Working Papers

Authors: Subhasish M. Chowdhury, Patricia Esteve-González, Anwesha Mukherjee

Aug 2020

The heterogeneous abilities of the players in various competitive contexts often lead to undesirable outcomes such as low effort provision, lack of diversity, and inequality. A range of policies are implemented to mitigate such issues by enforcing competitive balance, i.e., leveling the playing field. While a number of such policies are aimed at increasing competition, affirmative action (AA) policies are historically practiced in an ethical response to historical discrimination against particular social groups among winners. This survey summarizes the rapidly growing literature of contest theory on AA and other policies that level the playing field. Using a general theoretical structure, we outline research on player and contest designer behavior under a multitude of policy mechanisms; and discuss the theoretical, experimental, and empirical results in relation to some of the common debates surrounding AA.

JEL Codes: A31; C72; D74; D82

Keywords: Survey; Affirmative Action; Contest; Heterogeneity

Reference: 915

Individual View

Authors: Meredith M. Paker

Aug 2020

The brief recession from 1980–1981 in the UK led to a prolonged employment downturn, with the unemployment rate continuing to increase through 1984. A large literature has developed around the concept of jobless recoveries and their possible causes, focused primarily on the US from the 1990s. This paper argues that the employment recovery from the 1980–1981 recession in the UK can be considered an early example of a jobless recovery.

Then, taking the US as a comparison case, possible causes of this jobless recovery are evaluated. Labor reallocation across industries, regional effects, and job polarization are considered in depth for the UK. Industry labor reallocation emerges as the major difference between the UK and the US during the early 1980s recession and recovery period, suggesting this was the key factor driving the UK’s jobless recovery.

JEL Codes: N14, N34, J64, J21, E24

Keywords: jobless recovery; industry labor reallocation; structural change; job polarization

Reference: 182

Individual View

Authors: Hamish Low, Patrick Moran, Agnes Kovacs

Jul 2020

This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: first, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We find that the utility cost of temptation is one-quarter of the utility benefit of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation profiles for both liquid and illiquid wealth only if temptation is part of the preference specification. Our findings on the importance of temptation are robust to the different estimation strategies.

Revised July 2020

JEL Codes: D12; D91; E21; G11; R21

Keywords: life-cycle; temptation preferences; housing; estimating Euler equations

Reference: 796

Individual View

Authors: Rick Van der Ploeg

Jul 2020

The social rate of discount is a crucial driver of the social cost of carbon (SCC), i.e. the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g. autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labour in efficiency units. The market- based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.

JEL Codes: D81, D90, G12, H43, Q51, Q54, Q58

Keywords: cost-benefit analysis, climate policy, carbon pricing, social discount rate, term structure, Keynes-Ramsey rule, risk and uncertainty, disasters, expert opinions

Reference: 244

Individual View

Authors: Rajssa Mechelli, Andrea Colciago

Jul 2020

This paper links the debate on the decrease in competitiveness and busi- ness dynamism with that on rising inequality. We build a framework withentry, imperfect competition, heterogeneous households, and incompletemarkets. Recent trends in markups, factors’share, and business dynamismare explained through an increase in barriers to entry for new …rms, whichrestrict competition. Those trends account for 11% to 22% of the increasein income inequality observed between 1989 and 2007 and for 10% of the in-crease in wealth inequality. Just 16% of the population experiences a welfaregain during the transition from a high to a low competition environment.These are either the wealthy, or agents with low productivity relative to their asset holdings.

Keywords: inequality, entry, oligopoly, markups, incomplete markets

Reference: 914

Individual View

Authors: Daniel C. Hardy

Jul 2020

The role of the euro in financial markets is limited by the scarcity of euro- denominated liquid short-term safe instruments to serve as “near money” and high-quality collateral—a role fulfilled by US Treasury bills in the US dollar financial “ecosystem.” It is argued that the ECB could eliminate this scarcity by issuing a large volume of its own debt certificates, and thereby expand and stabilize demand for the euro. The initiative is shown to be easy to implement and consistent with the monetary implementation framework. The main objections are likely to be political rather than economic.

Reference: 913

Individual View

Authors: Elizabeth Baldwin, Paul Klemperer, Alex Teytelboym, Omer Edhan
Ravi Jagadeesan

Jun 2020

Abstract

We show that, with indivisible goods, the existence of competitive equilibrium fundamentally depends on agents’ substitution effects, not their income effects. Our Equilibrium Existence Duality allows us to transport results on the existence of competitive equilibrium from settings with transferable utility to settings with income effects. One consequence is that net substitutability—which is a strictly weaker condition than gross substitutability—is sufficient for the existence of competitive equilibrium. We also extend the “demand types” classification of valuations to settings with income effects and give necessary and sufficient conditions for a pattern of substitution effects to guarantee the existence of competitive equilibrium.

JEL Codes: C62, D11, D44

Reference: 912

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Authors: Andrea Bernini

Jun 2020

Although the 1960s race riots have gone down in history as America’s most violent and destructive ethnic civil disturbances, a single common factor able to explain their insurgence is yet to be found. Using a novel data set on the universe of radio stations airing black-appeal programming, the effect of media on riots is found to be sizable and statistically significant. A marginal increase in the signal reception from these stations is estimated to lead to a 7% and 15% rise in the mean levels of the likelihood and intensity of riots, respectively. Several mechanisms behind this result are considered, with the quantity, quality, and the length of exposure to radio programming all being decisive factors.

JEL Codes: J15, N92, L82, D74

Keywords: Minority Rights, Media, Conflict, Enfranchisement

Reference: 181

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Authors: Vellore Arthi, Markus Lampe, Ashwin Nair, Kevin Hjortshøj O’Rourke

Jun 2020

Research on the quantitative impact of interwar protection on trade flows remains scarce, and much of it has concluded that the impact was surprisingly small. In this paper we ask: Did Indian interwar protection hurt UK manufacturers, by raising tariffs on manufactured imports? Or did it favour UK interests, by discriminating against “foreign” (i.e. nonBritish) producers? We answer this question by quantifying the impact of trade policy on the value and composition of Indian imports, using novel disaggregated data on both trade policies and imports for 114 commodity categories coming from 42 countries. Indian trade elasticities were generally larger than those in the United Kingdom at the same time. We find that even though Indian protection lowered total imports, it substantially boosted imports from the UK. Trade policy had a big impact on trade flows.

Reference: 180

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Authors: Hamish Low, Michaela Benzeval, Jon Burton, Thomas F. Crossley, Paul Fisher, Annette Jäckle, Brendan Read

Jun 2020

Using new data from the Understanding Society: COVID 19 survey collected in April 2020, we show how the aggregate shock caused by the pandemic affects individuals across the distribution. The survey collects data from existing members of the Understanding Society panel survey who have been followed for up to 10 years. Understanding society is based on probability samples and the Understanding Society Covid19 Survey is carefully constructed to support valid population inferences. Further the panel allows comparisons with a pre-pandemic baseline. We document how the shock of the pandemic translates into different economic shocks for different types of worker: those with less education and precarious employment face the biggest economic shocks.Some of those affected are able to mitigate the impact of the economic shocks: universal credit protects those in the bottom quintile, for example. We estimate the prevalence of the different measures individuals and households take to mitigate the shocks. We show that the opportunities for mitigation are most limited for those most in need.

JEL Codes: C83, D31, G51, I31, J31, J63

Keywords: COVID-19, job loss, inequality, mitigation, financial distress

Reference: 911

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Authors: Adam Brzezinski, David Van Dijcke, Valentin Kecht

Jun 2020

In combating the spread of COVID-19, some governments have been reluctant to adopt lockdown policies due to their perceived economic costs. Such costs can, however, arise even in the absence of restrictive policies, if individuals’ independent reaction to the virus slows down the economy. This paper finds that imposing lockdowns leads to lower overall costs to the economy than staying open. We combine detailed location trace data from 40 million mobile devices with difference-in-differences estimations and a modification of the epidemiological SIR model that allows for societal and political response to the virus. In that way, we show that voluntary reaction incurs substantial economic costs, while the additional economic costs arising from lockdown policies are small compared to their large benefits in terms of reduced medical costs. Our results hold for practically all realistic estimates of lockdown efficiency and voluntary response strength. We quantify the counterfactual costs of voluntary social distancing for various US states that implemented lockdowns. For the US as a whole, we estimate that lockdowns reduce the costs of the pandemic by 1.7% of annual GDP per capita, compared to purely voluntary responses.

JEL Codes: I12, I18, H12, D04, C33, H51

Keywords: COVID-19, difference-in-differences, SIR model, social distancing, lockdown, big data

Reference: 910

Individual View

Authors: Sander Barendse, Andrew J. Patton

May 2020

We develop tests for out-of-sample forecast comparisons based on loss functions that contain shape parameters. Examples include comparisons using average utility across a range of values for the level of risk aversion, comparisons of forecast accuracy using characteristics of a portfolio return across a range of values for the portfolio weight vector, and comparisons using a recently-proposed “Murphy diagrams” for classes of consistent scoring rules. An extensive Monte Carlo study verifies that our tests have good size and power properties in realistic sample sizes, particularly when compared with existing methods which break down when then number of values considered for the shape parameter grows. We present three empirical illustrations of the new test.

JEL Codes: C53, C52, C12

Keywords: Forecasting, model selection, out-of-sample testing, nuisance parameters

Reference: 909

Individual View

Authors: Gustavo Mellior

May 2020

This paper analyses theoretically and quantitatively the effect that different higher education funding policies have on welfare (on aggregate and at the individual level) and wealth inequality. A heterogeneous agent model in continuous time, which has uninsurable income risk and endogenous educational choice is used to evaluate five different higher education financing schemes. Educational investments can be self financed, supported by government guaranteed student loans - that may come with or without income contingent support - or be covered by the public sector. When educational costs are small, differences in outcomes amongst systems are negligible. On the other hand, when these costs rise to realistic levels we see that there can be large gains in welfare and significant drops in inequality by moving to a system with more public sector support. This support can come in the form of tuition subsidies and/or income contingent student loans. However, as the cost of education and the share of debtors in society gets larger, it is preferable to increase public support in the form of tuition subsidies. The reason is that there is a pecuniary externality of debt that gets magnified when student loans become excessive. While I identify large steady state welfare gains from more public sector financing, I show that the transition costs can be large enough to justify the status quo.

JEL Codes: D52, D58, E24, I22, I23

Keywords: Incomplete markets, Higher education funding, Human capital

Reference: 908

Individual View

Authors: Maximilian Kasy, Alex Teytelboym

May 2020

We show how to efficiently use costly testing resources in an epidemic, when testing outcomes can be used to make quarantine decisions. If the cost of false quarantine and false release exceed the cost of testing, the optimal myopic testing policy targets individuals with an intermediate likelihood of being infected. A high cost of false release means that testing is optimal for individuals with a low probability of infection, and a high cost of false quarantine means that testing is optimal for individuals with a high probability of infection. If individuals arrive over time, the policy-maker faces a dynamic tradeoff: using tests for individuals for whom testing yields the maximum immediate benefit vs. spreading out testing capacity across the population to learn prevalence rates thereby benefiting later individuals. We describe a simple policy that is nearly optimal from a dynamic perspective. We briefly discuss practical aspects of implementing our proposed policy, including imperfect testing technology, appropriate choice of prior, and non-stationarity of the prevalence rate.

Reference: 907

Individual View

Authors: Martin Ellison, Sang Seok Lee, Kevin Hjortshøj O’Rourke

May 2020

How did countries recover from the Great Depression? In this paper we explore the argument that leaving the gold standard helped by boosting inflationary expectations and lowering real interest rates. We do so for a sample of 30 countries, using modern nowcasting methods and a new dataset containing more than 230,000 monthly and quarterly observations for over 1,500 variables. In those cases where the departure from gold happened on clearly defined dates, it seems clear that inflationary expectations rose in the wake of departure. Synthetic matching techniques suggest that the relationship is causal.

Revised May 2020.

Reference: 896

Individual View

Authors: David Escamilla-Guerrero, Moramay Lopez-Alonso

Apr 2020

We evaluate the responsiveness of migrant self-selection to short-run changes in the economic environment. Using novel historical micro data, we estimate the initial selectivity of Mexican migration (1906-08) and focus on labor institutions as short-run adjustment channels of self-selection. We find that the first Mexican migrants were positively self-selected on the basis of height—a proxy for physical productivity of labor. Additionally, the US financial crisis of 1907 significantly modified self-selection. Shifts in migrant self-selection during and after the crisis were influenced by the enganche, an institution that reduced migration costs, but only for the “best” Mexicans during “good” economic times.

JEL Codes: F22, J61, N36, O15

Keywords: labor migration, migrant self-selection, Panic of 1907, Mexico

Reference: 179

Individual View

Authors: Steve Bond, Arshia Hashemi, Greg Kaplan, Piotr Zoch

Apr 2020

The ratio estimator of a firm’s markup is the ratio of the output elasticity of a variable input to that input’s cost share in revenue. This note raises issues that concern identification and estimation of markups using the ratio estimator. Concerning identification: (i) if the revenue elasticity is used in place of the output elasticity, then the estimand underlying the ratio estimator does not contain any information about the markup; (ii) if any part of the input bundle is either used to influence demand, or is neither fully fixed nor fully flexible, then the estimand underlying the ratio estimator is not equal to the markup. Concerning estimation: (i) even with data on output quantities, it is challenging to obtain consistent estimates of output elasticities when firms have market power; (ii) without data on output quantities, as is typically the case, it is not possible to obtain consistent estimates of output elasticities when firms have market power and markups are heterogeneous. These issues cast doubt over whether anything useful can be learned about heterogeneity or trends in markups, from recent attempts to apply the ratio estimator in settings without output quantity data.

JEL Codes: D2, D4, L1, L2

Keywords: Markups, Output Elasticity, Revenue Elasticity, Production Functions

Reference: 906

Individual View

Abstract: Seeking substantive relationships among vast numbers of spurious connections when modelling Big Data requires an appropriate approach. Big Data are useful if they can increase the probability that the data generation process is nested in the postulated model, increase the power of specification and mis-specification tests, and yet do not raise the chances of adventitious significance. Simply choosing the best-fitting equation or trying hundreds of empirical fits and selecting a preferred one–perhaps contradicted by others that go unreported–is not going to lead to a useful outcome. Wide-sense non-stationarity (including both distributional shifts and integrated data) must be taken into account. The paper discusses the use of principal components analysis to identify cointegrating relations as a route to handling that aspect of non-stationary big data, along with saturation to handle distributional shifts, and models the monthly UK unemployment rate, using both macroeconomic and Google Trends data, searching over 3000 explanatory variables and yet identifying a parsimonious, well-specified and theoretically interpretable model specification.

JEL Codes: C51, Q54

Keywords: Cointegration; Big Data; Model Selection; Outliers; Indicator Saturation; Autometrics

Reference: 905

Individual View

Authors: David Ronayne

Apr 2020

We study a canonical model of simultaneous price competition between firms thatWe study a canonical model of simultaneous price competition between firms thatsell a homogeneous good to consumers who are characterized by the number ofprices they are exogenously aware of. Our setting subsumes many employed in theliterature over the last several decades. We show there is a unique equilibrium ifand only if there exist some consumers who are aware of exactly two prices. Theequilibrium we derive is in symmetric mixed strategies. Furthermore, when thereare no consumers aware of exactly two prices, we show there is an uncountableinfinityof asymmetric equilibria in addition to the symmetric equilibrium. Ourresults show the paradigm generically produces a unique equilibrium. We also showthat the commonly-sought symmetric equilibrium (which also nests the textbookBertrand pure strategy equilibrium as a special case) is robust to perturbations inconsumer behavior, while the asymmetric equilibria are not.

Revised March 2020.

JEL Codes: D43, L11

Keywords: price competition; price dispersion; unique equilibrium

Reference: 874

Individual View

Authors: David Ronayne, Greg Taylor

Apr 2020

Abstract

We study strategic interactions in markets where rms sell to consumers both directlyWe study strategic interactions in markets where rms sell to consumers both directlyand via a competitive channel (CC), such as a price comparison website ormarketplace, where multiple sellers' o ers are visible at once. We ask how a CC'ssize inuences market outcomes. A bigger CC means more consumers compareprices, increasing within-channel competition. However, we show such seeminglypro-competitive developments can raise prices and harm consumers by weakeningbetween-channel competition. We also use the model to study relevant active policyissues including price clauses, integrated ownership structures, and access toconsumers' purchase data.

 

Revised April 2020.

JEL Codes: JEL D43, D83, L11, M3

Reference: 843

Individual View

Authors: Peter Neary, Céline Carrère, Monika Mrázová

Mar 2020

Gravity as both fact and theory is one of the great success stories of recent research on international trade, and has featured prominently in the policy debate over Brexit. We first review the facts, noting the overwhelming evidence that trade tends to fall with distance. We then introduce some expository tools for understanding CES theories of gravity as a simple general-equilibrium system. Next, we point out some anomalies with the theory: mounting evidence against constant trade elasticities, and implausible predictions for bilateral trade balances. Finally, we sketch an approach based on subconvex gravity as a promising direction to resolving them.

JEL Codes: F17, F14, F10

Keywords: Bilateral Trade Balances; Brexit; Elasticity of Trade to Distance; Quantile Regression; Structural Gravity and Trade; Subconvex Demands

Reference: 904

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Authors: Anthony Venables

Mar 2020

Economic adjustment to trade and policy shocks is hampered by the fact that some sectors tend to cluster, so are hard to initiate in new places. This can give rise to persistent spatial disparities between cities within a country. The paper sets out a two-sector model in which cities divide into those producing tradable goods or services subject to agglomeration economies, and those only producing non-tradables for the national market. If import competition destroys some established tradable sectors, then affected cities fail to attract new tradable activities and switch to just produce non-tradables. Full employment is maintained (we assume perfect markets and price flexibility) but disparities between the two types of cities are increased. All non-tradable cities experience real income loss, while remaining tradable cities boom. The main beneficiaries are land-owners in remaining tradable cities, but there may be aggregate loss as the country ends up with too many cities producing non-tradables, and too few with internationally competitive activities. Fiscal policy has opposite effects in the two types of cities, with fiscal contraction causing decline in cities producing non-tradables, increasing activity in cities producing tradable goods, widening spatial disparities, and in the process increasing the share of rent in the economy.

JEL Codes: F12, F60, R11, R12

Keywords: Urban economics, divergence, rebalancing, lagging regions, de-industrialisation, fiscal policy

Reference: 903

Individual View

Authors: Francesco Zanetti, Carlo Pizzinelli, Konstantinos Theodoridis

Feb 2020

This paper documents state dependence in labor market fluctuations. Using a Threshold Vector Autoregression model (TVAR), 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. We calibrate the model to match the standard deviation of the job-transition rates explained by productivity shocks in the TVAR, and show that the model explains 88 percent of the state dependence in the unemployment rate, 76 percent for the separation rate and 36 percent for the job finding rate. The key channel underpinning state dependence in both job separation and job finding rates is the interaction of the firm’s reservation productivity level and the distribution of match-specific idiosyncratic productivity. Results are robust across several variations to the baseline model.

JEL Codes: E24, E32, J64, C11

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

Reference: 902

Individual View

Authors: Brian A’Hearn, Stefano Chianese, Giovanni Vecchi

Feb 2020

A problem for both historical and contemporary research on inequality is a scarcity of high quality data on wealthy households. In this paper we explore a rich source of such data for historical periods: the account books of aristocratic households preserved in their family archives. We make three contributions: i) a survey of the nobility in Italy and of their publicly accessible archives; ii) an assay of the type and quality of budget data they contain; and iii) an assessment of the impact of adding upper-tail families to a household budget sample on inequality estimates. In a nutshell, our assessment is that the data are relatively abundant, accurate, and highly impactful. An enhanced sample of noble families will enable us to significantly improve estimates of Italian inequality right back to the country’s founding in 1861. There is no reason to think the approach would be any less feasible or fruitful in other European countries.

JEL Codes: N33, N34, I3

Reference: 178

Individual View

Authors: Giacomo Gabbuti

Feb 2020

A century after Mussolini’s seizure of power, distributive trends during Interwar Italy are only partially known. This paper presents new evidence on inequality, contributing to the ‘classic’ debate on Fascism’s origins and legacy. Labour shares fell dramatically during the Great War, quickly recovered by 1922, and experienced a steady decline during Fascism, reaching a secular minimum in early 1940s. A newly assembled database of fiscal tabulations shows increasing concentration at the top between 1925 and 1936. These findings testify the fundamentally regressive nature of the Fascist regime, revealing significant discontinuity in Italy’s long-run inequality trend.

JEL Codes: B12, D63, J31, N14, N34

Reference: 177

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