Working Papers

Authors: Lucas Bretschger, Lin Zhang

Jul 2014

There is widespread concern that an international agreement on stringent climate policies will not be reached because it would imply too high costs for fast growing economies like China. To quantify these costs we develop a general equilibrium model with fully endogenous growth. The framework includes disaggregated industrial and energy sectors, endogenous innovation, and sector-speci c investments. We find that the implementation of Chinese government carbon policies until 2020 causes a welfare reduction of 0.3 percent. For the long run up to 2050 we show that welfare costs of internationally coordinated emission reduction targets lie between 3 and 8 percent. Assuming faster energy technology development, stronger induced innovation, and rising energy prices in the reference case reduces welfare losses signi cantly. We argue that increased urbanization raises the costs of carbon policies due to altered consumption patterns.

JEL Codes: Q54, O41, O53, C68

Keywords: Carbon policy; China; Endogenous growth; Induced innovation; Urbanization

Reference: 143

Individual View

Authors: Martina Kirchberger

Jul 2014

Children are increasingly treated as active members in the household.  However, their preferences over consumption and leisure are rarely modelled.  This paper considers heterogeneity in siblings' preferences over leisure and consumption and builds a theoretical and empirical model for children's time and consumption allocations in a household.  We test the predictions of the model with unique data from Ethiopia, India, Peru and Vietnam which contain detailed information on time use and allocations of assignable goods for sibling pairs.  We find that conditioning on observable variables, the residuals of these simultaneous decisions are significantly negatively correlated.  This suggests that differences in siblings' relative time and consumption allocations are driven by their relative preferences over leisure and consumption rather than differences in parents' relative altruism.  Families seem to function as market economies in which children trade off leisure and consumption, select their optimal bundle, and are rewarded by their parents accordingly.

JEL Codes: D1, J1, J2

Keywords: Intra-household allocation, children

Reference: 713

Individual View

Authors: Eric B. Schneider

Jun 2014

Abstract:

This paper is the first to use the individual level, longitudinal catch-up growth of boys and girls in a historical population to measure their relative deprivation. The data is drawn from two government schools, the Marcella Street Home (MSH) in Boston, MA (1889-1898) and the Ashford School of the West London School District (1908- 1917). The paper provides an extensive discussion of the two schools including the characteristics of the children, their representativeness, selection bias and the conditions in each school. It also provides a methodological introduction to measuring children’s longitudinal catch-up growth. After analysing the catch-up growth of boys and girls in the schools, it finds that there were no substantial differences between the catch-up growth by gender. Thus, these data suggest that there were not major health disparities between boys and girls in late nineteenth century America and early twentieth century Britain.

Keywords: Children

Reference: 131

Individual View

Authors: David Gill,Victoria Prowse

Jun 2014

In this paper we investigate how cognitive ability and character skills influence behavior, success and the evolution of play towards Nash equilibrium in repeated strategic interactions.  We study behavior in a p-beauty contest experiment and find striking differences according to cognitive ability: more cognitively able subjects choose numbers closer to equilibrium, converge more frequently to equilibrium play and earn more even as behavior approaches the equilibrium prediction.  To understand better how subjects with different cognitive abilities learn differently, we estimate a structural model of learning based on level-k reasoning.  We find a systematic positive relationship between cognitive ability and levels; furthermore, the average level of more cognitively able subjects responds positively to the cognitive ability of their opponents, while the average level of less cognitively able subjects does not respond.  Finally, we compare the influence of cognitive ability to that of character skills, and find that both cognition and personality affect behavior and learning.  More agreeable and emotionally stable subjects perform better and learn faster, although the effect of cognitive ability on behavior is stronger than that of character skills.

JEL Codes: C92, C73, D83

Keywords: Cognitive ability, character skills, personality traits, level-k, bounded rationality, learning, convergence, non-equilbrium behavior, beauty contest, repeated games, structural modeling, theory of mind, intelligence, IQ, cognition, Raven test

Reference: 712

Individual View

Authors: Alexander James, Brock Smith

Jun 2014

Over the past decade, the production of shale oil and gas signicantly increased in the United States. This paper uniquely examines how this energy boom has aected regional crime rates throught the United States. There is evidence that, as a result of the ongoing shale-energy boom, shale-rich counties experienced faster growth in rates of both property and violent crimes including rape, assault, murder, robbery, burglary, larceny and grand-theft auto. These results are particularly robust for rates of assault, and less so for other types of crimes. Policy makers should anticipate these effects and invest in public infrastructure accordingly.

JEL Codes: Q3; R11; K42

Keywords: Natural Resources; Hydraulic Fracturing; Crime; Resource Curse.

Reference: 140

Individual View

Authors: Sujoy Mukerji, Peter Klibanoff, Kyoungwon Seo

Jun 2014

We axiomatize preferences that can be represented by a monotonic aggregation of subjective expected utilities generated by a utility function and some set of i.i.d. probability measures over a product state space, S1. For such preferences, we define relevant measures, show that they are treated as if they were the only marginals possibly governing the state space and connect them with the measures appearing in the aforementioned representation. These results allow us to interpret relevant measures as reflecting part of perceived ambiguity, meaning subjective uncertainty about probabilities over states. Under mild conditions, we show that increases or decreases in ambiguity aversion cannot affect the relevant measures. This property, necessary for the conclusion that these measures reflect only perceived ambiguity, distinguishes the set of relevant measures from the leading alternative in the literature. We apply our findings to a number of well-known models of ambiguity-sensitive preferences. For each model, we identify the set of relevant measures and the implications of comparative ambiguity aversion.

JEL Codes: D01, D80, D81, D83

Keywords: Symmetry, beliefs, ambiguity, ambiguity aversion, sets of probabilities

Reference: 711

Individual View

Authors: Pierre-Louis Vezina

May 2014

Countries restrict the export of natural resources to lower domestic prices, stimulate downstream industries, earn rents on international markets, or on environmental grounds.  This paper provides empirical evidence of evasion of such export barriers. Using tools from the illicit trade literature, I show that exports of minerals, metals, or wood products are more likely to be missing from the exporter's statistics if they face export barriers such as prohibitions or taxes. Furthermore, I show that this relationship is signi cantly higher in countries with high levels of corruption and bribes at customs. The results have implications for the design of trade policies and environmental protection.

JEL Codes: F13, O17, O19

Keywords: natural resources, illegal trade, trade barriers

Reference: 139

Individual View

Authors: Kevin Sheppard, Wen Xu

May 2014

 We propose a new class of multivariate volatility models utilizing realized measures of asset volatility and covolatility extracted from high-frequency data. Dimension reduction for estimation of large covariance matrices is achieved by imposing a factor structure with time-varying conditional factor loadings. Statistical properties of the model, including conditions that ensure covariance stationary or returns, are established. The model is applied to modeling the conditional covariance data of large U.S. financial institutions during the financial crisis, where empirical results show that the new model has both superior in- and out-of-sample properties. We show that the superior performance applies to a wide range of quantities of interest, including volatilities, covolatilities, betas and scenario-based risk measures, where the model's performance is particularly strong at short forecast horizons.

 

JEL Codes: C32, C53, C58, G17, G21

Keywords: Conditional Beta, Conditional Covariance, Forecasting, HEAVY, Marginal Expected Shortfall, Realized Covariance, Realized Kernel, Systematic Risk

Reference: 710

Individual View

Authors: Eric B. Schneider

May 2014

This paper presents a new adaptive framework for understanding children's growth in the past.  Drawing upon the recent work of Gluckman and Hanson (2006) and their co-authors on adaptive responses in relation to growth, I present three prenatal and three postnatal adaptive mechanisms that affect the growth patterns of children.  The most novel adaptive response to the historical literature is the prenatal predictive adaptive response where the foetus develops assuming that the postnatal environment will closely match prenatal conditions.  Thus, the metalbolism and growth trajectory of a child is programmed during the prenatal period: children experiencing good conditions in utero would have a higher metabolism and growth trajectory than their counterparts facing poor conditions.  Having discussed the framework and other responses in detail, I then use it to reinterpret the growth pattern of American slaves (Steckel, 1979, 1986).  I argue that the mismatch between relatively good conditions in utero and absolutely appalling conditions in infancy and early childhood led slave children to become incredibly stunted by age three or four.  However, after this age, slave children experienced rapid catch-up growth, first because their immune systems had become more developed and had adapted to the poor disease environment and later because their diet improved tremendously and hookworm exposure was reduced when they entered the labour force around age ten.  Thus, American slave children were able to experience rapid catch-up growth because they were prenatally programmed for a higher metabolism and growth trajectory.  The paper concludes by setting out some stylized facts about children's growth in the past and pointing toward areas of future research.

Reference: 130

Individual View

Authors: Maria Porter, Abigail Adams

May 2014

This paper examines the motivation for intergenerational transfers between adult children and their parents, and the nature of preferences for such giving behaviour, in an experimental setting.  Participants in our experiment play a series of dictator games with parents and strangers, in which we vary endowments and prices for giving to each recipient.  We find that preferences for giving are typically rational.  When parents are recipients as opposed to strangers, participants display greater sensitivity to the price of giving, and a higher relative proclivity for giving.  Our findings also provide evidence of reciprocal motivations for giving, as players give more to parents who have full information regarding the context in which giving occurs.

JEL Codes: C91, D12, D64

Keywords: transfer motives, intergenerational, dictator games, lab experiments, altruism, reciprocity

Reference: 709

Individual View

Authors: Saraky Andrade de Sa, Julien Daubanes

May 2014

Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand, unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential

ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes. Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax

applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production. The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

JEL Codes: Q30; L12; H21; Q42

Keywords: Limit pricing; Non-renewable resource; Monopoly; Demand inelasticity; Substitutes subsidies

Reference: 136

Individual View

Authors: Anna Grodecka, Karlygash Kuralbayeva

May 2014

What is the optimal instrument design and choice for a regulator attempting to control emissions by private agents in face of uncertainty arising from business cycles? In applying Weitzman's result [Prices vs. quantities, Review of Economic Studies, 41 (1974), 477-491] to the problem of greenhouse gas emissions, the price-quantity literature has shown that, under uncertainty about abatement costs, price instruments (carbon taxes) are preferred to quantity restrictions (caps on emission), since the damages from climate change are relatively at. On the other hand, another recent piece of academic literature has highlighted the importance of adjusting carbon taxes to business cycle uctuations in a procyclical manner. In this paper, we analyze the optimal design and the relative performance of price versus quantity instruments in the face of uncertainty stemming from business cycles. Our theoretical framework is a general equilibrium real business cycle model with a climate change externality and distortionary scal policy. First, we nd that in an in nitely exible control environment, the carbon tax uctuates very little and is approximately constant, whilst emissions uctuate a great deal in response to a productivity shock. Second, we nd that a xed price instrument is advantageous over a xed quantity instrument due to the cyclical behavior of abatement costs, which tend to increase during expansions and decline during economic downturns. Our results suggest that the carbon tax is approximately constant over business cycles due to \at" damages in the short-run and thus procyclical behavior as suggested by other studies cannot be justi ed merely on the grounds of targeting the climate externality.

JEL Codes: E32, H23, Q54, Q58

Keywords: carbon tax, cap-and-trade, business cycles, distortionary taxes, climate change

Reference: 137

Individual View

Authors: John Quah

May 2014

We identify necessary and sufficient conditions under which a finite data set of price vectors and consumption bundles can be rationalized by a weakly separable utility function.  Our result could be understood as a generalization of Afriat's Theorem.

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

Keywords: Afriat's Theorem, utility function, revealed preference, generalized axiom

Reference: 708

Individual View

Authors: Mark Armstrong

May 2014

Traditionally, the scholarly journal market operates so that research institutions are charged high prices and the wider public is often excluded altogether, while authors can usually publish for free and commercial publishers enjoy high profits.  Two forms of open access regulation can mitigate these problems: (i) direct price regulation of the form whereby a journal must charge a price of zero to all readers, or (ii) mandating authors or publishers to make freely available an inferior substitute to the publishing paper.  The former policy is likely to result in authors paying to publish, which may lead to a reduction in the quantity of published papers and may make authors less willing to publish in selective journals.  Recent UK policy towards open access is discussed.

JEL Codes: D83, I23, L17, L51, L86

Keywords: publishing, journals, open access, two-sided markets, regulation

Reference: 707

Individual View

The optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption. This paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non-cooperative responses to this aspect of climate change. It is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions. The non-cooperative response leads to a bit more precautionary saving and diverging carbon taxes. We illustrate the various outcomes with a simple stylized North-South model of the global economy.

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

Keywords: global warming, tipping point, precautionary capital, growth, risk avoidance, carbon tax, free riding, international cooperation, asymmetries.

Reference: 149

Individual View

Authors: Thorvaldur Gylfason, Gylfi Zoega

May 2014

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years.

JEL Codes: F41, O23, O33

Keywords: Natural resource curse, Dutch disease, financial crisis

Reference: 138

Individual View

Authors: Ying-Ying Lee

May 2014

Partial mean processes with generated regressors arise in several important econometric problems, such as the distribution of potential outcomes with continuous treatments and the quantile structural function in a nonseparable triangular model.  This paper proposes a fully nonparametric estimator for the partial mean process, where the second step consists of a kernel regression on regressors that are estimated in the first step.  The main contribution is a uniform expansion that characterizes in detail how the estimation error associated with the generated regressor affects the limiting distribution of the marginal integration estimator.  The general results are illustrated with three examples: control variables in triangular models (Newey, Powell, and Vella, 1999; Imbens and Newey, 2009), the generalized propensity score for a continuus treatment (Hirano and Imbens, 2004), and the propensity score for sample selection (Das, Newey, and Vella, 2003).

JEL Codes: C13, C14, C31

Keywords: Continuous treatment, partial means, nonseparable models, generated regressors, control function

Reference: 706

Individual View

We derive a simple rule for a nearly optimal carbon tax that can be implemented and tested in a decentralized market economy. Our simple rule depends on the effect of the pure rate of time preference, growth and intergenerational inequality aversion and basic parameters of the carbon cycle, but also on any adverse effects of global warming on economic growth and mean reversion in climate damages. The performance of the simple rule is excellent and yields only tiny welfare losses compared with the true welfare optimum under a wide range of perturbations including some extreme runs designed to severely road-test the rule. Our IAM allows for scarce fossil fuel and endogenous energy transitions and generates cumulative carbon emissions and stranded assets which are also well predicted by our rule.

JEL Codes: H21, Q51, Q54

Keywords: simple rule, welfare losses, optimal carbon tax, intergenerational inequality aversion, growth, alternative climate damage specifications, stranded assets, transition times

Reference: 150

Individual View

Authors: Pierre-Louis Vezina, Christopher Parsons

May 2014

We provide cogent evidence for the causal pro-trade effect of migrants and in doing so establish an important link between migrant networks and long-run economic development.  To this end, we exploit a unique event in human history, the exodus of the Vietnamese Boat People to the US.  This episode represents an ideal natural experiment as the large immigration shock, the first wave of which comprised refugees exogenously allocated across the US, occurred over a twenty-year period during which time the US imposed a complete trade embargo on Vietnam.  Following the lifting of trade restrictions in 1994, the share of US exports going to Vietnam was higher and more diversified in those US States with larger Vietnamese populations, themselves the result of larger refugee inflows 20 years earlier.

JEL Codes: F14, F22

Keywords: Migrant Networks, US Exports, Natural Experiment

Reference: 705

Individual View

Authors: Simon Wren-Lewis, Jonathan Portes

May 2014

Theory suggests that government should as far as possible smooth taxes and its recurrent consumption spending, which means that government debts should act as a shock absorber, and any planned adjustments in debt should be gradual.  This suggests that operational targets for governments (e.g. for 5 years ahead should involve deficits rather than debt, because such rules will be more robust to shocks.  Beyond that, fiscal rules need to reflect the constraints on  monetary policy, and the extent to which governments are subject to deficit bias.  Fiscal rules for countries in a monetary union or fixed exchange rate regime need to include a strong countercyclical element.  Fiscal rule should also contain a 'knock out' if interest rates hit the zero lower bound: in that case the fiscal and monetary authorities should cooperate to formulate a fiscal expansion package that allows interest rates to rise above this bound.  In more normal times, the design of fiscal policy rules is likely to depend on the extent to which governments are subject to deficit bias, and the effectiveness of any national fiscal council.  For example, governments that had not shown a history of deficit bias could aim to target deficits five years ahead (rolling targets), and these would not require cyclical adjustment.  In contrast, governments that were more prone to bias could target a cyclically adjusted deficit at the end of their expected period of office.  In both cases fiscal councils would have an important role to play, in ensuring plans were implemented in the first case and allowing for departures from target when exernal shocks occurrred in the second.

JEL Codes: E62

Keywords: fiscal policy, fiscal rules, fiscal councils

Reference: 704

Individual View

Authors: Vellore Arthi

Apr 2014

 I use variation in childhood exposure to the Dust Bowl, an environmental shock to health and income, as a natural experiment to explain variation in adult human capital.  I find that the Dust Bowl produced significant adverse impacts in later life, especially when exposure was in utero, increasing rates of poverty and disability, and decreasing rates of fertility and college completion.  Dependence on agriculture exacerbates these effects, suggesting that the Dust Bowl was most damaging via the destruction of farming livelihoods.  This collapse of farm incomes, however, had the positive effect of reducing demand for child farm labor and thus decreasing the opportunity costs of secondary schooling, as evidence by increases in high school completion amongst the exposed.

Keywords: Dust Bowl, environmental shock, human capital formation, early life health

Reference: 129

Individual View

Authors: Francesco Zanetti

Apr 2014

This paper estimates a New Keynesian model to investigate to what extent labour market reforms undertaken by the Thatcher government in the late 1930s and the introduction of a constant inflation target in 1992 might have changed the UK economic outlook if they had been introduced in the early 1970s.  The results suggest that a stronger reaction to deviations of inflation from target have contributed to a more stable economic outlook, while labour market reforms and the introduction of a constant inflation target are unlikely to have produced a different outcome.

JEL Codes: E24, E32, E52, J64

Keywords: Labour market reforms, Search and matching, New Keynesian model

Reference: 702

Individual View

Authors: Damoun Ashournia, Jakob MunchDaniel Nguyen

Apr 2014

The impact of imports from low-wage countries on domestic labor market outcomes has been a hotly debated issue for decades.  The recent surge in imports from China has reignited this debate.  Since the 1980s several developed economies have experienced contemporaneous increases in the volume of imports and in the wage gap between high- and low-skilled workers.  However, the literature has not been able to document a strong causal relationship between imports and the wage gap.  Instead, past studies have attributed the widening wage gap to skill biased technological change.  This paper finds evidence for the direct impact of low wage imports on the wage gap.  Using detailed Danish panel data for firms and workers, it measures the effects of Chinese import penetration at the firm level on wages within job-spells and over the longer term taking transitions in the labor market into account.  We find that greater exposure to Chinese imports corresponds to a negative firm-level demand shock, which is biased towards low-skill intensive products.  Consistent with this an increase in Chinese import penetration results in lower wages for low skilled employees.

JEL Codes: F16

Keywords: Chinese import penetration, wage inequality, firm heterogeneity

Reference: 703

Individual View

Authors: Tim Willems, Shaun Larcom, Mare Sarr

Apr 2014

History offers many examples of dictators who worsened their behavior significantly over time (like Zimbabwe's Robert Mugabe), while there are also cases of dictators who have displayed remarkable improvements (like Jerry Rawlings of Ghana).  We show that such mutations can result from rational behavior when the dictator's flow use of repression is complementary to his accumulated stock of wrongdoings.  This complementarity gives rise to two steady states (one where repression is low and one where repression is high) and implies that any individual rising to power in this setup has the potential to end up as either a moderate leader, or as a dreaded tyrant.  Our model shows that dictators are more likely to derail with higher levels of divertible funds available, for example stemming from fungible aid inflows or from the exploitation of natural resources.

JEL Codes: D72, D74, N47, O10

Keywords: Dictatorship, Repression, Political violence, Resource curse, Learning, Multiple steady states

Reference: 701

Individual View

Authors: Gregg Huff, Gillian Huff

Apr 2014

This working paper analyzes demographic change in Southeast Asia's main cities during and soon after the World War II Japanese occupation.  We argue that two main patterns of population movements are evident.  In food-deficient areas, a search for food security typically led to large net inflows to main urban centres.  By contrast, an urban exodus dominated in food surplus regions because the chief risk was to personal safety, especially from Japanese and Allied bombing.  Black markets were ubiquitous, and essential to sustaining livelihoods in cities with food-deficit hinterlands.  In Rangoon and Manila, wartime population fluctuations were enormous.  Famines in Java and northern Indochina severely impacted Jakarta and Hanoi through inflows of people from rural areas.  In most countries, the war's aftermath of refugees, revolution and political disruption generated major rural-urban population relocations.  Turmoil in the 1940s had the permanent consequences of augmenting the primacy of Southeast Asia's main cities and promoting squatter settlement.

JEL Codes: N15, N90, N95, R11

Keywords: urbanization, Southeast Asia, famine, World War II, entitlements, Japan

Reference: 128

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