Working Papers

Authors: Hamish Low, Richard Blundell, Ran Gu, Soren Leth-Petersen, Costas Meghir

Dec 2019

We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

JEL Codes: D15, D82, E21

Keywords: Lemons penalty, car market, estimated life-cycle equilibrium model

Reference: 890

Individual View

Authors: Hamish Low, Luigi Pistaferri

Dec 2019

We show the extent of errors made in the award of disability insurance using matched survey-administrative data. False rejections (Type I errors) are widespread, and there are large gender differences in these type I error rates. Women with a severe, work-limiting, permanent impairment are 20 percentage points more likely to be rejected than men, controlling for the type of health condition, occupation, and a host of demographic characteristics. We investigate whether these gender differences in Type I errors are due to women being in better health than men, to women having lower pain thresholds, or to women applying more readily for disability insurance. None of these explanations are consistent with the data. We use evidence from disability vignettes to suggest that there are different acceptance thresholds for men and women. The differences by gender arise because women are more likely to be assessed as being able to find other work than observationally equivalent men. Despite this, after rejection, women with a self-reported work limitation do not return to work, compared to rejected women without a work limitation.

JEL Codes: I38, J16

Keywords: Disability Insurance, Gender Differences

Reference: 889

Individual View

Authors: Mark Armstrong, Jidong Zhou

Nov 2019

This paper studies competition between firms when consumers observe a pri-vate signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relax¬ing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens dif¬ferentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by con¬sumers can be designed flexibly.

JEL Codes: D43, D47, D83, L13, L15

Keywords: Information design, Bertrand competition, product differentiation, online platforms

Reference: 888

Individual View

Authors: Peter Neary, Martina Lawless, Zuzanna Studnicka

Nov 2019

This paper revisits the work of Fitzsimons, Hogan, and Neary (1999) on the level of trade between Ireland and Northern Ireland. In doing so, we reflect on the recent move to prominence of this issue since the referendum decision of the UK to leave the EU and also on the shift within the economics literature to looking at trade issues from a micro rather than a macro perspective as data availability has grown. Our country-level results show the same pattern of limited statistical significance for a border effect as was found in the earlier work still holds but when using firm-level data we find a positive and significant border effect. This effect holds for total trade at firm and product level with the primary determinant coming from the intensive margin, both in terms of average exports per firm and average exports per product within firms.

JEL Codes: F10

Keywords: Brexit; Gravity; Multi-Product Firms

Reference: 887

Individual View

Authors: H Peyton Young, Mark Paddrik, Sriram Rajan

Nov 2019

A major credit shock can induce large intra-day variation margin payments between counterparties in derivatives markets, which may force some participants to default on their payments. These payment shortfalls become amplified as they cascade through the network of exposures. Using detailed DTCC data we model the full network of exposures, shock-induced payments, initial margin collected, and liquidity buffers for about 900 firms operating in the U.S. credit default swaps market. We estimate the total amount of contagion, the marginal contribution of each firm to contagion, and the number of defaulting firms for a systemic shock to credit spreads. A novel feature of the model is that it allows for a range of behavioral responses to balance sheet stress, including delayed or partial payments. The model provides a framework for analyzing the relative effectiveness of different policy options, such as increasing margin requirements or mandating greater liquidity reserves.

JEL Codes: D85, G23, L1

Keywords: Financial networks, contagion, stress testing, credit default swaps

Reference: 886

Individual View

Authors: H Peyton Young, Mark Paddrik

Nov 2019

We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

JEL Codes: D85, G01, G17, L14

Keywords: Credit default swaps, central counterparties, stress testing, systemic risk, financial networks

Reference: 885

Individual View

Authors: H Peyton Young, Itai Arieli, Yakov Babichenko, Ron Peretz

Nov 2019

New ways of doing things often get started through the actions of a few innovators, then diffuse rapidly as more and more people come into contact with prior adopters in their social network. Much of the literature focuses on the speed of diffusion as a function of the network topology. In practice the topology may not be known with any precision, and it is constantly in flux as links are formed and severed. Here we establish an upper bound on the expected waiting time until a given proportion of the population has adopted that holds independently of the network structure. Kreindler and Young [38, 2014] demonstrated such a bound for regular networks when agents choose between two options: the innovation and the status quo. Our bound holds for directed and undirected networks of arbitrary size and degree distribution, and for multiple competing innovations with different payoffs.

Revised November 2019.

Reference: 884

Individual View

Authors: H Peyton Young, Sam Jindani

Nov 2019

Social norms are costly if they are harmful for individuals but they remain in place for long periods of time because deviations are punished by members of the community. Examples include female genital cutting, foot binding, and codes of honour such as duelling. These and many other costly norms are seldom ‘all or nothing’: they are multidimensional and can take many altern¬ative forms. We develop a general theory of norm dynamics that focuses on the intermediate-run behaviour of such systems. Al-though in the (very) long run costly norms tend to die out, in the intermediate run transitions to less costly versions of the norm may occur that significantly retard its ultimate abandonment.

Reference: 883

Individual View

Authors: David Ronayne, David P. Myatt

Oct 2019

We propose a two-stage replacement for established “clearinghouse" or “captive and shopper" pricing models: second-stage retail prices are constrained by first-stage list prices. In contrast to the mixed-strategy equilibria of single-stage games, a unique profile of distinct prices is supported by the play of pure strategies along the equilibrium path, and so we predict stable price dispersion. We find novel results in applications to models of sales, product prominence, advertising, and consumer search.

Keywords: price dispersion, clearinghouse models, prominence, advertising, buyer search

Reference: 873

Individual View

Authors: Jane Humphries, Benjamin Schneider

Oct 2019

In our earlier paper we used archival and printed primary sources to construct the first long-run series of wages for hand spinning in early modern Britain. Our evidence challenged Robert Allen’s claim that spinners were part of the ‘High Wage Economy’, which he sees as motivating invention, innovation, and mechanisation in the spinning section of the textile industry. Here we respond to Allen’s criticism of our argument, sources and methods, and his presentation of alternative evidence. Allen contends that we have understated both the earnings and associated productivity of hand spinners by focussing on part-time and low-quality workers. His rejoinder is found to rest on an ahistorical account of spinners’ work and similarly weak evidence on wages as did his initial claims. We also present an expanded version of the spinners’ wages dataset, which confirms our original findings: spinners’ wages were low even compared with other women workers and did not follow a trajectory which could explain the invention and spread of the spinning jenny.

JEL Codes: J24, J31, J42, J46, N13, N33, N63, O14, O31

Keywords: hand spinning, women's wages, Industrial Revolution, textiles, Great Divergence, induced innovation, High Wage Economy

Reference: 174

Individual View

Authors: David Escamilla-Guerrero

Oct 2019

This paper introduces and analyses the Mexican Border Crossing Records (MBCRs), an unexplored data source that records aliens crossing the Mexico-United States land border at diverse entrance ports from 1903 to 1955. The MBCRs identify immigrants and report rich demographic, geographic and socioeconomic information at the in¬dividual level. These micro data have the potential to support cliometric research, which is scarce for the Mexico-United States migration, especially for the beginnings of the flow (1884–1910). My analysis of the MBCRs suggests that previous literature might have inaccurately described the initial patterns of the flow. The results diverge from historical scholarship because the micro data capture better the geographic composition of the flow, allowing me to characterize the initial migration patterns with more precision. Overall, the micro data reported in the MBCRs offer the opportunity to address topics that concern the economics of migration in the past and present.

JEL Codes: N01, N36

Keywords: migration, micro data, Mexico

Reference: 173

Individual View

Authors: Godfrey Keller, Sven Rady

Oct 2019

We analyze undiscounted continuous-time games of strategic experimentation with two-armed bandits. The risky arm generates payoffs according to a Le´vy process with an unknown average payoff per unit of time which nature draws from an arbitrary finite set. Observing all actions and realized payoffs, players use Markov strategies with the common posterior belief about the unknown parameter as the state variable. We show that the unique symmetric Markov perfect equilibrium can be computed in a simple closed form involving only the payoff of the safe arm, the expected current payoff of the risky arm, and the expected full-information payoff, given the current belief. In particular, the equilibrium does not depend on the precise specification of the payoff-generating processes.

JEL Codes: C73, D83

Keywords: Strategic Experimentation, Two-Armed Bandit, Strong Long-Run Av¬erage Criterion, Markov Perfect Equilibrium, HJB Equation, Viscosity Solution

Reference: 882

Individual View

Authors: Anja Benshaul-Tolonen, Sarah Baum

Oct 2019

Does structural transformation matter for gender equality? This paper reviews the gender impacts of the highest value export industry in low and middle income countries—the extractive industries (oil, gas and mining). First, we analyze cross-country relationships between natural resource dependence and gender welfare indicators. Countries that are dependent on natural resource rents have greater gender inequality, lower education levels and more patriarchal norms, even after taking GDP per capita levels into account. Second, we conduct a comprehensive review of the empirical literature on the impact of extractive industries on women and gender relations, covering topics such as labor force participation, marriage markets, health, and security. The review points to extractive industries as a mixed blessing for women, showing heterogeneity across genders, sectors, and contexts. We propose new directions for research to ensure that extractive industries generate inclusive growth.

Reference: 221

Individual View

Authors: Sebastian Axbard, Anja Benshaul-Tolonen, Jonas Poulsen

Oct 2019

A large literature has highlighted the potential detrimental effects of natural resource wealth on social, economic and political outcomes. We study a previously largely unexplored relationship - the impact of natural resource wealth on criminal activity. Our empirical strategy exploits price fluctuations in 15 internationally traded minerals to study the impact of mineral wealth on local crime levels in South Africa - leveraging detailed crime data from 1,084 police precincts over 10 years. We find that increased mineral wealth leads to a reduction in criminal activity. An exploration of mechanisms suggest that the effect is due to changes in employment opportunities created by the mining industry, affecting the opportunity cost of engaging in criminal activity. Consistent with this we also document that results are driven by property crime and that mines are less likely to close down when prices are high. Our results suggest that downward shifts in international mineral prices can cause surges in crime. To investigate how resilience against such surges can be achieved, we exploit the roll-out of a government employment guarantee program and document that the program reduces the crime response to changes in international mineral prices.

JEL Codes: K42, D74, O13

Keywords: Extractive Industries, Mining, Crime

Reference: 220

Individual View

Authors: Francesco Zanetti, Tatsushi Okuda, Tomohiro Tsuruga

Sep 2019

We establish novel empirical regularities on firms’ expectations about aggregate and idiosyncratic components of sectoral demand using industry-level survey data for the universe of Japanese firms. Expectations of the idiosyncratic component of demand differ across sectors, and they positively co-move with expectations about the aggregate component of demand. To study the implications for inflation, we develop a model with firms that form expectations based on the inference of distinct shocks from a common signal. We show that the sensitivity of inflation to changes in demand decreases with the volatility of idiosyncratic component of demand that proxies the degree of shock heterogeneity. We apply principal component analysis on Japanese sectoral-level data to estimate the degree of shock heterogeneity, and we establish that the observed increase in shock heterogeneity plays a significant role for the reduced sensitivity of inflation to movements in real activity since the late 1990s.

JEL Codes: E31, D82, C72

Keywords: Imperfect information, Shock heterogeneity, Inflation dynamics

Reference: 881

Individual View

Authors: Jesus Fernandez-Villaverde, Francesco Zanetti, Federico Mandelman, Yang Yu

Sep 2019

We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.

JEL Codes: C63, C68, E32, E37, E44, G12

Keywords: Aggregate fluctuations, strategic complementarities, macroeconomic volatility, government spending

Reference: 880

Individual View

Authors: Vanessa Berenguer Rico, Bent Nielsen, Søren Johansen

Sep 2019

The Least Trimmed Squares (LTS) and Least Median of Squares (LMS) estimators are popular robust regression estimators. The idea behind the estimators is to find, for a given h; a sub-sample of h 'good' observations  among n observations and estimate the regression on that sub-sample. We find models, based on the normal or the uniform distribution respectively, in which these estimators are maximum likelihood. We provide an asymptotic theory for the location-scale case in those models. The LTS estimator is found to be h 1/2 consistent and asymptotically standard normal. The LMS estimator is found to be h consistent and asymptotically Laplace.

Keywords: Chebychev estimator, LMS, Uniform distribution, Least squares estimator, LTS, Normal distribution, Regression, Robust statistics

Reference: 879

Individual View

Authors: Sara Horrell, Jane Humphries, Jacob Weisdorf

Aug 2019

We use new estimates of men, women, and children’s wages in combination with cost-of-living indices to explore family living standards across six centuries of English history. A family perspective enables us to quantify the labour inputs required from women and children in circumstances when men’s earnings alone were insufficient to secure a decent standard of living, and so to register the historical relevance of the male breadwinner model. We employ a life-cycle approach where pre-marital savings help married couples manage increasing numbers of dependent children as well as other periods of economic pressure. We find that the male breadwinner model was generally insufficient for a ‘respectable’ standard of living; women and sometimes children were required to contribute and, even then, couples still faced poverty during old age. However, with the exception of the pre-Black Death period and the first half of the 17th-century, child labour was not essential and in the early modern era and old-age poverty was in retreat. We reconcile our findings with evidence of a surge in child-labour in the late 1700s and early 1800s, with reference to early modern economic growth, and its association with industriousness and consumerism, twin developments which served to stimulate the Industrial Revolution.

JEL Codes: J22, N13, O10

Keywords: Living Standards; Prices, Wages

Reference: 172

Individual View

Authors: Beata Javorcik, Ben Kett, Katherine Stapleton, Layla O'Kane

Aug 2019

This paper uses high frequency data on the universe of job adverts posted online in the UK to study the impact of the trade uncertainty caused by the Brexit referendum on labour demand. We develop measures of industry and regional exposure to the threat of poten¬tial most-favoured-nation (MFN) tariffs if the UK were to leave the EU without a trade deal. We show that industries and regions more exposed to the tariff threat differentially reduced online hiring in the period after the referendum. We also show that the magni¬tude of this negative effect varied with the time-varying perceived probability of a no-deal Brexit, proxied by the relative frequency of Google-searches for terms associated with a no-deal Brexit. The policy implications of this paper are that uncertainty around trade policy, not only enacted policy, have real economic impacts and governments should therefore strive for clarity and predictability in their actions to create a strong enabling environment for the private sector.

Reference: 878

Individual View

Authors: Sudhir Anand, Sanjay G. Reddy

Aug 2019

The disability-adjusted life year (DALY) is a measure of aggregate ill-health whose construction depends on a counterfactual – the number of life-years a person could have expected to live had she or he not died.  There are two ways of specifying the DALY counterfactual to estimate years of life lost (YLL) – by employing an ‘exogenous’ or an ‘endogenous’ life table.  An exogenous life table is independent of the mortality risks experienced by the population whose health (longevity) is being assessed, whereas an endogenous life table is composed of precisely these risks. 
Exogenous life tables have been used to construct the DALY in the Global Burden of Disease (GBD) studies – with different exogenous life tables used in the GBD 1990 and GBD 2010 (and later) exercises.  However, an endogenous life table is more appropriate for predicting life-years lost from premature mortality in any given country, and allocating resources through health interventions there on the basis of DALYs averted.
Whether an exogenous or an endogenous life table is used, anomalies can arise.  Furthermore, the approach adopted in GBD 2010 onwards adds special difficulties of its own.  GBD 2010 and later GBDs use an exogenous reference life table which is the same for men and women.  This leads to an underestimation of the disease burden of women relative to that of men.

Reference: 877

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Authors: Wilfried Kisling, Antonio Tena Junguito

Aug 2019

This article identifies and analyzes the determinants of the success of German exports to Argentina between 1875 and 1913, the fastest emerging market in South America at that time. New German technology and increasing productivity were complemented by banking and financial support for trade. We find that industrial sectors linked to German foreign banks (Auslandsbanken) in Argentina benefited from privileged access to financial support and hence exported more in comparison with other leading industrial countries. Our findings contribute to the literature on Latin American emerging markets and the role of finance in the development of foreign trade.

Reference: 171

Individual View

Authors: Sarah Clifford, Panos Mavrokonstantis

Aug 2019

We study behavioural responses to a widely-used tax enforcement policy that combines ele¬ments of self- and third-party reporting. Taxpayers self-report to the tax authority but must file documentation issued by a third-party to corroborate their claims. Exploiting salary-dependent cutoffs governing documentation requirements when claiming deductions for charitable contribu¬tions in Cyprus, we estimate that deductions increase by £0.7 when taxpayers can claim £1 more without documentation. Second, using a reform that retroactively shifted a threshold activating documentation requirements, we estimate that at least 64% of the response is purely a reporting adjustment. Finally, reporting thresholds affect the responsiveness to tax subsidies.

Keywords: Tax enforcement, Tax compliance, Charitable giving, Tax design

Reference: 876

Individual View

Authors: Ferdinand Rauch, Stephan Maurer

Aug 2019

This paper studies how the opening of the Panama Canal in 1914 changed market access and influenced the economic geography of the United States. We compute shipment distances with and without the canal from each US county to each other US county and to key international ports and compute the resulting change in market access. We relate this change to population changes in 20-year intervals from 1880 to 2000. We find that a 1 percent increase in market access led to a total increase of population by around 6 percent. We compute similar elasticities for wages, land values and immigration from out of state. When we decompose the effect by industry, we find that tradable (manufacturing) industries react faster than non-tradable (services), with a fairly similar aggregate effect.

JEL Codes: F1, R1, O1, N72

Keywords: Market access; Panama Canal; trade shock; gravity

Reference: 875

Individual View

Authors: , David Ronayne

Jul 2019

We study a canonical model of simultaneous price competition between firms that sell a homogeneous good to consumers who are characterized by the number of prices they are exogenously aware of. This setting subsumes many used in the literature over the past several decades. Our result shows that there is a unique equilibrium if and only if there exist some consumers who are aware of exactly two prices. The equilibrium we derive is in symmetric mixed strategies. Further¬more, when there are no consumers aware of exactly two prices, we show there is an uncountable-infinity of asymmetric equilibria in addition to the symmetric equilibrium. Our result shows that the paradigm generically produces a unique equilibrium; that the commonly-sought symmetric equilibrium is robust; and that the asymmetric equilibria are knife-edge phenomena.

JEL Codes: D43, L11

Keywords: price competition; price dispersion; unique equilibrium

Reference: 874

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Authors: John Muellbauer

Jun 2019

Empirical evidence on what drives house prices, such as income changes, extrapolative expectations and differences in supply elasticities, is important. In many countries, house price movements in major cities such as the capital are more extreme and often seem to lead the rest of the country. This chapter therefore proposes a framework for analysing prices at a regional level, with an application to London illustrating its leading role and the ripple effect in other UK regions. As is also shown for Paris, capital cities are more sensitive to interest rates and credit conditions, and international investors can play an important role (perhaps leading to affordability problems for local residents). After the crisis, debt-to-income ratios have risen strongly which, together with the higher interest rate sensitivity of housing in cities, may impede the normalisation of interest rates.

Reference: 872

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