ERID Working Paper Series

2020

Information and Facilitation Interventions for Accountability in Health and Nutrition: Evidence from a Randomized Trial in India

Link

Author: Manoj Mohanan, Vikram S. Rajan, Kendal Swanson and Harsha Thirumurthy

Abstract: Community-based accountability interventions have shown potential to improve delivery of public services, but there is limited evidence on the effectiveness of such interventions when implemented at scale by developing country governments. We study the effectiveness of social accountability interventions implemented by the Indian state government of Uttar Pradesh aimed at improving delivery of primary health and nutrition services to children and pregnant women. Using a village level randomized trial design, we investigate two key mechanisms through which accountability interventions are hypothesized to improve healthcare delivery and health outcomes: information provision about health service entitlements and facilitation of collective action for community monitoring. We find large improvements in immunization rates, treatment of childhood diarrhea, and institutional delivery rates, modest improvements in child nutritional outcomes, and no effects on child mortality. Overall, the effects of information combined with facilitation are larger and statistically significant more often than that of providing information alone. We also find evidence of gender disparities with most of the average effects being driven by improvements among boys, with little to no effect of accountability interventions among girls.

Last Revised: March 5, 2020

Date Written: February 1, 2020

 

Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Link

Author: Alessandro Gavazza and Andrea Lanteri 

Abstract: This paper studies the equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) different qualities of durable goods trade on secondary markets at market-clearing prices; and (2) households endogenously choose when to trade them or scrap them. The model successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, depressing mid-quality car prices. In turn, this effect reduces wealthy households’ incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to study the effects of collateral constraints and aggregate income shocks, and to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”).

Last Revised: February 2020

Date Written: October 17, 2018

 

Realized Semicovariances

Link

AuthorTim Bollerslev, Jia Li, Andrew Patton and Rogier Quaedvlieg

Abstract: We propose a new decomposition of the realized covariance matrix into components based on the signs of the underlying high-frequency returns. Under an asymptotic setting in which the sampling interval goes to zero, we derive the asymptotic properties of the resulting realized semicovariance measures. The first-order asymptotic results highlight how the concordant components and the mixed-sign component load differently on economic information concerning stochastic correlation and jumps. The second-order asymptotics, taking the form of a novel non-central limit theorem, further reveals the fine structure underlying the concordant semicovariances, as manifest in the form of co-drifting and dynamic ``leverage'' type effects. In line with this anatomy, we empirically document distinct dynamic dependencies in the different realized semicovariance components based on data for a large cross-section of individual stocks. We further show that the accuracy of portfolio return variance forecasts may be significantly improved by using the realized semicovariance matrices to ``look inside'' the realized covariance matrices for signs of direction.

Last Revised: January 23, 2020

Date Written: September 7, 2017

 

School Choice Under Imperfect Information

Link

Author: Kehinde Ajayi and Modibo Sibide 

Abstract: As in many school districts around the world, prospective high-school students in Ghana are assigned to schools through a centralized system. Using administrative data on applications, we report that virtually all students adopt a weakly dominated strategy, and matching outcomes show that approximately 15% of students end up unassigned, while almost half of schools have at least 1 vacancy. In order to rationalize choices in this setting, we build and estimate a model, where students engage in a costly search process to acquire information over school characteristics. The key insight of the model is that schooling decisions are exerted without the full examination of all available options, which may lead to sub-optimal choices. Our empirical application documents a substantial welfare loss: distance traveled to schools could be divided by 4. Counterfactual simulations show that if a planner were to restrict choices and assign the highest test score student to the most selective school, welfare would increase by 72%. We propose a mechanism design reform, and show that collecting preferences over a limited number of school attributes would recover most of the lost welfare.

Date: January 13, 2020

2019

Can Individuals’ Beliefs Help Us Understand Non-Adherence to Malaria Test Results? Evidence from Rural Kenya

Link

Author: Elisa M. Maffioli, Wendy O'Meara, Elizabeth Turner and Manoj Mohanan

Abstract

In malaria-endemic countries about a quarter of test-negative individuals take antimalarials (artemisinin-based combination therapies, ACTs). ACT overuse depletes scarce resources for subsidies and contributes to parasite resistance. As part of an experiment in Kenya that provided subsidies for rapid diagnostic test and/or for ACT conditionally on being positive, we study the relationship between beliefs on malaria status (prior and posterior the intervention), and the decisions to get tested and to purchase ACT. We find that prior beliefs do not explain the decision of getting tested (conditional on the price) and non-adherence to a negative test. However, test-negative individuals who purchase ACT report higher posterior beliefs than those who do not, consistent with a framework in which the formers revise beliefs upward, while the latters do not change or revise downward. Further research is needed to improve adherence to malaria-negative test results.

Last Revised: December 2019

Date Written: February 2017

 

Credit Attribution and Collaborative Work

Link

Author: Saltuk Ozerturk and Huseyin Yildirim

Abstract: We examine a dynamic model of teamwork in which the public attributes credit for success based on its perception of individual efforts. The collaborative behavior varies starkly depending on the shape of marginal effort cost, or project’s “difficulty.” In the unique (interior) equilibrium, higher ability collaborators work less and thus receive lower credit and payoff for “easy” projects, while the reverse holds for “difficult” projects. Despite free-riding, the team equilibrium may involve over-investment. Social efficiency requires over-rewarding collaborative work and under-rewarding solo work. The incentives to team up and the impact of effort monitoring on credit attribution are also investigated.

Date: November 4, 2019

 
Little Trailer Park on the Prairie: Determinants of Site Rents in Parks in the Great Plains and Rocky Mountain States

Link

AuthorCharles Becker and Brenda Garcia Lemus

Abstract: Recent research has indicated that the manufactured housing industry is highly heterogeneous, mainly because both demand conditions and zoning restrictiveness vary enormously from one locale to another. There is little formal empirical work on the industry, especially in the low population density region that encompasses the Great Plains (including Texas) and Rocky Mountain states. Using a data set with nearly 60,000 manufactured housing sales transactions for the regions, we explore the determinants of park lot rents using a GMM 3SLS model. Both park lot rent levels, their determinants, and responses to local multi-family and single-family housing conditions vary from one economic region to another.

Date: October 14. 2019

 

Alternative Measures of Mutual Fund Performance: Ranking DFA, Fidelity, and Vanguard

Link

Author: Chong Li, Edward Tower and Rhona Zhang

Abstract: This chapter evaluates the returns of the domestic equity funds of three major American companies: Vanguard, Fidelity, and Dimensional Fund Advisors relative to benchmarks using the Fama-French factors from January 2001 through December 2018.

We also present Sharpe’s (1992) style analysis combined with the Fama French 25 portfolios, sorted by the dimensions of book to market value and size. Both the two factor and the Sharpe analyses benchmark according to size and valueness. Comparing the two explores the robustness of our findings. Table 6 presents a succinct comparison of the results from both the 2 factor model and the Sharpe analyses. Both methods show that that for Fidelity the index portfolio consistently out-returns the managed portfolio.

Table 7 finds that between 2001and 2018 DFA, the indexed and managed portfolios from Vanguard, and the managed portfolio from Fidelity out-returned the US stock market. This is also true of the Fidelity index portfolio from 2005-2018.

We also construct efficient frontiers to assess which groups of funds and from which families are included and which are left out.

Date: October 13. 2019

 

Capital-Reallocation Frictions and Trade Shocks

Link

Author: Andrea Lanteri, Pamela Medina and Eugene Tan 

Abstract: "What are the short- and medium-term effects of an international-trade shock that increases competition for domestic manufacturing firms? We address this question by combining firm-level investment data from Peruvian manufacturing, bilateral trade-flows between Peru and China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, either through disinvestment or firm exit. In our model, these frictions induce slow transitional dynamics after a trade shock, with gradual productivity gains. On impact, a spike in inaction increases the aggregate productivity wedge relative to a frictionless" "benchmark."

Date: October 1, 2019

 

Economic Harbingers of Political Modernization: Peaceful Explosion of Rights in Ottoman Istanbul
Link

Author: Asli Cansunar and Timur Kuran

Abstract: The modernization drive of the late Ottoman Empire is typically attributed to visionary officials and pressures they faced from foreign powers. This paper ascribes a fundamental role to prior shifts in wealth toward non-Muslims and away from conservative groups, including Muslim clerics. These shifts, all under way in the 1700s, motivated Ottoman political leaders to begin, with the Gülhane Edict of 1839, to dismantle traditional institutions grounded in Islamic law and sultanic customs of governance. Despite its momentous provisions, the edict generated only minor resistance, because it addressed widespread and chronic grievances, legitimated trends unfolding for generations, and offered Muslim political elites, who had been losing ground, opportunities to catch up with rapidly advancing local Christians. The data, which come from Istanbul’s Islamic courts, allow the tracking of changes in the distribution of wealth, as measured by the founding of waqfs (Islamic trusts) and ownership of equities known as gediks.

Date: August 8, 2019

 

The Social Position of Daughters-in-Law and Domestic Violence: Patrilocal Marriage in Tajikistan

Link

AuthorCharles Becker and Mavzuna Turaeva

Abstract: A longstanding tradition of patrilocal marriage – living in the husband’s natal household - affects every generation of Central Asian women and their choices regarding childbearing, employment and education. While anthropological evidence suggests that elder household members, especially the mother-in-law, play a key and often detrimental role in the lives of junior women in their households, empirical studies are scarce. We use Tajikistan 2012 Demographic and Health Survey (DHS) data to explore the correlation between domestic violence and daughters-in-law’s living arrangements. Controlling on observables, propensity score matching (PSM) technique yields a positive and statistically significant treatment effect. Women who live with the in-law family are at least 72% more likely to experience emotional abuse committed by their husbands. A similar treatment effect does not emerge between physical violence and the presence of parents-in-law in the household.

Last Revised: August 4, 2019

Date Written: November 2016

 

Real Estate Market Evolution and Monetary Policy in Kazakhstan

Link

AuthorCharles Becker and Zhandos Ybrayev

Abstract: This paper considers the link between macroeconomic policy and housing demand in an upper middle-income transition economy, Kazakhstan. The paper further explores price cointegration and contagion across cities. We find evidence that some parts of the housing market lead others but that, overall, regional housing markets are only weakly interlinked. The markets also tend to respond weakly to policy interventions – a matter of possible concern to the nation’s central bank.

Date: June 20, 2019

 

Measuring China's Stock Market Sentiment

Link

Author: Jia Li, Yun Chen, Yan Shen, Jingyi Wang and Zhuo Huang

Abstract: This paper develops textual sentiment measures for China's stock market by extracting the textual tone of 60 million messages posted on a major online investor forum in China from 2008 to 2018. We conduct sentiment extraction by using both conventional dictionary methods based on customized word lists and supervised machine-learning methods (support vector machine and convolutional neural network). The market-level textual sentiment index is constructed as the average of message-level sentiment scores, and the textual disagreement index is constructed as their dispersion. These textual measures allow us to test a range of predictions of classical behavioral asset-pricing models within a unified empirical setting. We find that textual sentiment can significantly predict market return, exhibiting a salient underreaction-overreaction pattern on a time scale of several months. This effect is more pronounced for small and growth stocks, and is stronger under higher investor attention and during more volatile periods. We also find that textual sentiment exerts a significant and asymmetric impact on future volatility. Finally, we show that trading volume will be higher when textual sentiment is unusually high or low and when there are more differences of opinion, as measured by our textual disagreement. Based on a massive textual dataset, our analysis provides support for the noise-trading theory and the limits-to-arbitrage argument, as well as predictions from limited-attention and disagreement models.

Last Revised: May 10, 2019

Date Written: April 20, 2019

 

Rationalizing Rational Expectations? Tests and Deviations

Link

Author: Xavier D'Haultfœuille, Christophe Gaillac and Arnaud Maurel

Abstract: In this paper, we build a new test of rational expectations based on the marginal distributions of realizations and subjective beliefs. This test is widely applicable, including in the common situation where realizations and beliefs are observed in two different datasets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribution of realizations being a mean-preserving spread of the distribution of beliefs. The null hypothesis can then be rewritten as a system of many moment inequality and equality constraints, for which tests have been recently developed in the literature. Next, we go beyond testing by defining and estimating the minimal deviations from rational expectations that can be rationalized by the data. In the context of structural models, we build on this concept to propose an easy-to-implement way to conduct a sensitivity analysis on the assumed form of expectations. Finally, we apply our framework to test for and quantify deviations from rational expectations about future earnings, and examine the consequences of such departures in the context of a life-cycle model of consumption.

Last Revised: May 10, 2019

Date Written: November 12, 2018

 

Zakat: Islam’s Missed Opportunity to Limit Predatory Taxation

Link

AuthorTimur Kuran

Abstract: One of Islam’s five canonical pillars is a predictable, fixed, and mildly progressive tax system called zakat. It was meant to finance various causes typical of a pre-modern government. Implicit in the entire transfer system was personal property rights as well as constraints on government—two key elements of a liberal order. Those features could have provided the starting point for broadening political liberties under a state with explicitly restricted functions. Instead, just a few decades after the rise of Islam, zakat opened the door to arbitrary political rule and material insecurity. A major reason is that the Quran outlines the specifics of zakat as they related to conditions in seventh-century Arabia, without making explicit the underlying principles of governance.

Last Revised: May 10, 2019

Date Written: April 8, 2019

 

Evaluating the Changed Collection of Equity Mutual Funds for Vanguard Participants in the Duke University Retirement Plan

Link

Author: Chong Li, Edward Tower and Rhona Zhang

Abstract: From January 2019 Duke employees who are paid monthly have a changed set of mutual funds to choose from in their Duke University Faculty and Staff Retirement Plan. Which mutual funds are good choices? We compare the new lineup of funds with the Vanguard funds that have been cut from the retirement plan. We find that the new plan contains funds which on average have outreturned their benchmarks by more than the Vanguard funds that have been cut. We also characterize the styles of the funds in the new lineup to help the construction of balanced portfolios.

Date: May 1, 2019

 

Vanguard versus Fidelity: Multidimensional Comparison of the Index Funds and ETFs of the Two Largest Mutual Fund Families

Link

Author: Chong Li, Edward Tower and Rhona Zhang

Abstract: This paper compares Vanguard and Fidelity on 21 comparable funds in five aspects: performance, tax-efficiency, cost, diversification, benchmark and tracking precision. The conclusions are as follows: first, for pre-tax return, the difference between Vanguard and Fidelity is small, but Vanguard is the clear winner in after-tax return; second, Vanguard is much more tax-efficient than Fidelity; third, for the cost, Fidelity has lower expense ratio than Vanguard in all sample funds, while Vanguard has lower turnover, and both Vanguard and Fidelity have their own short-term redemption fee policy; fourth, Vanguard funds are more diversified which should reduce uncompensated risk; fifth, Fidelity funds have higher tracking precision to their benchmarks than Vanguard funds, but the difference is very small.

Date: March 26, 2019

 

The Effects of a ‘None of the Above’ Ballot Paper Option on Voting Behavior and Election Outcomes

Link

AuthorAttila Ambrus, Ben Greiner and Anita Zednik 

Abstract: We investigate how an explicit blank vote option “None of the above” (NOTA) on the ballot paper affects voting behavior and election results in political elections where non-establishment candidates are on the ballot. We report evidence from two online field experiments conducted in the weeks preceding the 2016 U.S. Presidential Election and the 2016 Austrian run-off election for President. The two elections are special because in the U.S. election one firmly establishment candidate (Hillary Clinton) was facing a self-declared non-establishment candidate (Donald Trump), while in the Austrian election, both candidates were from outside the traditional political establishment. In our experiments we subjected participants either to the original ballot paper or to a manipulated ballot paper where we added a NOTA option. We find that participants with a protest motive, who are either unhappy with the candidate set or with the political establishment in general, choose NOTA. Introducing a NOTA option on the ballot increases participation and reduces the vote shares of non-establishment candidates.

Last Revised: March 20, 2019

Date Written: March 14, 2019

 

Lessons for Tax Reform from an Equilibrium Model of Innovation

Link

Author: Domenico Ferraro, Soroush Ghazi and Pietro F. Peretto

Abstract: We formulate and estimate a general equilibrium model of innovation-led growth and use it to evaluate the quantitative implications of individual income tax reforms for innovation and aggregate productivity growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. We estimate the model parameters by matching key moments of U.S. data. The model generates an aggregate labor supply elasticity and a per capita GDP growth response to marginal tax rate changes that are consistent with available empirical estimates. We find that the model accounts reasonably well for the observed movements in TFP, labor productivity, hours worked and number of firms per capita during the “Reagan tax cuts” of the eighties. The model predicts that a temporary, deficit-financed, 3 percentage points cut in the average marginal individual income tax rate, set to expire in 2025, produces a temporary TFP growth acceleration leading to a 6 percent increase in real per capita GDP by year 2040.

Date: January 26, 2019

 

2018

Hayek's Epistemic Theory of Industrial Fluctuations

Link

Author: Scott Scheall

Abstract: F.A. Hayek essentially quit economic theory and gave up the phenomena of industrial fluctuations as an explicit object of theoretical investigation following the publication of his last work in technical economics, 1941’s The Pure Theory of Capital. Nonetheless, several of Hayek’s more methodologically-oriented writings bear important implications for economic phenomena, especially those of industrial fluctuations. Decisions (usually, for Hayek, of a political nature) taken on the basis of a “pretence” of knowledge impede the operation of the price system’s belief-coordinating function and thereby contribute to episodes of economic disequilibrium. Moreover, this later account – which I call Hayek’s epistemic theory of industrial fluctuations – implies certain aspects of his earlier theory. The two accounts are connected in virtue of the role that ignorance and the limits of human knowledge play in each. Indeed, it turns out that – substantively, if not methodologically – Hayek’s early theory of the cycle is a special case of the more general epistemic account.

Last Revised: December 19, 2018

Date Written: February 6, 2014

 
Growth with Deadly Spillovers

Link

AuthorPietro F. Peretto and Simone Valente

Abstract: Empirical studies show that pollution is one of the world’s most significant causes of premature death. However, despite its importance macroeconomics still largely neglects this negative externality. To fill the gap, we build a model where productivity growth, emissions, mortality and fertility are all endogenous. Primary production exploits natural resources and generates emissions that increase total deaths. Unlike conventional pollution externalities, deadly spillovers affect the path of economic activity and the associated level of welfare through multiple channels - consumption and fertility choices, labor supply, incentives to innovate. They can also undermine development even for damage elasticities below unity. The reason is that the response of the mortality rate to population change is not only state-dependent but also generates mortality traps - equilibrium paths leading to population implosion. Differently from poverty traps triggered by low income per worker, mortality traps threaten resource-rich economies with low population. Subsidies to primary production reduce long-run population capacity and expand the mortality trap. Discoveries of natural resource endowments bring the economy closer to population implosion and may as well expand the trap.

Date Written: December 12, 2018

 

Corporate Governance and Phases of Development

Link

Author: Maurizio Iacopetta and Pietro F. Peretto

Abstract: Corporate governance distortions delay or even halt a country’s transformation into a modern innovation economy. We investigate the mechanism through a growth model that allows for agency issues within firms. Governance distortions raise the cost of investment and depress the incentives to set up new firms. Modest differences in governance account for large gaps in income: A 32 percent investment cost differential explains the secular decline of Latin America income relative to that of the USA, and implies an industrialization delay of a third of a century. We obtain similar results for a large number of countries and macro-regions.

Date: November 8, 2018

 

Foreign Exchange Order Flow as a Risk Factor

Link

Author: A. Craig Burnside, Mario Cerrato and Zhekai Zhang

Abstract: This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to provide direct measures of buying and selling pressure related to carry trading and momentum strategies. We find that they appear to be good proxies for currency crash risk. Additionally, we show that the association between our order-flow factors and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

Date: October 29, 2018

 

Adaptation or Death? Bookstore Chains Meet Online Competition

Link

Author: Sherry Xiaohua Wu

Abstract: E-commerce is the fastest growing subsector within retail trade, yet the exact nature of competition between physical stores and the online channel is thinly studied empirically. Following a period of rapid growth, national aggregate establishment counts for the bookstore industry declined by over 40% between 1994 to 2012. I measure the differential effect of online competition on brick-and-mortar bookstores, using unique establishment-level data between 1987 to 2012 combined with measures of e-commerce levels from Forrester Research’s Technographics Survey. To trace out the impact of e-commerce, I exploit geographic and temporal variation in the level of online activities. I find that online competition has a larger negative effect on large chain stores than on single-unit stores. Furthermore, bookstores that were the most insulated from online competition are precisely the stores that sell a wide array of products outside of books, such as food, gift cards, and clothing. In response to surging online competition, stores have expanded their non-book product offerings over time. However, the largest bookstores chains were still most negatively impacted given that they were relative inefficient at non-book retailing. I develop a dynamic oligopoly model of the bookstore industry to quantify the effect of online retail on equilibrium market structure. One implication of the model is that the rise of online competition has disproportionately reduced long-run profitability for the large chains by over 30 % in the last time period of study, despite their non-book presence increasing the most over time.

Last Revised: October 26, 2018

Date Written: April 10, 2018

 

Day of Reckoning: Output Losses from Fiscal Stabilizations

Link

Author: Domenico Ferraro and Pietro F. Peretto

Abstract: We derive the quantitative implications of reducing sustained budget deficits (labeled fiscal stabilizations) in the context of a general equilibrium model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and incumbent firms improving own existing products. We discipline parameters using post-war observations for the U.S. economy. We find that fiscal stabilizations achieved via labor tax rate hikes permanently lower the equilibrium path of aggregate output. Output losses are sizable. For example, stabilizing the government debt-to-GDP ratio after 10 consecutive years of approximately 5% deficit-to-GDP ratios, entails a nearly 2% permanent loss in income per capita.

Date: September 27, 2018

 

Biased Experts, Majority Rule, and the Optimal Composition of Committee

Link

Author: Alvaro Name Correa and Huseyin Yildirim

Abstract: A committee of experts votes between a multi-attribute alternative and status quo. Each expert is a biased specialist who can privately evaluate only one attribute and puts more weight on it. We study whether a social-minded principal would compose the committee of more or less biased experts. We find that due to strategic voting, her optimal composition depends non-monotonically on the majority rule. The composition is, however, less crucial if experts can be uninformed. Nonetheless, the principal may prefer to have some uninformed experts, perhaps by rushing the vote, when the committee is large, or its composition is suboptimal.

Last Revised:  August 29, 2018

Date Written: June 12, 2018

 

Investments in social ties, risk sharing and inequality

Link

AuthorAttila Ambrus and Matthew Elliott

Abstract: This paper provides a framework to study the formation of risk-sharing networks through costly social investments, in particular the inefficiencies and resulting inequality associated with such processes. First, individuals invest in relationships to form a network. Next, neighboring agents negotiate risk-sharing arrangements. There is never underinvestment, but overinvestment is possible and we find a novel trade-off between efficiency and equality. The most stable efficient network also generates the most inequality. When the income correlation structure is generalized by splitting individuals into groups, such that incomes across groups are less correlated but these relationships are more costly, there can be underinvestment across group but not within group. We find that more central agents have better incentives to form across-group links, reaffirming the efficiency inequality trade-off. In general, endogenous network formation in the risk sharing context tends to result in highly asymmetric networks and stark inequalities in consumption levels.

Last Revised: August 15, 2018

Date Written: March 16, 2015

 

Optimal Policy with General Signal Extraction

Link

Author: Esther Hauk, Andrea Lanteri and Albert Marcet

Abstract: We study optimal policy when the planner has partial information in a general setup where observed signals are endogenous to policy. In this context, signal extraction and policy have to be determined jointly. We derive a general non-standard first order condition of optimality from first principles and we use it to find numerical solutions. This first order condition allows us to identify widely-used special cases in the literature in which the signal extraction and the optimal decision problems can be solved separately, using the well-known separation principle. Our general setup, which does not feature any separation, is relevant for most available dynamic models in macro. We apply our results to a model of fiscal policy and show that optimal taxes are often a very non-linear function of observed hours, calling for tax smoothing in normal times, but for a strong fiscal reaction to output in a deeper recession. This non-linearity arises because signal extraction interacts differently with optimal policy depending on the range of observed signals. The non-linearity is stronger near the top of the Laffer curve or near a debt limit. In a fully dynamic model taxes react with a delay to adverse deficit shocks due to partial information, and this can lead to larger low frequency fluctuations.

Last Revised: August 1, 2018

Date Written: September 2016

  

Behavioral Characterizations of Naivete for Time-Inconsistent Preferences

Link

Author: David S. Ahn, Ryota Iijima, Yves Le Yaouanq and Todd Sarver

Abstract: We propose nonparametric definitions of absolute and comparative naivete. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent ex ante between retaining the option to choose from a menu ex post or committing to her actual distribution of choices from that menu. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naivete and explore the restrictions implied by our definitions for several prominent models of time inconsistency.

Date: July 11, 2018

 

Housing Price Appreciation and Economic Integration in a Transition Economy

Link

Author: Galina A. An, Charles Becker and Enoch Cheng

Abstract: This paper explores patterns of real estate price movements in an emerging upper-middle income economy, Kazakhstan. The country experienced an explosive, 11-fold increase in real housing prices in urban areas between 2000 and 2007, followed by a sharp decline and stabilization. This paper traces the movements across different regions, types of housing, unit size categories, and neighborhood types. We find that prices moved together fairly closely, implying a linked if not unified housing market, along with wealth effects that were felt broadly throughout the (urban) economy. 

Last Revised: July 10, 2018

Date Written: March 13, 2018

 

Zoned Out? North Carolina Manufactured Housing Park Lot Rents

Link

Author: Charles Becker and Timothy Rickert

Abstract: This paper explores determinants of manufactured housing park (MHP) plot rents in North Carolina, with particular focus on the distinction among urban, rural, and periurban and small town parks, and on the possible role played by zoning restrictiveness. Little is known about how MHP rents are determined, even though it is estimated that more than 10 million Americans live in MHPs. We find that, contrary to our expectations, zoning appears to be an unimportant factor in determining park rents, while location, adjacent home prices, and nearby HUD “fair market rent” values are all important – though not uniformly so.

Last Revised: July 10, 2018

Date Written: May 31. 2018

 

Stepfamily Structure and Transfers between Generations in U.S. Families

Link

Author: Suzanne Bianchi, V. Joseph Hotz, Robert F. Schoeni, Judith Seltzer and Emily Wiemers

Abstract: Unstable couple relationships and high rates of re-partnering have increased the share of U.S. families with stepkin. Yet data on stepfamily structure are from earlier time periods, include only coresident stepkin, or cover only older adults. This paper uses new data on family structure and transfers in the Panel Study of Income Dynamics (PSID) to describe the prevalence and numbers of stepparents and stepchildren for adults of all ages and to characterize the relationship between having stepkin and transfers of time and money between generations, regardless of whether the kin live together. We find that having stepparents and stepchildren is very common among U.S. households, especially younger households. Furthermore, stepkin substantially increase the typical household’s family size; stepparents and stepchildren increase a household’s number of parents and adult children by nearly 40% for married/cohabiting couples with living parents and children. However, having stepkin is associated with fewer transfers, particularly fewer time transfers between married women and their stepparents and stepchildren. The increase in the number of family members due to stepkin is insufficient to compensate for the lower likelihood of transfers in stepfamilies. Our findings suggest that recent cohorts with more stepkin may give less time assistance to adult children and receive less time assistance from children in old age than prior generations.

Date: July 1, 2018

 

Uniform Nonparametric Series Inference for Dependent Data with an Application to the Search and Matching Model

Link

Author: Jia Li and Zhipeng Liao

Abstract: This paper concerns the uniform inference for nonparametric series estimators in time-series applications. We develop a strong approximation theory of sample averages of serially dependent random vectors with dimensions growing with the sample size. The strong approximation is first proved for heterogeneous martingale difference arrays and then extended to general mixingales via martingale approximation, readily accommodating a majority of applications in applied econometrics. We use these results to justify the asymptotic validity of a uniform confidence band for series estimators and show that it can also be used to conduct nonparametric specification test for conditional moment restrictions. The validity of high-dimensional heteroskedasticity and autocorrelation consistent (HAC) estimators is established for making feasible inference. The proposed method is broadly useful for forecast evaluation, empirical microstructure, dynamic stochastic equilibrium models and inference problems based on inter-section bounds. We demonstrate the empirical relevance of the proposed method by studying the Mortensen–Pissarides search and matching model for equilibrium unemployment, and shed new light on the unemployment volatility puzzle from an econometric perspective.

Date: June 17, 2018

 

Parenthood, Family Friendly Workplaces, and the Gender Gaps in Early Work Careers

Link

Author: V. Joseph Hotz, Per Johansson and Arizo Karimi

Abstract: We consider the role that workplace attributes play in accounting for the divergence in the careers of women and men, with the onset of parenthood. We exploit matched employer-employee data from Sweden to characterize a model-based index of workplace “family friendliness” and analyze the effect of more family friendly workplaces on the career gaps between mothers and fathers. We find that exogenously moving mothers to more family friendly workplaces would raise their wages and labor income. In contrast, such moves would entail reductions in the same outcomes for fathers, resulting in sizeable improvements in the parental gender gap in wages and income. At the same time, working in more family friendly workplaces would not reduce the penalty to wage rates earned by women with their transition to motherhood (i.e., the motherhood penalty), but it would reduce the motherhood penalty to earned income by facilitating mothers working more hours. Furthermore, the benefits of family friendly workplaces appear to come at the expense of the occupational skill progression of mothers relative to non-mothers, impeding mothers’ ability to climb career ladders over the longer run. Finally, using auxiliary data based on a survey, we find that jobs – as defined by our index – are more substitutable for one another in family friendly workplaces. This substitutability of workers in more family friendly workplaces appears to be the mechanism that facilitates mothers’ ability to balance work and family responsibilities in such workplaces. At the same time, it also may partially explain our finding that more family friendly workplaces slow mothers’ occupational skill-progression.

Date: June 15, 2018

 

Fiscal Policy with Limited-Time Commitment

Link

Author: Alex Clymo and Andrea Lanteri

Abstract: We propose a theory of optimal fiscal policy consistent with the observation that governments typically inherit their predecessors' plans and formulate their policies over a finite future horizon. We use this framework, which we call “Limited-Time Commitment" (LTC), to make two contributions. First, in a general stochastic model, we show that, under an intuitive sufficient condition, a chain of successive governments with LTC sustains the Full Commitment (FC) Ramsey equilibrium. This equivalence result clarifies in which cases existing recursive methods to solve for FC plans have a positive interpretation based on partial commitment. We apply this result in two benchmark models of optimal fiscal policy (with and without capital), in which the FC policy is time-inconsistent. Second, we investigate the implications of LTC in a model of capital taxation in which the FC outcome cannot be achieved with finite commitment. We show that the internalisation of near-future tax distortions represents a key distinction with respect to the literature on No Commitment (NC). In a calibrated version of the model, we find that a single year of fiscal commitment leads to large welfare gains (approximately a third of the difference between FC and NC). Finally, we use LTC to analyse commitment to different fiscal instruments and to study the importance of state-contingency in fiscal plans.

Date Written: June 1, 2018

 

Changes Across Cohorts in Wage Returns to Schooling and Early Work Experiences

Link

Author: Jared Ashworth, V. Joseph HotzArnaud Maurel and Tyler Ransom

Abstract: This paper investigates the wage returns to schooling and actual early work experiences, and how these returns have changed over the past twenty years. Using the NLSY surveys, we develop and estimate a dynamic model of the joint schooling and work decisions that young men make in early adulthood, and quantify how they affect wages using a generalized Mincerian specification. Our results highlight the need to account for dynamic selection and changes in composition when analyzing changes in wage returns. In particular, we find that ignoring the selectivity of accumulated work experiences results in overstatement of the returns to education.

Date: May 27, 2018

 

The Fiscal Externalities of Charter Schools: Evidence from North Carolina

Link

Author: Helen F. Ladd and  John D. Singleton

Abstract: A significant criticism of the charter school movement is that funding for charter schools diverts money away from traditional public schools. As shown in prior work by Bifulco and Reback (2014) for two urban districts in New York, the magnitude of such adverse fiscal externalities depends in part on the nature of state and local funding policies. In this paper, we build on their approach to examine the fiscal effects of charter schools on both urban and non-urban school districts in North Carolina. We base our analysis on detailed balance sheet information for a sample of school districts that experienced substantial charter growth since the statewide cap on charters was raised in 2011. We find a large and negative fiscal impact in excess of $500 per traditional public school pupil in our one urban school district, which translates into an average fiscal cost of more than $3,500 for each student enrolled in charter schools. We estimate comparable to somewhat larger fiscal externalities per charter school pupil for two non-urban districts.

Last Revised: April 30, 2018

Date Written: April 9, 2018

 

Marking Territory: Modeling the Spread of Ethnic Conflict in Bosnia and Herzegovina, 1992-1995

Link

Author: Charles Becker, Peter Devine, Harun Dogo and Elizabeth Margolin

Abstract: In order to study post-conflict economic development and social change in Bosnia and Herzegovina (BiH), it is necessary to control for variation in the effect of conflict on each local community. To do this, we first explore the variation in nature, severity, and incidence of conflict during the 1992-1995 war. The conflict narrative is coded by type and date of an incident; these data are then related to indicators of pre- and post-conflict population composition, and presence of industrial, transportation, or military infrastructure. We then use OLS and IV regressions to attempt to identify the community determinants of where and when fighting will occur within a war. The results across the four sets of regressions indicate that ethnic composition is the primary initial determinant of conflict type and intensity, with more diverse communities suffering more conflict and greater intensity of fighting. We conclude that any analysis of post-conflict economic development needs to control for the variation in pre-war ethnic diversity and differences in pre- and post-conflict ethnic composition. Subsequent studies will seek to understand the effect of conflict typology, intensity, and community type on landmine placement and the effect of landmines on post-conflict social and economic development.

Date: April 10, 2018

 

On Defining Ex Ante Payoffs in Games with Diffuse Prior

Link

AuthorAttila Ambrus and Aaron Kolb 

Abstract: We formalize the notion of a diffuse prior and show that, in stationary games, strategies which admit well-defined expected payoffs under the diffuse prior are essentially stationary. We define the diffuse prior through a limit construction, using sequences of well-defined priors that become increasingly dispersed. Admissible strategies are those for which ex ante payoffs along these sequences converge to a limit that does not depend on the particular sequence. A secondary contribution of the paper is a generalization of the concept of distributional strategies (Milgrom and Weber, 1985) to multistage games.

Last Revised: March 31, 2018

Date Written: May 2017

 

Ricardian Inference: Charles S. Peirce, Economics, and Scientific Method

Link

AuthorKevin D. Hoover and James R. Wible

Abstract: Standard histories of economics usually treat the “marginal revolution” of the midnineteenth century as both supplanting the “classical” economics of Smith and Ricardo and as advancing the idea of economics as a mathematical science. The marginalists – especially Jevons and Walras – viewed Cournot’s (1838) book on mathematical economics as a seminal work on which they could build. Surprisingly, the scientist, philosopher, and logician Charles S. Peirce discovered Cournot before the marginalist economists and possessed a deeper appreciation of his mathematical approach. While Peirce’s contributions to economics are limited, the influence of economics on his philosophy is subtle and not well understood. In a number of fragments, Peirce, who, despite Ricardo’s lack of mathematical form, nonetheless regarded him as a paradigmatic mathematical economist, refers to “Ricardian inference,” as a fundamental contribution to scientific method. Two, perhaps complementary, options are explored as to exactly what Peirce meant by Ricardian inference. On the one hand, he associates Ricardo with the “primipostnumeral syllogism,” which is a sort of generalization to uncountably infinite sets of what Peirce calls Fermatian inference (often referred to as mathematical induction). On the other hand, he holds up Ricardo as an exemplar of the “analytical method,” which is Peirce’s name for a hybrid form connecting analogy, abduction, and induction. On either account, economics plays a larger and more fundamental role in Peirce’s philosophy of science than is generally understood.

Last Revised: February 21. 2018

Date Written: July 10, 2017

 

The Economics of Trade Liberalization: Charles S. Peirce and the Spanish Treaty of 1884

Link

AuthorKevin D. Hoover and James R. Wible

Abstract: In the 1870s and 1880s, the scientist, logician, and pragmatist philosopher Charles S. Peirce possessed an advanced knowledge of mathematical economics, having mastered and criticized Cournot as early as 1871. In 1884 he engaged in a multi-round debate with the editors of The Nation over the economics of trade liberalization in the case of a proposed trade treaty with Spain concerning import tariffs on Cuban and Puerto Rican sugar. The debate is reconstructed and related carefully both to Peirce’s understanding of mathematical economics and to his philosophy of science.

Last Revised: February 21, 2018

Date Written: July 10, 2017

 

The Evolution of U.S. Spectrum Values Over Time

Link

AuthorMichelle Connolly, Nelson Sá, Azeem Zaman, Christopher Roark and Akshaya Trivedi 

Abstract: Using data on all FCC auctions of spectrum related to cellular services from 1997 to 2015 we attempt to identify intrinsic spectrum values from winning auction bids. Our analysis includes 15 auctions and close to 7,200 observations. We add two components to previous literature on this topic. First, we control for license and block specific auction rules. Second, we introduce two technological measures to separate out technological progress that effectively reduces spectrum scarcity from technological progress that increases demand for mobile applications. Previous papers have included simple time trends to reflect technological changes. Time trends are unable to distinguish across markets within the United States and conflate the effects of these two types of technological progress. Our results confirm previous theoretical and empirical findings for basic measures of demand such as population, population density, income levels, frequency levels, bandwidth and paired bands. We were surprised that 47 percent of all cellular licenses since 1997 have been won by small bidders: 42 percent were won using small bidder credits, 5 percent were won in set-aside/closed licenses, and 10 percent were won in closed licenses using bidding credits. Adjusting for the value of these licenses, this represents 27 percent of the real dollar value of these licenses. Our results further quantify the negative impact on headline winning bids when won using bidding credits. Increased spectral efficiency appears to be reducing spectrum scarcity as evidenced by its lowering of winning bids. Additionally, auction results confirm that the relative value of higher frequency spectrum is increasing over time.

Last Revised: February 12, 2018

Date Written: June 2017

 

A Delegation-Based Theory of Expertise

Link

AuthorAttila Ambrus, Volodymyr Baranovskyi and Aaron Kolb

Abstract: We investigate competition in a delegation framework. An uninformed principal is unable to perform a task herself and must choose between one of two biased and imperfectly informed experts. In equilibrium experts exaggerate their biases, similarly to the winner's curse phenomenon in common value auctions. We show that having a second expert can benefit the principal, even if the two experts have the same biases or if the first expert is known to be unbiased. Our principal can benefit from commitment to randomization and prefers experts with equal rather than opposite biases, in contrast to related work.

Last Revised: February 8, 2018

Date Written: August 2015

 
Supplementary Appendix to 'A Delegation-Based Theory of Expertise'

Link

Author: Attila Ambrus, Volodymyr Baranovskyi and Aaron Kolb

Abstract: This supplement provides welfare results not contained in the main text and a proof of Lemma A.1. For small bonuses, a mixed equilibrium exists if and only if a max equilibrium exists; if so, it is unique. For large bonuses, we find a unique candidate for mixed equilibrium and show that mixed and min equilibria cannot co-exist. Also, we give an example for equal biases, where this candidate is indeed a mixed equilibrium. However, when biases are different enough and the bonus is high, a mixed equilibrium does not exist. Though a general analytical comparison is infeasible, we show that mixed equilibria are inferior to min equilibrium or simple delegation in various special cases.

Date Written: February 8, 2018

 
More Apples vs. Better Apples: Distribution and Innovation-Driven Growth

Link

Author: Robert F. Kane and Pietro F. Peretto

Abstract: We model distribution, the delivery of goods to customers, as an activity governed by its own technology and undertaken by firms subsequently to production operations. We then use the model to investigate how distribution shapes innovation-driven economic growth. We contrast two canonical specifications of distribution costs, iceberg vs. per-unit, and characterize their implications for innovation. The per-unit cost implies that factory-specific productivity improvements cannot sustain steady-state growth. The reason is the classic Alchian-Allen insight: as the unit cost of production falls relative to the cost of distribution, it becomes harder to increase sales through cost reduction. Quality improvement, on the other hand, raises the services that customers obtain from each physical unit of the good so that firms can increase the volume of services delivered without increasing the volume of shipments. This mechanism explains why as the economy develops it gradually engages in more quality improvement relative to cost reduction. Unless technological advancements allow the distribution cost to fall to zero, quantity growth must cease and long-run growth must be driven by quality improvement. More generally, the ratio of distribution to manufacturing unit costs must be constant in the steady state. The iceberg cost delivers this property by assumption. The per-unit distribution cost, instead, yields an endogenous structure of the costs of serving the market.

Date:  January 24. 2018

2017

If We Allow Football Players and Boxers to Be Paid for Entertaining the Public, Why Don't We Allow Kidney Donors to Be Paid for Saving Lives?

Link

Author: Philip J. Cook and Kimberly D. Krawiec

Abstract: We contrast the compensation ban on organ donation with the legal treatment of football, boxing, and other violent sports where both acute and chronic injuries to participants are common. Our claim is that there is a stronger case for compensating kidney donors than for compensating participants in violent sports. If this proposition is accepted, one implication is that there are only three logically consistent positions: allow compensation for both kidney donation and for violent sports; allow compensation for kidney donation but not for violent sports; or allow compensation for neither. Our current law and practice is perverse in endorsing a fourth regime, allowing compensation for violent sports but not kidney donation.

We base our argument chiefly on the medical risk to participants, the consent process, social justice concerns, and social welfare considerations. The medical risks to a professional career in football, boxing, and other violent sports are much greater both in the near and long term than the risks of donating a kidney. On the other hand, the consent and screening process in professional sports is not as developed as in kidney donation. The social justice concerns stem from the fact that most players are black and some come from impoverished backgrounds. Finally, the net social benefit from compensating kidney donors – namely, saving thousands of lives each year and reducing the suffering of 100,000 more receiving dialysis – far exceeds the net social benefit of entertaining the public through professional sports. In sum, the arguments against compensating kidney donors apply with equal or greater force to compensating athletes in these sports.

Date Written: December 27, 2017

 

Through Scarcity to Prosperity: A Theory of the Transition to Sustainable Growth

Link

AuthorPietro F. Peretto

Abstract: This paper integrates fertility choice and exhaustible resource dynamics in a tractable model of endogenous technological change. The analysis shows that, under the right conditions, the interdependence of population, resources and technology produces a transition from unsustainable resource-based growth to sustainable knowledge-based growth that consists of three phases: (1) an initial phase where agents build up the economy by exploiting exhaustible natural resources to support population growth; (2) an intermediate phase where agents turn on the Schumpeterian engine of endogenous innovation in response to population-led market expansion; (3) a terminal phase where growth becomes fully driven by knowledge accumulation and no longer requires growth of physical inputs. The last phase is crucial: not only economic growth no longer requires growth of physical inputs, but technological change also compensates for the exhaustion of the natural resource stock.

Date Written: November 20, 2017

 

Bubbles on the Steppe: Intrinsic Bubbles and Credit Expansion in Kazakhstan's Real Estate Market

Link

Author: Galina A. An, Charles Becker and Enoch Cheng

Abstract: This paper uses high frequency aggregate housing price data from 2000 through 2017 for the minerals-rich former Soviet republic of Kazakhstan to explore price movements during boom and stagnation cycles. Kazakhstan experienced staggeringly rapid housing price growth at the outset of this period, when real prices for existing housing rose more than ten-fold in a seven-year period. Despite this rise (and subsequent decline by roughly one-third), it appears that bubble components as variously measured were small for new housing, and largely limited to 2002-04. A far larger bubble appears for sales of existing units, but unrecorded renovation expenditures may be pushing this term up. However, co-movement with vast credit expansion leads us to conclude that there is not enough evidence to support the rational speculative bubble model in Kazakhstan during 2000-2017, but we do find evidence for a policy-induced boom. What was not small was the huge rise in real housing wealth (and its likely contribution to aggregate demand) or the roughly 40% rise in housing stock that occurred during 2003-15. We conclude that credit expansion, housing wealth, and housing construction are far more important at least to a class of upper-middle-income countries than is generally appreciated.

Last Revised: November 17, 2017

Date Written: September 27, 2017

 

News or Noise? The Missing Link

Link

Author: Ryan Chahrour and Kyle Jurado

Abstract: The literature on belief-driven business cycles treats news and noise as distinct representations of agents' beliefs. We prove they are empirically the same. Our result lets us isolate the importance of purely belief-driven fluctuations. Using three prominent estimated models, we show that existing research understates the importance of pure beliefs. We also explain how differences in both economic environment and information structure affect the estimated importance of pure beliefs.

Last Revised: November 2, 2017

Date Written: September 2016

 

Recoverability

Link

Author: Ryan Chahrour and Kyle Jurado 

Abstract: When can structural shocks be recovered from observable data? We present a necessary and sufficient condition that gives the answer for any linear model. Invertibility, which requires that shocks be recoverable from current and past data only, is sufficient but not necessary. This means that semi-structural empirical methods like structural vector autoregression analysis can be applied even to models with non-invertible shocks. We illustrate these results in the context of a simple model of consumption determination with productivity shocks and non-productivity noise shocks. In an application to postwar U.S. data, we find that non-productivity shocks account for a large majority of fluctuations in aggregate consumption over business cycle frequencies.

Date Written: November 1, 2017

 

Risk Attitude Optimization and Heterogeneous Stock Market Participation

Link

Author: Todd Sarver

Abstract: This paper studies equilibrium portfolio choice and asset returns using a new model of recursive preferences called optimal risk attitude utility. Our model is an extension of recursive expected utility that allows an individual to optimally select her risk aversion parameter in response to the uncertainty that she faces. Choosing a lower level of risk aversion comes at a cognitive cost, and therefore is only undertaken in response to sufficiently large risk exposure. In addition to separating risk aversion from the elasticity of intertemporal substitution, our model can also separate risk attitudes toward small and large risks. We solve the dynamic stochastic general equilibrium of a calibrated economy and show that optimal risk attitude utility can provide a partial resolution to both the stock market participation puzzle and the equity premium puzzle. Our model generates a moderate premium for equity as well as endogenous heterogeneity in risk exposure, with one segment of the population holding minimal risk while the other holds a disproportionate share of aggregate risk, even when consumers have identical preferences and even among wealthy households. Using simple binary gambles as a rationality check for our model, we demonstrate that the preference parameters used in our calibration exhibit descriptively accurate levels of risk aversion for gambles ranging from one hundred dollars up to ten percent of wealth.

Date: October 20, 2017

 

Market Power, Production (Mis)Allocation, and OPEC

Link

Author: John Asker, Allan Collard-Wexler and Jan De Loecker

Abstract: This paper estimates the extent to which market power is a source of production misallocation. Productive inefficiency occurs through more production being allocated to higher cost units of production, and less production to lower-cost production units, conditional on a fixed aggregate quantity. We rely on rich micro-data covering the global market for crude oil, from 1970 to 2014, to quantify the extent of productive misallocation attributable to market power exerted by the OPEC. We find substantial productive inefficiency attributable to market power, ranging from 14.1 percent to 21.9 percent of the total productive inefficiency, or 105 to 163 billion USD.

Date Written: October 18, 2017

 

Wealth Creation, Wealth Dilution, and Population Dynamics

Link

Author: Christa N. Brunnschweiler, Pietro F. Peretto and Simone Valente

Abstract: Wealth creation driven by R&D investment and wealth dilution caused by disconnected generations interact with households’ fertility decisions, delivering a theory of sustained endogenous output growth with a constant endogenous population level in the long run. Unlike traditional theories, our model fully abstracts from Malthusian mechanisms and provides a demography-based view of the long run where the ratios of key macroeconomic variables ñ consumption, labor incomes and financial assets - are determined by demography and preferences, not by technology. Calibrating the model parameters on OECD data, we show that negative demographic shocks induced by barriers to immigration or increased reproduction costs may raise growth in the very long run, but reduce the welfare of a long sequence of generations by causing permanent reductions in the mass of firms and in labor income shares, as well as prolonged stagnation during the transition.

Date Written: October 18, 2017

 

Advice is Cheap: Information is Not!

Link

Author: Samuel Haefner and Curtis R. Taylor 

Abstract: An entrepreneur contracts with a consultant, who is protected by limited liability, to supply information about the state of a project prior to investing in it. For a given level of investment, a good project succeeds with higher probability than a bad one. The entrepreneur makes an upfront payment that the consultant can either invest in information acquisition (work) or divert for private benefit (shirk). If the consultant works, then he privately observes an unverifiable signal concerning the state of the project. Whether he works or shirks, the consultant reports a signal realization to the entrepreneur who then invests in the project in accordance with the advice she receives. Three contracting environments are considered: (i) complete contingent contracts in which compensation to the consultant may depend on reports, investment levels, and project outcomes; (ii) incomplete contingent contracts in which compensation may depend only on reports and project outcomes; and (iii) reputational contracts in which the consultant receives a non-contingent payment from a sequence of entrepreneurs so long as his referrals remain high. The principal under-utilizes information in settings (i) and (ii). In setting (iii) investments are statically but not dynamically efficient. For some parameter values the consultant shirks with positive probability and, therefore, supplies garbled advice. Finally, it is shown that if the consultant delivers no advice, then he nevertheless must be compensated in setting (i) and penalized in setting (iii).

Date Written: October 13, 2017

 

Social Pressure, Transparency, and Voting in Committees

Link

Author: Alvaro Name Correa and Huseyin Yildirim

Abstract: We examine the consequences of vote transparency in committees whose members fear being blamed by partisan observers for casting an unfavorable vote. We show that such social pressure, like optimal taxation, can improve the collective decision by mitigating a voting externality. Hence, institutions may adopt public voting when the fear of blame is too little, and secret voting when the fear is too much. We also show that public voting is particularly desirable in committees with overly biased members or overly biased voting rules against the alternative.

Last Revised: October 13, 2017

Date Written: September 4, 2017

 

A Countercultural Methodology: Caldwell's Beyond Positivism at Thirty-Five

Link

AuthorKevin D. Hoover

Abstract: Caldwell’s Beyond Positivism was a key publication that helped to precipitate the consolidation of the methodology of economics into a distinct subfield within economics. Reconsidering it after thirty-five years, it is striking for its anti-naturalism (i.e., its lack of deference to the actual practices of economics) or, perhaps, for its meta-naturalism (displayed in its excessive deference to the philosophy of science) and for its defense of pluralism. It offers pluralism as an unsuccessful defense against dogmatism. Against Caldwell’s pluralism, dogmatism is better opposed by a commitment of fallibilism and scientific humility. Caldwell’s defense of Austrian methodology is taken as a case study to illustrate and investigate his key themes and the issues that they raise.

Last Revised: October 3, 2017

Date Written: August 8, 2017

 

Estimation of Dynamic Discrete Choice Models in Continuous Time with an Application to Retail Competition

Link

AuthorPeter Arcidiacono, Patrick J. Bayer, Jason R. Blevins and Paul B. Ellickson

Abstract: This paper develops a dynamic model of retail competition and uses it to study the impact of the expansion of a new national competitor on the structure of urban markets. In order to accommodate substantial heterogeneity (both observed and unobserved) across agents and markets, the paper first develops a general framework for estimating and solving dynamic discrete choice models in continuous time that is computationally light and readily applicable to dynamic games. In the proposed framework, players face a standard dynamic discrete choice problem at decision times that occur stochastically. The resulting stochastic-sequential structure naturally admits the use of CCP methods for estimation and makes it possible to compute counterfactual simulations for relatively high-dimensional games. The model and method are applied to the retail grocery industry, into which Wal-Mart began rapidly expanding in the early 1990s, eventually attaining a dominant position. We find that Wal-Mart’s expansion into groceries came mostly at the expense of the large incumbent supermarket chains, rather than the single-store outlets that bore the brunt of its earlier conquest of the broader general merchandise sector. Instead, we find that independent grocers actually thrive when Wal-Mart enters, leading to an overall reduction in market concentration. These competitive effects are strongest in larger markets and those into which Wal-Mart expanded most rapidly, suggesting a diminishing role of scale and a greater emphasis on differentiation in this previously mature industry.

Last Revised: September 29, 2017

Date Written: January 28, 2015

 

The Z-Axis: Elevation Gradient Effects in Urban America

Link

AuthorCharles Becker and Victor Ye

Abstract: This paper presents an in-depth analysis of hilliness effects in American urban communities. Using data from seventeen cities, we establish robust relationships between topography and density, income and housing value gradients. We find that high-income households display strong preference not only for higher altitude but also for unevenness, leading to spatial income stratification at both the city and tract-level. We analyze potential causes of this propensity: micro-climate, crime, congestion, view effects, and use of public transit. We conclude that multi-dimensional spatial methods are crucial to investigations of cities with substantial unevenness. Moreover, redistributive social and economic policies must struggle with a fundamental, topographical dimension to inequality.

Last Revised: September 29, 2017

Date Written: June 2016

 

Robust Endogenous Growth

Link

AuthorPietro F. Peretto

Abstract: This paper studies a generalization of the Schumpeterian models with endogenous market structure that allows the overall production structure to be more than linear in the growth driving factor and yet generates endogenous growth, defined as steady-state, constant, exponential growth of income per capita. This version of modern growth theory, therefore, is robust in the sense that its key result obtains for a thick set of parameter values instead of, as often claimed, for a set of measure zero. The paper, moreover, pays close attention to transitional dynamics, showing not only the existence but also the global stability of the endogenous-growth steady state.

Date Written: September 4, 2017

 

Naiveté About Temptation and Self-Control: Foundations for Naive Quasi-Hyperbolic Discounting

Link

Author: David S. Ahn, Ryota Iijima and Todd Sarver

Abstract: We introduce and characterize a recursive model of dynamic choice that accommodates naivete about present bias. The model incorporates costly self-control in the sense of Gul and Pesendorfer (2001) to overcome the technical hurdles of the Strotz representation. The important novel condition is an axiom for naivete. We first introduce appropriate definitions of absolute and comparative naivete for a simple two-period model, and explore their implications for the costly self-control model. We then extend this definition for infinite-horizon environments, and discuss some of the subtleties involved with the extension. Incorporating the definition of absolute naivete as an axiom, we characterize a recursive representation of naive quasi-hyperbolic discounting with self-control for an individual who is jointly overoptimistic about her present-bias factor and her ability to resist instant gratification. We study the implications of our proposed comparison of naivete for the parameters of the recursive representation. Finally, we discuss the obstacles that preclude more general notions of naivete, and illuminate the impossibility of a definition that simultaneously incorporates both random choice and costly self-control.

Date Written: July 19, 2017

 

Dynamic Semiparametric Models for Expected Shortfall (and Value-At-Risk)

Link

AuthorAndrew J. Patton, Johanna Ziegel and Rui Chen

Abstract: Expected Shortfall (ES) is the average return on a risky asset conditional on the return being below some quantile of its distribution, namely its Value-at-Risk (VaR). The Basel III Accord, which will be implemented in the years leading up to 2019, places new attention on ES, but unlike VaR, there is little existing work on modeling ES. We use recent results from statistical decision theory to overcome the problem of "elicitability" for ES by jointly modelling ES and VaR, and propose new dynamic models for these risk measures. We provide estimation and inference methods for the proposed models, and confirm via simulation studies that the methods have good finite-sample properties. We apply these models to daily returns on four international equity indices, and find the proposed new ES-VaR models outperform forecasts based on GARCH or rolling window models.

Date Written: July 11, 2017

 

Margins of Labor Market Adjustment to Trade

Link

AuthorRafael Dix-Carneiro and Brian Kovak

Abstract: We use both longitudinal administrative data and cross-sectional household survey data to study the margins of labor market adjustment following Brazil’s early 1990s trade liberalization. We document how workers and regional labor markets adjust to trade-induced changes in local labor demand, examining various adjustment margins, including earnings and wage changes; interregional migration; shifts between tradable and nontradable employment; and shifts between formal employment, informal employment, and non-employment. Our results provide insight into the regional labor market effects of trade, and have important implications for policies that address informal employment and that assist trade-displaced workers. 

Date Written: June 2017

 

Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

Link

Author: Eric M. Aldrich and Howard Kung

Abstract: We compare local and global polynomial solution methods for DSGE models with Epstein-Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Last Revised: May 10, 2017

Date Written: January 23, 2017

 

Different Strokes for Different Folks: Experimental Evidence on the Effectiveness of Input and Output Incentive Contracts for Health Care Providers with Different Levels of Skills

Link

AuthorManoj Mohanan, Grant Miller, Katherine Donato, Yulya Truskinovsky and Marcos Vera-Hernandez

Abstract: A central issue in designing performance incentive contracts is whether to reward the production of outputs versus use of inputs: the former rewards efficiency and innovation in production, while the latter imposes less risk on agents. Agents with varying levels of skill may perform better under different contractual bases as well – more skilled workers may be better able to innovate, for example. We study these issues empirically through an experiment enabling us to observe and verify outputs (health outcomes) and inputs (guideline adherence) in Indian maternity care. We find that both output and input incentive contracts achieved comparable reductions in post-partum hemorrhage (PPH) rates, the dimension of maternity care most sensitive to provider behavior and the largest cause of maternal mortality. Interestingly, and in line with the theory, providers with advanced qualifications performed better and used new health delivery strategies under output incentives, while providers with and without advanced qualifications performed equally under input incentives.

Date Written: May 2, 2017

 

Multitasking and Heterogeneous Treatment Effects in Pay-for-Performance in Health Care: Evidence from Rwanda

Link

Author: Tisamarie Sherry, Sebastian Bauhoff and Manoj Mohanan

Abstract: Performance-based contracting is particularly challenging in health care, where multiple agents, information asymmetries and other market failures compound the critical contracting concern of multitasking. As performance-based contracting grows in developing countries, it is critical to better understand not only intended program impacts on rewarded outcomes, but also unintended program impacts such as multitasking and heterogeneous program effects in order to guide program design and scale-up. We use two waves of data from the Rwanda Demographic and Health Surveys collected before and after the quasi-experimental roll- out of Rwanda’s national pay-for-performance (P4P) program to analyze impacts on utilization of healthcare services, health outcomes and unintended consequences of P4P. We find that P4P improved some rewarded services, as well as some services that were not directly rewarded, but had no statistically significant impact on health outcomes. We do not find evidence that clearly suggests multitasking. We find that program effects vary by baseline levels of facility quality, with most improvements seen in the medium quality tier.

Last Revised: May 2, 2017

Date Written: March 1, 2016

 

Growing Productivity Without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline

Link

AuthorMatthias Kehrig and Nicolas Vincent

Abstract: The aggregate labor share in U.S. manufacturing declined dramatically over the last three decades: Since the mid-1980's, the compensation for labor declined from 67% to 47% of value added which is unseen in any other sector of the U.S. economy. The labor share of the typical U.S. manufacturing plants, in contrast, rose by over 5 percentage points. We reconcile these two facts by documenting (1) an important reallocation of production towards “hyper-productive plants” and (2) a downward adjustment of the labor share of those same plants over time. These two related forces account for almost all the change in the trend of aggregate labor share in the manufacturing sector, with only a small role for exit of high-labor-share plants. Relative to their peers, plants that account for the majority of production by the late 2000's arrive at a low labor share by gradually increasing value added by a factor of three while keeping employment and compensation unchanged.

Last Revised: April 25, 2017

Date Written: March 2017

 

2016

Economic Shocks and Crime: Evidence from the Brazilian Trade Liberalization

Link

AuthorRafael Dix-Carneiro, Rodrigo R. Soares and Gabriel Ulyssea

Abstract: This paper studies the effect of changes in economic conditions on crime. We exploit the 1990s trade liberalization in Brazil as a natural experiment generating exogenous shocks to local economies. We document that regions exposed to larger tariff reductions experienced a temporary increase in crime following liberalization. Next, we investigate through what channels the trade-induced economic shocks may have affected crime. We show that the shocks had significant effects on potential determinants of crime, such as labor market conditions, public goods provision, and income inequality. We propose a novel framework exploiting the distinct dynamic responses of these variables to obtain bounds on the effect of labor market conditions on crime. Our results indicate that this channel accounts for 75 to 93 percent of the effect of the trade-induced shocks on crime.

Date Written: December 22, 2016

 

A Capture Theory of Committees

Link

Author: Alvaro Name Correa and Huseyin Yildirim

Abstract: Why do committees exist? The extant literature emphasizes that they pool dispersed information across members. In this paper, we argue that they may also serve to discourage outside influence or capture by raising its cost. As such, committees may contain members who add no new information to the collective decision. We show that the optimal committee is larger when outsiders have higher stakes in its decision, lower quality proposals or more rivals, or when its members are more corruptible. We also show that keeping committee members anonymous and accountable for their votes can help deter capture.

Date Written: November 24, 2016

 

Behavioral Characterizations of Naiveté for Time-Inconsistent Preferences

Link

Author: David S. Ahn, Ryota Iijima, Yves Le Yaouanq and Todd Sarver

Abstract: We propose nonparametric definitions of absolute and comparative naiveté. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent between choosing from a menu ex post or committing to the actual distribution of choices from that menu ex ante. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naiveté and explore the restrictions implied by our definitions for several prominent models of time inconsistency. Finally, we discuss the implications of general naiveté for welfare and the design of commitment devices.

Date Written: November 14, 2016

 

Appendix to 'Queen Bees and Domestic Violence: Patrilocal Marriage in Tajikistan'

Link

AuthorCharles Becker and Mavzuna Turaeva

Abstract: Appendix to “Queen Bees and Domestic Violence: Patrilocal Marriage in Tajikistan,” available here: http://ssrn.com/abstract=2862096.

Date Written: October 31, 2016

 

Internal and External Validity of Experimental Risk and Time Preferences

Link

Author: Christian Belzil and Modibo Sidibe 

Abstract: Using a unique field experiment from Canada, we estimate individual preference over risk and time and show considerable heterogeneity in both dimensions and relatively stable distributions across our various specifications, which include hyperbolic, quasi-hyperbolic discounting as well as subjective failure probability over future payments. We investigate the prediction power (transportability) of the estimated preference parameters when used to explain the take-up decision of higher education grants where financial stakes are approximately seven to fifty times larger than the cash transfers used to elicit preferences. We find that both long-run discount factors and subjective payment failure risk parameters have a high degree of transportability across tasks, while parameters characterizing short-run discount preferences are irrelevant when considering higher-stakes decisions.

Date Written: October 31, 2016

 

Do Chinese Investors Get What They Don't Pay For? Expense Ratios, Loads, and the Returns to China's Open-End Mutual Funds

Link

Author: Yang Wang and Edward Tower

Abstract: In this paper we analyze the performance of China's open-ended mutual funds, using the data of 467 open-ended mutual funds from 60 fund families from January 2010 through April 2015. A paradox emerges. High expense ratios are associated with better performance. Unsurprisingly, in light of studies of US funds, when we benchmark performance against stock indexes with the same style, we find that the performance of most mutual funds does not beat the collection of indexes that most closely track the fund. Also, unsurprisingly, we find fund families with high expense ratios serve investors less well than those with low expense ratios, and, unsurprisingly in light of research on the US mutual fund market, the return reduction is larger than can be accounted for by the difference in expense ratios. Surprisingly, for most mutual funds we find high and similar expense ratios. We rank the mutual fund companies from best to worst, and we name names to help investors pick relatively good fund companies. Investors would earn higher returns by investing in mutual funds with low expense ratios and lower sales loads.

Date Written: October 27, 2016

 

The (Literally) Steepest Slope: Spatial, Temporal, and Elevation Variance Gradients in Urban Spatial Modelling

Link

AuthorCharles Becker and Victor Ye

Abstract: This paper presents an analysis of elevation gradient and temporal future-station effects in urban real estate markets. Using an extraordinary dataset from the Hong Kong publicly-constructed housing sector, we find enormous housing price effects caused by levels of terrain incline between apartments and subway stations. Ceteris paribus, two similar apartments with closest metro stations of the same walking distance may sell at a difference of up to 20% because of differences in the apartment-station slope alone. Anticipatory effects are similarly robust: apartment buyers regard a future, closer metro station as being 60% present when making purchases two years prior to its opening.

Date Written: October 15, 2016

 

Frictional Spatial Equilibrium

Link

Author: Benoît Schmutz and Modibo Sidibe

Abstract: We study the properties of spatial equilibrium in an economy where locations have heterogeneous endowments and the labour market is subject to matching frictions. Both workers and firms make endogenous location decisions, which, in turn, determine the spatial distribution of unemployment, wage and firm density, as well as city population. We explain why diverse urban configurations may coexist in a country without any impediment to labour mobility, and in particular, why homogeneous workers, free to move at will, may be subject to spatial stickiness while welfare is not equalized across space. We also introduce a typology of cities based on the productivity of their local amenities, which describes the co-movement of local economic outcomes and we show that the introduction of commercial real estate induces an asymmetry between urban decline and urban growth. Positive (negative) productivity shocks are more (less) likely to increase (decrease) population than rent, rent than wages, and wages than employment.

Date Written: September 27, 2016

 

Mixture-Averse Preferences and Heterogeneous Stock Market Participation

Link

Author: Todd Sarver

AbstractTo study intertemporal decisions under risk, we develop a new recursive model of non-expected-utility preferences. The main axiom of our analysis is called mixture aversion, as it captures a dislike of probabilistic mixtures of lotteries. Our representation for mixture-averse preferences can be interpreted as if an individual optimally selects her risk attitude from some feasible set. The representation includes special cases where the choice of risk attitude takes the form of an optimal selection of a reference point. We analyze the implications of the model for both insurance and investment decisions. The main application of the paper shows that mixture-averse preferences can generate endogenous heterogeneity in equilibrium stock market participation, even when consumers have identical preferences and even among wealthy households.

Date Written: September 9, 2016

 

Manufacturing Fetishism: The Neo-Mercantilist Preoccupation with Protecting Manufacturing

Link

Author: Alecia Cassidy, Edward Tower and Lucy Xiaolu Wang

Abstract: Two common views are that a country cannot develop without a strong manufacturing base and that trade restrictions are essential to facilitate the development of that strong manufacturing base and thus spur economic growth. We ask:

• Does a strong manufacturing share of GDP facilitate economic growth? • Do trade restrictions ensure the development of a strong manufacturing base? • How can governance affect manufacturing share? • And are the relationships we find robust across regions?

We find the manufacturing share is not significantly correlated with a higher standard of living. Nor is it related significantly and consistently to economic growth. We also find that trade restrictions both at home and abroad shrink the manufacturing base and smother economic growth. A better way than protectionism and subsidies specific to industry to enhance economic growth is to improve governance effectiveness and the quality of regulation.

Date Written: September 1, 2016

 

Regulation of Price Increases

Link

AuthorDavid B. Ridley and Su Zhang

Abstract: U.S. federal and state governments rarely regulate healthcare price levels, but do regulate price changes for pharmaceuticals, hospitals, and health insurance. Previous research showed that limiting price increases can raise launch prices and reduce both profit and social welfare, assuming consumers are myopic. We show that with forward-looking consumers, limiting price increases can have the opposite effect, that is, launch prices fall while profit and social welfare rise. Ironically, inflation regulation can cause inflation to rise, but only because firms are reducing launch prices to make the regulation bind and credibly commit to future prices.

Date Written: August 22, 2016

 

Transfers and Taxes: How Balancing the Budget with Distortionary Taxation Further Blesses the Recipient of a Transfer and Burdens the Donor

Link

Author: Edward Tower

Abstract: Suppose one country receives a transfer from another. Both are small, so world prices are unaffected. Each adjusts her tariff to achieve budget balance. If and only if the initial tariffs are below the maximum revenue levels, the recipient’s tariff falls and the donor’s tariff rises. The recipient benefits from the shrinkage of her distortion. Similarly, the donor suffers from her higher tariff. I establish this proposition then generalize it to taxes on many goods and factors, and variable world prices. For each country, the change in utility is minus the sum of the change in the total tax rate and the terms of trade effect.

Date Written: August 18, 2016

 

Production Function Estimation with Measurement Error in Inputs

Link

AuthorAllan Collard-Wexler and Jan De Loecker

Abstract: Production functions are a central component in a variety of economic analyses. However, these production functions often first need to be estimated using data on individual production units. There is reason to believe that, more than any other input in the production process, there are severe errors in the recording of capital stock. Thus, when estimating production functions, we need to account for the ubiquity of measurement error in capital stock. This paper shows that commonly used estimation techniques in the productivity literature fail in the presence of plausible amounts of measurement error in capital. We propose an estimator that addresses this measurement error, while controlling for unobserved productivity shocks. Our main insight is that investment expenditures are informative about a producer’s capital stock, and we propose a hybrid IV-Control function approach that instruments capital with (lagged) investment, while relying on standard intermediate input demand equations to offset the simultaneity bias. We rely on a series of Monte Carlo simulations and find that standard approaches yield downward-biased capital coefficients, while our estimator does not. We apply our estimator to two standard datasets, the census of manufacturing firms in India and Slovenia, and find capital coefficients that are, on average, twice as large.

Date Written: August 16, 2016

 

Trade Liberalization and Regional Dynamics

Link

AuthorRafael Dix-Carneiro and Brian Kovak

Abstract: We study the evolution of trade liberalization’s effects on local labor markets, following Brazil’s early 1990s trade liberalization. Regions that initially specialized in industries facing larger tariff cuts experienced prolonged declines in formal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberalization was three times the size of the effect 10 years after liberalization. These findings are robust to a variety of alternative specifications and to controlling for a wide array of post-liberalization shocks. The pattern of increasing effects on regional earnings is not consistent with conventional spatial equilibrium models, which predict that effect magnitudes decline over time due to spatial arbitrage. We investigate potential mechanisms, finding empirical support for a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies. This mechanism gradually amplifies the initial labor demand shock resulting from liberalization. We show that the mechanism explains the slow adjustment path of regional earnings and quantitatively accounts for the magnitude of the long-run effects.

Date Written: August 1, 2016

 

College Attrition and the Dynamics of Information Revelation

Link

AuthorPeter Arcidiacono, Esteban M. Aucejo, Arnaud Maurel and Tyler Ransom

Abstract: This paper investigates the role played by informational frictions in college and the workplace. We estimate a dynamic structural model of schooling and work decisions, where individuals have imperfect information about their schooling ability and labor market productivity. We take into account the heterogeneity in schooling investments by distinguishing between two- and four-year colleges, graduate school, as well as science and non-science majors for four-year colleges. Individuals may also choose whether to work full-time, part-time, or not at all. A key feature of our approach is to account for correlated learning through college grades and wages, whereby individuals may leave or re-enter college as a result of the arrival of new information on their ability and productivity. Our findings indicate that the elimination of informational frictions would increase the college graduation rate by 9 percentage points, and would increase the college wage premium by 32.7 percentage points through increased sorting on ability.

Last Revised: July 30, 2016

Date Written: May 31, 2016

 

Call Me Maybe: Experimental Evidence on Using Mobile Phones to Survey Microenterprises

Link

AuthorRobert Garlick, Kate Orkin and Simon Quinn

Abstract: High-frequency data is useful to measure volatility, reduce recall bias, and measure dynamic treatment effects. We conduct the first experimental evaluation of high-frequency phone surveys in a developing country or with microenterprises. We randomly assign microenterprise owners to monthly in-person, weekly in-person, or weekly phone interviews. We find high-frequency phone surveys are useful and accurate. Phone and in-person surveys yield similar measurements, with few large or significant differences in reported outcome means or distributions. Neither interview frequency nor medium affects reported outcomes in a common in-person endline. Phone surveys reduce costs without increasing permanent attrition from the panel.

Date Written: July 27, 2016

 

Preferences with Taste Shock Representations: Price Volatility and the Liquidity Premium

Link

Author: R. Vijay Krishna and Philipp Sadowski

Abstract: If price volatility is caused in some part by taste shocks, then it should be positively correlated with the liquidity premium. Our argument is based on Krishna and Sadowski (2014), who provide foundations for a representation of dynamic choice with taste shocks, and show that volatility in tastes corresponds to a desire to maintain flexibility. To formally connect volatile tastes to price volatility and preference for flexibility to the liquidity premium, we analyze a modified simple Lucas tree economy, where the representative agent is uncertain about his degree of future risk aversion, and where the productive asset cannot be traded in every period, while rights to output can. We show that a representative agent with a higher degree of uncertainty about his future risk aversion implies a higher liquidity premium (i.e., a lower price for the illiquid asset) and more price volatility.

Date Written: June 9, 2016

 

Randomly Evolving Tastes and Delayed Commitment

Link

Author: R. Vijay Krishna and Philipp Sadowski

Abstract: We consider a decision maker with randomly evolving tastes who faces dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice that features uncertain consumption utilities, which evolve according to a subjective Markov process. The parameters of the representation, which are the subjective Markov process governing the evolution of utilities, and the discount factor, are uniquely identified from behavior. We relate the correlation of tastes over time and the desire to delay commitment to future consumption.

Date Written: June 9, 2016

 

Data vs. Methods: Quasi-Experimental Evaluation of Alternative Sample Selection Corrections for Missing College Entrance Exam Score Data

Link

AuthorRobert Garlick and Joshua Hyman

Abstract: In 2007, Michigan began requiring all high school students to take the ACT college entrance exam. This natural experiment allows us to evaluate the performance of several parametric and semiparametric sample selection correction models. We apply each model to the censored, prepolicy test score data and compare the predicted values to the uncensored, post-policy distribution. We vary the set of model predictors to imitate the varying levels of data detail to which a researcher may have access. We find that predictive performance is sensitive to predictor choice but not correction model choice. All models perform poorly using student demographics and school- and district-level characteristics as predictors. However, all models perform well when including students’ prior and contemporaneous scores on other tests. Similarly, correction models using group-level data perform better with more finely disaggregated groups, but produce similar predictions under different functional form assumptions. Our findings are not explained by an absence of selection, the assumptions of the parametric models holding, or the data lacking sufficient variation to permit useful semiparametric estimation. We conclude that “data beat methods” in this setting: gains from using less restrictive econometric methods are small relative to gains from seeking richer or more disaggregated data.

Date Written: June 7, 2016

 

Estimating the Value of Higher Education Financial Aid: Evidence from a Field Experiment

Link

Author: Christian Belzil, Arnaud Maurel and Modibo Sidibe

Abstract: Using data from a Canadian field experiment designed to elicit risk and time preferences and quantify financial barriers to higher education, we estimate the distribution of the value of financial aid for prospective students, and relate it to parental socio-economic background, individual skills, risk and time preferences. Our results point to credit constraints affecting a sizable share of prospective students. We find that most of the individuals are willing to pay a sizable interest premium above the prevailing market rate for the option to take-up a loan, with a median interest rate wedge equal to 6.6 percentage points for a $1,000 loan. The willingness-to-pay for financial aid is also highly heterogeneous across students, with preferences, in particular discount factors, playing a key role in accounting for this variation.

Date Written: June 1, 2016

 

Should the Equities in the North Carolina State Employees’ Pension Fund Be Indexed or Actively Managed?

Link

Author: Edward Tower

Abstract: R. Ron Elmer is running for Treasurer of the State of North Carolina. He is aware that the high expenses and high turnover associated with active management of portfolios reduce returns. Part of Elmer’s platform is to replace active management of stock mutual funds, private equity, real estate funds, real estate partnerships, hedge funds and commodity funds with an index investment strategy, managed in house.

Date Written: May 19, 2016

 

Overeagerness

Link

AuthorPhilipp Sadowski

Abstract: We capture the impression that high types may send lower signals than low types in order not to appear too desperate. In contrast to the counter-signaling literature, we require only a noisy one-dimensional signal, where very low signal manifestations force types to execute their outside option. The central assumption is that low types are not only less productive when employed, but that they also face a worse outside option. High types then exploit low types’ eagerness not to end up with their bad outside option by running a larger risk of a very low signal manifestation.

Last Revised: May 18, 2016

Date Written: February 1, 2016

 

Frictional Labor Mobility

Link

Author: Benoît Schmutz and Modibo Sidibe

Abstract: We build a dynamic model of migration where, in addition to classical mobility costs, workers face informational frictions that decrease their ability to compete for distant job opportunities. We structurally estimate the model on a matched employer-employee panel dataset describing labor market transitions within and between the 100 largest French cities. Our identification strategy is based on the premise that frictions affect the frequency of job transitions, while mobility costs impact the distribution of accepted wages. We find that after controlling for frictions, mobility costs are one order of magnitude lower than previously reported in the literature and their effect on labor mobility and unemployment is significantly lower than the effect of informational frictions.

Date Written: May 3, 2016

 

Inertial Behavior and Generalized Partition

Link

Author: David Dillenberger and Philipp Sadowski

Abstract: We call behavior inertial if it does not react to the apparent arrival of relevant information. In a context where the precise information content of signals is subjective, we formulate an axiom that captures inertial behavior, and provide a representation that explains such behavior as that of a rational decision maker who perceives a particular type of information structure, which we call a generalized partition. We characterize the learning processes that can be described by a generalized partition. We proceed to assume that there is a true underlying information structure that may not be a generalized partition, and investigate different channels that may lead the decision maker to nonetheless perceive a generalized partition (and thus to display inertial behavior): A cognitive bias referred to as cognitive inertia and a bound on rationality which we term shortsightedness.

Date Written: May 1, 2016

 

Subjective Dynamic Information Constraints

Link

Author: David Dillenberger, R. Vijay Krishna and Philipp Sadowski

Abstract: We axiomatize a new class of recursive dynamic models that capture subjective constraints on the amount of information a decision maker can obtain, pay attention to, or absorb, via a Markov Decision Process for Information Choice (MIC). An MIC is a subjective decision process that specifies what type of information about the payoff-relevant state is feasible in the current period, and how the choice of what to learn now affects what can be learned in the future. The constraint imposed by the MIC is identified from choice behavior up to a recursive extension of Blackwell dominance. All the other parameters of the model, namely the anticipated evolution of the payoff-relevant state, state dependent consumption utilities, and the discount factor are also uniquely identified.

Date Written: April 2016

 

Forced Marriage and Birth Outcomes

Link

AuthorCharles Becker, Bakhrom Mirkasimov and Susan Steiner

Abstract: We study the impact of bride kidnapping, a peculiar form of marriage practiced in Central Asia, on child birth weight. The search for a suitable mate in a kidnapped marriage is initiated by the groom, and there is typically non-coerced consent only by the male. We expect adverse consequences from such marriages, working through poor spousal matching quality and subsequent psychosocial stress. We analyze survey data from rural Kyrgyzstan. We apply several estimation models, including an IV estimation in which we instrument kidnapping among young women with the district-level prevalence of kidnapping among older women. Our findings indicate that children born to kidnapped mothers are of a substantially lower birth weight than children born to mothers who are not kidnapped. This has important implications for children’s long-term development; it also discredits the ritualized-kidnapping-as-elopement view.

Date Written: April 6, 2016

 

Supplement to 'Subjective Dynamic Information Constraints'

Link

Author: David Dillenberger, R. Vijay Krishna and Philipp Sadowski

Abstract: Supplement to "Subjective Dynamic Information Constraints" (http://ssrn.com/abstract=2774300). All references to definitions and results in this Supplement refer to Dillenberger, Krishna, and Sadowski (2016, henceforth DKS) unless otherwise specified. This supplement is organized as follows. Section 1 establishes the Abstract Static Representation that is the starting point for our derivations in Appendix C of DKS. Section 2 reviews relevant notions from convex analysis. Section 3 provides a preference independent notion of minimality on the space of rics, which is referred to in Section 6 of DKS. Section 4 provides a metric on the space of partitions as referred to in Appendix A.3 of DKS. Section 5 extends the existence of the RAA representation, which is established in Krishna and Sadowski (2014) for finite prize spaces, to our domain with a compact set of prizes, as discussed in Appendix A.7 of DKS. Finally, Section 6 provides a detailed proof of the partitional representation introduced in Appendix C.1 of DKS.

Date Written: April 1, 2016

 

The Financial Power of the Powerless: Socio-Economic Status and Interest Rates under Partial Rule of Law

Link

AuthorTimur Kuran and Jared Rubin

Abstract: In advanced economies interest rates generally vary inversely with the borrower’s socio-economic status, because status tends to depend inversely on default risk. Both of these relationships depend critically on the impartiality of the law. Specifically, they require a lender to be able to sue a recalcitrant borrower in a sufficiently impartial court. Where the law is markedly biased in favor of elites, privileged socio-economic classes will pay a surcharge for capital. This is because they pose a greater risk to lenders who have limited means of punishing them. Legal power, as measured by privileges before the law, thus undermines financial power, which is the capacity to borrow cheaply. Developing the underlying theory, this paper also tests it through a data set consisting of judicial records from Ottoman Istanbul, 1602-1799. Pre-modern Istanbul offers an ideal testing ground because rule of law existed but was highly partial. Court data show that titled elites, men, and Muslims all paid higher interest rates conditional on various loan characteristics. A general implication is that elites can benefit from instituting impartially enforced rules in financial markets. The beginnings of legal modernization in the Ottoman Empire included the establishment of relatively impartial commercial courts.

Last Revised: March 23, 2016

Date Written: October 2014

 

The Impact of Hedge Funds on Asset Markets

Link

Author: Mathias S. Kruttli, Andrew J. Patton and Tarun Ramadorai

Abstract: This paper provides evidence of the impact of hedge funds on asset markets. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, based on the cross-sectional average …first order autocorrelation coefficient of hedge fund returns, and show that it has strong and robust in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We rationalize these …findings using a simple equilibrium model in which hedge funds provide liquidity in asset markets.

Last Revised: March 9, 2016

Date Written: August 8, 2015

 

Academic Peer Effects with Different Group Assignment Policies: Residential Tracking versus Random Assignment

Link

Author: Robert Garlick

Abstract: I study the relative academic performance of students tracked or randomly assigned to South African university dormitories. Tracking reduces low-scoring students' GPAs but has little effect on high-scoring students. This lowers mean GPA and raises GPA dispersion. I also directly estimate peer effects using random variation in peer groups across dormitories. Living with higher-scoring peers raises students' GPAs and this effect is larger for low-scoring students. Peer effects operate largely within race groups but operate both within and across programs of study. This suggests that spatial proximity alone does not generate peer effects. Interaction of some sort is required, but direct academic collaboration is not the relevant form of interaction. I integrate the results from variation in group assignment policies and variation in group composition by drawing on the matching and sorting literatures. Both sets of results imply that own and peer academic performance are substitutes in GPA production and that GPA may be a concave function of peer group performance. The cross-dormitory results correctly predict a negative effect of tracking on low-scoring students but understate the magnitude of the observed effect. I show that this understatement reflects both policy-sensitive parameter estimates and problems with extrapolation outside the support of the data observed under random assignment. This underlines the value of using both cross-policy and cross-group variation to study peer effects.

Date Written: March 3, 2016

 

Putting Dollars Before Scholars? Evidence from For-Profit Charter Schools in Florida

Link

Author:  John D. Singleton

Abstract: This paper compares for and non-profit operation of charter schools in Florida, where the for-profit share has grown by 80% since 2004-5 to nearly half of all charter schools. The unique dataset assembled combines the annual independent financial audits and accountability reports filed by all Florida charter schools with enrollment data and student proficiency on end-of-grade exams. Comparisons reveal that independent for and non-profit charter schools locate in similar markets and serve similar student bodies, whereas for-profits belonging to a network locate in lower income, denser, and more Hispanic areas relative to network non-profits. Bearing out the concerns of parents and policymakers, regression estimates indicate that, among independent charters, for-profits spend 6% less per pupil on instruction and achieve lower student proficiency gains. By contrast, among charter schools belonging to a network, for-profits spend over 10% less per pupil (around $800), but expenses on student instruction are not being cut. The estimates, which control for differences across schools in student composition and other characteristics, imply that an equivalent level of per pupil expenses purchases 0.029σ higher student proficiency in reading and 0.028σ higher in math at network for-profit charter schools. These findings suggest that network for-profit operated charter schools are able to economize without compromising student education.

Date Written: March 3, 2016

 

Game Theory and Cold War Rationality: A Review Essay

Link

AuthorE. Roy Weintraub

Abstract: This essay reviews new histories of the role of game theory and rational decision-making in shaping the social sciences, economics among them, in the post war period. The recent books "The World the Game Theorists Made" by Paul Erickson and "How Reason Almost Lost Its Mind" by Paul Erickson, Judy Klein, Lorraine Daston, Rebecca Lemov, Thomas Sturm, and Michael Gordin raise a number of complex historical questions about the interconnections among game theory, utility theory, decision-theory, optimization theory, information theory and theories of rational choice. Moreover the contingencies of time, place, and person call into question the usefulness of economists' linear narratives about the autonomous and progressive development of modern economics. The essay finally reflects on the challenges that these issues present for historians of recent economics.

Date Written: February 23, 2016

 

McCarthyism and the Mathematization of Economics

Link

AuthorE. Roy Weintraub

Abstract: Historians of the social sciences and historians of economics have come to agree that, in the United States, the 1940s transformation of economics from political economy to economic science was associated with economists’ engagements with other disciplines – e.g. mathematics, statistics, operations research, physics, engineering, cybernetics – during and immediately after World War II. More controversially, some historians have also argued that the transformation was accelerated by economists’ desires to be safe, to seek the protective coloration of mathematics and statistics, during the McCarthy period. This paper argues that that particular claim 1) is generally accepted, but 2) is unsupported by good evidence, and 3) what evidence there is suggests that this claim is false.

Date Written: February 18, 2016

 

Situational Analysis

Link

AuthorKevin D. Hoover

Abstract: Situational analysis (also known as situational logic) was popularized by Karl Popper as an appropriate method for the interpretation of history and as a basis for a scientific social science. It seeks an objective positive explanation of behavior through imputing a dominant goal or motive to individuals and then identifying the action that would be objectively appropriate to the situation as the action actually taken. Popper regarded situational analysis as a generalization to all of social science of the prototypical reasoning of economics. Applied to history, situational analysis is largely an interpretive strategy used to understand individual behavior. In social sciences, however, it is applied many to types of behavior or to group behavior (e.g., to markets) as is used to generate testable hypothesis. Popper’s account of situational analysis and some criticisms that have been levied against it are reviewed. The charge that situational analysis contradicts Popper’s view that falsification is the hallmark of sciences is examined and rejected: situational analysis is precisely how Popper believes social sciences are able to generate falsifiable, and, therefore, scientific hypotheses. Still, situational analysis is in tension with another of Popper’s central ideas: situational analysis as a method for generating testable conjectures amounts to a logic of scientific discovery, something that Popper argued elsewhere was not possible.

Date Written: February 18, 2016

 

A Jury of Her Peers: The Impact of the First Female Jurors on Criminal Convictions

Link

Author: Shamena Anwar, Patrick J. Bayer and Randi Hjalmarsson

Abstract: This paper uses an original data set of more than 3000 cases from 1918 to 1926 in the Central Criminal Courts of London to study the effect of the Sex Disqualification (Removal) Act of 1919. Implemented in 1921, this Act made females eligible to serve on English juries, providing a novel setting for studying the impact of female representation on jury verdicts. Results based on a pre-post research design imply that the inclusion of females had little effect on overall conviction rates but resulted in a large and significant increase in convictions for sex offenses and on the conviction rate differential between violent crime cases with female versus male victims. The inclusion of women also increased the likelihood of juries being discharged without reaching a verdict on all charges and the average time taken to reach a verdict. A complementary analysis of cases in which the jury was carried over from a previous trial also implies that the inclusion of female jurors on the seated jury sharply increased conviction rates for violent crimes against women versus men.

Date Written: February 10, 2016

 

Speculative Fever: Investor Contagion in the Housing Bubble

Link

AuthorPatrick J. Bayer, Kyle Mangum and James W. Roberts

Abstract: Historical anecdotes of new investors being drawn into a booming asset market, only to suffer when the market turns, abound. While the role of investor contagion in asset bubbles has been explored extensively in the theoretical literature, causal empirical evidence on the topic is virtually non-existent. This paper studies the recent boom and bust in the U.S. housing market, and establishes that many novice investors entered the market as a direct result of observing investing activity of multiple forms in their own neighborhoods, and that “infected” investors performed poorly relative to other investors along several dimensions.

Date Written: February 1, 2016

 

What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders

Link

AuthorPatrick J. Bayer, Fernando V. Ferreira and Stephen L. Ross

Abstract: This paper examines racial and ethnic differences in high cost mortgage lending in seven diverse metropolitan areas from 2004-2007. Even after controlling for credit score and other key risk factors, African-American and Hispanic home buyers are 105 and 78 percent more likely to have high cost mortgages for home purchases. The increased incidence of high cost mortgages is attributable to both sorting across lenders (60-65 percent) and differential treatment of equally qualified borrowers by lenders (35-40 percent). The vast majority of the racial and ethnic differences across lender can be explained by a single measure of the lender’s foreclosure risk and most of the within-lender differences are concentrated at high-risk lenders. Thus, differential exposure to high-risk lenders combined with the differential treatment by these lenders explains almost all of the racial and ethnic differences in high cost mortgage borrowing.

Date Written: February 1, 2016

 

The Market for Used Capital: Endogenous Irreversibility and Reallocation Over the Business Cycle

Link

AuthorAndrea Lanteri

Abstract: Capital reallocation is procyclical in the data, but countercyclical in standard business-cycle models. To solve this puzzle, I build a model of endogenous partial irreversibility, with heterogeneous firms facing aggregate and idiosyncratic productivity shocks. Used investment goods are imperfect substitutes for new ones because of firm-level capital specificity. The price of used capital responds to aggregate shocks, leading to equilibrium real-option effects on investment and reallocation. The model generates procyclical capital reallocation and procyclical price of used capital, consistent with new industry-level evidence I present, and provides a microfoundation for both micro and macro capital adjustment costs.

Date Written: January 17, 2016

 

How Taxes and Real Wage Inflexibility Interact to Make Trade Deficits Addictive: The Tertiary and Quaternary Burdens and Benefits of a Transfer

Link

AuthorEdward Tower and Victor Ye

Abstract: Previous articles on the transfer problem pay scant attention to the problems caused by the distortionary taxation that extracts the gift from the donor nation or the cut in distortionary taxation that bestows the gift to the recipient nation. When combined with inflexibility in the real wage these changes in taxation and the transfer itself impose a considerable burden to the donor matched by a considerable blessing to the recipient. We explore these effects, and conclude that “The Great Rebalancing” between the US and China needed to cure the US trade deficit, i.e. to eliminate the transfer that China is making to the US may bestow a big burden on the US matched by a big blessing for China.

Date Written: January 9, 2016

 

When Is Inequality Fair? An Experiment on the Effect of Procedural Justice and Agency

Link

Author: Merve Akbaş, Dan Ariely and Sevgi Yuksel

Abstract: We investigate how the perceived fairness of an income distribution depends on the beliefs about the process that generates the inequality. Specifically, we examine how two crucial features of this process affect fairness views: (1) Procedural justice – equal treatment of all; (2) Agency – one’s ability to determine his/her income. We do this in a lab experiment by differentially varying subjects’ ability to influence their earnings. Comparison of ex-post redistribution decisions of total earnings under different conditions indicate both agency and procedural justice to matter for fairness. Highlighting the importance of agency, we observe lower redistribution of unequal earnings resulting from risk when risk is chosen freely. Highlighting the importance of procedural justice, we find introduction of inequality of opportunity to significantly increase redistribution. Despite this increase, under inequality of opportunity, the share of subjects redistributing none remain close to the share of subjects redistributing fully revealing an underlying heterogeneity in the population about how fairness views should account for inequality of opportunity.

Date Written: January 1, 2016

 

2015

Is High-Tech Care in a Middle Income Country Worth It? Evidence from Perinatal Centers in Russia

Link

Author: Dzhamilya Nigmatulina and Charles Becker

Abstract: How much does a dramatic increase in technology improve healthcare quality in an upper-middle income country? Using rich vital statistics data on infant and maternal health outcomes, this study evaluates the effect of introducing technologically advanced perinatal hospitals in 24 regions of Russia on infant mortality during the period 2009-2013. A 7-year aggregate panel dataset reveals that opening a perinatal center corresponds to infant mortality reduction by 3.8% from the baseline rate, neonatal (0-28 day) mortality by 7% and early neonatal (0-6 day) mortality by 7.3%. We find that the perinatal centers help to save 263 additional infant lives annually, ranging from 3 to 25 lives in regions with different birth rates. We further estimate an annual average cost of 52 mln rb (or 2.6 m 2014 PPP USD) per life saved in an average region, which is much higher than the cost of similar interventions in the US.

Date Written: December 30, 2015

 

Delegation and Nonmonetary Incentives

Link

AuthorAttila Ambrus and Georgy Egorov

Abstract: In many contracting settings, actions costly to one party but with no direct benefits to the other (money-burning) may be part of the explicit or implicit contract. A leading example is bureaucratic procedures in an employer-employee relationship. We study a model of delegation with an informed agent, where the principal may impose money-burning on the agent as a function of the agent’s choice of action, and show that money-burning may be part of the optimal contract. This result holds even if action-contingent monetary transfers are possible, as long as transfers from the principal to the agent are bounded from below (as in limited liability or minimal wage requirements). In fact, the optimal contract can involve a combination of both efficient monetary incentives and inefficient nonmonetary incentives through money burning. Our model delivers some results novel to the delegation literature. First, money-burning is more likely if the principal is more sensitive to the choice of action than the agent. This is consistent with the perception that there is more bureaucratization in large organizations. Second, money-burning is more likely if the agent’s limited liability constraint is tighter relative to his participation constraint. This implies that a higher minimum wage distorts employment contracts towards using socially wasteful nonmonetary incentives, leading to a Pareto inferior outcome as the agent is still held down to his reservation value through increased money burning.

Date Written: December 4, 2015

 

Supplementary Appendix to 'Delegation and Nonmonetary Incentives'

Link

AuthorAttila Ambrus and Georgy Egorov

Abstract

Supplementary Appendix to "Delegation and Nonmonetary Incentives."

The paper "Delegation and Nonmonetary Incentives" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2700821

Date Written: December 4, 2015

 

The Case for Nil Votes: Voter Behavior Under Asymmetric Information in Compulsory and Voluntary Voting Systems

Link

AuthorAttila Ambrus, Ben Greiner and Anne Sastro

Abstract: We experimentally study the impact of adding an explicit nil vote option to the ballot in both compulsory and voluntary voting settings. We investigate this issue in an informational voting setting, in which some voters are uninformed and face the swing voter’s curse, implying that they can only affect the expected election outcome adversely. We generate predictions using a simple model of strategic voting in which some voters receive a psychological benefit (along the lines of Riker and Ordeshook (1968)) from choosing an action that they consider a legitimate participation in the election. We test our model in a double-blind pen-and-paper laboratory experiment, and find that the main comparative predictions of the model hold in the data, particularly strongly for compulsory voting. In particular, both under compulsory and voluntary voting, introducing a nil vote option reduces the number of uninformed voters casting a vote for a candidate, increasing voters’ expected welfare. Additionally, it eradicates strategic invalid votes under compulsory voting.

Date Written: December 2, 2015

 

The Crisis in Economic Theory: A Review Essay

Link

AuthorKevin D. Hoover

Abstract: The Great Recession and the financial crisis of 2007-09 prompted calls for fundamental reforms of economic theory. The role of theory in economics and in recent economic events is considered in light of two recent books: the sociologist Richard Swedberg’s "The Art of Social Theory" and the economist André Orléan’s "The Empire of Value: A New Foundation for Economics".

Date Written: November 6, 2015

 

Paul Samuelson's Historiography: More Wag than Whig

Link

AuthorE. Roy Weintraub

Abstract: In this review essay of Medema’s and Waterman’s collection of some of Samuelson’s writings in the history of economics, the author argues that Samuelson’s claim to have written “Whig History” is spurious. Moreover the author argues that Samuelson’s own writings on modern economics are, whether explicit or not, profoundly autobiographical. Samuelson, in constructing a literature ostensibly about contemporary economics, was simultaneously constructing a literature in which he and contemporary economics could be jointly considered and appraised.

Date Written: November 4, 2015

 

The Value of Manufactured Housing Communities: A Dual-Ownership Model

Link

AuthorCharles Becker and Ashley Yea

Abstract: There are roughly 50,000 manufactured housing communities (MHCs) in the United States, yet there appears to be virtually no academic research on their asset values. Using a detailed, proprietary database provided by Colliers International, we address this gap. We find that, due to the dual nature of rental and ownership in manufactured housing ownership, MHC values are driven by community rental income and thus affected by median month contract housing rents that surround the community. While value remains affected by traditional factors such as occupancy, location quality, and size of land, it emerges that manufactured housing community sales values are highly sensitive to local rental alternatives. We also find evidence that corporate MHC buyers pay less and sellers receive more for parks relative to smaller “mom-n-pop” owners.

Date Written: October 15, 2015

 

The Role of Royalties in Resource Extraction Contracts

Link

AuthorRobert F. Conrad, Bryce Hool and Denis Nekipelov

Abstract: The manner in which governments charge mineral resource producers has been the subject of considerable debate. In particular, there is a continuing debate about whether royalties should be reduced or eliminated, the preferred alternative then being some variant of an income-based charge such as a resource rent tax, a policy adopted in Norway, the United Kingdom and Australia. The argument for avoiding royalties is based on analyses demonstrating that royalties and other quantity-based charges distort production decisions and lead to outcomes such as high-grading and premature mine closure. We argue that it is inappropriate to infer that royalties are inefficient from the perspective of the resource owner (typically a government on behalf of society). Rather, the royalty serves a key pricing purpose and should be interpreted as the capital loss on the resource owner's balance sheet from extracting marginal reserves. We demonstrate this result under various conditions of uncertainty and informational asymmetry, using an incentive-based framework which enables us to highlight the separation of asset ownership from asset use. The principal-agent framework is consistent with the contracting problem encountered by governments who as resource owners contract with private sector firms for extraction rights.

Date Written: September 30, 2015

  

Data-Driven Jump Detection Thresholds for Application in Jump Regressions

Link

Author: Robert Davies and George Tauchen

Abstract: This paper develops a method to select the threshold in threshold-based jump detection methods. The method is motivated by an analysis of threshold-based jump detection methods in the context of jump-diffusion models. We show that over the range of sampling frequencies a researcher is most likely to encounter that the usual in-fill asymptotics provide a poor guide for selecting the jump threshold. Because of this we develop a sample-based method. Our method estimates the number of jumps over a grid of thresholds and selects the optimal threshold at what we term the “take-off” point in the estimated number of jumps. We show that this method consistently estimates the jumps and their indices as the sampling interval goes to zero. In several Monte Carlo studies we evaluate the performance of our method based on its ability to accurately locate jumps and its ability to distinguish between true jumps and large diffusive moves. In one of these Monte Carlo studies we evaluate the performance of our method in a jump regression context. Finally, we apply our method in two empirical studies. In one we estimate the number of jumps and report the jump threshold our method selects for three commonly used market indices. In the other empirical application we perform a series of jump regressions using our method to select the jump threshold.

Date Written: September 17, 2015

 

Democratic Punishment in Public Good Games with Perfect and Imperfect Observability

Link

Author: Attila Ambrus and Ben Greiner

Abstract: In the context of repeated public good contribution games, we experimentally investigate the impact of democratic punishment, when members of a group decide by majority voting whether to inflict punishment on another member, relative to individual peer-to-peer punishment. Democratic punishment leads to more cooperation and higher average payoffs, both under perfect and imperfect monitoring of contributions, primarily by curbing anti-social punishment and thereby establishing a closer connection between a member’s contribution decision and whether subsequently being punished by others. We also find that participating in a democratic punishment procedure makes even non-contributors’ punishment intentions more pro-social.

Date Written: August 26, 2015

 

Between Consumer Demand and Islamic Law: The Evolution of Islamic Credit Cards in Turkey

Link

Author: Murat Çokgezen and Timur Kuran

Abstract: The elimination of interest from financial transactions has been a salient goal of Islamization movements around the world. Its proponents have had to balance this objective, which they claim to draw from Islamic law (sharia), against consumer demand for convenient products. In general they have opted to accommodate consumer demand, but surreptitiously, using legal ruses to disguise their compromises. Turkey’s experience with credit cards offers a revealing case of the obfuscation in question. Having denounced credit cards as un-Islamic, Turkey’s Islamic banks have all proceeded to issue credit cards of their own in order to remain competitive with their openly interest-friendly, conventional rivals. With local variations, the Turkish pattern resembles that of other markets where Islamic credit cards have made inroads. In Malaysia and the United Arab Emirates, too, Islamic credit cards function like those of the conventional banks with which they compete for customers. The “Islamic” features of Islamic credit cards amount to branding. Contrary to the claims of their proponents, they do not represent fundamental financial innovation.

Date Written: July 27, 2015 

 

Losing Equilibrium: On the Existence of Abraham Wald's Fixed-Point Proof of 1935

Link

Author: Till Duppe and E. Roy Weintraub

Abstract: In fall 1935, Abraham Wald presented an existence proof for a general equilibrium of exchange model to Karl Menger’s Mathematical Colloquium in Vienna. Due to limited space, the paper could not be printed in the eighth proceedings of the Colloquium (the Ergebnisse) published in spring 1937 but was scheduled for the ninth issue of the series. After the annexation of Austria to Nazi Germany in March 1938 however, Menger’s Colloquium ended and the proof never appeared in print. Nor did Wald, after he fled to the U.S. and launched a career in statistics, pursue the diffusion of his proof. Since the proof never appeared, there has been continued speculation about whether Wald’s missing proof employed a fixed-point theorem. To date this question has remained unanswered. After his sudden death in 1950, only Wald’s preliminary proof of 1934 was translated into English for Econometrica. When thus Arrow, Debreu, and McKenzie in 1954 referred in their own fixed-point proofs only to Wald’s preliminary published version, his 1935 proof was forgotten. This did not change when economists and historians of economics, the authors included, reconstructed Wald’s contribution. The authors’ new evidence, however, establishes that the missing proof employed a fixed-point theorem. This article tells the story of Wald’s lost equilibrium proof.

Date Written: July 27, 2015

 

Gradual Bidding in Ebay-Like Auctions

Link

AuthorAttila Ambrus, Yuhta Ishii and James Burns

Abstract: This paper shows that in online auctions like eBay, if bidders can only place bids at random times, then many different equilibria arise besides truthful bidding, despite the option to leave proxy bids. These equilibria can involve gradual bidding, periods of inactivity, and waiting to start bidding towards the end of the auction - bidding behaviors common on eBay. Bidders in such equilibria implicitly collude to keep the increase of the winning price slow over the duration of the auction. In a common value environment, we characterize a class of equilibria that include the one in which bidding at any price is maximally delayed, and all bids minimally increment the price. The seller's revenue can be a small fraction of what could be obtained at a sealed-bid second-price auction, and in the worst equilibrium it is decreasing in the value of the object. With many bidders, we show that this equilibrium has the feature that bidders are passive until near the end of the auction, and then they start bidding incrementally.

Last Revised: June 11, 2015

Date Written: September 5, 2013

 

Information, Competition, and the Quality of Charities

Link

AuthorHuseyin Yildirim and Silvana Krasteva

Abstract: We propose a model of charity competition in which informed giving alone can explain quality heterogeneity across similar charities. It is this heterogeneity that also creates the demand for information. In equilibrium, too few donors pay to be informed; but interestingly, informed giving may increase with the cost of information. This is true if the charitable market is highly competitive or if private consumption is a strong substitute to giving – both of which are supported by evidence.

Date Written: May 16, 2015

 

Comparative Measures of Naiveté

Link

Author: David S. Ahn and Todd Sarver

Abstract: We propose nonparametric definitions of absolute and comparative naiveté. These definitions leverage both ex-ante choice of menu to identify individuals' projections of their future behavior and ex-post choice from menus to identify their actual behavior. Their main advantage is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent between choosing from a menu ex post or committing to the actual choice from that menu ex ante. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. One individual is more naive than another if she is both more optimistic about her future behavior while actually being less virtuous. In the case of Strotzian preferences, absolute naiveté implies that beliefs are a convex combination of virtuous and temptation utility, while comparative naiveté implies that the more naive individual's beliefs puts more weight than a more sophisticated individual on her virtuous utility, while her actual behavior puts more weight on the temptation utility. In different specifications of the underlying Strotzian preferences, such as quasi-hyperbolic discounting, the definitions impose further intuitive restrictions, such as inequalities on believed and actual present-bias factors. We propose suitable definitions for random choice. Finally, we discuss the implications of naiveté for welfare and the design of commitment devices.

Date Written: April 28, 2015

 

Politics in the Courtroom: Political Ideology and Jury Decision Making

Link

Author: Shamena Anwar, Patrick J. Bayer and Randi Hjalmarsson

Abstract: This paper uses data from the Gothenburg District Court in Sweden and a research design that exploits the random assignment of politically appointed jurors (termed nämndemän) to make three contributions to the literature on jury decision-making: (i) an assessment of whether systematic biases exist in the Swedish nämndemän system, (ii) causal evidence on the impact of juror political party on verdicts, and (iii) an empirical examination of the role of peer effects in jury decision-making. The results reveal a number of systematic biases: convictions for young defendants and those with distinctly Arabic sounding names increase substantially when they are randomly assigned jurors from the far-right (nationalist) Swedish Democrat party, while convictions in cases with a female victim increase markedly when they are assigned jurors from the far-left (feminist) Vänster party. The results also indicate the presence of peer effects, with jurors from both the far-left and far-right parties drawing the votes of their more centrist peers towards their positions. Peer effects take the form of both sway effects, where jurors influence the opinions of their closest peers in a way that can impact trial outcomes, and dissent aversion, where jurors switch non-pivotal votes so that the decision is unanimous.

Date Written: April 1, 2015

 

On Asynchronicity of Moves and Coordination

Link

AuthorAttila Ambrus and Yuhta Ishii

Abstract: This paper shows that asynchronicity of moves can lead to a unique prediction in coordination games, in an infinite-horizon setting, under certain conditions on off-equilibrium payoffs. In two-player games we derive necessary and sufficient conditions for play ultimately being absorbed in the Pareto dominant Nash equilibrium of the stage game, for every Markov perfect equilibrium. For players patient enough, the condition is that the Pareto dominant Nash equilibrium is also risk dominant, but for lower levels of patience the condition departs from simple risk-dominance. For general n-player symmetric games with patient players, we show that a necessary and sufficient condition for the Pareto dominant Nash equilibrium to be the unique limit outcome in all symmetric Markov perfect equilibrium is a particular generalization of risk-dominance for more than two players. We provide extensions to the unique selection results to all subgame perfect Nash equilibria, and to coordination games in which different players prefer different Nash equilibria of the stage game.

Date Written: March 23, 2015

 

The Dynamic Effects of Educational Accountability

Link

AuthorHugh Macartney

Abstract: This paper provides the first evidence that value-added education accountability schemes induce dynamic distortions. Extending earlier dynamic moral hazard models, I propose a new test for ratchet effects, showing that classroom inputs are distorted less when schools face a shorter horizon over which they can influence student performance. I then exploit grade span variation using rich educational data to credibly identify the extent of dynamic gaming, finding compelling evidence of ratchet effects based on a triple-differences approach. Further analysis indicates that these effects are driven primarily by effort distortions, with teacher reallocations playing a secondary role.

Last Revised: March 19, 2015

Date Written: March 1, 2015

 

Rare Events, Financial Crises, and the Cross-Section of Asset Returns

Link

AuthorFrancesco Bianchi

Abstract: Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. Small growth stocks tend to perform relatively better during financial crises. This helps to explain the cross section of asset returns when risk is priced according to a version of the "Bad Beta, Good Beta" Intertemporal CAPM that allows for regime changes.

Last Revised: March 17, 2015

Date Written: March 1, 2015

 

Constrained Discretion and Central Bank Transparency

Link

AuthorFrancesco Bianchi and Leonardo Melosi

Abstract: We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents' uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S. enhancing transparency is found to increase welfare.

Last Revised: March 13, 2015

Date Written: February 1, 2015

 

Monetary/Fiscal Policy Mix and Agents’ Beliefs

Link

AuthorFrancesco Bianchi and Cosmin L. Ilut

Abstract: We reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the ‘60s and the ‘70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the ‘70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early ‘80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the ‘60s and the ‘70s and for the break in the persistence and volatility of inflation.

Last Revised: March 13, 2015

Date Written: May 1, 2014

 

Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

Link

AuthorFrancesco Bianchi and Leonardo Melosi

Abstract: We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. We use a prototypical Real Business Cycle model to illustrate the methods.

Last Revised: March 13, 2015

Date Written: February 1, 2015

 

Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences

Link

AuthorAttila Ambrus, Tinna Laufey Ásgeirsdóttir, Jawwad Noor and László Sándor

Abstract: This paper examines the empirical question of whether subjects’ static choices among rewards received at different times are influenced by their expected income levels at those times. Moreover, we recover time preferences after compensating for possible income effects. Besides eliciting subjects’ preference between standard delayed rewards, the experimental design also elicited their preferences over delayed rewards that are received only if the subject’s income remains approximately constant. These preferences, along with elicited subjective probabilities of satisfying the condition, make the correction possible. We conducted the experiments in Iceland, where our prompt access to income tax records enabled us to condition delayed rewards on income realizations. We find that background income is associated with preferences over unconditional delayed rewards. While most people exhibited present bias when comparing unconditional delayed rewards, subjects with stable income did not. The results are similar for the entire sample once we correct subjects’ discount functions for income effects. This suggests that income expectations have an effect on choices between future rewards, and that this may account for some of the present-bias observed in experiments. 

The Supplement for this paper is available at the following URL: http://ssrn.com/abstract=2446690

Date Written: March 1, 2015

 

Supplement to 'Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences'

Link

AuthorAttila Ambrus, Tinna Laufey Ásgeirsdóttir, Jawwad Noor and László Sándor

Abstract: This Supplementary Appendix contains the English translations of the experimental questionnaire, survey questions, and instructions that were used in our experimental sessions on June 9th and 10th of 2010. For the original Icelandic language documents, please contact the authors. 

The paper 'Compensated Discount Functions - An Experiment on Integrating Rewards with Expected Income' to which this Supplement applies is available at the following URL: http://ssrn.com/abstract=2446602

Date Written: March 1, 2015

 

'Giving' in to Social Pressure

Link

Author: Alvaro Name Correa and Huseyin Yildirim

Abstract: In light of recent evidence, we develop a theory of charitable giving in which donors feel social pressure from a direct solicitation. We show that equilibrium donations are concentrated around a social norm: donors below the norm increase giving while those above the norm reduce it. Despite a higher level of the public good, relatively poor and/or low altruism givers fare worse under social pressure and would avoid the solicitor at a cost. Aggregate donor welfare improves to the extent that the added social motive alleviates the underprovision of the public good; however, overprovision may result. Our theory therefore predicts a light-handed regulation for charitable solicitations, which is consistent with their exemption from the popular Do Not Call list in the U.S. We further show that contrary to pure altruism, a more equal income distribution may produce more of the public good. In fundraising campaigns where a social norm is not apparent, one may emerge endogenously if donors are not too heterogeneous. In fact, multiple social norms may form, which offers a focal point argument for suggested donations.

Date Written: February 28, 2015

 

A Dynamic Model of Demand for Houses and Neighborhoods

Link

AuthorPatrick J. Bayer, Robert McMillan, Alvin Murphy and Christopher Timmins

Abstract: This paper develops a dynamic model of neighborhood choice along with a computationally light multi-step estimator. The proposed empirical framework captures observed and unobserved preference heterogeneity across households and locations in a flexible way. The model is estimated using a newly assembled data set that matches demographic information from mortgage applications to the universe of housing transactions in the San Francisco Bay Area from 1994-2004. The results provide the first estimates of the marginal willingness to pay for several non-marketed amenities – neighborhood air pollution, violent crime and racial composition – in a dynamic framework. Comparing these estimates with those from a static version of the model highlights several important biases that arise when dynamic considerations are ignored.

Last Revised: February 7, 2015

Date Written: February 5, 2015

 

Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem

Link

Author: Elliot Anenberg and Patrick J. Bayer

Abstract: This paper presents new empirical evidence that internal movement - selling one home and buying another - by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.

Last Revised: January 31, 2015

Date Written: December 5, 2014

 

The Vulnerability of Minority Homeowners in the Housing Boom and Bust

Link

AuthorPatrick J. Bayer, Fernando V. Ferreira and Stephen L. Ross

Abstract:This paper examines mortgage outcomes for a large, representative sample of individual home purchases and refinances linked to credit scores in seven major US markets in the recent housing boom and bust. Among those with similar credit scores and loan attributes, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. There is important heterogeneity within minorities: black and Hispanics that live in areas with lower employment rates and that have high debt to income ratios are the driving force behind the observed racial and ethnic differences in foreclosures and delinquencies. Moreover, these estimated differences are especially pronounced for loans originated near the peak of the housing boom even after controlling for the effect of origination timing on households’ equity position. These findings suggest that black and Hispanic homeowners drawn into the market near the peak were especially vulnerable to adverse economic shocks and raise concerns about homeownership as a mechanism for reducing racial disparities in wealth.

Last Revised: January 29, 2015

Date Written: May 2013

 

Speculators and Middlemen: The Strategy and Performance of Investors in the Housing Market

Link

AuthorPatrick J. Bayer, Christopher Geissler, Kyle Mangum and James W. Roberts

Abstract: Housing market transactions are a matter of public record and thus provide a rare opportunity to analyze the behavior, performance, and strategies of individual investors. Using data for all housing transactions in the Los Angeles area from 1988-2009, this paper provides empirical evidence on investor behavior that is consistent with several rationales for speculative investment in the finance literature, including the roles of middlemen and na¨ıve speculators. Speculative activity by novice investors increased sharply in the recent housing boom. These investors earned little more than the market rate of appreciation and demonstrated no ability to foresee market price movements.

Last Revised: January 31. 2015

Date Written: January 13, 2015

 

Job Search and Migration in a System of Cities

Link

Author: Benoît Schmutz and Modibo Sidibe

Abstract: We build an equilibrium job search model, where workers engage in both off- and on-the-job search over a set of cities, to quantify the impact of spatial matching frictions and mobility costs on the job search process. Migration decisions, based on a dynamic utility trade-off between locations, can rationalize diverse wage dynamics as part of forward-looking spatial strategies. Our estimation results allow us to characterize each of the largest 200 French cities by a set of city-specific matching and amenity parameters and to measure the impact of distance on spatial constraints. We find that after controlling for frictions, mobility cost parameters are significantly lower than previously reported in the literature. Additional results include a robust positive correlation between on-the-job arrival rates and local wage dispersion, which provides new empirical support to the wage-posting framework and suggests an alternative explanation for the city size wage gap. 

Date Written: January 9, 2015

 

Escaping the Great Recession

Link

AuthorFrancesco Bianchi and Leonardo Melosi

Abstract: High uncertainty is an inherent implication of the zero lower bound, while deflation is not because of inflationary pressure due to uncertainty about how debt will be stabilized. We show that policy uncertainty empirically accounts for the absence of deflation in the US economy. Announcing fiscal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning fiscal discipline, at the cost of increasing macroeconomic instability. The policy trade-off can be resolved by committing to inflating away only the portion of debt accumulated during the recession.

Date Written: January 1, 2015

2014

A Theory of Outsourced Fundraising: Why Dollars Turn into 'Pennies for Charity'

Link

Author: Zdravko Paskalev and Huseyin Yildirim

Abstract: Charities frequently rely on professional solicitors whose commissions exceed half of total donations. To understand this practice, we propose a principal-agent model in which the charity optimally offers a higher commission to a more “efficient” solicitor, raising the price of giving significantly. Outsourcing is, therefore, profitable for the charity only if giving is very price-inelastic. This, however, clashes with empirical evidence. We show that paid solicitations can benefit the charity if: (1) donors are unaware; (2) donors have intense “warm-glow” preferences; or (3) the charity worries mostly about watchdog ratings. We argue that informing the public of the mere existence of paid solicitations may be the most effective policy available. 

Date Written: December 6, 2014

 

Forecast Rationality Tests in the Presence of Instabilities, with Applications to Federal Reserve and Survey Forecasts

Link

Author: Barbara Rossi and Tatevik Sekhposyan

Abstract: This paper proposes a framework to implement regression-based tests of predictive ability in unstable environments, including, in particular, forecast unbiasedness and efficiency tests, commonly referred to as tests of forecast rationality. Our framework is general: it can be applied to model-based forecasts obtained either with recursive or rolling window estimation schemes, as well as to forecasts that are model-free. The proposed tests provide more evidence against forecast rationality than previously found in the Federal Reserve's Greenbook forecasts as well as survey-based private forecasts. It confirms, however, that the Federal Reserve has additional information about current and future states of the economy relative to market participants.

Last Revised: November 19, 2014

Date Written: November 4, 2014

 

Pirates of the Mediterranean: An Empirical Investigation of Bargaining with Asymmetric Information

Link

AuthorAttila Ambrus, Eric J. Chaney and Igor Salitskiy

Abstract: We investigate the effect of delay on prices in bargaining situations using a data set containing thousands of captives ransomed from Barbary pirates between 1575 and 1692. Plausibly exogenous variation in the delay in ransoming provides evidence that negotiating delays decreased the size of ransom payments, and that most of the effect stems from the signaling value of strategic delay, in accordance with theoretical predictions. We also structurally estimate a version of the screening type bargaining model, adjusted to our context, and find that the model fits both the observed prices and acceptance probabilities well.

Last Revised: November 19, 2014

Date Written: November 6, 2014

 

Growth, Slowdowns, and Recoveries

Link

AuthorFrancesco Bianchi and Howard Kung

Abstract: We construct and estimate a model that features endogenous growth and technology diffusion. The spillover effects from research and development provide a link between business cycle fluctuations and long-term growth. Therefore, productivity growth is related to the state of the economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic growth. During the Great Recession, technology diffusion dropped sharply, while long-term growth was not significantly affected. The opposite occurred during the 2001 recession. The growth mechanism induces positive comovement between consumption and investment.

Date Written: November 1, 2014

 

Fundamental versus Traditional Indexation for International Mutual Funds: Evaluating DFA, WisdomTree and RAFI PowerShares

Link

Author: Heehyun Lim and Edward Tower

Abstract: Do fundamental index funds beat traditional ones? The major companies that offer the new fundamentally indexed international mutual funds are Dimensional Fund Advisors (DFA), Research Affiliates, and WisdomTree. A major provider of traditional international index funds is DFA. We compare various fundamental international index fund portfolios from these providers with individualized benchmark portfolios composed of DFA traditional international funds. For each family we provide sixteen measures of how much an aggregate of its fundamental indexes out-returned its corresponding DFA traditional benchmark portfolio through June 2014. Taking averages, (1) the Research Affiliates PowerShare aggregate out-returned its corresponding DFA traditional benchmark portfolio by 1.08%/year, (2) the DFA fundamental aggregate under-returned by 0.30%/year, and (3) the WisdomTree aggregate under-returned by 0.74%/year. One cheer for fundamental international indexation and two for traditional indexation.

Date Written: October 27, 2014

 

Recovering Ex Ante Returns and Preferences for Occupations Using Subjective Expectations Data

Link

AuthorPeter ArcidiaconoV. Joseph HotzArnaud Maurel and Teresa Romano

Abstract: We show that data on subjective expectations, especially on outcomes from counterfactual choices and choice probabilities, are a powerful tool in recovering ex ante treatment effects as well as preferences for different treatments. In this paper we focus on the choice of occupation, and use elicited beliefs from a sample of male undergraduates at Duke University. By asking individuals about potential earnings associated with counterfactual choices of college majors and occupations, we can recover the distribution of the ex ante monetary returns to particular occupations, and how these returns vary across majors. We then propose a model of occupational choice which allows us to link subjective data on earnings and choice probabilities with the non-pecuniary preferences for each occupation. We find large differences in expected earnings across occupations, and substantial heterogeneity across individuals in the corresponding ex ante returns. However, while sorting across occupations is partly driven by the ex ante monetary returns, non-monetary factors play a key role in this decision. Finally, our results point to the existence of sizable complementarities between college major and occupations, both in terms of earnings and non-monetary benefits.

Date Written: October 1, 2014

 

A Strategic Model of Magical Thinking: Axioms and Analysis

Link

AuthorPhilipp Sadowski and Brendan Daley

Abstract

This paper seeks to make two contributions. First, we propose and analyze a tractable model of strategic play in which players behave as if their expectations about their opponents' behavior vary with their own choices. We refer to this nonstandard updating as magical thinking. The model provides a unified view of documented behavior in a range of often-studied games, such as the Prisoners' Dilemma, the Battle of the Sexes, Hawk-Dove, and the Stag Hunt. Second, we provide axioms applied to the behavior of the collection of players in symmetric 2x2 games, and a representation theorem that establishes these axioms to be the precise behavioral content of the model. We thereby suggest a novel way to import the axiomatic methodology of individual decision theory to strategic settings and demonstrate the benefits of this approach. 

In the model, the degree to which players exhibit magical thinking is heterogeneous in the population and is captured by players' types. All players perceive types to be i.i.d. draws from a common distribution. We show that the model's parameters, namely these individual types and the commonly perceived distribution, can be (essentially) identified from behavior in games, allowing for tractable comparative statics. Finally, the model generates novel predictions across games. For example, the ability of a collection of players to coordinate on Pareto superior Nash equilibria in coordination games is positively correlated with their degree of cooperation in Prisoners' Dilemma games. 

The supplement for this paper are available at the following URL: http://ssrn.com/abstract=2507394

Date Written: September 26, 2014

 

Supplement to a Strategic Model of Magical Thinking: Axioms and Analysis

Link

AuthorPhilipp Sadowski and Brendan Daley

Abstract: We establish that in the Prisoners' Dilemma, the model of Daley and Sadowski (2014) is logically distinct from three models that employ well-known forms of other-regarding preferences: altruism (Ledyard, 1995; Levine, 1998), inequity aversion (Fehr and Schmidt, 1999), and reciprocity (Rabin, 1993). 

The paper "A Strategic Model of Magical Thinking: Axioms and Analysis" to which this supplement applies is available at the following URL: http://ssrn.com/abstract=2507377

Date Written: September 26, 2014

 

The Genesis of Samuelson and Solow's Price-Inflation Phillips Curve

Link

AuthorKevin D. Hoover

Abstract: Samuelson and Solow in their 1960 paper in the American Economic Review: Papers and Proceedings were among the first economists to engage with Phillips’ famous unemployment/wage-inflation analysis, now referred to as the Phillips curve. They addressed the question of the relevance of Phillips’s analysis for the United Kingdom to the United States, and in process formulated the first unemployment/price-inflation version of the Phillips curve and were the first to interpret the Phillips curve as a menu for policy. Their paper was an informal analysis presented at a conference. The current paper offers a careful reconstruction and assessment of their original formulation, documenting the close relationship between the wage-inflation and price-inflation versions of the Phillips curve. A recent paper of Hall and Hart (2012) that suggests, first, that Samuelson and Solow should have reached different conclusions about the price-Phillips curve on the basis of regression estimates of their own data and, second, that had they done so the “inflationist” course of U.S. macroeconomic policy in the 1960s and 1970s would have been different. With the reconstruction as a background, the current paper demonstrates that Hall and Hart have not grasped the key details of Samuelson and Solow’s analysis, and that they ignore the actual context of the paper, so that neither of their suggestions is likely: Samuelson and Solow would have no reason to reach any different conclusion based on Hall and Hart’s estimates, and the course of macroeconomic policy is unlikely to have been affected in any case.

Date Written: September 24, 2014

 

Either or Both Competition: A 'Two-Sided' Theory of Advertising with Overlapping Viewerships

Link

AuthorAttila Ambrus, Emilio Calvano and Markus Reisinger

Abstract: In media markets, consumers spread their attention to several outlets, increasingly so as consumption migrates online. The traditional framework for studying competition among media outlets rules out this behavior by assumption. We propose a new model that allows consumers to choose multiple outlets and use it to study the effect of strategic interaction on advertising levels, and the impact of entry and mergers. We show that novel forces come into play, which reflect the outlets' incentives to control the composition of the customer base in addition to its size. We link consumer preferences and advertising technologies to market outcomes. The model can explain a number of empirical regularities that are difficult to reconcile with existing models. 

Date Written: September 1, 2014

 

Financial Markets, Industry Dynamics, and Growth

Link

Author: Maurizio Iacopetta, Raoul Minetti and Pietro F. Peretto

Abstract: We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new firms and by the in-house investment of incumbent firms. Firms' managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conflicts among firms' stakeholders inhibit the entry of new firms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.

Date Written: August 27, 2014

 

Monetary Policy and Stock Market Booms

Link

Author: Lawrence J. Christiano, Cosmin L. Ilut, Roberto Motto and Massimo Rostagno

Abstract: Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.

Last Revised: August 6, 2014

Date Written: September 24, 2010

 

Sidney Weintraub and American Post Keynesianism: 1938-1970

Link

AuthorE. Roy Weintraub

Abstract: Sidney Weintraub (1914-1983) was an American economist who spent most of his career at the University of Pennsylvania. A distinguished economic theorist (and the author’s father), he was a co-founder of the Journal of Post Keynesian Economics, and the leading figure in the US in the early years of the Post Keynesian movement. This article shows how the early development of American Post Keynesianism, despite claims to the contrary by historians of Post Keynesianism, had no connection to the UK group centered around Joan Robinson in Cambridge.

Date Written: July 21, 2014

 

The First Globalization Debate

Link

Author: Craufurd Goodwin

Abstract: Early in the 18th century, before the birth of political economy as a discipline, two of the earliest novels in the English language were published: Robinson Crusoe (1719) by writer and economic entrepreneur Daniel Defoe, and Gulliver’s Travels (1726) by the cleric and political adviser Jonathan Swift. The first was widely perceived as an entertaining adventure story, the latter as a pioneering work of science fiction. Both contain indirect comment on the foreign policy of Britain at the time. When viewed from the perspective of the modern economist, however, the works appear to be expressions of opposing positions on the desirability of a nation pursuing integration within a world economy. Crusoe demonstrated the gains from international trade and colonization and even the attendant social and political benefits. He explores the instinct to trade overseas, stages of growth, and the need for careful cost-benefit calculations. By contrast Swift warned of the complex entanglements that would arise from globalization, especially with foreign leaders who operated from theory and models rather than common sense. He makes a case for economic autarky.

Last Revised: July 9, 2014

Date Written: September 1, 2010

 

Information Criteria for Impulse Response Function Matching Estimation of DSGE Models

Link

Author: Alastair R. Hall, Atsushi Inoue, James M. Nason and Barbara Rossi

Abstract: We propose new information criteria for impulse response function matching estimators (IRFMEs). These estimators yield sampling distributions of the structural parameters of dynamic stochastic general equilibrium (DSGE) models by minimizing the distance between sample and theoretical impulse responses. First, we propose an information criterion to select only the responses that produce consistent estimates of the true but unknown structural parameters: the Valid Impulse Response Selection Criterion (VIRSC). The criterion is especially useful for mis-specified models. Second, we propose a criterion to select the impulse responses that are most informative about DSGE model parameters: the Relevant Impulse Response Selection Criterion (RIRSC). These criteria can be used in combination to select the subset of valid impulse response functions with minimal dimension that yields asymptotically efficient estimators. The criteria are general enough to apply to impulse responses estimated by VARs, local projections, and simulation methods. We show that the use of our criteria significantly affects estimates and inference about key parameters of two well-known new Keynesian DSGE models. Monte Carlo evidence indicates that the criteria yield gains in terms of finite sample bias as well as offering tests statistics whose behavior is better approximated by first order asymptotic theory. Thus, our criteria improve on existing methods used to implement IRFMEs.

Last Revised: July 6, 2014

Date Written: September 23, 2009

 

Institutional Roots of Authoritarian Rule in the Middle East: Civic Legacies of the Islamic Waqf

Link

AuthorTimur Kuran

Abstract: In the pre-modern Middle East the closest thing to an autonomous private organization was the Islamic waqf. This non-state institution inhibited political participation, collective action, and rule of law, among other indicators of democratization. It did so through several mechanisms. Its activities were essentially set by its founder, which limited its capacity to meet political challenges. Being designed to provide a service on its own, it could not participate in lasting political coalitions. The waqf’s beneficiaries had no say in evaluating or selecting its officers, and they had trouble forming a political community. Thus, for all the resources it controlled, the Islamic waqf contributed minimally to building civil society. As a core element of Islam’s classical institutional complex, it perpetuated authoritarian rule by keeping the state largely unrestrained. Therein lies a key reason for the slow pace of the Middle East’s democratization process. 

Date Written: June 12, 2014

 

Supplement to: 'Foundations for Cooperation in the Prisoners’ Dilemma'

Link

Author: Brendan Daley and Philipp Sadowski

Abstract: We establish that in the Prisoners’ Dilemma, the model of Daley and Sadowski (2014) is logically distinct from three models that employ well-known forms of other regarding preferences: altruism (Ledyard, 1995; Levine, 1998), inequity aversion (Fehr and Schmidt, 1999), and reciprocity (Rabin, 1993).

The paper "Foundations for Cooperation in the Prisoners’ Dilemma" to which this Supplement applies is available at the following URL: http://ssrn.com/abstract=2331579

Last Revised: June 6, 2014

Date Written: May 7, 2014

 

GMO's Predictions: A Useful Guide for Investors?

Link

AuthorEdward Tower, David Barry and Edward Stansky

Abstract: How successful are stock market predictions? We explore one set of easily accessible predictions by a respected firm, GMO. Specifically, we evaluate how effective GMO’s predicted stock returns have been in guiding investors from June 2000 through March 2014. We find that the predictions have been useful, although based on past history investing solely in the top one or two performing indexes would have been an inferior strategy for maximizing return to investing equal amounts in the three indexes with the top predicted returns.

Date Written: June 5, 2014

 

Extremal Quantile Regressions for Selection Models and the Black-White Wage Gap

Link

Author: Xavier D'Haultfœuille, Arnaud Maurel and Yichong Zhang

Abstract: We consider the estimation of a semiparametric location-scale model subject to endogenous selection, in the absence of an instrument or a large support regressor. Identification relies on the independence between the covariates and selection, for arbitrarily large values of the outcome. In this context, we propose a simple estimator, which combines extremal quantile regressions with minimum distance. We establish the asymptotic normality of this estimator by extending previous results on extremal quantile regressions to allow for selection. Finally, we apply our method to estimate the black-white wage gap among males from the NLSY79 and NLSY97. We find that premarket factors such as AFQT and family background characteristics play a key role in explaining the level and evolution of the black-white wage gap.

Date Written: June 1, 2014

 

Foundations for Cooperation in the Prisoners’ Dilemma

Link

Author: Brendan Daley and Philipp Sadowski

Abstract: We provide axiomatic foundations for a simple model of play in prisoners' dilemma games. The model accommodates cooperation and suggests that players behave as if their expectations about their opponents' behavior vary with their own choice. We refer to this nonstandard updating as magical thinking. The degree to which players exhibit magical thinking may be heterogeneous in the population and is captured by a uniquely identified parameter for each player. Further, it is as if all players perceive these parameters to be i.i.d. draws from a common distribution. The model's identification allows for tractable comparative statics. We investigate how our theory extends to all symmetric 2x2 games. 

The Supplement for this paper are available at the following URL: http://ssrn.com/abstract=2331585

Date Written: May 7, 2014

 

 

 

2013

Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility

Link

AuthorAndrew J. Patton and Kevin Sheppard

Abstract: Abstract Using recently proposed estimators of the variation of positive and negative returns (“realized semivariances”), and high frequency data for the S&P 500 index and 105 individual stocks, this paper sheds new light on the predictability of equity price volatility. We show that future volatility is much more strongly related to the volatility of past negative returns than to that of positive returns, and this effect is stronger than that implied by standard asymmetric GARCH models. We also find that the impact of a jump on future volatility critically depends on the sign of the jump, with negative (positive) jumps in prices leading to significantly higher (lower) future volatility. We show that models exploiting these findings lead to significantly better out-of-sample forecast performance for forecast horizons ranging from 1 day to 3 months.

Last Revised: November 18, 2013

Date Written: November 16, 2013

 

Daily House Price Indexes: Construction, Modeling, and Longer-Run Predictions

Link

AuthorTim BollerslevAndrew J. Patton and Wang Wenjing

Abstract: We construct daily house price indexes for ten major U.S. metropolitan areas. Our calculations are based on a comprehensive database of several million residential property transactions and a standard repeat-sales method that closely mimics the procedure used in the construction of the popular monthly Case-Shiller house price indexes. Our new daily house price indexes exhibit similar characteristics to other daily asset prices, with mild autocorrelation and strong conditional heteroskedasticity, which are well described by a relatively simple multivariate GARCH type model. The sample and model-implied correlations across house price index returns are low at the daily frequency, but rise monotonically with the return horizon, and are all commensurate with existing empirical evidence for the existing monthly and quarterly house price series. A simple model of daily house price index returns produces forecasts of monthly house price changes that are superior to various alternative forecast procedures based on lower frequency data, underscoring the informational advantages of our new more finely sampled daily price series.

Last Revised: November 16, 2013

Date Written: June 11, 2013

 

Time-Varying Systemic Risk: Evidence from a Dynamic Copula Model of CDS Spreads

Link

AuthorDong Hwan Oh and Andrew J. Patton

Abstract: This paper proposes a new class of copula-based dynamic models for high dimension conditional distributions, facilitating the estimation of a wide variety of measures of systemic risk. Our proposed models draw on successful ideas from the literature on modeling high dimension covariance matrices and on recent work on models for general time-varying distributions. Our use of copula-based models enable the estimation of the joint model in stages, greatly reducing the computational burden. We use the proposed new models to study a collection of daily credit default swap (CDS) spreads on 100 U.S. firms over the period 2006 to 2012. We find that while the probability of distress for individual firms has greatly reduced since the financial crisis of 2008-09, the joint probability of distress (a measure of systemic risk) is substantially higher now than in the pre-crisis period.

Last Revised: November 16, 2013

Date Written: May 23, 2013

 

Dynamic Copula Models and High Frequency Data

Link

Author: Irving De Lira Salvatierra and Andrew J. Patton

Abstract: This paper proposes a new class of dynamic copula models for daily asset returns that exploits information from high frequency (intra-daily) data. We augment the generalized autoregressive score (GAS) model of Creal, et al. (2012) with high frequency measures such as realized correlation to obtain a "GRAS" model. We find that the inclusion of realized measures significantly improves the in-sample fit of dynamic copula models across a range of U.S. equity returns. Moreover, we find that out-of-sample density forecasts from our GRAS models are superior to those from simpler models. Finally, we consider a simple portfolio choice problem to illustrate the economic gains from exploiting high frequency data for modeling dynamic dependence.

Last Revised: November 16, 2013

Date Written: June 24, 2013

 

Asymptotic Inference about Predictive Accuracy Using High Frequency Data

Link

AuthorJia Li and Andrew Patton

Abstract: This paper provides a general framework that enables many existing inference methods for predictive accuracy to be used in applications that involve forecasts of latent target variables. Such applications include the forecasting of volatility, correlation, beta, quadratic variation, jump variation, and other functionals of an underlying continuous-time process. We provide primitive conditions under which a "negligibility" result holds, and thus the asymptotic size of standard predictive accuracy tests, implemented using a high-frequency proxy for the latent variable, is controlled. An extensive simulation study verifies that the asymptotic results apply in a range of empirically relevant applications, and an empirical application to correlation forecasting is presented.

Last Revised: November 13, 2013

Date Written: July 6, 2013

 

Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

Link

Author: Ulrich J. Wagner and Christopher Timmins

Abstract: Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into "pollution havens"? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous, time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry.

Last Revised: October 23, 2013

Date Written: May 2008

 

Advances in Forecasting Under Instability

Link

Author: Barbara Rossi

Abstract: The forecasting literature has identified two important issues: (i) several predictors have substantial and statistically significant predictive content, although only sporadically, and it is unclear whether this predictive content can be exploited reliably; (ii) in-sample predictive content does not necessarily translate into out-of-sample predictive ability, nor ensures the stability of the predictive relationship over time. The objective of this chapter is to understand what we have learned about forecasting in the presence of instabilities. The empirical evidence raises a multitude of questions. If in-sample tests provide poor guidance to out-of-sample forecasting ability, what should researchers do? If there are statistically significant instabilities in Granger-causality relationships, how do researchers establish whether there is any Granger-causality at all? If there is substantial instability in predictive relationships, how do researchers establish which model is the best forecasting model? And finally, if a model forecasts poorly, why is that and how should researchers proceed to improve the forecasting models? In this chapter, we answer these questions by discussing various methodologies for inference as well as estimation that have been recently proposed in the literature.

Last Revised: September 27, 2013

Date Written: June 30, 2012

 

How Individual Preferences Get Aggregated in Groups - An Experimental Study

Link

AuthorAttila Ambrus, Ben Greiner and Parag A. Pathak

Abstract: This paper experimentally investigates how individual preferences, through unrestricted deliberation, get aggregated into a group decision in two contexts: reciprocating gifts, and choosing between lotteries. In both contexts we find that median group members have a significant impact on the group decision, but particular other members also have some influence. Non-median members closer to the median tend to have more influence than other members. By investigating the same individual’s influence in different groups, we find evidence for relative position in the group having a direct effect on influence. We do not find evidence that group choice exhibits a shift in a particular direction that is independent of member preferences and caused by the group decision context itself. We also find that group deliberation not only involves bargaining and compromise, but it also involves persuasion: preferences tend to shift towards the choice of the individual’s previous group, especially for those with extreme individual preferences.

Date Written: September 19, 2013

 

The Ontological Status of Shocks and Trends in Macroeconomics

Link

AuthorKevin D. Hoover

Abstract: Modern empirical macroeconomic models, known as structural auto-regressions (SVARs) are dynamic models that typically claim to represent a causal order among contemporaneously valued variables and to merely represent non-structural (reduced-form) co-occurence between lagged variables and contemporaneous variables. The strategy is held to meet the minimal requirements for identifying the residual errors in particular equations in the model with independent, though otherwise not directly observable, exogenous causes (“shocks”) that ultimately account for change in the model. In non-stationary models, such shocks accumulate so that variables have discernible trends. Econo-metricians have conceived of variables that trend in sympathy with each other (so-called “co-integrated variables”) as sharing one or more of these unobserved trends as a common cause. It is possible for estimates of the values of both the otherwise unobservable individual shocks and the otherwise unobservable common trends to be backed-out of co-integrated systems of equations. The issue addressed in this paper is whether and in what circumstances these values can be regarded as observations of real entities rather than merely artifacts of the representation of variables in the model. The issue is related, on the one hand, to practical methodological problems in the use of SVARs for policy analysis – e.g., does it make sense to estimate of shocks or trends in one model and then use them as measures of variables in a conceptually distinct model? The issue is also related to debates in the philosophical analysis of causation – particularly, whether we are entitled, as assumed by the developers of Bayes-net approaches, to rely on the causal Markov condition (a generalization of Reichenbach’s common-cause condition) or whether co-integration generates a practical example of Nancy Cartwright’s “byproducts” objection to the causal Markov condition.

Date Written: September 12, 2013

 

On Uniform Inference in Nonlinear Models with Endogeneity

Link

Author: Shakeeb Khan and Denis Nekipelov

Abstract: This paper explores the uniformity of inference for parameters of interest in nonlinear models with endogeneity. The notion of uniformity is fundamental in these models because due to potential endogeneity, the behavior of standard estimators of these parameters is shown to vary with where they lie in the parameter space. Consequently, uniform inference becomes nonstandard in a fashion that is loosely analogous to inference complications found in the unit root and weak instruments literature, as well as the models recently studied in Andrews and Cheng (2012a), Andrews and Cheng (2012b) and Chen, Ponomareva, and Tamer (2011). We illustrate this point with two models widely used in empirical work. The first is the standard sample selection model, where the parameter is the intercept term (Heckman (1990), Andrews and Schafgans (1998) and Lewbel (1997a)). We show that with selection on unobservables, asymptotic theory for this parameter is not standard in terms of there being nonparametric rates and non-gaussian limiting distributions. In contrast if the selection is on observables only, rates and asymptotic distribution are standard, and consequently an inference method that is uniform to both selection on observables and unobservables is required. As a second example, we consider the well studied treatment effect model in program evaluation (Rosenbaum and Rubin (1983) and Hirano, Imbens, and Ridder (2003)), where a parameter of interest is the ATE. Asymptotic behavior for existing estimators varies between standard and nonstandard across differing levels of treatment heterogeneity, thus also requiring new inference methods.

Date Written: September 11, 2013

 

CAPE: Using Its Variants to Predict the Returns from Investing in the S&P 500 Index

Link

Author: Edward Tower

Abstract: Is the US stock market overvalued? I use Shiller’s CAPE to predict the return of investing in the S&P500 index. Siegel argues that the recent fall in the share of earnings that are paid out as dividends has biased downwards predictions from the CAPE. I offer a solution to the problem of reduced dividends in the form of some alternative versions of CAPE, experiment with different time periods in calculating CAPE, and explore the role of previous peak earnings. While this study refers to the US stock market the issues are also important for valuing other markets.

Date Written: September 10, 2013

 

Lawyers: Gatekeepers of the Sovereign Debt Market?

Link

Author: Michael Bradley, Irving De Lira Salvatierra and G. Mitu Gulati

Abstract: The claim that lawyers act as gatekeepers or certifiers in financial transactions is widely discussed in the legal literature. There has, however, been little empirical examination of the claim. We test the hypothesis that law firms have replaced investment banks as the gatekeepers of the market for sovereign debt. Our results suggest that hiring outside law firms sends a negative signal to the market regarding the pending issuance; a finding that is inconsistent with the thesis that outside law firms primarily play a certification role in the sovereign debt market.

Date Written: August 28, 2013

 

Causal Effects of Health Shocks on Consumption and Debt: Quasi-Experimental Evidence from Bus Accident Injuries

Link

AuthorManoj Mohanan

Abstract: Endogeneity in the health-wealth relationship presents a challenge for estimating causal effects of health shocks. Using a quasi-experimental study design, comprising exogenous shocks sustained as bus accident injuries in India, with, "controls," drawn from travelers on the same bus routes one year later, I present new evidence of causal effects of health shocks on household consumption and debt. Using primary household survey data, I find that households faced with the health shock-related expenditures, which were on average equal to two months of household income, are able to smooth consumption on food, housing, and festivals, with small reductions in education spending. Debt was the principal mechanism used by households to mitigate effects of the shock, leading to significantly larger levels of indebtedness among the exposed.

Last Revised: August 27, 2013

Date Written: June 1, 2011

 

Dormant Shocks and Fiscal Virtue

Link

AuthorFrancesco Bianchi and Leonardo Melosi

Abstract: We develop a theoretical framework to account for the observed instability of the link between inflation and …fiscal imbalances across time and countries. Current policy makers’ behavior ‡influences agents’' beliefs about the way debt will be stabilized. The standard policy mix consists of a virtuous …fiscal authority that moves taxes in response to debt and a central bank that has full control over inflation. When policy makers deviate from this Virtuous regime, agents conduct Bayesian learning to infer the likely duration of the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the Virtuous regime and ‡inflation starts drifting in response to a …fiscal imbalance. Shocks which were dormant under the Virtuous regime now start manifesting themselves. These changes are initially imperceptible, can unfold over decades, and accelerate as agents' ’beliefs deteriorate. Dormant shocks explain the run-up of US inflation and uncertainty in the ’70s. The currently low long term interest rates and inflation expectations might hide the true risk of inflation faced by the US economy.

Last Revised: August 12, 2013

Date Written: March 1, 2013

 

A Note on Moral Hazard and Linear Compensation Schemes

Link

AuthorXiao Yu Wang

Abstract: This note identifies a moral hazard environment in which a piecewise linear compensation scheme is optimal. Both the principal and the agent have CARA utility, mean output is increasing in the agent's non-contractible input, and output is distributed according to a Laplace distribution, which resembles a normal distribution (e.g. it is symmetric about the mean), but has fatter tails. The key property of the Laplace distribution is that the likelihood ratio is a piecewise constant, where the discontinuity occurs at the mean. 

The value of this approach is twofold: First, a tractable, empirically-observed wage scheme emerges as the equilibrium in a simple static contracting model. Second, the optimal piecewise linear scheme cleanly separates insurance and incentive provision. The linearity at output levels away from the mean captures insurance, while the jump at the mean captures incentive provision. Hence, this model is well-suited for studying a wide variety of principal-agent problems in risky environments subject to moral hazard, such as the effect of risk and moral hazard considerations on employment relationships in developing economies.

Date Written: July 18, 2013

 

Endogenous Insurance and Informal Relationships

Link

AuthorXiao Yu Wang

Abstract: Heterogeneously risk-averse individuals who lack access to formal insurance build and use relationships with each other to manage risk. I show that the composition of equilibrium relationships under pairwise matching and when group size is endogenous is determined by a mean-variance trade-off across differentially risky productive opportunities, though output distributions may have infinitely-many nonzero cumulants. This has important policy implications. For example, a policy which ignores the equilibrium response of informal institutions may exacerbate inequality and hurt most those it intended to help: a reduction in aggregate risk may lead to an increase in risk borne by the most risk-averse individuals, as the least risk-averse abandon their roles as informal insurers. The theory also sheds light on the channels through which endogenous insurance relationships influence informal firm structure and entrepreneurship.

Date Written: July 18, 2013

 

Interdependent Utility and Truthtelling in Two-Sided Matching

Link

AuthorXiao Yu Wang

Abstract: Mechanisms which implement stable matchings are often observed to work well in practice, even in environments where the stable outcome is not unique, information is complete, and the number of players is small. Why might individuals refrain from strategic manipulation, even when the complexity cost of manipulation is low? I study a two-sided, one-to-one matching problem with no side transfers, where utility is interdependent in the following intuitive sense: an individual's utility from a match depends not only on her preference ranking of her assigned partner, but also on that partner's ranking of her. I show that, in a world of complete information and linear interdependence, a unique stable matching emerges, and is attained by a modified Gale-Shapley deferred acceptance algorithm. As a result, a stable rule supports truth-telling as an equilibrium strategy. Hence, these results offer a new intuition for why stable matching mechanisms seem to work well in practice, despite their theoretic manipulability: individuals may value being liked.

Date Written: July 18, 2013

 

Siting the New Economic Science: The Cowles Commission's Activity Analysis Conference of June 1949

Link

AuthorTill Duppe and E. Roy Weintraub

Abstract: In the decades following WWII, the Cowles Commission for Research in Economics came to represent new technical standards that informed most advances in economic theory. The public emergence of this community was manifest at a conference held in June 1949 titled Activity Analysis of Production and Allocation. Our history of this event situates the Cowles Commission among the institutions of post-war science in-between National Laboratories and the supreme discipline of Cold War academia, mathematics. Although the conference created the conditions under which economics, as a discipline, would transform itself, the participants themselves had little concern for the intellectual battles that had defined prewar university economics departments. The conference bore witness to a new intellectual culture in economic science based on shared scientific norms and techniques uninterrogated by conflicting notions of the meaning of either science or economics.

Last Revised: July 17, 2013

Date Written: May 1, 2013

 

Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach

Link

AuthorFrancesco Bianchi and Andrea Civelli

Abstract: Under the Globalization Hypothesis for inflation, as globalization increases, global economic slack should progressively replace the domestic gap in driving inflation. In order to assess the empirical support for this theoretical prediction, we use impulse response functions of inflation to domestic and foreign output gap shocks from a TV-VAR model estimated for eighteen countries. The main results of the analysis are twofold: First, the structural results show that global slack affects the dynamics of inflation in many countries, yet these effects do not get stronger over time. Second, a panel analysis that exploits the cross-section characteristics of the response functions shows that globalization, measured in terms of openness and business cycles integration, is positively related to the effects of global slack on inflation. The degree of openness of a country and its economic integration into the global economy are complementary rather than overlaid forces.

Date Written: July 1, 2013

 

Mathematical Economics Comes to America: Charles S. Peirce's Engagement with Cournot's Recherches Sur Les Principes Mathematiques De La Théorie Des Richesses

Link

Author: James R. Wible and Kevin D. Hoover

Abstract: Although Cournot’s mathematical economics was generally neglected until the mid-1870s, he was taken up and carefully studied by the Scientific Club of Cambridge, Massachusetts even before his “discovery” by Walras and Jevons. The episode is reconstructed from fragmentary manuscripts of the pragmatist philosopher Charles S. Peirce, a sophisticated mathematician. Peirce provides a subtle interpretation and anticipates Bertrand’s criticisms.

Date Written: July 1, 2013

 

Enhanced versus Traditional Indexation for International Mutual Funds: Evaluating DFA, WisdomTree and RAFI Powershares

Link

Author: Heehyun Lim and Edward Tower

Abstract: Do enhanced index funds beat traditional ones? The major companies that offer the new enhanced index international mutual funds are Dimensional Fund Advisors (DFA), RAFI, and WisdomTree. A major provider of traditional international index funds is DFA. We compare various enhanced international index fund portfolios from these providers with individualized benchmark portfolios composed of DFA traditional international funds. On average, (1) the RAFI power share portfolio out-returned its corresponding DFA traditional benchmark portfolio by 0.82%/year, (2) the average DFA enhanced portfolio under-returned by 0.14%/year, and (3) the WisdomTree portfolio under-returned by 1.01%/year. One cheer for enhanced international indexation and two for traditional indexation.

Date Written: June 26, 2013

 

Biodiversity Conservation and Child Malaria: Microeconomic Evidence from Flores, Indonesia

Link

AuthorSubhrendu K. Pattanayak, Catherine G. Corey, Yewah F. Lau and Randall A. Kramer

Abstract: In remote areas of developing countries, people's health and livelihoods are closely intertwined with the condition of the natural environment. Unfortunately, claims regarding the role of ecosystem degradation on disease outcomes rest on a short list of rigorous empirical studies that consider social, cultural and economic factors that underpin both ecosystem disruptions and behaviors related to exposure, prevention and treatment of diseases such as malaria. As the human ecological tradition suggests, omitting behaviors can lead to erroneous interpretations regarding the nature of the relationship between ecological changes and disease. We specify and test the relationship between child malaria prevalence and forest conditions in a quasi-experimental setting of buffer zone villages around a protected area, which was established to conserve biodiversity on Flores, Indonesia. Multivariate probit regressions are used to examine this conservation and health hypothesis, controlling for several individual, family and community variables that could confound this hypothesized link. We find that the extent of primary (protected) forest is negatively associated with child malaria, while the extent of secondary (disturbed) forest cover is positively correlated with child malaria, all else equal. This finding emphasizes the natural insurance value of conservation because children are both especially vulnerable to changes in environmental risks and key players in the future growth and prosperity of a society.

Last Revised: June 25, 2013

Date Written: November 18, 2010

 

Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics

Link

AuthorFrancesco Bianchi

Abstract: The evolution of the U.S. economy over the last 55 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs matter for the law of motion underlying the macro-economy. Monetary policy is identi…fied by repeated ‡fluctuations between a Hawk- and a Dove- regime, with the latter prevailing in the ‘'70s and during the recent crisis. To explore the role of agents' ’beliefs I introduce a new class of counterfactual simulations: beliefs counterfactuals. If in the ‘'70s agents had anticipated the appointment of an extremely conservative Chairman inflation would have been lower and the in‡flation- output trade-off more favorable. The large drop in in‡flation and output at the end of 2008 would have been mitigated if agents had expected the Federal Reserve to be exceptionally active in the near future.

Last Revised: June 6, 2013

Date Written: July 1, 2012

 

From Smith to Schumpeter: A Theory of Take-Off and Convergence to Sustained Growth

Link

Author: Pietro F. Peretto

Abstract: This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of …firm size and a set of equations that express the relevant endogenous variables – GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production – as functions of …firm size. It also obtains closed-form solutions for the dates of the events that drive the economy'’s phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave profi…le replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of …firms and entrepreneurs to Smithian market expansion.

Date Written: June 4, 2013

 

The Role of Age in Jury Selection and Trial Outcomes

Link

Author: Shamena Anwar, Patrick J. Bayer and Randi Hjalmarsson

Abstract: This paper uses data from 700 felony trials in Sarasota and Lake Counties in Florida from 2000-2010 to examine the role of age in jury selection and trial outcomes. The results imply that prosecutors are more likely to use their peremptory challenges to exclude younger members of the jury pool, while defense attorneys exclude older potential jurors. To examine the causal impact of age on trial outcomes, the paper employs a research design that isolates the effect of the random variation in the age composition of the pool of eligible jurors called for jury duty. Consistent with the jury selection patterns, the empirical evidence implies that older jurors are significantly more likely to convict. Results are robust to the inclusion of broad set of controls including county, time, and judge fixed effects. These findings imply that many cases are decided differently for reasons that are completely independent of the true nature of the evidence in the case – i.e., that there is substantial randomness in the application of criminal justice.

Date Written: May 2013

 

Informational Content of Special Regressors in Heteroskedastic Binary Response Models

Link

Author: Songnian Chen, Shakeeb Khan and Xun Tang

Abstract: We quantify the identifying power of special regressors in heteroskedastic binary regressions with median-independent or conditionally symmetric errors. We measure the identifying power using two criteria: the set of regressor values that help point identify coefficients in latent payoffs as in (Manski 1988); and the Fisher information of coefficients as in (Chamberlain 1986). We …find that for median-independent errors, requiring one of the regressors to be "“special" (in a sense similar to (Lewbel 2000)) does not add to the identifying power or the information for coefficients. Nonetheless it does help identify the error distribution and the average structural function. For conditionally symmetric errors, the presence of a special regressor improves the identifying power by the criterion in (Manski 1988), and the Fisher information for coefficients is strictly positive under mild conditions. We propose a new estimator for coefficients that converges at the parametric rate under symmetric errors and a special regressor, and report its decent performance in small samples through simulations.

Last Revised: May 17, 2013

Date Written: April 16, 2013

 

Endogenous Growth and Property Rights over Renewable Resources

Link

Author: Nujin Suphaphiphat, Pietro F. Peretto and Simone Valente

Abstract: We analyze the general-equilibrium effects of alternative regimes of access rights over renewable natural resources – –namely, open access versus full property rights –on the pace of development when economic growth is endogenously driven by both horizontal and vertical innovations. Resource exhaustion may occur under both regimes but is more likely to arise under open access. Under full property rights, positive resource rents increase expenditures and temporarily accelerate productivity growth, but also yield a higher resource price at least in the short-to-medium run. We characterize analytically the welfare effect of a regime switch induced by a failure in property rights enforcement: switching to open access is welfare reducing if the utility gain generated by the initial drop in the resource price is more than offset by the static and dynamic losses induced by reduced expenditure.

Date Written: May 1, 2013

 

Growth on a Finite Planet: Resources, Technology, and Population in the Long Run

Link

AuthorPietro F. Peretto and Simone Valente

Abstract: We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We fi…nd a pseudo-Malthusian equilibrium in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or collapse. Introducing a minimum resource requirement per capita, we obtain constant population even under complementarity.

Date Written: April 17, 2013

 

Estimating Racial Price Differentials in the Housing Market

Link

AuthorPatrick J. Bayer, Marcus D. Casey, Fernando V. Ferreira and Robert McMillan

Abstract: This paper uses unique panel data covering over two million repeat-sales housing transactions from four metropolitan areas to test for the presence of racial price differentials in the housing market. Drawing on the strengths of these data, our research design controls carefully for unobserved differences in the quality of neighborhoods and the homes purchased by buyers of each race. We find that black and Hispanic homebuyers pay premiums of about three percent on average across the four cities, differences that are not explained by variation in buyer income, wealth or access to credit. Further, the estimated premiums do not vary significantly with the racial composition of the neighborhood; nor, strikingly, do they vary with the race of the seller. This latter finding suggests that racial prejudice on the part of sellers is not the primary explanation for the robust premiums we uncover. The results have implications for the evolution of racial differences in wealth and home ownership and the persistence of residential segregation.

Date Written: March 1, 2013

 

Factor-Eliminating Technical Change

Link

AuthorPietro F. Peretto and John J. Seater

Abstract: Endogenous growth requires that non-reproducible factors of production be either augmented or eliminated. Attention heretofore has focused almost exclusively on augmentation. In contrast, we study factor elimination. Maximizing agents decide when to reduce the importance of non-reproducible factors. We use a Cobb-Douglas production function with two factors of production, one reproducible ("capital") and one not ("labor"). There is no augmenting progress of any kind, thus excluding the standard engine of growth. What is new is the possibility of changing factor intensities endogenously by spending resources on R&D. The economy starts with no capital and no knowledge of how to use it. By conducting R&D, the economy learns new technologies that use capital, which then is built. There are two possible ultimate outcomes: the economy may achieve perpetual growth, or it may stagnate with no growth. The fi…rst outcome is an asymptotic version of the AK model of endogenous growth, and the second outcome is the standard Solow model in the absence of any exogenous sources of growth. Which outcome is achieved depends on parameter values of saving and production, and there always is a feasible saving rate that will give the perpetual growth outcome. The model thus provides a theory of the endogenous emergence of a production technology with constant returns to the reproducible factors, that is, one that is capable of supporting perpetual economic growth. The model also allows derivation of the full transition dynamics, which have interesting properties. One especially notable feature is that the origin is not a steady state. An economy that starts with pure labor production becomes industrialized through its own efforts. The theory thus offers a purely endogenous explanation for the transition from a primitive to a developed economy, in contrast to several well-known theories. Several aspects of the transition paths accord with the evidence, suggesting that the theory is reasonable. In contrast to almost all the existing endogenous growth literature, neither monopoly power nor an externality is a necessary condition for endogenous growth. It is sufficient that firms be able to appropriate the results of their research and development efforts.

Last Revised: February 25, 2013

Date Written: March 1, 2007

 

Exchange Rate Determination, Risk Sharing and the Asset Market View

Link

AuthorA. Craig Burnside and Jeremy J. Graveline 

Abstract: Recent research in international finance has equated changes in real exchange rates with differences between the marginal utility growths of representative agents in different economies. The asset market view of exchange rates, encapsulated in this equation, has been used to gain insights into exchange rate determination, foreign exchange risk premia, and international risk sharing. We argue that, in fact, this equation is of limited usefulness. By itself, the asset market view does not identify the economic mechanism that determines the exchange rate. It only holds under complete markets, and even then, it does not generally allow us to identify the marginal utility growths of distinct agents. Moreover, if we allow for incomplete asset markets, measures of agents' marginal utility growths, and international risk sharing, cannot be based on asset market and exchange rate data alone. Instead, we argue that in order to explain how exchange rates are determined, it is necessary to make specific assumptions about preferences, goods market frictions, the assets agents can trade, and the nature of endowments or production.

Last Revised: January 30, 2013

Date Written: December 15, 2012

 

Andreoni-Mcguire Algorithm and the Limits of Warm-Glow Giving

Link

AuthorHuseyin Yildirim

Abstract: This paper provides a full equilibrium characterization of warm-glow giving à la Andreoni (1989, 1990) by extending the Andreoni-McGuire (1993) algorithm. The characterization indexes individuals according to their free-riding or “dropout” levels of the public good. The dropout level is finite for an individual whose donation is always dictated by some altruism. We show that if all individuals have finite dropout levels, then the crowding-out becomes complete as the population size grows. This suggests that in a large economy, the crowding-out is incomplete only when a non-negligible fraction of individuals behaves as though they were pure warm-glow givers. But since these individuals are also the only contributors in a large economy, the incomplete crowding-out must be zero. We discuss implications of these extreme crowding-out predictions for charitable behavior and fund-raising strategies.

Date Written: January 26, 2013

 

2012

Vanguard versus the Enhanced Indexers, DFA, RAFI, and WisdomTree: Is Traditional Indexation Passé?

Link

AuthorEdward Tower and Chao Yang

Abstract: Vanguard provides low cost cap-weighted mutual funds: traditional index funds. The asset allocation of DFA’s core funds is determined by fundamentals as well as market cap. RAFI’s allocation depends on four fundamental factors — dividends, cash flow, sales, and book equity value. WisdomTree’s is also determined by fundamentals alone. We compare them with corresponding Vanguard mutual fund portfolios. We examined fund returns from March 2007 through June 2012. Focusing on US funds only, DFA and RAFI had lower returns than portfolios of Vanguard funds that mimicked their style; WisdomTree out-returned Vanguard. Thus, some, but not all fundamental indexers have performed well.

Date Written: November 20, 2012

 

Lawyers: Gatekeepers of the Sovereign Debt Market?

Link

Author: Michael Bradley, Irving De Lira Salvatierra and G. Mitu Gulati

Abstract: The claim that lawyers act as gatekeepers or certifiers in financial transactions is widely discussed in the legal literature. There has, however, been little empirical examination of the claim. In this article, we test the hypothesis that law firms have replaced investment banks as the gatekeepers of the market for sovereign debt. We document a sea change in the relationship between issuers and investment banks on the one hand, and the relationship between issuers and outside law firms on the other. Prior to World War II outside law firms had little to no involvement in the issuance of sovereign debt. However, since World War II, and particularly since the late 1970s, the relationships between issuers and outside law firms have strengthened and their relationships with investment bankers have waned. In examining this sea change we find that issuers that hire only outside counsel to work with an investment banker pay a higher cost of capital than issuers who hire no outside counsel. We interpret this result as evidence that hiring an outside counsel is a sign of weakness on the part of the issuing sovereign. Moreover, we find that if the issuing sovereign hires two outside law firms – one to work with the underwriter and one that monitors the negotiations with the underwriter – the issuer’s cost of capital is higher than if it hires only an underwriter counsel. These results suggest that hiring outside law firms sends a negative signal to the market regarding the pending issue; a story inconsistent with the thesis that outside law firms play a certification role in the sovereign debt market.

Date Written: November 18, 2012

 

Of Positivism and the History of Economic Thought

Link

AuthorBruce Caldwell

Abstract: The rhetoric of positivism had a profound effect on the worldview and practice of economists in the middle of the last century. Though this influence has greatly diminished, it still may be found in the attitude of many economists towards the history of their discipline. This paper traces the effects of positivism in economics, then argues that the history of economics is a critical component of both the undergraduate teaching and the graduate training of economists, and that as such, it should be reintroduced into the economics curriculum. It concludes by documenting some recent hopeful signs of change

Date Written: November 1, 2012

 

Testing an Informational Theory of Legislation: Evidence from the U.S. House of Representatives

Link

AuthorAttila Ambrus, Hye Young You and László Sándor

Abstract: Using data on roll calls from the U.S. House of Representatives, this paper finds empirical support for informational theories of legislative decision-making. Consistent with the theoretical prediction, the bias of the committee a bill gets assigned to is strongly positively associated with the bias of its sponsor, and unbiased sponsors in expectation get assigned to roughly unbiased committees. Moreover, we find a negative relationship between the sponsor's absolute bias and the probability that the legislation is processed by closed rule. Despite these empirical regularities, there is a large variation in the data, suggesting that considerations other than informational efficiency are also important in committee appointments and procedural rule selection. As far as we know, our paper is the first one that provides quantitative empirical support for a theory of cheap talk versus delegation, in any setting.

Last Revised: October 12, 2012

Date Written: October 9, 2012

 

Testing an Informational Theory of Legislation: Evidence from the U.S. House of Representatives: Supplementary Appendix

Link

AuthorAttila Ambrus, László Sándor and Hye Young You

Abstract: Supplementary Appendix to Testing an Informational Theory of Legislation: Evidence from the U.S. House of Representatives.

Last Revised: October 12, 2012

Date Written: October 9, 2012

 

Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

Link

AuthorJames J. Anton, Gary Biglaiser and Nikolaos Vettas

Abstract: We analyze a simple dynamic durable good oligopoly model where sellers are capacity constrained. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition; thus it is possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer would bene…t from either a commitment not to buy in the future or by hiring an agent with instructions to buy always from the lowest priced seller. 

Date Written: September 28, 2012

 

Dynamic Preference for Flexibility

Link

Author: R. Vijay Krishna and Philipp Sadowski

Abstract: We consider a decision maker who experiences transient preference shocks when faced with dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice over infinite horizon consumption problems that features uncertain consumption utilities that evolve according to a subjective process that is iid. A generalization of the model introduces objective states of the world and accommodates persistent taste shocks that are transient, contingent on the state. In the corresponding representation the uncertainty about utilities depends on the exogenous state, which follows a subjective Markov process. The parameters of the representations, which are the subjective processes governing the evolution of beliefs over consumption utilities, and the discount factor, are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs.

Last Revised: September 25, 2012

Date Written: July 19, 2012

 

Quality, Upgrades, and Equilibrium in a Dynamic Monopoly Model

Link

AuthorJames J. Anton and Gary Biglaiser

Abstract: We examine an infinite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. We show that subgame perfect equilibrium payoffs for the seller range from capturing the full social surplus all the way down to capturing only the current flow value of each good and that each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient allocation path. This is true for all discount factors. We also show that inefficient equilibria exist for rates of innovation above a threshold.

Last Revised: September 21, 2012

Date Written: March 12, 2012

 

Shale Gas Development and Property Values: Differences Across Drinking Water Sources

Link

Author: Lucija Muehlenbachs, Elisheba Spiller and Christopher Timmins

Abstract: While shale gas development can result in rapid local economic development, negative externalities associated with the process may adversely affect the prices of nearby homes. We utilize a triple-difference estimator and exploit the public water service area boundary in Washington County, Pennsylvania to identify the housing capitalization of groundwater risk, differentiating it from other externalities, lease payments to homeowners, and local economic development. We find that proximity to wells increases housing values, though risks to groundwater fully offset those gains. By itself, groundwater risk reduces property values by up to 24 percent.

Date Written: September 1, 2012

 

A Theory of Subjective Learning

Link

Author: David Dillenberger, Juan Sebastián Lleras, Philipp Sadowski and Norio Takeoka

Abstract: We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst. We derive two utility representations of preferences over menus of acts that capture the individual’s uncertainty about his future beliefs. The most general representation identifies a unique probability distribution over the set of posteriors that the decision maker might face at the time of choosing from the menu. We use this representation to characterize a notion of “more preference for flexibility” via a subjective analogue of Blackwell’s (1951, 1953) comparisons of experiments. A more specialized representation uniquely identifies information as a partition of the state space. This result allows us to compare individuals who expect to learn differently, even if they do not agree on their prior beliefs. We conclude by extending the basic model to accommodate an individual who expects to learn gradually over time by means of a subjective filtration.

Date Written: August 31, 2012

 

Compatibility, Interoperability, and Market Power in Upgrade Markets

Link

AuthorJames J. Anton and Gary Biglaiser

Abstract: We examine the market power of a seller who repeatedly offers upgraded versions of a product. In the case of pure monopoly, the seller also controls compatibility across versions. In the case of an entrant who offers an upgrade, the incumbent seller also controls subsequent interoperability across versions. We argue that control of compatibility and interoperability does not allow an incumbent seller to charge a price premium relative to when such control is absent and, consequently, neither is a necessary source of market power.

Last Revised: August 15, 2012

Date Written: January 6, 2010

 

Man and Machine in Macroeconomics

Link

AuthorKevin D. Hoover

Abstract: The potted histories of macroeconomics textbooks are typically Keynes-centric. Keynes is credited with founding macroeconomics, and the central developments in the field through the early 1970s, including large-scale macroeconometric models are usually termed “Keynesian.” The story of macroeconomics is framed as support or opposition (e.g., monetarism or the new classical macroeconomics) to Keynes. The real story is more complicated and involves at least two distinct threads. Keynes was important, but perhaps more important for the detailed development of the field were the early macroeconometricians – Ragnar Frisch and Jan Tinbergen. Frisch and Tinbergen adopted physical or mechanical metaphors in which aggregate quantities are central. Keynes’s vision of macroeconomics is better described as “medical.” It is based in human psychology and individual decision-making and sees the economy as an organic system. Whereas policymakers and economic advisers in Keynes view can operate only within the economic system, Frisch and Tinbergen laid the basis for an optimal-control approach to economic policy in which the policymaker stands outside the system. Recent new classical macroeconomics has adopted an uneasy amalgam of the medical and mechanical metaphors.

Date Written: August 1, 2012

 

Delay as Agenda Setting

Link

AuthorJames J. Anton and Dennis Yao

Abstract: We examine a multi-issue dynamic decision-making process that involves endogenous commitment. Our primary focus is on actions that impact delay, an extreme form of lack of commitment. Delay is strategically interesting when decision makers with asymmetric preferences face multiple issues and have limited resources for influencing outcomes. A delayed decision becomes part of the subsequent agenda, thereby altering the allocation of resources. The opportunity to delay decisions leads the players to act against their short-run interests when they have strongly asymmetric preferences. Two classes of strategic activity emerge: focusing (reductions in delay) and pinning (increases in delay). We characterize these equilibria, explore how strategic delay alters the benefits to agenda setting, and develop implications for settings where bargaining is feasible. Our analysis applies directly to group, hierarchical, and coalitional decision making settings and illuminates a range of multi-market competitive interactions.

Date Written: June 5, 2012

 

Separate When Equal? Racial Inequality and Residential Segregation

Link

AuthorPatrick J. Bayer, Hanming Fang and Robert McMillan

Abstract: This paper introduces a mechanism that, contrary to standard reasoning, may lead segregation in U.S. cities to increase as racial inequality narrows. Specifically, when the proportion of highly educated blacks rises holding white education fixed, new middle-class black neighborhoods can emerge, and these are attractive to blacks, resulting in increases in segregation as households re-sort. To examine the importance of this 'neighborhood formation' mechanism in practice, we propose a new two-part research design that yields distinctive cross-sectional and time-series predictions. In cross section, if our mechanism is important, inequality and segregation should be negatively related for older blacks, as we find using both the 1990 and 2000 Censuses. In time series, a negative relationship should also be apparent, particularly for older blacks. Controlling for white education, we show that increased black educational attainment in a city between 1990 and 2000 leads to a signicant rise in segregation, especially for older blacks, and to a marked increase in the number of middle-class black communities, consistent with neighborhood formation. Of broader relevance, our findings point to a negative feedback loop likely to inhibit reductions in segregation and racial inequality over time.

Last Revised: May 9, 2012

Date Written: May 7, 2012

 

Price Discrimination in the Housing Market

Link

AuthorPatrick J. Bayer, Marcus D. Casey, Fernando V. Ferreira and Robert McMillan

Abstract: This paper sets out a new research design to test for price discrimination by sellers in the housing market. The design controls carefully for unobserved differences in the quality of neighborhoods and homes purchased by buyers of each race, using novel panel data from over two million repeat-sales housing transactions in four metropolitan areas. The results indicate that black and Hispanic homebuyers pay premiums of around 3 percent on average across the four cities – differences that are not explained by variation in buyer income, wealth or access to credit. The estimated premiums do not vary significantly with the racial composition of the neighborhood or, most strikingly, the race of the seller. This latter result rules out racial prejudice or animosity on the part of sellers as the primary explanation for the estimated premiums.

Date Written: May 1, 2012

 

Rationalizing Choice with Multi-Self Models

Link

AuthorAttila Ambrus and Kareen Rozen

Abstract: This paper studies a class of multi-self decision-making models proposed in economics, psychology, and marketing. In this class, choices arise from the set-dependent aggregation of a collection of utility functions, where the aggregation procedure satisfies some simple properties. We propose a method for characterizing the extent of irrationality in a choice behavior, and use this measure to provide a lower bound on the set of choice behaviors that can be rationalized with n utility functions. Under an additional assumption (scale-invariance), we show that generically at most five "reasons" are needed for every "mistake."

Date Written: May 1, 2012

 

Economic Modernization in Late British India: Hindu-Muslim Differences

Link

AuthorTimur Kuran and Anantdeep Singh

Abstract: The Muslims of South Asia made the transition to modern economic life more slowly than the region’s Hindus. In the first half of the twentieth century, they were relatively less likely to use large-scale and long-living economic organizations, and less likely to serve on corporate boards. Providing evidence, this paper also explores the institutional roots of the difference in communal trajectories. Whereas Hindu inheritance practices favored capital accumulation within families and the preservation of family fortunes across generations, the Islamic inheritance system, which the British helped to enforce, tended to fragment family wealth. The family trusts (waqfs) that Muslims used to preserve assets across generations hindered capital pooling among families; they were also ill-suited to profit-seeking business. Whereas Hindus generally pooled capital within durable joint family enterprises, Muslims tended to use ephemeral Islamic partnerships. Hindu family businesses facilitated the transition to modern corporate life by imparting skills useful in large and durable organizations.

Last Revised: March 23, 2012

Date Written: December 2011

 

Judicial Biases in Ottoman Istanbul: Islamic Justice and Its Compatibility with Modern Economic Life

Link

AuthorTimur Kuran and Scott Lustig

Abstract: The transition to impersonal exchange and modern economic growth has depended on the emergence of courts that enforce contracts efficiently. This paper shows that Islamic courts of the Ottoman Empire exhibited biases that would have limited the expansion of exchanges in the Eastern Mediterranean, particularly those between Muslims and non-Muslims. It thus explains why economic modernization in the Middle East required the establishment of secular courts. In quantifying Ottoman judicial biases, the paper also discredits the view that these courts treated Christians and Jews fairly as well as the counter-view that they ruled against non-Muslims disproportionately. Biases against non-Muslims were in fact institutionalized. By the same token, non-Muslims did relatively well in adjudicated interfaith disputes, because they settled most conflicts out of court in anticipation of judicial biases. Islamic courts also appear to have exhibited biases in favor of state officials. The paper thus refutes the Islamist claim that reinstituting Islamic law (sharia) would be economically beneficial.

Last Revised: March 23, 2012

Date Written: February 2012

 

Commitment-Flexibility Trade-Off and Withdrawal Penalties

Link

AuthorAttila Ambrus and Georgy Egorov

Abstract: Withdrawal penalties are common features of time deposit contracts offered by commercial banks, as well as individual retirement accounts and employer-sponsored plans. Moreover, there is a significant amount of early withdrawals from these accounts, despite the associated penalties, and empirical evidence shows that liquidity shocks of depositors are a major driving force of this. Using the consumption-savings model proposed by Amador, Werning and Angeletos in their 2006 Econometrica paper (henceforth AWA), in which individuals face the trade-off between flexibility and commitment, we show that withdrawal penalties can be part of the optimal contract, despite involving money-burning from an ex ante perspective. For the case of two states (which we interpret as “normal times” and a “negative liquidity shock”), we provide a full characterization of the optimal contract, and show that within the parameter region where the first best is unattainable, the likelihood that withdrawal penalties are part of the optimal contract is decreasing in the probability of a negative liquidity shock, increasing in the severity of the shock, and it is nonmonotonic in the magnitude of present bias. We also show that contracts with the same qualitative feature (withdrawal penalties for high types) arise in continuous state spaces, too. Our conclusions differ from AWA because the analysis in the latter implicitly assumes that the optimal contract is interior (the amount withdrawn from the savings account is strictly positive in each period in every state). We show that for any utility function consistent with their framework there is an open set of parameter values for which the optimal contract is a corner solution, inducing money burning in some states.

Date Written: March 1, 2012

 

A Fair and Impartial Jury? The Role of Age in Jury Selection and Trial Outcomes

Link

Author: Shamena Anwar, Patrick J. Bayer and Randi Hjalmarsson

Abstract: This paper uses data from over 700 felony trials in Sarasota and Lake Counties in Florida from 2000-2010 to examine the role of age in jury selection and trial outcomes. The results of the analysis imply that prosecutors are more likely to use their peremptory challenges to exclude younger members of the jury pool, while defense attorneys exclude older potential jurors. Having established that age has an important role in jury selection, the paper employs a research design that isolates the effect of the random variation in the age composition of the pool of eligible jurors called for jury duty to examine the causal impact of age on trial outcomes. Consistent with the jury selection patterns, the empirical evidence implies that older jurors are indeed more likely to convict. These results are robust to the inclusion of a broad set of controls for the racial and gender composition of the jury and a series of county, time, and judge fixed effects; almost identical effects are estimated separately for each county. These findings have implications for the role that the institution of peremptory challenges has on a defendant’s right to a fair trial and to an eligible citizen’s rights to serve on a jury.

Date Written: February 1, 2012

 

Appendix for Pirates of the Mediterranean: An Empirical Investigation of Bargaining with Transaction Costs

Link

AuthorAttila Ambrus, Eric J. Chaney and Igor Salitskiy

Abstract: Appendix for Pirates of the Mediterranean: An Empirical Investigation of Bargaining with Transaction Costs, found at http://ssrn.com/abstract=1954149.

Last Revised: January 7, 2012

Date Written: December 22, 2011

 

Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration

Link

AuthorPeter ArcidiaconoPatrick J. BayerFederico A. Bugni and Jonathan James

Abstract: Many dynamic problems in economics are characterized by large state spaces which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model's parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated.

Date Written: January 4, 2012

 

Ambiguous Business Cycles

Link

AuthorCosmin L. Ilut and Martin Schneider

Abstract: This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of confidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confidence about productivity works like `unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

Date Written: January 1, 2012

 

2011

Pricing of the Time-Change Risks

Link

Author: Ivan Shaliastovich and George Tauchen

Abstract: We develop a discrete-time real endowment economy featuring Epstein-Zin recursive utility and a Levy time-change subordinator, which represents a clock that connects business time to calendar time. This setup provides a convenient equilibrium framework for pricing non-Gaussian risks, where the solutions for financial prices are available up to integral operations in general, or in closed-form for tempered stable shocks. The non-Gaussianity of fundamentals due to time-deformation induces compensations for higher order moments and co-moments of consumption and dividend growth rates of the assets. Forecastability of the time change leads to predictability of the endowment streams and therefore to time-variation in financial prices and risk premia on assets. In numerical calibrations, we quantitatively analyze the compensations for different types of systematic risk.

Last Revised: December 13, 2011

Date Written: April 1, 2008

 

(Un)Informed Charitable Giving

Link

Author: Silvana Krasteva and Huseyin Yildirim

Abstract: Evidence suggests that donors have little demand for information before giving to charity. To understand this behavior and its policy implications, we present a model in which each individual can acquire costly information about her true value of charity. We observe that an individual who considers giving less is less likely to become informed; and indeed, an uninformed donor is, on average, less generous than an informed one. This implies that since the free-rider problem in giving worsens in a larger population, the percentage of informed givers becomes vanishingly small, leaving the total expected donations strictly below its highest level to be reached by a fully informed population. We show that while a direct government grant to the charity causes severe crowding-out by discouraging information acquisition, a matching grant increases donations by encouraging it. We further show that a “warm-glow” motive for giving does not necessarily weaken incentives to be informed, and that a (first-order) stochastic increase in true values for charity may actually decrease donations.

Date Written: December 12, 2011

 
Tobin’s Q Versus Cape versus Caper: Predicting Stock Market Returns Using Fundamentals and Momentum

Link

AuthorEdward Tower

Abstract: This paper predicts the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER — trend earnings calculated using regressions of log earnings on time. The CAPER is superior to the CAPE. But q emerges as by far the best of the predictors. Two versions of the model are built. The one with momentum predicts a 29% fall in real wealth over the eight years from end 2010. The one without momentum predicts real wealth to increase over all time horizons, but even after fifteen years, only a 32% increase in real wealth.

Date Written: December 3, 2011

 

Bayesian Estimation of a Dynamic Game with Endogenous, Partially Observed, Serially Correlated State

Link

Author: A. Ronald Gallant, Han Hong and Ahmed Khwaja

Abstract: We consider dynamic games that can have state variables that are partially observed, serially correlated, endogenous, and heterogeneous. We propose a Bayesian method that uses a particle filter to compute an unbiased estimate of the likelihood within a Metropolis chain. Unbiasedness guarantees that the stationary density of the chain is the exact posterior, not an approximation. The number of particles required is easily determined. The regularity conditions are weak. Results are verified by simulation from two dynamic oligopolistic games with endogenous state. One is an entry game with feedback to costs based on past entry and the other a model of an industry with a large number of heterogeneous firms that compete on product quality.

Date Written: December 1, 2011

 

Inverse Realized Laplace Transforms for Nonparametric Volatility Estimation in Jump-Diffusions

Link

Author: Viktor Todorov and George Tauchen

Abstract: We develop a nonparametric estimator of the stochastic volatility density of a discretely-observed Ito semimartingale in the setting of an increasing time span and finer mesh of the observation grid. There are two steps. The first is aggregating the high-frequency increments into the realized Laplace transform, which is a robust nonparametric estimate of the underlying volatility Laplace transform. The second step is using a regularized kernel to invert the realized Laplace transform. The two steps are relatively quick and easy to compute, so the nonparametric estimator is practicable. We derive bounds for the mean squared error of the estimator. The regularity conditions are sufficiently general to cover empirically important cases such as level jumps and possible dependencies between volatility moves and either diffusive or jump moves in the semimartingale. Monte Carlo work indicates that the nonparametric estimator is reliable and reasonably accurate in realistic estimation contexts. An empirical application to 5-minute data for three large-cap stocks, 1997-2010, reveals the importance of big short-term volatility spikes in generating high levels of stock price variability over and above that induced by price jumps. The application also shows how to trace out the dynamic response of the volatility density to both positive and negative jumps in the stock price.

Date Written: September 27, 2011

 

The Impact of Jury Race in Criminal Trials

Link

AuthorPatrick J. Bayer, Randi Hjalmarsson and Shamena Anwar

Abstract: This paper examines the impact of jury racial composition on trial outcomes using a unique dataset of all felony trials in Sarasota County, Florida between 2004 and 2009. We utilize a research design that exploits day-to-day variation in the composition of the jury pool to isolate quasi-random variation in the composition of the seated jury. We find strong evidence that all-white juries acquit whites more often and are less favorable to black versus white defendants when compared to juries with at least one black member. Using the Anwar-Fang rank order test, we find strong statistical evidence of discrimination on the basis of defendant race. These results are consistent with racial prejudice on the part of white jurors, black jurors, or both. Using a simple model of jury selection and decision-making, we replicate the entire set of empirical regularities observed in the data, including the fact that blacks in the jury pool are just as likely as whites to be seated. Simulations of the model suggest that jurors of each race are heterogeneous in the standards of evidence that they require to convict and that both black and white defendants would prefer to face jurors of the same race.

Last Revised: September 22, 2011

Date Written: September 1, 2011

 

Information Structure and Statistical Information in Discrete Response Models

Link

Author: Shakeeb Khan and Denis Nekipelov

Abstract: Discrete response models are of high interest in economics and econometrics as they encompass treatment effects, social interaction and peer effect models, and discrete games. We study the impact of the structure of information sets of economic agents on the Fisher information of (strategic) interaction parameters in such models. While in complete information models the information sets of participating economic agents coincide, in incomplete information models each agent has a type, which we model as a payoff shock, that is not observed by other agents. We allow for the presence of a payoff component that is common knowledge to economic agents but is not observed by the econometrician (representing unobserved heterogeneity) and have the agents' payoffs in the incomplete information model approach their payoff in the complete information model as the heterogeneity term approaches 0. We find that in the complete information models, there is zero Fisher information for interaction parameters, implying that estimation and inference become nonstandard. In contrast, positive Fisher information can be attained in the incomplete information models with any non-zero variance of player types, and for those we can also find the semiparametric efficiency bound with unknown distribution of unobserved heterogeneity. The contrast in Fisher information is illustrated in two important cases: treatment effect models, which we model as a triangular system of equations, and static game models. In static game models we show this result is not due to equilibrium refinement with an increase in incomplete information, as our model has a fixed equilibrium selection mechanism. We find that the key factor in these models is the relative tail behavior of the unobserved component in the economic agents' payoffs and that of the observable covariates.

Date Written: September 1, 2011

 

Tiebout Sorting and Neighborhood Stratification

Link

AuthorPatrick J. Bayer and Robert McMillan

Abstract: Tiebout’s classic 1956 paper has strong implications regarding stratification across and within jurisdictions, predicting (in the simplest instance) a hierarchy of internally homogeneous communities, ordered by household income. In practice, urban areas tend to exhibit varying degrees of within-neighborhood mixing, likely attributable to departures from several standard Tiebout assumptions – the fact that households are influenced by more than public goods packages when deciding where to live, the heterogeneous nature of the housing stock, and the role of employment geography, given commuting costs are non-zero. To shed light on the way these factors influence observed residential mixing, this paper quantifies the separate contributions of employment geography and housing preferences in reducing neighborhood stratification. It does so using an equilibrium sorting model, estimated with rich Census micro-data. Simulations based on the model using credibly-identified demand estimates show that counterfactual reductions in commuting costs lead to marked increases in education segregation and, to a lesser degree, increases in income segregation, as households now find it easier to locate in neighborhoods with similar households. In contrast, turning off preferences for housing characteristics actually reduces income segregation, indicating that the nonuniform distribution of housing serves to stratify households based on ability-to-pay. Related, we show that differences in housing also help accentuate differences in the consumption of local amenities.

Last Revised: August 7, 2011

Date Written: July 25, 2011

 

The Realized Laplace Transform of Volatility

Link

AuthorGeorge Tauchen and Viktor Todorov

Abstract: We introduce and derive the asymptotic behavior of a new measure constructed from high-frequency data which we call the Realized Laplace Transform of volatility. The statistic provides a nonparametric estimate for the empirical Laplace transform function of the latent stochastic volatility process over a given interval of time and is robust to presence of jumps in the price process. With a long span of data, i.e., under joint long-span and infill asymptotics, the statistic can be used to construct a nonparametric estimate of the volatility Laplace transform as well as of the integrated joint Laplace transform of volatility over different points of time. We derive feasible functional limit theorems for our statistic both under fixed span and infill asymptotics as well as under joint long span and infill asymptotics which allow to quantify the precision in estimation under both sampling schemes.

Last Revised: July 21, 2011

Date Written: July 19, 2011

 

Payoff Uncertainty, Bargaining Power, and the Strategic Sequencing of Bilateral Negotiations

Link

Author: Silvana Krasteva and Huseyin Yildirim

Abstract: This paper investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. We show that the sequencing matters to the buyer only when equilibrium trade can be inefficient. In this case, the buyer begins with the less powerful seller if the sellers have sufficiently diverse bargaining powers. If, however, both sellers are strong bargainers, then the buyer begins with the stronger of the two. For either choice, the buyer’s sequencing (weakly) increases the social surplus. Our analysis further reveals that it is sometimes optimal for the buyer to raise her own cost of acquisition to better manage the supplier competition. As such, we find that the buyer may commit to paying the sellers a minimum price strictly above the marginal cost; and that the buyer may outsource an input even though it can be made in-house. Finally, we identify the first - and second - mover advantages in negotiations for the sellers.

Date Written: July 20, 2011

 

Bright Lines, Risk Beliefs, and Risk Avoidance: Evidence from a Randomized Intervention in Bangladesh

Link

Author: Alessandro Tarozzi, Lori Snyder Bennear, Alexander Pfaff, H. B. Soumya, Kazi Matin Ahmed and Alexander van Geen

Abstract: We randomized 43 villages in Bangladesh to receive information on well-water arsenic that emphasized water safety relative to the national standard (bright-line message) or provided additional information on how risks from exposure increase with arsenic levels (gradient message). The gradient message led to 50% more switching of water sources when the arsenic level was moderately unsafe, but 40% less switching at high arsenic levels. The differences in behavior are at least partially explained by differences in risk perception that developed after the information campaign.

Last Revised: July 8, 2011

Date Written: July 1, 2011

 

Specification Test for Missing Functional Data

Link

AuthorFederico A. Bugni

Abstract: Economic data are frequently generated by stochastic processes that can be modeled as realizations of random functions (functional data). This paper adapts the specification test for functional data developed by Bugni, Hall, Horowitz and Neumann (2008) to the presence of missing observations. By using a worst case scenario approach, our method is able to extract the information available in the observed portion of the data while being agnostic about the nature of the missing observations. The presence of missing data implies that our test will not only result in the rejection or lack of rejection of the null hypothesis, but it may also be inconclusive. 

Under the null hypothesis, our specification test will reject the null hypothesis with a probability that, in the limit, does not exceed the significance level of the test. Moreover, the power of the test converges to one whenever the distribution of the observations conveys that the null hypothesis is false. 

Monte Carlo evidence shows that the test may produce informative results (either rejection or lack of rejection of the null hypothesis) even under the presence of significant amounts of missing data. The procedure is illustrated by testing whether the Burdett-Mortensen labor market model is the correct framework for wage paths constructed from the NLSY79 survey.

Last Revised: July 7, 2011

Date Written: March 14, 2011

 

Growth on a Finite Planet: Resources, Technology and Population in the Long Run

Link

AuthorPietro F. Peretto and Simone Valente

Abstract: We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. There exists a pseudo-Malthusian equilibrium in which population is constant and income grows exponentially: the equilibrium population level is determined by resource scarcity but is independent of technology. The stability properties are driven by (i) the income reaction to increased resource scarcity and (ii) the fertility response to income dynamics. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or human extinction. Introducing a minimum resource requirement, we obtain a second steady state implying constant population even under complementarity. The standard result of exponential population growth appears as a rather special case of our model.

Date Written: June 29, 2011

 

Identification of Panel Data Models with Endogenous Censoring

Link

Author: Shakeeb Khan, Maria Ponomareva and Elie T. Tamer

Abstract: This paper analyzes the identification question in censored panel data models, where the censoring can depend on both observable and unobservable variables in arbitrary ways. Under some general conditions, we derive the tightest sets on the parameter of interest. These sets (which can be singletons) represent the limit of what one can learn about the parameter of interest given the model and the data in that every parameter that belongs to these sets is observationally equivalent to the true parameter. We consider two separate sets of assumptions, motivated by the previous literature, each controlling for unobserved heterogeneity with an individual specific (fixed) effect. The first imposes a stationarity assumption on the unobserved disturbance terms, along the lines of Manski (1987), and Honore (1993). The second is a nonstationary model that imposes a conditional independence assumption. For both models, we provide sufficient conditions for these models to point identify the parameters. Since our identified sets are defined through parameters that obey first order dominance, we outline easily implementable approaches to build confidence regions based on recent advances in Linton et.al.(2010) on bootstrapping tests of stochastic dominance. We also extend our results to dynamic versions of the censored panel models in which we consider lagged observed, latent dependent variables and lagged censoring indicator variables as regressors.

Last Revised: June 20, 2011

Date Written: May 31, 2011

 

Dynamic Optimization in Models for State Panel Data: A Cohort Panel Data Model of the Effects of Divorce Laws on Divorce Rates

Link

Author: Tongyai Iyavarakul, Marjorie B. McElroy and Kalina Staub

Abstract: We present a new approach to the estimation of dynamic models using panel data, not on individuals, but aggregated to some level such as the school, county or state. This approach embeds the reduced form implications of dynamic optimization for exiting a chosen state (via divorce, dropping out, employment, etc.) into a model suitable for estimation with state panel data or similar aggregates (county, SMSA, etc.). With forward looking behaviors, exogenous changes in laws or rules give rise to selection effects on those considering entry and surprise effects for those who have already entered. The application to the effects of divorce laws on divorce rates.

Date Written: June 14, 2011

 

Estimation of Jump Tails

Link

AuthorTim Bollerslev and Viktor Todorov

Abstract: We propose a new and flexible non-parametric framework for estimating the jump tails of Itô semimartingale processes. The approach is based on a relatively simple-to-implement set of estimating equations associated with the compensator for the jump measure, or its "intensity", that only utilizes the weak assumption of regular variation in the jump tails, along with in-fill asymptotic arguments for uniquely identifying the \large" jumps from the data. The estimation allows for very general dynamic dependencies in the jump tails, and does not restrict the continuous part of the process and the temporal variation in the stochastic volatility. On implementing the new estimation procedure with actual high-frequency data for the S&P 500 aggregate market portfolio, we find strong evidence for richer and more complex dynamic dependencies in the jump tails than hitherto entertained in the literature.

Last Revised: June 10, 2011

Date Written: June 2, 2011

 

A Theory of Charitable Fund-Raising with Costly Solicitations

Link

AuthorHuseyin Yildirim and Alvaro Name Correa

Abstract: We present a theory of charitable fund-raising in which it is costly to solicit donors. We fully characterize the optimal solicitation strategy that maximizes donations net of fundraising costs. The optimal strategy dictates that the fund-raiser target only those individuals whose equilibrium contributions exceed their solicitation costs. We show that as the income inequality increases, so does the level of the public good, despite a non-monotonic fund-raising effort. This implies that costly fund-raising can provide a novel explanation for the non-neutrality of income redistributions and government grants often found in empirical studies. We also show that in large economies, only the "most willing" donors are solicited; and the average donation converges to the solicitation cost of these donors, which is strictly positive.

Date Written: May 27, 2011

 

Reconsidering Conventional Explanations of the Inverse Productivity-Size Relationship

Link

Author: Christopher B. Barrett, Marc F. Bellemare and Janet Y. Hou

Abstract: The inverse productivity-size relationship is one of the oldest puzzles in development economics. Two conventional explanations for the inverse relationship have emerged in the literature: (i) factor market imperfections that cause cross-sectional variation in household-specific shadow prices and thereby induce variation in input application rates; and (ii) the omission of soil quality measurements that are inversely correlated with farm or plot size but positively associated with yields. This study uniquely employs precise soil quality measurements at the plot level with multiple plots per household so as to allow testing of both conventional explanations simultaneously. Our empirical results show that, in these data, only a small portion of the inverse productivity-size relationship is explained by market imperfections and none of it seems attributable to the omission of soil quality measurements.

Last Revised: May 24, 2011

Date Written: June 13, 2009

 

Volatility Activity: Specification and Estimation

Link

Author: Viktor Todorov, George Tauchen and Iaryna Grynkiv

Abstract: The paper examines volatility activity and its asymmetry and undertakes further specification analysis of volatility models based on it. We develop new nonparametric statistics using high frequency option-based VIX data to test for asymmetry in volatility jumps. We also develop methods to estimate and evaluate, using price data alone, a general encompassing model for volatility dynamics where volatility activity is unrestricted. The nonparametric application to VIX data, along with model estimation for S&P Index returns, suggests that volatility moves are best captured by infinite variation pure-jump martingale with symmetric jump distribution. The latter provides a parsimonious generalization of the jump-diffusions commonly used for volatility modeling.

Date Written: May 13, 2011

 

Terms of Endearment: An Equilibrium Model of Sex and Matching

Link

AuthorPeter Arcidiacono, Andrew Beauchamp and Marjorie B. McElroy

Abstract: We develop a directed search model of relationship formation which can disentangle male and female preferences for types of partners and for different relationship terms using only a cross-section of observed matches. Individuals direct their search to a particular type of match on the basis of (i) the terms of the relationship, (ii) the type of partner, and (iii) the endogenously determined probability of matching. If men outnumber women, they tend to trade a low probability of a preferred match for a high probability of a less-preferred match; the analogous statement holds for women. Using data from National Longitudinal Study of Adolescent Health we estimate the equilibrium matching model with high school relationships. Variation in gender ratios is used to uncover male and female preferences. Estimates from the structural model match subjective data on whether sex would occur in one's ideal relationship. The equilibrium result shows that some women would ideally not have sex, but do so out of matching concerns; the reverse is true for men.

Date Written: May 5, 2011

 

Inference on an Extended Roy Model, with an Application to Schooling Decisions in France

Link

Author: Arnaud Maurel and Xavier D'Haultfœuille

Abstract: This paper considers the identification and estimation of an extension of Roy’s model (1951) of sectoral choice, which includes a non-pecuniary component in the selection equation and allows for uncertainty on potential earnings. We focus on the identification of the non-pecuniary component, which is key to disentangle the relative importance of monetary incentives versus preferences in the context of sorting across sectors. By making the most of the structure of the selection equation, we show that this component is point identified from the knowledge of the covariates effects on earnings, as soon as one covariate is continuous. Notably, and in contrast to most results on the identification of Roy models, this implies that identification can be achieved without any exclusion restriction nor large support condition on the covariates. As a byproduct, bounds are obtained on the distribution of the ex ante monetary returns. We also propose a three-stage semiparametric estimation procedure for this model, which yields root-n consistent and asymptotically normal estimators. Finally, we apply our results to the educational context, by providing new evidence from French data that non-pecuniary factors are a key determinant of higher education attendance decisions.

Date Written: May 1, 2011

 

Evidence for Dynamic Contracts in Sovereign Bank Lending

Link

Author: Peter Benczur and Cosmin L. Ilut

Abstract: This paper presents direct evidence for self-enforcing dynamic contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a punishment effect in prices) from an indirect effect through higher expected future default probabilities. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes dynamic contracts. Using data on bank loans to developing countries between 1973-1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.

Date Written: April 1, 2011

 

Can Oil Prices Forecast Exchange Rates?

Link

Author: Domenico Ferraro, Barbara Rossi and Kenneth Rogoff

Abstract: This paper investigates whether oil price shocks have a reliable and stable out-of-sample relationship with the Canadian/U.S Dollar nominal exchange rate. Despite state-of-the-art methodologies and clean data, we find paradoxically little systematic relation between oil prices and the exchange rate, especially if one takes the monthly and quarterly frequencies into account. In contrast, the very short term relationship between oil prices and exchange rates at the daily frequency is rather robust, and holds no matter whether we use contemporaneous (realized) or lagged oil price shocks in our regression. However, the short-term out-of-sample predictive ability is ephemeral, and it mostly appears after time variation in the forecasting ability of the models has been appropriately taken into account. We show that a similar results hold for other currencies and commodity price shocks.

Date Written: March 29, 2011

 

Tobin’s Q Versus CAPE Versus CAPER: Predicting Stock Market Returns Using Fundamentals and Momentum

Link

AuthorEdward Tower

Abstract: This paper predicts the performance of the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER, which is trend earnings calculated using regressions of log earnings on time. Generally, the CAPER is superior to the CAPE. But q emerges as by far the most important of the three predictors. Two versions of the model are built. The one with momentum predicts a 18% fall in real wealth over the four years from the end of 2010 from investing in the S&P 500 index. The one without momentum predicts wealth to increase, but even after fourteen years, only a 17% increase in real wealth.

Date Written: March 13, 2011

 

Micro-Loans, Insecticide-Treated Bednets and Malaria: Evidence from a Randomized Controlled Trial in Orissa (India)

Link

Author: Alessandro Tarozzi, Aprajit Mahajan, Brian Blackburn, Daniel Kopf, Lakshmi Krishnan and Joanne Yoong

Abstract: Many severe health risks in developing countries could be substantially reduced with access to appropriate preventive measures. However, the associated costs are often high enough to restrict access among poor households, and free provision through public health campaigns is often not financially feasible. We describe findings from the first large-scale cluster randomized controlled trial in a developing country context that evaluates the uptake of a health-protecting technology, insecticide-treated bednets (ITNs), through micro-consumer loans, as compared to free distribution and control conditions. Numerous studies have shown that widespread, regular use of ITNs is one the most effective preventive measures against malaria. However, ownership rates remain very low in most malarious areas, including our study areas in rural Orissa (India). Despite the un-subsidized price, 52 percent of sample households purchased at least one ITN, leading to 16 percent of individuals using a treated net the previous night, relative to only 2 percent in control areas where nets were not offered for sale. However, the increase fell significantly short of the 47 percent previous-night usage rate achieved with free distribution. Most strikingly, we find that neither micro-loans nor free distribution led to improvements in malaria and anemia prevalence, measured using blood tests. We examine and rule out several plausible explanations for this latter finding. We conjecture that insufficient ITN coverage is the most likely explanation, and discuss implications for public health policy.

Date Written: March 9, 2011

 

Time Inconsistency, Expectations and Technology Adoption: The Case of Insecticide Treated Nets

Link

Author: Alessandro Tarozzi and Aprajit Mahajan

Abstract: Economists have recently argued that time inconsistency may play a central role in explaining inter-temporal behavior, particularly among poor households. However, time-preference parameters are typically not identified in standard dynamic choice models and little is known about the fraction of inconsistent agents in the population. We formulate a dynamic discrete choice model in an unobservedly heterogeneous population of possibly time-inconsistent agents motivated by specifically collected information combined with a field intervention in rural India. We identify and estimate all time-preference parameters as well as the population fractions of time-consistent and naive and sophisticated time-inconsistent agents. We estimate that time-inconsistent agents account for more than half of the population and that sophisticated inconsistent agents are considerably more present-biased than their naive counterparts. We also examine whether there are other differences across types (e.g. in risk and cost preferences) and find that these differences are small relative to the differences in time preferences.

Date Written: March 2, 2011

 

Habit, Long-Run Risks, Prospect? A Statistical Inquiry

Link

Author: Eric M. Aldrich and A. Ronald Gallant

Abstract: We use recently proposed Bayesian statistical methods to compare the habit persistence asset pricing model of Campbell and Cochrane, the long-run risks model of Bansal and Yaron, and the prospect theory model of Barberis, Huang, and Santos. We improve these Bayesian methods so that they can accommodate highly nonlinear models such as the three aforementioned. Our substantive results can be stated succinctly: If one believes that the extreme consumption fluctuations of 1930–1949 can recur, although they have not in the last sixty years even counting the current recession, then the long-run risks model is preferred. Otherwise, the habit model is preferred. We reach this conclusion by undertaking two types of comparisons, relative and absolute, over two sample periods, 1930–2008 and 1950–2008, using real, annual, U.S. data on stock returns, consumption growth, and the price to dividend ratio. Comparisons are conducted using a trivariate series of all three, a bivariate series comprised of consumption growth and stock returns, and a univariate series of stock returns alone. The prior for each model is that the ergodic mean of the real interest rate be 0.896 within ±1 with probability 0.95 together with a preference for model parameters that are near their published values. The prospect theory model is not considered for the trivariate series because it puts all its mass on a two-dimensional subspace thereby violating the regularity conditions of the methods employed. For the trivariate series, in the relative comparison, the long-run risks model dominates the habit model over the 1930–2008 period, while the habit persistence model dominates the long-run risks model over the 1950–2008 period; in the absolute assessment, both models fail over both sample periods. Empirical results for the bivariate series are explored more completely because it has the most substantive relevance. For the bivariate series, in the relative comparison, the long-run risks model dominates over the 1930–2008 period, while the habit persistence model dominates over the 1950–2008 period; in the absolute assessment, the habit model fails in the 1930–2008 period and the prospect theory model fails in the 1950–2008 period. Out-of-sample, the models show interesting differences in their forecasts over the 2009–2013 horizon. In-sample, all three models track the conditional volatility of stock returns about the same. They differ mainly in how they track the conditional volatility of consumption growth and the conditional correlation between consumption growth and stock returns. For the univariate series and for both sample periods, the models perform about the same in the relative comparison and fit the series reasonably well in the absolute assessment. The main value of the univariate series is that the near equal performance of the three models permits exploration of methodological issues.

Last Revised: February 27, 2011

Date Written: May 18, 2010

 

What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations?

Link

Author: Barbara Rossi and Sarah Zubairy

Abstract: This paper analyzes the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations; and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.

Last Revised: February 6, 2011

Date Written: January 15, 2011

 

Causal Structure and Hierarchies of Models

Link

AuthorKevin D. Hoover

Abstract: Economics places a high premium on completeness of explanation. Typical general-equilibrium accounts of economic phenomena are preferred to partial equilibrium accounts on the ground that important interactions are necessarily omitted in the latter. A similar preference for microfoundational explanations over macroeconomic explanations of aggregate phenomena is grounded in similar reasoning. Probabilistic accounts of causation frequently presume that greater detail is superior to less. Simpson’s paradox, for example, assumes that failure to account for distinctions within populations results in false conclusions. Strategies of causal refinement – e.g., distinguishing between direct and indirect causes – are similar. However, there are countervailing practices in economics. Representative-agent models aim to capture economic motivation but not to reduce the level of aggregation. Structural vector-autoregression models and dynamic stochastic general-equilibrium models with small numbers of variables are often practically preferred to ones with large numbers. The distinction between endogenous variables determined within a causal system and exogenous variables determined independently of the causal system suggests a partitioning of the world into distinct subsystems. This paper will explore this tension. I advocate a structural account of causation grounded in Herbert Simon’s "Causal Order and Identifiability" (1953), which defines cause with reference to complete systems. But any workable causal epistemology must deal with incomplete systems and piecemeal evidence. The main formal focus of the paper is to better understand the constraints that a structural account of causation places on the freedom to model complex or lower-order systems as simpler or higher-order systems. The main epistemological focus is to understand how and to what degree piecemeal evidence can be incorporated into a structural account.

Last Revised: January 29, 2011

Date Written: January 5, 2011

 

Pragmatism, Perspectival Realism, and Econometrics

Link

AuthorKevin D. Hoover

Abstract: Econometricians tend to hold simultaneously two views in tension with each other: an apparent anti-realism that holds that all models are false and at best useful constructs or approximations to true models and an apparent realism that models are to be judged by their success at capturing an independent reality. This tension is resolved starting from Ronald Giere’s perspectival realism. Perspectival realism can itself be seen as a species of pragmatism, as that term is understood by its originator, Charles S. Peirce.

Last Revised: January 26, 2011

Date Written: January 24, 2011

 

Tails, Fears and Risk Premia

Link

AuthorTim Bollerslev and Viktor Todorov

Abstract: We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new Investor Fears index. The index suggests both large and time-varying compensations for fears of disasters. Our empirical investigations are essentially model-free, involving new extreme value theory approximations and high-frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out-of-the money options and new model-free implied variation measures for estimating the corresponding risk neutral expectations.

Last Revised: January 26, 2011

Date Written: March 5, 2010

 

Can We Explain the Sign-Switching Behavior of Cross-Country Interest Rate Correlations?

Link

Author: Dong-Hyun Ahn, In Seok Baek and A. Ronald Gallant

Abstract: This paper considers the well established empirical fact that conditional correlations among cross-country interest rates switch signs. Switching implies an alternation of coupling and decoupling of global bond markets over time. This evidence is robust to alternative estimation schemes. Here we use a seminonparametric (SNP) model with a BEKK-GARCH variance function to estimate conditional second moments both to confirm these results and to provide auxiliary models for structural estimation of term structure models. Using an extensive historical analysis, we find that major driving forces behind the sign-switching behavior of conditional correlations between the Eurodollar rate and the Euroyen rate are synchronization and dis-synchronization of business cycles and coordination and discoordination of monetary policies triggered by international policies and financial market crashes. Especially, we find that the two interest rates are more likely to couple when both the U.S. and Japan slip into a recession while the likelihood of decoupling is highest when both economies are in expansion. We also explore whether proposed International Affine Term Structure Models (IATSMs) and International Quadratic Term Structure Models (IQTSMs) are able to reproduce the sign-switching behavior of conditional correlations among cross-country interest rates. We find that a small subset of the IATSMs can generate sign-switching behavior but only by forgoing their ability to describe other features such as the positivity of nominal interest rates, heteroskedasticity in volatility, and correlations among underlying state variables. In contrast, the IQTSMs are able to generate it without limiting their ability to describe other dynamic features. Using the MCMC-Efficient Method of Moments (EMM), we test the empirical performance of the models in reproducing the sign-switching behavior of conditional correlations. The result suggests that the IATSMs conclusively fail to capture it while the IQTSMs are relatively successful but fail to reproduce ephemeral ones.

Last Revised: January 23, 2011

Date Written: January 5, 2011

 

Out-of-Sample Forecast Tests Robust to the Window Size Choice

Link

Author: Barbara Rossi and Atsushi Inoue

Abstract: This paper proposes new methodologies for evaluating out-of-sample forecasting performance that are robust to the choice of the estimation window size. The methodologies involve evaluating the predictive ability of forecasting models over a wide range of window sizes. We show that the tests proposed in the literature may lack power to detect predictive ability, and might be subject to data snooping across different window sizes if used repeatedly. An empirical application shows the usefulness of the methodologies for evaluating exchange rate models' ’forecasting ability.

Date Written: January 16, 2011

 

The Monetary Economy and the Economic Crisis

Link

Author: David E. W. Laidler

Abstract: The monetary economy has properties that cannot be analyzed using the tools of today's dynamic general equilibrium analysis. Keynes's economics, far from being an aberration in the otherwise orderly evolution of modern macroeconomics from Adam Smith's ideas about the "invisible hand," was a major contribution to an ongoing tradition in monetary theory in whose creation Smith himself had played a part. Retrospective consideration of this tradition suggests that the property of the monetary economy critical to the generation of economic crises and the stagnation that follows them is its capacity to permit trading at "false" prices, a phenomenon ruled out by assumption in dynamic general equilibrium models. Not only Keynes's explanation of depression but also Hayek and Robertson's analysis of the role of unsustainable forced saving in the boom can be thought of as relying on this factor.

Date Written: January 10, 2011

 

Lionel W. McKenzie and the Proof of the Existence of a Competitive Equilibrium

Link

AuthorE. Roy Weintraub

Abstract: The theorem proving the existence of general equilibrium in a competitive economy, which necessarily involved specifying the conditions under which such an equilibrium would exist, is an extraordinary achievement of twentieth-century economics. The discovery is commonly attributed to the paper by Kenneth Arrow and Gerard Debreu, "Existence of an Equilibrium for a Competitive Economy," which was published in the July 1954 issue of Econometrica. However it is less well-known, even within the economics profession, that Lionel McKenzie published a paper in the previous issue of Econometrica, "On Equilibrium in Graham's Model of World Trade and Other Competitive Systems,” which discussed many of the same themes. Over the past decade the new availability of archival material, the papers of Lionel McKenzie, Robert Solow, Gerard Debreu, and Leonid Hurwicz, permits a reexamination of the events surrounding the publication of both Econometrica papers in 1954. The discussion raises general issues concerning “simultaneous discovery,” “priority,” and “credit” in economic research, and opens a window into some academic practices of that time.

Date Written: January 1, 2011

 

 

2010

Testing for Weak Identification in Possibly Nonlinear Models

Link

Author: Barbara Rossi and Atsushi Inoue

Abstract: In this paper we propose a chi-square test for identification. Our proposed test statistic is based on the distance between two shrinkage extremum estimators. The two estimators converge in probability to the same limit when identification is strong, and their asymptotic distributions are different when identification is weak. The proposed test is consistent not only for the alternative hypothesis of no identification but also for the alternative of weak identification, which is confirmed by our Monte Carlo results. We apply the proposed technique to test whether the structural parameters of a representative Taylor-rule monetary policy reaction function are identified.

Date Written: December 24, 2010

 

Are GMO’s Predictions Prescient? Using Them to Predict Vanguard’s Mutual Fund Returns, October 2010

Link

Author: Edward Tower

Abstract: Each month, GMO publishes on the web its predictions of the real rate of return for various asset styles over the next seven years. Its web library retains its quarterly predictions, dating back to the end of the second quarter of 2000. This inquiry explores whether they predict the performance of the Vanguard mutual funds that invest in these styles? 

Last Revised: November 9, 2010

Date Written: October 1, 2010

 

GMO versus Vanguard: Assessing the Performance of Comparable Funds

Link

Author: Edward Tower

Abstract: GMO is a well known mutual fund company that serves wealthy clients. The minimum investment for a mutual fund account is 10 million dollars. GMO’s web site is a font of useful and entertaining information. Should the Vanguard investor who can’t afford to invest with GMO be envious of the wealthy who have access to GMO funds? This paper asks whether the GMO funds that have similar Vanguard counterparts over‐return or under‐return their Vanguard counterparts, and by how much. Some of the Vanguard counterparts are indexed. Thus, this paper also provides evidence on whether stock pickers can beat indexers.

Last Revised: November 9, 2010

Date Written: October 1, 2010

 

Strategic Asset Allocation in Practice: Using Vanguard Funds to Clone GMO’s Benchmark‐Free Allocation Fund

Link

Author: Edward Tower

Abstract: GMO offers a mutual fund which is free to change its composition of assets in accordance with expected risks and returns. It is called the GMO Benchmark Free Allocation Fund III, ticker: GBMFX. This study asks whether one could obtain the same performance by adjusting one’s holdings of Vanguard funds. We find that an investor was unable to reach the return of the GMO fund with either a continuously rebalanced portfolio of Vanguard funds or with a varying weight portfolio that matched the style of the GMO fund throughout the period. However, in the second half of the period since inception through June 2010, GBMFX had roughly the same return as the baskets of Vanguard funds.

Last Revised: November 9, 2010

Date Written: October 1, 2010 

 

Dynamic Preference for Flexibility

Link

AuthorPhilipp Sadowski and Vijay Krishna

Abstract: Following Kreps (1979), we consider a decision maker who is uncertain about her future taste for immediate consumption. This uncertainty leaves the decision maker with a preference for flexibility: When choosing among menus containing alternatives for future choice, she weakly prefers menus with additional alternatives. Existing representations accommodating this choice pattern cannot address dynamic decision situations like a consumption savings problem. We provide representations of choice over continuation problems that are recursive and take the form of Bellman equations. Two specific models are axiomatized. They feature stationary and Markovian beliefs over future tastes, respectively. The parameters of the representations, which are relative intensities of tastes, beliefs over those tastes and the discount factor, are uniquely identified from behavior. We characterize a natural notion of 'greater preference for flexibility' in terms of a stochastic order on beliefs and give an example of a Lucas tree economy, where a representative agent with greater preference for flexibility corresponds to larger price volatility in the sense of second order stochastic dominance.

Last Revised: November 4, 2010

Date Written: July 1, 2010

 

Another Look at the Identification at Infinity of Sample Selection Models

Link

Author: Arnaud Maurel and Xavier D'Haultfœuille

Abstract: It is often believed that without instrument, endogenous sample selection models are identified only if a covariate with a large support is available (see, e.g., Chamberlain, 1986, and Lewbel, 2007). We propose a new identification strategy mainly based on the condition that the selection variable becomes independent of the covariates for large values of the outcome. No large support on the covariates is required. Moreover, we prove that this condition is testable. We finally show that our strategy can be applied to the identification of generalized Roy models.

Date Written: November 1, 2010

 

Tapping the Supercomputer Under Your Desk: Solving Dynamic Equilibrium Models with Graphics Processors

Link

Author: Eric M. Aldrich, Jesús Fernández-Villaverde, A. Ronald Gallant and Juan Francisco Rubio-Ramirez

Abstract: This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute unified device architecture (CUDA) of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely.

Date Written: October 18, 2010

 

Contingent Preference for Flexibility: Eliciting Beliefs from Behavior

Link

AuthorPhilipp Sadowski

Abstract: Following Kreps (1979), I consider a decision maker who is uncertain about her future taste. This uncertainty leaves the decision maker with a preference for flexibility: When choosing among menus containing alternatives for future choice, she weakly prefers menus with additional alternatives. Standard representations accommodating this choice pattern cannot distinguish tastes (indexed by a subjective state space) and beliefs (a probability measure over the subjective states) as different concepts. I allow choice between menus to depend on objective states. My axioms provide a representation that uniquely identifies beliefs, provided objective states are sufficiently relevant for choice. I suggest this result as a choice theoretic foundation for the assumption, commonly made in the (incomplete) contracting literature, that contracting parties who know each others ranking of contracts, also share beliefs about each others future tastes in the face of unforeseen contingencies.

Date Written: October 10, 2010

 

Investor Overconfidence and the Forward Premium Puzzle

Link

AuthorA. Craig Burnside, Bing Han, David A. Hirshleifer and Tracy Yue Wang

Abstract: We offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence. In the model, overconfident individuals overreact to their information about future inflation, which causes greater overshooting in the forward rate than in the spot rate. Thus, when agents observe a signal of higher future inflation, the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate. The model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behavior of forward and spot exchange rates. Our approach is also consistent with the availability of profitable carry trade strategies.

Last Revised: October 8, 2010

Date Written: April 1, 2010

 

Carbon Allowance Auction Design: An Assessment of Options for the U.S.

Link

AuthorDavid McAdamsGiuseppe LopomoLeslie M. Marx  and Brian C. Murray

Abstract: Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the U.S. and are also included in recent bills in the U.S. Congress that would establish a national cap-and-trade program in the U.S. to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for the auction format for carbon allowance auctions: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these auction formats as applied to carbon allowance auctions and suggest auction design choices that address potential concerns about efficiency losses from collusion and other factors. We conclude that a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading choices, in part because it offers increased robustness to collusion without significant sacrifice in terms of price discovery. 

Date Written: September 2010

 

Ashamed to Be Selfish

Link

AuthorPhilipp Sadowski and David Dillenberger

Abstract: We study a decision maker (DM) who has preferences over sets of payoff-allocations between herself and a passive recipient, which represent second-stage choice problems. The recipient is only aware of second-stage choice of an allocation. Not choosing the normatively best allocation in the second stage inflicts shame on DM. We derive a representation that identifies DM's private ranking of allocations, her subjective norm, and shame. The normatively best allocation can be further characterized as the Nash solution of a bargaining game induced by the second-stage choice problem.

Date Written: September 20, 2010

 

Understanding Models’ Forecasting Performance

Link

Author: Barbara Rossi and Tatevik Sekhposyan

Abstract: We propose a new methodology to identify the sources of models’ forecasting performance. The methodology decomposes the models’ forecasting performance into asymptotically uncorrelated components that measure instabilities in the forecasting performance, predictive content, and over-fitting. The empirical application shows the usefulness of the new methodology for understanding the causes of the poor forecasting ability of economic models for exchange rate determination.

Last Revised: September 16, 2010

Date Written: August 1, 2010

 

Realized Laplace Transforms for Estimation of Jump Diffusive Volatility Models

Link

Author: Viktor Todorov, George Tauchen and Iaryna Grynkiv

Abstract: We develop a new efficient and analytically tractable method for estimation of parametric volatility models that is robust to price-level jumps and generally has good finite sample properties. The method entails first integrating intra-day data into the Realized Laplace Transform of volatility, which is a model-free and jump-robust estimate of daily integrated empirical Laplace transform of the unobservable volatility. The estimation then is done by matching moments of the integrated joint Laplace transform with those implied by various parametric volatility models. In the empirical application, the best fitting volatility model is a non-diffusive two-factor model where low activity jumps drive its persistent component and more active jumps drive the transient one.

Date Written: September 12, 2010

 

Stairway to Heaven or Highway to Hell: Liquidity, Sweat Equity, and the Uncertain Path to Ownership

Link

AuthorCurtis R. Taylor, Giuseppe Lopomo and Vijaykrishna Venkataraman

Abstract: A principal contracts optimally with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and has access to private information about the sequence of cost realizations. We formulate this mechanism design problem as a recursive dynamic program in which promised utility to the agent is the relevant state variable. By establishing that output distortions and the stringency of liquidity constraints decrease monotonically in promised utility, we are able to interpret the state variable as the agent’s equity in the firm. We establish a bang-bang property of optimal contracts wherein the agent is incentivised only through adjustments to his future utility until achieving a critical level of equity, after which he may be incentivised through cash payments, that is, through instantaneous rents. Thus the incentive scheme resembles what is commonly regarded as a sweat equity contract, with all cash payments net of costs (rents) being back loaded. A critical level of sweat equity occurs when none of the agent’s liquidity constraints bind. At this point, the contract calls for efficient production in all future periods and the agent attains a vested ownership stake in the firm. Finally, properties of the theoretically optimal contract are shown to be similar to features common in real-world work-to-own franchising agreements and venture capital contracts.

Date Written: September 2, 2010

 

An Economic Model of Amniocentesis Choice

Link

Author: Eduardo Fajnzylber, Seth G. Sanders and V. Joseph Hotz

Abstract: Medical practitioners typically utilize the following protocol when advising pregnant women about testing for the possibility of genetic disorders: Pregnant women over the age of 35 should be tested for Down syndrome and other genetic disorders; for younger women, such tests are discouraged since they can cause a miscarriage. The logic appears compelling. The rate at which amniocentesis causes a miscarriage is constant while genetic disorders rise over a woman’s reproductive years. Hence the potential benefit from testing – being able to terminate a fetus with a genetic disorder – rises with maternal age. We argue that this logic is incomplete. While the benefits to testing rise with age, so do the costs. While undergoing an amniocentesis always entails the risk of miscarriage of a healthy fetus, these costs are lower at early ages, because there is a higher probability of being able to replace a miscarried fetus with a healthy birth at a later age. We develop and calibrate a dynamic model of amniocentesis choice to explore this tradeoff. For parameters that characterize realistic age patterns of chromosomal abnormalities, fertility rates and miscarriages following amniocentesis, our model implies a falling, rather than rising, rate of amniocentesis as women approach menopause.

Date Written: August 2010

 

Empirical Asset Pricing and Statistical Power in the Presence of Weak Risk Factors

Link

AuthorA. Craig Burnside

Abstract: The risk factors in many consumption-based asset pricing models display statistically weak correlation with the returns being priced. Some GMM-based procedures used to test these models have very low power to reject proposed stochastic discount factors (SDFs) when they are mis-specified and the covariance matrix of the asset returns with the risk factors has less than full column rank. Consequently, these estimators provide potentially misleading positive assessments of the SDFs. Working with SDFs specified in terms of demeaned risk factors improves the performance of GMM but the power to reject mis-specified SDFs may remain low. Two summary tests for failure of the rank condition have reasonable power, and lead to no Type I errors in Monte Carlo experiments.

Last Revised: August 23, 2010

Date Written: August 1, 2007

 

Online Privacy and Price Discrimination

Link

AuthorCurtis R. Taylor, Vincent Conitzer and Liad Wagman

Abstract: When a firm is able to recognize its previous customers, it may use information about their purchase histories to price discriminate. We analyze a model with a monopolist and a continuum of heterogeneous consumers, where consumers are able to maintain their anonymity and avoid being identified as past customers, possibly at an (exogenous) cost. When consumers can costlessly maintain their anonymity, they all individually choose to do so, which paradoxically results in the highest profit for the firm. Increasing the cost of anonymity can benefit consumers, but only up to a point, after which the effect is reversed.

Date Written: July 2010

 

Performance and Turnover in a Stochastic Partnership

Link

Author: David McAdams

Abstract: This paper characterizes the social-welfare maximizing equilibrium of a stochastic partnership matching market, in which players paired to play a stochastic game may quit to be costlessly and anonymously re-matched. Patterns of performance and turnover in this equilibrium are consistent with the well-known survivor-ship bias and, if partners form meaningful first impressions, with the honeymoon effect. By contrast, maximizing social welfare in standard repeated games with re-matching typically requires that players receive low payoffs at the start of each relationship. Welfare and turnover comparative statics are also provided: higher partnership-states are associated with higher joint payoffs and, in the special case of an exogenous stochastic process, with both higher joint stage-game and joint continuation payoffs as well as longer-lasting relationships.

Date Written: July 23, 2010

 

Economic Modernization in Late British India: Hindu-Muslim Differences

Link

AuthorTimur Kuran and Anantdeep Singh

Abstract: The Muslims of South Asia made the transition to modern economic life more slowly than the region’s Hindus. In the first half of the twentieth century, they were relatively less likely to use large-scale and long-living economic organizations, and less likely to serve on corporate boards. Providing evidence, this paper also explores the institutional roots of the difference in communal trajectories. Whereas Hindu inheritance practices favored capital accumulation within families and the preservation of family fortunes across generations, the Islamic inheritance system, which the British helped to enforce, tended to fragment family wealth. The family trusts (waqfs) that Muslims used to preserve assets across generations hindered capital pooling among families, and they were ill-suited to profit-seeking business. Whereas Hindus generally pooled capital within durable joint family enterprises, Muslims tended to use ephemeral Islamic partnerships. Hindu family businesses facilitated the transition to modern corporate life by imparting skills useful in large and durable organizations.

Date Written: July 1, 2010

 

Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle

Link

AuthorCosmin L. Ilut

Abstract: High-interest-rate currencies tend to appreciate in the future relative to low-interest-rate currencies instead of depreciating as uncovered-interest-parity (UIP) predicts. I construct a model of exchange-rate determination in which ambiguity-averse agents face a dynamic filtering problem featuring signals of uncertain precision. Solving a max-min problem, agents act upon a worst-case signal precision and systematically underestimate the hidden state that controls payoffs. Thus, on average, agents next periods perceive positive innovations, which generates an upward re-evaluation of the strategy's profitability and implies ex-post departures from UIP. The model also produces predictable expectational errors, ex-post profitability and negative skewness of currency speculation payoffs.

Last Revised: May 19, 2010

Date Written: March 1, 2010

 

Inventory in Vertical Relationships with Private Information and Interdependent Values

Link

AuthorJames J. Anton, Gary Biglaiser and Tracy Lewis

Abstract: We study the use of inventory when a distributor is better informed about demand than a manufacturer. We find that when distributor and manufacturer values are interdependent it is optimal to endow the distributor with some inventory before it obtains its private information. We characterize the final allocation of the good and show that the distributor may have too few (many) units relative to the efficient allocation when demand is high (low).

Last Revised: May 16, 2010

Date Written: February 4, 2010

 

Time-Consistent Majority Rules and Heterogenous Preferences in Group Decision-Making

Link

AuthorHuseyin Yildirim

Abstract: This paper studies a collective decision problem in which a group of individuals with interdependent preferences vote whether or not to implement a public project of unknown value. A utilitarian social planner aggregates these votes according to a majority rule; but, unlike what is commonly assumed in the literature, the planner is unable to commit to the rule before votes are cast. Characterizing the time-consistent majority rules, we find that the ex ante optimal majority rule is time-consistent; but for groups whose members have sufficiently homogenous preferences, there is an ex ante suboptimal rule that is also time-consistent. Thus, in the absence of an ex ante commitment, the social planner prefers a relatively heterogeneous group in which strategic voting incentives are weak. This finding is in sharp contrast with the observation that under an exogenously given majority rule, the social planner prefers the most homogenous group. Applications to trial jury and advisory committee formations as well as academic hiring decisions are discussed.

Date Written: May 13, 2010

 

Discounts for Qualified Buyers Only

Link

AuthorDavid McAdams

Abstract: The standard monopoly pricing problem is re-considered when the buyer can disclose his type (e.g. age, income, experience) at some cost. In the optimal sales mechanism with costly disclosure, the seller posts a price list, including a "sticker price" available to any buyer and a schedule of discounts available to those who disclose certain types. Unambiguous welfare implications of such a pricing policy are available in the limiting case when the buyer's type is fully informative: (i) The buyer is better off and the monopolist worse off when disclosure is more costly. (ii) When discounts are sufficiently rare, social welfare is strictly less than if the seller could not offer discounts.

Date Written: May 10, 2010

 

Can Exchange Rates Forecast Commodity Prices?

Link

Author: Yu-Chin Chen, Kenneth Rogoff and Barbara Rossi

Abstract: This paper demonstrates that "commodity currency" exchange rates have remarkably robust power in predicting future global commodity prices, both in sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.

Last Revised: May 6, 2010

Date Written: June 29, 2008

 

Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Link

AuthorTim Bollerslev, Natalia Sizova and George Tauchen

Abstract: Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects relative to returns. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, is distinctly less persistent and appears short-memory. This paper develops the first internally consistent equilibrium based explanation for all of these empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. Our empirical investigations are made possible through the use of newly available high-frequency intra-day data for the VIX volatility index, along with corresponding high-frequency data for the S&P 500 aggregate market portfolio. We show that the qualitative implications from the new theoretical model match remarkably well with the distinct shapes and patterns in the sample auto-correlations and dynamic cross-correlations in the returns and volatilities observed in the data.

Last Revised: May 6, 2010

Date Written: March 19, 2010

 

Choice and Competition in Education Markets

Link

AuthorPatrick J. Bayer and Robert McMillan

Abstract: This paper presents a new approach for measuring the effects of competition on school performance. We use an equilibrium sorting model to generate an intuitive measure of the competition each school faces, captured by the slope of the school’s demand curve. We then show that this competition measure is positively related to school performance using rich Census data: a one standard-deviation increase in competitiveness leads to a 0.1 standard-deviation performance improvement, controlling for a host of other factors. This positive performance relationship is consistent with strong supply responsiveness, relevant to the school choice debate.

Date Written: April 30, 2010

 

Risk, Volatility, and the Global Cross-Section of Growth Rates

Link

Author: Alexandra Tabova and A. Craig Burnside

Abstract: We reconsider the empirical links between volatility and growth between 1970 and 2007. There is a strong and significant correlation between individual country growth rates and global factors that are arguably exogenous with respect to their economies. The amount of volatility driven by these external factors is highly correlated, cross-sectionally, with the overall amount of volatility in GDP growth. There is also a strong correlation between a country's average growth rate and the magnitude and sign of its exposure to global factors. We interpret our findings as a partial answer to the question "Why doesn't capital flow from rich to poor countries?" We argue that low-income countries that grow slowly are riskier from the perspective of the marginal international investor.

Date Written: April 23, 2010

 

Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

Link

AuthorJames J. Anton, Sandro Brusco and Giuseppe Lopomo

Abstract: In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur: the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement.

Last Revised: April 22, 2010

Date Written: August 26, 2009

 

Nonparametric Identification of First-Price Auctions With Non-Separable Unobserved Heterogeneity

Link

AuthorDavid McAdams, Yingyao Hu and Matthew Shum

Abstract: We propose a novel methodology for nonparametric identification of first-price auction models with independent private values, which allows for one-dimensional auction-specific unobserved heterogeneity, based on recent results from the econometric literature on nonclassical measurement error in Hu and Schennach (2008). Our approach can accommodate a wide variety of applications in which some location of the conditional distribution of bids (e.g. min or max of the support, mean, etc.) is increasing in the unobserved heterogeneity. This includes settings in which the econometrician fails to observe the reserve price, the cost of bidding, the number of bidders, or some factor (“quality”) with a non-linear effect on bidder values.

Date Written: April 8, 2010

 

Credit Quantity and Credit Quality: Bank Competition and Capital Accumulation

Link

Author: Nicola Cetorelli and Pietro F. Peretto

Abstract: In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation. We further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria. These results explain the convicting evidence emerging from the recent empirical studies of the effects of bank competition on economic growth. We obtain them developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to other relationship services which contribute to improve the likelihood of success of entrepreneurs' projects. 

This tension between credit quantity and credit quality is what leads to the ambiguous effect on capital accumulation, We also show that conditioning on one key parameter resolves the theoretical ambiguity: in economies where intrinsic market uncertainty is high (low), less (more) competition leads to higher capital accumulation.

Date Written: March 2010

 

Dynamic Entry with Cross Product Spillovers: An Application to the Generic Drug Industry

Link

Author: A. Ronald Gallant, Han Hong and Ahmed Khwaja

Abstract: Experience in one product market can potentially improve firm performance in a related product market in the future. Thus, entry into a market is determined not just by profits in that market but also by its future impact on profitability in other markets. We formulate and estimate a dynamic model of entry decisions of firms in the presence of such spillovers using data on the generic drug industry. Spillovers imply that a firm’s unobserved “ability” to profit in a product market not only changes stochastically but is also is endogenous to past entry decisions. Therefore, the model needs to accommodate unobserved state variables that are endogenous to firm actions and serially correlated. We address the methodological challenge of estimating such a model using a sequential importance sampling based technique. Our estimates show significant spillover effects of entry on future profits. On average, each entry reduces costs by 7% at the next entry opportunity. On average there are eight entry opportunities annually. The average cumulative benefit of a firm that enters all eight markets in a year is 51%. We conclude that spillovers are critical in the equilibrium evolution of the structure of the generic drug industry.

Date Written: March 2010

 

Limit Theorems for Power Variations of Pure-Jump Processes with Application to Activity Estimation

Link

Author: Viktor Todorov and George Tauchen

Abstract: This paper derives the asymptotic behavior of realized power variation of pure-jump Ito semimartingales as the sampling frequency within a fixed interval increases to infinity. We prove convergence in probability and an associated central limit theorem for the realized power variation as a function of its power. We apply the limit theorems to propose an efficient adaptive estimator for the activity of discretely-sampled Ito semimartingale over a fixed interval.

Date Written: March 18, 2010

 

Modeling College Major Choices Using Elicited Measures of Expectations and Counterfactuals

Link

AuthorV. Joseph HotzPeter Arcidiacono and Songman Kang

Abstract: The choice of a college major plays a critical role in determining the future earnings of college graduates. Students make their college major decisions in part due to the future earnings streams associated with the different majors. We survey students about what their expected earnings would be both in the major they have chosen and in counterfactual majors. We also elicit students’ subjective assessments of their abilities in chosen and counterfactual majors. We estimate a model of college major choice that incorporates these subjective expectations and assessments. We show that both expected earnings and students’ abilities in the different majors are important determinants of student’s choice of a college major. We also show that students’ forecast errors with respect to expected earnings in different majors is potentially important, with our estimates suggesting that 7.5% of students would switch majors if they made no forecast errors.

Last Revised: February 28, 2010

Date Written: January 22, 2010

 

Vanguard Versus DFA & Wisdomtree, and the Value Added by Dan Wiener’s Independent Adviser for Vanguard Investors

Link

AuthorEdward Tower and Zhang Yichong

Abstract: Investigating style-adjusted performance is important for an investor who has selected the desired style and wishes to know which fund or company or portfolio would have provided the best performance within that style. Looking at the entire portfolios provided to clients by different companies or suggested by different advisors enables assessment of how clients have done. This is a function of the funds provided by the companies, the advice provided by the companies and their associated advisors, as well as the behavior of the clients themselves. If we want to answer the question: “Has Vanguard or DFA or WisdomTree done better by their clients?” analyzing the returns of the entire portfolios is the correct method. This is what we do here.

Last Revised: January 14, 2010

Date Written:  November 6, 2009

 

Do Peso Problems Explain the Returns to the Carry Trade?

Link

AuthorA. Craig Burnside, Martin Eichenbaum, Isaac Kleshchelski and Sergio T. Rebelo

Abstract: We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs which are on average large and uncorrelated with traditional risk factors. We investigate whether these payoffs reflect a peso problem. We argue that they do. We reach this conclusion by analyzing the payoffs to the hedged carry trade, in which an investor uses currency options to protect himself from the downside risk from large, adverse movements in exchange rates

Date Written: January 1, 2010

2009

Robust Firm Pricing with Panel Data

Link

Author: Kanishka Misra, James W. Roberts and Benjamin R. Handel

Abstract: We present an econometric framework for robust pricing based on credible assumptions about consumer behavior. First, we introduce a panel data discrete choice model whose realistic assumptions about consumer behavior result in partial identification of preferences. Next we address the resulting ambiguity in the firm pricing problem since it cannot use standard techniques to maximize expected product. We present four models diciphering in how they account for potential variation in preferences over time.We then use the minimax regret criterion as a decision-making rule for firms facing ambiguity about consumer preferences. We study monopoly and oligopoly. We perform simulations that illustrate our methodology and compare our model results to the most common parametric model used in this setting. We show that in the likely event that the parametric assumptions do not represent the underlying data generating process, decisions based on the models presented in this paper substantially improve firm performance.

Date Written: December 21, 2009

 

Pricing of the Time-Change Risks

Link

AuthorGeorge Tauchen and Ivan Shaliastovich

Abstract: We develop a discrete-time real endowment economy featuring recursive preferences and a Levy time-change subordinator, which represents a clock that connects business time to calendar time. This setup provides a convenient equilibrium framework for pricing non-Gaussian risks, with closed-form analytical solutions for the asset prices. We show that the non-Gaussianity of fundamentals due to time-deformation induces risk compensations which depend on higher order moments of consumption and dividend series. Persistence of the activity shocks leads to predictability of the endowment streams and time variation in asset prices and risk premia. In numerical calibrations, we show that the compensation for Levy risks accounts for about one-third of the overall risk premium in the economy.

Date Written: November 2009

 

Unobserved Heterogeneity and Reserve Prices in Auctions

Link

Author: James W. Roberts

Abstract: This study addresses the need to account for unobserved heterogeneity in auctions to improve our estimates of the distribution of bidder values. The method uses reserve prices to allow the distribution of bidders' private information to depend on the realization of the unobserved heterogeneity. The identifying assumption is that reserve prices are monotonic in the realization of unobserved heterogeneity and sellers are not required to set reserve prices optimally. The model can be estimated using only transaction prices. The paper proposes an estimation method and derives the asymptotic distribution of the proposed estimator. Working with data on used car auctions, the paper shows that controlling for unobserved heterogeneity affects estimates of the distribution of bidder values and impacts predicted outcomes dramatically.

Date Written: November 6, 2009

 

Model Comparisons in Unstable Environments

Link

Author: Barbara Rossi and Raffaella Giacomini

Abstract: The goal of this paper is to develop formal techniques for analyzing the relative in-sample performance of two competing, misspecified models in the presence of possible data instability. The central idea of our methodology is to propose a measure of the models' local relative performance: the "local Kullback-Leibler Information Criterion" (KLIC), which measures the relative distance of the two models' (misspecified) likelihoods from the true likelihood at a particular point in time. We discuss estimation and inference about the local relative KLIC; in particular, we propose statistical tests to investigate its stability over time. Compared to previous approaches to model selection, which are based on measures of "global performance," our focus is on the entire time path of the models' relative performance, which may contain useful information that is lost when looking for a globally best model. The empirical application provides insights into the time variation in the performance of a representative DSGE model of the European economy relative to that of VARs.

Date Written: October 26, 2009

 

The Scale of Entrepreneurship in Middle Eastern History: Inhibitive Roles of Islamic Institutions

Link

Author: Timur Kuran

Abstract: The historical record belies the claim that Islam impeded entrepreneurship by inculcating conformism and fatalism. However, the diametrically opposed view that Islamic institutions are necessarily supportive of entrepreneurship flies in the face of the historical transformations associated with economic modernization. Islamic institutions that served innovators well in the medieval global economy became dysfunctional as the world made the transition from personal to impersonal exchange. The key problem is that Islamic law failed to stimulate the development of organizational forms conducive to pooling and managing resources on a large scale.

Last Revised: September 30, 2009

Date Written: March 1, 2008

 

Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics

Link

AuthorFrancesco Bianchi

Abstract: The evolution of inflation and output over the last 50 years are examined through the lense of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, behavior of the Federal Reserve is identified by repeated fluctuations between a Hawk- and a Dove-regime, instead of by the traditional pre- and post-Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late 70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a Bayesian algorithm to handle the technical difficulties that arise in rational expectations model with Markov-switching regimes.

Date Written: September 8, 2009

 

Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Link

AuthorTim BollerslevGeorge Tauchen and Natalia Sizova

Abstract: Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects relative to returns. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, is distinctly less persistent and appears short-memory. This paper develops the first internally consistent equilibrium based explanation for all of these empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. Our empirical investigations are made possible through the use of newly available high-frequency intra-day data for the VIX volatility index, along with corresponding high-frequency data for the S&P 500 aggregate market portfolio. We show that the qualitative implications from the new theoretical model match remarkably well with the distinct shapes and patterns in the sample autocorrelations and dynamic cross-correlations in the returns and volatilities observed in the data.

Date Written: August 1, 2009

 
Bednets, Information and Malaria in Orissa

Link

Author: Alessandro Tarozzi, Aprajit Mahajan, Joanne Yoong and Brian Blackburn

Abstract: We study the identification and estimation of key parameters in a basic model of technology adoption when specifically collected information on subjective beliefs and expectations about the technology’s impact is available. We discuss identification with both non-parametrically and parametrically specified utility as well as parametric and semi-parametric specifications for unobserved heterogeneity. We propose parametric and semi-parametric estimation methods to recover underlying preferences and use the model to study the adoption of bednets among poor useholds in rural Orissa (India). We carry out counter-factual exercises to examine the effects of price and belief changes on net ownership decisions. The results suggest that net purchase decisions are relatively insensitive to changes from current prices and beliefs. The methods proposes here should have applicability to other discrete choice settings with non-linear indices.

Date Written: June 1, 2009

 

Tilting at Imaginary Windmills: A Comment on Tyfield

Link

Author: E. Roy Weintraub and Yann Giraud

Abstract: In the inaugural issue of the Erasmus Journal for Philosophy and Economics, David Tyfield (2008) used some recent discussions about "meaning finitism" to conclude that the sociology of scientific knowledge (SSK) is an intellectually hopeless basis on which to erect an intelligible study of science. In contrast, the authors show that Tyfield's argument rests on some profound misunderstandings of the sociology of scientific knowledge. They show that his mischaracterization of SSK is in fact systematic and is based on lines of argument that themselves are at best incoherent.

Last Revised: April 28, 2009

Date Written: March 12, 2009

 

Expanding 'Choice' in School Choice

Link

AuthorAtila Abdulkadiroglu, Yeon-Koo Che and Yosuke Yasuda

Abstract: Truthful revelation of preferences has emerged as a desideratum in the design of school choice programs. Gale-Shapley's deferred acceptance mechanism is strategy-proof for students but limits their ability to communicate their preference intensities. This results in ex-ante inefficiency when ties at school preferences are broken randomly. We propose a variant of deferred acceptance mechanism which allows students to influence how they are treated in ties. It maintains truthful revelation of ordinal preferences and supports a greater scope of efficiency.

Last Revised: April 13, 2009

Date Written: November 28, 2008

 

John Maynard Keynes of Bloomsbury: Four Short Talks

Link

AuthorCraufurd GoodwinKevin D. HooverE. Roy Weintraub and Bruce Caldwell

Abstract: Four talks on Keynes in relation to the Bloomsbury Group: I. Maynard Keynes of Bloomsbury (Craufurd Goodwin); II. Keynes as Policy Advisor (E. Roy Weintraub); III. Keynes and Economics (Kevin D. Hoover); IV. Keynes and Hayek (Bruce Caldwell). The talks were delivered as part of roundtable discussion on John Maynard Keynes of Bloomsbury, the inaugural event of the Center for the History of Political Economy at Duke University, and were held in conjunction with Vision and Design: A Year of Bloomsbury, a campus-wide interdisciplinary program surrounding an exhibition of Bloomsbury art at Duke University's Nasher Museum.

Last Revised: April 13, 2009

Date Written: February 24, 2009

 

The Impact of Piped Water Provision on Infant Mortality in Brazil: A Quantile Panel Data Approach

Link

Author: Shanti Gamper-Rabindran, Shakeeb Khan and Christopher Timmins

Abstract: We examine the impac t of piped water on the under-1 infant mortality rate (IMR) in Brazil using a novel econometric procedure for the estimation of quantile treatment effects with panel data. The provision of piped water in Brazil is highly correlated with other observable and unobservable determinants of IMR - the latter leading to an important source of bias. Instruments for piped water provision are not readily available, and fixed effects to control for time invariant correlated unobservables are invalid in the simple quantile regression framework. Using the quantile panel data procedure in Chen and Khan (2007), our estimates indicate that the provision of piped water reduces infant mortality by significantly more at the higher conditional quantiles of the IMR distribution than at the lower conditional quantiles (except for cases of extreme underdevelopment). These results imply that targeting piped water intervention in areas with higher conditional quantiles of the IMR, when accompanied by other basic public health inputs, can achieve significantly greater reductions in infant mortality.

Last Revised: April 13, 2009

Date Written: September 2, 2007

 
Does Affirmative Action Lead to Mismatch? A New Test and Evidence

Link

AuthorPeter Arcidiacono, Esteban M. Aucejo, Hanming Fang and Kenneth I. Spenner

Abstract: We argue that once we take into account the students' rational enrollment decisions, mismatch in the sense that the intended beneficiary of affirmative action admission policies are made worse o could occur only if selective universities possess private information about students' post-enrollment treatment effects. This necessary condition for mismatch provides the basis for a new test. We propose an empirical methodology to test for private information in such a setting. The test is implemented using data from Campus Life and Learning Project (CLL) at Duke. Evidence shows that Duke does possess private information that is a statistically significant predictor of the students' post-enrollment academic performance. We also propose strategies to evaluate more conclusively whether the evidence of Duke private information has generated mismatch.

Date Written: April 8, 2009

 

Dynamics of the Term Structure of UK Interest Rates

Link

AuthorFrancesco Bianchi, Haroon Mumtaz and Paolo Surico

Abstract: This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis.

Date Written: March 1, 2009

 

Empirical Identification of the Vector Autoregression: The Causes and Effects of U.S. M2

Link

AuthorKevin D. Hoover, Selva Demiralp and Stephen J. Perez

Abstract: The M2 monetary aggregate is monitored by the Federal Reserve, using a broad brush theoretical analysis and an informal empirical analysis. This paper illustrates empirical identification of an eleven-variable system, in which M2 and the factors that the Fed regards as causes and effects are captured in a vector autogregression. Taking account of cointegration, the methodology combines recent developments in graph-theoretical causal search algorithms with a general-to-specific search algorithm to identify a fully specified structural vector autoregression (SVAR). The SVAR is used to examine the causes and effects of M2 in a variety of ways. We conclude that, while the Fed has rightly identified a number of special factors that influence M2 and while M2 detectably affects other important variables, there is 1) little support for the core quantity-theoretic approach to M2 used by the Fed; and 2) M2 is a trivial linkage in the transmission mechanism from monetary policy to real output and inflation.

Last Revised: February 26, 2009

Date Written: February 1, 2008

 

Probability and Structure in Econometric Models

Link

Author: Kevin D. Hoover

Abstract: The difficulty of conducting relevant experiments has long been regarded as the central challenge to learning about the economy from data. The standard solution, going back to Haavelmo's famous "The Probability Approach in Econometrics" (1944), involved two elements: first, it placed substantial weight on a priori theory as a source of structural information, reducing econometric estimates to measurements of causally articulated systems; second, it emphasized the need for an appropriate statistical model of the data. These elements are usually seen as tightly linked. I argue that they are, to a large extent, separable. Careful attention to the role of an empirically justified statistical model in underwriting probability explains puzzles not only in economics, but more generally with respect to recent criticisms of Reichenbach's principle of the common cause, which lies behind graph-theoretic causal search algorithms. And it provides an antidote to the pessimistic understanding of the possibilities for passive observation of causal structure in econometrics and related areas of Nancy Cartwright and others.

Last Revised: February 25, 2009

Date Written: September 19, 2007

 

Beyond Signaling and Human Capital: Education and the Revelation of Ability

Link

AuthorPatrick J. BayerPeter Arcidiacono and Aurel Hizmo

Abstract: We provide evidence that graduating from college plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from the very beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability.

Date Written: January 1, 2009

 

Web Appendix: Beyond Signaling and Human Capital: Education and the Revelation of Ability

Link

AuthorPatrick J. BayerPeter Arcidiacono and Aurel Hizmo

Abstract: Appendix to working paper titled "Beyond Signaling and Human Capital: Education and the Revelation of Ability." In that paper, we provide evidence that graduating from college plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from the very beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability.

Date Written: January 1, 2009

 

Identifying Individual and Group Effects in the Presence of Sorting: A Neighborhood Effects Application

Link

AuthorPatrick J. Bayer and Stephen L. Ross

Abstract: Researchers have long recognized that the non-random sorting of individuals into groups generates correlation between individual and group attributes that is likely to bias naïve estimates of both individual and group effects. This paper proposes a non-parametric strategy for identifying these effects in a model that allows for both individual and group unobservables, applying this strategy to the estimation of neighborhood effects on labor market outcomes. The first part of this strategy is guided by a robust feature of the equilibrium in vertical sorting models - a monotonic relationship between neighborhood housing prices and neighborhood quality. This implies that under certain conditions a non-parametric function of neighborhood housing prices serves as a suitable control function for the neighborhood unobservable in the labor market outcome regression. This control function transforms the problem to a model with one unobservable so that traditional instrumental variables solutions may be applied. In our application, we instrument for each individual’s observed neighborhood attributes with the average neighborhood attributes of a set of observationally identical individuals. The neighborhood effects model is estimated using confidential microdata from the 1990 Decennial Census for the Boston MSA. The results imply that the direct effects of geographic proximity to jobs, neighborhood poverty rates, and average neighborhood education are substantially larger than the conditional correlations identified using OLS, although the net effect of neighborhood quality on labor market outcomes remains small. These findings are robust across a wide variety of specifications and robustness checks.

Date Written: January 1, 2009

 

2008

Explaining the Economic Trajectories of Civilizations: The Systemic Approach

Link

Author: Timur Kuran

Abstract: A civilization constitutes a durable social system of complementary traits. Some of the complementarities of any given civilization are between elements of material life and ones commonly treated as integral to culture. Identifying the mechanisms responsible for a civilization's observed trajectory involves, therefore, causal relationships that cross the often-postulated cultural-material divide. Complementarities make it difficult to transplant institutions across civilizations on a piecemeal basis. They imply that reforms designed to jump start an economy will fail unless they are comprehensive. Civilizational analysis can benefit, therefore, from attention to institutional complementarities, including ones involving both cultural and material variables.

Last Revised: December 18, 2008

Date Written: July 1, 2008

 

Expected Stock Returns and Variance Risk Premia

Link

AuthorTim BollerslevGeorge Tauchen and Hao Zhou

Abstract: Motivated by the implications from a stylized self-contained general equilibrium model incorporating the effects of time-varying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a non-trivial fraction of the time series variation in post 1990 aggregate stock market returns, with high (low) premia predicting high (low) future returns. Our empirical results depend crucially on the use of "model-free,'' as opposed to Black-Scholes, options implied volatilities, along with accurate realized variation measures constructed from high-frequency intraday, as opposed to daily, data. The magnitude of the predictability is particularly strong at the intermediate quarterly return horizon, where it dominates that afforded by other popular predictor variables, like the P/E ratio, the default spread, and the consumption-wealth ratio (CAY).

Last Revised: December 14, 2008

Date Written: July 2008

 

Cointegrated TFP Processes and International Business Cycles

Link

Author: Pau Rabanal, Juan Francisco Rubio-Ramirez and Vicente Tuesta Reátegui

Abstract: A central puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard International Real Business Cycle (IRBC) models cannot reproduce this fact when calibrated using conventional parameterizations, and can only generate one fourth of the real exchange rate volatility observed in the data. Typically, IRBC models are solved assuming that total factor productivity (TFP) processes are stationary. In this paper, we first show that TFP processes for the U.S. and the "rest of the world" have a unit root, are cointegrated, and can be jointly characterized with a Vector Error Correction Model (VECM). Then, we explore the implications of extending an otherwise standard international real business cycle model that allows for cointegrated technology shocks. We show that the model can account for the high real exchange rate volatility observed in the data without having to rely on any particular nominal or real friction. Also, we show that the increase of relative volatility of the real exchange rate with respect to output in the last 20 years can be explained by changes in the parameter estimates of the VECM.

Date Written: October 1, 2008

 

Realized Jumps on Financial Markets and Predicting Credit Spreads

Link

Author: George Tauchen and Hao Zhou

Abstract: This paper extends the jump detection method based on bipower variation to identify realized jumps on financial markets and to estimate parametrically the jump intensity, mean, and variance. Finite sample evidence suggests that the jump parameters can be accurately estimated and that the statistical inferences are reliable under the assumption that jumps are rare and large. Applications to equity market, treasury bond, and exchange rate data reveal important differences in jump frequencies and volatilities across asset classes over time. For investment grade bond spread indices, the estimated jump volatility has more forecasting power than interest rate factors and volatility factors including option-implied volatility, with control for systematic risk factors. The jump volatility risk factor seems to capture the low frequency movements in credit spreads and comoves counter cyclically with the price-dividend ratio and corporate default rate.

Last Revised: September 25, 2008

Date Written: August 1, 2006

 

Ranking Mutual Fund Families: Minimum Expenses and Maximum Loads as Markers for Moral Turpitude

Link

Author: Edward Tower and Wei Zheng

Abstract: We evaluate the performance of 51 mutual fund families based on a study of their diversified US managed mutual funds over an 11 year period and explore the determinants of performance gross of published expenses. We find that mutual fund families which charge loads, high expenses to their most favored investors and have high turnover tend to perform badly, even gross of these fees. However, gross of published expenses, managed mutual fund portfolios of those families without loads, with low expenses in their least expensive class, and with low average turnover beat the corresponding indexes.

Date Written: September 2, 2008

 

Distribution of Surplus in Sequential Bargaining with Endogenous Recognition

Link

AuthorHuseyin Yildirim

Abstract: I examine a sequential bargaining situation in which agents compete to propose by expending (unproductive) efforts. Depending on the timing of efforts, I consider two types of "recognition" to select the proposer. Whereas "persistent" recognition refers to cases where competition to propose takes place at a pre-bargaining stage as in congressional committee assignments, "transitory" recognition represents cases where competition to propose is recurring throughout the bargaining as in international negotiations and legal battles. Equilibrium analyses of two recognition types reveal that (1) surplus is distributed more unequally under persistent recognition; (2) social cost is higher under persistent recognition if and only if it attracts a sufficient number of "active" bargainers, who exert a positive effort to propose; and (3) as the number of agents increases, each agent may actually have a greater incentive to propose under transitory recognition, while this incentive is always diminished under persistent recognition.

Date Written: July 2008

 

Has Models' Forecasting Performance for US Output Growth and Inflation Changed over Time, and When?

Link

Author: Barbara Rossi and Tatevik Sekhposyan

Abstract: We evaluate various models' relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the models' relative performance can be varying over time. We show that the models' relative performance has, in fact, changed dramatically over time, both for revised and real-time data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Namely, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless in the last two decades. When forecasting inflation, instead, fewer predictors are significant (among which, notably, capacity utilization and unemployment), and their predictive ability significantly worsened around the time of the Great Moderation.

Date Written: July 2008

 

Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model

Link

AuthorJames J. Anton and Gary Biglaiser

Abstract: We examine an infinite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. We find that the upgrade structure, quality growth, and the fact that consumers are always in the market can lead to an almost complete loss in market power for the seller even though all consumers are identical. This is true for all discount factors. We show that subgame perfect equilibrium payoffs for the seller range from capturing the full social surplus all the way down to capturing only the current flow value of each good and that each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient allocation path. We also find that equilibria may be inefficient.

Date Written: July 2008

 

Activity Signature Functions for High-Frequency Data Analysis

Link

Author: George Tauchen and Viktor Todorov

Abstract: We define a new concept termed the activity signature function, which is constructed from discrete observations of a process evolving continuously in time. Under quite general regularity conditions, we derive the asymptotic properties of the function as the sampling frequency increases and show that it is a useful device for making inferences about the activity level of an Ito semimartingale. Monte Carlo work confirms the theoretical results. One empirical application is from finance. It indicates that the classical model comprised of a continuous component plus jumps is more plausible than a pure-jump model for the spot $/DM exchange rate over 1986-1999. A second application pertains to internet traffic data at NASA servers. We find that a pure-jump model with no continuous component and paths of infinite variation is appropriate for modeling this data set. In both cases the evidence obtained from the signature functions is quite convincing, and these two very disparate empirical outcomes illustrate the discriminatory power of the methodology.

Date Written: July 22, 2008

 

Volatility Jumps

Link

Author: Viktor Todorov and George Tauchen

Abstract:The paper undertakes a non-parametric analysis of the very high frequency movements in stock market volatility using very finely sampled data on the S&P VIX index compiled by the CBOE. The data suggest that stock market volatility is best described as a pure jump process without a continuous component. The finding stands in contrast to nonparametric results, reported here and elsewhere, that the stock price itself is not a pure jump process but rather contains a continuous martingale component. The jumps in stock volatility are found to be so active that this discredits many recently proposed stochastic volatility models, including the classic affine model with compound Poisson jumps that is widely used in financial modeling and practice. Additional empirical work presents strong evidence for many common jumps, or co-jumps, in both the stock price and stock volatility.

Date Written: May 6, 2008

 

Is the 'Curse of Natural Resources' Really a Curse?

Link

AuthorPietro F. Peretto

Abstract: This paper takes a new look at the long-run implications of resource abundance. Using a Schumpeterian growth model that yields an analytical solution for the transition path, it derives conditions under which the curse of natural resources occurs and is in fact a curse, meaning that welfare falls, conditions under which it occurs but it is not a curse, meaning that growth slows down but welfare rises nevertheless, and conditions under which it does not occur at all. An effective way to summarize the results is to picture growth and welfare as hump-shaped functions of resource abundance. The property that the peak of growth occurs earlier than the peak of welfare captures the crucial role of initial consumption, which rises with resource abundance, and is an important reminder that the welfare effect of resource abundance depends on the whole path of consumption, not on a summary statistic of its slope. Growth regressions that ignore the endogeneity of initial income do not provide sufficient information to assess whether resource abundance is bad even if one could prove beyond reasonable doubt that the relation is indeed negative and causal. Recent evidence that the correlation is actually positive should make us even more skeptical of policy advice based on the curse logic.

Date Written: March 20, 2008

2007

A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts

Link

AuthorPietro F. Peretto

Abstract: I propose a Schumpeterian analysis of the growth and welfare effects of a deficit-financed cut of the tax rate on distributed dividends. I find that income per capita growth initially accelerates and then decelerates, eventually converging to a long-run value lower than the starting one. Interestingly, lower steady-state growth occurs despite the fact that - in line with intuition - the economy's saving ratio rises. Most importantly, I find that the policy's effect on welfare is negative. The mechanism that delivers these results is that taxes on distributed dividends affect differently the returns to investing in the growth of existing product lines and in the development of new product lines, and thus reallocate resources across activities that have different growth opportunity. The analysis is particularly relevant to the current debate about the Job Growth and Taxpayer Relief reconciliation Act of 2003 (JGTRRA), a real-world large-scale experiment in fiscal policy. A surprising implication is that the JGTRRA targeted the wrong tax rate: Holding the financing method (debt) equal, it should have cut the tax rate on corporate income, thereby reducing the distortions of the internal investment decisions of firms and improving growth and welfare.

Date Written: May 29, 2007

 

The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Comment

Link

Author: A. Craig Burnside

Abstract: Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet these excess returns are all approximately uncorrelated with the consumption risk factors they study. Hence, their model cannot explain the cross-sectional variation of the returns. Their positive assessment results from allowing for a large constant in the model, and from ignoring sampling uncertainty in estimated betas used as explanatory variables in cross-sectional regressions that determine estimated consumption risk premia

Date Written; May 1, 2007

 

Factor-Eliminating Technical Change

Link

AuthorPietro F. Peretto and John J. Seater

Abstract: Endogenous growth requires that non-reproducible factors of production be either augmented or eliminated. Attention heretofore has focused almost exclusively on augmentation. In contrast, we study factor elimination. Maximizing agents decide when to reduce the importance of non-reproducible factors. We use a Cobb-Douglas production function with two factors of production, one reproducible ("capital") and one not ("labor"). There is no augmenting progress of any kind, thus excluding the standard engine of growth. What is new is the possibility of changing factor intensities endogenously by spending resources on R&D. The economy starts with no capital and no knowledge of how to use it. By conducting R&D, the economy learns new technologies that use capital, which then is built. There are two possible ultimate outcomes: the economy may achieve perpetual growth, or it may stagnate with no growth. The first outcome is an asymptotic version of the AK model of endogenous growth, and the second outcome is the standard Solow model in the absence of any exogenous sources of growth. Which outcome is achieved depends on parameter values of saving and production, and there always is a feasible saving rate that will give the perpetual growth outcome. The model thus provides a theory of the endogenous emergence of a production technology with constant returns to the reproducible factors, that is, one that is capable of supporting perpetual economic growth. The model also allows derivation of the full transition dynamics, which have interesting properties. One especially notable feature is that the origin is not a steady state. An economy that starts with pure labor production becomes industrialized through its own efforts. The theory thus offers a purely endogenous explanation for the transition from a primitive to a developed economy, in contrast to several well-known theories. Several aspects of the transition paths accord with the evidence, suggesting that the theory is reasonable. In contrast to almost all the existing endogenous growth literature, neither monopoly power nor an externality is a necessary condition for endogenous growth. It is sufficient that firms be able to appropriate the results of their research and development efforts.

Date Written: March 2007

 

A Discrete-Time Model for Daily S&P500 Returns and Realized Variations: Jumps and Leverage Effects

Link

AuthorTim Bollerslev, Uta Kretschmer, Christian Pigorsch and George Tauchen

Abstract: We develop an empirically highly accurate discrete-time daily stochastic volatility model that explicitly distinguishes between the jump and continuous time components of price movements using nonparametric realized variation and Bipower variation measures constructed from high-frequency intraday data. The model setup allows us to directly assess the structural inter-dependencies among the shocks to returns and the two different volatility components. The model estimates suggest that the leverage effect, or asymmetry between returns and volatility, works primarily through the continuous volatility component. The excellent fit of the model makes it an ideal candidate for an easy-to-implement auxiliary model in the context of indirect estimation of empirically more realistic continuous-time jump diffusion and Levy-driven stochastic volatility models, effectively incorporating the interdaily dependencies inherent in the high-frequency intraday data.

Date Written: January 15, 2007

 

2006

The Employment (and Output) of Nations: Theory and Policy Implications

Link

AuthorPietro F. Peretto

Abstract: I study the effects of product and labor market frictions in a dynamic general equilibrium model with a three-states representation of the labor market. Firms bargain with unions over wages and employment levels. This generates unemployment. Households take the associated unemployment risk as given in making participation and consumption-saving decisions. Unemployment harms output because it inserts a wedge between labor supply (participation) and employment. New firms make entry decisions based on expected future profitability as determined by macroeconomic conditions. The model produces dynamics consistent with the long-run trends exhibited by the US and EU15 economies over the last 40-50 years. It also features feedback mechanisms linking the two markets that amplify the adverse effects on output of labor and product market frictions. These multiplier effects have interesting policy implications.

Date Written: August 11, 2006

2002

Market Power, Growth and Unemployment

Link

AuthorPietro F. Peretto

Abstract: Unemployment occurs because workers and firms have control over wages and prices. The exercise of market power over wages interacts with its exercise over prices. Understanding this interaction sheds new light on the effects of policy interventions on unemployment and growth. Reforms that result in lower labor costs raise employment, reduce unemployment, and boost growth because they expand the scale of the economy and generate more competition in the product market. The reduction in unemployment is larger than one would expect if the pro-competitive effect of the reforms were ignored. These reforms, thus, are even more attractive when one considers the endogenous structure of the product market. Product market reforms that foster innovation raise employment and reduce unemployment because they attract entry and generate more competition in the product market. The expansion of the economy's scale of activity attracts further entry, which further boosts R&D spending by firms and growth.

Date Written: March 22, 2002

2000

Oligopoly Banking and Capital Accumulation

Link

Author: Nicola Cetorelli and Pietro F. Peretto

Abstract: We develop a dynamic general equilibrium model of capital accumulation where credit is intermediated by banks operating in a Cournot oligopoly. The number of banks affects capital accumulation through two channels. First, it affects the quantity of credit available to entrepreneurs. Second, it affects banks' decisions to collect costly information about entrepreneurs, and thus determines the efficiency of the credit market. We show that under plausible conditions, the market structure that maximizes the economy's steady-state income per capita is neither a monopoly nor competition, but an intermediate oligopoly. Moreover, the credit market splits in two segments: one in which loans are screened and only high quality entrepreneurs obtain credit, and one in which banks extend credit indiscriminately to all entrepreneurs. The relative size of the two segments depends on the market power of banks and evolves endogenously along the path of capital accumulation. We thus obtain the prediction that the banking sector becomes more sophisticated as the economy develops.

Date Written: December 2000