Working Papers

Authors: Kevin Roberts

Oct 2013

This paper investigates the behaviour of bodies or organizations, operating in a stochastic environment, where there is a delegated decision maker.  A crucial decision is when to delegate to another decision maker.  The problem may be intrapersonal, as occurs when there are endogenously changing tastes, or interpersonal where delegation is intuitionally necessay or where decison making is 'as if' there is delegation.  This is possible if decision making is through voting - an existence theorem is given.  Decisions lead to shifts in control involving option losses; forward-looking recognition of this leads to the endogenous creation of hysteresis.  The fact that the behaviour of other agents leads to hysteresis makes it optimal for any single agent to introduce more hysteresis.  Organisations or bodies with many possible decision makers operate, in subsets of the state space, in one of two regimes, one where hysteresis is small and the other where hysteresis is large.

JEL Codes: D1, D2, D7

Keywords: Dynamic Voting, collective decisions, delegation, endogenous preferences, hysteresis

Reference: 678

Individual View

Authors: Liang Chen, Juan Dolado, Jesus Gonzalo

Oct 2013

Time invariance of factor loadings is a standard assumption in the analysis of large factor models.  Yet, this assumption may be restrictive unless parameter shifts are mild (i.e., local to zero).  In this paper we develop a new testing procedure to detect big breaks in these loadings at either known or unknown dates.  It relies upon testing for parameter breaks in a regression of one of the factors estimated by Principal Components analysis on the remaining estimated factors, where the number of factors is chosen according to Bai and Ng's (2002) information criteria.  The test fares well in terms of power relative to other recently proposed tests on this issue, and can be easily implemented to avoid forecasting failures in standard factor-augmented (FAR, FAVAR) models where the number of factors is a priori imposed on the basis of theoretical considerations.

JEL Codes: C12, C33

Keywords: Structural break, large factor model, factor loadings, principal components

Reference: 677

Individual View

Authors: Climent Quintana-Domeque, Francesco Turino

Oct 2013

Do relative concerns on visible consumption give rise to economic distortions?  We re-examine the question posited by Arrow and Dasgupta (2009) building upon their theoretical framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods.  Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium marginal rate of substitution between the visible and non-visible goods will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does.  If one is willing to invoke separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one, consistent with expenditure patterns both in developed and developing countries.

JEL Codes: D6, E2

Keywords: visible goods, non-visible goods, conspicuous consumption, inconspicuous consumption, conspicuous leisure, inconspicuous leisure, labor supply, market distortions

Reference: 676

Individual View

Authors: Kevin Hjortshøj O'Rourke, Richard S. Grossman, Madalina A. Ursu, Ronan Lyons

Oct 2013

Information on the performance of equities during the latter part of the globalized long nineteenth century is scarce, particularly for smaller European economies such as Ireland.  Using a dataset of over 35,000 price-year observations from the Investor's Monthly Manual, this paper constructs new monthly Irish stock market price indices for the period 1864-1930, encompassing periods of significant economic and political turmoil in Irish history.  In addition to a total market index covering all 118 equity securities issued by 94 companies, sector-specific indices are presented for railways, financial services companies, and miscellaneous industrial and retail companies.  Weighted by market capitalization, nominal equity prices were largely static in the 1860s, before increasing by almost 60% in nominal terms between 1870 and 1878.  Between 1878 and 1879, equity prices fell by one sixth in the space of a year, after which there was a secular rise in equity prices for two decades, with equity prices in 1899 twice what they had been in 1864.  Between the turn of the century and the outbreak of the Great War, though, prices fell by 25%, a pattern that stands in stark contrast to returns on the London exchange, which were greater during 1894-1913 than during the preceding two decades.  The period from 1914 until 1929 saw a number of boom-bust cycles, concurrent with war and other political events affecting Ireland, including its independence movement.  Railway equities, which had trebled between the mid-1860s and the turn of the century, fell sharply during the 1910s and 1920s.  In contrast, financial equity prices - which were just 20% higher in 1920 than in 1864 - rose strongly during the 1920s.  Overall, the average annual gain in equity prices over the period was just 0.9%, well below levels associated with an equity premium puzzle.

JEL Codes: E3, G12, N23, N24

Keywords: Irish stock exchange, Investor's Monthly Manual, long-run stock returns, 19th Century, 20th Century, Ireland

Reference: 120

Individual View

Authors: Renaud Foucart, Jana Friedrichsen

Oct 2013

We study two platforms competing for members by investing in network quality.  Quality is complementary to the network size: the marginal utility generated by an additional member increases with the network's quality.  Platforms are imperfect substitutes: a share of the potential members are biased toward each of the platforms and some are indifferent ex ante.  We assume that, in case of multiple equilibria, consumers use the investment in quality as a coordination device.  We find that, in equilibrium, platforms randomize over two disconnected intervals of investment levels, corresponding to competing for either the entire population or the mass of ex-ante different members.  While the "prize" of winning the competition for members is identical for both platforms, the value of the outside option "not investing" depends on a platform's share of ex-ante biased members.  The platform with the smallest share of ex-ante biased members bids more aggressively to compensate for its lower outside option and achieves a monopoly network with higher probability than its competitor.

JEL Codes: D43, D44, M13

Keywords: Internet, Platforms, Investment, Network Effects

Reference: 675

Individual View

Authors: Jennifer Castle,David Hendry, Oleg Kitov

Sep 2013

We consider the reasons for nowcasting, how nowcasts can be achieved, and the use and timing of information.  The existence of contemporaneous data such as surveys is a major difference from forecasting, but many of the recent lessons about forecasting remain relevant.  Given the extensive disaggregation over variables underlying flash estimates of aggregates, we show that automatic model selection can play a valuable role, especially when location shifts would otherwise induce nowcast failure.  Thus, we address nowcasting when location shifts occur, probably with measurement error.  We describe impulse-indicator saturation as a potential solution to such shifts, noting its relation to intercept corrections and to robust methods to avoid systematic nowcast failure.  We propose a nowcasting strategy, building models of all disaggregate series by automatic methods, forecasting all variables before the end of each period, testing for shifts as available measures arrive, and adjusting forecasts of cognate missing series if substantive discrepancies are found.  An alternative is switching to robust forecasts when breaks are detected.  We apply a variant of this strategy to nowcast UK GDP growth, seeking pseudo real-time data availability.

JEL Codes: C52, C51

Keywords: Nowcasting, Location shifts, Forecasting, Contemporaneous information, Autometrics, Impulse-indicator saturation

Reference: 674

Individual View

Authors: Daniel Gutknecht

Sep 2013

This paper develops a test for monotonicity of nonparametric regression models under endogeneity, which in its generality is novel in the literature.  The test statistic, which is built upon a second order U-process, introduces 'correction terms' based on control functions that purge the endogeneity.  The test has a non-standard asymptotic distribution from which asymptotic critical values can directly be derived.  Furthermore, the test statistic is extended to accommodate multivariate (exogenous) regressors.  Consistency against general alternatives is proved and the test's finite sample properties are examined in a Monte Carlo experiment.  The test is used to formally assess the monotonicity of the reservation wage as a declining function of elapsed unemployment duration.  This relationship is difficult to measure due to the simultaneity of both variables.  Preliminary results indicate that reservation wage functions do in fact not decline monotonically.

JEL Codes: C14, C36, C54, J64

Keywords: control function, endogeneity, reservation wages, test for monotonicity

Reference: 673

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Authors: Collin Raymond, Daniel J. Benjamin, Matthew Rabin

Sep 2013

People believe that, even in very large samples, proportions of binary signals might depart significantly from the population mean.  We model this "non-belief in the Law of Large Numbers" by assuming that a person believes that proportions in any given sample might be determined by a rate different than the true rate.  In prediction, a non-believer expects the distribution of signals will have fat tails, more so for larger samples.  In inference, a non-believer remains uncertain and influenced by priors even after observing an arbitrarily large sample.  We explore implications for beliefs and behavior in a variety of economic settings.

JEL Codes: B49, D03, D14, D83, G11

Keywords: learning, non-Bayesian updating, behavioral economics, information economics

Reference: 672

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Authors: Tim Willems, Shaun Larcom, Mare Sarr

Sep 2013

Recently, the international community has increased its commitment to prosecute malicious dictators - for example by establishing the International Criminal Court.  This has raised the international community's loss associated with being time-inconsistent (i.e.: granting amnesties ex post), the idea being that a reduced prospect of amnesty deters dictators from committing atrocities ex ante.  Simultaneously, however, this elects dictators of a worse type.  Moreover, when the costs of being time-inconsistent are lower than those associated with keeping the dictator in place, the international community will still grant amnesty - thereby making the effective punishment function non-monotonic.  Consequently, increased commitment to ex post punishment may actually induce dictators to worsen their behaviour, purely to "unlock" the amnesty option by forcing the international community into time-inconsistency.

JEL Codes: F55, K14, O12

Keywords: dictatorship, time-inconsistency, International Criminal Court, amnesty, institutions

Reference: 671

Individual View

Authors: Robin Winkler

Sep 2013

It is commonly thought that the rapid increase in household saving during the early years of National Socialism was partly driven by ideological factors.  On this view, the popularity of the regime allowed it to exert 'moral suasion' on households to save more than they might have done in the absence of such indoctrination.  This paper employs the previously unpublished raw data from a household budget survey conducted in 1937 to identify ideological heterogeneity at the household level.  Assuming that households' responsiveness to the regime's saving propaganda was a function of their exogenous ideological commitment to National Socialism, the paper tests the hypothesis that Nazi households saved more than others.  The new evidence presented here does not confirm this hypothesis.

JEL Codes: N14, D12

Keywords: German economic history, National Socialism, household saving

Reference: 119

Individual View

Authors: David Meredith, Deborah Oxley

Sep 2013

In 2009, Horrell, Meredith and Oxley used trends in body mass to argue that poor London women in the later 19th century suffered declining access to household resources over their lifetimes.  The authors evaluated competing models of household behaviour, rejected the unitary model of equal distribution throughout the household, saw some support for a safety-first model, but on the whole concluded that resources were allocated in accordance with bargaining power linked to the economic worth of family members.  As (particularly married) women's labour-force participation fell, so too did their share of the food diminish, and with this they lost weight.  This unequal distribution was supported by a moral economy of the family: a set of shared values about obligations and entitlements which protected earners and prioritized the needs of children secured by maternal sacrifice.  The current paper explores further the role of power in the family.  The contention of a bargaining household is supported through a very different but contemporaneous case study: the modern industrial town of Paisley.  The paper juxtaposes a service economy (Wandsworth near London) with a modern manufacturing sector (Paisley near Glasgow) in order to contrast how economic form and opportunities in the market sector shaped relations and outcomes in the household sector.  Again, our measure is lifetime nutrition and our data are drawn from prisons.  We find that families bargained over the allocation of resources; that bargaining position was heavily influenced by economic value, mediated by maternal sacrifice; that this was an earner bias rather than a gender bias; and that new industrial work for women and children supported a more egalitarian distribution that improved everyone's health status via superior heights and heavier weights.  It is a tale of two cities, of blood and bone, of flesh and families.

Reference: 118

Individual View

Authors: Kevin Hjortshøj O'Rourke, Nicholas Crafts

Sep 2013

This paper surveys the experience of economic growth in the 20th century with a focus on technological change at the frontier together with issues related to success and failure in catch-up growth.  A detailed account of growth performance based on historical national accounts data is given and is accompanied by a review of growth accounting evidence on the sources of economic growth.  The key features of our analysis of divergence in growth outcomes are an emphasis on the importance of 'directed' technical change, of institutional quality, and of geography.  We provide brief case studies of the experience of individual countries to illustrate these points.

JEL Codes: N10. O33, O43, O47

Keywords: catch-up, divergence, growth accounting, technical change

Reference: 117

Individual View

Authors: Renaud Foucart

Jul 2013

Consumption in the time of Internet is characterized by extremely low search costs, leading to increased product diversity (the long tail) and large mainstream products (superstars).  In this paper, I show how the mainstream taste can be catered by a niche product, while minority tastes can be mainstream.  A competitive market with arbitrarily small search costs supplies a product design corresponding to the mainstream taste at a price that only mainstream buyers are willing to pay.  Products corresponding to the taste of the minority are offered at lower price, and bought by several types of buyers.

JEL Codes: C7, D8, L11

Keywords: Search, matching, horizontal product diversity

Reference: 670

Individual View

Authors: Debopam Bhattacharya

Jul 2013

Abstract: We consider empirical measurement of exact equivalent/compensating variation resulting from price-change of a discrete good, using individual-level data. We show that for binary and multinomial choice, the marginal distributions of EV/CV are nonparametrically point-identified solely from the conditional choice-probabilities, under extremely general preference-distributions. These results hold even when the distribution/dimension of unobserved heterogeneity are neither specified, nor identified and utilities are neither quasi-linear nor parametrically specified. Welfare-distributions can be expressed as closed-form functionals of observable individual choice-probabilities, thus enabling easy computation in applications. Average EV for price-rise equals the change in average consumer-surplus and is smaller than average CV for a normal good. Point-identification fails for ordered choice if the unit-price is identical for all alternatives, thereby providing a connection to Hausman-Newey's (2013) partial identification results for the limiting case of continuous choice.

JEL Codes: D12, D11, C14, C25

Keywords: Multinimial choice, Compensating and equivalent variation, unobserved heterogeneity, unrestricted heterogeneity, deadweight loss

Reference: 669

Individual View

Authors: Javier Fernandez-Macho

Jul 2013

This paper introduces a class of cointegration tests based on estimated low-pass and high-pass regression coefficients from the same wavelet transform of the original time series data.  The procedure can be applied to test the null of cointegration in a n + k multivariate system with n cointegrating relationships without the need of either detrending nor differencing.  The proposed non residual-based wavelet statistics are asymptotically distributed as standard chi-square with nk degrees of freedom regardless of deterministic terms or dynamic regressors, thus offering a simple way of testing for cointegration under the null without the need of special tables.  Small sample quantiles for these wavelet statistics are obtained using Monte Carlo simulation in different situations including I(1) and higher order cointegration cases and it is shown that these wavelet tests exhibit appropriate size and good power when compared to other tests of the null of cointegration.

JEL Codes: C22, C12

Keywords: Brownian motion, cointegration, econometric methods, integrated process, multivariate analysis, spectral analysis, time series models, unit roots, wavelet analysis

Reference: 668

Individual View

Authors: James Wolter

Jul 2013

Global frailty is an unobserved macroeconomic variable.  In event data contexts, this unobserved variable is assumed to impact the hazard rate of event arrivals.  Attempts to identify and estimate the path of frailty are complicated when observed macroeconomic variables also impact hazard rates.  It is possible that the impact of the observed macro variables and global frailty can be confused and identification can fail.  In this paper I show that, under appropriate assumptions, the path of global frailty and the impact of observed macro variables can both be recovered.  This approach differs from previous work in that I do not assume frailty follows a specific stochastic process form.  Previous studies identify global frailty by assuming a stochastic form and using a filtering approach.  However, chosen stochastic forms are arbitrary and can potentially lead to poor results.  The method in this paper shows how to recover frailty without these assumptions.  This can serve as a model check to filtering approaches.  The methods are applied to simulations and an application to corporate default.

JEL Codes: C13, C14, C41, C58

Reference: 667

Individual View

Authors: David Gill,Victoria Prowse, Michael Vlassopoulos

Jul 2013

We use an online real-effort experiment to investigate how bonus-based pay and worker productivity interact with workplace cheating.  Firms often use bonus-based compensation plans, such as group bonuses and firm-wide profit sharing, that induce considerable uncertainty in how much workers are paid.  Exposing workers to a compensation scheme based on random bonuses makes them cheat more but has no effect on their productivity.  We also find that more productive workers behave more dishonestly.  These results are consistent with workers' cheating behavior responding to the perceived fairness of their employer's compensation scheme.

JEL Codes: C91, J33

Keywords: Bonus, compensation, cheating dishonesty, lying, employee crime, productivity, slider task, real effort, experiment

Reference: 666

Individual View

Authors: Jerry Tsai

Jul 2013

This paper offers an explanation for the properties of the nominal term structure of interest rates and time-varying bond risk premia based on a model with rare consumption disaster risk.  In the model, expected inflation follows a mean reverting process but is also subject to possible large (positive) shocks when consumption disasters occur.  The possibility of jumps in inflation increases nominal yields and the yield spread, while time-variation in the inflation jump probability drives time-varying bond risk premia.  Predictability regressions offer independent evidence for the model's ability to generate realistic implications for both the stock and bond markets.

JEL Codes: G12

Keywords: Term structure of interest rates, rare disasters

Reference: 665

Individual View

Authors: Pierre-Louis Vezina, Lorenzo Rotunno

Jul 2013

We show that the US in-bond system of imports may be used by firms to illegally avoid trade barriers, a practice known as in-bond diversion.  Digging into official Chinese and Mexican trade statistics, we uncover traces of US quota-hopping in-bond diversion by Chinese exports of textiles and apparel.  This is because the illicit scheme involves declaring Chinese exports bound for Mexico but diverting them to the US market while in transit, thus creating a gap between Chinese and Mexican reports.  Using the phaseout and removal of US quotas at the end of the Multifibre Agreement as a policy experiment, as well as variation in quota bindingness across products, we show that quota-bound products were associated with larger trade gaps which shrunk following the quota removals.  We also find that quotas were associated with larger shares of US imports aimed for transit warehouses, confirming the use of the in-bond system for illegal quota hopping.

JEL Codes: F13, O17, O19

Keywords: Textile and apparel, illegal trade, trade barriers

Reference: 664

Individual View

Authors: John Thanassoulis

Jul 2013

This paper analyses the real economy effects of firms having some shareholders with a short investment horizon on their shareholder register.  Short-term shareholders cause management to be concerned with the path of the share price as well as its ultimate value.  Such shareholders in an economy lead to bubbles in the prices of key inputs, to the misallocation of firms to risky business models, and to increased costs of capital.  For individual firms short-term shareholders induce the Board to reduce deferred incentives in CEO pay prompting CEO myopia and reduced investments in the long-run capabilities of the firm.

JEL Codes: G12, G34, L21, L25

Keywords: Investor time-horrizons, bubbles, CEO compensation, cost of capital, short-termism, bonuses, shareholder register

Reference: 663

Individual View

Authors: Vitaliy Oryshchenko, Richard J. Smith

Jul 2013

If additional information about the distribution of a random variable is available in the form of moment conditions, a weighted kernel density estimate reflecting the extra information can be constructed by replacing the uniform weights with the generalised empirical likelihood probabilities.  It is shown that the resultant density estimator provides an improved approximation to the moment constraints.  Moreover, a reduction in variance is achieved due to the systematic use of the extra moment information.

JEL Codes: C14

Keywords: Weighted kernel density estimation, moment conditions, higher-order expansions, normal mixtures

Reference: 662

Individual View

Authors: Mark Armstrong, Jidong Zhou

Jun 2013

A seller wishes to prevent the discovery of rival offers by its prospective customers.  We study sales techniques which serve this purpose by making it harder for a customer to return to buy later after a search for alternatives.  These include making an exploding offer, offering a "buy-now" discount, or requiring payment of a deposit in order to buy later.  It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so.  In a monopoly setting where the buyer has an uncertain outside option, the optimal selling mechanism features both buy-now discounts and deposit contracts.  When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative.  In many cases the outcome then involves exploding offers, so that no consumers return to buy after search.

JEL Codes: D18, D83, L13, L80

Keywords: Consumer search, sales techniques, price discrimination, sequential search

Reference: 661

Individual View

Authors: Christine Greenhalgh

Jun 2013

This paper begins by surveying recent economic studies of the relationships between technology transfer, intellectual property, innovation and diffusion in emerging countries.  It applies this literature to the Indian case.  India  is a potentially useful case study for several reasons.  India has recently been experiencing rapid growth and has several high technology sectors staffed by an absolutely large and highly educated middle class.  At the same time an even larger share of its very big population is still working in low productivity agriculture and many of these people are living in extreme poverty.

To reduce poverty and improve agricultural productivity India will need to create jobs in labour intensive production and distribution sectors to employ its vast army of unskillled workers.  The second part of the paper outlines how industry structure and innovative performance have been progressing in India following the economic reforms of the early 90s and the changes to intellectual property law occasioned by the TRIPS agreement and membership of the World Trade Organisation.

In the third section the focus turns to recent science, technology and innovation policy in India.  A study of the country's potential for innovation by the World Bank in 2007 argued that India must proceed on two fronts.  In addition to considering how India's growth prospects can be enhanced by world leading innovations, this volume placed great emphasis on inclusive innovation.  This may involve mainly the diffusion and absorption of existing knowledge, but is designed to improve the lot of the poor.  The World Bank report proposed a number of new policy directions aimed at speeding up innovation and technology diffusion in India.  We attempt to record what changes have been made to innovation policy, foreign direct investment policy and diffusion policy in India in recent years and assess whether these are likely to be effective.

JEL Codes: O2, O3

Keywords: Innovation, intellectual property, science policy, innovation policy, TRIPS

Reference: 660

Individual View

Authors: Christine Greenhalgh, Philipp Schautschick

Jun 2013

This paper surveys empirical studies employing trade mark data that exist in the economic literature to date.  Section 1) documents the use of trade marks by firms in several advanced countries including Australia, the United Kingdom and the United States, 2) reviews different attempts to gauge the function of a trade mark as indicator of innovation and product differentiation, and 3) provides an overview of the association of trade marks with dimensions of firm performance and productivity.  Sections 4) and 5) give accounts of studies that focus on the social costs and value of trade marks, namely their importance for firm survival, their impact on demand, and firms' incentives to innovate but also to raise rivals' costs.  Section 6) covers first endeavours to investigate the interplay between different types of intellectual property rights, while 7) briefly concludes.

JEL Codes: O33, O34

Keywords: Intellectual property, trade marks, empirical studies

Reference: 659

Individual View

Authors: Avner Offer

Jun 2013

Banking in the UK was stable for more than a century after 1866.  Financial institutions were differentiated according to function.  The core banks did not engage in maturity transformation, but in managing a payments system for business.  Real estate was a potential source of instability due to high credit elasticity of demand and to long maturities, but credit was successfully rationed by building societies, who relied on the funds that their savers had actually withdrawn from consumption.  After 1945, credit rationing came under pressure from consumers and housebuyers.  Incremental liberalisations after 1971 released a tide of credit which created a property windfall economy.  Borrowers and lenders both prospered until the system collapsed under its own weight in 2007.

Reference: Number 116

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