Working Papers

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

Individual View

Authors: James Wolter

Oct 2015

Abstract

We propose a hazard model where dependence between events is achieved by assuming dependence between covariates. This model allows for correlated variables specific to observations as well as macro variables which all observations share. This setup better fits many economic and financial applications where events are not independent. Nonparametric estimation of the hazard function is then studied. Kernel estimators proposed in Nielsen and Linton (1995, Annals of Statistics) and Linton, Nielsen and Van de Geer (2003, Annals
of Statistics) are shown to have similar asymptotic properties compared with the i.i.d.case. Mixing conditions ensure the asymptotic results follow. These results depend on adjustments to bandwidth conditions. Simulations are conducted which verify the impact of dependence
on estimators. Bandwidth selection accounting for dependence is shown to improve performance. In an empirical application, trade intensity in high-frequency financial data is estimated.

JEL Codes: C13, C14, C51

Keywords: Hazard estimation, Correlated events, Dependent covariates, Common covariates, Kernel estimation.

Reference: 761

Individual View

Authors: Alan Beggs

Oct 2015

Abstract

This paper studies the sensitivity of economic equilibria to perturbations when the implicit function theorem cannot be applied on account of the presence of boundaries. It presents results from the mathematical programming literature which provide conditions under which equilibria are robust to perturbation and are locally unique Lipschitz-continuous functions of parameters. Economic applications include search equilibrium, Cournot equilibrium and general equilibrium.

JEL Codes: C61, C62

Keywords: Sensitivity analysis, Implicit function theorem, Equilibria, Variational inequalities, Boundaries

Reference: 762

Individual View

Authors: Francesco Zanetti, Masashige Hamano

Oct 2015

Abstract

This paper introduces endogenous products entry and exit based on creation and destruction of product variety in a general equilibrium model. Recessionary technology shocks induce exit of unprofitable products on impact, allocating resources towards more productive production lines. However, during the recovery phase less productive production lines survive destruction, counteracting the original increase in productivity. The analysis shows that recoveries hinge on lower product destruction rather than higher product creation. Endogenous product destruction is critical to evaluate the effect of permanent policies of entry deregulation and subsidies aimed to stimulate the economy.

JEL Codes: D24, E23, E32, L11, L60

Keywords: Firm heterogeneity, endogenous product destruction, business cycles.

Reference: 759

Individual View

Authors: Fidel Perez-Sebastian, Ohad Raveh, Yaniv Reingewertz

Sep 2015

How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across state-levels of .scal advantage, showing that tax increases can be expansionary .even without their reinvestment. States rich in natural resources have a .scal advantage in the inter-state competition over production factors which allows them to respond better to increases in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscally advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition. The model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in fiscally advantaged states, through an increase in their tax base. Using the case of the U.S., and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 1:6% in high fiscal advantage states at the end of it.

JEL Codes: H77, Q32

Keywords: Federalism, natural resources, …scal advantage, tax competition

Reference: 160

Individual View

Authors: Fernando M Aragon, Juan Pablo Rud, Gerhard Toews

Sep 2015

This paper examines the heterogenous effect of mining shocks on local employment, by gender. Using the closure of coal mines in UK starting in mid 1980s, we find evidence of substitution of male for female workers in the manufacturing sector. Mine closures increase number of male manufacturing workers but decrease, in absolute and relative terms, number of female manufacturing workers. We document a similar, though smaller, effect in the service sector. This substitution effect has been overlooked in the debate of local impacts of extractive industries, but it is likely to occur in the context of other male-dominated industries. We also nd that mine closures led to persistent reductions in population size and participation rates.

Reference: 161

Individual View

Abstract

In China political control is centralised and economic management is decentralised. This gives rise to a serious principal-agent problem, in which the agents are often better informed than the principal. China also has a semi-marketised economy involving much state intervention. This intervention serves both a political and an economic function. It assists the Communist Party to remain in political command and generates formidable patronage resources. It also provides the policy instruments, including incentive structures for officialdom, to maintain a ‘developmental state’. The combination of economic decentralisation and semi-marketised economy creates a problem of weak accountability and a breeding ground for rent seeking and corruption.


For a quarter of a century China’s leadership gave overwhelming priority to the objective of achieving rapid economic growth. This policy was viewed as providing political legitimacy and securing the best protection against social instability. It is argued that the leadership was able to solve the principal-agent problem in its pursuit of economic growth.


By contrast, the solution to the principal-agent problem failed in other respects, giving rise to societal costs. Little attention was paid to the dramatic socioeconomic changes –including rising inequality and economic insecurity, environmental degradation, mass migration, rent seeking and corruption – which accompanied economic growth and posed new challenges. It is argued that these changes help to explain the failure of life satisfaction scores to rise over the two decades 1990-2010. They can also help to explain the rise in indicators of social instability over that period. It is to be hoped that the new leadership’s current anti-corruption campaign together with its declared policy intention to reduce state economic intervention and increase reliance on competitive markets will strengthen deterrence and weaken opportunities for rent seeking and corruption. The paper carries the implication that China’s economy cannot be well understood except through the lens of political economy.

JEL Codes: H10, H70, O53, P16

Keywords: Accountability, China, Developmental state, Governance, Life satisfaction, Political economy, Social instability

Reference: 758

Individual View

Authors: Mark Armstrong

Sep 2015

Abstract

I survey the use of nonlinear pricing as a method of price discrimination, both with monopoly and oligopoly supply. Topics covered include an analysis of when it is profitable to offer quantity discounts and bundle discounts, connections between second- and third-degree price discrimination, the use of market demand functions to calculate nonlinear tariffs, the impact of consumers with bounded rationality, bundling arrangements between separate sellers, and the choice of prices for upgrades and add-on products.

 

JEL Codes: D11,D21,D42,D86,L13,M31

Keywords: Price discrimination, nonlinear pricing, bundling, product-line pricing, screening, discrete choice.

Reference: 756

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Authors: Climent Quintana-Domeque, Marco Gonzalez-Navarro

Sep 2015

Abstract

We provide the first experimental estimation of the effects of the supply of publicly financed urban infrastructure on property values. Using random allocation of first-time street asphalting of residential streets located in peripheral neighbourhoods in Mexico, we show that within two years of the intervention households are able to transform their increased property wealth into significantly larger rates of vehicle ownership, household appliances, and home improvements. Increased consumption is made possible via both credit use and less saving. A cost-benefit analysis indicates that the valuation of street asphalting as capitalized into property values is about as large as construction costs.

JEL Codes: C93, H41, O12, O18

Keywords: development, infrastructure, credit use, wealth effect, randomized controlled trial

Reference: 757

Individual View

Authors: Ferdinand Rauch, Shaun Larcom, Tim Willems

Sep 2015

Abstract

We estimate that a significant fraction of commuters on the London underground do not travel their optimal route. Consequently, a tube strike (which forced many commuters to experiment with new routes) taught commuters about the existence of superior journeys -- bringing about lasting changes in behaviour. This effect is stronger for commuters who live in areas where the tube map is more distorted, thereby pointing towards the importance of informational imperfections. We argue that the information produced by the strike improved network-efficiency. Search costs are unlikely to explain the suboptimal behaviour. Instead, individuals seem to under-experiment in normal times, as a result of which constraints can be welfare-improving.

JEL Codes: D83,L91,R41

Keywords: Experimentation, Learning, Optimization, Rationality, Search

Reference: 755

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Authors: Gry Ostenstad, Wessel N. Vermeulen

Sep 2015

We ask how a small open economy with heterogeneous firms responds to a resource windfall. A resource windfall boosts demand but also affects wages such that production costs increase. The result is a higher number of firms and renewed selection among firms: New firms at the lower end of the productivity continuum can produce for the domestic market, while only the most productive firms continue to export. While the share of firms that sell traded varieties decreases, the average productivity of exporting firms increases. The increase in the number of varieties caused by a larger number of firms and the inflow of additional imports implies that there is an increase in aggregate welfare over and above the direct windfall gain. We provide analysis in a model with two types of labor. The windfall causes a reallocation of labor types and a change in relative wages, thereby implying different welfare outcomes for each type of labor and the possibility of rising inequality.

JEL Codes: F12, Q37

Keywords: Resource windfalls, heterogeneous firms, trade, welfare

Reference: 162

Individual View

Authors: Thomas McGregor

Sep 2015

This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-rich, low-income countries to global commodity price shocks. I use a block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries. The block recursive identification strategy assumes only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation increase in commodity prices raises per capita income in developing countries by 0.26% and government spending and investment by 4.4% and 12.4%. The effects are larger for less developed countries, economies with fixed exchange rate regimes and those that are more depended on commodity exports. Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.17–0.22 percentage points. Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions. This suggests that commodity price movements alone may be less important in explaining the volatility of low-income country growth than other explanations. Taken together, these results present a more nuanced picture of the ‘resource curse’ in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for deindustrialisation does exist. The channel through whichthis link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures. To illustrate the relevance of these results, I investigate the impact of the recent oil price collapseon the Nigerian economy.

JEL Codes: O11, O13, L16, Q02, C01, C33

Keywords: Dutch disease, Natural resources, Structural transformation, Panel-VAR

Reference: 163

Individual View

Authors: Thomas McGregor

Sep 2015

This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-rich, low-income countries to global commodity price shocks. I use a block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries. The block recursive identification strategy assumes only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation increase in commodity prices raises per capita income in developing countries by 0.26% and government spending and investment by 4.4% and 12.4%. The effects are larger for less developed countries, economies with fixed exchange rate regimes and those that are more depended on commodity exports. Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.17–0.22 percentage points. Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions. This suggests that commodity price movements alone may be less important in explaining the volatility of low-income country growth than other explanations. Taken together, these results present a more nuanced picture of the ‘resource curse’ in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for deindustrialisation does exist. The channel through which this link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures. To illustrate the relevance of these results, I investigate the impact of the recent oil price collapseon the Nigerian economy.

JEL Codes: O11, O13, L16, Q02, C01, C33

Keywords: Dutch disease, Natural resources, Structural transformation, Panel-VAR

Reference: 163

Individual View

Authors: H Peyton Young, Paul Glasserman

Aug 2015

Authors: Andrea Ferrero, Martin Seneca

Jul 2015

How should monetary policy respond to a commodity price shock in a resource-rich economy? As in the baseline New Keynesian model, the central bank of a small oil-exporting economy faces a tradeo between the stabilization of domestic ination and an appropriately defined output gap. But in our framework the output gap depends on oil technology, and the weight on output gap stabilization is increasing in the importance of the oil sector. Given substantial spillovers to the rest of the economy, optimal policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation would raise interest rates to limit the inationary impact of an exchange rate depreciation.

JEL Codes: E52, E58, J11

Keywords: small open economy, oil export, monetary policy

Reference: 158

Individual View

Authors: Fidel Perez-Sebastian, Ohad Raveh

Jul 2015

Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

JEL Codes: H77, Q33

Keywords: Natural resources, decentralization, bargaining power, risk sharing, secession

Reference: 142

Individual View

Authors: John Quah, Hiroki Nishimura, Efe A. Ok

Jul 2015

Richter's theorem and Afriat's theorem are two fundamental results underlying modern revealed preference analysis. In this paper, we provide a version of Richter's theorem that characterizes the rationalizability of a choice data set with a continuous utility function (rather than simply a complete preorder as in the original result) and extend Afriat's theorem so it becomes applicable in choice environments other than the classical setting of consumer demand. Furthermore, while standard treatments give very different proofs for these two results, we introduce a framework within which both results can be formulated and established in tandem. We also demonstrate how our generalized versions of these theorems can be used in empirical studies. In particular, we apply our results to devise tests for rationalizability in the context of choice data over lotteries, contingent consumption, intertemporal consumption, and positions in policy space. Some new results on the revealed preference theory of consumer demand (for instance, on the possibility of deriving utility functions from estimated Engel curves) are also reported.

 

JEL Codes: D11, D81.

Keywords: Revealed Preference, Rational Choice, Afriat's Theorem, Richter's Theorem, Engel Curves.

Reference: 752

Individual View

Authors: Damoun Ashournia

Jul 2015

I build and estimate a dynamic structural model of sectoral choices with heterogeneous workers accumulating human capital that is imperfectly transferable across sectors. Utility costs of switching sectors provides an additional barrier to mobility. Estimating the utility costs by Simulated Minimum Distance on administrative data covering the population of Danish workers and firms, costs are found to be in the range of 10% to 18% of average annual wages. By conducting counterfactual policy experiments, it is shown that the both the imperfect transferability of human capital and the utility costs are important for explaining the slow adjustment of the labour market following shocks to the economy.

JEL Codes: E24,F13,F16

Keywords: Globalisation, Adjustment costs, Worker heterogeneity

Reference: 751

Individual View

Authors: Arthur Downing

Jul 2015

Friendly societies were voluntary associations offering members sickness and medical insurance. By the end of the nineteenth century they were one of the most important forms of formal sickness and health insurance around the English-speaking world. A number of historians and economists have argued the competitive advantage of the friendly societies lay in their ability to monitor claims and curtail opportunism. This paper tests this claim, using a newly compiled panel dataset of societies operatingin in New Zealand in the 1870s and 1880s. The statistical material compiled by the New Zealand Registrar of friendly societies was of exceptional quality. Critically the Registrar collected information on the age structure of members in a large number of societies over a number of years. This allows us to test the impact of various behavioural and financial variables on claims rates, whilst controlling for the age of the members of a society. Regression analysis shows that branches were able to overcome moral hazard in the sense that members did not mechanistically respond to higher benefits scales by claiming more. However friendly societies faced diseconomies of scale. Larger, growing, and rural branches had higher claims rates, either because members responded a more fragile system of monitoring, or because they felt less of a sense of obligation to their society. Moreover an increase in the wealth of a society was associated with an increase in sickness claims. This suggests that members adjusted their behaviour in response to society’s ability to pay, and/or that societies sanctioned more claims when times were good. These two results indicate that members often worked through ill health but were able to claim if a society’s finances were in good health.

Keywords: Mutual aid, Moral hazard, institutions for collective action, friendly societies

Reference: 138

Individual View

Authors: Felix Pretis

Jun 2015

Climate policy target variables including emissions and concentrations of greenhouse gases, as well as global mean temperatures are non-stationary time series invalidating the use of standard statistical inference procedures. Econometric cointegration analysis can be used to overcome some of these inferential difficulties, however, cointegration has been criticised in climate research for lacking a physical justification for its use. Here I show that a physical two-component energy balance model of global mean climate is equivalent to a cointegrated system that can be mapped to a cointegrated vector autoregression, making it directly testable, and providing a physical justification for econometric methods in climate research. Doing so opens the door to investigating the empirical impacts of shifts from both natural and human sources, and enables a close linking of data-based macroeconomic models with climate systems. My approach finds statistical support of the model using global mean surface temperatures, 0-700m ocean heat content and radiative forcing (e.g. from greenhouse gases). The model results show that previous empirical estimates of the temperature response to the doubling of CO2 may be misleadingly low due to model mis-specification.

JEL Codes: C32,Q54

Keywords: Cointegration; VAR; Climate; Energy Balance.

Reference: 750

Individual View

Authors: Beata Javorcik, Steven Poelhekke

Jun 2015

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To establish a causal effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

JEL Codes: F21,F23

Reference: 749

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Authors: Pawel Dziewulski

Jun 2015

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To establish a causal effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent. 

 

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

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

Reference: 748

Individual View

Authors: Claudia Herresthal

Jun 2015

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

JEL Codes: D80,I20

Keywords: rankings, performance, school quality, school choice

Reference: 747

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