Working Papers

Authors: , Paul Glasserman, Peyton Young

Nov 2015

JEL Codes: G01,D85

Reference: 764

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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

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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

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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

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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

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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: 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

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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

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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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Authors: Pawel Dziewulski

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: C14, C60,C61,D11,D12

Keywords: revealed preference, testable restrictions, rationalisation, time-preference, discounted utility, hyperbolic discounting, exponential discounting

Reference: 748

Individual View

Authors: Claudia Herresthal

Jun 2015

School choice reforms allow families to apply to non-local schools and assign additional funding to schools based on families' demand. For these reforms to promote high-quality schools, families need to infer school quality from past performance, but past performance also depends on student ability. Because reforms alter the allocation of students to schools, it is unclear whether performance becomes more or less informative about quality. I model families as trading off estimated quality against proximity, and analyze a steady-state Bayesian-Nash equilibrium. I show that performance-based rankings become more informative about quality only if oversubscribed schools can choose whom to accept.

JEL Codes: D80,I20

Keywords: rankings, performance, school quality, school choice

Reference: 747

Individual View

Authors: Julio Martinez-Galarraga; Francisco Beltrán Tapia

Jun 2015

By collecting a large dataset in mid-19th century Spain, this paper contributes to the debate on institutions and economic development by examining the historical link between land access inequality and education. This paper analyses information from the 464 districts existent in 1860 and confirms that there is a negative relationship between the fraction of farm labourers and literacy rates. This result does not disappear when a large set of potential confounding factors are included in the analysis. The use of the Reconquest as a quasi-natural experiment allows us to rule out further concerns about potential endogeneity. Likewise, by employing data on schooling enrolment rates and number of teachers, this paper explores the mechanisms behind the observed relationship in order to ascertain to which extent demand or supply factors are responsible for it. Lastly, the gender composition of the data, which enables distinguishing between female and male literacy levels, together with boys and girls schooling enrolment rates, is also examined.

Keywords: economic history, inequality, land access inequality, education inequality, Spain, Pre-Industrial Spain

Reference: Number 137

Individual View

Authors: Francesco Zanetti

May 2015

This paper investigates the effect of …financial shocks using an estimated gen-
eral equilibrium model that links the …firm's ‡flows of …financing with labor market
variables. The results show that fi…nancial shocks have sizeable effects on …financial
variables, vacancy posting, unemployment and wages. Shocks to the job destruc-
tion rate are important in describing ‡fluctuations in unemployment. The analysis
also investigates the underlying driving forces of some key comovements in the
data.

JEL Codes: E32, E44

Keywords: Business cycle, labor market frictions, financial shocks.

Reference: Number 746

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Authors: Robin Winkler

May 2015

How good was the standard of living in pre-war Nazi Germany? Some historians have argued that household food consumption in the 1930s was at least as high as in the Weimar Republic, in spite of militarisation. This article provides new evidence against this view by demonstrating that food price controls significantly distorted consumption patterns. We estimate that involuntary substitution effects cost average working-class households 7% of their disposable income. Consumer welfare in Nazi Germany was thus meaningfully lower than observed consumption levels and prices suggest. Our finding is based on microeconometric welfare analysis of detailed budget data for 4,376 individual German households surveyed in 1927 and 1937.

JEL Codes: N14, N34, D12, D52

Keywords: economic history, economic development, standard of living, consumer welfare, Germany

Reference: Number 136

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Authors: Francesco Zanetti, Konstantinos Theodoridis

Apr 2015

We enrich a baseline RBC model with search and matching frictions on the labor market and real frictions that are helpful in accounting for the response of macroeconomic aggregates to shocks.  The analysis allows shocks to have an unanticipated and a new (i.e. anticipated) component.  The Bayesian estimation of the model reveals that the model which includes news shocks on macroeconomic aggregates produces a remarkable fit of the data.  News shocks in stationary and non-stationary TFP, investment-specific productivity and preference shocks significantly affect labor market variables and explain a sizeable fraction of macroeconomic fluctuations at medium- and long-run horizons.  Historically, news shocks have played a relevant role for output, but they have had a limited influence on unemployment.

JEL Codes: E32, C32, C52

Keywords: Anticipated productivity shocks, Bayesian SVAR methods, labour market search frictions

Reference: 745

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Authors: Pablo Astorga

Apr 2015

This paper presents a new consistent yearly series of gross income (between-group) inequality Ginis for four occupational categories in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela over the period 1900-2011 using a newly assembled wage dataset.  The approach used differentiates labour by skill level and allows for changing allocation of the labour force over time.  Profits and rents are calculated as a residual.  Our regional Gini shows a changing secular process with a reclined "S" shape with an inflection point around 1940 and a peak in the 1990s.  There are mixed country trends in the early and middle decades, but in most cases inequality was on the rise in the 1960s.  There was also a tendency for narrowing wage inequality in the middle decades of the last century - at the time of the Great Levelling in the developed economies - but whose impact was more than off-set by a rising share of the top group.  Inequality in the 20th century is a story of increased polarisation - particularly post 1970 - amid significant social mobility.

JEL Codes: N36, O15, O54

Keywords: economic history, economic development, income inequality, Latin America

Reference: Number 135

Individual View

Authors: Luke Samy

Apr 2015

Data from two different primary sources were used to construct indices of house prices (HPI) and rents (RRPI) of residential property located in London and the Home Counties between 1895 and 1939.  The indices were derived using the hedonics method of price index measurement, which extracts the variation in prices due to differences in the quality of dwellings that form the sample across different time periods.  Both nominal and real HPIs and RRPIs are reported in the paper, as well as simple summary statistics on the levels of house prices and rental values, years purchase and returns on housing for a selected number of boroughs in London over time.

Keywords: housing, rents, inflation, building societies

Reference: Number 134

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Authors: Andrew Mell, Simon Radford, Seth Alexander Thevoz

Mar 2015

Trust in political institutions has declined across developed democracies.  One of the main reasons cited for this lack of trust in public opinion polls has been the role of money in politics.  The Supreme Court decisions in Citizens United and McCutcheon, amongst others, have increased the political salience of potential campaign finance reforms, and the Great Recession has reinvigorated a public debate on regulatory capture by Wall Street.  So too scholars have taken up the topic with renewed vigor.  Political scientists have tried to tackle the issue in two main steps: firstly, by showing that money can buy access to legislators; and secondly, that legislators are thereby more responsive to the wishes of donors when writing and voting on laws.  Researchers have used experiments and other techniques to show that Congressional staffs are more responsive to requests from donors compared to others, and have also shown aggregate trends in responsiveness to the preferences of the wealthier. In this paper we try and go one step further: to show that donors can become legislators.  We do this by looking at a novel example: the United Kingdom's appointed Second Chamber, the House of Lords.  Compiling an original dataset of large donations and nominations for "peerages" that allow them to take a seat in the Lords, the authors show that, when the "usual suspects" for a position, like former MPs and party workers, are accounted for, donations seem to play an outsize role in accounting for the remaining peers.  Given the widespread concern at undue influence accorded to large donors, understanding the extent of how donations influence politics and evaluating proposals for democratic renewal should be a major concern of political scienes.

JEL Codes: K42, P48

Keywords: Illegal Behaviour, IlIicit Trade

Reference: 744

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