Working Papers

Authors: David Hendry, Andrew B. Martinez

Mar 2016

Abstract:

This paper develops a new approach for evaluating multi-step system forecasts with relatively few forecast-error observations. It extends Clements and Hendry (1993a) using Abadir et al.(2014) to generate "design-free" estimates of the general matrix of the forecast-error second-moment when there are relatively few forecast-error observations. Simulations show that the usefulness of alternative methods deteriorates when their assumptions are violated. The new approach compares well against these methods and provides correct forecast rankings.

JEL Codes: C22, C32, C53

Keywords: Invariance, Forecast Evaluation, Forecast Error, Moment Matrices, MSFE, GFESM

Reference: 784

Individual View

Authors: Jonathon M. Clegg

Mar 2016

Abstract:

Rational retrospective voting models have dominated the literature on election forecasting and the economic vote since they were first proposed by Anthony Downs in 1957. The theory views voters as appraisers of incumbent government’s past performance, which acts as the principal source of information individuals use when making their vote. Pure retrospective voting requires far less of the electorate in order to hold a government accountable and empirical work based on this theory has been very adept at predicting election outcomes and explaining individual voting decisions. In terms of the time period assessed to form judgements on past performance however, there is a surprising disconnect between the theoretical line of thought and actual testing. The sensible assumption of retrospective voting models is that voters, looking to judge a government’s past performance, should assess changes in their own welfare over an entire term of office, with little or no discounting of past events. The majority of empirical studies however, focus on economic performance over shorter time horizons, usually within a year of an election. There have only been a handful of studies attempting to empirically test the correct temporal relationship between changes in economic indicators and election outcomes, despite its importance for retrospective voting models and democratic accountability. This working paper empirically tests over which time horizons changes in macroeconomic fundamentals continue to have a significant bearing on election outcomes in Post War Britain. It finds that longer-term measures of economic change, over entire government terms, are better at predicting changes in incumbent’s vote shares than shorter-term measures, closer to the election period. This has important consequences for future voting models and is a promising result for democratic accountability.

JEL Codes: D72, C52

Reference: 143

Individual View

Authors: David Gill,Victoria Prowse, Zdenka Kissova, Jaesun Lee

Mar 2016

 

Abstract:

Rank-order relative-performance evaluation, in which pay, promotion and symbolic awards depend on the rank of workers in the distribution of performance, is ubiquitous. Whenever firms use rank-order relative-performance evaluation, workers receive feedback about their rank. Using a real-effort experiment, we aim to discover whether workers respond to the specific rank that they achieve. In particular, we leverage random variation in the allocation of rank among subjects who exerted the same effort to obtain a causal estimate of the rank response function that describes how effort provision responds to the content of rank-order feedback. We find that the rank response function is U-shaped. Subjects exhibit 'first-place loving' and 'last-place loathing', that is subjects work hardest after being ranked first or last. We discuss implications of our findings for the optimal design of firms' performance feedback policies, workplace organizational structures and incentives schemes.

JEL Codes: C23, C91, J22, M12,

Keywords: Relative performance evaluation, Relative performance feedback, Rank order feedback, Dynamic effort provision, Real effort experiment, Flat wage, Fixed wage, Taste for rank, Status seeking,Social esteem, Self esteem, Public feedback, Private feedback.

Reference: 783

Individual View

Authors: Robert Allen

Mar 2016

Abstract:

Schumpeter’s ‘perennial gale of creative destruction’ blew strongly through Britain during the Industrial Revolution, as the factory mode of production displaced the cottage mode in many industries. A famous example is the shift from hand loom weaving to the use of power looms in mills. As the use of power looms expanded, the price of cloth fell, and the ‘golden age of the hand loom weaver’ gave way to poverty and unemployment. This paper argues that the fates of the hand and machine processes were even more closely interwoven. With the expansion of factory spinning in the 1780s, the demand for hand loom weavers soared in order to process the newly available cheap yarn. The rise in demand raised the earnings of hand loom weavers, thereby, creating the ‘golden age’. The high earnings also increased the profitability of developing the power loom by raising the value of the labour that it saved. This meant that less efficient–hence, cheaper to develop--power looms could be brought into commercial use than would have been the case had the golden age not occurred. The counterfactual possibilities are explored with a model of the costs of weaving by hand and by power. The cottage mode of production was an efficient system of producing cloth, but it self-destructed as its expansion after 1780 raised the demand for sector-specific skills, thus providing the incentive for inventors to develop a power technology to replace it. The power loom, in turn, devalued the old skills, so poverty accompanied progress.

JEL Codes: N63, N34, O31

Keywords: Technological Change, Invention, Technological Unemployment, Creative Destruction

Reference: 142a

Individual View

Authors: Robert Allen

Mar 2016

Abstract:

This paper proposes a new method for defining an international poverty line based on explicit budgeting. The novel feature is that linear programming is used to deduce the diet that minimizes cost and guarantees survival. Nonfood items are also explicitly budgeted and amount to about one quarter of the cost of subsistence. A series of least cost diets are calculated with increasingly demanding nutritional requirements for twenty countries using prices from ICP 2011. The aim is to see which requirements rationalize the spending pattern of the poor. The ‘reduced basic’ model does the job. When the cost of the nonfood items are added to the cost of the ‘reduced basic’ diet, the resulting Linear Programming Poverty Line (LPPL) averages $1.88 per day across the poor countries in the sample. The same model rationalizes both the spending pattern of the poor and the World Bank Poverty Line. The LPPL has the advantages that it is (1) clearly related to survival and well being, (2) comparable across time and space since the same nutritional requirements are used everywhere, (3) adjusts consumption patterns to local prices, (4) presents no index number problems since solutions are always in local prices, and (5) requires only readily available information, namely, the prices in ICP or equivalent.

JEL Codes: I12, I32, O61, O63

Keywords: Absolute poverty, Diet problem, Linear Programming, World Bank Poverty Line

Reference: 141

Individual View

Authors: Valeria Rueda, Guillaume Laval, Etienne Patin

Feb 2016

Abstract:

This article explores the role of individual cultural distance on income, using the genetic distance as a proxy for cultural distance. We show that cultural distance has heterogeneous predictive power. In particular, culturally distant individuals living in regions with other individuals from more trusting ancestries or less xenophobic ones are more likely to be economically successful. First generation migrants seem to be less likely to success the more culturally distant they are, but this effect vanishes as time spent in the USA increases. Our research challenges the static view that cultural differences are necessarily an obstacle to economic performance in the long-run. Our interpretation of the results is robust to the use of alternative measures for cultural distance.

JEL Codes: J61, N30, O15, Z13, Z15 r

Keywords: Cultural Distance, Cultural Diversity, Genetics, Historical Persistence, Labor Participation, Social Capital

Reference: 140

Individual View

Authors: Anthony Venables, Jan I. Haaland

Feb 2016

Abstract:

This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Analysis encompasses cases in which the domestic MC sector is able to expand or contract flexibly, or is constrained to be of fixed size. In the former case domestic protection can bring gains by increasing the number of product varieties on offer; these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters some of whom may withdraw from the market. In the latter case gains from protection arise from terms-of-trade effects; since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter. In general, policies work through both a terms-of-trade and a variety effect, and the paper shows how the relative importance of each depends on the structure of the economy.

JEL Codes: F12, F13

Keywords: trade policy, monopolistic competition, heterogeneous firms, terms of trade, variety, productivity.

Reference: 782

Individual View

Authors: Heinrich H. Nax

Feb 2016

Abstract:

Reinforcement relative to an adaptive benchmark is a well-established model of behavior outside finance. Recently, reinforcement has been identified as an important driver of decisions to repurchase a stock. In this paper, we enrich the existing reinforcement model of repurchasing by an aspiration-based market benchmark. When choosing which stock to repurchase, investors’ sources of reinforcement are weighted averages of absolute returns from previous sales and relative returns with respect to a market benchmark. The weights change according to market environments. We empirically identify the following crucial asymmetry that cannot be reconciled by simple reinforcement strategy, but is consistent with the model we propose: investors place more weight on relative returns when the market is performing well, and place more weight on absolute returns when the market is performing badly.

JEL Codes: G02, G11, D01

Keywords: Reinforcement, Stock Repurchasing, Aspiration Adjustment

Reference: 781

Individual View

Authors: David Hendry, Felix Pretis, Lea Schneider, Jason E. Smerdon

Feb 2016

Abstract:

We present a methodology for detecting structural breaks at any point in time-series regression models using an indicator saturation approach. Building on recent developments in econometric model selection for more variables than observations, we saturate a regression model with a full set of designed break functions. By selecting over these break functions using an extended general-to-specific algorithm, we obtain unbiased estimates of the break date and magnitude. Monte Carlo simulations confirm the approximate properties of the approach. We assess the methodology by detecting volcanic eruptions in a time series of Northern Hemisphere mean temperature spanning roughly 1200 years, derived from a fully-coupled global climate model simulation. Our technique demonstrates that historic volcanic eruptions can be statistically detected without prior knowledge of their occurrence or magnitude- and hence may prove useful for estimating the past impact of volcanic events using proxy-reconstructions of hemispheric or global mean temperature, leading to an improved understanding of the effect of stratospheric aerosols on temperatures. The break detection procedure can be applied to evaluate policy impacts as well as act as a robust forecasting device.

JEL Codes: C22, C52, Q54

Keywords: Indicator Saturation, Model Selection, Location Shifts, Climate,Temperature, Volcanic Eruptions

Reference: 780

Individual View

Authors: Jennifer Castle, David Hendry, Michael P. Clements

Feb 2016

Abstract:

Economic forecasting may go badly awry when there are structural breaks, such that the relationships between variables that held in the past are a poor basis for making predictions about the future. We review a body of research that seeks to provide viable strategies for economic forecasting when past relationships can no longer be relied upon.

JEL Codes: C51, C22

Keywords: Business Cycles, Forecasting, Breaks

Reference: 779

Individual View

Authors: David Hendry

Jan 2016

Abstract:

Macroeconomic time-series data are aggregated, inaccurate, non-stationary, collinear and rarely match theoretical concepts. Macroeconomic theories are incomplete, incorrect and changeable: location shifts invalidate the law of iterated expectations and ‘rational expectations’ are then systematically biased. Empirical macro-econometric models are non-constant and mis-specified in numerous ways, so economic policy often has unexpected effects, and macroeconomic forecasts go awry. In place of using just one of the four main methods of deciding between alternative models, theory, empirical evidence, policy relevance and forecasting, we propose nesting ‘theory-driven’ and ‘datadriven’ approaches, where theory-models’ parameter estimates are unaffected by selection despite searching over rival candidate variables, longer lags, functional forms, and breaks.

JEL Codes: C51, C22

Keywords: Model Selection, Theory Retention, Location Shifts, Indicator Saturation, Autometrics.

Reference: 778

Individual View

Authors: H Peyton Young, Lucas Merrill Brown

Jan 2016

Abstract:

We study the increasing use of stock options to compensate executives in US corporations. As with many technological innovations, the adoption curve exhibits a classic S-shaped pattern: the rate rises slowly at first, then there is a period of rapid acceleration, and finally it tails off as the saturation level is approached. Using a longitudinal data set of Frydman and Saks (2010) supplemented with financial reports compiled by the authors, we argue that the diffusion of options was initially given a jump-start by a change in the tax law, but thereafter it was propelled by a process in which firms learned from the experience of earlier adopters. The notion that options spread primarily through social conformity or ‘jumping on the bandwagon’ is not borne out by the data.

JEL Codes: O33,O35

Reference: 777

Individual View

Authors: Jasper van Dijk

Jan 2016

Abstract:

This paper shows that attracting tradable jobs to a city has a bigger positive impact on employment in the non-tradable sector in the same city when the unemployment rate is higher. Therefore it is efficient to stimulate firms in the tradable sector to locate and/or expand in cities with relatively high unemployment rate. This policy would also reduce disparity between cities. Finally the jobs created in the non-tradable sector due to this local multiplier effect from the tradable sector will employ relatively more current inhabitants in cities with a high unemployment rate, thus making this policy more attractive for local policy makers as well.

A simple model illustrates the effect of a demand shock on employment in the non-tradable sector of a city. Empirically I consider the effect of demand from workers in the tradable sector on employment in the non-tradable sector in the same city using U.S. census data from 1980 to 2000. I find that 100 additional jobs in the tradable sector will increase employment in the non-tradable sector in the same city by employing 81 current residents and employing 28 workers that move to the city from other regions. I find that the size of this local employment multiplier depends on the local unemployment rate. Specifically, the multiplier for current residents increases, which drives the overall effect, but the multiplier for migrants decreases.

JEL Codes: F16, R15, R23

Keywords: Local labour market, Multiplier, Tradable, Non-tradable, Unemployment, Migration

Reference: 776

Individual View

Authors: Peter Neary, Dermot Leahy

Dec 2015

Abstract:

We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility
of trade affects the domestic firm's behavior is the same; trade liberalization increases trade volume monotonically; and welfare follows a U-shaped pattern. However, welfare
is usually greater under Bertrand than Cournot competition, despite the fact that for higher trade costs the volume of trade is greater under Cournot competition. In general,
there exists a “Nimzowitsch Region” in parameter space, where welfare is higher under Bertrand competition even though no actual trade takes place.

JEL Codes: F12,F13

Keywords: Cournot and Bertrand Competition, Cross-Hauling, Nimzowitsch Region,Oligopoly and Trade,Trade Liberalization

Reference: 775

Individual View

Authors: Peter Neary, Monika MrázováMathieu Parenti

Dec 2015

Abstract

We derive exact conditions relating the distributions of firm productivity, sales, output, and markups to the form of demand; in particular, for a large family (including Pareto, log-normal, and Fréchet), the distributions of productivity and output are the same if and only if demand is "CREMR" (Constant Revenue Elasticity of Marginal Revenue). Moreover, we use the Kullback-Leibler Divergence to quantify the information loss when a predicted distribution fails to match the actual one; and we find that,to explain the sales distribution, the choice between Pareto and log-normal productivity distributions matters less than the choice between CREMR and other demands.

JEL Codes: F15, F23, F12

Keywords: CREMR Demands; Heterogeneous Firms; Kullback-Leibler Divergence; Log-Normal Distribution; Pareto Distribution.

Reference: 774

Individual View

Authors: Rozana Himaz

Dec 2015

Abstract:

This paper investigates empirically whether large expenditure cuts and revenue rises that were the result of deliberate political efforts towards being austere had an impact on electoral outcomes in the UK using data from 1900 to 2015. The main electoral outcomes considered are the change in ruling party ideology and the margin of victory faced by the incumbent at the general election, in terms of seats secured. The paper finds that large cuts in spending and large rises in revenue significantly increases the chance of a government changing. However, the loss in seats were significantly higher for the incumbent compared to the winning partly only when large spending cuts were pursued rather than revenue increases during the incumbent's tenure in office. We also find that voters are sensitive to particular types of spending cuts, such as cuts in social security. These results are contrary to those in Alesina et.al (2013) using OECD data for 19 countries from 1975-2008, and several other papers in the empirical literature that found no significant correlation between fiscal adjustment and electoral looses.

 

JEL Codes: H2, H3, H5

Keywords: Fiscal austerity, electoral outcomes, United Kingdom

Reference: 773

Individual View

Authors: Ferdinand Rauch, Adriana Kocornik-Mina, Thomas K.J. McDermott, Guy Michaelsor

Dec 2015

Abstract

Does economic activity relocate away from areas that are at high risk of recurring shocks? We examine this question in the context of floods, which are among the costliest and most common natural disasters. Over the past thirty years, floods worldwide killed more than 500,000 people and displaced over 650,000,000 people. This paper analyzes the effect of large scale floods, which displaced at least 100,000 people each, in over 1,800 cities in 40 countries, from 2003-2008. We conduct our analysis using spatially detailed inundation maps and night lights data spanning the globe's urban areas. We find that low elevation areas are about 3-4 times more likely to be hit by large floods than other areas, and yet they concentrate more economic activity per square kilometre. When cities are hit by large floods, the low elevation areas also sustain more damage, but like the rest of the flooded cities they recover rapidly, and economic activity does not move to safer areas. Only in more recently populated urban areas, flooded areas show a larger and more persistent decline in economic activity. Our findings have important policy implications for aid, development and urban planning in a world with rising urbanization and sea levels.

JEL Codes: R11, Q54

Keywords: Urbanization, Flooding, Climate change, Urban recovery

Reference: 772

Individual View

Authors: Jasper van Dijk

Dec 2015

Abstract

This paper replicates Moretti (AER, 2010). I estimate the local employment multiplier between the tradable and the nontradable sector in MSAs in the United States using two methods. The first replicates Moretti's results, based on the description he gives in his paper and part of his estimation files. I am able to reverse engineer the specification he uses, but identify some discrepancies with his results. The second method is an alternative to his specification that produces more robust estimates of the local multiplier effect with more policy relevance. Using an alternative instrument which, I argue is more plausibly exogenous, I find that for each 100 new jobs in the tradable sector, there are 84 additional jobs created in the nontradable sector of the same city. This is 75 fewer jobs than predicted by Moretti.

JEL Codes: F16, R15, R23

Keywords: Local labor market, multiplier, tradable, nontradable

Reference: 771

Individual View

Authors: Andrew Mell

Dec 2015

Abstract:

A rational long lived player plays against a series of short lived players who use a variant of the Adaptive Play behavioral rule. In equilibrium, under certain conditions, there will be a cut-off level of reputation. If their reputation is below the cut-off, they will build their reputation, and consume out of their reputation if it is above the cut-off. Over the long run, their reputation oscillates around the cut-off. A public relations professional can manipulate the sampling of the short lived players to the benefit of the long lived player. As a result a patient long lived player's behavior will worsen while an impatient long lived player's behavior will improve.

JEL Codes: D82,D83,D84

Keywords: Reputation, Adaptive Play, Monitoring, Expectation Formation

Reference: 770

Individual View

Authors: Peter Neary

Dec 2015

Abstract

This paper presents a new model of oligopoly in general equilibrium and explores its implications for positive and normative aspects of international trade. Assuming
“continuum-Pollak" preferences, the model allows for consistent aggregation over a continuum of sectors, in each of which a small number of home and foreign firms engage in
Cournot competition. I show how competitive advantage interacts with comparative advantage to determine resource allocation, and, specializing to continuum-quadratic
preferences, I explore the model's implications for the gains from trade, for the distribution of income between wages and profits, and for production and trade patterns in
a two-country world.

JEL Codes: F10, F12

Keywords: “Continuum-Pollak" preferences, Continuum-quadratic preferences, GOLE (General Oligopolistic Equilibrium),Market integration,Trade and income distribution

Reference: 769

Individual View

Authors: Beata Javorcik,Peter Neary, Carsten Eckel, Leonardo Iacovone

Dec 2015

Abstract:

We review the implications of the "core competence" model of multi-product firms, including the “market-size paradox”: for most countries, the world market is much larger than the home market, while the costs of accessing foreign markets are relatively low; hence the model predicts that most domestic firms should export more of their core products than they sell domestically; yet, in practice, we do not observe this. Extending the model to allow for investment in export market penetration resolves the puzzle, and Mexican data confirm its predictions: in particular,only the largest firms exhibit the dominance of exports over home sales.

JEL Codes: F12

Keywords: Core competence model, Export market penetration costs, Flexible manufacturing, Multi-product firms.

Reference: 768

Individual View

Authors: Kevin Hjortshøj O'Rourke

Dec 2015

Abstract:

The paper looks at the development of the secular stagnation thesis, in the context of the economic history of the time. It explores some 19th century antecedents of the thesis, before turning to its interwar development. Not only Alvin Hansen, but Keynes and Hicks were involved in the conversations that led to Hansen's eventual statement of the thesis that we are familiar with. The argument made sense in the context of the interwar period, but more so in Britain than the US.

Keywords: Secular stagnation, Alvin Hansen, Keynes, Economic history, History of economic thought, Interwar

Reference: 139

Individual View

Authors: Alan Beggs

Nov 2015

Abstract

This paper studies learning when agents evaluate outcomes in comparison to a reference point. It shows that certain models of reinforcement learning lead to
classes of recursive preferences.

JEL Codes: D830, D870

Keywords: Reference points, Reinforcement Learning, Recursive Preferences

Reference: 767

Individual View

Authors: Peiran Jiao

Nov 2015

This paper applies survival analysis to individual trading data from a discount brokerage firm, and documents significant individual-level repurchase bias, investors' tendency to disproportionately repurchase more previously sold winners than losers. Investor sophistication and experience mitigated the bias, but generated asymmetric effects: the most sophisticated/experienced investors' tendency to avoid prior losers were almost completely eliminated, but they were still over twice more likely to repurchase prior winners. Limited attention, chasing past performance and risk-adjusted returns could not justify the asymmetry. This suggests one reason for loss from frequent trading was persistent naive reinforcement learning in repurchasing prior winners.

JEL Codes: D10,D14,G10

Keywords: Repurchase Bias, Reinforcement Learning, Sophistication, Experience.

Reference: 765

Individual View

Authors: Peiran Jiao

Nov 2015

Abstract:

Investors in the financial markets typically have access to both descriptive information of assets, from brochures, financial analysts, reports, etc., and own experience.
However, little is known about the role of experience in investment decisions. This paper investigates this issue by experimentally testing the effects of experience in an
investment task with choice feedback and varying levels of descriptive information. We document the double-channeled effects of experience: when elicited beliefs were controlled
for, participants significantly relied on experience regardless of the descriptions, behaving consistently with the law of effect; additionally, beliefs were also distorted by experience, in that participants were more optimistic about assets from which they gained, and pessimistic about previously unowned assets. In a calibration exercise, reinforcement learning significantly added predictive power to expected utility models.

JEL Codes: C91, D03, D83, G11.

Keywords: Description, Experience, Investment Decision, Belief Distortion.

Reference: 766

Individual View


Loading Papers...