade earlier. We find that aging drastically reduces the labor market participation of experienced relative to inexperienced workers; increasing their welfare-, disability-, and especially social security claims. Aging also reduces the (relative) migration of older workers into the aging LLMs. All of these reactions are mainly driven by low-skilled and low-earning workers. Our results imply that the effect of demographic change on the labor market is substantially more severe than previously recognized; it systematically impacts labor market outcomes beyond wages.

A Credit Cycle Model of Bank Loans and Corporate Debt: A Bank Capital View (G2, E3)

Ji Huang
,
National University of Singapore

Abstract

In this paper, we present a continuous-time macro-finance framework, in which firms raise external funds by either issuing corporate debt or obtaining bank loans. Although banks are more efficient than debt holders when liquidating assets of firms with liquidity problems, the interest spread of bank loans must cover the intermediation cost and the risk premium. Because of the crucial feature that the risk premium depends on the financial health of the banking sector, the cost of obtaining bank loans endogenously fluctuates across business cycles. This continuous-time framework allows us to capture that although bank-financing is more cyclical and volatile than bond-financing in the long run, the rise in bond credit can make up the credit loss incurred by the drastic decline in loan supply during crises. Meanwhile, our model also captures the fact that costs of both bank and bond credit increase in recessions when bank capital deteriorates.

A Holistic Visual "Wheel of Relationships" in Production Theory (A2, D2)

Alexandra Naumenko
,
North Carolina State University
Seyyed Ali Zeytoon Nejad Moosavian
,
North Carolina State University

Abstract

Production theory in advanced microeconomics comprises two intricate optimization problems: cost minimization and profit maximization. The cost minimization problem essentially involves deriving conditional factor demand functions and the cost function. The profit maximization problem involves deriving the output supply function, the profit function, and unconditional factor demand functions. Additionally, there are numerous mathematical equations in the setting of production theory which aid us in deriving each of the mentioned functions from another. These include Shephard’s lemma, Hotelling’s lemmas, direct and indirect mathematical relations, and other mathematical elements. All of these elements contribute to forming a neat wheel of relationships in production theory. However, these complexities and unseen, underlying linkages can bring about difficulties for both instructors to teach as well as students to learn the material. Much of this complexity has its root in the intricacies inherent in the mathematical theory of duality. The primary purpose of this poster is to illuminate these theoretical complexities through a holistic visual wheel of relationships in production theory in order to ease the teaching and learning of advanced production theory. More specifically, this poster introduces two instructional visuals which can be used as complementary teaching tools to demonstrate the connections between the profit-maximization and cost-minimization problems as well as other components of production theory in modern microeconomics. This visual clarification also allows for easier elaboration of three notions of optimality which must exist in any economic production system. These three types of optimality include technical optimality, allocative optimality, and scale optimality. The focus of the present poster is on the two extreme market structures: perfect competition and monopoly. In addition, the potency that such graphics can have to enrich learning experiences is discussed by referring to modern education literature.

A Lesson from the Great Depression That the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing

Arunima Sinha
,
Fordham University
Michael Bordo
,
Rutgers University

Abstract

We examine the first QE program through the lens of an open-market operation undertaken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. Using a dataset with weekly-level Treasury holdings of the Federal Reserve in 1932, and the corresponding yields, we first conduct an event study analysis. This indicates that the 1932 program significantly lowered medium- and long-term Treasury yields. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods, employing the methodology of Chen, Cúrdia and Ferrero (2012). We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Additionally, if the Federal Reserve had continued its operations in 1932, and used the announcement strategy of the QE operation, the upturn in economic activity during the Great Depression could have been achieved sooner.

A Likelihood-Based Comparison of Macro Asset Pricing Models (G1, E1)

Andrew Chen
,
Federal Reserve Board
Rebecca Wasyk
,
Federal Reserve Board

Abstract

We develop a model in which asset prices depend on long run growth, long run volatility, habit, and a persistent residual. We estimate the model using Bayesian methods which account for the entire likelihood of the data on consumption growth, dividend growth, and the price-dividend ratio. The residual is dominant, accounting for more than 80% of the variance of the price-dividend ratio across a variety of priors and specifications. Moreover, the filtered residual tracks most of the recognizable features of the U.S. stock market, such as the late 1990's boom and bust. Long run volatility, long run growth, and habit contribute in crises, but overall have a low correlation with the price-dividend ratio between 1929 and 2014. These results show that while long run risks and habit play a non negligible role, something else is driving the bulk of stock market fluctuations. We categorize and discuss theories which are consistent with our results.

A Market-Based Indicator of Currency Risk: Evidence From American Depositary Receipts (F3, G1)

Ingmar Roevekamp
,
Leibniz University of Hannover
Stefan Eichler
,
Leibniz University of Hannover

Abstract

We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating.

A New Look at Employer Sponsorship of 401(k) Plans With Linked Employer-Employee Administrative Records (H3, J3)

Michael Gideon
,
U.S. Census Bureau
Joshua Mitchell
,
U.S. Census Bureau

Abstract

This paper examines employer sponsorship of defined contribution (DC) retirement plans using job-level data from the universe of W-2 records, linked to employer-level data from Census Bureau’s Business Register and plan-level data from Form 5500. First, we use the universe of W-2 records from 2005 to 2013 to construct employer-level variables about tax-deferred DC plan sponsorship, and to analyze coverage and participation levels across the distribution of earnings. Linking these new employer level measures to the Business Register, we characterize substantial heterogeneity in sponsorship and participation rates by firm size, legal form of organization, industry, geographic location, and average firm wages. We supplement our new measure of plan sponsorship with information on auto-enrollment and match rates from Form 5500. Using these new measures, we examine how changes to rules concerning plan auto-enrollment and individual contribution limits affect employer sponsorship and participation rates, and how these changes vary by employer and employee characteristics.

A New Tail-Based Correlation (G1, E3)

Jinjing Liu
,
McGill University

Abstract

It is well established that dependence between asset returns increases when the market declines. This paper develops the ES-implied correlation, a correlation measure focusing on tails based on the expected shortfall (ES), to improve the existing value at risk (VaR)-implied correlation. Simulations which define period-by-period true correlations show that the ES-implied correlation is much closer to true correlations than is the VaR-implied correlation with respect to average bias, standard deviation and root-mean-squared error. Further, the ES-implied correlation, while generalizing the linear correlation, does not embody significant sacrifices when the linear correlation is appropriate, but produces substantial gains when the linear correlation is inappropriate. A series of H-statistics is developed for measuring and testing correlation asymmetries. The H-statistics from the ES-implied correlation clearly indicates that correlations between US and other G7 countries are significantly underestimated by the linear correlation during market downturns, while the H-statistics from the VaR-implied correlation do not produce a clear conclusion. The H-statistics could also evaluate the impact of portfolio weights on the VaR-implied correlation and the ES-implied correlation.

A Tobin Tax Only on Sellers (G1, H3)

Haiwei Chen
,
University of Alaska Fairbanks

Abstract

A market trading model shows that a financial transaction tax affects the risk of the investment by different traders in a secondary market and thus their demand. Specifically, the demand under a Tobin tax becomes more elastic for buyers and sellers but more inelastic for short sellers. It is shown that imposing a Tobin tax lowers market volatility for trading not involving a short seller. Furthermore, it is shown that imposing the tax solely on the seller, comparing with splitting it equally between the buyer and the seller, further reduces market volatility. Simulation results confirm these predictions of the model.

A Welfarist Role for Nonwelfarist Rules: An Example with Envy

Matthew Weinzierl
,
Harvard University

Abstract

I propose and formalize an argument for why economists working in the welfarist normative tradition should include nonwelfarist principles in how they judge economic policy. The key idea behind this argument is that the world is too complex, and our ability to model it too limited, for us to fully trace a policy's effects on welfare. Nonwelfarist principles can be valuable to a welfarist facing this limitation if they act as informational proxies, carrying accumulated knowledge about the effects of policy that otherwise cannot be considered. This argument can be seen both as extending a familiar logic for rule utilitarianism beyond the realm of individual ethics and as a specific version of a broader argument made for centuries by theorists from Hume to Hayek. I also provide evidence of an example in which real-world policy judgments are consistent with this theoretical argument. Results from a novel U.S. opinion survey show that approximately half of respondents reject redistribution driven by envy even though it generates direct utilitarian gains. That share rises as the role of envy is made more salient, consistent with respondents using nonwelfarist principles to encode concerns about the unobservable consequences of policy.

Access to Collateral and the Democratization of Credit: France's Reform of the Napoleonic Code

Kevin Aretz
,
University of Manchester
Murillo Campello
,
Cornell University and NBER
Maria-Teresa Marchia
,
University of Manchester

Abstract

We exploit the political economy of a contracting framework to show how access to collateral shapes the composition of corporate borrowing and the demographics of credit access. France's Ordonnance 2006-346 repudiated the 200-year old Napoleonic security code, easing the pledge of hard assets in a country where corporate credit was highly concentrated. The reform was, however, undermined by “non-codified” laws pushed by firms in large cities, which allowed them to pledge liquid assets to factoring companies. Using a differences-test strategy, we show that firms with high utilization of hard assets and limited access to factoring services increased their leverage ratios the most following the reform (intensive margin), with the fraction of “zero-leverage” firms among them dropping from 89% to 29% (extensive margin). Using contract-level data, we show that access to hard assets allowed for significant reductions in loan mark-ups and increases in loan maturities. Small, profitable, low-risk firms benefitted the most from derogating the Napoleonic code. Start-up firms registered unprecedented increases in the use of debt financing at incorporation. Department-level analysis allows us to map the effects of Ordonnance 2006-346 on credit access inequality within and across different areas of the country. The reform reached firms in rural areas, leading to a pronounced decline in the Gini index of credit concentration across France's countryside.

Adoption and Diffusion of Cardiac Procedures and Medical Technology: Evidence from TAVR

Robert Huckman
,
Harvard University
Ariel Dora Stern
,
Harvard Business School

Abstract

This project analyzes patterns in the adoption and diffusion of a relatively new cardiac procedure, transcatheter aortic valve replacement (TAVR). Using data on all TAVR procedures performed in the state of New York over a three-year period, we identify patterns of take-up across physicians and hospitals as well as patterns of access and receipt among (potential) patients. We ask whether take-up of TAVR is correlated with prior utilization of surgical aortic valve replacement (SAVR) – an older and more-intensive alternative – at the physician and/or facility level. We then explore how the use of this new interventional technology leads to changes over time in the type and severity of patient cases treated by both physicians and institutions. Further, we examine how outcomes change with TAVR experience as well as whether this experience impacts surgeons’ performance using the incumbent technology (i.e., SAVR) . Our findings have implications for the broader understanding how technology diffusion impacts treatment decisions by physicians, patient access to therapies, health care productivity, and spending.

Age and the Production of High-Impact and Transformative Science

Katy Borner
,
Indiana University
Gerald R. Marschke
,
State University of New York-Albany and NBER
Joseph Staudt
,
U.S. Census Bureau
Bruce A. Weinberg
,
Ohio State University, IZA, and NBER
Huifeng Yu
,
State University of New York-Albany

Abstract

Researchers, research institutions, and policy makers are interested in identifying and identifying and promoting transformative scientific research and maintining output of such work as the research workforce ages. This paper presents novel metrics of high-impact and transformative works applying rich characterizations of citation patterns and natural language processing 10,778,696 articles over 30 years from the Web of Science and MEDLINE. We show that impact and transformativeness are positively related (correlation=.46), but distinct. We show that young researchers (0-4 years and 5-9 years of experience) flow into fields with more transformative, but not fields with more high impact work. Fields with larger shares of young people and fewer old people produce more transformative work.

All in the Family? CEO Succession and Firm Organization (L2, L6)

Daniela Scur
,
University of Oxford
Renata Lemos
,
London School of Economics and Political Science

Abstract

Family ownership is the most prevalent type of firm ownership around the world and accounts for a large proportion of the economic activity and employment, especially in developing countries. In this paper we investigate the relationship between family control and firm organization and performance in the manufacturing sector of primarily emerging economies. To do this we collect a new detailed dataset of firm ownership and control history for over 800 firms in Latin America, Africa and Europe and merge this data with a unique dataset on firm performance and organizational structures, including on quality of managerial practices - the World Management Survey. We exploit exogenous variation in the composition of the family CEO's children, and use it as an instrumental variable for family ownership and control. Our results suggest a negative causal relationship between family ownership and control of firms and quality of management, with coefficients being over twice larger under 2SLS than OLS. In general the negative effect seems to stem from the family identity of the CEO, rather than simply family or non-family ownership.

Alphabetism: The effects of surname initial and the risk of being otherwise undistinguished (J1, I2)

Alexander Cauley
,
University of Colorado-Boulder
Jeffrey Zax
,
University of Colorado-Boulder

Abstract

In many contexts, the default ordering of individuals is in ascending order of the alphabet by family name. This ordering systematically confers greater attention on those whose family name begins with letters that are earlier in the alphabet. This disparity in attention may lead to differences in economic outcomes. This paper explores whether adult differences in educational attainment, occupational prestige and earnings are affected by the initial of the family name through ages 53. It demonstrates the presence of significant positive effects of alphabetic primacy in young adulthood that dissipate by age 35 and that do not reappear at age 53. These effects are significantly stronger for those who are not in either of the extremes of the distributions for IQ and physical attractiveness. Presumably, those who are not distinguished by cognitive ability or physical appearance rely most heavily on alphabetic orderings to achieve notice.

Ambiguous Information, Permanent Income, and Consumption Fluctuations (E3, D8)

Donghoon Yoo
,
University of Lausanne

Abstract

This paper studies asymmetric responses in consumption where the asymmetries are endogenously generated by agents' preferences and incomplete knowledge about information quality. Agents form expectations about the future based on incomplete information which is assumed to be ambiguous and these future expectations, distorted by ambiguity, affect spending asymmetrically. With a noisy signal of uncertain quality, consumption features asymmetric responses: the absolute size of the responses depends on whether the signal delivers good or bad news. I estimate the model on U.S. data by maximum likelihood and the estimates suggest that ambiguity plays a non-negligible role in consumption fluctuations.

An Econometric Method for Decomposing Total Factor Productivity into Individual Factor Productivities

Peter Zadrozny
,
U.S. Bureau of Labor Statistics

Abstract

Productivity is an important statistic indicating production conditions of a production unit, from single firm to whole economy. For example, the drop in average annual U.S. productivity growth from 2.9% in 1995-2005 to 1.3% since 2005 raises concerns for future U.S. livings standards but has no widely accepted explanation. The Solow residual has been the main measure of percentage change of productivity and is defined by period-to-period percentage growth of output minus the sum of cost-share-weighted period-to-period growths of production inputs. However, without further individual-input information, standard productivity analysis cannot account for the Solow residual in terms of changes in individual-input productivities. The paper develops and applies a new method for doing this that requires no additional individual-input information beyond that needed to compute the Solow residual. The method is applied to annual aggregate U.S. QKLEMS data for 1948-2005 based on the previous SIC classification (further data based on the current NAICS classification is not yet available). The method is based on a Cobb-Douglas Marginal Production (CDMP) relation that generalizes standard production functions such as Cobb-Douglas and Constant-Elasticity-of-Substitution. Econometric analysis of productivity using the present individual-input productivities rather than the Solow residual should result in more accurate inferences about sources of productivity change. CDMP is called a “relation” -- not a “function” -- because it is stated in total differential form, so that computing individual input productivities based on an estimated CDMP relation requires integrating a nonlinear system of differential equation s. This is done here using multi-step perturbation.

An International Comparative Study of Health Investment Behaviors After Retirement (I1, H3)

Yoshinori Nishimura
,
University of Tokyo
Hiroyuki Motegi
,
University of Tokyo
Masato Oikawa
,
University of Tokyo
Kazuyuki Terada
,
University of Tokyo

Abstract

This study examines the effects of retirement on health investment behaviors, including drinking, smoking, physical activities, sleeping, eating habits and other social activities. This is the first large-scale international comparison of elderly’s behavior in the labor market. We do the international comparison of the estimated results (the U.S., England, European countries, China, Japan and Korea) to examine the relationship between retirement and health. Along the growing interest of the effect of the policies which delay the retirement of elderly people, a number of studies have investigated the relation between retirement and health over the last two decades. The literatures reach a consensus only on a few aspects. By analyzing the change in health investment behaviors, we try to clarify the reason why the estimated results of the effect of retirement on health in the literatures are different. We apply the fixed effects with time effects instrumental variable methods for controlling the endogeneity of retirement and individual characteristics. We use the HRS and other sister datasets such as ELSA and SHARE. We find that the elderly heterogeneously change their health investment behaviors depending on the analyzed countries, the category of health investment behaviors, gender and education level, stress at work and family characteristics. We can conclude that the elderly increase drinking alcohol, physical activities, and social attendance after retirement. This is partly consistent with the implications of Grossman model. The contribution are that we firstly do the international comparison of the effects of retirement on health investment behaviors in developed countries and discuss the influence of the change in health investment behaviors on the effect of retirement on health. Our results suggest that the change in health investment behaviors after retirement can be the promising factor to explain the effect of retirement on health after retirement in developed countries.

Anatomy of Financial Crises (G1, C1)

Seung jung Lee
,
Federal Reserve Board
Kelly Posenau
,
Federal Reserve Board
Viktors Stebunovs
,
Federal Reserve Board

Abstract

We extend the framework used in Aikman et al.(2015) that maps vulnerabilities in the U.S. financial system to a broader set of advanced and emerging economies. Our extension tracks a broader set of vulnerabilities and, therefore, captures signs of different types of crises. The typical anatomy of the evolution of vulnerabilities before and after a financial crisis is as follows. Pressures in asset valuations materialize, and a build-up of imbalances in the external, financial, and nonfinancial sectors follows. A financial crisis is typically followed by a build-up of sovereign debt imbalances as the government tries to deal with the consequences of the crisis. Our early warnings indicators which aggregate these vulnerabilities predict banking crises better than the Credit-to-GDP gap at long horizons. Our indicators also predict the severity of banking crises and the duration of recessions, as they take into account possible spill-over and amplification channels of financial stress to from one to another sector in the economy. Our indicators are of relevance for macroprudential and crisis management, in part, because they perform better than the Credit-to-GDP gap and do not suffer from the gap’s econometric flaws.

Are Fundamentals Driving Agricultural Land Values? Evidence From Panel Data With Cross Section Dependence (G1, Q1)

Zahra Tayebi
,
University of Florida
Gulcan Onel
,
University of Florida

Abstract

Empirical investigations of farmland valuation models typically involve testing for cointegration between cash rents and farmland values, or simply testing the stationarity of cash rents-to-value ratios. Early studies typically found evidence of divergence between the present value of future cash flows and the market price of farmland. A possible explanation for the implied absence of empirical support for these models might be that standard econometric tests may not be powerful enough to detect long run equilibrium when applied to a single time series. A promising approach, in this case, is to combine the sample information from the time-series dimension with that from a cross-section. A major issue that arises in every panel data study with potential implications on inference is the possibility that the cross-section units are interdependent. So called second-generation panel unit root tests have been proposed to address the problem of cross-section dependence in numerous ways depending upon the underlying structure of the dependence. In this paper, we aim to investigate the suitability of this newer class of panel unit root tests for testing the Net Present Value (NPV) hypothesis for U.S. farmland, and to provide empirical guidance on how to tackle the cross-section dependence issue when using panel time-series data. We focus on i-) tests based on common factor extraction, and ii-) Block bootstrapping approach. While some of these are quite flexible in allowing for more general forms of cross unit correlation structures, others are relatively restrictive. Some models require a large cross-section dimension to be implemented, while others can be applied to panels with small N. We compare the estimates to those from earlier studies, and discuss if the farmland values can be explained only by its economic fundamentals as suggested by the NPV hypothesis.

Are the Most Capable Auditors in the Big 4 Firms? (M5, J4)

Ana Millan
,
Autonomous University of Barcelona
Pedro Ortin
,
Autonomous University of Barcelona
Stefan Sundgren
,
Umea University

Abstract

“While our core business is all about delivering exceptional service to our clients, we know that if we attract and retain the best people – and invest in them – we will deliver the best results for our clients.” This statement is from the webpage of Ernst & Young (EY). Differences in the strategic focus of Big 4 and non-Big 4 firms would have consequences for their hiring and compensation policies. Based on the literature on employer learning models (Harris and Holmström, 1982) and assignment models (Sattinger, 1993), we study some issues related to the capabilities of auditors. We focus on the early phase of auditors’ careers, namely the years before and after passing the CPA exam. We develop a theoretical model predicting that more able auditors will take the exam earlier and perform better than other members in their cohort. If Big 4 audit firms have a competitive advantage for attracting and retaining the best auditors of each incoming cohort, we expect that auditors at Big 4 firms take the exam earlier and perform better. Furthermore, if firms have imperfect information about the auditor’s capabilities, the performance on the exam will provide information about the capabilities of the auditor. Thus, the performance on the CPA exam is expected to be used for updating information about the auditors’ capabilities and consequently their wages. Using data for 1,377 auditors that attempted to take the Swedish CPA exam for the first time in the 2007–2012 period, we find empirical support for the predictions that performance on the exam is a function of age and Big 4 affiliation. Furthermore, using wage data two years prior to and two years following the CPA certification for 431 auditors, we find support for the prediction that performance on the exam is positively associated with wage increases.

Are Ultra-Poor People Credit Constrained Only? Evidence From a Field Experiment in Bangladesh (O2, Q1)

Ahsanuzzaman Ahsanuzzaman
,
North South University

Abstract

Using data from an experiment (PRIME intervention) in Bangladesh, this paper studies the effects of information related to use of credit and farming practices, in addition to microcredit provision, on the labor supply, including effects on other indicators such as occupational choices, and their seasonal variation, in the greater Rangpur area in Bangladesh. More importantly, it distinguish between the effects of mere microcredit provision (PRIME) and of access to extra services (PRIME plus) on labor supply across seasons, specifically during monga (lean) season. The paper finds that participating in any type of program increases the likelihood of non-agricultural occupation choices. PRIME plus program participation reduces labor supply on wage employment by reallocating intrahousehold labor supply of adult female. However, it is not clear from the study whether the mechanism of intrahousehold reallocation is through bargaining theory or income effects or substitution effects. While PRIME credit only program reduces The child labor on casual day-labor basis wage employment (both boy and girl) non-PRIME credit only increases the girl child labor on casual day labor basis wage employment. While PRIME plus increases girl child labor supply on non-agricultural wage employment, non-PRIME credit program participation reduces it. It is additional services, namely PRIME plus or non-PRIME plus, which raises the self-employment labor supply at the individual level during monga season. At the household level, however, PRIME plus reduces agriculture based self-employment labor supply.

Asymmetric Information and the Securitization of SME Loans (G1, E1)

Ugo Albertazzi
,
Bank of Italy
Margherita Bottero
,
Bank of Italy
Leonardo Gambacorta
,
Bank for International Settlements
Steven Ongena
,
University of Zurich

Abstract

Based on granular data for the entire population of firms borrowing from Italian banks active in the securitization industry, we test for asymmetric information in this market. We borrow the methodology from the empirical literature on insurance, looking at the correlation between the degree of risk-transfer and the default (accident) probability. The methodology adopted also provides information on how loans are selected for securitization based on observable characteristics. In addition, the presence of multiple lending relationships is exploited to disentangle the adverse selection and the moral hazard components. We document the presence of asymmetric information, mainly in the form of adverse selection. Moral hazard is limited to credit exposures characterized by weak relationship ties between the borrower and the lender, indicating that a tight credit relation is a credible commitment to continue monitoring after the securitization. Importantly, the selection of securitized loans based on observables is such that it largely compensates the effects of asymmetric information, rendering the unconditional quality of securitized loans significantly better than that of non-securitized ones. Thus, despite the presence of asymmetric information, our results are inconsistent with the view that credit-risk transfer leads to lax credit standards.

Attribute Non Attendance in a Revealed Preference Study (Q5, R1)

Weibin Xu
,
Virginia Tech
Kevin J Boyle
,
Virginia Tech
George Parsons
,
University of Delaware
Mark Morrison
,
Charles Sturt University

Abstract

Attribute non-attendance (ANA) is investigated in the context of a random utility travel cost model (RUM) . ANA has been an expanding area of investigation in stated preference studies, but has not been considered in the revealed preference applications. RUMs are used to study preferences for goods and services defined in terms of their attributes. An implied assumption of RUM recreation demand models is that participants consider all the attributes in the model when making their site choices. Failure to consider one or more of the attributes is called attribute nonattendance . The application is valuing riparian vegetation along waterways in public green spaces along waterways in southern Sydney, Australia. We find that ANA should be taken into account when studying preferences for recreation sites, and the treatment of ANA in model estimation affects estimates of Marshallian surplus and can influence policy recommendations.

Autocratic Rule and Social Capital: Evidence from Imperial China (N1, O1)

Melanie Meng Xue
,
University of California-Los Angeles
Mark Koyama
,
George Mason University

Abstract

This paper studies the consequences of autocratic rule for social capital in the context of imperial China. Between 1660--1788, individuals were persecuted if they were suspected of possessing subversive attitudes towards the ruler. Using a difference-in-differences approach, our main finding is that these persecutions led to an average decline of 38% in the number of charitable organizations in each subsequent decade. To investigate the long-run effect of persecutions, we examine the impact that they had on the provision of local public goods. During this period, local public goods, such as basic education, relied primarily on voluntary contributions and local cooperation. We show that persecutions are associated with lower provision of basic education suggesting that they permanently reduced social capital. This is consistent with what we find in modern survey data: persecutions left a legacy of mistrust and political apathy.

Basic Education and Persistent Regional Inequalities (R1, O4)

Francesco D'Acunto
,
University of Maryland

Abstract

The differences in basic education across European regions have persisted for centuries, despite dramatic economic shocks and institutional change. Higher historical basic education in regions predicts higher present-day basic education, income per capita, and low-tech innovation, and is unrelated to college education. At the micro level, manufacturers that employ more blue-collar workers are more likely to innovate their products and processes, invest more, and face less binding financial constraints in regions with higher historical basic education. I exploit the spatial diffusion of Protestantism and of the printing press to identify the origins of spatially-persistent basic education. Past growth, values, or past and present-day institutional quality do not fully explain the persistence of basic education and its long-run association with economic outcomes. These results support the view that education is a fundamental cause of economic growth (Glaeser et al., 2004).

Biodiversity and Productivity in Agriculture: Evidence From Malawi (Q1, Q2)

Maksym Ivanyna
,
Michigan State University

Abstract

I use data from a farmers' survey in Malawi to compare two agricultural technologies: monoculture maize and crop diversification (maize-legume intercrop). I match farmers locations with data on rainfall and air temperature to test whether more biodiverse agriculture is better at absorbing weather shocks, and hence dealing with 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 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 I am not able to identify the average population effect, I build a model to show that the effect I do 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 resistance-improving, if agricultural land used for maize-legume intercrop is expanded by about nine percentage points.

Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy (E3, G3)

Adam Gulan
,
Bank of Finland
Roberto Chang
,
Rutgers University
Andres Fernandez
,
Inter-American Development Bank

Abstract

Corporate sectors in emerging market economies have increased noticeably their reliance on foreign financing, presumably reflecting low global interest rates. This trend has largely reflected increased bond issuance by emerging economies' frms, in contrast to the bank loans that dominated capital flows in the past. To shed light on these developments, we develop a stochastic dynamic model of an open economy in which the levels of direct versus intermediated finance are determined endogenously. The model embeds the static, partial equilibrium model of Holmström and Tirole (1997) into a dynamic general equilibrium setting. It generates an increase in both bonds and loans following an exogenous drop in world interest rates; also, the ratio of bonds to loans increases because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. These implications are in line with empirical observations and highlight the role of equity in the adjustment process. More generally, the model is suitable for studying the interaction between modes of finance and the macroeconomy, and is of independent interest.

Boundary Spanning in Academia: Antecedents and Near-Term Consequences of Academic Entrepreneurialism

Kevin M Kniffin
,
Cornell University
Andrew S. Hanks
,
Ohio State University

Abstract

Given the complexity of questions studied by academicians, institutions are increasingly encouraging interdisciplinary research to tackle these problems; however, neither the pathways leading to pursuit of interdisciplinary research nor the resulting market outcomes have been closely examined. In this study, we apply prior work on the subject of academic specialization and generate three main findings related to interdisciplinary research pursuits. First, individuals who complete an interdisciplinary dissertation display near-term income risk since they tend to earn nearly $1,700 less in the year after graduation. Second, students whose fathers earned a college degree demonstrated a .8% higher probability of pursuing interdisciplinary research. Third, the probability that non-citizens pursue interdisciplinary dissertation work is 4.7% higher when compared with US citizens. Our findings quantify the risks of interdisciplinary work, contribute to conceptual models for academic specialization, and address policy debates that are relevant to academia as well as other industries.

Building the Auction Markets for the World’s Premier Risk-Free Securities: A Structural Analysis of the Primary Dealer System in the United States Treasury Auctions

Eiichiro Kazumori
,
State University of New York

Abstract

The goal of this paper is to quantify the contribution of the primary dealer system in the US Treasury auctions to the debt management objective of lowering the funding cost over time in the Treasury auction market structure after the financial crisis. The new idea of the paper is that the primary dealer system affects the bidding behavior and the market outcome through two channels. The first channel is the "information pooling channel" where a primary dealer pools its information with that of indirect bidders when the primary dealer observes the indirect bidders' bids. The second channel is the "competition channel" where the auction system maintains its competitiveness by keeping bids by indirect bidders rather than the primary dealers internalizing them. We first quantify the change in the Treasury primary market structure using the latest data till October 2015. We then partially identify the effect of auction design in this new economic market structure through structural estimation and counterfactual analysis using the asymptotic approximation method. The main finding is that the primary dealer system provides the lowest price volatilities while maintaining the equal level of auction prices through these two channels in comparison with the alternative direct bidding system and the syndicate bidding system. These properties of the primary dealer system could be valuable to the debt management objective and to the financial stability in the Treasury market structure after the financial crisis.

Business Cycle Synchronization, Value Added Trade, Equity Market Linkages and Industrial Structure (F4, F6)

Linyue Li
,
Central University of Finance and Economics

Abstract

This paper aims to provide a new theory of business cycle synchronization, in a framework that integrates value added trade, equity market linkages and industrial structure. Is there "China Effect" in the transmission of business cycle synchronization? The transmission of business cycle synchronization between China's economy and world economy will be mainly focused on, under globalization background and "New Normal", as China is gradually integrating into the world. Starting from macroeconomic data, through constructing multi-level dynamic factor model, the study combines the traditional economic cycle theory, the international economic cycle theory, the world economic cycle theory and its index system with latest new framework of business cycle model. Considering the characteristics of "New Normal" in China from macroeconomic level to industrial level and firm level, the external and internal impact on China's economy and world economy through international trade, international finance, industrial structure and international policy coordination will be one of the concern to do analysis and reveal the importance of the research on the new features of the world economic cycle fluctuations for the coordination of China's economy and the world economic development. Under the circumstance of sustainable growth in China and world economy, the study of international trade and international financial interdependence will be timely and promising. Accordingly, the research analysis will put forward policy recommendations for China's response to the new characteristics of world economic cycle fluctuations, which has important theoretical significance and practical application value. And at the same time, international economic policy cooperation is promoted greatly. This paper will also discuss China’s economic relationship with other emerging Asian countries and with major industrial countries, since it would be interesting to investigate the direction and magnitude of growth spillovers and business cycle synchronization between China and other major players in the world economy for policy implications.

Can an Emission Trading Scheme Promote the Outdated Capacity Withdrawal in Energy-Intensive Sectors? A Case Study on China’s Iron and Steel Industry (L1, D4)

Lei Zhu
,
Beihang University

Abstract

Large energy conservation potential and outdated capacity are the two main features of energy-intensive sectors in developing countries. Such countries also seek to implement market-based options to further control domestic carbon emissions as well as promote outdated capacity withdrawal and production-level upgrades. This paper presents a quantitative assessment of the emission trading scheme (ETS) for China’s iron and steel industry. The diverse array of normal and outdated capacities were modeled in a two-country, three-good partial equilibrium model. The energy-saving benefits that result from emission abatement were captured through the technology-based marginal abatement cost (MAC) curve. Simulation results show that the abatement potential can be underestimated if the energy-saving benefits that result from emission abatement are not considered. In the scenario analysis, we demonstrated that the free allocation of allowances can cause a competitiveness distortion among domestic normal and outdated capacities, and such a distortion cannot be corrected by implementing supplementary measures such as border carbon adjustments. Given the government’s intention to promote outdated capacity withdrawal and production-level upgrading, an output-based allocation approach is strongly suggested for China’s iron and steel sector.

Can Equity Crowdfunding Mitigate the Gender Gap in Entrepreneurship? (M1, J1)

Erin McGuire
,
University of Arizona

Abstract

The gender gap in entrepreneurship is well-documented. Firms founded by females raise significantly less start-up capital, which hurts their chances of success. There is empirical evidence that the gap can be partially explained by factors in the financial industry and by female entrepreneurs' preferences for particular types of financing. A new method of acquiring startup capital, equity crowdfunding, has the potential to lower this gender gap by opening access to a broader variety of investors. Using a novel dataset of startups and their funding sources compiled from CrunchBase API, I analyze whether the legalization of general solicitation (public advertising of raising capital) and equity crowdfunding through Title II of the JOBS Act in 2013 had an impact on female entrepreneurship. I argue that these changes to the entrepreneurial financing market had a larger impact on females due to access to a larger variety of investors and changes to requirements in relationships between investors and entrepreneurs. Estimates from a triple difference-in-differences model using the variation in competition in the traditional banking sector indicate that Title II increased aggregate funding on average by 22% more for female entrepreneurs in counties where the market concentration of traditional banking was 1 standard deviation above the mean.

Can Health Spending Be Reined in Through Supply Restraints? An Evaluation of Certificate-of-Need Laws (I1, J2)

James Bailey
,
Creighton University
Tomer Hamami
,
Northwestern University

Abstract

For 50 years, US policy-makers and economists have searched for ways to slow the growth of spending on health care. One approach currently taken by 35 states is to restrict the supply of health care by requiring new and growing providers to show that they serve an “economic need”. Hospitals and certain other health providers must obtain a Certificate of Need (CON) from a state board before opening or expanding. We develop the first theoretical model of how these laws affect total spending. We show that in a simple model where CON restricts supply, the effect of CON on spending depends on the elasticity of demand for health care. CON will work to restrain spending when demand is elastic; however, most estimates show the demand for health care to be quite inelastic. We therefore predict that CON is likely to backfire, resulting in increased prices for health care without much reducing its use. We show that the same conclusions largely hold in a more complex model inspired by Gaynor, Haas-Wilson and Vogt (2000). Using data from the National Health Expenditure Accounts, we estimate that CON laws do not reduce spending by any major payer or on any major type of provider, and that they increase spending on some types of health care.

Can Seminars for Export Promotion Work for SMEs Through Inter-Firm Networks? Evidence From a Randomized Controlled Trial in Vietnam (F1, C1)

Yasuyuki Todo
,
Waseda University
Yuri Kim
,
University of Tokyo
Daichi Shimamoto
,
Waseda University
Petr Matous
,
University of Sydney

Abstract

This paper investigates the impact of informational and motivational seminars for export promotion to small and medium enterprises (SMEs) in the apparel and textile village clusters in Northern Vietnam. In order to control for the self-selection biases which the existing literature on programs for export promotion did not fully correct for, we conducted a randomized control trial and invited randomly selected firms to one-day seminars. Because only some of the invited firms participated in the seminars, we employ a 2SLS approach in which dummies for random invitation are used as instruments for the actual participation. Then, we find that the seminars for export promotion had some positive effects on participant firms’ preparation for, perception of, and engaging in exporting. In addition, we find that a firm’s participation in seminars are encouraged when its peer firms in the same cluster also participate, even after we correct for possible endogeneity biases by fully utilizing our RCT. This strategic complementarity arises probably because participation with peers lowers psychological costs of participation and increases expected returns by enabling participants to confirm information learned with each other although a negative effect from free riding on peers' information is relatively small. Therefore, our findings suggest that to facilitate exports of SMEs for which lack of information is a barrier to export, besides low productivity, governments should provide information through seminars and training courses to them. In addition, neighboring firms which exchange information with each other should be invited to seminars together to promote participation.

Can We Estimate the Cost of a Recession? (E3, E2)

Sam Bullard
,
Wells Fargo Securities
John E. Siliva
,
Wells Fargo Securities, LLC
Azhar Iqbal
,
Wells Fargo Securities

Abstract

This paper develops a framework to estimate economic costs of a recession for the U.S. economy. The cost is estimated in terms of losses in per capita income, consumption and employment. We estimate the cost for each recession since 1948 to examine a ranking from most to least. In addition, the combined cost of all recessions is also estimated. Our proposed framework consists of two phases with the first phase generating conditional forecasts of target variables (PCE for example) using the pre-recession growth rates of the variables as the benchmark. Essentially, we forecast what would have been the growth path for the variables of interest if there were no recession. We then calculate the gap between forecasted and actual values of variables to estimate potential cost of recessions. The second phase utilizes pre-recession potential GDP to estimate the cost of recession. The intuition behind this phase is that the pre-recession potential GDP level is estimated using expansion phase growth rates and, generally speaking, these rates are higher than those which are calculated during recession/recovery times. Thereby, the gap between these two measures (estimated at two different time periods) of potential GDP is utilized as a benchmark to estimate the cost of recessions. In addition, we estimate the level of the selected variables that correspond to the pre-recession potential GDP growth rates. Furthermore, we combine recession costs from the above two phases into one using average of both costs. Another useful application of our proposed framework is to estimate the costs/benefits of the lower/higher productivity growth eras. Several different base periods are considered to estimate the productivity influence on the economy. For instance, we consider 1973 as the base to calculate cost of the lower productivity era. Another scenario utilizes 1996 to estimate benefits of higher productivity.

Carbon Trading, Carbon Taxes and Social Discounting (Q5, H2)

Maria Elisa Belfiori
,
Colorado State University

Abstract

This paper studies the optimal taxation of carbon emissions in a dynastic economy with altruistic generations. When the social welfare function places Pareto weights on unborn generations, the social discount rate is lower than the discount rate of the currently alive generation. The choice of the social discount rate in macro-climate models has sparked a heated debate. Stern (2007, AER 2008) argues in favor of a low discount rate based on a desire for intergenerational equity. Nordhaus (2007), Weitzman (2007), and many others criticize this point of view. They argue that the discount rate should be consistent with market returns. This paper argues that the relevant question is what the appropriate Pareto weights are—not what the appropriate social discount rate is. In this sense, there is no right or wrong answer. Moreover, this paper shows that alternative welfare criteria have important implications for the structure of the optimal regulatory system. In particular, the paper shows that: (i) the optimal carbon tax is not equal to the social cost of carbon; (ii) a subsidy on the reserves of oil in situ is sometimes optimal; (iii) carbon trading programs should limit the award of the carbon offsets allowances that can be used as a compliance instrument.

Childhood Shocks and Investment Behavior (G1)

Chi Liao
,
University of Manitoba

Abstract

We examine whether individuals who experienced household financial instability during their formative years as a child make investment decisions differently than those who have not had such experiences. Using a panel survey that follows children through to adulthood, we find that adults who experienced large negative household income shocks during childhood are less likely to participate in the stock market. However conditional on stock market participation, individuals who experienced negative income shocks during childhood invest a larger proportion of their financial assets in stocks. Childhood shocks appear to affect individuals' investment behavior primarily through a beliefs channel, as opposed to altering an individual's risk preferences.

China’s Changing Coercive Diplomacy: Reassessing the “Dalai Lama Effect” and Beijing’s Use of Punitive Economic Measures (F5, F1)

Xianwen Chen
,
Norwegian Institute for Nature Research
Bjornar Sverdrup-Thygeson
,
Norwegian Institute of International Affairs
Johann Osbakk
,
London School of Economics and Political Science

Abstract

Economic statecraft is a key tool for China, and its punitive edge an increasing feature of Beijing’s international relations. Combining the latest statistics with quantitative and qualitative analysis, this article finds that the current literature informing academic and political debates on the topic has failed to account for the heterogeneity of Chinese punitive trade measures. The automaticity and magnitude of China’s punitive measures on affected countries’ trade relations have been significantly overestimated as a result of not fully recognising and accounting for the extent and variety of Chinese measures of geoeconomic statecraft over the last decade. This article reassesses the data on Chinese trade diplomacy, in particular the so-called “Dalai Lama Effect” that suggest that governments receiving the Dalai Lama experience an average 16.9% reduction in exports to China in the current and next year. Our analysis based on updated trade numbers finds this to be of questionable statistical validity, and finds no significant “Dalai Lama Effect” for the 2002-2008 nor the 2002-2014 periods. Employing the framework of coercive diplomacy, we then examine the cases of Germany, France, Denmark and Norway, and argue that China’s punitive diplomacy is more light-weight, flexible and sophisticated than commonly assumed.

Coauthorship and the Measurement of Individual Productivity (D8, A1)

Rafael Treibich
,
University of Southern Denmark
Karol Flores-Szwagrzak
,
University of Southern Denmark

Abstract

Over the last decades, teams have come to dominate the production of scientific research, both in terms of quantity and impact. Yet, researchers still have to be evaluated on an individual basis for important decisions such as hiring, tenure or funding. In this paper, we propose a new index of individual scientific productivity that formally accounts for coauthorship. In contrast with existing measures, our index, CoScore, reflects the complete coauthorship network, not only the publication record of the author being ranked. CoScore uses the varying levels of success of all academic partnerships to infer, simultaneously, individual productivity and the extent of an author's contribution to each paper. The credit for a paper is allocated proportionally to each of its coauthors' scores, where the score of an author is defined as the sum of her contributions to all papers. Crucially, the scores of all authors are determined simultaneously and endogenously via the solution of a fixed point problem. We illustrate CoScore for a large database of papers in economics.

Cognitive Bubbles (C9, D8)

Ciril Bosch-Rosa
,
University College for Financial Studies-Madrid
Thomas Meissner
,
Technical University of Berlin
Antoni Bosch-Domenech
,
Pompeu Fabra University

Abstract

Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated many times. Here we test whether the occurrence of bubbles depends on the experimental subjects’ cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects’ cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble- crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects’ confusion and, therefore, raises some doubts about the relevance of this type of experiments.

Cognitive, socioemotional, and behavioral returns to college quality

Utteeyo Dasgupta
,
Wagner College
Subha Mani
,
Fordham University
Smriti Sharma
,
United Nations University
Saurabh Singhal
,
United Nations University

Abstract

We exploit the variation in the admissions process across colleges of a leading Indian university to estimate the effects of enrolling in a selective college on cognitive attainment using scores on standardized university exams; behavioral preferences such as risk, competitiveness, and overconfidence; and socioemotional traits using measures of Big Five personality. Using a regression discontinuity design, we find that enrolling in a selective college leads to improvements in females’ exam scores with no effect on males’ scores. Marginally admitted females in selective colleges become less overconfident and less risk averse as compared to their counterparts in the less selective colleges. Males in selective college experience declines in extraversion and conscientiousness. We find higher attendance rates among females to be one of the likely channels explaining the gender differences in returns to better college and peer environment.

Collateral Damage: Dollar Strength and Emerging Markets’ Growth

Nicolas Magud
,
International Monetary Fund
Pablo Druck
,
International Monetary Fund
Rodrigo Mariscal
,
International Monetary Fund

Abstract

We document, using data for 1970–2014, that during periods of U.S. dollar appreciation, real GDP growth in emerging markets slows down—and vice versa. The main transmission channel is through an income effect owing to the impact of the dollar on global commodity prices and capital/production inputs imports. As the dollar appreciates, dollar commodity prices fall, in turn depressing domestic demand growth via lower real (dollar) income, decelerating real GDP growth in emerging markets. Domestic demand growth also decelerates in countries that rely on importing capital or inputs for domestic production— as more depreciated countries increase the cost of importing capital and inputs. Moreover, we show that these effects hold despite any potential expansionary expenditure-switching effect owing to the relative currency depreciation of emerging market economies when the dollar appreciates. We also show that despite controlling for the effects of the U.S. real exchange rate appreciation and real GDP growth higher U.S. interest rate further reduces growth in emerging markets. All these effects are stronger in countries with more rigid exchange rate regimes. Therefore, at the time of writing, emerging markets’ growth is likely to remain subdued for some time reflecting, in part, the expected persistence of the strong dollar and the normalization of U.S. interest rates.

College Admissions and the Labor Market Beauty Premium (I2, I2)

David Ong
,
Peking University
Man Xie
,
University of Florida

Abstract

Beautiful people earn more. Surprisingly, this premium is often larger for men than for women, and is independent of customer contact, e.g., even in software engineering. Overlooked is the possibility that beauty can influence college admissions. We investigate this academic contributor to the labor market beauty premium by sampling 1,800 social media profiles of students from universities ranked from 1 to 200 in China and the US. Chinese university admissions are based on standardized test scores. In contrast, US universities use also extracurricular activities and grades, which are not necessarily beauty-blind. Consistent with beauty-blind admissions, we find that the beauty of students and the rank of their school are uncorrelated in China. This suggests that neither beauty nor its correlates (e.g., family income, intelligence, genetic quality…etc) are necessarily related to academic ability, as measured by standardized tests. However, we find that only better-looking White men get into much higher ranked schools in the US. Indeed, a one percentage point increase in beauty rank corresponds to a sizable 20 school increase in school rank for White men. Thus, better-looking White men in particular seem to be advantaged in the US college admissions system. Such an advantage corresponds to roughly a 7 percent increase in salary 10 years after graduation. Our findings suggest that the surprisingly high and field independent labor market beauty premium found for men (who are mostly White) in the US can be an unintended side effect of using non-academic/high school extracurricular activities in elite college admissions decisions.

Communications and Attitudes Toward Uncertainty Among Different Types of Subjects: Experimental Evidence from Bangladesh (D8, D7)

Ahsanuzzaman Ahsanuzzaman
,
North South University
George W. Norton
,
Virginia Tech

Abstract

Despite its role in economic decision-making, little attention has been paid to measuring ambiguity aversion of poor people in developing countries or in finding the role of ambiguity aversion in economic decision-making. Risk experiments in the previous studies have been designed in such a way that individuals face the risky and/or ambiguous situations alone. Individuals in the real world, especially farmers in developing countries, are likely to obtain information from peers before making a decision about a new innovation that has an ambiguous nature. This paper addresses two broad issues. The first issue is to measure the risk and ambiguity preferences of Bangladeshi rural farmers using experimental lotteries. The paper investigates whether the attitudes toward uncertainty (risk and ambiguity) differ when farmers face the uncertainty alone versus when they are allowed to communicate with peer groups of 3 or 6. A second issue is to find whether measures of attitudes toward uncertainty are the same across different groups of subjects using experimental lotteries at different environments. To do so, the paper replicates the same experiments with groups of students in two universities in Bangladesh. Finally, the paper also investigates whether demographic variables affect attitudes toward risk and ambiguity aversion for both farmer and student groups. It also investigates the factors that influence agents’ switching behavior between facing uncertainty alone and in groups. It finds that both farmers and students are, on average, risk and ambiguity averse. Communications with peers reduce both risk and ambiguity aversion with differences across the groups of subjects. When disaggregating the measured risk attitudes by gender, female students show more risk aversion than male students in the sample. While both students’ and farmers’ demographic characteristics affect risk and ambiguity aversion, older farmers and farmers with less schooling than those of the group average, and students with lower high school grades than that of the group average, become more risk averse deciding after communication with peers than deciding alone.

Comparing Apples to Apples: Estimating Consistent Partial Effects of Preferential Economic Integration Agreements (F1, C1)

Filip Tarlea
,
ETH Zurich and University of California-Berkeley
Peter Egger
,
ETH Zurich, CEPR, and CESifo

Abstract

The international trade literature is primarily concerned with identifying the determinants of trade flows. The main workhorse of trade models is the gravity equation, which suggests as main drivers the exporter and importer sizes, geography (distance between the two countries) and other bilateral trade costs such as colonial past, wether the countries share a common border or have the same language, and whether the countries are formally connected by any preferential economic integration agreement (PEIA). Among the proeminent such agreements are the preferential trade agreements (PTA), the bilateral investment treaties (BIT) and the double taxation treaties (DTT). Since these agreements are among the very few instruments that policy makers have to shape international trade patterns, and given the remarkable surge in the number of such agreements over the last decades, there is strong interest in precisely estimating the effect they have on international trade flows. We use a new covariate-balancing technique to estimate consistent partial effects of PEIAs. Namely we use entropy-weighting regression to estimate a gravity-based model of international trade and compare the results with those obtained with propensity score-weighting regression. Without meeting the covariate balancing assumption (as e.g. in propensity score weighting) the effects of PEIAs on exports are upward biased, as they are in the absence of any weighting. Combining PEIAs with each other tends to lead to larger joint effects on exports than the ones of individual PEIAs. The non-parametric estimation reduces the bias stemming from a country pair's self selection into a PEIA, an important challenge in parametric estimation models, most frequently used in international trade.

Competition Entry and Performance Feedback: The Impact of Information Disaggregated by Gender (C9, J2)

Sabrina Jeworrek
,
IAAEU and University of Trier

Abstract

By providing different forms of performance feedback before choosing between a piece-rate and a tournament compensation scheme, I test whether the gender tournament gap diminishes in size since individuals’ entry decision might be driven by incorrect self-assessments. Only the provision of information on average performance by gender actually shrinks the gender tournament gap by about 25 percent, which is, in particular, due to men with below average ability opting for the piece-rate more often. These results highlight that beliefs on one’s own and others’ abilities are still biased by gender stereotypes. Additonally, I find that, despite learning that they are not less able than men, high ability women opt even less often for the payoff enhancing tournament - pointing to the possibility that women feel increasing pressure to win the tournament in order to fulfill the expectations of others (or their own expectations) so that they shy away from competition even more.

Competitive Dominance of Emission Trading Scheme Over Pigouvian Taxation in a Globalized Economy (Q5, L5)

Hsuan-Chih Lin
,
Academia Sinica
Seung-Gyu Sim
,
University of Tokyo

Abstract

It is widely accepted that the emission trading scheme (delegating the emission pricing authority to the market mechanism) is not superior to the Pigouvian taxation scheme (the constrained planner's problem). In contrast, we demonstrate that in a globalized economy with international trade and cross border pollution, (i) the former outperforms the latter in terms of domestic welfare, and (ii) as more countries switch to the former, global welfare improves. We find that adopting the former incentivizes the foreign country to raise emission taxes without concerns on excessive shrink of its domestic production and aggravation of cross border pollution from the home country.

Concentration Bias in Intertemporal Choice (D9, C9)

Holger Gerhardt
,
University of Bonn
Frederik Schwerter
,
University of Bonn
Louis Strang
,
University of Bonn

Abstract

We present novel results on intertemporal choices that are at odds with both exponential and hyperbolic discounting. In particular, via a series of laboratory experiments, we provide causal evidence that intertemporal choices are systematically affected by whether consequences of these choices are concentrated in a few or dispersed over multiple periods. Although dispersed payoffs and costs are prevalent in everyday life, no empirical study so far has investigated whether spreading payments over time causally impacts discounting. We find that (i) individuals are less patient when the advantages of being patient are dispersed over many future periods than when they are concentrated in a single future period; we also find that (ii) individuals are more patient when the disadvantages of being patient are dispersed over multiple earlier periods than when they are concentrated in a single earlier period. Taken together, these findings demonstrate a bias toward concentration in individuals’ intertemporal choices. Our results are thus in line with the predictions of the recent theoretical model by Kőszegi and Szeidl (Q. J. Econ., 2013). Our findings suggest that previous studies—both theoretical and experimental—may have neglected an important factor that influences intertemporal decisions.

Connections in Scientific Committees and Applicants' Self-Selection: Evidence From a Natural Randomized Experiment

Manuel Bagues
,
Aalto University
Mauro Sylos-Labini
,
University of Pisa
Natalia Zinovyeva
,
Aalto University

Abstract

We examine how the presence of connections in scientific committees affects researchers' decision to apply for a promotion and their chances of success. We exploit evidence from Italian academia, where in order to be promoted to an associate or full professorship, researchers are firstly required to qualify in a national evaluation process. Prospective candidates are significantly less likely to apply when the committee includes, through luck of the draw, a colleague or a coauthor. This pattern is driven mainly by researchers with a weak research profile. At the same time, applicants tend to receive more favorable evaluations from connected evaluators. Overall, the evidence suggests that connected researchers benefit both from a positive bias in evaluations and from access to better information about their chances of success, which helps them to optimize the timing of their application and avoid costly errors. Our study shows that connections are an important determinant of application decisions in academia and, more generally, it highlights the relevance of self-selection for empirical studies on discrimination.

Contraceptive Use and Role of Caste Network (I1, Z1)

Esha Sinha
,
National Academy of Sciences, Engineering and Medicine

Abstract

Social network play a crucial role in determining individual’s usage of contraceptive in societies that rely on such networks for economic and social mobility. Using NFHS 2005-2006 data I estimate the impact of local caste based network on an individual woman’s decision to use modern contraceptive controlling for other covariates such as age, education, working status, percentage of daughters among living children, partner’s education and women autonomy in terms of accessing health care. I test for diffusion effect or learning effect of family planning program and the influence of interaction with health worker on contraceptive choice. I rely on Hierarchical Modeling as my methodological approach. The analysis point to a positive same-caste and cross-caste effect; if a higher proportion of women belonging to certain caste community use modern contraceptive, that has a positive association with probability of an individual women choosing a modern contraceptive, irrespective of the caste community she belongs to. I take into account the caste-religion interface by estimating the impact of local religion based network on modern contraceptive use.

Coordinating Expectations Through Central Bank Projections (C9, E5)

Luba Petersen
,
Simon Fraser University

Abstract

What type of forward guidance should central banks communicate? This paper uses a novel experimental framework to study the effects of central bank communication on the coordination of expectations. Subjects are incentivized to forecast the output gap and inflation in an experimental economy where their aggregated expectations directly influence macroeconomic dynamics. An automated central bank forms projections about the economy assuming subjects form expectations following the REE solution. Using a between-subject design, we vary whether the central bank communicates output and/or inflation projections, interest rate projections, or no information. Communicating about future output or inflation generally reduces the degree to which subjects rely on lagged information and increase their reliance on the REE solution. REE interest rate projections, by contrast, do not significantly alter subjects' forecast accuracy, disagreements, and heuristics used, due to the significant heterogeneity in how subjects utilize the information. The economy can, however, become significantly destabilized when the central bank's projections instead assume private agents weight historical information in their own personal forecasts. Central bank credibility significantly decreases when the central bank makes larger forecast errors when providing forward guidance about either output and inflation, but not when they provide a dual projection. Our experimental findings suggest that expectations are best coordinated and stabilized by communicating REE output and inflation forecasts simultaneously.

Corruption and Legislative Complexity: A Macroeconomic Analysis (O4, K2)

Giuseppe Di Vita
,
University of Catania

Abstract

In this paper we use a growth model to investigate the macroeconomic impact of legislative complexity on growth and welfare, in comparison with political corruption. After a careful review of the economic literature on corruption and legislative complexity, we set up the model. The main theoretical findings of the analysis are that legislative complexity, like corruption, constitutes a constraint to growth and determines a redistribution of income in favor of politicians. To check if the previsions of the model are verified we introduce a simple indicator of legislative complexity, built in a way that makes it internationally comparable, and consider the data for sixty-seven countries; using OLS and 2SLS econometric models we estimate the effects of legislative complexity and corruption on the growth rate of per capita income. The results of the econometric analysis support the hypothesis that legislative complexity is a constraint to growth, and that in countries with a long history of liberal democracy legislative complexity determines a redistribution in favor of the more wealthy social classes.

Credit Constraints and the Government Spending Multiplier (H3, H5)

Salem Abo-Zaid
,
Texas Tech University
Ahmed Hashmiwu
,
Texas Tech University

Abstract

Credit frictions have been referred to as raising the effectiveness of government spending during periods of liquidity trap. This paper studies the government spending multiplier in a quantitative model with households-side and firm-side credit constraints. We show that the premise that credit frictions generate larger multipliers during liquidity-trap periods is questionable. In particular, we have three main results. First, due to credit frictions, the government spending multiplier during periods of liquidity trap declines, particularly with household-side borrowing constraints. Second, when credit frictions are absent, the spending multiplier of liquidity-trap periods is larger than the spending multiplier of normal times (during which the nominal interest rate is free to adjust). However, a relatively small degree of credit frictions, especially in the households' sector, reverses this result. Therefore, our analyses not only cast doubts about fiscal policy being more effective because of credit frictions but that it is less likely to occur during liquidity-trap periods. Third, the sector on which the credit constraint is imposed matters for the conclusions regarding the effectiveness of fiscal policy: households-side and firm-side credit constraints affect the dynamics of the model differently, one through aggregate demand while the other through aggregate supply, leading to opposing effects on the spending multiplier.

Credit Financing, Financing Constraints and Enterprise Investment Efficiency: A Comparative Study of Manufacturing Enterprises in China and India (G2, G3)

Deng Xiangrong
,
Nankai University
Zhang Jiaming
,
Nankai University
Guo Xiaochun
,
Nankai University

Abstract

At present, there is no consensus in the literature concerning the influence of different credit financing on investment efficiency of enterprises, especially the lack of empirical evidence in developing countries. In this paper, based on the World Bank enterprise survey data, using the Heckman sample selection model, we study the effects of bank credit and trade credit on investment efficiency of manufacturing enterprises in China and India. The results show that in China, trade credit has a significant positive effect on investment efficiency of manufacturing enterprises. In contrast, bank credit has a significant negative effect. In India, trade credit can also improve the investment efficiency of manufacturing enterprises, but bank credit had no significant effect. From the point of view of the degree of financing constraints, the effects of bank credit and trade credit also have significant differences. In China, regardless of the financing constraint condition faced by the enterprises, trade credit improves the investment efficiency significantly. Bank credit, however, reduces the investment efficiency of weak financing constraint enterprises on the one hand, while on the other improves the investment efficiency of strong financing constraint enterprises. In India, both bank credit and trade credit have no significant effect on investment efficiency of weak financing constraint enterprises, but trade credit has a significant positive effect on the investment efficiency of strong financing constraint enterprises. In conclusion, this paper shows that trade credit can play a greater role in promoting the investment efficiency of manufacturing enterprises in developing countries.

Crime Risk and Housing Values: Evidence from Colorado's Natural Experiment

Raymond Brastow
,
Federal Reserve Bank of Richmond
Yuna Kim
,
University of North Carolina-Chapel Hill
Jeremy G. Moulton
,
University of North Carolina-Chapel Hill
Scott Wentland
,
Bureau of Economic Analysis

Abstract

Colorado voters approved a statewide ballot initiative in 2012 to legalize the use of marijuana for recreational use, providing a natural experiment for looking at the external effects of the crime and related crime risk on the residential housing market. Accompanying the change in crime patterns after the law takes effect, this policy change also provides a unique setting to investigate the external effects of exclusively cash-based businesses (i.e. marijuana dispensaries) on surrounding real estate and potential consequences of unbankable economic activity. Using a large MLS microdata set from Colorado, geocoded data on individual crimes, and dispensary locations statewide, we analyze both the impact of dispensaries on nearby real estate and the underlying mechanism (changes in crime patterns) associated with this policy change. Our empirical results underscore the importance of local (dis)amenities and access to market amenities in housing valuation and the external impact of crime risk on markets more generally.

Cross-Border Leveraged Buyouts (G3, D2)

Selva Bahar Baziki
,
Central Bank of the Republic of Turkey

Abstract

A substantial share (8.3%) of all cross-border Mergers and Acquisitions (M&As) undertaken during 1998-2008 consisted of cross-border buyouts performed by Private Equity (PE) firms, and this generated a much heated discussion about the role of PE in the international economy in contrast to Multinational Enterprises (MNE). First, to understand how this share varies across countries and time, I use a model of cross-border M&As similar to Norback et al. (2013). In this model PE firms restructure the target at a strictly higher level than any MNE rivals; and higher transaction costs, international market integration, and property rights reduce the relative presence of PE cross-border leveraged buyouts relative to cross-border M&As performed by MNEs. Next, I find evidence for the predictions of the model using a comprehensive global data-set that covers all majority-owned cross-border M&As that were completed between 1998 to 2008. Finally, in contrast to the popular tendency to discount the benefits of PE, the welfare analysis reveals that in a cross-border setting allowing PE firms to acquire domestic firms increases the acquisition price, and consumer surplus which results in higher welfare for the domestic economy.

Cross-Border Prudential Policy Spillovers: A Global Perspective (F3, G2)

Catherine Koch
,
Bank for International Settlements
Stefan Avdjiev
,
Bank for International Settlements
Patrick McGuire
,
Bank for International Settlements
Goetz von Peter
,
Bank for International Settlements

Abstract

We combine the BIS international banking statistics with the IBRN prudential instruments database in a global study which examines the effect of prudential measures on international lending. Our bilateral setting, which features multiple home and destination countries, allows us to simultaneously estimate both the international transmission and the domestic effects of such measures. We find that changes in loan-to-value limits affect the international component of bank lending, while local currency reserve requirements have a significant impact on the local lending of banks’ foreign affiliates. Balance sheet characteristics also play an important role in the international transmission of prudential measures.

Dark Side of Incentives: A Randomized Field Experiment in Uganda (I2, I3)

Dagmara Celik katreniak
,
CERGE-EI

Abstract

Throughout our lives, we are routinely offered different incentives as a way to motivate us, such as absolute and relative performance feedback, and symbolic, reputation or financial rewards. Many researchers have studied the effects of one or more of these incentives on how people change their performance. However, there can also be important psychological outcomes in terms of stress and happiness. The current paper contributes to the literature by explicitly accounting for this performance-versus-well-being tradeoff introduced by incentives. I implement two types of social comparative feedback regimes, within and across-class group comparisons, and two types of incentive regimes, financial and reputation rewards. The results show that rewards can lead to an increase in student performance up to 0.28 standard deviations (depending on whether students received feedback and what type), but at a cost of higher stress and lower happiness, whereas comparative feedback alone (without rewards) increases performance only mildly, by 0.09 to 0.13 standard deviations, but without hurting student well-being. More stressed students exert less effort, perform worse and attrite by 29 percent more compared to those who are stressed minimally. Furthermore, the results help to identify gender-specific responses to different incentive schemes. Boys strongly react to rewards with or without feedback. In contrast, girls react to rewards only if they are also provided with feedback. Finally, the paper contributes to the expanding literature on incentivized interventions in developing countries by using a rich dataset of more than 5000 primary and secondary school students in Uganda, who were repeatedly tested and interviewed over a full academic year.

Decentralized Governance and the Quality of School Leadership

Derek Laing
,
Syracuse University
Steven G. Rivkin
,
University of Illinois-Chicago
Jeffrey Schiman
,
University of Illinois-Chicago
Jason Ward
,
University of Illinois-Chicago

Abstract

In response to widespread dissatisfaction with the schools, the 1988 Chicago School Reform Act decentralized school governance by forming elected local school councils (LSCs) responsible for principal hiring, evaluation, and contract renewal as well as other management functions. Subsequent legislation outlined circumstances in which the district could reclaim authority from the LSC, thereby limiting local control. This paper investigates the distribution of principal effectiveness under a system in which there is uncertainty over the locus of decision-making authority. We first establish the presence of significant variation in principal effectiveness based on both an analysis of variance approach and the estimation of principal fixed effects. Teacher survey responses support the findings based on the principal fixed effects, though the much smaller magnitude of the analysis of variance estimates suggest that unobserved shocks inflate many existing estimates of the variance in principal effectiveness. We next consider potential differences in LSC behavior that contribute to the variation. Following Aghion and Tirole (1997) we develop a model that highlights the tensions between formal and real authority and incorporates potential differences in LSC capacity and incentives to maximize school quality. Using proxies for managerial capacity and incentives we find evidence largely consistent with the theory, showing that LSCs with higher management capacity and stronger incentives to raise school quality experience larger gains in principal effectiveness following the end of contracts.

Decision Under Risk, Time Constraints, and Opportunity Costs (D1, D8)

Sven Resnjanskij
,
University of Konstanz
Jan Hausfeld
,
University of Konstanz

Abstract

How are risky decisions affected by the opportunity costs of time? Derived from previous work on the allocation of time (Becker 1965), we develop an economic model in which a decision maker (DM) allocates time between a risky decision and an alternative time use by trading-off rationally the costs and the quality in risky decisions. We use data from a lab experiment in which we introduce exogenous variation in the opportunity costs of a decision by changing the attractiveness of the alternative time use. Relying on a structural estimation approach to simultaneously elicit preferences and decision errors, we find no evidence suggesting that the lower time investment and as a consequence a lower quality of the lottery decision is irrational in a sense that behavior deviates from the rational decisions predicted by our model. Our approach suggests that households may indeed behave rational when conducting errors in economic decisions, because investing more time in improving the decision might be too costly. This has important consequence in the design of potential policy interventions to improve economic decisions.

Democratic Involvement and Immigrants' Compliance with the Law

Alois Stutzer
,
University of Basel
Cédric Gorinas
,
The Danish National Centre for Social Research
Michaela Slotwinski
,
University of Basel

Abstract

Many people are concerned about societal cohesion in the face of higher numbers of foreigners migrating to Western democracies. The challenge for the future is to find and adopt institutions that foster integration. We investigate how the right to vote in local elections affects immigrants’ compliance with the law. In our study for Denmark, we exploit an institutional regulation that grants foreigners local voting rights after three years of stay. Relying on register data, we find causal evidence that the first possibility to vote considerably reduces the number of convictions for legal offenses of non-Western immigrants in the two years after elections. There are large differences across groups, with the greatest effects being observed for employed men.

Demographic Determinants of Nonwork at Work

Michael Burda
,
Humboldt University of Berlin
Katie Genadek
,
University of Minnesota
Daniel S. Hamermesh
,
University of Texas-Austin

Abstract

Using the American Time Use Survey (ATUS) 2003-2012, we find that non-work time at the workplace—eating on the job, enjoying leisure at work, cleaning up and other uses of time—varies significantly by demographic group—age, race, ethnicity, gender and education level. We first link these substantial demographic differences to geographic and occupational/industrial attributes of workers. Using interstate differences in legal protections among workers in protected classes we consider the source of remaining racial/ethnic differences. We examine the extent to which the differences alter our understanding of demographic earnings differentials.

Demography, Capital Flows and International Portfolio Choice Over the Life-Cycle (F4, J1)

Margaret Davenport
,
University of St. Gallen
Katja Mann
,
University of Bonn

Abstract

In an aging world, how does a country's demographic structure impact external positions in safe and risky assets and their respective prices? We answer these questions combining endogenous portfolio choice over the life-cycle with a two-region, general equilibrium model. We show that when one region is aging faster than the other, its demand for both safe and risky assets increases, whereas a greater portfolio share is allocated into safe assets. Absent perfectly elastic supply, this results in a change in autarky rates and, in an open economy, in international asset trades. Calibrating the model to the U.S. and the EU, a negative net external position emerges in safe assets in the U.S. vis-à-vis the EU, explaining a significant portion of observed bilateral positions. Further, we predict persistent bilateral positions throughout the demographic transition. The model allows to quantitatively assess the impact of demographic change on trade in different types of assets, whereas previously, the focus has been on aggregate capital flows.

Determinants of Corporate Investment: Theory and Evidence on the Investment Effect of Corporate Taxes

Ted Azarmi
,
University of Tuebingen and Heilbronn University
Carolin Schmidt
,
University of Tuebingen and Heilbronn University

Abstract

Using an Arrow-Debreu framework we derive optimal investment for a firm that takes on NPV-positive projects to analyze determinants of corporate investment. We mathematically optimize and graphically depict a model economy, and solve it for parameter values close to those of the US economy. We then develop a corporate investment theory and test it using Compustat data on all S&P 500 firms for a period of 64 years ending in 2014. The empirical test supports our theory and indicates that corporations invest to exploit economic rents. The results suggest that capital input into production by S&P 500 corporations is negatively related to effective yearly corporate taxes and effective average annual individual income taxes. In fact, the tax effects are highly significant with a p-value of 0.000 over the most recent 64 years. Corporate investments are positively and significantly related with the state of the economy measured by GDP growth and the increase in the firm's market value. We test hypotheses regarding tax neutrality, wealth effect, and underinvestment effect of corporate and individual taxes. Our results indicate that a 1 percentage point increase in the effective corporate tax rate approximately decreases capital input by $9.62m. When an additional percentage point in personal taxes is paid, then capital is reduced by $473.6m, which supports the underinvestment tax distortion hypothesis. In addition to our theory, we analyze determinants of investment which are related to safeguarding managerial interest and conclude that firms also invest as a turn-around strategy when sales, earnings before taxes (EBT) and debt decrease. Furthermore, as total assets increase, firms invest more regardless of availability of NPV-positive projects. This is consistent with managerial agency problems and behavioral finance theory. We directly measure total yearly capital input into production and actual tax payments instead of relying on reported Capex and tax rate.

Disaster Risk and Preference Shifts in a New Keynesian Model

Marlène Isoré
,
University of Helsinki
Urszula Szczerbowicz
,
Bank of France

Abstract

In RBC models, “disaster risk shocks” reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an elasticity of intertemporal substitution smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.

Discrete Pricing (D4, Q5)

Edward Osei
,
Tarleton State University

Abstract

We define discrete pricing as a pricing strategy of sellers wherein the price of a good is a discrete function of the quantity purchased. Discrete pricing is a common phenomenon in volume discount offers. Under the standard assumptions governing consumer utility maximization subject to a binding budget constraint, such pricing strategies have significant implications for buyers and sellers and societal resource use efficiency. We define a typical discrete pricing strategy, wherein a higher quantity of the good entails less total expenditure. A rational consumer facing this price schedule chooses the less expensive option, resulting in higher quantity of the good than intended and possibly higher total utility. Consequently, in many cases this rationale choice also entails a greater propensity towards waste. In this paper, we show the environmental implications of such strategies, as well as the implications for the welfare of buyers, sellers, and society. We derive conditions under which the discrete pricing strategy may be welfare enhancing, or alternatively welfare reducing, for the seller, the consumer, and for society as a whole.

Discrimination and Worker Evaluation

Costas Cavounidis
,
Boston University
Kevin Lang
,
Boston University, NBER and IZA

Abstract

African-Americans face shorter employment durations than apparently similar whites. We hypothesize that employers discriminate in either acquiring or acting on ability-relevant information. We construct a model with a binary information generating process, monitoring, at the disposal of rms. Monitoring black but not white workers is selfsustaining: new black hires are more likely to have been screened by a previous employer than white workers and therefore rms nd it optimal to discriminate in monitoring. The models additional predictions, lower lifetime incomes and longer unemployment durations for blacks, are both strongly empirically supported

Diverse Behavior Patterns in a Symmetric Society with Voluntary Partnerships (C7, D8)

Takako Fujiwara-Greve
,
Keio University
Masahiro Okuno-Fujiwara
,
Musashino University

Abstract

Voluntarily Separable Repeated Prisoner's Dilemma (Fujiwara-Greve and Okuno-Fujiwara, 2009) describes a large, mobile society where players can easily find a new partner but also can end the partnership unilaterally without information flows to future partners. Although there is no Nash equilibrium in which all players cooperate from the beginning of each new partnership, we show that this model is rich in its own way: there is a continuum of weakly evolutionarily stable distributions, in which many partnerships eventually achieve long-term cooperation, the periods it takes to reach long-term cooperation can vary from one to any finite number, and in the meantime any action combination sequence can be played. The equilibria give a rationale to diverse modes of behavior including tolerance of the partner's non-cooperation for some periods. No personalized punishment is needed to achieve long-term cooperation. The diversity of strategies in the society itself is the incentive device.

Do Elections Drive Firm-Level Credit Supply and Default Risk? (G1)

Naseem Faraz
,
Clark University
Naseem Faraz
,
Clark University

Abstract

Using novel confidential data of more than 38000 firms that represents the universe of firms in Pakistan, and the natural experiment of an election, this study measures political rents provisioning through credit supply to a firm and risk of default. We estimate the political cycles in firm level credit supply and default risk. Taking advantage of universe of credit to firms and micro time frequency, we control the selection bias and the measurement error problem(which is present in specification of timings of elections in previous literature). We find that credit supply to firms increases by 7% in periods leading up to an election, and firms become 24% more likely to default on these credits after elections. Further, state-owned banks drive these political cycles in credit and increase in risk of defaults- there is no evidence for privatized banks. The fixed effects strategy and exploitation of within variation for same firm provides clean identification of political cycle in firm's credits and decision to default on credits after elections. We also find that heterogeneity in effects is concentrated in firms of high politically affiliated industries. The ruling party's politician and high degree of competition derives more credit to an area where firm is located. On the contrary firm's investment in new projects, export performance, imports, and net profits do not increase along the identified political cycle. The default risk causes loss of 1.2% of GDP (on average) every year.

Do Higher Corporate Taxes Reduce Wages? Micro Evidence From Germany (H2, J3)

Clemens Fuest
,
IFO and University of Munich
Andreas Peichl
,
Centre for European Economic Research and University of Mannheim
Sebastian Siegloch
,
University of Mannheim

Abstract

This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.

Do Knowledge Externalities Lead to Growth in Economic Complexity? Empirical Evidence From Colombia (O3, O4)

Navroop Sahdev
,
Harvard University, University of Turin, and University of Paris XIII

Abstract

We live in a Complex Economic system where externalities play a key role in fostering growth in complexity through increasing interdependence of interacting agents. The study tests this hypothesis for the case of Colombia. We ask whether knowledge externalities lead to growth in economic complexity. If yes, which variety of knowledge externalities – MAR, Porter or Jacobs? Results from our empirical investigation uphold the MAR theories of externalities or intra-industrial externalities which are maximized with high local specialization and local monopoly. A pattern of convergence in economic complexity of Colombian municipalities emerges from our results, supporting Schumpeterian growth theories, which advocate that knowledge externalities drive convergence. This is in line with the recent macroeconomic trends of the Colombian economy which is suffering from “Dutch disease” leading to a contraction in its domestic economy. We show that knowledge externalities are a mechanism through which convergence dynamics are brought about and fostered in the domestic economy.

Do Separate Female Toilets in Schools Improve Female Enrollment? A Case Study From Indian States (O1, I2)

Rita Ray
,
Gustavus Adolphus College
Rajlakshmi Datta
,
DBS (PG) College-Uttarakhand

Abstract

In 2014, the Ministry of Human Resource Development in India launched Swachh Vidyalaya Abhiyan (the Clean School Program) with the goal of providing gender-specific toilets in all government schools within one year. This paper examines the effect of separate female toilets on the gender parity index in net enrollment and participation in the primary (grades I-V) and upper primary (grades VI-VIII) levels of education for 27 states and 4 union territories of India between 2007 and 2013. The results show that separate female toilets in schools have a significant positive effect on the gender parity index of net enrollment for both the primary and upper primary levels of education for India as a whole. For scheduled caste students, separate female toilets improve the gender parity index of net enrollment for the upper primary level only. Additionally, the results show that separate female toilets have a significant positive effect on the gender parity index of participation only at the upper primary level.

Do Single-Sex Schools Make Girls Less Interested in Predominantly Male Majors? (I2, J1)

Jihye Kam
,
University of Wisconsin-Madison

Abstract

This study estimates the impact of single-sex schooling on the gender gap in students’ choice of college major. Potential endogeneity concerns are alleviated by using two features of the South Korean educational setting: random assignment of students into general high schools in equalized educational districts and college-major-specific admissions policies. Single-sex schooling is found to widen the gender gap in the choice of predominantly male majors by 15.4 percentage points and to reduce in the choice of gender balanced majors by 23.2 percentage points. The results further show that single-sex schooling is associated with reallocation of female students from predominantly male or female majors to gender balanced majors while the net change in the gender gap is not statistically significant for predominantly female majors. One possible mechanism through which single-sex schooling affects college major choice is the imbalanced gender composition of teachers by school type. Increasing the overall proportion of female teachers could encourage more girls to pursue gender-balanced majors instead of predominantly female majors but would be insufficient to attract them to predominantly male majors. To nullify the negative effect of single-sex schooling on the choice of predominantly male majors, all girls’ schools need to recruit more male teachers who instruct science and mathematics while maintaining the share of female teachers at or above 58 percent. These findings provide policy implications on preferential hiring criteria, with respect to gender composition of teachers by subject.

Do Uber and Lyft Services Reduce DUI Arrests in the United States? Evidence From Uniform Crime Data (O3)

Genti Kostandini
,
University of Georgia
Tianyuan Luo
,
University of Georgia

Abstract

During the last few years there have been major developments with respect to public transportation in peoples’ every day lives. Approximately 5 years ago, companies such as Uber and Lyft have launched phone applications to link customers that need transportation with private drivers that offer rides for a fee which is usually a fraction of the cost of a taxi cab. Subsequently, these companies expanded their services into major US cities and abroad and now they are present in more than 350 cities worldwide. The use of these services experienced exponential growth in recent years. For example, Uber has provided over 20 million rides in London from June 2012 until 2015 (Uberexpansion, 2016) and completed 1 billion rides worldwide at the end of 2015 (Forbes, 2016). We take advantage of the variation on the timing of entrance of Uber and Lyft services in US cities to examine whether the use of these services affects DUI arrests. The peak time for rides provided by Uber and Lyft is around midnight which is also the time for most DUI arrests. Our hypothesis is that due to the higher availability and considerably lower prices, Uber and Lyft services may contribute to a decrease in the number of DUI arrests. This paper uses the synthetic control methods with panel data on DUI arrests, demographics and transportation characteristics in major US cities. Our findings suggest that Uber and Lyft services are associated with a decrease in the number of DUI arrests. However, these changes are found in cities that do not have good transportation services and relatively lower cost of living (e.g. Dallas and Atlanta) while, as expected, we find no significant changes in cities with good transportation services and higher cost of living (e.g. New York, San Francisco). Robustness checks are conducted to support these findings.

Do Women Lag Behind Men? A Matched-Sample Analysis of the Dynamics of Gender Gaps (J1, L2)

Joseph Farhat
,
Central Connecticut State University
Naranchimeg Mijid
,
Connecticut Center for Innovative Entrepreneurs

Abstract

Previous studies found mixed answers whether women-owned firms are less successful than men-owned firms. Women entrepreneurs may lag behind men because they tend to have less human capital, they may have different personal preferences toward their businesses, and they tend to choose highly competitive services and retail sectors. This comprehensive study builds upon previous researches to examine gender gaps in survival, business outcomes, growth rates and financial capital injections. We used a matched sample of 430 pairs of a woman-owned and a man-owned firms with the same human capital (measured by age, education, experience, and race), the same preferences (measured by weekly hours worked and whether they have home-based business or not) and in the same industrial clusters (high-tech, medium-tech, and non-tech). We used a confidential version of Kauffman Firm Survey, eight years of panel data of new firms that started in 2004. We found that a woman–owned firms have the same survival rate as a man-owned firms. Women start their firms with smaller assets and fewer employees and generate lower sales but earn same profit as men. Despite this fact, their growth rates of total assets, sales, profits and employment are same as their male-owned counterparts. We found no gender gaps in debt capital injection ratios. However, we found women use more equity capital and less trade finance as a percentage of total financing than men. Our findings suggest that women do not lag behind men but they manage a smaller firms. Our analysis of the size gap indicates that about half of the size gap is explained by differences in industry and the remaining half is unexplained, which needs to be explored more in detail in the future.

Does Health Care Expenditure Counter Adverse Effects of Obesity on Life Expectancy: Evidence From Global Data (I1, C1)

Sangeeta Bansal
,
Jawaharlal Nehru University
David Zilberman
,
University of California-Berkeley

Abstract

There is evidence that obesity is a risk to health and longevity of life. This is the first paper to quantitatively analyze the effect of obesity levels on life expectancy, and the trade-off between health expenditure and obesity levels using a panel data of 186 countries for the years 2005 and 2010. We find that life expectancy has non-monotonic relationship with obesity levels. At low prevalence of obesity, life expectancy is increasing in obesity levels, but beyond a certain threshold level of obesity prevalence, an increase in obesity level reduces life expectancy. The threshold level of obesity prevalence beyond which average life expectancy starts decreasing is 36.8% for men and 42.4% for women. Countries like US and Argentina have well passed these thresholds and other countries are fast approaching them. Health investment can increase average global life expectancy. Incremental effect of health expenditure in enhancing life expectancy is higher for countries where obesity prevalence is low, which tend to be developing countries. The marginal impact of health expenditure on increasing life expectancy is higher for women. While in low obesity countries, the cost of increasing life expectancy by 1 year for women is $277 per capita health expenditure and for men is $435. Loss in life expectancy due to obesity in the US is 0.65 years for men and 0.33 years for women. Our results are consistent over three data sets: when the health indicator used is life expectancy at birth, mortality rate between age group 15-60 years, and healthy life expectancy at birth. The policy implications from our analysis is that the effect on life expectancy of obesity can be addressed through additional health expenditures, which suggests a significant economic gain from reducing obesity rates. Further medical expenditure has higher incremental effect on women and developing countries.

Does Insurance Improve Resilience? Measuring the Impact of Index-Based Livestock Insurance on Development Resilience in Northern Kenya

Jennifer Denno Cissé
,
Cornell University

Abstract

Weather shocks, such as drought, have catastrophic impacts on vulnerable populations in arid and semi-arid pastoral regions of Sub-Saharan Africa. In the past decade, several countries have considered index insurance as a promising approach to help households manage weather risk and cope with catastrophic shocks. Taking advantage of a quasi-experimental, multi-round, household panel dataset, this paper evaluates the impact of an index-based livestock insurance product in Northern Kenya on development resilience in terms of both household herd size, the primary productive asset in the region, and child health. Given the hundreds of millions of dollars currently being spent on “building the resilience” of vulnerable populations in developing countries, this paper—the first causal impact assessment of a project on empirically measured resilience—demonstrates how researchers may go about assessing the resilience-building impacts of those projects. We find that index-based livestock insurance increases the household resilience to drought in terms of household livestock holdings. Insurance is also associated will substantially higher nutritional resilience in the children of drought-affected households.

Does Manager Race Matter? An Empirical Analysis of Manager Contract Length (J7)

Cornel Nesseler
,
University of Zurich
Carlos Gomez
,
University of Castilla-La Mancha

Abstract

Companies always want to hire the best possible manager. A rational board of governance would hire a manager which predicts to yield the best performance. This decision should not be based on race or gen- der of the manager (cf., Becker, 2010). In this paper we empirically examine if African Americans or White Americans have different contract lengths. In order to test whether this hypothesis is true, we empirically com- pare African American and White American coaches in the NCAA women league soccer. This data gives us the unique opportunity to clearly examine, in one industry, how managers perform. Win per- centage is a clear indicator to assess the performance of a coach e.g., Vrooman, 1995; Kesenne, 1996). Performance is a key component when assessing contract length. Our main focus is on contract length. Our covariates are manager education (i.e., school, type, and year of certi cation), manager -age, -experience, -gender, and -experience, NCAA team performance his- tory (i.e., a lag of the performance) and division information. We use a time series analysis to show that contract length crucially depends on race. We nd that White Americans are employed significantly longer than African Americans. By using a Blinder-Oaxaca decompo- sition(Kline, 2010), we find that African Americans have significant worse pre-conditions as managers (i.e., Work experience and NCAA team historic performance). If they would have the same experience as European Americans they would be employed significantly longer. This result contradicts previous results and has important eco- nomic and social implications for both NCAA teams/universities and coaches.

Does Speculative Activity Have Real Effects? (G1, E3)

Tao Li
,
City University of Hong Kong
Mark Loewenstein
,
University of Maryland

Abstract

We examine how opening financial markets for trade in real and “extraneous” risks can affect productive decisions. Agents have heterogeneous beliefs over these risks and trade in financial markets. We find that speculation, especially in “extraneous” risks uncorrelated with productivity can significantly affect productive decisions. Speculation can either decrease or increase real investment and asset prices, even in the presence of adjustment costs or irreversibility in capital investments. Since housing construction is a largely irreversible investment, our model can help to explain a boom and bust in housing construction and asset prices resulting from speculative activity in the financial markets. Full paper at: http://ssrn.com/abstract=2423360

Domestic Banks as Lightning Rods? Home Bias During Eurozone Crisis (F3, G2)

Orkun Saka
,
Cass Business School

Abstract

Governments and domestic banks in Europe have attracted criticism due to heightening inclination of banks to hold more local sovereign debt in the midst of the crisis, which has been interpreted as an evidence of financial repression or moral suasion. By using a novel dataset on bank-level exposures of sovereign and private debt covering the entire Eurozone crisis, I first confirm that sovereign debt has been reallocated from foreign to domestic banks at the peak of the crisis. Furthermore, this reallocation has been especially visible for banks as opposed to other domestic private agents and cannot be explained by the risk-shifting tendency of the banks located in troubled countries. However, in contrast with the previous literature focusing only on sovereign debt, I show that banks’ private sector exposures have (at least) equally suffered from a rising home bias. Finally, I present a direct information channel and demonstrate that foreign banks -free from moral suasion- located in informationally closer territories have relatively increased their exposures to crisis-countries.

Domestic Sales Versus Exports: The Role of Firm Productivity and Political Connections in China (F1)

Gal Hochman
,
Rutgers University
Chrysostomos Tabakis
,
Korea Development Institute
Shun Wang
,
Korea Development Institute
Na Zhang
,
Fudan University

Abstract

In this paper, we look at the role of political connections versus productivity in firms’ choice between domestic sales and exports. We develop a two-stage game with heterogeneous firms, where firms first pay a fixed cost and invest in their technology, which determines their productivity. In the second stage, firms decide on whether to invest in political connections, which are presumably more valuable for domestic performance in a country like China where market institutions are not perfect. We find that the most productive firms invest less in political connections and are the larger exporters. On the other hand, the less productive firms invest more in connections and mainly serve the domestic market. We build a novel dataset on political connections in China focusing on the publicly listed private firms in the Chinese stock market during the period 2003–2014. Our econometric analysis provides robust evidence in support of our model’s predictions.

Downward Nominal Wage Rigidity in Canada: Evidence From Firm- and Worker-Level Data (J3, E2)

Natalia Kyui
,
Bank of Canada

Abstract

We assess the importance of downward nominal wage rigidity (DNWR) in Canada using survey and administrative micro-level data. In particular, we explore the Survey of Labour and Income Dynamics (SLID) – a rich six-year rotating panel spanning over 15 years and providing information on wages for the employed population in Canada. To strengthen our conclusions, we also conduct a complementary analysis using administrative data–Major Wage Settlements (MWS). Descriptive analysis of SLID data suggests that, between 1994 and 2011, the mean, median and variance of the wage-change distribution decreased. We also observe a substantial increase in the proportion of workers experiencing wage freezes since the mid-2000s, along with a declining pattern in both wage cuts and increases. Our regression analysis builds upon the work of Crawford and Wright (2001), but we improve their analytical framework, for instance, by proposing alternative measures of DNWR. We find that the estimated impact of DNWR on average wage growth increased in the years following the 2009 recession: average wage growth in the economy was 0.7–1.0 pp higher due to DNWR for the 2009 to 2011 period. Likewise, the proportion of workers affected by DNWR was larger after 2009. Moreover, the impact of DNWR has likely increased post 2011 up to 2013, but then decreased, as suggested by MWS data. The estimation results also suggest that the effect of DNWR on average wage growth was much stronger during periods of low CPI inflation in Canada: the effect was two to three times larger when inflation was below 1.5 per cent compared to when inflation was above 2.5 per cent. Additionally, we find evidence of a positive relationship between provincial unemployment rate and the effects of DNWR. Finally, the paper provides an extensive analysis of the heterogeneity in the effect of DNWR.

Dowry: Household Responses to Expected Marriage Payments (O1, I3)

Nishith Prakash
,
University of Connecticut
S. Anukriti
,
Boston College
Sungoh Kwon
,
University of Connecticut

Abstract

Dowry is a ubiquitous feature of South Asian marriage markets. However, empirical research on dowry has been limited by the lack of data. We utilize retrospective information on gifts exchanged at the time of marriage for 39,544 marriages during 1960-2008 to describe dowry trends in contemporary rural India. Average real net dowry has been remarkably stable over time; although there is considerable heterogeneity across castes, religions, and states. Additionally, we examine the impact of dowry expectations on households’ financial and childbearing decisions and on investments in children. Parents increase savings and fathers work more in anticipation of future marriage payments for their daughters. However, dowry has no impact on fertility and sex-selection. The effects on expenditure on children’s education are inconclusive.

Drivers of Global Liquidity and Global Bank Flows: A View From the Euro Area (F3, E5)

Mary Everett
,
Central Bank of Ireland

Abstract

This paper exploits a novel bank-level monthly dataset to assess the effects of global liquidity on the global flows of euro area banks. The period associated with the European sovereign debt crisis has witnessed increased growth in euro area bank claims on extra-euro area residents, against a background of contracting euro area credit supply. Controlling for bank risk, global credit demand, and price effects such as interest rate differentials and exchange rates, empirical evidence supports a range of determinants of global liquidity - including global risk, global bank equity and unconventional monetary policy in the US, UK, Japan and euro area - as drivers of the global flows of euro area banks. Moreover, regression analysis indicates heterogeneity in the influence of global liquidity on global flows across euro area bank type, defined by their balance sheet composition and country of residence (stressed versus non-stressed euro area countries). The results highlight the importance of exogenous factors as drivers of global bank flows and the potential for international leakages of unconventional monetary policy.

Dynamic Asset Allocation with Hidden Volatility (D8, G3)

Zhiyu Feng
,
University of Notre Dame
Mark Westerfield
,
University of Washington

Abstract

We study a dynamic continuous-time principal-agent model with endogenous cash flow volatility. The principal supplies the agent with capital for investment, but the agent can misallocate capital for private benefit and has private control over both the volatility of the project and the size of the investment. The optimal incentive- compatible contract can yield either overly risky or overly prudent project selection; it can be implemented as a time-varying cost of capital in the form of a hurdle rate. Our model captures stylized facts about the use of hurdle rates in capital budgeting and helps to reconcile the mixed empirical evidence on the correlations among firm size, risk and managerial compensation.

Dynamic Conditional Distribution Models With Applications in Finance (G1, C6)

Jacob Lundbeck Serup
,
University of California-Santa Barbara

Abstract

In this paper, an entirely new class of dynamic market models called Dynamic Conditional Distribution (DCD) models is introduced to describe a financial market driven by Brownian motion and consisting of a bank account, a stock, a set of zero coupon bonds and a set of European type contingent claims with the stock as the underlying asset. The approach suggested in this paper is fundamentally different from that of previous dynamic market models since here, the market will be driven by directly choosing the dynamics of the risk neutral measure under which all assets are priced. This is done by prescribing the dynamics of the moments of the log return to the stock under the risk neutral measure simultaneously for all time horizons and in that sense, a DCD model can in fact also be interpreted as a term structure model. The main result of this paper is a set of drift conditions on the mean and variance for all time horizons which both insures that the model is well-specified and provides a tool for constructing DCD models. If additionally, it is assumed the market is driven by a set of factors and the moments are functions of these, higher order moments can be computed recursively and a wide range of interesting models constructed. This is illustrated by means of two specific examples. First, the Quadratic Ornstein-Uhlenbeck DCD model, assuming the moments as functions of the factors are of a certain form, allows for explicit computation of all moments and the distribution of these over time, the term structure of interest rates and prices of European type contingent claims. Second, the Nelson-Siegel Term Structure DCD model, assuming the term structure of the moments can be modeled by a Nelson-Siegel type function, also allows for computation of higher order moments.

Early Warning of the Housing Price Corrections: A Signal Extraction Approach (C4, C1)

Fuchun Li
,
Bank of Canada

Abstract

The purpose of this paper is to design an early warning model to predict the likelihood of house price corrections from booms to busts within an upcoming period of time. To achieve this objective, the signal extraction approach developed by Kaminsky, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to display aberrant behavior in the periods preceding a house price correction. Combining the information provided by all the indicators from 17 OECD countries, we build three different composite indicators, the summed composite indicator, the extreme composite indicator, and the weighted composite indicator. We use each of the three composite indicators to predict the likelihood of house price corrections within an upcoming period of time. The in-sample forecasting results indicate that the three composite indicators are useful tools for predicting the likelihood of house price corrections, and the weighted composite indicator outperforms the two other composite indicators. The out-of-sample forecasting results suggest that for most of the 17 OECD countries including Canada, the weighted composite indicator can provide informative help for predicting house price corrections and has better performance than the two other composite indicators.

Economic Hardships and Obesity Among Mothers and Children of Fragile Families (I1, I3)

Lorenzo Almada
,
Columbia University

Abstract

The goal of this study is to examine the relationship between obesity and chronic stress caused by the experience of economic hardship. In this setting, reports of experiencing one or more types of hardships due to lack of financial resources proxies for chronic stress exposure. We expand upon previous studies in several critical areas. First, we are able to examine both long-term (persistent) exposures to stressors as well as changes in the level (intensity) of stressor exposure over time on obesity. Second, we are able to estimate the relationship between these different measures of stress exposure on obesity among a sample of both mothers and children while addressing issues of omitted variables unaccounted for in previous studies. We use data from the Fragile Families and Child Wellbeing Study to estimate pooled OLS and individual fixed effects models interacting food insecurity/hardship and other economic hardship measures on obesity status. Our findings suggest that persistent economic hardship experiences are associated with increases in obesity. Furthermore, changes in the level of hardship experiences seem particular harmful to female children in households who are also food insecure.

Effectiveness of Paid Search Advertising: Experimental Evidence (L8, C9)

Daisy Dai
,
Lehigh University
Michael Luca
,
Harvard Business School

Abstract

Internet paid search advertising has become a popular marketing tool due to its ability to target potential buyers. For local businesses, one attractive option is to advertise on specialized platforms, such as review websites or online catalogs, where consumers are looking for business information. However, it is unclear whether the return to advertising on these platforms is higher than on general search engines. The difference in returns also has important implications on competition and profitability of platforms. This paper contributes to the discussion by measuring the effectiveness of paid search advertising on a review website, Yelp.com, a major platform that publishes crowd-sourced consumer reviews of local businesses. We design and analyze a large-scale field experiment that randomly assigns free paid search advertising to more than 8000 restaurants in the US during a three-month period. We find that advertising increases a restaurant's purchase intent, measured by the restaurant’s Yelp page clicks, by 10-30% depending on the restaurant type and increases the number of reviews, a proxy for revenue, by 4-7%. In terms of heterogeneous effects based on a restaurant's posted star rating, we find that paid search advertising is effective even for low-rating restaurants, but the effect is in general highest for restaurants with median ratings. The results suggest that paid search advertising can potentially substitute online reputation, and it works best for products or businesses with average ratings.

Emerging Markets and Exchange Market Pressures: Analysis Across Primary Commodity Groups (F3, E5)

Aleksandr V. Gevorkyan
,
St. John's University

Abstract

This is an empirical study exploring short-term sensitivity between the exchange market pressure and domestic and external factors in commodity dependent emerging markets. Part of the novelty of the study is the five commodity groups—sugar, cereal, fuels, ores, and coffee—and top five exporters from emerging or developing countries within each group. Fluctuations in the main export commodity and benchmark, crude oil, prices, in addition to affecting global trade flows and exporter’s foreign revenues, also result in significant exchange market pressures for both floating and pegged regimes. Moreover, volatility transpires via currency pressures, interest rates, and domestic private credit cycles, feeding into social costs of structurally weaker economies. Relying on monthly panel data, this paper, unlike prior studies, analyzes a full sample as well as two subsamples separated by the peak period of the primary commodity price in each group. Dynamic panel studies are employed as benchmark models. In addition, for robustness and lagged sensitivity, a new panel vector autoregression model is applied. Orthogonalized impulse-response functions results are largely consistent with renewable and nonrenewable commodity group characteristics. Overall, the results accentuate ongoing concern over economic diversification, speculative capital flows, and uncertainty in the backdrop of the “new normal” of the post-crisis macroeconomics. In this context, maintaining a policy-set exchange rate peg leads to a precipitous drain on international reserves as terms of trade deteriorate post-price peak levels. Built upon the literature on diverse exchange market pressures, this paper offers extensions in policy setting across a range of individual countries and country groups.

Empirical Evidence on Sellers’ and Buyers’ Reference-Dependent Preference in a Real Asset Market (D8, R2)

Zhi Dong
,
University of Auckland

Abstract

This paper is the first to explicitly conduct empirical tests on market agents’ reference-dependent preference, using a reference point that is independent of market agents. The study measures gain-loss utility, based on an exogenous and independent reference point—capital value (government valuation for taxation purpose). Capital value is prevailingly quoted and used in the private residential real estate market in New Zealand because the market lacks accessible and affordable information on real estate transaction prices. Buyers and sellers account for gain-loss utility based on the reference point when they make decisions on house transactions. House transaction price is an increasing and concave function of gain-loss utility based on the reference point. The number of days from capital value revision to the transaction day is a decreasing and convex function of gain-loss utility. Buyers and sellers are loss averse. They have the most sensitivity when loss utility is low and the least sensitivity when gain utility is high. They show continuous diminishing sensitivity on gain-loss utility until gain utility becomes extremely high. Buyers and sellers sensitivity on gain utility starts to increase when gain utility becomes very large. The framework of the study contributes to further empirical analyses on market agents’ behaviour based on independent reference points. The findings provide additional understanding of prospect theory and the literature of reference-dependent preferences. The study adds additional insights into the understanding of market players’ behaviour and preferences on decision-making process in a real asset market.

Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading (G3, G1)

Stefano Colonnello
,
Halle Institute for Economic Research (IWH) and Otto-von-Guericke University Magdeburg
Matthias Efing
,
Danish National Centre for Social Research and University of Geneva
Francesca Zucchi
,
Federal Reserve Board

Abstract

Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of this transfer crucially hinge on the relative bargaining power of shareholders and creditors. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiation. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders decline substantially relative to other firms.

Endogenous Cartel Formation with Free-Market Entry, and Firm Heterogeneity

Xin Zhao
,
Washington State University
Stephen Devadoss
,
Texas Tech University

Abstract

Why do large firms choose to compete with a cartel rather than to cooperate? Bos and Harrington (2010) explained why small firms do not join in a cartel by introducing heterogeneous firms. But it is still unclear why large firms do not join in a cartel. This paper shows a possibility that only mid-level productive firms benefit from joining a cartel by considering endogenous choices of firm-production capacity. The reason is that low-productive firms cannot compete efficiently for production quota in cartel and staying out can yield them larger profits. High-productive firms prefer to stay out because building excess capacity in cartel lowers their profits. Additionally, this paper also contributes to the cartel literature by considering an endogenous market entry through incorporating the heterogeneous-firm model into the infinitely repeated game approach. So the results also predict that an increase in demand for output and a decrease in capacity and entry costs induce low-productive firms to enter a cartel. Technology improvements of low-productive independent firms and an increase in price elasticity of output demand entice high-productive firms to join a cartel.

Endogenous Crises: Minsky Frictions in a Small Open Economy (E3, E1)

Kayhan Koleyni
,
University of Memphis
David M. Kemme
,
University of Memphis

Abstract

This paper introduces a new mechanism for financial frictions in a monetary dynamic stochastic general equilibrium model following Minsky’s financial instability hypothesis (1977). We expand the Christiano, Trabandt and Walentin (2011) model by introducing three different types of entrepreneurs or borrowers: hedge, speculative and Ponzi borrowers. We change the role of banks from a non-risk taking financial intermediary in the CTW (2011) model to a risky debt accumulator. Then we link the accumulation of debt to the endogenous state of nature, which is absent in the current DSGE literature. The state of nature is endogenously a function of past history and the relative state of the business cycle. So ultimately the bank’s profit function is a function of business cycle fluctuations. We also introduce a new type of shock, which we call the “Minsky system risk” shock and calculate the likelihood of Minsky moment endogenously based on bank’s profit maximization problem. In fact, by this paper endogenous banking crises are introduced into the DSGE literature.

Entrepreneurship, Innovation, and Dynamic Growth Versus Instability in the New Age of Market (C6, L1)

Faraz Farhidi
,
Georgia State University

Abstract

The challenge of the current study is to introduce entrepreneurship into Microeconomics theory for greater extendability and realism yet capture its unique aspects in a manageable analytical model. The model starts with a perfectly competitive market and then adds a subset of agents with unique skills, capabilities, startup savings, and risk preferences, called entrepreneurs. These profit-seeking agents, raising funds from the financial markets, modify a fraction of the existing products with additional (close substitute) attributes. Thus, a situation of monopolistic competition is created. A unique contribution developed is that entrepreneurship creates an endogenous cycle which brings growth but also instability and inequality at the same time caused by the risky decisions an entrepreneur has made before. The expected profit motive drives entrepreneurs to create new products, which expands supply. In perfect competition, markets' price competition erodes entrepreneurs’ monopoly rents to zero with a new equilibrium. However, in the current model, entrepreneurs simultaneously change the structure of the market toward monopolistic competition, creating a dynamic cycle where the prospect of entrepreneurial rents drives more product innovation, supply to the market, and structural change; while, at the same time, higher profit rates induce entry and price-cutting and force out old capacity and products.

Environmental Regulation and Global Value Chains: The Role of Transfer Prices (F1, Q5)

Pouya Ebrahimi
,
University of Montreal
Bernard Sinclair-Desgagne
,
University of Montreal

Abstract

This paper examines how an emissions tax set in a given country is internalized by a multinational firm. The firm – a vertically integrated monopoly – is made of two divisions: an upstream one which produces an intermediate good in country I, and a downstream one which uses this good to deliver and sell a final product in country F. The emissions tax is imposed on the upstream division by country I. Transactions between divisions are then managed through a transfer price which the multinational firm establishes internally. We show that this price, hence total production and emissions, adjusts differently to the emission tax, according to which one of the standard approaches to fix transfer prices (centralization vs. decentralization; cost-based vs. market based) the multinational is using. Implications for climate change policies are briefly discussed.

Equal opportunity through higher education: Theory and evidence on privilege and ability (I2, H3)

Yuval Arbel
,
Netanya Academic College-Israel
Ronen Bar-El
,
Open University of Israel
Yossef Tobol
,
Jerusalem College of Technology-Israel

Abstract

We model a higher education system that admits students according to their admission signal (e.g., matriculation GPA, SAT), which is, in turn, affected by their cognitive ability and socioeconomic background. We show that subsidizing education loans increases neither human capital stock nor aggregate consumption, but only yields income redistribution mainly among the upper class. We show that the policies aimed at compensating for poor socioeconomic background result in a higher aggregate consumption, as well as income redistribution from top to bottom. We test the model using a unique dataset that includes proxies of socioeconomic background and cognitive ability. Results show that the high school matriculation GPA is a weak predictor of academic achievements. We demonstrate that, while the high school matriculation GPA is explained by proxies of cognitive ability and socioeconomic background, academic GPA is solely explained by cognitive ability proxies. Finally, the lack of a matriculation certificate is associated with a poor socioeconomic background.

Estimating Short- and Long-Run Global Land Supply Elasticities of Agricultural Commodities From Dynamic Heterogeneous Panels (Q1, C3)

Md Zabid Iqbal
,
Iowa State University
Bruce Babcock
,
Iowa State University

Abstract

We estimate the short- and long-run global response of corn, soybeans, wheat, and rice growing areas to international crop output price changes while controlling for the effects of price volatility and production costs. We allow responses to vary across countries by adopting methods from the panel time-series literature model. Our estimates of growing-area response are considerably lower than estimates obtained using traditional models. Previous findings appear biased due to the assumption of homogeneous response across countries. Our aggregate estimates of short- and long-run elasticities of four crop-growing areas, with respect to average price, are 0.024 and 0.143, respectively. Crop-specific results indicate that both corn and soybean growing areas are generally more responsive than wheat and rice. For corn and soybeans, the long-run own-price growing area elasticities are 0.210 and 0.631, respectively. The long-run own-price elasticities for wheat and rice are 0.372 and 0.047, respectively. The short-run own-price elasticities for corn and soybeans are 0.100 and 0.213, respectively, compared to wheat (0.035) and rice (0.001). Our findings also reveal that output price volatility acts as a disincentive for growing-area response in the long-run but not in the short-run.

Estimating Spillovers Using Panel Data with a Factor Structure (C1, C4)

Hao Dong
,
London School of Economics and Political Science

Abstract

Network models have been playing an increasingly important role in economic studies. This paper aims to estimate spillovers, which are results of social interactions. In advance of existing literature, I use panel data with a factor structure. More precisely, the cross-sectional variations of the regressors that generate spillovers are assumed to be driven by a finite number of unobservable factors. With this factor structure, factor loadings and coefficients associated with factors in the reduced form (obtained by substituting the factor structure into the main equation) lead to linear constraints on spillovers, which can be used to improve error bounds of the Lasso estimator. Unlike existing constrained Lasso estimator, both factor loadings and coefficients from the reduced form are to be estimated, therefore the estimates enter into my constraints, and proper treatment of the estimation errors is required. Simulation results demonstrate that my estimator is close to the "ideal" constrained Lasso estimator, and has sharper error bounds than standard Lasso estimator when T is sufficiently large.

Estimating the Impact of Formal and Informal Borrowing on Household Well-Being in Nepal: Moderating Effects of Borrower’s Gender (I3, O1)

Olga Kondratjeva
,
Ohio State University

Abstract

This paper investigates how borrowing – both formal and informal – impacts subsequent social and economic household well-being, and how these effects are differentiated by borrower’s gender. The research focuses on the case of Nepal. The emphasis on borrower’s gender is important. First, in developing countries, lenders often target women in their lending, because women tend to be financially responsible and have higher repayment rates. Second, when managing household finance, women tend to spend more on education, health and other purchases that improve the overall household welfare. Borrowing behavior is potentially endogenous, since the unobserved characteristics that influence household well-being may also affect borrowing decisions. Endogeneity arises due to several reasons. On the demand side, borrowers self-select to apply or not to apply for different types of credit. On the supply side, lenders choose in which areas to operate and who to offer credit to. Therefore, systematic differences in characteristics may exist between borrowers and non-borrowers, and borrowers with formal and informal credit. Randomized control trials offer the rigorous method to draw causal inferences. However, since randomizing access to informal credit is impossible, econometric techniques are used to correct for the selection bias. The study uses the Nepal Living Standards Survey data from 2003-2004 and 2010-2011 collected by Nepal’s Central Bureau of Statistics and the World Bank. The panel data contain information on approximately 5,515 individuals from 935 households. The sample is disaggregated by borrower’s gender. Multiple household-level and individual-level well-being outcomes are explored, including investment, employment, schooling, health, consumption and asset-building. The regressors of interest are household-level borrowing from formal and informal sources in the past year. To address endogeneity of borrowing decisions in the observational data, (a) the fixed effects OLS estimator, (b) the fixed effects instrumental variable estimator, and (c) matching techniques will be used.

Evaluation of Japan’s 2006 Revision of the Law Concerning Stabilization of Employment of Older Persons: An Panel Data Analysis of Elderly Employment in Japan (J1, J2)

Tomoki Kitamura
,
Aoyama Gakuin University

Abstract

Japan faces the rapid aging of its population. As a response to this, the government had enacted measures to reduce employee pensions and raise the pension age, in order to secure the stability of the pension system. Income security for elderly employees near retirement age is an important policy problem in Japan. The Japanese government revised “the Law Concerning Stabilization of Employment of Older Persons” in 2006. The revision of the law aims to increase employment stability for elderly employees until they reach the pension age. Employers are obligated to (1) raise the mandatory retirement age gradually from 60 years old to 65 years old, (2) introduce means for continued employment, or (3) abolishing the mandatory retirement age. I empirically investigate the effectiveness of this reform. In particular, I examine the working and retirement behavior of regular and non-regular elderly employees. I use data from the Longitudinal Survey of Middle-aged and Elderly Persons conducted by the Ministry of Health, Labour and Welfare of Japan. I employ the difference-in-differences (DID) and the difference-in-difference-in difference (DDD) method by using a fixed effect regression model. The treatment group is the employees aged 60-61. This group is considered to be most affected by the extension of employment by the revision. The control groups are employees aged 58-59, or self-employed workers aged 58-61. Those groups are considered not to be affected by the revision. The preliminary results indicate that the effectiveness of the law is mixed. The revision seems to have little impact on the elderly employment. On the contrary, the revision seems to postpone the retirement of elder employees compared to the self-employed.

Evolution of a Common-Pool Resource: Theory and Evidence from Groundwater Usage (C7, Q2)

Caleb Koch
,
ETH Zurich
Heinrich Nax
,
ETH Zurich

Abstract

We apply game theory in a large-scale empirical study of individual-level decisions and dynamics of water usage in the context of the High Plains Aquifer, one of the largest (common-pool) groundwater systems in the world. We model a heterogeneous population of farmers in a repeated game setting, where groundwater levels dynamically evolve according to endogenous groundwater extraction rates and exogenous stochastic factors. We test the main theoretical predictions: (i) the components that drive individual water (over-)usages and (ii) behavioral heuristics and “anchoring" norms (Tversky and Kahneman 1974). Extraction data used for empirical tests spans 7 years with approximately 100,000 observations. Regarding (i), we find strong evidence for larger farms using less water-per-acre; furthermore, larger farms curb water-usage during dry seasons more than small farms. However, several empirical regularities in farmers’ groundwater usage contradict theoretical predictions. This motivates (ii), where we extend the dynamic groundwater model to consider behavioral heuristics. Motivated from theory, we find strong empirical evidence that the presence of a local high-appropriator exerts an influence on local neighbors to increase water-usage. Finally, combining theory and data, we recommend policies that leverage individual-level behavior and social norms with the aim of sustaining groundwater levels.

Exploring New Marketing Opportunities from the Nonlinear Relationship Between Income and Organic Food Expenditure (M3)

GwanSeon Kim
,
University of Kentucky
Jun Ho Seok
,
University of Kentucky
Tyler Mark
,
University of Kentucky

Abstract

The sales for organic foods in the U.S. surpass $35 billion in 2014 and continues to grow at an annual rate of 10% per year. This outpaces the sales growth of 1% annually for conventional foods. Organic food consumers have a different income level compared to conventional food consumers. It is due to the fact that the organic food is more expensive than the conventional food. For example, the conventional Avocado-Hass price is $1.58 per pound, but the organic Avocado-Hass price was $2.81 per pound as of 4 March 2016. There are mixed findings of elasticity relationship between income levels and organic food. One potential cause of the controversial results could be derived by the presence of non-linear relationship between income levels and organic food. Using the Nielsen dataset, we investigate the threshold non-linear relationship between income levels and organic food and measure the price sensitivity in organic food consumers with different income levels. This paper divides the organic food consumers based on different income threshold levels. Considering high income people tend to buy the organic foods, this paper can find a lower boundary of income level. Therefore, the grocery stores may target specific organic food consumers to maximize sales of organic foods. Furthermore, this paper shows two price elasticities for organic food demands based on the threshold income level. Since the organic foods have a short period of expiration date compared to conventional foods, the estimated price elasticities provide a guideline to grocery stores for reducing amounts of wasted food in U.S.

Exploring Relationship Between Foreign Competition and Entrepreneurship (J6, L2)

Ana Venancio
,
University of Lisbon
Farzana Chowdhury
,
Indiana University

Abstract

Globalization has increased trading activity among countries. In this article, we examine how foreign competition and human capital influence entrepreneurial activity in the host country over time. We propose that foreign competition fosters knowledge spillovers and consequently leads to new firm entry. We build on the competence based argument to suggest that these spillovers are strengthened by the availability of human capital. Based on a comprehensive panel dataset of employees and new firms in Portugal between 1994 and 2008, our findings demonstrate that the impact of foreign competition on domestic entrepreneurial activity is not always positive rather the availability of human capital moderates this relationship. We also find strong support for the positive effect of foreign competition on quality of the initial team. Our results are supported using several robustness analysis.

Exploring the Gaps in the Gig Economy Using a Web-Based Survey: Measuring the ‘And’ That Captures Formal ‘and’ Informal Work Activity (J1, R1)

Barbara J. Robles
,
Federal Reserve Board
Marysol G. McGee
,
Federal Reserve Board

Abstract

Given the ongoing changes to the alternative, informal and contingent work arrangements of many American workers (Schor, 2014; Friedman, 2014), the usual employment data sources such as the Current Population Survey (CPS-household survey, Census) and the Current Employment Survey (CES-establishment survey, BLS) are limited in measuring the new emergence of ‘gig’ and ‘supplemental’ work (Katz and Krueger, 2016). Employing a national internet panel of 18 year old and over survey respondents (GfK-General Population Panel) linked to market segment Sch C, 1099Misc and 1099K IRS data, we explore the drivers behind variation in work modes. These work modes cover: (1) full-time (with and without variable hours), (2) part-time (with and without variable hours), and (3) occasional work activity. Categories 1-3 occur while working (a) for someone else (employer-type work) or (b) for yourself (self-employed/consultant and contractor/sole proprietor/partnership). Some occasional work activity occurs online. Other informal work occurs in mobile platforms (eg., food trucks, etc.). We measure selling goods (used and new) as well as services (ie., babysitting and house cleaning, etc.) which can take place online and/or at specific off-line locales (established flea markets, clienteles’ homes, etc.). Our analysis of the ‘and’ component of the formal/informal work space includes analyzing: (i) What are the socio-economic demographics of those most involved in alternative work arrangements? (age, education, race/ethnicity, gender, etc.), (ii) What are the connections between the ‘spatial’ and ‘digital’ occasional work arrangements? (iii) What motivates those engaged in alternative work arrangements (income supplementing, learning new skills, hobby, etc.)? (iv) Are the ‘survival – push factors’ versus the ‘preference – pull factors’ for contingent and ‘gig’ work driven by socio-demographic characteristics or mainly by region and local economic conditions? The survey data is nationally representative with an over-sample of the low-to-moderate income respondents with a total respondent sample of 2,483.

Exposure to Academic Fields and College Major Choice

Jeffrey Grogger
,
University of Chicago
Hans Fricke
,
Stanford University
Andreas Steinmayr
,
University of Munich

Abstract

This study investigates how exposure to a field of study influences students’ major choices. We exploit a natural experiment where university students have to write a research paper in business, economics, or law during their first year before they choose a major. Due to oversubscription of business, the field of the paper is assigned quasi-randomly. We find that writing in economics raises the probability of majoring in economics by 2.7 percentage points. This effect is driven by assignment to topics less typical of the public’s perception of the field, suggesting students learn the field is broader than they thought.

Extensive Versus Intensive Margin Over the Business Cycle: New Evidence for Germany and the United States (E3, J2)

Alexander Herzog-Stein
,
Macroeconomic Policy Institute (IMK)
Patrick Nuess
,
Christian Albrechts University

Abstract

This article analyses the relevance of the extensive and the intensive margin of labor adjustment over the business cycle in Germany and in the United States from 1970 to 2014. Previous research has found that, firstly, the extensive margin dominates and that, secondly, the relative relevance of the two margins is of similar magnitude in both countries. This is in contrast with results from the research on the German employment performance in the Great Recession which attributed part of the employment success to the widespread use of instruments of working-time flexibility. Our results confirm that generally over the whole sample period the extensive margin is still the dominant margin of labor adjustment over the business cycle in both countries. While our reassessment shows that the relative importance of the extensive and intensive margin for the United States is stable over time, in contrast in Germany it is quite volatile over time. In general the intensive margin in Germany is more important than in the United States. However, its actual size depends crucially on the choice of the smoothing parameter of the Hodrick-Prescott Filter. In the Great Recession and the subsequent time period the intensive margin is dominant in Germany independent of the choice of the smoothing parameter. The relevance of the intensive margin dramatically increased in recent years in Germany and the intensive margin accounts for nearly 60 to 80% of the change in total hours worked.

Firm Investment Decisions Under Hyperbolic Discounting (D2)

Minwook Kang
,
Nanyang Technological University
Lei Sandy Ye
,
World Bank

Abstract

This paper constructs a model of corporate investment decisions under hyperbolic discounting of present values. The hyperbolic discounted present value can be interpreted as reflecting irrational myopic preferences or, as this paper demonstrates, reduced-form implications of corporate agency issues. Both cases result in an underinvestment problem for the firm, but the firm valuation criteria differ. We show that imposing revenue-neutral dividend taxes or investment subsidies by an outside authority can overcome the firm's underinvestment problem and consequently increase all periods' present value of dividends. Lastly, under a multi-period extension with Cobb-Douglas return functions, this paper shows quantitative implications of our model.

Firm-to-Firm Relationships and Price Rigidity: Theory and Evidence

Sebastian Heise
,
Yale University

Abstract

Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using confidential, transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about a relationship's life cycle and interviews I conducted with purchasing managers, I develop a model in which a buyer-seller pair subject to persistent, stochastic shocks to production costs shares profit risk under limited commitment. Relationships that experience good shocks have lower costs, trade more, and survive longer, which generates the relationship life cycle. Furthermore, since partners in older relationships on average enjoy a greater relationship surplus, alternative matches are less attractive to them, which enables the firms to share profit risk more completely by setting prices that are more responsive to shocks. As qualitatively predicted by the model, price flexibility in the data is correlated with trade growth within a relationship and with exporter risk aversion. Once structurally estimated, the model replicates the empirical correlation between relationship age and the responsiveness of prices to shocks. My results suggest that changes to the average length of relationships in the economy – e.g., in a recession, when the share of young relationships declines – can influence price flexibility and thus the effectiveness of monetary policy.

Flexible Prices and Leverage

Francesco D'Acunto
,
University of Maryland
Ryan Liu
,
University of California-Berkeley
Carolin Pflueger
,
University of British Columbia
Michael Weber
,
University of Chicago

Abstract

The frequency with which firms adjust output prices is an important determinant of persistent differences in capital structure across firms. We show the most flexible-price firms have a 19% higher long-term financial leverage than the most inflexible-price firms, controlling for known determinants of capital structure. We rationalize this novel fact in a costly-state-verification model, in which inflexible-price firms are more exposed to aggregate shocks, and face tighter financial constraints. In the model, bank lending relaxes financial constraints through monitoring and narrows the gap in financial leverage between inflexible- and flexible-price firms. Consistently, inflexible-price firms increased leverage more than flexible-price firms following the staggered implementation of the Interstate Bank Branching Efficiency Act across states and over time, which we use in a triple-differences identification strategy. Firms' frequency of price adjustment did not change around the deregulation.

Follow the Money: Remittance Responses to FDI Inflows (F2, F6)

Michael Coon
,
University of Tampa
Rebecca Neumann
,
University of Wisconsin-Milwaukee

Abstract

Migrant networks are an important catalyst for promoting FDI flows between countries. Migrants also send increasingly large remittances to their home countries. This paper considers how these two capital flows are related, specifically examining how remittance flows respond to the amount of FDI inflows to a country. Using a panel of 157 countries over 1980-2010, we estimate a random effects model and find a positive and significant effect of FDI flows on remittances, while controlling for other standard determinants of remittance flows. We account for the potential endogeneity of FDI to remittances by utilizing a two-stage Instrumental Variables approach. These findings are suggestive of a desire among the emigrant community to invest their income earned abroad in their home countries. We find the relationship is strongest for low income countries, highlighting the importance of remittances as a source of investment capital in these countries.

From Good Institutions to Good Norms: Top-Down Incentives to Cooperate Foster Prosociality but Not Norm Enforcement

Antonio Alonso Arechar
,
Yale University
David Rand
,
Yale University
Michael Stagnaro
,
Yale University

Abstract

What makes people willing to pay costs to help others, and to punish others’ selfishness? And why does the extent of such behaviors vary markedly across cultures? To shed light on these questions, we explore the role of formal institutions in shaping individuals’ prosociality and punishment. In Study 1 (N=707), we found that the quality of the institutions that participants were exposed to in daily life was positively associated with giving in a Dictator Game, but had little relationship with punishment in a Third-Party Punishment Game. In Study 2 (N=516), we investigated causality by experimentally manipulating institutional quality using a centralized punishment institution applied to a repeated Public Goods Game. Consistent with Study 1’s correlational results, we found that high institutional quality led to significantly more prosociality in a subsequent Dictator Game, but did not have a significant overall effect on subsequent punishment. Thus we present convergent evidence that the quality of institutions one is exposed to “spills over” to affect subsequent prosociality, but not punishment. These findings support a theory of social heuristics, suggest boundary conditions on spillover effects of cooperation, and demonstrate the power of effective institutions for instilling habits of virtue and creating cultures of cooperation.

Fueling Fiscal Interactions: Commodity Price Shocks and Local Governments in Colombia (H7, R5)

Nicolas Pardo
,
Humboldt University of Berlin
Frank M Fossen
,
University of Nevada-Reno
Lukas Mergele
,
Humboldt University of Berlin

Abstract

This paper explores the determinants of local public expenditures in a developing country. In particular, we study whether public expenditures in neighboring municipalities will influence local politicians' spending decisions, as many theories predict. Such spatial expenditure spillovers were understudied in previous research and mostly relied on state-level data from industrialized economies. Our first contribution is to analyze spatial fiscal interactions in a developing country setting. Second, we employ an unusually rich panel data set of the universe of Colombian municipalities, providing a rich source of policy variation. Third, we examine heterogeneous effects for a broad range of expenditure categories. Fourth, we offer a clean identification strategy exploiting variation in exposure of municipalities to exogenous changes in the world market prices for oil and coal, depending on the municipalities' endowment of natural resources. We find strong evidence for spillovers in public spending, although of smaller size compared to estimates from industrialized economies, hinting at stronger fiscal constraints in developing countries.

Fundamental Transformation and Contractual Reference Points in a Shapiro-Stiglitz World (D8, J4)

Vivian Carstensen
,
Bielefeld University and Leibniz University of Hannover

Abstract

Motivated by evidence of resilient labor markets, the purpose of this paper is to develop a rationale for smoothed disposable income in long-term employment relations. Through the lens of repeated moral hazard it provides a testable explanation for a cooperative lock-in of behavior and contributes to the twofold-role-of-wages literature with a third role: the role of aligning entitlement perceptions. Consistent with common characteristics of highly exposed sectors to the 2008-09 crisis, my model includes a critical threshold for product quality. Refining the discipline setting in Shapiro-Stiglitz's landmark model, it shows that incentive compatibility imposes Williamson’s fundamental transformation from ex-ante competitive setting to ex-post bilateral dependency, justifying to integrate the Hart-Moore (2008) model of contract-contents-as-reference-points: Quality consistent efficiency wages determine employees’ perceptions, equivalently constituting a contractual reference point. The third role of wages then predicts non-pecuniary shock absorption, correspondingly cushioning jobs and maintaining critical product quality. Following testable predictions derive from the sequential contract game: (1) Binding quality thresholds in production fundamentally transform competitive labor contracts into long-term employment relations and release reciprocal reference points as contract enforcement device, considerably protecting (i) employees’ remuneration from economic shocks and (ii) product quality from productivity shocks. (2) Corresponding labor market segments are characterized by sine-qua-non quality standards and fairly smoothed equilibrium unemployment (rates). Reputation denotes an important success factor, in turn imposing a severe negative impact on individual firms suffering from reputation loss, e.g. resulting from shading in response to CRP violation, with likely industry-wide spillovers. (3) Quality and incentive compliant shock adjustment of labor involves safeguarding of jobs with transmission channels at the intensive margin, eventually leading to labor market resilience (in terms of OECD (2012), where the model uses the two dimensions formalization with (absorbing) a) changes in total earnings and b) changes in the unemployment rate.

Gains from Early Support of a New Political Party (D7, G1)

Marco Leonardi
,
University of Milan and IZA
Rossella Mossucca
,
Einaudi Institute for Economics and Finance
Fabiano Schivardi
,
Bocconi University and CEPR
Battista Severgnini
,
Copenhagen Business School

Abstract

There is a large literature that looks at gains from political support. Usually the identification problem is that political parties are well-established and the reason why some firms support a party rather than another is endogenous to the performance of the firm and cannot be easily traced back in time because the connections between firms and political parties were established long before. This paper examines for the first time the value of political connections after the founding of a political party from scratch. We exploit the context of Italy where, over the last two decades, Silvio Berlusconi, a tycoon with a vast business group, has created a new political movement and has been the leader of a new conservative political coalition. We identify the 100 firms which supported Berlusconi in 1994 gathering this information from public records and from private conversations. Using balance sheet data of Italian companies for the period 1985 -2010, we investigate whether firms which supported from the very start Silvio Berlusconi in his bid to become prime minister in 1994 did better than competitors over the following years. The founding of a new party offers a natural experiment to test the value of patronage by political parties to business since in 1993 the traditional parties were affected by an unexpected political crises and supporting Berlusconi was a highly uncertain bet in 1993. We study possible mechanisms of gains for the firms: advertising on Berlusconi’s media, helps in public procurement, credit channel, and network opportunities. Our results show that Berlusconi’s supporters of 1994 did better than the competitors in terms of value added and employment but did not do significantly better in terms of productivity. These results do not seem to be responsive to the political cycle.

Gender Differences in Optimism (J1, D8)

Carl Magnus Bjuggren
,
Research Institute of Industrial Economics
Niklas Elert
,
Research Institute of Industrial Economics

Abstract

Swedish survey data reveal that women are less optimistic than men regarding the future economic situation. In addition, men are more likely to make forecast errors compared to women. However, in sharp economic downturns, both men and women quickly lower their expectations, and the gender differences in optimism disappear. We show that this convergence in beliefs can be explained by the amount of available information on the economy. In times of economic growth, the relative scarcity of information encourages optimism in men compared to women. When feedback about the economy is abundant, as in times of economic crises, men are not more optimistic than women.

Geographic Politics, Loss Aversion, and Trade Policy: The Case of Cotton and China (F1, Q1)

Wenshou Yan
,
University of Adelaide

Abstract

This paper seeks to explain government’s responses to world market price fluctuations. It develops a theoretical model of trade policy incorporating loss aversion and reference dependence. Like Freund and Özden (2008), this paper assumes only trade policy instruments are available to the government, but it goes beyond their model by adding a spatial dimension to interest-group politics. The model suggests that: (1) politically sensitive products receive more trade protection; (2) the government’s changing trade distortions insulate the domestic market from international price fluctuations by setting trade protection lower (higher) when the world price is higher (lower) than a targeted domestic reference price; and (3) variations in market intervention help producers at the expense of consumers in periods when the international price is well below trend, and help consumers at the expense of producers in high-price periods. These predictions from theory are shown to still hold when the model is extended to a large country case involving terms of trade effects. The model is tested empirically and found to offer a plausible explanation of the puzzling changes in cotton protection in China.

Global Risk Sharing through Trade in Goods and Assets: Theory and Evidence

Inga Heiland
,
Ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract

Firms facing uncertain demand at the time of production expose their shareholders to volatile returns. Risk-averse investors trading multiple assets will favor stocks that tend to yield high returns in bad times, that is, when the marginal utility of consumption is high. In this paper, I develop a firm-level gravity model of trade with risk-averse investors to show that firms seeking to maximize their present value will take into account that shareholders discount expected profits depending on the correlation with their expected marginal utility of consumption. The model predicts that, ceteris paribus, firms sell more to markets where profits covary less with the income of their investors. This holds true even in the presence of complete and internationally integrated financial markets. To test the model's prediction, I use data on stock returns to estimate correlations between demand growth in export markets and expected marginal utility growth of U.S. investors. I then show that the covariance pattern is reflected in the pattern of U.S. exports across destination markets and time within narrowly defined product-level categories, as predicted by the model. I conclude that by maximizing shareholder value, exporters are actively engaged in global risk sharing.

Global Value Chains and Effective Exchange Rates at the Country-Sector Level

Nikhil Patel
,
Bank for International Settlements
Zhi Wang
,
United States International Trade Commission
Shang-Jin Wei
,
Asian Development Bank

Abstract

The real effective exchange rate (REER) is one of the most cited statistical constructs in open-economy macroeconomics. With the rising importance of offshoring and outsourcing, the standard measures are increasingly flawed. Moreover, because different sectors within a country participate in international production sharing at different stages, sector level variations are also important. Incorporating these features, we develop a theoretical framework to compute REER at both the sector and country levels and apply it on inter-country input-output tables to study the properties of the new measures of the REER for 35 sectors in 40 countries over 1995-2009.

Globalization, Offshoring and Monetary Control (F4, F6)

Wen Zhang
,
Boston College

Abstract

This paper provides an empirical and theoretical investigation into the relationship between trade openness and the effects of monetary policy changes. Using data from US manufacturing industries at a 4-digit SIC level from 1972 to 2005, the empirical analysis reveals a negative relationship between trade openness and the effects of identified monetary policy shocks on the output of manufacturing industries. Based on this evidence, the theoretical section develops an open economy New Keynesian model that features heterogeneous manufacturing firms and one-way offshoring from the advanced economy to the less developed one. This model highlights a new channel through which trade openness influences the monetary transmission mechanism: a decline in both trade and offshoring costs raises labor demand elasticity. Trade openness weakens the effects of monetary policy changes on output and inflation by dampening the responses of the domestic labor market. The calibrated model indicates that, when the economy moves from trade and financial autarky to a modern trade regime with an incomplete international financial market, the monetary policy shocks have 22% less of an effect on real GDP and consumer price inflation.

Government Spending Shocks and Asset Prices (G1, E6)

Ruchith Dissanayake
,
University of Alberta

Abstract

This paper explores asset pricing implications and macroeconomic dynamics of government spending shocks. I introduce a novel exogenous measure of government spending shocks using financial data. Although consumption and investment decrease in the long run, fiscal shocks cause contemporaneously low marginal utility states. I find that assets with high sensitivity to government spending shocks earn significantly higher expected returns, on average, compared to assets with low sensitivity to government spending shocks. I document that fiscal shocks disproportionately worsen value of growth opportunities relative to value of existing assets. I develop a dynamic stochastic general equilibrium model to explain these insights.

Growth and Happiness in China, 1990-2015

Richard A. Easterlin
,
University of Southern California
Fei Wang
,
University of Southern California
Shun Wang
,
Korea Development Institute

Abstract

Over the past quarter century China has experienced unprecedented economic growth. This paper examines the associated trends in overall life satisfaction and life satisfaction differentials by socio-economic-status, drawing on the Gallup World Poll, World Values Survey, Horizon Research Group, and other sources.

Hard to Get: The Scarcity of Women and the Competition for High-Income Men in Chinese Cities (D1, J1)

David Ong
,
Peking University
Yu Yang
,
Peking University
Junsen Zhang
,
Chinese University of Hong Kong

Abstract

Reports in China of the difficulties of elite women in finding suitable mates have been increasing despite the growing scarcity of women. We show that this phenomenon can be a consequence of women’s preference for men who have higher incomes than themselves. With such a reference-dependent preference (RDP), the pool of men the high-income women desire shrinks as their income increases, while the pool of competing poorer women expands. Moreover, for high-income women, even when high-income men are more plentiful and richer (as in China), the direct effect of a greater number of desirable men can be overwhelmed by the indirect effect of the competitive “entry” of poorer women. We test for these competitive effects with online dating field experimental, Census, and China Family Panel Studies data. Consistent with competitive entry and its deterrence, the search intensity of beautiful low-income women and high-income women—irrespective of their beauty—for high-income men increases with sex ratio and the income of high-income men. The beauty of the wife of high-income men increases with sex ratio and the men’s income, as does the marriage probability of low-income women, while that of high-income women decreases. Our findings demonstrate the novel effects of women’s RDP for mate income.

Heterogeneity in Talent or in Tastes? (D9, E2)

Trevor S. Gallen
,
Purdue University
Ian Fillmore
,
Upjohn Institute

Abstract

This paper addresses two questions. First, how much of income inequality in the United States is due to tastes for leisure and how much is due to talent? Second, how does accounting for taste heterogeneity affect optimal redistribution relative to assuming homogeneous preferences? Several economists have noted that, to the extent that observed income differences reflect tastes rather than talent, the rationale for redistribution becomes weaker. Lockwood and Weinzierl (2015) formalize this intuition within a simple static economy. They argue that only talent-driven income inequality justifies redistribution and show that heterogeneity in tastes will tend to dampen the optimal amount of redistribution. To address this issue empirically, we estimate a version of the model in Neal and Rosen (2005) that extends the classic Ben-Porath (1967) lifecycle model of human capital investment to allow for a labor/leisure tradeoff. Using data from the PSID, we estimate the joint distribution of tastes and talent and assess the importance of accounting for taste heterogeneity for optimal redistributive taxation. We find between 15% and 22% of permanent income variation is due to differences in taste, rather than talent. Allowing for taste and talent heterogeneity rather than talent heterogeneity alone changes Mirrlesian calculus significantly.

Heterogeneous Responses and Differentiated Taxes: Evidence from the Heavy-duty Trucking Industry in the U.S. (Q4, R4)

Jen He
,
University of Maryland

Abstract

In this paper, I exploit a rich vehicle-level micro dataset of the U.S. heavy-duty trucking fleet to examine how truckers differentially respond to changes in fuel costs. The empirical results show that the long-run elasticities of vehicle-miles-traveled are -0.23 for combination trucks and -0.27 for vocational vehicles. Within each of the two groups, the estimated elasticities vary significantly among different truck weight classes and business sectors. The heterogeneity in truckers' responsiveness calls for differentiated policies, in particular, fuel taxes. I derive the optimal fuel taxes in a general equilibrium model that includes the externalities of truck operation (such as air pollution, road deterioration, traffic congestion, vehicle accidents and noise pollution), measures shipping demand in terms of payload distance and allows truckers to choose their routes based on shipping demand. Most of the optimally differentiated diesel taxes are about two or three times the actual rate. Compared to the optimal uniform tax, implementing differentiated taxes based on vehicle weight classes reduces the existing distortion and generates an overall welfare gain of about 17.5 billion US dollars per annum.

Heterogeneous Risk Preferences in Financial Markets (G1, C7)

Tyler Abbot
,
Sciences Po

Abstract

This paper builds a continuous time model of N heterogeneous agents whose CRRA preferences differ in their level of risk aversion and considers the Mean Field Game (MFG) in the limit as N becomes large. I add to the previous literature by characterizing the limit in N and by studying the short run dynamics of the distribution of asset holdings. I find that agents dynamically self select into one of three groups depending on their preferences: leveraged investors, diversified investors, and saving divestors, driven by a wedge between the market price of risk and the risk free rate. The solution is characterized by dependence on individual holdings of the risky asset, which in the limit converge to a stochastic flow of measures. In this way, the mean field is not dependent on the state, but on the control, making the model unique in the literature on MFG and providing a convenient approach for simulation. I simulate both the finite types and continuous types economies and find that both models match qualitative features of real world financial markets. However, the continuous types economy is more robust to the definition of the support of the distribution of preferences and computationally less costly than the finite types economy.

High-Income Donors’ Preferences for Charitable Donations

Mackenzie Alston
,
Texas A&M University
Catherine Eckel
,
Texas A&M University
Jonathan Meer
,
Texas A&M University
Wei Zhan
,
Texas A&M University

Abstract

The use of directed giving - allowing donors to target their gifts to specific organizations or functions - is pervasive in fundraising, yet little is known about its effectiveness. We conduct a field experiment at a public university on 70,000 high-giving-capacity donors. We vary the degree to which these donors can direct their gifts to specific activities at the university and investigate three related questions: whether donors desire control over their gifts; whether donors are willing to give to fundraising- and overhead-type activities; and whether major gift prospects are responsive to non-personal communications. Our results shed light on the nature of potential donors’ decision-making and have implications for fundraising best practices.

Hitting the “Grass Ceiling”: Informal Networks and Career Outcomes for Female Executives (G3, J4)

Lee Edward Biggerstaff
,
Miami University
Brad Goldie
,
Miami University

Abstract

One factor that female professionals cite as contributing to the persistent glass ceiling is the exclusion of women from male dominated informal networks that are important for promotion and career advancement. In this study, we empirically test the impact of the CEO’s participation in a male dominated sport as a signal of his embeddedness in an informal male-dominated network. Specifically, we find that CEOs that play golf are significantly less likely to employ a female on their executive team, and that this relationship becomes more acute for CEOs who are frequent golfers. We term this phenomenon the “grass ceiling.” Our findings suggest that the “grass ceiling” is even more pronounced in firms with CEOs with high ownership power; on the other hand, it appears that it can be mitigated by the presence of multiple females on the board of directors or via access to alternative professional networks. Our study provides the first empirical evidence that male-dominated informal networks represent a significant barrier to the careers of female executives. Overall, our study suggests that there is still significant work to be done to break down demand-side barriers to female advancement in the executive realm.

Honesty and Bluffing

Bryan C. McCannon
,
West Virginia University

Abstract

A bargaining environment is considered where there is asymmetric information regarding whether the two players have common preferences or conflicting preferences. If the cost of strategic communication is independent of the state, then signaling is not expected to be effective. If the uninformed agent believes, though, a (cheap-talk) signal has been sent, then the informed agents are incentivized to engage in deceptive bluffing. Alternatively, if bluffing is not too prevalent, honest communication can be worthwhile. A bargaining model where state-dependent mixed strategies arise as equilibria. Thus, bluffing occurs in equilibrium. Players who experience a disutility to engaging in deceptive behavior, along with players who gain a benefit to deceptive behavior are then introduced. The set of equilibria are refined and we show, ironically, that the introduction of honest players increases the overall level of deception while the introduction of dishonest players reduces deception.

Housing Equity and Mortgage Default: Introducing the Missed Payment Bias (D1, R3)

Robert Kelly
,
Central Bank of Ireland
Fergal McCann
,
Central Bank of Ireland

Abstract

The relationship between housing equity or the Loan to Value ratio (LTV) and mortgage default is one of the cornerstone topics of research and policy interest in household finance. In this paper we highlight and quantify a measurement error which has important implications for this literature. When a mortgage begins missing payments, its loan balance L no longer falls as per the contracted amortization schedule. At the same time, a performing loan with identical characteristics continues to reduce its loan balance with each payment made, leading to a differential in L between the two loans which we denote the “Missed Payment Bias” (MPB). We contend that the MPB, which is driven solely by the reverse causality between mortgage default and L, must be factored in before an estimate of the impact of LTV on default can be deemed reliable. We numerically show that MPB is increasing in the time a loan has spent in arrears, the interest rate, the loan’s age and the LTV itself. We then show using representative US data on prime mortgages that a cross-sectional model of mortgage default overestimates by a factor of two relative to a model that corrects defaulted loan balances as per the scheduled amortization. Finally we show that the MPB is far less important an issue for estimates ofCLTV in panel data models such as a discrete time or proportional hazard models.

How costly is forced gender-balancing of corporate boards? (G3, J2)

B. Espen Eckbo
,
Dartmouth College
Knut Nygaard
,
Oslo and Akershus University College
Karin S. Thorburn
,
Norwegian School of Economics

Abstract

In 2005, Norway became the first country to mandate gender-balanced corporate boards. We hypothesize that a gender quota reduces director CEO experience and increases board independence. Contrary to prior research, our robust performance estimates fail to reject an overall value-neutral effect of the quota, even for firms with all-male boards. We also show that, while boards lost some CEO experience, firms did not increase board size (to retain key male directors) or change legal form (to avoid the quota), and managed to maintain board network power. We conclude that investors and firms alike viewed the quota as a relatively low-cost constraint.

How Did the American Recovery and Reinvestment Act (ARRA) Impact the Material Well-Being of SNAP Participants? A Distributional Approach (I3, D1)

Pourya Valizadeh
,
University of Georgia
Travis A. Smith
,
University of Georgia

Abstract

The Supplemental Nutrition Assistance Program (SNAP) is the nation's largest nutritional safety net. The American Recovery and Reinvestment Act (ARRA) of 2009 increased SNAP benefits at an unprecedented level for all participants at a constant-dollar amount equal to 13.6 percent of the maximum benefit for each household size. In November 2013, the ARRA expired and SNAP benefits were reduced for all participants the first time in history. We examine how the implementation and expiration of the ARRA impacted the distribution of material well-being among SNAP participants. Understanding the distributional effects is of particular importance to food assistance policy as it can help the policymakers to identify the SNAP subpopulations that are the most sensitive to variations in SNAP benefits level. Using a fixed-effects quantile panel data estimator, we find evidence of heterogeneity within the SNAP population suggesting that mean regression model masks the distributional effects of the SNAP benefit changes. We find that the ARRA implementation led to a first-order improvement in the material well-being of SNAP participants. ARRA expiration, however, caused a second-order disimprovement.

How do house prices affect household consumption growth over the life cycle? (D1, R2)

Peng Wang
,
University of New South Wales
Konark Saxena
,
University of New South Wales

Abstract

We use a rich household panel dataset to study how house price changes affect household consumption decisions over the life cycle. We find that: (i) Young homeowners with greater income volatility have higher consumption sensitivity, supporting a precautionary saving channel; (ii) Older households with a higher housing equity to wealth ratio have higher consumption sensitivity, supporting a housing wealth effect; (iii) Young- and middle-aged homeowners are more likely to use cash-out refinancing after house price increases than old-aged homeowners, supporting a borrowing constraints channel. These results are consistent with a life cycle model with borrowing constraints and risky labor income.

How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme

Ville Rantala
,
University of Miami

Abstract

A unique dataset from a large Ponzi scheme shows that investment ideas can spread epidemically through social contagion. Investors could join the scheme only by personal invitation from an existing member, and I can observe how the idea spreads from one person to the next based on the inviter-invitee relationships. The social network has so-called scale-free connectivity structure where the distribution of the number of invited people approximately follows a power law. The structure differs significantly from randomly formed networks and explains why word-of-mouth information can spread rapidly even if the average investor does not share it with many others.

How Do Teacher Hiring, Transfer, and Attrition Relate to Access to Effective Teachers?

Eric J. Isenberg
,
Mathematica Policy Research
Jeffrey Max
,
Mathematica Policy Research
Philip Gleason
,
Mathematica Policy Research
Matthew Johnson
,
Mathematica Policy Research
Jonah Deutsch
,
Mathematica Policy Research

Abstract

Many factors influence students’ access to effective teachers—residential choice, school choice, teacher labor markets, and within-school assignments of teachers to students. In this paper, we describe how the hiring of teachers and their subsequent movement into and out of schools affect low-income students’ access to effective teachers. Past studies have examined patterns of teacher hiring, transfer, and attrition, and how these differ between high- and low-poverty schools. Some of these studies compare the amount of teacher hiring and mobility that occurs in high- and low-poverty schools. Others compare high- and low-poverty schools in terms of the effectiveness of the teachers being hired, transferring, or leaving the district. But these studies do not explicitly connect these patterns to low-income students’ access to effective teachers. We defined teachers who enter a district as new hires, those who move between schools as transfers, and those who leave a district as leavers. We measured the proportion of teachers in each of these categories and their effectiveness, comparing patterns in schools with many low-income students and those with fewer low-income students. We leveraged data on teachers in 26 districts located in 15 states in all four Census regions, using data from five school years. We first focus on average patterns of hiring, transfer, and attrition across the full sample. We then examine whether district-specific patterns of hiring, transfer, and attrition are related to inequity in access to effective teachers at the district level.

How Does P2P Lending Fit Into the Consumer Credit Market? (G2, L8)

Calebe de Roure
,
Frankfurt School of Finance and Management
Loriana Pelizzon
,
Goethe University Frankfurt
Paolo Tasca
,
University College London

Abstract

We develop a theoretical model to examine the interaction between bank lending and lending via peer-to-peer (P2P) lending platforms. The model predicts that: (i) banks prefer relationship lending loans over transaction loans and improve performance by avoiding transaction costs; (ii) transaction loans migrate to P2P lending platforms, so the emergence of P2P lending is correlated with a decline in bank lending; and (iii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We confront these predictions with data on P2P lending and non-construction consumer bank credit market in Germany. The empirical findings support predictions of the model and indicate that riskier borrowers seeking transaction loans are the ones being served by P2P lending.

How Financial Linkages Fuel the Fire? Asymmetric Effects in the International Transmission of United States Financial Stress (E4, F4)

Anastasios Evgenidis
,
Central Bank of Ireland
Athanasios Tsagkanos
,
University of Patras
Costas Siriopoulos
,
Zayed University

Abstract

The continuous increase in the degree of interdependence among financial markets during the last decades has amplified the horizons of potential investors and created the conditions for benefits to economies through the exploitation of transmission channels. However, the recent financial crisis clearly demonstrated how financial integration may also result in the escalation of countries vulnerability to financial crises originating elsewhere. In this paper, we address these issues by deriving an empirical international threshold-VAR model which accounts for the presence of different regimes of financial stress. Within this framework we are allowed to investigate and discuss some issues of particular interest for macro-financial and monetary policy purposes. The lessons to be learned from our analysis are the following. A loosening monetary policy and a beneficial shock in financial conditions would help the US economy to move out of intense financial stress periods. From a monetary policy perspective, this highlights the importance of using monetary policy and macroprudential tools in promoting financial stability. In addition, during turmoil periods, the financial accelerator has a significant influence in the international context, by amplifying and propagating the US financial shocks to the Eurozone. This could potentially explain why international business cycles transmission is so significant even though the observed shocks are not. Another interesting finding is that, part of the fluctuations observed in economic activity in both regions, are due to the accumulation of small financial condition shocks. This implies that small unimportant disturbances, which can be viewed in isolation, could generate data that mimic the behavior of macroeconomic series. The above finding provides further insight on the debate about policy rules versus discretionary policy. We suggest that central banks might also consider a policy stance less discretionary and more closely align to clear targets of what they want to achieve.

How Important is Precautionary Labor Supply? (D9, J2)

Davud Rostam-Afschar
,
University of Hohenheim

Abstract

We quantify the importance of precautionary labor supply defined as the difference between hours supplied in the presence of wage risk and hours under perfect foresight. Using data from the German Socio-Economic Panel (SOEP) for 2001-2012 we estimate dynamic labor supply equations augmented with a measure of wage risk. Our results show that married men choose about 2.5% of their hours of work or one week per year on average to shield against wage shocks. The effect is strongest for the self-employed, but also relevant for other groups. If self-employed faced the same wage risk as the median civil servant, their hours of work would reduce by 4%.

Human Barriers to International Trade (F1, O1)

Stefan Legge
,
University of St. Gallen
Irene Fensore
,
University of St. Gallen
Lukas Schmid
,
University of St. Gallen

Abstract

This paper investigates the impact of human barriers on international trade, using ancestral distance as a measure of the relatedness of populations. In a new data set covering the universe of global trade, our analysis documents that country pairs with a large ancestral distance are less likely to trade with each other (extensive margin) and if they do trade, we find that a reduced volume and number of goods traded (intensive margin). These results are robust to including a vast array of micro-geographic controls variables. We provide evidence suggesting that the inverse relationship between bilateral trade flows and ancestral distance arises from differences in values, preferences, technology, as well as network effects.

Hysteresis through Endogenous Rigidity in Participation and Wages (E2, J4)

Cynthia L. Doniger
,
Federal Reserve Board
David Lopez-Salido
,
Federal Reserve Board

Abstract

A substantial body of empirical literature shows that high unemployment, falling wages, and reduced economic activity can have lasting consequences: hysteresis. We model hysteresis as resulting from a coordination failure among atomistic firms and workers in a frictional labor market that features random search, ex-ante wage commitments, and the possibility of worker non-participation. This coordination failure results in a continuum of possible equilibria with high-labor-demand equilibria welfare dominating low-labor-demand equilibria. We then introduce changes in labor productivity and specify a protocol for revelation of the new equilibria following shocks such that the model exhibits (1) periods of endogenous wage rigidity, (2) persistent changes in wages and labor force participation in response to transitory movements in labor productivity, and (3) sluggish recoveries including both a ``jobless'' phase and a ``wageless'' phase. Furthermore, expansions are insufficiently robust and in this sense recessions are scarring.

Identifying Age Penalty in Women's Wages: New Method and Conclusions from Germany 1984-2008 (J7)

Joanna Tyrowicz
,
University of Warsaw and National Bank of Poland
Lucas van der Velde
,
University of Warsaw
Irene van Staveren
,
Erasmus University Rotterdam

Abstract

There are two possible gender-age patterns in wages. One is a widening of the adjusted gender wage gap (AGWG) during the reproductive years of child bearing and child rearing, followed by a narrowing of the gap in the post-reproductive period. The other possible gender-age pattern is a continued widening of the AGWG, first in the reproductive period, followed by a further increase during the post-reproductive years. We propose a double decomposition method based on DiNardo et al. (1996) reweighing scheme to disentangle cohort and age effects. We employ on a long panel of data from the Germany covering the 1984-2008 period. AGWG tends to decrease over time, especially during the 90’s, with a relative stabilization towards the end of the analyzed period. AGWG increases with age, though this growth is non monotonous, providing some support for the “double standard of aging" effect more than for the explanations derived from the human capital theory. Decrease in fertility and increase in educational attainment among women may have translated to lower gender wage gaps experienced by the labor market entrants, especially along the wage distribution. Yet, the novel double decomposition suggests strong age-related pattern, i.e. the unexplained part of the wage differential increases with age.

Identifying Priorities for Structural Reform (O4, E2)

Maksym Ivanyna
,
Michigan State University
Norbert Funke
,
Joint Vienna Institute
Asel Isakova
,
Joint Vienna Institute

Abstract

Structural reform is instrumental to the economic growth, but doing the reforms is politically and economically costly. At the same time, there are hundreds of potential directions that each government could undertake. Hence, the need to prioritize. Our paper provides a relatively simple and comprehensible way to do the prioritization. First, we identify structural reform gaps for a set of indicators. How does the country in focus compare to countries with similar “structural” characteristics, or to other benchmarks? Should all reforms be equally important for growth, then reforms with the largest gaps should be the first in line of priorities. Second, we use growth regressions to compare reforms in terms of their impact on the economic growth. It may make more sense to close a smaller gap in a more growth-enhancing area rather than to close a larger gap in a less growth-enhancing area. Given the multitude of econometric issues with the cross-country growth regressions, we do not attempt to identify the true magnitude of reforms’ effect on growth. However, we rank the magnitudes, which should be enough to prioritize the reforms. Even to rank the reforms, we must do a rather specific assumption about the population moments. Our ranking is valid only if the progress in reform is positively correlated with its impact on growth. We provide a theoretical model and empirical support for this assumption. The two approaches - reform gaps and reform ranking - are then combined to form reform priorities for each country. The reform priority is higher the larger is the reform gap and/or the larger is the impact of the reform on the economic growth.

Immigration and the Macroeconomy: A VAR Analysis (E3, F6)

Francesco Furlanetto
,
Norges Bank
Orjan Robstad
,
Norges Bank

Abstract

We propose a new VAR identification scheme that enables us to disentangle immigration shocks from other macroeconomic shocks. Identification is achieved by imposing sign restrictions on Norwegian data over the period 1990Q1 - 2014Q2. The availability of a quarterly series for net immigration is crucial to achieving identification. Notably, immigration is an endogenous variable in the model and can respond to the state of the economy. We find that domestic labor supply shocks and immigration shocks are well identified and are the dominant drivers of immigration dynamics. An exogenous immigration shock lowers unemployment (even among native workers), has a positive effect on prices and on public finances in the medium run, no impact on house prices and household credit, and a negative effect on productivity.

In Good Times and in Bad: Defined-Benefit Pensions and Corporate Financial Policy (G1, G3)

Sohnke M. Bartram
,
University of Warwick

Abstract

U.S. sponsors of defined-benefit pension plans make smaller contributions not only as a function of the funding level and past performance of the pension plan, but also if they have less cash, are less profitable and are financially distressed. As a result, plans have larger funding deficits if the sponsor is closer to bankruptcy and the plan has low investment returns. In fact, U.S. pension plans are still significantly underfunded in 2014 despite recent regulation to improve funding levels. Similarly, plan sponsors make more aggressive pension plan assumptions if they are financially distressed. While plan sponsors generally take less risk with their pension assets if they have high business or financial risk, there is some evidence of risk shifting during the financial crisis. As a result, funding rules, pension plan assumptions and investment policies are areas to consider for pension policy to protect plan beneficiaries.

Incentive(less)? The Effectiveness of Tax Credits and Cost-Sharing Subsidies in the Affordable Care Act (I1, H2)

Jesse Hinde
,
University of North Carolina-Chapel Hill

Abstract

The Patient Protection and Affordable Care Act (ACA) introduced several new policies in 2014, including an individual mandate, expanded Medicaid eligibility, and subsidized private coverage. Private subsidies include advance premium tax credits (APTCs) and cost-sharing reductions (CSRs). Individuals gain eligibility for APTCs and CSRs at 100% (138% in Medicaid expansion states) of the Federal Poverty Level (FPL), lose eligibility for CSRs at 250% FPL, and lose eligibility for the APTCs at 400% FPL. Using the Current Population Survey (CPS) and a regression discontinuity design, this study exploits the exogenous differences in subsidy eligibility in 2014 at three cutoffs to identify the separate and combined effects of the APTCs and CSRs on private insurance coverage. I estimate a 4.8 to 5.4 percentage point increase in private insurance coverage just above 138% FPL in Medicaid expansion states and a smaller effect above 100% FPL in non-expansion states attributable to the combined incentives. I calculate a demand elasticity for health insurance of -0.65 to -0.58, which is higher than most estimates in the literature, suggesting low-income individuals may be relatively more price responsive. There is no evidence of an effect on private health insurance at 250% FPL, attributable solely to the CSRs, and suggestive effects at 400% FPL, attributable to only the APTCs. Coverage increases do not appear to be driven by adverse selection, and there is no evidence of crowding-out or income manipulation around the cutoffs. APTC and CSR levels would need to be raised at higher incomes to induce more participation.

Incentives, Hiring and Productivity: Evidence From Academia (J3, M5)

Bo Bian
,
London Business School
Rainer Haselmann
,
Goethe University Frankfurt
Vikrant Vig
,
London Business School

Abstract

This paper investigates how incentives affect the productivity of innovative work. We present evidence from the German academia during 1990-2010 by exploiting a reform designed to uplift professors’ incentives to publish. Collectively, productivity gains while dispersion among universities goes up. Analysis of detailed professor-level data reveals heterogeneous effects of the reform. Young professors who are better incentivized improve more. Increases in productivity, especially that of highly innovative work, i.e. top tier publications, are concentrated among previously outperforming professors. After the reform, high quality publications of an average professor rise with the number of outstanding co-located colleagues, suggesting the existence of positive spillovers from star researchers. We further document an indirect productivity enhancing channel via better hiring decisions in the post reform era. Relationship hirings that impose detrimental impact on productivity become less prevalent.

Income and Wealth Concentration in Reunified Germany (D3, H2)

Charlotte Bartels
,
DIW Berlin
Katharina Jenderny
,
Umea University

Abstract

This paper presents series on income and wealth concentration in Germany after reunification in 1990 using microdata on individual income tax returns. Our income concentration series is the first series that takes into account changes in the definition of taxable income: in Germany, capital income was first partly and then completely excluded from the personal income tax base in 2001 and 2009. Changes in the underlying income concept of top income shares pose a major challenge to the comparability of these series both over time and between countries. Our top income shares are based on a consistent income definition which includes the imputation of capital income after 2009 when capital income was excluded from the income tax base. Using a rich data set containing all income taxpayers' files we construct a consistent top income share series including full capital incomes from 2001 to 2010. Missing capital income since 2009 is imputed using a composite measure of stock dividends and interest income tax flows. Complementing our income concentration analysis, we estimate top wealth shares by capitalizing the incomes reported in income tax returns combined with macroeconomic household balance sheets. We find that consistently including full capital income reveals an even steeper increase in income concentration at the top of the income distribution in Germany than previous series suggest. The very top was disproportionately hit by the recession in 2009.

Inequality at Year of Birth: Cohort Size and Enrollment Elasticity and Selectivity in China (I2, H4)

Han Liu
,
Rutgers University

Abstract

Previous study on the impact of cohort size focused on the long-term demographic change -- baby boom and bust effect, partly due to relatively smooth change of birth numbers in short run. The Chinese data, however, showed great fluctuations in annual birth numbers even in short time span due to social upheavals and policy changes in history. This exerted substantial pressure on educational system. As the vast majority of schools are publicly funded, schools cannot fully accommodate to aggregate demand change with quality concern. I use aggregated change in cohort size within province to create variation in demand to education and measure the elasticity of educational attainment with respect to cohort size. The regressions show that for educational institutes above middle school, the enrollments are significantly inelastic. Using census data, a 10% increase in cohort population will lead to a 2% decrease in high school enrollment rate; using institutional data, a 10% increase in middle school graduates will lead to a 4% decrease in high school enrollment rate. Also, this paper reveals the positive correlation between a school’s inelasticity and selectivity. It has long been noticed that Chinese students face high level of competition starting even from primary school, but the mechanism remained unheeded. Though schools’ selectivity cannot be directly measured, its interaction with elasticity can help uncover the mechanism. Since Chinese schools are highly hierarchical, where schools are strictly ranked according to academic performance and better schools are deemed more financial support, I build a model in which schools are utility maximizing bureaucrats. In the face of various initial conditions, schools in different notches have different optimal choices on enrollment. Using school level data in one prefecture, the result shows that more selective schools are more inelastic to demand change.

Inflation Uncertainty, Disagreement and Monetary Policy: Evidence from the ECB Survey of Professional Forecasters (E3, E5)

Matthias Hartmann
,
University of Mannheim

Abstract

We analyze the determinants of average individual inflation uncertainty and the cross sectional variance of point forecasts ("disagreement") based on data from the European Central Bank's Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods. This implies that conclusions based on disagreement as a single indicator of ex-ante uncertainty are incomplete and potentially misleading.

Informational Content of Referrals (M5, J6)

Raicho Bojilov
,
Ecole Polytechnique
Lalith Munasinghe
,
Barnard College
Tavis Barr
,
TalenTeck

Abstract

This paper investigates how referral signals about a difficult to observe dimension of the employment relation may induce statistical dependence between job offer, acceptance, stay, and performance. Even if the populations of referred and non-referred applicants are identical, match quality of referrals is likely to be superior if the referral process generates additional match-specific information that would lead employers and applicants to make better hiring and entry decisions, respectively. We model and show that the informational asymmetries that arise between referred and non-referred applicants imply that referred employees will be better matched compared to their observationally equivalent non-referred counterparts and thus more likely to stay and perform better on the job. We test this hypothesis using personnel records of a call center company that contain rich information on applicants, job offers and acceptances, employment history and duration, performance, early promotions and various proxies of referral quality. The results show that the referral process induces selection on unobservables, especially at the job offer stage. In particular, referred employees are more likely to perform better, remain longer with the company, and receive an early promotion. Moreover, the joint estimation of job offers, acceptances, stay decisions, and performance outcomes allows us to identify the contribution of referrals to search efficiency at each stage of the hiring process.

Innovation Beyond Firm Boundaries: Common Blockholders, Strategic Alliances, and Corporate Innovation

Thomas J. Chemmanur
,
Boston College
Yao Shen
,
City University of New York-Baruch College
Jing Xie
,
Hong Kong Polytechnic University

Abstract

We analyze the role of common equity blockholders in fostering the formation of strategic alliances, establish a positive causal effect of strategic alliances on corporate innovation, and analyze the channels through which strategic alliances foster innovation. Our findings can be summarized as follows. First, there is a positive relation between the fraction of a firm’s industry peers with whom it shares common blockholders and the number of strategic alliances that it enters into. Second, there is a positive relation between the R&D-related alliances formed by a firm and its subsequent innovation outcomes, as measured by the quantity and quality of patents filed, especially for alliances backed by common blockholders. Third, we document, for the first time in the literature, a unique method that firms use to share patent right with their alliance partners, namely, “co-patenting.” Fourth, we establish a positive causal relation between the formation of strategic alliances and innovation: first, by comparing the innovation of firms that fail to form alliances to those of firms that are able to successfully form strategic alliances; and second, by using an instrumental variable approach. Fifth, we establish that an important channel through which strategic alliances foster greater innovation is through the more efficient redeployment of human capital (inventors) across alliance partners.

Innovation Driving, Intellectual Property and Regional Economic Growth in China (O3, O2)

Jia Gao
,
People's Republic of China Patent Office
Zhongliang Han
,
Chinese Academy of Social Sciences

Abstract

We examine the role of patents and utility models in innovation and economic growth across regions in China. Using a panel dataset, we find that contributions of different types of intellectual property vary by regional economic development. Policy effects from regional patent subsidiary program design provide explanations for the existence of such differences. We also examine the regional economic performance during the twelfth five-year period, when the number of patents in force for each ten thousand head of population is included in the national economic and social development assessment index system. The empirical analysis implies that levels of economic development and significance of types of intellectual property should be concerned in policy making.

Innovator Commercialization Strategies and Adopter Willingness to Pay: The Case of New Fruit Varieties

Sherzod Akhundjanov
,
Utah State University
Jilll McCluskey
,
Washington State University
Karina Gallardo
,
Washington State University
Bradley Rickard
,
Cornell University

Abstract

This research is motivated by the sharp increase in the number of patented fruit varieties developed by breeding programs at public universities in the United States. Such varieties are licensed to growers as a way to generate revenue for universities through the use of fees and royalties. Although the use of fees and royalties for patents has been well discussed in the economic literature, there is very little empirical work that examines these questions for varietal innovations in agriculture. In this study, we assess how different commercialization mechanisms impact the long-term revenues for the industry and the research program, using the Washington State University apple breeding program as the innovator and the Washington apple industry as potential new variety adopters. We employ two methodologies to examine this issue. First, we conduct experimental (Becker-DeGroot-Marschak) auction to collect primary data from apple growers on their preferences for and relative profitability of 6 different licensing arrangements: fixed fee, per box royalty, and a combination of both under exclusive and non-exclusive contracts. Second, we conduct a choice experiment using a mail survey to elicit apple growers’ preferences and values for different licensing scheme features. Our results suggest that both the innovator and adopter profits are higher with exclusive than non-exclusive forms of contracts. For innovators, per box royalty is the most profitable, followed by combination, and finally fixed fee. In contrast, adopter profits are greatest with fixed fee, followed by combination, and fixed fee the last. The results from this research will provide information on how different mechanisms affect profits for both growers’ and the innovator and how growers’ willingness to pay varies according risk preference and orchard characteristics. The empirical results will help university breeding programs and administrators to design better commercialization mechanisms that are profitable for both university and growers.

Inside the Black Box of Rainfall Shocks - Rainfall and Market Prices in India (O1, I3)

Laura Zimmermann
,
University of Georgia

Abstract

A large literature in development economics studies the impact of rainfall shocks on a wide variety of outcomes, treating rainfall shocks as a proxy for transitory income shocks. But how exactly rainfall feeds through to household income is still not very well understood. This paper uses a large dataset on daily wholesale prices from India to study the effect of rainfall shocks on wholesale market prices. While prices for rice would be expected to increase in a drought due to their effect on the quantity of output, the results show that these patterns do not materialize in all seasons. Region- and state-specific results suggest that strategic re-optimization motives and the availability of storage make prices a lot less sensitive to weather conditions than may be expected. This implies that the welfare effects of rainfall shocks may be ambiguous for net producers of agricultural output.

Institutions, Firm Characteristics, and FDI Spillovers (F2, F2)

Yi Zhang
,
Xi’an Jiaotong University

Abstract

This paper investigates the effects of region-specific institutions on FDI spillovers in China. By documenting the channels through which FDI spillovers may occur, we establish conceptual links between various institutional dimensions and the spillover benefits. We then test our hypotheses using panel data techniques based on a comprehensive dataset on Chinese manufacturing firms from 1998 to 2007. The results indicate that institutions have significant moderating effects on productivity gains from FDI and, more importantly, that such effects vary across firms with different characteristics. Specifically, we find that intellectual property rights protection on average lowers the demonstration effect of FDI on local productivity, while it can increase the spillover benefits for local firms with high technological competence. We also note that the marginal productivity gains due to the increased competition are lower in regions with lower levels of government interference. Nevertheless, government interference reduces the competition effect of FDI on the productivity of firms with large size. Moreover, the better rule of law raises the linkage effects of FDI for local firms providing a high share of output to relationship-specific sectors (backward linkages) and firms in sectors with high relationship-specificity (forward linkages).

Insurance and Solidarity (D1, O2)

Susan Steiner
,
Leibniz University of Hannover
Friederike Lenel
,
Humboldt University of Berlin

Abstract

People often exhibit strong solidarity with their peers and transfer money when others are in need. We investigate whether or not such solidarity is conditional on the insurance uptake of the needy. We conduct a lab-in-the field experiment in Cambodia. We design a novel game in which half the subjects, the recipients, face the risk to lose a large proportion of their endowment. We vary whether or not the recipients can purchase an insurance before the loss is determined and whether or not they are aware that someone else, the providers, might transfer money to them. We find a significant reduction in solidarity when the recipients can be held accountable for their neediness: providers transfer 30% less when the recipients forewent the insurance. This response is unaffected by the awareness among recipients about the potential support from the providers. Our findings point to a specific form of crowding-out that is of great concern, especially for low-income countries where insurance markets are rapidly evolving: solidarity is crowded out by the mere existence of insurance.

Interest Rate Swaps Clearing and Systemic Risk (G1, G2)

Mohamed Bakoush
,
University of Southampton
Enrico H. Gerding
,
University of Southampton
Simon Wolfe
,
University of Southampton

Abstract

We develop a model to highlight the systemic risks of clearing OTC interest rate swaps. Participants in the IRS trading and clearing ecosystem are mainly dealers and clients which we model as heterogeneous agents that interact with each other through swap contracts in order to achieve their objectives based on simple strategies. We then build a network of the credit exposures that arise due to interactions between agents. Next, we analyze the interconnectedness, systemic risk, and stability of this network. Our model illustrates how greater interest rate volatility can be translated into systemic liquidity pressure on market participants. These endogenously formulated liquidity shocks may spill over to clients in the form of asset fire sales, or to dealers in the form of funding pressures. Furthermore, greater interconnectedness in the credit exposures network may amplify these fragilities.

International Capital Flows and the Allocation of Credit Across Firms (F3, G2)

Daniel Marcel te Kaat
,
University of Osnabrueck

Abstract

Substantial research yields mixed conclusions regarding the effects of international capital flows on economic growth. However, microeconomic channels that help to explain these inconsistencies are to date underexplored. This paper uses a novel dataset that covers about 20,000 firm-year observations to study the effects of the exogenous fluctuations in European capital flows on the allocation of credit across firms during 1995-2014. We find that bursts of capital inflows are associated with more loans to the least profitable firms within an industry, thereby reducing economic dynamics in the long-run. Consequently, there is evidence for time-varying implications of foreign capital for economic growth.

International Commodity Prices and State of Nations (O1, O5)

Olayinka Oyekola
,
Cardiff University

Abstract

There have been numerous studies linking the decline in economic outcomes of countries, especially those of the primary commodity export-dependent least developed countries (LDCs), to the volatility of international commodity prices. This is rather bizarre because most economies have a schedule of deposited mineral resources and cultivation of agricultural commodities such that exogenous changes in the world prices of commodities matter for all countries regardless of their level of economic development. Why then do shocks to commodity prices have dissimilar effects on the economic performance of different countries? To answer this question, and because every economy trades and depends on the availability of primary resources for different reasons, this paper uses data on the international prices of over 100 commodities, consisting of around 70 naturally occurring minerals and around 40 agricultural produce, together with data for individual country's commodity-specific exports to construct a new detailed international country-specific commodity price index for around 180 countries spanning the period 1980-2012. The consideration here has a unique advantage of using data on a large sample of most economically relevant commodities that enter into world trade as identified by geological survey bodies such as the United States Geological Survey (USGS), British Geological Survey (BGS), and The World Mining Congress (WMC), and statistical tables provided by international organisations such as World Bank, International Monetary Fund (IMF), and the United Nations’ Conference on Trade and Development (UNCTAD) and Commodity Trade Statistics Database (UN COMTRADE). So, what can we learn from this new extensive panel dataset on commodity prices? Here, we focus on documenting evidence on the causal influences exerted by price on selected indicators for state of nations. In addition, we provide evidence on the statistical relationship between growth rate of output and volatility of price, while controlling for other growth covariates in the extant literature.

International Spillovers of Large-Scale Asset Purchases (E3, F3)

Serdar Kabaca
,
Bank of Canada
Sami Alpanda
,
University of Central Florida

Abstract

This paper evaluates the international spillover effects of large-scale asset purchases (LSAPs) using a two-country dynamic stochastic general-equilibrium model with nominal and real rigidities, and portfolio balance effects. Portfolio balance effects arise from imperfect substitution between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs lower both domestic and foreign long-term yields, and stimulate economic activity in both countries. International spillover effects become larger as the steady-state share of long-term U.S. bond holdings increases in the rest-of-the-world portfolio, as the elasticity of substitution between short- and long-term bonds decreases, or as the elasticity of substitution between domestic and foreign bonds increases. We also find that U.S. asset purchases that generate the same output effect as U.S. conventional monetary policy have larger international spillover effects. This is because portfolio balance effects appear to be stronger under unconventional policy, and foreigners’ U.S. bond holdings are heavily weighted toward long-term bonds.

Investment Allocation by Traditional and Shadow Banks (E4, E5)

Sebastiaan Pool
,
Bank of the Netherlands and University of Groningen

Abstract

Since the 1980's the banking sector has been characterized by three trends: i) a secular decline in interest rates, ii) a reallocation of bank investment from corporate loans towards mortgages and iii) the rise of shadow banking relative to traditional banking. This paper builds a framework to examine how traditional and shadow banks allocate investment and how this affects the growth of both sectors. In the model an exogenous drop in real interest rates - motivated by the saving glut hypothesis - increases the share of mortgage investment. Consequently, the market for mortgage securities becomes deeper which improves the competitive advantage of shadow banks over traditional banks with respect to mortgage supply and, thereby, it fosters relative growth of the shadow banking sector. Meanwhile, the economy's production capacity declines and the share of loans collateralized by houses rather than by a claim on production increases. Loan-to-value constraints attenuate the reallocation of investment to mortgages and shadow banking growth.

Involvement and Fun: Unusual Suspects in the Economics Classroom (A1)

Jason Davis
,
Durban University of Technology

Abstract

There has been much debate on the use of games to teach economics, but little evidence of how students actually learn from these games. This prompted an investigation, in the form of a case study at the Durban University of Technology (DUT), using a qualitative approach to investigate how and why learning occurs. A sample of 1st year economics students, who had participated in a series of games on micro-economics topics, were chosen to participate in the research. This meant that they had to attend focus group sessions and participate in semi-structured interviews as part of the IQA (Interactive Qualitative Analysis) method. This enabled the development of a visual model to depict the various components and their relationships of the students’ learning process. The games emerged as key catalysts which placed involvement and fun at the core of the learning process, leading to a deeper conceptual understanding of the micro-economics topics. This has implications for economic education, as modern students clearly learn more through active participation and involvement.

Is Deflation Costly After All? Evidence from Noisy Historical Data (E3, N1)

Daniel Kaufmann
,
ETH Zurich

Abstract

I study the link between real activity and deflation, taking into account measurement problems in 19th century CPI data. Replications based on modern data show that measurement problems spuriously increase the volatility of inflation as well as the number of deflationary episodes, and they lower inflation persistence. As a consequence, estimates of the link between real activity and deflation may be attenuated because of the errors-in-variables problem. I find that real activity was on average substantially lower during 19th century deflations in the US, after controlling for measurement error using an IV-regression approach. Moreover, the average short-fall in real activity was not significantly different compared to the Great Depression. Using well-measured data for a panel of 17 industrialized economies shows that milder deflations were associated with a lower output gap. But, the association with GDP growth is not statistically significant.

Is Innovation a Factor in Merger Decisions? Evidence from a Panel of US Firms (L4, O3)

Mahdiyeh Entezarkheir
,
University of Western Ontario
Saeed Moshiri
,
University of Saskatchewan

Abstract

The impact of innovation on mergers has been a source of debate in merger enforcements. Innovative firms influence market structure by changing merger decisions, as mergers provide resources for commercialization of innovation and capturing knowledge spillovers. However, there is a paucity of empirical evidence on the innovation induced changes of merger likelihood. We construct panel data of mergers among publicly traded U.S. manufacturing firms from 1980 to 2003 and investigate the impact of innovation, measured by a citation weighted patent stock, on merger decisions controlling for business cycles and proxies of neoclassical, behavioural, and Q theories of mergers. We find that innovations are positively and significantly correlated with firms' merger likelihood, and these decisions are procyclical. The positive impact of weighted patent stocks on merger decision is robust to the mixed model estimation methods, and innovation effects on merger decisions vary across industries.

Is Italy a Country for Foreigners? A Field Experiment on Labor Market (J7, C9)

Maria Gabriella Campolo
,
University of Messina
Giovanni Busetta
,
University of Messina
Demetrio Panarello
,
Parthenope University of Naples Italy

Abstract

Recent immigrants to Italy seem to struggle in the labor market, dealing with significantly lower wages and higher unemployment rates. In order to investigate discrimination based on candidate’s origin, we collected data through a field experiment carried out in Italy between July 2013 and October 2014. We sent 22000 CVs in response to online job offer in Italy. Therefore, for each offer we prepared and sent 22 CVs constructed ad hoc (1 Italian man and 1 Italian woman, 5 first-generation foreigner men and 5 women, 5 second-generation foreigner men and women). The objective of our analysis is to evaluate whether discrimination based on ethnic origin affects Italian labor market in term of different opportunities of finding a job. For this reason call-back rates are analyzed using different Probit models in which variables, such as job characteristic and education required, are interacted with generation. We used such a variable to separate first and second generation foreign candidates and consider differently, in this way, foreign candidates from candidates with foreign origin, who was born and always been living in Italy. A significant discrimination has to be pointed out against women and foreign candidates both of the first and the second generation. Moreover, first generation candidates seem to be more discriminated than second, but this last difference does not seem to be massive. Even if we want to admit a rational discrimination based on perceived productivity difference (statistical discrimination), against first generation foreign candidates (concerning for instance language and education gaps), the same would not be reasonable for second generation candidates. Indeed, second generation foreign candidates are Italian citizens and they can be considered equivalent to Italian mother mount, always been living in Italy and also educated in same institutions. If such a discrimination exists, it will concern taste based reasons.

Jointly Optimal Taxes for Different Sources of Income (H2, H3)

Johannes Hermle
,
University of California-Berkeley
Andreas Peichl
,
Centre for European Economic Research and University of Mannheim

Abstract

We analyze a setting in which the government can impose different tax schedules on distinct types of income, such as wage, capital or self-employment income. Compared to standard optimal income tax formulas, optimal schedular income tax rates additionally depend on cross-elasticities between tax bases capturing fiscal externalities. We take an empirical approach and calculate income source specific optimal tax rates for Germany and the US using rich panel data from administrative tax records. First, we provide evidence that responses to taxes differ significantly by income source. Second, we calculate marginal social welfare weights implicit in the German and US personal income tax schedules accounting for differences in the responsiveness across income types. We show that average welfare weights differ significantly between income sources. Using these estimates, we calculate optimal linear income tax rates for Germany and the US. We find that optimal tax rates are significantly lower for wage income than for income from self-employment and capital. We discuss how our estimates vary with the size of fiscal externalities across tax bases.

Judicial Errors, Crime Deterrence and Appeals: Evidence from United States Federal Courts (K4)

Roee Sarel
,
Frankfurt School of Finance and Management

Abstract

This is a proposal for a presentation at the 2017 American Economic Association annual meeting in Chicago, IL. The paper extends the empirical research on crime deterrence to judicial errors and their correction on appeal. Early extensions of the seminal Becker (1968) model argue that type I judicial errors (wrongful convictions) are detrimental to deterrence, but only with scarce experimental evidence to support the claim. Theoretical objections have since accumulated, with some scholars suggesting that wrongful convictions actually increase deterrence and others asserting that deterrence is unaffected by type I errors. In this paper I seek to not only settle the theoretical dispute by providing empirical evidence, but also to incorporate error correction, which, thus far, has been mostly overlooked. Using multiple econometric methods, I analyze appeal results from U.S. federal courts (1997-2013), serving as a proxy for wrongful convictions. An instrumental variables approach is then employed to examine the causal effect of marginal changes in the rates of affirmations, reversals and remands on corresponding crime rates. My findings indicate that type I errors decrease deterrence, as predicted by earlier papers. Error correction, however, is found to have a more complex effect: reversals increase deterrence, but remands to a lower court decrease deterrence; which implies a need for theoretical adjustment, judicial caution and a closer look at the design of the criminal appeal system. Subsequently, I propose solutions to the deterrence problem of remands, each suited for a different potential source of the problem: loss of faith in the justice system; discounting of expected sanctions given the prolonged criminal process; and asymmetry in remand costs between the guilty and the innocent. My results hold special importance to those policy makers who must weigh the costs and benefits of the appeals process when deciding on resource allocation.

Kinship, Fractionalization and Corruption (O1, C9)

Mahsa Akbari
,
Simon Fraser University
Duman Bahrami-Rad
,
Simon Fraser University
Erik Olson Kimbrough
,
Simon Fraser University

Abstract

Biological theory suggests that cooperation can be sustained via two mechanisms: 'kin altruism' and 'reciprocal altruism', where the former facilitates cooperation with close relatives (via inclusive fitness) and the latter facilitates broader cooperation among unrelated individuals. In practice, norms of cooperation in human societies rely on both of these mechanisms, but crucially kin altruism may generate corruption. We argue that societal differences in mating practices and family structure can alter the relative returns to kin altruism and thus the frequency of corruption. In societies with high levels of sub-ethnic fractionalization, where endogamous (and consanguineous) mating within kin-group, clan and tribe increases the local relatedness of individuals, the relative returns to norms of kin altruism are high. In societies with exogamous marriage practices, the relative returns to norms of cooperation with non-relatives and strangers are increased. Using cross-country and within-country regression analyses and a cross-country lab experiment, we provide evidence for this account.

Labor Market Sorting in Germany (J3, J6)

Benjamin Lochner
,
University of Erlangen-Nuremberg and Institute for Employment Research
Bastian Schulz
,
University of Munich

Abstract

This paper analyzes the allocation of workers to jobs and the wage distribution in Germany. Our main contribution is to reconcile prominent empirical models of wage dispersion (Abowd et al., 1999; Card et al., 2013) with theoretical sorting models (Shimer and Smith, 2000; Eeckhout and Kircher, 2011; Hagedorn et al., 2016). We find that empirical fixed effect models provide a valid approximation of observed wages and matching patterns for a large part of the data. For low-type workers, however, wages are decreasing in the type of the firm a worker is matched with. This prediction of theoretical sorting models is at odds with the monotonicity assumption of fixed effect models. After ranking both workers and firms, we show that low-type workers have become increasingly sorted into low-type firms over time, especially out of unemployment. This increase is driven by selection into wage-maximizing matches at the bottom of the firm type distribution. It can be linked to increased domestic outsourcing of low-type workers to business service firms.

Labor Supply Factors and Economic Fluctuations (E3, C3)

Antoine Lepetit
,
Bank of France
Francesco Furlanetto
,
Norges Bank
Claudia Foroni
,
Norges Bank

Abstract

We propose a new VAR identification scheme that enables us to disentangle labor supply shocks from wage bargaining shocks. Identification is achieved by imposing robust sign-restrictions that are derived from a New Keynesian model with endogenous labor force participation. According to our analysis on US data over the period 1985-2014, labor supply shocks and wage bargaining shocks are important drivers of output and unemployment both in the short run and in the long run. These results suggest that identification strategies used in estimated New Keynesian models to disentangle labor market shocks may be misguided. We also analyze the behavior of the labor force participation rate through the lenses of our model. We find that labor supply shocks are the main drivers of the participation rate and account for about half of its decline in the aftermath of the Great Recession.

Labour Market Reform, Firm-Level Employment Adjustment and Trade Liberalisation (J6, F1)

Feicheng Wang
,
University of Nottingham Ningbo
Chris Milner
,
University of Nottingham Ningbo
Juliane Scheffel
,
University of Nottingham Ningbo

Abstract

This paper empirically investigates whether the nature of firm-level employment adjustment is affected by the flexibility of the labour market. Specifically, we take advantage of the differences in local labour market conditions created by the non-uniform implementation of hukou reform in China. Variations in the implementation across cities and time allow us to identify the employment effects of the reform by comparing firms in regions with hukou reform to those in regions without hukou reform. Combining firm-level data and city-level hukou reform data from 1998 to 2007, we adopt a difference-in-differences approach to address this question. The empirical results show evidence that firms exposed to the hukou reform have higher employment growth on average than similar firms without the reform, which indicates that a more flexible labour market allows for an easier employment adjustment. We also extend our empirical framework to exploit the conditioning effects of hukou reform on employment adjustments after trade reform. Consistent with our expectations, firms respond to trade shocks by increasing employment relatively more with the presence of hukou reform. These findings offer important policy implications to the current labour market reform in China and to other developing countries with inter-region labour movement barriers like India and Vietnam.

Lapse of Long-Term Care Insurance Coverage in the United States (I1)

Rashmita Basu
,
Baylor Scott & White Health

Abstract

Despite significant financial loss and implicit cost associated with a long-term care insurance (LTCI) policy lapse, cancellation of a LTCI policy prior to become eligible for benefits is a common phenomenon in this market. Using data from the 1996-2012 Health and Retirement Study, I investigate why do individuals let their LTCI policy lapse and suffer a financial loss of premium paid with the resumed risk of long-term care expenditures in the future. In this paper, I show that individuals could let their LTCI policies lapse due to competing financial needs within the household, expected utilization of long-term care services and poor financial decision resulting from lower cognitive function. I predict individuals’ lapse decision based on the present discounted value of expected utility of retaining LTCI coverage versus dropping the coverage. I also examine characteristics of individuals for whom a suspect choice can be identified under incomplete information. I find that individuals with higher competing financial needs within household and less wealthier are more likely to lapse their LTCI policies and make suboptimal decision regarding maintainting the coverage. Individuals with lower cognitive status are more likely to drop their policies as well as those with longer expected use of nursing home care. However, an individual's perceived risk of needing nursing home care in the future is negatively associated with the policy lapse. Finally dynamic analyses of ex-post risk of using long-term care suggest that individuals who drop their LTCI coverage are more likely to use long-term care than individuals who were otherwise equivalent at the time of purchase but maintained their coverage. This finding contradicts earlier evidence that inefficiencies in the private long-term care insurance market in the US is primarily due to reclassification risk and the market is adversely selected.

Learning and the Value of Trade Relationships

Ryan Monarch
,
Federal Reserve Board
Tim Schmidt-Eisenlohr
,
Federal Reserve Board

Abstract

Every commercial shipment depends on a relationship between a firm and its supplier. But not all relationships are equal; many die quickly while others last for decades. How relationships develop and their value to firms are central questions in economics. This paper exploits U.S. import data that reveal the importance of long-term relationships. First, almost half of all U.S. arm’s-length imports are concentrated in importer-exporter relationships that are three years or older. The distribution of relationship ages differs widely across countries. Some countries, like China, deliver most of their U.S. exports through short-term relationships, others, like Japan, send much more through long-term relationships. Second, as relationships age, the amount that is traded and the likelihood that the relationship survive another year increase. Third, long-term relationships are more resilient in the face of aggregate shocks. These findings inspire a model where importers learn about their foreign suppliers over time. A key element of the model is that the speed of learning can differ with country characteristics; learning occurs much faster with a supplier in a country without good contract enforcement, or with a low share of reliable suppliers. The model is calibrated to U.S. relationship-level import data. We estimate separate parameters for the top 20 U.S. trading partners, using moments from each country's distributions of relationships and trade across age cohorts. With these estimated parameters that govern the survival and growth of relationships, we can calculate the value of relationships for different countries. We find that long-term relationships are, on average, 7.2 times more valuable than new relationships across our countries. A counterfactual experiment projects the response of trade flows to a “reset” of trading relationships, meaning all accumulated knowledge about suppliers is wiped out. Trade first declines sharply and then moves back to steady-state levels only slowly, taking several years.

Learning Financial Shocks and the Great Recession (E3, D8)

Patrick Pintus
,
Bank of France and Aix-Marseille University
Jacek Suda
,
National Bank of Poland

Abstract

This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their uncertain environment. When agents update their beliefs about the parameters that govern the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts a sizeable recession in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks.

Legalization of Marijuana and Crime: Evidence From the United States (I1, K1)

Khawaja Mamun
,
Sacred Heart University

Abstract

This paper examines the relationship between the legalization of marijuana and crime rates using a state level panel data. Twenty-three states and the District of Columbia currently have laws legalizing marijuana in some form. Colorado, Washington, Oregon, Alaska and the District of Columbia have legalized the recreational use of cannabis while nineteen other states have also allowed the medical use of marijuana. We use a fixed-effect estimation on a panel data set from 1999 – 2014. We found that there is little evidence that legalization of marijuana has an effect on any types of crimes at the state level.

Lifecycle Consumption Under Different Income Profiles: Experimental Evidence (E2, C9)

Yue Li
,
State University of New York-Albany
John Duffy
,
University of California-Irvine

Abstract

We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles. We find that for every income profile we consider, subjects on average over-consume in the early periods of life and under-consume in later periods of life relative to the conditional optimum and any sudden drop in income reduces their lifetime utility. We conduct a specification search for a model to explain our data and find that a two-type model with one type consuming the conditional optimum and the other type consuming endowments best fits our data.

Linguistic Distance, Networks and the Regional Location Decisions of Migrants to the EU (F2, J6)

Julia Bredtmann
,
RWI Essen
Klaus Nowotny
,
University of Salzburg
Sebastian Otten
,
University College London

Abstract

This paper analyzes the interaction between migrant networks and linguistic distance in the location decisions of migrants to the European Union at the regional level. We test the hypothesis that language and networks are substitutes in the location decision. Based on individual level data and a random utility maximization framework we find that networks have a positive effect on location decisions while the effect of linguistic distance is, as expected, negative. We also find a positive interaction effect between the two variables: networks are more important the larger the linguistic distance between the home and host countries, and the negative effect of linguistic distance is smaller the larger the network size.

Local Labor Market Shocks and Residential Mortgage Payments: Evidence from Shale Oil and Gas Booms (D1, Q4)

Gregory Upton
,
Louisiana State University
Meagan N. McCollum
,
Baruch College

Abstract

Understanding how local labor market conditions impact household savings behavior is a central topic in labor economics. Frequently, housing is the largest item on a household's balance sheet, and therefore making monthly mortgage payments is often a primary savings vehicle for households. Surprisingly, the literature provides no estimates of the impact of economic fluctuations on household mortgage payment activity. After many years of declining crude oil production in the U.S., recent technological developments made the extraction of previously inaccessible energy resources feasible. Specifically, the advent of horizontal drilling and hydraulic fracturing techniques enabled the exploration and production of oil and gas from "shale" geological structures. In this study, we examine the impact of shale oil and gas discovery on long-term residents of six geographic areas that have the specific geological formations that allow for shale oil and/or gas extraction. We empirically examine the impact of the shale boom on mortgage payment activity of individuals who purchased property in one of these areas prior to the natural resource discovery. Using a unique data set with approximately 23 million loans and detailed monthly payment information, we find that borrowers with properties located in areas with shale oil and gas booms experienced a 6% reduced probability of missing a mortgage payment. This result is consistently observed in each of the shale areas with point estimates ranging from 4 to 9% and is robust to different levels of default severity, different control groups, and multiple placebo tests. This is the first paper that finds a causal effect of a local economic boom on household mortgage payment activity.

Long-Term Impacts of the Series of 1970-74 Disasters in Bangladesh (Q5, I3)

Shaikh M.S.U. Eskander
,
London School of Economics and Political Science
Edward Barbier
,
University of Wyoming

Abstract

We use childhood exposure to disasters in Bangladesh as natural experiments inducing variations in adulthood outcomes. Disasters immediately affect the income of adults, and result in less investment on children, who then have a potentially lower stock of human capital in their adulthood. The long-term impact, therefore, manifests as lower health and schooling, and thus lower earned income in the adulthood of children born and raised during a disaster. To explore this possible mechanism, we develop an overlapping generation model demonstrating that a disaster during the childhood lowers the human capital development and the adulthood consumption of that young generation. We hypothesize that children from households with greater exposure to a disaster, measured in terms of birth cohorts and birthplaces, will have lower health, schooling and consumption outcomes. In our empirical application to test this hypothesis, we focus on the long-term health, schooling and consumption impacts of the series of 1970-1974 disasters in Bangladesh: the 1970 cyclone, the 1971 war and the 1974 famine. Using the Bangladesh Household Income and Expenditure Survey dataset, we employ a difference-in-difference method empirically to investigate the long-term impacts for regions and cohorts with different degrees of exposure to these disasters. Results show that children from the 1970 cyclone and the 1974 famine regions experience significant schooling and consumption adversities in their adulthood, especially among the rural, female-headed and less-educated households. Such additional variations in outcomes among the rural, female-headed and less-educated households reinforce the importance of public programs benefiting the females and the poor. Especially in rural areas, development of healthcare and schooling facilities to meet basic health and schooling needs is necessary to be an integral part of the protective measures and adaptation strategies in order to lower the long-lasting impacts of a disaster on children.

Macroprudential Regulation and Cross-Country Spillovers (E3, F3)

Margarita Rubio
,
University of Nottingham

Abstract

In a globally interconnected banking system, there can be spillovers from domestic macroprudential policies to foreign banks and vice versa. The lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to countries with lower regulatory levels. This may decrease the effectiveness of macroprudential policies in the pursuit of global 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 or foreign banks. Macroprudential policies are conducted at a national level and represented by changes in the loan-to-value ratios. Results show that when policies are coordinated across countries, financial stability and welfare gains are larger than in a situation of non-coordination. If the regulation is only applied in one of the countries, its effects are offset by an increase in lending by foreign branches that are not subject to the same requirements. In order to enhance the effectiveness of macroprudential policies and achieve its goal of global financial stability, coordination mechanisms are desirable.

Maintaining Equity in the Italian National Health Service at the Time of the Measures for Reorganizing the Offerings of Outpatient Specialist Services (I1, K2)

Silvia Gatti
,
University of Bologna

Abstract

In Italy, the establishment in 1978 of a National Health Service (NHS) providing universal coverage for comprehensive and essential healthcare services marked a clear step forward in social policies and the concrete assertion of the safeguard of health as a fundamental right of the individual and collective interest. In addition to the universality of access, the system guarantees equality of access to healthcare services (eliminating geographical barriers and guaranteeing free medical care) and envisages financial contribution from individuals regardless of their risk of disease and the services obtained, but determined solely on the basis of their ability to contribute. With the way the welfare system has been set up from Beveridge up to the present, any deviation from the sanctioned rules in the NHS entails major changes in the national social security system (and in the logic of the associated tax system), generating inequalities in the spending, savings, and investment opportunities of households. This study intends to present the implications for household well-being and finances of the solutions adopted after 2010 to deal with the problems of waiting lists and the control of spending for the services of early detection of breast cancer, redirecting the services toward the screening of public health. Despite the proposals for empowerment and for the promotion of the listening to and involvement of the citizens, the system of guarantees of the NHS principles has not worked. Approaching the issue from a user’s point of view, the author analyzes the feasibility of applying to the functioning of the NHS a supplementary guarantee instrument, such as an independent regulatory agency, and considers its effects to safeguard the equity in accessing the services and contribute actively to improving the system.

Management and Pollution (Q5, L2)

Mark Curtis
,
Wake Forest University

Abstract

Over the past quarter century there are few economic trends more remarkable than the precipitous drop in emissions that has taken place among the United States manufacturing sector. While environmental regulations and trade are often cited as key drivers of this change, the decline in emissions also coincides with the manufacturing sectors' adoption of modern management practices. The emerging empirical literature on management practices has shown that well managed plants are more productive and make more efficient use of labor and energy. This paper explores the role of management practices in explaining manufacturing plant emissions by merging the World Management Survey, a detailed plant level survey of manufacturing plants, together with plant level emissions data from the National Emissions Inventory. Findings show that moving from the 25th to the 75th percentile of management quality distribution is associated with a 44.9\% reduction in emissions. Furthermore, management is shown to have an even greater impact on plants located in counties that are in nonattainment for ozone, suggesting that there are complementarities between environmental regulation and management.

Managerial Risk-Taking Incentives and Firm Risk in the Post-Regulatory Era (G3)

Tanseli Savaser
,
Bilkent University
Elif Sisli Ciamarra
,
Brandeis University

Abstract

We provide evidence that there has been a fundamental change in the relationship between managerial risk taking incentives and firm risk after 2002, a period characterized by significant regulatory changes concerning executive compensation practices in public corporations. A consequence of the regulatory changes is a drop in CEO stock option grants, translated into significantly lower risk-taking incentives. We show that firms with different risk profiles have responded to regulatory changes differently. Riskier firms decreased the stock option grants, thus risk-taking incentives to their CEOs the most. Yet, the changes in risk-taking incentives have not been accompanied by changes in firm risk. As a result, the relationship between managerial risk-taking incentives and firm risk becomes negative in the post-regulatory era.

Matching With Conflicts: An Application to the Advertising Industry (L8, L1)

Daisy Dai
,
Lehigh University

Abstract

In professional service markets, clients who are product market competitors are often reluctant to work with the same service agency. This can effectively restrict the choice set of clients seeking matches, and it may cause agency mergers to reduce efficiency even when static pricing inefficiencies are absent. To understand the importance of conflict, I construct a new data set on matches between pharmaceutical advertisers and advertising agencies from 2002 to 2010 in which competitors are defined by therapeutic classes, and estimate a two-sided matching model using a maximum score estimator. The results show that conflict does indeed reduce the match surplus, and the reduction is greater for a pair of agents who have matched with each other in the previous period. Also, preserving previously formed matches yields much higher surplus than forming new matches. Based on these estimates, I conduct a counterfactual exercise to illustrate the effect of conflict on the allocation of matches. I find that 14% of all matches that would have formed in a non-conflict environment are unable to form when conflict is present. Another counterfactual exercise shows that mergers between advertising agencies that previously contracted with competing advertisers decrease surplus by bringing their clients into conflict. Mergers involving agencies that have not previously contracted reduce the number of matching opportunities for new clients and tend to lower the total number of matches made in equilibrium.

Measuring Consumer Surplus in the On-Demand Economy: The Case of Uber (L1, D4)

Meng Liu
,
Massachusetts Institute of Technology
Chungsang Tom Lam
,
Clemson University

Abstract

Uber, a pioneer ride-sharing platform that serves as an alternative to traditional taxi cab services, has seen dramatic increase in adoptions from both Uber users and Uber driver-partners across the globe over the last few years. To understand Ubers role and its impact on the whole economy, we tackle the problem of consumer welfare of Uber by estimating a structural demand model for rides. In this model, consumers choose between Uber, Taxi cabs, and the “outside option” based on two attributes: price and convenience. Our estimation and identification leverage on the unusually rich data set that combine taxi and Uber trip records from New York City, as well as Uber surge pricing and waiting time at granular location-minute levels. Being among the first few, our work contributes to the understanding of the On-Demand Economy by providing evidence of consumer welfare increase due to fast-dropping transaction costs and growing realized transactions.

Measuring patent quality in cross-country comparison (O3)

Philipp Boeing
,
Centre for European Economic Research
Elisabeth Mueller
,
German Graduate School of Management and Law

Abstract

Our novel quality index is based on citations from international search reports and provides internationally comparable, quality-adjusted figures for applications made under the Patent Cooperation Treaty (PCT). We show that China’s recent patent expansion has taken place to the detriment of patent quality. Weighting national PCT counts with our index reveals a widening gap between the technological capacities of China and the leading USA.

Migration Decisions and Persistent Earnings Differentials: Evidence from Thailand

Ashish Shenoy
,
Massachusetts Institute of Technology

Abstract

I estimate the perceived cost of internal migration and associated labor supply elasticity in Thailand using the revealed-preference location decisions of workers. I develop a multiperiod model of the location decision where observed earnings are an imperfect proxy for the net present value of a migration. I use global commodity prices to construct instruments that identify permanent and transitory components of local earnings. Reduced-form evidence suggests that workers are sensitive to the share of the permanent component in an earnings innovation. Given this, I estimate a structural model of migration to recover cost parameters, exploiting variation in net present value induced by the instruments. Over a range of discount rates, I estimate the average cost of migration to an individual to lie between 0.3 and 1.1 times annual earnings. Fixed costs of moving (which include both financial and psychic costs) account for 60 percent of this, with the remaining 40 percent varying by distance. Furthermore, variation in idiosyncratic preferences is more than double the spatial variation in earnings. Using the parameter estimates of the model, I find that migration contributes 8.6 percentage points to local labor supply elasticity, split almost evenly between workers entering a province and fewer locals exiting. The model suggests that 20% of long-term earnings differentials over space can be attributed to perceived moving costs.

Mining Matters: Natural Resource Extraction and Local Business Constraints

Ralph De Haas
,
EBRD and Tilburg University
Steven Poelhekke
,
Free University Amsterdam and De Nederlandsche Bank

Abstract

We estimate the impact of local mining activity on the business constraints experienced by 22,150 firms across eight resource-rich countries. We find that the presence of active mines deteriorates the business environment in close vicinity to a firm (

Mitigation or a Vicious Circle? An Empirical Analysis of Abnormal Temperature Effects on Residential Electricity Consumption (Q5, Q4)

Gi-eu Lee
,
Michigan State Universtiy
Scott Loveridge
,
Michigan State University

Abstract

Interest in the impact of temperature on energy consumption due to climate change has been increasing. Existing empirical studies estimate temperature impacts due to climate change based on scenarios of future weather. However, this framework does not identify the realized impact of abnormal temperature, although climate has been changing and extreme weather events occurred more often in the past decade. Our study contributes to addressing this gap and empirically estimates the effects due to abnormal temperature on U.S. residential electricity from 1999 to 2014. We also evaluate the impacts from historical extreme temperature events during that period. Our study identifies both the seasonal abnormality, e.g. extreme summer heat, and unseasonable abnormality, e.g. a warm spell in spring or winter. Our empirical models allow the marginal effects to vary across temperature level to reflect regional variation of temperature shocks and preferences of temperature. Conditional on the region and event, seasonal abnormality can increase monthly electricity consumption up to 22%, while unseasonable abnormality can decrease it by 62%. Yearly, the unseasonable effect was dominant in an extremely warm year. For instance, in 2012, the unseasonable effect resulted in less annual electricity consumption, while annual consumption increases when the annual average temperature is colder in the prior and later year. Seasonal abnormalities are more influential in these years and lead to more electricity consumption. Therefore, an occasional hot year benefited the natural environment via reduced electricity consumption, thereby mitigating climate change, but climate change had caused overall increase of electricity consumption in the longer run.

Mortgage Choice with Renewable Short-term Contracts (G2, R2)

Katya Kartashova
,
Bank of Canada

Abstract

In this paper, we consider the choice between fixed (FRM) and variable rate mortgages (VRM) in repeated originations, primarily arising from short contractual terms. We isolate the role of state dependence, after controlling for borrower heterogeneity (both observed and unobserved) and factors previously shown to affect mortgage decisions. Capitalizing on the prevalence of short-term mortgage contracts in its housing finance, we use data for Canada consisting of a panel of individual mortgage originations from a cross-section of lenders. We also hand-collect data for the five largest Canadian chartered banks on the shares of variable rate contracts in different components of their mortgage originations. Our borrower-level results provide evidence of the importance of state dependence, suggesting a role for search or switching costs, as well as mortgage specific learning. Supportive of state dependence is also a finding of strong positive correlation between VRM share in renewals and its lag in new originations in chartered-bank data.

Multinational corporations and the EU Emissions Trading System: Asset erosion and creeping deindustrialization? (Q4, Q5)

Nils aus dem Moore
,
RWI Essen
Philipp Grosskurth
,
RWI Essen
Michael Themann
,
RWI Essen

Abstract

The EU Emissions Trading System (EU ETS) is the EU’s flagship tool to combat climate change and the world’s leading carbon market. However, it may threaten the international competitiveness of the firms subject to it, which could lead to a relocation of economic activity. This study explores industrial relocation in the context of multinational enterprises (MNEs) by exploiting the installation-level inclusion criteria of the EU ETS. After identifying ownership structures for our full sample of firms, we employ a matched difference-in-differences approach to account for confounding factors. Our results indicate that overall the EU ETS had a positive impact on the regulated firms’ tangible fixed asset bases. We also find a negative treatment interaction effect for a subgroup of multinational firms with special characteristics. However, the latter effect is not robust across all considered ownership specifications.

Mutual Fund Flows, Monetary Policy and Financial Stability (G2, E5)

Lucas Siga
,
New York University Abu Dhabi
Ayelen Banegas
,
Federal Reserve Board
Gabriel Montes-Rojas
,
CONICET and University of San Andres

Abstract

We study the links between monetary policy, mutual fund flows and the potential risks to financial stability that might arise from such flows using data over the period 2000-2014. We find that monetary policy can have a direct influence on the allocation decisions of mutual fund investors. In particular, we show that monetary policy shocks can help explain mutual fund flow dynamics and that the effect of these shocks differs by investment strategy. Results suggest that positive shocks to the path of monetary policy (tightening) are associated with persistent outflows from bond mutual funds. Conversely, a tighter than expected monetary policy path will cause net inflows into equity funds. In an industry that “mutualize” redemption costs and where many funds may engage in liquidity transformation, our flow-performance analysis provide evidence of the potential existence of a first-mover advantage in less liquid segments of the mar- ket. We argue that risk management practices may play a key role in mitigating these risks.

My Future or Our Future? The Disincentive Impact of Income Share Agreements (J3, M5)

Austin C. Smith
,
Miami University
Greg Madonia
,
University of Colorado

Abstract

Liquidity constraints can distort efficient investment across a variety of domains, for both firms and individuals. While debt financing is often used to address liquidity constraints, especially at the individual level, there has been a recent push towards Income Share Agreements (ISAs) – equity contracts in which individuals can raise money today by selling shares of their future income. Studying the impact of ISAs on future performance has proven difficult, given the lack of developed markets with sufficient data. Identifying a new ISA marketplace for tournament poker players, we assemble a unique panel dataset that tracks performance for individuals who sometimes receive ISA funding and sometimes do not. Beyond providing objective outcome measures, this setting allows for a straightforward comparison of the same individual's performance with and without an ISA contract. Because players seek ISA funding more often for more expensive tournaments, we include flexible individual by tournament entry fee fixed effects to effectively compare the same player to himself in a similar tournament. Consistent with a reduction in effort, we find that return on investment falls substantially when participating in an ISA, with much of the decline coming from a decreased likelihood of finishing in the top 5 percent of participants. Additional tests reveal that about 20 percent of the performance decline can be explained by players selecting into staking for tournaments that, even conditional on entry fee, consist of more skilled opponents. The remaining performance decline we attribute to the diminished individual incentives inherent in ISAs.

Nascent Markets: Understanding the Success and Failure of New Stock Markets

José Albuquerque de Sousa
,
Erasmus University Rotterdam
Thorsten Beck
,
Cass Business School
Peter van Bergeijk
,
Institute of Social Studies
Mathijs van Dijk
,
Erasmus University Rotterdam

Abstract

We study the success and failure of 40 newly established (“nascent”) stock markets since 1974 in their first 40 years of activity. Nascent markets differ markedly in their success, as measured by number of listings, market capitalization, and trading activity. Long-term success is mostly determined by early success, as well as by country characteristics at the moment of establishment. Banking sector development at establishment and the dynamics of national savings are the most reliable predictors of success. A high initial number of listings and trading activity are necessary, but not sufficient, conditions for success. These results point to the important role of initial conditions but also initial success in fostering long-term stock market development.

No Strings Attached: Chinese Foreign Aid and Regime Stability in Resource-Rich Recipient Countries (Q4, C3)

Huan-kai Tseng
,
George Washington University

Abstract

Does Chinese foreign aid promote authoritarianism? The practice of tying political conditionality has become the modus operandi by Western donors to promote democracy in recipient countries in the post-Cold War era. Recently, however, developing countries are experiencing a surge of foreign aid and government-sponsored investment activities (FAGIA) from China. Yet, unlike Western aid, China's FAGIA usually come without any political preconditions. By reducing recipients’ financial reliance on Western aid, China’s FAGIA may undermine the alleged democracy-promotion effect of Western aid. This study tackles this puzzle and argues that the primary motivation behind China’s aid allocation differs considerably from its Western counterpart: China tends to allocate its FAGIA to resource-rich recipients in the form of resources development-related projects in order to fuel its domestic growth machine. I further argue that this unconditional aid flow enhances the authoritarian tendency of rentier states by amplifying the resource curse of extractive industries which, at the margin, can offset the positive political conditionality effect of Western aid on recipients’ democracy. Drawing on extensive Chinese-sourced information and the newly available geo-coded AidData database, I probe China’s aid allocation from historical and geo-spatial perspectives. Using seemingly unrelated regression (SUR), I identify the unique natural resources-driven China’s aid allocation pattern from the politically-oriented Western aid. It also suggests that this pattern is particularly pronounced in resource-rich recipient countries. In a further assessment of my theoretical claim using instrumental regression with control function, I find that recipients’ resource dependence uniquely determines China’s aid inflows through which China’s aid imparts a negative effect on recipients’ levels of democracy. My analysis contributes to the ongoing debate on the political impact of China’s aid by identifying its determinant and clarifying the mechanism by which this non-politically motivated aid produces the observed negative institutional consequences in recipient countries.

Noisy Rational Bubbles (G1, D8)

Qiusha Peng
,
University of Cambridge

Abstract

This paper develops a theory of asset price dynamics during bubble-like market episodes. In the model, noise trading breaks the winner's curse and leads to systematic overpricing. Over time, investors gradually learn and asset prices tend to fall toward the fundamentals. Importantly, however, investors also update their expectations regarding the average precision of new information. This mechanism works to drive prices farther away from the intrinsic value. Finally, the model also allows for gradual endogenous investor inflows that greatly amplify predicted price movements. Numerical simulations show that the model can produce various price episodes.

Nonlinear Dependence by Using Functional Data Analysis and Copula Models (G1, G1)

Hojin Jung
,
Henan University
Jong-Min Kim
,
University of Minnesota-Morris

Abstract

This article investigates the relationship between crude oil prices and exchange rates by the daily return series. Functional data analysis is used to show the clustering pattern of exchange rates and oil prices over the time period through high dimensional visualizations. We select significant exchange rates of currencies related to crude oil prices by using the objective Bayesian variable selection method. Then we apply the popular and powerful statistical methods such as the semi-functional partial linear regression and Gaussian copula marginal regression. We find evidence of significant dependence for all considered pairs, except for the Mexican peso-Brent with the semifunctional model. All of our empirical results are consistent with different models. Our empirical results also show that the rise in the WTI oil price returns is associated with a depreciation of the US dollar.

Normative Conflict and the Emergence of Central Authority

David C Kingsley
,
University of Massachusetts Lowell

Abstract

Institutions evolve to solve social dilemmas within groups. Institutions can broadly be described as informal, suggesting the peer to peer enforcement of social norms, or formal, suggesting a central authority which enforces established rules. Research suggests that homogenous groups within public good experiments self-select into informal rather than formal institutions when the formal institution imposes a modest, fixed, cost. This result is intuitive, when groups are able to tacitly agree on contributions norms peer punishment is rarely needed and thus the informal institution imposes little cost and improves welfare. On the other hand, recent research suggests that normative conflict may reduce the capacity of groups to establish contribution norms and therefore reduces the effectiveness of peer punishment. This research investigates whether normative conflict, established through endowment heterogeneity, increases the proportion of groups which self-select into formal institutions. Results suggest that endowment heterogeneity reduces the effectiveness of the peer punishment mechanism. Heterogeneous groups recognize this and are more likely to self-impose the formal institution despite the fixed cost. This choice is rational as heterogeneous groups operating within the formal institution make significantly more than heterogeneous groups operating within the informal institution. This research suggests that central authority institutions emerge from within to solve social dilemmas in heterogeneous groups. More broadly, this research suggests that complex modern societies require centralized authority, in part, because social norms become ambiguous in heterogeneous groups.

Not All Consumption is Created Equal: Resolving Asset Pricing Puzzles With Thrifty Agents (G1, E1)

Muhammed Yonac
,
Syracuse University

Abstract

I show that it is possible to resolve the equity premium puzzle and the risk-free rate puzzle with a consumption-based model that uses a power utility function with a time-varying external benchmark consumption. I use a discrete-time representative agent model where the agents are assumed to be identical utility maximizers with a constant risk aversion coefficient. I use monthly U.S. data from 01/31/1960 to 12/31/2015 to calculate the parameters of the model. I show that the high average equity premium, along with the low and steady interest rate can be simultaneously explained with a low risk aversion coefficient if, i) the agents gain utility from the consumption growth itself, separate from the level of their consumption, and ii) the agents are 'thrifty', that is, the agents' 'local utility' at period t gained from consuming more than the optimal level by a certain amount is low compared to an increase in the optimal consumption at period t by the same amount. I define the 'local utility' at time t as the utility that would be gained from the consumption at time t if the agent was not forward-looking.

Offshoring Health Risks: The Impact of the United States Lead Regulation on Infant Health in Mexico (F1, Q5)

Shinsuke Tanaka
,
Tufts University
Kensuke Teshima
,
Mexico Autonomous Institute of Technology

Abstract

In this paper, we investigate the effect of the new NAAQS for lead on (i) environmental quality in the U.S., (ii) trade patterns between the U.S. and Mexico and (iii) infant health in Mexico. Our innovations are: 1) We employ unique combination of public/non-public datasets linking trade, environment and health outcomes both in the U.S. and Mexico that provide a rare level of detail and that were not previously employed in the related fields. Importantly, our data contain exact locations of polluting plants and residential locations at a fine disaggregated level that allow us to identify critical distance over which households are exposed to pollution emitted from sources. 2) We identify exogenous variations in environmental quality under quasi-experimental research settings that enable us to address a large set of time-variant factors. These two cutting-edge features help uncover causal relationships. We find that the new lead regulation substantially improved the ambient air quality in the U.S.; the concentrations of lead in ambient air fell in areas close to lead-emitting industrial plants than areas slightly away from these plants in the U.S. Our evidence suggests that such improvements in domestic environmental quality are driven by increased exports of lead contents to Mexico for recycle and production. We also find that exports from lead-emitting Mexican firms to the U.S. have also increased. Consequently, we find that the birth outcomes in Mexico deteriorated in proximity to battery recycling plants as compared with areas slightly away from them. Our findings are consistent with the pollution haven hypothesis suggesting that the stringent environmental policy in a developed country can induce offshoring pollution and health risks to a country with lax environmental standards.

Oil Price Shocks, Firm Entry and Exit in a Heterogeneous Firm Model (E3, Q4)

Soma Patra
,
California State University-Northridge

Abstract

Oil price shocks are considered to be one of the important factors behind U.S. recessions, yet little is known about the transmission channels of oil price shocks. What complicates the matter further is the small share of oil in production. To address the issue the literature has incorporated amplifying channels such as endogenous depreciation or variable markups. This paper investigates the hitherto unexplored area of the effect of oil price shocks on firm dynamics. In particular, we seek to understand the role oil price shocks play in the entry, exit decision of firms. Using data on U.S. firm births and business failures we find that oil price shocks have a significant negative effect on firm entry and positive effect on firm exit. This suggests that the extensive margin- the number of existing firms is an important mode of transmission for oil price shocks. We then proceed to build a DSGE model with heterogeneous firms which replicates this behavior of firm entry and exit and show that inclusion of firm entry, exit amplifies the effect of oil price shocks without relying on the standard magnifying channels. Further, the DSGE model is able to explain selection patterns over the business cycle as the firms surviving after an oil price shock are bigger and more productive.

Old-Age Income and Health Care: A Consumption Puzzle in Mexico (I1, I3)

Carlos Javier Riumallo Herl
,
Harvard University
Emma Aguila
,
University of Southern California

Abstract

This paper uses the quasi-experimental implementation of a non-contributory pension scheme in Yucatan, Mexico to evaluate the health care utilization and expenditure responses of the elderly to an exogenous unanticipated income shock. Using a difference-in-difference approach and data from a longitudinal aging survey we find evidence that non-contributory pensions encourages the use of formal health care services by 8.6 percentage points and medication adherence by approximately 6.7 percentage points. Furthermore, individuals with previous utilization shift from informal to formal services portraying a transfer to higher quality care. In contrast to the greater utilization, we find a reduction in out-of-pocket health expenditures potentially explained by the higher uptake of public health insurance. Finally, we find that non-contributory pensions reduce the incidence of catastrophic health care expenditures by 18 percentage points. Overall, our findings suggest that post-retirement income shocks can improve health care utilization, uptake of health insurance, and financial risk protection amongst the elderly.

On Enhanced Alternatives for the Hodrick-Prescott Filter (C1, C2)

Marlon Fritz
,
University of Paderborn
Thomas Gries
,
University of Paderborn
Yuanhua Feng
,
University of Paderborn

Abstract

The trend estimation for macroeconomic time series is crucial due to many different model specifications. One of the standard methods for detrending macroeconomic time series in the business cycle literature is the Hodrick-Prescott (HP) filter. In order to address difficulties of the HP filter, especially the choice of the smoothing parameter λ and the boundary problem, we argue that a data-driven local linear trend estimation could be a preferred method. Unlike the HP filter, using exogenously chosen and frequency-dependent smoothing parameters, we suggest a local linear trend estimation which determines the bandwidth endogenously, corrects automatically at boundary points and allows for short-range dependence. For this endogenous bandwidth selection, a data-driven iterative plug-in (IPI) algorithm is used. A comparison between the HP filter and the local linear trend estimation demonstrates similar trend results if λ for the HP filter is chosen appropriately. However, no exogenous choice is needed within the data-driven local polynomial estimation approach where the optimal bandwidth is estimated by minimizing the asymptotic mean integrated squared error. Further, with the endogenously determined bandwidth we can determine the length of the local linear trend, which we regard as continuously Moving Trend (MT), lasting 16 years for the quarterly US GDP data from 1947.1 to 2016.1. Moreover, a linear moving trend estimation method perfectly corresponds to log-linear growth processes often considered in growth theories.

One Sided Matching: Choice Selection with Risky, Rival Outcomes (D8, C9)

Matthew D. Webb
,
Carleton University
David Blake Johnson
,
University of Central Missouri

Abstract

Little is known about how individuals make decisions when they must choose several options from a set of options when the outcomes are risky and the payoffs are rival. When researchers model these decisions, they assume people maximize their expected utility. We design an experiment in which subjects face either rival or independent payoffs. While theory predicts different behavior, subjects behave nearly identically under these payoff schemes. This suggests individuals are not maximizing expected utility. Additional treatments demonstrate that this behavior is likely driven by a heuristic used to simplify a complex math problem, rather than a preference for lotteries with the highest independent expected utilities. Our results suggest that using expected utility as peoples' objective function in these types of environments will lead to biased predictions.

Opportunity Versus Necessity Entrepreneurship (J2)

Frank M Fossen
,
University of Nevada-Reno
Robert W Fairlie
,
University of California-Santa Cruz

Abstract

Identifying the motivations for starting a business is paramount for increasing innovation, job creation and economic growth through entrepreneurship. Two distinct motivations, "opportunity" and "necessity" entrepreneurship, have been repeatedly discussed in the literature. The basic distinction is that some entrepreneurs create businesses when they see a business opportunity whereas others are forced into starting a business out of necessity because of the lack of other options in the labor market. Another area of growing research is the relationship between entrepreneurship and the business cycle. Interest in the distinction between opportunity and necessity entrepreneurship has been heightened because of the "Great Recession" and subsequent economic expansion. Although the national unemployment rate rose to over 10 percent in the U.S., business creation actually increased during this period. Furthermore, previous studies indicate positive, negative and null relationships between unemployment and entrepreneurship, which might be due to opportunity and necessity entrepreneurship moving with the business cycle differently. The goal of this paper is to create a working definition of opportunity versus necessity entrepreneurship. We sketch out a theoretical model to illustrate the concepts and match these concepts as closely as possible in our empirical definitions. To classify entrepreneurs into opportunity versus necessity entrepreneurship, we propose using initial unemployment status before starting a business as characterizing necessity entrepreneurship. The definition is both objectively defined and available in many datasets. We examine how these definitions track the business cycle using data from two nationally-representative and widely used sources of data – one from the U.S. (the matched Current Population Survey) and another from Europe (the German Micro Census). Using our proposed working definitions we are able to identify both pro-cyclical and countercyclical components to entrepreneurship. We also examine the owner characteristics that are associated with "necessity" vs. "opportunity" entrepreneurship, and find consistent patterns.

Optimal Capital Income Taxation in the Borrower-Saver Model (H2, H3)

Sama Bombaywala
,
University of Manchester

Abstract

In this paper we derive the optimal level of capital taxation in the presence of agents with different discount factors. We set up a real business cycle model with patient and impatient households which borrow and lend amongst themselves, as per a borrowing constraint. Our results show that if the Ramsey planner's weights on different households are such that he is indifferent between redistribution towards patient and impatient households, the borrowing constraint is not binding. Moreover, we get the classical result of zero optimal capital taxation in the distant long run. However, if the Ramsey planner chooses the borrowing constraint to be always binding, he will favour redistribution from impatient households to patient households. As time moves forward, this ultimately leads to an increase in the optimal subsidy rate on the capital returns of patient households, a contradiction to the seminal Chamley-Judd result.

Optimal Taxation Under Different Concepts of Justness (H2, H3)

Robin Jessen
,
Free University of Berlin
Maria Metzing
,
DIW Berlin
Davud Rostam-Afschar
,
University of Hohenheim

Abstract

We extend the optimal taxation framework by Saez (2002) to allow for alternative concepts of justness. We calculate weights of a social planner's function as implied by the current German tax and transfer system based on the concepts of Minimum Sacrifice and subjective just incomes from survey questions and compare them to the welfarist case. We use new questions from the German Socio-economic Panel (SOEP) to obtain information about what amount of taxes individuals consider as just. We find that the German system is not pareto-optimal as it implies negative weights for working poor under the welfarist approach. Minimum absolute and relative sacrifice are the only concepts of justness that do not imply negative social weights for at least one income group.

Out of Sight, Out of Mind: Consumer Reaction to News on Data Breaches and Identity Theft

Vyacheslav Mikhed
,
Federal Reserve Bank of Philadelphia
Michael Vogan
,
Moody's Analytics

Abstract

We use the 2012 South Carolina Department of Revenue data breach as a natural experiment to study how data breaches and news coverage about them affect consumers’ take-up of fraud protections. We find that consumers directly affected by the breach acquired fraud protections immediately after the breach. The response of consumers exposed to the news about the breach only, was negligible. Among consumers directly affected by the data breach, the incremental effect of news was small. We conclude that in the absence of their direct exposure, consumers did not revise their beliefs about future expected losses associated with data breaches.

Overtime Premium and Hours of Work: Lessons From the Mandatory Increase in the Overtime Premium Rates (J2, J8)

Yukiko Asai
,
University of Tokyo

Abstract

This study evaluates the impact of a mandatory increase in the overtime premium rate from 25% to 50% of wage for overtime beyond 60 hours per month. In particular, it investigates adjustment of input by employers following the introduction of the policy. The reform increased the marginal cost of overtime beyond 60 hours per month for firms; however, no cost increase was incurred for overtime less than 60 hours per month. In other words, the reform taxed the employment of workers working long hours and created an incentive for employers to reduce worker hours and re-distribute the reduced hours to create new jobs or increase those of workers with shorter workdays. Since the reform only applied to workers in large-scale firm, I identify the causal effects of the reform by comparing changes in worker hours in affected firms with those in worker hours in unaffected firms. The results from the Japanese Labor Force Survey show that the reform decreased the incidence of overtime beyond 60 hours per month. I further investigate whether work hours for those working beyond 60 overtime hours per month are substituted with those of other workers. The analysis reveals that workers who worked long hours before the reform shifted from working beyond 60 overtime hours to working 60 or less overtime hours. However, I find little evidence that reduced hours of extreme overtime workers are re-distributed to those who work shorter workdays. In conclusion, the reform decreased the net overtime hours of workers, although it did not contribute towards the re-distribution of working hours.

Parental involvement regarding homework of students in secondary school: an experiment (I2)

Carla Haelermans
,
Maastricht University
Joris Ghysels
,
Maastricht University

Abstract

In this paper we analyze the effect of parental involvement on the use of a digital homework practice tool and on math and literacy performance of all students in grade 7 to 9 of two secondary schools in the Netherlands by means of an individually randomized experiment. The experiment consists of the provision of an app which allows parents to follow their child’s practice behavior in the digital homework tool. Results indicate that parental involvement via app-use positively affects the use of the homework tool of 7th and 8th grade students, but negatively affects the use of the tool of 9th grade students. Both an “Intent To Treat” (ITT) analysis and an Instrumental Variable-analysis controlling for non-compliance, point at this result. The positive effects are mainly driven by low-SES students, whereas the negative effect is driven by high-SES students and no effects are found for medium-SES students. Furthermore, we find positive effects of the use of the app on students’ math score, which is mainly driven by the grade 8 students, but we find no effects on literacy scores. All positive effects are driven by male students. Correlational analysis of parental and student questionnaire answers shows that 7th and 8th grade students and their parents are more likely to be aligned with respect to the desired amount of parental involvement, whereas there is a clear discrepancy in this for 9th grade students and their parents. In sum, the provision of a smartphone-based follow-up app for parents proves to foster homework activities of students, especially in low-SES families and in the early years of secondary education.

Parental Leave Equality and Subjective Well-Being (J1, I3)

Simon Hedlin
,
Harvard University

Abstract

This study uses data from Sweden to investigate the proportional distribution of parental leave days between parents and to analyze how this “parental leave equality” may be related to the parents’ subjective well-being. Three results are presented. First, there is no linear relationship between the total share of leave days taken by an individual and that individual’s subjective well-being; in other words, more parental leave is not unequivocally better. Second, and by contrast, there seems to be a significant relationship between parental leave equality and subjective well-being, which implies that parents who share the responsibility for childrearing more equally tend to be more satisfied with their lives. Third, a very simple and tentative analysis of a Swedish parental leave reform suggests that incentivizing parents to

Paying Bonuses During Crisis: Dynamic Compensation under Uncertainty Shocks and Limited Commitment (D8, G3)

Zhiyu Feng
,
University of Notre Dame

Abstract

This paper studies optimal dynamic compensation where firms face volatility shocks but have only limited ability to commit to long-term contracts. I analyze a continuous- time dynamic principal-agent model with private effort and regime switching in cash flow volatility. In high volatility times, limited-commitment firms are forced to expedite payments to managers because sufficient deferred compensation is no longer credible; meanwhile, contract termination becomes more likely. In contrast, full-commitment firms defer compensation even more in high volatility times. This relationship between payment timing and expected contract length sheds light on empirical observations of compensation and volatility.

Political Turnover and Firm Cash Holding: The Case of Expropriation in an Emerging Market (G3, H7)

Dongxing Ji
,
Harvard University and Tsinghua University
Xiaoran Ni
,
University of Michigan and Tsinghua University

Abstract

This paper examines the relation between political turnover and cash holding of listed-firms in an emerging market. Using a hand-collected dataset on changes of secretaries of municipal Party Committee (city heads) during 2002-2013 in China, we find strong evidence that political turnover is negatively associated with firm cash holding. This relation is driven by privately-owned firms, cities with lower government quality, and successors who are locally promoted and younger, which is largely consistent with a state expropriation story. This pattern is obviously not a result of uncertainty since it predicts positive relation instead; it can’t be explained by financial constraint hypothesis either, as analyses show that financial constraint is more severe during political turnover, which will increase cash holding. Furthermore, we find that in reacting to political turnover, firms protect their cash from the risk of state expropriation by dissipating more dividends and allocating more investments on intangible assets. To address endogeneity concern, we use two variables, the age of incumbent city heads and the percentage of city head replacement in the same province, to instrument for political turnover. The two stage least square regression yields similar results. The results are robust to propensity score matching, different econometric specifications, various sub-samples and alternative definitions of key variables. Our findings provide new insights on the political economy of firm financial policies. Existing literature on political turnover and firm behavior focuses on policy uncertainty. We find that expropriation risk plays an equally important role. Since governments behave differently in different stages of the political cycle (Mikesell, 1978; Rogoff, 1988), even without uncertainty, political turnover itself can possibly influence firm behavior. This is especially important in developing countries where there is weak rule of law and lack of property right protection.

Pollution, Ability, and Gender-Specific Investment Responses to Shocks

Teresa Molina
,
University of Southern California

Abstract

This paper investigates the long-term impact of in utero exposure to pollution on cognitive ability, educational attainment, and adult income. To overcome data limitations and endogeneity issues related to pollution, I use thermal inversions, a meteorological phenomenon that negatively impacts air quality, as an exogenous source of variation in pollution. After first verifying a strong and robust relationship between thermal inversions and pollution levels, I find that exposure to more thermal inversions (and therefore more pollution) during an individual's second trimester in utero leads to significantly lower cognitive test scores later in life. For women, this also results in lower educational attainment and income. The larger schooling response among women can be attributed to the different labor market conditions faced by each gender -- in particular, the higher tendency of women to sort into brain-intensive occupations, where schooling and ability exhibit greater complementarity than in brawn-intensive jobs.

Population Growth, Human Capital Accumulation, and the Long-Run Dynamics of Economic Growth (O4, E1)

Kaixing Huang
,
University of Adelaide

Abstract

In an effort to explain why the theoretically relevant growth effect of population growth on economic growth is empirically unobservable, this paper develops a modified idea-based growth model with endogenous human capital and population. Based on the assumption that the number of new ideas created is a positive function of the size of the population and the level of human capital of each person, the model predicts that the growth rate of per capita income is proportional to the growth rates of both population and human capital. The offsetting movement of the growth rates of population and human capital after the demographic transition obscures observation of the growth effect. More interestingly, we find that the stylized facts of economic take-off, demographic transition, increasing human capital investments, and economic convergence can be derived directly from this model. In fact, the model generates an evolution of the growth rates of population, human capital, and per capita income that is consistent with historical and postwar data.

Power Networks – A Network Approach to Voting Theory (D7)

Adam Telek
,
University of Alicante

Abstract

In this paper I extend voting theorem to electorates where the voters’ preferences over candidates are based on their personal ties and not their ideology (e.g. municipal or party leadership elections, with some restrictions). I build a model where voters are identical except for their interpersonal ties and the collection of these ties forms a social network. Tied voters benefit from each other’s success so the social network shows the network of interrelated interests. The voters play a citizen-candidate voting game where the voters first decide whether or not to run as a candidate on the election then they vote sincerely for one of the self-selected candidates. Electoral victory is the ultimate source of power but the benefits of the victory of a candidate spills over and spreads in the whole social network along the social ties. Using this model I study what network properties and the social structures lead to a (robust) voting equilibrium. I show that single peaked preferences on chain and tree networks are inherent in my model, then I define two network classes (bridge and windmill) and prove that every network where the equilibrium is robust to changes in the intensity of a connection is either a bridge or a windmill. In the discussion I relate my approach to the practice of using centrality measures (betweenness or eigenvector centrality) in the analysis and in an illustrative example I calibrate my model to predict the victory of the Medici family in a medieval power struggle.

Preferenciating Free Trade: Coevolving Network Models of Free Trade Negotiation (F1, C7)

Huan-kai Tseng
,
George Washington University
Hsuan-Wei Lee
,
University of North Carolina-Chapel Hill

Abstract

Why do some countries anchor themselves in multilateral trade negotiation while diverting their efforts toward negotiating preferential Free Trade Agreement (FTA), even when the achievement of a global FTA is more beneficial? In this study, we develop a generalized node-based model of coevolving networks using approximate master equations (AME) with extension to link-based model to capture different types of dynamics during FTA formation. We argue that without having to forgo stalled global trade talk, states can promote global FTAs through bypassing less cooperative partners and targeting more profitable partners for cooperation. The payoff accumulated from forging smaller trade blocs can become the “building block” for resuming stalled global trade talk by inducing less cooperative partners to cooperate. Our analysis of the node-based model suggests that nodes (states) tend to bypass defected nodes but form links with cooperative (particularly more profitable) nodes in the network each time when links are rewired. This partner-switching strategy can force defected nodes to update their “type” when the probability and the cost of being left out are sufficiently large. Our analysis thus clarifies the conditions under which a global FTA can be achieved. The Monte Carlo simulation shows our AME method—which considers the states of nodes and their degree, generating large systems of ordinary differential equations—outperforms existing pair approximation and mean field methods in both static and coevolving networks. The extended link-based analysis allows each node to have varying probability of cooperating or defecting with any other neighboring nodes, which gives a more realistic presentation of the real work dynamics by which countries with shared attributes (e.g., GDP, trade dependence) assort themselves into preferential FTAs that causes degree heterogeneity in the network. Our more brief discussion of recent bilateral and regional FTAs provides additional empirical support to the model.

Preventing the White Death: Tuberculosis Dispensaries (I1, N3)

Casper Worm Hansen
,
University of Copenhagen
Peter Sandholt Jensen
,
University of Southern Denmark
Peter Egedes Madsen
,
University of Southern Denmark

Abstract

Tuberculosis (TB) is a leading cause of death worldwide and while treatable by antibiotics since the 1940s, drug resistant strains have started to emerge. This paper estimates the effects of the establishment of a pre-antibiotic public health institution, known as the TB dispensary designed to prevent the spread of the disease. Our difference-in-differences estimation reveals that the rollout of the dispensaries in cities in Denmark led to a 16 percent decline in the TB mortality rate, but no significant impacts on other diseases when performing placebo regressions. We next take advantage of the dispensaries explicit targeting on TB to setup a triple-differences model which exploits other diseases as controls and obtain a very similar magnitude of the effect. As for the mechanism, the evidence highlights the dispensaries' preventive actions, such as facilitating a local diffusion of (hygiene) knowledge about the disease. At an estimated cost of 76 dollars per saved life-year, this particular public health institution was extraordinarily cost effective. In addition, we find small positive spillover effects of the dispensaries on productivity, as measured by annual income per tax payer at the city level, digitized from historical tax-assessment records.

Price and Quantity Volatility in Metropolitan Housing Markets, in the Short Run and the Long Run

Stephen Malpezzi
,
University of Wisconsin-Madison

Abstract

This paper examines house price and quantity dynamics in metropolitan housing markets. A number of papers have examined housing prices in a panel supply and demand framework (e.g. Follain and Giertz (2012), Glaeser, Gyourko and Saks (2005), Glaeser, Gyourko and Saiz, Leung (2014), and Malpezzi (1999)). A smaller number of papers have examined housing production in a similar localized framework (e.g. Green, Malpezzi and Mayo (2005), and McDonald and McMillen (2000)) but only a few have examined them together (e.g. Hwang and Quigley (2006) and Saks (2008)). Focus on simply prices, or quantities, in isolation can lead to anomalies as pointed out recently by Davidoff (2013). We apply switching regression models to study which markets adjust more on the quantity side in the short run, which adjust more in prices, and how these two adjustment mechanisms interact in a simple dynamic framework. The paper also focuses on the time frame of empirical analysis. We now have the benefit of some hindsight, not only of the boom and bust of the 2000s, but also more reliable estimates of prices in the 1970s and 1980s. Review of the literature shows how fragile certain results have been to the time span analyzed. Some results (and also important critiques of the literature, such as Gallin 2006, 2008) are reasonably robust to time frame, but others are not. Several papers maintain a cointegrating relationship between house prices and income, or house prices and rent (and often additional variables); for example, Abraham and Hendershott (1996), Capozza Hendershott Mack and Mayer (2004), Malpezzi (1999). Without cointegration, the error correction model may be spurious. We follow Gallin's (1999) suggestion to implement a more powerful cointegration test, but also show that the results are driven more by the time span of the data than choice of test.

Pricing Power in Domestic Market and Exchange Rate Disconnection (F3, F1)

Shuqi Li
,
Wuhan University of Technology
Zhongkuang Zhao
,
Peking University

Abstract

By utilizing detailed firm data in China, we structurally estimate the elasticity between export and exchange rate, and disentangle the effect of various hedging behaviors. Before/After the reform of RMB exchange rate regime, financial constraint increases the median of the elasticity for 1.325/1.626，while pricing hedging, financial hedging and operational hedging decrease the median for 0.007/0.015, 0.331/0.159, 0.695/0.929. We verify a significant effect of domestic sales as an operational hedging.Besides, the top 5% largest exporters are much less sensitive to exchange rate movement, and the median of their elasticity is about 0.15/0.24, indicating significant composition effect.

Procyclicality of the Comovement Between Dividend Growth and Consumption Growth (G1, E3)

Nancy R. Xu
,
Columbia University

Abstract

To resolve the "procyclicality puzzle" — stock returns and consumption growth covary procyclically (Duffee (2005)) — this article posits and empirically demonstrates that dividend growth and consumption growth comove procyclically. I analyze a variant of the Campbell and Cochrane model accounting for this procyclical comovement, providing both numerical and an intuitive approximate analytical solution. The procyclical comovement yields a more volatile price-dividend ratio albeit at the cost of a lower equity premium due to the new procyclical component in the amount of risk. Both model-simulated and empirical datasets indicate that the procyclical comovement forecasts excess equity returns.

Production and Regulatory Compliance Under Uncertainty (C7, C9)

Pedro P. Romero
,
University San Francisco de Quito
Diego Grijalva
,
University San Francisco de Quito
Santiago Bucaram
,
University San Francisco de Quito

Abstract

Regulation of economic activities is framed as a market failure wherein the public agency improves the decentralized result; and also in political economics as a government failure wherein vested interests capture the regulators. Here, we focus on regulatory uncertainty and its effects on productive effort by agents. In our model, a production unit is faced with a high or low level of regulation that is always enforced, and thereafter it must choose how much of the required regulation to comply with, given a penalty for failing to do so. In equilibrium, the firm’s output is negatively affected by the regulatory level and when faced with regulatory uncertainty. We test the main predictions of the model with an experimental design based on an environment wherein subjects earn money for successfully completing a production task with and without regulatory uncertainty. Subjects must endogenously choose how much time to allot between their production and a regulation tasks. We found that productive effort is, indeed, negatively affected by a higher regulatory level, and even more by regulatory uncertainty controlling for learning, task difficulty and other sociodemographic variables. We, also, identify a mechanism through which regulatory uncertainty affects performance this is that learning is impaired since participants can hardly discover what is the best strategy in such scenario.

Production of Online Word of Mouth: Peer Effects and the Moderating Role of User Characteristics (H4, L1)

Zaiyan Wei
,
Purdue University
Paulo Goes
,
University of Arizona
Yang Wang
,
University of Arizona
Daniel Zeng
,
University of Arizona

Abstract

We study peer effects on users' contributions to an emerging form of online word of mouth—product reviews. Provided by either consumers or third-party professionals, online reviews are closely correlated with consumers' purchasing decisions and product sales. Individuals have incentives of free riding and maximizing social capital when providing feedbacks online. We leverage a "natural experiment," which leads to an exogenous expansion in the users population of a major online reviews platform, to better understand the trade-off between the two conflicting incentives. Our empirical findings are mainly two-fold. First, we find that a larger population of audience and peer review writers, an immediate consequence of the exogenous shock, causally leads to more reviews posted, higher and more diverse ratings assigned, and reviews of higher quality by the users. In addition, we find that these effects are moderated by user characteristics including activeness, expertise, and popularity. These results have implications for platforms that rely on user contributions, as well as for business in the management of their online product or service feedbacks.

Productivity and Liquidity Management Under Costly Financing (G3, G1)

Felix Feng
,
University of Notre Dame
Jianyu Lu
,
University of Notre Dame
Jing Wang
,
University of Notre Dame

Abstract

We explore theoretically and empirically the relationship between firm productivity and liquidity management in the presence of financial frictions. We build a dynamic investment model and show that, counter to basic economic intuition, more productive firms could demand less capital assets and hold more liquid assets compared to less productive firms when financing costs are sufficiently high. We empirically test this prediction using a comprehensive dataset of Chinese manufacturers and find that more productive firms indeed hold less capital and more cash. We do not, however, observe this for U.S. manufacturers. Our study suggests a larger capital misallocation problem in markets with significant financing frictions than previously documented.

Productivity and Sources of Economic Growth in China and the United States Farm Sectors—a Bilateral Comparison

Sun Ling Wang
,
USDA-Economic Research Service
Eldon Ball
,
USDA-Economic Research Service
Richard Nehring
,
USDA-Economic Research Service
Truong Chau
,
Pennsylvania State University
Shicong Xu
,
Ohio State University

Abstract

According to the UN and FAO’s projections (2012), global population will increase by about a third of current population to 9 to 10 billion people in 2050. Combined income and population growth are estimated to lead to more than 60% increase in world food demand. This implies that we need to pursue a more productive global agricultural sector to meet the increasing demand. China and the United States are two major producers and consumers in the world food market. Sustained agricultural productivity growths in these two countries are especially critical for global food security. Measuring the relative productivity level and identifying sources of growth for China and the U.S. farm sectors thus have strong political implication and merit investigation. In this study we apply a bilateral translog index number approach to evaluate the relative levels of farm outputs, farm inputs, and total factor productivity (TFP) for China and the U.S. farm sectors spanning the 1985-2012 period. We construct spatial price indexes for two outputs—crops and livestock, and fours inputs—labor, capital, land, and intermediate goods based on prices and quantities of commodities common to both countries. We obtain indexes of relative real output and relative real input between the two countries by dividing the nominal value of output and input by the corresponding bilateral output price indices and input price indies, respectively. To adjust for relative land quality differences between the two countries we adopt a hedonic approach to estimate the shadow values of land attributes using the U.S. County level land characteristics and land value data (Ball et al. (2008)). We further apply the shadow values of land attributes to measure quality-adjusted land stock for China’s farm sector. The preliminary results show that while TFP growth is the major driver of the U.S. agricultural output growth, input growth plays an equally critical role with TFP in the earlier years for China’s farm sector. The trend of relative productivity level between two countries also indicates that China’s agricultural productivity is catching up with that of the U.S. farm sector.

Protectionism and the Fertility Education Trade-Off in Late 19th-Century France (O1, N3)

Vincent Bignon
,
Bank of France
Cecilia Garcia-Penalosa
,
Aix-Marseille University

Abstract

This paper provides evidence of how protectionism reversed the education and fertility trends that were well under way in late nineteenth -century France. Our identification strategy relies on a major policy change. Following the ‘grain invasion’ of Europe, cereal prices in France plunged, resulting in a major income loss for cereal producers (O’Rourke, 1997). Political pressure led to the adoption of the Méline tariff in 1892, which triggered a substantial increase in agricultural wages. We use this protectionist shock and the differences in cereal production at the district level to study whether districts more intensive in cereal production changes more their education and fertility behaviour after the introduction of the tariff. Our findings indicate that the tariff reduced education and increased fertility. The magnitude of these effects was substantial, and in regions with large shares of employment in cereal production the tariff offset the time trend in education for up to 15 years. Our evidence supports the existence of a trade-off between fertility and education in the second half of the twentieth century, in a country that had already experienced its fertility transition. We also document that within France the districts that benefited the most from the tariff had the strongest negative effect on children’s education.

Provision of Financial Stability: A Non-Cooperative Game With Mediation or a Cheap Talk Game? (G1, H4)

Faruk Ulgen
,
Grenoble Alpes University

Abstract

This article considers global financial stability a public good and seeks to assess the relevance of two alternative ways of producing it: market-led private provision mechanisms and public-led collective provision models. Those alternatives rest on specific regulatory principles: self-regulation or restrictive public regulation. The conditions of efficiency of decentralized/market-based regulation versus macro-prudential public supervision mechanisms are then examined and some relevant incentive-implementation systems are evaluated. Within the framework of a non-cooperative communication game, two financial supervision mechanisms are studied. First, in a decentralized cheap-talk configuration, a global agency (a Super-National Supervision Authority, SNSA) plays the role of a mediator between regional/national/local agencies that have private information and can intervene freely in their own zone without external constraint. Second, in a sender-receiver game, local agencies collect and treat information about their own zone and transmit it to the SNSA which must determine the relevant action. In each case, an incentive compatible mediation plan that generates a correlated equilibrium is reached through the intervention of an outside observer. The mechanism design obtained seems to be consistent with economic efficiency and stability criteria.

Public Policy, Environmental Impact and the Second-Hand Clothes Market: Market Distortions or Welfare Improvements From In-Kind Donations? (H2, Q5)

Debra K. Israel
,
Indiana State University

Abstract

The motto, “Reduce, Reuse, Recycle” is intended to promote habits that will reduce negative human impacts on our environment. However, only focusing on the reuse or recycling of items may inadvertently work against the primary goal: Reducing resource use. This research project examines second-hand clothing markets. In the United States, donations of used clothing are often motivated by helping those less fortunate than ourselves, or from a desire to “go green” through reuse of clothing. Tax deductions encourage this giving (donated value of more than 9 billion dollars in 2011). On the other hand, the importation of second-hand clothes in developing countries may be viewed as unfair competition that hurts the domestic clothing industry. The case of Bolivia is examined in more detail, as they have chosen to make imports of used clothing illegal. This research examines changing patterns over time in the international second-hand clothing market and in the itemized deductions for second-hand clothing in the United States.

QE Equivalence to Interest Rate Policy: Implications for Exit (E5, E4)

Samuel Reynard
,
Swiss National Bank

Abstract

With QE central banks have taken the role of commercial banks in providing broad money to the non-banking sector in exchange for debt. This paper presents and estimates a monetary policy transmission framework to jointly analyze central banks’ asset purchase and interest rate policies. The negative policy interest rate equivalent to QE is estimated in a framework that accounts for the broad money supply of the central bank and commercial banks. This effect of Federal Reserve QE programs is estimated to be equivalent to a negative policy (Federal funds) interest rate of about 4 percentage points. The analysis provides a quantitative framework to assess how much higher (relative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance.

Quantile House Price Indices in China: A Case of Beijing (R2, C2)

Lei Zhang
,
North Dakota State University
Yimin Yi
,
North Dakota State University

Abstract

Using a comprehensive micro-level dataset of newly-built residential housing units in Beijing, we examine the determinants of house prices from 2013 to 2015, and construct a regular house price index using Ordinary Least Squares estimation and quantile house price indices using quantile regression. Our findings suggest a high appreciation rate of house prices from 2013 to 2015. Moreover, we find that most housing attributes are valued differently across the complete distribution of house prices. The result shows that even though the trend of house price indices is similar, the magnitude of appreciation rates vary across different quantiles.

Quota Policies and Upward Mobility (J7, P1)

Stephen Daniel O'Connell
,
City University of New York and Massachusetts Institute of Technology

Abstract

A common argument for quota policies is their potential to increase the participation of targeted groups in positions that are not directly subjected to quotas or after quotas are no longer in place. I test this argument empirically in the context of India, where one third of local political leadership seats are randomly assigned over time to be held by a woman. Quotas increase the number of female candidates who later contest seats in state and national legislatures, where such policies do not exist. The effects can be explained by repeat candidacies of career politicians and new candidacies by politicians who gain particular experience from the quotas. Effect magnitudes imply that the policy accounts for a substantial portion of the increase in female candidates in these bodies since the start of the policy. Quotas do not induce permanent change in the presence of female candidates in higher office due to the low probability of a female candidate winning an election and effects on candidacy subsiding over time.

Racing With or Against the Machine? Evidence from Europe (J2, O3)

Terry Gregory
,
Centre for European Economic Research
Anna Salomons
,
Utrecht University
Ulrich Zierahn
,
Centre for European Economic Research

Abstract

A fast-growing literature shows that technological change is replacing labor in routine tasks, raising concerns that labor is racing against the machine. This paper is the first to estimate the labor demand effects of routine-replacing technological change (RRTC) for Europe as a whole and at the level of 238 European regions. We develop and estimate a task framework of regional labor demand in tradable and non-tradable industries, building on Autor and Dorn (2013) and Goos et al. (2014), and distinguish the main channels through which technological change affects labor demand. These channels include the direct substitution of capital for labor in task production, but also the compensating effects operating through product demand and local demand spillovers. Our results show that RRTC has on net led to positive labor demand effects across 27 European countries over 1999-2010, indicating that labor is racing with the machine. This is not due to limited scope for human-machine substitution, but rather because sizable substitution effects have been overcompensated by product demand and its associated spillovers. However, the size of the product demand spillover -- and therefore also RRTC's total labor demand effect-- depends critically on where the gains from the increased productivity of technological capital accrue.

Rain, Emotions and Voting for the Status Quo (D7, D9)

Armando Nicolas Meier
,
University of Basel
Alois Stutzer
,
University of Basel
Lukas Schmid
,
University of St. Gallen

Abstract

Do emotions affect the decision between change and the status quo? We exploit exogenous variation in emotions caused by rain and analyze data on more than 400 ballot propositions in Switzerland for the years 1958 to 2014 to address this question. The empirical tests are based on administrative ballot outcomes and individual postvote survey data. We find that rain decreases the share of votes for a change. Our robustness checks suggest that changes in the composition of the electorate or changes in information acquisition do not drive this result. In addition, we provide evidence that rain might have altered the outcome of several high-stake votes. We discuss the psychological mechanism and document that rain reduces the willingness to take risks, a pattern that is consistent with the observed reduction in the support of change.

Recovery of 1933

Margaret Jacobson
,
Indiana University
Eric M. Leeper
,
Indiana University
Bruce Preston
,
University of Melbourne

Abstract

When Roosevelt abandoned the gold standard in April 1933, he converted what had been effectively real government debt into nominal government debt and opened the door to implementing an unbacked fiscal expansion. We argue that he followed a fiscal rule that ran primary deficits until the price level rose and economic activity recovered. VAR estimates suggest that primary deficits made quantitatively important contributions to raising both the price level and real GNP from 1933 through 1937. The evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which were permitted to raise the monetary base, drove the recovery independently of fiscal actions.

Recovery Theorem With a Multivariate Markov Chain (G1)

Anthony Sanford
,
University of Washington

Abstract

The objective of this paper is to estimate three functions—the natural probabilities, pricing kernel, and discount rate—from observed state prices more accurately. Since these three functions appear as a single piece of information in the marketplace, we are unable to discern each function’s specific contribution to a change in price. To solve this problem, Ross (2015) proposed the univariate Recovery Theorem (RT), where the transition probability matrix is based on the current level of the S&P 500. In contrast, I derive a transition probability matrix using a multivariate Markov chain. I employ a mixture transition distribution where the proposed states depend on the level of the S&P 500 index and its options’ implied volatilities. I include volatility because the transition path between states depends on the propensity of an underlying asset to vary. An asset that is highly volatile is more likely to transition to a far-away state. This multivariate method improves significantly upon the univariate RT because the latter does not include volatility in the state transition, which makes its transition probabilities less precise. The forecast results indicate that the multivariate Markov chain produces superior results over the univariate RT. Using quarterly forecasts (updated monthly) for the 1996-2015 period, the out-of-sample R-square of the RT increases from around 12% to 30%.

Regimes Dependent Speculative Trading: Evidence from United States Housing Market (R3, E1)

Zhenxi Chen
,
University of Kiel

Abstract

This paper investigates the U.S. housing price dynamics from the perspective of speculative trading, in addition to the macro-finance factors such as the stock market, household disposable income and nominal interest rate. It is found that among the speculative investors, fundamental traders drive house price away from the fundamental value. Their trading is weakened in the regime of high nominal interest rate and their behavior even changes to push the price towards the fundamental value when price deviation is large. A second type of speculative traders is momentum traders who believe that the trend of the recent price movement would be persistent. Stock market has a positive effect on the house price. The positive effect of household income becomes pronounced when nominal interest rate is high. When the nominal interest rate is high, house price faces a negative effect from the nominal interest rate and the positive effect of inflation disappears. Among all the factors, speculative trading is the largest market force driving the U.S. housing market which exhibits self-correction in the long run.

Regular Versus Lump-Sum Payments in Union Contracts and Household Consumption (D1, E2)

Effrosyni Adamopoulou
,
Bank of Italy
Roberta Zizza
,
Bank of Italy

Abstract

In this paper we use information on monthly wage increases set by collective agreements in Italy and exploit their variation across sectors and over time in order to examine how household consumption responds to different types of positive income shocks (regular tranches versus lump-sum payments). Focusing on single-earner households, we fi…nd evidence of consumption smoothing in accordance with the Permanent-Income Hypothesis, since total and food consumption do not exhibit excess sensitivity to anticipated regular payments. Consumption does not respond at the date of the announcement of income increases either, as these are known to compensate workers for the overall loss in their wages’' purchasing power. However, consumption responds, albeit a little, to transitory and less anticipated one-off payments, as the expenditures on clothing&shoes increase upon the receipt of the lump-sum payments. This behaviour can be due to bounded rationality as consumers do not consider the lump-sum as part of the overall wage infl‡ation adjustment.

Regulating Land Use Change Leakages Due to Biofuels: Is it Worth it?

Madhu Khanna
,
University of Illinois-Urbana-Champaign
Weiwei Wang
,
University of Illinois-Urbana-Champaign
Tara Hudiburg
,
University of Idaho
Evan DeLucia
,
University of Illinois-Urbana-Champaign

Abstract

Efforts to reduce the indirect land use change (ILUC) related carbon emissions caused by biofuels has led to inclusion of an ILUC factor as a part of the carbon intensity of biofuels in a Low Carbon Fuel Standard (LCFS). While previous research has provided varying estimates of this ILUC factor, there has been no research examining the economic effects for the US and additional carbon savings globally from including an ILUC factor in implementing a LCFS. Using an integrated modeling framework we found that inclusion of an ILUC factor in a national LCFS led to additional abatement of cumulative emissions over 2007-2027 by 1.3% to 2.6% (0.6-1.1 Billion Mega-grams Carbon-dioxide-equivalent or B Mg CO2e) compared to those without an ILUC factor, depending on the ILUC factors utilized. The welfare cost to the US of this additional abatement ranged from $61 to $187 Mg CO2e -1 and was substantially greater than the monetary value of damages from carbon emissions (social cost of carbon) of $50 Mg CO2e-1.

Regulation and Investment in High-Tech and Low-Tech Sectors

Bentley Coffey
,
Duke University
Patrick A. McLaughlin
,
George Mason University

Abstract

We consider the effect of cumulated regulation on the R&D investment choice of heterogeneous firms. Recent endogenous growth models have shown economy-wide (Dawson and Seater 2013) and sector-specific (Coffey et al 2016) cumulated federal regulation to distort investment choices, thereby substantially diminishing long-run economic growth. Coffey et al (2016) implement Bayesian techniques with fairly standard sector-specific data joined with RegData 2.2, a database that employs machine learning on the text of federal regulatory code to measure the incidence of regulations on industries, to fit their model and produce counterfactual experiments. Rather than consider regulations’ cumulative effect on the entire economy with counterfactual simulations, we focus on testing regulations’ effect on investment for high-tech sectors compared to low-tech sectors. Traditional measures of investment, such as spending on structures, equipment, and R&D, may be affected by regulation, but arguably much innovation in a knowledge-intense industry arises from hiring and developing talented employees. We therefore implement an alternative measure of profit—profit per employee—that reflects gains from investment in employee talent, allowing us to distinguish those industries where the effect of regulation on productivity gains would not be identified by regressing R&D and other traditional investment expenditures on regulation. We then apply a suite of estimators designed for heterogeneous regressors in panel data to ensure robust estimation of the effects across sectors.

Reimbursement Incentives for Hospital Quality Competition in an Oligopolistic Industry: The Role of the Health Labor Market (L1, I1)

Genevieve Aku Alorbi
,
Southern Illinois University
Chifeng Dai
,
Southern Illinois University

Abstract

This paper investigates how government reimbursement schemes that induce quality competition among providers affects the choice of quality of care provided to patients and how these choices depend on the labor supply constraints in the healthcare labor market. We build a theoretical model that explicitly incorporates the healthcare labor market into a framework of a hospital Cournot competition, to show how a hospitals' choice of quality of patient care will be directly influenced when there is a shortage of health personnel in a regulated reimbursement system. We find that multiple equilibria can arise in healthcare markets depending on the consumers’ sensitivity to quality and hospitals’ share of cost when investing on quality. Contrary to existing findings, we are able to show that the effects of reimbursement scheme can vary in different equilibria and in different labor markets. In high patient sensitivity hospital markets, under a low/high hospital quality equilibrium, a cost/fixed reimbursement scheme can induce higher patient care quality by the hospital. Furthermore the labor market constraint is found to place an opposing pressure on the direction of choice of care induced by cost or fixed reimbursements hence preventing the hospital from attaining its full choice of quality of care. It is therefore necessary for government reimbursement policy to incorporate the shortage of labor supply into its reimbursement policy. Alternatively governmental policy that deals directly with factors that restrict healthcare labor supply such as licensing, certification and medical education accreditation might have to be introduced

Relative Prices, Non-Homothetic Preferences, and Product Quality (F3, O4)

Clemens Struck
,
Trinity College Dublin

Abstract

This paper develops a novel theory of price level differences across countries. In a model characterized by a quality hierarchy in demand, we illustrate that GDP per capita growth induces continuous demand shifts toward goods of higher quality. These demand shifts in turn lead to structural change in the form of labor reallocations along the product quality dimension. As higher quality goods are more difficult to produce they command higher prices. The demand shifts, thus, result in increasing price levels when countries experience rising levels of economic development.

Rise of the Machines: Evidence from the Container Revolution (R4, F1)

David Gomtsyan
,
University of Turin

Abstract

Trade economists have documented that the invention of the international shipping container had dramatic impact on the volumes of international trade. The container revolution also had important implications for labor markets in port cities. The process of moving goods in ports was a labor-intensive task and provided jobs for many workers. New technologies came to substitute these tasks and vastly reduced labor demand. As a result, despite rising volumes of cargo, since the early 1960's every major US port has experienced a significant decline in the number of workers employed as longshoreman. In this paper I use regional data to study more formally the effect of the container revolution on the employment of longshoremen and other economic outcomes in port cities. The results of the study show that the share of longshoremen in total employment declined in most US ports and the declines were especially large in those cities which had relatively larger numbers of workers employed as longshoreman. Despite large losses in jobs among workers employed as longshoreman, there is no evidence that containerization had a negative impact on total employment in cities that had larger numbers of workers employed as longshoreman. In fact, I document that containerization had negative effect on the unemployment rate in areas with relatively larger number of workers employed as longshoremen. This is not surprising because containerization and higher volumes of trade also create jobs in many other industries, which may offset the negative direct effect.

Risk Contagion of Corporate Defaults: Tracing the Impact on Guarantors (G3, G1)

Xiaoqian Zhang
,
Zhejiang University and Columbia University

Abstract

This article traces the credit default propagation on guarantors and its mechanisms when the borrower corporation defaults. I found strong evidence of its impact on equity price decline and economic behavior changes. Credit contagion was exploited from two aspects, implied collateral channel and lending relationship. I traced the impact on market reaction, financing and investment behavior, employment symmetric growth rate, and the risk of financial distress. Being sued as a guarantor and court enforcement significantly increase the propensity of financial distress through two propagating mechanism, credit loss and demand shrinkage, and China’s recent liquidity and real estate price shocks deepen the impact from credit loss.

Risk Factors and Asset Pricing: Evidence From China’s A-Share Market (G1)

Fan Chen
,
Renmin University of China
Jianhua Gang
,
Renmin University of China
Zongxin Qian
,
Renmin University of China

Abstract

Classic CAPM has long been criticized for wild errors in explaining the equity premia. This paper shows that part of the inaccuracy comes from the quality of the risk measurement. Evidence shows that while the conventional CAPM and the Fama-French three-factor model perform poorly in China’s A-share stock market, an alternative single factor model using the Aumann-Serrano economic index (the AS index) of riskiness to replace beta performs well. The AS index is able to capture useful higher-order information on the systematic risk that is neglected in the CAPM and it also dominates the Fama-French three-factor models. This paper also suggests that the momentum factor is particularly important in explaining the equity premia for China’s A-share market, and the momentum factor is significantly related to the AS index. The two factors are also proved to be complementary rather than perfect substitutes for each other.

Risk, Ambiguity, and Stochastic Volatility (G1, C4)

Hwagyun Kim
,
Texas A&M University

Abstract

This paper considers a general class of stochastic volatility models motivated by risk and uncertainty in economic decision making, and develops statistical tools based on both a density-based Kalman filter and a Bayesian approach. In particular, volatility is modeled as a general nonnegative function of autoregressive latent factors. The model is parsimonious and encompasses all the stochastic volatility models studied previously in the literature. Based on an economic model, we propose to use an S-shaped volatility function, allowing conditional volatilities to vary smoothly between two asymptotic regimes. We offer implications of nonlinear volatilities on asset pricing as well. In particular, the model justifies volatility of volatility using ambiguity and risk aversion. Empirical illustrations are provided.

School Accountability and Attention Deficit Hyperactivity Disorder (ADHD) (I1, I2)

James Matthew Hampton
,
University of Alabama
Susan Chen
,
University of Alabama

Abstract

Attention Deficit Hyperactivity Disorder (ADHD) is the most commonly diagnosed mental condition among American children. ADHD hinders a child's cognitive development and has a lasting impact on human capital accumulation and in the long-run educational and labor market outcomes. Like most forms of mental illness, diagnosis of ADHD is subjective. This subjectivity not only creates ambiguities in whether ADHD is over- or under- diagnosed, but it also opens the door to moral hazard. In this paper, we examine how incentives built into school policy, where teachers are held accountable for their student's achievement, can affect the underlying distribution of the reporting of ADHD symptoms by parents. We perform distributional analysis in the form of Stochastic Dominance testing to show that mother-reported hyperactivity has increased in the U.S. in a time period surrounding the No Child Left Behind Act of 2001 (NCLB). School Accountability policies, such as sanctions, put excess pressure on teachers to get their students to perform. The added pressure of consequential accountability laws led to higher rates of ADHD diagnosis as well as increases in levels of hyperactivity reporting of mothers. We perform stochastic dominance tests on a number of hyperactivity distributions parsed by race, income level, location, and time. We find that the hyperactivity distribution from 2004 first-order stochastically dominates that of 2000, indicating that hyperactivity has uniformly increased across an entire distribution, from mothers that initially reported low levels to those that reported extremely. We explore the relationship between school accountability and ADHD in a number of different econometric frameworks and unveil an unintended consequence of education policy.

Search Relativity (J6)

Ying Tung Chan
,
McGill University
Chi Man Yip
,
University of Calgary

Abstract

This paper proposes a unified theory that explains three sets of seemingly unrelated features of the unemployment rate by educational attainment (EUR). First, the higher the educational group, the lower is the EUR. Any economy with a higher proportion of highly-educated workers is expected to have a lower overall unemployment rate (OUR). Why are the OUR and the distribution of educational attainment uncorrelated? Second, it seems natural that the EUR increases with OUR. But why is such increase more pronounced for a lower educational group? Third, the lowest possible EUR is about half the OUR in each of the 50 states. What explains the magic number of one-half? In our model, unemployed workers with heterogeneous productivity compete with one another during a job search process. The job finding rate increases with the relative position in the distribution of search intensity, not its level. The increase in the share of the highly-educated improves the relative position of highly-educated unemployed workers; meanwhile, it creates the negative externality of the same size on the medium- and the low-educated unemployed, leaving the average transition rate and thus the OUR unchanged. Our model derives a novel formula of the EUR. The null hypotheses that the actual and the predicted values are from the same distribution cannot be rejected for high-school graduates and Bachelor's degree holders in 46 and 43 out of 50 states.

Searching High and Low: Extermal Dependence of International Sovereign Bond Markets (C4, G1)

Marina Tkalec
,
Institute of Economics-Zagreb

Abstract

This paper examines the degree of interdependence among sovereign bond markets in 24 developed and developing countries during times of stress or crisis using extreme value theory. We discuss tail behavior of individual sovereign bond spreads and compare the shape of that tail to exponential and power-law distributions. We proceed by estimating bivariate tail dependence index χ and search for the evidence of asymptotic tail dependence in sovereign bond spreads series. In order to establish the statistical significance of estimated bivariate tail dependence indices, we construct a bootstrap-based approach to searching for the presence of asymptotic tail dependence derived on the basis of Davis et al. (2012). Our empirical findings suggest that the US bond market does not exhibit extreme right tail co-movements with European sovereign bond market turbulences. Even though the UK did not adopt the euro, its sovereign bond market exhibits statistically significant right tail dependencies with a number of Eurozone bond markets, possibly indicating that it is not immune to financial distress originating from the EMU. New EU member states exhibit more frequent right tail dependencies with other new EU member states when compared to old EU members.

Selection and Stochastic Order (C6, C4)

Thomas Noe
,
University of Oxford
Thomas Noe
,
University of Oxford

Abstract

This paper considers a simple question whose answer has far-reaching consequences: Consider two random variables X and Y. If the distribution of X dominates the distribution Y under a stochastic ordering such as first-order stochastic dominance, will this dominance be preserved by competitive or "self" selection, i.e., will the distribution of [X| X > Y] dominate the distribution of [Y | Y > X])? I.e., is the effect of competitive selection sufficient to reverse dominance? The analysis provides a complete answer to this question by developing the selection-conditioned analogs of the two most pervasive size-based measures of dominance---(first-order) stochastic dominance and the likelihood ratio (MLR) ordering. These analogs are necessary and sufficient for selection-conditioned dominance. We term the condition for selection-conditioned stochastic dominance, competitive selection stochastic dominance (CSSD), we term the condition for selection conditioned monotone likelihood ratio (MLR) dominance, geometric dominance. Although the conditions for CSSD dominance are opaque, the conditions by geometric dominance, are simple, analogous to the MLR ordering condition, and define an order relation. While MLR ordering requires the quantile transform relating the compared distributions to be convex, geometric dominance requires that the quantile transform to be geometrically convex, roughly speaking, convex if plotted on a log-log scaled grid. When distributions are absolutely continuous, geometric dominance is determined by a very simple condition---the ratio between the dominant and dominated distributions' logarithmic derivatives being increasing. Using geometric dominance, we show that for all standard error distributions (Normal, Logistic, Lognormal inter alia), selection preserves stochastic order. As illustrated with series of models drawn from the literature, selection preservation implies that the sign of comparative static predictions for selection-conditioned observations can be inferred from the sign of unconditional predictions. Thus, in such cases, models can be validly tested on self-selected samples without correcting for self-selection bias.

Semiparametrically Optimal Hybrid Rank Tests for Unit Roots (C1)

Bo Zhou
,
Tilburg University
Ramon van den Akker
,
Tilburg University
Bas J.M. Werker
,
Tilburg University

Abstract

We propose a new class of unit root tests that exploits invariance properties in the Locally Asymptotically Brownian Functional limit experiment associated to the standard unit root model. The invariance structures naturally suggest tests that are based on the ranks of the increments of the observations, their average, and an assumed reference density for the innovations. The tests are semiparametric in the sense that they are valid, i.e., have the correct (asymptotic) size, irrespective of the true innovation density. For correctly specified reference density, our test is point-optimal and nearly efficient. For arbitrary reference density, we establish a Chernoff-Savage type result, i.e., our test performs as well as commonly used tests under Gaussian innovations but has improved power under other, e.g., fat-tailed or skewed, innovation distributions. We also propose a simplified version of our test that exhibits the same properties, however the Chernoff-Savage type result is restricted to Gaussian reference densities and can only be demonstrated by simulations.

Sex Crime, Murder, and Broadband Internet Expansion - Evidence for German Municipalities (K2, H4)

Andre Nolte
,
Centre for European Economic Research

Abstract

This paper studies the effects of the introduction of a new mass medium on criminal activity in Germany. The paper asks the question whether high-speed internet leads to higher/lower sex crime offences and murder. I use unique German data on criminal offences and broadband internet measured on the municipality level to shed light on the question. In order to address endogeneity in broadband internet availability, I follow Falck et al. (2014) and exploit technical peculiarities on the regional level that determine the roll-out of high-speed internet. In contrast to findings for Norway (Bhuller at al., 2013), this paper documents heterogeneous effects within and across (spillover effects) municipalities. While within municipalities the substitution effect dominates for overall sex crime and especially for sexual child abuse, I find strong and positive spillover effects to neighbouring municipalities that are driven by rape and child abuse. The effects on murder increase under the instrumental variable approach but remain insignificant. Overall, the estimated net effects might stem from indirect effects referred to differences in reporting crime, a matching effect, and a direct effect of higher and intensive exposure to extreme and violent media consumption. After investigating the potential mechanism, I do not find any evidence in favor of a reporting or matching effect. This suggests that the estimated net effect is most likely a result of increased consumption of extreme media.

Shadow Banking: China's Dual-Track Interest Rate Liberalization (E4, P2)

Lisheng Wang
,
Chinese University of Hong Kong
Hao Wang
,
Tsinghua University
Honglin Wang
,
Hong Kong Institute for Monetary Research
Hao Zhou
,
Tsinghua University

Abstract

Shadow banking in China is mainly conducted by banks to evade excessive credit control, and constitutes a dual-track mechanism to liberalize the country's rigid interest rate policy. We develop a model to show that the market track of shadow banking can lead to efficiency gain by reducing capital idolization and by financing productive but under-funded private enterprises (PEs). Pareto improvement can be achieved as banks and state-owned enterprises (SOEs) participate shadow banking and share the efficiency gain. Full interest rate liberalization may not necessarily lead to additional efficiency gain as it increases capital idolization in the presence of high reserve requirement, and magnifies bank credit mis-allocation in favor of less efficient SOEs.

Shale Oil Production Expansion and Water-Energy Nexus in North Dakota: A Decentralized Agent-Based Modeling Approach (Q2, Q4)

Siew Hoon Lim
,
North Dakota State University
Zhulu Lin
,
North Dakota State University
Michael Borders
,
North Dakota State University
Tong Lin
,
North Dakota State University

Abstract

The Bakken shale formation is one of the largest unconventional oil fields in the U.S. The expansion of oil industry in North Dakota as a result of the hydraulic fracturing technology has led to tremendous increases in the demand for water among other natural, physical, social and economic resources. Large problems in North Dakota are the location and quality of water. Demand for water in the region where hydraulic fracturing is occurring is where quality water is most scarce. North Dakota does have a variety of surface and groundwater sources, but most are not suitable for long-term use for various reasons. Except for the Missouri River and Lake Sakakawea, the storages of surface waters and shallow aquifers are limited and subject to drought condition. Much of the state’s surface waters and shallow aquifers are fully or nearly fully appropriated. In much of the region, the Fox Hills-Hell Creek (FH-HC) aquifer is historically the only water source capable of producing large quantities of fresh water for domestic, municipal, livestock, irrigation and industrial uses. However, there are growing concerns about the existing and potential water withdrawal from the FH-HC aquifer due to the large-scale water demand by the oil industry. A first-of-its-kind water depot–based allocation system has recently emerged to distribute large quantities of fresh water in the region. This project is a pilot study of the water-energy nexus at the Bakken Shale, using mathematical modeling to gain a better understanding of the complex interactions between human and natural systems that support energy and economic activities and large-scale use of water resources in the region. We develop an agent-based model for the watershed system at the Bakken region to analyze water-depots’ strategic interactions in the system and the implications on the natural environment and the water allocation among end users.

Short-Term Effects of Secondary School Tracking in Germany: A Disaggregated Synthetic Control Approach (I2, C4)

Kristina Strohmaier
,
University of Hohenheim
Aderonke Osikominu
,
University of Hohenheim
Gregor Pfeifer
,
University of Hohenheim

Abstract

Should we track pupils to different school types according to their abilities? And if yes, who is to decide which track is best? While the first question has already been addressed in the literature, research on the second question is still scarce. In Germany, a controversially discussed assignment rule determines the secondary school track. This rule is about mandatory and non-mandatory teacher recommendations where the binding nature varies between the German states. In this paper, we first examine whether the abolition of binding teacher recommendations leads to a shift in transition rates towards higher school forms. We secondly ask whether children then perform successfully at the beginning of secondary school with the repetition rate serving as an indicator for educational success. We exploit a recent policy reform of 2011 in the state of Baden-Wuerttemberg that led to the abolition of mandatory teacher recommendations, using the state of Bavaria as the control group. We apply a dis-aggregated version of the Synthetic Control Method (Abadie and Gardeazabal 2003). This allows us to derive a distribution of treatment effects for the districts of Baden-Wuerttemberg. For inference, we construct a placebo distribution, which results from analogous SCM procedure for the districts of Baden-Wuerttemberg at times where no treatment took place. Our findings suggest that the abolishment of mandatory teacher recommendations led to a substantial increase (decrease) in the transition rate to the highest (lowest) school track by about 7.5 (30) percent. While these results might be seen as a desirable development towards more higher education, this is only one part of the story. The other part concerns the overall repetition rate in grade five, for which we find a significant increase of 86% compared to the pre-intervention repetition rate suggesting that pressure has just been shifted from primary to (the beginning of) secondary school.

Shortened Lives, Cognitive Functioning and Social Preferences: Experimental Evidence from a Study of Huntington's Disease (D8, D1)

Michelle C Baddeley
,
University College London
Sarah Mason
,
University of Cambridge

Abstract

Huntington’s Disease (HD) is a genetic disease associated with much–reduced life expectancy and quality of life for patients and their carers/relatives. Once manifested, it is associated with rapidly declining cognitive/social functioning, excessive risk-taking and poor financial management. This paper develops economic analyses of HD, including extensions of Brunnermeier and Parker’s (AER 95(4)) analysis of optimism bias and anticipatory utility, applied by Oster, Shoulson and Dorsey (AER 103(2)) to changing optimism bias amongst HD patients before and after genetic testing. Oster, Shoulson and Ray (AER 103(5)) show shortened life expectancy limiting human capital accumulation, finding HD patients are significantly less likely than the general population to undertake education/ training. Oster, Shoulson, Quaid and Ray (J Public Econ 94[11-12]) explore adverse selection in health insurance, estimating that HD patients are up to 5 times more likely than others to take-out long-term care insurance. We link this literature with behavioural analyses of social preferences as well as our past research on social learning/herding and HD patients’ cognitive functioning (Parkinson, Baddeley 2013, J Socioeconomics 41:558-573; Baddeley 2010, Phil. Trans. Roy. Soc(B), 365[1538]; Burke, Tobler, Baddeley, Schultz 2010, PNAS 107(32):14421-36; Burke, Baddeley, Tobler, Schultz 2010, Front Hum Neurosci. 4:48; Barker, Mason 2014, Nat Rev Neurol 10(1):12-3; Begeti et al. 2013, J Neurol 260(11). Using controlled experiments, we analyse decision-making by HD patients versus “pre-manifest” HD (pre-HD) patients – the latter have been identified as genetic carriers of HD without yet exhibiting clinical symptoms. We correlate these differentials with performance in tests of cognitive functioning, behavioural/preference parameters (cognitive reflexivity, social/time/risk preferences) and herding/social learning. This evidence has important implications. Unravelling economic/financial constraints and consequences for HD sufferers (and others suffering shortened life expectancy) is crucial in understanding/ameliorating adverse selection and genetic discrimination in employment and health insurance markets, especially for pre-manifest patients who show no symptoms for many years, if ever.

Should Monetary Policy Lean Against Housing Market Booms? (E4, E5)

Sami Alpanda
,
University of Central Florida
Alexander Ueberfeldt
,
Bank of Canada

Abstract

Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the household debt gap. This crisis regime is characterized by an elevated risk premium on mortgage lending rates and a binding zero lower bound on the policy rate, imposing large costs on the economy. Using our set-up, we examine the optimal level of monetary leaning, introduced as a Taylor rule response coefficient on the household debt gap. We find that the costs of leaning in normal times outweigh the benefits from a lower crisis probability. Although the decline in the crisis probability reduces the volatility in the economy, this is achieved by lowering the average level of debt, which severely hurts borrowers and leads to a decline in overall welfare.

Signal processing on social media: Theory and evidence from financial markets (G1)

Peiran Jiao
,
University of Oxford
Andre Veiga
,
University of Oxford
Ansgar Walther
,
University of Oxford

Abstract

We analyze the processing of information from social media and news media, using a unique dataset on financial markets. We find patterns consistent with a theory of social media as an “echo chamber”: Social networks repeat information, but boundedly rational investors interpret repeated signals as new information. This is based on the empirical finding that stocks with high social media coverage experience high subsequent volatility and trading activity, while high news media coverage predicts low volatility and trading activity. Alternative mechanisms based on private information, investor disagreement, uncertainty shocks, and other behavioral biases are not consistent with the data.

Size and power of difference-in-differences studies in financial economics: An approximate permutation test (C4, C2)

Sebastian Bunnenberg
,
Leibniz University of Hanover
Steffen Meyer
,
Leibniz University of Hannover

Abstract

Researchers use difference-in-differences models to evaluate the causal effects of policy changes. As the empirical correlation across firms and time is usually unknown, estimating consistent standard errors is difficult and statistical inferences may be biased. We suggest an approximate permutation test using simulated interventions to reveal the empirical error distribution of estimated policy effects. In contrast to existing econometric corrections, such as single- or double-clustering, our approach does not impose any parametric form on the data. In comparison to alternative parametric tests, our procedure maintains correct size with simulated and real-world interventions. Simultaneously, it improves power.

Skills for Innovation and Growth (I2, O4)

Xiaoyu Tian
,
University of Northampton
Corrado Di Maria
,
University of East Anglia
Emiliya Lazarova
,
University of East Anglia

Abstract

This paper investigates the contribution of various skills to aggregate economic growth through the channels of innovation and imitation. Our findings confirm the optimal skill composition of the workforce depends on country’s level of economic development. Specifically, the skilled labour has a higher growth enhancing effect closer to the technological frontier and contributes to advanced economies improving their efficiency of productive factors from innovation. Whilst productivity gains from imitation are found in less developed countries which requires less technical skills. Our empirical estimates shed light on growth-maximising policies which should depend on the distance to the technological frontier.

Social Networks and Health Knowledge in India: Who You Know or Who You Are? (I1)

Niels-Hugo Blunch
,
Washington and Lee University
Nabanita Datta Gupta
,
Aarhus University

Abstract

Addressing several methodological shortcomings of the previous literature, this paper explores the relationship among health knowledge and caste and religion and a number of important mediating factors in India, estimating causal impacts through a combination of instrumental variables and matching methods. The results indicate the presence of a substantively large caste and religion health knowledge gap in the context of proper treatment of diarrhea in children favoring high caste women relative to low caste and Muslim women. We also provide evidence that while observed individual characteristics such as education and access to social networks explain part of the gap, a substantial part of the health knowledge gap is left unexplained. All groups have greater health knowledge in urban than in rural areas, but the gap is even wider in urban than in rural areas. Additionally, high caste women benefit more in terms of health knowledge from having health networks than women from other groups; except if the health person is of the same caste/religion, in which case low caste and Muslim women sometimes benefit by as much as double that of high caste women, or even more. It may therefore not be enough to give individuals access to high quality networks if caste and religion-related gaps in health knowledge are to be reduced; such networks also have to be homophilous, to have the maximum effect. Improved treatment from and confidence in the medical profession is found to be part of the mechanism linking social network formation with improved health knowledge about the treatment of diarrhea in children.

Social Norm, Female Labor Supply and Rural-Urban Migration in India (J6, D1)

Dongxing Ji
,
Harvard University and Tsinghua University

Abstract

This paper provides an explanation for the low rural-urban migration rate in India based on “unitary household” hypothesis and restrictive social norms on women’s interpersonal activities. The welfare function of a household consists of wage income, utility from marriage and disutility associated with a working wife; the disutility is larger when the wife’s job involves interpersonal tasks, which is usually the case in urban areas. The theory predicts that: (1) males in a household whose female members participate more in agricultural work are less likely to migrate; (2) males in a household whose female members enjoy more freedom to take a nonagricultural job are more likely to migrate. Combining the Rural Economic and Development Survey (2006) and Human Development Survey (2005 & 2011), these predictions are empirically examined. To address the endogeneity concern, I instrument for female labor participation rates in agricultural and nonagricultural sectors with two indicators of the “state-caste” group: the percentage of women practicing “ghungat” (a veil covering the head), and the percentage of women who can choose her occupation independently. Two-stage least square estimations yield similar results. To further eliminate endogeneity, I recalculate these two instrumental variables using only rural women who live with their husbands and do NOT work, with results unchanged. As a placebo test, I use the “male counterparts” of labor participation rates instead, yielding null effects. The results are also robust to different econometric specifications and alternative definitions of key variables.

Social Ties in Academia: A Friend is a Treasure

Tommaso Colussi
,
Institute for the Study of Labor (IZA)

Abstract

This paper employs a unique dataset on articles, authors and editors of the top general interest journals in economics to investigate the role of social connections in the publication process. Ties between editors and authors are identified based on their academic histories. Results show that an editor’s former PhD students and faculty colleagues experience an increase in their publication outcomes when this editor is in charge of a journal. The analysis of articles’ citations suggests that connections ultimately improve the quality of published papers.

Sources of Heterogeneity in Retail Price-Setting Behavior (E3, D8)

Daniel Greenwald
,
New York University
Bulat Gafarov
,
Pennsylvania State University
John Mondragon
,
Northwestern University
Leonid Ogrel
,
Pennsylvania State University

Abstract

What drives heterogeneity in retail price-setting behavior? Using weekly scanner data on household goods covering hundreds of stores in 24 markets, we construct standard measures of nominal rigidity at the store-product level and uncover several new facts. First, we find that product-level factors accounts for 23% of total variation in nominal rigidity. However, we document substantial within-product variation driven by stores, which accounts for 18 to 28% of the non-residual variation (or 5 to 10% of total variation). We use three observable factors to describe how sensitive store profits are to mispricing errors for each product. These factors not only explain across-product variation, but can also account for some fraction of within-product variation due to differences in responsiveness to these factors across stores. Specifically, stores that price more flexibly on average are also more sensitive to observables when setting pricing policies. A model of rational attention, in which heterogeneity is driven by variation in both product characteristics and manager information capacity, provides a compelling explanation for these findings.

Stabilising House Prices: The Role of Housing Futures Trading (G1, R2)

Arzu Uluc
,
Bank of England

Abstract

This study investigates the effects of housing futures trading on housing demand, house price volatility and housing bubbles in a theoretical framework. Housing is one of the largest asset classes in the world. However, the housing market is imperfect due to its illiquid and lumpy nature, high transaction costs, short-sale constraints and the absence of financial instruments that would permit investors to hedge their exposure to house price risk. Moreover, housing has the dual role of providing a flow of consumption services and being an investment asset. When households’ optimal consumption and investment decisions do not coincide, either their housing consumption or investment choices become distorted. This paper studies how the imperfections and distortions in the housing market can be addressed by introducing financial instruments, in particular housing futures. The baseline model is an application of the De Long, Shleifer, Summers and Waldmann (1990) model of noise traders to the housing market, when the risky asset is housing. This adds new features to the model as households receive utility from housing services and cannot short-sell houses. The existence of noise traders in the housing market creates uncertainty about house prices, causes prices to deviate away from their fundamental values, and leads to a distortion in housing consumption. To investigate the impact of housing derivatives trading on the housing market, a new financial instrument, housing futures, is introduced into the baseline model. The analysis indicates that housing futures trading affects house price stability through three channels: by (i) enabling households to disentangle their housing consumption decisions from investment decisions, (ii) allowing short-selling, and (iii) attracting an additional set of traders (pure speculators) looking for portfolio diversification opportunities. The results show that, for a large set of admissible parameter values, housing futures trading decreases the volatility of house prices and increases the welfare of households and investors.

State Marriage Equality Policies and Adolescent Suicide Attempts (I1, I3)

Julia Raifman
,
Johns Hopkins University
Ellen Moscoe
,
Harvard University
Bryn Austin
,
Harvard University
Margaret Mcconnell
,
Harvard University

Abstract

Background The health impacts of changes in civil rights are not well understood. Based on the natural experiment created by variation in state marriage equality policies in the United States, we analyzed the relationship between state marriage equality policies and adolescent suicide attempts. Suicide is a leading cause of adolescent death and disproportionately affects sexual minorities. Methods We conducted a difference-in-differences analysis comparing states that enacted marriage equality by 2013 with states that did not. We used 1999-2013 Youth Risk Behavioral Surveillance System (YRBSS) data, which is representative of public high school students in each of the 46 states with data. The primary outcome was one or more self-reported suicide attempts in the past year, which we separately assessed among all students and sexual minority students. We controlled for age, sex, race, grade, and state and year fixed effects. Results Prior to any states enacting marriage equality policies, 7.6% of all high school students and 28.5% of sexual minority high school students reported suicide attempts in the past year. After eight states enacted marriage equality policies, there was a net decrease in the proportion of students reporting suicide attempts of 1.3 percentage points (pp; 95% CI: -1.9 to -0.7 pp, p

Strategic Complementarity in Banks’ Funding Liquidity Choices and Financial Stability (G2)

Andre Silva
,
Cass Business School

Abstract

This paper examines whether banks’ liquidity and maturity mismatch decisions are affected by the choices of competitors and the impact of these coordinated funding liquidity policies on financial stability. Using a novel identification strategy where interactions are structured through decision networks, I show that banks do consider their peers’ liquidity choices when determining their own. This effect is asymmetric and not present in bank capital choices. Importantly, I find that these strategic funding liquidity decisions increase both individual banks’ default risk and overall systemic risk. From a macroprudential perspective, the results highlight the importance of explicitly regulating systemic liquidity risk.

Strategic Corporate Hedging (G3, L2)

Caleb Cox
,
Virginia Commonwealth University
Arzé Karam
,
Durham University
Matthias Pelster
,
Leuphana University

Abstract

We consider a dynamic multi-period framework of a Cournot duopoly and introduce a simultaneous hedging and a storage opportunity to allow players to manage risk before and after demand uncertainty is realized. Decision makers face a strategic dilemma: they must weigh the advantages of dealing with their risk exposure and the disadvantages of higher competition. Due to the storage opportunity, our multi-period setting differs from a repetition of the single-shot interaction. In equilibrium, firms consider the strategic impact of the hedging component, which increases competition. We provide supportive evidence of this theory in a laboratory experiment. Our experimental results suggest that the simultaneous hedging device significantly increases competition and negates duopoly profits.

Study Abroad Experience and Attitudes Towards Other Nationalities (I2, C9)

Jana Cahlikova
,
Max Planck Institute for Tax Law and Public Finance

Abstract

Every year, millions of people relocate to a foreign country for school or work. This paper provides evidence of how international experience shifts preferences and stereotypes related to other nationalities. I use participation in the Erasmus study abroad program to identify the effect of international experience: students who are ready to participate in the Erasmus program are chosen as a control group for students who have returned from studies abroad. Individuals make decisions in a Trust Game and in a Triple Dictator Game. Results show that while students do not differentiate between partners from Northern and Southern Europe in the Trust Game prior to an Erasmus study abroad, students who have returned from Erasmus exhibit less trust towards partners from the South. Behavior towards other nationalities in the Triple Dictator Game is not affected by the Erasmus study experience. Overall, the results suggest that participants learn about cross-country variation in cooperative behavior while abroad and therefore statistical discrimination increases with international experience.

Supply Elasticity, Constraints and Search Equilibrium in Commercial Real Estate Markets (R3, R1)

Michelle Tong
,
University of Reading
Gianluca Marcato
,
University of Reading

Abstract

In the current revolutionary shift of nature of office space demand, we focus on the offer response to demand changes by presenting a new conceptual model for the estimation of office supply elasticity in commercial real estate markets. We transfer concepts from labour economics to define frictional and structural vacancy and develop a theoretical framework where both physical and economic mismatch lead to either permanent or temporary levels of vacant space within a fundamental real estate cycle model. Empirically, we identify economic mismatch by observing landlords who re-let occupied space. Estimating an error correction model with 4 simultaneous equations, we determine the long-run equilibrium and matching process from short run disequilibrium to estimate elasticity and structural vacancy rate in 42 Metropolitan Statistical Areas (MSAs) covering almost 50% of the entire US population. We find that all MSAs are supply inelastic and our results are consistent with previous studies in housing markets. We also prove that the search and matching process is significant and improves the ability to explain our results. Finally, a positive correlation between estimated supply elasticity and structural vacancy implies that the low controlling power of landlords reduces the flexibility in adjusting equilibrium vacancies to respond to market shocks. Thus supply elasticity is likely to be explained entirely by geographical and regulatory constraints.

Survival in Speculative Markets (G1, D5)

Pietro Dindo
,
Sant Anna School of Advanced Studies-Pisa and Ca' Foscari University-Venice

Abstract

In a stochastic exchange economy where, due to beliefs' heterogeneity, agents engage in speculative trade, I investigate the Market Selection Hypothesis that speculation rewards agents with accurate beliefs. Assuming that markets are complete, I derive sufficient conditions for agents' survival in terms of intertemporal substitution rates and portfolio expected log-returns and use them to show that the Market Selection Hypothesis fails generically. In particular, when agents have Epstein-Zin preferences, beliefs heterogeneity may persist in the long-run or speculation may cause the agent with the most accurate beliefs to vanish. Failures occur because portfolio expected log-returns depend both on beliefs’ accuracy and risk preferences, through the comparison with the growth-optimal portfolio. Failures do not occur in CRRA economies because, due to the interdependence of relative risk aversion and intertemporal elasticity of substitution, portfolio returns not related to beliefs' accuracy are compensated by the component of saving that responds to uncertainty.

Sustainability on Energy Planning of China (C1, Q5)

Yan Yuan
,
New Mexico Institute of Mining and Technology
Toshiyuki Sueyoshi
,
New Mexico Institute of Mining and Technology

Abstract

In order to reinforce the environment protection, China needs to promote sustainable energy plan. This study compares the Returns to Damage (RTD) under Undesirable Congestion (UC) in natural disposability and Damages to Return (DTR) under Desirable Congestion (DC) in managerial disposability. After applying the methodology to Chinese provinces on energy planning for sustainable development, two facts are found. Environment protection has been historically ignored in China and Chinese government focused on large cities especially municipalities in terms of energy policy concerns. But China tries to improve the economy and environment at the same time. Therefore, Chinese government should proceed the privatization so that the linkage between government and energy firms will be broken. It will reinforce the power of energy management and GDP can be increased due to increased economic efficiency.

Sustainable International Monetary Policy Cooperation (F4, E5)

Takeki Sunakawa
,
University of Tokyo
Ippei Fujiwara
,
Keio University and Australian National University
Timothy Kam
,
Australian National University

Abstract

We provide new insight on international monetary policy cooperation using a two-country model based on Benigno and Benigno (2006). Assuming symmetry, save for the volatility of (markup) shocks, we show that an incentive feasibility problem exists between the policymakers across national borders: The country faced with a relatively more volatile markup shock has an incentive to deviate from an assumed Cooperation regime to one with Non-cooperation. More generally, a similar result obtains if countries also differ in size. This motivates our study of a history-dependent Sustainable Cooperation regime which is endogenously sustained by a cross-country, state-contingent contract between policymakers. Under Sustainable Cooperation, the responses of inflation and the output gap in both countries are different from those induced by the Cooperation and Non-cooperation regimes reflecting the endogenous welfare redistribution between countries under the state-contingent contract. Such history-contingent welfare redistributions are supported by resource transfers effected through incentive-compatible variations in the terms of trade (or net exports). Such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality.

Tastes, Tastefulness and Distastefulness

Alain Marciano
,
University of Montpelier
Elias L Khalil
,
Monash University

Abstract

Examples of tastefulness include suppressing self-promotion when one gives to charity and suppressing altruism when one is involved in business transaction. Otherwise, the acts would be judged, respectively, as self-aggrandizement and pity and, hence, distasteful. But how should we conceive tastefulness and distastefulness? Contrary to the standard economics and utilitarian approach, tastefulness is not a taste. Also, contrary to non-utilitarian moral theories, tastefulness is not the product of a normative moral principle. Rather, tastefulness is an evaluation of whether one’s “true intention” to optimize matches one’s “declared intention.” The declared intention acts as the context against which the true intention is judged. If one chooses to donate resources to charity, the declared intention (context) is benevolence. But if one’s true intention were self-promotion in this instance, the act would be judged as distasteful. This paper identifies four intentions and, correspondingly, four contexts of exchange. This allows us to identify four kinds of tasteful transactions when intentions match their contexts--and additional twelve kinds of distasteful acts when otherwise.

Teacher Peers at School: How Do Colleagues Affect Value-Added and Student Assignments?

Hedvig Horvath
,
University College London

Abstract

I estimate the effect of peers, defined as teachers at the same school and grade level, on the own effectiveness of teachers, measured by value-added scores. Traditional estimates using leave-out means imply significant and large positive spillovers among teachers. In this paper, I exploit a more compelling research design following Mas and Moretti (2009), which approximates the following thought experiment in a regression framework: A low value-added teacher, Teacher B is randomly replaced by a new, high value-added teacher, Teacher C, at a particular school-grade level. How does the value-added of incumbent Teacher A, who worked at the same school-grade level the year before, change in response? Among North Carolina elementary school teachers, I find that in response to the replacement of a teacher by a 1 standard deviation (SD) better teacher, incumbent peers' value-added increases by about 0.12 SDs, which is about one half of traditional estimates. Moreover, I uncover large heterogeneities across schools, which shed light on how much of these estimates are due to pure peer effects among teachers versus student sorting. Using the classification of schools developed in Horváth (2015), I find that the results are driven by schools that sort students to teachers, while estimates are low and insignificant in random assignment schools. Looking at changes in observed student characteristics in the incumbent teachers' classrooms reveals that assignments in random schools do not change when a colleague is replaced, just as expected. Therefore, the insignificantly small estimates in these schools provide clean estimates of peer effects. In contrast, average prior achievement in incumbent teachers' classrooms significantly decreases in sorting schools. In these schools, therefore, student sorting may explain the spillovers among teachers.

Terms-of-Trade Cycles and Macroeconomic Adjustment

Gustavo Adler
,
International Monetary Fund
Nicolas Magud
,
International Monetary Fund
Alejandro Werner
,
International Monetary Fund

Abstract

We study the process of external adjustment of countries facing large terms of trade shocks during the period 1960-2015; and the role of different policies and fundamental such as the exchange rate regime, monetary policy, fiscal policy, international reserves, capital account openness, and financial integration in smoothing the transition between the different phases of the terms-of-trade cycles.

Testing for Separability of Unobservables with Average Structural Functions of Unrestricted Heterogeneity (C1, C5)

Zhutong Gu
,
Rutgers University

Abstract

Additive separability between observables and unobservables are essential in structural modeling of heterogeneity in the presence of endogeneity. In this paper, we propose a simple test based on quantile average dierences of the average structural functions (ASF) generated by fully nonparametric or semiparametric nonseparable models with unrestricted heterogeneity. Upon identication, we establish conditions under which structural additivity is equivalent to the equality of ASFs. We use Nadaraya-Watson (NW) estimators to estimate the conditional expectations and control the asymptotic bias by an iterative procedure by Klein and Shen (2016). We show that the asymptotic test statistic follows a central 2 distribution under the null hypothesis and has power against a sequence of root-N local alternatives. Our proposed test statistic works reasonably well in a series of nite sample simulations and is robust to the choice of bandwidth and number of quantiles. We also show that the test can be straightforwardly extended to semiparametric models. Last but not least, to illustrate the performance, we demonstrate how to implement it in the context of production function estimation. We found that treating productivity as additive would significantly bias the estimation of input elasticity.

The Accuracy of Bunching Method Under Optimization Frictions: Students' Constraints (H2, J2)

Tuomas Kosonen
,
Labour Institute for Economic Research
Tuomas Matikka
,
VATT Institute for Economic Research

Abstract

This paper studies the influence of optimization frictions on behavior of taxpayers by utilizing a bunching estimator. Contrary to much of the recent literature, we focus on the kind of optimization friction that potentially lead to very inaccurate control of income. The friction originates from a sparse menu of job contracts available for workers. Under this scenario a local discontinuity in incentives might induce widespread responses in the income distribution. We are able to separate this type of optimization friction from other factors affecting the behavior of taxpayers by utilizing a combination of a notch, a discontinuous increase in the average tax rate, and a reform that shifted out the location of the notch. The notch is created by an income threshold in a study subsidy for higher education students in Finland. We compare the changes in the income distribution of students with changes of income distribution of other young part-time workers. Our key finding is that the whole income distribution of students shifts out in the reform, while the distribution of non-students experience only minor changes. This result implies that the total behavioral effect created by the notch is much wider than visible by the bunching behavior. Our results suggest that optimization frictions can contribute to the structural elasticity of taxable income more than previously thought, and that by utilizing the local bunching estimator can severely underestimate the structural elasticity. We also find evidence of optimization errors in that although students in general are aware of the system, they sometimes seem to erroneously locate to the wrong side of the notch. This evidence arises from a divided sample analysis, where students are divided according to their presumed optimization ability.

The Agency Problem and Systematic Bias in the Credit Rating Industry: Evidence from a Semiparametric Ordered-Response Model with Marginal Effects Analysis (C2, G2)

Yixiao Jiang
,
Rutgers University

Abstract

In respect of the conflict of interests faced by the credit rating agencies(CRAs),this paper studies the systematic pattern of rating bias in the credit rating industry by examining quantile marginal effects. After the stock of the CRA can be traded on public, there is a potential rating bias because the agency's rating decision might be affected by the economic interest of their shareholders. I propose a semiparametric ordered model in which the ratings are flexibly affected by firm/bond characteristics and a debt issuer's shareholding relation with the rating agencies. Compared with those in previous studies, our model makes much weaker functional form assumptions and predict actual ratings more accurately. In addition, our estimation strategy identifies and estimates the average marginal effects of this relation variable on ratings at both sample and quantile levels, which in turn mirrors the systematic pattern of rating bias. Under appropariate bias corrections, I show the cumulative marginal effects estimator and its quantile analogue have root-N-asymptotics which makes inference immediate. I apply the estimator to assess Moodys' upwardly rating bias towards bond issuer's that are related to Moodys' large shareholders. Based on the estimation results and marginal effect analysis, it is found that Moodys' is more likely to assign favorable ratings to bonds issued by large investee or portfolio firms of its large shareholders. However, non-investment grade bonds issued by any firm, regardless of their relation with Moodys', are unlikely to receive favorable treatment.

The Aino 2.0 Model (E3, E2)

Fabio Verona
,
Bank of Finland
Juha Kilponen
,
Bank of Finland
Antti Ripatti
,
University of Helsinki
Seppo Orjasniemi
,
National Audit Office of Finland

Abstract

The goal of this paper is to present Aino 2.0, the dynamic stochastic general equilibrium (DSGE) model currently used at the Bank of Finland for forecasting and policy analysis. The paper provides a detailed theoretical description of the model, its estimation (using Bayesian methods) and how it can be used to interpret the evolution of Finnish economy between 1995 and 2014 including the rise and fall of the electronics industry, the global financial crises and the stagnant growth performance ever since the end of the financial crisis. According to the estimates, the Finnish economy portrays very rigid wage setting and high external habit persistence in consumption, combined with relatively flexible prices. The Finnish business cycle is mainly driven by technology and external shocks, while the shocks originating from the financial sector play a relatively minor role. The model attributes a large part of the rise and fall of the electronics industry and the last years’ stagnant growth performance to technology (i.e. productivity) shocks, shocks to export shares as well as to export demand.

The Business Cycle and Mortality: Urban Versus Rural Counties (I1, E3)

Sediq Sameem
,
Southern Illinois University-Carbondale
Kevin Sylwester
,
Southern Illinois University-Carbondale

Abstract

Many studies have found that mortality declines during recessions, but do such results remain consistent in both urban and rural settings? To help uncover explanations for such a pro-cyclical nature of mortality, the present study revisits this topic but allows for associations between unemployment and mortality to differ between urban and rural areas. Using a total of 66,863 observations across 3066 counties of the U.S. from 1990 to 2013, we allow the coefficient on unemployment to differ between urban and rural counties. With an exception of deaths due to external accidents being pro-cyclical in rural settings, we find that the negative association between unemployment and mortality more generally holds for urban areas, particularly for females and the elderly. Moreover, we find death due to circulatory disease or influenza/pneumonia to be especially more prevalent in urban areas. Given that the negative associations between unemployment and mortality are generally stronger in cities, views attempting to explain pro-cyclical mortality should focus on characteristics in urban settings.

The China Shock Impact on Brazil’s Manufacturing Labor Market. (F1, O1)

Lourenco S Paz
,
Baylor University

Abstract

The vigorous growth of the Chinese economy together with its increasing role in international trade has raised fears of deindustrialization among developing countries. This study exploits the large increase in the international trade exposure of the Brazilian economy during 2000–2012 to assess the impacts of trade on its manufacturing sector. In this period, import penetration more than doubled, and at the same time, the Chinese share of the import penetration increased from 5% to 25%. Using household survey data that encompass both formal and informal workers, this paper’s estimates indicate that a higher import penetration reduces the share of employment in the population and the inter-industry wage premium. It increases the informality share and causes a skill downgrade by means of a smaller share of workers with high-school and college diplomas. An increase in the Chinese market share in the foreign markets served by Brazilian exporters also contracts the share of employment in the population, and the share of workers high-school diploma. When the import penetration is broken down into Chinese and non-Chinese components, the estimates clearly indicate that it is the Chinese import penetration that drives the skill downgrade and the expansion in the informality share. Moreover, skilled-labor intensive industries responded differently to these trade changes. For them, non-Chinese import penetration decreased their log hourly wage by more than the Chinese import penetration effect. The informal share in these industries is almost unaffected by the Chinese import penetration, although informality is positively affected by the Chinese market share expansion in Latin America. This paper’s estimates suggest that the observed increase in import penetration reduced the manufacturing employment by 70,000 jobs, and the Chinese imports accounted for 30% of this loss. Also, the expansion of the Chinese market share in foreign markets eliminated an additional 20,000 manufacturing jobs in Brazil.

The Conditional Nature of Credit Constraints (G2, G2)

Vlado Kysucky
,
Shenzhen University

Abstract

Credit constraints are conditional because they can occur at different stages. Borrowers might not apply for credit because they are discouraged, borrowers who apply might be rejected, and approved borrowers might obtain less favorable credit terms than requested. Using large scale micro-data on small businesses from Europe, I decompose credit constraints into these three conditional stages. I document their prevalence and investigate how firm, bank, and country characteristics affect their likelihood of occurrence. I find that credit constraints vary with the bank lending environment beyond firm risk. Tighter lending standards lead to higher discouragement and rejection rates, but conditional on approval, tight lending standards make unfavorable loan terms to the borrowers less likely. The effect is mainly due to higher loan volume rather than lower loan rates. I find evidence that credit constraints occur at the firm level and are consistent across various credit instruments. The evidence suggests that the conditional nature and stage-specific differences in the determinants should be considered in economic policies that aim at reducing credit constraints.

The Credit Rating Game: Evidence from a Strategic Game Model (G3, G2)

Ruoyan Huang
,
University of Hong Kong
Hongtao Li
,
Tulane University

Abstract

This paper investigates the competition effect of credit rating agencies (CRAs) on the rating quality of structured finance products. Using hand-collected data of collateralized debt obligations (CDOs), we specify the competition effect between CRAs using a discrete game model and quantify the competition impact on rating quality. We find that competition raised the probability of choosing lenient rating by 31% for Moody’s and 27% for S&P in the sample period of 2007-2008. We further show that the propensity of selecting lenient rating increases with the bargaining power of the underwriters and the complexity of the CDOs.

The Deficiency of Competitiveness: Did Socialism Fail to Foster It?

Syngjoo Choi
,
Seoul National University
Byung-Yeon Kim
,
Seoul National University
Jungmin Lee
,
Seoul National University & IZA
Sokbae Simon Lee
,
Columbia University & IFS

Abstract

Competitiveness is an indispensable quality for economic success in a market economy since competition is a basic principle of resource allocation. In this paper, we examine whether a socialist regime obstructs the development of competitiveness. To investigate this hypothesis, we conduct a laboratory experiment with non-student South Koreans and North Korean refugees to measure and compare their competitiveness. Results show that North Koreans are significantly less likely to self-select into the competition scheme. However, the inter-Korean difference disappears once we control for belief about the probability of winning the competition. We find that North Koreans hold a significantly lower expectation about winning the competition. Their lower expectation is explained by their lower general cognitive ability.

The Distribution of Earnings Losses: Evidence From Displaced Workers Survey 1994-2014 (J3)

Mallika Garg
,
Clemson University

Abstract

A large literature shows that workers, on average, suffer large and persistent earnings losses when displaced from a job. However, little attention has been devoted to the distribution of those losses. Using the 1994-2014 Current Population Survey displaced worker surveys, I find that averages, whether from simple summary statistics or calculated as expectations using ordinary least squares (OLS), give a misleading and incomplete picture. The average loss in earnings in my sample is 29%, compared with a median loss of just 12%. Using OLS, each year of tenure is associated with an additional 1.3% reduction in earnings. Quantile regression estimates reveal that this magnitude of effect corresponds to the 80th percentile, and that the effect of tenure at the median is just 0.7%. OLS estimates of the effect of changing industries and occupations are also considerably larger than quantile regressions at or below the median. I also attempt to correct for possible endogeneity in the choice to switch industry and occupation. Two-stage least squares estimates yield even larger estimated negative effects of changing industry and occupation than OLS, but instrumental variables quantile regression estimates, using the model developed by Chernozhukov and Hansen (2005), suggest that the marginal effects on such losses are highly concentrated among relatively few workers.

The Dynamic Effects of Forward Guidance Shocks (E5, E3)

Brent Bundick
,
Federal Reserve Bank of Kansas City
Andrew Lee Smith
,
Federal Reserve Bank of Kansas City

Abstract

We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks into a standard vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to significant increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a simple theoretical model.

The Dynamics of Capital Flow Episodes (F3, G1)

Christian Friedrich
,
Bank of Canada
Pierre Guerin
,
Bank of Canada

Abstract

This paper proposes a novel methodology for identifying episodes of strong capital flows based on a regime-switching model. In comparison with the existing literature, a key advantage of our methodology is to estimate capital flow regimes without the need for context- and sample-specific assumptions. We implement this approach using weekly fund flows data for a large set of advanced and emerging economies. As an application of our methodology to the global financial cycle literature, we use a time- varying structural vector-autoregressive (VAR) model to assess the impact of U.S. stock market volatility (VIX) shocks and U.S. monetary policy shocks on aggregated measures of equity outflow and equity inflow episodes. Our results indicate that both VIX and U.S. monetary policy shocks had substantially time-varying effects on episodes of strong capital flows over our sample period.

The Economic Drivers and Effects of Oil Price Uncertainty

Sang Baum Kang
,
Illinois Institute of Technology
Xuhui Pan
,
Tulane University
Jialin Zhao
,
Jialin Zhao (Illinois Institute of Technology)

Abstract

The crude oil market affects the global economy not only through the price level, but also from the channel of price uncertainty. Using the high-frequency data in the liquid oil futures market from 1987 to 2014, we estimate oil price uncertainty and investigate a large number of economic drivers. We next adapt the dimension reduction technique in Kelly and Pruitt (2015) and identify pervasive predictors that significantly improve the out-of-sample forecast of oil price uncertainty. These predictors include growth in global oil supply, aggregate demand, and Ludvigson's macroeconomic uncertainty. Furthermore, we find that while oil price uncertainty in general adversely affects real economic activity, there is an interesting asymmetry. Uncertainty attributable to unexpected negative oil price jump boosts real economy and is more important than uncertainty due to positive jumps.

The Effect of Differential Tax Rate and Community Benefit Reporting Requirement on Nonprofit Versus For-Profit Hospitals (H2, I1)

Shuyang Yang
,
Rutgers University

Abstract

This paper explores the effect of variation in state and federal level tax policy on the ownership choice and performance of hospitals. Given the preferential tax treatment on nonprofit hospitals, tax rate, in conjunction with the recently established community benefit reporting requirement, determine the net subsidy provided to nonprofit hospital compared to its for-profit counterpart. Using panel data, this paper exploits the variation in tax policy across states and time periods to identify the effect of tax subsidy on ownership choice of hospitals, and further the different behavior between nonprofit versus for-profit hospitals, including cost, provision of undercompensated care as well as quality. Two methods are employed: (1) A reduced form difference-in-difference (DD) estimation using state-level panel data on tax policies and nonprofit hospital market share. Regression result indicates that state CRR increases share of for-profit hospitals in the market by 4-6 percentage points with statistical significance. As state tax rate increases, the effect of CRR tends to diminish. (2) We adopt a structural estimation of dynamic model for hospital industry. We develop a dynamic structural model for hospital industry where nonprofit and for-profit hospitals coexist and maximize different objective functions which incorporate investment options, tax rate and community benefit reporting requirement. Each period, hospitals chooses investment, entry, exit and conversion decision. The model is estimated by calibration and GMM method.

The Effect of Firm Cash Holdings on Monetary Policy (E4, E5)

Andre C. Silva
,
Nova University of Lisbon
Bernardino Adao
,
Bank of Portugal

Abstract

Firm cash holdings increased substantially from 1980 to 2013. The overall distribution of firm cash holdings changed in the same period. We study the implications of these changes for monetary policy. We use Compustat data and a model with financial frictions that allows the calculation of the monetary policy effects according to the distribution of cash holdings. We find that the interest rate channel of the transmission of monetary policy has become more powerful, as the impact of monetary policy over real interest rates increased. With the observed changes in firm cash holdings, the real interest rate takes 3.4 months more to return to its initial value after a shock to the nominal interest rate.

The Effect of Increasing Education Efficiency on University Enrollment: Evidence from Administrative Data and an Unusual Schooling Reform in Germany (I2, J1)

Jan Marcus
,
University of Hamburg, DIW Berlin, and CIDER
Vaishali Zambre
,
DIW Berlin

Abstract

We examine the consequences of compressing secondary schooling on students' university enrollment. An unusual education reform in Germany reduced the length of academic high school while simultaneously increasing the instruction hours in the remaining years. Accordingly, students receive the same amount of schooling but over a shorter period of time, constituting an efficiency gain from an individual’s perspective. Based on a difference-in-differences approach using administrative data on all students in Germany, we find that this reform decreased enrollment rates. Moreover, students are more likely to delay their enrollment, to drop out of university, and to change their major. Our results show that it is not easy to get around the trade-off between an earlier labor market entry and more years of schooling.

The Effect of Maternity Leave Extensions on Firms and Coworkers (J3)

Yana Gallen
,
University of Chicago

Abstract

While a large literature is devoted to understanding the impact of maternity leave on children’s outcomes and the careers of women, less is known about the consequences of maternity leave at the workplace. This paper studies the effects of maternity leave on firms and coworkers by examining a 2002 Danish reform which increased the length of parental leave by 22 weeks. The timing of the policy change gives random variation in the length of leave available to women who gave birth around the time of the reform. I find no detectable effect of the reform on the earnings or promotions of coworkers in any of the five years after the reform (point estimates are about $100) and can reject differences in yearly earnings larger than $425 overall and differences larger than $280 for female coworkers. While there are some costs for coworkers in the same occupation as women who give birth in the sample period, these costs are 1-1.5 percent of earnings. I also find evidence that the reform increases the probability of firm shut-down by about two percentage points five years after the reform, concentrated among relatively small firms. Conditional on survival, I find no impact of the reform on firm value added.

The Effect of Peer Observation on Consumption Choices: Experimental Evidence (D1, C9)

Antonia Grohmann
,
DIW Berlin
Sahra Sakha
,
German Federal Bank

Abstract

This paper investigates the impact of peer observation on consumption decisions of rural households in Thailand using a lab-in-the-field experiment. We find that those groups that observe each other show lower within group standard deviation in their decisions. Thus, we find evidence of conformity. Further, we find that individual’s consumption choice is influenced by the group choice controlling for large number of individual, household, and village characteristics. We find that unfamiliarity of the product is counteracted by peer effects. Finally, we find evidence of treatment heterogeneity with regards to cognitive ability and village size.

The Effects of Cultural Similarity on Foreign Direct Investment and Productivity of Domestic Firms: Identification from Borders of Chinese Dialect Zones (F2, O1)

Sen Ma
,
University of Illinois-Urbana-Champaign

Abstract

Does cultural similarity affect destination choices of foreign direct investment (FDI)? To answer this question, I provide a novel identification strategy which explores discontinuous changes in investment from Hong Kong, Macau and Taiwan (HMT) to Mainland China at borders of Chinese dialect zones. China can be geographically separated into various dialect zones. People who speak the same Chinese dialect share the same cultural origin. Thus common dialect can be used to measure cultural similarity among Chinese people. I find that if a location in Mainland China is culturally similar to HMT (speaks the same Chinese dialect as HMT), this location attracts more investment from HMT. Causal effect of common dialect on HMT investment is identified from discontinuous increase in investment at geographical borders of common dialect zones. Share of HMT firms in regions right inside the common dialect border is 5 to 7 percentage points higher than regions right outside the border. In addition, I also find that the discontinuous increase in investment from HMT at the borders is larger in industries that receive less FDI entry-restriction policies. Using common dialect and common dialect interacted with entry-restriction policy as exogenous variations at the dialect borders, I find that presence of HMT firms generates negative horizontal spillover effect on productivity of domestic firms from the same region and same industry. A 1 percentage point increase in share of HMT firms decreases total factor productivity of domestic firms by 1.1 to 1.9 percent. Validity of identification assumptions are further tested in several placebo tests. As a result, I do not find discontinuous changes in share of foreign firms from regions other than HMT at the border. Neither do I find discontinuous changes in degree of economic development and geographical conditions at the border.

The Effects of Investor Sentiment on EUR/USD Exchange Rate (F3, C3)

Yanyan Yang
,
Claremont Colleges

Abstract

This paper demonstrates that investor sentiment plays a significant role in explaining the deviation from the Uncovered Interest rate Parity (UIP). To measure the investor sentiment, I apply new Sentix survey data including both economy sentiment index and exchange rate sentiment measured by the proportions of optimistic and pessimistic investors separately. The empirical study revisits the Fama Regression with investor sentiment. To examine the effects of sentiment dynamically, a VECM framework is used to test the effects of sentiment shocks on the deviation from UIP. The results suggest that the shocks of optimistic and pessimistic exchange rate sentiments last over longer horizons in contrast to transitory effects of the interest rate differential.

The Effects of Land Use Regulation on Deforestation: Evidence from the Brazilian Amazon

Liana Anderson
,
Cemaden
Samantha De Martino
,
University of Sussex
Torfinn Harding
,
Norwegian School of Economics
Karlygash Kuralbayeva
,
London School of Economics
Andre Lima
,
University of Maryland

Abstract

To reduce deforestation rates in the Amazon, Brazil established in the period 2004-2010 conservation zones covering an area 1.5 times the size of Germany. In the same period, Brazil experienced a large reduction in deforestation rates. By combining satellite data on deforestation with data on the location and timing of the conservation zones, we provide spatial regression discontinuity estimates and difference-in-difference estimates indicating that the policy cannot explain the large reduction in deforestation rates. The reason is that the zones are located in areas where agricultural production is likely to be unprofitable. We also provide evidence that zones reduce deforestation if the incentives for municipalities to reduce deforestation are high. We rationalize these finding with a spatial economics model of land use, with endogenous location of conservation zones and imperfect enforcement. Our findings point to the need for other explanations than the conservation zones to explain the sharp decline in deforestation rates in the Brazilian Amazon since 2004.

The Effects of Teenage Pregnancy on Breastfeeding and Infant Death in Developing Countries (I3, I3)

Pallab Ghosh
,
University of Oklahoma

Abstract

In most developing countries teenage pregnancy is very common because of poverty, lack of contraceptive measures, skewed sex ratio, child marriage and the existence of a male dominating society. This study investigates the effects of teenage child birth on breastfeeding and infant death in developing countries. We propose an economic model of breastfeeding under son-biased fertility preferences. Based on our proposed model we predict that teenage mothers breastfeed less than non-teenage mothers and infant survival also exhibits a similar pattern in developing countries. Moreover, analyzing the data from many developing countries in Africa, Middle-east and south Asia we find a large gender gap in terms of breastfeeding for teenage mothers. Using the data from the Demographic Health Series (DHS) surveys for many developing countries we find that teenage mothers breastfeed about 2 weeks less compared to the non-teenage mothers and the probability of infant death increases by 1.5% for the teenager mothers. The policy implications of the results are arguably applicable for contraceptive uptake, family planning and child health in developing countries.

The Endogenous Choice of Bribe Type under Asymmetric Punishment (D7, K4)

Lin Hu
,
University of Adelaide

Abstract

Abstract As an instrument of corruption control, it has been argued that asymmetric punishment can eliminate harassment bribery only if whistle-blowing is cheap and effective. In a more realistic environment where bribery is most likely to survive and another type of bribery—non harassment one—coexists, this paper investigates how asymmetric punishment affects the endogenous choice of bribe type to the bribe-giver. This is analyzed in a setting where bribe size is determined by Nash bargaining, detection of bribery and its type is conducted separately but could be relevant, and bribery detection rates can be endogenously chosen through whistle-blowing. The feasibility of whistle-blowing has no effect on the fraction of harassment bribery under symmetric punishment. When it is feasible, however, a switch from symmetric to asymmetric punishment leads to either no difference or more non-harassment bribery, which is independent of the relevance of detection of bribery and non-compliance. The result is robust when the legalization of bribe-giving is not feasible to non-harassment bribes.

The Evolutionary Foundations of Sectarianism

Sebastian Ille
,
New College of the Humanities

Abstract

The foundations of the evolution of cooperation is one of most intriguing topics today. Cooperation beyond kin or reciprocal altruism seems counter-intuitive from a strict evolutionary and self-regarding perspective. The evolutionary basis for sectarianism, the anti-thesis to cooperation, presents an even greater puzzle. Although sectarianism might seem to protect a group against detrimental external influences, it reduces opportunities for mutually advantageous exchanges and increases the risk of contests and wars, rendering sectarianism harmful both at the group and individual levels. Sectarianism is not limited to religious compartmentalization and hatred of other religious sects, but includes discrimination and eschewing beneficial interactions for reasons of different political or territorial affiliations, identity, and class. Sectarianism obstructs the Smithian invisible hand and turns the argument for pro-social behavior on its head. Instead of individuals cooperating for no apparent self-interest, sectarianism implies avoidance of cooperation in mutually beneficial cases. Understanding the roots of sectarianism is therefore deeply entangled with findings regarding the evolution of cooperation. The paper thereby tackles a principal theme in economics. Sectarianism remains a critically relevant subject of study, as the phenomenon is a key influence throughout the human history of intra-group conflict, and still plays a pivotal role in individual and group decision-making. In this paper, I study the principal drivers for sectarianism and the dynamics that undermine cooperation by building on existing approaches in multi-level selection and tools from evolutionary game theory and agent-based modeling. As much as these models provide a rationale for the co-evolution of cooperative behavior and institutions, and the internalization of other-regarding norms, such dynamics are also key to explaining the human tendency for racism, hostility, and religious bigotry. The model illustrates a co-evolution of sectarian identities and conflicts, mainly driven by peer-pressure, belonging, and previous experiences. Theoretical results are supported by empirical evidence from Lebanon.

The Great Depression of Income: Historical Estimates of the Long-Term Effect of Entering the Labor Market During a Recession.

Jeremy Moulton
,
University of North Carolina-Chapel Hill

Abstract

This paper estimates the longer-term impact of entering the labor market during the Great Depression using data from the 1940 U.S. Census and a regression discontinuity research design. I find that ten years after entry, less educated labor market entrants experienced a 9.4 percent negative shock to income in comparison with those that entered just prior. The impact is larger (14.5 percent) for those born into states more negatively affected by the Great Depression. More educated individuals appear insulated from these long-term negative effects. The estimates are compared to the current literature to add further evidence that entering the labor market during a recession results in long-term negative effects for those with less education or low ability.

The Human Development Index and Life Expectancy Prior to Birth (O1, B4)

Gherardo Girardi
,
London Metropolitan University

Abstract

Life expectancy is a component of the UN’s Human Development Index (HDI), together with years of schooling and income per capita. At present, estimates of life expectancy are available at birth and at each year after birth, but no estimates are available prior to birth. This paper calculates life expectancy prior to birth by taking into account interruptions of pregnancy, both natural (miscarriages) and artificial (abortions), and studies how doing so affects the HDI. The HDI falls both directly as a result of a lower life expectancy, and indirectly as a result of the fact that individuals who did not manage to arrive alive to birth enjoy neither schooling nor income. Consider for example the US: life expectancy at birth is 79 years, but is estimated to fall to 45 years prior to birth. Similarly, the US’s HDI with life expectancy measured at birth is 0.92, but drops to 0.31 prior to birth. Country rankings too change, so that Germany, a country with relatively few abortions, replaces Norway as the country with the highest HDI, at 0.34. The paper discusses important data limitations relating to both miscarriages and abortions, especially illegal abortions and abortions carried out abroad, for which estimates from the demographics literature are used. There is a clear policy implication that a lower number of interrupted pregnancies will increase the HDI when life expectancy is measured prior to birth. This is not controversial in the case of miscarriages, but it is in the case of abortions. The US public, for example, is split roughly 50/50 between pro-life and pro-choice supporters (Gallup 2014). The paper makes the link with Sen’s “missing women”, which in the past “disappeared” largely after birth, but many of whom now disappear through selective abortion (Sen 2003).

The Impact of Health Care Coverage on Infant Mortality and Disease Incidence (I1, N3)

Helge Liebert
,
University of St. Gallen
Beatrice Mader
,
University of St. Gallen

Abstract

This paper investigates the effect of changes in the physician coverage ratio on infant mortality, perinatal mortality and the incidence of common childhood diseases. We utilize historical data and variation in the regional physician density provided by discriminatory policies in Germany in 1933, when Jewish physicians were expulsed from health insurance schemes and subsequently emigrated in large numbers. The results indicate substantial health effects. One additional physician per 1,000 of population reduces infant mortality by 23% and perinatal mortality by 16%. We find similar negative effects for inflammatory bowel diseases, stillbirths and the incidence of measles, influenza and bronchitis. Improvements in health care can drastically reduce mortality from health issues caused by a lack of sanitation and contaminated drinking water. In contrast, the leading causes of infant mortality in developed countries today, premature birth and congenital weakness, are unaffected by changes in health care coverage. Utilizing a semiparametric control function approach, we show that mortality effects are highly nonlinear and disappear completely when the coverage ratio exceeds two physicians per 1,000 of population. Our result underscores the importance of preserving a regional baseline level of health care coverage.

The Impact of Labor Market Conditions on Job Creation: Evidence from Firm-Level Data (J2, J6)

Ekaterina Roshchina
,
Duke University

Abstract

Labor market conditions, i.e. labor market tightness and prevailing wages, determine the cost of hiring new workers and thus can have a profound impact on employment growth. In this paper, I estimate firm level elasticity of labor demand with respect to changes in labor market conditions, allowing for heterogeneous response both across firms and across regions. I consider changes along two margins: labor market tightness and wages, and quantify the contribution of each margin to employment growth. Using the employer-employee matched dataset from Brazil, I show that a one percent increase in labor market tightness reduces employment growth by 1 percentage points, and a one percent increase in wages reduces employment growth by 1-2 percentage points. I find that low-paying firms have 20-30% larger labor demand elasticity than high-paying firms. However, the contribution of labor market conditions to regional employment growth is small, and most of the effect of labor market conditions is driven by changes in labor market tightness rather than wages.

The Impact of Mandated Corporate Social Responsibility: Evidence from India’s Companies Act of 2013 (K2, M2)

Dhammika Dharmapala
,
University of Chicago
Vikramaditya Khanna
,
University of Michigan

Abstract

Firms’ Corporate Social Responsibility (CSR) activity has become the subject of a large literature in recent years. This paper analyzes CSR activity using quasi-experimental variation created by Section 135 of India’s Companies Act of 2013, which requires (on a “comply-or-explain” basis) that firms satisfying specific size or profit thresholds spend a minimum of 2% of their net profit on CSR. We examine effects along a number of different dimensions including firm value, CSR spending, and other outcomes, as well as exploring broader theoretical implications. Our analysis uses financial statement and stock price data on Indian firms from the Prowess database, along with hand-collected data from firms’ disclosures of CSR activity. By combining a regression discontinuity (RD) framework (based on a nonparametric local polynomial regression approach) with a standard event study, we find a negative and substantial effect on the value of affected firms (relative to unaffected firms) around the crucial event date. This effect seems to be concentrated among firms that are less customer-facing, as indicated by low advertising expenditures. Using a difference-in-difference approach, we find significant increases in CSR activity among firms affected by Section 135, especially in the fraction of firms engaging in CSR spending. The fraction of firms subject to Section 135 that engage in advertising expenditures appears to have declined, consistent with substitution between advertising and CSR. There is no robust evidence of any significant impact on sales or accounting performance, although a modest decline in the return on assets cannot be ruled out. For a subset of large firms, we hand-collect comprehensive CSR data and find that while firms initially spending less than 2% increased their CSR activity, large firms initially spending more than 2% reduced their CSR expenditures after Section 135 came into effect. We explore various explanations for this presumably unintended consequence of Section 135, and also seek to derive some wider implications of this analysis for understanding the role of CSR.

The Impact of Microfinance on Consumption: Evidence Using Household and Subdistrict Data in Bangladesh (O1, I3)

Ishraq Ahmed
,
Southern Illinois University
Sajal Lahiri
,
Southern Illinois University

Abstract

Microfinance institutions have been effective in providing credit to the poor over the past four decades. Despite the speculation regarding the actual success of such microfinance institutions, there has not been any analysis to ascertain their role in contributing to welfare improvements at a regional level. To understand this effect, we evaluate the impact of the placement of Grameen Bank and BRAC on welfare in Bangladesh. Welfare at the regional level is measured in terms of consumption. Our results indicate that the joint presence of both these institutions as well as their individual presence had a positive impact on consumption. In effect, we find that the placement of the Grameen Bank and BRAC may be contributing towards additional consumption thereby improving people’s welfare. We also find that the presence of both the institutions contribute positively to regions with lower than average consumption. This suggests that microfinance presence has a positive effect in regions that have lower welfare than average.

The impact of negative interest rates on bank balance sheets: Evidence from the euro area

Selva Demiralp
,
Koc University
Jens Eisenschmidt
,
European Central Bank
Thomas Vlassopoulos
,
European Central Bank

Abstract

The theoretical and empirical literature on the role of banks in monetary policy transmission is silent on whether their reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically using a euro area individual bank dataset. We use the cross-sectional variation in holdings of excess central bank reserves to identify adjustments in banks’ balance sheets triggered by the introduction of negative interest rates. We find evidence that the cost of holding excess central bank reserves under negative rates is leading banks to acquire more non-domestic bonds, extend more loans and rely less on wholesale funding. This reaction is driven by banks in less vulnerable countries and in particular by those that have high excess liquidity. These findings suggest that the negative interest rate policy of the ECB is empowering the easing impact of its other measures.

The Impact of the Federal SNAP Benefit Increase on American Time Use During the Great Recession (I3, D1)

Christian Raschke
,
Sam Houston State University

Abstract

This paper contributes to the literature by estimating how the reallocation of time from market work to household production during recessions is affected directly by changes in social support programs. In particular, I investigate the impact of the increased participation in the Supplemental Nutrition Assistance Program (SNAP) as a result of the 2009 American Recovery and Reinvestment Act. This is important because the recent estimates based on data from the Great Recession suggest that home production absorbs roughly 30 percent of foregone market work hours during recessions [Aguiar et al (2013, AER)]. However, these estimates may be biased if some of the observed time allocation change occurred due to changing incentives as a result of the SNAP policy change instead of due to general economic cycles. Considering SNAP participation in this context is particularly warranted because the previous literature has found that due to the design of the program, SNAP participants spend significantly more time in household production compared to non-participants. In this paper I combine data from the nationally representative American Time Use Survey, the Current Population Survey, as well as the SNAP Policy Database for the years 2003-2014. I exploit state-level variations in SNAP eligibility criteria, as well as state-level variations in the SNAP participation rate conditional on eligibility in order to estimate the effect of the federal benefit level change on time allocation. In addition, I provide robust estimates of the reallocation of time from market work to other time uses for different groups of individuals defined by their ex ante probability of SNAP participation. This paper contributes to the growing literature on the effects of social programs on time allocation.

The Intergenerational Overeducation Mobility in the United States (J6)

Murat Anil Mercan
,
Gebze Technical University
Ali Fehim Cebeci
,
Gebze Technical University

Abstract

Intergenerational relations such as; income and occupation mobility between parents and children have received increasing attention among economists and social scientists due to their close links with the economy’s pace of income inequality and the extent to which the economy offers equal opportunities to agents. Over-education and under-education of the employees, i.e. the mismatch between education level of the employee and education level that the job necessitates, are also subject of interest due to their implications for the labor market. However, there is no previous study which combines these literatures and analyze the over-education and under-education concepts in an intergenerational framework. This study aims to contribute the literature by investigating the intergenerational relationship between over-educated and under-educated fathers and their children’s over-education and under education profile as well as the children’s education level. Panel Study of Income Dynamics (PSID) dataset is employed throughout the analysis. Our results suggested that even though fathers’ over-education profile does not affect the education level of the next generation, sons and daughters of under-educated fathers have, on average, higher education, than their counterparts. When we looked at the intergenerational over-education and under-education mobility, we found that over-educated fathers are more likely to have over-educated sons whereas under-educated fathers are less likely to have under-educated sons. We could not find any relationship for daughters.

The Ongoing Design of Kidney Exchange: Recent and Prospective Developments

Alvin E. Roth
,
Stanford University

Abstract

Kidney exchange today contributes almost 15% of the living-donor kidney transplants in the U.S., and is growing in many other countries (Fig. 1). However the contemporary design of kidney exchange is different than was anticipated at the outset. The majority of kidney exchange transplants are carried out between patient-donor pairs registered at the same transplant center, while several large multi-hospital kidney exchange networks primarily organize chains of transplants that may be long and non- simultaneous, and provide transplants for hard to match pairs. The changes in design have evolved in response to changing participant behavior, and have involved close collaboration between market designers and transplant professionals. Progress has been made in eliciting the preferences of surgeons over kidneys for particular patients. Prospective future changes involve standardizing the acquisition charges for exchanged kidneys, beginning some kidney exchange chains with a deceased-donor kidney, and inviting into American kidney exchange patient-donor pairs from countries in which transplantation is financially unavailable, with the costs to be paid from the savings to the American health care system when an American patient is transplanted and hence removed from much more costly dialysis.

The Persistent Effects of Early-Life Exposure to Air Pollution: Evidence from the Indonesian Forest Fires (O1, I1)

Maria Fernanda Rosales
,
University of California-Irvine
Margaret Triyana
,
Nanyang Technological University

Abstract

We analyze the effects of early life exposure to air pollution in a developing country on children's human capital outcomes across the life cycle. To this end, we exploit the geographical variation of Indonesia's forest fires during the El Ni\~no weather phenomenon in 1997 and cohort variation in exposure as a natural experiment. Children affected by air pollution in utero and in their early years have worse health outcomes but do not suffer significant effects in cognitive function relative to children not exposed to this shock. While the negative effects on the children's health persist, we find no differential effects by socio-economic characteristics, thus suggesting that the adverse health effects of air pollution are not mitigated by socio-economic status.

The Political Determinants of Government Bond Holdings (G1, H6)

Stefan Eichler
,
Leibniz University of Hannover
Timo Plaga
,
Leibniz University of Hannover

Abstract

This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003-2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.

The Political Economy of Embodied Technologies (Q5, O3)

Gal Hochman
,
Rutgers University
David Zilberman
,
University of California-Berkeley

Abstract

Over the years, political scientists developed decision-making frameworks that take into account political power and long-term considerations. This paper borrows from this literature and develops a dynamic framework for selection among two policy instruments, tax and standard, aimed to attain pollution reduction by inducing adoption of clean technologies. It analyzes the impact of political uncertainty with respect to future political survival of the party in power on the choice of policy instruments, assuming some parties place more weight on the environment than others. The model developed is a two-period model that aims to capture the transition among ruling parties, which is based on the presumptions that (i) policy makers at the present aim to design policy outcomes that will survive a political transition, and (ii) production units employ a capital-intensive technology that consists of several activities each with its own fixed proportion properties. The analysis shows that because of political uncertainty, the party that places more weight on the environment sets an optimal dynamic tax that is larger than the Pigovian tax (one that simply maximizes the social welfare over time). The environmentally-minded party may prefer to enact a standard rather than a tax in order to ensure irreversible investment in clean capital. Using a numerical example, we find that a standard will enhance in the short-run the rate of adoption of the cleaner technologies by 17.3% but that a tax leads to 10.5% more firms with pollution-intensive fixed assets to exit their industry. The standard leads to higher adoption rates in the short run and thus makes reversing policy outcomes harder. The paper provides an explanation why policy makers may prefer use of an inefficient instrument: the nature of the political system and the technology results in adopting patterns under standards that will be preferred to the environmentally-minded party.

The Post-Crisis Slump in the Euro Area and the United States: Evidence From an Estimated Three-Region DSGE Model (F4, E3)

Robert Kollmann
,
ECARES, Free University of Brussels, and CEPR
Beatrice Pataracchia
,
European Commission
Rafal Raciborski
,
European Commission
Marco Ratto
,
European Commission
Werner Roeger
,
European Commission

Abstract

Published in: European Economic Review, Sept. 2016, Vol. 88, pp.21-41 (http://dx.doi.org/10.1016/j.euroecorev.2016.03.003) The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems.

The Predictive Power of the Dividend Risk Premium (G1, Y9)

Davide Avino
,
Swansea University
Andrei Stancu
,
University of East Anglia
Chardin Wese Simen
,
University of Reading

Abstract

We formally show that the dividend growth rate implied by derivatives prices (ig) contains information about the future (i) dividend growth rate and (ii) dividend risk premium. Using a dataset of intraday futures transaction prices covering the period 1997–2014, we show that 29% and 71% of the fluctuations in ig are related to the dividend growth and the dividend risk premium (drp), respectively. This leads us to conclude that the drp does not only move over time but it is also the main driving force of ig. This is important because a time varying dividend risk premium confounds the information content of ig for future dividend growth. We model the dynamics of the drp and assume that it depends on the lagged ig and the lagged drp. Although admittedly simple, this 2-factor model achieves a satisfactory empirical performance. This is evidenced by an R2 of around 60%. We use this parsimonious model to analyze the predictability of dividend growth. We show that the lagged dividend risk premium corrected implied growth rate, a linear combination of the lagged ig and the lagged drp, should predict dividend growth with a slope coefficient equal to 1. We develop a present value model to study the predictability of aggregate stock returns. Our model predicts that the lagged corrected dividend price (dpcorr) ratio, an affine function of (i) the lagged standard dp ratio, (ii) the lagged ig and (iii) the lagged drp, forecasts returns with a positive sign. Empirically, we find that accounting for the dividend risk premium strengthens the predictability of dividend growth and aggregate returns. Our results are confirmed both in- and out-of-sample. We assess the economic value of the predictability of returns and document that accounting for the dividend risk premium leads to utility gains of 1.56% per year.

The Price of a Safe Home: Lead Abatement Mandates and the Housing Market

Ludovica Gazze
,
Massachusetts Institute of Technology

Abstract

State mandates require mitigation of old houses that expose a child to lead hazards. I estimate the mandates' effects on the housing market exploiting differences by state, year, and housing vintage. After a mandate, prices of old houses decline by 4.3-6.4 percent, consistent with abatement costs being higher than willingness-to-pay. Families with children become 17 percent less likely to live in old houses. However, rents for old houses and rental expenditures for these families increase, suggesting that increased awareness does not drive families away from old houses. As such, the mandates' weak enforcement appears to have important distributional consequences.

The Pro-Competitive Effect of Chinese Imports: Amplification through the Input-Output Network (F1)

Miao Ouyang
,
Brandeis University

Abstract

The share of Chinese manufacturing imports in U.S. consumption has increased eight-fold between 1993 and 2011, from 1 to more than 8 percent. While the literature has documented the pro-competitive price effect of the rising Chinese import competition on U.S. industries, I provide new empirical evidence for a quantitatively larger, indirect effect: for the average manufacturing industry, the increase in import exposure of upstream suppliers reduces domestic producer prices by 0.82 percent per year, compared to a reduction of 0.27 percent due to the increase in direct import exposure. Together, the direct and indirect effects imply on average a lower price of more than 1 percent per year. By calibrating a general-equilibrium multi-industry model with input-output linkages, I further show that the net welfare gains from trade with China increase by 60 percent when the production network amplifies the pro-competitive effect. This mechanism also creates a substantially wider dispersion of industries that benefit and lose out from trade.

The Proper Limits of the Market: Economists vs. Communitarians

Yew-Kwang Ng
,
Nanyang Technological University
Yan Wang
,
Nanyang Technological University

Abstract

Many communitarians deplore the expansion of the market beyond its traditional confines, turning our market economy into a market society. We agree with the communitarians that we should go beyond the narrow view of pure economic efficiency, and take into account that market expansion may cause repugnance and crowd out morality and intrinsic motivation. This paper extends the traditional economic analysis to incorporate such wider effects. This does not provide a general case either in favor or against the market expansion. However, in combination with the first welfare theorem in economics and the principle of treating a dollar as a dollar in specific issues (Ng, AER, 1984), it provides a framework to estimate the relevant costs and benefits in a more appropriate way. Applying to specific issues, the paper finds that allowing legal prostitution and kidney sale is likely to be welfare improving in most cases, while possible inadequate blood supply in retaining voluntary and non-monetary donation could be solved by education on the point that frequent blood donation is good for the donors. As a society progresses in income, education, liberalism, etc., the scope of using the market may be expanded with general acceptance.

The Puzzle of Mistaken Millions: The MTA Surcharge and the Surge of Money onto MetroCards (D8, R4)

Meiping Sun
,
Columbia University

Abstract

Since 1998, the New York City Metropolitan Transportation Authority (MTA) system has used prepaid cards (MetroCards) to collect subway and bus fares. In 2013, the MTA imposed a $1 card fee (surcharge) on new MetroCard purchases. After the card fee was imposed, riders started to put more money on new MetroCard purchases. The response to the card fee was greater in low-income neighborhoods and among riders who used cash or debit cards rather than credit cards. As a result, riders carried much larger unused balances on their cards, and over $20 million a year more money escheated to the MTA when these cards expired. These results may have implications for other markets.

The Reliance of Structured Finance Investors on Credit Rating Agencies Before and After the Financial Crisis (C2)

Sheng Zhao
,
University of Edinburgh
Fernando Moreira
,
University of Edinburgh
Tong Wang
,
University of Edinburgh

Abstract

Credit rating agencies (CRAs) have been widely criticised as one of the factors leading to the 2008 crisis. Such criticism on the ratings offered to structured finance products (Asset-backed securities, ABS) is even heavier. We investigate whether the behaviour patterns of structured finance investors have significantly changed after the shock of the global financial crisis: did investors trust CRAs before 2008 and, if so, are they still trusting those institutions after the crisis? Our paper contributes to the related research in three directions: by 1) including diversified types of assets backing the ABS, 2) comparing the results before and after the 2008 crisis to show the investors’ behaviour pattern following the credit ratings and 3) including not only the issuance data, which most of the researchers have considered, but also taking transaction data into account to analyse the effects of rating events on transaction prices. The outline of our paper is as follows. A statistical analysis of the credit pattern transformation is firstly conducted to demonstrate the effect of the crisis on the rating industry. Afterwards, we run cross-sectional regressions to study the correlation between ABS prices and the issuance credit ratings in pre-and post-crisis periods. We find evidence of a weaker reliance of ABS investors on the ratings offered by credit rating agencies after the financial crisis. To supplement the static-regression analysis, we use time-series-event-analysis methods to identify the ABS price reactions to the rating events in the two periods and evaluate the transformation of price reaction degree around the crisis. We conclude that before the 2008 crisis, ABS investors’ decisions, reflected in prices, were significantly associated with the ratings offered by CRAs while the post-crisis period has seen a weaker link between prices and CRAs’ announcements, indicating a smaller influence of CRAs on the structured finance market.

The Risk Channel of Unconventional Monetary Policy

Dejanir Silva
,
Massachusetts Institute of Technology

Abstract

This paper examines how unconventional monetary policy affects asset prices and macroeconomic conditions by reallocating risk in the economy. I consider an environment with two main ingredients: heterogeneity in risk tolerance and limited asset market participation. Risk-tolerant investors take leveraged positions, exposing the economy to balance sheet recessions. Limited asset market participation implies the balance sheet of the central bank is non-neutral. Unconventional monetary policy reduces the risk premium and endogenous volatility. During balance sheet recessions, asset purchases boost investment and growth. In contrast, during normal times, the expectation of future interventions reduces growth by its impact on savings. A commitment by the central bank to unwind its portfolio early, conditional on the recovery of leveraged institutions’ balance sheet, reduces the risk premium by more than strategies involving holding its portfolio for longer. Asset purchases also have implications for the concentration of risk. Leveraged institutions respond to the policy by reducing risk-taking relatively more than risk-averse investors. As risk concentration falls, the probability of negative tail-events is reduced, enhancing financial stability.

The Role of Linguistic Proximity on the Labor Market Assimilation of Immigrant Men in Canada (J1, J6)

Alicia Adsera
,
Princeton University
Ana Ferrer
,
University of Waterloo

Abstract

This paper contributes to the analysis of the integration of immigrants in the Canadian labor market by focusing in two relatively new dimensions. We combine the large samples of the restricted version of the Canadian Census (1991-2006) with both a new measure of linguistic proximity of the immigrant’s mother tongue to that of the destination country, and with information of the occupational skills embodied in the jobs immigrants hold. In particular, we focus on physical strength, interpersonal skills, and quantitative skills. This allows us to assess the role that language plays in the labor market performance of immigrants and to better study their career progression relative to the native born. Linguistic proximity affects the types of jobs immigrant hold. The influence of linguistic proximity on the skill content of jobs immigrants hold over time and the associated wages also varies by the educational level of the migrants. Low linguistic proximity between origin and destination language imposes larger wage penalties to the university-educated, and more significantly affects the status of the jobs they hold (less skilled jobs with more physical requirement and less interpersonal demands). Within Canada, immigrants in Quebec who have French as their mother tongue have similar or better labor market outcomes (relative to native-born residents in Quebec) than immigrants with close linguistic proximity to English settling outside Quebec (relative to native born residents in the rest of Canada). However, since wages in Quebec are lower than elsewhere, immigrants in Quebec earn less in absolute terms than those residing elsewhere.

The Role of Real Exchange Rate in Expenditure Switching: How Important Are Price Deflators? (F4, F3)

JaeBin Ahn
,
International Monetary Fund
Rui Mano
,
International Monetary Fund
Jing Zhou
,
Columbia University

Abstract

This paper contrasts real exchange rate (RER) measures based on different deflators (CPI-, GDP deflator-, ULC-, PPI- etc.) and discusses potential implications for the link—or lack thereof—between RER and external balances. We begin by documenting patterns in the evolution of different measures of RER, and quantify the underlying sources of divergence. After establishing that the choice of deflator plays a key role in RER movements, we perform a comprehensive empirical investigation based on 35 developed and emerging market economies over 1995 to 2014. We find that only the RER measure deflated by ULC is consistent with the expenditure-switching mechanism, a robust finding across empirical specifications as well as sample countries and periods. Finally, the paper uses a model to evaluate different explanations —from wage and price stickiness, trade in intermediate inputs, to differences in the composition of each deflator—and concludes that such empirical findings can be generated even from a very simple and standard workhorse model like the one in Obstfeld (2001).

The Role of Trade Costs in the Surge of Trade Imbalances

Ricardo Reyes-Heroles
,
Federal Reserve Board

Abstract

This paper shows that the decline in trade costs that underlies the increase in observed global bilateral gross trade fl‡ows has notably contributed to the surge in the size of net trade imbalances over the past four decades. To show this, I propose a framework that embeds a quantitative multi-country general equilibrium model of international trade based on Ricardian comparative advantages into a dynamic framework in which trade imbalances arise endogenously. I identify and describe two mechanisms through which declines in trade costs lead to larger imbalances in the model. By exploiting the information in bilateral trade ‡flows, among other data, I calibrate the model and provide a decomposition that shows that 69 percent of the increase in the size of world trade imbalances can be explained by the decline in trade costs across countries. In other words, lower trade costs have not only allowed for more trade across countries in a particular point in time, but also for more trade over time. Moreover, the effect of lower trade costs on trade imbalances is heterogeneous across countries. In particular, trade imbalances in countries like the United States and China have been signifi…cantly affected by the decline in trade costs. I also show that the welfare gains from lower trade costs can differ substantially from those that are obtained when changes in trade imbalances are not taken into account.

The Role-Related Framing Effect in Buyer-Seller Bilateral Bargaining (C7)

Shanshan Huang
,
Nanjing University of Finance and Economics

Abstract

Buyers and sellers use offers and counteroffers to exchange information in bargaining markets. Strategies are measured in terms of the history of offers and counteroffers. Buyers and sellers, driven by different motivations to trade, apply different strategies. Using bilateral bargaining data from laboratory experimental markets, this paper examines buyer and seller strategies when they face a demand or supply shift. Offers are greatly affected by the shift. Buyers on average make smaller concessions for a demand decrease, and sellers on average make larger concessions for a positive supply shock. Extreme buyer initial prices and moderate seller initial prices benefit buyers the most. Final prices, in the midpoint of buyer and seller initial prices, favor buyers. As a result, buyers almost always outperform sellers, regardless of initial allocations of surplus. The result also shows that participants trade less than the competitive equilibrium quantity,due to reluctance to make concessions even for a profitable trade.

The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through

Kristin Forbes
,
Massachusetts Institute of Technology
Ida Hjortsoe
,
Bank of England
Tsvetelina Nenova
,
Bank of England

Abstract

A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations “pass through” to import and consumer prices. We show that in a standard open-economy model, the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we build on this model to develop an SVAR framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our understanding of why pass-through can change over short periods of time. For example, it can explain why sterling’s post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling’s 2013-15 appreciation was more muted.

The Size of Symmetric Free-Trade Blocs and World Welfare (F1, D6)

Tai-liang Chen
,
Zhongnan University of Economics and Law
Winston W. Chang
,
State University of New York-Buffalo State
Tetsuya Saito
,
Nihon University

Abstract

This paper presents a new price normalization rule in order to examine the effects of changes in the size of symmetric free-trade blocs on world welfare. In a symmetric model, a trading bloc does not act on the actions of the rest of the world as a whole but to individual external blocs in a one-to-one fashion. The relative bargaining power between any two blocs is therefore always evenly matched. This paper shows that the optimal tariff schedule is monotonically decreasing in relative bloc size and the world welfare unambiguously increases if the trading world becomes more integrated. As a result, the pessimal (lowest world welfare) bloc number is much larger than the ones obtained in the Krugman and Bond-Syropoulos models. Furthermore, this paper shows that the case for integration is stronger if there is an increase in similarity among goods and also in similarity among countries' endowments. It thus provides a theoretical foundation for the benefits of economic integration, paralleling those of Kemp-Wan-Shimomura's results and strengthening the case for regionalism as a stepping stone or building block toward a complete world economic integration.

The Study of Tail Dependence and Conditional Leverage Effects (G1, G1)

Jong-Min Kim
,
University of Minnesota-Morris

Abstract

We use a variety of different copulas and three asymmetric GARCH regression models to capture the asymmetry of dependence and the conditional leverage effect of oil prices. In particular, we develop the TBL-GARCH model proposed by Choi, Park, and Hwang (2012) to the asymmetric GARCH regression type model. More interesting, our empirical results indicate that there is a relationship between the asymmetry of copula tail dependence and the conditional leverage effect of asymmetric GARCH regression models. The findings from the two different approaches are congruent, in that there is no asymmetry of tail dependence and no conditional leverage effect in crude oil prices over our sample period.

The Value of Extended Time Span Coverage on Career Pathway: The Case for Sustained Investment in State Longitudinal Integrated Data Systems (I2, J4)

Ting Zhang
,
University of Baltimore

Abstract

This cohort study draws seven education, workforce and social services administrative data files. The defined cohort is 1984 first-time registrants in Maryland’s public community colleges. The multi-source analytical integrated data file documents subsequent postsecondary education and employment/earnings through 2013. Findings comparing snapshots of 1980’s and recent post-recession earnings quintile assignment and industry affiliation offer new gender-specific evidence about mobility within the earnings distribution over three recent decades. Similarly, advocates for popular industry-specific education and training sector policies will have new challenging evidence about the amount and directions of inter-industry mobility patterns over time, including pre- and post-recession time span coverage. The intertwined mobility between the education and workforce adds to the dynamics that this longitudinally integrated multifaceted long-horizon administrative dataset presents. This study illustrates the value of extended time span coverage of a state’s integrated education and workforce data system. It relies on the path dependency theory and an analytical data file created by the author that links seven education and workforce administrative record sources from multiple state government agencies. The hypothesis is that accurate measurement of employment and earnings ‘outcomes’ mechanism requires extended time span coverage of information on educational attainment and employment history. Multi-level mixed effect logistic and linear regression models are used to test three hypotheses. It finds that inclusion of the multiple steps along a postsecondary education pathway is critical to understanding workforce outcomes mechanism. Prior job histories matter. It takes time for the employment outcome effect to show up following education attainment. The study concludes with findings, research limitations, and with direct statements about how integrated data system access, content and use that has informed my research, and what lessons we offer to those in other countries about why it is important to conduct similar studies in different economic circumstances.

The Value of Political Connections in China: Government Officials on the Board of Directors (G1, G3)

Jijian Fan
,
University of California-Santa Cruz

Abstract

Understanding the value of political connections is important for firm decision-making and for social efficiency analysis. I examine this question by estimating the effect of having a politician on the board of directors on a firm’s stock price. A new policy in China (No.18 Regulation) forced politicians to resign as directors, providing an exogenous shock to political connectedness. I create an original data set with the political positions of all independent directors who resigned in 2013 and 2014. A regression discontinuity design reveals no immediate impact after the announcement of the regulation in the short run. A difference-in-difference design shows that the loss of high level politicians causes firm’s stock price fall in the long run. The analysis exploits heterogeneity in both the number and importance of politicians across firms to identify short-run and long-run effects.

Till Mortgage Do Us Part: Refinancing Costs and Mortgage Shopping (G2, D1)

Ljubica Djordjevic
,
Goethe University Frankfurt
Marianna Brunetti
,
University of Rome Tor Vergata
Rocco Ciciretti
,
University of Rome Tor Vergata

Abstract

We show that the mortgage refinancing costs, which serve as a “lock-in” for mortgage holders, play an important role in household’s decision to switch a bank. To this end, we use a unique household panel dataset that enables us to infer individual bank switching, in conjunction with a legal reform that exogenously slashed down the mortgage refinancing costs. We find that the households responded to this change by increasingly changing their main bank to refinance or prepay an existing mortgage loan (switching with a mortgage), as well as to take out a mortgage (switching for a mortgage). Dissecting these results, we show that the effects of the reform were not uniform across households, with the more educated and those residing in ex-ante less competitive markets being at the forefront of the wave of bank switching.

Time-to-Build and the Business Cycle (E3, E2)

Matthias Meier
,
Bonn University

Abstract

Time-to-build is a defining characteristic of capital-goods production. The present paper provides empirical evidence that this sector's ratio of backlog orders to shipments is countercyclical, giving a direct measure of time-to-build frictions in capital adjustment. In order to investigate the business-cycle implications of countercyclical time-to-build, we develop a general-equilibrium model with non-convex capital adjustment costs and a real wage rigidity. Longer time-to-build injects uncertainty into the firms' planning problem, in turn triggering wait-and-see behavior. With rigid wages, output is demand-driven. Then, fluctuations in time-to-build are similar to conventional demand shocks. Our calibration suggests that countercyclical time to build significantly increases business cycle volatility.

Title: Revisiting the Political Economy of Education Subsidies (I2, H2)

Kathryn Birkeland
,
University of South Dakota
Samuel Raisanen
,
Central Michigan University

Abstract

In their work on education subsidies, Rogerson and Fernandez (RES 1995) showed that reverse redistribution is an equilibrium outcome of voting on the tax rate and the extent to which education is publicly provided. The voting equilibrium in their economy results in all households paying taxes to support the education of the middle-income and high-income households. A key assumption in their model is the proportional tax rate. A review of effective tax rates in the U.S. shows regressive tax structures prevailing. We show that with a regressive tax system and partial subsidies for education, an equilibrium voting outcome could result in all households paying taxes to support education for the high-income households only. The result is a stronger version of redistribution than previously shown. As in the previous result, increased income inequality makes the outcome more likely.

Top Researchers as Stewards of Scientific Integrity: Evidence From a Randomized Natural Experiment (I2, J4)

Natalia Zinovyeva
,
Aalto University

Abstract

In recent years academia has observed the mushrooming of journals pretending to be academic though in reality providing no peer review. If some authors are accountable to principals who cannot accurately observe research quality, they may have incentives to publish in dubious journals. Exploiting exogenous variation in the composition of promotion committees in Italy, I analyze how the research quality of evaluators affects the success of authors with dubious publications. I use the blacklist of 'potential, possible, or probable predatory journals' by Jeffrey Beall to identify questionable articles. I find that the returns to dubious publications are significantly lower when researchers are evaluated by committees of higher research quality. Results indicate that the presence of top researchers in scientific committees helps to improve incentives in academia and to discourage academic misconduct.

Toxic Roads: Unearthing Hazardous Waste Dumping (O1)

Gaia Narciso
,
Trinity College Dublin
Caterina Gennaioli
,
London School of Economics and Political Science

Abstract

Illegal disposal of toxic waste has become an issue of concern in both developing and developed countries. Recycling hazardous waste entails very high costs, which might give strong incentives to dispose toxic material in an illegal way. This paper adopts an innovative strategy to identify where toxic waste might have been illicitly dumped. This strategy relies on a crucial premise: road constructions provide an ideal setting in which the burial of hazardous waste may take place. Guided by the medical literature, we investigate the health outcomes of individuals living along recently constructed roads in Ethiopia. This is hardly an easy task, as many confounding factors might explain certain patterns in health outcomes. We tackle this issue by looking at a specific set of health measures that the medical literature directly links to the potential effects of specific types of toxins. We construct a unique dataset, which includes the extensive Demographic and Health Survey, together with georeferenced data on roads, villages and economic development, covering a 10-year period. We find that an additional road within a 5-km radius is associated with an increase in infant mortality by 2.2%. Moreover, we provide evidence that young children living near a recently built road show a lower level of haemoglobin and are more likely to suffer of severe anaemia. A series of robustness checks confirms the above findings and excludes other potential confounding factors.

Trade Competition, Technology and Labor Re-Allocation (J6, J3)

Rita Ginja
,
Uppsala University
Teodora Borota
,
Uppsala University
Selva Bahar Baziki
,
Central Bank of the Republic of Turkey

Abstract

This paper provides new evidence on the (re-)allocation of workers across industries and firms with different technologies (captured by information and communication technologies, ICT) in response to increased import competition. Using employer-employee matched data from the Swedish manufacturing sector, we find increase assortative matching of workers in ICT intensive industries, that is, high(low)-wage workers sort into high(low)-wage firms. Industries with low ICT intensity do not exhibit any of these sorting patterns. We present a labor market matching model that explains the increased assortative matching in ICT intensive industries through an increase in the relative demand for qualified workers.

Traders' Decision-Making Processes: Results from an Investment Simulation Monitored with an EEG (G1, C9)

Roberto Ivo Da Rocha Lima Filho
,
Federal University of Rio de Janeiro

Abstract

The objective of this article is to identify, with the aid of an electroencephalogram (EEG), whether traders use different areas of the brain (and therefore different levels of neuronal activity) in their decision-making process when it comes to making a financial investment. A sample of forty (40) experienced traders was used, divided equally into 50% male and 50% female. Some findings through brain mapping indicate that these operators in the financial market tend to make decisions using an associative based rule process (anchored to historical or intuitive data); rather than any form of analytical based rule, as the classical financial literature on this issue suggests. From an economic standpoint, this work is distinct from the classical theories of Finance - Efficient Markets Theory and Modern Portfolio Theory - to the extent that it not only employs assumptions of behavioural finance, but also encompasses studies of neurocognitive processes.

Trust, Ethnic Diversity, and Personal Contact: Experimental Field Evidence (J7, C9)

Ashild Auglaend Johnsen
,
Norwegian University of Life Sciences
Henning Finseraas
,
Institute for Social Research
Torbjorn Hanson
,
Norwegian Defense Research Establishment
Andreas Kotsadam
,
University of Oslo
Gaute Torsvik
,
University of Oslo

Abstract

We combine a lab and a field experiment in the Norwegian Armed Forces to study how close personal contact with minorities affect in-group and out-group trust. We randomly assign majority soldiers to rooms with or without ethnic minorities and use an incentivized trust game to measure trust. First, we show that close personal contact with minorities increases trust. Second, we replicate the result that individuals coming from areas with a high share of immigrants trust minorities less. Finally, the negative relationship between the share of minorities and out-group trust is reversed for soldiers who are randomly assigned to interact closely with minority soldiers. Hence, our study shows that social integration involving personal contact can reduce negative effects of ethnic diversity on trust.

Two Blades of Grass: The Impact of the Green Revolution (O4, Q1)

Douglas Gollin
,
University of Oxford
Casper Worm Hansen
,
University of Copenhagen
Asger Moll Wigender
,
University of Copenhagen

Abstract

We examine the impact of the Green Revolution, defined as the diffusion of high-yielding crop varieties (HYVs), on aggregate economic outcomes in developing countries during the second half of the 20th century. We use time variation in the development and diffusion of HYVs of 10 major crops, and the spatial variation in agro-climatically suitability for growing them, to identify the causal effects of adoption. In a sample of 84 counties, we estimate that a 10 percentage points increase in HYV adoption increases GDP per capita by about 15 percent. This effect is fully accounted for by a combination of the direct effect on crop yields, factor adjustment in agriculture, and structural transformation. Our analysis also reveals that the Green Revolution reduced fertility and that the reduction was only partly offset by decreasing mortality rates. The net effect on population growth was therefore negative.

Two-Sided Matching in Physician-Insurer Networks: Evidence From Medicare Advantage (I1, L1)

Kathleen Nosal
,
University of Mannheim

Abstract

Many health insurance plans in the U.S. restrict enrollees to choose from a set of providers the insurer has contracted with. These provider networks are formed via bilateral bargaining between insurers and providers. Provider networks are an important tool for product differentiation and cost containment for insurers and also put real restrictions on consumer's choice of providers. In this paper, I analyze matching between insurers offering Medicare Advantage Plans and physicians, using a unique data set consisting of all insurer-physician links in several counties. I estimate parameters of a two-sided, many-to-many matching model which describes formation of provider networks, using the Maximum Score estimator of Fox (2010). This method uses implications of a pairwise stability condition to estimate a joint surplus function which depends on insurer-physician links. The surplus function accounts for the role of physician and insurer characteristics in determining their match values, and also for interactions between physicians linked to the same insurer, whose services may be complements or substitutes. The results indicate that insurers prefer on the margin to link with physicians who increase the specialty concentration of their network and who are located near other physicians in the network. Physicians are negatively affected by having a broader referral network, as defined by having a larger set of physicians with whom they have insurer links in common. These forces could lead to networks being undesirably narrow, excluding specialties, locations and specific physicians that would be valuable for some plan enrollees. Finally, compared with regional insurers, nationally active insurers have a larger number of exclusive links with physicians, and match with more physicianswith U.S. medical degrees. This result suggests positive assortative matching.

Two-Stage Spinoff Asset Impairment Theory and Evidence

Ted Azarmi
,
University of Tuebingen and Heilbronn University
David Marutschke
,
Soka University-Japan

Abstract

This paper analyses two-step spinoff based on consequences of the expected future change in value of a stakeholder's claim and its ability to block a restructuring. We show that a two-step spinoff allows an otherwise blocked value increasing (one-step) spinoff to take place by using the market information that a minority equity carve-out generates. We develop a theory that advocates maximizing shareholder wealth considering the claim of another stakeholder under two-dimensional asymmetric information consisting of 1) unobservable asset impairment and 2) management conglomeration agency problem. The asset impairment theory considers a two-step spinoff as a comprehensive managerial value enhancing strategy that considers actions of all stakeholders of a conglomerate. This strategy properly deals with the stakeholder claims which in effect are a bottleneck to a value enhancing spinoff. In addition, costs of the fixed-claim-imposed constrains (lawsuits, debt, pension obligations, bank loans) and managerial agency costs are inherent in a firm as a nexus of contracts. The two-step spinoffs allow managers to enhance shareholder wealth by successfully mitigating the above costs. Asset impairment is a theory of asymmetric valuation, it can analyze a scenario where shareholders underprice the firm irrationally. That is, Lamont and Thaler's (2003) mispricing hypothesis is accommodated. Managers, then, carve-out a firm in an attempt to mitigate the market mispricing. A carve-out may provide intense analysis of an IPO offering which may mitigate irrational underpricing due to lack of information. If post-carve-out market valuation indicates spinoff synergy, then, the stakeholder's ability to oppose a spinoff weakens and the second step of a two-step spinoff process may be implemented. The stakeholders benefit as they claim assets that are attached to a more valuable spun off unit than the same unit kept within a conglomerate while they lose their claim to the other spun off unit.

Uncovered Equity “Disparity” in Emerging Markets (F3, F6)

Cheng Yan
,
Durham University
Kate Phylaktis
,
Cass Business School
Ana-Maria Fuertes
,
Cass Business School

Abstract

The portfolio-rebalancing theory of Hau and Rey (2006) yields uncovered equity parity (UEP) as a prediction that local-currency equity return appreciation is offset by currency depreciation. Contrary to UEP, estimations of vector autoregressive models for eight Asian emerging markets using daily data reveals a positive nexus between equity returns and currency returns. The extent of the uncovered equity “disparity” is time-varying and asymmetric as it exacerbates in crisis. We find evidence that the UEP failure is due to investors’ return chasing. Robustness checks suggest that this explanation is not an artifact of changing global volatility conditions or a flight-to-quality phenomenon.

Understanding the Labor Market Returns to Mobility for Young Workers (J6, J3)

Janna E. Johnson
,
University of Minnesota
Samuel Schulhofer-Wohl
,
Federal Reserve Bank of Chicago

Abstract

Young workers are not doing well in the current U.S. economy. In fact, youth labor market outcomes have declined steadily relative to those of their older peers for over 30 years. Over the same period, variation in labor market conditions across cities has increased, while spatial mobility rates of young people have fallen. To attempt to reconcile this puzzling combination, we will compare the mobility and economic outcomes of the two cohorts of the National Longitudinal Survey of Youth: the 1979 (NLSY79) and 1997 (NLSY97). In doing so, we will show whether or not young people tend to move away from lower wage areas with lower employment rates and toward higher wage areas with higher employment rates, and if the rate at which they do so changed between the two cohorts. For movers, we will investigate whether and how the choice of destination has changed over time, as well as measure how long it takes for new arrivals to find a job. We start by applying an estimation strategy used by Kennan and Walker (2011). Originally applied only to white males with a high school degree, we re-estimate their model of optimal migration for all groups in both NLSY cohorts, allowing us to see if and how the relationship between local wages and mobility, as well as migration costs, have changed through time. We expect to find that young workers in the NLSY97 move at a lower rate to high wage and employment areas than those in the NLSY79. We will investigate whether this is due to changes in relative wage gains and/or migration costs, as well as identify the underlying reasons behind the falling mobility of young workers.

Unemployment or Out of the Labor Force: A Perspective from Time Allocation and Life Satisfaction (D1, E2)

Chao Wei
,
George Washington University
Chen Song
,
University of International Business and Economics

Abstract

Availability for work and engagement in active job search have been the conventional criteria to distinguish the unemployed from those not in the labor force. In this paper we use American time use survey data 2012-2013 to compare the demographic characteristics, time allocation and life satisfaction between the unemployed and three subgroups of those out of the labor force. The three subgroups include the retired, the disabled, and those who are out of the labor force but not retired or disabled (NLFNRND). We find that despite differences in time spent on job search, NLFNRND males share similar demographic characteristics, time allocation and life satisfaction as unemployed males. By examining the labor market status of the sample population in their CPS interviews, we also find that males who were NLFNRND or unemployed at the time of CPS interviews have similar transition rates to employment by the time of their ATUS interviews about two to five months later. By contrast, NLFNRND females spend as little time on job search as their male counterparts, yet their demographics characteristics and time allocations show high opportunity cost of substituting search and market activities for child care and nonmarket work. Compared to NLFNRND males, NLFNRND females have higher life satisfaction in their current status, and lower transition rates to employment. Both NLFNRND males and females have drastically different demographics, time allocation and life satisfaction from the retired and disabled, the other two subgroups of those not in the labor force. We argue that engagement in active job search reflects only a tiny fraction of time allocation patterns, and thus may not capture the full opportunity cost of time for employment considerations. We advocate a more sophisticated criterion considering time allocation and life satisfaction in distinguishing between being unemployed and not being in the labor force.

Unsurprising Shocks: Information, Premia, and the Monetary Transmission (E5, C3)

Silvia Miranda-Agrippino
,
Bank of England

Abstract

This article studies the informational content of monetary surprises, empirically measured as the reactions of financial markets to monetary policy announcements. We show that under general conditions monetary surprises are a function of more than just the monetary policy shock. Hence, they are not exogenous, and their use as external instruments for identification is questioned. We decompose monetary surprises into monetary policy shocks, forecast updates, and time-varying risk premia. All these components can change following the announcements, and in different directions depending on how the policy decisions are interpreted. Intuitively, because private sector forecasts may differ from central banks’ forecasts, what is unexpected by the public may not be unanticipated by the central bank. If markets fail to correctly account for the systematic component of policy when they are surprised by an interest rate decision, the price reaction that follows incorporates such forecasts asymmetry, which also affects risk compensations. Consistent with this theory, we show that ‘surprises’ are predictable by central banks’ forecasts, and by public data whose release predates the announcements. This can have strong quantitative implications for the estimated responses to the shock. We develop a new measure of monetary surprises, independent of central banks’ forecasts and unpredictable by past information. Contrary to raw surprises, the new measures retrieve responses consistent with standard macroeconomic theory even in informationally deficient VARs.

Upskilling: Do Employers Demand Greater Skill When Workers Are Plentiful?

Alicia Modestino
,
Northeastern University
Daniel Shoag
,
Harvard University
Joshua Ballance
,
Federal Reserve Bank of Boston

Abstract

The relationship between the unemployment rate and the job vacancy rate, commonly known as the Beveridge Curve, changed significantly following the Great Recession. Changes in recruiting intensity, such as tougher hiring standards and employee screening methods, may explain a significant portion of this shift. In this paper, we provide new, direct evidence on changes in employer hiring standards using a database that covers the near universe of online job postings. We show that employer education and experience requirements rose during the Great Recession, and that these increases were larger in states, occupations, and years that experienced greater increases in the supply of available workers. We argue that a significant portion of this relationship is causal with employers raising skill requirements in response to labor market slack and show that it is robust to controlling for local demand conditions as well as firm-job title fixed effects. Using a natural experiment arising from U.S. troop withdrawals from Iraq and Afghanistan as an exogenous shock to local, occupation-specific labor supply, we further identify the causal impact of increased labor supply on employer requirements. Our results imply that increases in the number of people looking for work can account for at least 30 percent of the total increase in employer skill requirements observed between 2007 and 2010.

Using Matching to Study Merger: An Application to the United States Airline Industry (L4, L4)

Zexuan Liu
,
Tianjin University of Finance and Economics
Qihong Liu
,
University of Oklahoma
Pallab Ghosh
,
University of Oklahoma

Abstract

We analyze the impact of merger on various measures of product dierentiation (vertical and horizontal), using the merger between US Airways and America West in 2005. We employ matching method to construct a matched group and then rely on di-in-di method to identify the impact of merger. On vertical dierentiation measures, our results show that merger reduces arrival delay by about 1.3 minutes, and increases the number of flights per route by about 13.78. Merging airlines also operate on fewer routes and fly to fewer destinations, by about 116 routes and 1.96 destinations respectively. Relative to ndings from simple di-in-di without matching, we find that size dierences can be signicant, suggesting the importance of constructing properly matched groups. For horizontal dierentiation measures, we nd that merger reduces the gaps (in minutes) between flights, but has only insignicant impact on other horizontal dierentiation measures. We conduct several falsication tests and the results suggest that the matching method, together with our selected carrier-route characteristics, work well for some product dierentiation measures but not for others.

Variability of Macroeconomic Forecasts: The Other Dimension (E3, E5)

Nathan Goldstein
,
Bar-Ilan University
Ben-Zion Zilberfarb
,
Bar-Ilan University

Abstract

We consider the variation in expectations under models of information rigidities. While many studies concentrate on forecast disagreement, which corresponds to the cross-sectional variability of forecasts, this study focuses on a dimension that was quite overlooked in the literature – the time variability of forecast series. We derive from several leading models of information rigidities the same pattern of variability, for which the time variance of the average forecast series should increase as the forecast horizon is getting shorter. However, models disagree on whether the actual series should vary more than the forecast series. We propose a bootstrap method to test the hypothesis of the variability pattern across forecast horizons, and apply it to a unique Israeli survey of inflation and exchange rates forecasts, taking advantage of the vast changes in inflation and exchange rate processes during the sample period. The survey period can be divided to three distinct sub-periods: a first sub-period of high inflation and rapid devaluation, which ended abruptly by a successful stabilization program; a second sub-period of moderate and declining inflation accompanied by special exchange rate policies; and a third sub-period of steady low inflation and fully-floated exchange rate. By breaking the sample to the distinct regimes, our evidence demonstrate that the predicted variability pattern across forecast horizons holds only when ruling out periods where special policy interventions bring on non-stationarity to the processes of the variables, as in the second sub-period of the sample, for which we get the precise reverse variability pattern. A possible implication of our results is that one should investigate the underlying process of macroeconomic series before drawing conclusions on the expectations formation process.

Variance-Based Competition and Resource Concentration in Markets (M1, L1)

Valentina Assenova
,
Yale University

Abstract

This article examines the relationship between competition for primacy among organizations and resource concentration in markets. Empirical regularities indicate that a few organizations control the majority of status resources in both nonprofit and for-profit settings. The article demonstrates that, when organizations compete over resources based on the variance of their performance, variance is status-enhancing at the tails of the performance distribution and status-neutral otherwise. Evidence from the private equity market confirms the presence of a U-shaped relationship between an organization's performance variance and its rate of resource acquisition. These differences contribute to resource inequality and inform our understanding of how competitive dynamics among organizations amplify Matthew effects in markets when the specified scope conditions are met.

Vertical Integration in Health Care Markets: Evidence From Brazil (I1, L4)

Jose Guilherme de Lara Resende
,
University of Brasilia
Taina Leandro
,
Administrative Council for Economic Defense-Brazil

Abstract

This paper investigates the effects of vertical integration among health care insurance companies and hospitals in the Brazilian health care market. We find that vertical integration between an insurance firm and a hospital decreases the total costs of health care plans. This result indicates that vertical integration enhances efficiency, a positive outcome on the market. Moreover, we find that this type of vertical integration mainly reduces medical costs, which is evidence that it eliminates the agency problem between hospitals and insurance companies. That is, when an insurance firm integrates to a hospital, it is able to cut unnecessary procedures and to reduce the overall medical expenditure.

Was Entry Into the WTO Worth It: Environmental Consequences of Trade Liberalization (F1, Q5)

Yuan Tian
,
University of California-Los Angeles

Abstract

Despite the enormous economic benefit from accession to the WTO, overall welfare of trade liberalization might be compromised since pollution from production also increased. Using plausibly exogenous tariff reduction on Chinese goods caused by the WTO accession, variation in industry composition across cities, and variation in pollution intensity across industries, I study the effect of trade liberalization on income, pollution and health in China during the period of 2000 to 2005. Using regional tariff shocks as instruments for change in income and pollution level, I show that cities that faced 10% larger GDP per capita increase experienced 6%-7% larger total mortality decline, and regions that faced 10% larger air pollution increase experienced 4%-13% larger total mortality increase. Overall, if all exports were generated from non-polluting industries, total mortality rate would have decline by 3.6% more. How- ever, in terms of overall welfare, the gains from income growth overweight losses from pollution increase.

Wedges for Wedges: Evaluating Integrations From the Perspective of a Neoclassical Model (F3, E1)

Shu-shiuan Lu
,
National Tsing Hua University

Abstract

This study demonstrates a new method for measuring the degree of integration, focusing on three case studies to explore the extent to which integration agreements implemented in the 1990s gave rise to a closer union related to German reunification, the North American Free Trade Agreement and the Eurozone. This new approach combines the essence of the difference-in-difference technique in Econometrics and wedge methodology in Macroeconomics to create a measure that improves the existing price-based measure for the degree of integration. Through the lens of this new measure, it is found that the agreements for integration have had weak effects on German reunification and no effect on the other cases in terms of actualizing a closer union. Furthermore, the frictions exerted to prevent the formation of a closer union differ across countries, in terms of size and type, tending to be large for small size members and small for large size members. Moreover, such frictions generate an effect resembling either taxes or subsidies imposed on factor returns. Hence, further integration generates unequal or even opposite impacts on member states as further integration implies the removal of these frictions differing in both types and sizes. These results thus provide quantitative support for the view that integration is not a process of Pareto improvement, and integration agreements involve tradeoffs and negotiations, with conflicts of interest being unavoidable. Accordingly, full integration is difficult to achieve, and indeed, integration decisions appear to be motivated more by politics than by economics.

What Drives Commodity Price Booms and Busts? (N5, Q1)

Martin Stuermer
,
Federal Reserve Bank of Dallas
David Jacks
,
Simon Fraser University

Abstract

We provide evidence on the dynamic effects of commodity demand shocks, commodity supply shocks, and inventory or other commodity-specific demand shocks on real commodity prices. In particular, we analyze a new data set of price and production levels for 12 agricultural, metal, and soft commodities from 1870 to 2013. We establish that commodity demand shocks strongly dominate commodity supply shocks in driving prices over a broad set of commodities and over a broad period of time. While commodity demand shocks have gained importance over time, commodity supply shocks have become less relevant.

What Drives the WTA-WTP Disparity in Real Estate Market? Endowment Effect, Information Asymmetry and Housing Decisions (D1, D8)

Miao (Cynthia) Gong
,
University of Cambridge

Abstract

The disparity between sellers’ willingness to accept (WTA) and buyers’ willingness to pay (WTP) has been widely observed in the economic experiments. Such an experiment usually involves instruments of trivial values and college students. Without assuming any wealth effect or transaction cost, their results show that the WTA-WTP gap can be interpreted as endowment effect. According to prospect theory, this is an evidence of reference dependence and loss aversion. However, given the high level of information asymmetry and high stakes involved in the housing transactions, this paper extends this psychological explanation to study why WTA exceeds WTP in the secondary real estate market. The idea is to decompose the driving force of WTA-WTP gap into two components: psychological forces and market frictions. Results from a field experiment carried out in Beijing, China shows that both psychological bias (i.e., endowment effect/loss aversion) and market frictions (i.e., information asymmetry effect) affect WTA-WTP gap in the housing-decision making process. This study will enhance our understanding of housing consumer behavior from the perspectives of Behavioral Economics, Psychology and the market mechanisms of this unique sector. The study also aims to help the Chinese central government to facilitate more effective housing policies and legislations.

What Makes the Market Jump? (G1)

Marcel Prokopczuk
,
Leibniz University of Hannover
Chardin Wese Simen
,
University of Reading

Abstract

Using intraday transaction prices and a non-parametric jump test, we show that jumps in the S&P 500 and VIX are low-probability, high-impact events. Extant research investigating the causes of jumps primarily focuses on scheduled macro-announcements. However, we find that unscheduled news, which has so far received little attention, triggers twice as many jumps and accounts for a larger proportion of the jump variation than scheduled news. Intriguingly, we show that close to 50% of jumps are not explained by fundamental news, revealing the presence of “excess jumps” in financial markets.

Wheeling Into School and Out of Crime: Evidence From Conditioning Driving Licenses to Minimum Academic Requirements (I3, K4)

Marian Vidal-Fernandez
,
University of Sydney
Rashmi Barua
,
Jawaharlal Nehru University and Indian Statistical Institute

Abstract

Since the late 1980s, several U.S. states have set minimum academic requirements for under-aged high school students to apply for and retain their driving licenses. This law, popularly known as "No Pass No Drive" (NPND), encourages teenagers with a strong preference for driving to stay in school beyond the minimum dropout age. Previous research shows that NPND laws increase educational outcomes for males (Barua and Vidal-Fernandez, 2014). This paper contributes to the literature analysing the positive externalities of educational policies (Lochner and Moretti, 2004) by analysing the effects of NPND laws on juvenile crime. Using arrests registry from the Federal Bureau of Investigation (FBI), we exploit variation across state and time to show that having an NPND law in place is significantly associated with a decrease incidence of males’ Driving Under the Influence (DUI), violent and property arrests by around one-percentage point. Reassuringly, we find that these effects are only present within the relevant cohorts (16 to 18 year olds). We argue that our findings are driven by an increase in education due to NPND laws (Barua and Vidal-Fernandez, 2014) rather than incapacitation. Consistent with previous research, we find an increase in white-collar arrests; a type of crime more likely to occur within higher educated individuals (Anderson, 2015). To rule out incapacitation effects, we use the Youth Risk Behavior Survey (YRBS) to explore crime-related activities in school. We find a decreased probability of feeling unsafe in school both for men and women. We do not find any significant effects on drug-use in nor out of school. We conclude that NPND laws can serve as a relatively cost-effective policy to increase positive externalities to education beyond and in addition to minimum dropout ages.

When Commitment Fails - Evidence from a Field Experiment

Anett John
,
CREST-ENSAE

Abstract

Commitment products can remedy self-control problems. However, imperfect knowledge about their preferences may (discontinuously) lead individuals to select into incentive-incompatible commitments, which reduce their welfare. I conduct a field experiment in the Philippines, where low-income individuals were randomly offered a regular-installment commitment savings product. Individuals chose a personalized savings plan and a default penalty themselves. A majority appears to choose a harmful contract: While the average effect on bank savings is large, 55 percent of clients default, and incur monetary losses. A possible explanation is that the chosen penalties were too low (the commitment was too weak) to overcome clients' self-control problems. Both take-up and default are negatively predicted by measures of sophisticated hyperbolic discounting - suggesting that partial sophisticates adopt weak commitments and then default, while full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.

When is Bad “Bad Enough”? A Framework for Analyzing Benefits of Coordination under Environmental Externalities

Anna A. Klis
,
Northern Illinois University

Abstract

This paper addresses the problem of determining which environmental situations merit international cooperation. When allocating limited diplomacy hours among similar externality issues, it is desirable to have a systematic method for appraising the value and likelihood of coordination beyond a simple cost-benefit analysis. Situations with externalities are often complicated, interconnected problems, where it may be difficult to identify how the parameters in the problem affect the public response. I first describe a general negative externality game which contains a "worsening parameter," that is, a key component of the environmental situation which determines the strength of the externality. The possible worsening parameters in other environmental situations are addressed as well. I then develop a framework which captures this complex worsening parameter and linearizes its effect for tractable examination. The worsening parameter can be classified according to "own effect" - causing a change in the marginal utility of a player's own action, "opponent effect" - altering the marginal externality incurred by the opponent's action, or "submodular effect" - strengthening the game's submodularity. I find and examine the sufficient conditions for this linearized worsening parameter to move non-cooperative and cooperative solutions in opposite directions. I argue that situations which behave in this manner and which have a higher worsening parameter value have more benefit to coordination through the increased range in actions to bargain over.

When Private Information Settles the Bill: Money and Privacy in Google’s Market for Smartphone Applications

Michael E. Kummer
,
Georgia Institute of Technology and ZEW, Mannheim
Patrick Schulte
,
ZEW, Mannheim

Abstract

We shed light on a money-for-privacy trade-off in the market for smartphone applications (apps). Developers offer their apps cheaper in return for greater access to personal information, and consumers choose between lower prices and more privacy. We provide evidence for this pattern using data on 300,000 mobile applications which were obtained from the Android Market in 2012 and 2014. We augmented these data with information from Alexa.com and Amazon Mechanical Turk. Our findings show that both the market’s supply and the demand side consider an app’s ability to collect private information, measured by their use of privacy-sensitive permissions: (1) cheaper apps use more privacy-sensitive permissions; (2) installation numbers are lower for apps with sensitive permissions; (3) circumstantial factors, such as the reputation of app developers, mitigate the strength of this relationship. Our results emerge consistently across several robustness checks, including the use of panel data analysis, the use of selected matched twin-pairs of apps and the use of various alternative measures of privacy-sensitiveness.

Who Creates Stable Jobs? Evidence from Brazil (J2)

Peter Brummund
,
University of Alabama
Laura Connolly
,
University of Alabama

Abstract

A popular perception about the US economy is that small businesses create most of the private sector jobs. However, recent work has shown that firm age is a more important determinant of job creation than is firm size (Haltiwanger, Jarmin, & Miranda, 2013). The authors show that rather than small firms, it is young firms and firm start-ups that are significant contributors to job creation in the US economy. But, young firms and firm start-ups are inherently volatile, potentially leading to high employment turnover and lower levels of job stability. Therefore, we first replicate the Haltiwanger, Jarmin, and Miranda (2013) analysis using data for the private sector in Brazil to provide a comparison of job creation between the US and Brazil. Then, the project extends the literature by conditioning the job creation analysis on a measure of job stability to determine what types of firms are creating stable jobs in Brazil.

Why Do Women Expect Less? On the Gender Gap in Student Wage Expectations (J3, D8)

Pia Rosina Pinger
,
University of Bonn
Jan Bergerhoff
,
University of Bonn
Philipp Seegers
,
Maastricht University

Abstract

This study investigates why women have much lower wage expectations than men even before labor market entry. We elicit individual wage expectations, expectations about future job characteristics, and individual preferences and traits from a sample of over 15,000 students. Using these data, we document that female students expect to earn roughly 17 percent lower wages than male students on their first job and that this gap increases to 30 percent when looking at the expectations for wages at age 55. The accumulated life-cycle gap in expected labor earnings amounts to around 500,000 EUR. We then decompose the expected wage gap into components attributable to expected labor force interruptions, expected number of hours worked, expected discrimination, study subject, self-reported wage negotiation styles, personality traits, economic preferences, IQ and subjective ability. Our results indicate that a large portion of the overall gap in expected wages relate to sorting into different study subjects/occupations and wage negotiation styles, while individual traits and expected labor force interruptions are largely unimportant.

Will Yield Factors Tell More? A Generalized Affine HJM Model With Unspanned Stochastic Volatility (G1, E4)

Qingbin Wang
,
Johnson & Wales University

Abstract

Curve-fitting models use some parameterization of yield curves with parameters having geometric meanings of level, slope, and curvature depending on their parameter loadings. Attempts have been made to use the geometric information in curve-fitting models to improve the empirical performance of dynamic affine models, such as Gaussian model in Christensen, Diebold, and Rudebush (2010). Unlike most affine short rate models, this paper develops a multifactor affine Heath- Jarrow-Morton (HJM) forward rate model with a general form of volatility. The factors in the model can form composite level, slope, and curvature, which is different from Wang (2014c) where factors form independent level, slope, and curvature. The model framework can be extended from Gaussian to different forms of stochastic volatility, either spanned or unspanned, while the bond yield formula remains unchanged. Another distinctive feature of the model is that stochastic volatility factors serve as the kernels of the yield factors’ long-run means, which are called shadow means due to the stochasticity of volatility factors. It allows bond yields indirectly depend on volatility factors yet without their presence in bond yield formula. This feature facilitates examining the interplay between bond yields and other factors, such as macroeconomic variables (Wang (2014b)), without the restriction of functional relationship between them. The model is tested with two data sets, U.S. treasury yields and LIBOR/Swap rates. The in-depth examination of the extracted factors and their geometric meanings shows that the movement patterns of yield factors change after the 2008 financial crisis, which indicates a structural change or regime switch. The paper also suggests a statistic called information utilization, which is used to study how investors respond to market situations. The analysis of information utilization shows its potential to identify business cycle and other drastic market changes.

Winner-Take-All Labor Markets and Environmental Quality

Haoming Liu
,
National University of Singapore
Jingfeng Lu
,
National University of Singapore
Alberto Salvo
,
National University of Singapore

Abstract

How do harsh ambient environments affect effort dynamics when workers compete for a prize over multiple rounds? When do workers "give up" early, at the expense of output quality? We examine the productivity of professional tennis athletes exposed to extreme environmental conditions. Workers are young, healthy, highly skilled, and experienced with severe heat and air pollution. Our setting includes the Australian Open, played in Melbourne every summer, and the China Open, played in Beijing every fall. First, we show that heat and PM2.5 pollution affect within-match player strategy and outcomes, in similar ways. Second, we build a three-stage contest model to help us understand the channels by which heat and pollution can affect unobserved player choices. Third, we estimate the structural model by Maximum Likelihood and interpret the economic primitives. Fourth, we conduct counterfactuals to assess how cooler and cleaner air would have changed tournament history. Our research contributes to better understanding of the benefits of mitigating global warming and abating air pollution.

Writing in Statistics and Economics Mass Lectures: Targeting Pain Points with Structured Writing-to-Learn (A2)

Stefan Ruediger
,
Arizona State University
Tatiana Batova
,
Arizona State University

Abstract

Business and economics students need to develop a variety of skills, from the knowledge of business and economic models, to law and policy to statistics and math to communicating complex information in effective and efficient ways within and outside of organizations. This presentation focusses on two specific subject areas and argues that providing students with assignments on the intersection of these two areas can significantly enhance learning. On the one hand, students need to understand and shape interactions in a variety of contexts, which are often impossible to address in a business communication class due to time limitations. On the other hand, they need to understand and apply complex mathematical and statistical models that can often be hard to practice in a mass lecture with its multiple-choice tests. This project relies on a collaborative effort between a professional/technical communication professor and an economics/statistics professor that aims at developing creative strategies to incorporate business writing assignments into business statistics and economics mass lectures. This study aims at helping students to improve understanding and application of business statistics and economic concepts through written assignments. Research shows that writing can be a powerful learning experience: it encourages students to think critically and apply new concepts to everyday life, while creating deeper meaning and promoting overall interest in a particular area of study. This is particularly applicable to business statistics and economics—two classes that usually have high failure rates. At the same time, students often struggle with applying knowledge and skills they gain in business writing classes outside of class, in situations that are not directly connected to class contexts. Combining these goals allowed learning to become a more comprehensive process for students: they were challenged to apply their business writing skills and to develop more creative and critical approaches to problem solving.