Working Papers

Authors: Jennifer Castle, David Hendry

Jan 2020

We investigate past climate variability over the Ice Ages, where a simultaneous-equations system is developed to characterize land ice volume, temperature and atmospheric CO2 levels as non-linear functions of measures of the Earth’s orbital path round the Sun. Although the orbital variables were first theorised as the fundamental causes of glacial variation by Croll in 1875 following Agassiz’s conception of a ‘Great Ice Age’ in 1840, their minor variations were thought insufficient to drive such major changes, especially the relative rapidity of shifts between glacial and warmer periods. The changes over the ice ages in atmospheric CO2 closely matched changes in land ice volumes, and since temperature changes are in turn affected by CO2 and also closely tracked ice volumes, a key identification issue is the causal role of CO2 in the process. As any links between CO2 and temperature above the forces from the orbital drivers (which of course are still operating) must have been natural ones hundreds of thousands of years ago, understanding their interactions at that time is important now that additional CO2 emissions are anthropogenic. We develop a simultaneous equation system over the last 800,000 years that allows a test of the role of CO2 as endogenously driven by the orbital variations, or an ‘exogenous’ influence as it now is.

JEL Codes: C01, C51, C87, Q54

Keywords: Climate Econometrics; Model Selection; Outliers; Identification; Saturation Estimation; Au- tometrics; Ice Ages

Reference: 898

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Authors: Anthony Venables, Julia Bird, Mathilde Lebrand

Jan 2020

This paper develops a computable spatial equilibrium model of Central Asia and uses it to analyze the possible effects of the Belt and Road Initiative on the economy of the region. The model captures international and subnational economic units and their connectivity to each other and the rest of the world. Aggregate real income gains from the Belt Road Initiative range from less than 2 percent of regional income if adjustment mechanisms take the form of conventional Armington and monopolistic competition, to around 3 percent if there are localization economies of scale and labor mobility. In the latter case, there are sizeable geographical variations in impact, with some areas developing clusters of economic activity with income increases of as much as 12 percent and a doubling of local populations, while other areas stagnate or even decline.

JEL Codes: F12, F15, R11, R13

Keywords: regional integration, transport infrastructure, spatial modeling, economic geography, Central Asia.

Reference: 897

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Authors: Sebastian Alvarez

Jan 2020

The recent international financial crisis has dramatically revealed the shortcomings and potential dangers of bank globalization and deeper financial integration. While the lack of supervision and adequate legal frameworks has been largely acknowledged as a main problem, the effects of regulation on the development of international banking activity and financial stability are still a matter of controversy. This article investigates the conditions under which the globalization of the domestic banking sector unfolded in Brazil and Mexico during the years of dizzying expansion of foreign finance that culminated the international debt crisis of 1982. It shows how the regulatory framework for international banking and foreign capital in Brazil created a model of intermediation that was considerably less vulnerable to crisis than in Mexico, with a more lightly regulated institutional base. These findings provide insights into historical discussions about the implications of financial regulation and capital controls for the development and expansion of foreign finance and whether the risks underlying international banking are necessarily inherent to the process of financial globalization.

Reference: 176

Individual View

Authors: Patrick Bennett, Chiara Ravetti, Po Yin Wong

Jan 2020

This paper uses the first discovery of oil a nd gas in Norway as a natural experiment to study the long run labour market implications of a positive economic shock. Existing studies largely focus on short term dynamics and on men, but the effects on women and their persistence in time are less known. Following the same individuals for up to two decades in the Norwegian Registry and Census data, we find that the oil discovery significantly increased male earnings (up to 7% annually), while female earnings declined (more than 10%). The shift in annual income is still present 15 years after the discovery. Labour force participation increased among men, while it declined for women in full-time employment. Specifically, the decline in female earnings was driven by married women. Moreover, men in oil regions shifted into high-paying occupations while women did the opposite after the discovery of oil. However, the income loss for women is mostly a short-term phenomenon: we find that women’s lifetime income improved for later cohorts.

Reference: 223

Individual View

Authors: Rick Van der Ploeg, Fidel Perez-Sebastian, Ohad Raveh

Dec 2019

Can oil discovery shocks affect the demand for protectionism? A two-period model of Dutch disease indicates that if the tradable sector is politically dominant then an oil discovery induces protectionism. If the economy is also credit constrained, this effect is intensified upon discovery, but partially reversed when oil revenues start to flow. We test these predictions using detailed bilateral tariff data that cover 96 products in 155 countries over the period 1988-2012, and worldwide discoveries of giant oil and gas fields. Our identification strategy rests on the exogeneity of the timing of discoveries. We find that an oil discovery increases tariffs during pre-production years and decreases tariffs in the years to follow yet to a lesser extent, most notably in capital scarce economies with a relatively dominant tradable sector. Our baseline estimates indicate that a giant oil field discovery induces a rise of approximately 15% in the average tariff over the course of 10 years; this increase is about 1.8 times larger during the pre¬production period when the oil discovery represents a pure news shock.

JEL Codes: Q32, F13, O24

Keywords: Oil discoveries, protectionism, capital scarcity, Dutch disease, political economy, trade policy, news shocks

Reference: 895

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Authors: Rick Van der Ploeg, Armon Rezai

Dec 2019

Assets in the fossil fuel industries are at risk of losing market value due to anticipated breakthroughs in renewable technology and governments stepping up climate policies in the light of the Paris commitments to limit global warming to 1.5 or 2 degrees Celsius. Stranded assets arise due to uncertainty about the future timing of these two types of events and substantial intertemporal and intersectoral investment adjustment costs. Stranding of assets mostly affects the 20 biggest oil, gas and coal companies who have been responsible for at least a third of global warming since 1965, but also carbon-intensive industries such as steel, aluminium, cement, plastics and greenhouse horticulture. A disorderly transition to the carbon-free economy will lead to stranded assets and legal claims. Institutional investors should be aware of these financial risks. A broader definition of stranded assets also includes countries reliant on fossil fuel exports and workers with technology-specific skills.

JEL Codes: E62, F41, G11, O33, Q33, Q34, Q35, Q40, Q54

Keywords: de-carbonisation, policy tipping, technology, stranded assets

Reference: 894

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Authors: Ridwan D. Rusli, Wessel N. Vermeulen

Dec 2019

We examine the economic consequences of resource extraction and the associ-ated revenue windfalls on subnational government revenues and spending patterns. Making use of Indonesia’s fiscal sharing rules and an offshore oil and gas produc-tion instrument, we find a positive impact of resource revenues on the center-local balancing funds including the general allocation fund, despite the latters’ fiscal re-balancing purposes. Fiscal windfalls from resource extraction increase public sector spending on capital and infrastructure projects as well as public goods and services, with positive spillover benefits on local tax revenues. At the same time spending on personnel and administration increases less and decrease as percentage of total expenditures. Interaction with district economic governance index data indicates enhanced infrastructure spending but also increases in the balancing funds.

JEL Codes: H71, O13, Q32

Keywords: Resource extraction; fiscal- and direct economic spillovers; decen¬tralization; subnational government budgets; South-East Asia; Indonesia

Reference: 222

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Authors: Anthony Venables, Gilles Duranton

Dec 2019

Many development policies, such as placement of infrastructure or local economic development schemes, are “place-based.” Such policies are generally intended to stimulate private sector investment and economic growth in the treated place, and as such they are difficult to appraise and evaluate. This paper sets the rationale for place-based policies and a framework for analyzing their effects and assessing their social value. It then reviews the literature on place-based policies in the contexts of special economic zones, transport policy, lagging regions, and local economic development policies.

JEL Codes: O10, O18, R10, R11, R13

Keywords: Place-based policies, spatial, economic corridors, lagging regions

Reference: 893

Individual View

I develop a game-theoretic framework to study the repercussions of an evaluator’s bias against a specific group of applicants. The evaluator decides upfront between holding an informed or a blind audition. In the latter, the evaluator learns neither the applicant’s ability nor the gender. I show that, above a threshold bias, the evaluator prefers a blind audition to provide high effort incentives exclusively for high-ability applicants. Consequently, committing to no information can be beneficial for the evaluator. I also show that a highly biased evaluator’s preferences align with those of a highly able female. The introduction of performance uncertainty may lead to market failure or may render informed auditions more profitable, rationalising ability-targeting interventions. My results can explain why blind auditions have increased the probability of women being hired via taste-based discrimination and challenge explanations grounded in sta¬tistical discrimination.

JEL Codes: C70, D81, D86, D91, J16, J71

Keywords: first impression, bias, blind audition, taste-based discrimination, performance un-certainty

Reference: 892

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Authors: Jane Humphries

Dec 2019

The paper uses autobiographical accounts by 227 working women alongside a larger sample of men’s life stories to compare girl and boys’ experiences of first jobs, schooling and family life in the late 18th and early 19th centuries. It asks whether girls were disadvantaged in seizing the opportunities and fending off the threats to wellbeing occasioned by economic change. Girls were more likely than boys to experience sexual harassment and this constrained the ways in which they could earn a living and live their lives. Fathers as breadwinners merited respect and often affection, but it was mothers with whom girls identified.

Reference: 175

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Authors: Anthony Venables, J. Vernon Henderson, Tanner Regan

Dec 2019

We model the building of a city, estimate parameters of the model, and calculate welfare losses from institutional frictions encountered in changing land-use. We distinguish formal and slum construction technologies; in contrast to slums, formal structures can be built tall, are durable, and non-malleable. As the city grows areas are initially developed informally, then formally, and then redeveloped periodically. Slums are modelled as a technology choice; however, institutional frictions in land markets may hinder their conversion to formal usage that requires secure property rights. Using unique data on Nairobi for 2003 and 2015, we develop a novel set of facts that support assumptions of the model, estimate all parameters of the model, and calculate welfare losses of conversion frictions. We track the dynamic evolution of the city and compare it with model predictions. In the core city formal sector, about 35% of buildings were torn down over 12 years and replaced by buildings on average three times higher. For slums in older areas near the centre, even after buying out slumlords, overcoming institutional frictions would yield gains amounting to $16,000 -18,000 per slum household, 30 times typical annual slum rent payments.

JEL Codes: O14, O18, R1, R3, H

Keywords: city, urban growth, slums, urban structure, urban form, housing investment, capital durability.

Reference: 891

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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

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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

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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

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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

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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

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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: 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

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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

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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

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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

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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

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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

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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

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