Working Papers

Authors: Ferdinand Rauch, Adriana Kocornik-Mina, Thomas K.J. McDermott, Guy Michaelsor

Dec 2015

Abstract

Does economic activity relocate away from areas that are at high risk of recurring shocks? We examine this question in the context of floods, which are among the costliest and most common natural disasters. Over the past thirty years, floods worldwide killed more than 500,000 people and displaced over 650,000,000 people. This paper analyzes the effect of large scale floods, which displaced at least 100,000 people each, in over 1,800 cities in 40 countries, from 2003-2008. We conduct our analysis using spatially detailed inundation maps and night lights data spanning the globe's urban areas. We find that low elevation areas are about 3-4 times more likely to be hit by large floods than other areas, and yet they concentrate more economic activity per square kilometre. When cities are hit by large floods, the low elevation areas also sustain more damage, but like the rest of the flooded cities they recover rapidly, and economic activity does not move to safer areas. Only in more recently populated urban areas, flooded areas show a larger and more persistent decline in economic activity. Our findings have important policy implications for aid, development and urban planning in a world with rising urbanization and sea levels.

JEL Codes: R11, Q54

Keywords: Urbanization, Flooding, Climate change, Urban recovery

Reference: 772

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Authors: Jasper van Dijk

Dec 2015

Abstract

This paper replicates Moretti (AER, 2010). I estimate the local employment multiplier between the tradable and the nontradable sector in MSAs in the United States using two methods. The first replicates Moretti's results, based on the description he gives in his paper and part of his estimation files. I am able to reverse engineer the specification he uses, but identify some discrepancies with his results. The second method is an alternative to his specification that produces more robust estimates of the local multiplier effect with more policy relevance. Using an alternative instrument which, I argue is more plausibly exogenous, I find that for each 100 new jobs in the tradable sector, there are 84 additional jobs created in the nontradable sector of the same city. This is 75 fewer jobs than predicted by Moretti.

JEL Codes: F16, R15, R23

Keywords: Local labor market, multiplier, tradable, nontradable

Reference: 771

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Authors: Andrew Mell

Dec 2015

Abstract:

A rational long lived player plays against a series of short lived players who use a variant of the Adaptive Play behavioral rule. In equilibrium, under certain conditions, there will be a cut-off level of reputation. If their reputation is below the cut-off, they will build their reputation, and consume out of their reputation if it is above the cut-off. Over the long run, their reputation oscillates around the cut-off. A public relations professional can manipulate the sampling of the short lived players to the benefit of the long lived player. As a result a patient long lived player's behavior will worsen while an impatient long lived player's behavior will improve.

JEL Codes: D82,D83,D84

Keywords: Reputation, Adaptive Play, Monitoring, Expectation Formation

Reference: 770

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Authors: Beata Javorcik,Peter Neary, Carsten Eckel, Leonardo Iacovone

Dec 2015

Abstract:

We review the implications of the "core competence" model of multi-product firms, including the “market-size paradox”: for most countries, the world market is much larger than the home market, while the costs of accessing foreign markets are relatively low; hence the model predicts that most domestic firms should export more of their core products than they sell domestically; yet, in practice, we do not observe this. Extending the model to allow for investment in export market penetration resolves the puzzle, and Mexican data confirm its predictions: in particular,only the largest firms exhibit the dominance of exports over home sales.

JEL Codes: F12

Keywords: Core competence model, Export market penetration costs, Flexible manufacturing, Multi-product firms.

Reference: 768

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Authors: Kevin Hjortshøj O'Rourke

Dec 2015

Abstract:

The paper looks at the development of the secular stagnation thesis, in the context of the economic history of the time. It explores some 19th century antecedents of the thesis, before turning to its interwar development. Not only Alvin Hansen, but Keynes and Hicks were involved in the conversations that led to Hansen's eventual statement of the thesis that we are familiar with. The argument made sense in the context of the interwar period, but more so in Britain than the US.

Keywords: Secular stagnation, Alvin Hansen, Keynes, Economic history, History of economic thought, Interwar

Reference: 139

Individual View

Authors: Peter Neary

Dec 2015

Abstract

This paper presents a new model of oligopoly in general equilibrium and explores its implications for positive and normative aspects of international trade. Assuming
“continuum-Pollak" preferences, the model allows for consistent aggregation over a continuum of sectors, in each of which a small number of home and foreign firms engage in
Cournot competition. I show how competitive advantage interacts with comparative advantage to determine resource allocation, and, specializing to continuum-quadratic
preferences, I explore the model's implications for the gains from trade, for the distribution of income between wages and profits, and for production and trade patterns in
a two-country world.

JEL Codes: F10, F12

Keywords: “Continuum-Pollak" preferences, Continuum-quadratic preferences, GOLE (General Oligopolistic Equilibrium),Market integration,Trade and income distribution

Reference: 769

Individual View

Authors: Alan Beggs

Nov 2015

Abstract

This paper studies learning when agents evaluate outcomes in comparison to a reference point. It shows that certain models of reinforcement learning lead to
classes of recursive preferences.

JEL Codes: D830, D870

Keywords: Reference points, Reinforcement Learning, Recursive Preferences

Reference: 767

Individual View

Authors: Peiran Jiao

Nov 2015

Abstract:

Investors in the financial markets typically have access to both descriptive information of assets, from brochures, financial analysts, reports, etc., and own experience.
However, little is known about the role of experience in investment decisions. This paper investigates this issue by experimentally testing the effects of experience in an
investment task with choice feedback and varying levels of descriptive information. We document the double-channeled effects of experience: when elicited beliefs were controlled
for, participants significantly relied on experience regardless of the descriptions, behaving consistently with the law of effect; additionally, beliefs were also distorted by experience, in that participants were more optimistic about assets from which they gained, and pessimistic about previously unowned assets. In a calibration exercise, reinforcement learning significantly added predictive power to expected utility models.

JEL Codes: C91, D03, D83, G11.

Keywords: Description, Experience, Investment Decision, Belief Distortion.

Reference: 766

Individual View

Authors: Peiran Jiao

Nov 2015

This paper applies survival analysis to individual trading data from a discount brokerage firm, and documents significant individual-level repurchase bias, investors' tendency to disproportionately repurchase more previously sold winners than losers. Investor sophistication and experience mitigated the bias, but generated asymmetric effects: the most sophisticated/experienced investors' tendency to avoid prior losers were almost completely eliminated, but they were still over twice more likely to repurchase prior winners. Limited attention, chasing past performance and risk-adjusted returns could not justify the asymmetry. This suggests one reason for loss from frequent trading was persistent naive reinforcement learning in repurchasing prior winners.

JEL Codes: D10,D14,G10

Keywords: Repurchase Bias, Reinforcement Learning, Sophistication, Experience.

Reference: 765

Individual View

Authors: , Paul Glasserman, Peyton Young

Nov 2015

JEL Codes: G01,D85

Reference: 764

Individual View

Authors: Guido Ascari, Louis Phaneuf, Eric Sims

Nov 2015

Abstract

We offer a comprehensive evaluation of the welfare and cyclical implications of moderate trend inflation. In an extended version of a medium-scale New Keynesian model, recent proposals to increase trend inflation from 2 to 4 percent would generate a consumption-equivalent welfare loss of 3.7 percent based on the non-stochastic steady state and of 6.9 percent based on the stochastic mean. Welfare costs of this magnitude are driven by four main factors: i) multiperiod nominal wage contracting, ii) trend growth in investment-specific and neutral technology, iii) roundaboutness in the U.S. production structure, and iv) and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI), insofar that this type of shock is sufficiently persistent. Moreover, moderate trend inflation has important cyclical implications. It interacts much more strongly with MEI shocks than with either productivity or monetary shocks.

JEL Codes: E31,E32

Keywords: Wage and price contracting; trend inflation; trend growth in technology; roundabout production; investment shocks; inflation costs; business cycles.

Reference: 763

Individual View

Authors: James Wolter

Oct 2015

Abstract

This paper derives asymptotics for functionals of a hazard model with an exposure-time effect and time-varying covariates. A semi-nonparametric sieve maximum likelihood estimator of a competing risks model based on the Cox proportional hazard is considered. Consistency of the estimator and its rate of convergence in the Fisher norm are derived. These results are prerequisites for asymptotic normality of plug-in estimators of hazard functionals. This provides an inference procedure for a large class of functionals including the conditional probability of events and various asset pricing formulas for defaultable securities. Asset pricing formulas in this class include the value of mortgages, insurance contracts, bonds, swaps and other options.

JEL Codes: C01, C14, C41

Keywords: Conditional probabilities, Sieve estimation, Hazard models

Reference: 760

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Authors: Alan Beggs

Oct 2015

Abstract

This paper studies the sensitivity of economic equilibria to perturbations when the implicit function theorem cannot be applied on account of the presence of boundaries. It presents results from the mathematical programming literature which provide conditions under which equilibria are robust to perturbation and are locally unique Lipschitz-continuous functions of parameters. Economic applications include search equilibrium, Cournot equilibrium and general equilibrium.

JEL Codes: C61, C62

Keywords: Sensitivity analysis, Implicit function theorem, Equilibria, Variational inequalities, Boundaries

Reference: 762

Individual View

Authors: James Wolter

Oct 2015

Abstract

We propose a hazard model where dependence between events is achieved by assuming dependence between covariates. This model allows for correlated variables specific to observations as well as macro variables which all observations share. This setup better fits many economic and financial applications where events are not independent. Nonparametric estimation of the hazard function is then studied. Kernel estimators proposed in Nielsen and Linton (1995, Annals of Statistics) and Linton, Nielsen and Van de Geer (2003, Annals
of Statistics) are shown to have similar asymptotic properties compared with the i.i.d.case. Mixing conditions ensure the asymptotic results follow. These results depend on adjustments to bandwidth conditions. Simulations are conducted which verify the impact of dependence
on estimators. Bandwidth selection accounting for dependence is shown to improve performance. In an empirical application, trade intensity in high-frequency financial data is estimated.

JEL Codes: C13, C14, C51

Keywords: Hazard estimation, Correlated events, Dependent covariates, Common covariates, Kernel estimation.

Reference: 761

Individual View

Authors: Francesco Zanetti, Masashige Hamano

Oct 2015

Abstract

This paper introduces endogenous products entry and exit based on creation and destruction of product variety in a general equilibrium model. Recessionary technology shocks induce exit of unprofitable products on impact, allocating resources towards more productive production lines. However, during the recovery phase less productive production lines survive destruction, counteracting the original increase in productivity. The analysis shows that recoveries hinge on lower product destruction rather than higher product creation. Endogenous product destruction is critical to evaluate the effect of permanent policies of entry deregulation and subsidies aimed to stimulate the economy.

JEL Codes: D24, E23, E32, L11, L60

Keywords: Firm heterogeneity, endogenous product destruction, business cycles.

Reference: 759

Individual View

Abstract

In China political control is centralised and economic management is decentralised. This gives rise to a serious principal-agent problem, in which the agents are often better informed than the principal. China also has a semi-marketised economy involving much state intervention. This intervention serves both a political and an economic function. It assists the Communist Party to remain in political command and generates formidable patronage resources. It also provides the policy instruments, including incentive structures for officialdom, to maintain a ‘developmental state’. The combination of economic decentralisation and semi-marketised economy creates a problem of weak accountability and a breeding ground for rent seeking and corruption.


For a quarter of a century China’s leadership gave overwhelming priority to the objective of achieving rapid economic growth. This policy was viewed as providing political legitimacy and securing the best protection against social instability. It is argued that the leadership was able to solve the principal-agent problem in its pursuit of economic growth.


By contrast, the solution to the principal-agent problem failed in other respects, giving rise to societal costs. Little attention was paid to the dramatic socioeconomic changes –including rising inequality and economic insecurity, environmental degradation, mass migration, rent seeking and corruption – which accompanied economic growth and posed new challenges. It is argued that these changes help to explain the failure of life satisfaction scores to rise over the two decades 1990-2010. They can also help to explain the rise in indicators of social instability over that period. It is to be hoped that the new leadership’s current anti-corruption campaign together with its declared policy intention to reduce state economic intervention and increase reliance on competitive markets will strengthen deterrence and weaken opportunities for rent seeking and corruption. The paper carries the implication that China’s economy cannot be well understood except through the lens of political economy.

JEL Codes: H10, H70, O53, P16

Keywords: Accountability, China, Developmental state, Governance, Life satisfaction, Political economy, Social instability

Reference: 758

Individual View

Authors: Mark Armstrong

Sep 2015

Abstract

I survey the use of nonlinear pricing as a method of price discrimination, both with monopoly and oligopoly supply. Topics covered include an analysis of when it is profitable to offer quantity discounts and bundle discounts, connections between second- and third-degree price discrimination, the use of market demand functions to calculate nonlinear tariffs, the impact of consumers with bounded rationality, bundling arrangements between separate sellers, and the choice of prices for upgrades and add-on products.

 

JEL Codes: D11,D21,D42,D86,L13,M31

Keywords: Price discrimination, nonlinear pricing, bundling, product-line pricing, screening, discrete choice.

Reference: 756

Individual View

Authors: Climent Quintana-Domeque, Marco Gonzalez-Navarro

Sep 2015

Abstract

We provide the first experimental estimation of the effects of the supply of publicly financed urban infrastructure on property values. Using random allocation of first-time street asphalting of residential streets located in peripheral neighbourhoods in Mexico, we show that within two years of the intervention households are able to transform their increased property wealth into significantly larger rates of vehicle ownership, household appliances, and home improvements. Increased consumption is made possible via both credit use and less saving. A cost-benefit analysis indicates that the valuation of street asphalting as capitalized into property values is about as large as construction costs.

JEL Codes: C93, H41, O12, O18

Keywords: development, infrastructure, credit use, wealth effect, randomized controlled trial

Reference: 757

Individual View

Authors: Ferdinand Rauch, Shaun Larcom, Tim Willems

Sep 2015

Abstract

We estimate that a significant fraction of commuters on the London underground do not travel their optimal route. Consequently, a tube strike (which forced many commuters to experiment with new routes) taught commuters about the existence of superior journeys -- bringing about lasting changes in behaviour. This effect is stronger for commuters who live in areas where the tube map is more distorted, thereby pointing towards the importance of informational imperfections. We argue that the information produced by the strike improved network-efficiency. Search costs are unlikely to explain the suboptimal behaviour. Instead, individuals seem to under-experiment in normal times, as a result of which constraints can be welfare-improving.

JEL Codes: D83,L91,R41

Keywords: Experimentation, Learning, Optimization, Rationality, Search

Reference: 755

Individual View

Authors: H Peyton Young, Paul Glasserman

Aug 2015

Authors: John Quah, Hiroki Nishimura, Efe A. Ok

Jul 2015

Richter's theorem and Afriat's theorem are two fundamental results underlying modern revealed preference analysis. In this paper, we provide a version of Richter's theorem that characterizes the rationalizability of a choice data set with a continuous utility function (rather than simply a complete preorder as in the original result) and extend Afriat's theorem so it becomes applicable in choice environments other than the classical setting of consumer demand. Furthermore, while standard treatments give very different proofs for these two results, we introduce a framework within which both results can be formulated and established in tandem. We also demonstrate how our generalized versions of these theorems can be used in empirical studies. In particular, we apply our results to devise tests for rationalizability in the context of choice data over lotteries, contingent consumption, intertemporal consumption, and positions in policy space. Some new results on the revealed preference theory of consumer demand (for instance, on the possibility of deriving utility functions from estimated Engel curves) are also reported.

 

JEL Codes: D11, D81.

Keywords: Revealed Preference, Rational Choice, Afriat's Theorem, Richter's Theorem, Engel Curves.

Reference: 752

Individual View

Authors: Damoun Ashournia

Jul 2015

I build and estimate a dynamic structural model of sectoral choices with heterogeneous workers accumulating human capital that is imperfectly transferable across sectors. Utility costs of switching sectors provides an additional barrier to mobility. Estimating the utility costs by Simulated Minimum Distance on administrative data covering the population of Danish workers and firms, costs are found to be in the range of 10% to 18% of average annual wages. By conducting counterfactual policy experiments, it is shown that the both the imperfect transferability of human capital and the utility costs are important for explaining the slow adjustment of the labour market following shocks to the economy.

JEL Codes: E24,F13,F16

Keywords: Globalisation, Adjustment costs, Worker heterogeneity

Reference: 751

Individual View

Authors: Arthur Downing

Jul 2015

Friendly societies were voluntary associations offering members sickness and medical insurance. By the end of the nineteenth century they were one of the most important forms of formal sickness and health insurance around the English-speaking world. A number of historians and economists have argued the competitive advantage of the friendly societies lay in their ability to monitor claims and curtail opportunism. This paper tests this claim, using a newly compiled panel dataset of societies operatingin in New Zealand in the 1870s and 1880s. The statistical material compiled by the New Zealand Registrar of friendly societies was of exceptional quality. Critically the Registrar collected information on the age structure of members in a large number of societies over a number of years. This allows us to test the impact of various behavioural and financial variables on claims rates, whilst controlling for the age of the members of a society. Regression analysis shows that branches were able to overcome moral hazard in the sense that members did not mechanistically respond to higher benefits scales by claiming more. However friendly societies faced diseconomies of scale. Larger, growing, and rural branches had higher claims rates, either because members responded a more fragile system of monitoring, or because they felt less of a sense of obligation to their society. Moreover an increase in the wealth of a society was associated with an increase in sickness claims. This suggests that members adjusted their behaviour in response to society’s ability to pay, and/or that societies sanctioned more claims when times were good. These two results indicate that members often worked through ill health but were able to claim if a society’s finances were in good health.

Keywords: Mutual aid, Moral hazard, institutions for collective action, friendly societies

Reference: Number 138

Individual View

Authors: Felix Pretis

Jun 2015

Climate policy target variables including emissions and concentrations of greenhouse gases, as well as global mean temperatures are non-stationary time series invalidating the use of standard statistical inference procedures. Econometric cointegration analysis can be used to overcome some of these inferential difficulties, however, cointegration has been criticised in climate research for lacking a physical justification for its use. Here I show that a physical two-component energy balance model of global mean climate is equivalent to a cointegrated system that can be mapped to a cointegrated vector autoregression, making it directly testable, and providing a physical justification for econometric methods in climate research. Doing so opens the door to investigating the empirical impacts of shifts from both natural and human sources, and enables a close linking of data-based macroeconomic models with climate systems. My approach finds statistical support of the model using global mean surface temperatures, 0-700m ocean heat content and radiative forcing (e.g. from greenhouse gases). The model results show that previous empirical estimates of the temperature response to the doubling of CO2 may be misleadingly low due to model mis-specification.

JEL Codes: C32,Q54

Keywords: Cointegration; VAR; Climate; Energy Balance.

Reference: 750

Individual View

Authors: Beata Javorcik, Steven Poelhekke

Jun 2015

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To establish a causal effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

JEL Codes: F21,F23

Reference: 749

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