Working Papers

Authors: Ferdinand Rauch, Matthias Beestermoller

Aug 2014

We show that the countries of the former Austro-Hungarian monarchy trade significantly more with one another in the aftermath of the collapse of the Iron Curtain than predicted by a standard gravity model.  This trade surplus declines linearly and monotonically over time.  We argue that these findings suggest that decaying cultural forces explain a significant part of trading capital.  We document the rate of decay of these cultural forces.

JEL Codes: F14, F15, N33, N34, N94

Keywords: Trade, Gravity, Culture, Borders, Habsburg Empire, Persistence

Reference: 718

Individual View

Authors: Ferdinand Rauch

Jul 2014

Gravity equations in trade imply that trade flows are proportional to the size of a country and inversely proportional to distance.  This paper develops an analogy of these observations with gravity in physics, and provides geometric intuition for a large class of mathematical processes in two dimensional space for which these relationships would be expected.  It then gives examples of trade processes that conform to gravity, including foraging patterns of various animal species.

JEL Codes: F00

Keywords: Foraging, Gravity, International Trade

Reference: 716

Individual View

Authors: Mark Armstrong

Jul 2014

This paper surveys models of markets in which some consumers are "savvy" while others are not.  We discuss when the presence of savvy consumers improves the deals available to non-savvy consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for savvy consumers (ripoff externalities).  We also discuss when the two groups of consumers have aligned or divergent views about market interventions.  The analysis covers two overlapping families of models: those which examine markets with price/quality dispersion, and those which exhibit forms of consumer hold-up.

JEL Codes: D03, D18, D43, D83

Keywords: Consumer protection, consumer search, price dispersion, hold-up, add-on pricing

Reference: 715

Individual View

Authors: Kevin Hjortshøj O'Rourke, Roberto Bonfatti

Jul 2014

Existing theories of pre-emptive war typically predict that the leading country may choose to launch a war on a follower who is catching up, since the follower cannot credibly commit to not use their increased power in the future.  But it was Japan who launched a war against the West in 1941, not the West that pre-emptively attacked Japan.  Similarly, many have argued that trade makes war less likely, yet World War I erupted at a time of unprecedented globalization.  This paper develops a theoretical model of the relationship between trade and war which can help to explain both these observations.  Dependence on strategic imports can lead follower nations to launch pre-emptive wars when they are potentially subject to blockade.

Reference: Number 132

Individual View

Authors: Clare Leaver, Paul Segal

Jul 2014

This paper investigates recent advances in our understanding of the global distribution of income, and produces the first estimates of global inequality that take into account data on the incomes of the top one percent within countries.  We discuss conceptual and methodological issues - including alternative definitions of the global distribution, the use of household surveys and national accounts data, the use of purchasing power parity exchange rates, and the incorporation of recently available data on top incomes from income tax records.  We also review recent attempts to estimate the global distribution of income.  Our own estimates combine household survey data with top income data, and we analyze various aspects of this disribution, including its within- and between-country components, and changes in relative versus absolute global inequality.  Finally, we examine global poverty, which is identified through the lower end of the global distribution.

This paper appears in (Eds.) A. B. Atkinson and F. Bourguignon, Handbook of Income Distribution, Volume 2A, Elsevier, Amsterdam, 2015.

JEL Codes: D63, E01, I32

Keywords: global inequality, purchasing power parity exchange rates, household surveys, national accounts, top incomes, global poverty

Reference: 714

Individual View

Authors: Martina Kirchberger

Jul 2014

Children are increasingly treated as active members in the household.  However, their preferences over consumption and leisure are rarely modelled.  This paper considers heterogeneity in siblings' preferences over leisure and consumption and builds a theoretical and empirical model for children's time and consumption allocations in a household.  We test the predictions of the model with unique data from Ethiopia, India, Peru and Vietnam which contain detailed information on time use and allocations of assignable goods for sibling pairs.  We find that conditioning on observable variables, the residuals of these simultaneous decisions are significantly negatively correlated.  This suggests that differences in siblings' relative time and consumption allocations are driven by their relative preferences over leisure and consumption rather than differences in parents' relative altruism.  Families seem to function as market economies in which children trade off leisure and consumption, select their optimal bundle, and are rewarded by their parents accordingly.

JEL Codes: D1, J1, J2

Keywords: Intra-household allocation, children

Reference: 713

Individual View

Authors: Eric B. Schneider

Jun 2014

Abstract

This paper is the first to use the individual level, longitudinal catch-up growth of boys and girls in a historical population to measure their relative deprivation. The data is drawn from two government schools, the Marcella Street Home (MSH) in Boston, MA (1889-1898) and the Ashford School of the West London School District (1908- 1917). The paper provides an extensive discussion of the two schools including the characteristics of the children, their representativeness, selection bias and the conditions in each school. It also provides a methodological introduction to measuring children’s longitudinal catch-up growth. After analysing the catch-up growth of boys and girls in the schools, it finds that there were no substantial differences between the catch-up growth by gender. Thus, these data suggest that there were not major health disparities between boys and girls in late nineteenth century America and early twentieth century Britain.

Keywords: Children

Reference: Number: 131

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Authors: David Gill,Victoria Prowse

Jun 2014

In this paper we investigate how cognitive ability and character skills influence behavior, success and the evolution of play towards Nash equilibrium in repeated strategic interactions.  We study behavior in a p-beauty contest experiment and find striking differences according to cognitive ability: more cognitively able subjects choose numbers closer to equilibrium, converge more frequently to equilibrium play and earn more even as behavior approaches the equilibrium prediction.  To understand better how subjects with different cognitive abilities learn differently, we estimate a structural model of learning based on level-k reasoning.  We find a systematic positive relationship between cognitive ability and levels; furthermore, the average level of more cognitively able subjects responds positively to the cognitive ability of their opponents, while the average level of less cognitively able subjects does not respond.  Finally, we compare the influence of cognitive ability to that of character skills, and find that both cognition and personality affect behavior and learning.  More agreeable and emotionally stable subjects perform better and learn faster, although the effect of cognitive ability on behavior is stronger than that of character skills.

JEL Codes: C92, C73, D83

Keywords: Cognitive ability, character skills, personality traits, level-k, bounded rationality, learning, convergence, non-equilbrium behavior, beauty contest, repeated games, structural modeling, theory of mind, intelligence, IQ, cognition, Raven test

Reference: 712

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Authors: Sujoy Mukerji, Peter Klibanoff, Kyoungwon Seo

Jun 2014

We axiomatize preferences that can be represented by a monotonic aggregation of subjective expected utilities generated by a utility function and some set of i.i.d. probability measures over a product state space, S1. For such preferences, we define relevant measures, show that they are treated as if they were the only marginals possibly governing the state space and connect them with the measures appearing in the aforementioned representation. These results allow us to interpret relevant measures as reflecting part of perceived ambiguity, meaning subjective uncertainty about probabilities over states. Under mild conditions, we show that increases or decreases in ambiguity aversion cannot affect the relevant measures. This property, necessary for the conclusion that these measures reflect only perceived ambiguity, distinguishes the set of relevant measures from the leading alternative in the literature. We apply our findings to a number of well-known models of ambiguity-sensitive preferences. For each model, we identify the set of relevant measures and the implications of comparative ambiguity aversion.

JEL Codes: D01, D80, D81, D83

Keywords: Symmetry, beliefs, ambiguity, ambiguity aversion, sets of probabilities

Reference: 711

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Authors: Kevin Sheppard, Wen Xu

May 2014

 We propose a new class of multivariate volatility models utilizing realized measures of asset volatility and covolatility extracted from high-frequency data. Dimension reduction for estimation of large covariance matrices is achieved by imposing a factor structure with time-varying conditional factor loadings. Statistical properties of the model, including conditions that ensure covariance stationary or returns, are established. The model is applied to modeling the conditional covariance data of large U.S. financial institutions during the financial crisis, where empirical results show that the new model has both superior in- and out-of-sample properties. We show that the superior performance applies to a wide range of quantities of interest, including volatilities, covolatilities, betas and scenario-based risk measures, where the model's performance is particularly strong at short forecast horizons.

 

JEL Codes: C32, C53, C58, G17, G21

Keywords: Conditional Beta, Conditional Covariance, Forecasting, HEAVY, Marginal Expected Shortfall, Realized Covariance, Realized Kernel, Systematic Risk

Reference: 710

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Authors: Eric B. Schneider

May 2014

This paper presents a new adaptive framework for understanding children's growth in the past.  Drawing upon the recent work of Gluckman and Hanson (2006) and their co-authors on adaptive responses in relation to growth, I present three prenatal and three postnatal adaptive mechanisms that affect the growth patterns of children.  The most novel adaptive response to the historical literature is the prenatal predictive adaptive response where the foetus develops assuming that the postnatal environment will closely match prenatal conditions.  Thus, the metalbolism and growth trajectory of a child is programmed during the prenatal period: children experiencing good conditions in utero would have a higher metabolism and growth trajectory than their counterparts facing poor conditions.  Having discussed the framework and other responses in detail, I then use it to reinterpret the growth pattern of American slaves (Steckel, 1979, 1986).  I argue that the mismatch between relatively good conditions in utero and absolutely appalling conditions in infancy and early childhood led slave children to become incredibly stunted by age three or four.  However, after this age, slave children experienced rapid catch-up growth, first because their immune systems had become more developed and had adapted to the poor disease environment and later because their diet improved tremendously and hookworm exposure was reduced when they entered the labour force around age ten.  Thus, American slave children were able to experience rapid catch-up growth because they were prenatally programmed for a higher metabolism and growth trajectory.  The paper concludes by setting out some stylized facts about children's growth in the past and pointing toward areas of future research.

Reference: Number 130

Individual View

Authors: Maria Porter, Abigail Adams

May 2014

This paper examines the motivation for intergenerational transfers between adult children and their parents, and the nature of preferences for such giving behaviour, in an experimental setting.  Participants in our experiment play a series of dictator games with parents and strangers, in which we vary endowments and prices for giving to each recipient.  We find that preferences for giving are typically rational.  When parents are recipients as opposed to strangers, participants display greater sensitivity to the price of giving, and a higher relative proclivity for giving.  Our findings also provide evidence of reciprocal motivations for giving, as players give more to parents who have full information regarding the context in which giving occurs.

JEL Codes: C91, D12, D64

Keywords: transfer motives, intergenerational, dictator games, lab experiments, altruism, reciprocity

Reference: 709

Individual View

Authors: John Quah

May 2014

We identify necessary and sufficient conditions under which a finite data set of price vectors and consumption bundles can be rationalized by a weakly separable utility function.  Our result could be understood as a generalization of Afriat's Theorem.

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

Keywords: Afriat's Theorem, utility function, revealed preference, generalized axiom

Reference: 708

Individual View

Authors: Mark Armstrong

May 2014

Traditionally, the scholarly journal market operates so that research institutions are charged high prices and the wider public is often excluded altogether, while authors can usually publish for free and commercial publishers enjoy high profits.  Two forms of open access regulation can mitigate these problems: (i) direct price regulation of the form whereby a journal must charge a price of zero to all readers, or (ii) mandating authors or publishers to make freely available an inferior substitute to the publishing paper.  The former policy is likely to result in authors paying to publish, which may lead to a reduction in the quantity of published papers and may make authors less willing to publish in selective journals.  Recent UK policy towards open access is discussed.

JEL Codes: D83, I23, L17, L51, L86

Keywords: publishing, journals, open access, two-sided markets, regulation

Reference: 707

Individual View

Authors: Ying-Ying Lee

May 2014

Partial mean processes with generated regressors arise in several important econometric problems, such as the distribution of potential outcomes with continuous treatments and the quantile structural function in a nonseparable triangular model.  This paper proposes a fully nonparametric estimator for the partial mean process, where the second step consists of a kernel regression on regressors that are estimated in the first step.  The main contribution is a uniform expansion that characterizes in detail how the estimation error associated with the generated regressor affects the limiting distribution of the marginal integration estimator.  The general results are illustrated with three examples: control variables in triangular models (Newey, Powell, and Vella, 1999; Imbens and Newey, 2009), the generalized propensity score for a continuus treatment (Hirano and Imbens, 2004), and the propensity score for sample selection (Das, Newey, and Vella, 2003).

JEL Codes: C13, C14, C31

Keywords: Continuous treatment, partial means, nonseparable models, generated regressors, control function

Reference: 706

Individual View

Authors: Pierre-Louis Vezina, Christopher Parsons

May 2014

We provide cogent evidence for the causal pro-trade effect of migrants and in doing so establish an important link between migrant networks and long-run economic development.  To this end, we exploit a unique event in human history, the exodus of the Vietnamese Boat People to the US.  This episode represents an ideal natural experiment as the large immigration shock, the first wave of which comprised refugees exogenously allocated across the US, occurred over a twenty-year period during which time the US imposed a complete trade embargo on Vietnam.  Following the lifting of trade restrictions in 1994, the share of US exports going to Vietnam was higher and more diversified in those US States with larger Vietnamese populations, themselves the result of larger refugee inflows 20 years earlier.

JEL Codes: F14, F22

Keywords: Migrant Networks, US Exports, Natural Experiment

Reference: 705

Individual View

Authors: Simon Wren-Lewis, Jonathan Portes

May 2014

Theory suggests that government should as far as possible smooth taxes and its recurrent consumption spending, which means that government debts should act as a shock absorber, and any planned adjustments in debt should be gradual.  This suggests that operational targets for governments (e.g. for 5 years ahead should involve deficits rather than debt, because such rules will be more robust to shocks.  Beyond that, fiscal rules need to reflect the constraints on  monetary policy, and the extent to which governments are subject to deficit bias.  Fiscal rules for countries in a monetary union or fixed exchange rate regime need to include a strong countercyclical element.  Fiscal rule should also contain a 'knock out' if interest rates hit the zero lower bound: in that case the fiscal and monetary authorities should cooperate to formulate a fiscal expansion package that allows interest rates to rise above this bound.  In more normal times, the design of fiscal policy rules is likely to depend on the extent to which governments are subject to deficit bias, and the effectiveness of any national fiscal council.  For example, governments that had not shown a history of deficit bias could aim to target deficits five years ahead (rolling targets), and these would not require cyclical adjustment.  In contrast, governments that were more prone to bias could target a cyclically adjusted deficit at the end of their expected period of office.  In both cases fiscal councils would have an important role to play, in ensuring plans were implemented in the first case and allowing for departures from target when exernal shocks occurrred in the second.

JEL Codes: E62

Keywords: fiscal policy, fiscal rules, fiscal councils

Reference: 704

Individual View

Authors: Vellore Arthi

Apr 2014

 I use variation in childhood exposure to the Dust Bowl, an environmental shock to health and income, as a natural experiment to explain variation in adult human capital.  I find that the Dust Bowl produced significant adverse impacts in later life, especially when exposure was in utero, increasing rates of poverty and disability, and decreasing rates of fertility and college completion.  Dependence on agriculture exacerbates these effects, suggesting that the Dust Bowl was most damaging via the destruction of farming livelihoods.  This collapse of farm incomes, however, had the positive effect of reducing demand for child farm labor and thus decreasing the opportunity costs of secondary schooling, as evidence by increases in high school completion amongst the exposed.

Keywords: Dust Bowl, environmental shock, human capital formation, early life health

Reference: Number 129

Individual View

Authors: Damoun Ashournia, Jakob MunchDaniel Nguyen

Apr 2014

The impact of imports from low-wage countries on domestic labor market outcomes has been a hotly debated issue for decades.  The recent surge in imports from China has reignited this debate.  Since the 1980s several developed economies have experienced contemporaneous increases in the volume of imports and in the wage gap between high- and low-skilled workers.  However, the literature has not been able to document a strong causal relationship between imports and the wage gap.  Instead, past studies have attributed the widening wage gap to skill biased technological change.  This paper finds evidence for the direct impact of low wage imports on the wage gap.  Using detailed Danish panel data for firms and workers, it measures the effects of Chinese import penetration at the firm level on wages within job-spells and over the longer term taking transitions in the labor market into account.  We find that greater exposure to Chinese imports corresponds to a negative firm-level demand shock, which is biased towards low-skill intensive products.  Consistent with this an increase in Chinese import penetration results in lower wages for low skilled employees.

JEL Codes: F16

Keywords: Chinese import penetration, wage inequality, firm heterogeneity

Reference: 703

Individual View

Authors: Francesco Zanetti

Apr 2014

This paper estimates a New Keynesian model to investigate to what extent labour market reforms undertaken by the Thatcher government in the late 1930s and the introduction of a constant inflation target in 1992 might have changed the UK economic outlook if they had been introduced in the early 1970s.  The results suggest that a stronger reaction to deviations of inflation from target have contributed to a more stable economic outlook, while labour market reforms and the introduction of a constant inflation target are unlikely to have produced a different outcome.

JEL Codes: E24, E32, E52, J64

Keywords: Labour market reforms, Search and matching, New Keynesian model

Reference: 702

Individual View

Authors: Tim Willems, Shaun Larcom, Mare Sarr

Apr 2014

History offers many examples of dictators who worsened their behavior significantly over time (like Zimbabwe's Robert Mugabe), while there are also cases of dictators who have displayed remarkable improvements (like Jerry Rawlings of Ghana).  We show that such mutations can result from rational behavior when the dictator's flow use of repression is complementary to his accumulated stock of wrongdoings.  This complementarity gives rise to two steady states (one where repression is low and one where repression is high) and implies that any individual rising to power in this setup has the potential to end up as either a moderate leader, or as a dreaded tyrant.  Our model shows that dictators are more likely to derail with higher levels of divertible funds available, for example stemming from fungible aid inflows or from the exploitation of natural resources.

JEL Codes: D72, D74, N47, O10

Keywords: Dictatorship, Repression, Political violence, Resource curse, Learning, Multiple steady states

Reference: 701

Individual View

Authors: Gregg Huff, Gillian Huff

Apr 2014

This working paper analyzes demographic change in Southeast Asia's main cities during and soon after the World War II Japanese occupation.  We argue that two main patterns of population movements are evident.  In food-deficient areas, a search for food security typically led to large net inflows to main urban centres.  By contrast, an urban exodus dominated in food surplus regions because the chief risk was to personal safety, especially from Japanese and Allied bombing.  Black markets were ubiquitous, and essential to sustaining livelihoods in cities with food-deficit hinterlands.  In Rangoon and Manila, wartime population fluctuations were enormous.  Famines in Java and northern Indochina severely impacted Jakarta and Hanoi through inflows of people from rural areas.  In most countries, the war's aftermath of refugees, revolution and political disruption generated major rural-urban population relocations.  Turmoil in the 1940s had the permanent consequences of augmenting the primacy of Southeast Asia's main cities and promoting squatter settlement.

JEL Codes: N15, N90, N95, R11

Keywords: urbanization, Southeast Asia, famine, World War II, entitlements, Japan

Reference: Number 128

Individual View

Authors: Kevin Hjortshøj O'Rourke, Gregory ClarkAlan M. Taylor

Mar 2014

Many previous studies of the role of trade during the British Industrial Revolution have found little or no role for trade in explaining British living standards or growth rates.  We construct a three-region model of the world in which Britain trades with North America and the rest of the world, and calibrate the model to data from the 1760s and 1850s.  We find that while trade had only a small impact on British welfare in the 1760s, it had a very large impact in the 1850s.  This contrast is robust to a large range of parameter perturbations.  Biased technological change and population growth were key in explaining Britain's growing dependent on trade during the Industrial Revolution.

JEL Codes: F11, F14, F43, N10, N70, O40

Keywords: British Industrial Revolution, Great Divergence, trade, colonies, growth, specialization

Reference: Number 126

Individual View

Authors: Jane Humphries, Jacob Weisdorf

Mar 2014

This paper presents a wage series for unskilled English women workers from 1260 to 1850 and compares it with existing evidence for men.  Our series cast light on long run trends in women's agency and wellbeing, revealing an intractable, indeed widening gap between women and men's remuneration in the centuries following the Black Death.  This informs several debates: first whether or not "the golden age of the English peasantry" included women; and second whether or not industrialization provided women with greater opportunities.  Our contributions to both debates have implications for analyses of growth and trends in wellbeing.  If the rise in wages that followed the Black Death enticed female servants to delay marriage, it contributed to the formation of the European Marriage Pattern, a demographic regime which positioned England on a path to modern economic growth.  If the industrial revolution provided women with improved economic options, their gains should be included in any overall assessment of trends in the standard of living distorts the overall evaluation of the gains from industrialization.

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

Keywords: Black Death, England, gender wage gap, industrial revolution, gender segregation, wages, women

Reference: Number 127

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Authors: Bary S.R. Pradelski

Mar 2014

We study decentralized learning dynamics for the classic assignment game with transferable utility.  At random points in time firms and workers match, break up, and re-match in the sesarch for better opportunities.  We propose a simple learning process in which players have no knowledge about other players' payoffs or actions and they update their behavior in a myopic fashion.  Behavior fluctuates according to a random variable that reflects current market conditions: sometimes the firms exhibit greater price stickiness than the workers, and at other times the reverse holds.  We show that this stochastic learning process converges in polynomial time to the core.  While convergence to the core is known for some types of decentralized dynamics this paper is the first to prove fast convergence, a crucial feature from a practical standpoint.  The proof relies on novel results for random walks on graphs, and more generally suggests a fruitful connection between the theory of random walks and matching theory.

JEL Codes: C71, C73, C78, D83

Keywords: assignment games, core, evolutionary game theory, matching markets, convergence time, random walks

Reference: 700

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