Working Papers

Authors: Jane Humphries, Jacob Weisdorf

Sep 2016


Existing measures of historical real wages suffer from the fundamental problem that workers’ annual incomes are estimated on the basis of day wages without knowing the length of the working year. We circumvent this problem by presenting a novel wage series of male workers employed on annual contracts. We use evidence of labour market arbitrage to argue that existing real wage estimates are badly off target, because they overestimate the medieval working year but underestimate the industrial one. Our data suggests that modern economic growth began two centuries earlier than hitherto thought and was driven by an ‘Industrious Revolution’.

JEL Codes: J3, J4, J5, J6, J7, J8, N33

Keywords: England, industrial revolution, industrious revolution, labour input, living standards, wages, Malthusian model.

Reference: 147

Individual View

Authors: Mark Armstrong

Sep 2016

The paper discusses situations in which consumers search through their options

in a deliberate order, in contrast to more familiar models with random search. Topics

include: the existence of ordered search equilibria with symmetric sellers (all con-

sumers first inspect the seller they anticipate sets the lowest price, and a seller which

is inspected first by consumers will set the lowest price); the use of price and non-

price advertising to direct search; the impact of consumers starting a new search at

their previous supplier; and the incentive a seller can have to raise its own search

cost. I also show how ordered search can be reformulated as a simpler discrete choice

problem without search frictions or dynamic decision making.

JEL Codes: D21, D43, D83, L11, L15, M37

Keywords: Consumer search, sequential search, ordered search, directed search, discrete choice, oligopoly, advertising, obfuscation.

Reference: 804

Individual View

Authors: James Forder

Sep 2016

Using a range of sources, it is argued that, contrary to common belief, Milton Friedman had no special influence on British policy in the 1970s and 1980s. The opposing impression appears to be derived in part from the work of Friedman’s admirers, but principally from the allegations of Margaret Thatcher’s opponents who believed they could taint her with his name.

Keywords: Friedman,monetarism,Thatcherism

Reference: Paper 802

Individual View

Authors: James Forder

Sep 2016

It is noted that Harry G. Johnson was widely admired for his broad knowledge of economics, and particularly for the excellence and synthesizing quality of much of his writing. His discussions of the “Phillips curve” and related matters are considered. It is found that they are brief, inaccurate, and inconsistent. It is clear that, despite his reputation, they should not be treated as authoritative. It is further suggested that rather than supposing that Johnson’s knowledge and capabilities have been grossly exaggerated, it may be better to conclude that the Phillips curve was not nearly so important in the literature of the 1960s and 1970s as has been supposed.

JEL Codes: B22, B29, E61

Keywords: Phillips curve,Harry Johnson,expectations,Phillips curve,Phillips curve myth

Reference: paper 803

Individual View

Authors: Rick Van der Ploeg, Rabah Arezki, Ferderik Toscani

Sep 2016

This paper explores the effect of market orientation on (known) natural wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries. Consistent with the predictions of a two-region model, our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries. In a thought experiment whereby economies in Latin America and sub-Saharan Africa remained closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s. Our results call into question the commonly held view that resource endowment is exogenous.

JEL Codes: E00, F3, F4.

Keywords: natural resources, discoveries, market orientation, liberalization, institutions, endogenous reserves

Reference: 180

Individual View

Policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis: none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations. Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors. We show that these prescriptions need to be modified for the following reasons. First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumption forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall. Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg.

JEL Codes: E60, F34, F35, F43, H21, H63, O11, Q33

Keywords: Dutch disease, permanent income, volatility, capital scarcity, domestic investment, Dutch disease, absorption constraints, overlapping generations, nominal wage rigidity

Reference: 178

Individual View

Authors: Pierre-Louis Vezina

Aug 2016

This paper examines the examines the effect of giant oil and gas discoveries on foreign direct investment in developing economies using a new project-level dataset. We document a large increase in non-extraction FDI in the 2 years following a giant discovery, an event which is unpredictable due to the uncertain nature of exploration. We find that FDI inflows increase by 73% and that this wave is driven by a 37% increase in the number of FDI projects as well as a 22% increases in source countries and a 17% increase in target sectors. We interpret this FDI response as evidence for the news-driven business-cycle hypothesis within a developing country setting and highlight FDI bonanzas as an important development channel for resource rich economies.

JEL Codes: F21, F23, Q32, Q33

Keywords: giant discoveries, news shocks, investment.

Reference: 177

Individual View

Authors: James Malcomson, Timothy Besley

Aug 2016

In spite of a range of policy initiatives in sectors such as education, health care

and legal services, whether choice and competition is valuable remains contested

territory. This paper studies the impact of choice and competition on different dimensions

of quality, examining the role of not-for-profit providers. We explore two

main factors which determine whether an alternative provider enters the market:

cost efficiency and the preferences of an incumbent not-for-profit provider (paternalism).

The framework developed can incorporate standard concerns about

the downside of choice and competition when consumer choice is defective (an

internality) or choice imposes costs on those who do not switch (an externality).

The paper considers optimal funding levels for incumbents and entrants showing

when the “voucher” provided for consumers to move to the incumbent should be

more or less generous than the funding for consumers who remain with the incumbent.

Finally, the model also offers an insight into why initiatives are frequently

opposed by incumbent providers even if the latter have not-for-profit objectives.

Keywords: Choice, Competition, Public Service, Not-for-profit

Reference: Number 801

Individual View

Authors: Ferdinand Rauch, Jan David Bakker, Christopher Parsons

Jul 2016

Under apartheid, black South Africans were severely restricted in their choice of location and many were forced to live in homelands. Following the abolition of apartheid they were free to migrate. Given gravity, a town nearer to the homelands can be expected to receive a larger inflow of people than a more distant town following the removal of mobility restrictions. Exploting this exogenous variation, we study the effect of migration on urbanisation and the distribution of population. In particular, we test if migration inflows led to displacement, path dependence, or agglomeration in destination areas. We find evidence for path dependence in the aggregate, but substantial heterogeneity across town densities. An exogenous population shock leads to an increase of the urban relative to the rural population, which suggests that exogenous migration shocks can foster urbanisation in the medium run.

JEL Codes: R12, R23, N97, O18

Keywords: Economic geography, migration, urbanisation, natural experiment

Reference: 800

Individual View

Authors: Sudhir Anand, Paul Segal

Jul 2016

The rise of the ‘emerging economies’ is leading to historically-unprecedented shifts in the global economy. While its implications for global poverty and the rise of a global ‘middle class’ have been documented, we present the first in-depth analysis of the changing composition of the global rich and the rising representation of developing countries at the top of the global distribution. We do so by constructing global distributions of income between 1988 and 2012 based on both household surveys and the new top incomes data derived from tax records, in order to capture the rich who are typically excluded from household surveys. We find that the representation of developing countries in the global top 1% declined until about 2002, but since 2005 it has risen significantly. This coincides with a salient decline in global inequality since 2005, according to a range of measures. We compare our estimates of the country-composition and income levels of the global rich with a number of other sources – including Credit Suisse’s estimates of global wealth, the Forbes World Billionaires List, attendees of the World Economic Forum, and estimates of top executives’ salaries. To varying degrees, all show a rise in the representation of the developing world in the ranks of the global élite. 

JEL Codes: D31, D63, O57

Keywords: top incomes, global top 1 percent, global inequality, extreme wealth

Reference: 799

Authors: Dominik Karos

Jul 2016

The members of a society are faced with the decision whether or not to participate in an anti-government protest. Their utilities depend on their own decision but also on those of their neighbors in an underlying social network. They randomly observe other people's decisions, gather information on who is already active, and base their decision on their information. The model uses a Markov process (that depends on the underlying social network) to analyze who will become active over time. Two new features are essential: first, only very mild assumptions about the underlying social network are made, in particular agents can be entirely heterogeneous. Second, individuals are allowed to coordinate their decision if they mutually observe each other. The government can use political violence in order to change people's utility from being active. The probability of a revolution can thereby be reduced in the short run, but not in the long run. Under political repression protests do not increase gradually, but suddenly; and the conditional probability of a quick revolution given a protest increases if the regime turns violently against the protesters. Since large jumps in the number of activists depend on their capability to coordinate, the repression of political activism is more effective in countries where social media are not easily accessible. The findings are illustrated by data on the number of protests and revolutions world-wide depending on a country's number on the Political Terror Scale.

JEL Codes: C72, D85, O33

Keywords: Social Networks, Coordination, Strong Nash Equilibrium, Innovation Diffusion, Unanticipated Revolutions, Political Repression

Reference: 797

Individual View

Authors: Pawel Dziewulski

Jul 2016


The evidence from psychophysics suggest that people are unable to discriminate between alternatives unless the options are significantly different. Since this assumption implies non-transitive indifferences, it can not be reconciled with utility maximisation. We provide a method of eliciting consumer preference from observable choices when the agent is incapable of discerning between similar bundles. It is well-known that the issue of noticeable differences can be modelled with semiorder maximisation. We introduce a necessary and sufficient condition under which a finite dataset of consumption bundles and corresponding budget sets can be rationalised with such a relation. The result can be thought of as an extension of Afriat's (1967) theorem to semiorders, rather than utility optimisation. Our approach is constructive and allows us to infer the just-noticeable difference that is sufficient for the agent to differentiate between bundles as well as the "true" preferences of the consumer (i.e., as if perfect discrimination were possible). Furthermore, we argue that the former constitutes a natural measure of how well the preference revealed in the data could be approximated by a weak order. We conclude by applying our test to household-level scanner panel data of food expenditures.

Revised June 2017.


JEL Codes: C14, C60, C61, D11, D12

Keywords: Revealed preference, testable restrictions, semiorder, just-noticeable difference, GARP, Afriat's efficiency index, money-pump index

Reference: 798

Individual View

Authors: Robert Allen

Jul 2016

In the 1980s, Lindert and Williamson famously revised the social tables of King, Massie,

Colquhoun, Smee, and Baxter that traverse the British industrial revolution. This paper

extends their work in three directions: Servants are removed from middle and upper class

households in the tables of King, Massie, and Colquhoun and tallied separately, estimates are

made for the same tables of the number and incomes of women and children employed in the

various occupations, income estimates are broken down into rents, profits, and employment

income. These extensions to the tables allow variables to be computed that can be checked

against independent estimates as a validation exercise. The tables are retabulated in a

standard format to highlight the changing social structure of Britain during the industrial

revolution. Changes in the social structure, the evolution of incomes by classes, and the pace

of structural transformation are revealed.

Keywords: social table, industrial revolution, national income, income distribution

Reference: 146

Individual View

The tractable general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for stock-dependent fossil fuel extraction costs and partial exhaustion of fossil fuel reserves, a negative impact of global warming on growth, mean reversion in climate damages, steady labour-augmenting technical progress, specific green technical progress driven by learning by doing, population growth, and a direct effect of the stock of atmospheric carbon on instantaneous welfare. We characterize the social optimum and derive simple rule for both the optimal carbon tax and the renewable energy subsidy, and characterize the optimal amount of untapped fossil fuel.

JEL Codes: H21, Q51, Q54

Keywords: social cost of carbon, carbon tax, renewable energy subsidy, general equilibrium, Ramsey growth, capital accumulation, stranded assets, simple rules

Reference: 176

Individual View

Authors: Brian A'Hearn, Nicola Amendola,Giovanni Vecchi

Jun 2016


The paper argues that household budgets are the best starting point for investigating a number of big questions related to the evolution of the living standards during the last two-three centuries. If one knows where to look, historical family budgets are more abundant than might be suspected. And statistical techniques have been developed to handle the associated problems of small, incomplete, and unrepresentative samples. We introduce the Historical Household Budgets (HHB) Project, aimed at gathering data and sources, but also at creating an informational infrastructure that provides i) reliable storage and easy access to historical family budget data, along with ii) tools to configure the data as it is entered so as to harmonise it with present-day surveys.

JEL Codes: N30, I31, I32, C81, C83, D60, D63, O12, O15

Keywords: household budgets, household budget surveys, living standards, inequality, poverty, survey, globalization, purchasing power parities,grouped data, poststratification.

Reference: 144

Individual View

Authors: Jane Humphries, Benjamin Schneider

Jun 2016


The prevailing explanation for why the Industrial Revolution occurred first in Britain is Robert Allen’s (2009) ‘high‐wage economy’ view, which claims that the high cost of labour relative to capital and fuel incentivized innovation and the adoption of new techniques. This paper presents new empirical evidence on hand spinning before the Industrial Revolution and demonstrates that there was no such ‘high‐wage economy’ in spinning, a leading sector of industrialization. We quantify the working lives of frequently ignored female and child spinners who were crucial to the British textile industry in the Early Modern period with evidence of productivity and wages from the late sixteenth to the early nineteenth century. Our results show that spinning was a widespread, low‐wage, low‐productivity employment, in line with the Humphries (2013) view of the motivations for the factory system.

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

Keywords: Hand spinning, Womenʹs wages, Industrial Revolution, Textiles, Great Divergence, High Wage Economy interpretation of invention and innovation

Reference: 145

Authors: Ralph De Haas, Steven Peolhekke

May 2016

We estimate the impact of local mining activity on the business constraints experienced by 22,150 firms across eight resource-rich countries. We find that the presence of active mines deteriorates the business environment in the immediate vicinity (<20 km) of a firm but relaxes business constraints of more distant firms. The negative local impact of mining is concentrated among firms in tradable sectors whose access to inputs and infrastructure becomes more constrained. This deterioration of the local business environment adversely affects firm growth and is in line with a natural resource curse at the sub-national level.

JEL Codes: L16; L25; L72; O12; O13; Q30

Keywords: Mining; natural resources; business environment

Reference: 175

Individual View

Authors: Torfinn Harding, Radoslaw Stefanski

May 2016

We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices. We find that a giant discovery with the value of a country's GDP increases the real exchange rate by 14% within 10 years following the discovery. The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods. We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and Dutch disease dynamics.

Reference: 174

Individual View


This paper provides a quantitative assessment of the ‘temptation preferences' of Gul and Pesendorfer (2001) for understanding consumer life-cycle choices. I first confirm the empirical relevance of these preferences. I then show that they provide rational and straightforward explanations for many life-cycle features that appear to be inconsistent with standard preferences. These include the puzzle of ‘excess sensitivity' in consumption; the ‘retirement-consumption puzzle'; the demand for commitment devices; and the slow downsizing in housing towards the end of the life-cycle.

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

Keywords: life-cycle models, temptation preferences, housing; estimating Euler-Equations

Reference: 796

Individual View

Authors: Rabah Arezki, Amadou Sy

Apr 2016

This paper studies the appropriate financing structure of infrastructure investment in Africa. It starts with a description of recent initiatives to scale up infrastructure investment in Africa. The paper then uses insights from the literature on informed vs. arm’s length debt to discuss the structure of infrastructure financing. Considering the differences in investors’ preferences that Africa faces, the paper argues that continent’s success to fill its greenfield and hence risky infrastructure gap hinges upon a delicate balancing act between development banking and institutional long-term investment. In a first phase, development banks which have both the flexibility and expertise should help finance the riskier phases of large greenfield infrastructure projects. In a second phase, development banks should disengage and offload their mature brownfield projects to pave the way for a viable engagement of long term institutional investors such as sovereign wealth funds. In order to promote an Africa wide infrastructure bond markets where the latter could play a critical role, the enhancement of Africa’s legal and regulatory framework should however start now.

JEL Codes: H49, H54, G30, G38

Keywords: Africa, Infrastructure Finance, Development Banks, Long-term Investors

Reference: 173

Individual View

Authors: Pawel Dziewulski, John Quah

Apr 2016


Supermodular functions are widely used in economics to model complementarity. For example, a firm's production function is supermodular if the marginal productivity of each factor increases with the usage of other factors. This in turn guarantees that when the price of a factor falls, the firm's demand for all factors increase. We generalise the notion of supermodular functions so the concept is also applicable to correspondences.  Supermodular correspondences arise naturally in a variety of settings. To illustrate the use of the concept and our results, we apply them to study, amongst other things, the optimising behaviour of firms producing multiple output goods and of agents with ambiguity aversion.

JEL Codes: C61, D21, D24

Keywords: supermodular correspondence, monotone comparative statics, multi- output production, ambiguity aversion

Reference: 795

Individual View

Authors: Anthony Venables, Samuel E Wills

Apr 2016

The paper explores strategies for managing revenue from natural resources, focusing on the balance between domestic and foreign asset accumulation. It suggests that domestic asset accumulation is the priority in developing countries, while there are three motives for accumulating foreign assets; inter-generational transfer, temporary ‘parking’ of funds, and stabilisation. The paper argues that the first of these is inappropriate for low income countries. The second is required if it is difficult to absorb extra spending in the domestic economy and takes time to build up domestic investment. The third is important, and depends on the extent to which the economy has other ways of adjusting to shocks.

JEL Codes: E60, F34, F35, F43, H21, H63, O11, Q33

Keywords: resource curse, managing windfalls, fiscal rules, volatility, absorptive capacity, Dutch disease, public investment

Reference: 171

Individual View

Authors: James Reade, Genaro Sucarrat

Apr 2016


This paper provides an overview of the R-package 'gets’, which contains facilities for General-to-Specific (GETS) modelling of the mean and variance of a regression, and Indicator Saturation (IS) methods for the detection and modelling of structural breaks and outliers. The mean can be specified as an autoregressive model with covariates (an 'AR-X' model), and the variance can be specified as an autoregressive log-variance model with covariates (a 'log-ARCH-X' model). The covariates in the two specifications need not be the same, and the classical regression model is obtained as a special case when there is no dynamics, and when there are no covariates in the variance equation. The four main functions of the package are arx, getsm, getsv and isat. The first function estimates an AR-X model with log-ARCH-X errors. The second function undertakes GETS model selection of the mean specification of an arx object. The third function undertakes GETS model selection of the log-variance specification of an arx object. The fourth function undertakes GETS model selection of an indicator saturated mean specification allowing for the detection of structural breaks and outliers. Examples of how LaTeX code of the estimation output can be generated is given, and the usage of two convenience functions for export of results to EViews and STATA are illustrated.

JEL Codes: C50, C52, C87

Keywords: general-to-specific, model selection, indicator saturation, log-variance, R

Reference: 794

Individual View

Authors: Janine Aron, John Muellbauer

Apr 2016


In the absence of micro-data in the public domain, new aggregate models for the UK’s mortgage repossessions and arrears are estimated using quarterly data over 1983-2014, motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies. An innovation to improve on the flawed but widespread use of loan-to-value measures, is to estimate difficult-to-observe variations in loan quality and access to refinancing, and shifts in lenders’ forbearance policy, by common latent variables in a system of equations for arrears and repossessions. We introduce, for the first time in the literature, a theory-justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears. This is based on an average debt-equity ratio, corrected for regional deviations, and uses a functional form for the distribution of the debt-equity ratio checked on Irish micro-data from the Bank of Ireland, and Bank of England snapshots of negative equity. We systematically address serious measurement bias in the ‘months-in-arrears’ measures, neglected in previous UK studies. Highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt-service ratio, the proportion of mortgages in negative equity and the unemployment rate. Economic forecast scenarios to 2020 highlight risks faced by the UK and its mortgage lenders, illustrating the usefulness of the approach for bank stress-testing. For macroeconomics, our model traces an important part of the financial accelerator: the feedback from the housing market to bad loans and hence banks’ ability to extend credit.

JEL Codes: G21, G28, G17, R28, R21, C51, C53, E27

Keywords: foreclosures, mortgage repossessions, mortgage payment delinquencies, mortgage arrears, credit risk stress testing, latent variables model.

Reference: 793

Individual View

Authors: Lina O Anderson, Samantha De Martino, Torfinn Harding, Karlygash Kuralbayeva, Andre Lima

Apr 2016

To reduce deforestation rates in the Amazon, Brazil established in the period 2004-2010 conservation zones covering an area 1.5 times the size of Germany. In the same period, Brazil experienced a large reduction in deforestation rates. By combining satellite data on deforestation with data on the location and timing of the conservation zones, we provide spatial regression discontinuity estimates and difference-in-difference estimates indicating that the policy cannot explain the large reduction in deforestation rates. The reason is that the zones are located in areas where agricultural production is likely to be unprofitable. We also provide evidence that zones reduce deforestation if the incentives for municipalities to reduce deforestation are high. We rationalize these finding with a spatial economics model of land use, with endogenous location of conservation zones and imperfect enforcement. Our findings point to the need for other explanations than the conservation zones to explain the sharp decline in deforestation rates in the Brazilian Amazon since 2004.

JEL Codes: Q28, Q58, R11, R14

Keywords: regulation, conservation policies, deforestation, Brazil

Reference: 172

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