Working Papers

Authors: Simon Quinn, Tom Gole

Nov 2014

When members of a committee have incentives to agree with each other, they over-weight public information: this can generate status quo bias.  We test this hypothesis using a novel field experiment -  a large debate tournament with random assignment of judges to committees.  To analyse our experimental data, we develop a new structural methodology for estimating discrete dynamic Bayesian games using Markov Perfect Equililbrium.  Our method allows for correlated unobservable signals and for rational dynamic updating of coordination preferences along the equilibrium path.  Our structural estimates show that judges with greater desire to coordinate are more likely to vote for teams with better past records; this shows that, in a committee context, public information can cause coordination on weaker candidates.

JEL Codes: C57, C93

Keywords: committees, discrete games, identification, field experiments, discrimination

Reference: 733

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Authors: James Malcomson

Nov 2014

This paper explores the implications of specific training for relational contracts.  A standard result for sustaining a relational contract is that the parties must jointly receive a surplus over what they can get by separating.  This has been interpreted as employees with relational contracts having discretely higher pay and productivity than inherently equally productive, or near equally productive employees without relational contracts.  Investment in specific training relaxes the incentive constraints on relational contracts, so the optimal level of investment can be higher for those with a relational contract than for those without, adding further to the productivity of those employed under a relational contract.  But the additional cost of optimal investment precisely offsets the post-investment surplus for marginal employees in relational contracts, which removes the discontinuity in the joint payoff from a relational contract.  An example shows that with optimal investment there may not even be a discontinuity in productivity between those employed with a relational contract and those employed without one because the incentive constraints on the former result in lower effort despite their higher training.

JEL Codes: C73, D82, D86

Keywords: relational incentive contracts, investment, specific training, dual labour market

Reference: 732

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Authors: J-F Carpantier, W N Vermeulen

Nov 2014

This paper tests the theoretically founded hypothesis that the surge of SWF establishments is determined by three main factors: 1) the existence of natural resources profits, 2) the government structure and 3) the ability to invest usefully in the domestic economy.  We test this hypothesis on a sample of 20 countries that established an SWF in the period 1998-2008 by comparing them to the roughly 100 countries that did not set up a fund in the same period. We find evidence for all three factors. The results suggest that SWFs tend to be established in countries that run an autocratic regime and have difficulties finding suitable opportunities for domestic investments. We do not find the net foreign asset position of a country to be similarly related to the explanatory variables, indicating that the establishment of an SWF is distinct from a national accounting result. We argue that our results indicate that it is relevant to study how an SWF interacts with the domestic economy and government policy.

JEL Codes: E21, E62, F39, G23, H52

Keywords: Sovereign Wealth Fund, Institutions, natural resources

Reference: 148

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Authors: Yehuda Levy

Nov 2014

A long-standing open question raised in the seminal paper of Kalai and Lehrer (1993) is whether or not the play of a repeated game, in the rational learning model introduced there, must eventually resemble play of exact equilibria, and not just play of approximate equilibria as demonstrated there.  This paper shows that play may remain distant - in fact, mutually singular - from the play of any equilibrium of the repeated game.  We further show that the same inaccessibility holds in Bayesian games, where the play of a Bayesian equilibrium may continue to remain distant from the play of any equilibrium of the true game.

JEL Codes: C65, C72, C73

Keywords: Rational Learning, Repeated Games, Nash Equilibrium

Reference: 731

Individual View

Authors: Jasper van Dijk

Nov 2014

This paper shows that within a regional economy, employment in the nontradable sector benefits from attracting jobs in the tradable sector.  I rework Moretti's study of U.S. cities (AER 2010) and find that one new job in a given city's tradable sector will result into 1.02 new jobs in the nontradable sector in the same city.  I show Moretti overestimated the size of this local multiplier by 0.57, because he made five perfunctory assumptions that had a major impact on his results.  Subsequently I show that Moretti's assertion that skilled tradable jobs have a larger multiplier than unskilled tradable jobs is not supported by the data.  The evidence provided by Moretti was only significant due to an endogeneity effect.

Keywords: Local labour market, multiplier, tradable, nontradable

Reference: 730

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Authors: Francesco Zanetti, Haroon Mumtaz

Oct 2014

This paper studies how key labor market stylized facts and the responses of labor market variables to technology shocks vary over the US postwar period.  It uses a benchmark DSGE model enriched with labor market frictions and investment specific technological progress that enables a novel identification scheme based on sign restrictions on a SVAR with time-varying coefficients and stochastic volatility.  Key findings are: i) the volatility in job finding and separation rates has declined over time, while their correlation varies across time; ii) the job finding rate plays an important role for unemployment, and the two series are strongly negatively correlated over the sample period; iii) the magnitude of the response of labor market variables to technology shocks varies across the sample period.

JEL Codes: E32, C32

Keywords: Technology shocks, labor market frictions, Bayesian SVAR methods, sign restrictions

Reference: 728

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Authors: Mark Armstrong,John Vickers

Oct 2014

We provide a simple necessary and sufficient condition for when a multiproduct demand system can be generated from a discrete choice model with unit demands.

JEL Codes: D01, D11

Keywords: Discrete choice, unit demand, multiproduct demand functions

Reference: 729

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Authors: Andrew Martinez

Oct 2014

This paper compares annual one-year-ahead and five-year-ahead forecasts from government agencies for the U.S. gross federal debt and deficit from 1984 to 2013.  Other studies have compared two of these agencies' forecasts, but not for debt.  The current paper finds that the forecast from the Analysis of the President's Budget performs best across both horizons but does not encompass the other forecasts.  Instead, each of the forecasts lacks information included by the other agencies and therefore a combination of all three outperforms any forecast individually.

JEL Codes: C53, H68

Keywords: Evaluating Forecasts, Government Forecasting, Macroeconomic Forecasts, Forecast Encompassing, Deficit

Reference: 727

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Authors: Alexander James

Oct 2014

A surprising feature of resource-rich economies is slow growth. It is often argued that natural-resource production impedes development by creating market or institutional failures. This paper establishes an alternative explanationa slow-growing resource sector.  A declining resource sector is disproportionately reflected in resource-dependent countries. Additionally, there is little evidence that resource dependence impedes growth in non-resource sectors. More generally, this paper illustrates the importance of considering industry composition in cross-country growth regressions.

JEL Codes: Q2; Q3; O1

Keywords: Resource Dependence; Economic Growth; Resource Curse

Reference: 147

Individual View

Authors: H Peyton Young

Oct 2014

Social norms are patterns of behavior that are self-enforcing at the group level: everyone wants to conform when they expect everyone else to conform.  There are multiple mechanisms that sustain social norms, including a desire to coordinate, fear of being sanctioned, signaling membership in the group, or simply following the lead of others.  This article shows how stochastic evolutionary game theory can be used to study the dynamics of norms.  We illustrate with a variety of examples drawn from economics, sociology, demography, and political science.  These include bargaining norms, norms governing the terms of contracts, norms of retirement, duelling, footbinding, medical treatment, and the use of contraceptives.  These cases highlight the challenges of applying the theory to empirical cases.  They also show that the modern theory of norm dynamics yields insights and predictions that go beyond conventional equilibrium analysis.

JEL Codes: C73, A120, O10

Keywords: evolutionary game theory, equilibrium selection, stochastic stability

Reference: 726

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Authors: Ansgar Walther

Sep 2014

Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities.  Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes.  These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III.  When bank failures are socially costly, microprudential regulation of leverage is also required.  Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk.

JEL Codes: G18, G21, G28, E44

Keywords: Systemic risk, leverage, maturity mismatch, macroprudential regulation, liquidiity, capital requirements, fire sales

Reference: 725

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Authors: James Forder

Sep 2014

There is a widely believed but entirely mythical story to the effect that the discovery of 'the Phillips curve' was, in the 1960s and perhaps later, an inspiration to inflationist policy.  The point that this is a myth is argued in Forder, Macroeconomics and the Phillips curve myth, OUP 2014.  One aspect of the explanation of how that myth came to be widely believed is considered in this paper.  It is noted that the expression 'Phillips curve' was applied in a number of quite distinct and inconsistent ways, and as a result there was, by about 1980, an enormous confusion as to what that label meant.  This confusion, as well as the multiplicity of possible meanings, it is suggested, made the acceptance of the myth much easier, and is therefore part, although only part, of the story of its acceptance.

JEL Codes: B22, B29

Keywords: Phillips curve, expectations, Phillips curve myth

Reference: 724

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Authors: James Forder

Sep 2014

Friedman (1968) - his famous Presidential Address to the American Economic Association - contains an elementary error right at the heart of what is usually supposed to be the paper's crucial argument.  That is the argument to the effect that during an inflation, changing expectations shift in Phillips curve.  It is suggested that the fact of this mistake, and of its having gone all-but unnoticed are points of historical interest.  Further reflections, drawing on the arguments of Forder (2014) Macroeconomics and the Phillips curve myth, are suggested.

JEL Codes: B22, E31

Keywords: Phillips, Friedman, Expectations

Reference: 723

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Authors: Pawel Dziewulski,John Quah

Sep 2014

Suppose we observe a finite number of input decisions made by a firm, as well as the prices at which those inputs were acquired.  What conditions on the set of observations are necessary and sufficient for it to be consistent with a firm choosing inputs to maximize profit, subject to a production function exhibiting production complementarities?  In this paper, we develop an axiomatic characterisation of this hypothesis and also develop a test that can be easily applied to finite data sets.

JEL Codes: D21, D24

Keywords: profit maximisation, production complementarities, supermodular production, modern manufacturing, cyclical monotonicity, quasilinear preferences

Reference: 722

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Authors: John Knight, Ramani Gunatilaka

Aug 2014

The paper contrasts early theories of the utility function (starting with Bentham and elaborated by Jevons) with the modern theory (laid down by Fisher and Samuelson).  The former include in the utility function not only the sensation of current events but also the memory of past events and the anticipation of future events.  The alternative hypotheses are tested by introducing both past and expected future income into the estimated subjective well-being function, using an appropriate data set for China.  The tests favour the early theories.  Implications are drawn.

JEL Codes: B13, B21, D60

Keywords: Anticipation, China, Discounted utility, Memory, Subjective well-being, Utility function

Reference: 721

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Authors: Lucas Bretschger, Christos Karydas

Aug 2014

We study the effects of greenhouse gas emissions on optimum growth and climate policy by using an endogenous growth model with polluting non-renewable resources. Climate change harms the capital stock. Our main contribution is to introduce and extensively explore the naturally determined time lag between greenhouse gas emission and the damages due to climate change, which proves to be crucial for the transition of the economy towards its steady state. The social optimum and the optimal abatement policies are fully characterized. The inclusion of a green technology delays optimal resource extraction. The optimal tax rate on emissions is proportional to output. Poor understanding of the emissions diffusion process leads to suboptimal carbon taxes and suboptimal growth and resource extraction.

JEL Codes: Q54, O11, Q52, Q32

Keywords: Non-Renewable Resource Dynamics; Pollution Di usion Lag; Optimum Growth; Clean Energy; Climate Policy

Reference: 144

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Authors: Antoine Bommier, Lucas Bretschger, Francois Le Grand

Aug 2014

The paper proves the existence of equilibrium in nonrenewable resource markets when extraction costs are non-convex and resource storage is possible.  Inventories atten the consumption path and eliminate price jumps at the end of the extraction period. Market equilibrium becomes then possible, contradicting previous claims from Eswaran, Lewis and Heaps (1983). We distinguish between two types of solutions, one with immediate and one with delayed build-up of inventories. For both cases we do not only characterize potential optimal paths but also show that equilibria actually exist under fairly general conditions. It is found that optimum resource extraction involves increasing quantities over a period of time. What is generally interpreted as an indicator of increasing resource abundance is thus perfectly compatible with constant resource stocks.

JEL Codes: Q30, C62, D92, D41

Keywords: Exhaustible resources, nonconvex extraction cost, equilibrium existence, resource storage

Reference: 146

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Authors: Lucas Betschger, Alexandra Vinogradova

Aug 2014

Climate physics predicts that the intensity of natural disasters will increase in the future due to climate change. One of the biggest challenges for economic modeling is the inherent uncertainty of climate events, which crucially affects consumption, investment, and abatement decisions. We present a stochastic model of a growing economy where natural disasters are multiple and random, with damages driven by the economy's polluting activity. We provide a closed-form solution and show that the optimal path is characterized by a constant growth rate of consumption and the capital stock until a shock arrives, triggering a downward jump in both variables. Optimum mitigation policy consists of spending a constant fraction of output on emissions abatement. This fraction is an increasing function of the arrival rate, polluting intensity of output, and the damage intensity of emissions. A sharp response of the optimum growth rate and the abatement share to changes in the arrival rate and the damage intensity justifes more stringent climate policies as compared to the expectation-based scenario. We subsequently extend the baseline model by adding climate-induced fluctuations around the growth trend and stock-pollution effects, demonstrating robustness of our results. In a quantitative assessment of our model we show that the optimal abatement expenditure at the global level may represent 0.9% of output, which is equivalent to a tax of $71 per ton carbon.

JEL Codes: O10, Q52, Q54

Keywords: Climate policy, uncertainty, natural disasters, endogenous growth

Reference: 145

Individual View

Authors: Donna Harris, Benedikt Herrmann, Andreas Kontoleon, Jonathan Newtonor

Aug 2014

This paper examines the relationship between norm enforcement and in-group favouritism behaviour.  Using a new two-stage allocation experiment with punishments, we investigate whether in-group favouritism is considered as a social norm in itself or as a violation of a different norm, such as egalitarian norm.  We find that which norm of behaviour is enforced depends on who the punisher is.  If the punishers belong to the in-group, in-group favouritism is considered a norm and it does not get punished.  If the punishers belong to the out-group, in-group favouritism is frequently punished.  If the punishers belong to no group and merely observe in-group favouritism (the third-party), they do not seem to care sufficiently to be willing to punish this behavour.  Our results shed a new light on the effectiveness of altruistic norm enforcement when group identities are taken into account and help to explain why in-group favouritism is widespread across societies.

JEL Codes: C92, D70, D73

Keywords: In-group Favouritism, Group Identity, Social Norms, In-group Punishment, Out-group Punishment, Third-party Punishment

Reference: 719

Individual View

Authors: Selma Telalagic

Aug 2014

This paper provides a causal reason for failure in productive efficiency in the household and explains why some households may be less efficient than others.  In the theoretical model, spouses make labour allocation decisions in each period to generate income, facing a threat of divorce in the next period.  This threat of divorce encourages spouses to invest in their outside options.  If decision-making is noncooperative, asymmetric outside options lead to lower productivity.  Using exogenous variation in inheritance rules in Malawi as a measure of outside options, the empirical results show that matrilineal households (where women have access to land) have 10% higher consumption than patrilineal households (where women have no access to land).  These resuls are robust to a wide variety of specifications and are corroborated by an analysis of labour allocation and income.  The results suggest that variation in spouses' outside options can help explain variation in household productivity.

JEL Codes: D12, D13, J12, J16

Keywords: Productive efficiency, Households, Land rights, Matriliny, Malawi

Reference: 720

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Authors: Ferdinand Rauch, Matthias Beestermoller

Aug 2014

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

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

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

Reference: 718

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Authors: Nicolas Berman, Mathieu Couttenier, Dominic Rohner, Mathias Thoenig

Jul 2014

This paper studies empirically the impact of mining on conicts in Africa.

Using novel data, we combine geo-referenced information over the 1997-2010 period on the location and characteristics of violent events and mining extraction of 27 minerals. Working with a grid covering all African countries at a spatial resolution of 0.5 0.5 degree, we find a sizeable impact of mining activity on the probability/intensity of conict at the local level. This is both true for low-level violence (riots, protests), as well as for organized violence (battles). Our main identification strategy exploits exogenous variations in the minerals' world prices; however the results are robust to various alternative strategies, both in the cross-section and panel dimensions. Our estimates suggest that the historical rise in mineral prices observed over the period has contributed to up to 21 percent of the average country-level violence in Africa. The second part of the paper investigates whether minerals, by increasing the nancial capacities of ghting groups, contribute to diffuse violence over time and space, therefore affecting the intensity and duration of wars. We find direct evidence that the appropriation of a mining area by a group increases the probability that this group perpetrates future violence elsewhere. This is consistent with \feasibility" theories of conflict. We also nd that secessionist insurgencies are more likely in mining areas, which is in line with recent theories of secessionist conflict. 

JEL Codes: C23, D74, Q34

Keywords: Minerals, Mines, Conflict, Natural Resources, Rebellion

Reference: 141

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Authors: Ferdinand Rauch

Jul 2014

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

JEL Codes: F00

Keywords: Foraging, Gravity, International Trade

Reference: 716

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Authors: Mark Armstrong

Jul 2014

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

JEL Codes: D03, D18, D43, D83

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

Reference: 715

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Authors: Kevin Hjortshøj O'Rourke, Roberto Bonfatti

Jul 2014

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

Reference: 132

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