Working Papers

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

Individual View

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

Individual View

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

Individual View

Authors: Rabah Arezki, Sambit Bhattacharyya, Nemera Mamo

Jun 2015

The empirical relationship between natural resources and conflict in Africa is not very well understood. Using a novel geocoded dataset on resource discovery and conflict we are able to construct a quasi-natural experiment to explore the causal effect (giant and major) oil and mineral discoveries on conflict in Africa at the grid level corresponding to a spatial resolution of 0.5 x 0.5 degree covering the period 1946 to 2008. Contrary to conventional wisdom, we find no evidence of natural resources triggering conflict in Africa after controlling for grid-specific fixed factors and time varying common shocks. Resource discovery appears to have improved local income measured by nightlights which could be reducing the conflict likelihood. We observe little or no heterogeneity in the relationship across resource type, size of discovery, pre and post conclusion of the cold war, and institutional quality. The relationship remains unchanged at the regional and national levels.

JEL Codes: D72, O11

Keywords: Resource discovery; Conflict onset; Conflict incidence; Conflict intensity

Reference: 159

Individual View

Authors: Julio Martinez-Galarraga, Francisco Beltrán Tapia

Jun 2015

By collecting a large dataset in mid-19th century Spain, this paper contributes to the debate on institutions and economic development by examining the historical link between land access inequality and education. This paper analyses information from the 464 districts existent in 1860 and confirms that there is a negative relationship between the fraction of farm labourers and literacy rates. This result does not disappear when a large set of potential confounding factors are included in the analysis. The use of the Reconquest as a quasi-natural experiment allows us to rule out further concerns about potential endogeneity. Likewise, by employing data on schooling enrolment rates and number of teachers, this paper explores the mechanisms behind the observed relationship in order to ascertain to which extent demand or supply factors are responsible for it. Lastly, the gender composition of the data, which enables distinguishing between female and male literacy levels, together with boys and girls schooling enrolment rates, is also examined.

Keywords: economic history, inequality, land access inequality, education inequality, Spain, Pre-Industrial Spain

Reference: 137

Individual View

Authors: Francesco Zanetti

May 2015

This paper investigates the effect of …financial shocks using an estimated gen-
eral equilibrium model that links the …firm's ‡flows of …financing with labor market
variables. The results show that fi…nancial shocks have sizeable effects on …financial
variables, vacancy posting, unemployment and wages. Shocks to the job destruc-
tion rate are important in describing ‡fluctuations in unemployment. The analysis
also investigates the underlying driving forces of some key comovements in the
data.

JEL Codes: E32, E44

Keywords: Business cycle, labor market frictions, financial shocks.

Reference: Number 746

Individual View

Authors: Robin Winkler

May 2015

How good was the standard of living in pre-war Nazi Germany? Some historians have argued that household food consumption in the 1930s was at least as high as in the Weimar Republic, in spite of militarisation. This article provides new evidence against this view by demonstrating that food price controls significantly distorted consumption patterns. We estimate that involuntary substitution effects cost average working-class households 7% of their disposable income. Consumer welfare in Nazi Germany was thus meaningfully lower than observed consumption levels and prices suggest. Our finding is based on microeconometric welfare analysis of detailed budget data for 4,376 individual German households surveyed in 1927 and 1937.

JEL Codes: N14, N34, D12, D52

Keywords: economic history, economic development, standard of living, consumer welfare, Germany

Reference: 136

Individual View

Authors: Francesco Zanetti, Konstantinos Theodoridis

Apr 2015

We enrich a baseline RBC model with search and matching frictions on the labor market and real frictions that are helpful in accounting for the response of macroeconomic aggregates to shocks.  The analysis allows shocks to have an unanticipated and a new (i.e. anticipated) component.  The Bayesian estimation of the model reveals that the model which includes news shocks on macroeconomic aggregates produces a remarkable fit of the data.  News shocks in stationary and non-stationary TFP, investment-specific productivity and preference shocks significantly affect labor market variables and explain a sizeable fraction of macroeconomic fluctuations at medium- and long-run horizons.  Historically, news shocks have played a relevant role for output, but they have had a limited influence on unemployment.

JEL Codes: E32, C32, C52

Keywords: Anticipated productivity shocks, Bayesian SVAR methods, labour market search frictions

Reference: 745

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Authors: Pablo Astorga

Apr 2015

This paper presents a new consistent yearly series of gross income (between-group) inequality Ginis for four occupational categories in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela over the period 1900-2011 using a newly assembled wage dataset.  The approach used differentiates labour by skill level and allows for changing allocation of the labour force over time.  Profits and rents are calculated as a residual.  Our regional Gini shows a changing secular process with a reclined "S" shape with an inflection point around 1940 and a peak in the 1990s.  There are mixed country trends in the early and middle decades, but in most cases inequality was on the rise in the 1960s.  There was also a tendency for narrowing wage inequality in the middle decades of the last century - at the time of the Great Levelling in the developed economies - but whose impact was more than off-set by a rising share of the top group.  Inequality in the 20th century is a story of increased polarisation - particularly post 1970 - amid significant social mobility.

JEL Codes: N36, O15, O54

Keywords: economic history, economic development, income inequality, Latin America

Reference: 135

Individual View

Authors: Luke Samy

Apr 2015

Data from two different primary sources were used to construct indices of house prices (HPI) and rents (RRPI) of residential property located in London and the Home Counties between 1895 and 1939.  The indices were derived using the hedonics method of price index measurement, which extracts the variation in prices due to differences in the quality of dwellings that form the sample across different time periods.  Both nominal and real HPIs and RRPIs are reported in the paper, as well as simple summary statistics on the levels of house prices and rental values, years purchase and returns on housing for a selected number of boroughs in London over time.

Keywords: housing, rents, inflation, building societies

Reference: 134

Individual View

Authors: Samuel Wills

Mar 2015

How should capital-scarce countries manage their volatile oil revenues? Existing literature is conflicted: recommending both to invest them at home, and save them in sovereign wealth funds abroad. I reconcile these views by combining a stochas- tic model of precautionary savings with a deterministic model of a capital-scarce resource exporter. I show that both developed and developing countries should build an offshore Volatility Fund, but refrain from depleting it when oil prices fall because it cannot be known when, or if, they will rise again. Instead, consump- tion should adjust and only the interest on the fund should be consumed. To do this I develop a parsimonious framework that nests a variety of existing results as special cases, which I present in four principles: for capital-abundant countries, i) smooth consumption using a Future Generations Fund, and ii) build a Volatility Fund quickly, then leave it alone; and for capital-scarce countries, iii) consume, in- vest and deleverage, and iv) invest part of the Volatility Fund domestically, then leave it alone.

JEL Codes: D81, E21,F43,H63,O13,Q32,Q33

Keywords: Natural resources, oil, volatility, sovereign wealth fund, precautionary saving, capital scarcity, anticipation

Reference: 154

Individual View

Authors: Rick Van der Ploeg, Mark Kaga, Cees Withagen

Mar 2015

Industria imports oil, produces final goods and wishes to mitigate global warming. Oilrabia exports oil and buys final goods from the other country. Industria uses the carbon tax to impose an import tariff on oil and steal some of Oilrabia’s scarcity rent. Conversely, Oilrabia has monopoly power and sets the oil price to steal some of Industria’s climate rent. We analyze the relative speeds of oil extraction and carbon accumulation under these strategic interactions for various production function specifications and compare these with the efficient and competitive outcomes. We prove that for the class of HARA production functions the oil price is initially higher and subsequently lower in the open-loop Nash equilibrium than in the efficient outcome. The oil extraction rate is thus initially too low and in later stages too high. The HARA class includes linear, loglinear and semi-loglinear demand functions as special cases. For non-HARA production functions Oilrabia may in the open-loop Nash equilibrium initially price oil lower than the efficient level, thus resulting in more oil extraction and climate damages. We also contrast the open-loop Nash and efficient outcomes numerically with the feedback Nash outcomes. We find that the optimal carbon tax path in the feedback Nash equilibrium is flatter than in the open-loop Nash equilibrium. It turns out that for certain demand functions using the carbon tax as an import tariff may hurt consumers’ welfare as the resulting user cost of oil is so high that the fall in welfare wipes out the gain from higher tariff revenues.

JEL Codes: C73, H30, Q32, Q37, Q54

Keywords: exhaustible resources, Hotelling rule, efficiency, carbon tax, climate rent, differential game, open-loop Nash equilibrium, subgame-perfect Nash equilibrium, HARA production functions

Reference: 155

Individual View

Authors: James Cust, Stevem Poelhekke

Mar 2015

Whether it is fair to characterize natural resource wealth as a curse is still debated. Most of the evidence derives from cross-country analyses, providing cases both for and against a potential resource curse. Scholars are increasingly turning to within-country evidence to deepen our understanding of the potential drivers, and outcomes, of resource wealth effects. Moving away from cross-country studies offers new perspectives on the resource curse debate, and can help overcome concerns regarding endogeneity. Therefore, scholars are leveraging datasets which provide greater disaggregation of economic responses and exogenous identification of impacts.

This paper surveys the literature on these studies of local and regional effects of natural resource extraction. We discuss data availability and quality, recent advances in methodological tools, and summarize the main findings of several areas of research. These include the direct impact of natural resource production on local labor markets and welfare, the effects of government spending channels resulting from mining revenue, and regional spillovers. Finally, we take stock of the state of the literature and provide suggestions for future research.

Keywords: survey, mining, Dutch disease, identification, spillovers

Reference: 156

Individual View

Authors: Andrew Mell, Simon Radford, Seth Alexander Thevoz

Mar 2015

Trust in political institutions has declined across developed democracies.  One of the main reasons cited for this lack of trust in public opinion polls has been the role of money in politics.  The Supreme Court decisions in Citizens United and McCutcheon, amongst others, have increased the political salience of potential campaign finance reforms, and the Great Recession has reinvigorated a public debate on regulatory capture by Wall Street.  So too scholars have taken up the topic with renewed vigor.  Political scientists have tried to tackle the issue in two main steps: firstly, by showing that money can buy access to legislators; and secondly, that legislators are thereby more responsive to the wishes of donors when writing and voting on laws.  Researchers have used experiments and other techniques to show that Congressional staffs are more responsive to requests from donors compared to others, and have also shown aggregate trends in responsiveness to the preferences of the wealthier. In this paper we try and go one step further: to show that donors can become legislators.  We do this by looking at a novel example: the United Kingdom's appointed Second Chamber, the House of Lords.  Compiling an original dataset of large donations and nominations for "peerages" that allow them to take a seat in the Lords, the authors show that, when the "usual suspects" for a position, like former MPs and party workers, are accounted for, donations seem to play an outsize role in accounting for the remaining peers.  Given the widespread concern at undue influence accorded to large donors, understanding the extent of how donations influence politics and evaluating proposals for democratic renewal should be a major concern of political scienes.

JEL Codes: K42, P48

Keywords: Illegal Behaviour, IlIicit Trade

Reference: 744

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