Working Papers

Authors: Thomas McGregor, Samuel Wills

Feb 2016

We investigate whether the geographic determinants of growth extend to natural amenities. We combine data on spatial and temporal variation in the quality of over 5000 surf breaks globally with data on local economic performance, proxied by night-time lights. We document a strong association between natural amenity quality and local economic development. Economic activity grows faster near good surf breaks; following the discovery of new breaks, or the technology needed to ride them; and during El Niño events that generate high-quality waves. The effects are concentrated in nearby towns and emerging economies, and population changes are consistent with tourism.

JEL Codes: O13, O44, O47, Q26, Q51, Q56, R11, R12

Keywords: Natural amenities, economic growth, new economic geography, natural

Reference: 170

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Authors: David Hendry

Jan 2016

Abstract:

Macroeconomic time-series data are aggregated, inaccurate, non-stationary, collinear and rarely match theoretical concepts. Macroeconomic theories are incomplete, incorrect and changeable: location shifts invalidate the law of iterated expectations and ‘rational expectations’ are then systematically biased. Empirical macro-econometric models are non-constant and mis-specified in numerous ways, so economic policy often has unexpected effects, and macroeconomic forecasts go awry. In place of using just one of the four main methods of deciding between alternative models, theory, empirical evidence, policy relevance and forecasting, we propose nesting ‘theory-driven’ and ‘datadriven’ approaches, where theory-models’ parameter estimates are unaffected by selection despite searching over rival candidate variables, longer lags, functional forms, and breaks.

JEL Codes: C51, C22

Keywords: Model Selection, Theory Retention, Location Shifts, Indicator Saturation, Autometrics.

Reference: 778

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Authors: Rabah Arezki, Thiemo Fetzer, Frank Pisch

Jan 2016

This paper provides novel empirical evidence of the effects of a plausibly exogenous change in relative factor prices on United States manufacturing production and trade. The shale gas revolution has led to (very) large and persistent differences in the price of natural gas between the United States and the rest of the world reflecting differences in endowment of difficult to trade natural gas. Guided by economic theory, empirical tests on output, factor reallocation and international trade are conducted. Results show that U.S. manufacturing exports have grown by about 10 percent on account of their energy intensity since the onset of the shale revolution. We also document that the U.S. shale revolution is operating both at the intensive and extensive margins.

JEL Codes: Q33, O13, N52, R11, L71

Keywords: manufacturing, exports, energy prices, shale gas

Reference: 167

Individual View

Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first best and second best with pre-commitment peak warming is 2.1 - 2.3 °C, under second best without commitment 3.5°C, and without any policy 5.1°C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.

JEL Codes: H21, Q51, Q54

Keywords: first best, second best, commitment, Markov-perfect, Ramsey growth, carbon tax, renewables subsidy, learning by doing, directed technical change

Reference: 168

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Authors: H Peyton Young, Lucas Merrill Brown

Jan 2016

Abstract:

We study the increasing use of stock options to compensate executives in US corporations. As with many technological innovations, the adoption curve exhibits a classic S-shaped pattern: the rate rises slowly at first, then there is a period of rapid acceleration, and finally it tails off as the saturation level is approached. Using a longitudinal data set of Frydman and Saks (2010) supplemented with financial reports compiled by the authors, we argue that the diffusion of options was initially given a jump-start by a change in the tax law, but thereafter it was propelled by a process in which firms learned from the experience of earlier adopters. The notion that options spread primarily through social conformity or ‘jumping on the bandwagon’ is not borne out by the data.

JEL Codes: O33,O35

Reference: 777

Authors: Jasper van Dijk

Jan 2016

Abstract:

This paper shows that attracting tradable jobs to a city has a bigger positive impact on employment in the non-tradable sector in the same city when the unemployment rate is higher. Therefore it is efficient to stimulate firms in the tradable sector to locate and/or expand in cities with relatively high unemployment rate. This policy would also reduce disparity between cities. Finally the jobs created in the non-tradable sector due to this local multiplier effect from the tradable sector will employ relatively more current inhabitants in cities with a high unemployment rate, thus making this policy more attractive for local policy makers as well.

A simple model illustrates the effect of a demand shock on employment in the non-tradable sector of a city. Empirically I consider the effect of demand from workers in the tradable sector on employment in the non-tradable sector in the same city using U.S. census data from 1980 to 2000. I find that 100 additional jobs in the tradable sector will increase employment in the non-tradable sector in the same city by employing 81 current residents and employing 28 workers that move to the city from other regions. I find that the size of this local employment multiplier depends on the local unemployment rate. Specifically, the multiplier for current residents increases, which drives the overall effect, but the multiplier for migrants decreases.

JEL Codes: F16, R15, R23

Keywords: Local labour market, Multiplier, Tradable, Non-tradable, Unemployment, Migration

Reference: 776

Individual View

Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilising resource endowments is a multi-stage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.

JEL Codes: Q3

Keywords: Natural resources, non-renewable, depletion, resource curse, Dutch disease, revenue management, diversification, genuine saving

Reference: 169

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Authors: Peter Neary, Dermot Leahy

Dec 2015

Abstract:

We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility
of trade affects the domestic firm's behavior is the same; trade liberalization increases trade volume monotonically; and welfare follows a U-shaped pattern. However, welfare
is usually greater under Bertrand than Cournot competition, despite the fact that for higher trade costs the volume of trade is greater under Cournot competition. In general,
there exists a “Nimzowitsch Region” in parameter space, where welfare is higher under Bertrand competition even though no actual trade takes place.

JEL Codes: F12,F13

Keywords: Cournot and Bertrand Competition, Cross-Hauling, Nimzowitsch Region,Oligopoly and Trade,Trade Liberalization

Reference: 775

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Authors: Peter Neary, Monika MrázováMathieu Parenti

Dec 2015

Abstract

We derive exact conditions relating the distributions of firm productivity, sales, output, and markups to the form of demand; in particular, for a large family (including Pareto, log-normal, and Fréchet), the distributions of productivity and output are the same if and only if demand is "CREMR" (Constant Revenue Elasticity of Marginal Revenue). Moreover, we use the Kullback-Leibler Divergence to quantify the information loss when a predicted distribution fails to match the actual one; and we find that,to explain the sales distribution, the choice between Pareto and log-normal productivity distributions matters less than the choice between CREMR and other demands.

JEL Codes: F15, F23, F12

Keywords: CREMR Demands; Heterogeneous Firms; Kullback-Leibler Divergence; Log-Normal Distribution; Pareto Distribution.

Reference: 774

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Authors: Rozana Himaz

Dec 2015

Abstract:

This paper investigates empirically whether large expenditure cuts and revenue rises that were the result of deliberate political efforts towards being austere had an impact on electoral outcomes in the UK using data from 1900 to 2015. The main electoral outcomes considered are the change in ruling party ideology and the margin of victory faced by the incumbent at the general election, in terms of seats secured. The paper finds that large cuts in spending and large rises in revenue significantly increases the chance of a government changing. However, the loss in seats were significantly higher for the incumbent compared to the winning partly only when large spending cuts were pursued rather than revenue increases during the incumbent's tenure in office. We also find that voters are sensitive to particular types of spending cuts, such as cuts in social security. These results are contrary to those in Alesina et.al (2013) using OECD data for 19 countries from 1975-2008, and several other papers in the empirical literature that found no significant correlation between fiscal adjustment and electoral looses.

 

JEL Codes: H2, H3, H5

Keywords: Fiscal austerity, electoral outcomes, United Kingdom

Reference: 773

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

Dec 2015

Abstract

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

JEL Codes: R11, Q54

Keywords: Urbanization, Flooding, Climate change, Urban recovery

Reference: 772

Individual View

Authors: Jasper van Dijk

Dec 2015

Abstract

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

JEL Codes: F16, R15, R23

Keywords: Local labor market, multiplier, tradable, nontradable

Reference: 771

Individual View

Authors: Andrew Mell

Dec 2015

Abstract:

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

JEL Codes: D82,D83,D84

Keywords: Reputation, Adaptive Play, Monitoring, Expectation Formation

Reference: 770

Individual View

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

Dec 2015

Abstract:

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

JEL Codes: F12

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

Reference: 768

Individual View

Authors: Kevin Hjortshøj O'Rourke

Dec 2015

Abstract:

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

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

Reference: 139

Individual View

Authors: Peter Neary

Dec 2015

Abstract

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

JEL Codes: F10, F12

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

Reference: 769

Individual View

Authors: Rabah Arezki, Patrick Bolton, Sanjay Peters, Frederic Samana, Joseph Stiglitz

Dec 2015

This paper investigates the emerging global landscape for public-private co-investments in infrastructure. The creation of the Asian Infrastructure Investment Bank and other so-called "infrastructure investment platforms" are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects. This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure. It concludes by identifying the main challenges policy makers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.

JEL Codes: H49, H54, G30, G38

Keywords: Infrastructure, Public Private Partnership, Long-term Investors, Savings, and Investment Policy

Reference: 166

Individual View

Authors: Alan Beggs

Nov 2015

Abstract

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

JEL Codes: D830, D870

Keywords: Reference points, Reinforcement Learning, Recursive Preferences

Reference: 767

Individual View

Authors: Peiran Jiao

Nov 2015

Abstract:

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

JEL Codes: C91, D03, D83, G11.

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

Reference: 766

Individual View

Authors: Peiran Jiao

Nov 2015

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

JEL Codes: D10,D14,G10

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

Reference: 765

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Authors: , Paul Glasserman, Peyton Young

Nov 2015

JEL Codes: G01,D85

Reference: 764

Individual View

Authors: Guido Ascari, Louis Phaneuf, Eric Sims

Nov 2015

Abstract

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

JEL Codes: E31,E32

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

Reference: 763

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Authors: Brick Smith, Samuel Wills

Oct 2015

Do oil booms reduce rural poverty and inequality? To study this we measure rural poverty by counting people that live in darkness at night: combining high-resolution global satellite data on night-time lights and population from 2000-2013.  We develop a measure that accurately identifies 74% of households as above or below the extreme poverty line when compared to over 600,000 household surveys. We find that both high oil prices and new discoveries increase illumination and GDP nationally. However, they also promote regional inequality because the increases are limited to towns and cities with no evidence that they benefit the rural poor.

JEL Codes: D31,E01,O11,O13,O47,Q32,Q33,Q43

Keywords: oil, rural poverty, poverty measurement, regional inequality, night-time lights, urbanization

Reference: 164

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Authors: Brock Smith

Oct 2015

This paper evaluates the impact of major natural resource discoveries since 1950 on GDP per capita and its proximate causes. Using panel fixed-effects estimation and resource discoveries in countries that were not previously resource-rich as a plausibly exogenous source of variation, I find a positive effect on GDP per capita levels following resource exploitation that persists in the long term. Results vary significantly between OECD and non-OECD treatment countries, with effects concentrated within the non-OECD group. I further test GDP effects with synthetic control analysis on each individual treated country, yielding results consistent with the average effects found with the fixed-effects model. Productivity, capital formation and education were also positively affected by resource discovery, while growth accounting analysis suggests productivity gains were a major distinguishing factor in GDP effects.

Keywords: Natural resource curse; economic growth; growth regressions; growth accounting; oil

Reference: 165

Individual View

Authors: James Wolter

Oct 2015

Abstract

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

JEL Codes: C01, C14, C41

Keywords: Conditional probabilities, Sieve estimation, Hazard models

Reference: 760

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