Working Papers

Authors: Ferdinand Rauch

Oct 2018

P. Brandily, F. Rauch

Roads are essential to facilitate interactions in cities. A sub-optimal road layout in cities and towns may inhibit interactions and constrain urban population growth. Using data from over 1800 cities and towns from Sub-Saharan Africa, and an instrument based on the history of foundation ages of cities in Africa, we study the relationship between the road layout of a city and its population growth. We show that cities characterised by low road density in the city centre experience less population growth in recent decades.

JEL Codes: O18, R4

Keywords: Road layout, Urban planning, Urbanization, Sub-Saharan Africa

Reference: 859

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Authors: Mark Armstrong, John Vickers

Oct 2018

Mark Armstrong, John Vickers

We analyze a market where some consumers only consider buying from a specific seller while other consumers choose the best deal from several sellers. When sellers are able to discriminate against their captive customers, we show that discrimination harms consumers in aggregate relative to the situation with uniform pricing when sellers are approximately symmetric, while the practice tends to benefit consumers in sufficiently asymmetric markets.

JEL Codes: D8, D43, L13

Reference: 858

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Authors: Ole Jann

Oct 2018

Ole Jann, Christoph Schottmüller

Why do people appear to forgo information by sorting into “echo chambers”? We construct a highly tractable multi-sender, multi-receiver cheap talk game in which players choose with whom to communicate. We show that segregation into small, homogeneous groups can improve everybody’s information and generate Pareto-improvements. Polarized preferences create a need for segregation; uncertainty about preferences magnifies this need. Using data from Twitter, we show several behavioral patterns that are consistent with the results of our model.

JEL Codes: D72, D82 (Asymmetric Information), D83 (Learning, Communication), D85 (Network Formation and Analysis)

Keywords: Asymmetric Information, Echo Chambers, Polarization, Debate, Cheap Talk, Information Aggregation, Twitter

Reference: 857

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Authors: Paul Pelz, Steven Poelhekke

Sep 2018

We analyse the local effect of exogenous shocks to the value of mineral deposits at the district level in Indonesia using a panel of manufacturing plants. To the best of our knowledge, we are the first to model and estimate the effect of heterogeneity in natural resource extraction methods. We find that in areas where mineral extraction is relatively capital-intensive, mining booms cause virtually no upward pressure on manufacturing earnings per worker, and both producers of traded and local goods benefit from mining booms in terms of employment. In contrast, labour-intensive mining booms drive up local manufacturing wages such that producers of traded goods reduce employment. This source of heterogeneity helps to explain the mixed evidence for `Dutch disease' effects in the literature. In addition, we find no evidenc revenue sharing between sub-national districts leads to any spillovers.

JEL Codes: L16; L72; O12; O13; Q30

Keywords: Dutch disease, natural resources, mining, labour intensity, Indonesia

Reference: 214

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Authors: Rick Van der Ploeg, Armon Rezai

Aug 2018

A simple integrated assessment framework that gives rules for the optimal carbon price, transition to the carbon-free era and stranded carbon assets is presented, which highlights the ethical, economic, geophysical and political drivers of optimal climate policy. For the ethics we discuss the role of intergenerational inequality aversion and the discount rate, where we show the importance of lower discount rates for appraisal of longer run benefit and of policy makers using lower discount rates than private agents. The economics depends on the costs and rates of technical progress in production of fossil fuel, its substitute renewable energies and sequestration. The geophysics depends on the permanent and transient components of atmospheric carbon and the relatively fast temperature response, and we allow for positive feedbacks. The politics stems from international free-rider problems in absence of a global climate deal. We show how results change if different assumptions are made about each of the drivers of climate policy. Our main objective is to offer an easy back-on-the-envelope analysis, which can be used for teaching and communication with policy makers.

JEL Codes: D81, H20, Q31, Q38

Keywords: simple rules, climate policy, ethics, economics, geophysics, politics, discounting with declining discount rates, positive feedback, free riding

Reference: 213

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Authors: , Francesco Zanetti, Konstantinos Theodoridis

Aug 2018

This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.

JEL Codes: E24, E32, J64, C11

Keywords: Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression

Reference: 856

Individual View

Authors: Avner Offer

Aug 2018

Since the 1980s privatisation and outsourcing have been promoted on grounds of efficiency and fiscal convenience. The argument here is that the appropriate choice between business and public enterprise is determined by the interaction between two time horizons, a financial time horizon and a project time horizon. The prevailing interest rate defines a credit time horizon. Among  project appraisal methods, the payback period defines a unique temporal outer bound for private sector break-even. Net present value break-evens (and other forms of business credit) are always shorter. Any project which has a break-even longer than the payback period cannot be funded by business alone. Long-term projects encounter uncertainty and attempt to control it by means of rigid contracts, which also lead to inferior outcomes. This analysis accounts for historical patterns of enterprise. It also provides normative guidance.  Public-private partnerships for infrastructure development intended to overcome credit time boundaries. They have given rise to inefficiency and corruption and are currently in decline. It is possible to overcome the temporal boundary with a  ‘franchise’ i.e. protection from uncertainty provided by social and government agencies. This allows longer credit break-evens, but at a cost in competitive efficiency. It is also prone to corruption.  The time-horizon model undermines the standard argument for market superiority. It turns Hayek on his head: it is financial markets that require certainty, whereas social and public agencies manage in its absence.

JEL Codes: H4, H43, H44, L32, L33, L38

Reference: 165

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Authors: John Muellbauer

Jul 2018

In housing affordability levels and volatility, there could hardly be a greater contrast than between the UK and Germany.  Differences in history, institutions and policies are explored in this paper. Residential housing supply has been far more expansionary in Germany and mortgage credit more tightly regulated. A sensibly regulated rental market and stable German house prices have combined to leave the rental sector with over half of tenures. Policy failures in the UK have resulted in widening intergenerational inequality, increased social exclusion, adversely affected productivity and growth and raised the risk of financial instability. Policy lessons are drawn for the UK, which go far beyond the remit of the immediately responsible Ministry of Housing, Communities and Local Government.

JEL Codes: R31; R21; H20; H24; G21; R38; R23

Keywords: Housing markets in the UK and Germany; housing affordability; property taxation; land value tax; land-use regulations; rent regulation; mortgage markets; house price volatility; residential mobility

Reference: 855

Individual View

Authors: Robert C. Allen

Jul 2018

Abstract

Jane Humphries and Benjamin Schneider have assembled several large data bases of spinners’ production and wages that they believe disprove my view that high wages led to mechanization in eighteenth century England. This paper examines their data and shows that they have little value in understanding the incentives to mechanize. They collected thousands of observations of the earnings of women, but they do not know how many hours the spinners worked, so the data fail to establish whether their wage per hour (the relevant variable) was high or low. Another large sample of evidence concerned the production per day of spinners, but this information was mainly derived from schools and charity programs whose participants were selected because they were unproductive–so valid inferences about the productivity of women in general cannot be derived from these data. In addition, I present new evidence that substantiates my earlier
estimates of productivity and earnings. The High Wage Hypothesis is unimpaired by the critique of Humphries and Schneider.

JEL Codes: N13, N22, N63, O31

Keywords: industrial revolution, technical change, induced innovation

Reference: 166

Individual View

Authors: Jacquelyn Pless, Arthur A. van Benthem

Jul 2018

We formalize pass-through over-shifting as a simple yet under-utilized test for market power.
We apply this test in the market for solar energy. Speci cally, we estimate the pass-through of
solar subsidies to solar system prices using rich micro-level transaction and subsidy data from
California. Buyers of solar systems capture nearly the full subsidy, while there is more-than-
complete pass-through to lessees. We conclude that solar markets are imperfectly competitive
by ruling out alternative explanations for over-shifting, and reinforce this conclusion with a test
of solar demand curvature. This procedure can serve to detect market power beyond the solar
market.

JEL Codes: H22, Q42, Q48, Q58

Keywords: solar subsidy, pass-through, over-shifting, demand curvature, market power, third-

Reference: 212

Individual View

Authors: Jan David Bakker, Ferdinand Rauch, Stephan Maurer, Jörn-Steffen Pischke

Jul 2018

We study the causal connection between trade and development using one of the earliest massive trade expansions: the first systematic crossing of open seas in the Mediterranean during the time of the Phoenicians. We construct a measure of connectedness along the shores of the sea. This connectivity varies with the shape of the coast, the location of islands, and the distance to the opposing shore. We relate connectedness to local growth, which we measure using the presence of archaeological sites in an area. We find an association between better connected locations and archaeological sites during the Iron Age, at a time when sailors began to cross open water very routinely and on a big scale. We corroborate these findings at the level of the world.

JEL Codes: F14, N7, O47

Keywords: Urbanization, locational fundamentals, trade

Reference: 854

Individual View

Authors: Anouk Rigterink

Jun 2018

This paper investigates the impact of an increase in the world price of a ‘lootable’, labour-intensive natural resource on the intensity of violent conflict. It suggests that such a price increase can have opposite effects at different geographical levels of analysis: a decrease in conflict intensity at the country level due to rising opportunity costs of rebellion, but an increase in conflict intensity in resource-rich sub-national regions, as returns to looting rise. The paper introduces a new measure of diamond
propensity based on geological characteristics, which is arguably exogenous to conflict and can capture small-scale labour-intensive production better than existing measures. The stated effects are found for secondary diamonds, which are lootable and related to opportunity costs of fighting, but not for primary diamonds, which are neither.

Reference: 211

Individual View

Authors: Thiemo Fetzer, Stephan Kyburz

Jun 2018

Can institutionalized transfers of resource rents be a source of civil conflict?
Are cohesive institutions better in managing distributive conflicts? We study
these questions exploiting exogenous variation in revenue disbursements to
local governments together with new data on local democratic institutions in
Nigeria. We make three contributions. First, we document the existence of a
strong link between rents and conflict far away from the location of the actual
resource. Second, we show that distributive conflict is highly organized involving
political militias and concentrated in the extent to which local governments
are non-cohesive. Third, we show that democratic practice in form having
elected local governments significantly weakens the causal link between rents
and political violence. We document that elections (vis-a-vis appointments), by
producing more cohesive institutions, vastly limit the extent to which distributional
conflict between groups breaks out following shocks to the available
rents. Throughout, we confirm these findings using individual level survey
data.

JEL Codes: Q33, O13, N52, R11, L71

Keywords: conflict, ethnicity, natural resources, political economy, commodity prices

Reference: 210

Individual View

Authors: Vanessa Berenguer Rico, Ines Wilms

Jun 2018

Abstract

Given the effect that outliers can have on regression and specification testing, a vastly used robustification strategy by practitioners consists in: (i) starting the empirical analysis with an outlier detection procedure to deselect atypical data values; then (ii) continuing the analysis with the selected non-outlying observations. The repercussions of such robustifying procedure on the asymptotic properties of subsequent specification tests are, however, underexplored. We study the effects of such a strategy on the White test for heteroscedasticity. Using weighted and marked empirical processes of residuals theory, we show that the White test implemented after the outlier detection and removal is asymptotically chi-square if the underlying errors are symmetric. Under asymmetric errors, the standard chi-square distribution will not always be asymptotically valid. In a simulation study, we show that - depending on the type of data contamination - the standard White test can be either severely undersized or oversized, as well as have trivial power. The statistic applied after deselecting outliers has good finite sample properties under symmetry but can suffer from size distortions under asymmetric errors.

JEL Codes: C01, C10

Keywords: Asymptotic theory, Empirical processes, Heteroscedasticity, Marked and Weighted Empirical processes, Outlier detection, Robust Statistics, White test

Reference: 853

Individual View

Authors: Pawel Adrjan

Jun 2018

Young firms are an engine of job creation, but little is known about the quality of the jobs that they offer. I use a matched employer-employee dataset to study how starting wages and lifecycle earnings of employees differ between young and mature firms. I find that young firms pay a small premium to new hires, but subsequent wage growth is better at mature firms, both within continuing job matches and when individuals change jobs. These results are confirmed by several approaches to addressing sorting and selection of employees into firms of different ages. There is substantial heterogeneity of outcomes: the few young firms that survive and become highly productive pay higher wages to employees from the outset than less successful young firms. Overall, highly-paid and stable jobs at young firms are rare. Policies that aim to stimulate job growth by encouraging the formation of new firms should therefore pay close attention to the types of firms that form as a result.

JEL Codes: J21, J23, J31, L26

Reference: 852

Individual View

Authors: Rahul Nath

May 2018

This paper studies how flexible labour decisions affect asset pricing in a Real Business Cycle model. It uses Jaimovich-Rebelo preferences with internal habits in consumption and distinguishes between two income effect channels (i) the ‘habit income effect’ channel and (ii) the ‘separability income effect’ channel. I find that asset prices are superior when the first channel is strong and the second is weak, this is the case of using GHH preferences with internal habits in consumption.

JEL Codes: E13, E32, E44, G12

Keywords: Asset Pricing, Income Effects, Jaimovich-Rebelo Preferences

Reference: 851

Individual View

Authors: Rahul Nath

May 2018

This paper derives explicitly an equity pricing relationship in a simple New Keynesian model. This relationship is used to study the equity pricing implications of New Keynesian models. I find that New Keynesian models suffer from the same asset pricing shortcomings as more traditional RBC versions and that this can be attributed to the presence of nominal rigidities. I then add capital adjustment costs to study how the interaction of both investment adjustment costs and capital adjustment costs affect the results.

JEL Codes: E12, E22, E44

Keywords: Asset Pricing, New Keynesian, Nominal Rigidities, Investment Adjustment Costs, Capital Adjustment Costs

Reference: 850

Individual View

Authors: Douglas Hay

May 2018

Abstract

Many economic historians agree that increased labour inputs contributed to Britain’s primary industrialisation. Voluntary self-exploitation by workers to purchase new consumer goods is one common explanation, but it sits uneasily with evidence of poverty, child labour, popular protest, and criminal punishments explored by social historians. A critical and neglected legal dimension may be the evolution of contracts of employment. The law of master and servant, to use the technical term, shifted markedly between 1750 and 1850 to advantage capital and disadvantage labour. Medieval in origin, it had always been adjudicated in summary hearings before lay magistrates, and provided penal sanctions to employers (imprisonment, wage abatement, and later fines), while giving workers a summary remedy for unpaid wages. The law always enforced obedience to employers’ commands, suppressed strikes, and tried to keep wages low. Between 1750 and 1850 it became more hostile to workers through legislation and judicial redefinition; its enforcement became harsher through expansion of imprisonment, capture of the local bench by industrial employers, and employer abuse of written contracts. More work in manuscript sources is needed to test the argument, but it seems likely that intensification of labour inputs during industrialisation was closely tied to these legal changes.

Keywords: coercion, contract of employment, labour law, industriousness, punishment, work time

Reference: 164

Individual View

Authors: Anja Tolonen

May 2018

JEL Codes: O12; O13; J16

Keywords: Gender Norms, Female Empowerment, Local Industrial Development, Gold Mining

Reference: 209

Individual View

Authors: Anja Tolonen

Apr 2018

Local industrial development has the potential to improve health and well-being,
while also damaging health through exposure to harmful pollution. It is an empirical
question which of these effects dominate. Exploiting the quasi-experimental expansion
of African large-scale gold mining, I find that local infant mortality rates decrease
by more than 50% alongside rapid economic growth. The instantaneous reduction is
comparable to overall gains in infant survival rates in the study countries from 1970 to
today. The results are robust to migration. Local industrial development—despite risk
of pollution—may be an effective tool to reduce infant mortality in developing countries

JEL Codes: O12, O13, I15, J13

Keywords: Industrial Development, Natural Resources, Gold Mining, Infant Mortality,

Reference: 208

Individual View

Authors: Pawel Adrjan, and Brian Bell

Apr 2018

Abstract

How do wages respond to firm-level idiosyncratic cost shocks? We create a unique dataset that links longitudinal data on workers’ compensation to the unexpected costs that UK firms have been forced to pay to plug large deficits in their legacy defined benefit pension plans. We show that firms are able to share the burden of such costs when a significant share of their workers are current or former members of the plan. We also investigate how compensation responds to the closure of defined benefit plans to future benefit accrual. We find that firms are able to use such closures to effectively reduce total compensation of workers who are plan members. These results point to significant frictions in the labour market, which we show are a direct result of the pension arrangement that workers have. Closing schemes has an implicit cost for firms since it reduces the frictions that workers face.

JEL Codes: J31, J32, G32

Keywords: Wages, Pensions, Frictions

Reference: 849

Individual View

Authors: Pawel Dziewulski

Apr 2018

Abstract

Critical cost-efficiency index (or CCEI), proposed in Afriat (1972, 1973) and Varian (1990), is the most commonly used measure of revealed preference violations. By representing consumer preference with interval orders, as in Fishburn (1970), we show that this index is equivalent to a particular notion of the just-noticeable difference, i.e., a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, CCEI can be interpreted as the consumer's cognitive inability to discriminate among options. This characterisation sheds new light on the existing empirical findings.

JEL Codes: C14, C60, C61, D11, D12

Keywords: utility maximisation, generalised axiom of revealed preference, critical cost-efficiency index, interval order, just-noticeable difference

Reference: 848

Individual View

Authors: Rick Van der Ploeg, Aart de Zeeuw

Apr 2018

The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

JEL Codes: D81, H20, O40, Q31, Q38

Keywords: climate tipping point, risk, social cost of carbon, precautionary capital, economic growth.

Reference: 207

Individual View

Authors: Peter Neary, Giovanni Maggi, Monika Mrázová

Mar 2018

Abstract

Red-tape barriers (RTBs) are an important source of trade costs, but have received little scholarly attention. Here we take a first step toward a theory of RTBs, and show that their implications are very different from those of more traditional trade barriers. Our model highlights that RTBs have important impacts on the extensive margin of trade, and yields rich predictions on how changes in the political-economic environment and product characteristics affect RTBs. Taking into account the endogenous response of RTBs is crucial to understanding the impact of reductions in tariffs and natural trade costs on the extensive and intensive margins of trade, as well as on welfare. Moreover, the availability of RTBs affects in important ways the tariff commitments that are specified in a trade agreement.

JEL Codes: F13, D7, F55

Keywords: International trade policy; Non-Tari Measures; Political economy; Red tape barriers; Trade agreements

Reference: 847

Individual View

Authors: Sara Horrell, Jane Humphries

Mar 2018

 

 

JEL Codes: N330

Keywords: Children’s work and pay; Labour Markets; Demography; Britain, long-run

Reference: 163

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