Working Papers

Authors: Rahul Nath

May 2018

This paper studies how flexible labour decisions affect asset pricing in a Real Business Cycle model. It uses Jaimovich-Rebelo preferences with internal habits in consumption and distinguishes between two income effect channels (i) the ‘habit income effect’ channel and (ii) the ‘separability income effect’ channel. I find that asset prices are superior when the first channel is strong and the second is weak, this is the case of using GHH preferences with internal habits in consumption.

JEL Codes: E13, E32, E44, G12

Keywords: Asset Pricing, Income Effects, Jaimovich-Rebelo Preferences

Reference: 851

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Authors: Rahul Nath

May 2018

This paper derives explicitly an equity pricing relationship in a simple New Keynesian model. This relationship is used to study the equity pricing implications of New Keynesian models. I find that New Keynesian models suffer from the same asset pricing shortcomings as more traditional RBC versions and that this can be attributed to the presence of nominal rigidities. I then add capital adjustment costs to study how the interaction of both investment adjustment costs and capital adjustment costs affect the results.

JEL Codes: E12, E22, E44

Keywords: Asset Pricing, New Keynesian, Nominal Rigidities, Investment Adjustment Costs, Capital Adjustment Costs

Reference: 850

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Authors: Douglas Hay

May 2018

Abstract

Many economic historians agree that increased labour inputs contributed to Britain’s primary industrialisation. Voluntary self-exploitation by workers to purchase new consumer goods is one common explanation, but it sits uneasily with evidence of poverty, child labour, popular protest, and criminal punishments explored by social historians. A critical and neglected legal dimension may be the evolution of contracts of employment. The law of master and servant, to use the technical term, shifted markedly between 1750 and 1850 to advantage capital and disadvantage labour. Medieval in origin, it had always been adjudicated in summary hearings before lay magistrates, and provided penal sanctions to employers (imprisonment, wage abatement, and later fines), while giving workers a summary remedy for unpaid wages. The law always enforced obedience to employers’ commands, suppressed strikes, and tried to keep wages low. Between 1750 and 1850 it became more hostile to workers through legislation and judicial redefinition; its enforcement became harsher through expansion of imprisonment, capture of the local bench by industrial employers, and employer abuse of written contracts. More work in manuscript sources is needed to test the argument, but it seems likely that intensification of labour inputs during industrialisation was closely tied to these legal changes.

Keywords: coercion, contract of employment, labour law, industriousness, punishment, work time

Reference: 164

Individual View

Authors: Anja Tolonen

May 2018

JEL Codes: O12; O13; J16

Keywords: Gender Norms, Female Empowerment, Local Industrial Development, Gold Mining

Reference: 209

Individual View

Authors: Anja Tolonen

Apr 2018

Local industrial development has the potential to improve health and well-being,
while also damaging health through exposure to harmful pollution. It is an empirical
question which of these effects dominate. Exploiting the quasi-experimental expansion
of African large-scale gold mining, I find that local infant mortality rates decrease
by more than 50% alongside rapid economic growth. The instantaneous reduction is
comparable to overall gains in infant survival rates in the study countries from 1970 to
today. The results are robust to migration. Local industrial development—despite risk
of pollution—may be an effective tool to reduce infant mortality in developing countries

JEL Codes: O12, O13, I15, J13

Keywords: Industrial Development, Natural Resources, Gold Mining, Infant Mortality,

Reference: 208

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Authors: Pawel Adrjan, and Brian Bell

Apr 2018

Abstract

How do wages respond to firm-level idiosyncratic cost shocks? We create a unique dataset that links longitudinal data on workers’ compensation to the unexpected costs that UK firms have been forced to pay to plug large deficits in their legacy defined benefit pension plans. We show that firms are able to share the burden of such costs when a significant share of their workers are current or former members of the plan. We also investigate how compensation responds to the closure of defined benefit plans to future benefit accrual. We find that firms are able to use such closures to effectively reduce total compensation of workers who are plan members. These results point to significant frictions in the labour market, which we show are a direct result of the pension arrangement that workers have. Closing schemes has an implicit cost for firms since it reduces the frictions that workers face.

JEL Codes: J31, J32, G32

Keywords: Wages, Pensions, Frictions

Reference: 849

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Authors: Pawel Dziewulski

Apr 2018

Abstract

Critical cost-efficiency index (or CCEI), proposed in Afriat (1972, 1973) and Varian (1990), is the most commonly used measure of revealed preference violations. By representing consumer preference with interval orders, as in Fishburn (1970), we show that this index is equivalent to a particular notion of the just-noticeable difference, i.e., a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, CCEI can be interpreted as the consumer's cognitive inability to discriminate among options. This characterisation sheds new light on the existing empirical findings.

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

Keywords: utility maximisation, generalised axiom of revealed preference, critical cost-efficiency index, interval order, just-noticeable difference

Reference: 848

Individual View

Authors: Rick Van der Ploeg, Aart de Zeeuw

Apr 2018

The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

JEL Codes: D81, H20, O40, Q31, Q38

Keywords: climate tipping point, risk, social cost of carbon, precautionary capital, economic growth.

Reference: 207

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Authors: Peter Neary, Giovanni Maggi, Monika Mrázová

Mar 2018

Abstract

Red-tape barriers (RTBs) are an important source of trade costs, but have received little scholarly attention. Here we take a first step toward a theory of RTBs, and show that their implications are very different from those of more traditional trade barriers. Our model highlights that RTBs have important impacts on the extensive margin of trade, and yields rich predictions on how changes in the political-economic environment and product characteristics affect RTBs. Taking into account the endogenous response of RTBs is crucial to understanding the impact of reductions in tariffs and natural trade costs on the extensive and intensive margins of trade, as well as on welfare. Moreover, the availability of RTBs affects in important ways the tariff commitments that are specified in a trade agreement.

JEL Codes: F13, D7, F55

Keywords: International trade policy; Non-Tari Measures; Political economy; Red tape barriers; Trade agreements

Reference: 847

Individual View

Authors: Sara Horrell, Jane Humphries

Mar 2018

 

 

JEL Codes: N330

Keywords: Children’s work and pay; Labour Markets; Demography; Britain, long-run

Reference: 163

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Mar 2018

Unanticipated climate policy curbs the value of physical capital that is costly to adjust. We illustrate this by showing that climate policy to keep peak global warming below 2°C depresses the share prices of oil and gas majors and their market capitalisation, curbs exploration investment and oil and gas discoveries, boosts proven reserves left abandoned in the crust of the earth, cuts exploitation investment, and induces an earlier onset of the carbon-free era. For a given carbon budget, an immediate carbon tax is the first-best response but delaying the carbon tax or a renewable energy subsidy to meet the same temperature target are preferred by shareholders because they introduce Green Paradox effects and protect the profitability of existing capital.

JEL Codes: D20, D53, D92, G11, H32, Q02, Q35, Q38, Q54

Keywords: climate policy, fossil fuel, exploration investment, discoveries, exploitation investment, stranded carbon assets, stock prices, irreversible capital, adjustment costs

Reference: 206

Individual View

Authors: Martin Ellison, Andreas Tischbirek

Feb 2018

Abstract

A novel decomposition highlights the scope for information to in uence the term structure of interest rates. Based on the law of total covariance, we show that real term premia in macroeconomic models contain a component that depends on covariances of realised stochastic discount factors and a component that depends on covariances of expectations of those stochastic discount factors. The impact of different informational assumptions can then be identified by looking at their effect on the second, expectational, component. If agents have full information about technology in a simple macro-finance model then the conditional covariance of expectations is low, which contributes to the real term premia implied by the model being at least an order of magnitude too small, a result that is unchanged if some components of technology are unobservable or observed with noise. To generate realistic term premia, we draw on the beauty contest literature by differentiating between private and public information and introducing the possibility of strategic complementarities in the formation of expectations. A quantitative version of the model is found to explain a significant proportion of observed term premia when estimated using data on expectations of productivity growth from the Survey of Professional Forecasters.

JEL Codes: E40, E43, E70, G12

Keywords: Yield Curve, Term Premia, Information Friction, Beauty Contest, Asset Pricing

Reference: 846

Individual View

Authors: Judy Stephenson

Feb 2018

Abstract

This paper provides new information and data on how work and pay actually operated for skilled and semi-skilled men on large London construction projects in the early 1700s, and for the first time, offers detailed firm level evidence on the number of days per year worked by men. Construction workers’ working days were bounded by structural factors of both supply and demand, men worked a far lower number of days than has been assumed until now. This has implications for our understanding of the ‘industrious revolution’, and industrialisation.

JEL Codes: J3, J4, J6, N33, N63

Keywords: England; industrial revolution; industrious revolution; labour input; living standards; wages, building craftsmen

Reference: 162

Individual View

Authors: Ohad Raveh, Yacov Tsur

Feb 2018

We identify an adverse consequence of natural resource windfalls, which is partic-
ularly detrimental in advanced democracies. We construct a political economy model
with endogenous public debt under exogenous resource windfall shocks, in which po-
litical myopia results from reelection prospects. Reelection-seeking politicians, while
more accountable toward their electorate, are also more myopic. The latter e ect
gives rise to a budget de cit bias, with the ensuing debt buildup that is exacerbated
by resource windfalls. We nd that the positive e ect of resource windfalls on debt
increases as the restrictions on reelection get laxer. We test the model's predictions
using a panel of U.S. states over the period 1963-2007. Our identi cation strategy
rests on constitutionally-entrenched di erences in gubernatorial term limits that pro-
vide plausibly exogenous cross-sectional and time variation in political time horizon,
and geographically-based cross-state di erences in natural endowments interacted with
the international prices of oil and gas. The empirical ndings corroborate the model's
predictions. In particular, our baseline estimates indicate that a resource windfall of
$1 induces an increase of approximately g14:7 in the public debt of states with no
gubernatorial term limits.

JEL Codes: Q32, H63, H74

Keywords: Resource windfalls, public debt, political myopia reelection

Reference: 205

Individual View

Authors: Martin Ellison, Charles Brendon

Jan 2018

Abstract

This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and sufficient conditions for this to be true, and show that these are equivalent to a straightforward but significant change to the first-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.

JEL Codes: D02, E61

Keywords: Time Consistency; Undominated Policy; Ramsey Policy

Reference: 844

Individual View

Authors: Alexander A. J. Wulfers

Jan 2018

Abstract

The Age of Mass Migration came to an end in the interwar period with new American immigration restrictions, but did this end affect some potential migrants more than others? I use previously unanalysed data from passenger lists of ships leaving Bremen, one of the major European ports of emigration, between 1920 and 1933, to identify occupations and skill levels of individual migrants. The main focus of the paper is on the role that policy played in influencing the selection of migrants. I study the American quota laws of 1921, 1924, and 1929, and find that increasingly strict quotas led to an increase in the skill level of migrants as well as a shift from agricultural to manufacturing workers first, and from manufacturing to professional workers later.

JEL Codes: J15, K37, N32, N34

Keywords: immigration policy, skill selection, quotas, United States, Bremen, interwar period

Reference: 161

Individual View

Authors: Kevin Hjortshøj O'Rourke, Alan de Bromhead, Alan Fernihough, Markus Lampe

Jan 2018

Abstract

A recent literature explores the nature and causes of the collapse in international trade during 2008 and 2009. The decline was particularly great for automobiles and industrial supplies; it occurred largely along the intensive margin; quantities fell by more than prices; and prices fell less for differentiated products. Do these stylised facts apply to trade collapses more generally? This paper uses detailed, commodity specific information on UK imports between 1929 and 1933, to see to what extent the trade collapses of the Great Depression and Great Recession resembled each other. It also compares the free trading trade collapse of 1929-31 with the protectionist collapse of 1931-3, to see to what extent protection, and gradual recovery from the Great Depression, mattered for UK trade patterns.

JEL Codes: F14, N74

Keywords: Great Depression; Great Recession; trade; protectionism

Reference: 160

Individual View

Authors: David Ronayne, Greg Taylor

Jan 2018

Abstract

We study strategic interactions in markets where firms sell to consumers both directly and via a competitive channel (CC), such as a price comparison website or marketplace, where multiple sellers’ offers are visible at once. We ask how a CC’s relative size influences market outcomes. A bigger CC means more consumers compare prices, increasing within-channel competition. However, such seemingly procompetitive developments can raise prices and reduce consumer surplus by weakening between-channel competition. We also use the model to study relevant active policy issues including price clauses, integrated ownership structures, and access to consumers’ purchase data.

Revised June 2018

JEL Codes: JEL D43, D83, L11, M3

Reference: 843

Individual View

Authors: Ian Crawford, Laura Blow

Jan 2018

Abstract

We investigate necessary and sufficient nonparametric conditions for mental accounting.

Reference: 842

Individual View

Authors: Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva

Jan 2018

We investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

JEL Codes: O44, Q54, Q58

Keywords: Infrastructure, Clean and Dirty Energy Inputs, Renewable Energy, Stranded Assets, Carbon Budget, Climate Change Policies, Green Paradox

Reference: 204

Individual View

Authors: Rick Van der Ploeg, Ton S. Van den Bremer

Jan 2018

A popular model of economy and climate change has logarithmic preferences and damages proportional to the carbon stock in which case the certainty-equivalent carbon price is optimal. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, correlated risks, and distributions that are skewed in the longer run to capture climate feedbacks. We derive a non-certainty-equivalent rule for the carbon price, which incorporates precautionary, risk-insurance and risk-exposure, and climate beta effects to deal with future economic and climatic risks. We interpret these effects with a calibrated DSGE model.

JEL Codes: H21, Q51, Q54

Keywords: precaution, insurance, economic, climatic and damage uncertainties, skewness, mean reversion, climate betas, risk aversion, prudence, intergenerational inequality aversion, convex damages, DSGE

Reference: 203

Individual View

Abstract

A new class of marked and weighted empirical processes of residuals is introduced. The framework is general enough to accommodate both stationary and non-stationary regressions as well as a wide class of estimation procedures with applications in misspecification testing and robust statistics. Two applications are presented.

First, we analyze the relationship between truncated moments and linear statistical functionals of residuals. In particular, we show that the asymptotic behaviour of these functionals, expressed as integrals with respect to their empirical distribution functions, can be easily analyzed given the main theorems of the paper. In our context the integrands can be unbounded provided that the underlying distribution meets certain moment conditions. A general first order asymptotic approximation of the statistical functionals is derived and then applied to some cases of interest.

Second, the consequences of using the standard cumulant based normality test for robust regressions are analyzed. We show that the rescaling of the moment based statistic is case dependent, i.e., it depends on the truncation and the estimation method being used. Hence, using the standard least squares normalizing constants in robust regressions will lead to incorrect inferences. However, if appropriate normalizations, which we derive, are used then the test statistic is asymptotically chi-square.

Reference: 841

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Authors: Jonas Harnau

Dec 2017

Abstract

Despite the widespread use of chain-ladder models, so far no theory was available to test for model specification. The popular over-dispersed Poisson model assumes that the over-dispersion is common across the data. A further assumption is that accident year effects do not vary across development years and vice versa. The log-normal chain-ladder model makes similar assumptions. We show that these assumptions can easily be tested and that similar tests can be used in both models. The tests can be implemented in a spreadsheet. We show the implementation in several empirical applications. While the results for the log-normal model are valid in finite samples, those for the over-dispersed Poisson model are asymptotic. We show in a simulation study that the finite sample performance is close to the asymptotic performance.

Keywords: Bartlett test; F-test; over-dispersed Poisson; log-normal

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Nov 2017

With the election of President Trump, climate deniers moved from the fringes to the centre of global policy making and need to be addressed in policy-making. An agnostic approach to policy, based on Pascal’s wager, gives a key role to subjective prior probability beliefs about whether climate deniers are right. Policy makers that assign a 10% chance of climate deniers being correct set the global price on carbon to $19.1 per ton of emitted CO2 in 2020. Given that a non-denialist scientist making use of the DICE integrated assessment model sets the price at $21.1/tCO2, agnostics’ reflection of remaining scientific uncertainty leaves climate policy essentially unchanged. The robustness of an ambitious climate policy also follows from using the max-min or the min-max regret principle. Letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max-min principle, it is possible to show how policy makers deal with fundamental climate model uncertainty when they are prepared to assign prior probabilities to different views of the world being correct. Allowing for a wide range of sensitivity exercises including damage uncertainty, it turns out that pricing carbon is the robust response under rising climate scepticism.

JEL Codes: H21, Q51, Q54

Keywords: climate model uncertainty, climate scepticism, robust climate policies, max-min, min-max regret, ambiguity aversion, DICE integrated assessment model

Reference: 202

Individual View

A cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions. Such a subsidy brings forward the end of the fossil fuel era, but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on global warming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming

JEL Codes: H21, Q51, Q54

Keywords: Second-best climate policy, Green Paradox, carbon budget, stranded assets, oligopolistic resource markets, limit pricing, voracious extraction, regime shift.

Reference: 201

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