Working Papers

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

Sep 2019

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

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

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

Reference: 880

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Authors: Vanessa Berenguer Rico, Bent Nielsen, Søren Johansen

Sep 2019

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

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

Reference: 879

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Authors: Sara Horrell, Jane Humphries, Jacob Weisdorf

Aug 2019

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

JEL Codes: J22, N13, O10

Keywords: Living Standards; Prices, Wages

Reference: 172

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

Aug 2019

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

Reference: 878

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Authors: Sudhir Anand, Sanjay G. Reddy

Aug 2019

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

Reference: 877

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Authors: Wilfried Kisling, Antonio Tena Junguito

Aug 2019

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

Reference: 171

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Authors: Sarah Clifford, Panos Mavrokonstantis

Aug 2019

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

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

Reference: 876

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Authors: Ferdinand Rauch, Stephan Maurer

Aug 2019

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

JEL Codes: F1, R1, O1, N72

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

Reference: 875

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Authors: , David Ronayne

Jul 2019

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

JEL Codes: D43, L11

Keywords: price competition; price dispersion; unique equilibrium

Reference: 874

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Authors: David Ronayne, David P. Myatt

Jun 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: John Muellbauer

Jun 2019

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

Reference: 872

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Authors: Vanessa Berenguer Rico, Bent Nielsen, Søren Johansen

May 2019

A uniform weak consistency theory is presented for the marked and weighted em­pirical distribution function of residuals. New and weaker sufficient conditions for uniform consistency are derived. The theory allows for a wide variety of regressors and error distributions. We apply the theory to 1-step Huber-skip estimators. These estimators describe the widespread practice of removing outlying observations from an intial estimation of the model of interest and updating the estimation in a second step by applying least squares to the selected observations. Two results are presented. First, we give new and weaker conditions for consistency of the estimators. Second, we analyze the gauge, which is the rate of false detection of outliers, and which can be used to decide the cut-off in the rule for selecting outliers.

JEL Codes: C01, C22

Keywords: 1-step Huber skip, Asymptotic theory, Empirical processes, Gauge, Marked and Weighted Empirical processes, Non-stationarity, Robust Statistics, Sta-tionarity

Reference: 871

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Authors: C. Knick Harley

May 2019

Authors: Christa N. Brunnschweiler, Steven Poelhekke

May 2019

Does institutional change in the petroleum sector lead to more oil and gas ex-ploration and discoveries? Foreign ownership and investment in the sector has tra-ditionally been unrestricted. We document that this is no longer the case; foreign-domestic partnerships are the norm today. Tracking changes in legislation between 1867 and 2008 for a panel of countries, we show that switching to foreign ownership results in more drilling and more discoveries of petroleum than domestic ownership. Switching to partnership yields even more drilling, but yields fewer discoveries. Dis¬coveries, and the intensity and quality of exploration drilling, are endogenous to industry-specific institutional change.

JEL Codes: E02, O43, Q30

Keywords: discoveries, oil and gas, natural resources, institutions

Reference: 219

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Authors: Vanessa Berenguer Rico, Bent Nielsen, Søren Johansen

May 2019

An extended and improved theory is presented for marked and weighted empirical processes of residuals of time series regressions. The theory is motivated by 1-step Huber-skip estimators, where a set of good observations are selected using an initial estimator and an updated estimator is found by applying least squares to the selected observations. In this case, the weights and marks represent powers of the regressors and the regression errors, respectively. The inclusion of marks is a non-trivial extention to previous theory and requires refined martingale arguments.

JEL Codes: C130

Keywords: 1-step Huber-skip; Non-stationarity; Robust Statistics; Stationarity

Reference: 870

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Authors: Stephen Broadberry, Leigh Gardner

Mar 2019

Estimates of GDP per capita are provided on an annual basis for eight Sub-Saharan African economies for the period since 1885. Although the growth experienced in most of SSA since the mid-1990s has had historical precedents, there have also been episodes of negative growth or “shrinking”, so that long run progress has been limited. Despite some heterogeneity across countries, this must be seen as a disappointing performance for the region as a whole, given the possibilities of catch-up growth. Avoiding episodes of shrinking needs to be given a higher priority in understanding the transition to sustained economic growth.

Reference: 169

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This paper investigates how counterterrorism that targets terrorist leaders, and thereby undermines control within terrorist organizations, affects terrorist attacks. The pa¬per exploits a natural experiment provided by strikes by Unmanned Aerial Vehicles (drones) ‘hitting’ and ‘missing’ terrorist leaders in Pakistan. Results suggest that ter¬rorist groups increase the number of attacks they commit after a drone ‘hit’ on their leader, compared to after a ‘miss’. This increase amounts to 29 terrorist attacks (43%) worldwide per group in the six months after a drone strike. Game theory provides sev¬eral explanations for the observed effect. Additional analysis of heterogenous effects across groups, and the impact of drone hits on the timing, type and target of attacks, attacks by affiliated terrorist groups, infighting and group splintering, indicates that aggravated problems of control (principal-agent and collective action problems) explain these results better than alternative theoretical mechanisms.

JEL Codes: D74, F5, O10

Keywords: Terrorism, Targeted Leader Killing, Unmanned Aerial Vehicles

Reference: 218

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Authors: David Ronayne, Greg Taylor

Mar 2019

Abstract

We study strategic interactions in markets where firms sell to consumers both directly and via a competitive channel (CC), such as a price comparison website or marketplace, where multiple sellers’ offers are visible at once. We ask how a CC’s relative size influences market outcomes. A bigger CC means more consumers compare prices, increasing within-channel competition. However, such seemingly procompetitive developments can raise prices and reduce consumer surplus by weakening between-channel competition. We also use the model to study relevant active policy issues including price clauses, integrated ownership structures, and access to consumers’ purchase data.

Revised March 2019

JEL Codes: JEL D43, D83, L11, M3

Reference: 843

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Authors: Guido Ascari, Timo Haber

Mar 2019

This paper proposes a minimal test of two basic empirical predictions that ag-gregate data should exhibit if sticky prices were the key transmission mechanism of monetary policy, as implied by the benchmark DSGE-New Keynesian models. First, large monetary policy shocks should yield proportionally larger initial re-sponses of the price level and smaller real effects on output. Second, in a high trend inflation regime, prices should be more flexible, and thus the real effects of monetary policy shocks should be smaller and the response of the price level larger. Our analysis provides some statistically significant evidence in favor of a sticky price theory of the transmission mechanism of monetary policy shocks.

JEL Codes: E30, E52, C22

Keywords: Sticky prices, local projections, smooth transition function, time-dependent pricing, state-dependent pricing

Reference: 869

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Authors: Harold Carter

Feb 2019

Social intervention by governments in liberal democracies faces two major problems. The first is that it tends to reward the majority at the expense of the weak; there is no agreed way to trade-off the claims of different groups on a limited pool of resources, so it comes down to political muscle. The second is that support for intervention depends on a continuing flow of new resources, to fix each new problem while still preserving the interests of existing clients – and as a result, subsidies and controls multiply, despite the fact that they often pursue conflicting goals. In the early days of the British welfare state these dilemmas were resolved by shared assumptions that were fundamentally illiberal, excluding some groups altogether and enabling a clear pecking order amongst the rest. By the end of the century these narratives had largely been rejected. What happened was not a collapse in the fact of collective provision (which continued to grow) but a collapse in the narrative by which it was understood. Unable to resist popular pressure to spend more, governments were also unable to build the public confidence necessary to persuade taxpayers to pay for what they wanted. The easiest course of action was to give in to vested interests; to fund as much as possible by borrowing, on and off the balance sheet; and once the money started to run out, to give in to the most powerful groups, and to pay proportionately less attention to the less vocal.

Reference: 168

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Authors: Anja Tolonen

Feb 2019

Does industrial development change gender roles? This is the first paper to causally explore the effects of a continent-wide expansion of a modern industry on gender roles, captured by attitudes and behaviors. Identification relies on plausibly exogenous spatial-temporal variation in gold mining in Africa. The establishment of industrial-scale mines induces female empowerment—justification of domestic violence decreases by 19%, women have better access to healthcare, and are 31% more likely to work in services— alongside rapid economic growth. Findings are robust to assumptions about trends, distance, and migration and show that gender roles can change rapidly with economic development.

Revised February 2019

JEL Codes: O12; O13; J16

Keywords: Gender Roles, Female Empowerment, Local Industrial Development, Gold Mining

Reference: 209

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