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  4. Preliminary Program
  5. AEA Poster Session
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AEA Poster Session

Poster Session

Friday, Jan. 7, 2022 7:00 AM - 6:00 PM (EST)

Saturday, Jan. 8, 2022 7:00 AM - 6:00 PM (EST)

Sunday, Jan. 9, 2022 7:00 AM - 3:00 PM (EST)

Hosted By: American Economic Association

'An Agent-based Stress Testing Framework of Central Clearing (G4, G2)

Dawid Zochowski
,
European Central Bank
Sebastian Krug
,
Christian Albrechts University

Abstract

We put forward a partial equilibrium model of a central counterparty (CCP) and clearing members (CM). Agents are profit optimizing and are exposed to market risk. We simulate the balance sheets and the leverage of the CCP and the CMs as a result of the market price movements. We also model the margin shortfalls and the entire default waterfall in case of CM defaults. Moreover, we analyze the stability of the network of counterparties in a system with and without a CCP. We compare the stability of the networks with and without a CCP by analyzing i) endogenous feedback effects between CM defaults and market liquidity, ii) the contagion to non-defaulting CM as well as iii) the contagion from service functions that CMs provide to the CCPs, such as liquidity provision or collateral and investment services.

We find that in a system with a single CCP overall less defaults occur than in a system without a CCP. In addition, a CCP mitigates contagion measured by lower amount of 2nd-round defaults. We also find that mark-to-market price feedbacks have considerable adverse impact on the stability of the system, while that the mutualization of losses has a strong stabilizing effect.

A Free and Fair Economy: A Game of Justice and Inclusion (C7, D7)

Demeze-Jouatsa Herman Ghislain
,
University of Bielefeld
Roland Pongou
,
University of Ottawa
Jean-Baptiste Tondji
,
University of Texas-Rio Grande Valley

Abstract

In this study, we show that principles of market justice guarantee equilibrium existence and efficiency in a free economy. Chief among these principles is that your pay should not depend on your name, and a more productive agent should not earn less. We generalize our findings to economies with social justice and inclusion, implemented in progressive taxation and redistribution, and guarantee a basic income to unproductive agents. Our analysis uncovers a new class of strategic form games by incorporating normative principles into non-cooperative game theory. Illustrations include applications to exchange economies, surplus distribution in a firm, and contagion and self-enforcing lockdown in a networked economy.

A Joint Top Income and Wealth Distribution (C5, D3)

Junyi Zhu
,
Deutsche Bundesbank
Viktor Steiner
,
Free University of Berlin

Abstract

Top distributions of income and wealth are still incompletely measured in many national statistics, particularly when using survey data. This paper develops the technique of incorporating the joint distributional relationship to enhance the estimation of these two top distributions by using the best data available for Germany. We leverage the bivariate copula to extrapolate both income and wealth distributions from German PHF (Panel on Household Finance) data under the incidental truncation model. The copula modelling grants the separability in choosing the estimation domain as well as the parametric specification between the marginal distribution and dependence structure. One distinct feature of our paper is to complement the model fit with external validation. The copula estimate can help us to perform out-of-sample prediction on the very top of the tail distribution from one margin conditional on the characteristics of the other. The validation exercises show that our copula-based approach can approximate much closer to the top tax data and wealth “rich list” than those unconditional marginal extrapolations. The data and effectiveness of our copula-based approach also verify our presumption of incidental truncation and differential detectability in the top lists.

A neural network ensemble approach for GDP forecasting (E3, C5)

Luigi Longo
,
IMT School for Advanced Studies-Lucca
Massimo Riccaboni
,
IMT School for Advanced Studies-Lucca
Armando Rungi
,
IMT School for Advanced Studies-Lucca

Abstract

We propose an ensemble learning methodology to forecast the future US GDP growth release. Our approach combines a Recurrent Neural Network (RNN) and a Dynamic Factor model accounting for time-variation in the mean with a Generalized Autoregressive Score (DFM-GAS). We show how our approach improves forecasts in the aftermath of the 2008-09 global financial crisis by reducing the forecast error for the one-quarter horizon. An exercise on the COVID-19 recession shows a good performance during the economic rebound. Eventually, we provide an interpretable machine learning routine based on integrated gradients to evaluate how the features of the model reflect the evolution of the business cycle.

A new Fed policy tool to ***Stop Inflation without causing a Recession*** => CBDC "FedAccounts" (E5, E4)

Lawrence C. Marsh
,
University of Notre Dame

Abstract

This research, which is based on the author’s forthcoming book "Distorted Money Flow," examines the diversion of the flow of money in recent decades from Main Street to Wall Street that has resulted in a buildup of both private debt and public debt without which the people on Main Street would be unable to buy back the value of the goods and services they are producing, and examines a way of achieving much tighter and more immediate control over consumer demand.

The Federal Reserve uses a supply-of-money tool to stop inflation by raising interest rates in financial markets causing businesses to cut back employee working hours, lay off workers and close outlets. Countering inflation by cutting back supply-of-goods-and-services in an attempt to curb demand-for-goods-and-services makes no sense when a consumer-savings tool can be created to stop inflation directly and more effectively.

This is achieved by modifying "The Public Banking Act" as recently introduced in Congress to create a digital cybersecurity block-chained Federal Reserve smartphone bank account for every American. Just as ATMs can be used by competing banks for a fee, private banks could be offered a fee to host these Federal Reserve bank accounts for individuals who prefer physical rather than direct online computer and smartphone digital banking.

To focus these accounts on consumers with a high marginal propensity to consume and to avoid competing with commercial banks for large accounts, these accounts could be restricted to one account per Social Security number and interest could be earned only on some base amount (e.g. $10,000 or less). Initially, $1,000 would be put into each account, which could not be withdrawn until after age 70. However, account holders could add additional money up to a specified annual limit until the total in their account reached the base amount. Money above the base amount would earn no interest. Any money above the initial $1,000 could be withdrawn at any time along with interest earned.

Whenever excessive inflation threatened, the Federal Reserve could set high interest rates for these accounts, increase the annual contribution limit allowed for that year and increase the base amount to encourage savings and discourage consumer demand, while keeping interest rates somewhat lower in the financial markets to encourage an increase in the supply of goods and services to tightly control inflation. See short YouTube video on "How to STOP INFLATION without causing a RECESSION" => https://www.youtube.com/watch?v=nnMT7DVyK0g

In the face of an economic downturn, the interest rate on savings could be lowered and the Federal Reserve could inject money into these individual Federal Reserve bank accounts promoting cash withdrawals and spending to stimulate consumer demand as necessary to restore the economy to full employment. Consistent with "The Public Banking Act" as recently introduced in Congress, the Federal Reserve bank would be authorized to offer small loans to individuals and small businesses to further encourage consumer demand and business activity and employment. See short YouTube video on "OPTIMAL MONEY FLOW" => https://www.youtube.com/watch?v=-hqBD3ZEhIM

Get more details at => https://optimal-money-flow.website/

.

A New Theoretical Foundation for the Shape of Utility Functions over Wealth (D9, D6)

Chishio Furukawa
,
Yokohama National University

Abstract

This paper proposes a new theoretical foundation for the shape of utility functions that holds regardless of contextual details. In particular, when decisionmakers face an underlying distribution of consumption values for which they allocate their wealth, their utility over that wealth is governed by that distribution. When the distribution has a Pareto tail, the utility function exhibits a constant elasticity. As its exponent approaches one following Zipf's Law, the utility function becomes approximately logarithmic. Based on Zipf's Law, a new utility function that nests canonical utility functions is proposed. As distributions induced by plausible stochastic processes replicate labor supply elasticities that are in accord with real-world data, this finding has practical benefits for economists.

A Pandemic Trap: Juggling Stringency between Unemployment and COVID-19 Cases (H1, I1)

Joshua Ping Ang
,
Rogers State University

Abstract

Using simultaneous equations models with panel data of 50 U.S. states, we examine the bi-directional and dynamic relationships between COVID-19 cases and unemployment in response to stringency policy. These relationships are critical to controlling COVID-19 spread while preserving the economy. When COVID-19 cases increase, we find that stringency policy becomes more restrictive and is effective in lowering cases. However, a high unemployment rate leads the government to reduce stringency, since implementing it increases the unemployment rate. We also find that the governor’s approval ratings positively affect state-level stringency policy; unemployment is affected negatively by retail sales and positively by labor participation, and temperature negatively affects the infection cases.

A Structural Analysis of Simple Contracts (C0, L0)

Daiqiang Zhang
,
State University of New York-Albany

Abstract

This paper provides an econometric framework for analyzing simple contracts where an
agent chooses between a fixed-price option and a cost-reimbursement option provided by a
principal. First, we propose a consistent procedure for testing the null hypothesis of a corresponding cost function being linear, which is widely assumed for tractability in the literature. Motivated by the rejection of such a null based on our empirical data, next we establish nonparametric identification, without restricting the cost function to be linear, for all model primitives conditioned on the agent exerting nonzero effort. These primitives include agent's cost and disutility functions, distribution of agent efficiency type, and parameters that characterize agent's bargaining power and intertemporal preference. Moreover, we propose a consistent procedure to implement the identification results for estimation. In our empirical study, we find strong evidence against linearity of the cost function. The importance of this empirical finding is further evidenced by a welfare analysis, which shows the welfare assessment to be sensitive to the specification of cost function.

A Structural Model of Subjective Well-Being (I3, J2)

Jinyang Yang
,
Virginia Tech
Liang You
,
Shanxi University of Finance and Economics

Abstract

I invoke the life-cycle labor supply and consumption framework to model subjective well-being as utility maximization. This framework opens the black box of material aspirations by incorporating two concepts: income desire and consumption desire, where the former adjusts on one's current income and the latter is determined by one's reference group. The framework has two predictions: (1) neighborhood income can be used as an instrument for identifying the impact of reference income on SWB, and (2) long-run impact of income on SWB can be isolated if we assume one's ``reference bias'' and ``optimism bias'' is unchanged over time. Our designed survey of all households in two homogeneous villages in China controls for sorting into neighborhoods, occupational effects and survey participation bias. The results show doubling one's reference income decreases SWB, measured by life satisfaction, by 0.6, which is less important than one's own income. The long-run impact of income on SWB is substantial, around 0.4.

A Tale of Gold and Blood: The Unintended Consequences of Market Regulation on Local Violence (O1, Q3)

Rafael Pucci
,
Insper-Brazil
Leila Pereira
,
Insper-Brazil

Abstract

How can a small change in fiscal accountability boost violent disputes for valuable natural resources? In this paper, we investigate a regulatory change in Brazil that greatly reduced governmental monitoring capacity against gold laundering and we show how this affected violence in illegal gold-mining sites. Because the new regulation introduced in 2013 made it harder for authorities to find illegal gold transactions between miners and first-buyers, demand for it increased and boosted competition for illegal mining sites, leading to more violence. To verify this, we devise a theoretical model and test its implications using a unique database combining gold deposits, Indigenous Territories, Natural Conservation Areas, environmental crimes, deforestation, and homicide rates. With a difference-in-differences design, we find that municipalities more exposed to illegal mining experienced extra 8 homicides per 100,000 people - or an increase of roughly 20% - after the regulation was passed. Moreover, the level of illegal activity, as well as deforestation, increased in places exposed to illegal gold-mining after the regulatory change.

A Tale of Two Firms (E3, E5)

Eunmi Ko
,
Rochester Institute of Technology

Abstract

This paper explores a contribution of the polarization in price-cost markups (see Diez, Fan, Villegas-Sanchez, 2021) to the slowdown of inflation/disinflation responses. Based on the basic general equilibrium model as in Gali (2015, Chapter 3), I extend the model to have two types of firms: high- and low-markup firms. In this environment, I compare the inflation responses of various shocks to the economy with the inflation responses in the single markup environments. The polarization on price-cost markups has a jamming effect on the responses of the aggregate price level, and the inflation responses are subdued in the polarized markup environment.

A Theory of Debt Maturity and Innovation (G3)

Yuliyan Mitkov
,
University of Bonn

Abstract

The financing of innovative firms must balance two goals. On the one hand, since innovation is inherently risky, the entrepreneur must receive adequate protection after failure. Simultaneously, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. Meeting these two goals can be especially challenging when contracts are incomplete and shaped by renegotiation. I show how an appropriate choice of debt maturity, together with ex-post contract renegotiation, embeds a "put option" into the firm's capital structure. The put is exercised when liquidation is efficient, and it partially insures the entrepreneur against failure and thus motivates innovation. The theory has novel empirical implications for the financing patterns of innovative firms.

A Theory of Subjective Feeling with Applications to Time Allocation (D9, D0)

Orges Ormanidhi
,
University of Minnesota
Jay S. Coggins
,
University of Minnesota

Abstract

In standard consumer theory, preferences are regarded as primitive. People are assumed capable of ranking any two bundles, and rationality implies choosing the most preferred bundle among available alternatives. Failure to optimize is considered anomalous. But what if, as suggested by some neuroscientists, preferences do not lie at the heart of human cognition? What if observed behavior is not based on an optimizing impulse?

We present a theory of the human experience that is independent of preference, and can also be free of the optimizing impulse. Our primitive called subjective feeling, akin to Jevons’s quantity of feeling, captures an individual’s ``instantaneous experiences” from both the engaged activity i and, given i, non-engaged activities j|i. When accumulated over time, these instantaneous experiences capture what we call ``integrated experience” from both i and all j|i's.

An essential distinction is maintained between a subject, who owns subjective feeling, and observers who wish to measure or estimate it. As observers, we call our measure of the primitive over time ``intensity of feeling,” f_i(t) for the engaged activity and f_j|i(t) for non-engaged activities. The activity on which a subject is spending time is the engaged activity and the remaining activities are non-engaged activities. Integrated experience is measured, from observers's perspective, by the integrals of f_i(t) and all f_j|i(t) during an interval of time.

We prove the existence of functions f_i(t) and f_j|i(t) that represent subjective feeling. Our theory rests upon three assumptions: I) a subject is considering spending time on a finite set of activities; II) at any moment in time, we assume that the subject is engaged in a single activity; and III) the rate of change in the intensity of feeling from an activity equals the difference between the proportional change in the intensity of feeling function for that activity and the sum of proportional changes in the intensity of feeling functions for the other activities, up to a coefficient of proportionality, also a function of time. These functions, for the engaged activity and all non-engaged activities, act simultaneously on the subject at every moment in time.

We apply our theory to time-allocation decisions. We explain a subject's choices of time allocations to different activities with a descriptive framework without imposing an optimizing impulse. Then, we impose an optimizing impulse and predict the subject's choice of time allocation and the order of engaged activities. Our descriptive framework relies on the concept of the switch-time, which is the instant when an engaged activity becomes a non-engaged activity and one of non-engaged activities becomes the engaged activity. Our prescriptive framework relies on the concept of conditional rationality, which is the subject's cognitive ability to order a finite number of overall experiences.

Our theory expands modern economic theory by making it more general and more generous. More general because our theory explains a non-optimal choice of time allocation and more generous because it has weaker assumptions, in particular a weak version of rationality, and predicts both the optimal time allocation and order of engaged activities.

Accounting for Transshipment: The Case of Kosovo (F1)

Shushanik Hakobyan
,
International Monetary Fund

Abstract

In November 2018, Kosovo imposed 100 percent tariff on goods imported from Serbia and Bosnia and Hercegovina. The tariff caused immediate and significant disruptions in regional trade flows. Imports from Serbia, the second largest trading partner of Kosovo after the EU, dropped to nearly zero by early 2019 and remained negligible thereafter. This paper empirically traces the transshipment from Serbia and Bosnia and Hercegovina to Kosovo via neighboring countries. Using imports data for 2017-19 at the HS 6-digit level and difference‐in‐difference approach to identify products that were previously being exported from Serbia and Bosnia and Hercegovina to Kosovo, this paper provides evidence of evasion of Kosovar tariff through transshipment via Albania and North Macedonia.

Adaptive Importance Sampling for Large DSGE Models (E1, C1)

Stefano Grassi
,
University of Rome-Tor Vergata
Marco Lorusso
,
Newcastle University
Francesco Ravazzolo
,
Free University of Bozen-Bolzano

Abstract

The paper introduces a new adaptive methodology for the estimation of dynamic stochastic general equilibrium (DSGE) models based on the Mixture of t by Importance Sampling weighted Expectation-Maximization (MitISEM). The use of Importance Sampling and of an adaptive scheme based on Expectation Maximization allows estimation of large-scale models and highly complex forms. Simulation exercises show how our method achieves identification of posterior distributions in several cases, including standard New Keynesians and macroeconomic models. We apply the MitISEM to estimate a large-scale open economy model encompassing international trade between two countries, namely Canada and the US. For both countries, we consider a rich fiscal policy sector that includes two different types of public expenditure: productive and unproductive government spending. Our findings show that, in the presence of nominal rigidities, an increase in productive spending generates a crowding-in on domestic private consumption whereas unproductive spending induces a fall in domestic private consumption. Finally, we find that irrespective to the type of government expenditure, an increase in public spending for the domestic economy induces an exchange rate appreciation and an improvement in the trade balance.

Aggregate Fluctuations from Clustered Micro Shocks (E3, E2)

Daisoon Kim
,
North Carolina State University

Abstract

Idiosyncratic firm-level shocks can generate macroeconomic fluctuations where they correlate across firms. However, most business cycle research has ignored the cross-firm pairwise correlations because a firm's cross-sectionally demeaned fluctuations are asymptotically uncorrelated with other firms. This argument breaks down if the variance-covariance matrix of idiosyncratic shocks differs across firms, as shown in the US data. Thus, I investigate how correlated idiosyncratic movements across firms within a cluster lead to macroeconomic fluctuations. These clustered origins well explain the evolution of the US GDP's volatility, especially the great moderation. Furthermore, their contributions to the volatility start to rise from around 10% to 25% in the recent two decades.

Aggregate Liquidity Allocation and Endogenous Uncertainty (E1, G0)

Ge Zhou
,
Zhejiang University

Abstract

This paper provides a continuous time DSGE model to shed light on an endogenous mechanism of liquidity allocation between real economy and financial system. This theory is helpful for us to understand the weak investment and saving glut of non-financial corporates in main advanced economies during the current recovery from the Great Recession. Physical capitals have less liquidity than their corresponding equities. With financial frictions, investment depends not only on the equity price but also on the capital structure of corporates. When the net worth of entrepreneurs who are risk-averse are low, they will disinvest and hold more financial assets to hedge against risks. This leads to more funds flowing into financial system so that a financial boom with high system risks but a slow economic recovery.

Aggregate Uncertainty and the Micro-Dynamics of Firms (E3)

Nicolo Dalvit
,
World Bank and Sciences Po

Abstract

Using firm level micro-data, I find evidence that firms with lower growth prospects are more sensitive to aggregate shocks. I interpret these findings using a model of demand accumulation and endogenous entry and exit decisions, which I then estimate on French data. The resulting cyclical dynamics of firms provide an explanation for the observed counter-cyclical dispersion in firms' growth rates. They suggest that cyclical dispersion is the result of a pre-existing and persistent characteristic of the firm and caution against its use as a proxy for time-varying uncertainty. The estimated negative correlation between a firm's sensitivity to aggregate shocks and its expected future growth rate is shown to have important consequences for the cyclical characteristics of entering and exiting firms. The quantitative model suggests that this compositional effect is sizeable and equivalent to around 10.5% of the drop in aggregate employment between 2008 and 2009.

Ambiguity, Date Labels, and Food Waste (D9, D8)

Ruiqing Miao
,
Auburn University
Roshell Rosales Aguilar
,
Auburn University
Norbert L.W. Wilson
,
Duke University

Abstract

The paper aims to understand how date labels (e.g., ‘best by’, and ‘use by’) would influence the consumer’s consumption decision. Existing studies have documented that date labels may cause consumers’ confusion about the edibility of food items and hence contribute to food waste. However, no study has investigated the underlying mechanism through which date labels may affect consumers’ food consumption decisions. This gap is important because legislators in the United States are contemplating regulating date labels to combat food waste (e.g., Food Date Labeling Act of 2019). The present study sheds light on the issue by theoretically modeling consumers’ decision under ambiguity and by using data collected from a series of experiments to test the hypotheses derived from the theoretical model.

We utilize an α-MaxMin model to depict a representative consumer’s decision making under ambiguity regarding whether or not to consume a food item with a certain date label. Testable hypotheses are derived from this theoretical. We conducted 16 series of laboratory experiments in two different cities in the United States (Auburn, AL and Ithaca, NY). The experiment includes an assessment of subjects’ ambiguity aversion parameters and solicitation of their food consumption decisions under various food item and date label scenarios. Results show that ‘use by’ date label will significantly increase waste of deli meat when compared with a ‘best by’ date label. A consumer who is more ambiguity averse would be more likely to discard deli meat labeled as ‘use by.’ These effects are not found for spaghetti sauce or eggs.

This study reveals the complexity of the interaction between date labels and consumers’ attitude toward ambiguity. It shows that simply changing food date labels might not be able to reduce food waste caused by consumers’ confusion on the information conveyed by these date labels.

An Explanation of Real U.S. Interest Rates with an Exchange Economy (E4, G1)

Tamas Z. Csabafi
,
University of Missouri-St. Louis
Max Gillman
,
University of Missouri-St. Louis

Abstract

The paper offers an explanation of historical quarterly real 3-month US Treasury bond interest rates in the United States economy since 1975. This offers one solution to the puzzle of standard asset pricing models being unable to explain rates through fundamentals alone. The model adds in a premium that can be viewed as reflecting liquidity by extending a standard exchange economy through the optimal use of bank supplied exchange credit. The paper contributes the closest fit to date of real interest rates in an exchange economy without liquidity elements added into the utility function. It explains business cycle filtered real ex-post interest rates, as well as procyclic output and labor. It also explains closely the actual level of real interest rates by adding back in the HP filtered trend. Three alternative shock construction methods are used and compared within this monetary business cycle framework that has a sparse set of shocks including bank productivity for the exchange credit sector. Results include robustness and sensitivity analysis such as comparison to a money-only economy. The Bayesian and iterative convergence methods yield a high correlation of the model implied real interest rate with data, and a relative volatility near one.

Ancestral Connections and Corporate Alliances: The Role of Culture in Mitigating Holdup (Z1, G4)

Yihui Pan
,
University of Utah
Xiaoxia Peng
,
University of Utah

Abstract

We study how culture works as an implicit incentive alignment mechanism to mitigate hold-up problems when firms form alliances. We measure ancestral connection between different areas using historical immigration from different countries to the U.S. and demonstrate its role in transmitting exogenous ideological shocks. We show that the ancestral composition of the area where firms locate influences their choices of alliance partners and new venture locations. Further, partners experience significantly better performance when the ancestral connection between their headquarters or between their inventors is stronger. Shared values and beliefs between firms’ key stakeholders likely underlie the role of ancestral connection.

Animal Spirits in Regulation: Evidence from Banking (G2, G4)

David Aldama-Navarrete
,
Federal Reserve Bank of Richmond
Filippo Curti
,
Federal Reserve Bank of Richmond
Sophia Kazinnik
,
Federal Reserve Bank of Richmond

Abstract

Are banking regulation and supervision consistent over time and space? We posit they are not, and that inconsistency in supervisory practice is influenced by variation in media sentiment toward banks. Further, we argue that this regulatory volatility is reflected in banks’ operational losses. We conjecture that this causal channel may lead to cyclicality in financial intermediation orthogonal to fundamentals.
To gauge variation in media sentiment toward banks, we perform sentiment analysis on a large textual corpus of US news publications; to measure regulatory response, we draw from proprietary Federal Reserve System data on confidential supervisory actions and bank operational losses, including legal damages, as well as court-docket information sourced from the Administrative Office of the United States Courts. Our empirical strategy relies on an IV approach to infer causality, using M&A activity among local media to instrument for potentially endogenous variation in media sentiment.

Are Historic Districts A Backdoor for Segregation? Yes and No (R2, J1)

Yang Zhou
,
University of North Texas
Jamie Bologna Pavlik
,
Texas Tech University

Abstract

Historic districts preserve the heritage of designated areas and increase the amenity for residents. However, these districts also come with restrictions and increased housing prices that could cause segregation. We study how two historic district programs impact residential segregation in Denver. We find that homebuyers are more likely to be White within historic districts, but that the official historic designation has no effect on this probability. More specifically, we calculate that the predicted probability of having a White homebuyer increases from 77 to over 80 percent when the home is located within a historic district. Similarly, we find that most transactions flow from White sellers to White buyers, regardless of official designation. Thus, while historic districts tend to be more segregated, official designation does not seem to amplify this existing problem.

Are Housing Rental Markets that Competitive? A Dynamic Monopoly Approach (D4, R0)

Goncalo Pessa Costa
,
City University of New York

Abstract

This paper develops a search model of the housing rental market with moving costs and imperfect information: the dynamic monopoly model. Landlords set the rent and, in equilibrium, there is an interval of rents charged for similar housing units, a consequence of landlords' market power. Within such interval, tenants turnover is higher the higher the rent charged, which results from a downward-sloping demand faced by individual landlords. The less elastic this demand is, the larger landlords' market power, and the larger the scope for public policy to regulate the market and improve efficiency. These implications are in stark contrast to those of the conventional perfect competition theory. Using data from the American Housing Survey, I create a data set of rental spells in New York City and estimate the average of that elasticity of demand, a measure of landlords' market power. To identify that estimate I use variation in rent that results from whether the housing units are rent controlled/stabilized, publicly owned or subsidized. The results suggest that the average NYC landlord has substantial market power. These findings are important for the public policy debate on housing inequalities, metropolitan housing crises and gentrification.

Are the Supporters of Socialism the Losers of Capitalism? Conformism in East Germany and Transition Success (P2, P3)

Max Deter
,
Wuppertal University
Martin Lange
,
ZEW Mannheim

Abstract

The empirical literature is inconclusive in whether democratization of a country goes together with a redistribution of economic resources (Acemoglu et al., 2015; Aidt et al., 2020). With newly available individual-level panel data on East Germany's socialist past, we analyze how former supporters and opponents of the system performed after reunification with the capitalist West. Opponents, who helped to overturn the communist system in the Peaceful Revolution, show increases in life satisfaction, income, and employment. Former members of the communist party and employees in the Stasi supervised area become less satisfied but have still higher incomes than the average East German population. The politically inactive silent majority lost strongly and show persistently lower levels of life satisfaction and labor market outcomes. Adverse effects are especially strong when individuals silently supported the communist system. Additional results show that conformism is also associated with political party preferences several decades after communism. The contribution to the literature on persistence of socialist elitism for economic outcomes are i) a novel dataset to analyze the results for the special case of East Germany, ii) the use of panel data to analyze differences in outcomes additionally to persistence effects, iii) the analysis of former dissidents of the system and their outcomes over a period of almost three decades. The paper relates to the economic literature on the long-lasting effects of socialism (Alesina and Fuchs-Schündeln, 2007; Becker, Mergele, and Woessmann, 2020) and the persistence of privileges of Communist elites (Geishecker and Haisken-DeNew, 2004; Vevcernik, 1995; Otrachshenko, Nikolova, and Popova, 2021).

Are You a Zombie? Machine Learning Methods to Classify Unviable Firms (G3, C5)

Angela De Martiis
,
University of Bern-Switzerland
Thomas Heil
,
Zeppelin University-Germany
Franziska Peter
,
Zeppelin University-Germany

Abstract

Using machine learning methods on high dimensional datasets of listed firms from Europe and the US, we develop a feature selection tool to categorize existing zombie firms and separate them from the non-zombies. In addition to confirming known variables, tree-based models allow us to find a new set of recurring and informative predictors that matter to capture tomorrow’s zombies. We find differences and similarities between zombie firms in Europe and the US over a crisis and non-crisis period and show that zombie status does not equal financial distress. Overall, these findings suggest that to examine the phenomenon of zombie companies a classification mechanism that outdoes conventional measures should be taken into account.

Assessing the Impact of COVID-19 on Trade: A Machine Learning Counterfactual Analysis (F1, O1)

Massimo Riccaboni
,
IMT School for Advanced Studies Lucca
Marco Dueñas
,
University of Bogotá Jorge Tadeo Lozano
Victor Ortiz
,
IMT School for Advanced Studies Lucca
Francesco Serti
,
IMT School for Advanced Studies Lucca
Federico Nutarelli
,
IMT School for Advanced Studies Lucca

Abstract

By interpreting exporters’ dynamics as a complex learning process, this paper constitutes the first attempt to investigate the effectiveness of different Machine Learning (ML) techniques in predicting firms’ trade status. We focus on the probability of Colombian firms surviving in the export market under two different scenarios: a COVID-19 setting and a non-COVID-19 counterfactual situation. By comparing the resulting predictions, we estimate the individual treatment effect of the COVID-19 shock on firms’ outcomes. On average, we find that the COVID-19 shock decreased a firm’s probability of surviving in the export market by about 20$p.p.$ in April 2020. Finally, we use a Classification Analysis (CA) to uncover the exporters' characteristics determining higher COVID-19 effects.

Asset Growth and Bond Performance: The Collateral Channel (G1, G0)

Yifei Li
,
University of Nevada-Reno
Fang Chen
,
University of New Haven
Wenfeng Wu
,
Shanghai Jiao Tong University
Tong Yu
,
University of Cincinnati

Abstract

The asset growth anomaly -- an inverse relationship between security performance and asset growth rates -- prevails not only in the equity market but also the corporate bond market. This can be attributed to risk and return tradeoff that bonds of high asset growth firms are better collateralized, driving lower default risk and expected return, or due to mispricing that investors under-estimate default probabilities of high asset growth issuers leading to a poor realized performance. We differentiate between these two possibilities by decomposing bond performance to yields and yield changes. We find that the underperformance of high asset growth bond issuers is mainly from the changes of bond yields. Among non-investment grade bonds where the anomaly effect is most intensive, the difference in bond performance caused of yield spread changes between extreme asset growth deciles is more than twice of the performance difference coming from yields spreads. We also show that bond issuers' collateral growth contributes significantly to the changes in yield spreads, and corroborating the mispricing interpretation, the collateral effect intensifies when bond market sentiment is high.

Asset Pricing In a World of Imperfect Foresight (G1, G4)

Felix Fattinger
,
Vienna University of Economics and Business
Peter Bossaerts
,
University of Melbourne
Frans van den Bogaerde
,
IFM Investors
Wenhao Yang
,
Chinese University of Hong Kong

Abstract

We consider a canonical asset pricing model, where agents with quadratic preferences are allowed to re-trade a limited set of securities over multiple periods, after which these securities expire, and agents consume their liquidation values. A key assumption in this model is that agents have perfect foresight: for all future contingencies, they correctly foresee the corresponding equilibrium prices. We show that, under myopia, prices generically are as if agents had perfect foresight. Yet their choices are wrong, because of neglected re-trading opportunities. In an experiment, we find both prices and choices to be consistent with myopia.

Asset Pricing with Option-Implied Consumption Growth (G1, E2)

Jinji Hao
,
Victoria University of Wellington

Abstract

Prompted by the asset pricing puzzles, particularly the equity premium puzzle (Mehra and Prescott, 1985) and the risk-free rate puzzle (Weil, 1989), the consumption-based asset pricing literature has been in search of more appropriate measures or models of consumption growth such that the resulted stochastic discount factors can be consistent with the asset returns for reasonable preference parameters. This paper shows that once the Epstein and Zin (1989) recursive preference, which is commonly used in the asset pricing literature, is assumed in a representative agent model, the market index option prices largely reveal the market subjective beliefs about the distribution of consumption growth and, thus, impose strong restrictions on the specification of consumption growth risk. The asset pricing with this option-implied consumption growth explains the data well. The model gives the data of option prices and stock returns enough flexibility in picking either a combination of low consumption risk and high risk aversion or a combination of high consumption risk and low risk aversion. The data indeed picks the latter with a risk aversion of 4.72, solving the equity premium puzzle. Moreover, the option-implied equity premium in real time predicts the future market returns better than the historical mean forecast as well as the popular predictors. The equilibrium risk-free rate not only matches the sample moments but also is highly (97%) correlated with the data. The model also implies a market conditional volatility in real time which not only matches the sample volatility on average but also predicts the future volatility much better than the lagged realized volatility or the option-implied risk-neutral volatility. Finally, the model also captures the dynamics of dividend-price ratio ratio and necessarily explains any asset pricing puzzles in the options market, e.g., the implied volatility skew, given that the option prices are taken as inputs.

Austerity and Young People's Political Attitudes in the U.K. (H5, F5)

Colombe Ladreit
,
Bocconi University

Abstract

This paper uses a triple difference-in-differences to study the impact of the 2012 British austerity policies on youth political attitudes. I do so by merging longitudinal survey data from Understanding Society with a district-level estimate of the austerity shock each individual was subject to over the years 2013 to 2015. I find that the welfare cuts led to a decrease in young people's interest in politics and the sense of satisfaction they get from voting. They are also more likely to believe they have no say in what the government does and feel their political influence has diminished. Overall, my results show that the British youth were at risk of higher political disenfranchisement following the implementation of the austerity measures.

Bad News, Good News: Coverage and Response Asymmetries (C3, E3)

Luca Gambetti
,
Autonomous University of Barcelona, Barcelona GSE and University of Turin
Nicolò Maffei-Faccioli
,
Bocconi University and IGIER
Sarah Zoi
,
Autonomous University of Barcelona and Barcelona GSE

Abstract

We construct two measures of media coverage of bad and good unemployment figures based on three major US newspapers. Using nonlinear SVAR techniques, we document four facts. (i) There is no significant negativity bias in media coverage of economic events. The asymmetric responsiveness of newspapers to positive and negative economic shifts is entirely explained by the higher persistence of bad shocks. (ii) Bad news are more informative than good news. (iii) Bad news increase agents’ agreement about economic outcomes and modify their expectations more than good news. (iv) Consumption reacts to bad news, but not to good news.

Bank Capital Requirements, Lending Supply and Economic Activity (E3, G0)

Antonio M. Conti
,
Bank of Italy

Abstract

We evaluate the relation between bank capital, lending supply and economic activity using
Italian data over 1993-2015, a period which covers three key post-crisis regulatory and supervisory
measures (the Basel III reform; the 2011 EBA Stress test; the ECB’s Comprehensive Assessment
and launch of the Single Supervisory Mechanism – SSM). We quantify the effects of increased
bank capital requirements adopting a novel procedure which recovers the size of the policy actions
relying on scenario analysis and Bayesian VARs with a rich characterization of the banking sector.
We document that the EBA and SSM measures unpredictably raised Tier 1 ratio by about 2.5
percentage points, leading to an average reduction in credit to firms and households by 5 and 4%,
respectively, and to a decline in real GDP by over 2 and 4%. The Basel III bank capital increase is
instead correctly anticipated in out-of-sample forecasting. These findings are robust to time-varying
model parameters and consistent with narrative sign restrictions techniques.

Bank Risk and Bank Rents: The Franchise Value Hypothesis Reconsidered (G2, G2)

Gianni De Nicolo
,
Johns Hopkins University
Viktoriya Zotova
,
University of Maryland

Abstract

The predictive relationship between banks' Tobin Q and a theory-based measure of bank risk of insolvency is highly non-linear. Using large samples of publicly quoted banks in the US, Europe, and Asia during 1985-2017, we find that higher values of Q predict lower bank risk of insolvency up to values of Q close to 1, but higher values of Q predict higher bank risk of insolvency when Q exceeds 1 and franchise value is priced. The franchise value hypothesis (FVH) postulating a negative relationship between bank rents and risk is thus rejected in our samples. We then construct proxy measures of bank efficiency rents, loan and deposit pricing power rents, and rents due to government guarantees as the potential sources of franchise value, and show that an increase of any if these rents associated with higher franchise values, hence they predict higher bank risk of insolvency. We provide an explanation of the rejection of the FVH using a calibration of two standard financial models of the banking firm, and a simple industry model with endogenous entry.

Bank Specialization and Zombie Lending (G2, G3)

Olivier De Jonghe
,
National Bank of Belgium
Klaas Mulier
,
Ghent University
Ilia Samarin
,
National Bank of Belgium

Abstract

Banks often specialize in lending to specific sectors and gain sector-specific information through having many interactions with borrowers from the same sector. We argue that such sectoral expertise also makes banks more aware of zombie firms in the sector as well as more knowledgeable about the negative impact that zombie firms exert on healthy borrowers. This induces specialized banks to reduce zombie lending. The reduction in zombie lending is larger when the scope and opportunity cost of negative spillovers to healthy borrowers is larger; namely, when the fraction of sectoral labor stuck in zombie firms is larger or when the sector is expected to grow faster. Additionally, specialized banks reduce zombie lending less in sectors with higher asset specificity, as zombie firms’ default (and potential asset fire sales) could trigger reductions in healthy borrowers’ collateral values

Banks, Shadow Banks, and Business Cycles (E3, G2)

Yvan Becard
,
Pontifical Catholic University-Rio de Janeiro
David Gauthier
,
Bank of England

Abstract

Credit spreads on household and business loans move in lockstep and spike in every recession. We propose a theory as to why banks tighten their lending standards following a drop in market sentiment. The key feature is a procyclical shadow banking sector that shifts risk from traditional banks to investors through securitization. We fit the model to euro area data and find that market sentiment shocks are the main driver of business and financial cycles over the past two decades.

Better Safe than Sorry: The Impact of Green Card Delays on the Propensity of Foreign STEM Doctorates to Work at Startups (J6)

Holden A. Diethorn
,
NBER

Abstract

In October 2005, newly-binding country-specific green card quotas led to multiple-year delays in the processing of EB-2 permanent residency visa applications for Chinese and Indian doctorates. This created an incentive for Chinese and Indian doctorates to seek employment at established firms over startups as the former are generally less likely to shut down prior to the resolution of visa delays. Using a difference-in-differences approach, I find that temporary resident STEM doctorates subject to EB-2 delays were 7.2 percentage points (42%) less likely to work at a startup in their first decade of employment after the emergence of visa delays.

Biased News and Irrational Investors: Evidence from Biased Beliefs about Uncertainty and Information Acquisition (G1, G4)

Jiatao Liu
,
Bayes Business School, University of London

Abstract

Investors who use biased information from news media subsequently tend to make irrational decisions about acquiring firm-specific information compared to rational expectations. This model of information acquisition yields testable predictions that are verified by using a novel dataset of news stories. First, when sentiment in news articles, as a proxy for biased public information, is more optimistic, investors tend to acquire less earnings-relevant information before the earnings announcement and vice versa. Second, the return predictability from firm-specific news sentiment confirms that it contributes to variations in asset information risk due, in a biased belief equilibrium, to the proportion of informed investors deviating from rational expectations. Overall, these findings suggest that biased public information inherent in news sentiment serves to irrationalize investors’ acquisition of firm-specific information through a biased perception of uncertainties in the risky asset payoff.

Birds of a Feather Invest Together - The Effect of National Culture on Financial Decisions (Z1, G5)

Veronika Molnár
,
University of Zurich and Swiss Finance Institute
Michele Pelli
,
University of Zurich and Swiss Finance Institute

Abstract

The empirical finance literature has until recently ignored the relevance of cultural traits in explaining financial dimensions. However, it seems reasonable to assume that agents are influenced by their national culture while making investment decisions, allocating financial assets, and forming risk preferences. In fact, as highlighted by Zingales (2015) “homo economicus was embedded in a cultural context and this context affected people’s choices in a relevant way”.

This study seeks to understand the impact of national culture on asset allocation and investment decisions based on a cross-country analysis. We base our baseline analysis on OECD countries and rely on Hofstede’s (2001) six-dimension model as our primary source of national cultural traits. We determine the relationship between national cultural traits and financial decisions by conducting a cross-sectional analysis. To establish causality, we employ the empirical methodology recommended by Zingales (2015). Namely, we “isolate the cultural component of beliefs and preferences by instrumenting them with their cultural determinants”. We closely follow the implementation devised by Berger et al. (2020) and apply it to the “OECD Household’s Financial Assets and Liabilities database”. The database is available from 1995 to 2019 and provides internationally comparable asset allocation observations of household financial assets broken down into six main categories.

We find that, in more individualistic societies, households hold less currency and deposits and invest more in equity and mutual funds than in more collectivist societies. In nations characterized by a greater uncertainty avoidance index, households hold more currency and deposits, invest more in money market funds and bonds but less in equity and mutual funds. In countries in which the power is distributed unequally, households hold more currency and deposits and, unexpectedly, invest less in pension funds and life insurances.

Bond Financing Channel of Monetary Policy: Evidence from Chinese Bank Lending (E5)

Yi Huang
,
Graduate Institute of International and Development Studies
Bing Lu
,
Beijing Normal University
Hao Zhou
,
Tsinghua University

Abstract

Using granular loan-level data from China, this paper proposes the bond financing channel of monetary policy transmission. We study the lending behavior of the bank in response to funding costs fluctuation caused by monetary policy shock. The main findings show that tighter monetary policy would increase loan rate and loan spread through the bond financing channel. In addition, it would also reduce loan volume and increase loan quality. We also explore the heterogeneous effect of monetary policy shock. The pass-through of monetary policy is stronger in the tight monetary policy period, as well as in areas with lower level of economic development, weaker fiscal capacity, and smaller bank penetration.

Bond Pricing and Business Cycles with Central Bank Asset Purchases (E3, E5)

Ronald Mau
,
University of Mississippi

Abstract

This paper studies the term premium in a general equilibrium model with a financial constraint and central bank asset purchases. Structural estimates of the term premium match past empirical measures. Term premium dynamics are policy dependent, with Federal Reserve quantitative easing programs reducing the term premium by 1.25% at peak and over 0.9% on average from 2009 to 2019. The model introduces household debt with a loan-in-advance constraint. Other models introduce household debt with relatively impatient agents. The loan-in-advance specification nests the relative impatience setup. Endogenous debt rollover under the loan-in-advance specification dampens the estimated effect of asset purchases on GDP.

Relative to past papers, I use a simple New Keynesian model to show how the term premium acts as an endogenous cost channel in the Phillips curve. Expected changes to the term premium act as a credit wedge in the IS curve. Current inflation is a function of the forward-looking paths of the output gap and term premium.

Structural estimates of the term premium are consistent with measures from Kim and Wright (2005) or Adrian, Crump, and Moench (2013). The loan-in-advance setup from this paper generalizes the "Four-equation New Keynesian Model" from Sims, Wu, and Zhang (2020), allowing the term premium to act as an endogenous source of propagation for non-financial shocks. Alternatively, under the four-equation setup, the term premium is only the origination point by which financial shocks propagate to the economy.

Finally, the loan-in-advance specification alters traditional forward guidance concerns in the New Keynesian literature. The presence of a financial wedge dampens the effect of forward guidance in the short- to medium-run, but does not alleviate long-run forward guidance perplexities common to the New Keynesian literature.

Born to Be Prime: Persistence in the U.S. Consumer Credit Market (G5, J0)

Davide Pietrobon
,
University of Geneva
Giacomo De Giorgi
,
University of Geneva

Abstract

We document the presence of intragenerational persistence in the U.S. consumer credit market. We construct profiles of the evolution of individuals' credit outcomes for a considerable part of their life using a panel representative of the U.S. population with credit history. Differences in credit scores around the time of entry in the credit market are persistent and predict distinctive life-cycle trajectories in crucial credit outcomes, such as mortgages and revolving credit.

Bounding Omitted Variable Bias Using Auxiliary Data (C1, J0)

Yujung Hwang
,
Johns Hopkins University

Abstract

This paper provides an estimator to bound omitted variable bias using auxiliary data including proxies for the omitted variable. The R package (’bndovb’) implementing the estimator is provided. This estimator can complement popular methods, such as Altonji et al. (2005) and Oster (2019), which bound the omitted variable bias using the identifying assumption that the degree of selection in treatment due to an unobservable is smaller than selection in treatment due to observables. Compared to Altonji et al. (2005) and Oster (2019), this method does not require making such an assumption and therefore may provide a robust bound when a researcher does not have a good prior about the degree of omitted variable bias. In addition, this method does not suffer from a multiple solution issue. An empirical example of estimating the Mincerian wage regression using auxiliary data including proxies for cognitive
and noncognitive ability is provided.

Brahmin Left versus Merchant Right: Changing Political Cleavages in 21 Western Democracies, 1948-2020 (P1, P5)

Amory Gethin
,
Paris School of Economics
Clara Martínez-Toledano
,
Imperial College London
Thomas Piketty
,
Paris School of Economics

Abstract

This article sheds new light on the long-run evolution of political cleavages in 21 Western democracies. We exploit a new database on the socioeconomic determinants of the vote, covering more than 300 elections held between 1948 and 2020. In the 1950s and 1960s, the vote for social democratic, socialist, and affiliated parties was associated with lower-educated and low-income voters. It has gradually become associated with higher-educated voters, giving rise in the 2010s to a disconnection between the effects of income and education on the vote: higher-educated voters now vote for the “left,” while high-income voters continue to vote for the “right.” This transition has been accelerated by the rise of green and anti-immigration movements, whose distinctive feature is to concentrate the votes of the higher-educated and lower-educated electorates. Combining our database with historical data on political parties’ programs, we provide evidence that the reversal of the education cleavage is strongly linked to the emergence of a new “sociocultural” axis of political conflict.

Breaking the Sovereign-Bank Nexus (G2, E4)

Jorge Abad
,
Bank of Spain

Abstract

This paper develops a quantitative dynamic general equilibrium model that features endogenous bank failure and sovereign default risk. It studies the feedback loop between sovereign and banking crises, and evaluates the effectiveness of bank capital regulation in addressing it. In the model, bank failure contributes to an increase of sovereign default risk through the government bailout of bank creditors. Meanwhile, holding high-yield risky sovereign bonds may be attractive to banks protected by limited liability. By increasing banks' failure risk and their funding costs, sovereign exposures hurt bank lending and contribute to further contractions in aggregate economic activity. Capital requirements shape banks' incentives to invest in sovereign debt. More stringent capital regulation makes banks safer, weakening the sovereign-bank nexus. This comes at the cost of constraining the overall supply of credit.

Burn Coal or Go Electric? A Randomized Field Experiment (Q5, D1)

Hanming Fang
,
University of Pennsylvania
King King Li
,
Shenzhen University
Peiyao Shen
,
ShanghaiTech University

Abstract

Coal heating in residential houses is an important source of indoor and outdoor air pollution, with damaging health consequences. We conduct a randomized field experiment to investigate the potential obstacles to electric heating involving three types of SMS campaign. These experiments allow us to examine the impact of electricity costs, health damages, and social information on the heating choices of neighbours for households in rural villages in northern China. We find that when households are given accurate feedback on electricity expenses, the usage of electric heating decreases substantially; the effect is most profound for households that are concerned about energy costs due to the salience bias. We find that health SMS and social comparison type SMS are only effective for households that are concerned about the health damage from coal heating or the decision of others.

Can a ‘Pet’ Take a Bite Out of the Savings Shortfall? (D9, G4)

Joelle Saad-Lessler
,
Stevens Institute of Technology
Vahid Ashrafimoghari
,
Stevens Institute of Technology
Jordan Suchow
,
Stevens Institute of Technology

Abstract

This paper explores the potential for gamification to develop and nurture a saving habit among Americans. Students are introduced to ‘pet’ savings accounts that require continual care. The owners of these ‘pets’ are reminded periodically to feed them at the touch of a button, with positive reinforcement built in. The feeding of the digital savings pets is linked to an actual bank account, automatically transferring funds from a checking account to a dedicated savings account. The amount of money needed to feed the pet is small — several dollars a day — to help reframe the problem and reduce loss aversion. Converting the process of saving for retirement into one of caring for a pet today changes the reference point for individuals. Savers check in on their pets by getting indicators of their portfolio performance, translated into easily understood communication. The savings ‘pets’ will be launched among students at a university, to provide a proof of concept. Results will analyze the success of this approach in increasing saving accumulations among students, and evaluate its promise for tackling the savings shortfall among Americans.

Can Air Pollution Save Lives? The Impacts of Air Quality on Risky Behavior (I1, Q5)

Yau-Huo (Jimmy) Shr
,
National Taiwan University
Wen Hsu
,
National Taiwan University

Abstract

In this paper, we find a rare “benefit” of air pollution: reducing the number of road accidents. Although studies have documented that elevated air pollution increases the number of traffic accidents and argued that impaired cognition is the main channel of such impact. Still, medical studies have found evidence showing that exposure to air pollution can increase the levels of stress hormone cortisol and make individuals more risk averse. We therefore hypothesize that air pollution can affect road safety through both cognitive impairment and higher level of risk aversion, where the former and latter would increase and decrease the number of accidents, respectively. Using the administrative individual-level traffic accident data from Taiwan between 2009 and 2015, this paper investigates the effect of air pollution on the number of traffic accidents with casualties. To treat the endogeneity between air quality and the number of traffic accidents, we use wind direction as an instrument variable to introduce exogenous variation in the level of air pollution. In addition, we apply a land-use regression model accounting for population, elevation, and emission data to interpolate 3km*3km level air quality data. Our results show that a 1 ug/m3 increase in PM2.5 concentration leads to a 0.3 – 0.5% reduction in the number of accidents associated with rule violations and a 0.3 – 0.6% reduction in speeding violations. However, the impacts of elevated air pollution on the number of accidents associated with carelessness and errors as well as violations that are “less risky,” such as illegal parking, are imprecisely estimated. These findings suggest that air pollution can save lives through less risky behavior. Moreover, those negative effects on violations are stronger among non-enclosed vehicle drivers, such as motorcyclists, so we argue that direct exposure is the main mechanism explaining how air pollution affect road use behavior.

Can Mentoring Alleviate Family Disadvantage in Adolescence? A Field Experiment to Improve Labor-Market Prospects (I2, J2)

Sven Resnjanskij
,
ifo Institute, University of Munich, and CESifo
Ludger Woessmann
,
ifo Institute, University of Munich, and CESifo
Jens Ruhose
,
Kiel University-Germany
Simon Wiederhold
,
Catholic University Eichstaett-Germany

Abstract

We study a mentoring program that aims to improve the labor-market prospects of schoolattending adolescents from disadvantaged families by offering them a university-student mentor. Our RCT investigates program effectiveness on three outcome dimensions that are highly predictive of adolescents’ later labor-market success: math grades, patience/social skills, and labor-market orientation. For low-SES adolescents, the one-to-one mentoring increases a combined index of the outcomes by half a standard deviation after one year, with significant increases in each dimension. Part of the treatment effect is mediated by establishing mentors as attachment figures who provide guidance for the future. The mentoring is not effective for higherSES adolescents. The results show that substituting lacking family support by other adults can help disadvantaged children at adolescent age.

Can Stay-at-Home Orders Create a Pandemic Housing Boom? (R1, R3)

Alina Arefeva
,
University of Wisconsin-Madison
Lu Han
,
University of Wisconsin-Madison

Abstract

We study how stay-at-home and shelter-in-place orders, imposed in the U.S. due to the COVID-19 outbreak, affected housing markets. We exploit county-level variation in the intervention dates to study the effect of these interventions on outcomes (prices, sales, and vacancies) both across and within housing markets. We use the ZTRAX transaction-level data and difference-in-difference strategy to show that stay-at-home orders significantly reduced home price and sales during the stay-at-home orders. Once the stay-at-home orders were lifted, prices and sales temporarily increased. Then the market recovery from the stay-at-home orders induced a housing and construction boom. We explain it with a search and matching model, in which increased search costs lead to lower prices and sales.

Can Whistleblowers Root Out Public Expenditure Fraud? Evidence from Medicare (I1, H4)

Jetson Leder-Luis
,
Boston University

Abstract

This paper analyzes private anti-fraud enforcement under the False Claims Act, which compensates whistleblowers for litigating against firms that overbill the government. I analyze several case studies of large, successfully prosecuted whistleblower lawsuits from the Medicare program, pairing new data on whistleblower lawsuits with large samples of Medicare Fee-for-Service claims from 1999 – 2016. I estimate that deterrence from $1.9 billion in whistleblower settlements generated future cost savings of nearly $19 billion, while imposing relatively few costs on the federal government. In a case study of fraudulent spine surgery, whistleblower-induced changes to care modestly improved patient health. These results suggest private enforcement by whistleblowers is a cost-effective way to combat public expenditure fraud.

Capital Allocation, the Leverage Ratio Requirement and Banks' Risk-Taking (G2, G0)

Ioana Neamtu
,
Bank of England
Quynh-Anh Vo
,
Bank of England

Abstract

This paper examines how the level (ie group or business unit level) at which regulatory requirements are applied affects banks’ asset risk. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is binding at the group consolidated level. If that is the leverage ratio requirement, then the allocation of regulatory constraints to business units either maintains or decreases the riskiness of banks’ investment portfolios. However, if the risk-weighted requirement is the binding constraint at the group level, applying regulatory requirements at the business unit level can lead to banks selecting riskier asset portfolios as optimal. We also find that the impact on banks’ asset risk differs across bank business models.

Causal Study Design: A Synthetic Control Approach to Evaluating Bangladesh’s Remittance Incentive Program (E6, G2)

Ethan Lobdell
,
Keck Graduate School

Abstract

This paper designs a causal study to explore Bangladesh’s 2% remittance incentive program on formal channel remittances. Globally, remittances are the most significant mechanism of foreign financial inflows with an estimated $550 billion sent annually. Globally, remittances surpass international development aid by three-fold and marginally outperform foreign direct investment as the primary form of foreign financing. There is clear empirical support for the impact remittances have on elevating individuals out of poverty. With an approximately 25% poverty rate in Bangladesh, the opportunity to amplify remittances that specifically target Bangladesh’s poor is a compelling opportunity. The 2% incentive program is a 53% reduction in the average 3.75% transaction fee that most Bangladeshi foreign nationals pay to remit. This could translate to anywhere between a 13% and 85% increase in overall remittances - with the higher outcome nearly doubling overall remittance inflows. Through the use of the synthetic control method, this paper has designed a comparative case study to establish the initial phases in evaluating the causal effect Bangladesh’s remittance incentive policy has on overall remittances compared to a synthetic control unit. The result of this paper was an empirical model that closely balanced key covariates, matched synthetic remittances with real remittances during the pre-treatment period, and tested the robustness of the model against control unit bias, covariate bias, and unmeasured covariate impacts. The strength of this paper is in its ability to maintain blindness to outcomes thereby preserving one of the most important causal comparative studies principles.

Central Bank Digital Currency and Quantitative Easing (E5, G2)

Martina Fraschini
,
University of Lausanne and Swiss Finance Institute
Luciano Alfredo Somoza
,
University of Lausanne and Swiss Finance Institute
Tammaro Terracciano
,
University of Geneva and Swiss Finance Institute

Abstract

We study how the introduction of a central bank digital currency (CBDC) interacts with ongoing monetary policies. We distinguish two policies: standard policy, where the central bank holds treasuries, and quantitative easing, where the central bank holds risky securities. We introduce an interest-bearing CBDC in each scenario and study the equilibrium allocations. We reach three main conclusions. First, the equilibrium impact of a CBDC depends on the ongoing monetary policy. Second, when the central bank conducts quantitative easing, the introduction of a CBDC is neutral under two conditions: the cost of issuing a CBDC is equal to the interest on reserves, and the demand for CBDC deposits is smaller than the amount of excess reserves in the system. Third, the introduction of a CBDC might render quantitative easing a quasi-permanent policy, as commercial banks optimally use their excess reserves to accommodate retailers' demand for switching from bank to CBDC deposits.

Central Bank Digital Currency in Brazil (E5, G2)

Isabella Kanczuk
,
Milton Academy
Joao Manoel Pinho de Mello
,
Brazil Central Bank

Abstract

Digital currencies---Central Bank backed digital payment instruments---pose several tradeoffs including the removal of anonymity that characterizes the use of cash. We study the implications of this trade-off in terms of credit, output, and welfare in the context of an emerging market, Brazil, where concerns are particularly pronounced. We consider a model of means of payment choices and households with different preferences over anonymous cash, non-anonymous deposits, and a digital currency overseen by a central authority that can choose the anonymity level. The financial sector is monopolistically competitive breaking the link between borrowing and lending rates. Calibrating the model to Brazil, we show that a sufficiently attractive digital currency reduces the holdings of both cash and bank deposits. Since the use of cash is costly, the use of the digital currency may increase welfare. However, if banks are liquidity constrained, the digital currency may result in lower credit and output leading to a reduction in welfare. We show that the digital currency interest remuneration can be set optimally to balance this trade-off dominating other policy choices.

Centralized Admission Systems and School Segregation: Evidence from a National Reform (I2)

Shanjukta Nath
,
Stanford University
Sergio Urzua
,
University of Maryland-College Park
Macarena Kutscher
,
University of Maryland-College Park

Abstract

This paper investigates whether the adoption of a centralized school admission system can alter within-school socio-economic diversity. We assess the importance of two factors: residential segregation and outside options. In theory, both have the potential to increase school segregation under centralized systems. We provide evidence confirming this premise. We take advantage of the largest school-admission reform implemented to date: Chile’s SAS, which in 2016 replaced the country’s decentralized system with a Deferred Acceptance algorithm. We exploit its sequential introduction across regions to quantify its heterogeneous impact on segregation. The empirical analysis is carried out using administrative data and a Difference-in-Difference strategy. SAS increased within-school segregation in areas with high levels of pre-existing residential segregation. School districts with the higher provision of private education experienced an uptick in school segregation as well. The migration of high-SES students to private schools emerges as a driver.

CEO International Background and Cross-Border M&As (G3, G4)

Busra Agcayazi
,
West Virginia University
Ann Marie Hibbert
,
West Virginia University
Thibaut Morillon
,
Elon University

Abstract

We investigate if having a CEO with an international background affects U.S. firms’ cross-border merger and acquisition (M&A) activities. By defining international background as having non-U.S. nationality, overseas education, foreign work experience, or combinations of these, we find that when a CEO has these characteristics, the firm is more likely to acquire international targets, and these deals are more value-enhancing. Moreover, our results indicate that having multiple international characteristics increases the likelihood and announcement returns of cross-border deals. The observed gains are related to the mitigating effect on due diligence, acquisition premium, and the financing of these deals mostly with equity. Additionally, CEOs with an international background realize most of the gains from conducting cross-border deals when the deals are announced within five years of their tenure as CEO of the firm. This suggests that U.S. firms are aware of the advantages that an international background provides. We address potential endogeneity concerns and our results are robust to alternate definitions of international background, a placebo test, and within-firm analysis.

Child Health and Parental Responses to an Unconditional Cash Transfer at Birth (I1, I3)

Stefanie Schurer
,
University of Sydney
Alexandra de Gendre
,
University of Sydney
John W. Lynch
,
University of Adelaide
Rhiannon Pilkington
,
University of Adelaide
Aurelie Meunier
,
University of York

Abstract

Baby Bonuses have been criticized for potentially harming unborn children because of strategic birth-shifting. Surprisingly little is known about the health consequences of unconditional cash transfers tied to the birth of a child. We estimate the causal impact of the unanticipated introduction of the Australian Baby Bonus (ABB) on child health from birth until age 5, using hospital and emergency room records linked to birth certificates and perinatal data from South Australia. We find that treated babies had fewer preventable, acute, and urgent hospital presentations, medical care that is accessible without copayments, in the first two years of life. In the second year of life, the ABB increased demand for elective care, which requires medical referrals and entails co-payments. Our findings suggest that the ABB improved child health through increased parental health investments, especially among disadvantaged families. Back-of-the-envelope calculations indicate that up to 34% of the ABB payouts were recouped within the first year of life of the beneficiary child due to improved health.

China's Economic Development under Currency Intervention (E5, O1)

Hailong Jin
,
South Dakota State University

Abstract

During the recent two decades, the spectacular economic growth of China has been under increasing scrutiny in the literature. However, prevailing discourses have either evaluated the causes/effects of the RMB exchange rate misalignment or theorized the investment/speculation channels. The implication of the Chinese-style currency intervention (CI) regime on economic development, in comparison, remains one of the most contentious subjects in international economics. To shed light on this issue, this research develops a new macroeconomic model to address the two core attributes of the Chinese economy during CI: the stagnant adjustment of the capital markets and the fast liberalization of the commodity markets. It investigates the impacts of macroeconomic controls on output growths and price levels from multiple aspects and makes several striking discoveries in opposition to key postulations of standard macroeconomic models. It also conducts a case study to examine China’s economic development during CI.

China’s Rebalancing and Gender Inequality (J1, E2)

Mariya Brussevich
,
International Monetary Fund
Era Dabla-Norris
,
International Monetary Fund
Bin Grace Li
,
International Monetary Fund

Abstract

This paper examines gender inequality in the context of structural change and rebalancing in China. In contrast with the predictions of the standard structural transformation literature, which suggest that rising service sector share is associated with narrowing gender gaps, we document that women’s relative wages and labor force participation in China have declined significantly during the last two decades. We provide a set of explanations for this finding. First, using household-level data, we show that women’s labor supply elasticity to spouse’s wages has increased dramatically between 1995 and 2013. This evidence is consistent with a U-shaped relationship between economic development and female labor force participation found in the literature. Second, using a theoretical model of structural transformation, we show that labor market wedges have increased over time, negatively impacting both women’s relative hours and earnings, which could in part be due to worsening employer discrimination and lack of affordable childcare options. Model counterfactuals suggest that removing discriminatory practices against women in the labor market and raising service sector productivity can boost both gender equality and economic growth in China.

Class Rank and Sibling Spillover Effects (I2, D1)

Alexandra de Gendre
,
University of Sydney

Abstract

Siblings are perhaps the most important childhood peers, yet we know little about sibling spillover effects on school achievement and their potential mechanisms. I estimate the effect of children’s rank in primary school on their younger sibling’s schooling outcomes using administrative records from the Netherlands. In this setting, variation in sibling rank is credibly exogenous and isolates sibling spillovers driven by behavioral and psychological mechanisms, as opposed to direct transmission of human capital. A 1SD increase in child rank in test scores increases their younger sibling’s test scores by 4.3 percent of a standard deviation, showing that behavioral mechanisms in sibling spillovers are empirically relevant. However, child rank also increases the chance that their sibling is recommended for the academic school track by 5 percent, even after accounting for younger sibling’s test scores. This recommendation is given exclusively by teachers, suggesting that teachers track children based on arguably meaningless information on their siblings. I argue that this is a form of teacher bias in expectation formation and show that it only occurs for non-migrant children. This points towards cultural proximity as an important factor in the formation of biased expectations, widening achievement gaps between migrant and non-migrant children. Overall, my findings show that school inputs can be important drivers of within-family human capital spillovers.

Cognitive Skills among Adults: An Impeding Factor for Gender Convergence? (J1, I2)

Lavinia Kinne
,
ifo Institute Munich-Germany
Alexandra Fedorets
,
DIW Berlin-Germany
Michele Battisti
,
University of Glasgow

Abstract

This paper investigates patterns in the distribution of cognitive skills among adult women and men. These are primarily measured by standardized numeracy tests in the international PIAAC survey. In line with observed rising educational equality, we report that the gender numeracy skill gap is lower for younger individuals. We document that field of study and being a parent explain the lower skill levels of women. Further, we show that women with the highest numeracy levels experience lower returns to skills compared to similarly-skilled men. These findings explain part of the gender pay gap and point at the mechanisms that create inequalities in the accumulation of skills, understanding which helps shaping policies to preserve human capital and address implicit gender discrimination.

College Education and Income Contingent Loans in Equilibrium (E6, I2)

Karol Mazur
,
University of Oxford

Abstract

We investigate the welfare implications of income-contingent loans (ICLs) used for financing college education in the presence of endogenous dropout risk. While providing insurance through ICLs increases college enrollment, it also generates a moral hazard cost of lowering educational effort and labor hours. We evaluate this insurance-incentives trade-off in a heterogeneous agent OLG life-cycle model calibrated to the US. We show that ICLs significantly increase welfare, the social cost of moral hazard is mild, the endogeneity of skill premium significantly reduces effectiveness of ICLs and that the non-linear repayment schedule is essential to delivering high welfare gains.

Collusion and Land Market Auctions (H7, K4)

Mengwei Lin
,
Cornell University

Abstract

This paper investigates the presence of collusion in auctions. Using a unique institutional feature of China's land market, we compare two formats of auctions and find that the two-stage auction generates a much lower price than the English auction. We exploit an exogenous variation created by an anti-corruption campaign to show that "corrupted" officials chose the two-stage auction less often during the inspection. Thus corruption can explain the price difference. We further document the existence of another type of collusion by showing that the security deposit rate has a reverse-U shape impact on the transaction price. Bidder collusion can explain the low price in the lower end of the security deposit rate axis, and corruption can rationalize the low price on the other end. We also find evidence consistent with the presence of a bid rotation scheme by showing a positive correlation between the closeness of firms and the timing of when they won the land parcels.

Combining Financial Incentives with Nudges to Increase Preschool Parental Engagement (I2, D1)

Rohen Shah
,
University of Chicago
Ariel Kalil
,
University of Chicago
Susan Mayer
,
University of Chicago

Abstract

Disadvantaged children arrive at kindergarten behind their more advantaged peers in indicators of school readiness. Previous research shows that family engagement is a crucial aspect to improving child outcomes. As such, Head Start and other publicly supported preschools are required to spend substantial funds promoting family engagement. In order to increase parental attendance at school-sponsored family-engagement events, we designed an intervention using a combination of financial incentives and tools from behavioral economics. Our intervention was a 17-week Randomized Control Trial (RCT) with 319 parents across 6 preschools in Chicago. The treatment group was given a $25 per event incentive to attend 8 events sponsored by their preschool, as well as weekly text message reminders of the events. The financial incentive was framed using loss aversion, where the parents were given $200 in a virtual account, and lost $25 for missing each event. The overall likelihood of attending an event was 12.8% in the control group and 16.4% in the treatment group, representing a 28% increase. There was little heterogeneity by event time and type. Attendance was not substantially higher for events later in the day, where work conflicts are less likely to arise. While this increase is substantial in relative terms, the fact that the absolute level of attendance was still less than 20% despite high incentives in the treatment group might imply that parents put little value on such school-sponsored events.

Commitment and Conflict in Multilateral Bargaining (C7, D7)

Topi Miettinen
,
Helsinki GSE and Hanken School of Economics
Christoph Vanberg
,
University of Heidelberg

Abstract

We extend the Baron and Ferejohn (1989) model of multilateral bargaining, allowing players to take an aggressive bargaining posture by attempting to commit to a bargaining position prior to negotiating. Any such attempted commitment fails with an exogeneously given probability. If successful, commitment binds a player to reject any proposal which allocates to her a share below a self-imposed threshold. We characterize the symmetric stationary subgame perfect equilibria. Under unanimity rule, there are potentially many equilibria which can be ordered from the least to most inefficient, according to how many commitment attempts must fail in order for an agreement to arise. The most inefficient equilibrium exists independently of the number of players. More efficient commitment profiles cannot be sustained in equilibrium if the number of players is sufficiently large. Expected delay increases (setwise) with the number of players. Under any (super)majority rule, the unique equilibrium is efficient. The results suggest that the unanimity rule is particularly damaging if the number of legislators is large and the time lags between consecutive sessions are long.

Common Knowledge and Collective Action on Directed Communication Networks: Models and Experimental Findings (C7, D8)

Sarah McDonald
,
University of Virginia
Gizem Korkmaz
,
University of Virginia
Fernando Vega-Redondo
,
Bocconi University

Abstract

Social media platforms are critical tools in organizing collective action, such as the Occupy Wall Street protests and the Arab Spring, and more recent Black Lives Matter protests, and the 2021 Storming of the US Capitol. In collective action problems, individuals are willing to participate if there is a sufficient number of other participants, and this requires that individuals know about each other's willingness to participate (threshold) and that this information is common knowledge (CK). Social networks can help the spread of information and facilitate CK and coordination, making collective action possible.

In this paper, we propose game-theoretic models of collective action on Twitter and Facebook communication networks. We model collective action as a coordination game in which individuals post their thresholds. Our goal is to understand how actionable information spreads locally on social media platforms and to theoretically characterize the necessary and sufficient conditions for CK and the minimal substructures necessary for CK to occur. Previous models of CK and collective action (Chwe 1999, 2000) assume that the network structure is commonly known by everyone. We characterize the communication patterns that facilitate CK and coordination where the network structure is (i) known by everyone, and (ii) locally known. A model of collective action on Facebook (Korkmaz et al. 2014) assumes that communication is undirected. Our model relaxes the assumption of bidirectional communication and assumes that communication can occur in one direction. Prior works do not discuss CK on Twitter-type communication networks, and this work proposes game-theoretic models of CK on Twitter networks, focused on Twitter “retweets”.

To test the predictions of the models, we conduct human subject experiments to identify the effects of both network structure and communication on CK. We find that in networks that satisfy our theoretic predictions, a higher number of participants choose to participate.

Competition and Corruption: Highway Corruption in West Africa (K4, O1)

Jeremy D. Foltz
,
University of Wisconsin-Madison
Kangli Li
,
University of Wisconsin-Madison

Abstract

Petty corruption in the developing world impedes citizens from receiving public services
and operating their businesses. In this paper, we show the importance of market structure
in determining a corruption equilibrium. We do this in the context of highway merchandise
transportation in West Africa, where checkpoint officials frequently stop truck drivers for petty bribes. We exploit a road system with two alternative corridors to develop a model which
predicts that checkpoints in the two competing corridors follow a Bertrand game as they set
price equal to the marginal cost. Moreover, when costs to pass through one corridor increase
due to road construction, checkpoints in the other corridor raise prices and keep drivers waiting for longer. We estimate a difference-in-differences model to con rm that road construction did increase both bribes and enforced delays for stops in the unaffected corridor.
This work demonstrates the importance of competition among corrupted officials to facilitate public services for drivers and suggests that the effectiveness of a local intervention can be o set by reallocating customers towards officials who are not affected by it.

Compression as an Alternative to Central Clearing (G2, G0)

Willem J. van Vliet
,
Chinese University of Hong Kong
Ben Charoenwong
,
National University of Singapore

Abstract

In the wake of the 2008 financial crisis, regulators have turned to central clearing in an effort to reduce systemic risk. As part of the 2009 Pittsburgh Summit, the G20 leaders agreed that standardized over-the-counter (OTC) derivative contracts “should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties” (G20 Leaders 2009).

However, central clearing is not without its downsides. Having all trades routed through a single central counterparty (CCP) mechanically introduces a systemically important participant which itself may require more regulatory oversight. Furthermore, the failure of the CCP could have disastrous consequences for the entire market. The loss sharing mechanisms designed to reduce risk also introduce moral hazard problems for market participants. Margin requirements may be excessive, especially in the presence of multiple CCPs across markets (Duffie 2011).

In this paper, we first develop a tractable model for analyzing the risk structure of different bilateral networks with the same net exposures, and study the implications for systemic risk. We conduct counterfactual analyses based on the current market structure of foreign exchange swaps. We find that a slight modification of trade compression can mimic many of the desirable features of central clearing, and in some cases address the limitations of central clearing as well. Specifically, we show that including intermediary financial agents taking both long and short positions with different counterparties can result in many of the risk-sharing benefits of a centrally cleared market.

Our findings suggest trade compression is a viable alternative to CCPs for markets where central clearing is impossible, such as cross-border markets or markets where similar but not identical products are traded. Furthermore, as the post-compression market is still a bilateral market, and compression ultimately requires consent from all parties involved, compression is not as likely to introduce moral hazard problems.

Consensus Among Economists in 2020 - A Sharpening of the Picture (A1)

Doris Geide-Stevenson
,
Weber State University
Alvaro La Parra-Perez
,
Weber State University

Abstract

Based on an extensive survey research of American Economic Association (AEA) members, this paper updates previous work that has been conducted roughly every decade since the 1970's. Economists are asked about their level of agreement with 46 economic propositions. Using a number of measures to classify the distribution of responses, the study is able to discern areas where economists show consensus, but also areas where economists' consensus has shifted over time. Previous research has shown that economists show the strongest consensus for propositions that deal with the global economy and free trade. Historically, the least consensus is found for macroeconomic propositions. The 2020 survey keeps almost half of the propositions identical to the initial surveys conducted in the late 1970's, 1990, 2000 and 2011. The most striking result is an increased consensus on many economic propositions, specifically the appropriate role of fiscal policy in macroeconomics and issues surrounding income distribution. Economists now embrace the role of fiscal policy in a way not obvious in previous surveys and are largely supportive of government policies that mitigate income inequality. Another area of consensus is concern with climate change and the use of appropriate policy tools to address climate change.

Contagion, Migration and Misallocation in a Pandemic (I1, E6)

Ke Tang
,
Tsinghua University
Danxia Xie
,
Tsinghua University
Longtian Zhang
,
Central University of Finance and Economics

Abstract

We present a multi-city migration model to study the endogenous choices of migration during a pandemic and to evaluate various policy alternatives as well. Analytical solutions are provided under the two situations respectively: laissez-faire equilibrium and social optimum. We find that migration rates diverge under these two situations, especially for the infected people. We also provide a new cross-country empirical fact that countries with higher COVID-19 mortality disparity across sub-regions tend to have lower nationwide mortality rates. This new fact is inconsistent with the prediction of the traditional misallocation literature, nevertheless is aligned with our theoretical model, which can be seen as an extension of the misallocation framework with cross-region contagion and externality. In addition, through numerical analyses we observe that the total social welfare can be increased by up to 2% in two-week time span with better policies. This research can shed light on policy design under pandemic threat and also help to enrich the misallocation literature.

Corporate Social Responsibility and Financial Reporting Quality (G3, M0)

Dmitriy V. Chulkov
,
Indiana University
Xiaoqiong Wang
,
Indiana University

Abstract

This paper studies the relationship between corporate social responsibility (CSR) and financial reporting quality. Our findings based on a data sample over the period from 1991 to 2018 confirm a positive relationship between CSR and reporting quality and demonstrate that firms with higher levels of corporate social responsibility investment are associated with higher accuracy of financial forecasts, fewer earnings surprises, and greater coverage by financial analysts. Empirical results hold after we account for potential endogeneity in this relationship. Additional analyses reveal that the positive relationship between CSR and financial reporting quality is stronger for firms that face low agency concerns, and firms that have a higher level of customer awareness and more long-term institutional ownership. We also find that when firms are financially unconstrained, the link between CSR investments financial reporting quality becomes stronger. Finally, we document that firms with higher CSR and better financial reporting are more likely to experience lower risk and higher levels of information disclosure. The evidence supports the stakeholder value maximization view of CSR and identifies the areas
of positive impact of CSR investment at a firm.

Cost of Research and Education Activities in Us Colleges - Scalability, Complementarity, and Heterogeneous Efficiency (I2)

Hajime Shimao
,
Santa Fe Institute
Xiaoxiao Li
,
Villanova University
Michael Holton Price
,
Santa Fe Institute
Diogo Martins
,
Villanova University
Chris Kempes
,
Santa Fe Institute

Abstract

Universities in the United States are remarkably diverse in their efficiency, both in terms of research output and educational achievement. In the existing literature, the heterogeneity is under-explored due to the lack of appropriate data and methodological limitations. In this paper, we address this by exploiting a newly consolidated dataset and adopting a neural-network-based method to infer cost functions for universities. Our analyses reveal that there are substantial efficiency differences across universities. Particularly, we show that while both research and education outputs generally exhibit an economy of scale, their scalability largely depends on the size and other institutional characteristics. Similarly, research and education activities are complementary to each other (economy of scope) only when the scales of productions are small to medium. Furthermore, the empirical cost isoclines of universities can be non-convex which leads to important policy implications, including diverse optimal portfolios and specialization. In short, our fully data-driven analysis suggests that model assumptions need empirical validation.

Could Intra-Firm Informational Misalignment Explain Price-Setting Patterns? (E3, D8)

Victor Espanha Monteiro
,
INSPER
Diogo Guillén
,
INSPER

Abstract

We propose a simple model for firm's pricing decision, based on the interplay between communication within firm and the provision of incentives. Such mechanism, endogenously, generates discrete prices and explain price stickiness even though there is no cost on adjusting prices or acquiring information. We embed this firm structure in a multi-sector general equilibrium model and derive a new Phillips curve where the misalignment of incentives and the number of divisions of a given firm drive the slope of the Phillips curve, exposing a new channel to monetary policy and illustrating its impact. Empirically, we take the model into a new retail daily database across countries and supermarkets to stress the relationship between within firm incentives and price-setting discussion, providing an empirical estimation of the theoretical mechanism. Our model matches the moments of microeconomic evidence on price-setting, as well as the macro-impact of real effect of monetary policy.

Covered Bonds and Bank Portfolio Rebalancing (G2, G3)

Jin Cao
,
Norges Bank
Ragnar Juelsrud
,
Norges Bank
Talina Sondershaus
,
Halle Institute for Economic Research

Abstract

We use administrative and supervisory data at the bank-, loan- and firm-level to investigate the impact of covered bond issuances on bank lending and real economic outcomes. We show that the introduction of covered bonds leads to a rebalancing of bank portfolios from mortgages to corporate loans. We provide a theoretical framework for analyzing the impact of covered bonds on bank portfolio allocation, and highlight two opposing forces: On the one hand, covered bonds encourage banks to issue more mortgage loans due to lower funding costs. On the other hand, covered bonds enhance the liquidity of existing mortgages which allow banks to substitute mortgages with riskier corporate lending for higher yields. If initial bank liquidity is sufficiently low, the latter mechanism dominates. We provide empirical support for this by showing that the observed portfolio reallocation is driven by low-liquid banks. The increase in corporate credit leads to more favorable outcomes at the firm-level.

COVID-19 Epidemic and Generational Welfare (E6)

Francesco Giuli
,
Roma Tre University
Giuseppe Ciccarone
,
Sapienza University of Rome
Enrico Marchetti
,
University of Naples Parthenope

Abstract

We study the effects of COVID-19, and the ensuing lockdown and fiscal policies, on the welfare of different age-groups within a life-cycle macroeconomic scheme, adapted from Gertler (1999), where the pandemic is represented as a shock to the mortality rate. We obtain two main results. First, we can show that lockdown policies have a negative impact on the dynamics of economic welfare of younger agents relative to that of older agents, thus providing analytical support to the idea that the management of the COVID-19 pandemic through lockdown policies has hit mainly the young generations. Second, we show that expansionary fiscal policies aimed at supporting income after the lockdown affect the relative welfare index of age-groups mainly through the repayment scheme of the consequent public debt; the more the repayment scheme entails a postponement of the debt repayment, the more older agents are favored (in relative terms).

COVID-19, Housing Prices and Macroprudential Policies (E4, E5)

Margarita Rubio
,
University of Nottingham
Isabella Blengini
,
EHL

Abstract

The COVID-19 crisis has been unprecedented in many angles. Unlike the 2008 global financial crisis, this crisis came from real factors caused by lockdown measures. Theoretically, in times of recession, when businesses close, unemployment rises and uncertainty prevails, house prices should be falling. However, unexpectedly, the lockdown effects and the easing of monetary policy have unevenly impacted consumers and sectors. This has provoked a redistribution towards housing, which has translated into an increase in house prices. In this context, the composition of policies to shape the recovery should take into account a coherent mix between monetary and macroprudential policies. This paper builds a multi-sector DSGE model, which features a housing market. Consumers are divided into savers and borrowers. Borrowers need collateral to obtain loans. Macroprudential policies are represented through changes in loan-to-value ratios. First, we use the model to assess how corona-shocks affect both the macroeconomy and housing markets. Then, we study the optimal monetary-macroprudential combination of policies to increase production without compromising financial stability.

COVID-19, Policy Interventions and Credit: The Brazilian Experience (G2, H7)

Daniel Mesquita
,
Getulio Vargas Foundation
Lars Norden
,
Getulio Vargas Foundation
Weichao Wang
,
Getulio Vargas Foundation

Abstract

The COVID-19 pandemic caused a global health and economic crisis to which governments responded with massive policy interventions. Using Brazil as a testing ground, we investigate the influence of the pandemic and ensuing policy interventions on local credit markets. First, we find that the pandemic has a significantly negative impact on local credit. Second, using a novel manually collected database on the staggered municipal government policy interventions, we show heterogenous effects of interventions: positive effects of soft interventions (e.g., social distancing and mass gathering restrictions) and late reopening, and negative effects of hard interventions (e.g., closure of non-essential services) and early reopening. Third, we find that state-owned banks grant more local credit than privately owned banks during the COVID-19 crisis but this difference is less pronounced than it was in the 2008 Financial Crisis. We confirm our results using pre-pandemic local political preference as instrument for policy interventions and orthogonalized policy intervention indicators, and in placebo tests.

Credit Constraints and Quantitative Easing (E5, E4)

Salem Abo-Zaid
,
University of Maryland-Baltimore County
Ahmed H. Kamara
,
Texas A&M University-Corpus Christi

Abstract

This paper studies the effectiveness of quantitative easing (QE) in a framework that features credit-constrained agents. In particular, we assess the strength of the portfolio re-balancing channel of QE. Following asset purchases, a portfolio adjustment cost limits the ability of the unconstrained agents to arbitrage assets in their portfolios, thus creating a channel for QE to manifest in the real economy. The strength of this channel is, thus, dependent on the share of the unconstrained agents who intertemporally substitute in response to changes in relative asset prices. We show that a rise in the share of the constrained agents, who own no assets, dampens the strength of the portfolio re-balancing channel, thereby limiting the effectiveness of quantitative easing.

Credit expansion and diligent banks (G2)

Magdalena Pisa
,
WHU-Otto Beisheim School of Management
Ashay Kadam
,
Goa Institute of Management

Abstract

This paper studies the effect of credit expansion on firm capital allocation, banks stability, and aggregate productivity and employment. We exploit a quasi-experimental setting generated by a regulatory change in India's PSL program eligibility cutoff. Comparing profiles of firms around the cutoff, we find that the credit expansion targets financially constrained firms and firms with a higher pre-treatment rate of return. We provide evidence of banks' significance in funneling the resources to those firms.

We also document that banks reacted to the credit expansion with a sturdy balance sheet that was not accompanied by more risk-taking. In particular, banks acting on the policy change responded with a lower NPA and higher Tier 1 capital adequacy ratio. Finally, on an aggregate level, we show that credit expansion decreased the dispersion in the marginal product of capital across firms and increased aggregate employment.

Creditor Rights, Collateral Reuse, and Credit Supply (G2, G5)

Brittany Almquist Lewis
,
Indiana University-Bloomington

Abstract

Utilizing a change to bankruptcy treatment of repo collateral, I provide causal evidence that strengthened creditor rights increase credit supply and financial instability by increasing the reuse of collateral. I use the 2000’s housing boom and bust as a laboratory and collect data linking dealers’ repledgeable collateral to their lending to mortgage companies. Exposed dealers increased their repledgeable collateral and credit provision to mortgage companies. Mortgage companies responded by increasing originations and pivoting toward non-traditional products. I estimate that the expansion in credit drove a 9% increase in originations and accounted for 38% of defaults on mortgages originated during 2005-2006, consistent with a financial accelerator. This paper changes our understanding of the size of the money creation generated in the repo markets.

Crime and (a Preference for) Punishment: The Effects of Drug Policy Reform on Policing Activity (K0, H0)

Adam Soliman
,
Duke University

Abstract

Every state imposes harsher punishments for drug offenses committed near schools. These “drug-free school zones” (DFSZs) aim to deter crime from entering schoolyards, but they can also give significant discretionary power to police, as they can expose offenders to additional risk for the same criminal activity. I exploit a sudden reduction in DFSZ size in order to examine offender and enforcement behavior and find an 18% decrease in drug arrests in “de-zoned” areas one year after the reform. There is no displacement of non-drug offenses and majority black neighborhoods have a larger decline in drug arrests. If offenders were significantly deterred by harsher penalties, as the law intended and Becker’s (1968) model predicts, there should be an increase in drug arrests. I therefore conclude that police respond to changes in punishment, where punishment severity and enforcement effort are complementary. Additionally, two concerns commonly associated with the “War on Drugs”view of weakening drug crime penalties, crime displacement and an increase in drug use, are not substantiated in this setting.

Cross-Border Institutions and the Globalization of Innovation (O3, F6)

Bo Bian
,
University of British Columbia
Jean-Marie A. Meier
,
University of Texas-Dallas
Ting Xu
,
University of Virginia-Darden

Abstract

We identify strong cross-border institutions as a driver for the globalization of innovation. Using 67 million patents from over 100 patent offices, we introduce novel measures of innovation diffusion and collaboration. Exploiting staggered bilateral investment treaties as shocks to cross-border property rights and contract enforcement, we show that signatory countries increase technology adoption and sourcing from each other. They also increase R\&D collaborations. These interactions result in technological convergence. The effects are particularly strong for process innovation, and for countries that are technological laggards or have weak domestic institutions. Increased inter-firm rather than intra-firm foreign investment is the key channel.

Crowding Out the Shadow: Effect of School Construction on Private Supplementary Education in Taiwan (I2, H5)

Andy Liyoung Chou
,
National Taipei University

Abstract

Scholars have long argued that the availability of schools (or the lack of them) is one of the drivers for the prevalence of private tutoring in East Asia. However, the official number of private tutoring businesses increased despite large increases in the number of high schools in Taiwan. This paper looks at the causal impact of school availability on private tutoring. I use a novel IV strategy and exploit variations across counties in high school construction to separate out the effect of high school construction on private tutoring through changes in availability. I find that an increase in the probability of getting into a public high school is associated with reductions in households' spending and participation in private tutoring.

Cyclicality and Asymmetry of the User Cost of Labor: Evidence and Theory (E3, J3)

Tomohide Mineyama
,
International Monetary Fund
Toshitaka Maruyama
,
University of California-Los Angeles

Abstract

The user cost of labor (UCL) plays an allocative role in a wide class of macroeconomic models. Despite this appealing feature, estimating the UCL involves empirical challenges as it requires a sequence of wages from hiring until separation. The cyclical changes in the average quality of new matches weigh on measuring the cyclicality of the UCL. In this paper, we overcome these challenges by exploiting unique Japanese data, which tracks wages at each tenure after school graduation. Our empirical findings are twofold. First, the UCL remains highly procyclical after controlling for the cyclical changes in the average job-match quality, whereas the new-hire wage is no longer more cyclical than the incumbent-worker wage. Second, downward adjustments of the UCL are smaller than upward ones. The downward rigidity arises from the combination of that of the new-hire and incumbent-worker wages. We then develop a wage posting model to account for these observations. We demonstrate that under asymmetric information, firms use wages as a screening tool to receive the application from targeted workers and maintain a high value of a posted contract in recessions, leading to the downward rigidity and overall high cyclicality of the UCL.

Dealing with Logs and Zeros in Regression Models (C1, A1)

Christophe Bellégo
,
CREST-ENSAE
David Benatia
,
HEC Montreal
Louis Daniel Pape
,
CREST-Ecole Polytechnique

Abstract

Log-linear models are prevalent in empirical research. Yet, how to handle zeros in the dependent variable has remained obscure. This article clarifies this issue and develops a new family of estimators, called iterated Ordinary Least Squares (iOLS), which offer multiple advantages to address the "log of zero". We extend it to the endogenous regressors setting (i2SLS), and provide simple but effective solutions to address common issues like the inclusion of many fixed-effects. In addition, we develop specification tests to help researchers select between alternative estimators. Finally, our methods are illustrated through numerical simulations and replications of recent publications.

Debt Aversion: Theory and Experiment (D9, C9)

Thomas Meisssner
,
Maastricht University
David Albrecht
,
Maastricht University

Abstract

Borrowing and saving decisions are among the most important and economically significant choices people face in their lifetime. An unwillingness to save may have severe implications such as insufficient retirement savings. In the same way, borrowing too much or too little can have negative economic consequences. Debt aversion, defined as unwillingness to take on debt even if economically beneficial, has received increased attention by researchers lately, for its adverse effects on financial decision-making. In this paper, we propose a formal model of debt aversion, and use a novel experiment to elicit and to jointly estimate debt aversion with preferences over time, risk and losses. In the experiment participants can accept or reject different debt and saving contracts, defined over real monetary payments. Using participants' choices, we can identify whether they systematically prefer saving contracts over debt contracts, controlling for time preferences, present bias, risk aversion and loss aversion. To this end, we employ maximum likelihood estimations to structurally estimate the preference parameters of our model of debt aversion. We find that participants are on average debt averse, thus establishing debt aversion as dimension of individual preferences in its own right, that is distinct from other relevant preferences, for instance loss aversion. Further, testing the relation of debt aversion and individual characteristics, we find that debt aversion is negatively associated with cognitive ability, and positively associated with participants' savings. Moreover, we demonstrate robustness of debt aversion to a wide array of alternative modeling specification and influencing factors.

Deciphering Federal Reserve Communication via Text Analysis of Alternative FOMC Statements (E4, G1)

Taeyoung Doh
,
Federal Reserve Bank of Kansas City
Dongho Song
,
Johns Hopkins University
Shu-Kuei Yang
,
Federal Reserve Bank of Kansas City

Abstract

We apply a natural language processing algorithm to FOMC statements to construct
a new measure of monetary policy stance, including the tone and novelty of a policy
statement. We exploit cross-sectional variations across alternative FOMC statements
to identify the tone (for example, dovish or hawkish) and contrast the current and
previous FOMC statements released after Committee meetings to identify the novelty
of the announcement. We then use high-frequency bond prices to compute the surprise
component of the monetary policy stance. Our text-based estimates of monetary policy
surprises are not sensitive to the choice of bond maturities used in estimation, are
highly correlated with forward guidance shocks in the literature, and are associated
with lower stock returns after unexpected policy tightening. The key advantage of our
approach is that we are able to conduct a counterfactual policy evaluation by replacing
the released statement with an alternative statement, allowing us to perform a more
detailed investigation at the sentence and paragraph level.

Decomposing Gender Differences in Bankcard Credit Limits (J1, G5)

Nathan Blascak
,
Federal Reserve Bank of Philadelphia
Anna Tranfaglia
,
Federal Reserve Board

Abstract

In this paper, we examine if there are gender differences in credit card limits by utilizing a unique panel data set linking mortgage applicant information with individual-level credit bureau data. We document that, on average, male borrowers have higher total bankcard limits than female borrowers, even after controlling for credit score, income, and demographic characteristics. Using a standard Kitagawa-Oaxaca-Blinder (KOB) threefold decomposition, we find that 87 percent of the difference is explained by differences in the effect of observed characteristics between male and female borrowers while approximately 10 percent of the difference in bankcard limits can be explained by differences in the levels of observed characteristics. Finally, we use a quantile decomposition strategy to analyze the gender gap along the entire bankcard credit limit distribution from 2006 to 2016. Our estimates show that gender differences in bankcard limits, along with the primary factors that drive this gap, have changed over time and vary across the distribution of credit limits.

Demonetization and Its Discontent: Political Strategy and Competition in Indian Elections (H7, H1)

Tushar Bharati
,
University of Western Australia

Abstract

On November 8, 2016, the Prime Minister of India announced the demonetization of notes that made 86 % of cash in circulation in India. I examine the impact of the prolonged cash shortage that followed on the political competition in the assembly elections within a year of the event. Using a difference-in-difference methodology comparing districts with high and low levels of population per bank, I show that demonetization had significant impacts on the political competition and the voter turnout in the elections that followed in districts more-acutely affected by the policy. Next, using the demonetization event and voter turnout in the past as instrumental variables for the number of candidates running for office and voter turnout, I show that Bhartiya Janta Party (BJP), the political party in power at the federal level that implemented demonetization, benefited from the decrease in competition and increase in voter turnout. We are unable to rule out a nation-wide change in voter preference in favor of BJP. But a comparison of elections within a year after demonetization but in different months suggest that the decrease in competition and the increase in voter turnout due to demonetization explains all the advantage BJP had in most-affected districts.

Determinants and Consequences of Poor Decisions in Health Insurance (D9, I1)

Lan Zou
,
University of St. Gallen
Christian Biener
,
University of St. Gallen

Abstract

This paper aims at understanding decision patterns and welfare effects of poor decisions in health insurance conditional on a large set of sociodemographic characteristics. While giving consumers choice has the potential to improve welfare in principle, the prevalence of empirically observed choices that deviate from utility-maximizing behavior in health insurance markets questions the validity of such arguments. We exploit the highly regulated nature of contracts with only six distinct deductible levels and standardized covered services across contracts and providers in the Swiss mandatory health insurance market to identify optimal and non-optimal coverage levels at the individual level based on a range of standard and behavioral decision models. Using population representative survey and register data from 16,380 individuals, collected by the Swiss Federal government, we show that consumers lose up to USD 1,200 (USD 420 on average) annually due to non-optimal deductible choice. We identify high levels of heterogeneity, indicating that it is particularly the low-income share of the population demanding non-optimally high coverage and facing high financial losses and that the saliency of health issues (e.g., via the presence of long-term chronic diseases) increases the probability to choose optimal coverage levels. Our results highlight the heterogenous adverse welfare effects of choice in complex settings conditional on a choice menu including non-optimal options in general and have implications for policy in the Swiss mandatory health insurance scheme.

Diagnostic Expectations and Macroeconomic Volatility (E7, E3)

Jean-Paul L'Huillier
,
Brandeis University
Sanjay R. Singh
,
University of California-Davis
Donghoon Yoo
,
Osaka University

Abstract

Diagnostic expectations have emerged as an important departure from rational expectations in macroeconomics and finance. We offer a first treatment of diagnostic expectations in linear macroeconomic models. We present a general proof of the existence of a rational expectations representation, which can be used to solve these models. Under some conditions, diagnostic expectations generate higher volatility than rational expectations. In a quantitative medium-scale DSGE model, we find that diagnostic expectations generate 38\% extra output volatility. Moreover, we discuss how the combination of diagnosticity with imperfect information can rationalize under- and over-reaction in macroeconomics.

Disclosure Law and External Audit Demand: Evidence from Latin America (G3, M4)

Jonathan Adongo
,
Albertus Magnus College

Abstract

The study relies on difference-in-differences to empirically identify the effect of disclosure law changes on external audit demand by private firms in 18 Latin American countries. Random effects probit estimation results indicate stronger disclosure law reduces the probability of external audit choice in treated medium-sized firms by 8.8 percentage points, relative to their untreated counterparts. The finding supports agency theory’s prediction that country-level and firm-level governance, represented by disclosure law and external audit choice, respectively, are substitutes for this firm size category. The implication is unintended consequences may result if principals in these firms do not enforce disclosure policy standards.

Discordant Relaxations of Misspecified Models (C1)

Désiré Kédagni
,
Iowa State University
Lixiong Li
,
Johns Hopkins University
Ismael Mourifié
,
University of Toronto

Abstract

In many set-identified models, it is difficult to obtain a tractable characterization of the identified set. Therefore, empirical works often construct confidence regions based on an outer set of the identified set. Because an outer set is always a superset of the identified set, this practice is often viewed as conservative yet valid. However, this paper shows that, when the model is refuted by the data, a nonempty outer set could deliver conflicting results with another outer set derived from the same underlying model structure, so that the results of outer sets could be misleading in the presence of misspecification. We provide a sufficient condition for the existence of discordant outer sets which covers models characterized by intersection bounds and the Artstein (1983) inequalities. We also derive sufficient conditions for the non-existence of discordant submodels, therefore providing a class of models for which constructing outer sets cannot lead to misleading interpretations. In the case of discordancy, we follow Masten and Poirier (2020) by developing a method to salvage misspecified models, but unlike them we focus on discrete relaxations. We consider all minimum relaxations of a refuted model which restores data-consistency. We find that the union of the identified sets of these minimum relaxations is misspecification-robust and has a new and intuitive empirical interpretation.

Discrete Payments Optimization Using Reinforcement Learning (C7, E5)

Pablo S. Castro
,
Google Research
Ajit Desai
,
Bank of Canada
Han Du
,
Bank of Canada
Rodney Garratt
,
University of California-Santa Barbara
Francisco Rivadeneyra
,
Bank of Canada

Abstract

This paper uses a machine learning technique called reinforcement learning (or RL) to approximate the policy rules of banks participating in a high-value payments system. The objective of the agents is to learn a policy function for the choice of amount of liquidity provided to the system at the beginning of the day and its flow rate of payments during the day. Also, we consider payments which are indivisible, i.e. discrete. Therefore, the bank has to solve a discrete optimization problem. Individual choices have complex strategic effects precluding a closed form solution of the optimal policy, except in simple cases. We show that in a simplified two-agent setting, agents using reinforcement learning do learn the policy that minimizes the cost of processing their individual payments. Our results show agents trained with RL can solve complex integer optimization problems in real-world strategic games and show usefulness of such tools to solve complex strategic liquidity management problems in payments systems.

Distribution-Free Assessment of Population Overlap in Observational Studies (C1)

Lihua Lei
,
Stanford University
Alexander D’Amour
,
Google Brain
Peng Ding
,
University of California-Berkeley
Avi Feller
,
University of California-Berkeley
Jasjeet Sekhon
,
Yale University

Abstract

The credibility of causal inference with observational studies relies crucially on the overlap of baseline covariates between different treated groups, which is also known as the positivity or common support assumption. The current empirical assessment of overlap is typically based on estimated propensity scores. This approach is meaningful only when the propensity score model is correctly specified, and in general, it has no formal statistical guarantee due to the lack of proper uncertainty quantification. In this work, we formally define a measure of population overlap inspired by the strict overlap condition (e.g. that propensity scores lie in [0.1, 0.9] almost surely), and develop a family of upper confidence bounds on this measure. We call them O-values. The O-values are valid in finite samples without any assumption on the data generating process, as long as the observations are independent and identically distributed. Technically, we construct the O-values based on a non-standard partial identification approach, with the uncertainty quantification handled by computable concentration inequalities.

Distributional Benefits of Government Spending at the ZLB (E6, E5)

Alexander Ueberfeldt
,
Bank of Canada
Thibaut Duprey
,
Bank of Canada

Abstract

Should we expect larger government spending multipliers from the COVID-19 fiscal packages given that monetary policy is constrained by the zero lower bound (ZLB)? We provide new evidence from quantile regressions and analyze them in a non-linear DGSE model.
Ramey and Zubairy (2018) showed that mean fiscal multipliers are larger during ZLB periods using 140 years of US data. In a related framework estimated with quantile local projections together with instruments for fiscal shocks, we find quantile fiscal multipliers to be larger than one during ZLB periods, but only conditional on being in the upper quantiles of future GDP growth. This means that, during ZLB episodes, fiscal stimulus increases upside risks to GDP more than it improves downside risks to GDP.
We then build a non-linear macro DSGE model able to replicate the historical distribution of GDP, with negative skewness both in its growth and gaps. As such, we also provide a framework to analyze the 5th percentile of the GDP growth distribution, i.e. Growth-at-Risk. Our simulations of periods of fiscal spending at the ZLB are consistent with the data: fiscal spending has a larger impact at the ZLB, especially in the upper tail of the future distribution of GDP with multipliers above one. The simulations further show that the larger multipliers during ZLB episodes are observed mostly when initial conditions are bad and when the economic recovery is protracted.
Our results suggest an insurance benefit of government spending: if the crisis is more damaging than expected and the recovery lasts longer, then fiscal multipliers are more likely to be around or above unity. This suggests that fiscal stimulus during the COVID-19 crisis is likely to be very effective with multipliers above one.

Distributional Welfare Effect of Inflation under Endogenous Search Model (E3, E5)

Van H. Nguyen
,
University of Kansas
Eungsik Kim
,
University of Kansas

Abstract

This paper addresses the classic issue of measuring the welfare cost of inflation. We extend the New Monetarist framework originated by Largo and Wright (2005) with a price dispersion mechanism similar to Wang (2016) but with the addition of heterogeneous productivity among agents. This productivity is the source of heterogeneous search cost among buyers, and it affects search intensity. Our model suggests that buyers of different productivity choose a different search intensity according to their opportunity cost of search. Low productivity group is inclined to search harder, and as a consequence, there is a positive externality towards high productivity group since they also benefit from sellers’ price dispersion. Overall, inflation has a distributional welfare effect on heterogeneous agents.

Diversity & Inclusion: A Tale of Two Economies (E3, E2)

Azhar Iqbal
,
Wells Fargo

Abstract

With the improving health picture, analysts are predicting a quick bounce-back in economic activities/back to the “normal.” We present a new framework to characterize the pace of the labor market recovery by race and gender. Our study would help design policies that account for disparities beneath aggregate statistics and facilitate policymakers’ transition towards a framework that benefits all.
This study estimates the asymmetric economic damages from the COVID-19 pandemic for different segments of the population. That is, Black Americans were affected the most in terms of, relatively, higher and faster unemployment compared to other races. Furthermore, Black women were affected more than Black men. Moreover, the pace of recovery is slower for Black Americans compared to other major races, and again, Black women are standing at the bottom in the recovery phase. Additionally, unlike other races, more Black women than Black men are in the labor force, which intensifies the problem of uneven pace of recovery for Blacks.
A similar conclusion is estimated for the Great Recession (GR) where Black women suffered the most among races/gender. Additionally, the pace of recovery for Black women was the slowest among any race/gender. Therefore, the slower recovery in the Black labor market may have pulled the national recovery down/slower pace. Furthermore, we estimate that if the Black labor market would have followed the same pace as what the national market observed, then the pace of labor market recovery would have been faster than the actual recovery.
Policymakers should incorporate diversity & inclusion (D&I) instead of the current tradition of one-policy-fits-all. Accounting for the disparate impacts of economic downturns and the uneven pace of recoveries would help to achieve faster recoveries and place less burden policymakers’ traditional toolkit.

Do as I Say and Do as I Do: Paternalism and Preference Differences in Decision Making for Others (C9, G1)

Georgia Buckle
,
University of Portsmouth
Wolfgang Luhan
,
University of Portsmouth

Abstract

Money managers justify the cost of advice by offering portfolio customisation for each client’s risk tolerance (Bernstein, 1992; Campbell and Viceira, 2002). However, instead of tailoring investments, managers often direct clients to invest according to their own risk preferences, rather than those of their client, which has caused significant underperformance in manager led funds (Linnainmaa et al, 2021). We study whether money managers overrule their client’s risk preferences paternalistically when investing for them. We also examine how differing risk preferences between managers and clients affects investments. In an online experiment, we test whether managers disregard their client’s risk preferences, by explicitly informing managers of their client’s preference before they invest on their behalf. In a Gneezy and Potters (1997) investment task, participants invest in a risky project first for themselves, then for another participant. When investing on their behalf, participants have complete information about their recipient’s risk preference, but no material stake in the decision. We use the strategy method to systematically vary the difference between decision-maker and recipient’s risk preferences within-subjects. We also elicit EQ and SVO to test whether those high in empathy adopt the recipient’s preferences more and whether those with more concern for recipients impose their own preferences out of paternalism. From preliminary results, we find that only 7% of managers project their preferences onto investments, whereas 13% follow their client’s preference exactly. However, overall managers do invest further from their client’s wishes, and closer to their own, the more their risk preferences differ. These findings add to the current policy debate about the merits of United States money managers assuming fiduciary duty for clients. Indeed, our results suggest that even if managers did act as fiduciaries, only a minority would follow the client’s preferences to the letter, and some may disregard them all together.

Do Children Perform Better in Religious Schools? Evidence from Population Data (I2, I0)

Deni Mazrekaj
,
Utrecht University
Christiaan Monden
,
University of Oxford

Abstract

Religious schools enjoy a high academic reputation among the parents in many societies. Previous studies that assessed the effect of religious schools were conducted in countries where religious schools are private or where they charge fees and set admission criteria. As a result, the effect of religious schooling could not be separated from the effect of private schooling and selection. We contribute to the literature by using Dutch data that include the entire population of children born between 1998 and 2007. In the Netherlands, both public and religious schools are publicly funded, schooling is free of charge and admission is independent of the child’s religious or ideological character. Using a range of models including fixed effects models, coarsened exact matching, and treatment effect bounds, we compare school outcomes of children in religious versus public schools. Our results indicate that children in religious schools outperform children in public schools in primary education. The benefits of religious schooling were largest for children in Orthodox Protestant, Islamic and Hindu schools, which mostly attract children from a disadvantaged socioeconomic background. However, the influence of religious schooling fades out by the end of secondary education.

Do Firms Set Pension Discount Rates Strategically? (G3, G0)

Xin Li
,
Michigan Technological University
Tong Yu
,
University of Cincinnati
Michael Goldstein
,
Babson College
Liping Chu
,
Shanghai University of International Business and Economics

Abstract

Corporations reduce the magnitude of pension contributions through the choices of pension liability discount rates, and do so asymmetrically: firms are slow to drop the rates when corporate bond rates drop, but raise them rapidly when rates rise. Cross-sectionally, firms with greater investment productivity and facing more financial difficulty set higher pension discount rates. Consistently, we find that firms setting high pension discount rates tend to have higher funding ratios and that setting high pension discount rates allow more productive firms to invest more and become more profitable when they face a lower level of insolvency risk. Imperfect elasticity of pension discount rates to market interest rates offers firms leeway to alleviate the constraints from defined benefit pension plans.

Do Institutional Investors Drive Female Critical Mass within a Firm’s Lifecycle and its Impact on Performance (G3, G3)

Shumi Akhtar
,
University of Sydney
Farida Akhtar
,
Macquarie University
April Ye
,
James Cook University

Abstract

This paper examines the effect of having three or more female representatives on a board of directors (“critical mass”) and its implications on firm performance. Drawing on insights from institutional theory and agency theory, we examine whether institutional shareholders promote or discourage female critical mass to improve gender diversity. We document that higher institutional ownership reduces the likelihood of hiring boards with female critical mass, and this manifests predominantly among firms that have greater level of agency problems (i.e. free cash flow). Additionally, we find that these effects are prevalent in boards during CEO turnover time. We also find that, female critical mass boards are significantly positively related to performance. We employ an instrumental variable approach using firms’ addition to S&P500 index as an instrument to account for potential endogeneity in the examined relationship between female critical mass and institutional ownership. Based on our findings, we conclude that higher ownership by institutional investors negatively impacts on female critical mass, which in turn may worsen board effectiveness.

Do Languages Generate Future-Oriented Economic Behavior? Experimental Evidence for Causal Effects (D9, D1)

Tali Regev
,
Interdiciplinary Center Herzliya
Ian Ayres
,
Yale University
Tamar Kricheli-Katz
,
Tel Aviv University

Abstract

Studies show that the use of languages which grammatically associate the future and the present tends to correlate with more future-oriented economic behavior. We take an experimental approach to go beyond correlation, and to identify causality. We asked bilingual participants, people fluent in two languages which differ in the way they encode time, to make a future-oriented economic decision. The participants who were addressed in a language in which the present and the future are marked more distinctly tended to value future events less than participants addressed in a language in which the present and the future are similarly marked.

Do Major Government Customers Help U.S. Firms Escape Foreign Competition? (H5, F1)

Qianqian Huang
,
City University of Hong Kong
Bin Yang
,
Jinan University

Abstract

This paper studies whether firms that generate a substantial share of their revenues from the government are more resilient to foreign competition. Using the United States granting Permanent Normal Trade Relations to China as an exogenous shock, we show that government contractors have better performance than their peer firms in industries that are more exposed to import shocks. The results are robust to the inclusion of a broad set of controls, instrumental variable analysis, matching analysis, and alternative proxies of government customer and import competition. There is also a stronger effect for firms with greater financial constraints and less corporate diversification. We further show that government procurements allow firms to maintain a higher level of investment and investment efficiency and enjoy lower cost of bank debt when facing increased import competition. Overall, this study provides further evidence on the effect of the government’s participation in product market.

Do Private Schools Increase Academic Achievement? Evidence from France (I2)

Léonard Moulin
,
Ined

Abstract

While the relative effectiveness of private and public education systems is the subject of a large research literature and is at the heart of public policies in many countries, empirical work on the subject in France is lacking. I use propensity score matching on a large French database to estimate the effect of enrollment in a private school on academic achievement as measured by ninth grade test scores in three school subjects (mathematics, French, and history-geography). I find that private school attendance has a large and significant effect on educational success. Boys’ (girls’) scores in private school were between 0.19 (0.13) and 0.23 (0.19) standard deviations (SD) higher on standardized tests in ninth grade. A series of checks confirm the robustness of these results. Moreover, the results show that it is boys with low test scores in sixth grade who benefit the most from the positive effects of enrollment in a private lower secondary school.

Do Tax Deferred Accounts Improve Lifecycle Savings? Experimental Evidence (C9, H3)

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

Abstract

Tax deferred accounts (TDAs) are an increasingly popular method of saving for retirement, and have become common across many developed countries. Nevertheless it is unclear whether TDAs actually improve a household's lifecycle savings behavior and retirement preparedness because it is difficult to perform a counterfactual analysis. Households always have other means of savings so there is no guarantee that a TDA, with its inflexible restriction that funds cannot be drawn until retirement, will be attractive or improve lifecycle savings. In this paper we resort to laboratory experiments to address the question of whether TDAs improve lifecycle savings by comparing experimental treatments where subjects have access to TDAs with treatments where they do not, and we are also careful to consider the tax consequences of our different treatments as well. We find that the presence of TDAs substantially improves a household's lifecycle savings behavior, making them better prepared for retirement.

Do Women Political Leaders Enhance Government Financial Conditions? Evidence from U.S. Cities. (H7, G4)

Thomas Krause
,
Danmarks Nationalbank
Iftekhar Hasan
,
Fordham University
Yaxuan Qi
,
City University of Hong Kong

Abstract

Limiting the increase of public debt is a key policy issue in most economies, especially after the fiscal policy responses to the COVID-19 crisis. This paper analyzes the effect of electing female political leaders on the financing cost of local government debt. To address endogeneity of political leadership, we collect gender information on mayoral candidates and employ a regression discontinuity (RD) design to analyze 604 female-male contested mayoral elections in 336 U.S. cities during 1990-2014. Using municipal bond issuance data provided by Thomson Reuters Securities Data Company (SDC), we find that municipal bond yield spreads of cities narrowly electing women mayors are 33 basis points lower than that of cities electing male mayors. This effect is robust to specifications using different functional forms of the assignment variable, alternative bandwidth choices, using various measures of bond yield spreads, and controlling for bond characteristics. More importantly, we show that our results are not driven by party affiliation. To explore the potential mechanism behind female mayors lowering municipal financing cost, we show that the gender effect is more pronounced in cities with higher risk of financial distress. Moreover, we find that female mayors reduce government debt and improve the fiscal stability of cities they govern. Specifically, female mayors lead to lower debt per capita ratios and lower debt to revenue.

Does accounting for children lead to higher optimal income redistribution? Overlapping generations model approach. (H3, E2)

Oliwia Komada
,
FAME-GRAPE

Abstract

We study the optimal design of the tax-benefit system in a framework that accounts for income risk and endogenous fertility. Children in our set-up are public good due to PAYG social security. We calibrate the model to the US. We show that the relationship between the welfare effect and the redistribution scale via labor tax is hump-shaped. The current tax system in the case of the US offers too low redistribution. Implementing the optimal tax generates large welfare gains. Endogenous fertility channels additionally boost welfare gains because higher redistribution leads to higher fertility levels. We also show that the optimal tax scheme depends strongly on the family policy structure, and redistributive child-related transfer, like child allowance, can substitute for the redistribution build-in the labor income tax scheme. Keeping tax system structure in a current shape and increase expenditure on child-related transfers by 2% of GDP leads to similar welfare gains as implementing optimal labor tax.

Does Bank Competition Increase Bank Liquidity Creation? A State-Level Perspective (G2)

Seungho Choi
,
Queensland University of Technology

Abstract

One purpose of regulations regarding bank competition is to encourage depressed local credit markets. Does enhanced competition through bank deregulation revive local economy? Exploiting staggered bank deregulation events in the United States, I document that state-level bank deregulation does not, on average, significantly affect state-level bank liquidity creation, while bank-level analyses demonstrate that enhanced bank competition decreases bank liquidity creation. In addition, I find that states and banks respond to state-level deregulation events differently. My results suggest that the policy, which is applied to all heterogeneous banks and states in the same way, does not fit all.

Does Civil Forfeiture Fight Crime? Evidence from New Mexico (K4, H7)

Jennifer McDonald
,
Institute for Justice
Dick Michael Carpenter II
,
University of Colorado-Colorado Springs

Abstract

This study examines civil forfeiture’s impact on crime rates. Proponents of the policy, which allows law enforcement to take and permanently keep property without a criminal conviction, claim it is an essential crime-fighting tool, particularly in the War on Drugs. Critics challenge the crime-fighting efficacy of civil forfeiture and warn the policy violates individual liberties. Previous research has associated increases in civil forfeiture with higher rates of drug arrests, but to date, no study has examined the impact of a significant civil forfeiture reform. Using a five-year panel of monthly crime rates, I studied the impact on crime of legislation that eliminated civil forfeiture in New Mexico. This study did not find sufficient evidence to conclude civil forfeiture effectively fights crime. Specifically, when the policy was eliminated in New Mexico, crime rates did not worsen compared to control states.

Does Consumer Monitoring Reduce Corporate Tax Evasion Along the Supply Chain? Evidence from Mongolia (H2, H8)

Tsogsag Nyamdavaa
,
London School of Economics

Abstract

This paper tracks the effects of consumer monitoring on firms’ tax evasion along the supply chain. To do so, I study a Mongolian government program, which incentivises consumers to report their purchases. First, I estimate the effect of the program on corporate income tax (CIT) and value-added tax (VAT), by comparing retailers who are directly affected, and wholesalers, who are only indirectly affected. I find that retailers increase their reported sales, but partly offset this by artificially inflating their costs on CIT returns. As a result, retailers’ CIT liabilities increase by 11%. In comparison, their VAT liabilities increase by 31% because VAT is less prone to such cost manipulation. Second, I find that the program also increases the VAT liabilities of upstream firms by about 15% when they are more likely to sell to (monitored) retailers, compared to the upstream firms that sell to firms that are not directly monitored. The program does not, however, affect the upstream firms’ reported CIT liabilities. My findings highlight the enforcement advantage of VAT compared to CIT and that consumer monitoring enhances the self-enforcing mechanism in VAT along the supply chain.

Does IT Help Startups? Information Technology in Banking and Entrepreneurship (G2, E4)

Toni Ahnert
,
Bank of Canada and CEPR
Yannick Timmer
,
International Monetary Fund
Nicola Pierri
,
International Monetary Fund
Sebastian Doerr
,
Bank for International Settlements

Abstract

This paper analyzes the increasingly important role of information technology (IT) in banking for entrepreneurship. We show that IT in banking spurs entrepreneurship. Job creation by young firms is stronger in US counties which are more exposed to IT-intensive banks through their historical geographical footprint, especially for firms in industries that rely more on external finance and have low startup capital. Entrepreneurs that use their homes as collateral benefit disproportionately more from IT in banking when house prices rise. We also show that IT adoption of banks reduces the role of distance between the headquarter and lending location in small business lending, suggesting that IT adoption can mitigate information frictions.

Does Paid Family Leave Save Infant Lives? Evidence from California (I1, J1)

Feng Chen
,
Tulane University

Abstract

One goal of the paid family leave program in the U.S. is to help working parents balance their
careers and family responsibilities and hence improve the well-being of their infants. A large
body of literature evaluates the effects of California’s Paid Family Leave program (CA-PFL) on
early childhood outcomes, but most studies have been based on the analyses of surviving infants.
If the CA-PFL reduces infant deaths, then such analyses would understate the program’s true
effects. Using the linked birth and infant death data in the U.S. with a difference-in-differences
framework, I find that the implementation of the CA-PFL reduced the post-neonatal mortality
rate by 0.135 (per 1,000 live births), or it saved approximately 339 infant lives in California from
2004 to 2008. The effects were driven by death from internal causes and there were larger effects
for boys than girls. These results are stable across a variety of robustness checks, and additional
examinations give little reason to believe that the results are induced by the endogeneity of
policy, simultaneously shocks, and fertility changes.

Does Real Earnings Management Adversely Affect Analyst Coverage and Forecasts? (M4, G1)

Guanming He
,
Durham University
Zhichao April Li
,
Durham University
Richard Slack
,
Durham University

Abstract

Cohen et al. (2008) provide evidence that, after the implementation of the Sarbanes-Oxley Act (hereafters, SOX) in 2002, firms tend to switch from accrual-based earnings management methods to real earnings management methods to manipulate their reported earnings. We investigate whether, in the post-SOX era, real earnings management adversely affects the coverage and forecasts of financial analysts who play a key role as information intermediaries between firms and investors in stock markets. We find that the extent of real earnings management is negatively associated with the number of analysts covering and forecasting earnings for firms. This association is less pronounced for firms that exhibit a high degree of accrual-based earnings management, thus reconciling with Cohen et al.’s finding that firms utilize accrual-based earnings management and real earnings management as substitutes in managing earnings. We find no evidence that real earnings management reduces the informativeness of, or increases the error in, analyst forecasts. This suggests that, given an analyst’s decision to cover firms that engage in real earnings management, s/he does not compromise on the quality of her/his forecasts. In aggregate, the reduced analyst coverage, albeit not in company with an increase in forecast error or a decrease in forecast informativeness, would potentially undermine the analysts’ overall information-intermediary role in stock markets, thereby deteriorate the overall information environments of firms, and weaken capital market efficiency. Our study thus calls for the importance of scrutinizing and curbing real earnings management.

Does the Marketing Experience of Firm Executives Promote Corporate Innovation? (M3, O3)

Guanming He
,
Durham University
Erik-Jan Hultink
,
Delft University of Technology-Netherlands
Jingbo Luo
,
Lanzhou University-China

Abstract

Based on a sample of Chinese listed companies from 2009 to 2019, we examine whether the marketing experience of executives, which plausibly facilitates commercialization of innovation outputs, spurs corporate innovation. We find that firms having a stronger team of marketing-experienced executives exhibit a higher degree of innovation. The finding is robust to using propensity-score matching, coarsened-exact matching, firm-fixed-effects regression, two-stage least squares regression, the impact threshold for a confounding variable test, difference-in-differences regression analysis, a dynamic panel generalized method of moments estimator, and a placebo test to control for potential endogeneity, and is also amenable to using alternative measures of corporate innovation and of executive marketing experience. We also find that the impacts of innovation on corporate performance and productivity are more positive for firms with executives more experienced in marketing. Further analysis reveals that the positive effect of executive marketing experience on innovation is manifested more significantly in increased invention patents and increased product-design patents, and is stronger for firms with executives experienced in R&D, firms with high growth, firms confronted with fierce industrial product market competition, and non-state-owned enterprises.

Dominant Currency Dynamics: Evidence on Dollar-Invoicing from UK Exporters (F4, F3)

Meredith Crowley
,
University of Cambridge
Lu Han
,
University of Liverpool
Minkyu Son
,
University of Cambridge

Abstract

How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.

Downward Wage Rigidity In a Liquidity Trap (E3, E4)

Yangyang Ji
,
Central University of Finance and Economics
Wei Xiao
,
Binghamton University

Abstract

A large strand of literature finds that there exists downward nominal wage rigidity in the economy – there is more resistance to nominal wage cuts than to raises. Since wage cuts are more likely to happen during economic downturns, a natural question to ask is how the asymmetry in rigidity affects the severity of recessions. In this paper, we focus on the most severe recessions – depressions that are coupled with deflation and a liquidity trap, such as the Great Depression and the 2008 financial crisis. Our finding is surprising: downward wage rigidity may lessen the severity of a depression.

Conventional wisdom suggests that in a recession, wage rigidity may cause a rise in real wages, which lowers labor demand and exacerbates the decline in output and employment. However, we find that this is only part of the story. A rise in real wages raises the marginal cost of firms and the purchasing power of consumers, both of which raise inflation expectations. When the economy is in a liquidity trap and the nominal interest rate hits the zero-lower-bound, higher inflation expectations lower the real interest rate and stimulates investment demand. This mechanism works against the conventional mechanism, and offers some relief to the economy. Our finding is based on analyses of a new Keynesian model, revised to incorporate downward wage rigidity and a liquidity trap.

We also analyze a parallel version of the economy, in which the size of the negative shock is not severe enough to tank the economy into a liquidity trap. In that economy, downward wage rigidity results in a more severe recession – a result that is consistent with findings in the literature. It is a paradox: downward wage rigidity worsens recessions – unless the recession is bad enough to push the economy into a liquidity trap.

Dynamic Demand of Capital and Labor: Evidence from Chinese Industrial Firms (D2, J2)

Le Tang
,
Suffolk University

Abstract

This paper employs a structural econometric approach to study the joint dynamic demand for capital and labor in Chinese firms. We recover key structural parameters in a dynamic model of interrelated factor demand subject to joint convex and non-convex costs. The model is able to replicate the stylized facts directly observed from Chinese manufacturing firm-level data over the period 1998-2007. Our estimations reveal that firms exhibit significant convex and fixed costs when adjusting capital or employment stock. Moreover, the adjustments in two factor inputs are inter-related, and adjusting capital and labor simultaneously is more costly than adjusting two inputs sequentially. Our counterfactual analysis suggests that removing the frictions in both capital and labor adjustments will lead to a 1% increase in aggregate total factor productivity (TFP) and a 7% increase in aggregate output.

Dynamic Games and Rational-Expectations Models of Macroeconomic Policies (E1, C3)

Reinhard Neck
,
Alpen-Adria University-Klagenfurt
Engelbert J. Dockner
,
Vienna University of Economics and Business

Abstract

We consider a linear-quadratic differential game with two decision makers, which is interpreted as a model of the interactions between the government and the private sector. The open-loop Stackelberg equilibrium solution of this game is characterized analytically. On the other hand, we formulate a linear dynamic continuous-time model with rational expectations. We show that under some assumptions, the problem of determining optimal policies for a government with an economy given by the rational-expectations model is equivalent to the problem of determining the leader’s open-loop Stackelberg equilibrium strategy for the differential game. Consequences for the time inconsistency of optimal policies and for the problem of non-uniqueness of solutions of rational-expectations models are briefly discussed.

Dynamic Patent Portfolio Management (G3, G1)

Qian Qi
,
Peking University

Abstract

I propose a tractable model integrating dynamic internal capital allocation with im- perfect patent protection, thereby endogenizing patent war and financing constraints. I emphasize the central importance of capital intangibility for corporate decisions when intangibles are insecure. The main results are: (1) relative to the first-best, im- perfect patent protection introduces the non-diversifiable patent risk as a new factor for internal capital misallocation; (2) the firm manages patent risk via patent portfolio management, litigation, and patent insurance; (3) the endogenous capital reallocation can diminish the impact of the imperfect patent protection; (4) firms on the verge of liquidation tend to use patent litigation to alleviate financial distress; (5) endogenous technology choice play an important rule in patent portfolio management, and (6) imperfect patent protection creates the wedge between average q and marginal q, yet this wedge will be diminished when the firm’s intangibility is high. Remarkably, this paper extends the Modern Portfolio Theory to the real investment case.

Dynamic relationships between criminal offending and victimization (K4, C3)

Christopher Erwin
,
Auckland University of Technology
Juliane Hennecke
,
Auckland University of Technology
Lisa Meehan
,
Auckland University of Technology
Gail Pacheco
,
Auckland University of Technology

Abstract

In the economics of crime, it is a stylized fact that those who commit crimes are more likely to be victims of crime. Similarly, victims of crime are more likely to be criminals. We explore the simultaneous nature of this relationship using a census of all police investigations in New Zealand between 2014 and 2020. We first revisit this hypothesis by following previous literature and pooling data over time and using recursive bivariate probit methods. This provides evidence of a weak, but fully simultaneous, relationship between criminality and victimhood. We next explore the overlap hypothesis by examining the intertemporal relationships between criminality and victimhood using a monthly panel of individuals chosen randomly from the New Zealand population. Panel fixed effects models reveal that previous victimization (offending) is only positively linked to current offending (victimization) in the months occurring immediately before offending (victimization). This suggests that the overlap between victimhood and criminality is driven primarily by 1) criminal incidents occurring close together in time or 2) incidents where individuals are at once considered both the victim of a crime and an offender (e.g., mutually combative assaults). The detailed nature of New Zealand Police records allows us to further explore intertemporal relationships by incident type, including violent crimes, property crimes, intimate partner violence, and offenses involving weapons.

Dynamic Risk Sharing in a Fiscal Union (E3, E6)

Chang Liu
,
National University of Singapore

Abstract

This paper highlights time-varying regional risk and federal fiscal transfer policy as two competing forces driving regional risk sharing over the business cycle and quantifies their impacts on aggregate fluctuations. I uncover that regional risk is strongly countercyclical: the conditional standard deviation of idiosyncratic shocks to U.S. state-level output growth is estimated to be 40% larger in NBER recessions than in normal times. However, the extent to which regions insure against these risks has not varied much over the business cycle. I argue that federal fiscal transfers that operate in a "state-contingent" manner during recessions can reconcile these results. To understand what these patterns of regional risk and fiscal integration imply for the aggregate, I build a New Keynesian model of heterogeneous regions with an incomplete asset market. The calibrated model suggests that during an economic downturn, increased regional risk worsens risk sharing, due to more regions being constrained at the borrowing limit; meanwhile, it amplifies the impact of aggregate productivity shocks, due to stronger precautionary saving motives leading to lower aggregate demand. However, state-contingent federal government transfers stabilize both the regional and aggregate economy, by providing insurance to the regions that need it the most - those with low productivity and high marginal propensity to consume. Taken together, this paper demonstrates the power of regional redistributive policies as automatic stabilizers in a fiscal union.

E-cigarettes and Smoking: Correlation, Causation, and Selection Bias (I1)

James E. Prieger
,
Pepperdine University
Anna Choi
,
Sejong University

Abstract

This study investigates the correlation between e-cigarette use (electronic nicotine delivery systems, ENDS) and smoking cessation, examines whether there is selection bias in cross-sectional studies of ENDS and cessation, and estimates the causal effect of ENDS on cessation.

ENDS may encourage or discourage cessation, depending on whether they are complements or substitutes for smoking. Ignoring the issue of selection-into-treatment (i.e., ENDS use) leads to bias in estimates of the causal effect of ENDS use on smoking. Many public health studies ignore the endogeneity problem but nonetheless conclude that ENDS hinder cessation.

We use data from Korea, 2014 to 2018, to establish that there is positive correlation between ENDS use and smoking. Then evidence for selection bias is presented, including changing characteristics of ENDS users and stronger correlation between ENDS and smoking after a negative government report on ENDS.

Causal effects are investigated with parametric (bivariate probit and copula models) and control function (moment-based) models for endogenous treatment effects with binary treatment and outcome variables. The causal effect of ENDS on cessation is estimated to be positive: ENDS use is associated with a 16 to 17 percentage point higher probability of cessation for male smokers choosing to use ENDS. The preferred model, based on the rotated Clayton copula with Gaussian (probit) marginals, is selected by formal information criteria. The results vary across the many other models estimated, but in a majority of them the treatment effects are roughly similar, statistically significant, and evidence for the endogeneity of ENDS use is confirmed.

The results lead to important policy implications. Some public health and regulatory officials discourage ENDS use because they believe, based on mere correlation, that ENDS causally discourage cessation from tobacco. The present study indicates that, instead, ENDS perhaps should be encouraged as part of cessation efforts.

Early Childhood Human Capital Formation at Scale (H1, I1)

Abu S. Shonchoy
,
Florida International University
Johannes Bos
,
American Institutes for Research
Saravana Ravindran
,
National University of Singapore
Akib Khan
,
Uppsala University

Abstract

Can governments leverage existing service-delivery platforms to scale early childhood development (ECD) programs? We experimentally study a large-scale home-visiting intervention providing materials and counseling - integrated into Bangladesh's national nutrition program without extra financial incentives for the service providers (SPs). We find SPs partially substituted away from nutritional to ECD counseling. Intent-to-treat estimates show the program improved child's cognitive (0.17 SD), language (0.23 SD), and socio-emotional developments (0.12-0.14 SD). Wasting and underweight rates also declined. Improved maternal agency, complementary parental investments, and higher take-up of the pre-existing nutrition program were important mechanisms. We estimate a sizeable internal rate-of-return of 19.6%.

Early Female Marriage and Sex Differentials in Child Healthcare and Nutrition (I1, J1)

Mazhar Mughal
,
Pau Business School-France
Rashid Javed
,
Westminster International University-Tashkent
Charlotte Fontan Sers
,
Pau Business School-France

Abstract

Preferential treatment of boys at early stage of life is an important issue in the son-preferring societies of the Indian Subcontinent. In this study, we examine to what extent this prevailing gender bias is associated with the practice of early female marriage. Using data from four Demographic and Health Surveys, we study the association between early marriage among Pakistani women and differential peri- and post-natal child healthcare, nutrition and child development outcomes. At issue is whether early marriage has a role to play in the gender discrimination that begins in the womb, and whether boys and girls are treated differently when parents allocate nutrition and healthcare resources. We find that early marriage is significantly associated with several healthcare, nutrition and child development outcomes. The sex of the child too is significant in some estimations, showing the prevalence of son preference. However, the effects of maternal marriage age on child outcomes are found to be not gender-specific. Whether or not a woman married before reaching the age of 18 does little to modify the male gender bias prevalent in the society. This finding underscores the strength of existing patriarchal social norms which still reward women with greater say for bearing sons.

Early-Life Experiences, Altruism, and Stock Price Crash Risk (G4, G3)

Guan-Ying Huang
,
Southwestern University of Finance and Economics
XiangYue Feng
,
Southwestern University of Finance and Economics
Zhen-Xing Wu
,
Zhongnan University of Economics and Law

Abstract

By investigating the effects of a natural disaster on firm-specific stock price crash risk, we establish that firms led by a board chair who experienced the Great Chinese Famine exhibit lower crash risks. The findings are robust to addressing endogeneity issues that examine heterogeneity in excess death rates, as well as the influence of Wenchuan earthquake. The chairs with the famine experience have lower probability of financial restatement, earning management, and earning smooth. Finally, board chairs’ disaster experiences engage more in corporate social responsibility and enhance firms’ donations to such initiatives, which identifies the channel through which an altruistic attitude.

Earthquakes and Crimes Against Women (J0, I0)

Adan Silverio-Murillo
,
Monterrey Institute of Technology and Higher Education

Abstract

We study the effects of a series of earthquakes that struck Mexico in September 2017 on gendered violence; namely, on domestic violence, sexual abuse, and rape. Using a national municipal-level crime data and a difference-in-differences strategy, results suggest that domestic violence increased by 17%, sexual abuse rose by 11%, and rape climbed by 12%. Then, using an event-study design, we observe two main patterns. The first pattern shows that domestic violence increased after the natural disaster but returned to pre-earthquake levels after approximately eight months. The second pattern demonstrates that sexual abuse and rape increased shortly after the event but never returned to pre-earthquakes levels. Finally, we explore a battery of mechanisms to understand the increase on crimes against women. Our findings indicate that a surge of street gangs occurred following the earthquakes, and that these gangs can played an important role in the escalation of crimes against women on the streets.

Eco-Certification: Warm Glow or Cold Prickle? (D9, Q5)

Klaas T. Van 'T Veld
,
University of Wyoming

Abstract

Eco-certification programs, which allow firms to display an eco-label on a product if it meets some environmental quality standard, have become a prominent complement to, and sometimes substitute for, direct environmental regulations. This paper analyzes two common approaches to modeling why consumers are willing to pay extra for certified products: one approach has consumers experience positive utility, or “warm glow,” from benefiting the environment; the other has them experience negative utility, or “cold prickle,” from damaging the environment. The two approaches yield identical predictions, provided consumers’ reference point for measuring benefits or damages is treated as fixed.

Social psychologists Miller and Monin (2016) argue, however, that many puzzling behavioral phenomena involving moral choices can be unified by assuming that people divide such choices into two categories. In situations perceived as “moral opportunities,” choosing the moral option enhances one’s moral self-image, giving rise to warm glow, while not choosing the option leaves one’s self-image unchanged. In situations perceived as “moral tests,” however, choosing the option leaves one’s self-image unchanged, while failing to choose the moral option diminishes one’s moral self-image, giving rise to cold prickle or guilt. Miller and Monin suggest, moreover, that these moral frames are highly context-dependent, varying across people as well as time.

By modeling a market in which eco-certified goods compete with non-certified ones, I show formally that, when such moral framing is allowed for, and when the reference point relative to which consumers experience either warm glow or cold prickle is modeled as endogenous to other consumers’ choices in plausible ways, ambiguity of market, welfare, and environmental outcomes becomes pervasive. It arises when assessing the impact of introducing eco-certified goods, when determining optimal certification standards, and when comparing eco-label programs’ effects to those of policy alternatives.

Economic Impact of the Most Drastic Lockdown During COVID-19 Pandemic---the Experience of Hubei, China (H1, C2)

Xiao Ke
,
Hubei University of Economics and Peking University
Cheng Hsiao
,
University of Southern California-Los Angeles

Abstract

This paper uses the panel approach proposed by Hsiao, Ching, and Wan (2012) and Hsiao and Zhou (2019) to assess the evolution of economic consequences of the drastic lockdown policy in the epicenter of COVID-19---the Hubei Province of China during worldwide curbs on economic activity. We find that the drastic 76-day COVID-19 lockdown policy brought huge negative impacts on Hubei’s economy. In 2020:q1, the lockdown quarter, the treatment effect on GDP was about 37% of the counterfactual. However, the drastic lockdown also brought the spread of COVID-19 under control in little more than two months. After the government lifted the lockdown in early April, the economy quickly recovered with the exception of passenger transportation sector which rebounded not as quickly as the rest of the general economy.
To the best of our knowledge, this is the first study identifying the dynamic macroeconomic consequences of the COVID-19 lockdown policy in the epicenter of China in times of pandemic. The counterfactual are constructed in the absence of “lockdown”, in times of pandemic not in the absence of pandemic. To get a whole picture, we assess the consequences on total output and its sectoral components, its private components, and the transportation sector. Second, our method does not involve modeling how COVID-19 spread and how the COVID-19 and other factors have affected the evolution of GDP, investment, or retail sales. Our results do not depend on the specific model specifications assumed in some current studies. It appears that as the world is facing the complex situation of global anti-epidemic efforts, our estimated results could shed light on how to formulate effective public policy in times of pandemic crisis.

Effect of an Income Shock on Subnational Debt: Micro Evidence from Mexico (H7, G2)

Mariela Dal Borgo
,
Bank of Mexico

Abstract

This paper examines how the debt stock of municipal governments responds to a shock that affects the distribution of revenue from the central government. The shock stems from the discrete updating of population census data that is plausibly uncorrelated with short-term financing needs. For a one-standard-deviation increase in the population shock, I find that federal transfers to Mexican municipalities increase by 2% over the first two post-census years. Using supervisory loan-level data, I show that the probability of municipalities being indebted declines by 0.1 percentage points over the same period. The response is driven by governments with relatively more own-source revenue, less dependent on transfers, which lenders perceive as more creditworthy. These findings reveal that the capacity to smooth shocks in credit markets is restricted to few governments with a diversified revenue base. In general, there is no evidence of a positive effect of grants on local debt, not even when the lender is a public bank. The additional revenue mostly goes to finance short-term, current expenditures, with limited potential to alter the path of local development.

Effect of Transparency on Corruption: Evidence from USA (H7, H1)

Labanyalata Roy
,
Middle Tennessee State University
Ennio Piano
,
Middle Tennessee State University

Abstract

Transparency international constructs index about the transparency of policies across the world. But there is no transparency index for the states of USA. In this paper we construct transparency index for different states from the information available on the website of the state governments. These include various parameters as whether people are allowed during decision making process, how much information reaches people etc. Then we rank the states according to the index constructed. We look at the relationship between transparency and corruption. For corruption we use corruptions convictions index (CCI), corruption perceptions index (CPI) and corruption reflections index (CRI). These indices have been constructed by Dincer and Johnston . Corruption convictions index (CCI) is based on the convictions of public officials and is constructed from the data of the Public Integrity Section of Department of Justice. Corruption Perceptions Index (CPI) is based on survey of perception of corruption in three branches of government viz. executive, legislative, and judicial. Corruption reflections index (CRI) is a state level version of the method used by Gentzkow, Glaser and Goldin (2006). CRI is based on the corruption stories covered in the Associated Press (AP) news wires which are electronically available via LexisNexis. Given all these indices we regress corruption and transparency. We take state weather, income, population as controls. Our initial results suggest that more transparent the laws of the state, the less corruption is there in that state.

Effective Training Through a Mobile App: Evidence from a Randomized Field Experiment (O3, Q1)

Kenn Chua
,
University of Minnesota
Qingxiao Li
,
University of Minnesota
Khandker Wahedur Rahman
,
BRAC University
Xiaoli Yang
,
Shenyang Agricultural University

Abstract

The application of information and communication technologies could be a viable alternative to traditional agricultural extension services in developing countries. We develop a mobile application-based training module intended to improve the quality of the grape and use a randomized controlled trial (RCT) to examine its effectiveness. We find that providing technical training through the mobile app can improve farmers’ knowledge and help them enhance the quality of their produce. We also find that motivating farmers through the mobile app is not effective and undermine the impact of increased knowledge. Bundling motivation with technical training can lead farmers to overestimate the quality of their products. It suggests that keeping training through mobile apps focused on the technical module is more desirable.

Effectiveness of Relocation Incentives for High Skilled Professions (I2, H2)

Anomita Ghosh
,
University of Illinois-Urbana-Champaign

Effects of Childhood Peers on Personality Skills (I2, J1)

Shuaizhang Feng
,
Jinan University
Jun Hyung Kim
,
Jinan University
Zhe Yang
,
Jinan University

Abstract

Despite extensive literature on peer effects, the role of peers on personality skill development remains poorly understood. We fill this gap by investigating the effects of having disadvantaged primary school peers, generated by random classroom assignment and parental migration for employment. We find that having disadvantaged peers significantly lowers conscientiousness, agreeableness, emotional stability, and social skill. The implied effects of a 10--15 percentage point change in the classroom proportion of disadvantaged peers are comparable to the effects of popular early childhood interventions. Furthermore, we find suggestive evidence that these effects are driven by the peers' personality skills.

Emigration and Public Finances (H2, J6)

Jhorland Ayala García
,
Bank of the Republic-Colombia
Yuanyuan Gu
,
Nanjing University of Information Science and Technology

Abstract

According to the World Migration Report 2020, the number of international migrants has increased over the last five decades, from 84 million in 1970 to 272 million in 2019. Among all the migrants, approximately 141 million live in Europe and North America, and around 80% emigrated from developing countries. The economic consequences of emigration for a developing country are mixed. On the one hand, emigrants generally embody a younger and higher educated part of the population. For example, 74% of immigrants are in the working-age range of 20 to 64, representing the loss of human capital for the origin countries. On the other hand, emigrants remit substantial funds to family members in their home country. International remittances have grown from an estimated 126 billion in 2000 to 689 billion in 2020.
This paper studies the aggregated impact of emigration on tax revenue in developing countries. Although there is evidence of the impact of remittances on tax revenue, the aggregated fiscal impact of emigration has not been studied. We try to fill this gap in the literature. Using cross-country data from 1990 to 2020, we follow the approaches of Feyrer (2019) and Docquier et al. (2016) to identify the causal effect of emigration on tax revenue. In particular, we use an instrumental variable that constructs from a gravity-based model for emigration. We find that the overall effect of emigration on the tax revenue is always positive and significant, and the effects are varied from different kinds of tax revenue. The findings of this paper could be useful for policymakers to understand the economic consequences of emigration and design policies that increase these benefits.

Endogeneity in Modal Regression (C1, C5)

Tao Wang
,
University of California-Riverside

Abstract

In this paper, we propose a control function approach to account for endogeneity in a parametric linear triangular simultaneous equations model for modal regression when the conditional mode of unobservable error term on the explanatory variable is nonzero. We adjust the endogeneity with the residuals from the conditional mode decomposition of the endogenous variable as controls in the structural equation, and develop a computationally attractive two-step estimation procedure with the conditional mode independence restriction. Particularly, in the first step, we construct the estimated modal residuals from the reduced-form linear modal regression for the endogenous variable. In the second step, we include the reduced-form residual nonparametrically as an additional variable and propose a three-stage estimation method for the resulting semiparametric partially linear modal regression which has not been fully investigated in the literature. The proposed estimators could be easily solved by virtue of a modified modal expectation-maximization (MEM) algorithm. Consistency and asymptotic properties of the estimators for both parametric and nonparametric parts are rigorously established under generic regularity conditions, where we demonstrate that the parametric estimators are root-nh^3-consistent (n is sample size and h is a bandwidth) and the estimation of the nonparametric component is oracle. Monte Carlo simulations are conducted to examine the finite sample performance of the proposed estimation procedures. Two applications to the real dataset of Return to Schooling and Colonial Origins of Comparative Development are presented to further illustrate the proposed estimators in practice. We in the end develop an adaptive lasso method to select instrumental variables and demonstrate the oracle property of the proposed penalized modal regression model.

Endogenous Abatement Technology (O3, E6)

Ghassane Benmir
,
London School of Economics and Political Science
Josselin Roman
,
Paris Dauphine University

Abstract

We first explore empirical evidence on fiscal and macro-financial drivers of green innovation. We find that the ETS price plays a significant role in steering green innovation. However, above a certain level, it negatively impacts green research and development (R&D), whereas long-term loans help boost green R&D. Second, to investigate the role financial policy could play in stimulating green R&D, we build a general equilibrium model where we show how green innovation could help achieve the net-zero target at lower output costs compared to fiscal carbon policies. Using Bayesian techniques, we first estimate the model and then construct counterfactual policy implementation scenarios, where we show that financial subsidies, macroprudential policies, and monetary policy differently affect the path of the trend growth in green innovation, and that they all have the same pro-cyclical dynamics. In addition, we investigate the net-zero emissions target under the three above-mentioned policies in order to assess their efficacy, and find that financial and monetary policy could substitute to fiscal policy and help achieve the net-zero objective.

Endogenous Product Adjustment and Exchange Rate Pass-Through (E3, F4)

Andreas Freitag
,
University of Basel
Sarah Lein
,
University of Basel, CEPR, and KOF ETH Zurich

Abstract

We document how product quality responds to exchange rate movements and quantify the
extent to which these quality changes affect the aggregate pass-through into export prices.
We analyze the substantial sudden appreciation of the Swiss franc post-removal of the
1.20-CHF-per-euro lower bound in 2015 using transaction-level export data representing
a large share of total exports. We find that firms upgrade product quality after the
appreciation. Furthermore, they disproportionately remove lower-quality products from
product ranges. This quality upgrading and quality sorting effect accounts for approximately
one-third and one-tenth of total pass-through one year after the appreciation, respectively.
We cross-check our results with the microdata underlying the Swiss export price index,
which includes an adjustment factor for quality based on firms' reported product replacements,
and obtain similar results.

Endogenous Spatial Production Networks: Quantitative Implications for Trade and Productivity (F1, R1)

Piyush Paritosh Panigrahi
,
Yale University

Abstract

Larger Indian firms selling inputs to other firms tend to have more customers, tend to be used more intensively by their customers, and tend to have larger customers. Motivated by these regularities, I propose a novel empirical model of trade featuring endogenous formation of input-output linkages between spatially distant firms. The empirical model consists of (a) a theoretical framework that accommodates first order features of firm-to-firm network data, (b) a framework for structural estimation based on maximum likelihood that is uninhibited by the scale of data, and (c) a procedure for counterfactual analysis that speaks to the effects of micro- and macro- shocks to the spatial network economy. In the model, firms with low production costs end up larger because they find more customers, are used more intensively by their customers and in turn their customers lower production costs and end up larger themselves. The model is estimated using micro-data on firm-to-firm sales between Indian firms located across 141 districts. The model's fit is good. The estimated model implies that a 10% decline in inter-state border frictions in India leads to welfare gains ranging between 1% and 8% across districts. Moreover, over half of the variation in changes in firms' sales to other firms can be explained by endogenous changes in the network structure.

Endogenous Technology, Scarring and Fiscal Policy (E3, E6)

Michaela Elfsbacka Schmoller
,
Bank of Finland

Abstract

This paper studies the role of fiscal policy in a New Keynesian DSGE model with endogenous technology growth through R&D and technology adoption. In this framework, recessions can generate permanent scarring effects in total factor productivity. Demand-side shocks affect productivity-improving investment and thus the technology stock, rendering monetary policy non-neutral also over the long run. As a result, the costs of the ELB are higher than models with exogenous technology suggest, raising the role of supplementary fiscal policy and emphasizing the role of monetary-fiscal interaction in this context. Fiscal growth policies which target R&D and technology adoption support aggregate demand at present, while at the same time directly reducing scarring effects and related permanent output losses. Fiscal multipliers display both a short- and a long-term dimension, including permanent effects of fiscal stimulus.

Escaping Secular Stagnation with Unconventional Monetary Policy (E7, C9)

Luba Petersen
,
Simon Fraser University
Ryan Rholes
,
Texas A&M University

Abstract

We design a new experimental framework to study policy interventions in secular stagnations and liquidity traps using an overlapping-generations environment where participants form expectations and make real economic decisions. We explore the ability of unconventional monetary policy to lead economies out of deflationary traps and away from a binding zero lower bound. We observe that participants are able to coordinate on high inflation full-employment equilibria. Permanent exogenous deleveraging shocks induce pessimistic expectations that precipitate persistently deflationary episodes. These shocks generate considerable consumption heterogeneity and also change subjects' forecasting heuristics to make them more backward-looking. We experimentally test policies aimed at re-anchoring expectations and the economy on the high inflation steady state. Permanently increasing the central bank's inflation target is insufficient to generate inflationary expectations. Eliminating the zero lower bound, on the other hand, is consistently effective at stimulating spending and generating the necessary inflation for the economies to escape the zero lower bound. Negative interest rates are more potent than raising the inflation target at shifting consumption to the present. Our findings suggest that inflation expectations and demand is better stimulated through realized wealth effects than coordination on rational expectations equilibria.

Estimating Effects of Dividend Tax Policy Changes (H2, G3)

Ziqi Xie
,
Comerica Bank

Abstract

At the beginning of 2021, we witnessed the high market volatility related to individual investors' activities, which reflected on specific stocks, including GME, AME, BB, etc. The events also lead to the block of trading from brokerage agencies. Compared with the U.S. market, the Chinese financial market has far more (appropriately 160 million in 2019) individual investors. To increase financial market stability, provide an incentive for listed firms to distribute dividends, and encourage long-term investment, on June 13, 2005, the Ministry of Finance and State Administration of Taxation of the People’s Republic of China jointly issued a document (Caishui 2005 No. 102) to lower the dividend tax rate from 20% to 10% for all investors. By conducting difference-in-differences and propensity score matching estimations with machine learning algorithms, I find that, after the 2005 policy change, lowering the dividend tax decreased the turnover rate and the number of trading volumes by over 18% and 68 million shares respectively. Therefore, this paper initiates the exploration of how policy variations affect investors' behavior.

Estimating Policy-Corrected Long-Term and Short-Term Tax Elasticities for the United States, Germany, and the United Kingdom (H2, E6)

Umut Unal
,
Philipps University of Marburg
Bernd Hayo
,
Philipps University of Marburg
Sascha Mierzwa
,
Philipps University of Marburg

Abstract

We estimate the elasticities of the most important tax categories with the help of a new quarterly database of discretionary tax measures for the US, Germany, and the UK over the period 1980Q1 to 2018Q2. Employing Romer & Romer’s (2009) narrative approach, we construct a policy-neutral dataset based on revenue figures from governmental records. Using this quantitative information, we are able to subtract policy-induced changes, which are typically not considered in the extant literature. Furthermore, we estimate state-dependent elasticities and adopt a more intuitive approach to measuring SR asymmetries based on the phase of the business cycle. In addition to ‘booms’ and ‘recessions’, we define a 'neutral' business cycle situation. Such a setup avoids setting a slightly negative/positive deviation from the long-run trend equal to a large recession/boom. In this regard, our findings can be summarized as follows: (i) In Germany and the UK, long-term tax-to-base elasticities are generally higher than short-term elasticities, whereas results for the US are mixed. (ii) Short-term elasticities for base-to-output elasticities tend to be smaller than unity, whereas long-term elasticities are close to unity. (iii) Germany and UK tax-to-output elasticities in the short term are lower than long-term elasticities, with mixed results for the US. (iv) For tax-to-base elasticities, we find business cycle asymmetries only across countries but not within countries. (v) For base-to-output elasticities, our results suggest few asymmetries across countries and more asymmetries across tax types. (vi) Typically, the above conclusions do not hold for corporate income tax.

Estimating Shadow Policy Rates in a Small Open Economy and the Role of Foreign Factors (E4, E5)

Jorge Alberto Fornero
,
Central Bank of Chile
Markus Kirchner
,
Central Bank of Chile
Carlos Molina
,
Central Bank of Chile

Abstract

Shadow monetary policy rates (SMPRs) are useful to evaluate the policy stance when interest rates are at their lower bounds and unconventional policies are implemented. We present a methodology to estimate an SMPR for the case of a small open economy based on a dynamic factor model, which allows to consider the impact of foreign monetary conditions on domestic ones. An application to Chile shows that under large negative shocks, unconventional policies drove the domestic SMPR to negative levels. Also, the SMPR is mainly driven by domestic (foreign) factors in the short (long) run, lending support to the classic trilemma.

Estimating the Economic Cost of COVID-19 (E3, E2)

Azhar Iqbal
,
Wells Fargo
Sam Bullard
,
Wells Fargo

Abstract

With the development of COVID-19 vaccines, analysts are predicting a quick bounce back in economic activities (back to the “normal”) and thereby suggesting that damages from the pandemic are temporary in nature.
Our study presents a framework to estimate economic costs of the COVID-19 pandemic for the U.S. economy. We characterize whether the pandemic-related damages are short lived or long lasting. The potential damages are estimated in terms of losses in major variables, including employment, consumption and GDP growth rates. By accurately estimating near-term damages from the pandemic, our framework would assist policymakers in regard to effective decision making.
To estimate damages from the pandemic, we utilize the pre-COVID potential level of the target variables, GDP for example, as a benchmark and compare these estimates with those that are calculated during the COVID pandemic. The intuition behind this method is that the pre-COVID potential GDP level is estimated using expansion phase growth rates and with the assumption of no COVID pandemic resurgence in the near future. Consequently, these rates are higher than those that are calculated during the pandemic and thereby the gap between these two measures of potential GDP is utilized as a benchmark to estimate the economic cost of COVID-19.
Our study suggests damages from the pandemic are not short lived (potentially long lasting) as the level/trend of potential GDP (and other variables) has shifted downward. That is, the major sectors have shifted to a lower growth trajectory compared to the pre-COVID growth path. These findings have vital implications for policymakers. That is, comparing real GDP with the post-COVID potential GDP estimates would paint an illusion of a stronger recovery. Furthermore, the illusion of a stronger recovery may lead to a sooner-than-appropriate-time policy normalization. Policymakers would avoid policy errors by utilizing our framework in the post-COVID era.

Estimation of a Partially Linear Seemingly Unrelated Regressions Model: Application to a Translog Cost System (C1, D2)

Xin Geng
,
Nankai University
Kai Sun
,
Shanghai University

Abstract

This paper studies a partially linear seemingly unrelated regressions model to estimate a translog cost system that consists of a partially linear translog cost function and input share equations. A simple and feasible estimation procedure is proposed. We show that both our parametric and nonparametric component estimators are consistent, asymptotically normal, and more efficient relative to the single-equation counterparts. We highlight that the relative efficiency gain of the nonparametric estimator for a particular equation, based on the Cholesky decomposition, improves with its position in the system and is maximized when this equation is placed at the end. A model specification test for parametric functional forms is proposed, and how to correct the between- and within-equation heteroscedasticity is also discussed. An Italian banking data set is used to estimate the translog cost system, yielding policy implications for risk management in banking.

Evaluating Marginal Internalities: A New Approach (H3, I1)

Zarko Y. Kalamov
,
University of Technology Berlin

Abstract

Consumers of sin goods often do not take the full health costs of consumption into account. In such cases, they impose an internality on themselves. If a social planner wishes to impose a sin tax, she needs first to measure the money-metric of the marginal internality.

This paper exploits a relationship between the sin good demand's health insurance elasticity and the marginal internality to estimate the latter. It develops a model where the internality arises because of both a self-control problem and biased beliefs about potential health harms. We show that the health insurance elasticity's determinants consist of rational factors and the money-metric of the marginal internality. By using empirical measurements of both the rational factors and the elasticity, we can determine the underlying marginal internality.

The most reliable existing method for the measurement of marginal internalities is the so-called "counterfactual normative consumer" approach, applied by Allcott, Lockwood and Taubinsky (2019, QJE) to sugary drinks consumption. It is a direct method that uses surveys to measure consumers' nutritional knowledge and self-control.

This paper's approach does not rely on surveys and uses different data to measure the same statistic. Thus, it complements the "counterfactual normative consumer" approach. We calibrate the model to sugary drinks consumption and show that our results are within the range of estimates derived by Allcott et al. (2019).

Evidence of Seclusion’s Effect on Suicide: Implications of COVID-19 Economic Interventions and Relocation (I1, H8)

Jacob James Rich
,
Case Western Reserve University School of Medicine
James A. Thornton
,
Eastern Michigan University

Abstract

Prior to COVID-19, suicide in the United States was on an upward trajectory. However, preliminary data from the Centers for Disease Control and Prevention show the suicide rate dropped approximately 6.4% in 2020 amid the pandemic. Following the lifetime utility hypothesis of Hamermesh and Soss (1974), we provide evidence to explain why this occurred, showing why some states have historically experienced higher suicide rates and how changing factors amid the pandemic led to less suicide. The relationship between states having smaller population densities and higher rates of suicide is almost one-to-one, and this study is mostly concerned with investigating the effect of seclusion on suicide with population density acting as a proxy. We do this by estimating a log-log suicide mortality panel model using annual data on all 50 states and Washington, D.C. for the period 1999-2019. Our model includes a number of socio-economic, lifestyle, and environmental variables that previous empirical studies suspect influence suicide rates. We test the sensitivity of the estimated effect of population density on suicide with several different specifications to confirm robustness. Our results show that the estimate of population density (-0.77, CI: -1.52 — -0.01) is robust and isolation is the best predictor of a state’s suicide rate. Our analysis of control variables then shows that unemployment (0.10, CI: 0.01 — 0.18) has had the second-largest effect on suicide, historically. Government interventions to enhance unemployment insurance and the mass exodus from cities to rural areas are most responsible for the reduction in suicides amid the COVID-19 pandemic of 2020.

Evolution versus Creationism in the Classroom: The Lasting Effects of Science Education (I2, Z1)

Benjamin Arold
,
LMU Munich and ifo institute

Abstract

Anti-scientific attitudes can impose substantial costs to public health, the environment,
and the economy. In this paper, we focus on the content of science education as one determinant of (anti-)scientific attitudes that is directly subject to the policymaker. Specifically, we isolate the causal effect of student’s exposure to teachings about evolution theory in science education on (i) their knowledge about evolution at the end of schooling, (ii) their attitudes on evolution in adulthood, and (iii) the probability that they work in life sciences.
In a generalized difference-in-differences framework, we exploit state-level reforms of the coverage of evolution in US State Science Education Standards as a source of arguably exogenous variation of students’ exposure to evolution teachings.
First, we link data on the evolution coverage in State Science Standards with the individual level National Assessment for Educational Progress (NAEP). We find that being exposed to a more comprehensive evolution coverage in high school increases students’ knowledge about evolution at the end of high
school. At the same time, we see that students’ knowledge in scientific areas other than
evolution (placebos) is not affected. Second, we link data on the evolution coverage in State Science Standards with the General Social Survey (GSS). We find that being exposed to a more comprehensive evolution coverage in high school increases individuals' approval of evolution in adulthood. At the same time, we find no effects on non-evolution scientific, religious, and political outcomes. Third, we link data on the evolution coverage in State Science Standards with the American Community Survey (ACS). We find that being exposed to a more comprehensive evolution coverage in high school increases individuals’ probability to work in life sciences in adulthood, but not in other occupational fields. In sum, these findings show that the content of science education has lasting effects on individuals.

Examining Patent Examiners: Present Bias, Procrastination and Task Performance (D9, O3)

Ryo Nakajima
,
Keio University
Ryuichi Tamura
,
University of Niigata-Prefecture
Michitaka Sasaki
,
Tottori University

Abstract

We explore the unproductive procrastination behavior of patent examiners, probe whether present-biased preferences cause such behavior, and estimate the magnitude.

This paper focuses on patent examiners' task performance rather than task completion timing to assess present-biased time preferences. Previous economic studies using field data take task completion on or near deadline as evidence for present-bias-induced procrastination. By construct, we use variation in task performance to enhance the power of identification. Intuitively, if a delay is systematically accompanied by substandard performance, it will not be bolstered by option value theory but rather by present-bias theory because postponed decisions become counterproductive.

We set out a quasi-hyperbolic discounting model where a patent examiner is assigned a biweekly quota of patent application reviews and determines the level of effort by the deadline. We test the model's predictions using data on patent prosecution activities in the U.S. We also estimate the time preference parameters of the quasi hyperbolic discounting model. The panel structure of the patent examination data allows us to follow each patent examiner's performance profile. Since the present-bias factors are estimated as the number of patent examiners, the dimensionality problem occurs in the estimation process. We address this issue using a Bayesian inference approach with the Markov chain Monte Carlo (MCMC) method.

The estimation results provide strong evidence that present bias is widespread among patent examiners. Specifically, more than half the patent examiners have a present-bias factor of less than one.　We draw two policy implications from our analysis. First, given that attrition rates are significantly higher for less present-biased patent examiners than for more present-biased patent examiners, the employee retention policy should target the former group. Second, reducing the patent examination quota can improve patent examination quality and timeliness. For a pharmaceutical patent, this reform could yield substantial consumer benefits.

Examining the Zero-Markup Drug Policy in China: A Structural Approach (I1, L5)

Castiel Chen Zhuang
,
University of Washington
Qifan Huang
,
University of Washington
Zhentong Lu
,
Bank of Canada

Abstract

Since 2010, China’s pharmaceutical industry has gone through a series of reforms, notably the “Zero-Markup Drug Policy” (ZMDP). The main motivation of the policy is to break the integration between drug prescription and dispensation so that the known agency problem between physicians and patients can be alleviated. This paper estimates a structural model of China’s prescription drug market and quantifies the impact of the ZMDP on the profitability of hospitals and patient welfare. Our results suggest that: physicians’ prescription choices are more sensitive to patient’s out-of-pocket costs than hospitals’ drug markups, unless the coinsurance rate is above 35 percent; pricing is mostly dominated by provincial governments that are assumed to represent patients’ welfare; branded drugs are more preferable and less price elastic than generic ones, and the ZMDP makes generic drugs relatively more favorable and thus more profitable; while total sales is negatively affected by the ZMDP, overall patient welfare improves by a sizable amount because of the lowered prices.

Exit Expectations, Time Inconsistency, and the Optimal Design of a Currency Union (E5, E4)

Yuta Saito
,
Kobe International University

Abstract

In a currency union, monetary policies are determined collectively by the member countries. For countries' lacking commitment, one benefit of belonging to a currency union is that a country's monetary policy gains credibility by loosing their monetary autonomy. Focusing on this benefit of belonging to a currency union, this paper analyses the effect of an exogenous rise in the expectation of members' exit on the currency union's optimal design. Our two main results are as follows. First, higher expectations of a country's exit enable the public to anticipate a higher probability of domestic discretionary policymaking in the future. Since the public knows that the authority has an incentive to generate surprise inflation, we have a higher expected inflation rate accompanied by a lower growth rate at the rational expectation equilibrium. Second, a higher exit expectations of advanced countries increases the optimal share of developing countries in the currency union from the advanced countries' perspective. In other words, unlike the traditional theory of optimal currency areas, a higher exit probability requires a greater portion of member countries with dissimilar economic backgrounds to be in the currency area.

Expansion of Intermittent Renewables: Strategies, pass-through costs, and welfare distribution (Q4, L1)

Gloria Colmenares
,
University of Münster
Andreas Löschel
,
Ruhr-University Bochum
Dominik Schober
,
University of Mannheim

Abstract

We investigate technology as a source of product differentiation and its impact on strategic behavior and wealth distribution in the German day-ahead market. We compare the performance of our model to a benchmark, using elasticity-adjusted markups and without bid data. We represent uncertainty on the demand side as an intermittency of renewables or a flexible demand response. In a system with 33% renewable shares, both model estimates converge at off-peak hours, being robust to ramping cost and renewable forecast assumptions. Producers pass on fuel and carbon costs differently with implications for reinforced regulations by the European Emissions Trading Scheme. Implications for counterfactuals with carbon prices up to 100 e/tCO2 are also discussed.

Export by Cohort (F1, L2)

Zhang Chen
,
Princeton University
Qing Huang
,
Peking University

Abstract

We find a ‘cohort effect’ among new exporters in the same destination market: firms entering later tend to perform better at the same age. Better performance of late entrants indicates improvement in measured firm characteristics. To identify such changes, we rely on structural models of new exporter dynamics, among which two competing theories stand out: demand learning and customer accumulation. We show that the relationship between sales growth at entry and cohort is informative about the main driver of post-entry exporter growth. A major class of demand learning models à la Jovanovic (1982) predict only a negative relationship, which is inconsistent with the weak positive relationship seen in the data. On the other hand, we show analytically that customer accumulation models are flexible enough to generate all signs of relationship. Guided by the qualitative analysis, we build a tractable customer base accumulation model with advertising, estimate it structurally and validate its capability to replicate the empirical cross-cohort exporter lifecycles. The model estimates suggest that cohort effect is a combination of productivity effect and reputation effect: exporters entering one cohort later on average gain 0.2% in measured productivity and start with a 7% larger customer base.

Female Mayors and Violence Against Women: Evidence from the U.S. (J1, H7)

Jinglin Wen
,
University of Glasgow

Abstract

Women are overrepresented in some crimes. In the United States, more than one in three women experience sexual violence involving physical contact during their lifetimes. Yet, only one out of four sexual assaults are reported to the police. This study examines the effect of female leadership in local government on violence against women. Regression discontinuity estimates show that elections of female mayors decrease violence specifically targeted toward women but leave other violence unaffected. The effect is strong only for local elected leaders and it is persistent throughout her term, while there is no effect for non-local leaders. Moreover, the study explores behavioral responses by victims. Evidence suggests that female victims are more likely to report violence against them after female mayors take office. Importantly, female victories are followed by greater police responsiveness to violence against women. There are no such effects for violence against men. These findings survive various robustness checks. The evidence accords with deterrence that refers to the behavioral reduction in crime due to offender anticipation of punishment.

Financial Autonomy in Small Open Economies (E4, G1)

Shan Xue
,
Claremont Graduate University
Thomas D. Willett
,
Claremont Graduate University and Claremont McKenna College

Abstract

This paper studies term structures of government bonds and estimates the bonds risk premia to explain stabilized cross-border capital flows in small open economies without effectively independent monetary policy. In Hong Kong (HK), the local currency is hardly pegged against the US dollars, and the monetary authority chooses open financial accounts at the cost of losing monetary independence. HK's Exchange Fund Bills and Notes (EFBN) are estimated to have a similar term structure with the US Treasury Bonds in the sample from 1996Q4 to 2020Q2. The EFBN risk premia, however, deviated occasionally from the US counterpart, suggesting divergent market expectations on HK and US assets. A vector-autoregressive model is employed to explain the EFBN risk premia with HK macroeconomic variables. The result shows that HK domestic price and real output are unable to predict the risk premia, speaking to the absence of policy aim at internal stability in HK. These findings also imply that, in addition to shocks from hard currency and the local economy, the risk premia in small open economies are to be explained by factors related to regional financial markets.

Financial Infrastructure and Micro-enterprise Performance: Evidence from India (G2, O2)

Subrata Kumar Ritadhi
,
Ashoka University
Reajul Alam Chowdhury
,
University of Illinois-Urbana-Champaign

Abstract

How does financial infrastructure affect micro-enterprise performance? We study this question in the context of India's bank branch expansion policy initiated in 2006. The policy classified regions as ``underbanked'' if their ex-ante branch density was less than the national average branch density, and encouraged private banks to open branches in these underbanked areas. We exploit this threshold-specific treatment assignment rule in the spirit of a regression discontinuity design to identify the causal impact of branch expansion on micro-enterprise performance, using data from a nationally representative survey on unincorporated micro and small enterprises. Focusing on regions located within a narrow window around the discontinuity threshold, our results show that enterprises in underbanked regions witnessed a significant increase in both revenues and value-addition in the aftermath of the policy intervention. The treatment effects are economically significant – underbanked districts see a 18% increase in enterprise revenues and a 22% increase in value-addition. There was however no change in formal or informal credit for these enterprises along either the extensive or the intensive margins, indicating that the positive impact of branch expansion on enterprise revenues and profitability occurred through spillovers from increased local demand and industry linkages with registered enterprises. Our findings lend support to the view that banks can serve as vehicles for pro-poor growth.

Financial Market Structure and the Supply of Safe Assets: An Analysis of the Leveraged Loan Market (G2)

David Xiaoyu Xu
,
University of Texas-Austin

Abstract

I study dynamic collateral management in a setting where financial intermediaries can replace deteriorated loans through secondary market trading. Such trades increase the supply of safe assets beyond the level produced by static pooling and tranching. However, collateral substitution generates investment and financing externalities across intermediaries, resulting in an inefficiency: too many intermediaries issue safe debt, but they underproduce safe assets relative to a constrained efficient benchmark. Simple policy interventions targeting only one side of intermediary balance sheets may exacerbate the inefficiency. I apply the model to analyze the leveraged loan market and recent regulatory changes on collateralized loan obligations.

Financial or Non-financial Shocks: Rivals That Play Together (G0, E3)

Hamed Ghiaie
,
ESCP Business School

Abstract

This paper estimates a model using Bayesian methods and data from the US (1990Q1- 2019Q2) to explore how the financial sector contributes to business cycles through banks’ asset reallocation channel and the quality of capital adequacy constraint. The paper shows that the contribution of financial and non-financial shocks has varied before, during and after the recent financial crisis; housing demand and asset price shocks are the main contributors and the credit shocks are the most persistent. In addition, the paper presents the application of macroprudential tools, along with their impact on the economy in general, and on welfare in particular. The findings illustrate that the tools which control household borrowing ability, such as loan-to-value or debt-to-income ratios, do not impact welfare significantly.
However, the impact of policies on the leveraged sector is substantial. The paper proposes macroprudential policies that allow policy makers to stabilize the economy without changing welfare. Such policies, however, should be timely, targeted and temporary, otherwise they may cause disruptions.

Financial Sanctions and the Transformation of the Global Banking Network (F5, F3)

Qi Zhang
,
Georgetown University

Abstract

Since the 2010s, targeted and secondary financial sanctions have become the most powerful and widely used tool of the United States’ economic statecraft. While it contributes to containing money laundering and terrorist financing activities, it is unclear how banks might be affected by these measures and how they will respond? This paper creates an original dataset of over 3,000 active and defunct banking branches and subsidiaries of 39 global systematically important banks (G-SIBs). The dataset traces changes in these banks’ ownership and status between 1990 and 2020. We find that financial sanctions have re-shaped the global banking network. In particular, large European banking groups are hit heavily by these sanctions. Rising compliance cost has forced them to close their branches and subsidiaries in high risk and low yield regions such as the Caribbean, Africa, and the Middle East. When these banks retreat, regional banks and Chinese banks are rising and quickly taking over their positions. Interestingly, American banks have also strengthened their positions in the global banking network during the past ten years. This paper is primarily a descriptive study. It aims to present how financial sanctions have re-shaped the global banking network, and it explores potential new research directions on the banking industry.

Financing Mechanism of Green Fund: Behavioral of Government, Social Capital and Enterprise (G4, H3)

Lili Wei
,
Lanzhou University
Ying Yang
,
Lanzhou University
Jing Zhang
,
Lanzhou University

Abstract

In order to adapt to climate change, the Green Climate Fund(GCF) helps developing countries build green projects, but developing countries are still experiencing huge financial gaps. In response to carbon emission target, China has established the National Green Development Fund in 2020, and local governments have established green funds from 2017 to 2021.We summarize that the common model of green funds is that fiscal funds or government-guided funds are used as parent funds, and sub-funds are set up to leverage the participation of social capital. We used assumption of investors' bounded rationality, constructed dynamic evolutionary game models built with three participants, which include the government, social capital and enterprises. Use dynamic evolutionary game model and numerical simulation analysis method to discuss the equilibrium strategy and influence mechanism of attracting social capital investment.

We found that the green investment of social capital is affected by the government's attitude, incentive policies, and risk sharing. Enterprises should make correct use of green funds, and accept the supervision of fund management companies to ensure the environmental effect of green funds. In order to mobilize private, institutional, and commercial financing for climate change mitigation and adaptation, the government should give full play to its leverage in the green fund, focusing on government guidance and market operation, to build greener projects and adapt to climate change.

Firm Heterogeneity and the Capital Market (E2, G3)

Tobias König
,
Humboldt University of Berlin and DIW Berlin

Abstract

I investigate the importance of different types of financial constraints on firms for the transmission of external equity demand shocks and monetary policy shocks.
External equity financing shocks are constructed from firm microdata using the novel Granular Instrumental Variable methodology. I find that firms with high expected future profitability increase their investment relatively more when capital market funding conditions are exogenously improved. The relevance of Tobin's Q however, cannot be confirmed for the transmission of monetary policy shocks. Instead highly indebted firms react more sensitively in their investment response to interest rate changes. A contrast arises in the implications of both types of funding shocks on the relaxation of firm borrowing constraints. My results imply that policymakers have to consider the role of both monetary policy conditions and access to capital markets to stimulate firm investment.

Firm Revenue Elasticity and Business Cycle Behaviour (E3, D2)

Daisoon Kim
,
North Carolina State University
Anthony Savagar
,
University of Kent

Abstract

Recent literature on market power in macroeconomics notes the limitations of using revenue elasticities to proxy output elasticities when estimating markups. Although revenue elasticities may not unlock markups, we can -- to some extent -- circumvent markup estimation and use revenue elasticities to study business cycle dynamics. Using U.S. firm-level data, we measure revenue elasticities and estimate impulse responses using local projections. We present theory to show higher revenue elasticity firms generate greater business cycle amplification and find empirical evidence consistent with this theory.

Firm-Bank Relationships: A Cross-Country Comparison (G2, E5)

Niklas Grimm
,
European Central Bank
Angela Maddaloni
,
European Central Bank
Melina Papoutsi
,
European Central Bank
Fabiano Schivardi
,
Luiss University and EIEF

Abstract

We document the structure of firm-bank relationships across the Euro area countries and present new stylised facts using novel data from the recent credit registry of the Eurosystem. The main findings are the following. First, the number of firm-bank relationships varies significantly across firm size and across countries in the EA. Even though the number of relationships is increasing with firm size in all countries, the absolute number of relationships differs across countries. The median firm in Italy, Spain, and Portugal has at least one more bank relationship than a firm in Ireland, the Netherlands, Germany and Austria, controlling for the firm size and industry. Second, the median firm in all countries appears to have a main bank that lends at least half of the firm's total credit. Still, there is a significant heterogeneity across countries and firms size on the credit concentration, with firms in Spain, Italy, and Portugal to depend less on their main bank compared to firms in Ireland and the Netherlands, where the share of the main bank is almost equal to one. Lastly, differences in the credit contracts are also identified. In Spain, Portugal, Italy, and France debt contracts with shorter maturities such as trade receivables correspond to a larger share of the total credit, while in Germany and the Netherlands most of the credit is allocated in contracts with longer maturities, such as collateralized loans and revolving credit. Such differences appear to be correlated with the structure of the firm-bank relationships and at the same time could have important implications for investment decisions in long-run projects. Overall, the paper highlights the noteworthy heterogeneity in the firm-bank relationships across the Euro area countries that is linked with the growth of the corporate sector, but also with the firms' exposure to a bank shock.

Firm-level Political Risk and Debt Choice (G2, G3)

Guan-Ying Huang
,
Southwestern University of Finance and Economics
Carl Hsin-han Shen
,
Macquarie University
Zhen-Xing Wu
,
Zhongnan University of Economics and Law

Abstract

In this study, we examine the effect of firm-level political risk on debt financing choices. Using a U.S. sample, our investigation indicates that firms with higher political risk significantly prefer issuing private debt to public debt. Such a finding is robust to the tests addressing endogeneity concerns, including a test using the disagreement among the congress representatives as an instrumental variable and a difference-in-difference test using the beginning of Iraq War as the experiment. We identify several reasons of our findings and provide supportive empirical evidence. Firstly, our results are more pronounced when a borrower has higher default probability, lower asset liquidity, and higher financial statement transparency in a period of high policy uncertainty. These findings are consistent with the notions that private lenders are advantageous because they can efficiently manage the reorganization process when the borrowers are financially distressed, and because they can continue updating their information regarding a borrower when the policy uncertainty rises. Next, we find evidence that there exists an implicit contract between a borrower and its relationship bank, following which a borrower accepts less favorable terms during normal times in exchange for the lender’s support during difficult times. Taken together, this study advances our understanding of how political risk influences financing decisions and highlights the cross-sectional heterogeneity in the level of political risk facing individual firms.

Fiscal Stimulus and Firms: Profitability during the Global Financial Crisis (E6, H6)

Marcos Poplawski-Ribeiro
,
International Monetary Fund

Abstract

This paper examines how fiscal stimulus impacted corporate profitability during the global financial crisis. Using Worldscope data for more than 66,600 non-financial firms in 52 advanced and emerging economies between 2008 and 2010, it finds that a decrease in the structural fiscal balance has a significant effect on the profitability of the sampled firms. A decline of one percent of potential GDP in the structural balance is associated with a 1.2 percentage point increase in the profit (relative to total assets) of the panel average firm. The effect has a greater statistical significance in advanced economies compared to emerging ones, and in Europe and Asia than in other regions. It differs across industries, being felt most significantly in manufacturing and construction industries and having key implications for the fiscal response to shocks at industry- and firm levels.

Follow-Thy-Neighbor? Spillovers of Asset Purchases within the Real Sector (D2, E5)

Talina Sondershaus
,
Halle Institute for Economic Research

Abstract

Market participants are interconnected and events which affect some entities can disseminate through the economy due to agglomeration spillovers, local aggregate demand effects or competition between firms. By exploiting the first large sovereign bond purchase program of the ECB, the securities market program (SMP), this paper investigates whether asset purchases induce spillover effects between treated and non-treated firms. I compare firms linked to banks which held SMP eligible assets to firms linked to banks which did not hold SMP eligible assets and take spillover effects between and within the two groups into account. When ignoring spillovers in the assessment of real effects, there is no difference between treated and control firms. In contrast, when taking spillovers between firms into account, directly treated firms invest less and induce negative spillovers on firms operating in the same industry and region. The paper shows the importance to consider spillover effects when assessing the real effects of unconventional monetary policy: when neglected, spillovers can cover up direct effects.

Forecasting with Panel Augmented Macroeconomic Data using Recurrent Neural Networks and AutoML (E3, C6)

Cameron Fen
,
University of Michigan
Samir Undavia
,
Accenture NLP

Abstract

A fundamental problem in macroeconomics is the external validity of time series models. Typical macroeconomic data only has approximately 300 quarterly time steps, which implies the best reduced-form models are linear. Structural models often require priors and to heavily borrow from microeconomics research to identify parameters. We propose a simple data augmentation: training reduced-form and structural models with a panel of countries, instead of the single country of interest. This augmentation improves the GDP RMSE forecasting performance of AR(2), VAR(1), and VAR(4) models over 1 to 5 horizons by an average of 15 percent, compared to a single country baseline. This also seems to make models more policy invariant, as country out-of-sample forecasts, where data on every country but the country of interest is used, outperforms, achieving roughly half the RMSE performance improvements of using the entire panel of countries. Furthermore, we document similar generalization gains for DSGE models like the Smets-Wouters model, suggesting that the external validity of estimation and calibration could benefit from matching moments on a panel of countries rather than just the United States or other baseline data sets. This procedure is easy to implement and can immediately improve the external validity of most macroeconomic models. Finally, as the effective data size has increased, we test more non-parametric machine learning models on this data set. We use both a recurrent neural network and AutoML, which performs a horse-race of many machine learning models and reports the best performing model on the validation set. We show that before the data augmentation, these methods perform poorly on test sets, but with the augmented data, the AutoML, a rough proxy for excellent non-parametric machine learning performance, outperforms all baseline economic models in 4 of the 5 horizons. This performance is confirmed with robustness checks.

Foreign Aid through Domestic Tax Cuts? Evidence from Multinational Firm Presence in Developing Countries (H2, O1)

Marcel Olbert
,
London Business School
Jeffrey L. Hoopes
,
University of North Carolina-Chapel Hill
Rebecca Lester
,
Stanford University
Daniel Klein
,
University of Mannheim

Abstract

This paper studies whether corporate tax cuts in developed countries affect economies in the developing world. We focus on one of the most prominent fiscal policies – the corporate income tax regime – and study a major U.K. tax cut as an exogenous shock to foreign investment in Africa. Difference-in-differences estimates show that multinational U.K. firms increase their subsidiary presence in sub-Saharan Africa by 17-24 percent following the 2010 announcement of U.K. tax rate reductions. Exploiting location-specific nighttime luminosity data as well as local data from the African Demographic and Health Surveys, we also document increased economic activity and higher employment rates of African citizens within close proximity (10 kilometers) of local U.K.-owned subsidiaries. Our findings imply that, beyond the goal of motivating home country investment, developed countries' corporate tax cuts have economic impact in developing nations.

Foreign Reserves, Fiscal Capacity and Lender of Last Resort (F3, O1)

Humberto Martinez
,
Rutgers University

Abstract

Why do emerging markets accumulate foreign reserves for precautionary purposes while advanced economies do not? In this paper, I argue that, in contrast to advanced economies, developing countries accumulate reserves because they lack the sufficient fiscal capacity - ability to extract resources from its citizens - to provide liquidity during market stress events successfully. Thus, by accumulating reserves, emerging countries can emulate advanced economies and eliminate any exposure to a sudden stop. However, since accumulating reserves is costly, a country might choose to remain exposed to sudden stops. This decision depends on the trade-off between the expected welfare losses of a sudden stop, and the cost of accumulating the necessary amount of reserves to eliminate this exposure which is a function of the level of fiscal capacity. To show this argument, I develop a theoretical model of small open economy that borrows from international market where funding costs are driven by a global financial cycle. Moreover, I present supporting empirical evidence for a sample of 98 countries between 1991 and 2016 of this non-linear relationship between fiscal capacity and foreign reserves. In terms of policy, this paper links fiscal capacity with an economy's resilience to global shocks. Thus, countries should not shy away of strengthening their institutions for tax compliance.

Fossil Fuel Equity Bias (G4, Q5)

Ibrahim Tahri
,
Potsdam Institute for Climate Impact Research

Abstract

Public markets represent an important channel for raising additional funds for green investments. In this paper, we develop a theoretical framework to describe potential behavioral biases in equity markets that can lead to underinvestment in green assets. Investors’ preference for holding fossil fuel based assets relative to emerging green assets might stem from the existence of an information asymmetry between the two types of assets with respect their expected payoffs and risks. The effort and cost for gathering information on newly emerging technologies are not the same for the already established ones. We rationalize an underdiversified portfolio through a combined learning-investment model. Building upon the literature of investment under incomplete information, we derive a (Merton type) continuous-time stochastic learning-investment model, where investors chose both the optimal degree of attention to private information and portfolio weights. Attention to information is incorporated as an explicit cost, and directly affects the utility of the investor. High information costs reduce the ability of the risk-averse investor to learn about the underlying asset, which would allow her to reduce the uncertainty about the equity’s expected mean-returns. Hence, with a high level of uncertainty and high information costs, investors are inclined to favor more familiar assets. To achieve the targets aimed at limiting the negative effects of climate change there is a need for a greater involvement of the financial sector. Climate policies, on top of the current fundamentals, can be designed to reduce the uncertainty evolving around the performance of green assets.

FX Hedging, Currency Choice, and Dollar Dominance (F3, E3)

Martina Fraschini
,
University of Lausanne and Swiss Finance Institute
Tammaro Terracciano
,
University of Geneva and Swiss Finance Institute

Abstract

We study how foreign-exchange (FX) hedging affects firms’ currency choice and exchange-rate pass-through dynamics. We develop a theoretical model that features dynamic currency choice with incomplete pass-through and limited access to FX derivatives markets. Our model predicts that having access to FX hedging favours foreign currency pricing when firms are risk-averse. We test and quantify these theoretical results by using novel French product-level data on exports to extra-EU countries and their FX derivatives positions. We find that, given the level of local currency volatility exporters face, having access to FX hedging largely favours US dollar pricing, while it does not influence local currency pricing. This means that easier access to FX hedging markets contributes to explaining dollar dominance in global trade. Furthermore, we document that FX hedging is associated with persistent lower levels of exchange-rate pass-through into export prices.

Gain without Pain? Non-Tariff Measures, Plants’ Productivity and Markups (F1, L2)

Giorgio Presidente
,
University of Oxford

Abstract

This paper studies how productivity and markups respond to non-tariff measures (NTMs). We build a novel time-varying dataset on all NTMs applied to imported prod- ucts by Indonesia. Using price and quantity information, we disentangle the impact of NTMs on plants’ technical efficiency and markups. We find that on average, NTMs generate fewer distortions than import tariffs. However, while specific NTMs increase the quality of the products on which they are applied, others act as barriers to trade similar to import tariffs. These results suggest that in order to gauge their impacts and guide policy-making, NTMs should not be bundled together in empirical analyses.

Gender Bias in Education Expenditure in Iraq: Evidence from Household Socio-Economic Survey (I2, O1)

Erfan Kareem
,
Southern Illinois University-Carbondale
Akm Mahbub Morshed
,
Southern Illinois University-Carbondale

Abstract

This paper examines the nature, scope, and plausible determinants of gender discrimination in allocating household resources by examining the education expenditure on boys' and girls' education in Iraq. Using data from the household expenditure survey conducted in 2007, as expected, we find a strong male bias in household resource allocation in Iraq. However, there exist considerable variations in this bias depending on the age of the child, income level of the household, rural-urban divide, and the regions of Iraq. These results suggest that parents' allocation of resources for education expenditure for boys and girls is motivated by the economic interest of the households. This suggests that changing the incentive structure such as targeted employment opportunities for women, better access to childcare and health care, and better physical and social infrastructure would help attain gender equality.

Gender Differences In Reaction To Enforcement Mechanisms: A Large-Scale Natural Field Experiment (C9, G2)

Difang Huang
,
Monash University
Zhengyang Bao
,
Monash University

Abstract

We followed 58,345 borrowers from a peer-to-peer lending platform to study how women and men react to enforcement mechanisms differently. In the experiment, borrowers were randomized into treatments where they received different text messages urging for timely repayment if they had loans due the next day. Compared to a reminder message, the messages inducing social pressures and financial incentives reduced the overdue rate for both genders. However, females were more responsive to messages producing social pressures, while males were more responsive to financial incentives. The results imply the potential importance of a gender-dependent mechanism to enhance compliance.

Gender, Group Liability and Moral Hazard in Microfinance (G4, Z1)

Shagata Mukherjee
,
Meghnad Desai Academy of Economics
Michael Price
,
University of Alabama

Abstract

This study examines whether social context and norms lead to gender differences in moral hazard behavior among microfinance borrowers by conducting microfinance field experiments in comparable matrilineal and patrilineal societies in India. This paper also takes the first step to analyze the strategic interaction of the constituent components of default which is not explored in the prior literature in microfinance experiments. The previous experiments in microfinance have focused primarily on only one of the two moral hazards (ex-ante moral hazard and ex-post moral hazard) channels through which default occurs while abstracting from the other (Abbink et al. 2006, Kono 2006, Gine et al. 2010). Our experiment can thus be viewed as a generalized version of the previous experiments on moral hazard in microfinance. Our experimental design allows us to isolate the two moral hazard channels by incorporating three treatments which are, the ex-ante game treatment where subjects’ only make decisions over project choice, the ex-post game treatment where subjects’ only make decisions over repayment choice and the full game treatment where subjects’ make decisions over both project and repayment choice. Thus, decomposing the moral hazard channels, we find that matrilineal women become more prone to ex-post moral hazard when there is no possibility of ex-ante moral hazard and vice versa. We also find that in patrilineal societies, women are significantly less prone to exhibit ex-post moral hazard, but we observe a reversal of gender effect in the matrilineal society. Our results thus suggest that gender difference in moral hazard is driven by the social context, norms and gender roles in different societies.

Getting on the Wagon: Decreasing Alcohol Abuse to Improve Rural Well-being (O1, I3)

David Murphy
,
Colgate University
Carolina Castilla
,
Colgate University
Andrew Simons
,
Fordham University

Abstract

A major global social and economic problem is the widespread abuse of alcohol. In western Kenya, a highly populated area with significant levels of rural poverty, illicit sale and consumption of locally brewed spirits is causing significant negative societal impacts: harming health, decreasing agricultural productivity, and leading to intra-household conflict. We implemented a randomized control trial across a wide area of western Kenya in which treatment group households received three days of group training along with a longer period of individual and household-level counseling with the objective to decrease substance abuse. Findings show that training attendance and alcohol counseling significantly decreased alcohol usage relative a control group as measured by both self and spouse reported consumption levels. The study also shows that treated households increased their time spent in agricultural work and decreased reporting of intimate partner violence (IPV) by the spouse relative to the control group. Experimental auctions for agricultural inputs also show those exposed to alcohol counseling have greater willingness to pay for productivity-enhancing agricultural inputs than those in the control group and were more willing to share information about experimental auction winnings with their spouse. A cost-benefit analysis shows that simple alcohol counseling can lead to significant net benefits through increased agricultural productivity and decreased IPV.

Global Confidence, Uncertainty, and Business Cycles (E2, F1)

Jongrim Ha
,
World Bank
Inhwan So
,
Bank of Korea

Abstract

This paper investigates the role of global confidence cycles, measured as the common factor across a wide range of survey-based business or consumer confidence indicators in global macroeconomic fluctuations over 1985-2019. We estimate a factor-augmented vector autoregression model, where global confidence shocks are identified through recursive restrictions. We report three main results. First, the global confidence cycles, in particular that of consumer confidence, have played a key role in global business cycle fluctuations, explaining over a third of total variations. Second, while global business confidence shocks are in nature demand-driven, global consumer confidence seems to reflect both demand and supply shocks, in line with “animal spirit” and “news” views on the relationship between confidence and economic activities. Third, the shifts in global confidence are not necessarily accounted for by uncertainty shocks. Instead, confidence acts as an important channel in the transmission of uncertainty shocks. The results are robust to alternative identification using a novel set of external instruments, alternative variable orderings, and different uncertainty measures.

Global prices and internal migration: Evidence from the palm oil boom in Indonesia (F6, O1)

Rizki Nauli Siregar
,
University of Mainz

Abstract

I study how regions respond to price shocks in the presence of internal migration. I examine Indonesia in the 2000s as it faced a commodity boom for palm oil, which became one of its main export commodities. I exploit the variation in the land shares and crop suitability to compute the potential contribution of main crops across district economies as a measure of local exposure to shocks. I find that the commodity boom increased the purchasing power of palm oil-producing districts. These districts also received more migration, providing evidence that palm oil price shocks were no longer localized. Indeed, internal migration spread the windfall. I also find spillover to neighboring districts. However, these relatively higher levels of purchasing power did not last after the commodity boom ended in 2014. I show that the palm-oil sector grew through extensification as a response to the price shocks, with no indication of growth through intensification. I estimate the overall welfare gains in Indonesia between 2005 and 2010 and find substantial gains from migration.

Global Share Repurchases Over the Business Cycle (G3, E3)

Zigan Wang
,
University of Hong Kong
Qie Ellie Yin
,
Hong Kong Baptist University
Luping Yu
,
Xiamen University

Abstract

Using a dataset that covers details of repurchase cases across the globe, we comprehensively analyze how repurchase motives, details, and consequences vary over the business cycle. We find that in economic recession, firms buy back stocks to bring up undervalued stock price or to enhance market liquidity, and their repurchase announcements are accompanied by higher short-term stock returns and a lower completion rate. In expansion periods, firms repurchase to distribute excess cash; their announcements are followed by less inefficient investment, higher long-term returns and a higher completion rate.

Global Value Chains and the Dynamics of UK Inflation (E3, F1)

Melih Firat
,
Johns Hopkins University
Aydan Dogan
,
Bank of England
Tommaso Aquilante
,
Bank of England

Abstract

This paper investigates the relationship between the involvement of the UK economy in global markets and its inflation dynamics. We first document that the UK Phillips curve started to flatten in the early 1980s with a significant change in the slope in the late 1990s and show that this change is strongly associated to trade openness. We then use disaggregate data to show that the interaction between the sectoral and source-country dimensions crucially affect the slope of the UK Phillips curve: we uncover robust evidence that UK industries with higher shares of intermediate imports from Emerging Market Economies have flatter Phillips curves. Interestingly, while integration with China is an important force behind this result, integration with other Emerging Market Economies also plays a significant role in putting downward pressure on UK inflation. Our empirical findings are consistent with a two-country, multi-sector model where firms use intermediate goods from home and foreign industries in addition to the labor in production.

Going Universal. The Impact of Free School Lunches on Child Bodyweight Outcomes (I1, H4)

Birgitta Rabe
,
University of Essex
Angus Holford
,
University of Essex

Abstract

In recent years, several countries have switched from means-tested to universal provision of free school meals to increase meal uptake, reduce stigma and combat childhood obesity. Evidence on the success of such policies is lacking. We study the impact on young children's bodyweight of a switch to universal provision of nutritious free school meals in England, using unique high-quality data on children’s height and weight collected by trained nurses in schools. We exploit identifying variation in the timing of weight measurements in a difference-in-difference framework which allows us to show how bodyweight outcomes evolve as dosage of free meals increases throughout the school year.

We find that exposure to high quality universal free lunches increases healthy weight prevalence and reduces obesity prevalence and BMI by the end of the first year of school. The effect is driven by substitution of low-quality home-produced lunches with school meals among children not eligible under means-testing, while we find no evidence of income or parental labour supply effects. This suggests universal provision can improve the diets of relatively well-off pupils.

We contribute to the literature by evaluating a policy that is a relevant policy option in the large number of countries that already run high quality, means-tested free meal policies. We also contribute to the wider literature on the relative advantages of universalism versus targeting or means-testing and on the role of in-kind transfers in promoting child welfare. Our results suggest that parents from a wide range of backgrounds face time and/or information constraints in preparing their children’s diets which mean that there is a role for universal food provision in school to reduce childhood obesity.

Grandfathers and Grandsons: Social Security Expansion and Child Health in China (I1, D1)

Jinyang Yang
,
Virginia Tech
Xi Chen
,
Yale University

Abstract

We examine the multigenerational impacts of a nationwide social pension program in China, the New Rural Pension Scheme (NRPS). NRPS was rolled out in full scale since 2012 and enrollees age over 60 in rural areas are eligible to receive at least 70 CNY non-contributory monthly pension. We use household age eligibility change over time and across households to identify the impacts of NRPS on child health. We find NRPS substantially increases grandchild's weight, but not height. Child BMI z score increases by 0.9-1.1. We find a novel gender pattern that the impacts are likely to be driven by grandfather's pension receipt, and are more salient in boys subsample. Grandsons living with NRPS eligible grandfathers are more likely to be overweight/obese. We explore the mechanism and find the impacts are more plausible to be driven by a mixture of income effects and son preference.

Growing like Germany: Local Public Debt, Local Banks, Low Private Investment (G2, E6)

Iryna Stewen
,
Johannes Gutenberg University-Mainz
Mathias Hoffmann
,
University of Zurich
Michael Stiefel
,
University of Zurich

Abstract

Using a firm-bank panel of more than 1m German firms over 2010-2016, we document that local public bank lending to municipalities crowds out private investment. Our results show how crowding-out can happen in a developed economy characterized by low interest rates and fiscal austerity. Our mechanism relies on two structural features of Germany's banking landscape: First, the geographical segmentation of credit markets for small and medium firms (SME) which are dominated by local banks. Secondly, a special statutory mandate requiring local public banks to lend to municipalities. With yields on local government debt declining to all-time lows, local public banks tried to alleviate stress on their balance sheets by using their local market power to charge higher rates on their SME customers. This crowded out firm investment. Perversely, fiscal consolidation at the state and federal levels contributed to this effect by putting pressure on the budgets of municipal governments which increasingly borrowed from local public banks. Crowding-out lowered aggregate private investment by around 30-40 bio euros per year (or 1 percent of GDP). Thus, we identify a novel channel through which low interest rates can adversely affect bank lending and firm performance. Our results also illustrate how segmented credit markets can amplify negative multiplier effects from fiscal austerity.

Hadwiger Separability, or: Turing Meets Von Neumann and Morgenstern (D9, D8)

Modibo Khane Camara
,
Northwestern University

Abstract

It can be time-intensive to make optimal choices. This is especially true in settings where people make many related choices at once. To ensure that decisions are made in a reasonable amount of time, people often follow heuristics that isolate -- or separate -- some of their choices from others. A sizable empirical literature on choice bracketing and related phenomena provides evidence for this kind of behavior.

This paper incorporates time constraints into decision theory, and uses the resulting framework to better understand how and why people separate choices.

I combine classic approaches in decision theory and computational complexity theory to obtain a model of a time-constrained agent. There are three ingredients to my model: choice under risk, time constraints, and high-dimensionality. I begin with a standard model of choice under risk. Then I introduce time constraints: for any given menu, the agent must express her choice within polynomial time. If a choice correspondence can be executed by an algorithm that respects this time constraint, it is called "computationally tractable". Finally, I specialize the model to focus on high-dimensional problems where the agent makes many related choices at once.

Theorem 1 shows that a time-constrained agent who satisfies the expected utility axioms must have a Hadwiger separable Bernoulli utility function. Hadwiger separability relaxes additive separability by allowing for complementarities and substitutions, but limiting their frequency. Note that, like many results in computational complexity, this theorem relies on conjectures that well-known problems are computationally hard (e.g. P\neq NP).

Theorem 2 provides a partial converse to theorem 1.

Theorem 3 shows that time-constrained agents may be better off violating the expected utility axioms, even if they intrinsically want to maximize expected utility. My result quantifies "better off".

Finally, I explore applications to demand estimation with many products/characteristics.

Happiness, Productivity and Willingness to Compete (C9, J0)

Karl Overdick
,
University of Oxford

Abstract

Is happiness a necessary attribute of a successful employee? This paper analyses productivity and willingness to compete (WTC) as two measures of employee success. It conducts an online experiment on 645 respondents with real-effort tasks eliciting productivity and WTC for different levels of happiness. No effect of happiness is obtained despite sufficient statistical power. One explanation is that affective happiness does not shift behavioural preferences like risk aversion enough. In contrast, more established alternative features such as pay scheme and gender shift both behavioural preferences and objective outcomes significantly.

Happy to Help: The Welfare Effects of a Nation-Wide Micro-Volunteering Programme (I3, D6)

Paul Dolan
,
London School of Economics
Christian Krekel
,
London School of Economics
Ganga Shreedhar
,
London School of Economics

Abstract

We estimate the wellbeing benefits from volunteering for England’s National Health Service (NHS) Volunteer Responders programme, which was set up in response to the Covid-19 pandemic. Using a sample of over 9,000 volunteers, we exploit the oversubscription of the programme and the random assignment of tasks via a smartphone app to estimate causal wellbeing returns, across multiple counterfactuals. We find that volunteers report significantly stronger personal wellbeing and feelings of belongingness and social connectedness to their local communities. A social welfare analysis shows that the benefits of the programme were at least 140 times greater than its costs. Our paper is the first to study the welfare effects of a large-scale, nation-wide micro-volunteering programme based on an app that flexibly allocates small (‘micro’) tasks directly from those in need to those who want to help. Our findings advance our understanding of the ways in which pro-social behaviours can improve personal wellbeing as well as social welfare.

Healthcare Reform: Equity versus Efficiency (I1, I3)

Cristian Pardo
,
Saint Joseph's University
Jorge Sabat
,
Diego Portales University

Abstract

In this paper we conduct an ex-ante evaluation of a health insurance reform in Chile that has an increase in equity as its main objective. Currently, the private system offers actuarially fair insurance policies (the efficiency component). New legislation, however, mandates that premiums should be non-discriminatory with respect to age and gender in the private health insurance system (the equity component), while maintaining premiums the public insurance system, which is determined solely by the individual’s income, unchanged. We develop a heterogeneous agent model of choice of both consumption-saving and private-versus-public health insurance, which we estimate using data on insurance claims in the private system and from Chile’s Household Budget Survey, Employment Survey, National Socioeconomic Characterization Survey, and the Survey of Household Finances. We discuss different microeconomic and macroeconomic outcomes such as health-risk taking, consumption-saving and welfare. The counterfactual analysis findings arise from the resulting risk characteristics of the new pooling equilibrium that would prevail in the private system after the reform. Namely, there are liquidity effects (changes in premiums) in the short term that would favor of high-risk individuals (who would pay less for private insurance, encouraging some to move towards the private system), while the opposite outcome takes place for low-risk individuals who stay in the private system or are forced to move to the public system, which generally has lower coverage. We also find an average positive but heterogenous welfare effect of the reform, which includes a reduced need for subsidizing the public system due to the drop in the risk-skimming behavior traditionally shown by private insurers. This result is an example of a non-discriminatory policy change that can be supported from a traditional economic point of view.

Healthy, nudged, and wise: Experimental evidence on the role of cost reminders in healthy decision-making (I1, D9)

Adnan M. S. Fakir
,
University of Sussex

Abstract

We evaluate the performance of two behavioral interventions aimed at reducing tobacco consumption in an ultra-poor, rural region of Bangladesh where conventional methods like taxes and warning labels are infeasible. The first intervention asked participants to daily log their tobacco consumption expenditure. The second intervention placed two graphic posters warning participating households of the harmful effects of tobacco consumption on their children and themselves in their sleeping quarters. While both interventions reduced household tobacco consumption expenditure, male participants who logged their expenditure substituted cigarettes with cheaper smokeless tobacco. Risk-averse males who spent relatively more on tobacco responded more to the logbook intervention. Relatively more educated, patient males with children below age five responded better to the poster intervention. The findings suggest extending policies that worked elsewhere to the rural poor in developing countries, where cheaper substitutes are readily available, might be unwise. Instead, policies can leverage something as universal as parents' concern for their children's health for promoting healthy decision-making.

Heterogeneous Earnings Risk in Incomplete Markets (C3, E2)

Eva Frieda Janssens
,
University of Amsterdam

Abstract

This paper provides a novel characterization of time-varying heterogeneous earnings risk through a Markov process with heterogeneous transition probabilities. The resulting earnings process allows for a richer notion of earnings risk heterogeneity than previously studied by the literature. Assumptions are derived under which a combination of savings and earnings data can be used to identify the earnings process parameters. Alternatively, a narrower interpretation of earnings risk can be adopted, limiting risk heterogeneity to heterogeneous variances of earnings shocks, such that the earnings process is identifiable from earnings data only. This gives rise to two identification strategies. Applying both strategies to the Survey of Income and Program Participation dataset shows that individuals face considerable inequality of earnings risk. High-risk states are found to be temporary, while low-risk states are persistent. Comparing both strategies shows that only allowing for variance heterogeneity is too restrictive, and a rich notion of risk is required to capture the joint dynamics of individuals' savings and earnings.

Heterogeneous Effects of Conditional Cash Transfers and Extended School Day Program on Academic Achievement: Evidence from Dominican Republic (I2, O3)

Jose Pellerano
,
Technological Institute of Santo Domingo
Daniel Rafael Morales
,
Dominican Institute for Evaluation and Research of Educational Quality
Claudia Curiel
,
Dominican Institute for Evaluation and Research of Educational Quality
Noel Rodriguez
,
University of Bristol

Abstract

There is abundant evidence documenting the impact of CCTs on educational outcomes focused on enrollment, attendance, dropout, and graduation; but instances that use and find impacts on learning outcomes are still scant. Furthermore, social policy impact studies usually evaluate effects on educational outcomes excluding interactions with education policies. Exploiting the expansion of the extended school day program that reached a coverage of more than 50% of total public enrollment in the Dominican Republic by 2019, and the administration of nationwide diagnostics tests during 2017- 2019 by the Ministry of the Education on three student cohorts (N = 503,828), we implement a regression discontinuity design taking advantage of the conditional cash transfer allocation rules and merging it with the beneficiary registry (Sistema Unico de Beneficiarios - SIUBEN) and households transfers records, providing us a valid comparison framework. We also employ recently developed ML quasi-experimental estimators to study heterogenous effects. Preliminary results indicate that there are no differences in academic achievement of students from beneficiary and non-beneficiary households, but we find heterogeneous positives effects in beneficiaries who have been included in the extended school day program.

Heterogeneous Returns to Medical Innovations (I1, J2)

Volha Lazuka
,
University of Southern Denmark and Lund University

Abstract

This paper sets up a quasi-experiment to estimate the impact of medical innovations on the economic outcomes for the individual and their family based on the rich administrative data for Sweden covering 1 million persons. I find that an increase in medical innovations by one standard deviation raises family income by 15%. Medical innovations strongly influence not only own disposable and labour income and welfare payments but also a spouse’s income. I also find that the economic effects are heterogeneous in relation to the insurance eligibility of the health shock. Results also suggest decreasing yet always positive returns to scale.

Hiding Filthy Lucre in Plain Sight: Theory and Identification of Business-Based Money Laundering (K4, F3)

Alessandro Peri
,
University of Colorado-Boulder
Keith E. Maskus
,
University of Colorado-Boulder
Anna Rubinchik
,
Western Galilee College

Abstract

Money laundering is the process of moving proceeds from illicit activities into the legal economy. We develop a monopolistic competition model incorporating a criminal enterprise which chooses between laundering through offshore financial investments or through acquiring legitimate establishments, called business-based money laundering. We use off-shore accounts links to measure the exposure of U.S. counties to the evolution of anti-money-laundering regulations in Caribbean jurisdictions. We find that the number of business establishments grows significantly more in counties that are exposed to sharper financial scrutiny abroad, providing the first empirical evidence of substitution between the two laundering channels.

High Frequency Trading and Price Discovery in the Foreign Exchange Market (F3, G1)

Yin-Feng Gau
,
National Central University
Zhen-Xing Wu
,
Zhongnan University of Economics and Law

Abstract

We study the effect of high-frequency trading (HFT) on the intraday trading of currencies at the platform of Electronic Broking Services (EBS). We use the realized variance-based information share to measure the price discovery efficacy and find that the contribution of HFT is time-varying and is highest during the overlapping trading hours of London and New York, after dividing the 24-hour trading of FX markets into Asian, European, London-NY overlapping and U.S. sessions. Our new evidence shows that the liquidity supply from HFT accounts for the improvement of price discovery attributed to HFT, while the arrival of new information around macroeconomic announcements does not weaken the contribution of HFT to price discovery.

Historical Anti-Semitism and Firm Access to Finance (G2, G3)

Jianan Lu
,
University of Edinburgh
Brian Main
,
University of Edinburgh
Wenxuan Hou
,
University of Edinburgh

Abstract

This paper analyzes the effects of anti-Jewish pogroms in the historical “Pale of Settlement” on the access to informal finance of present-day firms in East Europe. While historical anti-Semitic pogroms are associated with higher general trust among the present-day residents, this runs in parallel with a lower trust in finance, with this financial-antipathy mechanism dominating the net effect. Firms located in regions with a higher historical intensity of pogroms tend to experience higher financial constraints, accompanied by a reduced access to external credit, and a lower propensity to invest. These effects diminish with distance from pogrom activity, which further indicates a cultural link to local historical anti-Semitism. Our results are not driven by the experiences of the Holocaust or a Communist regime. Our causal interpretation of the long-lasting effects on financial development of historical discrimination against Jews is supported by the results of identification strategies based on instrumental variables and regression discontinuity design.

Holy Cow! Religious Violence, Cattle Markets and Social Costs in India (O1, Q1)

Jitendra Singh
,
Ashoka University
Anand Murugesan
,
Central European University-Vienna

Abstract

We study how religious violence breaks down informal markets, with economic costs for large sections in India. Coinciding with the rise in Hindu nationalism, India recorded an exponential increase in violent attacks on persons suspected of trading cattle (mostly Muslims) for slaughter by cow-vigilante groups in the last decade. We show that this violence led to a drop in cattle trade and that rural households' inability to sell unproductive cattle led to increased cattle abandonment. We construct a novel dataset using a quadrimestral representative panel of Indian households, a state-level panel of road accidents, media reports of vigilante violence, and historical data on Hindu-Muslim conflicts in India. Exploiting the temporal and spatial variation of violence, we causally estimate its impact on the cattle trade market with an event study design. We show that violence led to a more than 10 percent decline in cattle holdings among households in the affected regions. Next, we causally identify the effect of violence on the number of stray cattle using a proxy measure: the number of road accidents due to stray cattle. We construct a Bartik instrument for vigilante violence using historical Hindu-Muslim conflicts (1950 - 2000) to find an alarming 200% increase in road accidents due to stray cattle in affected regions. The results are consistent with predictions from our theoretical model. Finally, we examine externalities on farmers by conducting a primary household survey in Rajasthan, the largest state, with spatial variation in the violence. We find that farmers self-report extensive crop damages from stray cattle and precautionary costs in regions experiencing violence.

Hospital Ownership and Exposure to Bankruptcy Risk: Evidence from the COVID-19 Impact (G0, I1)

Ge Bai
,
Johns Hopkins University
Phillip Phan
,
Johns Hopkins University
Luis Quintero
,
Johns Hopkins University
Alessandro Rebucci
,
Johns Hopkins University
Xian Sun
,
Johns Hopkins University

Abstract

This paper assesses the impact of COVID-19 on the financial stability of hospitals distinguishing by ownership type. We model the COVID-19 impact on the liquidity and solvency metrics of hospitals and identify operational, structural and cyclical factors affecting the bankruptcy risk across counties and census tracts. Most of the typical financial performance data are low frequency. To provide more timely indicators of hospital's financial stress in response to the COVID-19 pandemic, we use high-frequency daily visits to healthcare facilities tracked by smartphones to predict operational indicators that are historically associated with hospital financial distress. We calibrate a model that allows us to estimate a stable relationship between mobility indicators and operational indicators and use it to assess the financial impact of the pandemic. We find that the pandemic affected hospitals in 2020 differently according to their ownership structure. In particular, investor-owned hospitals experienced significantly more financial distress than others. We predict that 27.55% of all hospitals will become financially distress after 2020, up 0.69 percentage points from 2019. In contrast, 37.80% of investor owned hospitals are predicted to become financially distressed, up 5.86 percentage points from 2019. Since investor-owned hospitals are the main providers of specialty treatment such as psychiatric and acute long-term care, the increased financial distress among these hospitals is likely to result in long-term effects on the patients seeking the specialty treatment.

Household Needs Priority and Risky Investments (G5, G2)

Zhongyan Zhu
,
Monash University
Woon Sau Leung
,
University of Edinburgh

Abstract

We offer the needs priority to explain non-equity participation. After satisfying basic needs but before considering investments, a household has two decisions to make: earmark cash reserves and benchmark its luxury goods consumption. We demonstrate that, without emergency funds, indulgence in a luxury lifestyle will crowd out investment needs. Our analysis predicts that two households with high (low) cash reserves have strong (weak) tolerance on low returns and would keep engaging in or leave risky investments on low return arrivals. Our empirical analysis confirms stay or withdrawal decisions by flow differences across fixed-income mutual funds holding high or low-risk assets.

Household Savings and Monetary Policy under Individual and Aggregate Stochastic Volatility (E5, E3)

Christopher Naubert
,
City University of New York
Lilia Maliar
,
City University of New York and CEPR
Serguei Maliar
,
Santa Clara University
Yuriy Gorodnichenko
,
University of California-Berkeley and NBER

Abstract

We study a heterogeneous-agent model with sticky-prices in which total factor productivity and individual productivity are subject to stochastic volatility shocks. Agents save through liquid bonds and illiquid capital and shares. To construct equilibrium, we use a deep learning algorithm. Our method preserves non-linearities, which is essential for understanding portfolio choices. With rich heterogeneity at the household level, we are able to quantify the impact of uncertainty across the income and wealth distribution. We find that persistent high levels of uncertainty increase wealth inequality, and that in response to a contractionary monetary policy shock, illiquid wealth inequality decreases and liquid wealth inequality increases.

Housing, the Credit Market and Unconventional Monetary Policies: From the Sovereign Crisis to the Great Lockdown (E5, E6)

Hamed Ghiaie
,
ESCP Business School

Abstract

This paper develops a two-country model of a monetary union to evaluate the interaction between housing, the credit market and unconventional monetary policies first during the ECB’s Asset Purchase Programmes (APP) from 2015 until 2020, then, over the ECB’s Pandemic Emergency Purchase Programme (PEPP) in 2020. In this paper the 2020 lockdown is presented as a negative signal from macroeconomic fundamentals which causes labor to grind to a halt. The model is calibrated for the Euro Area and incorporates heterogeneous households, portfolio balance effects, a credit market susceptible to default, and nominal and real rigidities. The model features the housing accelerator and the post-crisis house price double-dip. The findings illustrate the way in which macro-housing channels lead to self-reinforcing loops, affecting the portfolio re-balancing channel as the main way for asset purchases to influence the economy. The results show that asset purchasing performs better during a crisis, particularly if it is conducted for an appropriate extent of time. The findings illustrate that the PEPP should be extended until the covid-19 crisis phase is over and that it alone is not sufficient to accelerate the recovery; more actions, namely targeted fiscal policy, are required. Finally, the APP, PEPP and lockdown are assessed through a welfare analysis.

How Do Firms Adjust When Trade Stops? (F1, D2)

Alminas Zaldokas
,
Hong Kong University of Science and Technology
Povilas Lastauskas
,
Bank of Lithuania
Aurelija Proskute
,
Bank of Lithuania

Abstract

Recent trends in deglobalization and trade wars beg the question of whether firm adjustments observed over the decades of trade liberalization will be reversed in a symmetric fashion.

Indeed, when faced with strong negative demand shocks, firms are likely to adjust on a number of dimensions. Such adjustments might interact with each other and moreover involve a substantial degree of heterogeneity. In fact, many international trade barriers that lead to substantial negative demand shocks are likely to be correlated with the broader economic adjustments. For instance, they may be linked to changes in domestic worker wage expectations and labor supply. Technological shocks may also trigger alterations to trade agreements but are also likely to lead to demand changes directly or through the production function recompositions.

To shed light on the adjustment, we investigate how firms respond to a sudden, unanticipated, and long-lasting negative demand shock. We explore a unique event when due to political reasons, unrelated to concerned firms, the exporters have lost access to a major export market. In particular, we look at an abrupt negative trade shock to food production (food manufacturers) in Lithuania in 2014 after the Russian counter-sanctions on imports from Europe. We build a theory where firms are forward-looking and face nonconvexities in the labor market along with investment decisions which require time to produce productive capital.

By making use of a unique firm-level dataset, consisting of all exporters in the country, we establish that part-time employment is indeed used as the first shock absorber, in line with the theory. Furthermore, we find that more full-time employees are dismissed with a lag when the uncertainty about shock persistence is resolved, particularly among those firms that are more constrained by the availability of flexible adjustment margins. Finally, we show that export market re-orientation is linked to the size and persistence of the trade shock.

How Do Firms Invest? The Role of Astrological Consultations on Investment Expectations and Decisions (E2, E7)

Jaqueson Kingeski Galimberti
,
Auckland University of Technology
Saten Kumar
,
Auckland University of Technology

Abstract

Investment is a key determinant of a nation’s progress. A substantial share of national investment comes from the private sector, where firms need to invest both to keep up with technological progress as well as to develop innovations that will give them a competitive advantage in the market. When planning their investments, firms are faced with substantial uncertainty about future market conditions and need to form expectations about the profitability of such plans. How do firms form such expectations?

In this paper we attempt to address the question by running an experiment on New Zealand firms about their investment plans and decisions. We survey 587 firms about their planned one-year-ahead investment expenditures. We find that firms use astrological predictions when forming their investment expectations and making decisions. We treated a random selection of these firms, 212 in total, with exogenous predictions about their future profits. The predictions are obtained from professional astrologers, where the firm’s returns are predicted to be high (>5%), moderate (1%-5%), or low (<1%). We then conduct a follow-up survey, approximately one year after the first survey, asking how much the firm actually invested in the previous year.

We find that the provision of astrological information led to statistically significant changes in firms’ investment decisions. On average, firms receiving the highest return prediction over-invested about 1 percentage point more than the control group. The effect of the treatment was stronger on firms receiving the lowest return predictions. Namely, on average, firms receiving the prediction of a return below 1% tended to under-invest about 2.7 percentage points more than the firms that did not receive any astrological prediction. These estimates are robust to the inclusion of subsector fixed effects and individual-specific controls such as the firm’s size and age, and the respondent’s age, ethnicity and level of education.

How Do High-Skilled International Students Impact Domestic Students? Evidence from the Post OPT STEM Extension Period (F6, I2)

Town Oh
,
Purdue University

Abstract

In this paper, I look at how international students impact domestic students’ academic performances in the US higher education. I focus on the post-2008 period when there was a unique shock of international student enrollment due to the OPT-Stem extension. Using administrative data from a large public university, I find that international students have a slight negative affect on domestic students’ grades and graduation rates in the Engineering and Sciences. However, there is also positive returns to education from interacting with international students conditional on graduating in Engineering. In essence, there is a small cost of international students in terms of increased competition for higher grades but these same forces bring positive externality in learning and eventually higher returns to education.

How Does Maternity Leave Allowance Affect Fertility and Career Decisions? (J1, J2)

Sébastien Fontenay
,
Free University of Brussels

Abstract

The level of compensation during maternity leave varies significantly across countries, yet previous research provides limited insights on its consequences. In this paper, I assess how the generosity of maternity leave allowance affects first-time mothers' subsequent fertility decisions and career trajectory. I exploit the fact that the allowance is capped in Belgium so that women with pre-leave earnings above the maximum threshold face drastically lower replacement rates. Using a regression kink design, as well as a rich set of administrative data on mothers from 2002 to 2015, I find that subsequent fertility increases with the level of benefits: for each additional euro in daily allowance the probability of having a second child increases by 0.6 percentage point. Subsequently, I explore the consequences for their career and show that mothers who receive higher benefits are more likely to leave salaried employment for self-employment. I demonstrate that the transition to self-employment does not affect their earnings in the long run, suggesting that the career changes might reflect non pecuniary preferences. In fact, heterogeneity analysis reveals that those working in sectors with poor work-family balance are more likely to become self-employed.

How Parents’ Beliefs About Their Children’s Academic Ability Affect Educational Investments (I2)

Tianqi Gan
,
University of Maryland-College Park

Abstract

Using a randomized field experiment with parents of high school students in China, I examine the causal effects of parents' belief in their children's ability on educational investment and children's academic performance. I document two types of information frictions that result in systematic biases in parents' beliefs about children's ability: overconfidence in future performance and underestimating college admission requirements. I then introduce two interventions to correct parents' belief biases. In the first intervention, I use machine-learning techniques to generate predictions on children's future academic performance and distribute them to randomly selected parents. In the second intervention, I give randomly selected parents a report that lists the feasible colleges corresponding to their children's current academic performance. I find that both interventions lead to dramatic reductions in belief biases. In addition, parents report higher levels of monetary investments in children's education, which significantly improved children's academic performance. I also find significant non-linearity for the impacts of ability belief on parental educational investments around their aspirations.

Human Capital Effects of Spending Time with Parents: Evidence from a Swedish Childcare Access Reform (I1, I2)

Anna Sjögren
,
IFAU
Malin Tallås Ahlzén
,
Stockholm University

Abstract

We study the effects of increased opportunities for one-on-one time with a parent during infancy on the human capital formation of children. To this end, we exploit a nationwide reform that mandated Swedish municipalities to offer childcare access for infants' older siblings, while parents were on parental leave to care for their infants. Survey data on childcare enrollment show that the reform had a significant impact on the childcare enrollment of older siblings. Using rich administrative data, we estimate intention-to-treat effects in a differences-in-differences setting, comparing infants with and without siblings of childcare age, pre- and post-reform, in municipalities that were affected the reform. We find no robust overall effects on the children's 6th grade test scores, but we find evidence of positive effects on test scores for sons of less than university educated mothers and daughters of highly educated mothers. Exploring potential pathways, we find no evidence of changes in quantity of parental time during infancy, pointing instead towards the role of improved quality of parent-child interactions as a result of less competition for parental time. We also find that improvements in physical and mental health in school age may have contributed to the positive effect for boys and a lower probability of having a younger sibling may have reduced competition for parental time further and contributed to the improved test scores for girls.

Identification and Estimation of a Dynamic Multi-Object Auction Model (C5, C7)

Samuel Mitchell Altmann
,
University of Oxford

Abstract

In this paper I develop an empirical model of bidding and entry behaviour in repeated simultaneous first-price auctions. The model is motivated by the fact that auctions rarely take place in isolation; they are often repeated over time, and multiple heterogeneous lots are regularly auctioned simultaneously. Incorrect modelling of bidders as myopic or as having additive preferences over lots can lead to inaccurate counterfactuals and welfare conclusions.

I prove non-parametric identification of primitives in this model, and introduce a computationally feasible procedure to estimate this type of game. I then use a simulation study to consider the properties of the proposed estimation procedure; I find that the procedure performs at least as well as standard approaches to estimating dynamic games, but takes only a small fraction of the time. I apply the model to data from Michigan's Department of Transport procurement auctions in order to assess the inaccuracies from estimating misspecified static or single-object models.

Identifying Always-the-Same-Rating Reviewers in a One-Sided-Review System Using Big Data Analytics (M3, D8)

Jikhan Jeong
,
Washington State University

Abstract

In one-sided review systems (e.g., Amazon), product reviews can be written without providing personal information. Consequently, consumers, sellers, and firms have no direct way to evaluate the credibility of the reviewers, limiting the utility of unfiltered Big Data from one-sided review systems. It is therefore imperative to identify and remove potential misleading reviews before estimating and predicting product quality from online reviews. This study identifies ‘Always-the-Same-Rating’ reviewers (ASRs), reviewers that always give the same star rating for all reviewed products. ASRs can generate a self-selection bias, lessening the informativeness of average measures of product quality (e.g., average star ratings). This study identifies ASRs in twenty-nine product categories by analyzing individual 230 million reviews for 15 million products written by 102 million reviewers on Amazon. In detail, ASRs can be divided into two subgroups, ‘Always-the-same-rating reviewers in All categories’ (AiAs) and ‘Always-the-same-rating reviewers in a category’ (AiCs). Surprisingly, the vast majority (99.997%) of AiCs are found to be AiAs; 98.203% of AiA reviewers always give a five-star rating for all reviewed products. The digital music category, in particular, shows a relatively high share and volume of ASRs among all categories, making an ideal focal category for further empirical analysis of ASRs. This study empirically demonstrates that star rating, the usefulness of reviews, length of headline and review, and holiday are potential indicators of reviews written by ASRs. In addition, deep learning models effectively identify reviews written by ASRs, and the positive weighted convolutional neural network (CNN) on top of Bidirectional Encoder Representations from Transformers (BERT) embedding shows higher performance than the unweighted one. Combining text and non-textual data shows a higher predictive performance than the text-only case. The approaches developed in this study will be useful for mitigating the effects of potential self-selection bias in online product reviews and promotional reviews.

Identifying the Heterogeneous Impact of Highly Anticipated Events: Evidence from the Tax Cuts and Jobs Act (G1, C3)

Paul Borochin
,
University of Miami
Murat Celik
,
University of Toronto
Xu Tian
,
University of Georgia
Toni Whited
,
University of Michigan

Abstract

We develop a method for estimating the stock market impact of aggregate events. Based
on using data on both stock and options prices, our technique accounts for two important
sources of bias present in traditional methods. First, our method takes into account market
anticipation, without the need for information on specific firm characteristics. Many event
studies only measure a fraction of an event’s full value effect, so the measured market reaction at event resolution can be misleading, particularly in the case of a very high degree of market anticipation. Second, our method is robust to the possibility of the event being good news for some firms and bad for others, without prior specification of this heterogeneity.
We apply the method to the passage of the Tax Cuts and Jobs Act (TCJA), which exhibits both
anticipation and heterogeneity. We estimate the market anticipated the probability of passage
to be as high as 95% 30 days before the event. The full value impact of the TCJA is found to
be 12.36%, compared to 0.68% when market anticipation is ignored. The firm-level impact of
the TCJA is considerably heterogeneous, with large and innovative firms with high growth
prospects being the largest winners.

Identity Display, Group Selection and Cooperation: A Public Goods Experiment under the Chaoshan and Hakka Culture in China (C9, D7)

Hongquan Lian
,
South China Normal University
Yufan Sun
,
Renmin University of China

Abstract

Culture can deeply affect economic behaviors, economists and sociologyists have expounded the relevant views for a long time. Under the background of high-level globalization, it is important to understand the relationship between cultural differences and social preferences. This paper uses the method of laboratory experiment, and compares the behavioral differences in cooperation between Chaoshan and Hakka culture in Guangdong, China. As a multi-national country, China always holds the cultural concept of "harmony in diversity". In order to promote multi-national integration and common development, this paper contributes to find an effective coordination mechanism of cooperation in the context of cultural diversity, and therefore introduces two mechanisms of identity display and group selection into the game of public goods. The experiment finds that both identity display and group selection have positive and effective effects on promoting cooperation. When social cooperation is carried out within groups with the same cultural identity, it is of great significance to display culture identity in the cooperation. While when group selection is ensured to be realized, adding a segment of group selection may further promote social cooperation. In general, under the diverse cultural background in China, we can achieve a higher level of social cooperation with the help of culture identity. This research helps to improve the system construction, as well as promote social cooperation and common development in multi-cultural areas.

Idiosyncratic Asset Return and Wage Risk of U.S. Households (E2, D3)

Stephen Snudden
,
Wilfrid Laurier University

Abstract

This paper documents the degree of idiosyncratic asset return risk, serial correlation, and correlation with wage risk for US households. Novel panel-data measures for returns on household assets are proposed. Sizeable idiosyncratic return risk is documented to exist concurrently with permanent heterogeneity in household-specific returns and exhibits negative serial correlation. On average, idiosyncratic permanent risk to wages and transitory risk to total asset returns are correlated. This arises primarily from correlated wage and capital gains to primary housing assets, and is age-dependent. The estimates inform the covariance structure of idiosyncratic asset returns and wage risk.

IMF Programs and Financial Flows to Offshore Centers (F3, H0)

Shekhar Aiyar
,
International Monetary Fund
Manasa Patnam
,
International Monetary Fund

Abstract

This paper examines whether IMF lending is associated with increases in outflows to offshore financial centers (OFCs), known for bank secrecy and asset protection, relative to other international destinations. Using quarterly data from the BIS on bilateral bank deposits, we are unable to detect any positive and statistically significant effect of IMF loan disbursements on bank deposits in OFCs. The result holds even after restricting the sample to the duration of the IMF program, where disbursement quarters and non-disbursement quarters should be subject to similar degrees of macroeconomic stress. It is also robust to using the scheduled tranche of disbursements as an instrument for actual disbursements. While the effects vary by the type and conditionality of the IMF program, as well as the amount of lending, none of the effects are found to be positive and statistically significant. We also estimate whether the recent surge in emergency lending, during the Covid-19 crisis, is associated with an increase in outflows to OFCs but find no evidence to support this.

Impact of COVID-19 on Small Businesses in Big Cities- New Evidence from San Francisco (I1, R1)

Anoshua Chaudhuri
,
San Francisco State University
Cynthia Huie
,
San Francisco Small Business Commission

Abstract

Covid-19 has been devastating for small businesses across the nation, particularly in dense urban areas. A literature review of immediate impacts of COVID on small businesses in the US revealed that the knowledge generated using nationally representative data does not allow us to adequately capture local impacts in big cities, especially in high cost of living areas that have seen an exodus of residents and office workers due to shelter-in-place. Small businesses that supported this population have seen a drop-in clientele. Apart from public health guidelines, there have been demand-driven reasons for the hugely negative impacts on small businesses. This has had catastrophic impacts on small business owners and their families and has the potential to change the vibrancy of big cities.
To gather data to further inform the extent of impacts and influence relevant policy-making in San Francisco, we used a community-based participatory research model in which university researchers collaborated with the city’s Small Business Commission, supervisors, and other business stakeholders to come up with a survey instrument that would adequately capture local struggles, barriers, and opportunities. The survey was translated into 8 other languages to capture data from small business owners with attention to equity and social justice issues and was administered between January and February of 2021. Data was collected through merchants associations, commission, and office of workforce lists and is a representative 1% sample.
Results from the study indicate that the pandemic-related closures have negatively impacted more than 80% of businesses in the city. It has had a disproportionate impact on small businesses, particularly arts, restaurants, personal services, gyms, and salons, businesses in certain neighborhoods, owned by ethnic minorities, which might change the city for a long time to come. This study informs policymakers, not only in San Francisco but in similar cities across the nation, that local voice is important for effective policy-making during crises as well as potential ways to support and preserve our communities through this crisis.

Impacts of Teaching Modality on U.S. COVID-19 Spread in Fall 2020 Semester (I1, I2)

Syed Badruddoza
,
Texas Tech University
Modhurima Dey Amin
,
Texas Tech University

Abstract

In response to the COVID-19 pandemic and its containment measures, the U.S has implemented partial or full business closures to mitigate the spread. Many U.S. colleges temporarily closed or switched to online in spring 2020, and over six out of ten colleges reopened in fall 2020 with an in-person or a combination of in-person and online teaching plans. College students mainly fall in the age cohort of 18 to 29 years, which has a lower death rate (0.4%) from COVID-19, but a greater chance of socialization than the other age-cohorts.

Given the substantial risk of spread from college campuses to the community, a policy question is whether colleges should hold in-person classes or switch to online or hybrid mode. We combine manually-collected college-level data, National Center for Educational Statistics, the U.S. census, New York Times, and HealthData.gov to predict the chance of a college adopting one of the three modes of teaching: in-person, online, and hybrid; and then estimate the average treatment effects of the modalities on county-level COVID-19 cases and deaths.

In a quasi-experimental approach, we match college and county characteristics using propensity scores, nearest neighbors, and multivariate distance and calculate the average treatment effects of three teaching modalities: in-person, online, and hybrid on COVID-19 outcomes up to two months after college reopening. In pairwise comparison, colleges reopened with in-person teaching mode were found to have about 36% point more cases within 15 days of reopening, compared to those reopened online, and the gap widens over time at a decreasing rate. Death rates follow the pattern with a time lag. However, colleges with hybrid mode catch the pattern of in-person mode after some time. We also find that greater endowment and student population, and fewer republican votes in the county are major predictors of choosing remote teaching modes over in-person.

Impacts of the Covid-19 crisis: Evidence from 2 million UK SMEs (G3, G2)

Sudipto Karmakar
,
Bank of England
James Hurley
,
Bank of England
Elena Markoska
,
Bank of England
Eryk Walczak
,
Bank of England
Daniel Walker
,
Bank of England

Abstract

The Covid-19 pandemic materially reduced UK economic activity and small and medium sized businesses (SMEs) were hardest hit. At the start of 2020 before the pandemic took hold, UK SMEs accounted for around 60% of employment and half of total revenues. In this paper, we use a novel near real-time dataset on the universe of UK SME accounts with major banks to document the impact of the Covid-19 crisis, in terms of turnover and cash flow declines. We use linear regressions and machine learning models to study the path of these variables for SMEs of different sizes, across different regions and sectors of the economy, to document substantial heterogeneity across firms. The dataset comprises monthly information on 2 million SMEs that have current accounts or debt with 9 major banks - roughly 5 billion data points. Our main findings are: the Covid public health interventions coincided with a 30% reduction in turnover year on year for the average SME; there was significant heterogeneity across SMEs, with the biggest reductions for younger SMEs in consumer-facing sectors in Scotland and London; but cash flows did not decline on average and there was much less heterogeneity across SMEs, as a result of substantial government support. Using a probit model, we also document significant heterogeneity, with regards to firm age, turnover and location, in the usage of government guaranteed scheme loans. Our analysis provides a framework to monitor SME developments in the coming months as the corporate sector recovers from the pandemic.

Import Competition, Foreign Inputs, and Labor Adjustment in a Developing Country: Evidence from the Colombian Liberalization (J0, F1)

Juan Munoz
,
IESEG School of Management

Abstract

WWe study how import competition and foreign inputs coming from high-income countries affect employment and earnings in less-developed economies. We use administrative data from Colombia, and exploit exogenous tariff reductions that increased Colombian imports from the United States, to derive five conclusions that contrast with previous findings for high-income economies. First, import competition decreases employment in a similar magnitude that foreign inputs increase it. Second, losses in manufacturing employment are driven by substitution with foreign inputs. Third, labor market adjustment among informal workers occurs by decreased earnings rather than employment. Fourth, high-skilled workers experience significant earnings losses, whereas low-skilled do not, and the effect is focused towards the informal, high-skilled jobs. Fifth, isolated regions experience proportionally larger manufacturing losses. Our results show that international trade between countries with different levels of economic development does not create only winners in developing countries, but, instead, has highly heterogeneous responses that contrast with those found within developed economies.

Incentive Pay Prior to CEO Turnover When Effort Choices Have Lasting Effects (G3, J3)

John M Barron
,
Purdue University
Dmitriy V. Chulkov
,
Indiana University

Abstract

We present a modified principal-agent model to identify a link between the anticipated likelihood of future CEO turnover and the optimal sensitivity of incentive pay to firm performance. The analysis focuses on the optimal sequence of standard one-period incentive contracts when CEO effort choices have lasting effects on firm performance. In such a model, an increase in the anticipated likelihood of turnover reduces the impact of future incentive contracts on current CEO effort, and induces a compensatory increase in the optimal sensitivity of current CEO compensation to current firm performance. We find empirical evidence in support of this prediction for a sample of over 3,000 US firms. Using an executive-specific fixed effects model, we find that among CEOs who depart within two years, the sensitivity of current incentive pay to changes in current firm performance is greater when there is a higher anticipated likelihood of CEO turnover as proxied by departures that reflect a planned succession and departures by CEOs who have reached retirement age. As expected, this increase in the sensitivity of current incentive pay to changes in firm performance is not found if the subsequent turnover is classified as unplanned, and thus not anticipated by the firm.

Indirect effect of corruption: evidence from heterogeneity in corruption experience and tax morale (H2, D9)

Abu Bakkar Siddique
,
George Mason University

Abstract

This paper identifies indirect effects of corruption observed in declining individual tax morale due to their corruption experience. Corruption breaks the fiscal contract between governments and taxpayers. So, it hurts the motivation to pay taxes, and thus creates dishonest citizens. To identify corruption effects, I utilize corruption experience heterogeneity, which is more exogeneous than other measures, based on newly added questions in the World Value Survey and probability of not cheating on taxes and apply multi-level hierarchical models. Potential carriers of the corruption effects are fairness in the tax system, ethnic diversity, the public shame of being exposed, and public policies. I also ruled out potential effects of peers and reduced-expected costs of cheating on taxes due to revealed corruption.

Indirect Network Effects and Policy Implication: Empirical Analysis of the Chinese Electric Vehicle Market (H2, D6)

Junji Xiao
,
Lingnan University
Jianwei Xing
,
Peking University
Xiaodan Guo
,
Dongbei University of Finance and Economics

Abstract

Governments can accelerate technology adoption by directly subsidizing the technology or subsidizing
the adoption of its complements when indirect network effects exist. The optimal policy choices
depend on the scale of the indirect network effects, relative to the direct policy effects. This paper estimates the mutual indirect network effects between electric vehicles (EVs) and charging stations, and assesses the effectiveness of EV purchase subsidies and charger subsidies on EV adoption and their efficiency, applying EV sales and charger number data in China. Although the indirect network effect of chargers on EV adoption is significant, our findings suggest that EV purchase subsidies are 34.4% more effective than charger subsidies of equal-size spending in promoting EV adoption, at a lower cost of efficiency loss. Moreover, these two subsidies are different in their effects on the distributions of EV sales and consumer welfare: the recent changes in EV subsidies are in favor of high-range vehicles and their buyers while charger subsidies are in favor of low-range vehicles and their buyers.

Individual Compliance with Disease-Preventive Behavior: Experimental Evidence (I1, C9)

Andrea Sorensen
,
University of St. Thomas

Abstract

The rise and spread of COVID-19 has made individual compliance with disease-preventive behaviors such as wearing face coverings, social distancing, staying home when sick, hand washing, and vaccination critically important to reducing the spread and saving lives. From an economic perspective, these disease-preventive behaviors vary in terms of the private and external benefits they provide. Because of this, individual compliance may vary across behaviors, and interventions aimed at increasing compliance may be more successful for some behaviors than others. The experiments in this paper characterize a simplified version of the disease-prevention environment. Individuals face a possible loss, representative of getting sick, and are given the option to pay a small cost to decrease either their own probability of loss, others’ probabilities of loss, or both, depending on the treatment. Additionally, each decision environment is tested in three different frames, positive, negative, and neutral. In the positive frame, the positive externality created by paying the cost is emphasized in environments with an externality. In the negative frame, the negative externality created by not paying the cost is emphasized in environments with an externality. An additional treatment includes a “moral nudge”, in which subjects read the University’s mission statement to “advance the common good” prior to participating in the experiment. Initial results suggest that in baseline treatments, individual behavior is well predicted by the Nash equilibrium, which is sub-optimal for environments with an externality. Individuals do, however, choose to pay the cost more often in treatments with a positive frame on the externality, and even more often in treatments with a negative frame on the externality. Additional sessions are needed to confirm these initial results and to further investigate the “moral nudge”.

Individual Prevention and Organized Screening: A Reflection on Data of the Access of Early Detection of Breast Cancer in Emilia-Romagna, and in Bologna in Particular, After the Reorganization of the Offering (I1, K3)

Silvia Gatti
,
University of Bologna

Abstract

The data (2002-2016) from the Regional Health Service of Emilia-Romagna on the access to the mammographic services in the Local Health Authorities (AUSLs) of the region (data accessed as generalized civic access) allowed (poster at AEA Meeting 2020) to identify the different choices (YES screening; NO screening) for the early detection of breast cancer undertaken by the women in Bologna and in the other AUSLs in Emilia-Romagna after 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(poster at AEA Meeting 2017).
To better understand what happened in the early detection of breast cancer in Bologna after 2010, women residing in the Bologna AUSL who underwent at least one mammogram in 2010 in spontaneous access or in scheduled screening were taken into consideration and the choices they made in the following years up to 2016, the last available year, were analyzed (paper at WEAI meeting March 2021).
Thus in 2016 it appears that 58,1% of women who had had one or more mammograms through spontaneous access in 2010 progressively did not have any more mammograms (at least within the National Health Service), neither in spontaneous access nor in scheduled screening.
Now in this new paper we examine in depth the different behavioral patterns of women with respect to early detection of breast cancer in Emilia-Romagna, and in particular in Bologna, and we study their different reactions to changes in the offering. We, therefore, want to compare our results with the new debate taking place in Italy (National Screening Observatory, Italian Group for Mammographic Screening, Surveillance PASSI of the Istituto Superiore di Sanità) on the early detection of breast cancer and on the organized screening.

Inflation Gap Persistence, Indeterminacy, and Monetary Policy (E3, E5)

Yasuo Hirose
,
Keio University
Takushi Kurozumi
,
Bank of Japan
Willem Van Zandweghe
,
Federal Reserve Bank of Cleveland

Abstract

Empirical studies have documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous research into the source of the decline has offered competing views while sidestepping the possibility of equilibrium indeterminacy. This paper examines the source by estimating a medium-scale DSGE model using a Bayesian method that allows for indeterminacy. The estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that induces persistent dynamics of the economy.

Inflationary Household Uncertainty Shocks (E3, D8)

Gene Paul Gerard Ambrocio
,
Bank of Finland

Abstract

I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks do not universally behave like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. Further analysis, including a comparison of results across countries, suggest that factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. These results lend support to a pricing bias mechanism as an important transmission channel.

Information Acquisition and Price Setting under Uncertainty: New Survey Evidence (E3, E0)

Cheng Chen
,
Clemson University
Tatsuro Senga
,
Queen Mary University of London
Chang Sun
,
University of Hong Kong

Abstract

What makes prices sticky? While it is commonly understood that prices adjust only sluggishly to changes in economic conditions, the source of sluggish price adjustment is under-explored empirically. In this paper, we argue that sluggish information updating drives price stickiness. To this end, we use a panel dataset that contains information on both firm-level expectations and price adjustments and document the following facts: (1) there is a positive correlation between whether a firm updates its expectations and whether it adjusts prices; (2) firms update expectations more frequently and make less correlated forecast errors in downturns; (3) firms adjust prices more frequently in downturns which include both upward and downward adjustments. We then extend a Ss price-setting model with second moment shocks to allow for endogenous information acquisition by the firm. The model predicts that firms acquire information more intensively during periods of high volatility, also adjusting expectations and prices more often. It is countercyclical volatility, interacted with menu costs and information rigidity, that drives our results. This implies that the flexibility of the aggregate price level is counter-cyclical, making monetary policy less effective in recessions.

Information Integration, Coordination Failures, and Quality of Prescribing (H5, H7)

Liisa T. Laine
,
University of Pennsylvania
Petri Böckerman
,
University of Jyväskylä, Labour Institute for Economic Research, and IZA Institute of Labor Economics
Mikko Nurminen
,
Turku School of Economics
Tanja Saxell
,
VATT Institute for Economic Research

Abstract

Organizations aim to improve the coordination of interdependent decisions to achieve more desirable outcomes. The difficulty for improving coordination is that information is incomplete and dispersed among decision-makers. Health care is a prominent example: a patient’s care delivery is spread across multiple physicians, and each physician has different knowledge of the patient’s health and medical history.

We analyze a public policy of health information integration in Finland. The country was one of the first ones to adopt a nationwide system for electronic prescribing (e-prescribing). Our identification approach is based on the staggered adoption of e-prescribing across all the municipalities between 2010 and 2014. Compared to individual providers’ incompatible and incomplete information systems, e-prescribing systems provide more comprehensive information on prescriptions across different physicians involved in a patient’s care. The adoption of interoperable e-prescribing system serves as a plausibly exogenous shock to the information sets of physicians, being directly relevant to their prescribing decisions and coordination.

Using our prescription-level data, we find that the adoption of e-prescribing has no statistically significant effect on the overall probability of co-prescribing harmful drug combinations. We also evaluate regional heterogeneity in the effects because there is considerable evidence of an urban-rural gap in health care provision and outcomes. Similar to the average effect, there is no statistically significant effect on the probability of harmful co-prescribing in urban regions. However, in rural regions, the measure of low-quality prescribing reduces substantially, by approximately 35 percent. The improvement in the quality of prescribing in rural regions is driven by unspecialized physicians (generalists) and by interacting prescriptions from different physicians, rather than from the same physician. Despite the underwhelming results on average, our results for rural regions still support the view that information integration has the potential to improve coordination and mitigate the harms of fragmentation in health care.

Information Pools and Insider Trading: A Snapshot of America’s Financial Elite. (G2, G3)

Antoine Didisheim
,
Swiss Finance Institute and University of Lausanne
Luciano Alfredo Somoza
,
Swiss Finance Institute and University of Lausanne

Abstract

We document abnormal correlations between the performance of hedge funds’ managers with an elite socio-economic background. In particular, Columbia, Harvard, University of Pennsylvania, Stanford, and NYU alumni are highly correlated among themselves. We take steps toward linking this phenomenon to a shared information pool with a quasi-natural experiment: the 2009 Galleon Capital insider trading scandal. The difference-in-difference analysis shows a significant reduction in returns of the elite managers following the scandal. Finally, we present evidences suggesting that investors recognize this pool’s value, as funds with access to elite information are associated with 55% higher assets under management at launch.

Institutional Ownership and Investment by Private Companies (G3)

Jiaman Xu
,
University of Edinburgh

Abstract

We examine whether institutional shareholders in established private companies promote investment by alleviating funding constraints. Our sample is derived from company share registers and is comprehensive with respect to type of institution and size of shareholding. Institutions give rise to higher levels of investment in intangible assets, and higher external finance. The effects are largest for companies with minority institutional stakes, suggesting that alleviation of constraints is a primary motive for ownership in private companies without taking control. Institutions have more impact on external equity than debt, which differs from the case of companies taken over in leveraged buyouts.

Inter-firm Patent Litigation and Innovation Competition (G3, K4)

Jongsub Lee
,
Seoul National University
Seungjoon Oh
,
Peking University
Paula Suh
,
University of Georgia

Abstract

Using novel inter-firm patent litigation data, we show a significant interplay between intellectual property rights' boundaries and product market dynamics. Instrumenting a firm's patent litigation propensity with the passage of China's National Intellectual Property Strategy reform, we find that patent litigation reduces defendant firms' innovation activity and fosters more exploitative innovations. The effects strengthen with product market overlap between litigants. We further find that patent litigation intensifies product market competition among close rivals and results in lower and more disperse innovation activities within industry, implying an industry structure where Schumpeterian effect of competition is more likely.

Interest Rates and Asset Prices under Financial Liberalization (F3, F4)

Jingxian Hu
,
Boise State University

Abstract

This paper constructs a general equilibrium model and studies the determination and the dynamics of the interest rates, the asset prices, and the exchange rates as the financial markets integrate globally and deepen with larger borrowing capacities. With the floating exchange rates, capital account liberalization increases the real interest rate in equilibrium, whereas financial development lowers the equilibrium real interest rate. In the fixed exchange rate regime, the equilibrium real interest rate is negative and rises as the financial market develops. The volatilities of the domestic equity price and bond price decline, and the domestic currency appreciates at the stochastic steady state with a deeper financial market and a more liberalized capital account. Faced with the uncertainty of the asset prices and the exchange rates, the design of monetary policy relies on accurate estimations of the financial volatilities. Proper reactions to the financial risks make central banks less constrained by the Mundell-Fleming trilemma and leave space for the policy rate adjustments under both exchange rate regimes.

Intergenerational Mobility in Switzerland: Evidence from Large Administrative Datasets (H0, J0)

Isabel Z. Martinez
,
ETH Zurich
Preetha Kalambaden
,
University of Bern-Switzerland

Abstract

Using large administrative datasets from Switzerland, we study the intergenerational transmission of economic status along four dimensions: income, wealth, education, and occupation status. Thanks to the linkage of i) full population census data with ii) social security earnings records dating back to 1981, iii) individual income and wealth tax data, and iv) large population surveys, we obtain precise measures of our outcomes around age 30 for all the cohorts born 1967--1982 and their parents.
Our results show that income mobility is particularly high in international comparison, exceeding the rates observed in the U.S. or even in Sweden---while at the same time educational and occupational mobility are low. However, we find that over time absolute upward income mobility has declined for cohorts born after 1975.
We further shed light on employment probabilities of women and mothers and the prevalence of entrepreneurship, given parental working histories. Mother’s occupation and education are less correlated with the respective child outcomes than father’s. This suggests that family culture matters for intergenerational transmission of economic status. Even though mothers typically spend more time with their children than fathers, their background has less of an impact on children’s economic status later in life.
We also study heterogeneity across subgroups, such as immigrants, and in regions within Switzerland. As we observe language spoken at home, we exploit the fact that Switzerland has three different language regions to understand how potential language barriers in school or local labor markets affect mobility patterns.

Internal Migration and House Prices in Australia (R1, R3)

Umut Unal
,
Philipps University of Marburg
Isil Erol
,
University of Reading

Abstract

Australia is one of the most mobile countries in the world through internal migration, which is an overlooked part of population change. This paper provides an exciting episode that has not been examined previously and explores whether, and to what extent, internal migration affects house prices across Australia. In this regard, we use the Statistical Areas Level 3 (SA3) disaggregated data set that represents the regional breakdown of Australia to study the impact of internal migration inflows on local housing prices. To address the potential endogeneity problem due to simultaneous causality between migration flow and house price changes, we confirm our results with two-stage least squares (2SLS) by a manually constructed instrumental variable that matches the shift-share instrument used in the immigration literature. We find a strong evidence that there is a local economic impact of internal migration in Australian cities; internal migration pushes up the demand for housing in migration-receiving areas and results in house price increases. According to 2SLS models, internal migration that amounts to 1% of the initial local area population is associated with point estimates of 0.62% to 0.81% increase in house prices. Put differently, as of 2019, an annual increase in the stock of migrants equal to 1% of an SA3 region's initial population leads to $4,290 to $5,605 annual increase in house prices. We have also suggestive evidence that the estimates of the OLS specification are downward biased indicating that migrants tend to move towards regional cities and/or towns in which house prices are more affordable, conditional on the local controls and the time effects. Considering that house price changes are an essential source of human capital accumulation and local economic development, internal migration and its influence on housing prices play a crucial role in fostering the sustainable development specifically in regional Australia.

International Reserves, Debt Currency Composition & Sovereign Default (E6)

Yasin Kursat Önder
,
University of Ghent

Abstract

We study the joint decision of accumulating international reserves and issuing debt in both foreign and local currency using a quantitative sovereign default model. In this environment the government lacks commitment to repay its debt obligations, issues long-term debt denominated in both foreign and local currency and accumulates international reserves. In addition, the government can inflate away its local currency debt using discretionary depreciation. However, inflation is costly and the government will balance this trade-off. The addition of the simultaneous decision of accumulating reserves and issuing local & foreign currency debt allows us to: i) extend the canonical sovereign default model which thus far only considered two out of three of our assets, ii) shed light on the sustainability benefits of optimal currency depreciation and iii) reconcile the canonical quantitative default model with the empirical observation that emerging economies’ governments have increased both their reserves and their local currency debt levels in the last decade. Furthermore, our analysis can also shed light on the optimal government response to a shock that hit the sovereign during exceptional financial stress episodes such as the global financial crisis or the COVID-19 pandemic.

International Spillovers of New Monetary Policy (E5, E6)

Dennis Nsafoah
,
University of Calgary
Aamir Rafique Hashmi
,
University of Calgary

Abstract

We study international spillovers of conventional and new monetary policies of a large
economy to a small open economy (SOE). Building on Sims and Wu (2020), we employ a medium-scale New Keynesian model that features all the major types of new monetary policies and the conventional monetary
policy in a unified framework. We extend their model to an open economy setting. We use our model as a measurement device to quantify the spillovers and study the economic mechanisms behind them. In our quantitative application, Canada is the SOE and the US is the large economy. Our results show that there is little difference in the spillover effects of conventional and new monetary policies on the GDP of the SOE. However, the effects on various components of GDP (consumption, investment and net exports) differ by policy.
We also simulate counterfactual monetary policy scenarios for the US and Canada around the Great Recession of 2008. Three main conclusions emerge from these simulations: (1) If the Fed had not engaged in quantitative easing (QE), the US recession in the wake of the 2008 financial crisis would have been deeper but Canada would have had better economic outcomes; (2) there are diminishing returns to QE in terms of its effects on both the US and Canadian real variables; and (3) had the Bank of Canada followed the Fed and engaged in QE of its own during the Great Recession, the real economic outcomes would have been better for Canada.

Investment Risk-taking and Benefit Adequacy under Automatic Balancing Mechanism in Public Pension System (H5, G1)

Shin Kimura
,
University of Hyogo
Tomoki Kitamura
,
Tohoku Gakuin University and NLI Research Institute
Kunio Nakashima
,
NLI Research Institute

Abstract

The global trend of aging populations is a cause for concern regarding the financial conditions of public pensions. Policymakers worldwide are contemplating the introduction of policies to increase the sustainability of public pensions. The Japanese government has repeatedly revised the public pension system to increase the chances of achieving financial stability. The new systems introduced by the government include a fixed contribution rate and an automatic balancing mechanism, which reduce the benefit level according to the long-term demographic and financial conditions of the system. The public pension in Japan has a large pension reserve fund for investing in stocks and bonds worldwide. However, the risk-taking of the reserve fund along with the adequacy of the benefit levels has not been intensively discussed in the literature and as a practice. Therefore, by using prediction methods for the financial verification of public pensions developed by the government, and by applying stochastic simulation methodologies, we investigate the relation between investment risk-taking on the reserve fund and future benefit levels. This study contributes to the literature by focusing on the effects of investment risk-taking on the reserve fund in terms of the sustainability of the public pension system, particularly considering several potential pension system revisions under current policy discussion, which have not been addressed by previous studies. We find that the distribution of benefit levels shifts downward when the reserve fund invests more in bonds than in the term of the current allocation levels. Furthermore, while the benefit levels increase on average, they are faced with greater downward risk when the reserve fund invests in more stocks. These results indicate that lowering investment risk does not correspond to a low risk of benefit levels because investment returns may be unsatisfactory and the automatic balancing mechanism continues for a longer duration.

Is Gender Destiny? Gender Bias and Intergenerational Educational Mobility in India (I2, J6)

Shahe Emran
,
Initiative for Policy Dialogue and Columbia University
Hanchen Jiang
,
University of North Texas
Forhad Shilpi
,
World Bank

Abstract

Many recent studies provide evidence of gender bias against girls in India, for example, in health, education expenditure, breast feeding, and sex selection. In contrast, the gender gap in schooling has narrowed substantially over the decades. Does gender convergence in schooling attainment imply that the girls in the younger generation in India enjoy equal educational opportunities as the boys?
To analyze this question, we study intergenerational schooling persistence addressing both empirical and theoretical challenges. We incorporate gender bias against girls in the family, school and labor market in a Becker-Tomes model and derive mobility and investment equations that can be taken to data. Parents may underestimate a girl's ability, expect lower returns, and have “pure son preference”. The model delivers the widely used linear conditional expectation function (CEF) for mobility under constant returns but generates strong predictions: parental bias cannot cause gender gap in relative mobility. With diminishing returns, the CEF is concave, and parental bias affects both relative and absolute mobility.
Since coresidency causes severe underestimation of the gender gap, we use data from India Human Development Survey that includes nonresident children and parents. Evidence rejects the linear mobility CEF in favor of a concave relation (both rural and urban). The daughters of uneducated fathers face lower relative and absolute mobility irrespective of rural/urban location. We find gender equality in absolute mobility for the children of college educated fathers in urban areas, but not in villages. Theoretical insights help understand the mechanisms, suggesting underestimation of academic ability and unfavorable school environment for girls. Rural parents exhibit pure son preference. Differences in the incidence of unwanted girls and the impact of parental nonfinancial inputs explain the rural-urban differences. The standard linear model misses important heterogeneity and yields misleading conclusions such as no son preference in rural India.

Is Grass Greener in the Gray Zone? Innovation in the Cannabis Market (O3, I1)

Lucy Xiaolu Wang
,
University of Massachusetts Amherst; Max Planck Institute for Innovation and Competition; Canadian Centre for Health Economics

Abstract

Despite many recent developments regarding cannabis legalization, there is little evidence on how innovative activities respond to legalization within the US or globally. This paper studies research and intellectual property (IP) seeking activities in the cannabis market. A novel dataset is constructed from clinical trials, trademarks, and patent applications, which are then categorized by purposes or focused areas. Using difference-in-differences models, we find that cannabis-related US clinical trials do not react much to legalization but increase much stronger after adult-use cannabis dispensary openings. Mechanism tests suggest legalization itself does not reduce the cost barriers to access research materials. Patenting rose globally and within the US post-legalization, mainly in user-oriented downstream technologies. Trademark filings increase both globally and within the US, but are almost entirely driven by cannabis-related non-cannabis products with low value and novelty. The results suggest that the current semi-legalization status hinders progress in high-value research and product building, and increased legalization helps accelerate formal knowledge diffusion through patenting. Bacon-decomposition analyses further strengthen the main results. We are incorporating other new difference-in-differences methods with the special setting of cannabis legalization with sequential time-varying policy adjustments.

Is This Time Different for Monetary Policy? (E5, E3)

Sam Bullard
,
Wells Fargo
Azhar Iqbal
,
Wells Fargo

Abstract

The improving health picture, alongside the robust response from policymakers, has materially changed expectations on the outlook. With the stage set for a rapid economic rebound, analysts are wondering if this time is different for monetary policy. Particularly, is this the end of the declining Fed Funds Rate (FFR) trend? That is, in each business cycle over the past 30 years, every peak in the FFR is lower than the past cycle. In addition, the FOMC offered larger incentives and for a longer duration in a recession relative to the past cycle. Therefore, each recession drained the FOMC’s resources and left the Committee with “less ammunition” to fight the next recession.
Does the current cycle indicate a break in the past declining FFR trend? Does the FOMC deviate from the past tradition of offering larger incentives for a longer duration?
This study develops a new framework to estimate the likely path of the FFR, particularly, the likely peak value for the FFR in the near future. Using the historical relationship between the FFR and the 10-year Treasury yields, our framework suggests that the FFR may follow the past declining trend in the near future. That is, the near-term peak in the FFR may be lower than the past cycle’s peak value.
Another application of our framework suggests that the estimated duration of monetary stimulus for the current cycle may be shorter than the past cycle. However, the estimated magnitude of the current monetary stimulus has already crossed the previous cycle’s bar.
Therefore, our work suggests, in terms of the past declining FFR trend and size of the monetary incentives, this time may not be different for monetary policy. Duration of the offered incentives may be different (shorter) for the present cycle.

Is Women’s Competitiveness Expressed through their Husband’s Income? (J0, D1)

Gahye Rosalyn Jeon
,
Georgia State University
David Ong
,
Jinan University and University of Birmingham Joint Institute

Abstract

We test for the influence of heterosexual individual’s own and cohabiting partner’s competitiveness on their own and partner’s income using a recently validated measure of competitiveness, incorporated in 2017 within a large representative sample survey, with income data from 2015-2021. First, we show that in aggregate, the past (before 2017) and future (after 2017) income levels of men and women increase with their own competitiveness when we do not control for contemporaneous (2017) income. When we control for contemporaneous income to eliminate the potential influence of past success on surveyed competitiveness, we find that only the future income of single men and women increases on own competitiveness, but not that of cohabiting men or women. Remarkably, only men’s female partner’s competitiveness, not their own, increases their future income. Women’s competitiveness also increases household income, while men’s does not increase their female partner’s nor household income. Inconsistent with women’ s competitiveness increasing men’s income by increasing women’s specialization in household production, women’s competitiveness does not increase men’s work hours. However, men’s own competitiveness does increase their work hours, but evidently, longer hours do not increase their income. Our findings suggest that women’s competitiveness may, paradoxically, be contributing to gender and household income inequalities.

Job Mobility Within and Across Occupations (J6, J3)

Attila Gyetvai
,
Bank of Portugal

Abstract

This paper assesses the impact of occupational mobility on life cycle wage inequality. I develop a model of job mobility which attributes differential returns to occupations to occupationally heterogeneous labor market frictions, compensating differentials, and non-pecuniary job switching costs. I estimate the structural model on linked Hungarian administrative data and use it to quantify the relative importance of each of these mechanisms. High-skill occupations offer higher wages and more stable employment; in turn, low-skill occupations feature higher non-wage amenities but larger non-pecuniary costs of switching to high-skill jobs. As a result, workers who start their careers in the bottom 10 percent of the wage distribution in a high-skill occupation surpass those who start in the top 5 percent of a low-skill occupation in 5 years. I find that occupationally heterogeneous labor market frictions are the key drivers of these ex ante wage profiles. These results indicate that occupational heterogeneity in the sources of wage inequality is instrumental to fully account for life cycle wage dynamics.

Just Do IT? An Assessment of Inflation Targeting in a Global Comparative Case Study (E5, E3)

Roberto Duncan
,
Ohio University
Enrique Martinez-Garcia
,
Federal Reserve Bank of Dallas
Patricia Toledo
,
Ohio University

Abstract

The literature on the effects of inflation targeting (IT) remains open to question. Putting aside panel regression analyses, the literature has mostly used difference-in-differences estimators to evaluate the causal effects of IT. This paper addresses the concerns with those techniques using synthetic control methods for causal inference in a (large) sample of advanced economies (AEs) and emerging market and developing economies (EMDEs). First, we find that IT was relatively effective in reducing the inflation rate in advanced economies that pursued lower inflation, with falls lower than 1 percent over the first five years of the post-intervention period. Among EMDEs, the average reduction in inflation fluctuates around 2 percent per year. That said, these gains are statistically significant only in a few AEs (Canada, UK) and EMDEs (Colombia, Philippines, Poland, and South Africa). Interestingly, IT contributed to fight deflation in Japan and raise its inflation rate compared with its estimated counterfactual. Second, IT countries were able to cushion the external shocks related to the high commodity prices and the global financial crisis. During the 2007-09 period, the gains in lower inflation are almost negligible in AEs. In contrast, EMDEs achieved inflation rates about 3 percent lower than the average rate of the comparison group. Third, we find that the IT effectiveness---measured by the dynamic treatment effect---is statistically associated with proxies of the degree of central bank independence. Among AEs, policy formulation attributions seem to play an important role. In contrast, the central bank's ability on lending to the public sector appears as a statistically relevant covariate in EMDEs.

Kid-Cession: The Impact of the COVID-19 Pandemic on Parents’ Labor Force Participation and Welfare (J1, G5)

Daniel M. Sullivan
,
JPMorgan Chase Institute
Erica Deadman
,
JPMorgan Chase Institute
Tanya Sonthalia
,
JPMorgan Chase Institute

Abstract

Prior work has shown that the COVID-19 pandemic has especially harmed the labor market outcomes of women with children. A likely explanation is the closure of schools and childcare resources due to the pandemic, along with differentials in time spent on child care between men and women. In this paper, we use administrative banking data and geographic data on school closures to calculate several measures of the disproportionate impact of the pandemic on women with children. First, we document differential trends in labor income, bank balances, and spending across households’ family structure (e.g., children vs. no children), gender, and whether schools were in person or virtual in the fall of 2020. Second, we use industry-specific unemployment rates—based on UI and PUA receipt into a customer’s checking account—to detect involuntary job separations (i.e., layoffs) vs. voluntary separations (i.e., quitting to take care of children). We then document resulting effects on household consumption caused by voluntary separations.

Land Prices and the Persistent Effects of Wealth Inequality (O4, E2)

Thomas Phelan
,
Federal Reserve Bank of Cleveland
Keyvan Eslami
,
Ryerson University
Lara Loewenstein
,
Federal Reserve Bank of Cleveland

Abstract

We show how, in theory, wealth inequality can have long-run effects on an economy’s output. We develop and solve an endogenous growth model in which land enters both the preferences of households (via housing) and the production function for research and development.
When preferences over consumption and housing are non-homothetic, the cross-sectional distribution of wealth affects the fraction of national income devoted to housing relative to all other goods, reducing the demand for new products. This affects the profits accruing to producers of new varieties, which affects the incentives for firms to innovate, and so permanently affects output. The model therefore presents a simple mechanism linking together features of the United States economy observed over the last four decades: declining economic growth and firm entry, rising inequality, and the increasing role of housing in national income.

Land-Use Regulation and Economic Development: Evidence from the Farmland Red Line Policy in China (R1, R5)

Yue Yu
,
University of Toronto

Abstract

Many countries have land-use regulations to preserve farmland from urban sprawl, such as greenbelts, urban growth boundary, and agricultural zoning. In this paper, I show that such regulations can distort economic activity across sectors and locations at a substantial cost to aggregate welfare in developing countries during urbanization. I study a major policy restricting farm-to-urban land conversion in China - the Farmland Red Line Policy - to provide causal evidence on the impact of land-use regulation on local development measured by GDP and population growth. The policy imposes an additional cost on urban land development, which depends on exogenous local geographical features. I show that a greater additional cost driven by the geographical features significantly reduces urban land supply, lowers GDP, and decreases population. To understand the aggregate impact of the policy, I develop a quantitative spatial equilibrium model that features endogenous land-use decisions. According to the model, the policy causes an excess supply of farmland and an under-supply of urban land, and the extent of such land misallocation varies across locations due to their local geographical features. In the constrained equilibrium, the spatial and sectoral mobility of workers implies that land misallocation leads to labor misallocation. The calibrated model reveals that the welfare of workers would have been 6% higher in 2010 if the policy had not been implemented. Moreover, a cap-and-trade system that achieved the same aggregate level of farmland would have been far less costly in terms of welfare. The results suggest that fast-growing economies in developing countries need to design land-use policies carefully, as the welfare costs of poorly designed policies can be substantial.

Latinx High School Mathematics Achievement in Gentrifying School Zones (I2, H4)

Elizabeth Iris Rivera Rodas
,
Montclair State University

Abstract

This project investigates high school mathematics achievement of Latinx students in schools that are located in gentrifying areas. As the rate of gentrification has increased in many inner cities that have traditionally been the home of Black and Latinx people across the country, it is important to investigate the impact that these demographic shifts have on student outcomes. As Latinos become a larger portion of the student population in K-12 public schools, it is important that we increase the enrollment of these groups not only to ensure that they are doing well economically but the country as well.
School Attendance Boundary data are merged onto the HSLS:09 data. HSLS:09 followed a nationally representative cohort of children from ninth grade through three years after their expected high school graduation year. This study focuses on students who are present in the first three waves of the HSLS data set who attended public high school and student high school transcript data was available for all four years. These selection criteria result in 10,810 students representing 767 high schools across the United States.
Multilevel models with random intercepts are used to estimate the relationship between gentrification, school diversity, and Latinx mathematics academic achievement and account for the nested nature of the data. This study shows that in the majority of gentrified secondary public schools became more diverse which attributed to the lower mathematics achievement for Latinx students. This study provides evidence that gentrification may be negatively impacting students who are not displaced because of educational redlining in the short term. This study not only adds to the current literature, but lays the groundwork for future research looking at the impact of gentrification on public secondary schools across the country.

Learning and the Anatomy of the Profitability Premium (G1, E2)

Chi-Yang Tsou
,
Hong Kong University of Science and Technology

Abstract

I introduce imperfect information and learning for unobservable long-run productivity into a dynamic asset pricing model and provide an explanation for the profitability premium. Firms with high profitability have greater information precision and face greater exposure to updated long-run productivity shocks through the learning mechanism. Deviating from the existing models without learning, my framework provides a unified explanation for a wide set of empirical facts: firms with high cash-based operating profitability (1) have higher information precision and capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns; and (3) exhibit shorter cash-flow duration.

Leasing as a Mitigation Channel of Capital Misallocation (G1, E0)

Kai Li
,
Hong Kong University of Science and Technology and Peking University
Yiming Xu
,
Cambridge University

Abstract

Leased capital accounts for about 20\% of the total productive physical assets used by U.S. publicly listed firms, and this proportion is even higher among small and financially constrained firms - over 40\%. In this paper, we argue that leasing is an important alternative way of capital reallocation, complementary to directly purchasing capital from the reallocation market, and it significantly mitigates credit-constraint-induced capital misallocation. However, in the existing literature, leased capital is an ``unmeasured'' capital in quantifying capital misallocation. Empirically, we show that neglecting leased capital and overlooking its mitigation effect lead to significant overestimations of both the capital misallocation (Hsieh and Klenow, 2009) and the cyclicality of capital reallocation (Eisfeldt and Rampini, 2006). Theoretically, we develop a general equilibrium model with heterogeneous firms, collateral constraint and an explicit buy versus lease decision to demonstrate this novel mechanism: the possibility for firms to rent capital when they are financially constrained mitigates capital misallocation.

Leasing as a Risk-Sharing Mechanism (G1, E2)

Chi-Yang Tsou
,
Hong Kong University of Science and Technology

Abstract

This paper argues leasing is a risk-sharing mechanism: risk-tolerant lessors (capital owners) provide insurance to financially constrained risk-averse lessees (capital borrowers) against systematic capital price fluctuations. We provide strong empirical evidence to support this novel risk premium channel. Among financially constrained stocks, firms with a high leased capital ratio earn average returns 7.35% lower than firms with a low leased capital ratio, which we call it the negative leased capital premium. We develop a general equilibrium model with heterogeneous firms and financial frictions to quantify this channel. Our study also provides a caveat to the recent leasing accounting change of IFRS 16: lease induced liability and financial debt should not be treated equally on firms' balance sheet, as their implications for firms' equity risks and cost of equity are opposite.

Leveraging on Human Capital: Labor Rigidities and Sorting over the Business Cycle (E2, E3)

Edoardo Maria Acabbi
,
University Carlos III of Madrid
Andrea Alati
,
Bank of England
Luca Mazzone
,
International Monetary Fund

Abstract

This paper analyzes the scarring effects on workers and hysteresis effects on the whole real economy of business cycle fluctuations. We introduce a structural model of the labor market that features worker and rm heterogeneity, whereby workers accumulate human capital and search on the job. Wages are set through an optimal dynamic contract, with downward wage rigidity arising endogenously through limited commitment on the firm side. In this setting aggregate fluctuations alter the sorting between workers and firms and distort incentives to accumulate human capital. We show that contractual rigidities, together with limits to the intensity of investment in human capital, generate long term costs of business cycle fluctuations. Scarring effects for workers arise in absence of demand externalities or informational frictions, as a direct result of physical constraints to investment and limited commitment by workers. Once inefficiently separated, workers that look for employment in bad times direct their search towards less productive firms, a fact which has long lasting consequences for their working career. The consequence is an ensuing hysteresis in firms' productivity distribution, which tends to persist long after aggregate productivity reverted back to trend. Using administrative data on the universe of Italian labor contracts provided by the social security administration (INPS), we provide empirical evidence of these mechanisms.

Liquidity and Monetary Transmission: A Quasi-Experimental Approach (E5, G2)

Boromeus Wanengkirtyo
,
Bank of England
Sam Miller
,
Alan Turing Institute and Warwick Business School

Abstract

In the face of lower real interest rates, central bank balance sheets are likely to remain larger relative to pre-crisis levels, resulting in greater banking system liquidity. However, there is little evidence on the impact of higher liquidity on credit supply and the monetary transmission mechanism in the ‘new normal'. We exploit a novel dataset on bank liquidity positions arising from a unique regulatory regime and combine it with a highly-detailed, loan-level administrative dataset on UK mortgages. Using the design of quantitative easing auctions as an instrument for liquidity to address endogeneity, we find that more liquid banks charge slightly higher mortgage interest rates, and pass on significantly less changes in risk-free rates. We explain this through bank behaviour that attempts to preserve net interest margins in the face of holding low-yielding liquidity. Consistent with this, we find excess liquidity leads to reaching-for-yield responses in banks' mortgage risk-taking. Additionally, the results shed light on the optimal mix between (un)conventional monetary policy tools. Policies that boost bank net interest margins are more likely to help the transmission of risk-free rates to lending rates.

Liquidity Provision and Co-insurance in Bank Syndicates (G2)

Vladimir L. Yankov
,
Federal Reserve Board
Filip Zikes
,
Federal Reserve Board
Kevin Kiernan
,
Fannie Mae

Abstract

We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.

Liquidity Traps in a Monetary Union (F3, F4)

Robert Kollmann
,
Free University of Brussels and CEPR

Abstract

The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low. This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, a rise in government purchases in an individual country has a weak effect on GDP in the rest of the union. The results here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery.
............................................
Paper published in: Oxford Economic Papers, October 2021, Vol. 73(4), 2021, 1581–1603; doi: 10.1093/oep/gpab019
https://academic.oup.com/oep/article-abstract/73/4/1581/6352248
robert_kollmann@yahoo.com ; http://www.robertkollmann.com
........
PLEASE E-MAIL ME IF YOU WOULD LIKE TO ARRANGE A ZOOM MEETING ABOUT THIS (OR RELATED) RESEARCH

Liquidity Traps in a World Economy (F3, F4)

Robert Kollmann
,
Free University of Brussels and CEPR

Abstract

This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven”liquidity trap.
............................................
Paper published in: Journal of Economic Dynamics and Control, Vol. 132, November 2021, 104206
https://doi.org/10.1016/j.jedc.2021.104206
robert_kollmann@yahoo.com ; http://www.robertkollmann.com
........
PLEASE E-MAIL ME IF YOU WOULD LIKE TO ARRANGE A ZOOM MEETING ABOUT THIS (OR RELATED) RESEARCH

Lone Stars or Constellations? The Impact of Performance Related Pay on Matching Assortativeness in Academia (M5, O3)

Erina Ytsma
,
Carnegie Mellon University

Abstract

The effects of performance pay on effort and sorting have been studied extensively, but the effect performance pay may have on workforce composition in general, and the degree of matching assortativeness in particular, is much less understood. Yet if complementarities in worker skill exist, we would expect performance pay to increase positive matching assortativeness and this may greatly affect total productivity, particularly in industries with strong complementarities, such as academia (Kremer (1993), Legros and Newman (2002)).

This paper studies the effect of performance related pay on the distribution of academics across universities in a hedonic coalition formation model and provides empirical evidence that performance pay increases the clustering of similarly productive academics, giving rise to a less homogeneous distribution of academic stars across universities. To do so, the paper exploits the introduction of performance pay in German academia as a natural experiment and employs a newly constructed data set that encompasses the affiliations and publication records of the universe of academics in the country.

Using plausibly exogenous variation in the productivity of new hires by exploiting mandated professorial retirement rules as an instrument, I find evidence of positive spillovers or complementarities between co-located academics. These are larger in fields with larger co-author teams and when relatively more productive academics are co-located with relatively less productive academics. The latter suggests the academic production function is submodular.

I then test whether the introduction of performance related pay increases clustering of similarly productive academics in a difference-in-differences framework, using the strength of complementarities in academic fields as continuous measure of treatment intensity. I find that performance pay significantly increases positive matching assortativeness. With a submodular production function, however, such an increased clustering of similarly skilled workers is not optimal, and a more equal distribution of academic stars could increase total research output.

Lying Aversion and Vague Communication: An Experimental Study (C9, D9)

Keh-kuan Sun
,
Chapman University
Guangying Chen
,
Washington University in St. Louis

Abstract

An agent may benefit from misleading the audience's belief about the state of the world. While a more blatantly misleading message may be more effective than a vaguely misleading message, however, they may affect one's internal cost of dishonesty and social identity of honesty differently. Thus, a sophisticated agent must balance the degree of truthfulness and vagueness of the message.

We explore the extent to which these two types of lying costs affect people's sophisticated use of vague messages in communication and vice versa in a simple experimental setting. To this end, we introduce a novel experiment design that isolates the internal cost of lying and the social identity cost of appearing dishonest. In particular, the design varies the relevance of the social identity concern across anonymous and non-anonymous treatments. Our setup extends the framework of Fischbacher and Föllmi-heusi (2013) by implementing a richer message space with vagueness.

The experimental data shows that subjects employ more vague messages in treatments in which the social identity concern is relevant. In treatments in which the social identity concern is irrelevant, on the other hand, we find that most subjects exploit vagueness so as to be consistent with the truth, yet at the same time leveraging the imprecision to their own benefit in a more undisguised manner. We also find a smaller but non-trivial-sized group of truth-tellers who do not take advantage of vague messages even against potential opportunities for monetary gain. The result opens a new set of questions on the motivations behind the preferences for truth-telling.

Macroeconomic Dynamics of the Russian Federation: Econometric Model - 2020 (E1, C3)

Sergey Mitsek
,
Liberal Arts University-Yekaterinburg

Abstract

The article presents the results of the new version of the author's econometric model of the Russian economy. This version consists of 24 equations and 66 identities that describe the relationships between 90 variables (14 exogenous and 76 endogenous).
The new version implemented the following innovations: a) the share of cash in the money mass and mandatory reserve ratio were included; b) the parameters were re-estimated due to new quarterly data from 1999 to 2019 (by OLS and ML – ARCH); c) the specification of the equations was improved due to new estimates.
The elasticities in equations and impulse multipliers estimated show the continuing stagnation of total factor productivity, the strong dependence of the Russian economy on demographic and international factors, and low efficiency of fiscal and monetary policies.
The forecast for 2020 - 2023 obtained on the basis of the model in the base case shows the GDP growth rate equal to -0.5% per year, while inflation will be 3-4% per year. Nevertheless, a noticeable acceleration of growth rates is possible at high (3% per year) growth rates of the world economy.
These results do not take into account the impact of the COVID-19 pandemic (which will change these results for the worse in both the global economy and the Russian economy). But they can provide a useful picture of the development of the Russian economy after the consequences of the pandemic is overcome.

Macroeconomic Effects of the COVID-19 Public Health Crisis (C6, E6)

Jonathan Barlow
,
Boston University
Irena Vodenska
,
Boston University

Abstract

This paper proposes a dynamic cascade model to investigate the systemic risk posed by sector-level disruption in input. We then use this model to study the effect of the challenge presented by COVID-19 on the U.S. economy. We construct a weighted digraph G = (V; E; W) using the industry-by-industry total requirements table for 2018, provided by the Bureau of Economic Analysis. In this graph, the nodes Vi represent sector level industries, an edge Eij represents a commodity flow from industry i to industry j, and a weight Wij captures this commodity's value. We impose an initial shock that disrupts one or more industries' production capacity, and we calculate the propagation of production shortage with a modified Cobb-Douglas production function. The initial shock is modeled based on the spike in unemployment between March and April 2020, as reported by the Bureau of Labor Statistics. The industries within the network are assigned a resilience r that determines an industry's ability to absorb input losses. If the input loss rate exceeds the resilience r, the industry fails, and its outputs go to zero. We observe a critical resilience rc, such that below this critical value, the network experiences a catastrophic cascade resulting in total network collapse.

Macroprudential Policy and Credit Spreads (E4, E3)

Margarita Rubio
,
University of Nottingham
Veronica Veleanu
,
University of Surrey

Abstract

After the 2008 global financial crisis, there is a focus on macroprudential and banking policies to create a sound financial system in which financial problems are not spilled over to the real economy. Macroprudential authorities need to use indicators to assess the sustainability of credit growth and the level of system-wide risk and take the right policy-making decisions. We propose a countercyclical macroprudential rule, which responds not only to the credit growth but also to credit spreads. First, we empirically test the validity of this additional variable by providing evidence on the correlation of credit spreads with credit booms. Then, we explicitly introduce this variable into a Dynamic General Equilibrium (DSGE) model. We use our model to determine to which extent, having macroprudential measures responding to credit spreads may be welfare improving. Our results show the optimal weight that the rule should attach to this indicator so that we can give relevant policy recommendations to this respect.

Macroprudential Regulation of Investment Funds in a DSGE Framework (G2, E4)

Florian Wicknig
,
University of Cologne
Christoph Kaufmann
,
European Central Bank
Giovanni di Iasio
,
Bank of Italy

Abstract

The size of the investment fund sector is increasing rapidly and the real economy is becoming more reliant on investment fund intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and funds that allocate credit to firms. Banks grant loans and issue liquid deposits, while funds hold bonds, store deposits at banks, and issue shares that expose them to periodic redemptions. In the market solution, funds hold too little deposits and are forced to sell bonds when hit by large redemptions. Forced sales restrict investment funds' ability to finance the real economy. We show that a macroprudential minimum liquidity buffer improves upon the market solution. Regulation trades off the mitigation of forced asset sales against a reduction in deposits available to households. By addressing the liquidity risks inherent in fund intermediation, regulation can avoid the amplification of financial sector shocks as experienced in March 2020.

Making News Salient (G0)

Seungho Choi
,
Queensland University of Technology

Abstract

CEOs have incentives to communicate with their investors after news releases if the market misinterprets the news. I examine how CEOs communicate with the market through their trading patterns. I find that CEOs are more likely to purchase shares after positive and negative news releases, suggesting that they want to confirm their positive news if the market underreacts to it and want to mitigate the market overreaction to their negative news by purchasing shares. These patterns vary conditional on the information environment, institutional ownership, and news categories. My results suggest that CEOs can make the news salient via their trading pattern.

Managerial Attention, Employee Attrition, and Productivity: Evidence from a Field Experiment (M5, J2)

Hugh Xiaolong Wu
,
Washington University in St. Louis
Shannon X. Liu
,
University of Toronto

Abstract

What is the causal impact of managerial attention on employee attrition, productivity, and well-being? How should firms strategically allocate managerial attention among workers? We formulate a theory that illustrates how different attention allocation strategies influence workers’ updated beliefs about the manager’s type, and, in turn, employee performance. To test the theoretical predictions of the model, we conduct a 6-month randomized control trial at a leading multi-national spa chain with 157 stores and more than 10,000 workers in China. In the experiment, managers are given a weekly list of employees with whom they are required to have a standardized, private conversation. We compare the random allocation method, where attention allocation is uncorrelated with any employee characteristics, to the directed allocation method, where managers focus on employees with more negative emotions and therefore higher attrition probabilities. We document significant causal effects of managerial attention on employee attrition and well-being. Consistent with the theory, we find that random allocation of managerial attention is more effective than directed allocation in reducing turnover.

Managing COVID Policy Uncertainty: A Behavioural Macroeconomic Policy Model (E7, E6)

Michelle Baddeley
,
University of Technology Sydney

Abstract

The COVID pandemic has triggered unprecedented macroeconomic shocks. Large fiscal deficits, historically low interest rates and fluctuations in cash hoarding, alongside long-term trends away from fiat currency towards electronic transactions and crypto-currencies, have magnified policy uncertainty and loosened policy-makers' control of the monetary transmission mechanism. On the real side, a complex nexus of demand- and supply-side shocks have catalysed the inflationary pressures now building around the world.

In analysing the monetary policy implications of these COVID trends, this research contrasts behavioural economic insights about present bias with rational expectations models of time-inconsistent monetary policy and explores the implications for control of inflation. Preliminary theoretical analysis shows that policy uncertainty is magnified when policy-makers' loss functions embed present bias in the form of quasi-hyperbolic discounting relative to a scenario in which policy-makers and private agents form forward-looking rational expectations using exponential discounting.

In identifying some of the empirical associations, policy uncertainty data from Baker et al. (2020) (downloaded from policyuncertainty.com) is used in an econometric analysis of price pressures. These analyses suggest that policy uncertainty increases with the market volatility associated with the spread of infectious disease. The policy implications in the context of the ongoing COVID pandemic and its fallout are profound if the extent and complexity of policy uncertainty are magnified by policy-makers' susceptibility to present bias, thus limiting their ability to control macroeconomic outcomes.

Mandating Public Annuity Purchase and Banning Gender-Based Pricing May Unintentionally Lead to Advantageous Selection (H5, G5)

Yinan Ying
,
University of Hong Kong
Sau-Him P. Lau
,
University of Hong Kong
Qilin Zhang
,
University of Hong Kong

Abstract

A well-known solution to adverse selection in insurance markets is to mandate that everyone buy insurance. This paper revisits this solution when gender-based pricing is banned in a mandatory public annuity program with the partial waiver. In a simple model with these two policy features and the assumptions of positive health-wealth correlation and gender gaps in health and wealth, we introduce a measure of the severity of adverse selection and decompose this measure into the within-group and between-group effects when the gender-neutral pricing is adopted. A surprising result is that the severity of adverse selection may be zero and may even be negative (meaning that advantageous selection is present) if the between-group effect is stronger. Our analysis suggests that advantageous selection may arise from the interaction of gender-neutral pricing and the exemption clause of the mandatory public annuity program. This provides an alternative mechanism to the idea emphasized in models with multidimensional private information.

Marginal Tax Changes with Risky Investment (E6, H2)

Myroslav Pidkuyko
,
Bank of Spain
Patrick Macnamara
,
University of Manchester
Raffaele Rossi
,
University of Manchester

Abstract

Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.

Mark My Words: The Transmission of Central Bank Communication to the General Public via the Print Media (E5, C8)

Timothy Munday
,
University of Oxford
James Brookes
,
Bank of England

Abstract

Central banks need to influence wage and price-setters' expectations to fulfil their objectives. Despite its importance, communication to the general public is far less studied than communication to financial markets. This paper posits that a key channel through which the general public receives central bank communication is through the print media. We examine which features of central bank text are associated with increased newspaper reporting of central bank communication. We write down a model of news production and consumption in which news generation is endogenous. We use our model to show that standard econometric techniques will likely (i) provide biased estimates and (ii) fail to deal with the high-dimensionality of the estimation problem. We use computational linguistics to measure the the extent of news coverage a central bank communication receives, and the textual features that might cause a communication to be more (or less) likely to be considered newsworthy. We apply our model to the case of the Bank of England, and utilise machine learning techniques designed for high-dimensional equations to estimate the relationship between news coverage and central bank communication. We find that the interaction between the state of the economy and the way in which the Bank of England writes its communication is important for determining news coverage. Content and the state of the economy on their own do not seem to have an effect on news coverage. We provide concrete suggestions for ways in which central bank communication can increase its news coverage by improving readability in line with our results.

Market Power in Product and Labor Markets and Average Stock Returns (G1, E1)

Sami Alpanda
,
University of Central Florida
Tanseli Savaser
,
Vassar College
Murat Tinic
,
Kadir Has University

Abstract

In this paper, we analyze the asset pricing implications of market power in product and labor markets. To investigate the effect of these changes in labor and product market power on firms' asset prices, we first construct a real business cycle (RBC) model where firms have oligopoly and oligopsony power in product and labor markets, respectively, and show that the presence of market power in either market is associated with a lower equity premium. We then provide empirical support for the above results using univariate and multivariate portfolio analysis along with firm-level panel regressions. Our results suggest that investors demand a premium for holding stocks that are in low labor market concentration industries. In addition, we show a negative and significant relationship between labor market concentration and future returns even after controlling for other systematic factors such as market risk, size, value, and momentum.

Marriage and Development: Cross-Country Evidence (O4, J1)

Ying Feng
,
National University of Singapore
Jie Ren
,
National University of Singapore

Abstract

Marriage is an important economic subject because it matters not only for labor supply decisions but also for fertility and child-raising decisions. In this paper, we draw microdata from 92 countries to document that marriage rates decrease with development: one log point increase in GDP per capita is associated with a decrease of 5 percentage points in marriage rates for adults above age 22 for both genders. Over the life cycle from age 15 to 89, marriage rates for males are always higher in low- than in middle-, and high-income countries. In low-income countries, the male marriage rate is 73% on average across all 5-year age bins, which is 7 and 13 percentage points higher than that in middle- and high-income countries, respectively. For females, the average marriage rate in low-income countries is 8 and 17 percentage points higher than in middle- and high-income countries before age 50, although it becomes lower than that in high-income countries during age 50 and 75. Furthermore, we show that variations in desired fertility and demographic compositions including distributions of age, education, and urban status can account for at most one third of the decreasing marriage rates with GDP per capita. Finally, we propose a framework to quantitatively decompose the contributions from the declining gender education gaps and changing social norms with development.

Marriage Market Signaling and Women’s Occupation Choice (J1, J3)

Danyang Zhang
,
Purdue University

Abstract

Despite the general closure of gender disparities in the labor market over the past half century,
occupational segregation has been stubbornly persistent. I develop a new model that explains these
occupational outcomes through marriage market signaling. Vertically differentiated men have preference
over women’s unobservable caregiving ability. Heterogenous women choose caregiving occupations
to signal their ability to be caregivers. My model generates unique predictions on the influence of
marriage market conditions on women’s occupational choices. I find empirical support for these
predictions using longitudinal data on marriage rates, policy shocks to divorce laws, and shocks to
the marriage market sex ratio driven by waves of immigration.

Mass Shootings and Infant Health in the United States (I1, I3)

Tushar Bharati
,
University of Western Australia
Rakesh Banerjee
,
University of Exeter

Abstract

We study the causal effect of mass shooting incidents during pregnancy on infant health outcomes. Our identification strategy exploits the spatial and temporal variation of mass shooting incidents across counties of the United States. We find that increased severity of mass shooting incidents leads to lower average birth weight, increased incidence of low birth weight (less than 2500 grams), and higher infant mortality rates. Further, we use the exogenous variation in the media coverage of mass shooting incidents due to competing international newsworthy events to show that the effects are exacerbated by the coverage of mass shooting events. Our findings suggest that the adverse effects on health might be due to psychological stress from exposure to news coverage of shooting incidents.

Measures of Model Risk for Continuous-time Finance Models (C5, G1)

Shuyuan Qi
,
University of Reading
Emese Lazar
,
University of Reading
Radu Tunaru
,
University of Sussex

Abstract

Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to L´evy jump models and affine jump-diffusion models. We investigate the impact of parameter estimation risk and model specification risk on the models’ ability to capture the joint dynamics of stock and option prices. We estimate the parameters using Markov chain Monte Carlo techniques, under the risk-neutral probability measure and the real-world probability measure jointly. We find strong evidence supporting modeling of price jumps.

Measuring Interdependence of Inflation Uncertainty (E3, C1)

Seohyun Lee
,
International Monetary Fund

Abstract

The unprecedented fiscal and monetary policy responses during the COVID-19 crisis has increased uncertainty about inflation. During crises periods, the strength of the transmission of inflation uncertainty shocks from one country to another tends to intensify. This paper examines empirical methodologies to measure the strength of the interdependence of inflation uncertainty between the UK and the euro area. We first estimate inflation uncertainty by ex post forecast errors from a bivariate VAR GARCH model. The interdependence of uncertainty is estimated using a probability model. The results imply that the spillover of uncertainty is stronger for uncertainty about distant future than near future. The evidence from quantile regressions shows that such empirical method could suffer from bias if endogeneity is not properly addressed. To identify structural parameters in an endogeneity representation of interdependence, we exploit heteroskedasticity in the data across different regimes determined by the ratio of variances. The results no longer exhibit stronger interdependence at longer horizons. Estimated by different sample periods, the strength of the propagation of inflation uncertainty intensifies during the Global Financial Crisis while the interdependence significantly weakens during the post-crisis period.

Measuring Systemic Financial Stress and Its Risk for Growth (G0, E3)

Manfred Kremer
,
European Central Bank
Sulkhan Chavleishvili
,
Aarhus University

Abstract

This paper proposes a general statistical framework for systemic financial stress indexes rooted in standard definitions of systemic risk. We consider systemic stress as an ex post measure of systemic risk. Our statistical framework defines systemic stress as a state of the financial system in which a representative set of individual stress measures is considered extremely high and strongly co-dependent. The composite indicator results from a matrix association index that combines two matrices quantifying the extremeness and the co-dependence hypotheses. We demonstrate that several indicators from the financial stress and systemic risk literatures can be represented as special cases of our general framework. The paper also introduces a daily enhanced variant of the ECB’s composite indicator of systemic stress (CISS) for the US and the euro area. The CISS aggregates index components using their time-varying cross-correlations as co-dependence measures, thereby putting more weight on situations in which stress becomes widespread and thus systemic. From a statistical point of view, the various design steps are geared towards delivering a composite indicator which does not suffer from look-ahead bias, is sufficiently robust to outliers and largely unaffected by differing distributional properties of the underlying raw data. We develop a bootstrap algorithm to test critical levels of the CISS. The final part runs a quantile vector autoregression model for the CISS, the PMI and annual real GDP growth. The results confirm the CISS as a significant driver of economic activity, but mainly in the lower tails of the growth distributions in line with the recent growth-at-risk literature. Conditional forecast exercises and variance decompositions suggest a dominant role of financial stress in explaining the severe recession during the financial crisis in 2008/9. This is different from the Covid-19 crisis in which financial stress shocks only play a minor role compared to aggregate output shocks.

Measuring the Natural Rate of Real Interest for Chinese Economy (E4, E5)

Lixin Sun
,
Shandong University

Abstract

In this paper, we deliver several measures of the natural rate of real interest for Chinese economy and assess their reliabilities as the indicators of Chinese monetary policy conducts. First, we use the simple univariate methods including the historical average level and filtering techniques to quantify the natural real rate. Second, a VAR/VECM model based on Taylor rule is built up to calculate the natural real interest rate. Third, also as a robustness check, we quantify the natural real rate using a New Keynesian system and then evaluate all the estimates. The empirical results suggest that the natural real rate varies over time with a countercyclical pattern, and the estimate in terms of the Taylor rule is most efficient and successful for indicating the stance of monetary policy in China. Our study provides new insights to investigate the monetary policy operation and its effects on the business cycle in China.

Medicaid Expansion's Effect on Self-Employment Reporting (H2, J4)

Benjamin Glasner
,
University of Washington

Abstract

This paper tests whether the expansion of Medicaid following the Affordable Care Act impacted the supply of labor toward work which does not offer employer supplied health insurance. I find a reduction in engagement in self-employment in states which expanded Medicaid, with roughly 350,000 to 700,000 fewer individuals reporting earnings from nonemployer establishments among states which expanded Medicaid. This represents approximately an 18.9% - 37.7% reduction in comparison to the expected number of self-employed. Using data on the deployment of Uber, I test whether this effect is driven by an employment lock effect, or if instead it is evidence of tax evasion through a reduction in declared self-employment income. I find evidence that the reduction in declared self-employment is biased by tax evasion. This result supports previous work on reported earnings from self-employment being manipulated in reference to means-tested programs (Andreoni, Erard and Feinstein, 1998; Saez, 2010; Chetty et al., 2012;Chetty, Friedman and Saez, 2013).

Medical Loss Ratio Regulation and Insurer Pricing (I1, L5)

Xiaoxi Zhao
,
Boston University

Abstract

The Affordable Care Act Medical Loss Ratio (MLR) regulation limits each insurers' profit by setting a minimum requirement on the ratio of medical spending to premium revenue. This regulation may undermine the incentives for insurers to bargain for lower prices when negotiating with health care providers. I build a bargaining model of how MLR constraint affects price negotiation between insurers and providers. This model illustrates the insurer trade-off between lower premiums and higher service prices and reveals how bargaining for lower prices is reduced. Predictions from the model are tested in a structural model of MLR regulation on negotiated prices and insurers' costs using data from the individual Health Insurance Exchange Marketplace. Welfare calculations using estimated demand, cost, and bargaining parameters suggest that, with the presence of insurer-provider price negotiation, the MLR regulation led to higher health service prices and consumer welfare loss. The counterfactual analysis suggests that either a health service price regulation or a well-designed public insurance option could make health services and health insurance plans more affordable and further improve consumer welfare.

Migration Workers and Their Left-Behind Children’s Mental Health (I1, J1)

Rongrong Sun
,
Henan University
Hongwei Pei
,
Henan University

Abstract

Following massive flows of internal migration of rural population in China, a large quantity of literature has emerged to explore the income gains and the subsequent welfare improvement. However, only a few studies examine the problems related to left-behind children’s mental health (or, noncognitive ability development). In this paper, we develop a theoretical framework a la Cunha, Heckman and Schennach (2010) and analyze the effect of parents’ migration on children’s mental health, using the China Family Panel Survey (CFPS) 2012-2018 panel dataset. We use factor analysis to measure the noncognitive ability of children of age between 10 and 15 in three dimensions: depression, self-esteem, and self-control. Our OLS regression analysis shows that, on average, left-behind children are more depressed (by an increase of 0.0472 standard deviations) and less self-esteemed (by a decline of 0.023 standard deviations), while their self-control ability is not significantly different from others. The negative impact on mental health is particularly more profound to young children (10-12 years old). All our results are robust to using IV and DID models. We explain this impact with two possible transmission channels: the company channel and the communication channel. For the first channel, we find that the rise of income in a low- and middle-income family due to parents’ off-farm work compensates for the lack of parents’ company in children’s noncognitive skill development. This leads to an insignificant impact on the left-behind children from low- or middle-income families, while this impact is significant for the left-behind children from high-income families. For the second channel, we find that the parents’ migration results in deterioration in parent-child relationships due to lack of communication, which contributes to a worsening of children’s mental health.

Minority-Owned Startups: Discrimination in Access to Capital and Industry Selection (E2, J7)

Eugene Tan
,
University of Toronto
Teegawende H. Zeida
,
Brock University

Abstract

We use multiple micro-data sources (Survey of Small Business Finances and Kauffman Firm Survey) to document three key facts regarding the impact of racial inequalities in accessing startup financing on firm outcomes. First, Black-owned firms generally have lower capital-labor ratios than White-owned firms, and they also typically start and stay smaller over time. Second, Black-owned firms have lower average revenue products of capital (ARPK) than White-owned firms. Finally, Black-owned firms have lower average revenue products of labor (ARPL) than White-owned firms. We argue that our findings present a puzzle for the extant literature on racial inequalities in startup financing. Our first fact is consistent with a long literature documenting discrimination against Black entrepreneurs in startup financing. However, viewed through the lens of a standard investment model, our second fact is mutually inconsistent with our first fact. In standard investment models where returns to capital is globally decreasing, financially constrained firms employ lower capital-labor ratios since capital is scarce, but enjoy higher internal returns to capital, that is, higher ARPK. To resolve this puzzle, we propose an alternative model of entrepreneurial choice and production with two key ingredients: (1) an extensive margin of selection where financially constrained entrepreneurs potentially selective negatively into sectors with lower implicit costs of capital, and (2) a production function with locally increasing returns to scale. We use our model to match our three facts above, and then further study the macroeconomic impacts of discrimination in startup financing.

Modelling Yield Curve in Less Liquid Markets (G1, C4)

Marcin Dec
,
FAME-GRAPE

Abstract

Less liquid markets for government bonds (LLMs) are characterized by many well recognized challenges which reduce the reliability of the classic Nelson-Siegel-Svensson NSS parsimonious approach. We document key stylized facts about government bond markets concerning liquidity, diversity of maturities available, bid-ask spread in price quotes, as well as price distortion in the very short end of the curve due to switch auctions. Based on these facts, we augment the NSS approach with model- and data-driven endogenous system of weights which permits reliable estimation of yield curves in LLMs. We apply our approach to the data for one of the largest European emerging markets: Poland. Through a battery of sensitivity analyses we show that there exists a class of weights that systematically gives better results than the classic NSS approach. The best fit weights have at least the same weight for the short end of the curve as a sum for all other tenors of bonds. It proves that inferring from the liquidity in particular maturities raises the information content and quality of yield curve estimation, which links our results to the pure expectation hypothesis (PEH).

Monetary Instruments and Inflation in Nigeria: A Revisit of FAVAR (E5, C5)

Emmanuel Akande
,
Central Bank of Nigeria
Adeniyi Adenuga
,
Central Bank of Nigeria
Jeremiah Joshua
,
Central Bank of Nigeria

Abstract

This paper revisits the potency of the Factor Augment Vector Autoregression (FAVAR) model to trace the impact of notable monetary policy instruments on inflation in Nigeria. Having identified the latent information from the unobserved variables using the factor analysis approach, we retained the variables with higher communality and eliminate those with higher uniqueness. Our results show no immediate evidence of "price and liquidity puzzles", contrary to Bernake et al (2005) and other notable authors. The estimated factors improve the inflation forecast for Nigeria. Our results further show that there exists a high impact of monetary policy rate on Inflation, and the persistent increase in the unobserved information of short-term interest rates and monetary aggregates serves as an effective monetary channel or transmission mechanism of the Nigerian monetary system. Moreover, we find that inflation is mostly driven by food consumer price indices and a good FAVAR estimation should not only involve increasing the selected factors but also eliminate variables whose variance contributes least to the variances shared by the common factor. Consequently, for Monetary Policy Rate (MPR), Treasury Bill Rate (TBR), and Cash Reserve Ratio (CRR) to be an effective policy instrument, they need to be anchored on efficient operating and monetary targets.

Monetary Policy in a Small Open Economy with Multiple Monetary Assets (E4, E5)

Van H. Nguyen
,
University of Kansas

Abstract

To examine the impact of openness on the volatility of macroeconomic variables in a small and open economy, we revisit the issues of money measurement. I compare the behavior of different money measures in the context of the New Keynesian framework with sticky price. I introduce the banking sector into the model, which allows the accommodation of multiple monetary assets like currency and interest-bearing-deposits. The central bank conducts its monetary policy via a simple interest rate rule. I explore the responses of different money measures, namely simple-sum, monetary base, and Divisia quantity aggregate with respect to domestic and foreign shocks and compare these responses with those from a theoretical benchmark. I find that Divisia tracks the movement of money most closely to the benchmark, followed by monetary base, while simple sum often does not match the correct trend. I analyze the impact of openness, which has an inverse relation with home-bias in consumption, on the volatility of macroeconomic variables. I find that as a small economy becomes more open, domestic inflation and nominal interest rate are more volatile while term of trade and exchange rate become more stable. Among the different money measures, monetary base and Divisia follow the monetary aggregate benchmark to become less volatile as consumption becomes less home-biased, while simple-sum, again, does not.

Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg (E5, E4)

Isabel Hanisch
,
University of Notre Dame
Ronald Mau
,
University of Mississippi
Jonathan Rawls
,
University of Notre Dame

Abstract

We study monetary policy in a New Keynesian model with a variable term premium and scope for central bank asset purchases to matter. A version of the Divine Coincidence holds with both the short-term rate and balance sheet as available policy tools. Active balance sheet management can support a determinate rational expectations equilibrium under a permanent interest rate peg. Fixing the policy rate is four times more costly than fixing the balance sheet with the optimal monetary policy under commitment. A textbook treatment of optimal interest rate policy shows that the central bank's loss function directly penalizes term premium fluctuations.

Monetary Policy, Excess Reserves and Credit Supply: Old-Style versus New-Style Central Banking (E5, E4)

Mauricio Salgado Moreno
,
Humboldt University of Berlin

Abstract

The operational framework in the U.S. changed in 2008 as a consequence of the unconventional policies implemented to mitigate the Great Financial Crisis. This change in the operational framework at the Fed can be summarized as a switch from a “corridor” to a “floor” system.
In this paper I examine the effects of this switch on the monetary transmission mechanism. Concretely, I analyze if the bank-lending channel changed due to the alterations in the operational system.
To this end, I develop a regime-switching two-agent New-Keynesian (TANK) model with an interbank market to compare both systems. Monetary policy is implemented via Open-Market Operations and thus, the model is able to capture both dimensions of conventional policy, i.e. the interbank target (or Federal Funds) rate and the central bank's balance sheet size.
I find that under a corridor system real activity declines after a monetary contraction in line with Bernanke and Blinder (1988). However, under a floor system, monetary tightening stimulates credit supply, and hence aggregate demand. The reason for this counterintuitive result is that, without a binding reserve requirement constraint, a fall in reserves reduces a friction introduced by the presence of liquidity management costs. A smaller friction enables banks to obtain more deposits, and thus to increase credit supply.
Additional simulations support the Fed’s decision to keep a floor system, since a run on the non-bank money market participants has no consequences for aggregate demand under the new operational framework. Finally, I assess the Fed’s 2019 plan to increase the level of excess reserves and conclude with a word of caution: under the new system, monetary expansion could affect real economic activity in a contractionary manner.

Monetary-Fiscal Policy Interactions in an Era of Unconventional Policies (E6, E5)

Takuji Fueki
,
Bank of Japan

Abstract

This article assesses whether the introduction of unconventional monetary policy has helped the Bank of Japan respond actively to the inflation rate. Then we address what roles monetary and fiscal policy stances play on the behavior of inflation in Japan. A Markov switching dynamic stochastic general equilibrium model with changes in monetary/fiscal policy interaction is estimated. The special feature is to integrate the shadow interest rate in our model, which can be interpreted as an aggregate that captures the overall effect of unconventional monetary policies as well as conventional monetary policy. Focusing in particular on the prolonged deflation observed in Japan, we find that Japan's policy regime was characterized by the combination of passive monetary and passive fiscal policy. We quantitatively clarify that this combination played a substantial role in propagating negative demand shocks, leading to prolonged deflation. But, after the introduction of unconventional monetary policy, monetary policy then has switched from a passive regime to an active regime. We show that the policy regime change has helped to push up inflation.

Moral Hazard under Contagion (C7, L2)

Boli Xu
,
Northwestern University

Abstract

We study dynamic partnerships where the output evolves stochastically, each player can exit at any time, and players who have exited continue to enjoy some benefits if the remaining players keep contributing to the partnership. Players can free-ride on their partners’ contributions, knowing that it may trigger subsequent defections of their partners. The unique equilibrium features a curse of productivity: An increase in the output of a partnership may strictly harm all the players by exacerbating free-riding. Another main finding is that a partnership’s ability to sustain cooperation is non-monotonic in its group size.

More than Just Babies: Paid Family Leave and Caregiver Outcomes (J1, J4)

Pamela Meyerhofer
,
Montana State University
Wendy Stock
,
Montana State University

Abstract

The large and rapidly growing paid family leave literature primarily focuses on health and labor outcomes for new parents and children, overlooking the 20 percent of claims for caregiving. As the Baby Boomer generation ages, an increasing share of the labor force will be older workers, and many of these older workers (particularly women) will also have caregiving responsibilities for their older parents and in-laws. The availability of paid leave allows caregivers to take a short leave to care for a family member and return to the labor force rather than exiting entirely to provide the necessary care. This project utilizes Health and Retirement Survey (HRS) data to estimate the impact of state paid family leave programs (primarily California Paid Family Leave implemented in 2004) on extensive and intensive measures of employment rates and retirement among caregivers. Preliminary findings show no significant changes along the extensive margin of currently working or currently retired. Along the intensive margin, however, those eligible for paid family leave work 7 more hours per week and 5 more weeks per year. Additionally, they are 8 percentage points less likely to be partially retired and the average age at retirement increased by about 1 year. This research elucidates the burdens aging women face balancing work and caregiving to inform future policy to support this generation.

Move On Up: Electrification and Internal Migration (H4, J6)

Angelika Johanna Budjan
,
University of Heidelberg

Abstract

This study uses the large scale roll-out of electric transmission infrastructure in Nigeria during the years 2010 to 2015 to quantify the effect of electrification on agricultural productivity and internal migration. I combine household panel data on agricultural production and migration of household members with remote-sensing data on observed cropland area at grid cell level. The estimation strategy relies on spatio-temporal variation in distance to the electric transmission grid. To address endogenous grid location, I create a hypothetical grid based on least construction costs and condition on distance to the closest electric substation. Results show an increase in agricultural production, wages and land inputs following the construction of new transmission lines, while agricultural labor demand does not increase. In addition, transmission lines increase the migration propensity of household members, in particular children aged 13-18. Analysis of origin-destination data using a gravity model reveales that electrification accelerates rural to urban migration. Results are robust to the inclusion of numerous economic and political control variables, the inclusion of changes in road infrastructure and placebo tests using data on planned future grid.

Moved to Poverty? A Legacy of Apartheid in South Africa (I0, N0)

Bladimir Carrillo
,
Federal University of Pernambuco
Wilman Javier Iglesias Pinedo
,
University of Nebraska-Lincoln
Carlos Charris
,
Federal University of Viçosa

Abstract

This paper examines the consequences of the homeland system set up by the apartheid government in South Africa. This system forced Black people to live in homelands and as consequence several million individuals were moved to such areas during the 1960s and 1970s, resulting in one of history’s largest segregation policy experiments. We examine how and why relocation to the homelands affected human capital attainment. We exploit the staggered timing of homeland establishment in a cross-cohort identification strategy that compares migrants and homeland natives. Our basic finding is that moving to the homelands during childhood significantly reduces educational attainment. The magnitude of this effect is particularly pronounced for early childhood exposure, consistent with the importance of events and circumstances during critical periods of child development. The policy also had important consequences on individual success in the labor market: exposed cohorts are significantly less likely to work and have lower income in adulthood. Our examination of possible mechanisms suggests an important role for place effects. Moving to the homelands at earlier ages implies greater childhood exposure to poorer neighborhoods and it disproportionally reduces human capital attainment. The findings of this paper illustrate how discriminatory policies against specific ethnic groups can have long-lasting consequences and increase ethnic inequality.

Mutual Risk Sharing and Fintech: The Case of Xiang Hu Bao (O3, G5)

Hanming Fang
,
University of Pennsylvania
Xiao Qin
,
Shanghai Jiao Tong University
Wenfeng Wu
,
Shanghai Jiao Tong University
Tong Yu
,
University of Cincinnati

Abstract

Xiang Hu Bao (XHB), meaning "mutual protection" in Chinese, is a novel online platform operated by Alibaba's Ant Financial to facilitate mutual risk sharing of critical illness exposures. XHB reached nearly 100 million members in less than one year since its launch and so far has offered its members critical illness protections at significantly lower cost than traditional critical illness insurance. There are three major distinctions between XHB and traditional insurance products. First, XHB leverages the tech giant's platform and digital technology to lower enrollment and claim processing costs. Second, different from insurance applying sophisticated actuarial pricing models, XHB collects no premiums ex ante from members, but instead equally allocates indemnities and administrative costs among participants after each claims period. Third, XHB limits coverage amount, often below critical illness insurance products, particularly for older participants. We show this restriction potentially leads to separating equilibrium, a la Rothschild-Stiglitz, where low-risk individuals enroll in XHB while high-risk individuals purchase critical illness insurance. Data shows that the incidence rate of the covered illness among XHB members is well below that of comparable critical illness insurance. Our findings further suggest the role of advantageous selection in explaining the cost advantages of the Fintech-based mutual protection programs.

New Economics of Regulation: Financial Stability as a Social Dilemma (H4, G1)

Faruk Ulgen
,
University Grenoble Alpes

Abstract

This article is an exploratory essay on financial regulation and stability in the light of the 2007-2008 turmoil. It seeks to bring forth the major characteristics of the regulatory environment that let the crisis dynamics develop in spite of numerous warning signs that became apparent from the years 2005. In this vein, I draw upon the New Economics of Regulation (Laffont, 1994).I then suggest a non-cooperative communication game between an extra-market (a public) regulator and the market players (the regulatees) and study the rules that could lead to a relevant incentives mechanism. These rules should perform in their communication and coordination role by allowing financial institutions to undertake activities that are consistent with systemic stability. Compared with the literature developed on this issue, the article offers an alternative perspective to financial stability. It assumes that systemic stability is a public good that decentralized market mechanisms cannot provide. I borrow from the analysis of Ostrom (1998) on the commons and collective action and argue that financial regulation takes on systemic importance since a smooth functioning of markets requires continuous and sustainable provision of financial stability. The implementation of the model rests on a comparison between two alternative communication processes: a binding mediation-based revelation model and a low-constraints-based cheap talk process. The optimal framework is a function of a given environment. Each alternative reveals to be relevant only under a set of specific conditions. The relevance of a regulatory framework then rests on the consistency of an institutional environment with regard to the institutional characteristics of the economy. A possible implementation of the results can be considered in all areas of public choice that partially involve market mechanisms and that have to face coordination problems in order to respond to societal shocks such as the current Covid pandemic.

New Evidence on Monetary Transmission: Interest Rate versus Inflation Target Shocks (E5, E4)

Elizaveta Lukmanova
,
KU Leuven
Katrin Rabitsch
,
Vienna University of Economics and Business

Abstract

This paper presents new empirical evidence on monetary transmission by incorporating two types of shocks -- a standard temporary interest rate shock and a persistent inflation target shock. In an estimated DSGE model under imperfect information, in which we address the concern that agents, in reality, may not be able to distinguish between these two types, we find delayed Neo-Fisherian behavior in response to the persistent shock: interest rate and inflation increase, but with a lag. In an empirical VAR model that accounts for such uncertainty in identifying assumptions, we similarly find evidence for positive co-movement of interest rates and inflation in the short aftermath of the persistent shock, however, not on impact. This finding suggests that agents need time to learn the nature of the monetary shock and adjust their expectations, consistent with the predictions of the DSGE model under imperfect information.

New Products (O3, L2)

Alminas Zaldokas
,
Hong Kong University of Science and Technology
Abhiroop Mukherjee
,
Hong Kong University of Science and Technology
Tomas Thornquist
,
Shell Street Labs

Abstract

We introduce a new measure of innovation based on important product launches by public firms in the US. Our measure is based on stock-market reactions to media articles – classified by a convolutional neural network approach as referring to new product introductions – and has two distinct advantages. First, it covers the entire spectrum of industries and is not limited to products sold by retail firms. Second, we rely on collective wisdom about product value expressed through financial markets. This lends a forward-looking aspect to our measure, and helps avoid issues associated with valuing new types of output in a changing economy. Using our measure, we derive a few stylized facts. We show that product innovations are highly persistent, both at the firm- and at the industry-level. Firms that launch more new products are larger, and they typically operate in industries that are more competitive.

Newborns during the Crisis: Evidence from the 1980s’ Farm Crisis (I1, G5)

Chan Yu
,
University of International Business and Economics

Abstract

This paper overcomes an identification challenge in the literature of wealth-health relationship by proposing a novel research design. By studying an interest rate shock that triggered a severe farm credit crisis in the 1980s, I analyze the health effect of wealth losses due to the crisis on infant birth outcomes. To address the endogeneity concern about wealth losses, I construct an instrument using the interaction of land specialization and starting time of the shock. The variation of land specialization stems from the difference in geo-climatic condition suitable for agricultural production, which is exogeneous to local economic condition. I find that great wealth losses were detrimental to the well-being of newborns. A ten percent increase in net wealth raised the low-birth weight rate by 0.1 percentage points and reduced the actual birth weight by 3 grams. I also present evidence that household expenditure reductions in food and health care might be the main contributor to worse infant health outcomes. Households living in areas having more wealth losses also reduced more food consumption and prenatal care visits.

News and Networks: Using Text Analytics to Assess Bank Networks During COVID-19 Crisis (G2, C0)

Sophia Kazinnik
,
Federal Reserve Bank of Richmond
Daniela Scida
,
Federal Reserve Bank of Richmond
John Wu
,
Federal Reserve Bank of Richmond
Cooper Killen
,
Federal Reserve Bank of Richmond

Abstract

We study the 'interconnectedness' of stress-tested banks by exploiting how they are mentioned together in the context of financial news. We start by constructing weekly co-occurrence network matrices following Ronnqvist and Sarlin (2015) text-to-network approach. Using the COVID-19 pandemic as an external shock, we examine how bank networks behave during high stress periods. We find that banks become more interconnected during peaks of COVID-19 induced stress. We put forth a new measure of systemic risk that utilizes text-based eigenvector centrality. This measure provides a more stable ranking system than the traditional SRISK measure during both high and low stress periods.

No going back: COVID-19 disease threat perceptions and migrants’ willingness to return to work in India (J6, I1)

Shagata Mukherjee
,
Meghnad Desai Academy of Economics
Sujoy Chakravarty
,
Jawaharlal Nehru University
Varun Arora
,
BIAS Inc
Shubhabrata Roy
,
BIAS Inc
Anirudh Tagat
,
Monk Prayogshala

Abstract

In this paper, we explore the link between the likelihood of re-migration to cities and the perceived threat of contracting COVID-19 using data on reverse migrant workers in India collected using a telephonic survey. We find that individuals who perceive a significant chance of contracting COVID-19 have significantly lower stated likelihood to return to their urban work centres. We observe heterogeneity with respect to duration of migration as longer-term migrants perceive a lower disease threat than short-term migrants. With respect to socio-demographics, we find that having dependents and owning more land increases the threat perception of COVID-19. Moreover, bigger landowners and married individuals display lower projected likelihood of return to urban work centres. We also find that a rising number of unique sources of information accessed and a lower recall of preventive measures are associated with a higher COVID-19 threat perception. Finally, we find that loss-averse individuals display lower disease threat perception, whereas more impatient individuals have higher COVID-19 risk perception. Thus, a key policy takeaway from our results is that along with standard economic incentives, behavioural factors and access to information regarding COVID-19 crucially determine migrants' potential return to urban workplaces.

Nonparametric Analysis of Financial Development and Consumption (G2, E2)

Joshua Duarte
,
University of Coimbra
Pedro Bação
,
CeBER/University of Coimbra
João Sousa Andrade
,
CeBER/University of Coimbra

Abstract

In this paper we analyze the effect of financial development on consumption using nonparametric regression methods for panel data.
In high-income countries, financial development has a positive impact on consumption. However, the responsiveness of consumption to financial development decreases as the level of financial development rises.
In low-income countries, intermediate levels of financial development appear to be associated with lower consumption, while variations in the level of financial development in the tails appear not to affect consumption.
The response of consumption to the remaining regressors has a magnitude and sign along the lines of what previous literature on the subject has found. However, the results suggest that these responses are nonlinear, depending not only on the level of the regressor, but also on the level of financial development.

Not that way! An Exploration of the Social Free-rider Problem as Cause of the Boomerang Effect from Social Norm Information (C9, D8)

José Gabriel Castillo
,
Litoral Polytechnic School-Ecuador
Lauren A. Rhodes
,
Escuela Superior Politécnica del Litoral
Gonzalo E. Sánchez
,
Litoral Polytechnic School-Ecuador

Abstract

Social norm information is often used to nudge people towards prosocial behavior, yet in some instances a boomerang effect may occur that can potentially cause unintended harm. While there have been several explanations for why boomerang effects occur, the standard literature does not provide explanations based in economic theory. As these nudges are often used in campaigns of societal importance, it is valuable to understand under what circumstances the boomerang effect will occur. One cause of a boomerang effect that we explore is a free-rider problem whereby the social norm information acts as a mechanism of updating prior probabilities on the actions of others. In this study, we explore the free-rider problem in the context of the boomerang effect from social norm information and estimate its effects in a laboratory experiment through a modified dictator game with the option for punishment. We find evidence that social norm information may result in boomeranged behavior in this context, particularly for females.

Objectified Housing Sales and Rent Prices in Representative Household Surveys: the Impact on Macroeconomic Statistics (E5, G1)

M. Denisa Naidin
,
Luxembourg Institute of Socio-Economic Research and University of Luxembourg
Sofie R. Waltl
,
Luxembourg Institute of Socio-Economic Research and Vienna University of Economics and Business
Michael H. Ziegelmeyer
,
Central Bank of Luxembourg and Munich Center for the Economics of Aging

Abstract

Reliable macro-economic housing and wealth statistics as well as counterfactual analyses across housing tenure status require hypothetical sales and rent price estimates reflecting current market conditions and representing the housing stock. We replace subjectively estimated values by participants in the Luxembourg Household Finance and Consumption Survey by objectified values imputed via hedonic models estimated on observable market transactions. We characterise survey participants who tend to under- or over-report, respectively, and find strong correlations with tenure length, tenure type, type of dwelling, as well as household income and wealth.
We find structural shifts in the wealth distribution, detect large regional variation in price-to-rent, price-to-income and rent-to-income ratios as well as stark affordability concerns: only 15\% of all renting households could theoretically afford and would economically benefit from purchasing their inhabited dwelling given current market conditions. Renters that could afford such a purchase are typically below 35, placed at the top of the wealth and income distribution and reside outside of Luxembourg City.

On Optimal Currency Areas and Common Cycles: Are the Acceding Countries Ready to Join the Euro? (F3, E3)

Louisa Grimm
,
Osnabrück University
Sven Steinkamp
,
Osnabrück University
Frank Westermann
,
Osnabrück University

Abstract

The former EU president Jean-Claude Junker has proposed that all countries of the European Union should also adopt the euro as their currency and recent research has shown that countries currently pursuing this goal indeed fulfill the classical Optimal Currency Area (OCA) criterion of positively correlated shocks with the European Monetary Union (EMU). We illustrate, however, that not only the correlation of shocks but also a common impulse response pattern over time is needed for a currency area to be optimal. We test this additional OCA criterion using the concept of a common serial correlation test. The test clearly rejects the notion that the potentially acceding countries share a common cyclical response pattern with the EMU aggregate – except for Sweden. Instead, the business cycles in most of the other countries exhibit only a very weak form of codependence.

On the Macroeconomic Effects of Shadow Banking Development (E3, O4)

Shuonan Zhang
,
University of Portsmouth

Abstract

We build and estimate a dynamic stochastic general equilibrium model with risky innovation and shadow credits to study the macroeconomic implications of shadow banking (SB), particularly on productivity. Our analysis is motivated by negative relationships between SB development and innovation outcome or total factor productivity (TFP) growth. In our model, information asymmetry associated with technology utilisation leads to an agency problem in which shadow intermediation reduces banks’ incentives to screen project quality. An SB boom crowd-out traditional financial services, decreases innovation quality and technology efficiency, and thereby reduces TFP. In the light of model mechanisms, we analyse cross-country differences and deliver important implications of SB. SB development mainly driven by financial factors (e.g., the US case) leads to significant loss on TFP while that relatively prompted by real-sided factors (e.g., China and the EA cases), could be less harmful.

On the Origin of Cognition: How Childhood Conditions Shape Cognitive Function at Older Age (J1, I1)

Shu Cai
,
Jinan University
Wei Li
,
Hong Kong University of Science and Technology

Abstract

The paper examines the long-term impact of early childhood conditions on the cognitive function at older age. Using a unique data from a longitudinal survey of Chinese elderly aged 65 and above, we find the old people who experienced poorer nutrition and medical conditions during their childhood and whose fathers were uneducated tend to have lower cognitive ability. In addition, poor nutrition in childhood and the uneducated father or mother predict significant faster deterioration in cognition at older age. We also find significant gender differences in the association. Girls suffer more in cognitive development in late life due to worse childhood conditions than boys. Further mechanism analyses suggest educational attainment accounts for about 20 to 30 percent of the associations between early life circumstances and both the level and the speed of decline of cognitive function at older age.

Opacity, Signaling, and Bail-ins (G2, E4)

Kentaro Asai
,
Australian National University
Bruce Grundy
,
Australian National University
Ryuichiro Izumi
,
Wesleyan University

Abstract

Should banks be transparent in the presence of bail-ins? Banks experiencing losses may bail-in creditors to allocate resources efficiently. However, if banks privately learn the losses, bail-ins may signal the asset quality. When bail-ins do not signal the quality, banks immediately bail-in creditors and sell assets at a pooled price, insuring creditors against asset risks. When bail-ins signal the quality, banks attempt to delay bail-ins to sell assets at a higher price. Such incentives can cause excessive short-term repayments. To avoid costly signaling, banks choose to be transparent or opaque so that they will not know asset qualities privately.

Optimal corporate leverage and speculative cycles: an empirical estimation (C5, G3)

Aleksandr V. Gevorkyan
,
St. John's University
Samar Issa
,
Saint Peter’s University

Abstract

This paper develops an empirical model of corporate capital structure and overleveraging.
Motivated by the Stein (2012) model for optimal debt this paper extends the analysis into
the corporate sector for a sample of 89 corporations across six leading industries:
technology, financial, pharmaceutical, auto, airline and energy. Calculated for each firm,
the model allows to infer an industry specific default risk measuring overleveraging as the
difference between actual and optimal debt. The results from the above estimations
suggest that the estimated corporate excess debt has largely been moving up, spiking
around the crisis period, i.e., the global financial crisis and then continuing into recovery.
This trend is consistent with an increase in the actual debt across industries, though the
average excess debt ratios vary by sector. These results are informative for more applied
future outlook studies assessing the pandemic scenarios. More broadly, the results of this
paper also conform to the general Kaleckian-Minskyan analytical framework suggesting
a possibility of rising speculative bubble in the economy over the medium term.

Optimal Sample Allocation in Experimental Studies Probing Mediation Effects (C9, C6)

Zuchao Shen
,
University of Florida
Feng Liu
,
Western Illinois University

Abstract

Experimental studies investigating main treatment effects have been widely used in economics, psychology, education, and other social sciences to evaluate whether a treatment works or not. Meanwhile, mediation analysis can probe the mechanisms through which an intervention impacts an outcome. Experimental studies employing mediation analyses to investigate the mechanisms through which a treatment operates on an outcome often lay the cornerstone for the critical development and iterative improvement of a specific treatment.

A key consideration in designing experimental studies probing main and mediation effects is to determine an efficient sampling plan such that the design will use the minimum resource to achieve an adequate statistical power (e.g., 80%). However, the literature has rarely provided guidance on how to design efficient and well-powered experiments that aim to assess both main and mediation effects. In this paper, we developed a flexible optimal design framework for experimental studies investing both main and mediation effects by leveraging and modeling the cost of sampling in a power analysis framework.

In our derivation, we considered two inferential tests of mediation (e.g., Sobel test, joint significance test) and the inclusion of covariates. The results suggest that the proposed framework can identify efficient sampling plans and is robust to misspecifications of concomitant design parameters (e.g., cost structures of sampling). To facilitate end-user calculations, we have implemented these formulas in the R package odr.

Outmigration and Tax Rates: Will the Wealthy Leave? (H7, J6)

Eric Daniel Lenz
,
Illinois State University

Abstract

Are wealthy people likely to move where tax rates are lower? I show that differences in real estate tax rates between two counties influence the migration of people at different income levels. I exploit variation in outmigration and real estate tax rates at the county-level from the IRS’s Statistics of Income (SOI) and Zillow's Home Value Index. I find that real estate tax rates matter for migration except for the wealthy upper 25%.

Overborrowing & Shadow Banking (G2, G1)

Genevieve Nelson
,
Danmarks Nationalbank

Abstract

In this paper I show that the existence of unregulated financial institutions (“shadow banks”) generates overborrowing (relative to the socially optimal level) in competitive equilibrium. This is because borrowers fail to internalize that an additional unit of borrowing, when the financial sector is well functioning, has adverse effects on the credit conditions they will face if a crisis arises. The social planner therefore has a motive to intervene to reduce borrowing in good times so as to limit the severity of a crisis. The discretionary planner’s optimal allocation can be decentralized either using borrower based instruments or via regulation of financial intermediaries. The optimal regulation of commercial banks is pro-cyclical.

Paid Family Leave and Unpaid Eldercare (J1, I1)

Bongsun Seo
,
American University

Abstract

As the size of the older population in the U.S. grows, informal care provided by family and friends remains an important source of long-term care. In addition to demographic transitions, COVID-19 has drastically increased eldercare needs by disproportionately impacting elderly individuals. However, informal caregiving is associated with a reduction in labor force attachment for caregivers of working age. As a measure to support employed caregivers, some states have implemented paid family leave (PFL) policies for increased flexibility of work for caregivers. This paper evaluates the impact of PFL in California, New Jersey, and Rhode Island on the labor and health outcomes of middle-aged individuals with parents or spouse in need of eldercare using rich panel data. I analyze heterogeneous effects by gender and class of the caregiver. Findings suggest that a parent or spouse's health shock decreases potential caregivers' labor force participation, increases their retirement probability, but does not impact their self-reported physical or mental health. State-level paid family leave did not offset the negative impact of care needs on labor outcomes. This study contributes to policymakers designing leave policies to address increasing eldercare needs due to aging populations and the pandemic by discussing the differential impacts of paid leave policy on unpaid caregivers’ outcomes.

Pandemic Babies: The Effects of Medical Procedure Delays on Infant and Maternal Health (I1, J1)

Xuechao (Jane) Qian
,
Ohio State University

Abstract

This paper studies the extent to which delaying or skipping medical care affects infant and maternal health, using medical procedure delay executive orders issued by more than thirty US states at the beginning of the COVID-19 pandemic and a nationwide large claims dataset. Fuzzy RD estimates suggest that infants born after the orders are issued are more likely to experience postponed emergency room or urgent care visits, miss immunizations, have health issues related to the perinatal period, and show delayed physiological development, particularly among those less than four months old. Moreover, difference-in-difference results show delayed medical care threatens infant health through maternal health. Newborns delivered by women with pregnancy exposure to procedure delay orders are more likely to be low birth weight, and women are more likely to develop pregnancy-related health problems after procedure delay orders.

Parental Inputs and Child Outcomes (I0, J0)

Arizo Karimi
,
Uppsala University
Daniel Avdic
,
Monash University
Elin Boström
,
Uppsala University
Anna Sjögren
,
Institute for Evaluation of Labor Market and Education Policy and Uppsala University

Abstract

This paper exploits the introduction of a Swedish “daddy-month” reform in a
difference-in-discontinuities design to study how fathers’ parental leave affects children’s
human capital. Results show that the reform improved average compulsory
school-leaving GPAs of sons of college educated fathers by 0.06 standard deviations,
while GPAs of sons of non-college educated fathers declined by 0.05 standard
deviations. We estimate that the reform increased intergenerational persistence of
human capital by ten percent for boys with no corresponding effects for girls. We
provide suggestive evidence that these results are linked to asymmetric impacts on
family stability and role model effects.

Parents in a Pandemic Labor Market (J1, D0)

Lily Seitelman
,
Federal Reserve Bank of San Francisco
Olivia Lofton
,
Federal Reserve bank of San Francisco
Nicolas Petrosky-Nadeau
,
Federal Reserve Bank of San Francisco

Abstract

Gender gaps in labor market outcomes during the pandemic are largely due to differences across parents: Employment and labor force participation fell much less for fathers as compared to women and non-parent men at the onset of the pandemic; the recovery has been more pronounced for men and women without children, and; the labor force participation rate of mothers has resumed declining following the start of the school year. The latter is partially offset in states with limited school re-openings. Evidence suggests flexibility in setting work schedules offsets some of the adverse impact of the pandemic on mothers’ employment, while the ability to work from home does not. We additionally find that employment and labor force participation fell more for black and Hispanic mothers, and that their recovery took longer than that of white mothers. Preliminary results using a matched sample show that the distinction between part-time and full-time employment prior to the pandemic have an effect on rates of exiting the labor force, with part-time workers leaving at greater rates than full-time workers.

Passive Investing and Price Efficiency (G1, G2)

Jeongmin 'Mina' Lee
,
Washington University in St. Louis

Abstract

This paper studies how falling fees for delegated investments affect price efficiency in a theoretical framework, in which the investors’ allocations, management fees, and asset prices are all determined in a general equilibrium. Importantly, investors optimally decide whether to participate in the financial market or simply hold the safe asset, and active managers trade strategically, adjusting the traded quantities according to market liquidity. Perhaps surprisingly, and in contrast to the broad theoretical literature, prices of the index fund become more efficient as passive fees decrease and more investors choose the uninformed index fund. Prices can become more efficient even when the inflow to passive funds comes at the expense of the outflow from active funds, as has been the case more recently since 2007. Combined with the observed downward trend in fees, the finding is consistent with recent empirical evidence that prices, especially those of S&P 500, have become more informative over time.

Patent Boxes and the Success Rate of Applications (H2, O3)

Ryan Hynes
,
University College Dublin
Ronald B. Davies
,
University College Dublin
Dieter F. Kogler
,
University College Dublin

Abstract

Patent boxes significantly reduce the corporate tax rate applied to income earned from a patent. This incentivizes firms to increase the likelihood of a patent application being granted by creating more novel research and using more successful legal representation when filing the application. Conversely, it supports submitting applications for marginally novel innovations that otherwise would not have been submitted, lowering the probability of success. We use data from applications to the European Patent Office from 1978 to 2019 and find that the introduction of a patent box increases the average success rate of applications from large, corporate innovators by 6.9 percent- age points. This impact only materializes two years after a patent box takes effect, suggesting that improved research effort is the dominant response by firms. Therefore patent boxes may help to increase innovation novelty and improve the overall quality of research.

Pattern Making and Pattern Breaking: Measuring Novelty in Brazilian Economics (O3, Z1)

Bernardo Mueller
,
University of Brasilia
Marcos Paulo Correia
,
University of Brasilia

Abstract

How do new ideas emerge in academic contexts and what forces determine which ideas get selected and which are forgotten? We analyze more than 1,600 papers presented at the ANPEC Brazilian Economics Meetings from 2013 to 2019 using topic modeling and relative entropy measures. In contrast to simply counting citations or reference combinations, these methods explore the information in the actual texts to detect the rise of new patterns and whether these patterns persist once they have been established. We find that novelty is highly correlated with transience so that most new ideas are quickly forgotten. However, of the ideas that persist those that are more novel have a higher impact. We show that our text-based measure of impact is correlated with subsequent citations. Our results provide a metric to compare the nature of research at the level of Brazilian Economics departments as well as for individual researchers. Finally, we analyze how the selection procedures for the ANPEC meetings affect the incentives for economists to pursue more novel or conventional research.

Paying Interest on Reserves to Promote Liquidity (E5, G2)

Davide Porcellacchia
,
European Central Bank

Abstract

Liquidity regulation is the conventional policy deployed to correct insufficient liquid-asset holdings by banks. In a standard banking model in which under laissez faire banks hold excessively illiquid asset porfolios, I find that payment of interest on reserves, by strengthening banks’ incentive to hold liquid assets, equivalently corrects this distortion. In fact, it is the optimal policy intervention, since it does not act as a tax on banks and thus, unlike liquidity regulation, avoids financial disintermediation. In an extension, I show that payment of interest on reserves has a fiscal cost and therefore distortionary taxation implies a lower optimal level of interest on reserves.

Perception and Reality. Evaluation of Elite Football Women’s and Men’s Performance (C9, Z2)

Cornel Nesseler
,
Norwegian University of Science and Technology
Helmut Dietl
,
University of Zurich
Carlos Gomez
,
University of Zurich

Abstract

Societies are conditioned to provide consumers almost exclusively with male sports.1 Research commonly assumes that one main reason why female sports are underrepresented is because of performance differences between females and males.2 While physiological differences are unquestionable, it is unknown if consumers are able to distinguish between female and male sports. Thus, we use videos of professional women and men soccer players to test this hypothesis, blurring the players to conceal their gender. Here we show, that consumers are unable to distinguish between female and male soccer when the gender is invisible. Participants prefer men’s soccer videos when the gender of the players is visible. These findings reveal a bias in the evaluation of men’s and women’s soccer. Our results demonstrate that not performance differences but other factors, e.g., social expectations, have an important influence how consumers evaluate female sports.

Political Action Committee Activity and the Elasticity of Demand (H0, E6)

Kevin Modlin
,
Florida International University

Abstract

Considerable attention is paid to the amount of money in politics, including the role of Political Action Committees (PACs). It is generally assumed the money raised is spent to pursue political ends. This makes sense on the face. However, that does not seem to sufficiently explain the variations in activity among political committees. This work examines the amount raised and spent by PACs from different economic sectors. The author will then incorporate the price elasticity of demand as the independent variable to explain PACs' activity better.
The research incorporates the aggregation of PAC dollars across five election cycles, according to public records, and will draw from existing studies of the price elasticity of demand for specific goods. Not surprisingly, many PACs are distributed by sector and good.

This work is influenced by political science research which suggests that corporate donations have minimal influence on policy outcomes. (Hansen, Rocca, & Ortiz) Also, Acemoglu et al. look at the effect of the price elasticity of demand on other political events and argue a “key parameter determining the incentives for war is the elasticity of demand.”

This paper is part of a broader research agenda that looks at the influence the collective demand for goods has on politics.

Political Repression, Media Propaganda, and Nation Building (N4, D7)

Peiyuan Li
,
University of Colorado Boulder

Abstract

In the conquest of China in the mid-17th century, the Manchu-led Qing government oppressed the Han Chinese, the native population of China. Two and a half centuries later, when modern newspaper technology became available, revolutionary propagandists took advantage of a retelling of the political repression and resistance to fan the flames of discontent. Applying machine learning to analyze 0.3 million newspaper article titles, I examine the interaction between the anti-Manchu propaganda and the historical repression and resistance. I find that prefectures with repression and resistance responded more to the anti-Manchu propaganda and produced more revolutionaries. After the revolution, revolutionaries strove to build a modern nation-state by organizing the Kuomintang party, army, and government. The results indicate that propaganda utilizing repression and resistance shaped the political identity and played a pivotal role in the political transformation of modern China.

Polygyny, Inequality, and Social Unrest (J1, D7)

Tim Krieger
,
University of Freiburg
Laura Renner
,
University of Freiburg

Abstract

Is polygyny related to social unrest? We propose three theoretical mechanisms related to different dimensions of grievance-inducing and greed-related inequality, which may occur in polygynous societies:
(i) Economic, reproductive and social inequality resulting in relative deprivation among non-elite men (‘vertical inequality’ where polygyny implies a monopolization of women by the elite).
(ii) Inequality within elites when it comes to the distribution of resources and inheritance, both related to the relative position of dependent family members in a clan (‘horizontal inequality’ where the polygynous elite itself may fall victim of instability and internal violence).
(iii) Gender inequality in general, since highly patriarchal structures and inequality between sexes make up the core of polygynous family structures. In order to earn the bride price, women are ‘sold’ into marriages by their families, thereby reinforcing the dominant role of males and foregoing the benefits of more gender-diverse societal and political structures, such as women’s more peaceful strategies of conflict resolution.
Using data for 41 African countries from 1990-2014, we provide evidence for these mechanisms and their relationship to four different types of social unrest. We find that medium levels of polygyny, gender inequality and vertical economic inequality are positively associated with both the intensity and incidence of all four types of social unrest under consideration. For horizontal inequality, the feasibility of mobilization seems to be particularly important. Countries with higher average incomes and high levels of inequality within polygynous families have a higher probability of unrest compared to similar countries without horizontal inequality.
The robustness of our results is tested through alternative and complementary hypotheses such as strategic behavior of elites, population growth that relaxes tight marriage markets, and an excess of male deaths that could possibly be balanced by polygynous marriages (implying possible reverse causation), all of which we are able to reject.

Positive Public Financing Shocks could Increase Local Racial Disparity (I2)

Tian Qiu
,
University of Kentucky

Abstract

This paper shows that a positive local financial shock has heterogeneous effects on academic achievement. White students show meaningful improvement, but Black and Hispanic students do not. Consequently, the achievement racial gap widens following the shock. Changes in school funding are not responsible for this phenomenon; rather, it is explained by heterogeneous outcomes in household Socioeconomic Status (SES). Consistent with racial segregation hindering the even distribution of economic gains, the achievement racial gap widens more in more racially segregated areas. These results highlight the possibility that a credit shock induced increase in government spending could perversely increase local racial disparity.

Practice the Purpose Preach: Experimental Evidence on the Effect of Corporate Purpose on Workers’ Willingness to Go the Extra Mile (M0, M5)

Nikolai Dominic Brosch
,
Technical University of Munich
Alwine Mohnen
,
Technical University of Munich

Abstract

Academics and business leaders increasingly call for a (re)definition of corporate purpose beyond profit-maximization to create value by contributing to the welfare of society and planet. In this context, the present paper employs a two-phase natural field experiment to investigate whether, when and how the communication of a corporate purpose influences workers’ willingness to complete unrequired extra work. The main findings show that receiving information about an employer’s corporate purpose causes workers to complete more extra work. Workers whose personal preferences match with the organization’s purpose are most responsive. For those workers the communication of a corporate purpose in combination with an authentic purpose practice further increases their additional work performance, whereas a non-authentic purpose practice backfires. Furthermore, we find evidence that the underlaying mechanism is primarily driven through an increase in workers’ meaning of work. In a broader context, the findings that workers are willing to go the extra mile working for an organization with purpose provide some empirical indications in support of the theoretically proposed business case of purpose.

Preschool and Child Health: Evidence from China’s Subsidized Child Care Program (I2, H5)

Meiqing Ren
,
University of Illinois-Chicago

Abstract

Early childhood education programs have been found to be effective for promoting children’s social and cognitive development. However, less research has investigated the health impacts associated with these programs. Using a quasi-experiment of the first universal child care program in China from 2010, this paper aims to identify whether preschool attendance together with nutrition and health services at school produces any short-term effects on health-related outcomes of preschoolers. I exploit the variation in the number of subsidized preschools across provinces and implement difference-in-differences and triple-difference strategies. Results confirm the effectiveness of this program by showing a strong and positive impact on preschool attendance. This study then documents the benefits to alleviating undernutrition. Specifically, a preschooler from high-intensity provinces is 5 percentage points less likely to be underweight than their counterparts from low-intensity provinces. Estimates show a larger effect in rural areas, suggesting a result of narrowing the rural-urban gap in education access and undernutrition preventions. However, I find no impact on overweight probability. There is also evidence showing that the program has encouraged caregivers of preschoolers to refer kids to a doctor when kids get sick, instead of finding medicines by themselves.

Present-Biased Households and Monetary Policy (E7, E5)

Lahcen Bounader
,
International Monetary Fund
Jonathan Benchimol
,
Bank of Israel
Doron Kliger
,
University of Haifa

Abstract

We build a behavioral New Keynesian model with present-biased households’ and show that the natural interest rate and the present bias are positively related. The higher (weaker) the bias, the higher (lower) the natural interest rate in the economy. Our present bias endogenization demonstrates that higher present bias is likely to occur under lower macro volatilities, higher cognitive costs, and higher relative risk aversion. Using Bayesian estimation, our empirical results elucidate key behavioral mechanisms driving the decline in natural interest rates during crises. High volatilities characterizing crises tend to increase the agents’ awareness and weaken their present bias, which in turn lowers the natural interest rate. This mechanism increases the likelihood of the Zero Lower Bound occurrence during crises. We also study optimal monetary policy and show that present-bias introduces a new channel through which monetary policy stance could change abruptly following a disturbance.

Price Pressure and the Turn-of-the-month Effect: Evidence from Retirement Accounts (G1)

Abhiroop Mukherjee
,
Hong Kong University of Science and Technology
Darwin Choi
,
Chinese University of Hong Kong
Claire Yurong Hong
,
State Accident Insurance Fund
Dong Lou
,
London School of Economics

Abstract

One popular explanation behind the turn-of-the-month (ToM) effect – the fact that stock returns are higher on days surrounding the turn of calendar months – is that people typically get their salaries at this time, and their investment in equities creates price pressure around those days. We test this hypothesis using a hand-collected comprehensive sample of mutual funds contained in 401K retirement accounts in the US, which constitute a substantial chunk of equity investments of the salaried. We find no evidence to support this hypothesis. While the ToM effect is still present in the data, stocks held by retirement funds which get large inflows of capital at ends-of-month do not exhibit a stronger ToM effect. On the other hand, we find evidence that stocks heavily held by retirement account funds have significantly higher returns in the middle-of-the-month. Evidence from Target date funds corroborates both these results.

Pricing Protest: The Response of Financial Markets to Social Unrest (E7, G1)

Philip Barrett
,
International Monetary Fund
Mariia Bondar
,
Goethe University-Frankfurt
Sophia Chen
,
International Monetary Fund
Mali Chivakul
,
International Monetary Fund
Deniz O. Igan
,
International Monetary Fund

Abstract

Using a new daily index of social unrest, we provide systematic evidence on the negative impact of social unrest on stock market performance. An average social unrest episode in a typical country causes a 1.4 percentage point drop in cumulative abnormal returns over the two-week event window. This drop is more pronounced for events that last longer and for events that happen in emerging markets. Stronger institutions, particularly better governance and more democratic systems, mitigate the adverse impact of social unrest on stock market returns.

Product Recalls, Market Size, and Innovation in the Pharmaceutical Industry (I1, O3)

Massimo Riccaboni
,
IMT School for Advanced Studies Lucca
Federico Nutarelli
,
IMT School for Advanced Studies Lucca
Andrea Morescalchi
,
IMT School for Advanced Studies Lucca

Abstract

The idea that research investments respond to market rewards is well established in the literature on markets for innovation (Schmookler, 1966; Acemoglu Linn, 2004; Bryan Williams, 2021). Empirical evidence tells us that a change in market size, such as the one measured by demographical shifts, is associated with an increase in the number of new drugs available (Acemoglu Linn, 2004; Dubois et al., 2015). However, the debate about potential reverse causality is still open (Cerda et al., 2007). In this paper, we analyze market size’s effect on innovation as measured by active clinical trials. The idea is to exploit product recalls, an innovative instrument, tested to be sharp, strong, and unexpected. The work analyses the relationship between US market size and innovation at the ATC-3 level through an original dataset and the two-step IV methodology proposed by Wooldridge et al. (2019). The results reveal a robust and significantly positive response of the number of active trials to market size. The first stage results display a negative and significant (Huber-White robust standard errors) impact of recalls and their lag on the log of sales at the market level. Such findings are enforced by analyzing abnormal values, which display the strong negative impact of recalls on sales. As measured by the impact of log sales on innovation, the second stage's outcomes reveal a robust and significantly positive response of active trials to market size. According to our estimates, an increase of 10% in market size leads to an increase of almost 6.3 % of active clinical trials. The effect of control variables (i.e., the share of generics, scientific production) aligns with theory.

Profit Shifting and Equilibrium Principles of International Taxation (H2, F1)

Manon Francois
,
Paris School of Economics

Abstract

We study the choice between source-based and destination-based corporate taxes in a two-country model, allowing multinational firms to use transfer pricing to allocate profits across tax jurisdictions. We show that source-based taxation is a Nash equilibrium for tax revenue maximizing jurisdictions if domestic and foreign firms generate large revenues. We also show that destination-based taxes are a Nash equilibrium when firms generate low revenues, which implies the presence of multiple equilibria. Both the source and the destination principle coexist in equilibrium when domestic and foreign corporate revenues are intermediate. However, the source principle always tax-dominates the destination principle.

Progressing towards Efficiency: The Role for Labor Tax Progression in Privatizing Social Security (E2, H3)

Joanna Tyrowicz
,
IZA, University of Warsaw and FAME-GRAPE
Krzysztof Makarski
,
National Bank of Poland and Warsaw School of Economics
Oliwia Komada
,
FAME-GRAPE

Abstract

We show that labor tax progression can effectively substitute for the insurance implicit in redistributive social security, challenging the existing view in the literature that linking pensions to individual incomes wages reduces distortions associated with social security, but severely reduces welfare due to removing insurance. Our study shows that privatizing social security can deliver aggregate welfare gains if alternative channels of providing insurance are implemented.

We develop a stylized theoretical model. The agents participate in fully redistributive social security and pay a progressive labor income tax. In this setup, both the pension benefits and labor taxation provide insurance against income uncertainty. Then, we introduce a pension benefit proportional to individual contributions of each agent. In this setup, income shocks from the working period carry over to retirement, and the only source of redistribution is labor tax progressivity. We replace redistributive social security, where benefits partially pool between idiosyncratic income shocks with an arrangement where the individual pension benefit depends solely on individual contributions. We complement this change with an increase in redistribution through labor tax progressivity in during the working period. We show that there exist changes in labor income taxes accompanying such social security reform, which are fiscally neutral and at the same time raise welfare.

We take the intuitions derived from this stylized setup to a calibrated general equilibrium setup, replicating the features of the US economy. We characterize the conditions under which disincentives from redistributive social security may be reduced without loss of welfare. We compensate insurance loss of insurance from privatizing social security through greater progression in the instantaneous labor taxation. We find that for plausible calibrations of Frisch elasticity, privatizing social security coupled with labor tax progression may deliver aggregate welfare gains.

Promoting Student Diversity in the European Higher Education Area: Lessons Learned from a Good Practice in Germany (I2, H5)

Vivian Carstensen
,
Bielefeld University AS, CareTech OWL & Leibniz University Hannover
Olga Zlatkin-Troitschanskaia
,
JGU Mainz
Roland Happ
,
JGU Mainz

Abstract

The European Higher Education Area (EHEA) originates in the 1999 Bologna Declaration signed by education ministers from 29 European countries. Meanwhile, the supra-national network encompasses 49 member countries. Consistent with the United Nations Sustainable Development Goals, the EHEA now gives strategic priority to the social dimension of higher education. Specifically, policies of social inclusion and campus diversity are of great interest. Understanding which mechanisms lead to wider participation and success in higher education is essential for the optimal design and effectiveness of such policies. The purpose of our research is to add to the understanding of widening participation in the EHEA.
Inspired by evidence in Germany for a growing success of historically underrepresented groups in higher education, we contribute a country-specific study and provide novel insights on diverse communities of learners at universities.
Our empirical study shows that a non-traditional educational practice of state provided upper secondary schooling that prepares for fully fledged access to university contributes to alleviating remaining disadvantages in the achievements of minorities. Striving to promote equal educational opportunities, associated full-time public schools substitute for the standard pre-university graduation track offered by traditional high-track schools. This paper examines the capability of the non-traditional, specialized, high track to establish an important entry channel to higher education. Using a representative survey of first year university students in Germany, we reveal supportive evidence that the specialized high track contributes a good educational practice to promote equal opportunities and student diversity in higher education. Specifically, second-generation immigrants are ceteris paribus 14 percentage points more likely to benefit from the good practice. Likewise, students from less educated family backgrounds are between 7 and 8 percentage points more likely to enter university using the entry channel enabled by the specialized schools. Students from academic households, however, are generally drawn to the traditional route to university. These findings allow to draw policy implications for purposeful action to put forward one of the EHEA’s major goals.
We conclude that keeping young adults in compulsory education sufficiently long and, at the same time, encouraging them to upgrade school tracks off the standard trail creates social innovation that helps to put forward the goal of social inclusion in the EHEA. The good practice examined in this paper might, therefore, be considered for a rollout experiment across other EHEA countries.

Public Sector Balance Sheet Strength and the Macro Economy (H6, H5)

Seyed Reza Yousefi
,
International Monetary Fund and Amazon

Abstract

This paper introduces concepts of public sector balance sheet (PSBS) strength, taking into account different aspects of what governments own in addition to what they owe. It develops measures of PSBS strength and investigates their macroeconomic implications. Empirical estimations show that in their pricing of sovereign bonds, financial markets account for government assets and net worth in addition to their liabilities. Furthermore, economies with stronger public sector balance sheets experience shallower recessions and recover faster in the aftermath of economic downturns. This faster return to growth can be explained by the greater space for countercyclical fiscal policy in countries with stronger balance sheets.

Public Support and Enterprise Performance: Evidence from Firm-Level Data in Ethiopia (M2, J0)

Tigist Mekonnen Melesse
,
World Bank
Yesuf Awel
,
United Nations Economic Commission for Africa

Abstract

The purpose of this study is to evaluate the impact of public contract to small and medium-sized enterprises (SMEs) on their performance. We use a rich firm-level dataset from the World Bank Enterprise Surveys and apply quasi-experimental approaches (endogenous treatment effect and propensity scores weighted difference-in-difference) to test the effect of public contract awards on SMEs sales and employment growth. Our results indicate that public contracts enhance SMEs sales and employment. The results highlight the positive role of public contracts as a promotion strategy to improve firm performance and address the unemployment. Further, our results have implications for government supports to businesses in the era of COVID-19 crisis that affected businesses with demand shock. We conclude by providing policymakers advice to diagnose the challenges that firms face in low-income countries and craft a more targeted support policy to address the unemployment and firms’ growth issues in developing countries like Ethiopia.

Pulp Friction: Long-Term Contracts as Quantity Insurance (L2, D8)

Olivier Darmouni
,
Columbia University
Simon Essig Aberg
,
University of Michigan
Juha Tolvanen
,
University of Vienna

Abstract

In decentralized markets for homogeneous goods, firms often trade using long-term contracts even though spot trade is more flexible to changing market conditions. We argue that long-term contracts are valuable in decentralized markets with frictions because they provide informal quantity insurance from the risk of being matched with low value trading partners -- buyers and sellers become endogenously risk averse with respect to quantity. Using proprietary invoice and production data from a large seller, we estimate a model of long-term contracts and spot trade in the pulp and paper industry to size the value of long-term contracts and the costs of inflexibility. We find that eliminating long-term contracts would decrease median surplus by 70%, while absent any trading frictions it would increase it by 139%.

Quantile Connectedness of the U.S. Interbank Liquidity Risk Network: a Bayesian Nuclear Norm Estimation Approach (G2, C1)

Lina Lu
,
Federal Reserve Bank of Boston
Jushan Bai
,
Columbia University
Tomohiro Ando
,
Melbourne Business School
Cindy M. Vojtech
,
Federal Reserve Board

Abstract

Understanding the connectedness of financial networks is central to the study of shocks transmission and systemic risk.
Many studies investigate the connectedness of various financial networks, focusing on financial assets connectedness among financial institutions, at the conditional mean.
In contrast, we study the quantile-dependent U.S. interbank liquidity risk network based on a non-publicly available supervisory dataset.
Both methodological and empirical contributions are new to the literature.
We first propose a new Bayesian nuclear norm estimation method that automatically estimates the quantile connectedness of the network.
We employ a common factor structure to deal with unobserved heterogeneity that may exhibit endogeneity within the network.
Together with a quantile vector autoregressive model with common factors, we then apply the proposed Bayesian method to the supervisory dataset to study the quantile-dependent liquidity risk network among large U.S. bank holding companies between April 2017 and December 2020.
We find that the liquidity risk network varies across quantiles and has changed substantially during the COVID-19 pandemic relative to the pre-pandemic period.
The estimated quantile liquidity network connectedness measures could be useful for bank supervision and financial stability monitoring by providing leading indicators of the system-wide liquidity risk connectedness not only at the median but also at the tails, as well as identifying systemically important banks and vulnerable banks in the liquidity risk transmission of the U.S. banking system.

Quantitative Forward Guidance through Interest Rate Projections (E5, G1)

Boris Hofmann
,
Bank for International Settlements
Fan Dora Xia
,
Bank for International Settlements

Abstract

We assess the effectiveness of quantitative forward guidance through interest rate projections along four key dimensions: (i) predictability, (ii) credibility, (iii) consistency and (iv) non-redundancy. Based on data for the Reserve Bank of New Zealand, the Norges Bank, the Swedish Riksbank and the Federal Reserve we find that the interest rate projections released by these four central banks are predictable and credible. Market expectations of the future path of interest rates anticipate changes in the central bank projection path and adjust to path surprises. The adjustment is, however, not one to one and decreases with the projection horizon. Moreover, high uncertainty around the projection path reduces the impact of path surprises. We also find the interest rate projections to be consistent with the macro projections that are released by the four central banks in parallel as these projections are empirically linked by a stabilising Taylor rule. Finally, interest rate projections are not redundant as they impact market expectations also when controlling for the effects of macro projections.

Rainy Day Liquidity (G1, G2)

Xin Li
,
Michigan Technological University
Jingzhi Huang
,
Pennsylvania State University
Mehmet Saglam
,
University of Cincinnati
Tong Yu
,
University of Cincinnati

Abstract

Insurance firms are a key player in the corporate bond market. In this study, we consider the role of life insurers as "rainy day" liquidity providers who improve liquidity in stressful conditions due to persistent activity of buy-and-hold investing for long-term horizon. To this end, we present evidence that insurers' corporate bond purchases improve bond liquidity during the financial crisis and among downgraded bonds facing selling pressure. Life insurers are net purchasers of downgraded bonds within investment grades. Downgraded bonds that life insurers purchase in larger amounts are significantly better priced.

Raising the Inflation Target: What Are the Effective Gains in Policy Room? (E4, E3)

Jean-Paul L'Huillier
,
Brandeis University
Raphael Schoenle
,
Brandeis University

Abstract

The return of the zero lower bound on interest rates poses a serious challenge for central banks because it leaves them without their main instrument. This situation is prompting policymakers to consider raising their inflation target to regain policy room. We show that the gains generated by this strategy are not one-to-one: Because a higher inflation target leads to a steeper Phillips curve, to get, for instance, 2 percentage points of extra room, policymakers need to raise their inflation target from 2\% to 5\%. Moreover, taking this mechanism into consideration raises the optimal inflation target by 1 pp.

Re-estimating Potential GDP: New Evidence on Output Hysteresis (E3, E4)

Diego Anzoategui
,
Rutgers University
Min Kim
,
Rutgers University

Abstract

We propose a simple structural method to estimate potential (or flexible-price) output. Our baseline method is derived from a New Keynesian model with wage rigidities, yet it is consistent with a wide range of assumptions on technology, preferences, policy rules and expectation formation. Our approach has two main advantages over existing methods. First, it provides an unbiased estimate of potential GDP that is not subject to the Lucas Critique. Second, unlike other model-based approaches, our method does not require prior knowledge of all deep parameters and it does not resort to Bayesian estimation or calibration of the underlying model. Hence, our estimates are consistent with a large set of possible parametrizations. We compute potential GDP for the US and find that the output gap implied by our method is highly correlated with the one computed by the Congressional Budget Office (CBO), a widely used estimate. However, there is a stark difference between the two series during and after the Great Recession. We also use our potential GDP estimates to contribute to the debate on the effects of demand shocks on aggregate supply. We show evidence supporting hysteresis hypotheses claiming that demand shocks can affect potential GDP

Reading between the Lines − Using Text Analysis to Estimate the Loss Function of the ECB (E5, E3)

Juha Kilponen
,
Bank of Finland
Maritta Paloviita
,
Bank of Finland
Markus Haavio
,
Bank of Finland
Pirkka Jalasjoki
,
Bank of Finland
Ilona Vänni
,
Bank of Finland

Abstract

We apply textual analysis to extract the tone (sentiment) from the introductory statements to the ECB’s press conferences regarding economic outlook. By combining this information with Eurosystem/ECB staff macroeconomic projections, we are able to directly estimate the Governing Council’s loss function. Our analysis suggests that prior to the new monetary policy strategy announced in July 2021, the de facto inflation aim of the ECB may have been considerably below 2%. We also find evidence that the loss function has been asymmetric, which would mean that the ECB has been more averse to inflation above 2% than below 2%. The ECB’s new definition of price stability implies a symmetric loss function with a bliss point at 2.0%. Hence our results indicate that the new strategy will bring about a clear change in the Governing Council’s policy preferences.

Reading Between the Lines: Quantitative Text Analysis of Banking Crises (G2, C4)

Emile du Plessis
,
University of Hamburg-Germany

Abstract

This paper develops five indicators based on a large corpus of economic news articles to forecast financial crises. The methodological approaches feature the identification of key topics within a large volume of texts, as well as the measurement of similarity between texts. A Banking Crisis Lexicon Index and Sentiment Index are developed through analysing a vast amount of economic articles to detect the evolution of banking sector discourse. Findings from Granger causality highlight leading indicators status and receiver operating characteristics suggest robust forecasting performance strength of the Banking Crisis Lexicon Index, globally and for developed economies up to two years preceding a crisis. While the aggregated Sentiment Index constitutes a coincidental indicator, for developed economies it is a short-term leading indicator. A combined lexicon and sentiment index exhibit solid forecasting performance. Statistical models Wordscores and Wordfish are introduced to study banking crises and underscore crisis classification strength. A hand-coding approach is used to verify the veracity of the indices and provides credence to the vital contribution of published deliberations in understanding and detecting banking sector frailties. In reading between the lines, this paper contributes to the literature on quantitative text analyses in constructing text-based latent banking crisis indicators.

Redistribution of Return Inequality (H3, E6)

Karl Schulz
,
University of Mannheim

Abstract

Wealthier households obtain higher returns on their investments than poorer ones. How should the tax system account for this return inequality? I study capital taxation in an economy in which return rates correlate with ability types and wealth, giving rise to type and scale dependence. Whereas an increase in type dependence ceteris paribus raises optimal capital taxes, more scale dependence provides a rationale for lower taxes, making the policy implications of return inequality non-trivial. The intuition is that, aside from amplifying capital inequality, scale dependence generates an inequality multiplier effect between wealth and its pre-tax return rate. This effect scales up standard elasticity measures that determine the responsiveness of capital to taxes. In a financial market microfoundation, in addition to type and scale dependence, I identify general equilibrium effects that call for more redistribution relative to the partial equilibrium. Finally, I provide macro and micro estimates of the novel sufficient statistics and demonstrate their quantitative importance for capital taxation.

Reinforcement Learning for Household Finance: Designing Optimal Policy for Mortgage Market (G5, C6)

Lilia Maliar
,
City University of New York
Arka Bandyopadhyay
,
Baruch College

Abstract

We apply reinforcement learning (RL) techniques from machine learning (ML) to improve efficiency of residential mortgage market in a dynamic setting which consists of three agents: the borrower (household), lender (financial institution that loans the money) and servicer (intermediary that sends mortgage statements). Our objective is to understand intertemporal choice of the borrower on the one hand and pricing, investment and portfolio allocation, transaction costs, tax consequences of the issuer/lender on the other. To attain this objective, we optimize the hedging of contingent claims (cashflow from different plausible paths that a loan take) by the servicer. By implementing the optimal policy, the servicer can preempt moral hazard from the borrower's behavior and increase the mortgage market efficiency. Our approach differs from the conventional (adhoc) approach which depends on the qualitative legal and industry expert judgement. RL is a model-agnostic methodology of solving dynamic optimization problems, adding action space on top of state space used in classical approaches.

Relational Contracts in Frictional Markets with Rematching (C7, L1)

Duoxi Li
,
Boston University

Abstract

How do market opportunities affect the value and dynamics of long-term relationships? This paper studies a matching market in which matched principals and agents interact via relational contracts, and unmatched principals and agents can randomly and anonymously rematch with each other. Market characteristics like search frictions and market thickness affect the probability of matching a new partner and forming a new relationship. I show that a high rematching probability leads to non-stationary and less productive relationships, while a low rematching probability leads to stationary and productive relationships. Welfare is non-monotonic in the rematching probability, as a lower rematching probability facilitates incentive provision but hinders relationship formation.

Relationship between Students’ and Families Growth Mindset with Students’ Academic Performance in Math: The Case of the Dominican Republic (I2, I3)

Yshabella Reyes
,
Ministry of Industry and Commerce and SMEs
Daniel Rafael Morales
,
Dominican Institute for Evaluation and Research of Educational Quality
Emily Ega
,
Dominican Institute for Evaluation and Research of Educational Quality
Carmen Maura Taveras
,
Pontificia Universidad Católica de Chile

Abstract

Recent academic literature on education, psychology, and education of economics has widely documented a strong significant relationship between growth mindset - the belief that intelligence is not fixed and can be developed - and students’ academic achievement, particularly when these two variables are controlled by students’ socioeconomic background. Current findings in the Latin America region suggest that student growth mindset can temper the effects of poverty on academic achievement, but our best knowledge no study has considered the interplay between students’ and their families’ growth mindset on academic achievement. We use a novel database of 9th graders students and their families in the Dominican Republic (N=110,000). Preliminary results show that families’ growth mindset strongly predicts students’ growth mindset, and also their math academic achievement. Multilevel regression analysis depicts differences in math scores ranging from 0.1 to 0.4 standard deviations. These findings suggest that students’ mindset are highly influenced by families’ mindset and may be a mechanism to elicit explicit academic behaviors, especially in under-privileged students’ and families

Reluctant Savers and Mortgage Subsidies (E7, E6)

Antonio Andres Bellofatto
,
University of Queensland
Stefan Hinkelmann
,
Institute for International Economic Studies and Stockholm University
Sevin Yeltekin
,
University of Rochester

Abstract

The Mortgage Interest Deduction (MID) ranks among the largest tax expenditures in the US tax code. Despite the many proposals aiming to revise the MID, the ultimate effects of modifying it are still ambiguous and controversial. One argument against this policy points to its regressivity, as it mostly benefits wealthy homeowners. On the other hand, the MID could alleviate self-control problems by promoting savings in an illiquid asset. This paper focuses on this interaction between progressivity and self-control, by studying the effects of eliminating the status-quo MID within a heterogeneous agents model with incomplete markets and Gul-Pesendorfer preferences. Ignoring self-control issues can lead to underestimating the average welfare gains associated with the MID repeal. Crucially, MID tax savings constitute a liquid form of income which exacerbates self-control costs of the losers from the policy reform.

Resource Allocation in Post-Conflict Power Sharing Arrangements – Evidence from Lebanon (H1, L3)

Mounir Mahmalat
,
The Policy Initiative
Sami Atallah
,
Lebanese Center for Policy Studies
Wassim Maktabi
,
Lebanese Center for Policy Studies

Abstract

Post-conflict power-sharing arrangements not only allocate political power but also economic re-sources among powerful elites. This article investigates the mechanisms of rent allocation of a major source of such resources: Public procurement of large infrastructure projects. We analyze a new da-taset of all infrastructure procurement contracts awarded between 2008 and 2018 by Lebanon’s Council of Development and Reconstruction (CDR), the major state institution to implement large infrastructure projects after the country’s civil war (1975-1990). We qualify the extent to which polit-ically connected firms capture larger contract values by differentiating the “quality” of their connec-tions. We find that connected firms capture larger project values, however, only those firms that are connected directly to the board of CDR and their political protégés, rather than the wider set of pow-erful political elites. We argue that the arrangements to share economic resources are based on collu-sive networks, upheld by norms of power-sharing behavior.

Retirement, Housing Mobility, Downsizing and Neighbourhood Quality-A Causal Investigation (J1, R2)

Ha Trong Nguyen
,
Telethon Kids Institute
Francis Mitrou
,
Telethon Kids Institute
Stephen Zubrick
,
Telethon Kids Institute

Abstract

This paper provides the first causal evidence on the impact of retirement on housing choices. Our empirical strategy exploits the discontinuity in the eligibility ages for state pension as an instrument for the endogenous retirement decision and controls for time-invariant individual characteristics. The results show that retirement leads to a statistically significant and sizable increase in the probability of making a residential move or the likelihood of becoming outright homeowners. We also find that individuals downsize both physically and financially and tend to move to better neighbourhoods or closer to the coast upon retirement. We additionally discover that some housing adjustments take place up to 6 years before retirement. Moreover, our results reveal significant heterogeneity in the retirement impact by gender, marital status, education, housing tenue, income and wealth. Within coupled households, housing mobility choices are primarily influenced by the wife’s retirement while housing downsizing decisions are only affected by the husband’s retirement. The results suggest that failing to address the endogeneity of retirement often under-states the retirement impact on such housing arrangements. From a policy perspective, our findings suggest that policies to increase retirement ages would also postpone the retirement attributable housing adjustments among older people. The evidence of the substantial housing mobility and downsizing around retirement may be useful input to housing or fiscal policies as it demonstrates that the unleashing of accumulated housing equity occurs well before some major life course events identified in the current literature.

Retiring from Unemployment: The Role of Personal Finances (I3, J6)

Jianbo Luo
,
State University of New York-Buffalo

Abstract

Happiness studies find that unemployed individuals’ life satisfaction (LS) increases after they retire, and use social identity to explain the positive effects of retirement. The explanation is widely accepted in academia.
This paper, however, suggests that LS increases are due to financial situation changes. As in Hetschko, Knabe, and Schöb (2014), this paper uses a difference-in-differences (DiD) estimation to compare the retirement transition of employed and unemployed individuals based on the German Socio-Economic Panel (SOEP). The innovation of this paper is to combine the DiD with a matching approach based on entropy balancing. Moreover, in the matching process, two procedures are utilized for control variable selection: manual selection and automated selection based on the state-of-the-art machining learning methods Lasso.
Using the above empirical strategy, this paper first shows that for the employed, the retirement transition substantially decreases income. By contrast, the unemployed experience an increase in income after retirement. The transition from unemployment is associated with a greater LS increase. This paper then conducts a heterogeneity analysis, which demonstrate that the LS increase is largely concentrated on those whose financial status is better.
This paper makes three contributions. First, to the authors’ knowledge, this paper is the first to suggest that the LS increase during retirement from unemployment is due to financial improvement. Second, novel empirical methods, including entropy balancing matching and Lasso feature selection, are utilized. Third, this paper also contributes to the literature on unemployment and happiness.
Explaining why LS increases during retirement from unemployment is important for policy recommendations. Nonmaterial-based explanations suggest that finding a job is the most important consideration in fighting against unemployment, regardless of job quality or wage. Material-based explanations, by contrast, emphasize a decent living standard. This suggestion poses more challenges to policy makers.

Reward, Punishment and Children’s Cooperation Preference (C7, J1)

Yexin Zhou
,
Beijing Normal University-Zhuhai
Siwei Chen
,
Peking University
Jubo Yan
,
Nanyang Technological University

Abstract

Based on a large-scale field experiment of public goods games from over 1600 students aged 7-17, this paper investigates the effects of different institutions, including endogenous reward, endogenous punishment, exogenous reward, and exogenous punishment, on children’s cooperation preference. First, we found that exogenous mechanisms are more effective than endogenous ones, indicating that the endogenous premium does not exist in children; Punishment is more effective than reward under an exogenous context. Then, we asked children about their preference for reward/punishment and found that reward is more popular. Supporters of institutions contribute more than opponents. Thirdly, we introduced uncertainty into reward/punishment and found that mechanisms with a 50% probability of enactment could also significantly improve children’s cooperation, but the effects are inferior to certain ones. Finally, a significant positive correlation was found between children’s contribution and their beliefs about the contribution of other group members. However, the free riders could take advantage of the institutional effect on cooperation promotion to select the dominant strategy. Compared with previous studies, this paper systematically analyzes the role of incentive institutions in improving children’s cooperation and thus provides policy implications.

Right-to-Work Laws, Unionization, and Hourly Wages (J5, J3)

Noah Wexler
,
University of Minnesota

Abstract

Right-to-work (RTW) laws prohibit labor unions from requiring that all workers covered by a union-negotiated contract contribute financially to the union. This allows workers to opt out of paying dues or fees while retaining union contract benefits like wage raises — a classic free-rider problem. If too many workers free-ride, union funding decreases, which may weaken contract bargaining and reduce union organizing in nonunion workplaces. Although RTW laws have historically existed in states with historically low union concentration, five states in the Rust Belt — a region with a historically high prevalence of unionism and manufacturing — enacted RTW laws since 2010. Drawing on 14 years of data on private sector workers from the Current Population Surveys, I use Sun and Abraham’s (2020) interaction-weighted difference-in-differences event study estimator to find that the recent wave of RTW legislation led to sustained reductions in union membership ranging between 1.0 and 2.7 percentage points per year, with similar effects on union contract coverage. Meanwhile, RTW reduced wages by between 0.6% and 2.7% over its first three effective years. However, I find only a short-term spike in free-riding (defined by union contract-covered workers not paying membership dues) and no wage reduction among contract-covered workers. This suggests that wage effects are driven by reduced union expansion into new workplaces, potentially associated with union leaders’ fear of future free-riding rather than free-riding itself. Thus, workers in RTW states who would otherwise join unions or work under union contracts do not recieve a union wage premium, dragging their wages down compared to their non-RTW state counterparts. Further, I show how RTW’s effect varies by demographics and socioeconomic status, finding that workers of color, workers in traditionally unionized industries, and male workers experience higher magnitude reductions in union membership and wages than others.

Risk-Aversion and the Bifurcated Interest Responses of Corporate Investment: Theory and Evidence (E4, E7)

Ying Wu
,
Salisbury University

Abstract

This paper analyzes how the bifurcated interest response of risk-averse investment challenges a negative relationship between investment and interest rates. Risk-averse firms weigh the certainty equivalent of a risky investment return against the safe return of a riskless project. If investment return (θ) and the interest rate (r) are sufficiently low, while firms often prefer holding safe assets to undertaking risky investment projects, there is an increasing θ-r boundary along which investment can be maximized when its return bifurcates its interest response. Specifically, my model shows that investment increases with the interest rate if the return on investment exceeds its boundary value but decreases with the interest rate otherwise. Furthermore, investment tends to respond more to an increase than a decrease in the interest rate. Essentially, the improved investment return is the driving force for risk-averse investment whereas the peripheral role of a higher interest rate is mainly to lower the safe return and associated risk premium. I empirically demonstrate that the theoretical predictions of my model - i.e., bifurcated interest responses of investment and an asymmetric response pattern with respect to increases versus decreases in the interest rate - are empirically borne out using U.S. nonfinancial business data.

Robustly Optimal Monetary Policy in a Behavioral Environment (E3, E5)

Lahcen Bounader
,
International Monetary Fund
Guido Traficante
,
European University of Rome

Abstract

There is a wide consensus that uncertainty affects the conduct of monetary policy. There is less consensus on the impact of uncertainty on monetary policy decisions. The first ever contribution to this question, (Brainard, 1967), has established what is called Brainard’s attenuation principle; i.e. the presence of uncertainty implies an attenuated policy response compared to settings where uncertainty is not taken into account. A recent literature contested this result showing, in particular setups, that uncertainty
leads to aggressive policy actions (e.g. Giannoni, 2002)). This paper provides a reexamination of Brainard’s attenuation principle in a specific setting, a behavioral New Keynesian model entailing a behavioral (psychological) parameter; i.e. cognitive discounting. We assess the robust optimal policy with uncertainty regarding this behavioral parameter, but we also revisit the robust policy with uncertainty regarding the slope of the Phillips curve. Introducing uncertainty in the behavioral parameter seems natural, as we lack solid empirical evidence on its numerical values. Further, as this parameter pertains to psychological underpinnings of individual decision-making, it is hard to be pin it down to a specific value. More interestingly, this parameter falls in the characterization of Barlevy (2011), in parameters affecting the persistence, but not in the conventional way.
We show that in face of uncertainty regarding the cognitive discounting parameter, the robust optimal policy implies an interest rate reaction lower than what is suggested by the otherwise optimal policy without robustness. We confirm Brainard (1967)’s attenuation principle in this case, which is against Barlevy (2011)’s rationalization theory of aggressive responses to uncertainty. For price rigidity uncertainty, our results are in line with the previous literature. Interestingly, when the central bank faces a joint uncertainty, we show that the robust policy is in line with the attenuation principle.

Role of Academic in Improving the Value-Based Education in India (I2, A2)

Babita Srivastava
,
William Paterson University

Abstract

Quality education is a very powerful instrument for combating poverty and inequality in India. Therefore, ensuring universal access to quality education is central to the economic and social development of the country (The World Bank, 2011). The current Indian educational system lacks access to technology and qualified teachers. The pedagogical strategies used in higher education do not support character development, as is evidenced by an increase in violence and social unrest. India can learn from its ancient history, when its educational system was first designed to develop the whole person, by adopting this approach for its current system. India should consider incorporating value-based education in order to promote a sense of civic responsibility and social values in students.

Safe Asset Demand (G1, G3)

Andreas Brøgger
,
Copenhagen Business School

Abstract

I show the new fact that Idiosyncratic volatility significantly predicts the convenience yield. This fact is poses a puzzle with current safe asset theories. I develop a new theory that reconciles this puzzle - a theory I label Safe Asset Demand. Safe Asset Demand explains 29% of future convenience yield variation and is verified in the cross-section of firm treasury holdings. I show that when managers are exposed to moral hazard, corporate demand will be determined by their idiosyncratic risk. I isolate my demand-based effect from confounders by using exogenous cross-sectional variation from corporate size and industry exposures. The results provide support for the importance of corporates as an investor class.

Satellite University Campus and Local Government Finance: Evidence from China's Higher Education Expansion (H7, H3)

Wei Ha
,
Peking University
Mengze Li
,
Peking University

Abstract

In the last decade, a growing body of research shows that higher education institutions (HEIs) bring about local economic growth (Wang & Tang, 2020; Hausman, 2017; Liu,2015; Cantoni & Yuchtman, 2014 ). Less is known, however, about when and why local governments would be interested in attracting HEIs to their localities. Existing evidence from developing country context is even more scarce. China, the fastest-growing large-size emerging economy in the past forty years, has set up 452 new university campuses nationwide to accommodate the unprecedented expansion of higher education since 1999. This large natural experiment offers a unique opportunity to examine the decision-making process of local government in this regard and its consequent impact on local government finance.

Drawing on the public choice theory by James Buchanan and the fiscal federalism literature by Musgrave and Oates, we hypothesize that local governments that are under severe fiscal pressure would be more likely to engage HEIs to set up satellite campuses and the influx of HEIs would boost the local fiscal revenues through appreciation of land price first and other sources of revenues later on.

We manually collect the detailed information of each and every new campus between 1999 and 2007 and link it to the local government finance yearbook to construct a unique panel dataset at the county-level. Survival analysis, difference-in-differences, and event study model are performed drawing on the temporal and geographical variation in the setup of new campuses. The findings are consistent with our hypotheses. Heterogeneity analysis shows that effects are much larger in less developed western regions.

These findings shed new lights on the micro mechanisms of universities’ impact on economic growth and the role of higher education in the process of China’s urban construction and economic development during the late 90s and early 2000s.

Saving Neonatal Lives for a Quarter (I1, C4)

Christine Valente
,
University of Bristol
Hans Henrik Sievertsen
,
University of Bristol
Mahesh Puri
,
Center for Research on Environment and Health and Population Activities

Abstract

Neonatal sepsis kills over 400,000 children annually. Experimental findings on the preventive use of chlorhexidine vary widely across settings, leading to external validity concerns. To
address this, we (i) provide the first quasi-experimental estimates of the effect of chlorhexidine in “real life” conditions and (ii) apply machine-learning (ML) to analyze treatment effect heterogeneity in a nationally-representative, Nepalese observational dataset. We find that
chlorhexidine decreases neonatal mortality by 43% and that a simple targeting policy leveraging heterogeneous treatment effects improves neonatal survival relative to WHO recommendations. Out-of-sample ML predictions match the heterogeneous pattern of existing experimental
findings across five different countries.

School Entry and Leaving Laws and Earnings over the Life Cycle (I2, J3)

Kamila Cygan-Rehm
,
Leibniz Institute for Educational Trajectories (LIfBi)-University of Bamberg

Abstract

This study investigates the effects of school entry and leaving laws on labor market outcomes from a life-cycle perspective. For identification, I use geographical and temporal variation from independent changes in cutoff rules for enrollment and compulsory schooling requirements that occurred in Germany during the 1950s and 1960s. Using administrative data with nearly career-long labor market biographies, I study the impacts of the two common policies for the same cohorts and within the same institutional setting. This allows me to shed light on their relative importance and potential interaction effects. I find that returns to compulsory schooling differ substantially by the statutory age at school entry. Specifically, younger school starters benefit relatively more from extended schooling compared to older entrants, which suggests that later policies can mitigate initial disparities due to school entry rules.

School Track Decisions and Teacher Recommendations: Evidence from German State Reforms (I2, J2)

Elisabeth Grewenig
,
Centre for European Economic Research-Mannheim

Abstract

I study the effects of admission requirements, a common regulation to determine program
assignment, in the context of school track decisions. Depending on the federal state in Germany, either teachers or parents have the discretion to decide which secondary school track
a child may pursue after primary school. Applying a differences-in-differences approach,
I exploit variation in the implementation and abolition of binding teacher recommendations across states and over time to investigate its effects on students’ academic outcomes.
Using data from Germany-wide large-scale skill assessments, I show that binding teacher
recommendations significantly improve student achievement in fourth grade, prior to track
assignment. Effects persist into ninth grade, after consequential track assignment. Further
analyses suggest that effects are driven by increased time investments in students’ skill
development.

Selection into Informative Consumer Credit Markets (G5, D1)

Maya Shaton
,
Hebrew University

Abstract

Technological innovation facilitated households’ access to information about their cost of credit. We exploit a quasi-natural experiment in an online consumer credit market to identify which households take advantage of informative markets. We find that when a platform switched from personalized loan prices to prices by credit grade – less experienced individuals immediately and disproportionately exit the market, especially among riskier borrowers. We conclude that less experienced borrowers sort into markets offering personalized information. Additional analysis confirms that their behavior is consistent with learning from personalized prices. Our results highlight the important, yet overlooked, informative role of the growing Fintech sector.

Sentiment in Bank Examination Reports and Bank Outcomes (G2, C8)

Seung Jung Lee
,
Federal Reserve Board
Maureen Cowhey
,
Federal Reserve Board
Thomas Popeck Spiller
,
Federal Reserve Board
Cindy M. Vojtech
,
Federal Reserve Board

Abstract

We investigate whether the bank supervisory process provides useful insight into bank future outcomes. We do this by conducting textual analysis on about 5,400 small to medium-sized commercial bank examination reports from 2004 to 2016. These confidential examination reports provide textual context to each component of the supervisory CAMELS ratings: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Each component is given a categorical rating, and each bank is then designated an overall composite CAMELS rating along the same scale, which are used to determine the safety and soundness of banks. We find that controlling for a variety of factors, including the ratings themselves, the sentiment supervisors express in describing most of the components predict future bank outcomes. The sentiment conveyed in the capital, asset quality, management, and earnings sections provides significant information in predicting future outcomes for capital levels, problem loans, supervisory actions, and profitability, respectively. This suggests that bank supervisors play a meaningful role in the surveillance of the banking system.

Separating Retail and Investment Banking: Evidence from the UK (G2, E5)

Matthieu Chavaz
,
Bank of England
David Elliott
,
Bank of England

Abstract

The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements, we document novel implications for credit supply, competition, and risk-taking via a funding structure channel. By preventing retail deposits from funding capital market activities, this separation leads universal banks to rebalance towards mortgage lending and away from supplying corporate credit lines and underwriting services. By redirecting the benefits of deposit funding towards the retail market, this rebalancing reduces the cost of household credit, without eroding lending standards. However the rebalancing also increases mortgage market concentration and risk-taking by smaller banks via competition effects.

Shaping the Future: Policy Shocks and the GDP Growth Distribution (E6, C5)

Thibaut Duprey
,
Bank of Canada
Alexander Ueberfeldt
,
Bank of Canada
Francois-Michel Boire
,
University of Western Ontario

Abstract

When central banks lower interest rates or governments raise spending during downturns, they aim to improve the economic outlook and avert the worst possible outcomes. Standard econometric approaches focus on the most likely scenario. We instead study the influence of policy interventions on the entire distribution of future GDP growth, with attention to the lower tail.

Building a new quantile regression-vector autoregression hybrid model (QR-VAR), we investigate the dynamics of the distribution of GDP growth following policy shocks. The VAR structure characterizes economic dynamics over time and allows for a structural meaning of shocks based on traditional sign or zero restrictions. The variable of interest, in our application GDP growth, is modelled through quantile regressions. Here we employ a distribution-free method, allowing for heteroskedasticity, skewness and multi-modality. We project the quantiles one step ahead to simulate a conditional density distribution of GDP growth from which we can re-sample to project the whole distribution of GDP growth multiple periods ahead. We perform simulations under alternative data generating processes to assess the performance of our QR-VAR.

After estimating our QR-VAR on a panel of six countries from 1964Q1 to 2019Q4, we investigate how monetary and fiscal policy shocks shape the future GDP growth distribution. We obtain three key insights: First, monetary policy easing shifts the distribution of future GDP growth up, but without significantly changing its shape. In contrast, fiscal stimulus creates positive skewness by increasing upside risks more than it reduces downside risks. Third, the fiscal effect is stronger when monetary policy is constrained by the zero-lower bound and when government spending originates from the central government.

Our results suggest that fiscal stimulus can shape the distribution of future GDP growth and is well suited to hasten the recovery phase of the COVID-19 pandemic.

Short-Time Work and Precautionary Savings (E2, E5)

Thomas Dengler
,
Humboldt University of Berlin
Britta Gehrke
,
University of Rostock

Abstract

In the Covid-19 crisis, most OECD countries use short-time work schemes (subsidized working time reductions) with the aim to preserve employment relationships. This paper studies whether and to what extent short-time work can save jobs through stabilizing aggregate demand in recessions. We build a New Keynesian model with incomplete asset markets and labor market frictions, featuring an endogenous firing as well as a short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive. As a result, aggregate demand falls by less. Using a quantitative model analysis, we show that this channel can increase the stabilization potential of short-time work over the business cycle up to 55%, even more when monetary policy is constrained by the zero lower bound. Our results also suggest that an increase of the STW replacement rate may be more effective compared to an increase of the unemployment benefit replacement rate.

Should Passive Investors Actively Manage Their Trades? (G1, G2)

Sida Li
,
University of Illinois-Urbana-Champaign

Abstract

Using novel daily holding data for exchange-traded funds (ETFs), I identify three types of ETFs that adopt distinct approaches to rebalancing their portfolios, which generates meaningful return heterogeneity. First, 56% of ETFs track public indices that pre-announce their rebalances, and they trade entirely on reconstitution days at closing prices. Their large, uninformed trades pay 67 bps in execution costs, a figure that is three times higher than what is paid in similar-sized institutional trades. Second, 7% of ETFs spread out their trades across 10 days and save 34 bps per trade or 7.3 bps per year. Third, 37% of ETFs use self-designed indices to avoid pre-announcements of rebalancing stocks and save 30 bps per trade. The alternative rebalance schedule leads to a tracking error of 10.6 bps per year and an information ratio of 0.69. For a $2 million retirement account that accrues over 30 years, the transaction cost savings rise to $29 thousand at retirement.

Size, Heterogeneity and Distributional Effects of Self-Employment Income Tax Evasion (H2, H3)

Carlo Fiorio
,
University of Milan
Francesco Figari
,
University of Insubria
Paolo Di Caro
,
Italian Ministry of Economy and Finance
Marco Manzo
,
Italian Ministry of Economy and Finance
Martina Bazzoli
,
Irvapp-FBK

Abstract

We measure tax evasion in Italy by estimating a food expenditure equation that disentangles households with prevalent income from self-employment, which is self-declared, from those with mostly third-party reported income. By using a novel dataset that links the 2013 Italian Household Budget Survey with individual tax records over a period of 7 years, we reduce measurement error by a great extent. We also depart from the usual constant share of underreporting, showing that underreporting heterogeneity among self-employed is significant, and is larger for singles and for college-educated households. We show that self-employed workers in Italy exhibit a similar attitude to tax evasion as those in other developed countries. Therefore, we point to the structure of the economy for an explanation of why aggregate tax evasion in Italy is larger than in other developed countries.

The estimated heterogeneity of underreporting behavior of households combined with the use of a tax-benefit microsimulation model have allowed us to shed light on the distributional effects of income tax evasion, showing that almost 73% of the missing revenue is attributable to taxpayers at the top of the income distribution.

Skill Loss during Unemployment and the Scarring Effects of the COVID-19 Pandemic (E2, I1)

Paul Jackson
,
National University of Singapore
Victor Ortego-Marti
,
University of California-Riverside

Abstract

We integrate the SIR epidemiology model into a search and matching framework
with skill loss during unemployment. As infections spread, fewer jobs are created, skills
deteriorate and TFP declines. The equilibrium is not efficient due to infection and skill
composition externalities. Job creation increases infections due to increased interactions
among workers. However, lower job creation decreases TFP due to skill loss. A three-month lockdown causes a 0.56% decline in TFP, i.e. nearly 50% of productivity losses
in past recessions. We study the efficient allocation given the trade-off between both
externalities and show that quantitatively the skill composition externality is sizeable.

Social Comparison, Employee Attrition, and Productivity: Evidence from a Workplace Field Experiment (M5, J6)

Hugh Xiaolong Wu
,
Washington University in St. Louis
Yucheng Liang
,
Briq and Carnegie Mellon University
Shannon X. Liu
,
University of Toronto

Abstract

Social Comparison among coworkers is prevalent in organizations and often has consequences for employee turnover, productivity, and well-being? Can firms mitigate the costs of performance comparison by redesigning the information environment? In a 7-month randomized control at a leading multi-national spa chain with more than 7,000 workers in China, we sent spa workers twice-weekly messages to inform them of the performance trajectories of their high-performing senior coworkers. This information treatment reduced the overall attrition rate of new workers by 12%, and the effect is most pronounced for high-performing new workers. The lower attrition rate is mostly driven by the improvement in new workers' stress levels and mental health conditions, which in turn results from the lowering of their beliefs about high-performing senior co-workers' past performance. Overall, this study demonstrates that showing junior workers the "resumes" of senior workers mitigates the social comparison costs within firms.

Social learning online v/s in-person: Experimental Evidence from Indian Farmers (O3, Q1)

Vanisha Sharma
,
Cornell University

Abstract

With the advent of mobile phones and the internet in India, channels of information exchange have widened more than ever. A by-product of this development has been the expansion of the digital agriculture movement, including smartphone agriculture. Smartphone agriculture uses mobile applications as a cost-effective channel for agricultural advisory, facilitating timely decision-making that can affect farmers at every stage of the production process. Despite increasing rates of smartphone adoption and internet accessibility even in the remotest parts of India, prevalence of smartphone agriculture still looms relatively low. As a puzzling contrast, the messenger service Whatsapp has become one of the most-used smartphone applications with over 300 million customers in India, steadily expanding in rural areas as well.

In this paper, I bring together pieces from this puzzle by studying the effects of farmer-Whatsapp groups on smartphone agriculture adoption rates. More specifically, by collecting data from a unique field experiment spanning 100 Indian villages, I test whether long-distant (online) connections lead to better diffusion and adoption of new agricultural technology by bridging farmers from disparate parts of a region. While existing literature provides evidence on peer-effects and social learning in agriculture technology adoption, these studies do not consider this new dimension of virtual interactions across space. I plan to address this relatively understudied gap in literature by randomly assign villages to two treatment interventions. In the first arm, I connect farmers on across-village moderated Whatsapp groups to facilitate online information sharing of farming practices. In the second arm, along with such Whatsapp groups we also simulate in-person connections by making the Whatsapp group participants meet physically to discuss several farming related topics over lunch. I then measure the differential effects of online farmer-interactions in these two types of groups. By facilitating online discussions on digital agriculture technology, and its benefits and challenges, I expect to see an increase in awareness and adoption rates of smartphone agriculture in both treatment groups. For villages with unfavorable baseline beliefs about smartphone agriculture, the treatment with both Whatsapp groups and in-person meetings is expected to have a greater effect on smartphone agriculture adoption rates than the only Whatsapp group treatment.

Social Preferences on Networks (D9, C9)

Sarah Rezaei
,
University of Innsbruck
Stephanie Rosenkranz
,
Utrecht University
Utz Weitzel
,
Free University Amsterdam
Bastian Westbrock
,
University of Hamburg

Abstract

We develop a model of social preferences for network games and study
its predictions in a local public goods game with multiple equilibria.
The key feature is that players’ social preferences are heterogeneous.
This gives room for disagreement between players about the “right”
payoff ordering. When preferences are compatible, however, players
coordinate on a refined equilibrium set. How easily the requirements
for preference compatibility are met crucially depends on a property
of the network structure: neighborhood nestedness. This means that
equilibrium selection succeeds in small, connected structures but also
in centralized networks. All predictions are confirmed in an experiment.

Sovereign Debt Crises and Firm Dynamics (F3, E4)

Gaston Chaumont
,
University of Rochester
Violeta Gutkowski
,
Federal Reserve Bank of St. Louis
Givi Melkadze
,
Georgia State University
Ia Vardishvili
,
Auburn University

Abstract

This paper quantifies the role of entry and exit in propagating the effect of the sovereign default risk on the real economy. Using enterprise-level data from Portugal, we show that the higher sovereign default risk during the European debt crisis (2010-2012) is associated with a substantial decline in firm entry and a rise in exit. Moreover, cohorts of firms exposed to high sovereign default risk consist of fewer firms and employ persistently and significantly fewer workers over their life cycle. We find that the cumulative drop in employment across exposed cohorts is significant and has a long-lasting negative effect on the dynamics of the economic aggregates. Motivated by the empirical facts, we develop a heterogeneous firm dynamics model with endogenous entry and exit, sovereign default risk, and financial frictions. The calibrated model generates a close match to firms' life-cycle dynamics and salient features of the sovereign-bank-firm relationships in Portugal. We find that the sovereign-liquidity channel is one of the main drivers of the observed dynamics in the extensive margin, which, in turn, has a long-lasting negative effect on aggregate employment. We argue that policies that support small and young business operations could reduce the long-run adverse effects of the high sovereign default risk.

Sovereign Debt Repatriation during Crises (F3, F4)

Laura Sunder-Plassmann
,
University of Copenhagen
Serkan Arslanalp
,
International Monetary Fund

Abstract

We use a comprehensive dataset on the sovereign debt investor base to document threenovel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external to domestic investors prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; and (iii) the nature of debt restructuring matters: external investors do not leave during preemptive defaults. The dataset we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.

Specification Testing for Prediction (C1, C5)

Masahiro Kato
,
Cyberagent Inc.

Abstract

This paper proposes a prediction-based specification test for parametric regression models. The soundness of regression analysis relies on the model specification's correctness. On the other hand, given a set of regression models, we are also interested in finding a model with a better prediction ability, even if there is no correctly specified model in the set. This paper considers a situation where two stratified datasets are given: one has a covariate and the corresponding outcome, but the other only has a covariate without the corresponding outcome. This paper aims to conduct statistical inference for the unobserved outcome of the latter dataset based on a model estimated from the paired former dataset. We introduce a weak model specification concept, which suffices for prediction tasks. Let us consider the risk of predicting the unobserved outcome. When the risk minimizer is the same between the regressions of two stratified datasets, the proposed specification test does not reject the alternative hypothesis, even if the model is potentially misspecified in the conventional meaning. Our proposed test is not consistent but suffices for prediction task and counterfactual inference of the unobserved outcome. We can apply the proposed method to a wide range of real-world applications, such as the conditional average treatment effect estimation. Through experiments, we investigate the effectiveness of the proposed method.

Spousal Insurance, Precautionary Labor Supply, and the Business Cycle (E2, D1)

Kathrin Ellieroth
,
Colby College

Abstract

I document that married women are less likely to leave the labor force and are more attached to employment in recessions. Using a two-person household incomplete assets markets model with labor market frictions, I show that married women exhibit precautionary labor supply in response to the higher threat of job loss experienced by their husband in recessions. Quantitative analysis shows that married women's precautionary labor supply behavior is an important mechanism of intra-household risk sharing and accounts for 30% of married women's low cyclicality of employment. Furthermore, I show that spousal insurance reduces consumption volatility in married households by 30% over the business cycle.

Staffing Composition and Patient Selection in Nursing Homes: Evidence from Regulation on Nurse Mandatory Overtime (I1, J0)

Zheyuan Dong
,
University of Illinois-Chicago

Abstract

Due to their uncertainty in future patient volume and health status, nursing homes typically use regular scheduled staff hours combined with overtime hours or third party agency nurse hours during demand peak. This paper studies how nurse staff hours composition affects patient selective admission against Medicaid patients in nursing homes. Leveraging on the state level regulations prohibiting mandatory overtime for nurses as an exogenous shock to nursing homes' ability to use overtime hours, I find that nursing homes reduced total staff hours by 4.5% and the share of Medicaid patients in nursing homes increased by 2% in states that passed regulation.  Estimated impact is mainly driven by non-hospital-based nursing homes. The result suggests that targeting overtime hours as an labor input used more in treating Medicare patients can be an effective solution to temper the selection against disadvantaged patients. 

State Health Insurance Benefit Mandates and Health Care Affordability (I1, H0)

James Bailey
,
Providence College

Abstract

Every US state requires private health insurers to cover certain conditions, treatments, and providers. These benefit mandates were rare as recently as the 1960’s, but the average state now has more than forty. These mandates are intended to promote the affordability of necessary health care. Our study aims to determine the extent to which benefit mandates succeed at this goal. Using fixed effects and difference-in-difference research designs with data from the restricted Medical Expenditure Panel Survey- Household Component (MEPS-HC), we provide the first empirical estimates of how health insurance benefit mandates affect out-of-pocket costs and total spending on health care. Further, we develop a framework of health care affordability that puts the empirical results into context and allows for an evaluation of how mandates affect the overall affordability of health care.

State Infertility Insurance Mandates and Women’s Educational Choices (I1, J1)

Meiqing Ren
,
University of Illinois-Chicago

Abstract

Approximately 1 in 8 couples have trouble getting pregnant or sustaining pregnancy in the United States. Despite the recent technological development and increased usage of infertility treatments, medical treatment for infertility problems remains extremely costly. To address a perceived need for coverage, to date 19 states have enacted some form of the infertility insurance mandate. In this paper, I investigate the impact of state infertility insurance mandates on the educational choices of women. Using a triple-difference approach applied to data from March Current Population Survey, I find that state infertility insurance mandates increase the probability of investing in advanced education when females are more confident in their ability to delay fertility, with larger effects on white women.

Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom (E6, G1)

Bernd Hayo
,
University of Marburg
Sascha Mierzwa
,
University of Marburg

Abstract

We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, where-as business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legislative stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX re-turns, whereas FT30 returns barely react on days of domestic legislative action.

Stock Returns, Market Trends, and Information Theory: A Statistical Equilibrium Approach (G1, C4)

Emanuele Citera
,
New School for Social Research

Abstract

This paper attempts to develop a theory of statistical equilibrium based on an entropy-constrained framework, that allows us to explain the distribution of stock returns over different market trends. By making use of the Quantal Response Statistical Equilibrium model (Scharfenaker and Foley, 2017), we recover the cross-sectional distribution of daily returns of individual companies listed the S&P 500, over the period 1988-2019. We then make inferences on the frequency distributions of returns by studying them over bull markets, bear markets and corrections. The results of the model shed light on the microscopic as well as macroscopic behavior of the stock market, in addition to providing insights in terms of stock returns distribution.

Strategic Trading Around Predictable Liquidation Events: Evidence from Index Reconstitutions (G1, G2)

Philip Andrew Drummond
,
Monash University
Wai-man Liu
,
Australian National University
Emma Schultz
,
Australian National University

Abstract

This study tests the competing theoretical predictions of strategic trading around predictable liquidation events. We take an event study approach centered on the liquidity shocks resulting from index reconstitutions. We find that stocks with resiliency that is one standard deviation below the cross-sectional average prior to index reconstitution exhibit relative bid-ask spreads that are 2.36 basis points higher on reconstitution days. The equivalent increase in the depth-weighted relative spread measured across ten price levels is 24.22 basis points. This relationship is consistent with the Bessembinder, Carrion, Tuttle, and Venkataraman (2016) model prediction that strategic traders absorb a portion of order imbalance in resilient stocks through liquidity provision. However, we find no evidence of predatory trading nor liquidity provision for index deletions, which we attribute to high post-reconstitution trading costs.

Strengthening Farmer Competences to Increase Climate Resilience of Cocoa Farms: A Randomized Control Trial in Honduras (D9, Q1)

Gracia María Lanza Castillo
,
Tropical Agricultural Research and Higher Education Center
Enrique Ernesto Alvarado Irias
,
Georg August University of Göttingen

Abstract

Cocoa cultivation is the income source for more than 350,000 farmers in Latin America; however, this income hardly surpasses the poverty level. Consequently, this lack of income increases farmers' vulnerability to climate change. Cocoa farm management relates to the individual's ability (men or women) to make the right decisions in terms of distribution of shade, fertilization, and pest and disease control. Many agricultural programs focused on providing technical assistance targeting these three factors individually, without having a significant impact on lifting men and women out of poverty; because increasing cacao yields do not automatically translate into higher net income, the farmer must have the competencies to decide what and how to adapt to specific changes. This research project's general objective is to provide scientific evidence on how empowering farmers' competencies reduce their vulnerability to climate change. We build on the concept of `boost' from behavioral economics to strengthen farmers' mental tools to employ new procedures and redesign the tools if necessary. We implement a randomized controlled trial in Honduras, providing heuristic-based training through farmer schools. This research project measure farmers' competencies, adoption, and degree of adoption from different integrated agricultural models which include the attributes of shade, fertilization, pest, disease management, and risk literacy boost. The results of this project proposal will contribute to the literature by providing empirical and scientific evidence and policy recommendations on the design of interventions to lift cocoa farmers out of poverty in Latin America.

Structural Changes in the Job Ladder and the Flattening of the Phillips Curve (E3, C3)

Riccardo Zago
,
Bank of France
Riccardo Zago
,
Bank of France

Abstract

Routine jobs are destroyed every time an economy enters in a recession (Jaimovich and Siu (2020)). This paper shows that such a structural change in the composition of the job ladder –triggered and matured during a crisis– has important implications for inflation dynamics and the Phillips Curve (PC). Using data from the European Monetary Union, we show that countries experiencing a bigger shift in the occupational structure during a downturn exhibit slow inflation recovery and a flatter PC afterward. In particular, we estimate that the shift in the composition of the job ladder during the Great Recession and the following Sovereign Debt Crisis jointly explain 34% of the flattening of the PC between 2002 and 2018. We reconcile this evidence with a New Keynesian DSGE Model accounting for heterogeneity in the labor market. Different wage flexibility is underneath the flattening of the PC generated by both an endogenous and exogenous shift towards non-routine employment during recessions.

Stylized Facts from Consumer Prices of Multi-Channel Retailers in Mexico (E3, E5)

Diego Solorzano-Rueda
,
Bank of Mexico

Abstract

Evidence on price rigidity is used to inform macroeconomic modeling. Using web scraping techniques, this paper characterize the frequency, size and dispersion of price changes as observed on the website of eight large retailers in Mexico, and compare them with price statistics stemming from brick and mortar stores of the same retailers. Strikingly, the evidence suggests that prices observed in brick and mortar stores (offline) change more frequently than those observed on websites (online). However, given a price change, online prices tend to exhibit larger price changes than their offline counterparts. Regarding the distribution of price adjustments, this study shows that online price changes are centered at focal points (multiples of 5%) and report a smaller fraction of tiny price changes relative to the distributions drawn from offline price changes. When focusing on the 2020 data, affected by the Covid-19 pandemic, the results suggest that, for the product categories and retailers in the study, the frequency of price changes increased roughly by the same magnitude in both online and offline sales channels, while the average size of price adjustments do not change relative to previous years.

Sudden Stop with Local Currency Debt (F3, G0)

Siming Liu
,
Shanghai University of Finance and Economics
Chang Ma
,
Fudan University
Hewei Shen
,
University of Oklahoma

Abstract

This paper embeds the choice of debt denomination within a sudden stop model and explores how this alternative structure provides new perspectives on financial regulations. Decentralized agents do not internalize the effects of their portfolio decisions on financial amplification and undervalue the insurance benefit of local currency debt. A social planner who can commit to her policies would denominate more debts in local currency because that improves risk-sharing and economic resilience during a financial crisis. The model suggests that a superior capital control policy should also alter the composition of capital inflows rather than merely reduce the aggregate volumes.

Switching-Track after the Great Recession (E1, O4)

Francesca Vinci
,
European Central Bank
Omar Licandro
,
University of Nottingham

Abstract

We propose a theoretical framework to reconcile episodes of V-shaped and L-shaped recovery, encompassing the behaviour of the U.S. economy before and after the Great Recession. In a DSGE model with endogenous growth, negative demand shocks destroy productive capacity, pushing the economy towards a lower trend. A Taylor rule policy designed to reduce the output gap may counterbalance the shocks, preventing the destruction of economic capacity and inducing a V-shaped recovery. However, when shocks are deep and persistent enough, like during the Great Recession, they call for a downward revision of potential output measures, the so-called switching-track, weakening the recovering role of monetary policy and inducing a L-shaped recovery. When calibrated to the U.S. economy, the model generates V-shaped recoveries from small shocks, whilst large and persistent demand shocks lead to a switching-track and affect the supply side permanently.

Tackling the Volatility Paradox: Spillover Persistence and Systemic Risk (G0, E4)

Christian Kubitza
,
University of Bonn

Abstract

This paper introduces Spillover Persistence as a novel characteristic of systemic risk, which reflects the dynamics of losses in the financial system. Declines in Spillover Persistence capture buildups of fragility before systemic risk materializes, both during the run-up phase of banking crises and asset price bubbles. Consistent with the volatility paradox in macro-finance models, loose financial constraints connect declines in Spillover Persistence to fragility. When systemic risk materializes and amplification effects arise, Spillover Persistence increases. Thus, it disentangles fragility from amplification effects, which is useful to implement countercyclical regulation and extends existing systemic risk measures.

Tail Risk and Expectations (E7, E0)

Yeow Hwee Chua
,
Nanyang Technological University and Stanford University
Zu Yao Hong
,
University of Maryland

Abstract

We incorporate tail risk in a Bayesian learning framework with information frictions and study how individuals' expectations respond to first and second moment shocks. In our model, we retain "rational news" through Bayesian learning and abstract from any behavioral biases. First, we show that individuals overreact under tail risk, that is, individuals are excessively optimistic and pessimistic as compared to a Bayesian learning framework without tail risk. Second, uncertainty shocks lead to more pessimistic forecasts. Third, the magnitude of overreaction depends on the level of uncertainty in the economy. To validate these theoretical findings, we use quantile regressions to estimate the GDP growth distribution and its measure of tail risk. By comparing the state of the economy in tail risk and non-tail risk episodes and using an event study approach, there is more overreaction behavior under tail risk episodes. In addition, we find that uncertainty shocks lead to a larger fall in expectations when the economy exhibits tail risk. Also, consistent with the theoretical findings, the magnitude of overreaction is larger in periods of higher uncertainty. Our findings seek to shed light on factors driving overreaction in expectations, and to highlight the importance of uncertainty shocks in propagating macroeconomic stability.

Tailored Stories (D9, D8)

Chiara Aina
,
University of Zurich

Abstract

Is it possible to persuade others only by providing interpretations of future events? I study the general problem of manipulating a boundedly rational agent by controlling her interpretation of signals she is about to receive. Persuasion arises because the agent updates her beliefs and takes an action based on the narrative she finds most plausible given her prior beliefs. Leveraging this, not only is the persuader able to strategically manipulate the agent to maximize his expected utility, but he can also induce the agent to hold non Bayes-plausible beliefs across signal realizations. Allowing for multiple stories to be communicated before the signal realizes, I propose a disciplined relaxation of the Bayes-plausibility constraint. This paper seeks to provide insights on the mechanism behind incoherent perceptions of the observed facts and the impact of persuasion via storytelling. I illustrate the model with applications in politics, finance, nudging policies, and self-control task.

Talents from Abroad. Foreign Managers and Productivity in the United Kingdom (F2, J6)

Dimitrios Exadaktylos
,
IMT School for Advanced Studies Lucca
Massimo Riccaboni
,
IMT School for Advanced Studies Lucca
Armando Rungi
,
IMT School for Advanced Studies Lucca

Abstract

In this paper, we test the contribution of foreign management to firms’ competitiveness. We use a novel dataset on the careers of 165,084 managers employed by 13,106 companies in the United Kingdom in 2009-2017. We find that domestic manufacturing firms become on average 4.9% more productive after hiring foreign managers while increasing volumes of activity and capital intensity. In particular, we find that previous industry-specific experience by foreign managers is the primary driver of productivity gains in domestic firms. Foreign-owned firms do not show significant gains from recruiting foreign talents. Our identification strategy combines matching techniques, difference-in-difference, and pre-recruitment trends to challenge reverse causality. Results are robust across different specifications and to sample composition effects. Eventually, our findings pinpoint how limits to the global mobility of managerial talents risk hampering domestic markets’ competitiveness.

Target Inflation and Forward Guidance (E5, E6)

Michael Dobrew
,
Deutsche Bundesbank

Abstract

This paper studies the impact of higher inflation targets on the effectiveness and credibility
of forward guidance announcements. Higher inflation rates induce a more forward looking
behavior of firms. This implies that agents "see through" announcements on future interest
rates and the positive current period demand effects they generate reducing the overall effectiveness of forward guidance. This result is robust to expectations processes that are not
subject to the forward guidance puzzle, e.g. inattention, imperfect credibility or learning.
Optimal policy in an environment with positive target inflation holds interest rates lower
for even longer but this becomes less credible the higher the target.

Taxation of Top Incomes and Tax Avoidance (E2, H2)

Alessandro Di Nola
,
University of Konstanz
Georgi Kocharkov
,
Deutsche Bundesbank
Almuth Scholl
,
University of Konstanz
Anna Tkhir
,
Goethe University-Frankfurt
Haomin Wang
,
University of Konstanz

Abstract

In the US, the debate on how to tax the rich has highlighted two salient empirical facts. First, there is a high concentration of entrepreneurs with small and medium-sized businesses at the top of the US income distribution. Second, the estimated response of reported income to marginal tax rates is larger for the top 1 % income earners compared to the rest of the population. This difference may be attributed to tax avoidance.

Motivated by these empirical facts, this paper incorporates tax avoidance by entrepreneurs in a quantitative macroeconomic model with heterogeneous agents and occupational choice to study the aggregate and distributional effects of income taxation at the top. Specifically, entrepreneurs can reduce their tax burden in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization (sole proprietorships, S- corporations, and C- corporations). On the intensive margin, they can shift their income between different tax bases.

We calibrate the model to the US economy. We find that poor and low-productivity entrepreneurs choose to be sole proprietor to take advantage of the low administrative costs. Wealthier entrepreneurs switch to S-corporations to avoid the social security taxes by disguising their labor income as business income. Only the wealthiest and most productive entrepreneurs choose to run C-corporations; they pay a higher operation cost and face double-taxation, but benefit from a looser financial constraint. The results are in line with the empirical evidence reported in Smith et al. (2019).

We show that eliminating all tax avoidance opportunities leads to more entrepreneurs and a greater share of C-corporations. This significantly improves productive efficiency as C-corporations are less financially constrained. In this counterfactual economy, tax revenue and average net income are significantly higher compared to the baseline. In contrast, eliminating only the intensive margin of taxation leads to a modest increase in tax revenue and has little macroeconomic impact.

The presence of tax avoidance also limits the redistributive effect of progressive taxation. We show that a revenue-neutral increase in tax progressivity can lead to higher inequality and lower efficiency as entrepreneurs switch from S-corporations to C-corporations to avoid income taxes. However, in the counterfactual scenario in which all entrepreneurs pay income taxes, increasing tax progressivity can effectively reduce inequality.

Terrorism and Patriotic Investors: Evidence from the 1920 Wall Street Bombing (G4, N2)

David-Jan Jansen
,
De Nederlandsche Bank

Abstract

This paper argues that patriotism does not necessarily account for stock market resilience in the face of terror. Studying the 1920 Wall Street bombing, I find that a rallying-around-the-flag effect does not explain the upbeat market reaction at the time. On the contrary, firms with patriotic terms (such as "American'' or "U.S.'') in their name underperformed. Using hand-collected data for 79 NYSE firms, I estimate that abnormal returns for patriotic firms were around one percentage point lower on the day after the bombing. The absence of a clear international actor behind the attack may explain this limited role of patriotism.

Testing Superneutrality When Money Growth Is Endogenous (E0, C3)

John Keating
,
University of Kansas
Andrew Lee Smith
,
Federal Reserve Bank of Kansas City
Victor J. Valcarcel
,
University of Texas-Dallas

Abstract

This paper develops a model that tests long-run superneutrality of money while controlling for endogenous money growth. We find that an exogenous permanent increase in inflation has a positive long-run effect on output. This finding rejects superneutrality based on Friedman's famous dictum that a permanent movement in "inflation is always and everywhere a monetary phenomenon." We show that our result is robust to a potentially important source of misspecification by extending an existing econometric technique to a novel setting. Using similar methods we show that a simpler vector autoregression model that was popular in previous work is biased against finding evidence for superneutrality because that model fails to account for endogenous money growth. Overall the paper concludes Mundell-Tobin effects seem more prevalent than they used to.

The Black Hole of Logistics Costs of Digitizing Commodity Money (E5, E4)

Boliang Lin
,
Beijing Laboratory of National Economic
Ruixi Lin
,
National University of Singapore

Abstract

In this paper, we reveal the depreciation mechanism of representative money (banknotes) from the perspective of logistics warehousing costs. Although it has long been the dream of economists to stabilize the buying power of the monetary units, the goal we have honest money always broken since the central bank depreciate the currency without limit. From the point of view of modern logistics, the key functions of money are the store of value and low logistics (circulation and warehouse) cost. Although commodity money (such as gold and silver) has the advantages of a wealth store, its disadvantage is the high logistics cost. In comparison to commodity money, credit currency and digital currency cannot protect wealth from loss over a long period while their logistics costs are negligible. We proved that there is not such honest money from the perspective of logistics costs, which is both the store of value like precious metal and without logistics costs in circulation like digital currency. The reason hidden in the back of the depreciation of banknotes is the black hole of storage charge of the anchor overtime after digitizing commodity money. Accordingly, it is not difficult to infer the inevitable collapse of the Bretton woods system. Therefore, we introduce a brand-new currency named honest devalued stable-coin and built a attenuation model of intrinsic value of the honest money based on the change mechanism of storage cost of anchor assets, like gold, which will lay the theoretical foundation for a stable monetary system.

The Confidant: A Model of Nepotism  (H0)

Yufeng Sun
,
Shanghai University of Finance and Economics
Jiahua Che
,
China Europe International Business School

Abstract

Corruption is commonly understood as the use of public office for private gains by self-dealing government officials.  Another kind of corruption that is almost equally prevalent but never studied is corruption, or more precisely influence of public office for private gains, by confidants of government officials.  We develop a model of strategic information revelation where a government official, after consulting a bureaucrat, has the option to seek additional information from his confidant.  The confidant in turn channels information from her clients after collecting bribery from the latter.  To focus on corruption by confidant, we assume the official to be a social welfare maximizer.  We show (1) in his effort to maximize social welfare, the government official always seeks additional information from his confidant ex-post consulting the bureaucrat; (2) anticipating this, the bureaucrat may ex ante conceal its information; (3) the resulting information loss can outweigh the information gain from the confidant, leading to efficiency loss; (4) clients bribe either to get things done (as is commonly understood) or to insure things from being undone; (5) in both cases, bribery exhibits complementarity and hence requires scale: one client bribes when all clients bribe; (6) hence multiple equilibria are possible: no client bribes when expecting others do not bribe and the confidant, as a result, cannot influence the official.  Our analysis offers three important implications: (a) corruption by confidant can be a cultural phenomenon; (b) having benevolent officials alone does not stop corruption; (c) fighting corruption must not be limited to how public office is used, but also how it is influenced.  

The Covered Interest Rate Parity with Collateral (F3, E4)

Ljubica Georgievska
,
University of California-Los Angeles

Abstract

I document that accounting for a no-arbitrage consistent but scares and costly collateral rental yield, an institutional feature of derivative contracts, explains a large part of the apparent violations to the Covered Interest Rate Parity (CIP). I build two empirical approaches to estimate this yield. The first approach assumes that the actual collateral rental yield is unobservable and generates it from a simple no-arbitrage model. The second approach assumes that the yield is observable and proxies it using the differences in the difference between the risk-free and overnight index swap rates of the bilateral currencies. I use three alternative proxies for the risk-free rate: general collateral repo, BOX, and T-bill rates. Remarkably, all estimates yield the same results - sharply reduced apparent violations. Notably, the collateral rental yield is independent of limits to arbitrage intermediary frictions, suggesting that previously documented CIP violations mostly reflect institutional details of derivative contracts regarding collateral.

The COVID-19 Bailouts (H8, H2)

Jean-Marie A. Meier
,
University of Texas-Dallas
Jake Smith
,
University of Texas-Dallas

Abstract

We use hand-collected data to investigate the COVID-19 bailouts for all publicly listed US firms. The median tax rate is 4% for bailout firms and 16% for no-bailout firms. The bailouts are expensive when compared to past corporate income tax payments of the bailout firms. We compute the number of years a bailout recipient has to pay corporate income tax to generate as much tax revenue as it received in bailouts: 135.0 years for the Paycheck Protection Program and 267.9 years for the airline bailouts. We also document a dark side of the bailouts. For many firms, the bailouts appear to be a windfall. Numerous bailout recipients made risky financial decisions, so bailing them out might induce moral hazard. Moreover, lobbying expenditures positively predict bailout likelihood and amount.

The Dangers of Policy Experiments: Initial Beliefs under Adaptive Learning (E4, D8)

Patrick Pintus
,
CNRS-InSHS and Aix-Marseille University
Jacek Suda
,
Narodowy Bank-Polski and Warsaw School of Economics
Burak Turgut
,
Center for Social and Economic Research

Abstract

The paper studies the implication of initial beliefs and associated confidence on the system's dynamics under adaptive learning. We first illustrate how prior beliefs determine learning dynamics and the evolution of endogenous variables in a small DSGE model with credit-constrained agents, in which rational expectations are replaced by constant-gain adaptive learning. We then examine how discretionary experimenting with new macroeconomic policies is affected by expectations that agents have in relation to these policies. More specifically, we show that a newly introduced macro-prudential policy that aims at making leverage counter-cyclical can lead to substantial increase in fluctuations under learning, when the economy is hit by financial shocks, if beliefs reflect imperfect information about the policy experiment. This is in the stark contrast to the effects of such policy under rational expectations.

The Default Effect of Mandating Financial Aid Planning on Student Outcomes (I2, H4)

Elijah Neilson
,
Southern Utah University
Salman Khan
,
Harvard University

Abstract

We study the default effects of mandating financial aid planning for high school students on FAFSA completion, high school graduation, and college enrollment rates. The current literature has shown the importance of completing the FAFSA on student outcomes. In the literature, several interventions have been developed and studied to increase FAFSA completion from partnering with tax experts to providing students with personalized assistance to launching texting campaigns that nudged students to complete the FAFSA. In this paper, we study a new and innovative state-wide intervention that mandated financial aid planning as a requirement for high school graduation in Louisiana. We use the event study and synthetic control methods to understand the causal effects of this policy on several student outcomes. Overall, we find positive effects of this policy on student outcomes and discuss several policy implications in light of national calls to reform the FAFSA application.

The Dynamics of Population Ageing and FDI Inflows: A Multi-Country Study (F4)

Rajarshi Mitra
,
Tokyo International University
Md Thasinul Abedin
,
University of Chittagong-Bangladesh
Kanon Kumar Sen
,
Bangladesh University of Professionals

Abstract

The OECD member countries have been experiencing a significant decline in population in recent times. This is a pressing policy concern for the national governments of the OECD countries because of continuously rising public social expenditure, and steady declines in per-capita GDP growth, national saving and investment rates, national labor force and tax revenues. Economic theory posits that, due to population ageing, the supply of capital will decrease. Capital will flow out of the home country to destinations that offer relatively higher rates of return on investments; thus, population ageing is expected to reduce foreign capital inflows in OECD countries.

Despite strong theoretical underpinnings, there is hardly any country-case analysis on the time-series effects of population ageing on FDI inflows in OCED countries. We apply Pesaran et. al.`s (2001) bounds testing approach to cointegration analysis, and model the short-run and long-run effects of an increase in population above 65 years of age (% of total population) on the net FDI inflows (% of GDP) for each of the 20 OECD member countries in our study. The long-run effects are significantly negative for Australia, Austria, Costa Rica, Denmark, Finland, Spain and Sweden; significantly positive for Colombia, Germany, Greece, Italy, Japan, Norway and Portugal, and insignificant for Belgium, Chile, France, Mexico, the UK and the USA.

We, therefore, hypothesize that the immediate (short-run) effect of population ageing on net FDI inflows (% of GDP) could be insignificant. As the government introduces socio-economic reforms to counteract the negative effects of a declining population, in the long-run, net FDI inflows (% of GDP) could increase in countries that are faced with an ageing population. Our results have important public policy implications which are discussed.

The Dynamics of Storage Costs (G1)

Lei Zhao
,
ESCP Business School
Andrei Stancu
,
University of East Anglia
Lazaros Symeonidis
,
University of Essex
Chardin Wese Simen
,
University of Liverpool

Abstract

We document that the monthly storage cost of oil averages 0.50% of the spot price and varies over time. We decompose the basis, defined as the ratio of the spread between the futures and spot prices over the spot price, into the storage cost (scc) and the adjusted convenience yield (acyc) channels. The scc dominates the mean of the basis and accounts for nearly half of its variations. We show that the scc predicts future inventory growth and is the main conduit through which the predictive power of the basis for oil spot returns arises.

The Economics of Medical Procedure Innovation (I1, K2)

Bingxiao Wu
,
Rutgers University
David Dranove
,
Northwestern University
Craig Garthwaite
,
Northwestern University
Christopher Heard
,
Northwestern University

Abstract

This paper explores the economic incentives of medical procedure innovation. Using a novel, proprietary dataset on billing code applications of emerging medical procedures, we highlight two mechanisms that could hinder innovation. First, the administrative hurdle of securing permanent, reimbursable billing codes substantially delays innovation diffusion. We find that Medicare utilization of innovative procedures increases nine-fold after the billing codes are promoted to permanent (reimbursable) from provisional (non-reimbursable). However, only 29 percent of the provisional codes are promoted within the five-year probation period. Second, medical procedures lack intellectual property rights, especially those involving no patented devices. When appropriability is limited, specialty medical societies lead the applications of billing codes. Our work indicates that the ad hoc process that oversees procedure innovations creates uncertainty over both the development process and the allocation and enforceability of property rights; this stands in stark contrast to the more deliberate regulatory oversight for pharmaceutical innovations.

The Economy after the Fall: Less Intangible, Less Innovative (E2, O3)

Maren Froemel
,
Bank of England
Francesca Vinci
,
European Central Bank

Abstract

The rise of intangible investment across advanced countries is a well documented fact. This paper contributes empirical evidence to the recent theoretical literature evaluating the role of
intangible investment on firm behaviour, over the long run and after negative shocks.
We pose two research questions:
1. Does intangible intensity matter for firm growth?
2. Was the rise of intangible intensity accelerated or slowed down by the Great Recession?
We document a positive link between investment in R&D as well as firm specific intangibles and
firm growth, for both innovative and non innovative firms in the United States. Furthermore, we find that the Great Recession led to a deceleration of the rise of intangible intensity, driven by
a slowdown in innovation intensity. This paper thus contributes to the literature by providing
evidence reinforcing the theoretical notion that intangibles matter for long run growth, and by
offering new insights on the medium to long run scarring effects of recessions.

The Effect of Awarding Disability Benefits on Opioid Consumption (I1, I0)

Minglu Sun
,
University of South Florida
Andrei Barbos
,
University of South Florida

Abstract

Strong empirical evidence points towards a significantly higher prevalence of opioid consumption among people receiving disability benefits (DB) than in the general population of the United States. However, no previous research established a causal relationship between the decision to award DB to applicants and their subsequent opioid use. We aim to contribute towards filling this gap. There are channels through which awarding DB may both increase and depress opioid consumption, and thus, ex-ante, the sign of a potential causal relationship is ambiguous. To correct for the treatment endogeneity, since an individual’s age at the time of the decision on an application impacts discontinuously at certain age cutoffs the award decision, we employ a fuzzy Regression Discontinuity model with three age cutoffs used for identification. We find that awarding DB increases the likelihood of using opioids by about 27-30 percentage points. This suggests that the positive association between DB receipt and opioid consumption is likely to be causal.

The Effect of Child Allowances on Women Labor Supply: Evidence from Israel (H5, J2)

Yuval Mazar
,
Bank of Israel
Yaniv Reingewertz
,
University of Haifa

Abstract

This study estimates the effect of the sharp reduction in Israel’s child allowances in the early 2000s on women labor supply. The study uses the difference-in-differences method to estimate changes in the labor supply of Israeli women with more children (four or five) compared to changes in the labor supply of women with fewer children (two or three). The results show an increase of approximately 3.1 percentage points in the labor supply of women with four or five children, relative to that of women with two or three children. These numbers translate to an income elasticity of labor supply in the range of -0.50 to -0.81. Finally, we document the heterogeneity of these effects and provide several tests of their validity.

The Effect of Cultural Differences on Cash Holdings of Multinational Businesses (G3, F3)

Fan Zhang
,
Macau University of Science and Technology
Jacky Yuk-Chow So
,
Macau University of Science and Technology

Abstract

This paper investigates the effect of cultural differences on corporate cash holdings by focusing on multinational businesses. The result shows that the degree of national cultural dispersion within a multinational firm is positively related to its cash holding level, after controlling for other firm- and country-level factors. This positive relation is explainable by precautionary motive and agency problem. Further, we use control theory to come up with a model to predict optimal cash level, finding that more cash holdings associated with cultural diverseness are above the optimal level and that cultural diversity slows down the adjustment speed to the optimal cash level. Besides, we show that financial flexibility and business diversification can mitigate high cash holdings related to the effect of cultural diversity. Overall, these results suggest that it is important for multinational management to account for cultural diversity in the context of global operations.

The Effect of Forward Guidance on Euro Area Economic Activity in a DSGE Model with Interest Rate Expectations (E4, E5)

Ansgar Rannenberg
,
National Bank of Belgium
Gregory de Walque
,
National Bank of Belgium
Thomas Lejeune
,
National Bank of Belgium

Abstract

We compare the empirical performance of a relatively standard Smets and Wouters (2007) type DSGE model estimated on Euro Area macroeconomic data and data on market-based interest rate expectations to an otherwise identical model with Preferences Over Safe Assets (POSA). We also compare the effect of ECB forward guidance in the two models. In the NOPOSA model, the forward guidance announcement of the ECB post 2013Q2 increased the level of GDP by 8.3% and by 0.4 p.p. by the end of 2019Q4, while with POSA the effect is only a fraction of those values. The data strongly prefers the POSA model in sample. Furthermore, interest rate expectations data strongly improves the out-of-sample forecasting performance of both models, but the POSA model outperforms the NOPOSA model.

The Effect of Immigration on the Living Arrangements of Elderly Natives (I1, J6)

Domininkas Mockus
,
University of Illinois Urbana-Champaign

Abstract

The elderly overwhelmingly desire to age in place (not live in a nursing home), and the workforce supporting aging in place has a relatively high share of low-skill immigrants. This paper examines the impact of low-skill immigration on elderly living arrangements using individual-level data from the 1980-2000 Censuses. Exploiting the tendency of new immigrants to migrate to existing settlements of immigrants from the same birthplace, I use a two-stage least squares (2SLS) strategy to identify the causal effect of immigration on the living arrangements of native elderly. A 1 percentage-point increase in low-skilled immigration increases the probability that an elderly native will age in place by 0.04 percentage points and increases the probability of supported aging in place (aging in place with assistance from someone other than a spouse) by 0.30 percentage points. Consistent with a migration-induced cost reduction in aging in place, a 1 percentage point increase in low-skilled immigration also reduces the wages of all low-skilled workers in private households by 1.03%. My results suggest that low-skilled immigration is an effective way to increase aging in place which may improve quality of life and lower total healthcare costs.

The Effect of Paid Maternity Leave on Fertility and Mother's Labor Force Participation (J1, H8)

Andra Hiriscau
,
Florida International University
Andra Hiriscau
,
Florida International University

Abstract

This study examines how paid maternity leave (ML) impacted fertility and mothers'
labor force participation in Romania. The ML gives mothers the right to paid leave
until the child turns one year old, and it offers 65% of monthly income before birth.
I examine the effects of this policy change using a regression discontinuity design and
census data. I show that mothers who are eligible for ML are 3 percentage points more
likely to have an additional child than those ineligible. The effect is persistent for
seven years after the policy was implemented. I find no significant results regarding the
mother's labor force participation. These results have important implications regarding
the shrinking working-age population and the ability to fund benefits programs.

The Effect of Pandemics on Labor Markets: Evidence from the 1918 Influenza Pandemic (N1, J2)

Haelim Park Anderson
,
Federal Deposit Insurance Corporation
Adam Copeland
,
Federal Reserve Bank of New York
Jin-Wook Chang
,
Federal Reserve Board

Abstract

Using a newly constructed dataset from U.S. public employment offices, we measure job-finding rates, job-filling rates, and labor market tightness and study the effect of the 1918 Influenza Pandemic on the labor market. Surprisingly, we find that the 1918 Influenza had little effect on labor supply. Labor market tightened sharply during the peak of the pandemic because labor demand from industries mobilized for war production reached its peak with labor supply constraints. In addition, the dispersion in labor shortages across sectors reached the highest point with the industries for war production facing the biggest labor shortages. A decline in labor market tightness after the pandemic was driven by a reduction in labor demand from war-related industries, which contracted by more than 40 percent following the end of WWI.

The Effect of the China Connect (F3, G0)

Chang Ma
,
Fudan University
John Rogers
,
Fudan University
Sili Zhou
,
Fudan University

Abstract

We analyze the effects on Chinese firms of the “China Connect” equity market liberalization. Because China is a capital abundant country, unlike typical emerging markets in the literature, the benefits and costs of liberalization are logically different. Nonetheless, the liberalization brought benefits: lower funding costs, higher stock prices, and more investment for connected firms compared to unconnected firms, despite a common negative effect on all firms from capital outflows. These benefits come from a new channel: reducing domestic credit misallocation between private- and state-owned enterprises. We also document costs: connected firms became more sensitive to external shocks than unconnected firms.

The Effect of Tobacco Control on Infant Death and Prenatal Smoking (I1, I3)

Maxwell Chomas
,
Georgia State University
Michael Pesko
,
Georgia State University

Abstract

It is well-known that tobacco use adversely affects health. Surprisingly, few studies have examined the effect of tobacco control policies on infant mortality using two-way fixed effect (TWFE). In this paper, we propose to examine the effect of conventional tobacco control policies of cigarette taxes and smoking indoor air laws on first-year infant mortality. We use the restricted version of the National Vital Statistics System provided by the CDC to observe all births and infant death over 2000-2017 in the USA. This data not only gives us prenatal smoking data from a mother at each trimester of her pregnancy but also timing and cause of infant death, which we explore as separate analyses. Data from the American Nonsmoker’s Rights Foundation is used to construct a county level time series of the percentage of the county covered by smoking indoor air laws and cigarette taxes. We use this data to run TWFE and event studies which incorporate the possibly many tobacco control policies changes over our study period within a given county. Our results suggest modest reductions in the effect of these policies on overall infant mortality.

The Effect of Urban Migration on Educational Attainment: Evidence from Africa (I2, O1)

Raoul van Maarseveen
,
Uppsala University

Abstract

Is rural to urban migration a viable way to improve the opportunities available to children? And does growing up in a developing world city raise educational attainment? Using census data on 14 African countries combined with an age-at-move design, I show that childhood exposure to cities significantly raises primary school completion, school attendance, and literacy rates. The results are robust to the inclusion of household fixed effects, visible within all subgroups and particularly large for girls. Quantitatively, the results suggest that rural-to-urban migration explains 10% of the educational gains in Africa over the last four decades. The findings suggest that rural to urban migration improves the opportunities available to children in developing countries. Furthermore, the paper highlights a channel through which urbanization can stimulate economic development, even in the absence of structural transformation.

The Effects of Capital and Liquidity Requirements in a Macroeconomic Dynamic Model of Banking (G2)

Chao Huang
,
Beijing Jiaotong University
Fernando Moreira
,
University of Edinburgh
Thomas Archibald
,
University of Edinburgh

Abstract

This paper studies the quantitative impacts of Basel-style capital and liquidity requirements on bank lending, bank liquidity holdings and interbank trading activities. We develop a model in which banks are subject to business cycle variations, are financed by deposits and equity, and transform these liabilities into loans, liquid bonds and interbank lending. Banks are exposed to credit and liquidity risks, both made up by systematic and idiosyncratic components, where idiosyncratic liquidity risks can be coped with through the interbank market. We contribute to the literature by investigating the Basel-style capital and liquidity requirements from a macro-prudential perspective, i.e. evaluating their performance considering a system of banks, while the existing literature has merely focused on micro-prudential (single bank) aspects. We find that (1) banks’ capital is pro-cyclical while their liquidity is countercyclical; therefore, liquidity requirements are important in mitigating liquidity risks in economic expansions, (2) there are U-shaped relationships between social welfare and capital and liquidity requirements, indicating the existence of optimal capital and liquidity requirements, (3) introducing liquidity requirements reduces interbank rates and interbank trading volume, indicating that these liquidity requirements are effective in mitigating banks’ excessive reliance on the interbank market to manage liquidity shortages, as expected in Basel III, and (4) introducing liquidity requirements lowers social welfare but improves banks’ stability by reducing bank defaults and the volatility of bank lending during business cycles.

The Effects of Financial Heterogeneity on the Bank-Balance Sheet Channel of Monetary Policy in a Monetary Union (E5, F0)

Mai Hakamada
,
University of California-Santa Cruz

Abstract

In this study, I investigate the impact of heterogeneity in financial frictions across the Eurozone on bank balance sheet dynamics and the bank-balance sheet channel of monetary policy. Using country-level bank balance sheet data, I estimate financial frictions in a two-country, monetary union New Keynesian model with banks. The results indicate that financial frictions in core countries are significantly smaller than peripheral countries in the Eurozone. Given this financial heterogeneity, my model predicts that (1) financial shocks cause more severe recessions in peripheral countries than in core countries, and (2) the bank-lending channel has a weaker stimulus effect in peripheral countries. In light of financial heterogeneities, these research findings have important policy implications for the single monetary authority in the Eurozone. By implementing simulations, I find that asset purchase policies, particularly region-specific asset purchases, can complement the bank-balance sheet channel's unequal outcomes inside a region.

The Effects of Fiscal Policy on Households during the COVID-19 Pandemic: Evidence from Emerging Economies (H3)

Giang Nghiem
,
Leibniz University Hannover
Dzung Bui
,
University of Marburg
Lena Dräger
,
Leibniz University Hannover
Bernd Hayo
,
University of Marburg

Abstract

In response to the economic crisis due to the COVID-19 pandemic, many governments provided financial assistance to households. Using representative consumer surveys conducted during the pandemic in 2020, we examine the effects of this fiscal policy instrument on households in two emerging economies, Vietnam and Thailand. Our paper contributes to the literature by studying the responses of consumer sentiment and durable spending to government financial support and their underlying transmission channels. We find that government support improves consumer sentiment and increases the likelihood of durable spending. Possible channels of these effects are more optimistic macroeconomic expectations, higher trust in the government’s ability to deal with the pandemic as well as less concern about the general impact of the crisis. We also find that financial support improves individuals' mental health and life satisfaction. Our results suggest that government financial support not only helps stimulate the economy but also enhances people's well-being more generally.

The Effects of Overconfidence on the Political and Financial Behavior of a Representative Sample (D9, G4)

Bernhard Kassner
,
University of Munich
Ciril Bosch-Rosa
,
Technical University-Berlin
Steffen Ahrens
,
Friedrich Schiller University Jena

Abstract

We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of eliciting overconfidence that is simple to understand, quick to implement, and captures respondents' excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one's judgment is correlated with lower portfolio diversification, larger stock price forecasting errors, more extreme political views, and a change in voting behavior. These results validate our method and show how overconfidence is a bias that permeates several aspects of peoples' life.

The Effects of the OPT Extension Rule on STEM Business Programs in the U.S. (I2, J6)

Sie Won Kim
,
Texas Tech University

Abstract

I investigate the effects of STEM Optional Practical Training (OPT) extension rule on STEM program offerings and student degree attainment. The extension rule enables international students with STEM degrees to apply for a 17-month extension of the OPT period to work in the United States. Compared to studies on student choices, little is known about department responses to the changes in immigration policies. I use U.S. universities’ major code level data from 2006-2018. This paper exploits a business major code designated as a STEM major in May 2012. I find that the OPT extension rule increases the probability of offering STEM-designated business programs by 2.58 percentage points (24.1%) at the bachelor's level and 4.19 percentage points (67.9%) at the master's level. In addition, the extension of the OPT period increases the number of degrees awarded to international students by 62% at the master’s level in STEM-designated majors.

The Employment and Earning Outcomes after the ABAWD Waiver Expired: Benefit Reduction or Enhanced Employment? (I3, J2)

Ting Zhang
,
University of Baltimore
Conrad Helms
,
University of Baltimore

Abstract

In January 2016, a longstanding waiver of a rule that required Able-Bodied Adults Without Dependents (ABAWD) SNAP recipients to work at least 80 hours per month or lose their benefits started to be lifted in some counties. This study examines the employment and earnings effects of this waiver expiration, relying on matched full longitudinal administrative records with sub-state-level data of 2015-2019 from a state’s Department of Human Services, the state’s Department of Labor, and robust econometric models. Extending beyond the literature and holding prior employment, demographic, socioeconomic and local labor market attributes constant, our multivariate fixed-effect linear probability models, fixed-effect logistic regression models, and fixed-effect panel data models find that (1) the waiver expiration is associated with a higher probability to be employed within 2 years, not within 3 months, after the quarter of receiving SNAP benefits; (2) the waiver expiration is associated with decreasingly lower earnings within two years after the quarter of receiving SNAP benefits; (3) a SNAP Employment & Training (E&T) program mandate is associate with only higher earnings among all ABAWDs but both higher employment propensity and higher earnings among ABAWDs after the work requirement waiver was lifted. This study reflects the importance of giving more time for ABAWDs to find a better-matched job after the waiver expires and illustrates the necessity to better utilize SNAP E&T programs after the waiver expires.

The Effects of Trade Liberalization on Marriage and Fertility Choices: Evidence from China (J1, F1)

Wei Luo
,
University of Hong Kong
Xianqiang Zou
,
Renmin University of China

Abstract

This paper comprehensively examines the influence of trade liberalization on women’s marriage and fertility in China using the accession to WTO as a natural experiment. Exploiting regional variation in the exposure to export tariff cuts, we first document that export tariff reduction improved female labor market conditions, especially their nonagricultural employment. We find that export tariff cut reduces women’s marriage rate and delays their first marriage. Moreover, it also reduces women’s number of children. These effects on marital and fertility behaviors are more prominent for high-skilled women relative to the low-skilled.

The Forecasts of Individual FOMC Members: New Evidence after Ten Years (E5, C0)

Jaime Marquez
,
Johns Hopkins University
Yanki Kalfa
,
University of California-San Diego

Abstract

A central tenet of Macroeconomics is that monetary policy is forward looking. But Romer (2010) uses the forecasts of the participants of the U.S. Federal Open Market Committee's (FOMC) and shows a remarkable heterogeneity in these participants' outlooks. What accounts for this forecast heterogeneity? And how can one reconcile the tension between the need for a single monetary and the heterogeneity of forecasts that are steering it? To study these two questions, we continue the line of work initiated by Romer (2010). We find that forecast revisions are large and remarkably heterogenous across participants. Specifically, the FOMC's forecast heterogeneity is systematically related to differences in participants' education, voting status, and regional affiliation, as Romer anticipated. These results should not be surprising: heterogeneity is a built-in feature of the functioning of the Federal Reserve System and the role of the FOMC is to reconcile the differences. The reconciliation of private and public interests, and the implied heterogeneity of courses of action, involves a conversation in which the Chair gets the benefit of the doubt.

The Geography of Intergenerational Mobility in Latin America and the Caribbean (J6, I2)

Ercio Andres Munoz
,
City University of New York-Graduate Center

Abstract

In this paper, I estimate intergenerational mobility (IGM) in education using cross-sectional data from 91 censuses that span 24 countries in Latin America and the Caribbean (LAC) over half a century. I measure upward mobility as the likelihood of obtaining at least a primary education for individuals whose parents did not finish primary school, whereas downward mobility as the likelihood of failing to complete primary education for individuals whose parents completed at least primary school. In addition, I explore the geography of educational IGM using nearly 400 "provinces" (coarse administrative units similar to states in the U.S.) and more than 6,000 "districts" (fine administrative units similar to counties in the U.S.). I document wide cross-country and within-country heterogeneity. In LAC, the distance between the most and least upwardly mobile country is close to what has been recently documented in Africa, although the least mobile countries in Africa are less mobile than the least mobile in LAC. I document a declining trend in the mobility gap between urban and rural populations, but I do not find important differences by gender. Within countries, the level of mobility is highly correlated to the share of primary completion of the previous generation, which suggests a high level of inertia. In addition, upward (downward) mobility is negatively (positively) correlated to distance to the capital and the share of employment in agriculture, but positively (negatively) correlated to the share of employment in industry.

The Global Transmission of U.S. Monetary Policy (E4, F4)

Riccardo Degasperi
,
University of Warwick
Seokki Simon Hong
,
University of Warwick
Giovanni Ricco
,
University of Warwick

Abstract

We quantify global US monetary policy spillovers by employing a high-frequency identification and big data techniques, in conjunction with a large harmonised dataset covering 30 economies. We report three novel stylised facts. First, a US monetary policy tightening has large contractionary effects onto both advanced and emerging economies. Second, flexible exchange rates cannot fully insulate domestic economies, due to movements in risk premia that limit central banks' ability to control the yield curve. Third, financial channels dominate over demand and exchange rate channels in the transmission to real variables, while the transmission via oil and commodity prices determines nominal spillovers.

The Heterogeneous Effects of Forward Guidance Under Imperfect Central Bank Credibility Across the U.S., U.K., Japan, and Germany (E5, E6)

Stephen Cole
,
Marquette University
Enrique Martinez-Garcia
,
Federal Reserve Bank of Dallas

Abstract

This paper studies the effects of forward guidance with imperfect central bank credibility across the economies of the U.S., U.K., Japan, and Germany. We estimate a standard New Keynesian DSGE model that uniquely measures credibility and forward guidance statements by exploiting expectations data from the Consensus Forecasts database. The results show heterogeneous effects of forward guidance across economies due to varying degrees of credibility of the monetary authority. Specifically, our measure of central bank credibility in the U.S., U.K., and Germany are all high while it is relatively low in Japan. Consequently, a less credible monetary authority leads to muted effects of forward guidance on the economy. In addition, we show that economies have a greater prospect of undershooting their inflation objective when the public perceives forward guidance statements as not fully credible. This result can lead to a de-anchoring of inflation expectations. Therefore, central bank credibility in terms of forward guidance commitments is an important component for the objectives of policymakers, and especially for economies entrenched in low inflation and low inflation expectations.

The Impact of A Financial Literacy Program and the Spillover Effects: Evidence from a Clustered Randomized Experiment in Rural Uganda (D1, L2)

Jana Hamdan
,
DIW Berlin and Humboldt University-Berlin
Tim Kaiser
,
University of Koblenz-Landau
Lukas Menkhoff
,
DIW Berlin and Humboldt University-Berlin
Yuanwei Xu
,
Leibniz University-Hannover and University of Muenster

Abstract

We study the impact of a five-hour financial literacy program and the spillover effects on small business owners in rural Uganda using a two-stage randomized experiment. We first randomize the program at the village level, and then within villages we randomize the treatment intensity. One year after the program, the small business owners in the treated villages have lower loan taking and more punctual loan repayment. Those targeted in the treated villages have higher usage of mobile money, larger business profits and investments, and higher savings. Moreover, we find evidence of positive effects on the spillover individuals regarding the use of mobile money and borrowing behaviors, and the spillover effect on mobile money use is stronger when the village had higher treatment intensity. However, the spillover individuals experience a negative impact regarding business performance by having smaller business investments as well as savings.

The Impact of Adverse Selection on Misallocation of Capital and Finance (G3, G2)

Ikuo Takei
,
Asia School of Business in collaboration with MIT Sloan

Abstract

This paper estimates a heterogeneous firm model on dynamic adverse selection in corporate bond markets. The firm chooses between corporate bonds, priced on the accumulation of borrower's history of financials and default, and bank loans with costly monitoring and screening technology. Cross-subsidization caused by asymmetric information in corporate bond markets leads to misallocation of capital and finance. I find precise information associated with firm's productivity increases consumption by 1.4% along with an improvement of the allocative efficiency. In the counterfactual policy analysis, the taxation of debt forgiveness under Chapter 11 reorganization generates substantial rise in consumer welfare by reducing low productivity firms' incentive to overissue corporate bonds.

The Impact of Income and Socioeconomic Characteristics on Education: A Gender Differences Analysis (I2, O1)

Humaira kamal Pasha
,
University Clermont Auvergne

Abstract

The prime objective of this study is to determine education attainment and current enrollment with per capita income and socio-economic characteristics of the households in the framework of gender differences by using Pakistani survey data from 2005 to 2016 with ordered logit and logit models respectively. It also deals with potential endogeneity between education and income per capita of the household by using Two Stage Residual Inclusion (2SRI) approach. Other objective of this study is to examine the impact of educational inequalities in extended models; in addition, it develops alternative strategy to highlight the effect of gender differences in education for economic growth of the household. Finally, it decomposes the gender effect to demonstrate the factors behind unequal treatment with children in a household. The findings provide statistically significant effect of household’s income on education attainment and current enrollment even after controlling for potential endogeneity. However, findings by gender reveal that the educational transition is higher from primary to secondary education attainment, and, personal attributes and household infrastructure are favorable for girls. In contrast, income per capita, educated members, digital access and provincial heterogeneity significantly contribute in boys’ current enrollment. Meanwhile, as compared to standard deviation, Gini coefficient of schooling significantly reduces education among girls. The Oaxaca decomposition demonstrates explained gender disparity in education attainment and current enrollment by 61 and 41 percent respectively; however, most of the variation remains unexplained. Findings from alternative specification provides significant decrease in income per capita with gender gap in education and its impact is comparatively lower among boys. The study recommends government interventions to reduce gender gap by investing in females’ human capital to uplift their socio-economic position in a society.

The Impact of Medicaid Expansion on Those Lacking Housing Basics, 2010-19 (I1)

Chengcheng Zhang
,
Claremont Graduate University

Abstract

Virtually no study exists that discusses the relationship between housing quality, as measured by having certain basic necessities, and the likelihood of having health insurance coverage. Housing quality plays a crucial role in that it can be harmful or beneficial to our health in significant ways. Individuals with housing issues are typically identified as having more healthcare needs such as infectious diseases. By using available data from the American Community Survey, 2010-2019, we expose how those individuals lacking housing basics gained health insurance coverage after the ACA was implemented. Comparisons in health insurance coverage rates are conducted before (2010-2013) with after (2015-2019) between individuals living in states that participated in the ACA Medicaid expansions and those living in non-participating states. We use a difference-in-differences approach to estimate pre-post ACA insurance coverage between Medicaid expansion and non-expansion states, and estimate if such discrepancies vary across the following, according to if individuals live in homes that contain all basic necessities and those lacking at least one. Adjusted uninsured rates decreased 5.19 percentage points more in Medicaid expansion states than in non-expansion states among those lacking at least one basic necessity. In addition, adjusted Medicaid coverage increased 9.94 percentage points more in expansion states than in non-expansion states among those lacking at least one basic necessity. By comparison, there is a 1.90 percentage point greater adjusted increase in employer-sponsored coverage in non-expansion states than expansion states. We also find that insurance coverage rates increased for both groups after the ACA implementation in both expansion and non-expansion states. Those living in homes lacking at least one basic necessity displayed the highest improvements in insurance coverage. However, disparities in coverage continue to persist between individuals whose housing lacks at least one basic necessity and those with complete housing.

The Impact of Parental Involvement in Abortion Laws on Adolescent Educational Attainment and Labor Force Participation (I0)

Cuicui Song
,
Tulane University

Abstract

Most states require parental involvement in a minor’s decision to obtain an abortion, that is, minors need to present evidence that one or both parents have been notified of or consented to the procedure before allowing an abortion to go forward. The years in which a parental involvement in abortion law is enforced vary by state. Several studies have examined the impact of parental involvement laws on abortion use and teen births, but the effect of this policy on long-term indicators such as educational attainment and employment status is not well studied. Using American Community Survey (ACS) data and Natality data, this study investigates the impact of parental Involvement laws on adolescent educational attainment and labor force participation in a difference-in-differences framework. The treatment group is comprised of adolescents who were exposed to the policy while the control group consists of adolescents who were not exposed to the policy. The results suggest that parental involvement laws on abortion reduce the rate of both high school and college completion. Also, the parental involvement laws have the negative effect on labor force participation.

The Impact of Payday Lending on Crimes (G5)

Chen Shen
,
University of North Carolina-Charlotte

Abstract

Police departments located in states allowing payday lending report 14.34% more property crimes than the police departments located in states not allowing payday lending. I also find that the police departments located in counties bordering with states allowing payday lending report more property crimes. Those results are driven by the financial pressure induced by payday loans. Furthermore, the impact of payday lending concentrates in areas with a higher proportion of the minority population.

The impact of return migration on school-work tradeoff and labor outcomes of adolescents (J1, O1)

Avinandan Chakraborty
,
University of New Mexico

Abstract

Return migration is an intrinsic part of the cycle of international migration and development. In this study, I examine the causal effect of return migration on the school-work tradeoff and selection into employment types of children aged 12-19 years in Mexican households. I use the Mexican census of 2010 and various other sources to construct a unique dataset. I employ the control function approach and use U.S. state-level immigration enforcement acting as push factors as an instrument to address the endogeneity of return migration. My results suggest an increase in the probability of school attendance, a decrease in labor market participation, and a decrease in the probability of working and going to school simultaneously for children of households with return migrants, relative to non-migrant households. Moreover, I find a decrease in the probability of employment in wage/salaried work, and an increase in self-employment among children in return migrant households. I speculate that these improvements are driven by the migrants' experience, accumulation of human and financial capital in the United States, as well as better labor market opportunities when they return. This paper suggests return migration from a developed to a developing country as a mechanism through which migrant flows may benefit origin developing countries worldwide. Policies aimed at assisting the reintegration of return migrants in local markets may substantially improve the quality of education and can act as a channel to reduce child labor.

The Impact of the Largest Cash Transfer Program for Refugees in the World on Child Labor and Education (O1, I2)

Aysun Hızıroğlu Aygün
,
Istanbul Technical University
Murat Güray Kırdar
,
Boğaziçi University
Murat Koyuncu
,
Boğaziçi University
Quentin Stoeffler
,
Mohammed VI Polytechnic University

Abstract

This paper investigates whether unconditional cash transfers can keep refugee children in school and out of work. We raise this question in the unique context of Turkey, where the largest refugee population is hosted (including 3.6 million Syrians) and is supported by the largest humanitarian cash transfer in the world, the Emergency Social Safety Net program. We exploit a program eligibility criterion to identify the causal impacts of the ESSN program through a Regression Discontinuity Design. Specifically, having a household dependency ratio just above the 1.5 eligibility cut-off increases the likelihood to receive transfers by 38 percentage points, which allows us to use a fuzzy-RDD approach to identify the effect of being a beneficiary of the program. The results show a large effect of the program on child labor and school enrollment among both male and female refugee children. Being a beneficiary household reduces the fraction of children working from 14.0 to 1.6 percent (by 88 percent) and the fraction of children aged 6–17 not in school from 36.2 to 13.7 percent (by 62 percent). Unpacking the mechanisms at play shows that ESSN transfers become a significant part of households’ income, substantially eliminate extreme poverty, and reduce their need to resort to harmful coping strategies. Investigating the reasons for children not attending school, we find that beneficiary households become more likely to send children to school because the cash transfers address both the opportunity cost and direct cost of schooling—although the former effect is more important. We provide a careful investigation of the RDD assumptions as well as several robustness checks of the results. In addition, we use a second dataset to provide further evidence of the robustness of our results. The overall findings have important implications for the design of policies aimed at supporting refugee children at scale.

The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve (E3, C1)

Guido Ascari
,
University of Oxford and Pavia
Luca Fosso
,
University of Pavia and Norges Bank

Abstract

Since 2000 U.S. inflation has remained both below target and silent to domestic slack and monetary interventions. A trend-cycle VAR decomposition explores the role of globalisation in explaining the puzzling behaviour of inflation. The trend analysis shows that, starting from 90s, despite very well-anchored expectations, slow-moving imported "cost-push" factors induced deflationary pressure keeping trend inflation below target. The cycle block provides evidence in favour of the flattening of Phillips curve, mainly attributable to a weaker wage pass-through. The business cycle behaviour of inflation is determined by a shock originating abroad, which indeed generates the main bulk of volatility in the international prices of intermediate goods and is poorly connected to the domestic slack.

The Labor Market Return to Reversing High School Dropout (I2, J2)

Rebecca Brough
,
University of Notre Dame
David C. Phillips
,
University of Notre Dame
Patrick Turner
,
University of Notre Dame

Abstract

This paper estimates the effect of graduating from high school for adults who dropped out of traditional high school. The Excel Center operates schools that help adults acquire a standard high school diploma rather than a GED. Compared to trends for people who apply but do not enroll, earnings of graduates increase by 39% over 5 years. We address selection into graduation by conditioning on 5 years of pre-application earnings trends, comparing to enrolled students who exit due to positive shocks, and using variation in graduation from assignment to remedial coursework. Earnings gains occur alongside switches away from hospitality and temporary jobs toward the health sector and greater credentials, which both suggest that skill accumulation is an important mechanism.

The Largest Sin Taxes Have Smaller than Average Pass-Through (H2, I1)

Bibek Adhikari
,
Illinois State University

Abstract

I provide one of the first evidence of the impact of the introduction of a 100 percent tax on tobacco products by five Gulf countries from 2017 to 2019. I use disaggregated monthly data on prices of up to 70 categories of household goods and services. I compare the change in the price of the tobacco products in treated countries relative to comparison countries as well as changes in the price of other products in treated countries using difference-in-differences event study research design. I find that more than 60 percent of the tax is passed through to the final consumers. However, this estimate is smaller than estimates documented in the literature that are calculated using smaller tax increases, suggesting a trade-off between the size of the tax and the pass-through to final consumers.

The Life-Cycle of Migrants and Natives in the Danish Experience (E2, J3)

Giacomo De Giorgi
,
University of Geneva
Mauricio Prado
,
Copenhagen Business School
Battista Severgnini
,
Copenhagen Business School

Abstract

The aim of this paper is to analyze different outcomes such as occupation, income, health and education over the life-cycle and across generations of migrants from different origin countries and natives.
Understanding the life-cycle profiles of migrants and natives represents a crucial piece of information for policy makers. However, it is a challenging task since it is difficult to obtain a complete overview of their characteristics and economic choices. The Danish administrative data offers an exceptional opportunity for studying individuals’ life-cycle trajectories for several reasons. First, it is possible to combine the high-quality administrative register datasets collected by Statistics Denmark (which has full coverage of the entire population living in Denmark during the period 1980-2013) and to match the employees to their correspondent firms’ characteristics. Second, the completeness of the information is guaranteed by the fact that Denmark does not have a significant informal sector. Third, tracking every person in the Danish economy and administration over time gives the possibility to study the life-cycle profiles not only for the first generation of migrants but also for subsequent generations.
Inspired by the work of Chetty et al. (QJE, 2014) and Abramitzky et al. (AER: Insights, 2020) on the US, we study the mobility across generations and analyze whether Denmark is a land of opportunity for immigrants. Contrary to the American evidence, we find that in terms of life-cycles second and third generation immigrants do converge towards the Danish natives, but generally, migrants’ penalty is large and persistent over time. The only exception is represented by second- generation migrants from high-income countries, who already do substantially better than Danes in prime age.

The Long-term Impact of Early Migration Barriers on Firm Productivity: Evidence from China (J0, O0)

Zhangfeng Jin
,
Zhejiang University
Shiyuan Pan
,
Zhejiang University

Abstract

Migration barriers were commonly considered as important sources of lower productivity, especially in developing countries. This study explores the long-term impact of migration barriers on productivity through a distinctive feature of internal migration policies in China. Using an instrumental variable (IV) approach, we show that a one standard deviation increase in the strength of early migration barriers improves average firm productivity by 28% after more than two decades. The impact is more pronounced for state-owned enterprises but becomes insignificant for foreign-owned firms. A causal mediation analysis in IV settings shows that the positive productivity responses are entirely driven by the adoption of incentive pay. These findings suggest that such migration barriers enhance long-term efficiency when the widespread adoption of management technology is absent.

The Macroeconomics of TechFin (G2, E3)

Dan Su
,
University of Minnesota

Abstract

In the past few years, many large technology companies have started lending in the capital markets, i.e., ``TechFin''. How should we modify the existing macro-finance theories to accommodate the rise of this new financial intermediary? This paper introduces both a banking sector and a TechFin sector into a continuous-time general equilibrium model with heterogeneous entrepreneurs and incomplete markets. These two financial sectors are identical except for the types of borrowing constraints faced by entrepreneurs. Entrepreneurs borrowing from banks are subject to the standard collateral-based borrowing constraints. In contrast, technology advantages allow the big tech companies to resolve agency costs and perform cash flow-based lending. I use a deep learning neural network approach to obtain global solutions, and the main conclusions are threefold. First, the classical financial accelerator mechanism will not be weakened by BigTech lending. Second, this new TechFin credit system also acts as a propagation mechanism of (micro) uncertainty shocks. Third, the rise of TechFin, combined with countercyclical (micro) uncertainty, will lead to smaller aggregate productivity losses in steady-state and less volatile business cycles.

The Material Basis for Cooperation: How Scarcity Reduces Trusting Behavior (O1, C9)

Gustav Agneman
,
Lund University
Paolo Falco
,
University of Copenhagen
Exaud Joel
,
University of Dar es Salaam
Onesmo Selejio
,
University of Dar es Salaam

Abstract

Trusting behavior is a cornerstone of cooperation and, hence, economic performance, not least in poor communities where economic transactions often rely on informal agreements. But trusting is potentially costly since the counterpart may decide to defect and might thus be governed by material considerations. In this study, we investigate whether food scarcity influences the level of trusting behavior in rural Tanzania by leveraging quasi-experimental variation in food supply induced by the harvest. Through a lab-in-the-field experiment, we document that farmers display lower levels of trusting behavior during the lean season and that the difference is explained by variation in food scarcity.

The Origins of Tax Havens: A Quantitative Approach (H2, N4)

Sebastien Laffitte
,
Paris-Saclay Normal School

Abstract

How and why does a country become a tax haven? In my paper, I develop a theoretical and empirical arguments to explain the onset of tax havens. Using specialized sources written by tax experts, I develop a new dataset that traces back the offshore legal history of tax havens until the mid-19th century. For each country recognized as a tax haven, I collect the year and purpose of each legal reform that aims at making it a tax haven, or aims at reinforcing it. I first provide new descriptive evidence about the emergence of tax havens in the 20th century. I rationalize these trends into a theoretical framework where the rise of tax havens is seen as the result of the emergence of a demand for tax havens operations. In particular, the introduction of modern taxes fuelled the demand for tax havens’ operations. My empirical analysis confirms the role of demand and explores the determinants that, associated with increasing demand, participated to the emergence of the offshore world.

The Political Origins of Missing Women (J1, N3)

Pramod Kumar Sur
,
Asian Growth Research Institute and Osaka University

Abstract

This paper studies the political origins of missing women in India. I present evidence that a short-term policy implemented by the government in the past can induce significant changes in the sex ratios and initiate long-term persistent effects. Using census datasets and vital statistics, I examine the forced sterilization program implemented in India during emergency rule in the 1970s. Exploiting the timing of the emergency rule and a difference-in-difference estimation approach, I document that the policy led to an increase in the ratio of boys to girls. I demonstrate a plausible mechanism suggesting that the forced sterilization policy led to a sharp rise in the death rate of infants less than 7 days.

The Political Scar of Epidemics (H0, P1)

Orkun Saka
,
University of Sussex and London School of Economics and Political Science
Barry Eichengreen
,
University of California-Berkeley
Cevat Giray Aksoy
,
European Bank for Reconstruction and Development

Abstract

What kind of political legacy do national health crises leave behind? Drawing evidence from past epidemics, we find that epidemic exposure in an individual’s “impressionable years” (ages 18 to 25) has a persistent negative effect on confidence in political institutions and leaders, but not in other institutions or individuals. We find similar negative effects on confidence in public health systems however, suggesting that the loss of confidence in political institutions and leaders is associated with the effectiveness of governments’ healthcare-related policies during past epidemics. In line with this argument, our results are mostly driven by individuals who experienced epidemics under weak governments with less capacity to act against the epidemic, disappointing their citizens. We validate this reduced-form mechanism by showing that weak governments took longer to introduce policy interventions in response to the COVID-19 outbreak. Finally, we report some evidence suggesting that the epidemic-induced loss of political trust may discourage individuals from participating in electoral democracy in the long-term.

The Politics of the Paycheck Protection Program (H8, G3)

Deniz O. Igan
,
International Monetary Fund
Thomas Lambert
,
Erasmus University
Prachi Mishra
,
International Monetary Fund

Abstract

This paper examines the incidence of special interests in the allocation of loans through the Paycheck Protection Program (PPP). We find that lobbying at the firm and industry levels helps obtain larger PPP loans during the pandemic. We also observe that PPP lending is more responsive to lobbying in ideologically less conservative areas as well as in industries less affected by the pandemic. Our findings are consistent with the notion that lobbying firms have experience in navigating administrative and policy complexity and can thus benefit more from aid provided under the PPP.

The Real Effects of Financial Uncertainty Shocks: A Daily Identification Approach (E3, C3)

Piergiorgio Alessandri
,
Bank of Italy
Andrea Giovanni Gazzani
,
Bank of Italy
Alejandro Vicondoa
,
Pontifical Catholic University of Chile

Abstract

Isolating financial uncertainty shocks is difficult because financial markets rapidly price changes in several economic fundamentals. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as an instrument in a VAR. We show that this novel approach is theoretically appealing because it provides a full picture of the transmission mechanism: within-month interactions between equity and bond markets play a central role in propagating uncertainty to the real economy. Once these interactions are accounted for, uncertainty shocks depress output and inflation across specifications and identification schemes, reconciling the conflicting conclusions reached in previous studies.

The Risk Premium Channel and Long-Term Growth (E3, G1)

Dawid Zochowski
,
European Central Bank
Malte D. Schumacher
,
University of Zurich

Abstract

Financial leverage impacts stock market volatility and risk premium. This way it persistently
influences growth rates of output and consumption. To better understand this mechanism and the propagation of financial risks to the real economy we study a quantitative DSGE model linking a state-of-the-art general equilibrium asset pricing framework à la Kung and Schmid (2015) with models of financial sector with a constraint on leverage as in Gertler and Kiyotaki (2010). We solve the model with global nonlinear methods. We show that a constraint on leverage induces countercyclical risk premium in equity markets even if the constraint is not binding. Since the agents care about long-run fluctuations in consumption growth, the intermediaries hold less outside capital than they could. This way they avoid a financial distress in economic downturns. We show that a mere increase in the probability of a financial distress leads to an increase in risk premium and facilitates the deleveraging of corporates in a low growth environment.

The Same Yet Different: The Effects of Vividness in a Laboratory Asset Market (G4, C9)

Sudeep Ghosh
,
Hong Kong Polytechnic University
Tom Vinaimont
,
Nazarbayev University

Abstract

We provide a framework to interpret investor reactions to qualitatively augmented financial data. Information providers use vivid qualifiers to make base-rate information proximate, emotionally engaging and imagery-producing. Vivid treatment patterns influence investor behavior through biases triggered by the activation of attention and focus. In our laboratory asset market, we expose subjects to information derived from two sources: directional content from a system source and constructed content from a social feedback mechanism. Effects of treating the information with vivid attributes are measurable and strong. Individual responses to vivid information indicate more attention and engagement, resulting in more willingness to trade. Such responses transcend the market clearing mechanism to also affect market variables. System-generated high quality information content creates more focus and adjusts prices towards fundamental values. Low quality information content from a social source distracts participants by confirming their prior optimism bias, leading to larger price deviations from fundamental values. Further, when information from the social source is portrayed vividly, it moderates the interaction between information and sentiment resulting in trade flows from pessimists to optimists. Overall, treatments with more vivid displays tend to sustain prices above fundamental values.

The Social Costs of Patronage Ties: Lessons from the 2008 Sichuan Earthquake (H1, Q5)

Yiming Cao
,
Boston University

Abstract

This paper examines the societal consequences of patronage ties, the informal personal connections between individuals unequal in their power. I provide empirical evidence that these connections create social vulnerabilities that magnify the impact of negative shocks. Specifically, I study the aftermath of the devastating 2008 Sichuan earthquake, which offers an opportunity to bring to light vulnerabilities that remain invisible in most states of the world. Using an original dataset that covers 1,065 buildings in the quake-affected area, I find that buildings constructed when the county officials had connections to their superiors at the prefectural level (in terms of having the same hometown) are 13 percentage points (83 percent) more likely to collapse relative to the no-connection benchmark. I find suggestive evidence that the effects likely reflect a lack of building code enforcement due to shirking or rent-seeking by connected officials. Aggregated damage statistics at the county level suggest that one additional year of having a connected official is associated with an 8 percent increase in mortality and a 3 percent increase in direct economic loss from the earthquake. These findings add to the long-standing debate on whether patronage (and corruption more broadly) is socially detrimental by highlighting the fact that the costs of corruption may be latent and hard to observe in the absence of negative shocks.

The Socio-Economic Impact of Special Economic Zones: Evidence from Cambodia (O2, R2)

Mariya Brussevich
,
International Monetary Fund

Abstract

This study examines the socio-economic impact of special economic zones (SEZs) in Cambodia—a prominent place-based policy established in 2005. The paper employs a database on existing and future SEZs in Cambodia with matched household surveys at the district level and documents stylized facts on SEZs in a low-income country setting. To identify causal effects of the SEZ program, the paper (i) constructs an alternative control group including future SEZ program participants and districts adjacent to SEZ hosts; and (ii) employs a propensity score weighting technique. The study finds that entry of SEZs disproportionately benefits female workers and leads to a decline of income inequality at a district level. However, the findings also suggest that land values in SEZ districts tend to rise while wage levels remain largely unchanged relative to other districts. In addition, the paper tests for socio-economic spillovers to surrounding areas and for agglomeration effects associated with clusters of multiple SEZs.

The Trade Credit Clearinghouse: Liquidity and Coordination (G3, G2)

Jurica Zrnc
,
Croatian National Bank and University of Vienna
Milan Božić
,
Banja Luka Stock Exchange

Abstract

We study the economic effects of a clearinghouse that allows a large network of firms to reduce their trade credit exposures and thus potentially lower the risk stemming from interfirm financial linkages. The clearinghouse reduced the gross debt amount in the economy by a sizable 10% of GDP. Exploiting unique data on the debt network and the clearinghouse algorithm, we identify plausibly exogenous variation in clearing for a particular firm that comes from changes in debts far away in the network. We find that clearing reduces default rates, especially for financially distressed and cash poor firms. Consistent with reductions in firm risk, clearing increases investment, sales and bank lending. The effect of clearing also depends on the characteristics of the counterparty, such as bargaining power and liquidity. We argue that the clearinghouse is an exchange technology that alleviates the lack of appropriate financial contracts. Furthermore, we provide evidence that the clearinghouse solves a coordination failure arising in a complex network of debts.

The Transmission of Keynesian Supply Shocks (E3, E0)

Ambrogio Cesa-Bianchi
,
Bank of England
Andrea Ferrero
,
Oxford University

Abstract

Sectoral supply shocks can trigger shortages in aggregate demand when strong sectoral complementarities are at play. US data on sectoral output and prices offer support to this notion of ``Keynesian supply shocks'' and their underlying transmission mechanism. Demand shocks derived from standard identification schemes using aggregate data can be the result of sectoral supply shocks that spillover to other sectors via a Keynesian supply mechanism. This finding is not only a feature of the Covid episode but a regular feature of the data in general. Understanding the origins of business cycle fluctuations requires breaking the dichotomy between aggregate demand and supply disturbances.

The Visible Hand when Revenues Stop: Evidence from Loan and Stock Markets during Covid19 (G3, G2)

Diane Pierret
,
University of Luxembourg
Francois Koulischer
,
University of Luxembourg
Roberto Steri
,
University of Luxembourg

Abstract

We document that public interventions in the corporate sector during the Covid19 pandemic help firms access bank loans, cushion liquidity shortfalls, and boost their market valuations. We use firm-level data on Covid19-related news to trace firms’ liquidity shocks in several European countries, which differ in public spending for fiscal stimulus and debt guarantees to corporations. As market valuations rebound in spite of the deterioration of firms’ revenues, interventions drive a part of the disconnect between markets and the real economy. Remarkably, the financial sector internalizes part of the benefits of interventions targeting non-financial firms. To interpret these results, we lay out a moral hazard model of corporate borrowing and public interventions. The model suggests that interventions in the corporate sector are effective to mitigate incentive problems leading to credit market failures. Lenders benefit from loan guarantees as a compensation to finance firms with severe debt overhang problems.

The Wage–Employment Nexus: A Tale of Persistence (E3, J3)

Antonio M. Conti
,
Bank of Italy

Abstract

We use conditional forecasting analysis to document the feeble relation between wage growth and unemployment experienced by the euro area since the Global Financial Crisis, i.e. the so-called missing wage growth. We also show that this has reflected a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2008:Q2 (acyclical) to negative since then (countercyclical). We argue that the strong persistence of the recession and of the subsequent recovery can account for this change, rationalizing the relevance of the duration of the cyclical phase for macroeconomic correlations by means of a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent, firms adjust relatively more the extensive margin, leading to a countercyclical response of labour productivity, which attenuates the reaction of wages. We take the model to the data using a Bayesian VAR, where persistent demand shocks are identified exploiting the theoretical prediction, which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks(i) induce a lower reaction of wages to employment and(ii)have been a non-negligible driver of employment and wage dynamics in the aftermath of the Global Financial Crisis.

This Is “What’s in Your Wallet”...and Here’s How You Use It (E4, D1)

Tamas Briglevics
,
Magyar Nemzeti Bank
Scott Schuh
,
West Virginia University

Abstract

U.S. consumer wallets have many more means of payment so why is cash still used so often?
We develop a dynamic structural model blending cash inventory management and payment
instrument choice. For each expenditure, consumers endogenously choose cash, debit card,
or credit card with an option to withdraw cash beforehand. The model is estimated with
transaction-level data from a daily consumer payment diary and reveals that utility from
payment services far exceeds cash management costs. Card owners’ optimal cash holdings
are about $50 and determined jointly with cash payment shares. Eliminating cash would
reduce consumer welfare about the same as eliminating either debit or credit cards and
have implications for monetary policy and consumption financing.

Time of Day and High Stakes Cognitive Assessments (I2, I1)

Denni Tommasi
,
Monash University
Alessio Gaggero
,
University of Granada

Abstract

A variety of external conditions may affect individual performances in high stakes cognitive
assessments, with potentially lasting consequences on earnings and career. We provide the first
causal evidence that the time of the day is an important condition affecting the performance at the moment of an evaluation. Exploiting a setting in which cognitive assessments are quasi-randomly assigned at a different time-of-day, we find that peak performance occurs in the early afternoon. The estimated time-of-day effects follow specific patterns consistent with the circadian rhythm, which suggests that biological factors are important determinants of performances even in economically meaningful settings.

Time-Varying Exchange Rate Pass-Through into Terms of Trade (E3, F4)

Justas Dainauskas
,
London School of Economics and Political Science

Abstract

For the last few decades, the U.S. paid for nearly all of its imports and sold its exports to the rest of the world using the U.S. dollar. If the U.S. import and export prices were sticky in U.S. dollar terms, then exchange rate pass-through (ERPT) into the U.S. terms of trade (TOT) should be close to zero and stable over time. I test this hypothesis by estimating ERPT into TOT using a state-space model and find that it is overwhelmingly rejected. Specifically, I show that ERPT into TOT is time-varying and counter-cyclical, such that it decreases from 60% in 1990 to 15% in 2003, then rises back to 60% in 2008 during the peak of the financial crisis, and then gradually reverts to 10% in 2015. I show that the time variation of ERPT into TOT stems from the dynamics of prices for primary commodities, which over the last three decades amount to on average one-quarter and one-tenth of all U.S. imports and exports, respectively.

To Survive and Thrive in the Pandemic Season: The Impacts of Firm and Country Characteristics on Private Firms (G3, K2)

Yu Liu
,
University of Texas-Rio Grande Valley
Jian Xu
,
University of Texas-Rio Grande Valley
Zuobao Wei
,
University of Texas-El Paso

Abstract

We provide the first comprehensive evidence on the effects of pre-pandemic firm/country characteristics on the survival and growth of private firms around the world during the pandemic season. This study is also one of the first to examine a longer time period into the crisis when both countries and firms have enough time to react to the crisis. First, we find that firms with state or parental ownership, with high labor productivities are much more likely to survive and grow, while firms with foreign ownership, with finance obstacles are less likely to survive or grow. Firms in countries with a higher income, a lower GDP growth, a lower Covid density, and a less stringent policy are more likely to survive and grow. Second, our results indicate that many firm/country characteristics affect firm growth vastly different between peaceful and pandemic seasons. Third, we find that the relationship between firm characteristics and firm survival/growth is systematically affected by the policy stringency. Fourth, in terms of culture and country governance, we find that uncertainty avoidance and long-term orientation (individualism) are positively (negatively) related with firm survival/growth. However, measures of governance development, especially voice and freedom, are negatively related with firm survival/growth.

Togetherness in the Household (D1, J2)

Alexandros Theloudis
,
Tilburg University
Sam Cosaert
,
University of Antwerp
Bertrand Verheyden
,
LISER Luxembourg

Abstract

Spending time together with a spouse is a major gain from marriage. We extend the classical collective model of the household to allow for togetherness between spouses. Togetherness takes the form of joint leisure and joint care for children. Using revealed preferences conditions and Dutch data over years 2009-12, we find that households are willing to pay 1.2 euro per hour -10% of the average wage- to convert private leisure to joint, and 2.1 euro per hour to convert private childcare to joint. Our results suggest togetherness is an important component of household time use despite being overlooked in the economics literature.

Trade and Market Power in Product and Labor Markets (F1, F4)

Gaelan MacKenzie
,
Bank of Canada

Abstract

This paper studies the effects of endogenous firm-level market power in input and product markets on equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i) a markup of price over marginal cost that depends on product market shares and (ii) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to local labor market competitors compared to a setting with perfect competition in input and product markets. Opening product markets up to trade reallocates market shares in product and labor markets towards countries' large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms' markups than on their markdowns. Nevertheless, because of the increase in large firms' input market power, there is a redistribution of the gains from trade from wages to firm profits.

Trade Shocks and the Role of Stakeholder Preference in Corporate Social Responsibility (M2, G3)

Shantanu Banerjee
,
Lancaster University
Swarnodeep Homroy
,
University of Groningen
Aurelie Slechten
,
Lancaster University

Abstract

This paper investigates the role of stakeholder preference on corporate social responsibility (CSR). We find that Indian firms increase CSR expenses when trade restrictions (Antidumping) are initiated against competing Chinese exports from countries with a high stakeholder preference for CSR. However, when these shocks emanate from countries with a lower stakeholder preference, CSR expenses remain unchanged. Capital investments and R&D of Indian firms increase due to the same shocks, irrespective of their country of origin. Finally, CSR increases firm value only when the demand shocks originate from countries with a higher CSR preference. Collectively, our results provide empirical evidence of investment motives for CSR.

Transmission of Industry-Specific Shocks: The Role of Bank Specialization (G2, E3)

Rajkamal Iyer
,
Imperial College London
Sotirios Kokas
,
University of Essex
Alexander Michaelides
,
Imperial College London and CEPR
José-Luis Peydró
,
Imperial College London and CEPR

Abstract

Are idiosyncratic shocks to one industry transmitted to other industries through lending specialization of common financial intermediaries? We find that banks specializing in a sector increase their lending to that sector post a transitory negative shock. However, in the presence of funding constraints, banks cut their lending disproportionately to unrelated and non-affected sectors. Firms in unrelated sectors experiencing a reduction in credit compensate by raising funds externally, primarily in good times. However, when financing conditions are tight, these shocks translate into aggregate real effects for unrelated industries. Thus, industry-specific transitory shocks can be passed on to other unrelated industries through specialization of common lenders in bad times, thereby amplifying the initial shock.

Transnational Diffusion of Identity Politics (D7, F5)

Soeren Schwuchow
,
Brandenburg University of Technology

Abstract

We study a model of multi-dimensional politics in which voting decisions are not only affected by the voters' preferences regarding redistribution but also by their identity. Voters may thus trade material gains from redistribution for immaterial benefits from identity politics. Based on this widely accepted approach, we model a novel channel for the transnational diffusion of identity politics. According to our approach, changes in foreign identity politics can influence domestic voting decisions due to two mechanisms: First, by changing the domestic voters’ role models, specified by their identities and, second, by shifting the relative gains from specific identities for domestic voters. The first effect affects the domestic voters’ preferred levels of domestic identity politics. The second potentially alters the voters’ decisions on recategorization (i.e., changing their identities) and, hence, can change the future composition of the domestic electorate. Our model thus implies a positive effect from foreign on domestic identity politics via domestic voting decisions. Accordingly, identity politics can spread from one country to another, resulting in cascades of mutually reinforcing policies. Our model also reveals the surprising consequences of cultural constraints on recategorization under those conditions. With cultural constraints, a foreign shock can have permanent consequences for domestic identity politics, even if the shock completely disappears at its origin. Furthermore, smaller changes in the relative benefits of identities do not necessarily have any effect on the society’s composition until, taken together, the changes are large enough to overcome the rigidity of culture but then likely result in sudden large changes in the electorate. In addition, our model also illustrates the impact of formal identity groups, which may be formed even without influence on politics but could help to consolidate power. Groups can thus become powerful in the following, having far-reaching consequences for domestic identity politics.

Treating the Symptoms or the Cause: Symbolic and Substantive Talent Acquisition in Response to Data Breaches (M1, J2)

Sarah Bana
,
Stanford University
Erik Brynjolfsson
,
Stanford University
Wang Jin
,
Massachusetts Institute of Technology
Sebastian Steffen
,
Massachusetts Institute of Technology
Xiupeng Wang
,
Skidmore College

Abstract

Do firms react to data breaches by investing in cybersecurity talent or are they more likely to invest in talent that helps save their public image or tackle subsequent legal issues? We assemble a unique dataset to answer this question by combining information on data breach events with detailed firm-level hiring data from Burning Glass Technologies database. Using a difference-in-differences design, we find that firms indeed increase their hiring for cybersecurity workers. While this effect is statistically significant, the economic magnitude is relatively small at around 2 percentage points, consistent with firms' lack of incentives to improve their cybersecurity. Additional exploration of non-cybersecurity postings indicates that many firms also invest more in human capital targeting public relations and legal issues (i.e., the symptoms) rather than making substantive talent investments that target cybersecurity issues (i.e., the root cause). Further, we conduct a series of tests exploring the heterogeneity of firms' responses across industry, firms' listing status, as well as the level of public scrutiny of their data breach. We find suggestive evidence that higher public scrutiny, through media and online search attention, may incentivize firms to respond to data breaches in a substantive way, in particular for firms in service-providing industries and public firms. With an increase in the volume and severity of cyberattacks, our research provides an important insight into how media coverage and public attention, in addition to more data-conscientious customer behavior and increased privacy regulation, can provide better incentives for firms to make more substantive IT investments to safeguard their data.

U.S. Monetary Policy Surprise and Financial Institutions Behavior: Data Lessons from Banks and Insurers in 72 countries (E3, F3)

Audrey Soedjito
,
Brandeis University

Abstract

I document the impact of US monetary policy surprise on the leverage dynamics of banks and insurance companies in 72 countries through event study analysis on the change in their leverage ratio surrounding 156 scheduled FOMC announcements from 2000 to 2019. There are two facts that I present in this study: (1) Less than 20% of the magnitude of the jump in leverage ratio of banks and insurance companies within one day of FOMC announcement are attributed to FOMC announcement effect on interest rates and spot exchange rates movement that are anticipated based on past history and expectations. That is, the impact of US monetary policy to banks and insurers’ balance sheet is largely attributed to the surprise jump in leverage ratio following the unexpected outcome of US monetary policy, (2) this surprise jump in leverage ratio due to the unexpected outcome of US monetary policy indicates banks' and insurers' behavioral reactions due to deviation from their own optimal leverage target that may differ to regulatory requirement, and are unique to each bank and insurance companies. Further study is needed to show that this accumulated burden from adjusting to FOMC announcement imperfectly affects the optimal leverage of banks and insurance companies, and increases in interest rate differentials with the USA.

U.S. Treasury Auctions: A High Frequency Identification of Supply Shocks (E4, E6)

Maxime Phillot
,
University of Lausanne

Abstract

We present a novel identification strategy of U.S. Treasury supply shocks based on auction data. After providing a summary of the Treasury auction process and the Treasury futures market, we propose a conceptual framework to elicit expectations about debt supply based on futures data.

The working hypothesis formulates that changes in Treasury futures prices around Treasury announcements reflect shocks to the expected supply of debt. Assuming that, on announcement days, demand for public debt instruments is fixed and markets are fed with nothing else than the announcement, a no-arbitrage condition identifies the shift in supply from observed futures returns.

Because one may be worried that other components such as monetary policy affect futures prices, we regress futures returns on announcement days between 1998 and 2020 onto a market-based measure of monetary policy, and use the residuals therefrom as a clean measure of U.S. Treasury supply shocks.

We estimate the IRFs of financial variables to shocks to the amount of securities offered by the Treasury through local projections with instrumental variables. We argue that our shock series are valid instruments, because they likely explain a substantial share of the variance in the total amount of securities tendered by the Treasury, and are orthogonal to the innovations of the other variables in the system.

We show that Treasury supply shocks have sizable and significant effects on financial markets. A surprise increase in the net supply of Treasury securities is good news, as it drives stock prices up and leads to a decrease in volatility. Corporate bonds yields decrease, indicating an improvement in financing conditions. At the same time, the 10-year term premium increases, indicating an upward shift in inflation expectations, and the liquidity premia decrease.

Uncovering the Heterogeneous Effects of News Shocks to Underlying Inflation (E5, E3)

Evi Pappa
,
Carlos III University of Madrid and CEPR
Sebastian Rast
,
European University Institute
Alejandro Vicondoa
,
Pontifical Catholic University of Chile

Abstract

We identify in a SVAR shocks that best explain future movements in different measures of underlying inflation over a five-year horizon and label them as news augmented shocks to underlying inflation. Independently of the measure used, such shocks raise the nominal rate and inflation persistently, while they induce mild and short-lived increases in economic activity. The extracted inflation shocks have differential distributional effects. They increase significantly and persistently the consumption of mortgagors and home owners. Differently from the traditional monetary policy disturbances, news augmented shocks to underlying inflation induce a positive wealth effect for mortgagors and homeowners, driven by a reduction in the real mortgage payments and a persistent increase in real house prices that they induce.

Understanding Mechanisms Underlying Peer Effects Among Parents: Evidence From a Field Experiment on Parental Education Investment Decision (D9, I2)

Tianqi Gan
,
University of Maryland-College Park

Abstract

Peer effects are widely observed among students in the school setting. Parents whose children enrolled in the same school are also peers and there should be some peer effects among them. Understanding the mechanisms underlying these peer effects can help policymakers evaluate the rationality of parental education investments.

This paper uses a well-designed randomized control trial to disentangle the three channels of peer effects among parents: learning by observing, possession rate (or keeping up with the Joneses), and competition. I introduced a new service to parents whose children are from the same cohort and collected parents’ Willingness to Buy (WTB) of this service. Treated parents received additional information on other parents’ WTB or possession rate. In the experiment, I unhooked the link between purchase decision and possession by allocating the service to parents randomly and independently to their WTB. This design allows me to separate the keeping up with the Joneses effect from the observational learning effect. Moreover, I created different peer groups for parents by releasing the WTB or possession rate of different types of parents. Some peer groups are more competitive than others. By doing this, I can test if part of the peer effect is driven by competition among students. I also identified the optimal choices for parents by estimating how beneficial the service is to each parent. Comparing the peer effects on parents’ purchase decisions and their optimal choices, I found out the magnitude of irrational investments driven by the peer effects.

Understanding Persistent ZLB: Theory and Assessment (E3, E5)

Pablo Cuba-Borda
,
Federal Reserve Board
Sanjay R. Singh
,
University of California-Davis

Abstract

Concerns of prolonged near zero interest rates and below target inflation have become widespread in the advanced world. We build an analytical framework that incorporates two hypotheses of persistent ZLB episodes: expectations-driven liquidity traps and secular stagnation driven liquidity traps. We estimate the DSGE model with Japanese data from 1998:Q1 to 2012:Q4. Using Bayesian prediction pools, we find that a policymaker faces considerable real-time un- certainty in identifying the dominant narrative. We propose robust policies that eliminate expectations-driven traps and are expansionary under secular stagnation.

Universities and Regional Economic Growth: Evidence from New Campuses in China (I2, O3)

Dongyang Chen
,
Peking University
Wei Ha
,
Peking University
Xiaoyang Ye
,
Brown University

Abstract

Since the rise of the knowledge economy and as the global economic competition intensifies, countries around the world has increasingly placed high emphasis on the role of universities in driving economic growth. The US models of Silicon Valley and Route 128 have been touted as the dream model. But the expansion of higher education will not necessarily bring economic growth. In practice, the better endowed regions are more likely to attract more prestigious universities to set up sub-campuses which means traditional analyses end up overestimating the effects of universities on growth. This research utilizes the natural experiment of constructing the new campuses by universities in nearby towns to accommodate the rapid increase in number of enrolled students caused by the arguably exogenous expansion of higher education since 1999 in China to explore the causal effects of new universities on local economic growth.
A rather comprehensive collation of administrative data，satellite light data as well as online open access data allows us to capture the exact effect of the new campus. Using 19-year panel data at county level and employing the two-way fixed-effects model, event study, and synthetic control method, we find that the new university campuses stimulate the economic growth, and the positive effects concentrate on the secondary and tertiary industries. Moreover, the positive effects start to appear after a few years and strengthen over time. Heterogeneous treatment effects are also observed that new campuses in the central and western regions have larger impacts on local economic growth, and the existence of incumbent campuses in the same county attenuates the impact of new campuses. We will further analyze the impact of new campuses on regional innovation and productivity of firms based on patent database and industrial firm database. Besides, we also plan to analyze the spatial spillover effect of new campuses.

Using Stock Returns to Identify Government Spending Shocks: New Insights (E2, H5)

Ruchith Dissanayake
,
Queensland University of Technology

Abstract

The existing instruments of government spending using accumulated stock returns of military contractors generate vastly different consumption and investment impulse responses when compared to the narratively identified war news shocks as per Ramey (2011). We show that a reason for this difference is because of the persistence in the accumulated stock returns. Instead, a return spread between diversified portfolios of defense firms minus private consumption and investment good firms (DMP) renders persistence and generates responses akin to war news shocks. DMP return spread is a relevant instrument for post-1963 period and the spread Granger-causes shocks identified using standard VAR approach.

Vaccine Hunters – Do They Help or Hurt the Vaccination Campaign? (I1, C9)

Johanna Mollerstrom
,
George Mason University
Linda Thunstrom
,
University of Wyoming

Abstract

To end the pandemic and achieve herd immunity, it is crucial that a very high share of people chose to receive one of the available COVID-19 vaccines. However, many remain skeptical, and it is uncertain if the necessary share will be reached. At the same time there are many examples of how some people - billionaires and ordinary folks alike - go to extreme lengths to get the vaccine before they are actually eligible. We conduct an incentivized large scale experiment on a US general population sample and investigate if the fact that some try to get ahead in the line to the vaccine help or hurt the vaccination effort. Specifically, does it lead to the vaccine being perceived as more desirable, and therefore to a higher willingness to receive the vaccine, or does it simply decrease trust in the state's ability to handle the pandemic? In addition to this being a crucial topic for those interested in increasing the take-up of the vaccine, we also introduce a novel, incentivized measure of willingness to get vaccinated via a series of choices between monetary compensation and access to a vaccine appointment service.

Violence in Hometown and Refugee Children’s Expectations (I0, J0)

Semih Tumen
,
TED University and IZA
Cevat Giray Aksoy
,
European Bank for Reconstruction and Development and King's College London
Gaurav Khanna
,
University of California-San Diego

Abstract

We ask whether ongoing violence in refugee children’s hometowns in Syria affects their educational performance in Turkey. Combining a rich set of administrative records about Syrian student’s academic performance and school attendance in Turkey with granular information on the timing, location, and magnitude of violence in their hometowns in Syria, we provide robust evidence that an increase violence in hometown increases refugee students’ academic performance in Turkey and reduces their school absenteeism. Our identification strategy relies on the assumption that timing and magnitude of violence in a refugee student’s hometown in Syria is reasonably exogenous to their concurrent school performance in Turkey. We argue that increased violence in Syria alters refugee children’s expectations as they update downward their beliefs on probability of going back to Syria. As a result, they invest in their human capital more intensively, which can be interpreted as increased effort to integrate into host communities.

Was Implementation Left Behind? A National Analysis of State and Federal School Accountability (I2, H5)

Valentina Martinez Pabon
,
Tulane University

Abstract

No Child Left Behind (NCLB) and the state accountability systems implemented during the 1990s have included an increasingly intense series of interventions for low-performing schools. If the initial steps were insufficient, schools were supposed to be closed, taken over by other education organizations, or reconstituted. Using event study and difference-in-differences analyses, I find that state accountability and NCLB itself did not affect the frequency of closure and takeover of publicly funded schools in the country. Moreover, I find that NCLB generated an anticipatory but transitory increase in closures and led to a rise in closures among schools with small enrollments. Overall, my findings suggest that the infrequent and weak implementation of the most extreme sanctions on low-performing schools is partly behind the limited effects of accountability policies on student performance.

Wealth, Race, and Consumption Smoothing: Evidence from UI Recipients (E2, D1)

Fiona Greig
,
Author
George Eckerd
,
Author

Abstract

Using administrative data covering over 1 million individuals that experienced unemployment from 2008 through 2020, we document the connection between household balance sheets and consumption smoothing in the wake of job loss. Estimates of the marginal propensity to consume out of income shocks (MPC) are remarkably stable across the Great Recession, expansion, and pandemic periods. However, for a given income change, spending fell by more during the Great Recession, paralleling the trend for employed individuals, while spending was higher for unemployed individuals during the pandemic, reflecting generous unemployment insurance payments. Consistent with several prior studies, Black and Latinx individuals exhibited a higher MPC, lower liquidity buffers, and were less likely to be classified as investors. Finally, the slope between spending and income changes is found to be flatter—signaling a smaller MPC—for large income declines for a wide range of households, however, households lower liquid balances exhibited less MPC dampening in the left tail, suggesting deeper welfare costs. These results inform policymakers concerned with the distribution of consumption outcomes around unemployment events and the role of financial health in weathering labor market volatility.

Welfare Effects of International Trade in Waste (F6, Q5)

Prakrati Thakur
,
University of Illinois-Urbana-Champaign

Abstract

International trade in waste has experienced a considerable growth over the past three decades. Despite the growing volumes, welfare implications of international trade in waste on any country are unclear. On one hand, trade in waste lowers prices of recycled materials, creates employment opportunities, is a source of additional income and technology transfer. On the other hand, importing waste poses health and environmental hazards locally. This paper quantifies the welfare implications of international trade in waste. To this end, I build a structural gravity model with production of waste micro-founded as a by-product of manufacturing and trade flows driven by technological differences across countries. I disaggregate waste flows by their weight-to-value ratios to capture not only relative benefits from trade, but also relative externality costs that depend on ease of recycling of different materials found in data. I estimate the trade elasticity parameters through cross-section regressions using trade data on manufactured goods, high-value, and low-value waste. The other key parameters of the model are estimated by simulating the entire economy. The results indicate that the benefits of waste trade exceed its externality costs globally. However, poor countries incur greater environmental costs than benefits, while the rich lower.

What Are the Benefits of a Subway in Mumbai, India? (R4, R3)

Maureen L. Cropper
,
University of Maryland
Palak Suri
,
University of Maryland

Abstract

Mumbai, the financial capital of India, is one of the most densely populated and congested cities in the world. To supplement an extensive, but overcrowded, rail network over 100km of metro rail lines have been planned. Line 1 of the Mumbai Metro (11.4 km in length) became operational in June 2014, providing the first east-west rail link in the city. In this paper, we examine the impact of this metro line on property prices and study the channels underlying the capitalization effects.

To estimate the effect of Line 1 on property prices, we use administrative data on assessed values for various land categories for 725 sub-zones of Mumbai from 2011-18. Using difference-in-differences in an event study framework, we compare areas that are within 1 km of Line 1 with control areas between 1 and 3 km from Line 1. After 2014, prices for residential and commercial properties within 1 km of the Metro increased between 17% and 13% compared to controls. We use hedonic regressions and heterogeneity analysis to suggest mechanisms underlying these observed effects. Access to rail and employment accessibility are plausible channels in addition to commute time savings, the value of which is estimated in Suri (2021). In particular, the relative increase in residential land values in areas within 1 km of Line 1 vs areas 1-3 km from Line 1 go up from 17% to 24% for areas with large improvements in employment accessibility.

The annualized value of property price increases associated with Line 1 is approximately $2 billion (PPP), twice the estimated value of reductions in commuting times implied by the joint housing and mode choice model in Suri (2021). We also compare these values with the estimated value of improved employment accessibility.

What Drives Closed-End Fund Discounts? Evidence from COVID-19 (G4, G1)

Liang Ma
,
University of South Carolina

Abstract

By exploiting the exogenous COVID-19 shock, this paper attempts to shed light on the closed-end fund (CEF) discount puzzle. CEF discounts increased after COVID-19, and I identify a causal role of sentiment in this effect. I show that COVID-19 reduced individual investor sentiment. Using the difference-in-differences (DiD) approach, I find that CEFs with higher sentiment beta or higher retail ownership experienced a larger increase in discounts after the COVID-19 shock. The DiD results are unlikely to be driven by alternative channels such as the liquidity, expense, payout, and leverage channels. Overall, the results support the sentiment-based explanation of CEF discounts.

What Drives Tax Policy? Political and Economic Determinants of State Tax Policy in the Past 40 Years (H2, H7)

Sarah Robinson
,
University of California-Santa Barbara
Alisa Tazhitdinova
,
University of California-Santa Barbara and NBER

Abstract

How states should determine tax policy and how states actually determine tax policy are questions that occupy the minds of many economists. Theoretical models offer conflicting predictions – while tax competition provides incentives for convergence, sorting of mobile individuals may lead to divergence. This paper brings empirical evidence on a wide range of tax rates and rules to explain how and why states determine tax policy.
First, we provide a comprehensive and detailed overview of US state tax policies in the past 40+ years, paying particular attention to states’ political leanings. We show that tax policies vary greatly across states, yet show substantial persistence within states (even when taxes change frequently). We document a number of new trends and show how these differ by political party in power.
Second, we follow the previous literature to empirically evaluate the degree to which particular factors can explain the observed patterns. Specifically, we consider both economic factors (such as competition with nearby states and changing revenue requirements due to economic downturns or federal mandates) and political factors (such as changes in political power within the state). While we do not establish causal relationships, we identify statistically significant relationships by comparing the observed pattern of tax changes to simulations where changes occur at random. Our results suggest that state tax policies are largely non-reactionary: most tax changes do not appear to occur in response to economic or political changes.
Finally, we explore to what extent tax policy is affected by states’ institutional features such as the size of state legislatures, term limits, balanced budget or voter initiative rules. We find that institutional factors explain a substantial amount of the variation in how frequently states change tax policy. However, all factors taken together have low explanatory power for the timing and magnitude of tax changes.

What Is Productive Investment? Insights from Firm--Level Data for the United Kingdom (C6, D2)

Marko Melolinna
,
Bank of England
Sudipto Karmakar
,
Bank of England
Philip Schnattinger
,
University of Oxford

Abstract

This paper studies the effects of different types of investment and levels of debt on productivity in the UK, using firm-level data. We set out a stylised model of a dynamic firm profit--maximisation problem, and augment this model with an external financing option in a novel way. We use the model to illustrate why productivity--enhancing investment differs from other uses of company funds in terms of its effects on TFP, and how these positive effects can be stronger for firms that have higher indebtedness. We then examine the issue empirically with data on listed firms in the UK. Our main finding is that intangibles investment are a good proxy for productivity--enhancing investment, as they have a positive effect on TFP, and in those firms that have high debt and high level of intangibles, these effects are even more pronounced. On the other hand, we find no consistent evidence of positive TFP effects for other uses of funds, like tangible capital expenditure or dividends and equity buybacks. The effects of debt on TFP are smaller and more tenuous, but we find no evidence of a negative TFP effect of debt in firms that have high levels of intangibles intensity.

What Keeps Stablecoins Stable? (F3, G1)

Ganesh Viswanath Natraj
,
University of Warwick
Richard Lyons
,
University of California-Berkeley

Abstract

Using stablecoin Treasury trades with private investors, we examine how improved arbitrage design stabilizes the price of the dominant stablecoin, Tether. We identify two 2019 efficiency reforms: migration of Tether from the Omni to the Ethereum blockchain and decentralization of issuance. These reforms led to an increase in investor access to arbitrage trading with the Treasury, reducing the absolute size of peg deviations by half. Further evidence for the importance of arbitrage design is present in the stability mechanism of the stablecoin DAI and in the creation of authorized merchants for WBTC.

What Lies Beneath: Evidence from Leaked Bank Data on How Elites Use Offshore Banking (H2, D7)

Matthew Collin
,
Word Bank

Abstract

This paper uses account data leaked from an Isle of Man bank to investigate the characteristics of individuals and firms that store their money in tax havens. Using internal documents that assign the ultimate ownership of companies and trusts that held deposits at the bank, I establish three things: first, most customers are from rich countries and are likely to be from the upper end of the income and wealth distributions of those countries. Second, I show that a non-negligible amount of offshore wealth is connected to a small number of political elites (so called politically-exposed persons, or PEPs). On average, these accounts have substantially higher balances and are more likely to receive payments from other tax havens, which is consistent with PEPs having access to more resources than the average offshore client while also desiring to obscure that ownership. Finally, I show that a substantial proportion of bank deposits are obscured from publicly-available statistics published by the Bank of International Settlements which are commonly used to measure offshore wealth. When I correctly assign deposits to their ultimate beneficial owner, offshore bank deposits owned by residents of tax havens drops by up to 32% and deposits held by residents of non-havens doubles. I conclude with how recommendations on how reporting requirements need to change to improve the ability of regulators and the research community to detect and counter illicit finance.

What Shapes the U.S. Wealth Distribution? Longevity versus income inequality (E1, D3)

Oliwia Komada
,
FAME-GRAPE and Warsaw School of Economics
Krzysztof Makarski
,
FAME-GRAPE and Warsaw School of Economics
Joanna Tyrowicz
,
FAME-GRAPE and University of Warsaw
Piotr Zoch
,
FAME-GRAPE and University of Warsaw

Abstract

We develop a rich general equilibrium overlapping generations model to quantify the role of trends in labor income inequality, longevity, capital income inequality and taxation on the changes in the distribution of wealth in the U.S. Unlike earlier research, which emphasizes the role of labor income and capital income shocks, we show that the key drivers of changes in the wealth distribution lie in the demographic processes. We decompose changes in wealth inequality to within (birth) cohort and between (birth) cohort components and show that the between component, driven predominantly by increased life span after retirement is a key driver of increased wealth inequality in the US. Our setup permits counterfactual simulations with progressive income and wealth taxes and shows that the trend in longevity cannot be feasibly attenuated with taxation.

Wheels of Change: Transforming Girl’s Lives with Bicycles (O1, I2)

Ana Garcia-Hernandez
,
University of Rosario and Innovations for Poverty Action
Nathan Fiala
,
University of Connecticut
Kritika Narula
,
Yale University
Nishith Prakash
,
University of Connecticut

Abstract

Reducing the gender gap in education is a primary goal for many countries. Two major challenges for many girls are the distance to school and their safety when commuting. We study the impact of providing a bicycle to a school-going girl who lives more than 3 km from the school. We randomized whether a girl receives a bicycle with a small cost to her family to cover replacement parts, a bicycle where these costs are covered by the program and so is zero cost to the family or a control group. We find that the bicycle reduced average commuting time to school by 35%, late arrival by 66%, and decreased absenteeism by 27\% in the short and medium-run. We also find evidence of increased grade transition in the medium-run, improved math test scores, girls expressing higher feelings of control over their lives and, for those who received bicycles with a small cost to her family, higher levels of aspirations, self-image, and a desire to delay marriage and pregnancy. Heterogeneity analysis by distance to school shows an inverted U-shape for most of the schooling and empowerment results, suggesting those impacts are larger for girls that live further away from school. This also suggests that empowerment outcomes worked through increased attendance in school.

When Aiyagari meets Piketty: Growth, Inequality and Capital Shares (O1, D3)

Teemu Pekkarinen
,
University of Helsinki
Toni Juuti
,
Labour Institute for Economic Research
Juha Junttila
,
University of Jyväskylä
Kari Heimonen
,
University of Jyväskylä

Abstract

We incorporate the division of income between capital and labor into analysis on the relationship between inequality and growth. Using historical data, we are the first to document that changes in the top 1 % income shares are positively associated with subsequent growth of per capita GDP when the capital share of income is low, whereas under high capital share, the association is negative. Our focus is on high income countries as we pool data from Australia, Canada, Denmark, Finland, France, Germany, Japan, Netherlands, New Zealand, Norway, Sweden, the United Kingdom, and the United States. We show that the empirical findings are compatible with a theoretical analysis that emphasizes how changes in the distribution of income translate into the accumulation of capital and overall economic activity through the interplay between precautionary saving motives and consumption smoothing. We also reveal – again empirically and theoretically – that the above results hold when financial frictions are not excessive. Our findings remained robust with respect to several tests: we included additional control variables, accounted for the level of income inequality, capital depreciation and different definitions of growth rates, excluded extreme observations, considered top 10 % and top 0.1 % shares in addition to top 1 %, and considered a variety of different estimation techniques.

When Populists Deliver on Their Promises: The Electoral Effects of a Large Cash Transfer Program in Poland (H2, D7)

Jan Gromadzki
,
Warsaw School of Economics
Katarzyna Sałach
,
University of Warsaw
Michał Brzeziński
,
University of Warsaw

Abstract

We estimate the effects of the introduction of large cash transfer on the support for the ruling populist party in Poland. We exploit the variation at the municipal level in the annual amount of received cash transfer per capita and apply a difference-in-differences design to study the electoral effects of the transfer. Results show that $100 of cash transfer per capita translated into an increase in the vote shares for the ruling party by nearly 2 percentage points. To large extent, the effects were due to recruiting previously non-voting individuals. Without the transfer, all else being equal, the populist party would not remain in power.

When the Polluters Pay: Environmental Justice and Support for a Progressive Fuel Tax in India (H2, Q5)

Anca Balietti
,
Heidelberg University
Tillmann Eyemess
,
Heidelberg University
Angelika Johanna Budjan
,
Heidelberg University

Abstract

Air pollution poses a major health risk in urban centers across the world. In India’s major cities, the sources of pollution abound, with vehicle exhaust, and both heavy and small-scale industries as the main culprits. As in many places around the world, despite their lower contribution to pollution generation, the less wealthy part of the population bears an increased share of the health burden, due to both higher exposure and limited access to preventive and restorative health care. We rely on randomized survey experiments providing interactive, personalized information on income inequality to a large sample of urban Indian workers on Amazon Mechanical Turk. We estimate the elasticity of preferences for progressive fuel taxation, when participants receive information about their relative position in the income distribution, their contribution to local air pollution relative to the average, and their differential ability to access health care services and to adopt effective self-defensive measures against pollution.

Which Lenders Are More Likely to Reach Out to Underserved Consumers: Banks vs. Fintechs vs. Other Nonbanks? (G2, G5)

Erik Dolson
,
Federal Reserve Bank of Philadelphia
Julapa Jagtiani
,
Federal Reserve Bank of Philadelphia

Abstract

There has been a great deal of interest recently in understanding the potential role of fintech firms in expanding credit access to the underbanked and credit-constrained consumers. We explore the supply side of fintech credit, focusing on unsecured personal loans and mortgage loans. We investigate whether fintech firms are more likely than other lenders to reach out to “underserved consumers,” such as minorities; those with low income, low credit scores, or thin credit histories; or those who have a history of being denied for credit. Using a rich data set of credit offers from Mintel, in conjunction with credit information from TransUnion and other consumer credit data from the FRBNY/Equifax Consumer Credit Panel, we compare similar credit offers that were made by banks, fintech firms, and other nonbank lenders. Fintech firms are more likely than banks to offer mortgage credit to consumers with lower-income, lower-credit scores, and those who have been denied credit in the recent past. Fintechs are also more likely than banks to offer personal loans to consumers who had filed for bankruptcy (thus also more likely to receive credit card offers overall) and those who had recently been denied credit. For both personal loans and mortgage loans, fintech firms are more likely than other lenders to reach out and offer credit to nonprime consumers.

Who Determines United States Healthcare Out-of-pocket Costs? Factor Ranking and Selection Using Ensemble Learning (C3, I1)

Chengcheng Zhang
,
Claremont Graduate University

Abstract

Purpose: Healthcare out-of-pocket (OOP) costs consist of the annual expenses paid by individuals or families that are not reimbursed by insurance. In the U.S, broadening healthcare disparities are caused by the rapid increase in OOP costs. With a precise forecast of the OOP costs, governments can improve the design of healthcare policies to better control the OOP costs. This study designs a purely data-driven ensemble learning procedure to achieve a collection of factors that best predict OOP costs.
Methods: We propose a voting ensemble learning procedure to rank and select factors of OOP costs based on the Medical Expenditure Panel Survey dataset. The method involves utilizing votes from the base learners forward subset selection, backward subset selection, random forest, and LASSO.
Results: The top-ranking factors selected by our proposed method are insurance type, age, asthma, family size, race, and number of physician office visits. The predictive models using these factors outperform the models that employ the factors commonly considered by the literature through improving the prediction error (test MSE of the OOP costs’ log-odds) from 0.462 to 0.382.
Conclusion: Our results indicate a set of factors which best explain the OOP costs behavior based on a purely data-driven solution. These findings contribute to the discussions regarding demand-side needs for containing rapidly rising OOP costs. Instead of estimating the impact of a single factor on OOP costs, our proposed method allows for the selection of arbitrary-sized factors to best explain OOP costs.

Whom Does the FAFSA Favor? Quantifying the Gap between EFC and ACF for Students from Divorced Families (I2, Z1)

Weibo Zhou
,
Dalian Maritime University

Abstract

Each year, 14 million households seeking federal aid for college complete a detailed questionnaire about their finances, the Free Application for Federal Student Aid (FAFSA). Based on the FAFSA, "need" is defined as the difference between the Cost of Attendance (COA) and the Expected Family Contribution (EFC), an estimate of how much the family can pay out of pocket for college. For students from divorced families, provided that the parent with whom the student lives (the custodial parent) is the one filling out the FAFSA, if any existing stepparent is married to the custodial parent at the time that the student fills out the FAFSA, the student must report the stepparent’s income and assets.
The question I ask in this project is, do stepparents meet the FAFSA-prescribed EFC? If not, what is the gap between the EFC and the AFC (Actual Family Contribution)? There are two specific cases I investigate in this project. The first case is one in which a stepparent does not contribute to the student’s college study. In this case, the student’s financial aid will be negatively affected by the presence of the stepparent. This implies the student’s true, underlying need is more than the calculation based on the FAFSA. The second case happens when the custodial parent and stepparent meet the EFC, while the biological parent also makes financial transfers to the child while studying in college, which means the student receives more college financial aid than existing need formulas, using an accurate measure of family support, would prescribe.
This ongoing project points out the potential problem in the FAFSA form for students from divorced families and evaluates the proportion of FAFSA applicants who are affected by this problem. Second, it will quantify the gap between EFC and AFC for those students affected.

Why Do Parents Underinvest in Their Children’s Education? Evidence from China (D1)

Jiyuan Wang
,
Central University of Finance and Economics
Rob Alessie
,
University of Groningen
Viola Angelini
,
University of Groningen

Abstract

In this paper we study whether the presence of binding liquidity constraints and the existence of fixed costs can explain the underinvestment of parents in their children's human capital. We first incorporate these two potential mechanisms into the theoretical model of Raut and Tran (2005) and then we test their empirical relevance using data from the China Health and Retirement Longitudinal Study (CHARLS). Our results support the idea that both fixed costs and binding liquidity constraints play an important role in explaining human capital underinvestment.

Why Does Corporate Social Responsibility Matter in Cross-Border M&A? Evidence from China (G3, M0)

Xianmin Liu
,
Queen Mary University of London
Gulnur Muradoglu
,
Queen Mary University of London
Ni Peng
,
Queen Mary University of London

Abstract

This paper explores how corporate social responsibility (CSR) performance affects cross-border mergers and acquisitions (CBMAs) attempted by Chinese bidders. We show that bidders with higher CSR performance are more likely to complete cross-border deals successfully and quickly, and have better post-merger operating performance. Furthermore, Chinese bidders from underdeveloped regions enjoy enhanced benefits from CSR in their cross-border deals. However, Chinese bidders with state ownership (e.g., SOE bidders) are less likely to see the long-term value of CSR realized in their cross-border deals. Overall, our findings support the stakeholder value maximization theory of CSR.

Why Has the US COVID-19 Crisis Been So Severe? The Employer-Sponsored Health Insurance Channel (I0, C1)

Eiichiro Kazumori
,
University of Massachusetts

Abstract

The COVID-19 crisis in the US has been disproportionately severe compared with other countries.

The crucial novelty of this paper is that this paper is the first one to explain the unique severity of the US crisis via its unique health insurance system: a significant number of uninsured people and the employer-sponsored health insurance (ESI) system.

The amplification mechanism is as follows: when the pandemic breaks out and the government adopts lockdowns, ESI, through which the majority of people in the US are insured, amplifies the crisis by making the most vulnerable population uninsured.

We first study the health insurance coverage in 2020 and find that those who got uninsured in 2020 are disproportionally working age, Hispanic, low educational attainment, and low income compared to the general population, amplifying the already existing disparities.

The linear regressions of US daily cases on US uninsured rates controlling for US unemployment rates, the mask mandate, business closures, the stay-at-home order, and the time trend find that the uninsured rates have a highly statistically significant relationship with COVID-19 cases. The pooled linear regressions of state daily cases on state uninsured rates controlling for state-level heterogeneity, state-level unemployment rates, state-level policy variables, and the time trend also find that the state uninsured rates have statistically significant effects on state cases, consistent with the mechanism of the paper.

Using these models, we conduct counterfactual analysis of the impact of full Medicaid expansion and the ACA repeal, and the results suggest that the policy of providing health insurance coverage comparable to other countries during the pandemic could have reduced the severity of the US COVID-19 crisis to the level comparable to other countries.

Why There Was Not a Crime Wave During the Great Recession? (J6, K4)

Pallab Ghosh
,
University of Oklahoma
Ahmed Fatmaoui
,
University of Oklahoma

Abstract

There was a spike in the US aggregate crime rate during all previous recessions since 1960 except the Great Recession. The existing literature unable to explain why there was no crime wave in the Great Recession? This study entangles this puzzle by exploiting the regional variation of the growth in non-routine manual in-person jobs which requires human interactions. We test the hypothesis that during 2008-2009, a large fraction of Hispanics, including the Mexican-born immigrants, was most benefited from an increase in labor demand in the non-routine manual occupations. We show that the aggregate crime rate during the Great Recession did not increase because a large fraction of Mexican-born immigrants moved out from a local labor market, which experienced a relatively higher fall in labor demand due to the recession. Also, some of the local low-skill native young men who lost their job during the recession did not move because they were employed in non-routine manual occupations.

Window Dressing Behavior of the U.S. Global Systemically Important Banks (G2, E5)

Mirewuti Muhetaer
,
University of California-Riverside

Abstract

This paper examines window dressing behavior among the U.S. Global Systemically Important Banks (G-SIBs). Using supervisory data from large U.S. Bank Holding Companies (BHCs), I find that the U.S. G-SIBs repress their systemic importance scores in the year-end to lower their capital surcharges assigned by bank regulators. The priority and feasibility of reduction of scores in the five categories, which are size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity, differ and complexity scores are the most reduced in the fourth quarter. I also show how macroeconomic activity and financial condition affect the systemic importance score. I find that U.S. specific method 2 (more strict) dominates the internationally accepted method 1 both in scores and in additional capital surcharges for the eight U.S. G-SIBs. However, under the year-end approach, banks are still deviating from the original intentions of the regulation. Based on my findings, I propose two new approaches to assign additional capital surcharges based on systemic importance scores of G-SIBs: quarterly average and quarterly maximum. The quarterly maximum approach is the most efficient in targeting banks that practice window dressing. Overall, the findings provide new evidence regarding the window dressing behavior of the U.S. banks and the effectiveness of the G-SIB framework, with implications for policymakers and bank supervisors.

Women on Boards: Does Corporate Culture In uence Board Gender Diversity? (G3, J7)

Paulina Roszkowska
,
Cass Business School

Abstract

We examine the link between corporate culture and the company's willingness to appoint women to the Boards of Directors. We proxy corporate culture by how companies communicate with investors in the 10-K filings. Our findings provide persistent evidence for a causal link between competitive and collaborative corporate culture and board gender balance. Companies characterized by a high degree of competing culture tend to appoint fewer female directors, consistent with the stylized fact that women shy away from competition. Companies with a high degree of collaborative culture appoint on average more women to their Boards. Companies that score high on collaborative culture, care about achieving goals as a team and long-term human development are likely to be genuinely interested in appointing female directors because they oftentimes have more than one woman on the Board. We also show that, in line with tokenism theory, companies characterized by a less collaborative (more competitive) culture are more likely to appoint female directors only to `tick-the-box' rather than to truly benefit from board gender diversity. We use a dynamic approach to address the reverse causality issue and show that female directors have the potential to affect corporate culture only when they constitute a critical mass in the board.

Worker Mobility, R&D Human Capital, and Firm Productivity (O3, J6)

Erling Barth
,
Institute for Social Research, University of Oslo, and NBER
James Davis
,
Economic Research Service, USDA
Holden A. Diethorn
,
NBER
Gerald Roger Marschke
,
State University of New York-Albany and NBER
Andrew Wang
,
National Bureau of Economic Research

Abstract

Evidence suggests that technological innovativeness and diffusion rates have declined over the last two decades. Over the same period, labor mobility, which has been linked to the dynamism and innovativeness of high-tech clusters, has also declined. This paper uses detailed economy-wide and longitudinal employer-employee linked data combined with data on firms’ R&D expenditures to investigate the link between establishment productivity and labor mobility in the manufacturing industry over the years 1997 through 2015. We show that at the establishment level, while the share of the workforce consisting of new workers was relatively flat, the share of new workers arriving from employers that conduct R&D--new workers with R&D human capital--increased by over 50% to about one-quarter of the average workforce. We find that influxes of new workers with R&D human capital are associated with higher establishment productivity and these influxes can account for a significant portion of the increase in manufacturing establishment TFP over the 1997-2015 period. Overall, our results suggest a role for worker mobility dynamics in explaining establishment productivity dynamics in manufacturing.

Working from Home: Too Much of a Good Thing? (R1, J2)

Sergey Kichko
,
Higher School of Economics University
Kristian Behrens
,
University of Quebec-Montreal
Jacques François Thisse
,
Catholic University of Louvain

Abstract

We develop a general equilibrium model with three production factors—land, skilled, and unskilled labor—and three sectors—the construction sector that supplies buildings to firms and workers, and the intermediate sector that supplies an endogenous range of intermediates to the final sector, which itself produces the consumption good. Skilled workers benefit from spillovers when they interact in the office but bear commuting costs; home workers save on commuting costs but incur extra costs as they need to consume some housing as office space. Skilled workers can work a varying share of their time in the office and the remaining share at home. More WFH leads to a trade-off between lower productivity and less costly office space at the firm level.
First, the effects of WFH are described by bell-shaped curves: telecommuting first increases skilled and unskilled workers' productivity and GDP up to some threshold, whereas its starts to decrease productivity and GDP when there is excessive downscaling of office space. Indeed, a relatively small share of home-workers allows one to exploit more intensively the potential of the information and communication technologies (ICTs). However, beyond some level, a higher share of home-workers becomes less efficient for the current development of ICTs. In the same vein, there is first more and, then, less diversity in the intermediate sector. Assuming that the number of intermediate firms reflects the efficiency of the innovation system, this result suggests that too much WFH may be detrimental to long-run innovation and growth via foregone agglomeration economies. These results confirm what OECD (2020) suggests in its recent report on the possible long-run consequences of increased telework. Second, some back-of-the-envelope computations using consensus parameter values suggest the WFH share that maximizes GDP varies between one or two working days per 5-day week. This is broadly in line with the empirical evidence.

Yes, Standing Committee: Promotion under Collective Leadership in CCP (D7, P2)

Haokun Sun
,
Cornell University

Abstract

Chinese Communist Party (CCP) started to implement the collective leadership decision mechanism in the post-Mao era. The mechanism tries to encourage the CCP Politburo Standing Committee to rule by consensus to prevent authoritarianism. This project studies the election inside the Central Committee of the CCP since 1982. To characterize the connection benefits in elections under collective leadership, I construct a social network through shared hometown, college alumni, and past working experience within the Central Committee. Moreover, I separate the network into vertical and horizontal connections. I show the vertical connection to the incumbent Standing Committee members increases a candidate's likelihood of promoting to the Politburo and being assigned to a prestigious position. The horizontal connection with the peer Central Committee members could harm the candidate's opportunity in promoting to the Politburo and the job assignment. The results remain robust with various specification and estimation settings, including Katz- Bonacich centrality measure.

To investigate the potential majority rule under the collective leadership, I further present a coalitional game among the incumbent Standing Committee in deliberating Central Committee members' job assignments. The results suggest the Standing Committee member has quasi-veto rights when deciding the vice-provincial-ministerial above-level appointment. However, the estimated majority rules are relatively lower during Deng and Xi's presidency, comparing to Jiang and Hu.

Yield Curve Momentum (G1, C4)

Markus Sihvonen
,
Bank of Finland

Abstract

I analyze time series momentum along the Treasury term structure. Past bond returns predict future returns both due to autocorrelation in bond risk premia and because unexpected bond return shocks increase the premium. Yield curve momentum is primarily due to autocorrelation in yield changes rather than autocorrelation in bond carry and can largely be captured using a single bond return or yield change factor. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies.