We introduce the Realized moMents of Disjoint Increments (ReMeDI) paradigm to measure microstructure noise (the deviation of the observed asset prices from the fundamental values caused by market imperfections). We propose consistent estimators of arbitrary moments of the microstructure noise process based on high-frequency data, where the noise process could be serially dependent, endogenous, and nonstationary. We characterize the limit distributions of the proposed estimators and construct confidence intervals under infill asymptotics. Our simulation and empirical studies show that the ReMeDI approach is very effective to measure the scale and the serial dependence of microstructure noise. Moreover, the estimators are quite robust to model specifications, sample sizes, and data frequencies.
We develop a tractable model of banks' liquidity management with an over-the-counter interbank market to study the credit channel of monetary policy. Deposits circulate randomly across banks and must be settled with reserves. We show how monetary policy affects the banking system by altering the trade-off between profiting from lending and incurring greater liquidity risk. We present two applications of the theory, one involving the connection between the implementation of monetary policy and the pass-through to lending rates, and another considering a quantitative decomposition behind the collapse in bank lending during the 2008 financial crisis. Our analysis underscores the importance of liquidity frictions and the functioning of interbank markets for the conduct of monetary policy.
We study firm responses to a large-scale change in apprenticeship regulation in Colombia. The reform requires firms to train, setting apprentice quotas that vary discontinuously in firm size. We document strong heterogeneity in responses across sectors, where firms in sectors with high skill requirements tend to avoid training apprentices, while firms in low-skill sectors seek apprentices. Guided by these reduced-form findings, we structurally estimate firms' training costs. Especially in high-skill sectors, many firms face large training costs, limiting their willingness to train apprentices. Yet, we find substantial overall benefits of expanding apprenticeship training, in particular when the supply of trained workers increases in general equilibrium. Finally, we show that counterfactual policies taking into account heterogeneity across sectors can deliver similar benefits from training while inducing less distortions in the firm-size distribution and in the allocation of resources across sectors.
We study discrete panel data methods where unobserved heterogeneity is revealed in a first step, in environments where population heterogeneity is not discrete. We focus on two-step grouped fixed-effects (GFE) estimators, where individuals are first classified into groups using kmeans clustering, and the model is then estimated allowing for group-specific heterogeneity. Our framework relies on two key properties: heterogeneity is a function—possibly nonlinear and time-varying—of a low-dimensional continuous latent type, and informative moments are available for classification. We illustrate the method in a model of wages and labor market participation, and in a probit model with time-varying heterogeneity. We derive asymptotic expansions of two-step GFE estimators as the number of groups grows with the two dimensions of the panel. We propose a data-driven rule for the number of groups, and discuss bias reduction and inference.
We study the optimal design of corporate taxation and R&D policies as a dynamic mechanism design problem with spillovers. Firms have heterogeneous research productivity, and that research productivity is private information. There are non-internalized technological spillovers across firms, but the asymmetric information prevents the government from correcting them in the first best way. We highlight that key parameters for the optimal policies are (i) the relative complementarities between observable R&D investments, unobservable R&D inputs, and firm research productivity, (ii) the dispersion and persistence of firms' research productivities, and (iii) the magnitude of technological spillovers across firms. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. In the data, high research productivity firms get disproportionately higher returns to R&D investments than lower productivity firms. Very simple innovation policies, such as linear corporate taxes combined with a nonlinear R&D subsidy—which provides lower marginal subsidies at higher R&D levels—can do almost as well as the unrestricted optimal policies. Our formulas and theoretical and numerical methods are more broadly applicable to the provision of firm incentives in dynamic settings with asymmetric information and spillovers, and to firm taxation more generally.
This paper shows that robust inference under weak identification is important to the evaluation of many influential macro asset pricing models, including (time-varying) rare-disaster risk models and long-run risk models. Building on recent developments in the conditional inference literature, we provide a novel conditional specification test by simulating the critical value conditional on a sufficient statistic. This sufficient statistic can be intuitively interpreted as a measure capturing the macroeconomic information decoupled from the underlying content of asset pricing theories. Macro-finance decoupling is an effective way to improve the power of the specification test when asset pricing theories are difficult to refute because of a severe imbalance in the information content about the key model parameters between macroeconomic moment restrictions and asset pricing cross-equation restrictions. We apply the proposed conditional specification test to the evaluation of a time-varying rare-disaster risk model and the construction of robust model uncertainty sets.
This paper studies optimal decision rules, including estimators and tests, for weakly identified GMM models. We derive the limit experiment for weakly identified GMM, and propose a theoretically-motivated class of priors which give rise to quasi-Bayes decision rules as a limiting case. Together with results in the previous literature, this establishes desirable properties for the quasi-Bayes approach regardless of model identification status, and we recommend quasi-Bayes for settings where identification is a concern. We further propose weighted average power-optimal identification-robust frequentist tests and confidence sets, and prove a Bernstein-von Mises-type result for the quasi-Bayes posterior under weak identification.
More than two decades ago, a well-known study on heart attack treatments provided evidence suggesting that, when appropriately adjusted for quality, medical care prices were actually declining (Cutler, McClellan, Newhouse, and Remler (1998)). Our paper revisits this subject by leveraging estimates from more than 8000 cost-effectiveness studies across a broad range of conditions and treatments. We find large quality-adjusted price declines associated with treatment innovations. To incorporate these quality-adjusted indexes into an aggregate measure of inflation, we combine an unadjusted medical-care price index, quality-adjusted price indexes from treatment innovations, and proxies for the diffusion rate of new technologies. In contrast to official statistics that suggest medical care prices increased by 0.53 percent per year relative to economy-wide inflation from 2000 to 2017, we find that quality-adjusted medical care prices declined by 1.33 percent per year over the same period.
We theoretically analyze the problem of testing for p-hacking based on distributions of p-values across multiple studies. We provide general results for when such distributions have testable restrictions (are non-increasing) under the null of no p-hacking. We find novel additional testable restrictions for p-values based on t-tests. Specifically, the shape of the power functions results in both complete monotonicity as well as bounds on the distribution of p-values. These testable restrictions result in more powerful tests for the null hypothesis of no p-hacking. When there is also publication bias, our tests are joint tests for p-hacking and publication bias. A reanalysis of two prominent data sets shows the usefulness of our new tests.
We study optimal control problems in the multivariate linear-quadratic-Gaussian framework under rational inattention. We propose a three-step procedure to solve this problem using semidefinite programming and derive the optimal signal structure without strong prior restrictions. We analyze both the transition dynamics of the optimal posterior covariance matrix and its steady state. We characterize the optimal information structure for some special cases and develop numerical algorithms for general cases. Applying our methods to solve three multivariate economic models, we obtain some results qualitatively different from the literature.
Many causal and structural effects depend on regressions. Examples include policy effects, average derivatives, regression decompositions, average treatment effects, causal mediation, and parameters of economic structural models. The regressions may be high‐dimensional, making machine learning useful. Plugging machine learners into identifying equations can lead to poor inference due to bias from regularization and/or model selection. This paper gives automatic debiasing for linear and nonlinear functions of regressions. The debiasing is automatic in using Lasso and the function of interest without the full form of the bias correction. The debiasing can be applied to any regression learner, including neural nets, random forests, Lasso, boosting, and other high‐dimensional methods. In addition to providing the bias correction, we give standard errors that are robust to misspecification, convergence rates for the bias correction, and primitive conditions for asymptotic inference for estimators of a variety of estimators of structural and causal effects. The automatic debiased machine learning is used to estimate the average treatment effect on the treated for the NSW job training data and to estimate demand elasticities from Nielsen scanner data while allowing preferences to be correlated with prices and income.
This paper studies the impacts of managers in the administrative public sector using novel Italian administrative data containing an output‐based measure of productivity. Exploiting the rotation of managers across sites, I find that a one standard deviation increase in managerial talent raises office productivity by 10%. These gains are driven primarily by the exit of older workers who retire when more productive managers take over. I use these estimates to evaluate the optimal allocation of managers to offices. I find that assigning better managers to the largest and most productive offices would increase output by at least 6.9%.
Facing several decisions, people may consider each one in isolation or integrate them into a single optimization problem. Isolation and integration may yield different choices, for instance, if uncertainty is involved, and only one randomly selected decision is implemented. We investigate whether the random incentive system in experiments that measure ambiguity aversion provides a hedge against ambiguity, making ambiguity‐averse subjects who integrate behave as if they were ambiguity neutral. Our results suggest that about half of the ambiguity averse subjects integrated their choices in the experiment into a single problem, whereas the other half isolated. Our design further enables us to disentangle properties of the integrating subjects' preferences over compound objects induced by the random incentive system and the choice problems in the experiment.
How can one determine whether a treatment, such as the introduction of a social program or trade shock, alters agents' incentives to form links in a network? This paper proposes analogs of a two‐sample Kolmogorov–Smirnov test, widely used in the literature to test the null hypothesis of no treatment effects, for network data. It first specifies a testing problem in which the null hypothesis is that two networks are drawn from the same random graph model. It then describes two randomization tests based on the magnitude of the difference between the networks' adjacency matrices as measured by the 2 → 2 and ∞ → 1 operator norms. Power properties of the tests are examined analytically, in simulation, and through two real‐world applications. A key finding is that the test based on the ∞ → 1 norm can be much more powerful for the kinds of sparse and degree‐heterogeneous networks common in economics.
We use household‐level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial within‐village frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). Selection substantially amplifies the productivity effect of distortionary policies by affecting occupational choices that worsen average ability in agriculture.
This paper presents finite‐sample efficiency bounds for the core econometric problem of estimation of linear regression coefficients. We show that the classical Gauss–Markov theorem can be restated omitting the unnatural restriction to linear estimators, without adding any extra conditions. Our results are lower bounds on the variances of unbiased estimators. These lower bounds correspond to the variances of the the least squares estimator and the generalized least squares estimator, depending on the assumption on the error covariances. These results show that we can drop the label “linear estimator” from the pedagogy of the Gauss–Markov theorem. Instead of referring to these estimators as BLUE, they can legitimately be called BUE (best unbiased estimators).
This paper studies the optimal conduct of monetary policy in a multisector economy in which firms buy and sell intermediate goods over a production network. We first provide a necessary and sufficient condition for the monetary policy's ability to implement flexible‐price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first‐best allocation. We then characterize the optimal policy in terms of the economy's production network and the extent and nature of nominal rigidities. Our characterization result yields general principles for the optimal conduct of monetary policy in the presence of input‐output linkages: it establishes that optimal policy stabilizes a price index with greater weights assigned to larger, stickier, and more upstream industries, as well as industries with less sticky upstream suppliers but stickier downstream customers. In a calibrated version of the model, we find that implementing the optimal policy can result in quantitatively meaningful welfare gains.
We propose and implement a new method to estimate treatment effects in settings where individuals need to be in a certain state (e.g., unemployment) to be eligible for a treatment, treatments may commence at different points in time, and the outcome of interest is realized after the individual left the initial state. An example concerns the effect of training on earnings in subsequent employment. Any evaluation needs to take into account that some of those who are not trained at a certain time in unemployment will leave unemployment before training while others will be trained later. We are interested in effects of the treatment at a certain elapsed duration compared to “no treatment at any subsequent duration.” We prove identification under unconfoundedness and propose inverse probability weighting estimators. A key feature is that weights given to outcome observations of nontreated depend on the remaining time in the initial state. We study effects of a training program for unemployed workers in Sweden. Estimates are positive and sizeable, exceeding those obtained with common static methods. This calls for a reappraisal of training as a tool to bring unemployed back to work.
We consider nonparametric estimation of a mixed discrete‐continuous distribution under anisotropic smoothness conditions and a possibly increasing number of support points for the discrete part of the distribution. For these settings, we derive lower bounds on the estimation rates. Next, we consider a nonparametric mixture of normals model that uses continuous latent variables for the discrete part of the observations. We show that the posterior in this model contracts at rates that are equal to the derived lower bounds up to a log factor. Thus, Bayesian mixture of normals models can be used for (up to a log factor) optimal adaptive estimation of mixed discrete‐continuous distributions. The proposed model demonstrates excellent performance in simulations mimicking the first stage in the estimation of structural discrete choice models.
We investigate the impact of job loss on crime and the mitigating role of unemployment benefits, exploiting detailed individual-level data linking employment careers, criminal records, and welfare registries for the universe of male workers in Brazil. The probability of committing crimes increases on average by 23% for workers displaced by mass layoffs, and by slightly less for their cohabiting sons. Using causal forests, we show that the effect is entirely driven by young and low-tenure workers, while there is no heterogeneity by education and income. Regression discontinuity estimates indicate that unemployment benefit eligibility completely offsets potential crime increases upon job loss, but this effect vanishes completely immediately after benefit expiration. Our findings point to liquidity constraints and psychological stress as the main drivers of criminal behavior upon job loss, while substitution between time on the job and leisure does not seem to play an important role.
This paper integrates the classic theory of firm boundaries, through span of control or taste for variety, into a model of the labor market with random matching and on-the-job search. Firms choose when to enter and exit, whether to create vacancies or destroy jobs in response to shocks, and Bertrand-compete to hire and retain workers. Tractability is obtained by proving that, under a parsimonious set of assumptions, all worker and firm decisions are characterized by their joint surplus, which in turn only depends on firm productivity and size. The job ladder in marginal surplus that emerges in equilibrium determines net poaching patterns by firm characteristics that are in line with the data. As frictions vanish, the model converges to a standard competitive model of firm dynamics. The combination of firm dynamics and search frictions allows the model to: (i) quantify the misallocation cost of frictions; (ii) replicate elusive life-cycle growth profiles of superstar firms; and (iii) make sense of the failure of the job ladder around the Great Recession as a result of the collapse of firm entry.
Many economic and causal parameters depend on nonparametric or high dimensional first steps. We give a general construction of locally robust/orthogonal moment functions for GMM, where first steps have no effect, locally, on average moment functions. Using these orthogonal moments reduces model selection and regularization bias, as is important in many applications, especially for machine learning first steps. Also, associated standard errors are robust to misspecification when there is the same number of moment functions as parameters of interest.

We use these orthogonal moments and cross-fitting to construct debiased machine learning estimators of functions of high dimensional conditional quantiles and of dynamic discrete choice parameters with high dimensional state variables. We show that additional first steps needed for the orthogonal moment functions have no effect, globally, on average orthogonal moment functions. We give a general approach to estimating those additional first steps. We characterize double robustness and give a variety of new doubly robust moment functions. We give general and simple regularity conditions for asymptotic theory.
We construct an endogenous growth model with random interactions where firms are subject to distortions. The TFP distribution evolves endogenously as firms seek to upgrade their technology over time either by innovating or by imitating other firms. We use the model to quantify the effects of misallocation on TFP growth in emerging economies. We structurally estimate the stationary state of the dynamic model targeting moments of the empirical distribution of R&D and TFP growth in China during the period 2007–2012. The estimated model fits the Chinese data well. We compare the estimates with those obtained using data for Taiwan and perform counterfactuals to study the effect of alternative policies. R&D misallocation has a large effect on TFP growth.
We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky-price models. The method is based on the eigenvalue-eigenfunction representation of the dynamics of the cross-sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.
This paper considers maximum likelihood (ML) estimation in a large class of models with hidden Markov regimes. We investigate consistency of the ML estimator and local asymptotic normality for the models under general conditions, which allow for autoregressive dynamics in the observable process, Markov regime sequences with covariate-dependent transition matrices, and possible model misspecification. A Monte Carlo study examines the finite-sample properties of the ML estimator in correctly specified and misspecified models. An empirical application is also discussed.
This paper investigates the effect of terrorism financing and recruitment on attacks. I exploit a Sharia-compliant institution in Pakistan, which induces unintended and quasi-experimental variation in the funding of terrorist groups through their religious affiliation. The results indicate that higher terrorism financing, in a given location and period, generate more attacks in the same location and period. Financing exhibits a complementarity in producing attacks with terrorist recruitment, measured through data from Jihadist-friendly online fora and machine learning. A higher supply of terror is responsible for the increase in attacks and is identified by studying groups with different affiliations operating in multiple cities. These findings are consistent with terrorist organizations facing financial frictions to their internal capital market.
We develop a unique survey that focuses on the job search behavior of individuals regardless of their labor force status and field it annually starting in 2013. We use our survey to study the relationship between search effort and outcomes for the employed and non-employed. Three important facts stand out: (1) on-the-job search is pervasive, and is more intense at the lower rungs of the job ladder; (2) the employed are at least three times more effective than the unemployed in job search; and (3) the employed receive better job offers than the unemployed. We set up a general equilibrium model of on-the-job search with endogenous search effort, calibrate it to fit our new facts, and find that the search effort of the employed is highly elastic. We show that search effort substantially amplifies labor market responses to productivity shocks over the business cycle.
The public debate over disability insurance has centered on concerns about individuals without severe health conditions receiving benefits. We go beyond health risk alone to quantify the overall insurance value of U.S. disability programs, including value from insuring nonhealth risk. We find that disability recipients, especially those with less-severe health conditions, are much more likely to have experienced a wide variety of nonhealth shocks than nonrecipients. Selection into disability receipt on the basis of nonhealth shocks is so strong among individuals with less-severe health conditions that by many measures less-severe recipients are worse off than more-severe recipients. As a result, under baseline assumptions, benefits to less-severe recipients have an annual surplus value (insurance benefit less efficiency cost) over cost-equivalent tax cuts of $7700 per recipient, about three-fourths that of benefits to more-severe recipients ($9900). Insurance against nonhealth risk accounts for about one-half of the value of U.S. disability programs.
This paper provides evidence that exposure to illegal labor markets during childhood leads to the formation of industry-specific human capital at an early age, putting children on a criminal life path. Using the timing of U.S. antidrug policies, I show that when the return to illegal activities increases in coca suitable areas in Peru, parents increase the use of child labor for coca farming, putting children on a criminal life path. Using administrative records, I show that affected children are about 30% more likely to be incarcerated for violent and drug-related crimes as adults. No effect in criminality is found for individuals that grow up working in places where the coca produced goes primarily to the legal sector, suggesting that it is the accumulation of human capital specific to the illegal industry that fosters criminal careers. However, the rollout of a conditional cash transfer program that encourages schooling mitigates the effects of exposure to illegal industries, providing further evidence on the mechanisms.
In the U.S., large firms now account for a greater share of economic activity, new firms are being created at slower rates, and workers are receiving a smaller share of GDP. Changes in population growth provide a unified quantitative explanation. A decrease in population growth lowers firm entry rates, shifting the firm-age distribution toward older firms. Firm aging accounts for (i) the concentration of employment in large firms, (ii) and trends in average firm size and exit rates, key determinants of firm entry rates. Feedback effects from firm demographics generate two-thirds of the effect. Prior to the decrease, entry rates rose steadily reflecting the earlier baby boom. The glut of firms due to the baby boom lead to rich transitional dynamics within the feedback effects, accounting for more than half the total change. Baby boom induced changes in the firm-age distribution provide a driving force for the post-WWII rise and fall in the aggregate labor share. Ignoring changes in population growth attributes all the long run decline in entry rates to a decrease in firm exit rates, which in reality have been only one-third as large.
We study the selection of Fellows of the Econometric Society, using a new data set of publications and citations for over 40,000 actively publishing economists since the early 1900s. Conditional on achievement, we document a large negative gap in the probability that women were selected as Fellows in the 1933–1979 period. This gap became positive (though not statistically significant) from 1980 to 2010, and in the past decade has become large and highly significant, with over a 100% increase in the probability of selection for female authors relative to males with similar publications and citations. The positive boost affects highly qualified female candidates (in the top 10% of authors) with no effect for the bottom 90%. Using nomination data for the past 30 years, we find a key proximate role for the Society's Nominating Committee in this shift. Since 2012, the Committee has had an explicit mandate to nominate highly qualified women, and its nominees enjoy above-average election success (controlling for achievement). Looking beyond gender, we document similar shifts in the premium for geographic diversity: in the mid-2000s, both the Fellows and the Nominating Committee became significantly more likely to nominate and elect candidates from outside the United States. Finally, we examine gender gaps in several other major awards for U.S. economists. We show that the gaps in the probability of selection of new fellows of the American Academy of Arts and Sciences and the National Academy of Sciences closely parallel those of the Econometric Society, with historically negative penalties for women turning to positive premiums in recent years.
We document that between 50% and 70% of changes in the U.S. wage structure over the last four decades are accounted for by relative wage declines of worker groups specialized in routine tasks in industries experiencing rapid automation. We develop a conceptual framework where tasks across industries are allocated to different types of labor and capital. Automation technologies expand the set of tasks performed by capital, displacing certain worker groups from jobs for which they have comparative advantage. This framework yields a simple equation linking wage changes of a demographic group to the task displacement it experiences. We report robust evidence in favor of this relationship and show that regression models incorporating task displacement explain much of the changes in education wage differentials between 1980 and 2016. The negative relationship between wage changes and task displacement is unaffected when we control for changes in market power, deunionization, and other forms of capital deepening and technology unrelated to automation. We also propose a methodology for evaluating the full general equilibrium effects of automation, which incorporate induced changes in industry composition and ripple effects due to task reallocation across different groups. Our quantitative evaluation explains how major changes in wage inequality can go hand-in-hand with modest productivity gains.
We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.3–1.4 times.
We study the role of commitment in communication and its interactions with rules, which determine whether information is verifiable. Our framework nests models of cheap talk, information disclosure, and Bayesian persuasion. It predicts that commitment has opposite effects on information transmission under the two alternative rules. We leverage these contrasting forces to experimentally establish that subjects react to commitment in line with the main qualitative implications of the theory. Quantitatively, not all subjects behave as predicted. We show that a form of commitment blindness leads some senders to overcommunicate when information is verifiable and undercommunicate when it is not. This generates an unpredicted gap in information transmission across the two rules, suggesting a novel role for verifiable information in practice.
United States households' consumption expenditures and car purchases collapsed during the Great Recession and more so than income changes would have predicted. Using CEX data, we show that both the extensive and the intensive car spending margins contracted sharply in the Great Recession. We also document significant cross-cohort differences in the impact of the Great Recession including a stronger reduction in car spending by younger cohorts. We draw inference on the sources of the Great Recession by investigating which shocks can explain household choices in a 60 period life-cycle model with idiosyncratic and aggregate shocks fitted to aggregate and life-cycle moments. We find that the Great Recession was caused by a combination of large aggregate income and wealth shocks, while cross-cohort adjustment patterns imply a role for life-cycle income profile shocks. We also find a role for car loan premia shocks in accounting for car spending and car loans.
Virtually all theories of economic growth predict a positive relationship between population size and productivity. In this paper, I study a particular historical episode to provide direct evidence for the empirical relevance of such scale effects. In the aftermath of the Second World War, 8 million ethnic Germans were expelled from their domiciles in Eastern Europe and transferred to West Germany. This inflow increased the German population by almost 20%. Using variation across counties, I show that the settlement of refugees had large and persistent effects on the size of the local population, manufacturing employment, and income per capita. These findings are quantitatively consistent with an idea-based model of spatial growth if population mobility is subject to frictions and productivity spillovers occur locally. The estimated model implies that the refugee settlement increased aggregate income per capita by about 12% after 25 years and triggered a process of industrialization in rural areas.
Discrete location, occupation, skill, and hours choices of workers underpin their incomes. This paper analyzes the optimal taxation of discrete income-generating choice. It derives optimal tax equations and Pareto test inequalities for mixed logit choice environments that can accommodate discrete and unstructured choice sets, rich preference heterogeneity, and complex aggregate cross-substitution patterns between choices. These equations explicitly connect optimal taxes to societal redistributive goals and private substitution behavior, with the latter encoded as a substitution matrix that describes cross-sensitivities of choice distributions to tax-induced utility variation. In repeated mixed logit settings, the substitution matrix is exactly the Markov matrix of shock-induced agent transitions across choices. We describe implications of this equivalence for evaluation of prevailing tax designs and the structural estimation of optimal policy mixed logit models. We apply our results to two salient examples: spatial taxation and taxation of couples.
We evaluate and partially challenge the household leverage view of the Great Recession. In the data, employment and consumption declined more in U.S. states where household debt declined more. We study a model of a monetary union composed of many regions in which liquidity constraints shape the response of employment and consumption to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit explain 40% of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2007–2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.
We construct robust empirical Bayes confidence intervals (EBCIs) in a normal means problem. The intervals are centered at the usual linear empirical Bayes estimator, but use a critical value accounting for shrinkage. Parametric EBCIs that assume a normal distribution for the means (Morris (1983b)) may substantially undercover when this assumption is violated. In contrast, our EBCIs control coverage regardless of the means distribution, while remaining close in length to the parametric EBCIs when the means are indeed Gaussian. If the means are treated as fixed, our EBCIs have an average coverage guarantee: the coverage probability is at least 1 − α on average across the n EBCIs for each of the means. Our empirical application considers the effects of U.S. neighborhoods on intergenerational mobility.
How large economic stimuli generate individual and aggregate responses is a central question in economics, but has not been studied experimentally. We provided one-time cash transfers of about USD 1000 to over 10,500 poor households across 653 randomized villages in rural Kenya. The implied fiscal shock was over 15 percent of local GDP. We find large impacts on consumption and assets for recipients. Importantly, we document large positive spillovers on non-recipient households and firms, and minimal price inflation. We estimate a local transfer multiplier of 2.5. We interpret welfare implications through the lens of a simple household optimization framework.
The benefits of new technologies accrue not only to high-skilled labor but also to owners of capital in the form of higher capital incomes. This increases inequality. To make this argument, we develop a tractable theory that links technology to the distribution of income and wealth—and not just that of wages—and use it to study the distributional effects of automation. We isolate a new theoretical mechanism: automation increases inequality by raising returns to wealth. The flip side of such return movements is that automation can lead to stagnant wages and, therefore, stagnant incomes at the bottom of the distribution. We use a multiasset model extension to confront differing empirical trends in returns to productive and safe assets and show that the relevant return measures have increased over time. Automation can account for part of the observed trends in income and wealth inequality.
This paper studies the role of private sector companies in the development of local amenities. We use evidence from one of the largest multinationals of the 20th century: the United Fruit Company (UFCo). The firm was given a large land concession in Costa Rica—one of the so-called “Banana Republics”—from 1899 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, we implement a geographic regression discontinuity design that exploits a land assignment that is orthogonal to our outcomes of interest. We find that the firm had a positive and persistent effect on living standards. Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities—like the development of education and health infrastructure—that can account for our result. Consistent with this mechanism, we show, empirically and through a proposed model, that the firm's investment efforts increase with worker mobility.
I study the effect of labor market imperfections on the labor share in a tractable model that emphasizes the interaction between productivity dispersion and firm competition for workers. I calibrate the model using administrative data covering the universe of firms in Canada from 2000 to 2015. As in the data, most firms have a high labor share, yet the aggregate labor share is low due to the disproportionate effect of a small fraction of large, highly productive firms. I find that a rise in the dispersion of firm productivity causes the aggregate labor share to decline in favor of firm profits. The mechanism is that productivity dispersion effectively shields high-productivity firms from wage competition. Regression evidence from cross-country and cross-industry data supports both the model prediction and mechanism.
We propose a method for constructing confidence intervals that account for many forms of spatial correlation. The interval has the familiar “estimator plus and minus a standard error times a critical value” form, but we propose new methods for constructing the standard error and the critical value. The standard error is constructed using population principal components from a given “worst-case” spatial correlation model. The critical value is chosen to ensure coverage in a benchmark parametric model for the spatial correlations. The method is shown to control coverage in finite sample Gaussian settings in a restricted but nonparametric class of models and in large samples whenever the spatial correlation is weak, that is, with average pairwise correlations that vanish as the sample size gets large. We also provide results on the efficiency of the method.
Many firms in developing countries could be too small to adopt modern technology embodied in expensive production machines. This paper shows that rental market interactions allow these small firms to increase their effective scale and mechanize production. We conduct a survey of manufacturing firms in Uganda, which uncovers an active rental market for large machines between small firms in informal clusters. We then build an equilibrium model of firm behavior and estimate it with our data. We find that the rental market is quantitatively important for mechanization and productivity since it provides a workaround for other market imperfections that keep firms small. The rental market also shapes the effectiveness of development policies to foster mechanization, such as subsidies to purchase machines. Overall, our results point to the importance of taking into account firm-to-firm interactions within informal clusters to understand technology adoption in low income countries: focusing on the small scale of firms in isolation might be misleading.
There is an innate human tendency, one might call it the “league table mentality,” to construct rankings. Schools, hospitals, sports teams, movies, and myriad other objects are ranked even though their inherent multi-dimensionality would suggest that—at best—only partial orderings were possible. We consider a large class of elementary ranking problems in which we observe noisy, scalar measurements of merit for n objects of potentially heterogeneous precision and are asked to select a group of the objects that are “most meritorious.” The problem is naturally formulated in the compound decision framework of Robbins's (1956) empirical Bayes theory, but it also exhibits close connections to the recent literature on multiple testing. The nonparametric maximum likelihood estimator for mixture models (Kiefer and Wolfowitz (1956)) is employed to construct optimal ranking and selection rules. Performance of the rules is evaluated in simulations and an application to ranking U.S. kidney dialysis centers.
We show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity for affected industries in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms' input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. Liberalization increases capital overall. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 23%, physical capital by 53%, wage bills by 28%, and reduces MRPK by 33% relative to low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that inefficiencies in that sector may cause misallocation. Finally, we propose an assumption under which a novel method exploiting natural experiments can be used to bound the effect of changes in misallocation on treated industries' aggregate productivity. These industries' Solow residual increases by 3–16%.
We develop a new nonparametric approach for discrete choice and use it to analyze the demand for health insurance in the California Affordable Care Act marketplace. The model allows for endogenous prices and instrumental variables, while avoiding parametric functional form assumptions about the unobserved components of utility. We use the approach to estimate bounds on the effects of changing premiums or subsidies on coverage choices, consumer surplus, and government spending on subsidies. We find that a $10 decrease in monthly premium subsidies would cause a decline of between 1.8% and 6.7% in the proportion of subsidized adults with coverage. The reduction in total annual consumer surplus would be between $62 and $74 million, while the savings in yearly subsidy outlays would be between $207 and $602 million. We estimate the demand impacts of linking subsidies to age, finding that shifting subsidies from older to younger buyers would increase average consumer surplus, with potentially large impacts on enrollment. We also estimate the consumer surplus impact of removing the highly-subsidized plans in the Silver metal tier, where we find that a nonparametric model is consistent with a wide range of possibilities. We find that comparable mixed logit models tend to yield price sensitivity estimates toward the lower end of the nonparametric bounds, while producing consumer surplus impacts that can be both higher and lower than the nonparametric bounds depending on the specification of random coefficients.
We quantify the distortionary effects of nexus tax laws on Amazon's distribution network investments between 1999 and 2018. We highlight the role of two features of the expansion of Amazon's network: densification of the network of distribution facilities and vertical integration into package sortation. Densification results in a reduction in the cost of shipping orders, but comes at the expense of higher facility operating costs in more expensive areas and lower scale economies of processing shipments. Nexus laws furthermore generate additional sales tax liabilities as the network grows. Combining data on household spending across online and offline retailers with detailed data on Amazon's distribution network, we quantify these trade-offs through a static model of demand and a dynamic model of investment. Our results suggest that Amazon's expansion led to significant shipping cost savings and facilitated the realization of aggregate economies of scale. We find that abolishing nexus tax laws in favor of a non-discriminatory tax policy would induce the company to decentralize its network, lowering its shipping costs. Non-discriminatory taxation would also entail lower revenue, however, as tax-inclusive prices would rise, resulting in a fall in profit overall. This drop and the decline in consumer welfare from higher taxes together fall short of the increases in tax revenue and rival profit, suggesting that the abolishment of nexus laws would lead to an increase in total welfare.
This paper argues that a unified analysis of consumption and production is required to understand the long-run behavior of the U.S. labor share. First, using household data on the universe of consumer spending, I document that higher-income households spend relatively more on labor-intensive goods and services as a share of their total consumption. Interpreted as nonhomothetic preferences, this fact implies that economic growth increases the aggregate labor share through an income effect. Second, using disaggregated data on factor shares and capital intensities, I document that equipment-intensive goods experienced relatively larger declines in their labor shares. Based on this finding, I estimate that capital and labor are gross substitutes, and that investment-specific technical change reduces the labor share. Given the estimated elasticities, a parsimonious neoclassical model quantitatively matches the observed low-frequency movements in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter.
We propose a framework for analyzing the sensitivity of counterfactuals to parametric assumptions about the distribution of latent variables in structural models. In particular, we derive bounds on counterfactuals as the distribution of latent variables spans nonparametric neighborhoods of a given parametric specification while other “structural” features of the model are maintained. Our approach recasts the infinite-dimensional problem of optimizing the counterfactual with respect to the distribution of latent variables (subject to model constraints) as a finite-dimensional convex program. We also develop an MPEC version of our method to further simplify computation in models with endogenous parameters (e.g., value functions) defined by equilibrium constraints. We propose plug-in estimators of the bounds and two methods for inference. We also show that our bounds converge to the sharp nonparametric bounds on counterfactuals as the neighborhood size becomes large. To illustrate the broad applicability of our procedure, we present empirical applications to matching models with transferable utility and dynamic discrete choice models.
We incorporate forward‐looking capital accumulation into a dynamic discrete choice model of migration. We characterize the steady‐state equilibrium; generalize existing dynamic exact‐hat algebra techniques to incorporate investment; and linearize the model to provide an analytical characterization of the economy's transition path using spectral analysis. We show that capital and labor dynamics interact to shape the economy's speed of adjustment toward steady state. We implement our quantitative analysis using data on capital stocks, populations, and bilateral trade and migration flows for U.S. states from 1965–2015. We show that this interaction between capital and labor dynamics plays a central role in explaining the observed decline in the rate of income convergence across U.S. states and the persistent and heterogeneous impact of local shocks.
I study regulation of noncompete employment contracts, assessing the trade‐off between restricting worker mobility and encouraging firm investment. I develop an on‐the‐job search model in which firms and workers sign dynamic wage contracts with noncompete clauses and firms invest in their workers' general human capital. Employers use noncompete clauses to enforce buyout payments when their workers depart, ultimately extracting rent from future employers. This rent extraction is socially excessive, and restrictions on these clauses can improve efficiency. The optimal regulation policy is characterized. In an application to the managerial labor market using a novel contract data set, I find the optimal policy to be quantitatively close to a ban.
This paper notes a simple connection between synthetic control and online learning. Specifically, we recognize synthetic control as an instance of Follow‐The‐Leader (FTL). Standard results in online convex optimization then imply that, even when outcomes are chosen by an adversary, synthetic control predictions of counterfactual outcomes for the treated unit perform almost as well as an oracle weighted average of control units' outcomes. Synthetic control on differenced data performs almost as well as oracle weighted difference‐in‐differences, potentially making it an attractive choice in practice. We argue that this observation further supports the use of synthetic control estimators in comparative case studies.
This paper studies a first‐price common‐value auction in which bidders do not know the number of their competitors. In contrast to the case of common‐value auctions with a known number of rival bidders, the inference from winning is not monotone, and a “winner's blessing” emerges at low bids. As a result, bidding strategies may not be strictly increasing, but instead may contain atoms. Moreover, an equilibrium fails to exist when the expected number of competitors is large and the bid space is continuous. Therefore, we consider auctions on a grid. On a fine grid, high‐signal bidders follow an essentially strictly increasing strategy, whereas low‐signal bidders pool on two adjacent bids on the grid. The solutions of a “communication extension” based on Jackson, Simon, Swinkels, and Zame (2002) capture the equilibrium bidding behavior in the limit, as the grid becomes arbitrarily fine.
How do political connections affect firm dynamics, innovation, and creative destruction? We extend a Schumpeterian growth model with political connections that help firms ease bureaucratic and regulatory burden. The model highlights how political connections influence an economy's business dynamism and innovation, and generates a number of implications guiding our empirical analysis. We construct a new large‐scale data set for the period 1993–2014, on the universe of firms, workers, and politicians, complemented with corporate financial statements, patent data, and election data, so as to define connected firms as those employing local politicians. We identify a leadership paradox: market leaders are much more likely to be politically connected, but much less likely to innovate. Political connections relate to a higher rate of survival, as well as growth in employment and revenues, but not in productivity—a result that we also confirm using the regression discontinuity design. At the aggregate level, gains from political connections do not offset losses stemming from lower reallocation and growth.
This paper theoretically and empirically investigates factional arrangements within the Chinese Communist Party (CCP), the governing political party of the People's Republic of China. Using detailed biographical information of political elites in the Central Committee and provincial governments, we present a set of new empirical regularities within the CCP, including systematic patterns of cross‐factional balancing at different levels of the political hierarchy and substantial faction premia in promotions. We propose and estimate an organizational economic model to characterize factional politics within single‐party nondemocratic regimes and its economic implications.
As search frictions in the market for a consumer product decline, buyers are able to locate and access more and more sellers. In response, sellers choose to design varieties of the product that are more and more specialized in order to take advantage of the heterogeneity in buyers' preferences. I find conditions on the fundamentals of the market under which the increase in specialization exactly offsets the decline in search frictions. Under these conditions, the extent of competition and the extent of price dispersion remain constant over time even though search frictions are vanishing. Buyer's surplus and seller's profit, however, grow over time at a constant endogenous rate, as the increase in specialization allows sellers to cater better and better to the preferences of individual buyers.
Since network data commonly consists of observations from a single large network, researchers often partition the network into clusters in order to apply cluster‐robust inference methods. Existing such methods require clusters to be asymptotically independent. Under mild conditions, we prove that, for this requirement to hold for network‐dependent data, it is necessary and sufficient that clusters have low conductance, the ratio of edge boundary size to volume. This yields a simple measure of cluster quality. We find in simulations that when clusters have low conductance, cluster‐robust methods control size better than HAC estimators. However, for important classes of networks lacking low‐conductance clusters, the former can exhibit substantial size distortion. To determine the number of low‐conductance clusters and construct them, we draw on results in spectral graph theory that connect conductance to the spectrum of the graph Laplacian. Based on these results, we propose to use the spectrum to determine the number of low‐conductance clusters and spectral clustering to construct them.
This paper develops and deploys a methodology for testing whether people correctly value tools that reduce attention costs. We call these tools bandwidth enhancements (BEs) and characterize how demand for BEs varies with the pecuniary incentives to be attentive, under the null hypothesis of correct perceptions and optimal choice. We examine if the theoretical optimality conditions are satisfied in three experiments. The first is a field experiment (n = 1373) with an online education platform, in which we randomize incentives to complete course modules and incentives to utilize a plan‐making tool to complete the modules. In the second experiment (n = 2306), participants must complete a survey in the future. We randomize survey‐completion incentives and how long participants must wait to complete the survey, and we elicit willingness to pay for reminders. The third experiment (n = 1465) involves a psychometric task in which participants must identify whether there are more correct or incorrect mathematical equations in an image. We vary incentives for accuracy, elicit willingness to pay to reduce task difficulty, and examine the impact of learning and feedback. In all experiments, demand for reducing attention costs increases as incentives for accurate task completion increase. However, in all experiments—and across all conditions—our tests imply that this increase in demand is too small relative to the null of correct perceptions. These results suggest that people may be uncertain or systematically biased about their attention cost functions, and that experience and feedback do not necessarily eliminate bias.
Shape restrictions have played a central role in economics as both testable implications of theory and sufficient conditions for obtaining informative counterfactual predictions. In this paper, we provide a general procedure for inference under shape restrictions in identified and partially identified models defined by conditional moment restrictions. Our test statistics and proposed inference methods are based on the minimum of the generalized method of moments (GMM) objective function with and without shape restrictions. Uniformly valid critical values are obtained through a bootstrap procedure that approximates a subset of the true local parameter space. In an empirical analysis of the effect of childbearing on female labor supply, we show that employing shape restrictions in linear instrumental variables (IV) models can lead to shorter confidence regions for both local and average treatment effects. Other applications we discuss include inference for the variability of quantile IV treatment effects and for bounds on average equivalent variation in a demand model with general heterogeneity.
This paper assesses when the validity of difference‐in‐differences depends on functional form. We provide a novel characterization: the parallel trends assumption holds under all strictly monotonic transformations of the outcome if and only if a stronger “parallel trends”‐type condition holds for the cumulative distribution function of untreated potential outcomes. This condition for parallel trends to be insensitive to functional form is satisfied if and essentially only if the population can be partitioned into a subgroup for which treatment is effectively randomly assigned and a remaining subgroup for which the distribution of untreated potential outcomes is stable over time. These conditions have testable implications, and we introduce falsification tests for the null that parallel trends is insensitive to functional form.
The discourse around pay transparency has focused on partial equilibrium effects: how workers rectify pay inequities through informed renegotiation. We investigate how employers respond in equilibrium. We study a model of bargaining under two‐sided incomplete information. Our model predicts that transparency reduces the individual bargaining power of workers, leading to lower average wages. A key insight is that employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others. When workers have low individual bargaining power, pay transparency has a muted effect. We test our model with an event‐study analysis of U.S. state‐level laws protecting the right of private sector workers to communicate salary information with their coworkers. Consistent with our theoretical predictions, transparency laws empirically lead wages to decline by approximately 2%, and wage declines are smallest in magnitude when workers have low individual bargaining power.
This paper studies the welfare effects of encouraging rural–urban migration in the developing world. To do so, we build and analyze a dynamic general‐equilibrium model of migration that features a rich set of migration motives. We estimate the model to replicate the results of a field experiment that subsidized seasonal migration in rural Bangladesh, leading to significant increases in migration and consumption. We show that the welfare gains from migration subsidies come from providing better insurance for vulnerable rural households rather than from correcting spatial misallocation by relaxing credit constraints for those with high productivity in urban areas that are stuck in rural areas.
We study a regulation in Chile that mandates warning labels on products whose sugar or caloric concentration exceeds certain thresholds. We show that consumers substitute from labeled to unlabeled products—a pattern mostly driven by products that consumers mistakenly believe to be healthy. On the supply side, we find substantial reformulation of products and bunching at the thresholds. We develop and estimate an equilibrium model of demand for food and firms' pricing and nutritional choices. We find that food labels increase consumer welfare by 1.8% of total expenditure, and that these effects are enhanced by firms' responses. We then use the model to study alternative policy designs. Under optimal policy thresholds, food labels and sugar taxes generate similar gains in consumer welfare, but food labels benefit the poor relatively more.
We postulate a continuous‐time heterogeneous agent model with a financial sector and households to study the nonlinear linkages between aggregate and financial variables. In our model, the interaction between the supply of bonds by the financial sector and the precautionary demand for bonds by households produces significant endogenous aggregate risk. This risk makes the economy transition between a high‐leverage region and a low‐leverage region, which, in turn, creates state dependence in impulse responses: the same shock starting from the high‐leverage region gets propagated and amplified more than when the shock arrives when leverage is low. State dependence in impulse responses generates a time‐varying aggregate precautionary savings motive that, by moving the risk‐free rate, justifies the leverage level of the financial sector in each region. Finally, we illustrate the usefulness of neutral networks to solve for the nonlinear perceived law of motion of the model, and the importance of household heterogeneity in driving its quantitative properties.
Job loss comes with large present value earnings losses which elude workhorse models of unemployment and labor market policy. I propose a parsimonious model of a frictional labor market in which jobs differ in terms of unemployment risk and workers search off‐ and on‐the‐job. This gives rise to a job ladder with slippery bottom rungs where unemployment spells beget unemployment spells. I allow for human capital to respond to time spent out of work and estimate the framework on German Social Security data. The model captures the joint response of wages, employment, and unemployment risk to job loss which I measure empirically. The key driver of the “unemployment scar” is the loss in job security and its interaction with the evolution of human capital and, in particular, the search for better employment.
This paper proposes a Sieve Simulated Method of Moments (Sieve‐SMM) estimator for the parameters and the distribution of the shocks in nonlinear dynamic models where the likelihood and the moments are not tractable. An important concern with SMM, which matches sample with simulated moments, is that a parametric distribution is required. However, economic quantities that depend on this distribution, such as welfare and asset prices, can be sensitive to misspecification. The Sieve‐SMM estimator addresses this issue by flexibly approximating the distribution of the shocks with a Gaussian and tails mixture sieve. The asymptotic framework provides consistency, rate of convergence, and asymptotic normality results, extending existing results to a new framework with more general dynamics and latent variables. An application to asset pricing in a production economy shows a large decline in the estimates of relative risk aversion, highlighting the empirical relevance of misspecification bias.
What drives the dynamics of top wealth inequality? To answer this question, I propose an accounting framework that decomposes the growth of the share of aggregate wealth owned by a top percentile into three terms: a within term, which is the average wealth growth of individuals initially in the top percentile relative to the economy; a between term, which accounts for individuals entering and exiting the top percentile due to changes in their relative wealth rankings; and a demography term, which accounts for individuals entering or exiting the top percentile due to death and population growth. I obtain closed‐form expressions for each term in a wide range of random growth models. Evidence from the Forbes 400 list suggests that the between term accounts for half of the recent rise in top wealth inequality.
Work on relational employment agreements often predicts low payments or termination for poor performance. The possibility of saving can, however, limit the effectiveness of monetary incentives in motivating an employee with diminishing marginal utility for consumption. We study the role of savings and their observability in optimal relational contracts. We focus on the case where players are not too patient, and hence the constant first‐best effort cannot be implemented. If savings are hidden, the relationship eventually deteriorates over time. In particular, both payments and effort decline. On the other hand, if savings are public, consumption is initially high, so the agent's savings fall over time, and effort and payments to the agent increase. The findings thus suggest how tacit agreements on consumption can forestall the deterioration of dynamic relationships in which the agent can save.
We develop a new approach for the identification of Pareto‐improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto‐improving reform directions. A main insight is that “Two brackets are enough”: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto‐improving. We also show how to check whether a given tax reform is Pareto‐improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the United States in 1975. A robust finding is that, prior to the EITC, the U.S. tax‐transfer system was not Pareto‐efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto‐improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto‐improving.
The method of synthetic controls is a fundamental tool for evaluating causal effects of policy changes in settings with observational data. In many settings where it is applicable, researchers want to identify causal effects of policy changes on a treated unit at an aggregate level while having access to data at a finer granularity. This article proposes an extension of the synthetic controls estimator that takes advantage of this additional structure and provides nonparametric estimates of the heterogeneity within the aggregate unit. The idea is to replicate the quantile function associated with the treated unit by a weighted average of quantile functions of the control units. This estimator relies on the same mathematical theory as the changes‐in‐changes estimator and can be applied in both repeated cross‐sections and panel data with as little as a single pre‐treatment period. It also provides a unique counterfactual quantile function for any type of distribution.
This paper studies the extent to which the cyclicality of occupational mobility shapes that of aggregate unemployment and its duration distribution. We document the relation between workers' occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop a multisector business cycle model with heterogenous agents. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among many others. Our analysis shows that occupational mobility due to workers' changing career prospects, and not occupation‐wide differences, interacts with aggregate conditions to drive the fluctuations of the unemployment duration distribution, and the aggregate unemployment rate.
We combine personnel records of the United States federal bureaucracy from 1997 to 2019 with administrative voter registration data to study how ideological alignment between politicians and bureaucrats affects turnover and performance. We document significant partisan cycles and turnover among political appointees. By contrast, we find no political cycles in the civil service. At any point in time, a sizable share of bureaucrats is ideologically misaligned with their political leaders. We study the performance implications of this misalignment for the case of procurement officers. Exploiting presidential transitions as a source of “within‐bureaucrat” variation in political alignment, we find that procurement contracts overseen by misaligned officers exhibit greater cost overruns and delays. We provide evidence consistent with a general “morale effect,” whereby misaligned bureaucrats are less motivated to pursue the organizational mission. Our results thus help to shed some of the first light on the costs of ideological misalignment within public organizations.
Most U.S. government spending on highways and bridges is done through “scaling” procurement auctions, in which private construction firms submit unit price bids for each piece of material required to complete a project. Using data on bridge maintenance projects undertaken by the Massachusetts Department of Transportation (MassDOT), we present evidence that firm bidding behavior in this context is consistent with optimal skewing under risk aversion: firms limit their risk exposure by placing lower unit bids on items with greater uncertainty. We estimate the amount of uncertainty in each auction, and the distribution of bidders' private costs and risk aversion. Simulating equilibrium item‐level bids under counterfactual settings, we estimate the fraction of project spending that is due to risk and evaluate auction mechanisms under consideration by policymakers. We find that scaling auctions provide substantial savings relative to lump sum auctions and show how our framework can be used to evaluate alternative auction designs.
Public employment programs may affect poverty both directly through the income they provide and indirectly through general equilibrium effects. We estimate both effects, exploiting a reform that improved the implementation of India's National Rural Employment Guarantee Scheme (NREGS) and whose rollout was randomized at a large (sub‐district) scale. The reform raised beneficiary households' earnings by 14%, and reduced poverty by 26%. Importantly, 86% of income gains came from non‐program earnings, driven by higher private‐sector (real) wages and employment. This pattern appears to reflect imperfectly competitive labor markets more than productivity gains: worker's reservation wages increased, land returns fell, and employment gains were higher in villages with more concentrated landholdings. Non‐agricultural enterprise counts and employment grew rapidly despite higher wages, consistent with a role for local demand in structural transformation. These results suggest that public employment programs can effectively reduce poverty in developing countries, and may also improve economic efficiency.
Using a new survey of firms in New Zealand, we document how exogenous variation in the macroeconomic uncertainty perceived by firms affects their economic decisions. We use randomized information treatments that provide different types of information about the first and/or second moments of future economic growth to generate exogenous changes in the perceived macroeconomic uncertainty of some firms. The effects on their decisions relative to their initial plans as well as relative to an untreated control group are measured in a follow‐up survey six months later. We find that as firms become more uncertain, they reduce their prices, employment, and investment, their sales decline, and they become less likely to invest in new technologies or open new facilities. These ex post effects of uncertainty are similar to how firms say they would respond to higher uncertainty when asked hypothetical questions.
We develop a class of tests for time‐series models such as multiple regression with growing dimension, infinite‐order autoregression, and nonparametric sieve regression. Examples include the Chow test and general linear restriction tests of growing rank p. Employing such increasing p asymptotics, we introduce a new scale correction to conventional test statistics, which accounts for a high‐order long‐run variance (HLV), which emerges as p grows with sample size. We also propose a bias correction via a null‐imposed bootstrap to alleviate finite‐sample bias without sacrificing power unduly. A simulation study shows the importance of robustifying testing procedures against the HLV even when p is moderate. The tests are illustrated with an application to the oil regressions in Hamilton (2003).
I study the optimal provision of information in a long‐term relationship between a sender and a receiver. The sender observes a persistent, evolving state and commits to send signals over time to the receiver, who sequentially chooses public actions that affect the welfare of both players. I solve for the sender's optimal policy in closed form: the sender reports the value of the state with a delay that shrinks over time and eventually vanishes. Even when the receiver knows the current state, the sender retains leverage by threatening to conceal the future evolution of the state.
Gul and Pesendorfer (2015) propose a promising theory of decision under uncertainty, they dub Hurwicz expected utility (HEU). HEU is a special case of α‐maxmin EU that allows for preferences over sources of uncertainty. It is consistent with most of the available empirical evidence on decision under risk and uncertainty. We show that HEU is also tractable and can readily be measured and tested. We do this by deriving a new two‐parameter functional form for the probability weighting function, which fits our data well and which offers a clean separation between ambiguity perception and ambiguity aversion. In two experiments, we find support for HEU's predictions that ambiguity aversion is constant across sources of uncertainty and that ambiguity aversion and first order risk aversion are positively correlated.
This paper revisits the New Keynesian framework, theoretically and quantitatively, in an economy with multiple sectors and input‐output linkages. Analytical expressions for the Phillips curve and welfare, derived as a function of primitives, show that the slope of all sectoral and aggregate Phillips curves is decreasing in intermediate input shares, while productivity fluctuations endogenously generate an inflation‐output tradeoff—except when inflation is measured according to the novel divine coincidence index. Consistent with the theory, the divine coincidence index provides a better fit in Phillips curve regressions than consumer prices. Monetary policy can no longer achieve the first‐best, resulting in a welfare loss of 2.9% of per‐period GDP under the constrained‐optimal policy, which increases to 3.8% when targeting consumer inflation. The constrained‐optimal policy must tolerate relative price distortions across firms and sectors in order to stabilize the output gap, and it can be implemented via a Taylor rule that targets the divine coincidence index.
Structural transformation in most currently developing countries takes the form of a rapid rise in services but limited industrialization. In this paper, we propose a new methodology to structurally estimate productivity growth in service industries that circumvents the notorious difficulties in measuring quality improvements. In our theory, the expansion of the service sector is both a consequence—due to income effects—and a cause—due to productivity growth—of the development process. We estimate the model using Indian household data. We find that productivity growth in nontradable consumer services such as retail, restaurants, or residential real estate was an important driver of structural transformation and rising living standards between 1987 and 2011. However, the welfare gains were heavily skewed toward high‐income urban dwellers.
We study extensive‐form games and mechanisms allowing agents that plan for only a subset of future decisions they may be called to make (the planning horizon). Agents may update their so‐called strategic plan as the game progresses and new decision points enter their planning horizon. We introduce a family of simplicity standards which require that the prescribed action leads to unambiguously better outcomes, no matter what happens outside the planning horizon. We employ these standards to explore the trade‐off between simplicity and other objectives, to characterize simple mechanisms in a wide range of economic environments, and to delineate the simplicity of common mechanisms such as posted prices and ascending auctions, with the former being simpler than the latter.
We study sequential bargaining between a proposer and a veto player. Both have single‐peaked preferences, but the proposer is uncertain about the veto player's ideal point. The proposer cannot commit to future proposals. When players are patient, there can be equilibria with Coasian dynamics: the veto player's private information can largely nullify proposer's bargaining power. Our main result, however, is that under some conditions there also are equilibria in which the proposer obtains the high payoff that he would with commitment power. The driving force is that the veto player's single‐peaked preferences give the proposer an option to “leapfrog,” that is, to secure agreement from only low‐surplus types early on to credibly extract surplus from high types later. Methodologically, we exploit the connection between sequential bargaining and static mechanism design.
An agent observes the set of available projects and proposes some, but not necessarily all, of them. A principal chooses one or none from the proposed set. We solve for a mechanism that minimizes the principal's worst‐case regret. We compare the single‐project environment in which the agent can propose only one project with the multiproject environment in which he can propose many. In both environments, if the agent proposes one project, it is chosen for sure if the principal's payoff is sufficiently high; otherwise, the probability that it is chosen decreases in the agent's payoff. In the multiproject environment, the agent's payoff from proposing multiple projects equals his maximal payoff from proposing each project alone. The multiproject environment outperforms the single‐project one by providing better fallback options than rejection and by delivering this payoff to the agent more efficiently.
We use a two‐stage experiment on agricultural lending in Mali to test whether selection into lending is predictive of heterogeneous returns to capital. Understanding this heterogeneity, and the selection process which reveals it, is critical for guiding modeling of credit markets in developing countries, as well as for policy. We find such heterogeneity: returns to capital are higher for farmers who borrow than for those who do not. In our first stage, we offer loans in some villages and not others. In the second stage, we provide cash grants to a random subset of all farmers in villages where no loans were offered, and to a random subset of the farmers who do not borrow in villages where loans were offered. We estimate seasonal returns to the grant of 130% for would‐be borrowers, whereas we find returns near zero for the sample representative of non‐borrowers. We also provide evidence that there are some farmers—particularly those that are poor at baseline—that have high returns but do not receive a loan.
This paper shows that there is more scope for a borrower to engage in a sustainable infinite debt rollover (a “Ponzi scheme”) when interest/growth rates are stochastic. In this context, I prove that the relevant “r vs. g” comparison uses the yield rlong to an infinite‐maturity zero‐coupon bond. I show that rlong is lower than the risk‐neutral expectation of the short‐term yield when it is variable, and that rlong is close to the minimal realization of the short‐term yield when it is highly persistent. The paper applies these results to illustrative heterogeneous agent dynamic stochastic general equilibrium models to obtain similarly weakened sufficient conditions for the existence of public debt bubbles.
We study the investment effects of market integration on renewable energy expansion. Our theory highlights that market integration not only improves allocative efficiency by gains from trade but also incentivizes new investment in renewable power plants. To test our theoretical predictions, we examine how recent grid expansions in the Chilean electricity market changed electricity production, wholesale prices, generation costs, and renewable investments. We then build a structural model of power plant entry to quantify the impact of market integration with and without the investment effects. We find that the market integration in Chile increased solar generation by around 180%, saved generation costs by 8%, and reduced carbon emissions by 5%. A substantial amount of renewable entry would not have occurred in the absence of market integration. Our findings suggest that ignoring these investment effects would substantially understate the benefits of market integration and its important role in expanding renewable energy.
We show that, in a general family of linearized structural macroeconomic models, knowledge of the empirically estimable causal effects of contemporaneous and news shocks to the prevailing policy rule is sufficient to construct counterfactuals under alternative policy rules. If the researcher is willing to postulate a loss function, our results furthermore allow her to recover an optimal policy rule for that loss. Under our assumptions, the derived counterfactuals and optimal policies are robust to the Lucas critique. We then discuss strategies for applying these insights when only a limited amount of empirical causal evidence on policy shock transmission is available.
We study how discounting and monitoring jointly determine whether cooperation is possible in repeated games with imperfect (public or private) monitoring. Our main result provides a simple bound on the strength of players' incentives as a function of discounting, monitoring precision, and on‐path payoff variance. We show that the bound is tight in the low‐discounting/low‐monitoring double limit, by establishing a public‐monitoring folk theorem where the discount factor and the monitoring structure can vary simultaneously.
Emissions abatement alone cannot address the consequences of global warming for weather disasters. We model how society adapts to manage disaster risks to capital stock. Optimal adaptation—a mix of firm‐level efforts and public spending—varies as society learns about the adverse consequences of global warming for disaster arrivals. Taxes on capital are needed alongside those on carbon to achieve the first best. We apply our model to country‐level control of flooding from tropical cyclones. Learning rationalizes empirical findings, including the responses of Tobin's q, equity risk premium, and risk‐free rate to disaster arrivals. Adaptation is more valuable under learning than a counterfactual no‐learning environment. Learning alters social‐cost‐of‐carbon projections due to the interaction of uncertainty resolution and endogenous adaptive response.
What is the role of credit scores in credit markets? We argue that it is, in part, the market's assessment of a person's unobservable type, which here we take to be patience. We postulate a model of persistent hidden types where observable actions shape the public assessment of a person's type via Bayesian updating. We show how dynamic reputation can incentivize repayment. Importantly, we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individuals' credit scores. We conduct counterfactuals to assess how more or less information used in scoring individuals affects outcomes and welfare. If tracking of individual credit actions is outlawed, poor young adults of low type benefit from subsidization by high types despite facing higher interest rates arising from lower dynamic incentives to repay.
We investigate the ability of a platform to design its marketplace to promote competition, improve consumer surplus, and increase its own payoff. We consider demand‐steering rules that reward firms that cut prices with additional exposure to consumers. We examine the impact of these rules both in theory and by using simulations with artificial intelligence pricing algorithms (specifically Q‐learning algorithms, which are commonly used in computer science). Our theoretical results indicate that these policies (which require little information to implement) can have strongly beneficial effects, even when sellers are infinitely patient and seek to collude. Similarly, our simulations suggest that platform design can benefit consumers and the platform, but that achieving these gains may require policies that condition on past behavior and treat sellers in a nonneutral fashion. These more sophisticated policies disrupt the ability of algorithms to rotate demand and split industry profits, leading to low prices.
R&D investment reduces current profits, so short‐term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short‐termist distortions might not quantitatively matter if aggregation or equilibrium dampen their impact. So I build and estimate a quantitative endogenous growth model in which short‐termism arises naturally as discipline on conflicted managers and boosts firm value by about 1%. But short‐termism reduces R&D, and the social return to R&D is higher than the private return due to standard channels including knowledge spillovers and imperfect competition. So at the macro level, short‐termist distortions slow growth by 5 basis points yearly and lower social welfare by about 1%.
What is the pathway to development in a world marked by rising economic nationalism and less international integration? This paper answers this question within a framework that emphasizes the role of demand-side constraints on national development, which is identified with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms that need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day purchasing power parity in 2011 U.S. dollars over a five-year period. This outcome is affected in a statistically significant and economically meaningful way by domestic market size, which is measured as a function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization, and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low- or lower-middle-income country does not live in a market large enough to experience sustained poverty reduction. Domestic redistribution targeted towards generating a larger middle class can partially compensate for the lack of an international market.
We study the propagation of monetary shocks in a sticky-price general equilibrium economy where the firms' pricing strategy features a complementarity with the decisions of other firms. In a dynamic equilibrium, the firm's price-setting decisions depend on aggregates, which in turn depend on the firms' decisions. We cast this fixed-point problem as a Mean Field Game and prove several analytic results. We establish existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate shock. We prove that strategic complementarities make the IRF larger at each horizon. We establish that complementarities may give rise to an IRF with a hump-shaped profile. As the complementarity becomes large enough, the IRF diverges, and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models: the Calvo model and the Golosov–Lucas model display a comparable amplification, in spite of the fact that the non-neutrality in Calvo is much larger.
We propose a new simulation-based estimation method, adversarial estimation, for structural models. The estimator is formulated as the solution to a minimax problem between a generator (which generates simulated observations using the structural model) and a discriminator (which classifies whether an observation is simulated). The discriminator maximizes the accuracy of its classification while the generator minimizes it. We show that, with a sufficiently rich discriminator, the adversarial estimator attains parametric efficiency under correct specification and the parametric rate under misspecification. We advocate the use of a neural network as a discriminator that can exploit adaptivity properties and attain fast rates of convergence.
In this paper, I consider two normative questions: (1) how should policymakers approach tradeoffs that involve different age groups, and (2) at what rate should policymakers discount the consumption of future generations? I demonstrate that, under standard assumptions, these two questions are equivalent: caring more about the future means caring less about the elderly. Even small differences between the social discount rate and the market interest rate can have significant quantitative implications for the relative value placed on the consumption of different age groups.
This paper describes the response of the economy to large shocks in a nonlinear production network. A sector's tail centrality measures how a large negative shock transmits to GDP, that is, the systemic risk of the sector. Tail centrality is theoretically and empirically very different from local centrality measures such as sales share—in a benchmark case, it is measured as a sector's average downstream closeness to final production. It also measures how large differences in sector productivity can generate cross-country income differences. The paper also uses the results to analyze the determinants of total tail risk in the economy. Increases in interconnectedness can simultaneously reduce the sensitivity of the economy to small shocks while increasing the sensitivity to large shocks. Tail risk is related to conditional granularity, where some sectors become highly influential following negative shocks.
One dominant approach to evaluate the causal effect of a treatment is through panel data analysis, whereby the behaviors of multiple units are observed over time. The information across time and units motivates two general approaches: (i) horizontal regression (i.e., unconfoundedness), which exploits time series patterns, and (ii) vertical regression (e.g., synthetic controls), which exploits cross-sectional patterns. Conventional wisdom often considers the two approaches to be different. We establish this position to be partly false for estimation but generally true for inference. In the absence of any assumptions, we show that both approaches yield algebraically equivalent point estimates for several standard estimators. However, the source of randomness assumed by each approach leads to a distinct estimand and quantification of uncertainty even for the same point estimate. This emphasizes that researchers should carefully consider where the randomness stems from in their data, as it has direct implications for the accuracy of inference.
We develop a new approach to estimating the causal effects of treatments or instruments that combine multiple sources of variation according to a known formula. Examples include treatments capturing spillovers in social or transportation networks and simulated instruments for policy eligibility. We show how exogenous shocks to some—but not all—determinants of such variables can be leveraged while avoiding omitted variables bias. Our solution involves specifying counterfactual shocks that may as well have been realized and adjusting for a summary measure of nonrandomness in shock exposure: the average treatment (or instrument) across shock counterfactuals. We use this approach to address bias when estimating employment effects of market access growth from Chinese high-speed rail construction.
Nearest neighbor (NN) matching is widely used in observational studies for causal effects. Abadie and Imbens (2006) provided the first large-sample analysis of NN matching. Their theory focuses on the case with the number of NNs, M fixed. We reveal something new out of their study and show that once allowing M to diverge with the sample size an intrinsic statistic in their analysis constitutes a consistent estimator of the density ratio with regard to covariates across the treated and control groups. Consequently, with a diverging M, the NN matching with Abadie and Imbens' (2011) bias correction yields a doubly robust estimator of the average treatment effect and is semiparametrically efficient if the density functions are sufficiently smooth and the outcome model is consistently estimated. It can thus be viewed as a precursor of the double machine learning estimators.
We develop an urban growth model where human capital spillovers foster entrepreneurship and learning in heterogeneous cities. Incumbent residents limit city expansion through planning regulations so that commuting and housing costs do not outweigh productivity gains from agglomeration. The model builds on strong microfoundations, matches key regularities at the city and economy-wide levels, and generates novel predictions for which we provide evidence. It can be quantified by relying on few parameters and gives us a basis to estimate them. We examine counterfactuals relaxing planning regulations or constraining city growth to assess the effect of cities on economic growth and aggregate output.
The United States spends significant amounts on non-medical transfers for its working-age population in a wide range of programs that support low- and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare-improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate, although most households support the move as losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If, instead, per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, it becomes feasible to improve upon the current system. Providing per-person transfers to all households is costly, and reducing tax distortions helps to provide for resources to expand redistribution.
Identifying the strategies that are played is critical to understanding behavior in repeated games. This process is difficult because only choices (not strategies) are observable. Recently, a debate has emerged regarding whether subjects play mixed strategies in the indefinitely repeated prisoner's dilemma. We use an experimental approach to elicit mixed strategies from human subjects, thereby providing direct empirical evidence. We find that a majority of subjects use mixed strategies. However, the data also suggest subjects' strategies are becoming less mixed over time, and move toward three focal pure strategies: Tit For Tat, Grim Trigger, and Always Defect. We use the elicited strategies to provide an empirically-relevant foundation for analyzing commonly used mixture model estimation procedures.
We document a strong empirical connection between corporate taxation and the manufacturing labor share, both in the US and across OECD countries. Our estimates associate 30 to 60% of the observed decline in labor shares with the fall in corporate taxation. Using an equilibrium model of an industry where firms differ in their capital intensities, we show that lower corporate tax rates reduce the labor share by raising the market share of capital-intensive firms. The tax elasticity of the labor share depends on the joint distribution of labor intensities and value added at the micro level. Given the empirical distribution in the US manufacturing sector, our quantitative analysis suggests that corporate tax cuts explain a significant part of the decline in the manufacturing labor share since the 1950s. The shift away from traditionally large, labor-intensive production units raised the concentration of market shares and reduced the concentration of employment.
In this paper, we formulate and estimate a flexible model of job mobility and wages with two-sided heterogeneity. The analysis extends the finite mixture approach of Bonhomme, Lamadon, and Manresa (2019) and Abowd, McKinney, and Schmutte (2019) to develop a new Classification Expectation-Maximization algorithm that ensures both worker and firm latent-type identification using wage and mobility variations in the data. Workers receive job offers in worker-type segmented labor markets. Offers are accepted according to a logit form that compares the value of the current job with that of the new job. In combination with flexibly estimated layoff and job finding rates, the analysis quantifies the four different sources of sorting: job preferences, segmentation, layoffs, and job finding. Job preferences are identified through job-to-job moves in a revealed preference argument. They are in the model structurally independent of the identified job wages, possibly as a reflection of the presence of amenities. We find evidence of a strong pecuniary motive in job preferences. While the correlation between preferences and current job wages is positive, the net present value of the future earnings stream given the current job correlates much more strongly with preferences for it. This is more so for short- than long-tenure workers. In the analysis, we distinguish between type sorting and wage sorting. Type sorting is quantified by means of the mutual information index. Wage sorting is captured through correlation between identified wage types. While layoffs are less important than the other channels, we find all channels to contribute substantially to sorting. As workers age, job arrival processes are the key determinant of wage sorting, whereas the role of job preferences dictate type sorting. Over the life cycle, job preferences intensify, type sorting increases, and pecuniary considerations wane.
Using an endogenous growth model, Liu, Mian, and Sufi (2022) (LMS) show that a decline in the interest rate can lead to a fall in productivity growth and a rise in leader-laggard productivity gaps and firm profits. We identify two issues in their quantitative analysis of transition dynamics: a time-scale error and the omission of composition terms in calculating productivity growth along the transition to a new balanced growth path. Correcting the time-scale error and including the composition terms, the decline in the interest rate that LMS study leads to a large and protracted productivity boom lasting about 20 years. In addition, the average leader-laggard gap grows much more slowly than reported in their paper. We also point out an issue in their quantitative analysis of steady-state profit shares. These issues are related to the quantitative exercises, and do not affect the key theoretical contributions of LMS.
Oil and gas leases between mineral owners and extraction firms typically specify a date by which the firm must either drill a well or lose the lease. These deadlines are known as primary terms. Using data from the Louisiana shale boom, we first show that well drilling is substantially bunched just before the primary term deadline. This bunching is not necessarily surplus-reducing: using an estimated model of firms' drilling and input choices, we show that primary terms can increase total surplus by countering the effects of leases' royalties, as royalties are a tax on revenue and delay drilling. These benefits are reduced, however, when production outcomes are sensitive to drilling inputs and when drilling one well indefinitely extends the period of time during which additional wells may be drilled. We enrich the model to consider mineral owners' lease offers and find small effects of primary terms on owners' revenue.
This paper studies the effect of a restorative justice intervention targeted at 143 youth ages 13 to 17 facing felony charges of medium severity (e.g., burglary, assault). Eligible youths were randomly assigned to participate in the Make-it-Right (MIR) restorative justice program or a control group where they faced standard criminal prosecution. We estimate the effects of MIR on the likelihood that a youth will be rearrested in the four years following randomization. Assignment to MIR reduces the probability of a rearrest within six months by 19 percentage points, a 44 percent reduction relative to the control group. Moreover, the reduction in recidivism persists even four years after randomization. Thus, our estimates show that restorative justice conferencing can reduce recidivism among youth charged with relatively serious offenses and can be an effective alternative to traditional criminal justice practices.
This paper develops a sufficient statistics framework for analyzing the welfare effects of disability insurance (DI). We derive social-optimality conditions for the two main DI policy parameters: (i) eligibility rules and (ii) benefit levels. Applying this framework to two restrictive DI reforms in Austria, we find that tighter DI eligibility rules triggered higher fiscal cost savings and lower insurance losses. Hence, tighter DI eligibility rules dominate DI benefit reductions in scaling back the Austrian DI system.
We study the effect of interest rates on wealth inequality. While lower rates decrease the growth rate of rentiers, they also increase the growth rate of entrepreneurs by making it cheaper to raise capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the lifetime equity and debt issuance rate of individuals in the right tail of the wealth distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. Overall, we find that the secular decline in interest rates (or more generally of required rates of returns) can account for about 40% of the rise in Pareto inequality; that is, the degree to which the super rich pulled ahead relative to the rich.
Climate change is increasing the frequency of extreme weather events, with low-income countries being disproportionately impacted. However, these countries often face market frictions that hinder their ability to adopt effective adaptation strategies. In this paper, I explore the role of credit market failures in limiting adaptation. To achieve this, I collaborate with a large microfinance institution and offer a randomly selected group of farmers access to guaranteed credit through an “Emergency Loan” following a negative climate shock. I document three key results. First, farmers who have access to the emergency loan make less costly adaptation choices and are less severely affected when a flood occurs. Second, I find no evidence of adverse spillover effects on households that did not receive the Emergency Loan. Finally, I demonstrate that providing the Emergency Loan is profitable for the microfinance institution, making it a viable tool for the private sector to employ in similar circumstances.
The maximum-likelihood estimator of nonlinear panel data models with fixed effects is asymptotically biased under rectangular-array asymptotics. The literature has devoted substantial effort to devising methods that correct for this bias as a means to salvage standard inferential procedures. The chief purpose of this paper is to show that the (recursive, parametric) bootstrap replicates the asymptotic distribution of the (uncorrected) maximum-likelihood estimator and of the likelihood-ratio statistic. This justifies the use of confidence sets and decision rules for hypothesis testing constructed via conventional bootstrap methods. No modification for the presence of bias needs to be made.
To what extent is a worker's human capital growth affected by the quality of his coworkers? To answer this question, we develop and estimate a model in which the productivity and the human capital growth of an individual depend on the average human capital of his coworkers. The measured production function is supermodular: The marginal product of a more knowledgeable individual is increasing in the human capital of his coworkers. The measured human capital accumulation function is convex: An individual's human capital growth is increasing in coworkers' human capital only when paired with more knowledgeable coworkers, but independent of coworkers' human capital when paired with less knowledgeable coworkers. Learning from coworkers accounts for two thirds of the stock of human capital accumulated on the job. Technological changes that increase production supermodularity lead to labor market segregation and, by reducing the opportunities for low human capital workers to learn from better coworkers, lead to a decline in aggregate human capital and output.
We study a flexible class of trade models with international production networks and arbitrary wedge-like distortions like markups, tariffs, or nominal rigidities. We characterize the general equilibrium response of variables to shocks in terms of microeconomic statistics. Our results are useful for decomposing the sources of real GDP and welfare growth, and for computing counterfactuals. Using the same set of microeconomic sufficient statistics, we also characterize societal losses from increases in tariffs and iceberg trade costs and dissect the qualitative and quantitative importance of accounting for disaggregated details. Our results, which can be used to compute approximate and exact counterfactuals, provide an analytical toolbox for studying large-scale trade models and help to bridge the gap between computation and theory.
There is substantial empirical evidence showing that peer effects matter in many activities. The workhorse model in empirical work on peer effects is the linear-in-means (LIM) model, whereby it is assumed that agents are linearly affected by the mean action of their peers. We develop a new general model of peer effects that relaxes the linear assumption of the best-reply functions and the mean peer behavior and that encompasses the spillover, conformist model, and LIM model as special cases. Then, using data on adolescent activities in the United States, we structurally estimate this model. We find that for many activities, individuals do not behave according to the LIM model. We run some counterfactual policies and show that imposing the mean action as an individual social norm is misleading and leads to incorrect policy implications.
Measuring the effect of peers on individuals' outcomes is a challenging problem, in part because individuals often select peers who are similar in both observable and unobservable ways. Group formation experiments avoid this problem by randomly assigning individuals to groups and observing their responses; for example, do first-year students have better grades when they are randomly assigned roommates who have stronger academic backgrounds? In this paper, we propose randomization-based permutation tests for group formation experiments, extending classical Fisher Randomization Tests to this setting. The proposed tests are justified by the randomization itself, require relatively few assumptions, and are exact in finite samples. This approach can also complement existing strategies, such as linear-in-means models, by using a regression coefficient as the test statistic. We apply the proposed tests to two recent group formation experiments.
We propose a theory of how market power affects wage inequality. We ask how goods and labor market power jointly determine the level of wages, the skill premium, and wage inequality. We then use detailed microdata from the U.S. Census Bureau between 1997 and 2016 to estimate the parameters of labor supply, technology, and the market structure. We find that a less competitive market structure lowers the average wage of high-skilled workers by 11.3%, and of low-skilled workers by 12.2%, contributes 8.1% to the rise in the skill premium, and accounts for 54.8% of the increase in between-establishment wage variance.
We propose new confidence sets (CSs) for the regression discontinuity parameter in fuzzy designs. Our CSs are based on local linear regression, and are bias-aware, in the sense that they take possible bias explicitly into account. Their construction shares similarities with that of Anderson–Rubin CSs in exactly identified instrumental variable models, and thereby avoids issues with “delta method” approximations that underlie most commonly used existing inference methods for fuzzy regression discontinuity analysis. Our CSs are asymptotically equivalent to existing procedures in canonical settings with strong identification and a continuous running variable. However, they are also valid under a wide range of other empirically relevant conditions, such as setups with discrete running variables, donut designs, and weak identification.
We estimate and trace a credit demand curve for households that recently experienced damage to their homes from a natural disaster. Our administrative data include over one million applicants to a federal recovery loan program for households. We estimate extensive-margin demand over a large range of interest rates. Our identification strategy exploits 24 natural experiments, leveraging exogenous, time-based variation in the program's offered interest rate. Interest rates meaningfully affect consumer demand throughout the distribution of rates. On average, a 1 percentage point increase in the interest rate reduces loan take-up by 26%. We find a large impact of applicants' credit quality on demand and evidence of monthly payment targeting. Using our estimated demand curve and information on program costs, we find that the program generates an average social surplus of $2900 per borrower.
In a setting of many-to-one two-sided matching with nontransferable utilities, for example, college admissions, we study conditions under which preferences of both sides are identified with data on one single market. Regardless of whether the market is centralized or decentralized, assuming that the observed matching is stable, we show nonparametric identification of preferences of both sides under certain exclusion restrictions. To take our results to the data, we use Monte Carlo simulations to evaluate different estimators, including the ones that are directly constructed from the identification. We find that a parametric Bayesian approach with a Gibbs sampler works well in realistically sized problems. Finally, we illustrate our methodology in decentralized admissions to public and private schools in Chile and conduct a counterfactual analysis of an affirmative action policy.
We show that stricter grading policies in STEM courses reduce STEM enrollment, especially for women. We estimate a model of student demand for courses and optimal effort choices given professor grading policies. Grading policies are treated as equilibrium objects that in part depend on student demand for courses. Differences in demand for STEM and non-STEM courses explain much of why STEM classes give lower grades. Restrictions on grading policies that equalize average grades across classes reduce the STEM gender gap and increase overall enrollment in STEM classes.
In markets with complicated products, individuals may choose how much time and effort to spend understanding and comparing alternatives. Focusing on insurance choice, we find evidence consistent with individuals acquiring more information when there are larger consequences from making an uninformed choice. Building on the rational inattention literature, we develop and estimate a parsimonious demand model in which individuals choose how much to research difficult-to-observe characteristics. We use our estimates to evaluate policies that simplify choice. Reducing the number of plans can raise welfare through improved choice as well as savings in information costs. Capping out-of-pocket costs generates larger welfare gains than standard models. The empirical model can be applied to other settings to examine the regulation of complex products.
Most empirical work in economics has considered only a narrow set of measures as meaningful and useful to characterize individual behavior, a restriction justified by the difficulties in collecting a wider set. However, this approach often forces the use of strong assumptions to estimate the parameters that inform individual behavior and identify causal links. In this paper, we argue that a more flexible and broader approach to measurement could be extremely useful and allow the estimation of richer and more realistic models that rest on weaker identifying assumptions. We argue that the design of measurement tools should interact with, and depend on, the models economists use. Measurement is not a substitute for rigorous theory, it is an important complement to it, and should be developed in parallel to it. We illustrate these arguments with a model of parental behavior estimated on pilot data that combines conventional measures with novel ones.
We use high-frequency data on fine particulate matter air pollution (PM 2.5) at the locality level to study the effects of high pollution on daily labor supply decisions in the metropolitan area of Mexico City. We document a negative, non-linear relationship between PM 2.5 and same-day labor supply, with strong effects on days with extremely high pollution levels. On these days, the average worker experiences a reduction of around 7.5% of working hours. Workers partially compensate for lost hours by increasing their labor supply on days that follow high-pollution days. We find that low-income workers reduce their labor supply significantly less than high-income workers. Unequal responses to high pollution along other dimensions (job quality, flexibility, gender) matter, but less than income. We provide suggestive evidence that reductions in labor supply due to high pollution are consistent with avoidance behavior.
This paper investigates how tax rates and tax enforcement jointly impact fiscal capacity in low-income countries. We study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to the status quo tax rate or to a rate reduction. This variation in tax liabilities reveals that the status quo rate lies above the revenue-maximizing tax rate (RMTR). Reducing rates by about one-third would maximize government revenue by increasing tax compliance. We then exploit two sources of variation in enforcement—randomized enforcement letters and random assignment of tax collectors—to show that the RMTR increases with enforcement. Including an enforcement message on tax letters or replacing tax collectors in the bottom quartile of enforcement capacity with average collectors would raise the RMTR by about 40%. Tax rates and enforcement are thus complementary levers. Jointly optimizing tax rates and enforcement would lead to 10% higher revenue gains than optimizing them independently. These findings provide experimental evidence that low government enforcement capacity sets a binding ceiling on the revenue-maximizing tax rate in some developing countries, thereby demonstrating the value of increasing tax rates in tandem with enforcement to expand fiscal capacity.
This paper theoretically and empirically studies the interaction of search and application approval in credit markets. Risky borrowers internalize the probability that their application is rejected and behave as if they had high search costs. Thus, “overpayment” may be a poor proxy for consumer sophistication since it partly represents rational search in response to rejections. Contrary to standard search models, our model implies (1) endogenous adverse selection through the search and application approval process, (2) a possibly non-monotone or non-decreasing relationship between search and realized interest, default, and application approval rates, and (3) search costs estimated from transaction prices alone are biased. We find support for the model's predictions using a unique data set detailing search behavior of mortgage borrowers. Estimating the model, we find that screening is informative and search is costly. Counterfactual analyses reveal that tightening lending standards and discrimination through application rejection both increase equilibrium interest rates. This increase in realized interest rates is in part due to strategic complementarity in bank rate setting.
Developing country megacities suffer from severe road traffic congestion, yet the level of congestion is not a direct measure of equilibrium inefficiency. I study the peak-hour traffic congestion equilibrium in Bangalore. To measure travel preferences, I use a model of departure time choice to design a field experiment with congestion pricing policies and implement it using precise GPS data. Commuter responses in the experiment reveal moderate schedule inflexibility and a high value of time. I then show that in Bangalore, traffic density has a moderate and linear impact on travel delay. My policy simulations with endogenous congestion indicate that optimal congestion charges would lead to a small reduction in travel times, and small commuter welfare gains. This result is driven primarily by the shape of the congestion externality. Overall, these results suggest limited commuter welfare benefits from peak-spreading traffic policies in cities like Bangalore.
Annually, work-related mortality is responsible for 5–7% of all global deaths, and at least 1-in-9 workers experience nonfatal occupational accidents (ILO (2019a,b)). Occupational Safety and Health (OSH) committees are considered the key worker voice institution through which to improve workplace safety and health (ILO (1981)). I present evidence of OSH committees' causal effects on workers and on factories. To do so, I collaborated with 29 multinational apparel buyers that committed to enforce a local mandate for OSH committees on their suppliers in Bangladesh. With the buyers, I implemented a nearly year-long field experiment with 84 supplier factories, randomly enforcing the mandate on half. The buyers' intervention increased compliance with the OSH committee law. Exploiting the experimental variation in OSH committees' strength, I find that stronger OSH committees had small, positive effects on objective measures of safety. These improvements did not come at a cost to workers in terms of wages or employment or to factories in terms of labor productivity. The effects on compliance, safety, and voice were largest for factories with better managerial practices. Factories with worse practices did not improve, and workers in these factories reported lower job satisfaction; this finding suggests complementarity between external enforcement and internal capacity in determining the efficacy of regulation.
The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the United States. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.
We ask how fiscal deficits are financed in environments with two key features: (i) nominal rigidity, and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits can contribute to their own financing through two channels: a boom in real economic activity, which expands the tax base; and a surge in inflation, which erodes the real value of nominal government debt. Our main theoretical result establishes that this mechanism becomes more potent as fiscal adjustment is delayed, leading to full self-financing in the limit: if the monetary authority does not lean too heavily against the fiscal stimulus, then the government can run a deficit today, refrain from tax hikes or spending cuts in the future, and still see its debt converge back to its initial level. We further demonstrate that a significant degree of self-financing is achievable when the theory is disciplined by empirical evidence on marginal propensities to consume, nominal rigidities, the monetary policy reaction, and the speed of fiscal adjustment.
This paper studies the role of fiscal capacity in European state consolidation. Our analysis is organized around novel data on the territories and cities of the Holy Roman Empire in the early modern period. Territories implementing an early fiscal reform were more likely to survive, increased in size, and achieved a more compact extent. We provide evidence for the causal interpretation of these results and show key mechanisms: revenues, military investments, and marriage success. The imposition of Imperial taxes, quasi-random in timing and size, increased the benefits of an efficient tax administration on the side of rulers, driving the implementation of fiscal centralization. Within territories, Chambers became the dominant administrative institution, tilting the consolidating states toward absolutism.
Central banks wish to avoid self-fulfilling fluctuations. Interest rate rules with a unit response to real rates achieve this under the weakest possible assumptions about the behavior of households and firms. They are robust to household heterogeneity, hand-to-mouth consumers, non-rational household or firm expectations, active fiscal policy, and to any form of intertemporal or nominal-real links. They are easy to employ in practice, using inflation-protected bonds to infer real rates. With a time-varying short-term inflation target, they can implement an arbitrary inflation path, including optimal policy. This provides a way to translate policy makers' desired path for inflation into one for nominal rates. U.S. Federal Reserve behavior is remarkably close to that predicted by a real rate rule, given the desired inflation path of U.S. monetary policy makers. Real rate rules work thanks to the key role played by the Fisher equation in monetary transmission.
We exploit a natural experiment involving a randomization of votes across parties within coalitions in all local elections in Italy for over a decade. A lottery on the position of party symbols in the ballot papers allows estimating the causal effect of increasing votes to parties for coalition policies. A non-marginal random boost of votes shifts budgetary spending towards the treated party's platform, but only for issues that are salient in that party's political manifesto. We study the chains of mechanisms mapping votes into policies and link it to an increase in bargaining power within legislative majorities. Parties leverage their higher electoral support to gain the appointment of politically affiliated cabinet members. Empowering different parties also leads to the selection of cabinets with different socio-demographic characteristics. The unintentional experiment helps shed new light on mechanisms mapping votes to parties into coalition policies.
The gains from agglomeration economies are believed to be highly localized. Using confidential Census plant-level data, we show that large industrial plant openings raise the productivity not only of local plants but also of distant plants hundreds of miles away, which belong to large multi-plant, multi-region firms that are exposed to the local productivity spillover through one of their plants. This “global” productivity spillover does not decay with distance and is stronger if plants are in industries that share knowledge with each other. To quantify the significance of firms' plant-level networks for the propagation and amplification of local productivity shocks, we estimate a quantitative spatial model in which plants of multi-region firms are linked through shared knowledge. Counterfactual exercises show that while large industrial plant openings have a greater local impact in less developed regions, the aggregate gains are greatest when the plants locate in well-developed regions, which are connected to other regions through firms' plant-level (knowledge-sharing) networks.
Supply chain disturbances can lead to substantial increases in production costs. To mitigate these risks, firms may take steps to reduce their reliance on volatile suppliers. We construct a model of endogenous network formation to investigate how these decisions affect the structure of the production network and the level and volatility of macroeconomic aggregates. When uncertainty increases in the model, producers prefer to purchase from more stable suppliers, even though they might sell at higher prices. The resulting reorganization of the network tends to reduce macroeconomic volatility, but at the cost of a decline in aggregate output. The model also predicts that more productive and stable firms have higher Domar weights—a measure of their importance as suppliers—in the equilibrium network. We provide a basic calibration of the model using U.S. data to evaluate the importance of these mechanisms.
This paper proposes a model for, and investigates the consequences of, strong spatial dependence in economic variables. Our findings echo those of the corresponding “unit root” time series literature: Spatial unit root processes induce spuriously significant regression results, even with clustered standard errors or spatial HAC corrections. We develop large-sample valid unit root and stationarity tests that can detect such strong spatial dependence. Finally, we use simulations to study strategies for valid inference in regressions with persistent spatial data, such as spatial analogues of first-differencing transformations. Regressions from Chetty, Hendren, Kline, and Saez (2014) are used to illustrate the issues and methods.
We document significant gaps in wealth across health status over the life cycle in Germany—a country with a universal healthcare system and negligible out-of-pocket medical expenses. To investigate the underlying sources of these wealth-health gaps, we build a heterogeneous-agent life-cycle model in which health and wealth evolve endogenously. In the model, agents exert efforts to lead a healthy lifestyle, which helps maintain good health status in the future. Effort choices, or lifestyle behaviors, are subject to adjustment costs to capture their habitual nature in the data. We find that our estimated model generates the great majority of the empirical wealth gaps by health and quantify the role of earnings and savings channels through which health affects these gaps. We show that variations in individual health efforts account for around a quarter of the model-generated wealth gaps by health, illustrating their role as an amplification mechanism behind the gaps.
We develop a framework for quantifying barriers to labor force participation (LFP) and entrepreneurship faced by women in India. We find substantial barriers to LFP, and higher costs of expanding businesses through hiring workers for women entrepreneurs. However, there is one area where female entrepreneurs have an advantage: the hiring of female workers. We show that this is not driven by the sectoral composition of female employment. Consistent with this pattern, policies promoting female entrepreneurship can significantly increase female LFP even without explicitly targeting female LFP. Counterfactual simulations indicate that removing all excess barriers faced by women entrepreneurs would substantially increase the fraction of female-owned firms, female LFP, earnings, and generate substantial gains for the economy. These gains are due to higher LFP, higher real wages and profits, and reallocation: low productivity male-owned firms previously sheltered from female competition are replaced by higher productivity female-owned firms previously excluded from the economy.
This paper shows that matching frictions and a thick market externality in firm-to-firm trade shape the agglomeration of economic activity. Using panel data of firm-to-firm trade in Japan, I demonstrate that firms gradually match with alternative suppliers following an unanticipated supplier bankruptcy, and that the rate of rematching increases in the geographic density of alternative suppliers. Motivated by these empirical findings, I develop a general equilibrium model of firm-to-firm matching in input trade across space. The model reveals that the thick market externality gives rise to an agglomeration externality affecting regional production and welfare. Using the calibrated model to the reduced-form patterns of firm-to-firm matching, I estimate that the elasticity of a region's real wage with respect to population density due to the thick market externality is approximately 0.02. This finding highlights the substantial impact of the thick market externality on the overall agglomeration benefit.
This paper studies how social media affects the dynamics of protests and strikes in China during 2009–2017. Based on 13.2 billion microblog posts, we use tweets and retweets to measure social media communication across cities and exploit its rapid expansion for identification. We find that, despite strict government censorship, Chinese social media has a sizeable effect on the geographical spread of protests and strikes. Furthermore, social media communication considerably expands the scope of protests by spreading events across different causes (e.g., from anticorruption protests to environmental protests) and dramatically increases the probability of far-reaching protest waves with simultaneous events occurring in many cities. These effects arise even though Chinese social media barely circulates content that explicitly helps organize protests.
We propose a new adaptive hypothesis test for inequality (e.g., monotonicity, convexity) and equality (e.g., parametric, semiparametric) restrictions on a structural function in a nonparametric instrumental variables (NPIV) model. Our test statistic is based on a modified leave-one-out sample analog of a quadratic distance between the restricted and unrestricted sieve two-stage least squares estimators. We provide computationally simple, data-driven choices of sieve tuning parameters and Bonferroni adjusted chi-squared critical values. Our test adapts to the unknown smoothness of alternative functions in the presence of unknown degree of endogeneity and unknown strength of the instruments. It attains the adaptive minimax rate of testing in L2. That is, the sum of the supremum of type I error over the composite null and the supremum of type II error over nonparametric alternative models cannot be minimized by any other tests for NPIV models of unknown regularities. Confidence sets in L2 are obtained by inverting the adaptive test. Simulations confirm that, across different strength of instruments and sample sizes, our adaptive test controls size and its finite-sample power greatly exceeds existing non-adaptive tests for monotonicity and parametric restrictions in NPIV models. Empirical applications to test for shape restrictions of differentiated products demand and of Engel curves are presented.
The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable—the real exchange rate—and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real; an extended set of Mussa facts falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market, in which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy, emphasizing the importance of monetary transmission via the risk premium channel.
We create a novel reign-level data set for European monarchs, covering all major European states between the 10th and 18th centuries. We first document a strong positive relationship between rulers' cognitive ability and state performance. To address endogeneity issues, we exploit the facts that (i) rulers were appointed according to hereditary succession, independent of their ability, and (ii) the widespread inbreeding among the ruling dynasties of Europe led over centuries to quasirandom variation in ruler ability. We code the degree of blood relationship between the parents of rulers, which also reflects “hidden” layers of inbreeding from previous generations. The coefficient of inbreeding is a strong predictor of ruler ability, and the corresponding instrumental variable results imply that ruler ability had a sizeable effect on the performance of states and their borders. This supports the view that “leaders made history,” shaping the European map until its consolidation into nation states. We also show that rulers mattered only where their power was largely unconstrained. In reigns where parliaments checked the power of monarchs, ruler ability no longer affected their state's performance.
This study provides a structural analysis of detailed, alternating-offer bargaining data from eBay, deriving bounds on buyers and sellers private value distributions and the gains from trade using a range of assumptions on behavior and the informational environment. These assumptions range from weak (assuming only that acceptance and rejection decisions are rational) to less weak (e.g., assuming that bargaining offers are weakly increasing in players' private values). We estimate the bounds and show what they imply for consumer negotiation behavior and inefficient breakdown. For the median product, bargaining ends in impasse in 37% of negotiations even when the buyer values the good more than the seller.
Using randomized control trials (RCTs) applied over time in different countries, we study whether the economic environment affects how agents learn from new information. We show that as inflation rose in advanced economies, both households and firms became more attentive and informed about publicly available news about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low- and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment.
Many argue that minimum wages can prevent efficiency losses from monopsony power. We assess this argument in a general equilibrium model of oligopsonistic labor markets with heterogeneous workers and firms. We decompose welfare gains into an efficiency component that captures reductions in monopsony power and a redistributive component that captures the way minimum wages shift resources across people. The minimum wage that maximizes the efficiency component of welfare lies below $8.00 and yields gains worth less than 0.2% of lifetime consumption. When we add back in Utilitarian redistributive motives, the optimal minimum wage is $11 and redistribution accounts for 102.5% of the resulting welfare gains, implying offsetting efficiency losses of −2.5%. The reason a minimum wage struggles to deliver efficiency gains is that with realistic firm productivity dispersion, a minimum wage that eliminates monopsony power at one firm causes severe rationing at another. These results hold under an EITC and progressive labor income taxes calibrated to the U.S. economy.
While the mechanism design paradigm emphasizes notions of efficiency based on agent preferences, policymakers often focus on alternative objectives. School districts emphasize educational achievement, and transplantation communities focus on patient survival. It is unclear whether choice-based mechanisms perform well when assessed based on these outcomes. This paper evaluates the assignment mechanism for allocating deceased donor kidneys on the basis of patient life-years from transplantation (LYFT). We examine the role of choice in increasing LYFT and compare realized assignments to benchmarks that remove choice. Our model combines choices and outcomes in order to study how selection affects LYFT. We show how to identify and estimate the model using instruments derived from the mechanism. The estimates suggest that the design in use selects patients with better post-transplant survival prospects and matches them well, resulting in an average LYFT of 9.29, which is 1.75 years more than a random assignment. However, the maximum aggregate LYFT is 14.08. Realizing the majority of the gains requires transplanting relatively healthy patients, who would have longer life expectancies even without a transplant. Therefore, a policymaker faces a dilemma between transplanting patients who are sicker and those for whom life will be extended the longest.
We conduct a series of experiments and document a robust behavioral pattern whereby people behave more morally in uncertain environments than degenerate deterministic ones. We show that this pattern is weakened when the moral implication of behavior is diminished or when uncertainty pertains to others rather than oneself. These findings are incompatible with standard models that respect dominance. We propose a mechanism based on the anxiety aspect of uncertain environments whereby people act morally as if their moral behavior can help deliver a better outcome. We further delve into the complexity aspect of uncertainty to arrive at a more comprehensive understanding of these findings.
We estimate valence measures of candidates running in U.S. House elections from data on vote shares. Our identification and estimation strategy builds on ideas developed for estimating production functions, allowing us to control for possible endogeneity of campaign spending and sample selection of candidates due to endogenous entry. We find that incumbents have substantially higher valence measures than challengers running against them, resulting in about 3.5 percentage-point differences in the vote share, on average. Eliminating differences in the valence of challengers and incumbents results in an increase in the winning probability of a challenger from 6.5% to 12.1%. Our measure of candidate valence can be used to study various substantive questions of political economy. We illustrate its usefulness by studying the source of incumbency advantage in U.S. House elections.
We study the effect of incarceration on wages, self-employment, and taxes and transfers in North Carolina and Ohio using two quasi-experimental research designs: discontinuities in sentencing guidelines and random assignment to judges. Across both states, incarceration generates short-term drops in economic activity while individuals remain in prison. As a result, a year-long sentence decreases cumulative earnings over five years by 13%. Beyond five years, however, there is no evidence of lower employment, wage earnings, or self-employment in either state, as well as among defendants with no prior incarceration history. These results suggest that upstream factors, such as other types of criminal justice interactions or pre-existing labor market detachment, are more likely to be the cause of low earnings among the previously incarcerated, who we estimate would earn just $5000 per year on average if spared a prison sentence.
We propose a double robust Bayesian inference procedure on the average treatment effect (ATE) under unconfoundedness. For our new Bayesian approach, we first adjust the prior distributions of the conditional mean functions, and then correct the posterior distribution of the resulting ATE. Both adjustments make use of pilot estimators motivated by the semiparametric influence function for ATE estimation. We prove asymptotic equivalence of our Bayesian procedure and efficient frequentist ATE estimators by establishing a new semiparametric Bernstein–von Mises theorem under double robustness; that is, the lack of smoothness of conditional mean functions can be compensated by high regularity of the propensity score and vice versa. Consequently, the resulting Bayesian credible sets form confidence intervals with asymptotically exact coverage probability. In simulations, our method provides precise point estimates of the ATE through the posterior mean and delivers credible intervals that closely align with the nominal coverage probability. Furthermore, our approach achieves a shorter interval length in comparison to existing methods. We illustrate our method in an application to the National Supported Work Demonstration following LaLonde (1986) and Dehejia and Wahba (1999).
There has been a call for caution regarding the standard procedure for Bayesian inference in set-identified structural vector autoregressions on the grounds that the common practice of using a uniform prior over the set of orthogonal matrices induces a non-uniform prior for individual impulse responses or other quantities of interest. This paper challenges this call by formally showing that when the focus is on joint inference, the uniform prior over the set of orthogonal matrices is not only sufficient but also necessary for inference based on a uniform joint prior distribution over the identified set for the vector of impulse responses. In addition, we show how to conduct inference based on a uniform joint prior distribution for the vector of impulse responses.
Based on the GARCH literature, Engle and Russell (1998) established consistency and asymptotic normality of the QMLE for the autoregressive conditional duration (ACD) model, assuming strict stationarity and ergodicity of the durations. Using novel arguments based on renewal process theory, we show that their results hold under the stronger requirement that durations have finite expectation. However, we demonstrate that this is not always the case under the assumption of stationary and ergodic durations. Specifically, we provide a counterexample where the MLE is asymptotically mixed normal and converges at a rate significantly slower than usual. The main difference between ACD and GARCH asymptotics is that the former must account for the number of durations in a given time span being random. As a by-product, we present a new lemma which can be applied to analyze asymptotic properties of extremum estimators when the number of observations is random.
Using a lab‐in‐the‐field experiment in Uganda we study how risk sharing influences investment behaviour. Depending on the treatment, an investor may decide to share profits with a paired person, and/or the paired person may compensate the investor for investment losses. Following sharing norms in African societies, predicted investment is higher if loss sharing is possible, and/or profit sharing is not possible. Contrary to these predictions, we find that investment is higher when losses may not be shared or when profits may be shared with friends. A combination of directed altruism and expected reciprocity appears most plausible to explain these results.
We examine how variation in local economic conditions has shaped the AIDS epidemic in Africa. Using data from over 200,000 individuals across 19 countries, we match biomarker data on individuals' serostatus to information on local rainfall shocks, a large source of income variation for rural households. We estimate infection rates in HIV‐endemic rural areas increase by 11% for every recent drought, an effect that is statistically and economically significant. Income shocks explain up to 20% of variation in HIV prevalence across African countries, suggesting existing approaches to HIV prevention could be bolstered by helping households manage income risk better.
We re‐consider the impact that regulation of call termination on mobile phones has had on mobile customers’ bills. Using a large panel covering 27 countries, we find that the ‘waterbed’ phenomenon, initially observed until early 2006, becomes insignificant on average over the 10‐year period, 2002–11. We argue that this is related to the changing nature of the industry, whereby mobile‐to‐mobile traffic now plays a much bigger role compared to fixed‐to‐mobile calls in earlier periods. Over the same decade, we find no evidence that regulation caused a reduction in mobile operators’ profits and investments.
We investigate parents’ preferences for school attributes in a unique data set of survey, administrative, census and spatial data. Using a conditional logit, incorporating characteristics of households, schools and home–school distance, we show that most families have strong preferences for schools’ academic performance. Parents also value schools’ socio‐economic composition and distance, which may limit the potential of school choice to improve academic standards. Most of the variation in preferences for school quality across socio‐economic groups arises from differences in the quality of accessible schools rather than differences in parents’ preferences, although more advantaged parents have stronger preferences for academic performance.
This article studies the causal effect of educational attainment on conviction and incarceration using Sweden’s compulsory schooling reform as an instrument for years of schooling and a 70% sample from Sweden’s Multigenerational Register matched with more than 30 years of administrative crime records. We find a significant negative effect of schooling on male convictions and incarceration; one additional year of schooling decreases the likelihood of conviction by 6.7% and incarceration by 15.5%. Though OLS estimates for females are of a similar magnitude to those for males, we find no evidence of a significant causal effect for women.
We investigate the impact of transport infrastructure on the organisation and efficiency of manufacturing activity. The Golden Quadrilateral (GQ) project upgraded a central highway network in India. Manufacturing activity grew disproportionately along the network. These findings hold in straight‐line IV frameworks and are not present on a second highway that was planned to be upgraded at the same time as GQ but subsequently delayed. Both entrants and incumbents facilitated the output growth, with scaling among entrants being important. The upgrades facilitated better industrial sorting along the network and improved the allocative efficiency of industries initially positioned on GQ.
This article studies the effect of free pre‐school education on child outcomes in primary school. We exploit the staggered implementation of free part‐time pre‐school for three year olds across Local Education Authorities in England in the early 2000s. The policy led to small improvements in attainment at age 5, with no apparent benefits by age 11. We argue that this is because the expansion of free places largely crowded out privately paid care, with small changes in total participation, and was achieved through an increase in private provision, where quality is lower on average than in the public sector.
Using large longitudinal survey data from the UK Millennium Cohort Study, this article estimates the relationship between maternal time inputs and early child development. We find that maternal time is a quantitatively important determinant of skill formation and that its effect declines with child age. There is evidence of long‐term effects of early maternal time inputs on later outcomes, especially in the case of cognitive skill development. In the case of non‐cognitive development, the evidence of this long‐term impact disappears when we account for skill persistence.
Understanding the motivations behind intergenerational transfers is an important and active research area in economics. The existence and responsiveness of familial transfers have consequences for the design of intra and intergenerational redistributive programmes, particularly as such programmes may crowd out private transfers amongst altruistic family members. Yet, despite theoretical and empirical advances in this area, significant gaps in our knowledge remain. In this article, we advance the current literature by shedding light on both the motivation for providing intergenerational transfers, and on the nature of preferences for such giving behaviour, by using experimental techniques and revealed preference methods.
Credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus‐maximising quality. While standard theory predicts that equal mark‐up prices solve the credence goods problem if customers can verify the quality received, experimental evidence indicates the opposite. We identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers’ social preference types. Our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency.
Reforms giving users of public services choice of provider aim to improve quality. But such reforms will work only if quality affects choice of provider. We test this crucial prerequisite in the English health care market by examining the choice of 3.4 million individuals of family doctor. Family doctor practices provide primary care and control access to non‐emergency hospital care, the quality of their clinical care is measured and published and care is free. In this setting, clinical quality should affect choice. We find that a 1 standard deviation increase in clinical quality would increase practice size by around 17%.
Much uncertainty in life relates to the behaviour of others in interactive environments. This article tests some implications of subjective expected utility theory (Savage, 1954) in an experimental strategic setting where there is uncertainty about the actions of other players. In this environment, a large majority of our participants violate subjective expected utility theory. However, they do not exhibit the sorts of consistent ‘attitude to ambiguity’ found in individual decision experiments. We discuss three possible explanations of their behaviour: non‐linear transformation of probabilities; noise in responses; and/or systematic biases in the way that individuals generate subjective probabilities.
Using unique panel data, we compare the cognitive performance and wagering behaviour of children (10–11 years) with that of adults playing the Swedish version of the TV shows Jeopardy and Junior Jeopardy. Although facing the same well known high‐stakes game, and controlling for performance differences, there is no gender gap in risk taking between girls and boys in contrast to adults; while girls assume more risk than women, boys assume less risk than men. We also find that female behaviour is differently sensitive to social context. Whereas women wager less, girls perform worse and employ inferior wagering strategies when randomly assigned to male opponents.
We analyse the impact of the establishment of the Diamond Light Source synchrotron, a large basic scientific research facility in the UK, on the geographic distribution of related research. To account for the potentially endogenous location choice of the synchrotron, we rely on the availability of a ‘runner‐up’ site. We use data on academic publications to trace the geographic distribution of related scientific inputs and outputs. Our results suggest that proximity to Diamond had a positive impact on the output of related research. This proximity effect appears to be driven by an increase in inputs rather than the productivity of scientists.
We document that households in the UK with extremely low measured income tend to spend much more than those with merely moderately low income. This phenomenon is evident throughout three decades worth of microdata and across different employment states, levels of education and marital statuses. Of the likely explanations, we provide several arguments that discount over‐reporting of expenditure and argue that under‐reporting of income plays the major role. In particular, by using a dynamic model of consumption and saving, and paying special attention to poverty dynamics, we show that consumption smoothing cannot explain all the apparent dissaving.
We analyse cross‐country trends in several aspects of technological progress during 1980–2011 by examining the US patent citations data. Our estimation results on patent quality and citation lags relative to the US reveal the following. The emerging Asian economies of Korea, Taiwan and China have achieved substantial catch‐up. In the case of Korea and Taiwan, progress has been made in both patent quality and citation lags. China has achieved improvement in patent quality but not in citation lag. In contrast, advanced economies of Europe and Japan have displayed steady decline in patent quality, while the US has strengthened its position.
The effects of a financial transaction tax (FTT) are scientifically disputed, as seemingly small details of its implementation may matter a lot. In this article, we provide experimental evidence on the different effects of an FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that a tax on markets has negative effects on volatility and trading volume, whereas a tax on residents shows none of these undesired effects. Additionally, we observe that individual risk attitude is not related to traders’ reaction to the different forms of an FTT.
India’s experience presents a puzzle at odds with a basic fact of household economics: amidst unprecedented economic growth, average per capita daily calorie consumption has declined in recent decades. Does an improving disease environment explain the calorie decline? A diminished burden of infectious disease could lower energy needs by increasing absorption and effective use of calories. We document a robust effect of disease exposure – measured as infant mortality and as poor sanitation – on calorie consumption. Similar effects are found using multiple datasets and empirical strategies. Disease can account for an important fraction (one‐fifth or more) of India’s calorie decline.
We document an effect of survey participation on household saving. Identification comes from random assignment to modules within a population‐representative Internet panel. The saving measure is based on linked administrative wealth data. Households that responded to a detailed questionnaire on needs in retirement reduced their non‐housing saving rate by 3.5 percentage points, on a base of 1.5%. The survey may have acted as a salience shock, possibly with respect to reduced housing costs in retirement. Our findings present an important challenge to survey designers. They also add to the evidence of limited attention in household financial decision making.
We study the determinants of firm‐level heterogeneity in a model where innovation choices upon entry affect the variance of productivity draws. In equilibrium, productivity is Pareto distributed with a shape parameter that depends on industry‐level characteristics. We show that export opportunities, by increasing the pay‐offs in the tail, induce firms to invest in bigger projects with more dispersed outcomes. When more productive firms pay higher wages, trade amplifies wage dispersion by making firms more unequal. These results are consistent with how firm size, innovation and wage heterogeneity vary in a panel of US industries and states.
By exploiting the cancellation of the 2012 American Political Science Association Annual Meeting, we investigate the role of conferences in facilitating academic collaboration. We assembled data sets comprising 17,467 academics, and in difference‐in‐differences analysis we find that the conference cancellation led to a decrease in individuals’ likelihood of co‐authoring an article with another attendant by 16%. Moreover, collaborations formed among attendants of (occurring) conferences are associated with more successful co‐publications: an effect which is sharpest for teams that are new or non‐collocated. Conferences seem to de‐cluster the co‐authorship network. Altogether, our findings demonstrate the importance of conferences in scientific production.
Anaemia impairs physical and cognitive development in children and reduces human capital accumulation. The prior economics literature has focused on the role of inadequate nutrition in causing anaemia. This article is the first to show that sanitation, a public good, significantly contributes to preventing anaemia. We identify effects by exploiting rapid and differential improvement in sanitation across regions of Nepal between 2006 and 2011. Within regions over time, cohorts of children exposed to better community sanitation developed higher haemoglobin levels. Our results highlight a previously undocumented externality of open defaecation, which is today practiced by over a billion people worldwide.
This paper studies the relationship between group size and informal risk sharing. It shows that under limited commitment with coalitional deviations, this relationship is theoretically ambiguous. It investigates this question empirically using data on sibship size of household heads and spouses from rural Malawi, exploiting a social norm among the main sample ethnic group to define the potential risk‐sharing group. We uncover evidence of worse risk sharing of crop losses in larger potential risk‐sharing groups, and rule out alternative explanations for the findings. A simple calibration exercise indicates that our empirical findings are consistent with the theory.
This article uses a novel identification strategy to measure power in the household. Our strategy is to elicit women's willingness to pay to receive a cash transfer instead of their spouse receiving it. We selected participants from a sample of women who had already participated in a policy intervention in Macedonia offering poor households cash transfers conditional on having their children attending secondary school. The programme randomised transfers at the municipality level to either household heads (generally a male) or mothers. We show that women who were offered the transfer on average have stronger measured empowerment. Here, IV estimation confirms this result.
Most London housing transactions involve trading long leases of varying lengths. We exploit this to estimate the time value of housing – the relationship between the price of a property and the term of ownership – over a 100 years and derive implied discount rates. For our empirical analysis, we compile a unique historical data set (1987–92) to abstract from the right to extend leases currently enjoyed by tenants. Across a variety of specifications and samples, we find that leasehold prices are consistent with a time declining schedule and low long‐term discount rates in housing markets.
We use a field experiment to test whether saving and borrowing satisfy demand for lump‐sum accumulation from regular deposits. Inspired by ROSCAs, we offer different credit and saving contracts to subjects. We find that individuals often accept both credit and saving contract across experimental waves. This behaviour can be rationalised by assuming that individuals seek lump‐sum payments and struggle to hold savings. Structural estimation of this model accounts for the behaviour of 75% of participants. Of these, two‐thirds have high demand for lump‐sum accumulation but savings difficulties. These results imply that the distinction between microlending and microsaving is largely illusory.
This article examines the relationship between the presence of foreign affiliates and product upgrading by Turkish manufacturing firms. The analysis suggests that Turkish firms in sectors and regions more likely to supply foreign affiliates tend to introduce more complex products, where complexity is captured using a measure developed by Hidalgo and Hausmann (2009). This finding is robust to controlling for omitted variables, sample selection and potential simultaneity bias. It is also in line with the view that inflows of foreign direct investment stimulate upgrading of indigenous production capabilities in host countries.
The Roy model has more precise predictions about the self-selection of migrants than previously realised. The conditions shown to result in positive or negative selection in terms of expected earnings also imply a stochastic dominance relationship between the earnings distributions of migrants and non-migrants. We test these predictions using the Danish full population administrative data. We find strong evidence of positive self-selection of emigrants in terms of pre-emigration earnings and residual earnings: the income distribution for the migrants almost stochastically dominates the distribution for the non-migrants. Decomposing the self-selection in total earnings reveals that unobserved abilities play the dominant role.
Motivated by the observation that medical care explains only a relatively small part of the socio-economic status (SES)-health gradient, we present a life-cycle model that incorporates several additional behaviours that potentially explain (jointly) a large part of observed disparities. As a result, the model provides not only a conceptual framework for the SES-health gradient but more generally an improved framework for the production of health. We derive novel predictions from the theory by performing comparative dynamic analyses. More generally, our comparative dynamic method can be applied to models of similar form, e.g. human capital, health deficits, firm investment, to name a few.
Exploiting a genealogy of English individuals living in the 16th to the 19th centuries, this study shows that lower parental reproductive capacity positively affected the socio-economic achievements of offspring. Using the time interval between the date of marriage and the first birth as a measure of reproductive capacity, we find that parental fecundity positively affected the number of siblings and that children of parents with lower fecundity were more likely to become literate and employed in skilled and high-income professions. This suggests there was a trade-off between child quantity and quality in England during the industrial revolution, supporting leading theories of the origins of modern economic growth.
The negative consequences of long-term exposure to particulate pollution are well established but a number of studies find no effect of short-term exposure on health outcomes. The high correlation of industrial pollutants complicates the estimation of the impact of individual pollutants on health. In this study, we use emissions from Kīlauea volcano, which are uncorrelated with other pollution sources, to estimate the impact of pollutants on local emergency room admissions and a precise measure of costs. A one standard deviation increase in particulates leads to a 23–36% increase in expenditures on ER visits for pulmonary outcomes, mostly among the very young.
We conducted an experiment with a representative sample of the Dutch population to study whether trustworthiness depends on the ethnicity of the interaction partner. Native Dutch trustees play with an anonymous trustor, who is either another native Dutch or a non-Western immigrant. We find that trustees reciprocate trust up to 12% less if the trustor is a non-Western immigrant than if he/she is native Dutch. This percentage increases up to 23% for trustees who report disliking ethnic diversity in an independent survey. Since the decision to reciprocate does not involve behavioural risk, our results provide evidence of taste-based discrimination.
We analyse how neighbourhood ethnic diversity and segregation affect adolescents’ social participation in England. We distinguish between participation in ‘purposeful activities’—such as sports and volunteering—and hanging around with friends. We suggest a novel identification strategy to address the problem of endogeneity of ethnic diversity and segregation. We find that ethnic diversity decreases hanging around, while ethnic segregation increases it. No effects on participation in purposeful activities are found.
We study the causal effect of mandatory military conscription in Sweden on the criminal behaviour of men born in the 1970s. We find that military service significantly increases post-service crime (overall and across multiple crime categories) between the ages of 23 and 30. These results are driven primarily by young men who come from low socioeconomic status households and those with pre-service criminal histories, despite evidence of a contemporaneous incapacitation effect of service for the latter group. Much of this crime-inducing effect can be attributed to negative peer effects experienced during service. Worse post-service labour market outcomes may also matter.
We study contestability in charity markets where non-commercial, not-for-profit providers supply a homogeneous collective good through increasing-returns-to-scale technologies. Unlike in the case of for-profit competition, the absence of price-based sales contracts for charities means that fixed costs can translate into entry barriers, protecting the position of an inefficient incumbent; or, conversely, they can make it possible for inefficient newcomers to contest the position of a more efficient incumbent. Evidence from laboratory experiments show that fixed-cost driven tradeoffs between efficiency and perceived risk can lead to inefficient technology adoption.
Using data from a large-scale field experiment, we show that while there is no gender difference in willingness to make risky decisions on behalf of a group in a sample of children, a large gap emerges in a sample of adolescents. The proportion of girls who exhibit leadership willingness drops by 39%, going from childhood to adolescence. We explore the possible factors behind this drop and find that it is largely associated with a dramatic decline in ‘social confidence’, measured by willingness to perform a real effort task in public.
In 2008, the Brazilian government made the concession of rural credit in the Amazon conditional upon stricter requirements as an attempt to curb forest clearings. This article studies the impact of this innovative policy on deforestation. Difference-in-differences estimations based on a panel of municipalities show that the policy change led to a substantial reduction in deforestation, mostly in municipalities where cattle ranching is the leading economic activity. The results suggest that the mechanism underlying these effects was a restriction in access to rural credit, one of the main support mechanisms for agricultural production in Brazil.
This article investigates the link between management practices and workforce skills in manufacturing firms, exploiting geographical variation in the supply of human capital. Skills measures are constructed using newly compiled data on universities and regional labour markets across 19 countries. Consistent with management practices being complementary with skills, we show that firms further away from universities employ fewer skilled workers and are worse managed, even after controlling for a rich set of observables and fixed effects. Analysis using regional skill premia suggests that variation in the price of skill drives these relationships.
Iceberg transport costs are a key ingredient of modern trade and economic geography models. Using detailed information on Boston’s nineteenth-century global ice trade, we show that the cost of shipping the only good that truly melts in transit is not well-proxied by this assumption. Additive cost components account for the largest part of per unit ice(berg) transport costs in practice. Moreover, the physics of the melt process and the practice of insulating the ice in transit meant that shipping ice is subject to economies of scale. This finding supports, from an unexpected historical angle, recent efforts to incorporate more realistic features of the transportation sector in trade and economic geography models.
We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. A giant discovery with the value of 10% of a country’s GDP appreciates the real exchange rate by 1.5% within ten years following the discovery. The appreciation starts before production begins and the non-traded component of the real exchange rate drives the appreciation. Labour reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labour productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa–Samuelson effect.
We analyse how job training requirements interact with engineering complexity in shaping firms’ automation decisions. A model that distinguishes between a task’s engineering complexity and its training requirements predicts that when two tasks are equally complex, firms automate the task that requires more training. Under plausible conditions this leads to job polarisation, and in particular to polarisation of employment by initial training requirements. US data provide empirical support for the model’s implications. Training requirements and a measure of engineering complexity account for much of US job polarisation from 1980 to 2008.
Social scientists have recently explored how framing of gains and losses affects productivity. We conducted a field experiment in peri-urban Uganda, and compared output levels across 1,000 workers over isomorphic tasks and incentives, framed as either losses or gains. We find that loss aversion can be leveraged to increase the productivity of labour. The estimated welfare costs of using the loss contract are quite modest—perhaps because the loss contract is viewed as a (soft) commitment device.
In many situations, people can lie strategically, for their own benefit. Since individuals differ with respect to their willingness to lie, the credibility of statements will crucially depend on who self-selects into such cheap-talk situations. We study this process in a two-stage political competition setting. At the entry stage, potential candidates compete in a contest to become their party’s candidate in an election. At the election stage, the nominated candidates campaign by making promises to voters. Confirming the model’s key prediction, we find in our experiment that dishonest people over-proportionally self-select into the political race and thereby lower voters’ welfare.
We analyse the political economy of the public provision of private goods when individuals care about their social status. Status concerns motivate richer individuals to vote for the public provision of goods they themselves buy in markets: a higher provision level attracts more individuals to the public sector, enhancing the social exclusivity of market purchases. Majority voting may lead to a public provision that only a minority of citizens use. Users in the public sector may enjoy better provision than users in the private system. We characterise the coalitions that can prevail in a political equilibrium.
We document two changes in post-war US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose. We propose an explanation for these changes that is based on reduced hiring frictions due to improvements in information about the quality of job matches and the resulting decline in turnover. We develop a simple model with hiring frictions and variable effort to illustrate the mechanisms underlying our explanation. We show that our model qualitatively and quantitatively matches the observed changes in business cycle dynamics.
In this article, we study the labour supply effects and the redistributional consequences of the US social security system. We focus particularly on auxiliary benefits, where eligibility is linked to marital status. To this end, we develop a dynamic, structural life cycle model of singles and couples, featuring uncertain marital status and survival. We account for the socio-economic gradients to both marriage stability and life expectancy. We find that auxiliary benefits have a large depressing effect on married women’s employment. Moreover, we show that a revenue neutral minimum benefit scheme would moderately reduce inequality relative to the current US system.
Following the 2007–8 global food crisis, agricultural producers have invested in large tracts of land in developing countries. We investigate how the arrival of large-scale farms changes inter-personal trust and reciprocity, important components of social capital, in traditional villages. We elicit trust and reciprocal behaviour in villages that lie near large-scale farms and compare them with villages at a distance. Our data reveal greater trust in villages close to large-scale farms. Reciprocity is more frequent after farm employment. These results are likely driven by communal coping and reputation building. A natural field measure shows that trust correlates with public good sharing.
We analyse how labour flows respond to permanent idiosyncratic shifts in firm-level production functions and demand curves using very detailed Swedish micro data. Shocks to firms’ physical productivity have only modest effects on firm-level employment decisions. In contrast, we document rapid and substantial employment adjustments through hires and separations in response to firm-level demand shocks. The choice of adjustment margin depends on the sign of the shock: firms adjust through increased hires if these shocks are positive and through increased separations if the shocks are negative.
Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and ‘willingness to pay’ (WTP) to avoid them. Using estimates of the ‘value of a statistical life’ (VSL), we find the WTP to avoid major pandemics, and show that it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.
We use a natural field experiment to estimate the causal effect of race on discretionary favours in the marketplace. Test customers are randomly assigned to board public buses with no money to purchase a fare, leaving the bus driver to voluntarily decide whether to offer them a free ride. Based on 1,552 transactions, we uncover strong evidence of racial bias: bus drivers were twice as willing to let white testers ride free as black testers (72% vs. 36% of the time). Signals of wealth and patriotism improve minority testers’ outcomes. Our results show that white privilege extends to unregulated daily interactions.
A key challenge in developing countries interested in providing early childhood development (ECD) programmes at scale is whether these programmes can be effectively delivered through existing public service infrastructures. We present the results of a randomised experiment evaluating the effects of a home-based parenting programme delivered by cadres in China’s Family Planning Commission (FPC)—the former enforcers of the one-child policy. We find that the programme significantly increased infant skill development after six months and that increased investments by caregivers alongside improvements in parenting skills were a major mechanism through which this occurred. Children who lagged behind in their cognitive development and received little parental investment at the onset of the intervention benefited most from the programme. Household participation in the programme was associated with the degree to which participants had a favourable view of the FPC, which also increased due to the programme.
We use the recent trade escalation between the USA and its trade partners to study whether retaliatory tariffs are politically targeted. We find comprehensive evidence using individual and aggregate voting data suggesting that retaliation is carefully targeted to hurt Trump. We develop a simulation approach to construct counterfactual retaliation responses allowing us to quantify the extent of political targeting while also studying potential trade-offs. China appears to place great emphasis on achieving maximal political targeting. The EU seems to have been successful in maximising political targeting while at the same time minimising the potential damage to its economy.
We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.
We examine 220 estimates of the present-bias parameter from 28 articles using the Convex Time Budget protocol. The literature shows that people are on average present-biased, but estimates exhibit substantial heterogeneity across studies. There is evidence of modest selective reporting in the direction of over-reporting present bias. The primary source of heterogeneity is the type of reward, either monetary or non-monetary, but this effect is weakened after correcting for selective reporting. In studies using monetary rewards, the delay until the issue of the reward associated with the ‘current’ time period influences estimates of the present-bias parameter.
Using genealogical data of British aristocrats, we show that inheritances can affect childlessness. We study settlements, a contract restricting heirs’ powers and settling bequests for yet-to-be-born generations. Settlements reduced childlessness to the ‘natural’ rate, ensuring aristocratic dynasties’ survival. Our estimation exploits that settlements were signed at the heir’s wedding if the family head lived until this date. Whether the heir was born after a girl provides as-good-as-random assignment into settlements. Next, we develop a theory that reproduces our findings, shows that exponential discounting cannot rationalise inheritance systems restricting heirs and that inheritance systems can emerge endogenously when fertility concerns exist.
We document a novel fact about neonatal death, or death in the first month of life. Globally, neonatal mortality is disproportionately concentrated in India. We identify a large effect of birth order on neonatal mortality that is unique to India: later-born siblings have a steep survival advantage relative to the birth-order gradient in other developing countries. We show that India’s high prevalence of maternal undernutrition and its correlation with age and childbearing can explain this pattern. We find that Indian mothers exit the underweight body mass range at an internationally comparatively high rate as they progress through childbearing careers.
It is argued that crises open up a window of opportunity to implement policies that otherwise would not have the necessary political backing. We show that not only is the crises–reforms nexus unfounded in the data, but rather crises are associated with a reversal of liberalisation interventions depending on the institutional environment. We find that, in democratic countries, crises occurrences have no significant impact on liberalisation measures. On the contrary, after a crisis, autocracies reduce liberalisation in multiple economic sectors, which we interpret as the fear of regime change leading non-democratic rulers to please vested economic interests.
Several behavioural models of choice assume that decision makers place more weight on attributes where options differ more, an assumption we test in a set of experiments. We find that subjects are more likely to choose an option when we add options increasing the maximal difference in the original option’s strongest attribute, suggesting that the decision maker’s focus is drawn to attributes with a high spread. Additional experiments corroborate this finding. Still, we document that the focusing effect diminishes when options are presented using numbers instead of graphs or when subjects are forced to wait before submitting their answers.
Based on detailed administrative tax records, we implement a bunching design to explore how individual taxpayers respond to personal income taxation in Uruguay. We estimate a very modest elasticity of taxable income at the first kink point (0.06) driven by a combination of gross labour income and deduction responses. Taxpayers use personal deductions more intensively close to the kink point and underreport income to the tax authority. Our results suggest that the efficiency costs of taxation are not necessarily large in contexts characterised by limited deduction opportunities. Policy efforts should be directed at broadening the tax base and improving enforcement capacity.
We investigate strategic communication about the social impact of costly prosocial actions. A ‘sender’ with noisy information about impact sends a cheap-talk message to a ‘receiver’, upon which both agents choose whether to act. In the presence of social preferences and image concerns, the sender trades off persuasion, exaggerating impact to induce receiver action, and justification, downplaying impact to cast doubt on the effectiveness of action and excuse her own passivity. In an experiment on charitable giving we find evidence for both motives. In line with our theory and a justification motive, increasing image concerns reduces communication of positive impact.
In this paper we study how a student's ordinal rank in a peer group affects performance and specialisation choices in university. By exploiting data with repeated random assignment of students to teaching sections, we find that a higher rank increases performance and the probability of choosing related follow-up courses and majors. We document two types of dynamic effect. First, earlier ranks are less important than later ranks. Second, responses to rank changes are asymmetric: improvements in rank raise performance, while decreases in rank have no effect. Rank effects partially operate through students’ expectations about future grades.
Why do tax rates vary so much across countries? We study the role of other-regarding preferences and ethnic fragmentation in redistribution. A government is elected by altruistic voters and chooses a redistributive income tax. Altruism is directed towards social identity groups. Three main factors yield low levels of redistribution: (i) strong in-group altruism among rich voters—referred to as class altruism; (ii) weak universal altruism—in particular among the rich; and (iii) ethnic fragmentation among poor voters. We document survey evidence that the pattern of altruism in the United States and the European Union is consistent with the observed differences in taxes.
A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.
How does enforcement of labour regulations shape the labour market effects of trade? We combine local economic shocks generated by the unilateral trade liberalisation in Brazil and enforcement variation across regions to show that regions with stricter enforcement observed: (i) lower informality; (ii) larger losses in overall employment; (iii) greater reductions in the number of formal plants. Regions with weaker enforcement experienced opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labour market shocks.
Does pre-colonial history—and in particular the role of interstate warfare—help explain long-run development patterns across India? To address this question, we construct a new geocoded database of historical conflicts on the Indian subcontinent. We document a robust positive relationship between pre-colonial conflict exposure and local economic development today. Drawing on archival and secondary data, we show that districts that were more exposed to pre-colonial conflict experienced greater early state-making, followed by lower political violence and higher investments in physical and human capital in the long term.
This paper studies the use of emotion and reason in political discourse. Adopting computational-linguistics techniques to construct a validated text-based scale, we measure emotionality in six million speeches given in U.S. Congress over the years 1858–2014. Intuitively, emotionality spikes during times of war and is highest in speeches about patriotism. In the time series, emotionality was relatively low and stable in earlier years but increased significantly starting in the late 1970s. Across Congress members, emotionality is higher for Democrats, for women, for ethnic/religious minorities, for the opposition party and for members with ideologically extreme roll-call voting records.
We study the effects of two exogenous modifications in the Swedish pension system application form nudging individuals towards a fixed-term payout. Meanwhile, the set of available options and the default option—life annuity—were unchanged during the period under study. We examine the effects on individuals’ payout decisions and the spillover effects on labour supply and other pensions using a difference-in-difference framework and detailed administrative data on actual payout decisions and a wide range of individual-level outcomes. Each modification increased the demand for the nudged payout by around 30 percentage points. The first modification also induced individuals to work less.
We study the role of perceived trade-offs between human lives and economic benefits in shaping policy views. In an online experiment with a representative sample from the United States conducted during the early Covid-19 pandemic, we provide randomised information on the medium-run costs of restricting economic activity to mitigate infections. A one standard deviation lower perceived economic cost of lockdowns increases support by about twice as much as having a Covid at-risk condition, and by half as much as being a Democrat. Varying projected health benefits has a similar effect. Personal exposure to health risks reduces people’s responsiveness to cost-benefit considerations.
This paper documents that a large-scale government subsidy aimed at encouraging people to eat out in restaurants in the wake of the first 2020 COVID-19 wave in the United Kingdom has had a significant causal impact on new cases, accelerating the subsequent second COVID-19 wave. The scheme subsidised 50% off the cost of food and non-alcoholic drinks for an unlimited number of visits in participating restaurants on Mondays–Wednesdays from 3–31 August 2020. Areas with higher take-up saw both a notable increase in new COVID-19 infection clusters within a week of the scheme starting and a deceleration in infections within two weeks of the program ending. Similarly, areas that exhibited notable rainfall during the prime lunch and dinner hours on the days the scheme was active record lower infection incidence—a pattern that is also measurable in mobility data—and non-detectable on days during which the discount was not available or for rainfall outside the core lunch and dinner hours.
During the COVID-19 pandemic, traditional (offline) chess tournaments were prohibited and instead held online. We exploit this unique setting to assess the impact of remote work policies on the cognitive performance of individuals. Using the artificial intelligence embodied in a powerful chess engine to assess the quality of chess moves and associated errors, we find a statistically and economically significant decrease in performance when an individual competes remotely versus offline in a face-to-face setting. The effect size decreases over time, suggesting an adaptation to the new remote setting.
How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to popular trade cost variables such as currency unions, trade agreements and World Trade Organization membership. While we estimate that these variables are associated with increased bilateral trade on average, we find substantial heterogeneity. Consistent with the predictions of our framework, trade cost effects are strong for ‘thin’ bilateral relationships characterised by small import shares, and weak or even zero for ‘thick’ relationships.
Over the past millennium, China has relied on the Confucian clan to achieve interpersonal cooperation, focusing on kinship and neglecting the development of impersonal institutions needed for external finance. In this paper, we test the hypothesis that the Confucian clan and financial markets are competing substitutes. Using the large cross-regional variation in the adoption of modern banks, we find that regions with historically stronger Confucian clans established significantly fewer modern banks in the four decades following the founding of China's first modern bank in 1897. Our evidence also shows that the clan continues to limit China's financial development today.
Outsourcing the management of ninety-three randomly-selected government primary schools in Liberia to eight private operators led to learning gains of 0.18|$\sigma$| after one year, but these effects plateaued in subsequent years (reaching 0.2|$\sigma$| after three years). Beyond learning gains, the programme reduced corporal punishment (by 4.6 percentage points from a base of 51%), but increased dropout (by 3.3 percentage points from a base of 15%) and failed to reduce sexual abuse. Despite facing similar contracts and settings, some providers produced uniformly positive results, while others presented trade-offs between learning gains, access to education, child safety, and financial sustainability.
Using a structural life-cycle model, we quantify the heterogeneous impact of school closures during the corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children’s development process. We quantitatively characterise the long-term consequences from a COVID-19-induced loss of schooling, and find average losses in the present discounted value of lifetime earnings of the affected children of |$2.1\%$|⁠, as well as welfare losses equivalent to about |$1.2\%$| of permanent consumption. Because of self-productivity in the human capital production function, younger children are hurt more by the school closures than older children. The negative impact of the crisis on children’s welfare is especially severe for those with parents with low educational attainment and low assets.
A large body of literature has examined the impact of the horizontal market structure on the tax incidence on consumers. However, the extent to which the vertical market structure affects the tax pass-through—which might be particularly relevant in the presence of the double marginalisation problem—is an unexplored question. Using a confidential dataset of gas station contracts with a major Spanish refiner, in combination with their retail fuel prices and characteristics, we document that the pass-through of a tax on prices is about 38% higher in vertically integrated gas stations than in independent ones. Our estimates allow us to assess the impact on government revenue and emissions under different counterfactual market scenarios.
The trend of rising income inequality in Germany since the mid-1990s is strongly amplified when considering income after housing expenditure. The income share of housing expenditure rose disproportionally for the bottom income quintile and fell for the top quintile. Factors contributing to these trends include declining relative costs of homeownership versus renting, changes in household structure, declining real incomes for low-income households and residential mobility towards larger cities. Younger cohorts spend more on housing and save less than older cohorts did at the same age, which will affect future wealth accumulation, particularly at the bottom of the income distribution.
We investigate the impact of cognitive skills and economic preferences on fund managers' professional decisions by running a battery of experiments with them. First, we find that fund managers’ risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category and other controls. Second, we show that fund managers’ ambiguity tolerance positively correlates with the funds’ tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do find that fund managers with high cognitive reflection abilities compose funds at lower risk.
We report from a study of how uncertainty about whether a given inequality reflects performance or luck shapes distributive behaviour. We show theoretically that the reaction to uncertainty depends on how people trade-off the probability of making a mistake when redistributing, and the size of this mistake. We show experimentally that uncertainty causes a strong egalitarian pull among a majority of meritocratic individuals. The theoretical framework and the experimental results are supported in general population surveys in the United States and Norway. Our findings suggest that how people handle uncertainty about the source of inequality may be of great importance for understanding distributive conflicts in society.
Economists increasingly recognise the importance of personality traits for socio-economic outcomes, but little is known about the stability of these traits over the life cycle. Existing empirical contributions typically focus on age patterns and disregard cohort and period influences. This paper contributes novel evidence for the separability of age, period and cohort effects for a broad range of personality traits based on systematic specification tests for disentangling age, period and cohort influences. Our estimates document that, for different cohorts, the evolution of personality traits across the life cycle follows a stable, though non-constant, age profile, while there are sizeable differences across time periods.
This study considers a new subsidy design to support the purchase or production of target products. Under the proposed design, subsidy payments are inversely related to product prices. Compared to ‘flat’ subsidies, this design reduces producers’ market power and the subsidy benefits passed on to them, improving the cost-effectiveness of government spending (by up to 50% according to simulations based on an actual subsidy programme). Additionally, this subsidy’s cost-effectiveness and incidence can be adjusted flexibly by changing the policy parameters. Finally, the subsidy design can be modified to provide larger payments to higher-quality products, thereby offsetting disincentives for quality improvement.
We evaluate the impact of a price floor for alcohol introduced in Scotland in 2018, using a difference-in-differences strategy with England as a control group. We show that the policy led to the largest reductions in alcohol units purchased among the heaviest drinkers—the group who, at the margin, are likely to create the largest externalities from drinking. The price floor is well targeted at heavy drinkers because they buy a much greater fraction of their units from cheap products and switched away from these products strongly, with only limited substitution towards more expensive products. We show that if the marginal external cost of drinking is at least moderately higher for heavy than lighter drinkers, then a price floor outperforms an ethanol tax. However, more flexible tax systems can achieve similar reductions in externalities to the price floor, but avoid the large transfers from public funds to the alcohol industry that arise under the floor.
We document the outbreak of a trade war after the United States adopted the Smoot-Hawley tariff in June 1930. U.S. trade partners initially protested, with many eventually choosing to retaliate with tariffs. Using a new quarterly dataset on bilateral trade for ninety-nine countries, we show that U.S. exports to retaliators fell by 28%–32%. Using a second new dataset on U.S. exports at the product level, we find that the most important U.S. exports to retaliating markets were particularly affected, suggesting a possible mechanism whereby the United States was targeted despite most-favoured-nation obligations. The retaliators’ welfare gains from trade fell by 8%–16%.
We study quantitatively the optimality of quarantine and testing policies; and whether they are complements or substitutes. We extend the epidemiological susceptible-exposed-infectious-recovered model to incorporate an information friction. Our main finding is that testing is a cost-efficient substitute for lockdowns, rendering them almost unnecessary. By identifying carriers, testing contains the spread of the virus without reducing output, although the implementation requires widespread massive testing. As a byproduct, we show that two distinct optimal lockdown policy types arise: suppression, intended to eliminate the virus, and mitigation, concerned about flattening the curve. The choice between them is determined by a ‘hope-for-the-cure’ effect, arising due to either an expected vaccine or the belief that the virus can be eliminated. Conditional on the policy type, the intensity and duration of the intervention is invariant to both the trade-off between lives and output and the aversion to GDP variations: the optimal intervention path depends mostly on the virus dynamics.
We present incentivised panel data measuring risk preferences of subsistence farmers from across Ethiopia and pair them with rainfall data. We use these data to test the hypothesis that risk preferences may adapt to the environment of the decision maker. We find that rainfall shocks decrease risk tolerance for the same individuals over time. We also find that historical rainfall characteristics and geographical features can explain 40% of the variation in preferences across individuals. The time-changing effects are perfectly aligned with the geographical effects we document, painting a unified and highly coherent picture. This provides the first real-world evidence that preferences may systematically adapt to the environment of the decision maker.
We develop a model of the politics of state capacity building undertaken by incumbent parties that have a comparative advantage in clientelism rather than in public goods provision. The model predicts that, when challenged by opponents, clientelistic incumbents have the incentive to prevent investments in state capacity. We provide empirical support for the model’s implications by studying policy decisions by the Institutional Revolutionary Party that affected local state capacity across Mexican municipalities and over time. Our difference-in-differences and instrumental variable identification strategies exploit a national shock that threatened the Mexican government’s hegemony in the early 1960s.
Female authors are under-represented in top economics journals. In this paper, I investigate whether higher writing standards contribute to the problem. I find that (i) female-authored papers are 1%–6% better written than equivalent papers by men; (ii) the gap widens during peer review; (iii) women improve their writing as they publish more papers (but men do not); (iv) female-authored papers take longer under review. Using a subjective expected utility framework, I argue that higher writing standards for women are consistent with these stylised facts. A counterfactual analysis suggests that senior female economists may, as a result, write at least 5% more clearly than they otherwise would. As a final exercise, I show tentative evidence that women adapt to biased treatment in ways that may disguise it as voluntary choice.
We examine how workers’ expectations about pension reform vary with proximity to reforms, information availability and worker characteristics. Using newly collected data, we find that (1) expectations about reform are revised upward by about 10 percentage points in the year prior to a reform, from a median of 50%, regardless of whether the reform is announced; (2) expectations increase more the stronger the media activity about imminent reforms; (3) the effect of information on expectations varies systematically with characteristics that proxy cognitive ability and information value; (4) expectations do not converge as a result of reform announcements or implementations.
How successful are sanctions at targeting the economic interests of political elites in affected countries? We study the case of Iran, using information on the stock exchange-listed assets of two specific political entities with significant influence over the direction of Iran’s nuclear programme. Our identification strategy focuses on the process of negotiations for sanctions removal, examining which interests benefit most from news about diplomatic progress. The results indicate the ‘bluntness’ of sanctions on Iran, but also provide evidence of their effectiveness in generating substantial economic incentives for elite policymakers to negotiate a deal for sanctions relief.
Using a unique reform in the Spanish financial aid program, I estimate the impact of need-based grants on student achievement and dropout decisions under different intensities of academic requirements. Utilising comprehensive administrative data from a large university, I exploit sharp discontinuities in the grant eligibility formula to identify the effect of aid on student outcomes. I find that aid eligibility has no effect on student outcomes when the academic requirements are comparable with most existing national grant schemes worldwide. In contrast, I find that need-based grants have strong positive impacts on student performance and degree completion when they are combined with more demanding academic requirements.
We study residential lease payments during the COVID-19 pandemic. A survey of Israeli renters shows that nearly one in eight did not pay full rent during the first lockdown in March–April 2020. These households held back two-thirds of their contractually due rent on average. Financially fragile households with large income cuts withheld a greater share. Both formal and relational aspects of the landlord-tenant relationship affected payments: tenants paid more of their rent if their leases included formal provisions against non-payment, and less if they had strong relationships with their landlords. We use bargaining and relational contract theories to explain our findings.
An imperfectly informed regulator needs to procure multiple units of some good (e.g., green energy, market liquidity, pollution reduction, land conservation) that can be produced with heterogeneous technologies at various costs. How should she optimally procure these units? Should she run technology-specific or technology-neutral auctions? Should she allow for partial separation across technologies? Should she instead post separate prices for each technology? What are the trade-offs involved? We find that one size does not fit all: the preferred instrument depends on the costs of the available technologies, their degree of substitutability, the extent of information asymmetry and the costs of public funds. We illustrate the use of our theory for policy analysis with an ex ante evaluation of Spain’s recent renewable auction.
We study how political empowerment affected women’s emancipation as reflected in their life choices. The staggered introduction of female suffrage in Swiss states allows us to exploit the variation in the age at which women were exposed to the right to vote to estimate the differences in life choices between women who were socialised in a world with politically empowered women and those who were socialised before. Our empirical findings document that early exposure to female suffrage increased female labour force participation, weakened marital bonds and motivated human capital investment.
We examine the educative role played by parents in social norm transmission. Using a field experiment, we study whether parents enforce and comply more with norms when their children are present compared to when they are not. We compare similar parents when or after they drop off or pick up their children at school. We find that parents accompanying children, in contrast to parents alone, are more likely to punish norm violators and to provide help to strangers when there is no violation. They also tend to substitute more direct punishment with withholding help as a means of indirect punishment.
Despite the relatively uncontested importance of promoting school attendance in the policy arena, little evidence exists on the causal effect of school absence on long-run outcomes. We address this question by combining historical and administrative records for cohorts of Swedish individuals born in the 1930s. We find that elementary school absence significantly reduces contemporaneous academic performance, final educational attainment and labour income throughout the life cycle. The findings are consistent with a dynamic model of human capital formation, whereby absence causes small immediate learning losses, which cumulate to larger human capital losses over time and lead to worse labour market performance.
We study assortative mating of Norwegian parents over five decades and its consequences for offspring outcomes. Parents are characterised by the earnings decile of their parents (the offspring's grandparents) as an indicator of social class. While assortative mating has remained stable across decades, parenthood has become more skewed toward the higher classes. Examining the influence on offspring education and employment, we find that the marginal effect of one parent's class is smaller the higher is the class of the other. Overall, mating trends have contributed to slight improvements in average education and employment and reduced inequality in the offspring generation.
We study a multi-unit auction model in which bidders are privately informed about the maximum number of units they are willing to trade (which we refer to as ‘capacity’). No matter how big or small, private information on capacities changes the nature of the equilibrium as compared to when private information is on costs (or valuations). Also, the uniform-price and discriminatory auctions are not revenue equivalent, in contrast to when costs are independently drawn. In particular, with independently drawn capacities (and possibly costs), the discriminatory format reduces payments to firms relative to the uniform-price format. Our analysis is motivated by the performance of future electricity markets in which renewable energies will be predominant, but the set-up also applies to a variety of contexts (from central bank liquidity auctions to emissions trading).
Relying on a large-scale experiment in Peru, this study evaluates the effects of an in-class intervention on financial literacy and financial behaviour. As soon as the programme is over, treated students record significant financial literacy gains that do not hinder their academic performance. The programme also leads to immediate changes in downstream financial behaviour as measured by financial autonomy and financial savviness. Credit bureau records gathered three years later show that early improvements in financial literacy translate into limited, but positive long-lasting changes in financial behaviour. The treatment did not affect students’ credit or repayment behaviour on the extensive margin, but, among those few with outstanding loans, it reduced arrears by 20%.
The New Poor Law reform of 1834 induced dramatic and heterogeneous reductions in welfare spending across English and Welsh counties. Using the reform in a difference-in-differences instrumental variables strategy, we document a robust negative relationship between the generosity of welfare provision and criminal activity. Results are driven by non-violent property crimes and are stronger during months of seasonal agricultural unemployment, highlighting the particularly criminogenic combination of welfare cuts and precarious work opportunities for the economically vulnerable.
Trusting behaviour is a cornerstone of cooperation and, hence, economic performance, not least in poorer communities where economic transactions often rely on informal agreements. But trusting behaviour is potentially costly since the counterpart may decide to defect. In this study, we investigate whether food scarcity influences the level of trusting behaviour in rural Tanzania by leveraging quasi-experimental variation in food supply induced by the harvest. Through a lab-in-the-field experiment, we document that farmers display lower levels of trusting behaviour during the lean season compared to the abundant season and show that the difference is explained by variation in food scarcity.
In response to the COVID-19 pandemic, large parts of the economy were locked down and, as a result, households’ income risk rose sharply. At the same time, policy makers put forward the largest stimulus package in history. In the United States it amounted to $2 trillion, a quarter of which represented transfer payments to households. To the extent that such transfers were (i) announced in advance and (ii) conditional on recipients being unemployed, they mitigated income risk associated with the lockdown—in contrast to unconditional transfers. We develop a baseline scenario for a COVID-19 recession in a medium-scale heterogeneous agent new Keynesian model and use counterfactuals to quantify the impact of transfers. For the short run, we find large differences in the transfer multiplier: it is negligible for unconditional transfers and about unity for conditional transfers. Overall, we find that the transfers reduced the output loss due to the pandemic by some two percentage points at its trough.
Using Swedish economy-wide data, we examine the relationship between business-cycle conditions and the use of social contacts in the process where young workers are matched to their first real jobs. We measure social contacts acquired during paid work during high school, and we rely on interacted class-establishment fixed-effect models to isolate the effects of interest. One-third of post-graduation matches are formed at establishments where youths worked during their studies. Graduates are much more likely to match with sites to which adult co-workers from these jobs have relocated. The importance of these job-finding channels is strongly counter-cyclical for young labour market entrants.
Do members of a majority group systematically shift punishment onto innocent members of an ethnic minority? We introduce an experimental paradigm, punishing the scapegoat game, to measure how injustice affecting a member of one's own group shapes punishment of an unrelated bystander. When no harm is done, we find no evidence of discrimination against the ethnic minority (Roma people in Slovakia). In contrast, when a member of one's own group is harmed, the punishment ‘passed’ onto innocent individuals more than doubles when they are from the minority, as compared to when they are from the dominant group.
We study the role of new-product quality for the dynamics of durable-good expenditures around the Great Recession. We assemble a rich dataset on US new-car markets during 2004–12, combining data on transaction prices with detailed information about vehicles’ technical characteristics. During the recession, a reallocation of expenditures away from high-quality new models accounts for a significant decline in the dispersion of expenditures. In turn, car manufacturers introduced new models of lower quality. The drop in new-model quality persistently depressed the technology embodied in vehicles, and likely contributed to the slow recovery of expenditures.
Using an identification strategy based on random assignment of refugees to different municipalities in Denmark between 1986 and 1998, we find strong evidence that gang crime rates in the neighbourhood at assignment increase the probability of boys to commit crimes before the age of 19, and that gang crime (but not other crime) increases the likelihood of teenage motherhood for girls. Higher levels of gang crime also have detrimental and long-lasting effects, with men experiencing significantly higher levels of inactivity and women experiencing lower earnings and higher levels of welfare benefit claims at ages 19 to 28.
The delayed response of law enforcement to calls for service has become a hot button issue when evaluating police department performance. While it is often assumed that faster response times could play an important role in quelling potentially violent incidents, there is no empirical evidence to support this claim. In this paper, we measure the effect of police response time on the likelihood that an incident will result in an injury. To overcome the endogeneity of more severe calls being assigned higher priority, which requires a faster response, we take several steps. First, we focus on the subset of calls for service categorised as ‘Major Disturbance—Violence’ that all receive the same priority level. Second, we instrument for police response time with the number of vehicles within a 2.5-mile radius of the incident at the time it is received by the call centre. When controlling for beat, month and time-of-day fixed effects, this instrumenting strategy allows us to take advantage of the geographical constraints faced by a dispatcher when assigning officers to an incident. In contrast to the ordinary least squares estimates, our two-stage least squares analysis establishes a strong causal relationship whereby increasing response time increases the likelihood that an incident results in an injury. The effect is concentrated among female victims, suggesting that faster response time could potentially play an important role in reducing injuries related to domestic violence.
We assess the career earnings losses that individual Swedish workers suffered when their occupations’ employment declined. High-quality data allow us to overcome sorting into declining occupations on various attributes, including cognitive and non-cognitive skills. Our estimates show that occupational decline reduced mean cumulative earnings from 1986–2013 by no more than 2%–5%. This loss reflects a combination of reduced earnings conditional on employment, reduced years of employment and increased time spent in unemployment and retraining. While on average workers successfully mitigated their losses, those initially at the bottom of their occupations’ earnings distributions lost up to 8%–11%.
We study the interaction between family and school inputs by identifying the causal impact of information about school quality on parental time investment into children. Inspection ratings provide news that shifts parental beliefs about school quality, and hence investment into children. We study this using household panel data from England, linked to administrative records on school inspection ratings. We find that parents receiving good news over school quality significantly decrease time investment into their children. We provide insights on the distributional and test score impacts of the nationwide inspections regime, through multiple margins of endogenous response of parents and children.
We investigate how culture affects gender differences in willingness to compete in a large pre-registered experiment using an epidemiological approach. Our sample of 1,943 Norwegians with parents born in 59 different countries shows a smaller gender gap in willingness to compete among individuals of more gender-equal ancestries. The difference is driven by women with parents from more gender-equal countries wanting to compete more and men with the same ancestry wanting to compete less. The results are robust to controlling for a large set of factors at the individual, parental and ancestral country levels, indicating that gendered culture shapes competitive preferences.
This paper studies the suppression of an infectious disease in the canonical susceptible-infectious-recovered model. It derives three results. First, if technically feasible, the optimal response to a sufficiently small outbreak is halting transmissions instead of building up immunity through infections. Second, the crucial trade-off is not between health and economic costs, but between the intensity and duration of control measures. A simple formula of observables characterises the optimum. Third, the total cost depends critically on the efficiency of contact tracing, since it allows relaxing costly social distancing without increasing transmissions. A calibration to the COVID-19 pandemic illustrates the theoretical findings.
‘Right to Buy’, a large-scale natural experiment whereby incumbent tenants in public housing could buy properties at heavily subsidised prices, increased the United Kingdom homeownership rate by over 10 percentage points between its 1980 introduction and the 1990s. This paper studies the impact of this reform on crime by leveraging exogenous variation in eligibility for the policy. Results show that Right to Buy generated significant property crime reductions. Behavioural changes of incumbent tenants and renovation of public properties were the main drivers of this crime reduction. This is evidence of a novel means by which subsidised homeownership and housing policy can reduce criminality.
Academia, and economics in particular, faces increased scrutiny because of gender imbalance. This paper studies the job market for entry-level faculty positions. We employ machine learning methods to analyse gendered patterns in the text of 12,000 reference letters written in support of over 3,700 candidates. Using both supervised and unsupervised techniques, we document widespread differences in the attributes emphasised. Women are systematically more likely to be described using ‘grindstone’ terms and at times less likely to be praised for their ability. Using information on initial placement, we highlight the implications of these gendered descriptors for the quality of academic placement.
Censorship makes new ideas less available to others, but also reduces the number of people choosing to develop non-compliant ideas. We propose a new method to measure the effect of censorship on knowledge growth, accounting for the agents’ choice between compliant and non-compliant occupations. We apply our method to the Catholic Church’s censorship of books written by members of Italian universities and academies over the period 1400–750. We highlight new facts: once censorship was introduced, censored authors were of better quality than the non-censored authors, but this gap shrank over time and the intensity of censorship decreased over time. We use these facts to identify the deep parameters of a novel endogenous growth model that links censorship to knowledge diffusion and occupational choice. We conclude that the average log publication per scholar in Italy would have been 43% higher if censorship had not been present, while the effect of adverse macroeconomic processes is almost four times smaller. The induced reallocation of talents towards compliant activities explains half the effect of censorship.
Based on artefactual field experiments, we investigate whether finance professionals differ from a sample of the working population in terms of industry-relevant preferences and personality traits. When adjusting for socioeconomic characteristics, we find only few and less marked differences: finance professionals are less risk averse, less trustworthy, show higher levels of psychopathy and are more competitive than participants from the general population. In an additional survey, experts with hiring experience consider industry selection, self-selection and imprinting by industry norms as explanatory for the observed subject pool differences.
We combine information from the British Household Panel Study and the United Kingdom Household Longitudinal Study (also known as Understanding Society) to construct consistent time series of aggregate worker stocks, worker flows and earnings in the United Kingdom over the period 1992–2017. We propose a method to harmonise data between the British Household Panel Study and United Kingdom Household Longitudinal Study, which we validate by checking the consistency of some of our headline time series with equivalent series produced from other sources, notably by the Office for National Statistics. In addition to drawing a detailed aggregate picture of the United Kingdom labour market over the past two and a half decades, we use our constructed data set to compare the impact of industry, occupation and employer tenure on wages in the United Kingdom. We find that returns to occupation tenure are substantial. All else equal, five years of occupation tenure are associated with a 3.3% increase in wages. We also find that industry tenure plays a non-negligible part in driving wage growth.
What is the role of trade policy in promoting intra-Empire trade? We address the question in the context of interwar India, whose trade policies have been accused of harming British export interests. We quantify the impact of trade policy on the value and composition of Indian imports, using novel disaggregated data on both trade policies and imports for 114 commodity categories coming from 42 countries. We find that, even though Indian protection lowered total imports, it substantially boosted imports from the United Kingdom. Despite the rising tariff barriers facing British exporters, trade diversion from other countries ensured that Indian trade policy benefited them overall.
Dutch victimisation rates increase by 9%–15% immediately upon reaching ages 16 and 18. We disentangle the role of the many rights granted at these ages using offence location data, cross-cohort variation in the minimum legal drinking age driven by a 2014 reform and survey data of alcohol/drug consumption and mobility behaviours. We conclude that access to weak alcohol, bars/clubs and smoking increases victimisation at 16 and that age-18 rights (hard alcohol, marijuana coffee shops) exacerbate this risk; vehicle access does not play an important role. We find no evidence of systematic spillovers onto individuals still ineligible for these rights.
This paper studies the economic and political effects of a large trade shock in agriculture—the grain invasion from the Americas—in Prussia during the first globalisation (1870–913). We show that this shock led to a decline in the employment rate and overall income. However, we do not observe declining per capita income and political polarisation, which we explain by a strong migration response. Our results suggest that the negative and persistent effects of trade shocks we see today are not a universal feature of globalisation, but depend on labour mobility. For our analysis, we digitise data from Prussian industrial and agricultural censuses on the county level and combine them with national trade data at the product level. We exploit the cross-regional variation in cultivated crops within Prussia and instrument with Italian and United States trade data to isolate exogenous variation.
We relate origin-destination real price differences to immigrants’ reservation wages and their career trajectories, exploiting administrative data from Germany and the 2004 enlargement of the European Union. We find that immigrants who enter Germany when a unit of earnings from Germany allows for larger consumption at home settle for lower entry wages, but subsequently catch up to those arriving with less favourable exchange rates, through transition to better-paying occupations and firms. Similar patterns hold in the United States data. Our analysis offers one explanation for the widespread phenomenon of immigrants’ downgrading, with new implications for immigrant cohort effects and assimilation profiles.
I measure the economic effects of greenbelts that prohibit new construction beyond a predefined urban fringe and therefore act as urban growth boundaries. I focus on England, where 13% of the land is designated as greenbelt land. I provide reduced-form evidence and estimate a quantitative equilibrium model that includes amenities, housing supply, a traffic congestion externality, agglomeration forces, productivity and household location choices. Greenbelt policy generates positive amenity effects, but also strongly reduces housing supply. I find that greenbelts increase welfare because amenity effects are sufficiently strong. At the same time, however, greenbelts decrease housing affordability by limiting housing supply.
We measure the adoption of management practices in over 220 private for-profit and non-profit health facilities in 64 districts across Tanzania and link these data to process quality-of-care metrics, assessed using undercover standardised patients and clinical observations. We find that better managed health facilities are more likely to provide correct treatment in accordance with national treatment guidelines, adhere to a checklist of essential questions and examinations, and comply with infection prevention and control practices. Moving from the 10th to the 90th percentile in the management practice score is associated with a 48% increase in correct treatment. We then leverage a large-scale field experiment of an internationally recognised management support intervention in which health facilities are assessed against comprehensive standards, given an individually tailored quality improvement plan and supported through training and mentoring visits. We find zero to small effects on management scores, suggesting that improving management practices in this setting may be challenging.
Digital credit has expanded rapidly in Africa, with opaque loan terms amidst low consumer financial literacy. Rich data from Malawi shows substantial demand for a digital loan with a base interest rate of 10% over 15 days, yet most borrowers are not aware of loan terms, repay late and incur substantial late fees. Regression discontinuity analyses show no evidence that access to small digital loans harms consumers’ perceived well-being. A short, randomised, phone-based financial literacy intervention improved knowledge, but did not increase timely loan repayment and modestly increased loan demand, ultimately increasing the likelihood of ever defaulting.
African Americans face shorter employment durations than similar Whites. We hypothesise that employers discriminate in acquiring or acting on ability-relevant information. In our model, monitoring Black, but not White, workers is self-sustaining. New Black hires were more likely fired by previous employers after monitoring. This reduces firms’ beliefs about ability, incentivising discriminatory monitoring. We confirm our predictions that layoffs are initially higher for Black than non-Black workers, but that they converge with seniority and decline more with the Armed Forces Qualification Test for Black workers. Two additional predictions, lower lifetime incomes and longer unemployment durations for Black workers, have known empirical support.
I investigate the macroeconomic impact of central bank funding becoming a more attractive funding source to financial intermediaries in times of crisis. I show that the requirement to pledge collateral has a contractionary effect on private credit, everything else equal, and thereby reduces the expansionary effect that such lending otherwise has. I use an estimated New Keynesian model with financial frictions to show that the collateral effect explains the limited growth of Italian banks’ private credit in response to the European Central Bank’s three-year longer-term refinancing operations. Finally, I explore whether changes in lending policy can offset the cumulative negative effects from the collateral effect.
Artificial intelligence increasingly becomes an indispensable advisor. New ethical concerns arise if artificial intelligence persuades people to behave dishonestly. In an experiment, we study how artificial intelligence advice (generated by a natural language processing algorithm) affects (dis)honesty, compare it to equivalent human advice and test whether transparency about the advice source matters. We find that dishonesty-promoting advice increases dishonesty, whereas honesty-promoting advice does not increase honesty. This is the case for both artificial intelligence and human advice. Algorithmic transparency, a commonly proposed policy to mitigate artificial intelligence risks, does not affect behaviour. The findings mark the first steps towards managing artificial intelligence advice responsibly.
Gender discrimination is present across various fields, but identifying the underlying mechanism is challenging. We demonstrate own-gender favouritism in a field setting that allows for clean identification of tastes versus beliefs: the One Bid game on the TV show The Price Is Right. Players must guess an item’s value without exceeding it, leaving the last bidder with a dominant ‘cutoff’ strategy of overbidding another player by |${\$}$|1. We show that last bidders are significantly more likely to cut off opposite-gender opponents. This behaviour is explained by own-gender favouritism rather than beliefs that cutting off opposite-gender opponents is more profitable.
Do celebrity endorsements matter? And if so, how can celebrities communicate effectively? We conduct a nationwide Twitter experiment in Indonesia promoting vaccination. Celebrity messages are 72% more likely to be passed on or liked than similar messages without a celebrity’s imprimatur. In total, 66% of the celebrity effect comes from authorship, compared to passing on messages. Citing external medical sources decreases retweets by 27%. Phone surveys show that those randomly exposed to messaging have fewer incorrect beliefs and report more vaccination among friends and neighbours. The results can inform public health campaigns and celebrity public service more generally.
This paper analyses the rise of radical movements and the design of counter-radicalisation policies. A group derives meaning from participation in identity-based activities and a forward-looking organisation provides a platform for these activities. The warning sign for radicalisation is cultural purification by the organisation, i.e., the screening out of moderates and exclusive recruitment of radicals. While this shrinks the club, it puts it on a growth path along which it becomes larger and more extreme over time. Conventional counter-radicalisation policies can backfire. The radicalisation mechanisms we identify can be disabled by mild anti-radical messaging and informational interventions that eliminate stereotypes.
In most OECD countries, unemployment rates show no trend, which is puzzling if advancements in information and communication technologies decrease labour-market frictions. We show, both analytically and quantitatively, that accounting for the secular decline in self-employment rates solves the puzzle. While declining labour-market frictions can theoretically explain these trends, we provide contradictory causal evidence that the roll-out of broadband internet has increased self-employment and decreased unemployment rates. We reconcile these observations with a new model featuring frictions in both labour and goods markets. We explain falling self-employment and non-trending unemployment quantitatively by labour-market frictions declining relatively more than goods-market frictions.
People care about crime, with the spatial distribution of both actual and perceived crime affecting the local amenities from living in different areas and residential decisions. The literature finds that crime tends to happen close to the offender's residence, but does not clearly establish whether this is because the location of likely offenders and crime opportunities are close to each other, whether more local crimes are likely to be solved or whether there is a high commuting cost for criminals. We use a rich administrative dataset from one of the biggest UK police forces to disentangle these hypotheses, proposing a procedure for controlling for the selection bias induced by the fact that an offender’s location is only known when they are caught. We find that the cost of distance is very high, especially for crimes without any financial gain. For property crimes, we find a similar cost of distance to commuting for legal work. We also investigate how local socio-economic characteristics affect both the number of criminals and the number of crimes.
This paper shows that austerity spending cuts harmed student performance in standardised national tests. To identify this relationship, we use cross-municipality variation in the timing of eligibility for the Italian Domestic Stability Pact as an exogenous shifter of local public spending. We then compare test scores for students that were from the same municipality, but who were exposed to different levels of austerity cuts based on their birth year. Combining administrative data on public spending and test scores with an instrumental variable model, we show that the test score impact from austerity spending cuts is around 5.1% of a standard deviation in math and 4.6% in reading. These effects are more pronounced for children with limited resources at home. We provide suggestive evidence that school budget cuts account for most of the observed test score impact.
We evaluate the welfare effects of the Roam-like-at-home regulation, which has drastically reduced the price of accessing the mobile Internet for residents of the European Economic Area when travelling abroad in the European Economic Area. Our estimates using individual-level consumption data suggest that consumer surplus increased by around €2.44 per user and travel day. We show that around 40% of the consumer surplus gains originated from a reduction in deadweight loss, that is, new users accessing the mobile Internet. We also highlight that the regulation had a heterogeneous impact on consumers, varying with usage intensity and the reason for travel (business versus leisure).
To study the effects of non-partisan information and get-out-the-vote campaigns on the partisan composition of the voting population in competitive authoritarian elections, we conducted a large-scale field experiment prior to the 2018 Bangladeshi general election. Our two treatments highlight that high turnout increases the winning party’s legitimacy and that election outcomes matter for policy outcomes. Both treatments increase turnout (measured by ink marks) in government strongholds, but decrease turnout in opposition strongholds. We explain the withdrawal of treated opposition supporters and conclude that non-partisan information and get-out-the-vote campaigns can further tilt the uneven playing field in competitive authoritarian elections.
Local exposure to conservative news causes judges to impose harsher criminal sentences. Our evidence comes from an instrumental variable analysis, where randomness in television channel positioning across localities induces exogenous variation in exposure to the Fox News Channel. These treatment data on news viewership are taken to outcome data on almost seven million criminal sentencing decisions in the United States for the years 2005–17. Higher Fox News viewership increases incarceration length, and the effect is stronger for Black defendants and for drug-related crimes. We can rule out changes in the behaviour of police, prosecutors or potential offenders as significant drivers. Consistent with changes in voter attitudes as the key mechanism, the effect on sentencing harshness is observed for elected (but not appointed) judges. Fox News viewership also increases self-reported beliefs about the importance of drug crime as a social problem.
This paper proposes a model of the distribution channel to study the decisions of manufacturers, retailers and consumers. The model is used to study how retail distribution affects manufacturing and consumers. As the cost of distribution falls, the retail sector increases assortment size and allows a larger mass of manufacturers to enter, allowing consumers to buy more variety. Entry primitives in manufacturing and retailing determine vertical pricing power. The equilibrium of the model predicts that the national retail sector is a fraction of the total economy that depends on the demand for variety. It is not affected by, e.g., consumer transportation cost or income. Data support this prediction.
We investigate the impact of a randomised information intervention about population-level mortality on health investment and subjective health expectations. Our focus is on risky sex in a high-HIV-prevalence environment. Treated individuals are less likely to engage in risky sexual practices one year after the intervention, with, for example, an 8% increase in abstinence. We collected detailed data on individuals’ subjective expectations about their own and population survival, as well as other important health outcomes. Our findings emphasise the significance of integrating subjective expectation data in field experiments to identify the pathways that lead to behavioural change.
Epidemic exposure in an individual's ‘impressionable years’ (ages 18 to 25) has a persistent negative effect on confidence in political institutions and leaders. This loss of trust is associated with epidemic-induced economic difficulties, such as lower income and unemployment later in life. It is observed for political institutions and leaders only and does not carry over to other institutions and individuals. A key exception is a strong negative effect on confidence in public health systems. This suggests that the distrust in political institutions and leaders is associated with the (in)effectiveness of a government's healthcare-related response to epidemics. We show that the loss of political trust is largest for individuals who experienced epidemics under weak governments with low policymaking capacity, and confirm that weak governments in fact took longer to introduce policy interventions in response to COVID-19. We report evidence that the epidemic-induced loss of political trust discourages electoral participation in the long term.
Public school choice often yields student assignments that are neither fair nor efficient. The efficiency-adjusted deferred acceptance mechanism allows students to consent to waive priorities that have no effect on their assignments. A burgeoning recent literature places the efficiency-adjusted deferred acceptance mechanism at the centre of the trade-off between efficiency and fairness in school choice. Meanwhile, the Flemish Ministry of Education has taken the first steps to implement this algorithm in Belgium. We provide the first experimental evidence on the performance of the efficiency-adjusted deferred acceptance mechanism against the celebrated deferred acceptance mechanism. We find that both efficiency and truth-telling rates are higher under the efficiency-adjusted deferred acceptance mechanism than under the deferred acceptance mechanism, even though the efficiency-adjusted deferred acceptance mechanism is not strategy proof. When the priority waiver is enforced, efficiency further increases, while truth-telling rates decrease relative to variants of the efficiency-adjusted deferred acceptance mechanism where students can dodge the waiver. Our results challenge the importance of strategy proofness as a prerequisite for truth telling and portend a new trade-off between efficiency and vulnerability to preference manipulation.
People often receive feedback influenced by external factors, yet little is known about how this affects self-serving biases. Our theoretical model explores how multi-dimensional uncertainty allows additional degrees of freedom for self-serving bias. In our primary experiment, feedback combining an individual’s ability and a teammate’s ability leads to biased belief updating. However, in a follow-up experiment with a random fundamental replacing the teammate, unbiased updating occurs. A validation experiment shows that belief distortion is greater when outcomes originate from human actions. Overall, our experiments highlight how multi-dimensional environments can enable self-serving biases.
Can voters in clientelist countries be swayed by programmatic promises? Results from a structural model and a field experiment disseminating candidate policy platforms in Philippine mayoral elections indicate that they can. Voters who received information about candidate policy promises were more likely to vote for candidates who were closer to their own preferences. Voters who were informed about incumbent candidates’ past commitments were more likely to vote for incumbents who fulfilled them. The structural model uncovers mechanisms. Information about campaign promises increases policies’ salience relative to other voter concerns; it also affects voter beliefs about candidate quality and candidates’ platforms.
We partnered with the Ghanaian government to simultaneously test four methods of increasing achievement—assistant-led remedial pull-out lessons, remedial after-school lessons, smaller class sizes and teacher-implemented partial day tracking—in schools with low and heterogeneous student achievement. The interventions increased student learning by about 0.1 standard deviations, rising to 0.4 standard deviations when adjusting for imperfect implementation, with no effects on attendance, grade repetition or drop-out. Test score increases were larger for girls. Test score gains persisted after the program ended. Assistants implemented the program with higher fidelity than teachers, although their fidelity decreased over time while teacher fidelity marginally improved.
We investigate the long-term impact of conflict on economic development, focusing on the US ‘Secret War’ in Laos (1964–73). Our study employs multiple empirical strategies and data on bombing campaigns, satellite imagery, and development indicators to demonstrate that regions heavily bombed during this period experienced lower economic development almost fifty years after the conflict officially ended. A one-standard-deviation increase in bombing intensity is associated with a 7.1% decrease in GDP per capita. We demonstrate the persistent effects of bombing campaigns on human capital accumulation, structural transformation and migration patterns, stressing the role of unexploded ordnance contamination as the primary mechanism of transmission of these effects.
Capital costs are not directly observed since firms own part of their capital stock. I show under which assumptions variation in firms’ input choices reveals the user cost of capital. Using Compustat data for the United States, I find that the costs of tangible capital as a share of output have not been increasing, while economic profits have been increasing over the past 50 years from around 4% to around 9% of sales. About three-quarters of the fall in the labour share is associated with a rise in profits and the remainder is associated with a rise in intangible intensity.
Large-scale student assessments are a cornerstone of proposed educational reforms to improve student achievement from very low levels in low- and middle-income countries. Yet, this promise relies on their presumed reliability. I use direct audit evidence from a large Indian state (Andhra Pradesh) to show that, as currently administered, official learning assessments substantially overstate proficiency and understate the ‘learning crisis’ of low student achievement. In an experiment covering over 2,400 schools, I evaluate whether digital tablet-based testing could reduce distortion. Although paper-based assessments proctored by teachers severely exaggerate achievement, tablet-based assessments closely match independent test data and are much less likely to be flagged for cheating. Furthermore, I use the direct audit-based retest to directly validate existing (indirect) statistical procedures for detecting cheating at scale and establish that it would be feasible to monitor data integrity cheaply and at scale with such methods. Overall, these results suggest that well-designed technology-aided interventions may improve data integrity at scale, without which these learning assessments are unlikely to serve as a catalyst for policy action.
This paper explores the link between trust in government, policymaking and compliance. It focuses on a specific channel whereby citizens who are convinced of the merits of a policy are more motivated to comply with it. This, in turn, reduces the government’s cost of implementing this policy and may also increase the set of feasible interventions. As a result, state effectiveness is greater when citizens trust their government. The paper discusses alternative approaches to modelling the origins of trust, especially the link to the design of political institutions. We then provide empirical evidence consistent with the model’s findings that compliance is increasing in government trust using the Integrated Values Survey and voluntary compliance during COVID-19 in the United Kingdom.
On 20 October 2020, prior to the US presidential election, Twitter modified its user interface for sharing social media posts. In an effort to reduce the spread of misinformation on the platform, the new interface nudged users to be thoughtful about the content they were sharing. Using data on over 160,000 tweets by US news media outlets, we show that this policy significantly reduced news sharing, but that the reductions varied heterogeneously by political slant: sharing of content fell significantly more for left-wing outlets relative to right-wing outlets. Examining Twitter activity data for news-sharing users, we find that conservatives were less responsive to Twitter’s intervention. Lastly, using web traffic data, we document that the policy significantly reduced visits to news media outlets’ websites.
Using a randomised experiment in 200 Bangladeshi villages, we evaluate the impact of an over-the-phone learning support intervention (telementoring) among primary school children and their mothers during Covid-19 school closures. Post-intervention, treated children scored 35% higher on a standardised test, and the homeschooling involvement of treated mothers increased by 22 minutes per day (26%). We also found that the intervention forestalled treated children's learning losses. When we returned to the participants one year later, after schools briefly reopened, we found that the treatment effects had persisted. Academically weaker children benefited the most from the intervention that only cost USD20 per child.
We use a cash transfer to relax households’ borrowing constraints, then elicit their willingness to pay for a remedial education programme offering tutoring and life skills training. Lottery losers were willing to pay 3,300 Tanzanian Shillings for the programme, which is 7% of per capita monthly expenditures. For those identified at baseline as able to borrow, willingness to pay increases by 3% upon winning a lottery prize of 3,200 Tanzanian Shillings. For those unable to borrow, willingness to pay increases by 27% upon winning the lottery. We conclude that borrowing constraints limit access to educational programmes, and may increase inequality of educational attainment.
This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (−5.9%) in the past three decades due to a combination of falling fixed costs (−4.0%) and decreasing excess profits (−1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.
This paper investigates the impact of a large electricity tax exemption on production levels, employment and input choices in the German manufacturing industry. For two policy designs, we show that exempted plants increase their electricity use. This effect is larger under a notched exemption policy, where passing an eligibility threshold yields infra-marginal benefits, compared to a policy without such benefits. We detect no significant impact of the exemptions on production levels, export shares and employment. Using counterfactual simulations, we document that notched policies substantially distort firms’ production input choices when financial stakes are high and compliance costs are low.
This paper introduces a new mechanism to distribute refugees within the European Union. The usual approach of assigning mandatory refugee quotas has been heavily opposed by several countries. Our mechanism adjusts these quotas to countries’ preferences on immigration. All countries become weakly better off, even though they do not exchange monetary transfers, which are ethically controversial. We formally model refugee relocation as a division problem with single-peaked preferences. Our ‘quota adjustment mechanism’ is the only one satisfying strategy-proofness, Pareto efficiency and a novel concept of fairness that takes account of the asymmetry across countries.
We study how voters’ preferences between a safe incumbent and a risky opponent change in the aftermath of a negative aggregate shock. With reference-dependent preferences, economically disappointed voters become risk lovers, and are hence attracted by the more risky candidate. Survey data from the German Socio-Economic Panel are consistent with our assumptions and theoretical predictions on voters’ behaviour.
We conduct a field experiment in which we offer credit and saving contracts to the same pool of Pakistani microfinance clients. Additional treatments test ex ante demand for soft commitment (in the form of reminders, either to respondents or to their families), hard commitment (in the form of a penalty for missing an instalment) and flexibility (an option to postpone an instalment) to save or pay loan instalments on time. We find substantial demand for fixed repayment contracts in both the credit and savings domains, in ways that imply that respondents value the commitment required. While we find little or no average demand for additional contractual features, we nonetheless observe that different combinations of contractual add-ons are preferred depending on the respondent’s level of financial discipline. Respondents with high financial discipline prefer flexibility in credit contracts when combined with reminders to self while those with low discipline value penalties in savings contracts only when paired with reminders. Our results imply that, for the average microfinance client, demand for commitment is met through the regular payment schedule built into standard microcredit or commitment savings contracts. However, combining penalties or flexibility with reminders may appeal to certain subsets of clients.
We exploit a unique quasi-experiment to study the effects of judicial decisions on sensitive issues on political attitudes. In 2010, the Spanish Constitutional Court partially overruled the new Catalan Constitution—the Estatut—that granted further decentralisation. Our identification strategy relies on the fact that this ruling occurred amid a public opinion survey. We find that the ruling increased support for independence by 5 percentage points. We interpret this result as evidence of judicial backlash on political attitudes: a judicial decision that limited further autonomy triggered a shift in attitudes towards even more autonomy. Moreover, the ruling decreased trust in the courts and satisfaction with democracy. This backlash of political attitudes extends to other spheres: Catalans increased their national identification with their region and the support for pro-decentralisation parties. Finally, we show that the ruling increased polarisation around the partisan and identity cleavages.
The share of couples where the wife outearns the husband is increasing globally. In this paper, I examine how this dynamic affects mental health. Using data on the 2001 marital cohort in Sweden, I show that while mental health is positively associated with own and spousal income, it is negatively linked to the wife’s relative income. In the most conservative specification, the wife starting to earn more increases the likelihood of a mental health diagnosis by 8%–11%. This represents a significant indirect cost of changes in family dynamics.
We investigate whether experiencing a disability incidence in the household affects economic risk preferences in Vietnam, leveraging (i) ten years of individual-level panel data and (ii) data from a lab-in-the-field experiment. We find that individuals who experience a disability event in the household behave in a more risk-averse manner than individuals without such an experience. Examining potential underlying mechanisms, we demonstrate that a household disability shock leads to lower wealth, which in turn is related to higher levels of risk aversion. Furthermore, we provide evidence that cognitive mechanisms—fearful emotions and the updating of beliefs (becoming more pessimistic about the future)—are another, perhaps even more important channel through which disability shocks affect risk preferences.
We use space- and time-resolved mobility data to assess how heat impacts Singapore, a rich city state and arguably a harbinger of what is to come in the urbanising tropics. Singapore’s offices, factories, malls, buses and trains are widely air conditioned, its public schools less so. We document increased attendance and commuting to workplaces, malls and the more air-conditioned schools on hotter relative to cooler days, particularly by low-income residents with limited use of adaptive technologies at home. Investment by rich cities may attenuate heat’s pervasive negative consequences on productive outcomes, yet this may worsen the climate emergency in the long run.
There is strong public opposition to increased immigration throughout Europe. Given the modest economic impacts of immigration estimated in most studies, the depth of anti-immigrant sentiment is puzzling. Immigration, however, does not just affect wages and taxes. It also changes the composition of the local population, threatening the compositional amenities that natives derive from their neighborhoods, schools, and workplaces. In this paper we use a simple latent-factor model, combined with data for 21 countries from the 2002 European Social Survey (ESS), to measure the relative importance of economic and compositional concerns in driving opinions about immigration policy. The ESS included a unique battery of questions on the labor market and social impacts of immigration, as well as on the desirability of increasing or reducing immigrant inflows. We find that compositional concerns are 2–5 times more important in explaining variation in individual attitudes toward immigration policy than concerns over wages and taxes. Likewise, most of the difference in opinion between more- and less-educated respondents is attributable to heightened compositional concerns among people with lower education.
This paper calculates the effects of immigration on the wages of native US workers of various skill levels in two steps. In the first step we use labor demand functions to estimate the elasticity of substitution across different groups of workers. Second, we use the underlying production structure and the estimated elasticities to calculate the total wage effects of immigration in the long run. We emphasize that a production function framework is needed to combine own-group effects with cross-group effects in order to obtain the total wage effects for each native group. In order to obtain a parsimonious representation of elasticities that can be estimated with available data, we adopt alternative nested-CES models and let the data select the preferred specification. New to this paper is the estimate of the substitutability between natives and immigrants of similar education and experience levels. In the data-preferred model, there is a small but significant degree of imperfect substitutability between natives and immigrants which, when combined with the other estimated elasticities, implies that in the period from 1990 to 2006 immigration had a small effect on the wages of native workers with no high school degree (between 0.6% and +1.7%). It also had a small positive effect on average native wages (+0.6%) and a substantial negative effect (−6.7%) on wages of previous immigrants in the long run.
In this paper, we propose an analytically tractable overlapping-generations model of human capital accumulation and study its implications for the evolution of the US wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with some prominent trends observed in the US data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within-group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation of the US labor markets since the 1970s.
In this paper we investigate how career considerations may affect fertility decisions in the presence of a temporary employment shock. We compare the birth rates of women displaced by a plant closure with those of women unaffected by job loss after establishing the pre-displacement comparability of these groups. Our results reveal that job displacement reduces average fertility by |$5\%  - 10\% $|⁠, and that these effects are largely explained by the response of women in more skilled occupations. We offer an explanation of our results based on career interruptions of women.
We study how class size and class composition affect the academic and labor market performance of college students, two crucial policy questions given the secular increase in college enrollment. Our identification strategy relies on the random assignment of students to teaching classes. We find that a one standard deviation increase in class-size results in a 0.1 standard deviation deterioration of the average grade. Further, the effect is heterogeneous as it is stronger for males and lower income students. Also, the effects of class composition in terms of gender and ability appear to be inverse U-shaped. Finally, a reduction of 20 students (one standard deviation) in one’s class size has a positive effect on monthly wages of about €80 ($115) or |$6\% $| over the average.
This paper estimates whether exports affect the incidence of HIV in Africa. This relationship has implications for HIV prevention policy as well as for the consequences of trade increases in Africa. I estimate this impact using two sources of data on HIV incidence, one generated based on UNAIDS estimates and the other based on observed HIV mortality. These data are combined with data on export value and volume. I find a fairly consistent positive relationship between exports and new HIV infections: doubling exports leads to a |$10\%  - 70\% $| increase in new HIV infections. Consistent with theory, this relationship is larger in areas with higher baseline HIV prevalence. I interpret the result as suggesting that increased exports increase the movement of people (trucking), which increases sexual contacts. Consistent with this interpretation, the effect is larger for export growth than for income growth per se and is larger in areas with more extensive road networks.
We model an open economy where macroeconomic variables fluctuate in response to oil supply shocks, as well as aggregate demand and supply shocks generated domestically and abroad. We use several robust predictions of the model to identify five fundamental shocks underlying the fluctuations of the (real) oil price, the US activity and the global business cycle. The estimates show that supply shocks generated in the global economy explain the largest fraction of the oil price fluctuations, about four times more than canonical oil supply shocks. The correlation between oil prices and the US activity varies with the type of shock.
Sign restrictions on the responses generated by structural vector autoregressive models have been proposed as an alternative approach to the use of exclusion restrictions on the impact multiplier matrix. In recent years such models have been increasingly used to identify demand and supply shocks in the market for crude oil. We demonstrate that sign restrictions alone are insufficient to infer the responses of the real price of oil to such shocks. Moreover, the conventional assumption that all admissible models are equally likely is routinely violated in oil market models, calling into question the use of posterior median responses to characterize the responses to structural shocks. When combining sign restrictions with additional empirically plausible bounds on the magnitude of the short-run oil supply elasticity and on the impact response of real activity, however, it is possible to reduce the set of admissible model solutions to a small number of qualitatively similar estimates. The resulting model estimates are broadly consistent with earlier results regarding the relative importance of demand and supply shocks for the real price of oil based on structural vector autoregressive (VAR) models identified by exclusion restrictions, but imply very different dynamics from the posterior median responses in VAR models based on sign restrictions only.
Does democracy help babies survive in sub-Saharan Africa? By using retrospective fertility surveys conducted in 28 African countries, I compare the survival of infants born to the same mother before and after democratization to disentangle the effect of democracy from that of changes in population characteristics, which is infeasible with country-level statistics on infant mortality. I find that infant mortality falls by 1.2 percentage points, |$12\% $| of the sample mean, after democratization in the post-Cold War period. Relevant aspects of democracy appear to be the combination of multiparty elections and leadership change.
This paper uses a novel approach to infer hospital technical quality from revealed preferences over residency programs. Specifically, we use Spanish medical graduates’ residency choices made from 1995 to 2000. We start by estimating a model of medical graduates preferences that controls for hospital, proximity, specialty, and gender effects. We interpret the coefficients on the hospital dummy variables as measures of medical graduates’ preferences over hospitals. Our results show that graduates do indeed discriminate between hospitals and that their preferences correlate with hospital-specific covariates arguably related to hospital training quality. We then show that preferences from medical graduates are positively and statistically significantly correlated with risk-adjusted hospital rankings based on five alternative outcome measures. Finally, we construct reputation scores for each hospital using news story counts in three media outlets and find that medical graduates’ preferences are especially valuable for inference of hospital technical quality of care as they do not simply reflect well known reputation.
We consider an incomplete markets economy with capital accumulation and endogenous labor supply. Individuals face countercyclical idiosyncratic labor and asset risk. We derive conditions under which the aggregate allocations and price system can be found by solving a representative agent problem. This result is applied to analyze the properties of an optimal monetary policy in a New Keynesian economy with uninsured countercyclical individual risk. The optimal monetary policy that emerges from our incomplete markets economy is the same as the optimal monetary policy in a representative agent model with preference shocks. When price rigidity is the only friction the optimal monetary policy calls for stabilizing the inflation rate at zero.
This paper estimates, using data from the United States and the Euro Area, a two-country stochastic growth model in which both neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. The results point to large and persistent swings in productivity, both favorable and adverse, originating in the United States but not transmitted to the Euro Area. More specifically, the results suggest that while the Euro Area missed out on the period of rapid investment-specific technological change enjoyed in the United States during the 1990s, it also escaped the stagnation in neutral technological progress that plagued the United States in the 1970s.
I build a model where potentially biased judges verify complex states by interpreting an imperfect signal whose noise captures factual ambiguities. In a sales and a financial transaction I show that judicial biases amplify and distort factual ambiguities, creating enforcement risk. To insure against such risk, parties write simple noncontingent contracts that optimally protect the party that is most vulnerable to judicial error. These results shed light on the empirical association between law and finance and rationalize salient features of real world enforcement regimes.
We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external finance. We present a benchmark model in which this conditional investment–cash flow sensitivity increases monotonically with the cost premium for external finance, for firms in a financially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate investment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the first-order conditions of our model, and show that this can be estimated directly.
In this paper, I test the most basic prediction of Grossman and Hart (1986, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Journal of Political Economy, 691–719): allocations of asset ownership that expose a party to ex-post expropriation reduce this party’s ex-ante relationship-specific investments. In the empirical context of the German housing market, I find that relationship-specific investments, such as bathroom renovations, are more frequent if the occupant is protected against expropriation because he owns his home. To avoid the endogeneity of the homeownership allocation, I rely on the natural experiment of the German reunification: under the communist regime, ownership existed but was economically meaningless; yet after reunification, ownership unexpectedly reacquired legal force.
Since the 1970s almost all US states have introduced a form of joint custody after divorce. I analyze the causal effect of these custody law reforms on different family outcomes. My identification strategy exploits the different timing of reforms across the US states. Estimations based on state panel data suggest that the introduction of joint custody led to an increase in marriage rates, an increase in overall fertility (including a shift from nonmarital to marital fertility), and an increase in divorce rates for older couples. Accordingly, female labor market participation decreased. Further, male suicide rates and domestic violence fell in treated states. The empirical evidence is consistent with the hypothesis that joint custody increased the relative bargaining power of men within marriage.
The wage paid to politicians affects both the choice of citizens to run for office and the performance of those who are appointed. First, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians’ pay may change their mind. Second, if the re-election prospects of incumbents depend on their in-office deeds, a higher wage may foster performance. We use data on all Italian municipal governments from 1993 to 2001 and test these hypotheses in a quasi-experimental setup. In Italy, the wage of mayors depends on population size and sharply rises at different thresholds. We apply a regression discontinuity design to the only threshold that uniquely identifies a wage increase: 5,000 inhabitants. Exploiting the existence of a two-term limit, we further disentangle the composition from the incentive component of the effect of the wage on performance. Our results show that a higher wage attracts more-educated candidates, and that better-paid politicians size down the government machinery by improving efficiency. Importantly, most of this effect is driven by the selection of competent politicians, rather than by the incentive to be re-elected.
This paper analyzes whether information about the quality of high schools published in a national newspaper affects school choice in the Netherlands. We find that negative (positive) school-quality scores decrease (increase) the number of first-year students who choose a school after the year of publication. These effects are only large for the college-preparatory track, such that a school receiving the most positive score for its most academic track sees 16–18 more first-year students enroll. We find that parents respond to the most recent and most prominently displayed information. The effects of information about school quality do not seem to be greater in regions with larger relevant newspaper circulation, suggesting that direct exposure to news about school quality does not explain the response to this information.
We present a novel experimental design to measure honesty and lying. Participants receive a die which they roll privately. Since their payoff depends on the reported roll of the die, the subjects have an incentive to be dishonest and report higher numbers to get a higher payoff. This design has three advantages. First, cheating cannot be detected on the individual level, which reduces potential demand effects. Second, the method is very easy to implement. Third, the underlying true distribution of the outcome under full honesty is known, and hence it is possible to test different theoretical predictions. We find that about |$20\% $| of inexperienced subjects lie to the fullest extent possible while |$39\% $| of subjects are fully honest. In addition, a high share of subjects consists of partial liars; these subjects lie, but do not report the payoff-maximizing draw. We discuss different motives that explain the observed behavioral pattern.
We compare social preference and social norm–based explanations for peer effects in a three-person gift exchange experiment. In the experiment a principal pays a wage to each of two agents, who then make effort choices sequentially. In our baseline treatment we observe that the second agent’s effort is influenced by the effort choice of the first agent, even though there are no material spillovers between agents. This peer effect is predicted by the Fehr–Schmidt (1999) model of social preferences. As we show from a norms elicitation experiment, it is also consistent with social norms compliance. A conditional logit investigation of the explanatory power of payoff inequality and elicited norms finds that the second agent’s effort is best explained by the social preferences model. In further experiments we find that the peer effects change as predicted by the social preferences model. Again, a conditional logit analysis favors an explanation based on social preferences, rather than social norms. Our results suggest that, in our context, the social preferences model provides a parsimonious explanation for the observed peer effect.
We run a large-scale natural field experiment to evaluate alternative strategies to enforce compliance with the law. The experiment varies the text of mailings sent to potential evaders of TV license fees. We find a strong effect of mailings, leading to a substantial increase in compliance. Among different mailings, a threat treatment which makes a high detection risk salient has a significant deterrent effect. Neither appealing to morals nor imparting information about others’ behavior enhances compliance on aggregate. However, the information condition has a weak positive effect in municipalities where evasion is believed to be common.
Many publishers use an honor system for selling newspapers in the street. We conducted a field experiment to study honesty in this market, finding that a moral reminder increases the level of honesty in payments, whereas the same message has no effect on whether one is honest. Reminding customers of the legal norm has no effect. We argue that these results are consistent with a preference for honesty, based on an internalized social norm. Auxiliary evidence suggests that the moral message remains effective when it is posted for longer periods, and even when it is removed again.
“Nudges” are being widely promoted to encourage energy conservation. We show that the popular electricity conservation “nudge” of providing feedback to households on own and peers’ home electricity usage in a home electricity report is two to four times more effective with political liberals than with conservatives. Political conservatives are more likely than liberals to opt out of receiving the home electricity report and to report disliking the report. Our results suggest that energy conservation nudges need to be targeted to be most effective.
Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951, Econometrica, 19, 293–302), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration—the abuse of authority—and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972, American Economic Review, 62, 777–795) critique of the Coasian approach.
Using data on young men from the National Education Longitudinal Survey, this paper investigates the relationship between childhood misbehavior and later education and labor market outcomes. The main finding is that eighth-grade misbehavior is important for earnings over and above eighth-grade test scores. Moreover, controlling for educational attainment, childhood misbehavior is associated with earnings at all educational levels, whereas achievement test scores are related to earnings only for young men with postsecondary degrees. Possible explanations for the association between eighth-grade misbehavior and economic success are explored.
This paper provides evidence that social networks strongly affect board composition and are detrimental to corporate governance. Our empirical investigation relies on a large data set of executives and outside directors of French public firms. This data source is a matched employer–employee data set that provides detailed information on directors/CEOs as well as information about the firm employing them. We find a strong and robust correlation between the CEO’s network and that of his directors. Networks of former high-ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account not only firm and directors’ fixed effects but also the matching of firms and director in terms of one observable and one unobservable characteristic. Turning to the direct effects of such network activity, we find that firms in which these networks are most active pay their CEOs more, are less likely to replace a CEO who underperforms, and engage in less value-creating acquisitions. These findings suggest that social networks are active in the boardroom and have detrimental effects on firms’ governance.
We document the unequal enforcement of liberalization reform of business regulation across Russian regions with different governance institutions, which leads to unequal effects of liberalization. National liberalization laws were enforced more effectively in subnational regions with more transparent government, a more informed population, a higher concentration of industry, and stronger fiscal autonomy. As a result, liberalization had a substantial positive effect on the performance of small firms and the growth of the official small business sector in regions with stronger governance institutions. In contrast, in regions with weaker governance institutions, we observe no effect of reform and, in some cases, even a negative effect.
Social preference research has received considerable attention among economists in recent years. However, the empirical foundation of social preferences is largely based on laboratory experiments with self-selected students as participants. This is potentially problematic as students participating in experiments may behave systematically different than nonparticipating students or nonstudents. In this paper we empirically investigate whether laboratory experiments with student samples misrepresent the importance of social preferences. Our first study shows that students who exhibit stronger prosocial inclinations in an unrelated field donation are not more likely to participate in experiments. This suggests that self-selection of more prosocial students into experiments is not a major issue. Our second study compares the behavior of students and participants recruited from the general population in a trust experiment. In general, we find very similar behavioral patterns for the two groups, but nonstudents make significantly more generous repayments suggesting that results from student samples might be seen as a lower bound for the importance of prosocial behavior.
Employment contracts are often incomplete, leaving many responsibilities subject to workers’ discretion. High work morale is therefore essential for sustaining voluntary cooperation and high productivity in firms. We conducted a field experiment to test whether workers reciprocate wage cuts and raises with low or high work productivity. Wage cuts had a detrimental and persistent impact on productivity, reducing average output by more than |$20\% $|⁠. An equivalent wage increase, however, did not result in any productivity gains. The results from an additional control experiment with high monetary performance incentives demonstrate that workers could still produce substantially more output, leaving enough room for positive reactions. Altogether, these results provide evidence consistent with a model of reciprocity, as opposed to inequality aversion.
Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent outsourcing patterns concord with the predictions of a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a detailed measure of vertical integration. We rely on five measures of technological intensity to proxy for investments that are likely to be specific to a buyer–seller relationship. A theoretical model that allows for varying degrees of investment specificity and interrelatedness—externalities between buyer and supplier investments—guides the analysis. Property rights predictions on the link between investment intensities and optimal ownership are strongly supported, but only for transactions with low interrelatedness. High specificity and low risk of appropriation strengthen the predictions in the model and in the data.
The identification of information problems in different markets is a challenging issue in the economic literature. In this paper, we study the identification of moral hazard from adverse selection and learning about risk within the context of a multi-period dynamic model. We extend the model of Abbring, Chiappori, and Pinquet (2003, Journal of the European Economic Association, 1, 767–820) to include learning about risk and insurance coverage choice over time. We derive testable empirical implications for panel data. We then perform tests using longitudinal data from France during the period 1995–1997. We find evidence of moral hazard among a sub-group of policyholders with less driving experience (less than 15 years). Policyholders with fewer than five years of experience have a combination of learning about risk and moral hazard, whereas no residual information problem is found for policyholders with more than 15 years of experience.
Do public sector firm ownership and lack of competition matter for wages and employment? To address this question, we consider a large public-sector company that is privatized. Using personnel records, we find employment contract liberalization to generate relative wage losses for older, high-tenure, low-skilled, part-time workers, permanent residents, and women. Employment reductions mostly affect the same groups experiencing a wage decline. Overall, wage liberalization leads to an increase in wage inequality of between |$6\% $| and |$9\% $|⁠, which—if applied to the whole public sector—would lead to a |$52\% $| to |$76\% $| closure of the “inequality gap” between the private and public sectors in Europe. Our results suggest that differences between public- and private-sector wage structures found in descriptive studies are to a large extent causal rather than the result of selection into these sectors and that public sector employment and career path regulations limit a firm’s ability to maintain a competitive workforce.
This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990–2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms’ relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.
When policymakers and private agents use models, the economists who design the model have an incentive to alter it in order to influence outcomes in a fashion consistent with their own preferences. I discuss some consequences of the existence of such ideological bias. In particular, I analyze the role of measurement infrastructures such as national statistical institutes, the extent to which intellectual competition between different schools of thought may lead to polarization of views over some parameters and at the same time to consensus over other parameters, and finally how the attempt to preserve influence can lead to degenerative research programs.
The tendency of countries to accumulate public debt has been rationalized in models of political disagreement and lack of commitment. We analyze in a benchmark model how the evolution of public debt is affected by lack of commitment per se. While commitment introduces indeterminacy in the level of debt, lack of commitment creates incentives for debt to converge to specific levels. One of the levels that debt often converges to implies no debt accumulation at all. In a simple example we prove analytically that debt converges to zero, and we analyze numerically more complex models. We also show in an imperfect credibility setting that a small deviation from full-commitment is enough to obtain these results.
Many organizations rely on teamwork, and yet field evidence on the impacts of team-based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by |$14\% $|⁠, whereas introducing a tournament increases it by |$24\% $|⁠. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team-based incentives crowds out the productivity-enhancing effect of social connections under team production.
This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm’s innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm-specific financial constraints, as well as information on shocks to firms’ internal funds that serve as firm-level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.
We estimate the stock-flow matching model using micro-level data from a well-defined labor market. Using a dataset of complete labor-market histories for both sides of the market, we estimate hazard functions for job-seekers and vacancies. We find that the stock of new vacancies has a significant positive impact on the job-seeker hazard, over and above that of the total stock of vacancies. There is an even stronger robust result for vacancy hazards. Thus we find evidence in favor of stock-flow matching, even when controlling for unobserved search heterogeneity and stratifying into submarkets defined by location and occupation.
Using a new data set on Swiss cantons since 1890, we analyze how the adoption of proportional representation affects fiscal policy. In line with economic theory, we show that proportional systems shift spending toward broad goods (like education and welfare benefits) but decrease spending on geographically targetable goods (like roads). We find little evidence that proportional representation increases the overall size of government. An analysis of the underlying theoretical mechanisms reveals that proportional representation increases electoral turnout, left-wing representation, and political fragmentation. These changes in political representation explain a substantial share of the rise in education spending, but a small share of the rise in welfare spending or the decline in road expenditures.
We compare communication about private information to communication about actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player’s contribution, and allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, however, we find that free-ride depends on the language: the informed player free-rides less—and thereby lies less frequently—when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free-ride and less lying.
In this paper, we ask whether variation in preference anomalies is related to variation in cognitive ability. Evidence from a new laboratory study of Chilean high-school students with similar schooling backgrounds shows that small-stakes risk aversion and short-run discounting are less common among those with higher standardized test scores. The relationship with test scores survives controls for parental education and wealth. We find some evidence that elementary-school GPA is predictive of preferences measured at the end of high school. Two laboratory interventions provide suggestive evidence of a possible causal impact of cognitive resources on expressed preferences.
In this paper, we use a dynamic stochastic general equilibrium model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. However, given this fiscal free lunch, it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.
We study experimentally the role of the network structure of pre-play communication in determination of outcome and behavior in a multiplayer coordination game with conflicting preferences. We explore the trade-off between the efficiency and equity of coordination outcomes and its link to the network structure of communication. Our results show substantial variations in both efficiency and equity of coordination outcomes across networks. While, as expected, increasing the length of communication improves the chance of successful coordination, it also reduces the asymmetry in the distribution of coordinated outcomes. We identify behaviors that explain variations in the distribution of coordinated outcomes both within and across networks. In all treatments, coordination is mostly explained by convergence in communication.
We estimate the effect of taxes on intergenerational transfers by exploiting a sequence of Italian reforms culminating with the abolishment of transfer taxes. We use the Surveys of Household Income and Wealth from 1993 to 2006, which have data on real estate transfers, and information on potential donors and recipients. Difference-in-differences estimates indicate that the abolition of transfer taxes increases the probability of high-wealth donors making a transfer by two percentage points and increases the area transferred by 9.3 square meters relative to poorer donors.
We develop a model of directed technology adoption, frictional unemployment, and migration to examine the effects of a change in skill endowments on the wages, employment rates, and emigration rates of skilled and unskilled workers. We find that, depending on the elasticity of substitution between skilled and unskilled workers and the elasticity of the matching function, an increase in the skill ratio can reduce both the relative unemployment rate and the relative emigration rate (brain drain) of skilled workers. We provide numerical simulations to support our findings and show that the effects are empirically relevant and potentially sizable.
In this paper we analyze the impact of immigrants on the type and quantity of native jobs. We use data on 15 Western European countries during the 1996–2010 period. We find that immigrants, by taking manual-routine type of occupations pushed natives towards more “complex” (abstract and communication) jobs. This job upgrade was associated to a 0.7% increase in native wages for a doubling of the immigrants’ share. These results are robust to the use of an IV strategy based on past settlement of immigrants across European countries. The job upgrade slowed but did not come to a halt during the Great Recession. We also document the labor market flows behind it: the complexity of jobs offered to new native hires was higher relative to the complexity of lost jobs. Finally, we find evidence that such reallocation was larger in countries with more flexible labor laws.
Social comparison has potentially far reaching consequences in many economic domains. We conducted a field experiment to examine how social comparison affects workers’ effort provision if their own wage or that of a co-worker is cut. Workers were assigned to groups of two, performed identical individual tasks, and received the same performance-independent hourly wage. Cutting both group members’ wages caused a decrease in performance. But when only one group member’s wage was cut, the affected workers decreased their performance more than twice as much as when both workers’ wages were cut. This finding indicates that social comparison among workers affects effort provision because the only difference between the two wage-cut treatments is the other group member’s wage level. In contrast, workers whose wage was not cut but who witnessed their group member’s pay being cut displayed no change in performance relative to the baseline treatment in which both workers’ wages remained unchanged. This indicates that social comparison exerts asymmetric effects on effort.
This study finds that the introduction of sex-selective abortion in Taiwan due to the legalization of abortion when prenatal sex-detection technology was already available increased the fraction of males born at higher parities and changed the composition of mothers choosing to give birth. Controlling for compositional changes, we find that access to sex-selective abortion reduced relative neonatal female mortality rates for higher-parity births.
This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest that fiscal consolidation has contractionary effects on private demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.
This paper empirically tests theories of bank runs. We use a structural panel VAR to extract runs from deposit market data. Identification exploits cross-sectional heterogeneity in deposit insurance: we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured. Conditional on a run, we study the behavior of uninsured banks with bad and good fundamentals. We find that both experience runs, but deposit outflows at the former are more severe. Panic effects, which affect all uninsured deposits alike, irrespective of fundamentals, dominate in the aggregate. Insured banks partially absorb the outflow of uninsured deposits.
Democracies rarely engage in conflicts with one another, though they are not averse to fighting autocracies. We exploit the existence in many countries of executive term limits to show that electoral accountability is the key reason behind this “democratic peace” phenomenon. We construct a new dataset of term limits for a sample of 177 countries over the 1816–2001 period, and combine this information with a large dataset of interstate conflicts. Our empirical analysis shows that, although democracies are significantly less likely to fight each other, democracies with leaders who face binding term limits are as conflict prone as autocracies. The study of electoral calendars confirms the importance of re-election incentives: in democracies with two-term limits, conflicts are less likely to occur during the executive’s first mandate than in the last one. Our findings support the Kantian idea that elections act as a discipline device, deterring leaders from engaging in costly conflicts.
We conduct a laboratory experiment to study how demand for redistribution of income depends on self-interest, insurance motives, and social concerns relating to inequality and efficiency. Our choice environments feature large groups of subjects and real-world framing, and differ with respect to the source of inequality (earned or arbitrary), the cost of taxation to the decision maker, the dead-weight loss of taxation, uncertainty about own pretax income, and whether the decision maker is affected by redistribution. We estimate utility weights for the different sources of demand for redistribution, with the potential to inform modeling in macroeconomics and political economy
We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find that (i) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries’ productivity growth, (ii) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign, (iii) net public debt financed by private creditors is positively correlated with growth, (iv) public savings are strongly positively correlated with growth, whereas correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.
The paper tests the popular hypothesis that the high prevalence of homicide in the South of the United States originates from the settlement by herders from the fringes of Britain in the 18th century. I find that historical Scots-Irish presence is associated with higher contemporary homicide, particularly by white offenders, and that a culture of violence was transmitted to subsequent generations—but only in the South and, more generally, where historical institutional quality was low. The interpretation is that the Scots-Irish culture of honor prevailed and persisted as an adaptive behavior to weak institutions. As institutional quality converged between the South and North over the last 200 years, the influence of the culture of honor has been fading over time. The results are robust to controlling for state fixed effects and for a large number of historical and contemporary factors, as well as to relying on instrumental variables for historical settlements. The results are also specific to a particular type of homicide and background of settlers.
In proportional representation (PR) systems, political power is typically shared across several political parties. Many parties are small and focused on specific policies, such as environmental policy and immigration. Do these small parties matter for policy? I provide the first systematic evidence for this by developing the first regression discontinuity design tailored specifically for PR systems. With this method, which can be applied in all countries with PR systems, I estimate the causal effect of party representation on immigration policy, environmental policy and tax policy using data on Swedish municipalities. The results show that party representation has a large effect on the first two policies, but not on the tax policy.
A hallmark result within behavioral economics is that individuals’ choices are affected by current endowments. A recent theory due to Kőszegi and Rabin (2006, Quarterly Journal of Economics, 121, 1133–1165) explains such endowment effect with a model of expectations-based reference-dependent preferences. Departing from past work, we conduct complementary experiments to disentangle expectations—verified probabilistic beliefs held by subjects—from other features of endowment—such as “assignment” to a good—hence allowing us to compare the effect of expectations with that of other variations. While mere assignment can affect choices, we do not find a large role in the effect for Kőszegi–Rabin expectations.
We use book translations as a new measure of international idea flows and study the effects of Communism’s collapse in Eastern Europe on these flows. Using novel data on 800,000 translations and difference-in-differences approaches, we show that while translations between Communist languages decreased by two thirds with the collapse, Western-to-Communist translations increased by a factor of 4 and quickly converged to Western levels. Convergence was more pronounced in the fields of applied and social sciences, and was more complete in Satellite and Baltic than in Soviet countries. We discuss how these patterns help us understand how repressive institutions and preferences towards Western European ideas shaped the international diffusion of knowledge.
We identify the ages that constitute sensitive (or critical) periods in children’s development towards their adult health status, skills, and human capital. For this, we use data on families migrating into Sweden from countries that are poorer, with less healthy conditions. Late-life health is proxied by adult height and other adult outcomes. The relation between siblings’ ages at migration and their adult outcomes allows us to estimate the causal effect of conditions at specific childhood ages. We effectively exploit that, for siblings, the migration occurs simultaneously in calendar time but at different developmental stages (ages). We find evidence that the period just before the puberty growth spurt constitutes a critical period for adult height and we find related critical periods for adult cognition, mental health, and education.
We investigate the relationship between foreign direct ownership of firms and firm- and region-level output volatility using a novel panel data set for European countries. We document a positive, highly robust, relationship between firm-level foreign ownership and volatility of value added. This relationship holds cross-sectionally and in panels with firm fixed effects where the relationship captures within-firm variation over time. Considering domestic firms with assets in foreign countries, we document that it is international diversification, rather than the nationality of the owner, that explains this positive correlation. Our results can also be found at the aggregate level, where we show that region-level volatility is correlated positively with foreign investment in the region. We show that this positive relation between aggregate volatility and foreign investment can be explained by the granularity of the firm size distribution and the fact that foreign ownership is concentrated among the largest firms.
We analyze the effects of the unprecedented rise in trade between Germany and “the East” (China and Eastern Europe) in the period 1988–2008 on German local labor markets. Using detailed administrative data, we exploit the cross-regional variation in initial industry structures and use trade flows of other high-income countries as instruments for regional import and export exposure. We find that the rise of the East in the world economy caused substantial job losses in German regions specialized in import-competing industries, both in manufacturing and beyond. Regions specialized in export-oriented industries, however, experienced even stronger employment gains and lower unemployment. In the aggregate, we estimate that this trade integration has caused some 442,000 additional jobs in the economy and contributed to retaining the manufacturing sector in Germany. This is almost exclusively driven by the rise of Eastern Europe, not by China. We also conduct an analysis at the individual worker level, and find that trade had a stabilizing overall effect on employment relationships.
The notion of contracts as reference points provides the basis for a deeper understanding of important phenomena such as the employment contract, vertical integration, firm scope, authority, and delegation. Previous experiments lend support to this notion but they ignore realistic aspects of trading relationships such as informal agreements and ex-post renegotiation or revision. Here we show that the central behavioral mechanism underlying contractual reference points is robust to such considerations. Our data reveal that informal agreements can mitigate the trade-off between rigidity and flexibility but they do not fully resolve the problem of misaligned reference points. Our experiments also show that contract revision is a more nuanced process than the previous literature has recognized. We find, for example, that it is sometimes better for parties to write a simple (rigid) contract and then revise it ex post if needed, rather than to anticipate and include future contingencies in a (flexible) contract from the outset.
Using data from 1869 to 1928, we estimate the effect of party control of state governments on the entry, exit, circulation, prices, number of pages, and content of Republican and Democratic daily newspapers. We exploit changes over time in party control of the governorship and state legislatures in a differences-in-differences design. We exploit close gubernatorial elections and state legislatures with small majorities in a parallel regression-discontinuity design. Neither method reveals evidence that the party in power affects the partisan composition of the press. Our confidence intervals rule out modest effects, and we find little evidence of incumbent party influence even in times and places with high political stakes or low commercial stakes. The one exception is the Reconstruction South, an episode that we discuss in detail.
How does an ex-ante contract affect behavior in an ex-post renegotiation game? We address this question in a canonical buyer–seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threat points. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex-ante contract was written. The ex-ante contract causes sellers to ask for markups that are 45% lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. These effects do not depend on whether the contract was written under competitive or monopolistic conditions. Our results provide strong evidence supporting the hypothesis that contracts serve as reference points that shape and coordinate the expectations of the contracting parties.
This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the “sufficient-statistics” formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.
This paper evaluates the global welfare impact of observed levels of migration using a quantitative multi-sector model of the world economy calibrated to aggregate and firm-level data. Our framework features cross-country labor productivity differences, international trade, remittances, and a heterogeneous workforce. We compare welfare under the observed levels of migration to a no-migration counterfactual. In the long run, natives in countries that received a lot of migration—such as Canada or Australia—are better off due to greater product variety available in consumption and as intermediate inputs. In the short run, the impact of migration on average welfare in these countries is close to zero, while the skilled and unskilled natives tend to experience welfare changes of opposite signs. The remaining natives in countries with large emigration flows—such as Jamaica or El Salvador—are also better off due to migration, but for a different reason: remittances. The welfare impact of observed levels of migration is substantial, at about 5% to 10% for the main receiving countries and about 10% in countries with large incoming remittances.
In spite of general agreement that establishing the rule of law is central to properly functioning economies, little is known about the cost of law and order breakdowns. This paper studies a specific context of this by estimating the effect of Somali piracy attacks on shipping costs using data on shipping contracts in the dry bulk market. To estimate the effect of piracy, we look at shipping routes whose shortest path exposes them to piracy and find that the increase in attacks in 2008 led to around an 8% to 12% increase in costs. From this we calculate the welfare loss imposed by piracy. We estimate that generating around 120 USD million of revenue for Somali pirates led to a welfare loss in excess of 630 USD million, making piracy an expensive way of making transfers.
In order to analyze the role of limited commitment and preference heterogeneity in explaining the consumption allocation, I propose a theoretical and empirical framework to estimate and evaluate a risk-sharing model where insurance transfers have to be self-enforcing and the coefficient of relative risk aversion may depend on observable household characteristics. I compare this model to benchmark models with full commitment and/or without preference heterogeneity using data from three Indian villages. I find that the limited commitment model with heterogeneous preferences outperforms the benchmark models in a statistical sense and in terms of (i) explaining the dynamic response of consumption to idiosyncratic income shocks, (ii) accounting for the variation of consumption unexplained by household and time effects, and (iii) capturing the variation of inequality across time and villages and predicting changes in inequality. I also use the estimated models to predict the effects of a counterfactual tax and transfer policy on the consumption allocation. The limited commitment model with preference heterogeneity predicts larger benefits to the poor than its homogeneous counterpart.
We conduct two experimental tests of the claim that people are overconfident, using new tests of overplacement that are based on a formal Bayesian model. Our two experiments, on easy quizzes, find that people overplace themselves. More precisely, we find apparently overconfident data that cannot be accounted for by a rational population of expected utility maximizers who care only about money. The finding represents new evidence of overconfidence that is robust to the Bayesian critique offered by Benoît and Dubra (Jean-Pierre Benoît and Juan Dubra (2011). “Apparent Overconfidence.” Econometrica, 79, 1591–1625). We discuss possible limitations of our results.
We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed data set covering the whole of the United Kingdom, we find that, over the course of time, many entrants have begun to take advantage of unbundling. LLU entry only had a positive effect on broadband penetration in the early years, and no longer in the recent years as the market reached maturity. In contrast, LLU entry continues to have a positive impact on the quality of the service provided, as entrants differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter-platform competition has a positive impact on both penetration and quality.
In this paper we analyze how image utility can lead to misreporting of private information in contexts where truthful reports maximize monetary outcomes. In a controlled experiment, subjects go through a series of quiz questions and subsequently report a performance measure. We vary whether reports are made to an audience or not. In an additional feedback treatment, reports are also stated to an audience and afterwards the experimenter publicly verifies whether reports were correct. We find that in the audience treatment, stated reports are significantly higher relative to the private treatment as well as the feedback treatment. Our findings suggest that overconfident appearance might be a consequence of social approval seeking.
We develop a measure of maximum sustainable government debt for advanced economies. How much investors are willing to lend to a country's government depends on the country's expected primary surplus, the level and volatility of its rate of growth, and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today. We provide a simple formula that computes a country's maximum sustainable debt (MSD) as a function of four easy-to-estimate parameters. We further compute a country's theoretical probability of default (PD) as a function of its debt-to-GDP ratio. We finally calibrate our measures for 23 OECD countries and test the relation between sovereign yield spreads and our theoretical PD at prevailing debt levels. We find it to be strongly statistically significant.
Attitudes towards risk and uncertainty have been indicated to be highly context-dependent, and to be sensitive to the measurement technique employed. We present data collected in controlled experiments with 2,939 subjects in 30 countries measuring risk and uncertainty attitudes through incentivized measures as well as survey questions. Our data show clearly that measures correlate not only within decision contexts or measurement methods, but also across contexts and methods. This points to the existence of one underlying “risk preference”, which influences attitudes independently of the measurement method or choice domain. We furthermore find that answers to a general and a financial survey question correlate with incentivized lottery choices in most countries. Incentivized and survey measures also correlate significantly between countries. This opens the possibility to conduct cultural comparisons on risk attitudes using survey instruments.
How important are economies of scale in exporting? We argue that firm size cannot be the main determinant of export status if a model is to be consistent with the observed number and size of exporters. Instead, we need a lot of variation independent of firm size to reconcile the model with the data. We show that the augmented model also has markedly different implications regarding the margin of adjustment in the event of a trade liberalization: most of the adjustment is through the intensive margin and productivity gains due to reallocation are halved.
This paper proposes an empirical model which can be used to estimate the international transmission of volatility shocks. Using this model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP of 1% relative to trend and a 0.7% increase in UK CPI relative to trend at the two-year horizon. Using a nonlinear open-economy DSGE model, we find that these empirical estimates are consistent with the response to a perturbation to the volatility of foreign “supply” type shocks, while an increase in the volatility of demand shocks has a negligible impact.
Following Max Weber, many theories have hypothesized that Protestantism should have favored economic development. With its religious heterogeneity, the Holy Roman Empire presents an ideal testing ground for this hypothesis. Using population figures of 272 cities in the years 1300–1900, I find no effects of Protestantism on economic growth. The finding is precisely estimated, robust to the inclusion of various controls, and does not depend on data selection or small sample size. Denominational differences in fertility behavior and literacy are unlikely to be major confounding factors. Protestantism has no effect when interacted with other likely determinants of economic development. Instrumental variables estimates, considering the potential endogeneity of religious choice, are similar to the OLS results.
Who becomes a top politician in China? We focus on provincial leaders—a pool of candidates for top political office—and examine how their chances of promotion depend on their performance in office and connections with top politicians. Our empirical analysis, based on the curriculum vitae of Chinese politicians, shows that connections and performance are complements in the Chinese political selection process. This complementarity is stronger the younger provincial leaders are relative to their connected top leaders. To provide one plausible interpretation of these empirical findings, we propose a simple theory in which the complementarity arises because connections foster loyalty of junior officials to senior ones, thereby allowing incumbent top politicians to select competent provincial leaders without risking being ousted. Our findings shed some light on why a political system known for patronage can still select competent leaders.
We develop a dynamic model of dealer intermediation between a monopolistic customer–dealer market and a competitive interdealer limit order market. Dealers face inventory constraints and adverse selection. We characterize the optimal quote setting and inventory management behavior for both markets in closed form and reveal how price setting in one market segment influences quote behavior in the other. The framework is used to explore market stability issues of the two-tier market structure and delivers testable predictions about how the dispersion of retail prices is related to the state of the interdealer limit order book. Data from the European sovereign bond market is used to test for inventory related retail price dispersion.
This paper estimates social effects of incentivizing people in teams. In three field experiments featuring exogenous team formation and opportunities for repeated social interactions, we find large team effects that operate through social channels. In particular, assignment to a team treatment increases productivity by 9%–17% relative to an individual incentive treatment, even though the individual incentive yields a higher private return. Further, we find that in a choice treatment individuals overwhelmingly prefer the individual incentive to the team incentive, despite the latter being more effective. These results are most consistent with the team effects operating through guilt or social pressure as opposed to pure altruism.
Using data on Members of the European Parliament (MEPs), we examine the impact of salaries on the composition and the behavior of legislators. Employing a differences-in-differences approach, we exploit the introduction of a law that equalized MEPs' salaries which had previously differed by as much as a factor of 10. Increasing salaries raises the fraction of MEPs who run for re-election but decreases the quality of elected MEPs (proxied by college quality). Salary has no discernible impact on effort or legislation output. Higher salaries induce more political competition.
We analyze a general search model with on-the-job search (OJS) and sorting of heterogeneous workers into heterogeneous jobs. For given values of nonmarket time, the relative efficiency of OJS, and the amount of search frictions, we derive a simple relationship between the unemployment rate, mismatch, and wage dispersion. We estimate the latter two from standard micro data. Our methodology accounts for measurement error, which is crucial to distinguish true from spurious mismatch and wage dispersion. We find that without frictions, output would be about 9.5% higher if firms can commit to pay wages as a function of match quality and 15.5% higher if they cannot. Noncommitment leads to a business-stealing externality which causes a 5.5% drop in output.
I examine 2,735 estimates of the elasticity of intertemporal substitution in consumption (EIS) reported in 169 published studies. The literature shows strong selective reporting: researchers discard negative and insignificant estimates too often, which pulls the mean estimate up by about 0.5. The reporting bias dwarfs the effects of methods, with the exception of the choice between micro and macro data. When I correct the mean for the bias, for macro estimates I get zero, even though the reported |$t$|-statistics are on average two. The corrected mean of micro estimates of the EIS for asset holders is around 0.3-0.4. Calibrations greater than 0.8 are inconsistent with the bulk of the empirical evidence.
Europe's debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and nondebtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bond holders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.
Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet and worries about the risks of lax fiscal policy. However, the two may interact in important and understudied ways. This paper examines the co-evolution of public and private sector debt in advanced countries from 1870 to 2012. We find that in advanced economies financial crises are not preceded by public debt build-ups nor are they more likely when public debt is high. However, history shows that high levels of public debt tend to exacerbate the effects of private sector deleveraging after financial crises. The economic costs of financial crises rise substantially if large private sector credit booms are unwound at times when the public sector has little capacity to pursue macroeconomic and financial stabilization.
The theoretical literature on sovereign defaults has focused on adverse shocks to debtors' economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center, such as the European Sovereign Debt Crisis in the aftermath of the US Subprime Crisis in 2008. Crises in the financial centers are rare disasters and, thus, their effects on the periphery can only be captured by examining long episodes. In this paper, we examine sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger losses for investors.
Greater financial integration between core and peripheral European Monetary Union (EMU) members not only had an effect on both sets of countries but also spilled over beyond the euro area. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. We present a stylized model that illustrates possible mechanisms for these developments. We then analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, core EMU countries increased their borrowing from outside of the EMU and their lending to the EMU periphery. Moreover, we present evidence that large core EMU banks’ lending to periphery borrowers was linked to their borrowing from outside of the euro area.
With the beginning of the Euro Crisis, the long-standing trend of European financial integration reversed. Investors unwound cross-border positions of debt obligations and increased holdings of locally issued debt. In other words, debt obligations were repatriated. We use data on bank portfolios to document three new empirical regularities of the financial disintegration: (i) repatriation affected mainly debt of crisis countries; (ii) repatriation affected mainly public debt; (iii) the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the Euro area. We read these results in light of standard theories of cross-border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt.
Sovereign debt restructurings can be implemented preemptively—prior to a payment default. We code a comprehensive new data set and find that preemptive restructurings (i) are frequent (38% of all deals 1978–2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign’s optimal choice: preemptive restructurings occur when default risk is high ex ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions.
This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920–1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978–2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras, averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We then analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings.
We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left- (pro-public goods) and right-leaning (pro-private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left-leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time-series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries.
This paper presents a political economy theory of fiscal policy and unemployment. The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production. Such policies are fiscally costly, but can be financed by issuing government debt. Policy decisions are made by a legislature consisting of representatives from different political districts. With the available policies, it is possible for the government to completely eliminate unemployment in the long run. However, with political decision making, the economy always has unemployment. Unemployment is higher when the private sector experiences negative shocks. When these shocks occur, the government employs debt-financed fiscal stimulus plans which involve both tax cuts and public production increases. When the private sector is healthy, the government contracts debt until it reaches a floor level. Unemployment levels are weakly increasing in the economy's debt level, strictly so when the private sector experiences negative shocks. Conditional on the level of workers employed, the mix of public and private output is distorted.
Performance-based promotion schemes in administrative hierarchies have limitations. Chinese provincial leaders, despite facing strong career concerns, make different policy decisions depending on their career backgrounds. Provincial party secretaries who have risen from low to high positions within the province they govern (“locals”) spend a higher share of budgetary resources on education and health care and invest less in construction infrastructure than party secretaries who have made their most significant career advancements in other provinces (“outsiders”). Identification comes from variation in central leadership and term limits. As the promotion mechanism rewards infrastructure investments, locals are less likely to be promoted at the end of the term. We explore various mechanisms and provide evidence that the difference between locals and outsiders is not driven by knowledge or experience. Several pieces of evidence suggest that locals cater to low-level provincial elites, who helped them rise to power. Thus, local career trajectories limit the power of career concerns by fostering competing allegiances.
This paper presents direct evidence for relational contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a “punishment” effect in prices) from an indirect effect through higher expected future default probabilities (“loss of reputation”). Such a punishment provides positive surplus to lenders after a default and decreases the borrower's present discounted value of the net benefits of future borrowing, which create dynamic incentives. Using data on bank loans to developing countries for 1973–1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.
In insurance markets, the uninsured can generate a negative externality on the insured, leading insurance companies to charge higher premia. Using a novel panel data set and a staggered policy change that introduces exogenous variation in the rate of uninsured drivers at the county level in California, we find that uninsured drivers lead to higher insurance premia: a 1 percentage point increase in the rate of uninsured drivers raises premia by roughly 1%. We calculate the monetary fine on the uninsured that would fully internalize the externality and conclude that actual fines in most US states are inefficiently low.
Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of time-varying payroll taxes and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget induces countercyclical payroll taxation, renders gross wages more rigid over the cycle and strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve and countercyclical unemployment as well as substantial volatility and persistence of vacancies and unemployment.
This paper explores the quantitative asset-pricing implications of expectations-based reference-dependent preferences, as introduced by Koszegi and Rabin (2009, American Economic Review, 99(3), 909–936), in an otherwise traditional Lucas-tree model. I find that the model easily succeeds in matching the historical equity premium and its variability when the preference parameters are calibrated in line with micro evidence. The equity premium is high because expectations-based loss aversion makes uncertain fluctuations in consumption more painful. Additionally, loss aversion introduces variation in returns because unexpected cuts in consumption are particularly painful, and the agent wants to postpone such cuts to let his reference point decrease. This variation generates strong predictability. However, it also causes counterfactually high volatility in the risk-free rate, which I address by allowing for variation in expected consumption growth, heteroskedasticity in consumption growth, time-variant disaster risk, and sluggish belief updating.
Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.
We investigate the “law of small numbers” using a data set on lotto gambling that allows us to measure players' reactions to draws. While most players pick the same set of numbers week after week, we find that those who do change, react on average as predicted by the law of small numbers as formalized in recent behavioral theory. In particular, players tend to bet less on numbers that have been drawn in the preceding week, as suggested by the “gambler's fallacy”, and bet more on a number if it was frequently drawn in the recent past, consistent with the “hot-hand fallacy”.
We explore the idea that prosocial behavior in experimental games is driven by social norms imported into the laboratory. Under this view, differences in behavior across subjects is driven by heterogeneity in sensitivity to social norms. We introduce an incentivized method of eliciting individual norm-sensitivity, and we show how it relates to play in public goods, trust, dictator, and ultimatum games. We show how our observations can be rationalized in a stylized model of norm-dependent preferences under reasonable assumptions about the nature of social norms. Then we directly elicit norms in these games to test the robustness of our interpretation.
I document that the labor force participation rate of West German mothers with children aged zero to two exceeds the corresponding child-care enrollment rate, while the opposite is true for mothers whose children are older than two but below the mandatory schooling age. These facts also hold for a cross-section of E.U. countries. I develop a life-cycle model that explicitly accounts for this age-dependent relationship by including various types of nonpaid and paid child care. I calibrate this model to data for West Germany and use the calibrated model for policy analysis. Increasing the supply of subsidized child care for children aged zero to two generates an increase in the maternal labor force participation rate consistent with empirical evidence from other settings; however, this increase is too small to conclude that the lack of subsidized child care accounts for the low labor force participation rate of mothers with children aged zero to two. The response along the intensive margin suggests that a large fraction of part-time working mothers would work full-time if they had greater access to subsidized child care. Finally, making subsidized child care available to more women does not achieve one of the commonly stated goals of such reforms, namely to increase the fertility rate.
We show that unexpected price-level movements generate sizable wealth redistribution in the Euro Area (EA), using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA as a whole is a net loser of unexpected price-level decreases, with Italy, Greece, Portugal, and Spain losing most in per capita terms, and Belgium and Malta being net winners. Governments are net losers of deflation, while the household (HH) sector is a net winner in the EA as a whole. HHs in Belgium, Ireland, Malta, and Germany experience the biggest per capita gains, while HHs in Finland and Spain turn out to be net losers. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net losers of deflation, while older and richer HHs are winners. As a result, wealth inequality in the EA increases with unexpected deflation, although in some countries (Austria, Germany, and Malta) inequality decreases due to the presence of relatively few young borrowing HHs. We document that HHs’ inflation exposure varies systematically across countries, with HHs in high-inflation EA countries holding systematically lower nominal exposures.
We study experimentally how communication changes the effectiveness of contract types when sellers choose unenforceable quality after a possible cost shock. Communication potentially removes conflicting perceptions that may otherwise plague flexible contracts. Indeed, we find that introducing free-form communication sharply reverses an advantage of rigid contracts in favor of flexible contracts, which then deliver much higher earnings. Control treatments that avoid selection effects reveal a strong parallel shift from rigid to flexible. Chat content analysis identifies clarification of post-shock transfers, promises, and personal rapport as key correlates of high earnings, with clarification working only in conjunction with flexible contracts. A communication channel restricted to clarifying transfer plans also favors use of flexible contracts, but mildly compared to chat.
What role does affordable and widely available public child care play for fertility? We exploit a major German reform generating large temporal and spatial variation in child care coverage for children under the age of three. Our precise and robust estimates on birth register data reveal that increases in public child care have significant positive effects on fertility. The fertility effects are more pronounced at the intensive than at the extensive margin, and are not driven by changes in the timing of births or selective migration. Our findings inform policy makers concerned about low fertility by suggesting that universal early child care holds the promise of being an effective means of increasing birth rates.
We explore how more wage equality fuels the generosity of the welfare state via political competition in elections, and how a more generous welfare state fuels wage equality via empowerment of weak groups in the labor market. Together the two mechanisms may generate a cumulative process that explains how equality multiplies, and why countries with more equal distributions of market outcomes also have stronger welfare states. The complementarity between wage setting and welfare spending can explain why almost equally rich countries differ so much in economic and social equality among their citizens.
A dynamic political economy theory of fiscal policy is presented to explain the simultaneous existence of public education and pensions in modern democracies. The driving force of the model is the intergenerational conflict over the allocation of the public budget. Successive generations of voters choose fiscal policies through repeated elections. The political power of elderly voters creates the motive for adults to support public investment in the human capital of future generations since it expands future pension possibilities. We characterize the Markov perfect equilibrium of the voting game in a small open economy. The equilibrium reproduces salient features of intergenerational fiscal policies in modern economies.
This paper theoretically and empirically investigates the relationship between local-level ethnic composition and the spread of conflict. Cross-country literature on conflict finds that ethnic diversity, and ethnic polarization in particular, are associated with greater incidence of conflict. However, the question remains as to where within ethnically diverse countries conflict begins and where and how it spreads. To study this question, I present a model in which local ethnic groups’ decision to attack depends on three key variables: ethnic population shares, ethnic groups’ weapons ratio, and the share of co-ethnic successes in the battles that took place in the previous period. The model generates three predictions: conflict starts in ethnically homogeneous areas and only later spreads to ethnically heterogeneous areas; neighbor co-ethnics’ success increases subsequent probability of winning and may lead to attack; and greater ethnic diversity is associated with costlier conflict. I find strong support for these predictions using detailed municipal-level data on attacks and ethnic polarization during the initial spread of the Bosnian Civil War. Moreover, my conflict model is able to predict the sequence of actual conflict outcomes with reasonably high accuracy.
A large body of literature has emphasized the elite capture of democratic institutions as the explanation for the low levels of spending on public education in many low-income democracies. This paper provides an alternative to that longstanding hypothesis. Motivated by new cross-country facts and evidence from Brazilian municipalities, we hypothesize that many democratic developing countries might invest less in public education spending because poor decisive voters prefer the government to allocate resources elsewhere. One possible explanation is that low-income voters could instead favor redistributive programs that increase their incomes in the short run, such as cash transfers. To test for this possibility, we design and implement an experimental survey and an incentivized choice experiment in Brazil. The findings from both interventions support our hypothesis.
Recent experimental studies suggest that risk aversion is negatively related to cognitive ability. In this paper we report evidence that this relation may be spurious. We recruit a large subject pool drawn from the general Danish population for our experiment. By presenting subjects with choice tasks that vary the bias induced by random choices, we are able to generate both negative and positive correlations between risk aversion and cognitive ability. Our results suggest that cognitive ability is related to random decision making rather than to risk preferences.
We investigate the relationship between individual trust and individual economic performance. We find that individual income is hump-shaped in a measure of intensity of trust beliefs. Our interpretation is that highly trusting individuals tend to assume too much social risk and to be cheated more often, ultimately performing less well than those with a belief close to the mean trustworthiness of the population. However, individuals with overly pessimistic beliefs avoid being cheated, but give up profitable opportunities, therefore underperforming. The cost of either too much or too little trust is comparable to the income lost by forgoing college. Our findings hold in large-scale international survey data, as well as inside a country with high-quality institutions, and are also supported by experimental findings.
Understanding how economic incentives affect illegal drug production is essential for crafting policies in response to the international drug trade. Policymakers typically face a choice between two strategies: targeting criminal groups via law enforcement, and offering producers incentives to engage in alternate activities. Yet, little is known about how the returns to alternate legal activities affect drug supply. We contribute to this literature by examining how shocks to legal commodity prices affect the drug trade in Mexico. Our analysis exploits exogenous movements in the Mexican maize price stemming from weather conditions in US maize-growing regions, as well as exports of other major maize producers. Using data on over 2200 municipios spanning 1990–2010, we show that lower prices differentially increased the cultivation of both marijuana and opium poppies in municipios more climatically suited to growing maize. We also find impacts on downstream drug-trade outcomes, including drug cartel operations and killings perpetrated by these groups. Our findings demonstrate that maize price changes contributed to the burgeoning drug trade in Mexico, and point to the violent consequences of an expanding drug sector.
I present a model with discontinuous asset-market participation (DAMP), where all agents are non-Ricardian, and where heterogeneity among market participants implies financial-wealth effects on aggregate consumption. The implied welfare criterion shows that financial stability arises as an additional and independent target, besides inflation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and inflation may be optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants may lead monetary policy to induce substantially higher welfare losses.
The rise in obesity has largely been attributed to an increase in calorie consumption. We show that official government household survey data indicate that levels of calorie consumption have declined in England between 1980 and 2013; while there has been an increase in calories from food eaten out at restaurants, fast food, soft drinks and confectionery, overall there has been a decrease in total calories purchased. Households have shifted towards more expensive calories, both by substituting away from home production towards market production, and substituting towards higher quality foods. We show that the decline in calories can be partially, but not entirely, rationalized with weight gain by a decline in the strenuousness of work and daily life.
It is commonly perceived that increasing incentives improves performance. However, the reaction to increased incentives might differ between men and women, leading to gender differences in performance. In a natural experiment, we study the gender difference in performance resulting from changes in stakes. We use detailed information on the performance of high-school students and exploit the variation in the stakes of tests, which range from |$5\%$| to |$27\%$| of the final grade. We find that female students outperform male students in all tests—but to a relatively larger degree when the stakes are low. The gender gap disappears in tests taken at the end of high school, which count for |$50\%$| of the university entry grade.
Irrigated agriculture makes societies more likely to be ruled by authoritarian regimes. Ancient societies have long been thought to follow this pattern. We empirically show that irrigation affects political regimes even in the present. To avoid endogeneity, we use geographical and climatic variation to identify irrigation dependent societies. We find that countries whose agriculture depended on irrigation are about six points less democratic on the 21-point polity2 scale than countries where agriculture has been rainfed. We find qualitatively similar results across regions within countries. We argue that the effect has historical origins: irrigation allowed landed elites in arid areas to monopolize water and arable land. This made elites more powerful and better able to oppose democratization. Consistent with this conjecture, we show that irrigation dependence predicts land inequality both at the country level, and in premodern societies surveyed by ethnographers. (JEL: O11, N50, Q15)
This paper explores the political economy that leads frontier regions to be unequal. By focusing on the presence of a stable frontier between Castile and the Nasrid Kingdom of Granada in the late Middle Ages, our analysis shows how a historical border may generate differences in inequality that can become extremely persistent. We argue that the dynamics of being a militarily insecure frontier region created the conditions on the Castilian side for a high concentration of economic and political power. Through the application of a border specification and a spatial regression discontinuity design to municipal-level data, we find that municipalities on the Castilian side have a significantly higher percentage of landless workers, a greater accumulation of wealth, and more jurisdictional rights among the privileged orders, as measured in the 18th century. We use current indicators of land inequality and development to show that the effect of the frontier of Granada persists even today. (JEL: C14, N2, N9, O1)
Avoiding information about adverse welfare consequences of self-interested decisions, or willful ignorance, is an important source of socially harmful behavior. To understand this issue, we analyze a Bayesian signaling model of an agent who cares about self-image and has the opportunity to learn the social benefits of a personally costly action. We show that willful ignorance can serve as an excuse for selfish behavior by obfuscating the signal about the decision-maker's preferences, and help maintain the idea that the agent would have acted virtuously under full information. We derive several behavioral predictions that are inconsistent with either outcome-based preferences or social-image concern and conduct experiments to test them. Our findings, as well as a number of previous experimental results, offer support for these predictions and thus, the broader theory of self-signaling. (JEL: D83, C72, C91)
We provide evidence that German savings banks, which are controlled by county-level politicians, systematically adjust lending policies in response to local electoral cycles. The different timings of county elections across states and the existence of a comparable group of cooperative banks—that are very similar to savings banks but lack their political connectedness—allow for identification of the effects of county elections on savings bank lending. These effects are economically meaningful and very robust to various specifications. We find that election-induced lending negatively impacts savings bank profitability and is associated with an increase in credit defaults roughly three years after an election. Examining the political-economy aspects of our findings, we provide evidence that savings bank excess lending and public spending at the county level are substitute levers for county politicians. Finally, we find indications that subpar pre-election economic county performance hurts re-election prospects and increases the intensity of lending cycles. (JEL: G21, D72, D73)
Iodine deficiency is the leading cause of preventable mental retardation in the world today. The condition, which was common in the developed world until the introduction of iodized salt in the 1920s, is connected to low iodine levels in the soil and water. We examine the impact of salt iodization on cognitive outcomes in the United States by taking advantage of this natural geographic variation. Salt was iodized over a short period of time beginning in 1924. We use military data collected during World War I and World War II to compare outcomes of cohorts born before and after iodization in localities that were naturally poor and rich in iodine. We find that for the one-quarter of the population most deficient in iodine this intervention raised intelligence quotient (IQ) by approximately one standard deviation. Our results can explain roughly one decade’s worth of the upward trend in IQ in the United States (the Flynn effect). We also document a large increase in thyroid-related deaths following the countrywide adoption of iodized salt, which affected mostly older individuals in localities with high prevalence of iodine deficiency. (JEL: I12, I18, J24, N32)
Is there a rational component in the decision to commit suicide? Economists have been trying to shed light on this question by studying whether suicide rates are related to contemporaneous socioeconomic conditions. This paper goes one step further: we test whether suicides are linked to forward-looking behavior. In Italy, collective sentence reductions (pardons) often lead to massive releases of prisoners. More importantly, they are usually preceded by prolonged parliamentary activity (legislative proposals, discussion, voting, etc.) that inmates seem to follow closely. We use the legislative proposals for collective pardons to measure changes in the inmates’ expectations about the length of their sentences, and find that suicide rates tend to be significantly lower when pardons are proposed in congress. This suggests that, among inmates in Italian prisons, the average decision to commit suicide responds to changes in current expectations about future conditions. At least partially, therefore, the decision seems rationalizable. (JEL: I1, D1, K4)
This paper documents consumers’ difficulty valuing life annuities. Using a purpose-built experiment in the American Life Panel, we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them. We also find that buy values are negatively correlated with sell values and that the sell–buy valuation spread is negatively correlated with cognition. This spread is larger for those with less education, weaker numerical abilities, and lower levels of financial literacy. Our evidence contributes to the emerging literature on heterogeneity in financial decision-making abilities, particularly regarding retirement payouts. (JEL: D14, D91, G11, H55)
This study provides evidence of government distortion of news coverage among independently owned media outlets in a democratic regime. It uses data from 1946 to 2010 and documents that U.S. news coverage of human rights abuses committed by foreign governments was associated with membership on the United Nations Security Council and the degree of political alliance with the United States. For countries that were not allied with the United States, coverage increased with membership; for countries that are strongly allied with the United States, coverage decreased with membership. There is an analogous effect on reports of human rights abuses by the U.S. State Department, but no such effect on human rights practices according to other measures. The results are driven by the Reagan and Bush Sr. Administrations, 1981–1992, a period during which the government was known to have actively influenced the press. (JEL: P16, N4)
We study the relative importance of intrinsic moral motivation and extrinsic social motivation in explaining moral behavior. The key feature of our experiment is that we introduce a dictator game design that manipulates these two sources of motivation. In one set of treatments, we manipulate the moral argument for sharing, in another we manipulate the information given to the recipient about the context of the experiment and the dictator's decision. The paper offers two main findings. First, we provide evidence of intrinsic moral motivation being of fundamental importance. Second, we show that extrinsic social motivation matters and is crowding-in with intrinsic moral motivation. We also show that intrinsic moral motivation is strongly associated with self-reported charitable giving outside the lab and with political preferences. (JEL: D63)
We document interpersonal violence as a dimension of the resource curse. We rely on a historical natural experiment in the United States, where mineral discoveries occurred sometimes before, sometimes after formal institutions were established in the county of discovery. In places where mineral discoveries occurred before formal institutions were established, there were more homicides per capita historically and the effect has persisted to this day. Today, the share of homicides and assaults explained by the historical circumstances of mineral discoveries is comparable to the effect of education or income. Our results imply that short-term and quasi-exogenous variations in the institutional environment can lead to large and persistent differences in cultural and institutional development. (JEL: K42, N31, O14, Z13)
This paper shows that having access to a fast Internet connection is an important determinant of capitalization effects in property markets. Our empirical strategy combines a boundary discontinuity design with controls for time-invariant effects and arbitrary macroeconomic shocks at a very local level to identify the causal effect of broadband speed on property prices from variation that is plausibly exogenous. Applying this strategy to a micro data set from England between 1995 and 2010 we find a significantly positive effect, but diminishing returns to speed. Our results imply that disconnecting an average property from a high-speed first-generation broadband connection (offering Internet speed up to 8 Mbit/s) would depreciate its value by 2.8%. In contrast, upgrading such a property to a faster connection (offering speeds up to 24 Mbit/s) would increase its value by no more than 1%. We decompose this effect by income and urbanization, finding considerable heterogeneity. These estimates are used to evaluate proposed plans to deliver fast broadband universally. We find that increasing speed and connecting unserved households pass a cost–benefit test in urban and some suburban areas, whereas the case for universal delivery in rural areas is not as strong. (JEL: L1, H4, R2)
We conduct a laboratory experiment that tests two fundamental predictions unique to salience theory. If an agent purchases one of two vertically differentiated products, salience theory makes the following two distinct predictions. First, it hypothesizes that a higher expected price level for both products shifts demand toward the more expensive, high-quality product. Second, it predicts that demand for the high-quality product is larger if the price level is expectedly high than if it is unexpectedly high. In our experiment, subjects purchased fast or slow Internet access at different price levels. Our results strongly support both predictions of salience theory. (JEL: D03)
We analyze the effect of immigrants’ legal status on their consumption behavior using unique survey data that samples both documented and undocumented immigrants. To address the problem of sorting into legal status, we propose two alternative identification strategies as exogenous source of variation for current legal status: First, transitory income shocks in the home country, measured as rainfall shocks at the time of emigration. Second, amnesty quotas that grant legal residence status to undocumented immigrants. Both sources of variation create a strong first stage, and—although very different in nature—lead to similar estimates of the effects of illegal status on consumption, with undocumented immigrants consuming about 40% less than documented immigrants, conditional on background characteristics. Roughly one quarter of this decrease is explained by undocumented immigrants having lower incomes than documented immigrants. Our findings imply that legalization programs may have a potentially important effect on immigrants’ consumption behavior, with consequences for both the source and host countries. (JEL classification: F22, D12, K42).
The interaction between present bias and limited memory can explain why individuals do not act at deadlines and why providing reminders can have large effects. Individuals in my model must choose when and whether to complete a task, but may forget or procrastinate. A calibration exercise shows that assuming perfect memory leads to biased estimates of present bias because the rate of task completion at the deadline is much lower with imperfect memory. Naïve procrastination explains why individuals do not set up reminders despite large gains to doing so. The model offers guidance for empirical studies of reminders, making a distinction between anticipated and unanticipated reminders: anticipated reminders can induce additional procrastination, lowering both welfare and the probability the task is completed. I then use this framework to show how to optimally set deadlines and time the delivery of reminders to present-biased individuals. (JEL: D01, D03, D91)
Theories about neighbours’ influence on children's education that are based on social capital, cohesion, and disorganisation stress the importance of neighbourhood stability. This is because stability is regarded as necessary for building strong ties and friendships, which in turn affect educational outcomes. However, amongst the vast number of studies on the effect of neighbours on a child's education, none has tested whether neighbourhood stability matters. We fill this gap by estimating the causal effect of residential turnover on student test score gains. Estimation is based on administrative data on four cohorts of secondary school students in England, allowing us to control for pupil-level, neighbourhood-level, and school-by-cohort level unobservables and for changes in neighbourhood composition driven by students’ residential mobility. We show that a high turnover of same-school-grade students reduces value added for teenagers who stay in their neighbourhood, although turnover of other age groups does not matter. These results coupled with auxiliary findings based on survey data suggest that neighbours’ turnover damages education through the disruption of local ties and friendships, highlighting a so-far undiscovered spillover of mobility. (JEL: C21; I20, R23)
In some important multiplayer situations, such as efforts to supply a global public good, players can choose the game they want to play. In this paper we conduct an experimental test of the decision by a group with fixed membership, playing over a finite number of periods, to choose between a “tipping” game, in which every player wants to contribute to the public good provided enough other players contribute, and a prisoners’ dilemma, the classic cooperation game. In the prisoners’ dilemma, the first best outcome is attainable, but cannot be sustained as a Nash equilibrium. In the tipping game, only a second best outcome may be attainable, but there exists a Nash equilibrium that is strictly preferred to the one in the prisoners’ dilemma. We show that many groups persistently choose the prisoners’ dilemma despite its strategic disadvantage, and that the groups that eventually choose the tipping game do better than the ones that stick with the prisoners’ dilemma. (JEL: C72, C92, F53, H41)
This article is based on the presidential address delivered at the EEA Annual Congress 2016. It discusses China's institutional and economic transformation through the lens of the model of growth and convergence developed in Acemoglu, Aghion, and Zilibotti (JEEA 2006), which emphasizes the dichotomy between investment- and innovation-led growth. The economic reforms introduced in the 1980s and 1990s have enabled the Chinese economy to grow at historically unprecedented rates through fostering investment, reallocation, and technology adoption from abroad. The Chinese stimulus package introduced in 2008 appears to have prolonged the longevity of China's investment-driven growth beyond its optimal point. Over the last decade, China has activated the engine of innovation-led growth. The article discusses the virtues and limits of such ongoing transition, based on research in progress using firm-level data on R&D and productivity growth. Finally, it provides an appraisal of the institutional and policy reforms that are necessary for China to continue on its path of rapid convergence. (JEL: H54, O11, O16, O25, O32, O33, O53)
Responsible financial habits are important for economic welfare, yet it remains unclear whether they can be effectively taught. Entertainment media offers a unique and cost-effective channel of reaching millions of viewers with financial education messages that resonate. This paper uses random and symmetric encouragement methodology to study the economic impact of targeted messages on debt management and gambling scripted in a popular television soap opera in South Africa. The results show treated viewers score significantly higher on financial knowledge, are more likely to borrow from formal sources and for productive purposes, and are less likely to enter into retail credit or gamble. Quantitative and qualitative analyses of mechanisms show strong recall of messages conveyed by the lead character, which supports theories of psychological and emotional influences on decision-making. (JEL: C93, D03, D14, O12, O17).
Unemployment varies across space and in time. Can attitudes toward work explain some of these differences? We study job search durations along the Swiss language border, sharply separating Romance language speakers from German speakers. According to surveys and voting results, the language border separates two social groups with different cultural background and attitudes toward work. Despite similar local labor markets and identical institutions, Romance language speakers search for work almost seven weeks (or 22%) longer than their German speaking neighbors. This is a quantitatively large effect, comparable to a large change in unemployment insurance generosity. (JEL: J21, J64, Z10)
This paper investigates the potential of an infant intervention to improve life expectancy, contributing to emerging interest in the early life origins of chronic disease. We track individuals from birth to death, and are able to identify age and cause of death. The intervention was pioneered in Sweden in 1931–1933, and appears to have been pivotal in the emergence of universal infant care programmes in the Scandinavian countries during the creation of the Welfare State. It provided information and support to mothers, with an emphasis on nutrition and sanitation, while monitoring infant care through home visits and clinics. We estimate that the average duration of programme exposure in infancy led to a 1.56% point decline in the risk of infant death (24% of baseline risk) and a 2.56% point decline in the risk of dying by age 75 (7.0% of baseline risk), and these impacts are much larger for children born out of wedlock. Intervention-led declines in the risk of dying after the age of 50 are dominated by reductions in cancer and cardiovascular mortality. We find no evidence of selective utilisation, and the estimates are similar when we exploit within-mother variation in outcomes. (JEL: I15; I18; H41)
We develop and estimate a structural model that incorporates a sizeable public sector in a labor market with search frictions. The wage distribution and the employment rate in the public sector are taken as exogenous policy parameters. Overall wage distribution and employment rate are determined within the model, taking into account the private sector’s endogenous response to public sector employment policies. Job turnover is sector specific and transitions between sectors depend on the worker’s decision to accept alternative employment in the same or different sector by comparing the value of employment in the current and prospective jobs. The model is estimated on British data by a method of moments. We use the model to simulate the impact of various counterfactual public sector wage and employment policies.
Unemployment accounts are mandatory individual savings accounts that can be used only during unemployment or retirement. Unlike unemployment insurance, unemployment accounts solve the moral hazard problem but provide no public insurance to workers. I study a hybrid system that borrows from concepts of both unemployment insurance and unemployment accounts, in which workers are mandated to save when employed and can withdraw from the account when unemployed. Once the account is exhausted, the unemployed worker receives unemployment benefits. This hybrid policy provides insurance to workers more efficiently than an unemployment insurance system because it provides government benefits selectively. As a consequence, young workers can reduce their precautionary savings and better smooth their consumption over the life cycle. Calibrating the model to the US economy, I find that, relative to an optimal unemployment insurance system, the optimal hybrid policy leads to a welfare gain of 2.4%, measured as consumption equivalent variation.
Using data on 143 sovereigns provided by nine agencies based in six countries, we estimate the determinants of sovereign ratings to test whether agencies assign higher ratings to their respective home countries, as well as to economically, geopolitically, and culturally aligned countries. Our regression results show that the respective home country, culturally more similar countries, and countries to which home-country banks have a larger risk exposure receive higher ratings than justified by their economic and political fundamentals. Cultural proximity, as measured by linguistic similarity, is shown to be the main transmission channel that explains the advantage of the home country. Further empirical tests that control for the existence of foreign offices and rated countries’ levels of information transparency suggest that a more optimistic perception of risks rather than informational advantages drives this cultural home bias. (JEL: G24, F34, H63, F65, G15)
This paper uses administrative data to study the relationship between the decentralization of wage bargaining systems and the costs of worker displacement. Specifically, the paper exploits a major reform of the wage bargaining system in the Danish manufacturing sector, a reform that changed the wage-setting process from a highly centralized bargaining system at the national level to a decentralized system with a strong emphasis on firm-level wage bargaining. The results show that under the centralized wage bargaining system, displaced workers’ income losses were small, whereas under the decentralized wage bargaining system, these income losses increased substantially, particularly because displaced workers experienced worse wage growth under the decentralized system. The effect persists after controlling for a variety of macroeconomic indicators, and displaced workers’ income losses did not increase in sectors that were not affected by a comparable change in the wage bargaining system.
In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo’s subgame perfect implementation mechanism induces truth-telling, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good’s value. We find that Moore–Repullo mechanisms fail to implement truth-telling in a substantial number of cases even under perfect information about the valuation of the good. Our data further suggests that a substantial proportion of these lies are made by subjects who hold pessimistic beliefs about the rationality of their trading partners. Although the mechanism should—in theory—provide incentives for truth-telling, many buyers in fact believe that they can increase their expected monetary payoff by lying. The deviations from truth-telling become significantly more frequent and more persistent when agents face small amounts of uncertainty regarding the good’s value. Our results thus suggest that both beliefs about irrational play and small amounts of uncertainty about valuations may constitute important reasons for the absence of Moore–Repullo mechanisms in practice.
We estimate the costs of occupational mobility and quantify the relative importance of differences in task content as a component of total mobility costs. We use a novel approach based on a model of occupational choice that delivers a gravity equation linking worker flows to occupation characteristics and transition costs. Using data from the Current Population Survey and the Dictionary of Occupational Titles we find that task-specific costs account for no more than 15% of the total transition cost across most occupation pairs. Transition costs vary widely across occupations and, while increasing with the dissimilarity in the mix of tasks performed, are mostly accounted for by task-independent occupation-specific factors. The fraction of transition costs that can be attributed to task-related variables appears fairly stable over the 1994–2013 period.
People’s fairness preferences are an important constraint for what constitutes an acceptable economic transaction, yet little is known about how these preferences are formed. In this paper, we provide clean evidence that previous transactions play an important role in shaping perceptions of fairness. Buyers used to high market prices, for example, are more likely to perceive high prices as fair than buyers used to low market prices. Similarly, employees used to high wages are more likely to perceive low wages as unfair. Our data further allows us to decompose this history-dependence into the effects of pure observation versus the experience of payoff-relevant outcomes. We propose two classes of models of path-dependent fairness preferences—either based on endogenous fairness reference points or based on shifts in salience—that can account for our data. Structural estimates of both types of models imply a substantial deviation from existing history-independent models of fairness. Our results have implications for price discrimination, labor markets, and dynamic pricing. (JEL: C9, D0, J0, L1)
We study economies where price stickiness arises due to the simultaneous presence of both menu and information costs. We identify the relative importance of these costs using firm’s survey data and analyze the response of prices and output following a permanent unexpected monetary shock. For a given frequency of price adjustment, we find that the information friction significantly amplifies the real effect of the shock when the shock is small, or when it is not known by firms. Instead, when the shock is large and known to firms the flexibility of prices increases and the real effects gradually vanish. (JEL: E23, E31, E52)
This paper considers the implications of habit formation and financial frictions for the propagation of macroeconomic shocks. In a model that is capable of matching asset pricing moments, a short-lived shock that destroys a small fraction of the economy’s stock of pledgeable collateral generates a persistent recession, a stock market crash, and a flight-to-safety effect. This novel mechanism creates a tight link between the asset pricing implications of macroeconomic models and their ability to propagate and amplify the effects of macroeconomic shocks. (JEL: E32, E44, G10)
The smallpox vaccination method was the paramount medical innovation of the late 18th and early 19th centuries. We exploit the introduction of the smallpox vaccine in Sweden to identify the causal effect of early-life mortality on fertility. Our analysis shows that parishes in counties with higher levels of smallpox mortality prior to the introduction of vaccination experienced greater declines in infant mortality afterward. Exploiting this finding in an instrumental-variable approach reveals that the decline in infant mortality had a negative effect on the number of children born, whereas we find a small insignificant effect on the number of surviving children and natural population growth. (JEL: J10; J13; I15; N33)
As predicted by loss aversion, numerous studies find that penalties elicit greater effort than bonuses, even when the underlying payoffs are identical. However, loss aversion also predicts that workers will demand higher wages to accept penalty contracts. In six experiments I recruited workers online under framed incentive contracts to test the second prediction. None find evidence for the predicted distaste for penalty contracts. In four experiments penalty framing actually increased the job offer acceptance rate relative to bonus framing. I rule out a number of explanations, most notably self-commitment motives do not seem to explain the finding. Two experiments that manipulate salience are successful at eliminating the effect, but do not significantly reverse it. Overall, loss aversion seems to play surprisingly little role in this setting. The results also highlight the importance of behavioral biases for infrequent, binding decisions such as contract take-up. (JEL: D03, J41, D86)
Countries with strong executive constraints have lower growth volatility but similar average growth to those with weak constraints. This paper argues that this may explain the relationship between executive constraints and inflows of foreign investment. It uses a novel dataset of Dutch sector-level investments between 1983 and 2012 to explore this issue. It formulates an economic model of investment and uses data on the mean and variance of productivity growth to explain the relationship between investment inflows and executive constraints. The model can account for the aggregate change in inflows when strong executive constraints are adopted in terms of the reduction in the volatility in productivity growth. The data and model together suggest a natural way of thinking about country-level heterogeneity in investment inflows following the adoption of strong executive constraints.
We study the patterns of credit supply in Italy following the burst of the European sovereign debt crisis in 2011. Comparing lending to the same firm, we find that domestic banks reduced credit supply, increased interest rates on credit granted, and lowered the probability of accepting loan applications more than foreign banks, which were less affected by the sovereign crisis. The credit contraction is the consequence of a largely country-specific effect, not explained by heterogeneity in bank characteristics, but associated to a generalized increase in the cost of funding of Italian banks. Looking across firms, we find that credit restrictions by domestic banks were not fully compensated by foreign banks’ lending, implying that Italian firms experienced an aggregate credit shortage.
We study the desirability of limits on the public debt and of political turnover in an economy where incumbents have an incentive to set public expenditures above the socially optimal level due to rent-seeking motives. Parties alternate in office and cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. In contrast to the received literature, we find that strict limits on government borrowing can exacerbate political economy distortions by making a political compromise unsustainable. This tends to happen when political turnover is limited. Conversely, a tight limit on the public debt fosters a compromise that yields the efficient outcome if political turnover is vigorous. Our analysis thus suggests that to sustain good economic policies, a society needs to restrict either the extent of political turnover or the ability of governments to issue debt, but not both.
We use laboratory experiments to test for one of the foundations of the rational voter paradigm—that voters respond to probabilities of being pivotal. We exploit a setup that entails stark theoretical effects of information concerning the preference distribution (as revealed through polls) on costly participation decisions. We find that voting propensity increases systematically with subjects’ predictions of their preferred alternative’s advantage. Consequently, pre-election polls do not exhibit the detrimental welfare effects that extant theoretical work predicts. They lead to more participation by the expected majority and generate more landslide elections.
In a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents, the properties of the Laffer curve depend on whether debt or transfers are adjusted to balance the government budget constraint. The Laffer curve conditional on public debt is horizontally S-shaped. Two opposing forces explain this result. First, when government wealth increases, the fiscal burden declines, calling for lower tax rates. Second, because the interest rate decreases when government wealth increases, fiscal revenues may also decline, calling for higher taxes. For sufficiently negative government debt, the second force dominates, leading to the odd shape of the Laffer curve conditional on debt.
We summarize the estimates from over 200 recent studies of active labor market programs. We classify the estimates by type of program and participant group, and distinguish between three different post-program time horizons. Using regression models for the estimated program effect (for studies that model the probability of employment) and for the sign and significance of the estimated effect (for all the studies in our sample) we conclude that: (1) average impacts are close to zero in the short run, but become more positive 2–3 years after completion of the program; (2) the time profile of impacts varies by type of program, with larger average gains for programs that emphasize human capital accumulation; (3) there is systematic heterogeneity across participant groups, with larger impacts for females and participants who enter from long term unemployment; (4) active labor market programs are more likely to show positive impacts in a recession.
In this paper we use the same methodology as Aghion et al. (2017a) to compute missing growth estimates from creative destruction in France. We find that from 2004 to 2015, about 0.5 percentage point of real output growth per year is missed by the statistical office, which is about the same as what was found in the United States. We look at how missing growth varies across French sectors and regions, and we look at the underlying establishment and firm dynamics. In particular we show that the similar missing growth estimates between France and the United States hide noticeable differences in plant dynamics between the two countries.
We propose a theory of social interactions based on self-selection and comparative advantage. In our model, students choose peer groups based on their comparative advantage within a social environment. The effect of moving a student into a different environment with higher-achieving peers depends on where in the ability distribution she falls and the shadow prices that clear the social market. We show that the model’s key prediction—an individual’s ordinal rank predicts her behavior and test scores—is borne out in one randomized controlled trial in Kenya as well as administrative data from the United States. To test whether our selection mechanism can explain the effect of rank on outcomes, we conduct an experiment with nearly 600 public school students in Houston. The experimental results suggest that social interactions are mediated by self-selection based on comparative advantage.
Building on the idea that members of religious communities insure each other against some idiosyncratic risks, we argue that religious communities should be more widespread where populations face greater common risk. Our theoretical argument builds on idiosyncratic and common risks aggravating each other. When this is the case, individuals have a greater incentive to mutually insure against idiosyncratic risk when greater common risk makes the worst case scenario of bad realizations of common and idiosyncratic risks more likely. Our empirical analysis exploits common rainfall risk as a source of common county-level agricultural risk in the 19th-century United States. We find that a greater share of the population was organized in religious communities in counties with greater common agricultural risk, holding expected agricultural output constant. The link between rainfall risk and membership in religious communities is stronger among more agricultural counties and counties exposed to greater rainfall risk during the growing season. We also find that among the historically more agricultural counties, more than 1/3 of 19th-century differences in religious membership associated with rainfall risk persist to the turn of the 21st century.
We study the impact of the diffusion of high-speed Internet on different forms of political participation, using municipal data from Italy from 1996 to 2013. Our empirical strategy exploits the fact that the cost of providing ADSL-based broadband services in a given municipality depends on its relative position in the pre-existing voice telecommunications infrastructure. We first show that broadband Internet had a substantial negative effect on turnout in parliamentary elections up until 2008. It was, however, positively associated with other forms of political participation, both online and offline, such as the emergence of local online grassroots protest movements. The negative effect of the Internet on turnout in parliamentary elections essentially reversed after 2008, when local grassroots movements coalesced into the Five-Star Movement electoral list. Our findings support the view that: (i) the effect of the Internet varies across different forms of political participation; (ii) it changes over time, as new political actors emerge that are able to take advantage of the new technology to attract disenchanted or demobilized voters; and (iii) these new forms of mobilization eventually feed back into the mainstream electoral process, converting “exit” back into “voice.”
What are the welfare effects of immigration on low-skilled and high-skilled natives? To address this question, we develop a general equilibrium model featuring two skill types, search frictions, wage bargaining, and a welfare state that redistributes income through unemployment benefits and the provision of public goods. Our quantitative analysis suggests that, in all 20 countries studied, immigration attenuates the effects of search frictions. The resulting gains tend to outweigh the welfare costs of redistribution. Immigration has increased native welfare in almost all countries. In two-thirds of countries, both high- and low-skilled natives have benefited from the presence of immigrants, contrary to what models without search frictions or redistribution predict. Average total welfare gains from migration are 1.25% and 1.00% for high- and low-skilled natives, respectively.
Subjective well-being may not improve in step with increases in material well-being due to hedonic adaptation, a psychological process that attenuates the long-term emotional impact of a favorable or unfavorable change in circumstances. As a result, people’s degree of happiness eventually returns to a stable reference level. We use a multicountry field experiment to examine the impact on subjective measures of well-being of the provision of improved housing to extremely poor populations in order to test whether they exhibit hedonic adaptation when their basic housing needs are met. After 16 months, we find that subjective perceptions of well-being improve substantially for recipients of improved housing but that, after, on average, eight additional months, 60% of that gain has dissipated. Extrapolation achieved through estimation of a structural model of hedonic adaptation suggests that the decay rate of the treatment effect is 20% per month. As a result, after 28 months of treatment exposure, we forecast that the entire treatment effect will have disappeared.
This paper shows that ethnic diversity within the disenfranchised majority is a strong correlate of the incidence of violence during democratization. We study the relationship between ethnicity and conflict in South Africa during the fall of apartheid. Migration flows following the implementation and repeal of apartheid segregation laws induce cross-sectional and time variation in the ethnic composition of districts. Using Census data from the years before and after democratization, we compare the evolution of conflict across districts experiencing differential changes in ethnic composition. We find that ethnic polarization and inequality within the Black majority correlate strongly and positively with the incidence of armed confrontations between Black-dominated groups. Results suggest that during democratic transitions ethnic markers can become a salient technology to separate individuals into well-identified groups and mobilize them for political violence.
The interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features—in isolation—dampen them. During recessions, fears of unemployment stir up precautionary sentiments that induce agents to save more. The additional savings may be used as investments in both a productive asset (equity) and an unproductive nominal liquid asset. The desire to hold the nominal liquid asset puts deflationary pressure on the economy which, provided that nominal wages are sticky, increases labor costs, and reduces firm profits. Lower profits repress the desire to save in equity, which increases (the fear of) unemployment, and so on. This mechanism causes the model to behave differently from its complete markets version and is quantitatively important even if monetary policy counteracts the desire to hold more of the liquid asset by lowering the interest rate. The deflationary pressure yields a mean-reverting reduction in the price level, which implies an increase in expected inflation and a decrease in the expected real interest rate even if the policy rate does not adjust. Thus, our mechanism is different from the typical zero lower bound argument. Due to the deflationary spiral, our model also behaves differently from its incomplete market version without aggregate uncertainty, especially in terms of the impact of unemployment insurance on average employment levels.
How should a central bank act to stabilize the ratio of debt over gross domestic product (GDP)? We show how the persistent nature of household debt shapes the answer to this question. In environments where households repay mortgages gradually, surprise interest hikes only weakly influence household debt, and tend to increase debt-to-GDP in the short run while reducing it in the medium run. Interest rate rules with a positive weight on debt-to-GDP cause indeterminacy. Compared to inflation targeting, debt-to-GDP stabilization calls for a more expansionary policy when debt-to-GDP is high, so as to deflate the debt burden through inflation and output growth.
We study a firm dynamics model where access to credit improves the bargaining position of firms with workers and increases the incentive to hire. To evaluate the importance of the bargaining channel for the hiring decisions of firms, we estimate the model structurally using data from Compustat and Capital IQ. We find that the bargaining channel explains 13% of firm-level employment volatility. We also evaluate the relative contribution of credit and revenue shocks for firm-level employment fluctuations and find that credit shocks account for 22%.
This paper analyzes the determinants behind the spatial distribution of the sex industry in Thailand. We relate the development of the sex industry to an early temporary demand shock, that is, US military presence during the Vietnam War. Comparing the surroundings of Thai military bases used by the US army to districts close to unused Thai bases, we find that there are currently five times more commercial sex workers in districts near former US bases. The development of the sex industry is also explained by a high price elasticity of supply due to female migration from regions affected by an agricultural crisis. Finally, we study a consequence induced by the large numbers of sex workers in few red-light districts: the HIV outbreak in the early 1990s.
In this paper, we study parental beliefs about the returns to parental investments made during different periods of childhood. Using two independent samples, we document that parents perceive the returns to different late investments to be higher than the returns to early investments, and that they perceive investments in different time periods as substitutes rather than complements. We show that parental beliefs about the returns to investments vary substantially across the population and that individual beliefs are predictive of actual investment decisions. Moreover, we document that parental beliefs about the productivity of investments differ significantly across socioeconomic groups. Perceived returns to early parental investments are positively associated with household income, thereby potentially contributing to the intergenerational persistence in earnings.
We study how family culture has affected the adoption and generosity of public pension systems. Our theoretical framework suggests that inheritance rules shape filial obligations to parents, and thus the within-family intergenerational transmission of resources. In countries with egalitarian inheritance rules, inheriting children represent a large share of the population, and support generous pension systems; in countries with nonegalitarian inheritance rules, a majority of noninheriting individuals prefer basic pension systems. An empirical cross-country analyses using historical data on inheritance rules support these predictions. These results are robust to controlling for alternative legal, religious, demographic, economic, and political explanations. Evidence from individual (General Social Survey) data confirms our findings: US citizens whose ancestors came from countries featuring egalitarian inheritance rules rely more on the government as a provider of old age security income.
Using a unique dataset of daily US and UK price listings and the associated number of clicks for precisely defined goods from a major shopping platform, we shed new light on how prices are set in online markets, which have a number of special properties such as low search costs, low costs of monitoring competitors’ prices, and low costs of nominal price adjustment. We document that although online prices change more frequently than offline prices, they nevertheless exhibit relatively long spells of fixed prices. By many metrics, such as large size and low synchronization of price changes, considerable cross-sectional dispersion, and low sensitivity to predictable or unanticipated changes in demand conditions, online prices are as imperfect as offline prices. Our findings suggest a need for more research on the sources of price rigidities and dispersion, as well as on the relative role of menu and search costs in online-pricing frictions.
This paper studies the organization of knowledge in multinational firms. In the theory, knowledge is a costly input for firms that they can acquire at their headquarters or their production plants. Communication costs impede the access of the plants to headquarter knowledge. The model shows that multinational firms systematically acquire more knowledge at both their foreign and domestic plants than non-multinationals if their foreign plants face higher communication costs with headquarters than their domestic plants. This theoretical prediction helps understand why multinational firms pay higher wages to workers than non-multinational firms, and why their sales decrease across space. The empirical analyses show that higher communication costs indeed decrease multinational firms’ foreign sales. Consistent with model-specific comparative statics, the decrease is stronger in sectors with less predictable production processes. Data on corporate transferees allow shedding light on one tool of multinational firms’ organization of knowledge.
We take advantage of a unique natural experiment to provide new, credible evidence on the health consequences of scheduling birth early for non-medical reasons. In May 2010, the Spanish government announced that a €2,500 universal “baby bonus” would stop being paid to babies born after December 31, 2010. Using administrative data from birth certificates and hospital records, we find that about 2,000 families shifted their date of birth from January 2011 to December 2010 (out of 9,000 weekly births). The affected babies, born about one week early on average, weighed about 200 g less at birth, and suffered a sizeable increase in hospitalization rates in the first two months of life, mostly for respiratory disease.
We study how financial frictions affect firm-level heterogeneity and trade. We build a model in which productivity differences across monopolistically competitive firms are endogenous and depend on investment decisions at the entry stage. By increasing entry costs, financial frictions lower the exit cutoff and hence the value of investing in bigger projects with more dispersed outcomes. As a result, financial frictions make firms smaller and more homogeneous, and hinder the volume of exports. Export opportunities, instead, shift expected profits to the tail and increase the value of technological heterogeneity. We test these predictions using comparable measures of sales dispersion within 365 manufacturing industries in 119 countries, built from highly disaggregated US import data. Consistent with the model, financial development increases sales dispersion, especially in more financially vulnerable industries; sales dispersion is also increasing in measures of comparative advantage. These results help explaining the effect of financial development and factor endowments on export sales.
Savings accounts are owned by most households, but little is known about the performance of households’ investments. We create a unique dataset by matching information on individual savings accounts from the DNB Household Survey with market data on account-specific interest rates and characteristics. We document heterogeneity in returns across households, which can be partly explained by financial sophistication. A one-standard deviation increase in financial literacy is associated with a 12% increase compared to the median interest rate. We isolate the usage of modern technology (online accounts) as one channel through which financial literacy has a positive association with returns.
We examine whether racial discrimination exists in access to public services in the United States. We carry out an email correspondence study in which we pose simple queries to more than 19,000 local public service providers. We find that emails from putatively black senders are almost 4 percentage points less likely to receive an answer compared to emails signed with a white-sounding name. Moreover, responses to queries coming from black names are less likely to have a cordial tone. Further tests suggest that the differential in the likelihood of answering is due to animus toward blacks rather than inferring socioeconomic status from race. Finally, we show that attitudes toward the government among blacks are more negative in states with higher discrimination.
In this paper we estimate the effects of college education on cognitive abilities, health, and wages, exploiting exogenous variation in college availability. By means of semiparametric local instrumental variables techniques we estimate marginal treatment effects in an environment of essential heterogeneity. The results suggest positive average effects on cognitive abilities, wages, and physical health. Yet, there is heterogeneity in the effects, which points toward selection into gains. Although the majority of individuals benefits from more education, the average causal effect for individuals with the lowest unobserved desire to study is zero for all outcomes. Mental health effects, however, are absent for the entire population.
The correct prediction of how alternative states of the world affect our lives is a cornerstone of economics. We study how accurate people are in predicting their future well-being after facing major life events. Based on individual panel data, we compare people’s life satisfaction forecasts reported in the first interview after a major life event with their actual evaluations five years later on. This is done after the individuals experience widowhood, unemployment, disability, marriage, separation, or divorce. We find systematic prediction errors that seem at least partly driven by unforeseen adaptation after the first four of these events.
This paper provides evidence on the price and perception of rare natural disasters. We exploit a unique, spatially extremely detailed, dataset on predicted flood water levels in the Netherlands. This dataset, in combination with information on the universe of home sales over the period 1999–2011, allows us to identify people's willingness to pay to avoid flood risk using a border discontinuity design. We find that house prices are on average 1% lower in places that are at risk of flooding. This flood risk discount is more pronounced in neighborhoods with higher predicted flood water levels. Our estimates imply that average perceived flood risk in the Netherlands is much higher than the official protection levels at which the government claims to uphold the country's flood defenses. People expect a flood to happen at least once every 100 years. Depending on the predicted flood water level in their neighborhood, people in flood prone areas are willing to pay 9%–36% more for their flood protection than what the Dutch government currently spends on it.
Can demographic shocks affect the long-run evolution of female labor force participation and gender norms? This paper traces current variation in women’s participation in the labor force within Sub-Saharan Africa to the emergence of a female-biased sex ratio during the centuries of the transatlantic slave trade. This historical shock affected the division of labor along gender lines in the remaining African population, as women substituted for the missing men by taking up areas of work that were traditionally male tasks. By exploiting variation in the degree to which different ethnic groups were affected by the transatlantic slave trade, I show that women whose ancestors were more exposed to this shock are today more likely to be in the labor force, have lower levels of fertility, and are more likely to participate in household decisions. The marriage market and the cultural transmission of internal norms across generations represent important mechanisms explaining this long-run persistence.
We investigate viewer responses to ideological changes in television programming induced by cadenas, unannounced government propaganda in Venezuela. The drop-off in ratings during cadenas is concentrated among viewers of news programming on opposition channels, relative to progovernment channels. Also, the drop-off in ratings for moderate channels takes an intermediate value. The drop-off is stronger for viewers with access to cable channels, which do not air cadenas and experience an increase in viewership during cadenas. Structural estimation of our model allows us to quantify the degree to which opposition viewers limit their exposure to and ultimately the influence of propaganda via tuning out.
Many countries provide financial incentives to spur innovation, ranging from tax incentives to research and development grants. In this paper, we study how such financial incentives affect individuals’ decisions to pursue careers in innovation. We first present empirical evidence on inventors’ career trajectories and income distributions using deidentified data on 1.2 million inventors from patent records linked to tax records in the United States. We find that the private returns to innovation are extremely skewed—with the top 1% of inventors collecting more than 22% of total inventors’ income—and are highly correlated with their social impact, as measured by citations. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. We then build a stylized model of inventor career choice that matches these facts as well as recent evidence that childhood exposure to innovation plays a critical role in determining whether individuals become inventors. The model predicts that financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they only affect individuals who are exposed to innovation and have essentially no impact on the decisions of star inventors, who matter most for aggregate innovation. Importantly, these results hold regardless of whether the private returns to innovation are fully known at the time of career choice or are fully stochastic. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline. Although we do not present direct evidence supporting these model-based predictions, our results call for a more careful assessment of the impacts of financial incentives and a greater focus on alternative policies to increase the supply of inventors.
Large and persistent earnings losses following displacement have adverse consequences for the individual worker and the macroeconomy. Leading models cannot explain their size and disagree on their sources. Two mean-reverting forces make earnings losses transitory in these models: search as an upward force allows workers to climb back up the job ladder, and separations as a downward force make nondisplaced workers fall down the job ladder. We show that job stability at the top rather than search frictions at the bottom is the main driver of persistent earnings losses. We provide new empirical evidence on heterogeneity in job stability and develop a life-cycle search model to explain the facts. Our model offers a quantitative reconciliation of key stylized facts about the U.S. labor market: large worker flows, a large share of stable jobs, and persistent earnings shocks. We explain the size of earnings losses by dampening the downward force. Our new explanation highlights the tight link between labor market mobility and earnings dynamics. Regarding the sources, we find that over 85% stem from the loss of a particularly good job at the top of the job ladder. We apply the model to study the effectiveness of two labor market policies, retraining and placement support, from the Dislocated Worker Program. We find that both are ineffective in reducing earnings losses in line with the program evaluation literature.
We study how competition among charities affects individuals’ giving behavior. We characterize situations where charities benefitting substitute or complementary causes incentivize donations by offering subsidies in the form of rebates. Our theory predicts that an increase in the rebate rate offered by a given charity relative to a substitute charity will shift donations away from the substitute charity, but this “stealing” effect is not expected when complementary charities are considered. Our model further characterizes the conditions under which total donations increase with rebates. We test the model in an experimental setting, and demonstrate that the experimental results support our theoretical predictions. We derive the demand for giving as rebates vary for both substitute and complementary causes. The social net benefit of rebates is calculated by comparing campaign costs with new donations generated.
We develop a new methodology for quantifying the tasks undertaken within occupations using over 3,000 verbs from more than 12,000 occupational descriptions in the Dictionary of Occupational Titles (DOTs). Using micro data from the United States from 1880 to 2000, we find an increase in the employment share of interactive occupations within sectors over time that is larger in metro areas than nonmetro areas. We interpret these findings using a model in which reductions in transport and communication costs induce urban areas to specialize according to their comparative advantage in interactive tasks. We present suggestive evidence relating increases in employment in interactive occupations to improvements in transport and communication technologies. Our findings highlight a change in the nature of agglomeration over time toward an increased emphasis on human interaction.
We estimate the upper-level elasticity of substitution between goods and services of a nested aggregate CES preference specification. We show how this elasticity can be derived from the long-run response of the relative price of a good to a change in its VAT rate. We estimate this elasticity using new data on changes in VAT rates across 74 goods and services for 25 European Union countries from 1996 through 2015. Depending on the level of aggregation, we find a VAT pass-through rate between 0.4 and 0.7. This implies an upper-level elasticity of 3, at the lowest level of aggregation with 74 categories, and 1 (Cobb–Douglas preferences) at a high level of aggregation that distinguishes 10 categories of goods and services.
This paper uses data from the Gothenburg District Court in Sweden and a research design that exploits the random assignment of politically appointed jurors (termed nämndemän) to make three contributions to the literature on jury decision-making: (i) an assessment of whether systematic biases exist in the Swedish nämndemän system, (ii) causal evidence on the impact of juror political party on verdicts, and (iii) an empirical examination of the role of peer effects in jury decision-making. The results reveal a number of systematic biases: convictions for young defendants and those with distinctly Arabic names increase substantially when they are randomly assigned jurors from the far-right (nationalist) Swedish Democrat party, whereas convictions in cases with a female victim increase markedly when they are assigned jurors from the far-left (feminist) Vänster party. An analysis of peer effects implies that jurors from the far-left and far-right parties influence the votes of nämndemän from centrist parties in a way that is consistent with their respective party platforms. This analysis also suggests that at least some of these peer effects result in genuine changes of opinions (affecting trial outcomes), rather than vote changes motivated solely to reach unanimous decisions.
We experimentally investigate behavioral drivers of bribery, focusing on the role of self-interest, reciprocity, and moral costs associated with distorting judgment. In our laboratory experiment, two participants compete for a prize; a referee picks the winner. Participants can bribe the referee. When the referee can keep only the winner's bribe, bribes distort her judgment. When the referee keeps the bribes regardless of the winner, bribes no longer influence her decision. An experiment in an Indian market confirms these results. These findings imply that our participants are influenced by bribes out of self-interest, and not because of a desire to reciprocate. Further evidence shows that self-interest guides decisions to a greater extent when referees have scope for avoiding the moral costs associated with distorting judgment. As a result, limiting referees’ ability to form self-serving evaluations can significantly reduce the effectiveness of bribes.
The medical literature documents adverse health effects of acute exposure to diesel exhaust, yet quasi-experimental evidence of a policy intervention sustained over months at the scale of a metropolis is lacking. Exploiting the inauguration of a beltway that removed 20,000 cargo trucks passing daily through inner-city roads in São Paulo, we examine the spatially differentiated impacts on the megacity's traffic, air quality and public health. We combine rich panel data on road congestion, ambient NOx concentrations (as a signature of diesel exhaust), and hospital admissions and deaths. The policy reduced congestion, pollution, and hospitalizations, with effects attenuating at increasing distances from a key inner-city corridor used by the transit trucks prior to the beltway opening. The change in congestion was transient, as gasoline–ethanol passenger cars responded by filling the space the diesel trucks left behind. Effects on air and health persisted thanks to the compositional change in road users. We use 2SLS regression, taking policy-induced variation in NOx to instrument for measured pollution, to quantify about one annual hospitalization for every 10–20 trucks—and one annual death for every 100–200 trucks—using inner-city roads. Policymakers in megacities where humans and diesel vehicles reside and transit in close proximity may learn from São Paulo's experience.
We uncover heterogeneity in social preferences with a structural model that accounts for outcome-based and reciprocity-based social preferences and assigns individuals to endogenously determined preferences types. We find that neither at the aggregate level nor when we allow for several distinct preference types do purely selfish types emerge, suggesting that other-regarding preferences are the rule and not the exception. There are three temporally stable other-regarding types. When ahead, all types value others' payoffs more than when behind. The first, strongly altruistic type puts a large weight on others' payoffs even when behind and displays moderate levels of reciprocity. The second, moderately altruistic type also puts positive weight on others' payoff, yet at a lower level, and displays no positive reciprocity. The third, behindness averse type puts a large negative weight on others' payoffs when behind and is selfish otherwise. In addition, we show that individual-specific estimates of preferences offer only very modest improvements in out-of-sample predictions compared to our three-type model. Thus, a parsimonious model with three types captures the bulk of the information about subjects' social preferences.
We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011–2012 to assess whether a large provision of central bank liquidity to banks during a financial crisis has a positive impact on banks’ credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for confounding factors at the level of banks. We find that the LTROs enhanced loan supply: according to our baseline estimate, banks borrowing 1 billion euros from the facility increased their loan supply by 186 million euros over one year. We also find that the transmission mostly took place with the first operation of December 2011, in which banks that were more capital constrained bid more. Moreover, we show that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhanced this transmission. Lastly, the operations benefited larger borrowers more and did not lead banks to increase their lending to riskier firms.
This paper studies the origins of what has become one of the most radical and encompassing programmes of school reform seen in the recent past in advanced countries—the introduction of academy schools to English education. Academies are independent state funded schools that are allowed to run in an autonomous manner outside of local authority control. Almost all academies are conversions from already existent state schools and so are school takeovers that enable more autonomy in operation than was permitted in their predecessor state. Studying the first round of conversions that took place in the 2000s, where poorly performing schools were converted to academies, a focus is placed on legacy enrolled pupils who were already attending the school prior to conversion. The impact on end of secondary school pupil performance is shown to be positive and significant. Performance improvements are stronger for pupils in urban academies and for those converting from schools that gained relatively more autonomy as a result of conversion.
We evaluate the impact on competitiveness of a randomized educational intervention that aims to foster grit, a skill that is highly predictive of achievement. The intervention is implemented in elementary schools, and we measure its impact using a dynamic competition task with interim performance feedback. We find that when children are exposed to a worldview that emphasizes the role of effort in achievement and encourages perseverance, the gender gap in the willingness to compete disappears. We show that the elimination of this gap implies significant efficiency gains. We also provide suggestive evidence on a plausible causal mechanism that runs through the positive impact of enhanced grit on girls' optimism about their future performance.
Does a person's historical lineage influence his or her current economic status? Motivated by a large literature in the social sciences stressing the effect of an early transition to agriculture on current economic performance at the country level, we examine the relative contemporary status of individuals as a function of how much their ancestors relied on agriculture during the preindustrial era. We focus on Africa, where—by combining anthropological records of groups with individual-level survey data—we can explore the effect of the historical lifeways of one's forefathers. Within enumeration areas (typically a single village or group of villages in the countryside and a city block in urban areas) as well as occupational groups, we find that individuals from ethnicities that derived a larger share of subsistence from agriculture in the precolonial era are today more educated and wealthy. A tentative exploration of channels suggests that differences in attitudes and beliefs as well as differential treatment by others, including differential political power, may contribute to these divergent outcomes.
The structural transformation from manufacturing to services comes with a process of services deepening: the services share of intermediate inputs rises over time. Moreover, inflation reacts less to monetary policy shocks in countries that are more intensive in services intermediates. We rationalize these facts using a two-sector New Keynesian model where trends in sectoral productivities generate endogenous variations in the Input–Output matrix. Services deepening reduces the contemporaneous response of inflation to monetary policy shocks through a marginal cost channel. Since services prices are stickier than manufacturing prices, the rise of services intermediates raises the sluggishness of sectoral marginal costs and inflation rates.
Aggregate production functions are reduced-form relationships that emerge endogenously from input–output interactions between heterogeneous producers and factors in general equilibrium. We provide a general methodology for analyzing such aggregate production functions by deriving their first- and second-order properties. Our aggregation formulas provide nonparametric characterizations of the macroelasticities of substitution between factors and of the macrobias of technical change in terms of microsufficient statistics. They allow us to generalize existing aggregation theorems and to derive new ones. We relate our results to the famous Cambridge–Cambridge controversy.
Indemnifying smallholder farmers against crop loss is thought to play an important role in encouraging the adoption of new technologies and facilitating productivity growth, but to be infeasible due to information problems. Consequently there is interest in developing alternative, partial, insurance products. Examples include rainfall insurance and the limited liability inherent in credit contracts. I argue that although these products may reduce information asymmetry, ambiguity averse farmers struggle to assess whether the contracts reduce risk. This problem is most pronounced when the production technology is ambiguous, as is likely the case for new technologies. I formalize this argument and test the theory using data from two RCTs, conducted in Malawi and Kenya. Comparative statics from the theory are consistent with both sets of data, and I argue that income losses from ambiguity aversion may be substantial.
We introduce a model in which agents observe signals about the state of the world, and some signals are open to interpretation. Our decision makers first interpret each signal based on their current belief and then form a posterior on the sequence of interpreted signals. This “double updating” leads to confirmation bias and can lead agents who observe the same information to polarize. We explore the model’s predictions in an online experiment in which individuals interpret research summaries about climate change and the death penalty. Consistent with the model, there is a significant relationship between an individual’s prior and their interpretation of the summaries; and over half of the subjects exhibit polarizing behavior.
We study the effect of the Israeli–Palestinian conflict on various education outcomes for Palestinian high school students in the West Bank during the Second Intifada (2000–2006). Exploiting within-school variation in the number of conflict-related Palestinian fatalities during the academic year, we show that the conflict reduces the probability of passing the final exam, the total test score, and the probability of being admitted to university. The effect of conflict varies with the type and the timing of the violent events the student is exposed to and it is not significant for students in the upper tail of the test score distribution. We discuss various possible transmission mechanisms explaining our main result. Evidence suggests a role for both the conflict-induced deterioration of school infrastructures and the worsening in the student's psychological well-being due to direct exposure to violent events.
In this paper we address the question of how individuals form expectations and invent, reinforce, and update their forecasting rules in a complex world. We do so by fitting a novel, parsimonious, and empirically validated genetic algorithm learning model with explicit heterogeneity in expectations to a set of laboratory experiments. Agents use simple linear first order price forecasting rules, adapting them to the complex evolving market environment with a Genetic Algorithm optimization procedure. The novelties are: (1) a parsimonious experimental foundation of individual forecasting behavior; (2) explanation of individual and aggregate behavior in three different experimental settings, (3) improved one- and 50-period ahead forecasting of experiments, and (4) characterization of the mean, median, and empirical distribution of forecasting heuristics. The median of the distribution of GA forecasting heuristics can be used in designing or validating simple Heuristic Switching Models.
That unmarried individuals die at a faster rate than married individuals at all ages is well documented. Unmarried women in developing countries face particularly severe vulnerabilities, so that excess mortality faced by the unmarried is more extreme for women in these regions compared to developed countries. We provide systematic estimates of the excess female mortality faced by older unmarried women in developing regions. We place these estimates in the context of the missing women phenomenon. There are approximately 1.5 million missing women between the ages of 30 and 60 years old each year. We find that 35% of these missing women of adult age can be attributed to not being married. These estimates vary by region. India has the largest proportion of missing adult women who are without a husband, followed by the countries in East Africa. By contrast, China has almost no missing unmarried women. We show that 70% of missing unmarried women are of reproductive age and that it is the relatively high mortality rates of these young unmarried women (compared to their married counterparts) that drive this phenomenon.
China’s hukou system imposes two main barriers to population movements. Agricultural workers get land to cultivate but are unable to trade it in a frictionless market. Social transfers (education, health, etc.) are conditional on holding a local hukou. We show that the land policy leads to over-employment in agriculture and it is the more important barrier to industrialization. Effective land tenure guarantees and a competitive rental market would correct this inefficiency. The local restrictions on social transfers also act as disincentives to migration with bigger impact on urban migrations than to job moves to rural enterprises.
We establish a causal role for banking access in the spread of the Industrial Revolution over the period 1817–1881 by exploiting unique employment data from 10,528 parishes across England and Wales and a novel instrument. We estimate that a one standard deviation increase in 1817 finance employment increases annualized industrial employment growth by 0.93 percentage points. We establish the role of structural transformation as an underlying growth mechanism and show that banking access: (i) increases the industrial employment share; (ii) stimulates urbanization; and (iii) fosters inter-industry transition to high TFP, intermediate and capital-intensive sub-sectors.
We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomised controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts, this effect is muted in villages where joint-liability loans are available.
Does tax evasion run in the family? To answer this question, we study the case of the commuter tax allowance in Austria. This allowance is designed as a step function of the distance between the residence and the workplace, creating sharp discontinuities at each bracket threshold. It turns out that the distance to the next higher bracket is a strong determinant of compliance. The match of different administrative data sources allows us to observe actual compliance behavior with little error at the individual level across two generations. To identify the intergenerational causal effect in tax evasion behavior, we use the paternal distance to next higher bracket as an instrumental variable for paternal compliance. We find that paternal noncompliance increases children’s noncompliance by about 23%.
A significant amount of resources is spent every year on the improvement of transportation infrastructure in developing countries. In this paper, we investigate the effects of one such large project, the Golden Quadrilateral in India. We do so using a model of internal trade with variable markups. In contrast to the previous literature, our model incorporates several channels through which transportation infrastructure affects welfare. In particular, the model accounts for gains stemming from improvements in the allocative efficiency of the economy. We calibrate the model to the Indian manufacturing sector and find real income gains of 2.7%. We also find that allocative efficiency accounts for 7.4% of these gains. The importance of allocative efficiency varies greatly across states, and can account for up to 18% of the overall gains in some states. The remaining welfare gains are accounted for by changes in labor income, productive efficiency, and average markups that affect states’ terms of trade.
We consider how the outcome of bargaining varies with changes in the trade-off between equality, efficiency, and total-earnings maximization. We observe that subjects avoid an equal-earning outcome if it is Pareto inefficient; a large proportion of bargaining pairs avoids an equal and Pareto efficient outcome in favor of one giving unequal and total-earnings maximizing payoffs, and this proportion increases when unequal outcomes imply larger earnings to one of the players, even though this also implies higher inequality; finally, we document a compromise effect that violates the independence of irrelevant alternatives condition.
A large behavioral economics literature is concerned with cognitive biases in individual and group decisions, including sequential decisions. These studies often find a negative path-dependency consistent with mechanisms such as the gambler's fallacy or contrast effects. We provide the first test for such biases in group decision making using observational data. Specifically, we study more than 27,000 verdicts adjudicated sequentially by over 900 juries for high-stake criminal cases at London's Old Bailey Criminal Court in the 18th and 19th centuries. Using jury fixed effects to account for heterogeneity in their baseline propensity to convict, we find that a previous guilty verdict significantly increases the chance of a subsequent guilty verdict by 6.7%–14.1%. This positive autocorrelation is robust to alternative estimation strategies, independent of jury experience and driven by the most recent lag and pairs of similar cases. Such positive path dependency may be explained by sequential assimilation effects, which may reflect a jury's desire to be internally consistent, and short-term “emotional” impacts of the characteristics and/or outcome of one case on another. As in modern-day jury studies, our results highlight that factors independent of the facts and evidence of the current case might affect jury behavior.
Although developing countries are characterized by high average fertility rates, they are as concerned by childlessness as developed countries. Beyond natural sterility, there are two main types of childlessness: one driven by poverty and another by the high opportunity cost of child-rearing. We measure the importance of the components of childlessness with a structural model of fertility and marriage. Deep parameters are identified using census data from 36 developing countries. As average education increases, poverty-driven childlessness first decreases to a minimum, and then the opportunity-driven part of childlessness increases. We show that neglecting the endogenous response of marriage and childlessness may lead to a poor understanding of the impact that social progress, such as universal primary education, may have on completed fertility. The same holds for family planning, closing the gender pay gap, and the eradication of child mortality.
We propose a novel identification scheme for a nontechnology business cycle shock, which we label “sentiment”. This is a shock orthogonal to identified surprise and news TFP shocks that maximize the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks—surprise TFP, news of future TFP, and sentiment—from the United States to Canada. The US sentiment shock produces a business cycle in the United States, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of the US short-run business cycle fluctuations. The sentiment shock also has a significant impact on Canadian macroaggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the United States and Canada, accounting for over 40% of the forecast error variance of Canadian GDP and over one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5–10 years, and surprise TFP innovations do not generate synchronization. We provide a simple theoretical framework to illustrate how the US sentiment shocks can transmit to Canada.
Using administrative data on firms and workers in Germany, we quantify the spillover effects of mass layoffs. Our empirical strategy combines matching with an event study approach to trace employment and wages in regions hit by a mass layoff relative to suitable control regions. We find sizable and persistent negative spillover effects on the regional economy: regions, and especially firms producing in the same broad industry as the layoff plant, lose many more jobs than in the initial layoff. In contrast, negative employment effects on workers employed in the region at the time of the mass layoff are considerably smaller. Strikingly, workers younger than 50 suffer no employment losses, as geographic mobility fully shields them from the decline in local employment opportunities.
This paper evaluates how sharing a kindergarten classroom with low-achieving repeaters affects the long-term educational performance of regular first-time kindergarten students. Exploiting random assignment of teachers and students to classes in Project STAR, I document three sets of causal impacts: students who are exposed to repeaters (1) score lower on a standardized math test at the end of kindergarten, an effect that fades out in later grades; (2) show persistent improvements in noncognitive skills such as effort and discipline; and (3) are more likely to graduate from high school and to take a college entrance exam around the age of 18. I argue that the positive spillovers on long-term educational attainment are driven by the differential accumulation of noncognitive skills by repeater-exposed students during childhood. Results are consistent with the hypothesis that the improvements in these skills are driven by behavioral adjustments of teachers to the presence of repeaters in the classroom.
Unlike performance incentives for private sector managers, little is known about performance incentives for managers in public sector bureaucracies. Through a randomized trial in rural China, we study performance incentives rewarding school administrators for reducing student anemia—as well as complementarity between incentives and orthogonally assigned discretionary resources. Large (but not small) incentives and unrestricted grants both reduced anemia, but incentives were more cost-effective. Although unrestricted grants and small incentives do not interact, grants fully crowd-out the effect of larger incentives. Our findings suggest that performance incentives can be effective in bureaucratic environments, but they are not complementary to discretionary resources.
On January 15, 2015, the Swiss National Bank discontinued its minimum exchange rate policy of 1 euro against 1.2 Swiss francs. This policy change resulted in a sharp, unanticipated, and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the pass-through of this unusually clean exchange rate shock into import unit values at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euros, the pass-through is immediate and complete. Second, for goods invoiced in Swiss francs, the pass-through is partial and exceptionally fast: beginning on the second working day after the exchange rate shock, the medium-run pass-through is reached after 12 working days.
We study the relationship between the composition of the political class and the size of government. First, we use a citizen-candidate model to show that the extension of suffrage is inconsequential for government spending when stricter eligibility requirements are in place. The removal of eligibility requirements, on the other hand, leads to the election of less wealthy politicians and the enactment of more redistributive policies. We test these predictions empirically using data from the 13 U.S. original states. We find no robust correlation between the extension of the franchise and government spending or the composition of the political class. However, the subsequent elimination of eligibility restrictions is associated with an increase in government spending and the election of state senators with a less elite background.
We study belief formation in social networks using a laboratory experiment. Participants in our experiment observe an imperfect private signal on the state of the world and then simultaneously and repeatedly guess the state, observing the guesses of their network neighbors in each period. Across treatments we vary the network structure and the amount of information participants have about the network. Our first result shows that information about the network structure matters and in particular affects the share of correct guesses in the network. This is inconsistent with the widely used naive (deGroot) model. The naive model is, however, consistent with a larger share of individual decisions than the competing Bayesian model, whereas both models correctly predict only about 25%–30% of consensus beliefs. We then estimate a larger class of models and find that participants do indeed take network structure into account when updating beliefs. In particular they discount information from neighbors if it is correlated, but in a more rudimentary way than a Bayesian learner would.
We study the macroeconomic effects of unconventional monetary policy in the euro area using structural vector autoregressions, identified with external instruments. The instruments are based on the common unexpected variation in euro area sovereign yields for different maturities on policy announcement days. We first show that expansionary monetary surprises are effective at lowering public and private interest rates and increasing economic activity, consumer prices, and inflation expectations. We then document that the shocks lead to a rise in primary public expenditures and a widening of internal trade balances.
We study whether a woman’s labor supply as a young adult is shaped by the work behavior of her adolescent peers’ mothers. Using detailed information on a sample of U.S. teenagers who are followed over time, we find that labor force participation of high school peers’ mothers affects adult women’s labor force participation, above and beyond the effect of their own mothers. The analysis suggests that women who were exposed to a larger number of working mothers during adolescence are less likely to feel that work interferes with family responsibilities. This perception, in turn, is important for whether they work when they have children.
This paper evaluates the international spillover effects of large-scale asset purchases (LSAPs) using an estimated two-country dynamic stochastic general-equilibrium model with nominal and real rigidities and portfolio balance effects. Portfolio balance effects arise from imperfect substitutability between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs in the United States lower long-term yields and stimulate economic activity not only in the United States, but also in the rest of the world (ROW) economy. This occurs despite the currency appreciation in the ROW and the resulting deterioration in their trade balance. The key for this result is the decline in the ROW term premia through the portfolio balance channel, as the relative demand for ROW long-term bonds increases following an LSAP in the United States. Our model indicates that US asset purchases that generate the same output effect as US conventional monetary policy has larger international spillovers due to stronger portfolio balance effects. We also show that international openness in financial markets reduces the stimulatory effects of LSAPs in the originating country, while increasing their international spillover effects.
Credit booms are not rare, some end in a crisis (bad booms) whereas others do not (good booms). We document that credit booms start with an increase in productivity growth, which subsequently falls faster during bad booms. We develop a model in which a crisis happens when a credit boom transits toward an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises are more likely during booms that display larger productivity declines. We test the main predictions of the model and identify the default probability as the main component of measured productivity that lies behind crises.
We investigate a mechanism that facilitates the provision of public goods in a network formation game. We show how competition for status encourages a core player to realize efficiency gains for the entire group. In a laboratory experiment we systematically examine the effects of group size and exogenously monetarized status rents. The experimental results provide very clear support for the concept of challenge-freeness, a refinement that predicts when a repeated game equilibrium will be played, and if so which one. Two control treatments allow us to reject the possibility that these observations are driven by social preferences, independently of the competition for status.
During recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (MEU) model and the smooth ambiguity model, respectively; and the issue is whether or not a desire to hedge independently resolving ambiguities contributes to an ambiguity-averse agent's preference for a randomized act. Building on this insight, we implement an experiment whose design provides a qualitative test that discriminates between the two classes of models. Among subjects identified as ambiguity sensitive, we find greater support for the class exemplified by the smooth ambiguity model; the relative support is stronger among subjects identified as ambiguity averse. This finding has implications for applications that rely on specific models of ambiguity preference.
We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population displacement, and shopping sprees around major snowstorms and hurricanes. We find that these large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and despite the fact that stores adjust prices frequently. We also provide evidence that retailers maintain frequent promotional sales even as their demand varies and that they seek to match movements in their local competitors’ recourse to promotional sales.
We examine the effect of technical change on human capital formation during England's Industrial Revolution. Using the number of steam engines installed by 1800 as a synthetic indicator of technological change and occupational statistics to measure working skills (using HISCLASS), we establish a positive correlation between the use of steam engines and the share of skilled workers at the county level. We use exogenous variation in carboniferous rock strata (containing coal to fuel the engines) to show that the effect was causal. While technological change stimulated the formation of working skills, it had an overall negative effect on the formation of primary education, captured by literacy and school enrolment rates. It also led to higher gender inequality in literacy.
Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative and survey data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but although the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. The richer earnings process implies lower welfare costs of earnings risk.
This paper studies the effect of India's rural public works program on rural-to-urban migration and urban labor markets. We find that seasonal migration from rural districts that implemented the program decreased relative to those that were selected to, but did not implement it. We use a gravity model and find that real wages rose faster in cities with higher predicted migration from program districts. Since most seasonal migrants work outside of their district, urban wage increases were not limited to program districts, and may have attracted migrants from nonprogram districts. Difference-in-differences may hence be biased. Structural estimates indeed suggest that migration decreased by 22% in program districts, but also increased by 5% in nonprogram districts. As a result, urban wages increased by only 0.5%, against 4.1% if the program had been implemented in all selected districts.
In many historical episodes, criminal activity displays booms and busts. One clear example is the case of metal crime in the United Kingdom (and elsewhere) where, in the face of big increases in value driven by world commodity prices, thefts rose very sharply in the 2000s, after which they fell. This paper studies the respective roles of prices, policing and policy in shaping this crime boom and bust. Separate study of each reveals metal crime being driven up via sizeable and significant metal crime–price elasticities and driven down by changes in policing and policy. A regression-based decomposition analysis confirms that all three of the hypothesised factors considered in the paper - prices, policing and policy - were empirically important in the different stages of metal theft's boom and bust.
We estimate the importance of inherited wealth in Sweden over the past 200 years. Inheritance is measured both as the annual inheritance flow divided by national income and as the share of inherited wealth in all private wealth. In the 19th century, Sweden differs from France and the United Kingdom in having much lower inheritance–income flows, but at the same time exhibiting equally large shares of inherited wealth in total wealth. This pattern is in line with Sweden at the time being a poor country with low domestic capital accumulation, but at the same time exhibiting high economic growth rates. In the 20th century the importance of inheritance in relation to national income fell, but since the 1990s it has increased rapidly, today reaching almost the same levels as a century ago. The share of inherited wealth in total wealth has also fallen over time, but remains relatively low due to a rapid accumulation of new wealth. We study potential determinants and explanations, pointing especially to Swedish welfare-state institutions, and in particular to the development of an extensive public occupational pension system contributing to keeping private inheritance low.
Models of risk-sharing predict that relative consumption growth rates are positively related to changes in real exchange rates. We investigate this hypothesis using a new multicountry and multiregional data set. Within countries, we find evidence for risk-sharing: episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation. Across countries, however, the association is reversed: relative consumption and real exchange rates are negatively correlated. We define this reversal as a “border” effect. We find the border effect and show that it accounts for over half of the deviations from full risk-sharing. Since cross–border real exchange rates involve different currencies, it is natural to ask how much of the border effect is accounted for by movements in exchange rates. Our measures indicate that a large part of the border effect comes from nominal exchange rate fluctuations. We develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross–country risk-sharing.
We provide evidence that institutions have a strong influence over where oil and gas exploration takes place. We utilise a global data set on the location of exploration wells and national borders. This allows for a regression discontinuity design with the identifying assumption that the position of borders was determined independently of geology. In order to break potential simultaneity between borders, institutions, and activities in the oil sector, we focus on drilling that occurred after the formation of borders and institutions. Our sample covers 88 countries over the 1966–2010 period. At borders, we estimate more than twice as much drilling on the side with better institutional quality. Subsample analyses reveal effects of institutions on exploration drilling in both developing and high income countries, as well as across three types of operating companies. We find that the supermajor international oil companies are particularly sensitive to institutional quality in developing countries. Our findings are consistent with the view that institutions shape both exploration companies’ incentives to invest in drilling and host countries’ supply of drilling opportunities.
Recent advances have led to the discovery of specific genetic variants that predict educational attainment. We study how these variants, summarized as a linear index—known as a polygenic score—are associated with human capital accumulation and labor market outcomes in the Health and Retirement Study (HRS). We present two main sets of results. First, we find evidence that the genetic factors measured by this score interact strongly with childhood socioeconomic status in determining educational outcomes. In particular, although the polygenic score predicts higher rates of college graduation on average, this relationship is substantially stronger for individuals who grew up in households with higher socioeconomic status relative to those who grew up in poorer households. Second, the polygenic score predicts labor earnings even after adjusting for completed education, with larger returns in more recent decades. These patterns suggest that the genetic traits that promote education might allow workers to better accommodate ongoing skill biased technological change. Consistent with this interpretation, we find a positive association between the polygenic score and nonroutine analytic tasks that have benefited from the introduction of new technologies. Nonetheless, the college premium remains a dominant determinant of earnings differences at all levels of the polygenic score. Given the role of childhood SES in predicting college attainment, this raises concerns about wasted potential arising from limited household resources.
The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories and we document that many disaggregated service categories feature a negative income elasticity of relative prices. We divide service industries into two broad categories based on the income gradient of its relative price: traditional services with positive income elasticities and nontraditional services with negative income elasticities of relative prices. Using an otherwise standard multisector development accounting framework extended to include an input–output structure, we find that the cross-country income elasticity of sectoral productivity is large in nontraditional services (1.15), smaller in manufacturing (1.05), and much smaller in traditional services (0.67). Eliminating cross-country productivity differences in nontraditional services reduces aggregate income disparity by 58%, a 7.9-fold reduction in aggregate productivity differences. Heterogeneity between traditional and nontraditional services also has a substantial impact on aggregate productivity.
Many experts see a move toward high-value export crops, such as fruits and vegetables, as an important opportunity for economic growth and poverty reduction, but little is known about the effects of export crops in fragile and conflict-affected countries. We exploit movements in world market prices combined with geographic variation in crop production to show that increases in the value of bananas, the country’s biggest export crop, caused an increase in conflict violence and insurgent-controlled territory in the Philippines. This effect was concentrated in provinces where bananas are produced in large plantations with areas greater than 25 hectares. Our results are consistent with a mechanism in which insurgents fund their operations by extorting large agricultural export firms.
The theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange. However, endogenizing the exchange process is critical for understanding the conditions that support the use of money. We develop a “traveling game” to study the emergence of decentralized and centralized exchange, theoretically and experimentally. Players located on separate islands can either trade locally, or pay a cost to trade elsewhere, so decentralized and centralized markets can both emerge in equilibrium. The former minimize trade costs through monetary exchange; the latter maximizes overall surplus through nonmonetary exchange. Monetary trade emerges when coordination is problematic, whereas centralized trade emerges otherwise. This shows that to understand the emergence of money it is important to amend standard theory such that the market structure is endogenized.
This paper uses a dataset from Tanzania with information on consumption, income, and income shocks within and across family networks. Crucially and uniquely, it also contains data on the degree of information existing between each pair of households within family networks. We use these data to construct a novel measure of the quality of information both at the level of household pairs and at the level of the network. We also note that the individual level measures can be interpreted as measures of network centrality. We study risk sharing within these networks and explore whether the rejection of perfect risk sharing that we observe can be related to our measures of information quality. We show that households within family networks with better information are less vulnerable to idiosyncratic shocks. Furthermore, we show that more central households within networks are less vulnerable to idiosyncratic shocks. These results have important implications for the characterisation of the empirical failure of the perfect risk-sharing hypothesis and point to the importance of information frictions.
We investigate unemployment due to mismatch in the United States over the past three and a half decades. We propose an accounting framework that allows us to estimate the contribution of each of the frictions that generated labor market mismatch. Barriers to job mobility account for the largest part of mismatch unemployment, with a smaller role for barriers to worker mobility. We find little contribution of wage-setting frictions to mismatch.
We study the distribution of public services by local politicians when political support spreads through social networks. We sketch a model showing that incumbents target goods and services to individuals who would lead to the largest aggregate loss of support if they stopped supporting the incumbent. Those individuals have high betweenness centrality. Using data on 3.6 million households from the Philippines, we show that households with high betweenness centrality receive a greater number of public services from their local government. This result is robust to the inclusion of controls for program eligibility, detailed measure of family wealth and elite status, family ties with politicians, and other measures of centrality.
Some of the richest places in the world have very high historical border presence, and are often located in particular geographic environments. In this paper we compile grid-cell level data on borders between sovereign states in Europe and surrounding areas from 1500 until today to document that state borders tend to be located in rugged and mountainous terrain, by rivers, and where it rains a lot. Moreover, two commonly used measures of economic activity—night lights and population density—are higher in cells with more borders, in particular more stable borders. This result holds also when controlling for geography. However, by the same metric, cells with more borders than neighboring cells are less developed than those neighbors. These patterns are consistent with a theory in which state competition benefits long-run development, but these benefits accrue more to the center than the periphery of states.
I use unique child-level panel data from Ethiopia, India, Peru, and Vietnam, four developing countries with widely differing levels of student achievement, to study the extent to which differences in the productivity of primary schooling can explain international differences in human capital. I document, using identical tests of quantitative skills across countries, that although some cross-sectional gaps in test scores between these countries are evident at preschool ages, these grow substantially in the first 2–3 years of schooling. By the age of 8 years, differences are particularly stark between Vietnam and the other three countries. Using value-added models, and a regression-discontinuity design based on enrolment guidelines, I show that the causal effect of an extra grade of schooling on test scores is substantially higher in Vietnam by 0.25–0.4 standard deviations compared to the other countries. This differential productivity of a school year accounts for most of the cross-country achievement gap at 8 years of age. Equalizing the exposure to and the productivity of schooling closes the gap with Vietnam almost entirely for Peru and India and by ∼60% for Ethiopian students enrolled.
Uncertainty rises in recessions. But does uncertainty cause downturns or vice versa? This paper argues that counter-cyclical uncertainty fluctuations are a by-product of technology growth. In a firm dynamics model with endogenous technology adoption, faster technology growth widens the dispersion of firm-level productivity shocks, a benchmark uncertainty measure. Moreover, faster technology growth spurs a creative destruction process, generates a temporary downturn, and renders uncertainty counter-cyclical. Estimates from structural vector autoregressions (VARs) on U.S. data confirm the model’s predictions. On average, 1/4 of the cyclical variation in uncertainty is driven by technology shocks. This fraction rises to 2/3 around the “dot-com” bubble.
Based on complete population data, with the exact same definitions of family class background and economic outcomes for a large number of birth cohorts, we examine post-war trends in intergenera-tional economic mobility in Norway. Standard summary statistics indicate stable or mildly declining rank–rank mobility for sons and sharply declining mobility for daughters. The most conspicuous trend in the mobility patterns is that men and women born into the lowest parts of the parental earnings distribution have fallen behind in terms of own earnings rank, as well as a number of other quality-of-life indicators. A considerable part of this development can be explained by changes in the class distribution of educational attainment and in its rising influence on earnings rank. We argue that although the educational revolution has diminished the role of inherited ability, it has enlarged the influence of the family as provider of a social learning environment.
Standard models of labor supply predict that unearned income decreases labor supply. We propose an alternative noncooperative household model in which a woman’s unearned income improves her autonomy within the household, which raises her gains from working and can increase her labor supply. We find empirical support for this model, using women’s exposure to the Hindu Succession Act in India as a source of exogenous variation in their unearned income. Exposure to the Hindu Succession Act increases a woman’s labor supply by between 3.8 and 6.1 percentage points, particularly into high-paying jobs. Autonomy increased by 0.17 standard deviations, suggesting that control of income is a potential channel for these effects. Thus, policies that empower women can have an additional impact on the labor market, which can further reinforce autonomy increases.
This paper reports the results from a laboratory experiment designed to study political distortions in the accumulation of public debt. A legislature bargains over the levels of a public good and of district specific transfers in two periods. The legislature can issue or purchase risk-free bonds in the first period and the level of public debt creates a dynamic linkage across policymaking periods. In line with the theoretical predictions, we find that public policies are inefficient and efficiency is increasing in the size of the majority requirement, with higher investment in public goods and lower debt associated with larger majority requirements. Debt is lower when the probability of a negative shock to the economy in the second period is higher indicating that even in a political equilibrium debt is used to smooth consumption and to insure against economic uncertainty. Also in line with the theoretical predictions, we find that dynamic distortions are eliminated when the first period proposer can commit to a policy for both periods. The experiment, however, highlights two phenomena that are surprising in terms of standard theory and have not been previously documented. First, balancing the budget in each period is a focal point, leading to lower distortions than predicted. Second, higher majority requirements induce significant delays in reaching an agreement.
Whether people seek or avoid risks on gambling, insurance, asset, or labor markets crucially depends on the skewness of the underlying probability distribution. In fact, people typically seek positively skewed risks and avoid negatively skewed risks. We show that salience theory of choice under risk can explain this preference for positive skewness, because unlikely, but outstanding payoffs attract attention. In contrast to alternative models, however, salience theory predicts that choices under risk not only depend on the absolute skewness of the available options, but also on how skewed these options appear to be relative to each other. We exploit this fact to derive novel, experimentally testable predictions that are unique to the salience model and that we find support for in two laboratory experiments. We thereby argue that skewness preferences—typically attributed to cumulative prospect theory—are more naturally accommodated by salience theory.
This paper investigates experimentally how people value choice. Our experiments elicit subjects’ valuations of various choice sets (or menus) that differ in size and composition. The comparison of these valuations allows us to assess subjects’ preferences between sets and test a number of the theories of preferences over menus proposed in the literature. The results suggest that subjects are choice-averse: the value of a choice set is significantly and robustly lower than that of its preferred element, and adding a suboptimal option reduces the value of a set. The data also reveal that the quality of suboptimal elements has a positive effect on set preferences. Taken together, these results suggest two possible explanations. The first is that individuals fear making bad decisions in the final choice; the second is that people value choice sets heuristically as a whole, and not on the basis of their final consequences. Other explanations of choice aversion that appear in the literature are not fully consistent with the behavior we observe.
It is well known that transitions from employment to unemployment reduce consumption expenditure, but is this fall mainly driven by quantities or by prices? Using panel data on expenditure and quantities from the Spanish consumption survey we find that the unemployed pay prices that are, on average, 1.5% lower, and that this difference in prices accounts for roughly one sixth of the gap in consumption expenditure between the employed and the unemployed. The reduction in prices estimated with panel data is considerably lower than the existing estimates for the United States, which rely on cross-sectional comparisons. Based on our estimates, and using economic theory, we reassess the value of providing unemployment insurance and show how the social value of providing unemployment insurance can be decomposed into a consumption-smoothing component and a component that depends on prices.
This paper estimates the individual impact of a worker’s job loss on his/her criminal activity. Using a matched employer–employee longitudinal data set on unemployment, crime, and taxes for all residents in Denmark, the paper builds each worker’s timeline of job separation, unemployment, and crime. The paper focuses on displaced workers: high-tenure workers who lose employment during a mass-layoff event at any point between 1990 and 1994 (inclusive). Controlling for municipality- and time-specific confounders identifies the individual impact separately from the aggregate impact of the unemployment rate on crime. Placebo tests display no evidence of trends in crime prior to worker separation. Using Denmark’s introduction of the Act on an Active Labor Market at the end of 1993, we estimate the impacts of activation and of a reduction in benefit duration on crime: crime is lower during active benefits than during passive benefits and spikes at the end of benefit eligibility. We use policy-induced shifts in the kink formula relating prior earnings to unemployment benefits to estimate the separate impacts of labor income and unemployment benefits on crime: the results suggest that unemployment benefits do not significantly offset the impact of labor income losses on crime.
We develop a search-theory of asset liquidity which gives rise to endogenous financing constraints on investment in an otherwise standard dynamic general equilibrium model. Asset liquidity describes the ease of issuance and resaleability of private financial claims, which is the outcome of a costly search-and-matching process for such claims implemented by financial intermediaries. Limited liquidity of private claims creates a role for liquid assets, such as government bonds, to ease financing constraints. We show that endogenising liquidity is essential to generate positive co-movement between asset liquidity and asset prices. When the cost of intermediating funds to entrepreneurs rises, investment and output fall whereas the hedging value of liquid assets increases, driving up liquidity premia. In the United States, such intermediation cost shocks can account for at least 37% of the variation in output, and more than 78% of the variation in liquidity premia.
We outline a formal procedure for deriving the aggregate wage-elasticity of labor supply for a large group of heterogeneous workers who operate under uncertainty. Heterogeneity relates to preferences, income, wealth, and the labor market status. If each worker faces a small, possibly nonuniform wage change, the implied aggregate wage-elasticity can be represented by a closed-form expression. This expression captures an extensive and an intensive margin. We empirically implement the procedure for a dynamic model of individual labor supply and a micro panel of men in Germany from 2000 to 2013. We find that the extensive margin is less time-varying than the intensive margin, and that its size varies with the measure of reservation wages. Self-reported reservation wages render a larger extensive margin than other proxies. The estimated aggregate Frisch wage-elasticity varies between 0.85 and 1.06, and the two margins matter equally strongly for the unbalanced sample.
Foreign creditors’ business cycles influence both the process and the outcome of sovereign debt restructurings. We compile two datasets on creditor committees and chairs and on creditor business and financial cycles at the restructurings. We find that when creditors experience high GDP growth, restructurings are delayed and settled with smaller haircuts. To rationalize these stylized facts, we develop a theoretical model of sovereign debt with multiround renegotiations between a risk averse sovereign debtor and a risk averse creditor. The quantitative analysis of the model shows that high creditor income results in both longer delays in renegotiations and smaller haircuts. Our theoretical predictions are supported by data.
Since the middle of the 1990s, productivity growth in Southern Europe has been substantially lower than in other developed countries. We argue that this divergence was partly caused by inefficient management practices, which limited Southern Europe’s gains from the IT Revolution. To quantify this effect, we build a multi-country general equilibrium model with heterogeneous firms and workers. In our model, the IT Revolution generates divergence for three reasons. First, inefficient management limits Southern firms’ productivity gains from IT adoption. Second, IT increases the aggregate importance of management, making its inefficiencies more salient. Third, IT-driven wage increases in other countries stimulate Southern high-skill emigration. We calibrate our model using firm-level evidence, and show that it can account for 35% of Italy’s, 47% of Spain’s, and 81% of Portugal’s productivity divergence with respect to Germany between 1995 and 2008. Counterfactual policy experiments show that subsidies to IT adoption or education cannot reduce this gap: only policies that directly tackle inefficient management are effective.
Using data on house sales and inventories, this paper shows that housing transactions are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The number of transactions has implications for welfare because each transaction reduces mismatch for homeowners. The quantitative importance of the decision to move house is shown in understanding the U.S. housing-market boom during 1995–2003. (JEL: D83, E22, R31)
We identify Pakistani men’s willingness to pay to preserve their anti-American identity using two experiments imposing clearly specified financial costs on anti-American expression, with minimal consequential or social considerations. In two distinct studies, one-quarter to one-third of subjects forgo payments from the U.S. government worth around one-fifth of a day’s wage to avoid an identity-threatening choice: anonymously checking a box indicating gratitude toward the U.S. government. We find sensitivity to both payment size and anticipated social context: when subjects anticipate that rejection will be observable by others, rejection falls suggesting that, for some, social image can outweigh self-image.
We study the impact of social health insurance on mortality. Using the introduction of compulsory health insurance in the German Empire in 1884 as a natural experiment, we estimate difference-in-differences and regional fixed effects models exploiting variation in eligibility for insurance across occupations. Our findings suggest that Bismarck’s health insurance generated a significant mortality reduction. Despite the absence of antibiotics and most vaccines, we find the results to be largely driven by a decline of deaths from infectious diseases. Further evidence suggests that statutory access to well-trained doctors was an elementary channel. This finding may be explained by insurance fund physicians transmitting new knowledge on infectious disease prevention.
This paper studies the effects of university STEM education on innovation and labor market outcomes by exploiting a change in enrollment requirements in Italian STEM majors. University-level scientific education had two direct effects on the development of patents by students who had acquired a STEM degree. First, the policy changed the direction of their innovation. Second, it allowed these individuals to reach top positions within firms and be more involved in the innovation process. STEM degrees, however, also changed occupational sorting. Some higher-achieving individuals used STEM degrees to enter jobs that required university-level education, but did not focus on patenting.
We evaluate the impact on earnings, pensions, and further labor market outcomes of two parallel educational reforms increasing instructional time in Swedish primary school. The reforms extended the annual term length and years of compulsory schooling by comparable amounts. We find striking differences in the effects of the two reforms: at 5% the returns to the term length extension were sizeable and benefited broad ranges of the population. The compulsory schooling extension had small (2%) albeit significant effects, which were possibly driven by an increase in post-compulsory schooling. Both reforms led to increased sorting into occupations with heavy reliance on basic skills and the term extension reduced the gender gap in employment and earnings.
I take advantage of a discontinuity in the probability of admission to a highly selective private university to estimate causal returns to investing in elite university education. I use a newly assembled data set that combines individual administrative records about high school attendance, university admission, university attendance, and tax returns. I find a discontinuity in income of 38 log points at the admission cutoff. The fuzzy regression discontinuity estimate for the elite enrollment effect is 58 log points. This should be interpreted as the average treatment effect for students applying to the elite university who are close to the cutoff and chose to enroll. When I take into account the evidence that students enrolling in the elite university tend to make different field choices, the net institutional enrollment premium is 41 log points. Cumulated over 15 years, the net-of-tuition elite premium is €246,991. I explore potential channels explaining the sizeable enrollment effects and I find that students just above the admission cutoff are 15 percentage points more likely to complete a university degree, they are 26 percentage points more likely to graduate on time and attend university with substantially higher quality peers.
We develop a multicountry, multisector trade model featuring risk-averse workers, labor market frictions, unemployment benefits, and equilibrium unemployment. Trade opening leads to a reduction in unemployment when it simultaneously raises welfare and reallocates labor toward sectors with lower-than-average labor market frictions. We then estimate and calibrate the model using employment data from 31 OECD countries and worldwide trade data. Finally, we quantify the potential unemployment, real wage, and welfare effects of repealing NAFTA and raising bilateral tariffs between the United States and Mexico to 20%. This policy would increase unemployment by 2.4% in the United States and 48% in Mexico.
Using household-level debt data over 2000–2012 and local variation in inequality, we show that low-income households in high-inequality regions (zip codes, counties, states) accumulated less debt relative to their income than low-income households in lower inequality regions. We also find evidence that low-income households face higher credit prices and reduced access to credit as inequality increases. We argue that these patterns are consistent with inequality tilting credit supply away from low-income households and toward high-income households, which may have long-run implications for outcomes like homeownership or entrepreneurship.
Evolutionary theorists have long noted that intergenerational transmission in fertility may counteract aggregate fertility decline through a process of natural selection. I study this evolutionary process by estimating how intergenerational associations in fertility vary over the fertility transition and feed back into the level of average fertility. Microdata from 40 developing countries indicate that intergenerational persistence breaks down at the onset of the fertility transition but then strengthens as the transition progresses. These changes are attributable to a reversal of fertility differences by skill, as predicted by economic models of long-run demographic change. As fertility approaches the replacement level, rising intergenerational associations reweight the population to raise aggregate fertility rates, pushing back against aggregate fertility decline.
We investigate how social status concerns may affect voters’ preferences for redistribution. Social status is given by a voter’s relative standing in two dimensions: consumption and social class. By affecting the distribution of consumption levels, redistribution modifies the weights attached to the two dimensions. Thus, redistribution not only transfers resources from the rich to the poor, but it also amplifies or reduces the importance of social class differences. Social status concerns can simultaneously lead some members of the working class to oppose redistribution and some members of the socioeconomic elites to favor it. They also give rise to interclass coalitions of voters that, despite having different monetary interests, support the same tax rate. We characterize these coalitions and discuss the resulting political equilibrium.
Can temporary input cost advantages have a long-run impact on production patterns? I study this question in the context of shipbuilding from 1850 to 1911. Although North America was the dominant wood shipbuilding region in the mid-19th century, the introduction of metal shipbuilding shifted the industry to Britain, where metal inputs were less expensive. After 1890, Britain’s input price advantages largely disappeared but its dominant position in the industry persisted. I show that American shipbuilders exposed to British competition struggled to transition to metal shipbuilding and present evidence that the mechanism behind Britain’s persistent lead was the development of pools of skilled workers.
This paper investigates the dynamics of wage adjustment to an exogenous increase in labor supply exploiting the sudden and unexpected inflow of repatriates to France resulting from Algerian independence in 1962. I measure the impact of this particular supply shift on the average wage of pre-existing native workers across French regions between 1962 and 1976. I find that regional wages decreased between 1962 and 1968, before returning to their pre-shock level 15 years after. I also investigate the dynamics of skill-specific wages in response to the regional penetration of repatriates and find that the wages of high and low educated native workers declined initially but fully recovered by 1976.
Do behavioral biases affect prices in a high-stakes market? We study the role of left-digit bias in the purchase of an apartment. Left-digit bias is the failure to fully process digits after the first, perceiving prices just below a round number (such as $3.99) as cheaper than their round counterpart ($4). Apartments with asking prices just below round millions are sold at a 3%–5% higher final price after an auction. This effect appears not to be driven by differences in observables or in real estate agents’ behavior. Auctions for apartments listed just below round numbers are more competitive and attract more bidders and bids.
Can public interventions persistently reduce conflict? Adverse weather shocks, through their impact on incomes, have been identified as robust drivers of conflict in many contexts. An effective social insurance system moderates the impact of adverse shocks on household incomes, and hence, could attenuate the link between these shocks and conflict. This paper shows that a public employment program in India, by providing an alternative source of income through a guarantee of 100 days of employment at minimum wages, effectively provides insurance. This has an indirect pacifying effect. By weakening the link between productivity shocks and incomes, the program uncouples productivity shocks from conflict, leading persistently lower conflict levels.
This paper studies the effect of security-motivated trade restrictions on economic activity and political violence. We exploit the 2008 restrictions imposed by Israel on imports of selected goods to the West Bank as a quasi-experiment. We show that after 2008 (i) output and wages decrease differentially in manufacturing sectors that use restricted materials more intensively as production inputs, (ii) wages decrease in localities where employment is more concentrated in these sectors, and (iii) episodes of political violence are more likely to occur in these localities. This differential effect accounts for 16% of violent events that occurred in the West Bank from 2008 to 2012.
Housing transactions by moving homeowners take two steps—buying a new house and selling the old one. This paper argues that the transaction sequence decisions of moving homeowners have important effects on the housing market. Moving homeowners prefer to buy first whenever there are more buyers than sellers in the market. However, this congests the buyer side of the market and increases the buyer–seller ratio, further strengthening the incentives of other moving owners to buy first. This endogenous strategic complementarity leads to multiple steady state equilibria and large fluctuations, which are broadly consistent with stylized facts about the housing cycle.
We investigate how variations in soil productivity affect civil conflicts. We first present a model with heterogeneous land in which variations in input prices (fertilizers) affect appropriable rents and the opportunity costs of fighting. The theory predicts that spikes in input prices increase the likelihood of conflicts through their effect on income and inequality, and that this effect is magnified when soil fertility is naturally more heterogeneous. We test these predictions using data on conflict events covering all Sub-Saharan African countries at a spatial resolution of 0.5 |$\times$| 0.5 degree latitude and longitude over the 1997–2013 period. We combine information on soil characteristics and worldwide variations in fertilizer prices to identify local exogenous changes in input costs. As predicted, variations in soil productivity triggered by variations in fertilizer prices are positively associated with conflicts, especially in cells where land endowments are more heterogeneous. In addition, we find that the distribution of land fertility both within and across ethnic groups affects violence, and that the effect of between-group heterogeneity in soil quality is magnified in densely populated areas. Overall, our findings imply that inequality in access to fertile areas—an issue largely neglected in the literature dealing with the roots of Sub-Saharan African civil wars—constitutes a serious threat to peace at the local level.
Regret and its anticipation affect a wide range of decisions. Job-seekers reject offers while waiting for an offer to match their best past offer; investors hold on to badly performing stocks; and managers throw good money after bad projects. We analyze behavior of a decision maker with regret preferences in a dynamic context and show that regret agents have a disposition to gamble until they receive a payoff matching the best past offer. Results from a lab experiment confirm that many subjects exhibit such behavior and are reluctant to stop below the past peak.
China’s rapid growth has been driven by policy reforms that significantly reduce market frictions. Policy reforms are determined by the government according to its own politico-economic considerations. This paper embeds these politico-economic considerations in a macro model of China to endogenously study government policies, market frictions, and economic growth. In the model, an elite runs the government and maximizes its own incomes, facing a political constraint: getting enough supporters. The government provides high enough incomes to state workers in order to gain their support. It also controls capital allocations in the state and the private sector to balance between keeping enough supporters and extracting more taxes from the private sector. These policies initially generate rapid growth accompanied by declining labor and capital market frictions but in the long run, keep the frictions persistent, which are harmful to growth. The calibrated model can quantitatively account for salient aspects of China’s recent development and provide predictions for future dynamics.
The experience of the European monetary union has been characterized by current account imbalances, widening gross external positions, and a severe sovereign debt crisis. I argue that institutional features of the European Economic and Monetary Union have contributed to all three. I show in a model that subsidies on holdings of assets issued within the union contribute to current account imbalances, to gross capital flows, and to the severity of the crisis. In a quantitative model with heterogeneous countries, I show that the subsidies account for a substantial fraction of the widening of gross external positions in the euro area by inducing countries with high income and external assets to engage in intermediation of gross capital flows.
We examine whether unanticipated changes in home values drive spending and mortgage-based equity extraction. To do this, we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 3%–5% of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios, which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among fixed rate mortgage (FRM) borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.
Economists have long advocated road pricing as an efficiency-enhancing solution to traffic congestion, yet it has rarely been implemented because it is thought to create losers as well as winners. In theory, a judiciously designed toll applied to a portion of the lanes of a highway can generate a Pareto improvement, even before using the toll revenue. This paper explores the practical relevance of this theoretical possibility by using survey and travel time data, combined with a structural model of traffic congestion, to estimate the joint distribution of agent preferences over three dimensions—value of time, schedule inflexibility, and desired arrival time—and evaluate the effects of adding optimal time-varying tolls. I find that adding tolls on half of the lanes of a highway yields a Pareto improvement. Further, the social welfare gains from doing so are substantial—up to $1,740 per road user per year.
We study whether employment history provides information about a worker’s “work attitude”, that is, the tendency to act cooperatively and reliably in the workplace. We conjecture that, holding all else equal, frequent job changes can indicate poor work attitude and that this information is transmitted through employment histories. We find support for this hypothesis across three studies that employ complementary laboratory, field, and survey experiments, as well as in labor market panel data. First, a tightly controlled laboratory labor market experiment demonstrates that prior employment information allows employers to screen for reliable and cooperative workers and that these workers obtain better employment outcomes. Secondly, we conduct a field experiment that varies the frequency of job changes in applicants’ resumes and find that those with fewer job changes receive substantially more callbacks from prospective employers. Thirdly, a survey experiment with human resources professionals confirms that the resume manipulations in the field study create different perceptions of work attitude and that these largely account for the callback differences. Finally, we find evidence consistent with our hypothesized relationships in empirical labor market data. Our work highlights the potential importance of job history as a signal of work attitude in labor markets, and points to a potential cost of frequent job changes.
This paper explores how labor market conditions drive gender differences in the human capital decisions of men and women. Specifically, I investigate how male and female schooling decisions respond to an exogenous change in cognitive ability. Using data from Mexico, I begin by documenting that in utero exposure to thermal inversions, which exacerbate air pollution, leads to lower cognitive ability in adulthood for both men and women. I then explore how male and female schooling decisions respond differentially to this cognitive shock: for women only, pollution exposure leads to reduced educational attainment and income. I show that this gender difference is explained by the fact that women disproportionately sort into white-collar jobs, where schooling and ability are more complementary than they are in blue-collar jobs.
Measuring and understanding the evolution of wealth inequality is a key challenge for researchers, policy makers, and the general public. This paper breaks new ground on this topic by presenting a new method to estimate and study wealth inequality. This method combines fiscal data with household surveys and national accounts in order to provide annual wealth distribution series, with detailed breakdowns by percentiles, age, and assets. Using the case of France as an illustration, we show that the resulting series can be used to better analyze the evolution and the determinants of wealth-inequality dynamics over the 1970–2014 period. We show that the decline in wealth inequality ends in the early 1980s, marking the beginning of a rise in the top 1% wealth share, though with significant fluctuations due largely to asset price movements. Rising inequality in savings rates coupled with highly stratified rates of returns has led to rising wealth concentration in spite of the opposing effect of house price increases. We develop a simple simulation model highlighting how changes in the combination of unequal savings rates, rates of return, and labor earnings that occurred in the early 1980s generated large multiplicative effects that led to radically different steady-state levels of wealth inequality. Taking advantage of the joint distribution of income and wealth, we show that top wealth holders are almost exclusively top capital earners, and increasingly fewer are made up of top labor earners; it has become increasingly difficult in recent decades to access top wealth groups with one's labor income only.
Labor market outcomes demonstrate considerable variation between and within skill groups. We construct a general equilibrium model with incomplete markets and exogenous differences that matches these facts. We study the role of exogenous heterogeneity in choosing the optimal replacement rate and the maximum benefit for an unemployment insurance (UI) system. The optimal average replacement rate is 27%, compared to 0% in a model without exogenous heterogeneity. The relatively generous choice is due to the redistributive role of UI, which is a manifestation of two elements. First, workers who are unemployed more often receive positive net transfers from the UI system because they draw resources more frequently. Second, the existence of a cap on benefits makes UI progressive. Our main result holds in the presence of a generous progressive taxation system.
We empirically investigate the proposition that firms charge premia on cash prices in transactions involving trade credit. Using a comprehensive panel data set on product-level transaction prices and firm characteristics, we relate trade credit issuance to price setting. In a recession characterized by tightened credit conditions, we find that prices increase significantly more on products sold by firms issuing more trade credit, in response to higher opportunity costs of liquidity and counterparty risks. Our results thus demonstrate the importance of trade credit for price setting and show that trade credit issuance induces a channel through which financial conditions affect prices.
We investigate the long-run effects of government surveillance on civic capital and economic performance, studying the case of the Stasi in East Germany. Exploiting regional variation in the number of spies and administrative features of the system, we combine a border discontinuity design with an instrumental variable strategy to estimate the long-term, post-reunification effect of government surveillance. We find that a higher spying density led to persistently lower levels of interpersonal and institutional trust in post-reunification Germany. We also find substantial and long-lasting economic effects of Stasi surveillance, resulting in lower income, higher exposure to unemployment, and lower self-employment.
In many matching markets, bargaining determines who matches with whom and on what terms. We experimentally investigate allocative efficiency and how subjects’ payoffs depend on their matching opportunities in such markets. We consider three simple markets. There are no information asymmetries, subjects are patient, and a perfectly equitable outcome is both feasible and efficient. Efficient perfect equilibria of the corresponding bargaining game exist, but are increasingly complicated to sustain across the three markets. Consistent with the predictions of simple (Markov perfect) equilibria, we find considerable mismatch in two of the markets. Mismatch is reduced but remains substantial when we change the nature of bargaining by moving from a structured experimental protocol to permitting free-form negotiations, and when we allow players to renege on their agreements. Our results suggest that mismatch is driven by players correctly anticipating that they might lose their strong bargaining positions, and by players in weak bargaining positions demanding equitable payoffs.
Allowing for ambiguity about the behavior of the policymaker in a simple New-Keynesian model gives rise to wedges between long-run inflation expectations, trend inflation, and the inflation target. The degree of ambiguity we measure in Blue Chip survey data helps explain the dynamics of long-run inflation expectations and the inflation trend measured in the US data. Ambiguity also has implications for monetary policy. We show that it is optimal for policymakers to lean against the households’ pessimistic expectations, but also document the limits to the extent the adverse effects of ambiguity can be undone.
We develop a general framework to study source-dependent preferences in economic contexts. We behaviorally identify two key features. First, we drop the assumption of uniform uncertainty attitudes and allow for source-dependent attitudes. Second, we introduce subjective prices to compare outcomes across different sources. Our model evaluates profiles source-wise, by computing the source-dependent certainty equivalents; the latter are converted into the unit of account of a common source and then aggregated into a unique evaluation. By viewing time and location as instances of sources, we show that subjective discount factors and subjective exchange rates are emblematic examples of subjective prices. Finally, we use the model to explore the implications on optimal portfolio allocations and home bias.
We construct income-specific price indexes for the period from 2004 to 2016. We find substantial differences across income groups that arise during the Great Recession. The difference in annual inflation between the lowest quartile of the income distribution and the highest quartile was 0.22 percentage points for 2004–2007, 0.85 percentage points for 2008–2013, and 0.02 percentage points for 2014–2016. We find that product quality substitution and changes in the shopping behavior, margins mostly available to richer households, explain around 40% of the gap. Our evidence shows that not accounting for these differences in price indexes could lead to significant biases in the calculation of consumption and income inequality.
There is a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational choice of agents and might generate some type of misallocation. We develop a life-cycle model with endogenous occupational choice and heterogeneous agents to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil, a country with a high public sector earnings premium. Our counterfactual exercises demonstrate that public–private earnings premium can generate important allocation effects and sizeable productivity losses. For instance, a reform that would decrease the public–private wage premium from its benchmark value of |$19\%$| to |$15\%$| and would align the pension of public sector workers with the one in place for private sector workers could increase aggregate output by nearly |$11.2\%$| in the long run without any decrease in the supply of public infrastructure. We provide a decomposition of the aggregate effect into changes in factors accumulation and changes in TFP and implement a welfare distributive analysis.
We study financial stability regulation in an environment with pecuniary externalities and where banks face both a liability choice (between private money creation and long-term borrowing) and an asset choice (between liquid and illiquid investments). Return risk on illiquid assets gives rise to liquidity risk, because banks that learn to have low future returns find themselves unable to roll over “money-like” debt. Privately optimal borrowing and investment decisions by banks lead, in general, to socially inefficient outcomes. The nature of inefficiency depends critically on the degree to which liquidity risk is systemic: When risk is highly systemic, banks hold the socially optimal amount of liquid assets, but create an excessive amount of money and overinvest in risky assets; when risk is not highly systemic, banks hold too little liquidity, create insufficient private money, and underinvest in risky assets. Quantity- and price-based regulations to address the identified inefficiencies are discussed.
We propose a novel measure of goodness of fit for stochastic choice models, that is, the maximal fraction of data that can be reconciled with the model. The procedure is to separate the data into two parts: one generated by the best specification of the model and another representing residual behavior. We claim that the three elements involved in a separation are instrumental in understanding the data. We show how to apply our approach to any stochastic choice model and then study the case of four well-known models, each capturing a different notion of randomness. We illustrate our results with an experimental data set.
Agricultural and other physically demanding sectors are important sources of growth in developing countries, but prevalent diseases such as malaria can adversely impact the productivity and labor supply of workers. We estimate the impact of malaria infection on worker earnings, labor supply, daily productivity, and task selection by using a phased-in design where we randomize the study week in which piece-rate workers at a large sugarcane plantation in Nigeria are offered malaria testing and treatment. Two estimation strategies indicate a significant and substantial intent to treat effect of the intervention. The program increases worker weekly earnings by 11%–13% over the weeks following the offer, depending on the reference period, estimated using a between-worker estimator that exploits the experimental design. A within-worker estimate provides similar but smaller estimates of 8%–10%. We identify different pathways through which this effect occurs. For workers who test positive for malaria, the treatment of illness principally increases labor supply, leading to higher earnings. For workers who test negative, the health information leads to increased earnings via augmented daily productivity. This productivity response arises, in part, from selection into higher return tasks within their job at the plantation. The results underline the importance of medical treatment but also of improved access to information about one's health status, as the absence of either leads workers to work less or choose lower return tasks when working.
Agents need to be motivated to develop ideas and to share information regarding their potential value. When the agents fail to agree on which alternative to implement, the principal needs to decide how to resolve the disagreement. When the agents’ information is soft, favoring one of the agents in the case of disagreement is always optimal in the present setting. In contrast, if the information is hard, a balanced treatment of the agents is preferred to encourage competition. The reason for the difference is the high cost of sustaining both informative communication and effort in a balanced organization.
Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model that integrates Search and Matching (SAM) frictions in the labor market. The model features an endogenous idiosyncratic earnings risk, which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is a downward pressure on real interest rates in recessions due to a precautionary savings motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate the local indeterminacy of the intended steady state, and (c) nominal rigidities and inincomplete markets are complementary in terms of amplifying the impact of shocks on the macroeconomy.
This paper studies how material incentives and social norms shape ethnic identity choices in China. Provincial policies give material benefits to minorities, which consequently affect the ethnicity choices for children in ethnically mixed marriages. We formalize the ethnic identity choice in a simple framework, which highlights the interaction of (i) material benefits stemming from ethnic policies, (ii) identity costs associated with breaking the norm of following the father’s ethnicity, and (iii) social reputations altering the importance of identity costs. Consistent with the model, we find that ethnic policies increase the propensity to break the prevailing norm for mixed families with minority mothers. Moreover, the impact of ethnic policies is larger in localities where more such families follow the norm. More broadly, our study shows (1) how government policies can shape identity choices and (2) how one can allow for both complementarity and substitutability between individual and social motives in empirical analyses.
We present the first evidence on the role of occupational choices and acquired skills for migrant selection. Combining novel data from a representative Mexican task survey with rich individual-level worker data, we find that Mexican migrants to the United States have higher manual skills and lower cognitive skills than nonmigrants. Results hold within narrowly defined region–industry–occupation cells and for all education levels. Consistent with a Roy/Borjas-type selection model, differential returns to occupational skills between the United States and Mexico explain the selection pattern. Occupational skills are more important to capture the economic motives for migration than previously used worker characteristics.
Providing estimable sufficient statistics to give policy prescriptions has become a widespread approach, a well-known limitation of which is the endogeneity of sufficient statistics to the policy. Using optimal tax policy as our field of application, we highlight a new source of endogeneity. It arises under multidimensional heterogeneity, because optimal tax formulas are then expressed as functions of weighted means of sufficient statistics computed at the individual level and the weights are endogenous to the tax policy. We analytically show that ignoring these composition effects leads to underestimate the optimal linear tax and, under a restrictive set of assumptions, the optimal nonlinear tax as well. In the latter case, we use an improved tax perturbation approach to study composition effects without these assumptions. Numerical simulations on US data suggest the optimal tax rate may be underestimated by 6 p.p. for high incomes levels. We also relate our tax perturbation method to the first-order mechanism design method, both methods having hitherto been used separately to derive optimal tax schedules.
We study a bilateral trade setting in which a buyer has private valuations over a multi-product seller’s inventory. We introduce the notion of an incentive-compatible market segmentation (IC-MS)—a market segmentation compatible with the buyer’s incentives to voluntarily reveal their preferences. Our main result is a characterization of the buyer-optimal IC-MS. It is partially revealing, comprised primarily of pooling segments wide enough to keep prices low but narrow enough to ensure trade over relevant products. We use our results to study a novel design problem in which a retail platform seeks to attract consumers by calibrating the coarseness of its search interface. Our analysis speaks directly to consumer privacy and the debate regarding product steering versus price discrimination in online retail.
This paper studies the contribution of parental influence in accounting for cross-country gaps in human capital achievements. We argue that the cross-country variation in unobserved parental characteristics is at least as important as the one in commonly used observable proxies of parental socioeconomic background. We infer this through an indirect empirical approach, based on the comparison of the school performance of second-generation immigrants. We document that, within the same host country or even the same school, students whose parents come from high-scoring countries in standardized international tests do better than their peers with similar socioeconomic backgrounds. This finding is not driven by differential selection into emigration. We provide several pieces of evidence that support the transmission of cultural values as a leading channel behind the cross-country variation in the parental component. Unobserved parental characteristics account for about 15% of the cross-country variance in test scores, roughly doubling the overall contribution of parental influence.
We study distributional preferences in larger “societies”. We conduct experiments via Mechanical Turk, in which subjects choose between two income distributions, each with seven (or more) individuals, with hypothetical incomes that aim to approximate the actual distribution of income in the United States. In contrast to prior work, our design allows us to flexibly capture the particular distributional concerns of subjects. Consistent with standard maximin (Rawlsian) preferences, subjects select distributions in which the bottom individual’s income is higher (but show little regard for lower incomes above the bottom ranking). In contrast to standard models, however, we find that subjects select distributions that lower the top individual’s income, but not other high incomes. Finally, we provide evidence of “locally competitive” preferences—in most experimental sessions, subjects select distributions that lower the income of the individual directly above them, whereas the income of the individual two positions above has little effect on subjects’ decisions. Our findings suggest that theories of inequality aversion should be adapted to account for individuals’ aversion to “topmost” and “local” disadvantageous inequality.
We study whether crony governance can extend beyond economic policy to the targeting of state violence against citizens. Specifically, we examine the logic driving the choice of firm-level union representatives who were subjected to state repression by the 1976–1983 Argentine military junta. Using an original dataset, we find a positive, nonspurious, and robust correlation between labor repression and cronyism, measured by political, business, and social connections to the regime. Our results indicate that the number of firm-level union representatives victimized by the regime is three times higher for connected firms relative to nonconnected ones. The effect is pronounced in privately owned (as opposed to state-owned) firms, suggesting that the correlation is driven by cronyism for financial gain rather than ideology or information transmission. We show that connected firms benefited from violence against union representatives by subsequently having less strikes and a higher market valuation. Our findings highlight the pervasiveness of governmental cronyism, even in cases where one of the regime's main stated goals was to curb such behavior.
We provide the first analysis of the risk-sharing implications of altruism networks. Agents are embedded in a fixed network and care about each other. We explore whether altruistic transfers help smooth consumption and how this depends on the shape of the network. We find that altruism networks have a first-order impact on risk. Altruistic transfers generate efficient insurance when the network of perfect altruistic ties is strongly connected. We uncover two specific empirical implications of altruism networks. First, bridges can generate good overall risk sharing, and, more generally, the quality of informal insurance depends on the average path length of the network. Second, large shocks are well-insured by connected altruism networks. By contrast, large shocks tend to be badly insured in models of informal insurance with frictions. We characterize what happens for shocks that leave the structure of giving relationships unchanged. We further explore the relationship between consumption variance and centrality, correlation in consumption streams across agents, and the impact of adding links.
Recent research has pointed to large gaps in labor productivity between the agricultural and non-agricultural sectors in low-income countries, as well as between workers in rural and urban areas. Most estimates are based on national accounts or repeated cross-sections of microsurvey data, and as a result typically struggle to account for individual selection between sectors. This paper uses long-run individual-level panel data from two low-income countries (Indonesia and Kenya) to explore these gaps. Accounting for individual fixed effects leads to much smaller estimated productivity gains from moving into the non-agricultural sector (or urban areas), reducing estimated gaps by roughly 67%–92%. Furthermore, gaps do not emerge up to 5 years after a move between sectors. We evaluate whether these findings imply a re-assessment of the conventional wisdom regarding sectoral gaps, discuss how to reconcile them with existing cross-sectional estimates, and consider implications for the desirability of sectoral reallocation of labor.
When choices are inconsistent due to behavioral biases, there is a theoretical debate about whether the structure of a model is necessary for providing precise welfare guidance based on those choices. To address this question empirically, we use standard data sets from the lab and field to evaluate the predictive power of two “model-free” approaches to behavioral welfare analysis. We find they typically have high predictive power, which means there is little ambiguity about what should be selected from each choice set. We also identify properties of revealed preferences that help to explain the predictive power of these approaches.
The textbook New Keynesian (NK) model implies that the labor share is procyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages during the Great Moderation period in the United States, the Euro Area, the United Kingdom, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but also with medium-scale NK models commonly used for monetary policy analysis and where it is possible to break the direct link between the labor share and the inverse markup. Our results imply that either NK models are unable to separate the dynamics of the labor share from the markup or markups do not respond in the way NK models predict.
We reexamine the role of incomplete contracts in a dynamic model of renegotiation that endogenizes the timing of investments and trade. The interaction between bargaining and investment significantly alters the lessons learned from static models. When the opportunity to trade is expected to be long lasting, contracts that exacerbate the parties’ absolute vulnerability to hold-up—especially following under-investment—are desirable. For example, joint ownership of complementary assets can be optimal, an exclusivity agreement can protect the investments of its recipient, and trade contracts can facilitate purely cooperative investment.
People in our experiment choose between two information sources with opposing biases in order to inform their guesses about a binary state. By varying the nature of the bias, we vary whether it is optimal to consult information sources biased towards or against prior beliefs. Even in our deliberately-abstract setting, there is strong evidence of confirmation-seeking and to a lesser extent contradiction-seeking heuristics leading people to choose information sources biased towards or against their priors. Analysis of post-experiment survey questions suggests that subjects follow these rules due to fundamental errors in reasoning about the relative informativeness of biased information sources.
We estimate the effects of in-utero exposure to a trade embargo on survival and human capital in an import-dependent developing country. Using a regression discontinuity design, we find that a nearly comprehensive embargo imposed by India on Nepal in 1989 led to a large decline in reported live births, and increased early life mortality. The decline in births is concentrated in poorer, more remote districts, and is sharper for female births than male births, consistent with documented gender discrimination. Women survivors of exposure are more educated in adulthood than unexposed cohorts.
I study the long-term consequences of an effective free school choice program that targeted disadvantaged students in Israel two decades ago. I show that the program led to significant gains in post-secondary education through increased enrolment in academic and teachers’ colleges without any increase in enrolment in research universities. Free school choice also increased earnings at the adulthood of treated students. Male students had much larger improvements in college schooling and labor market outcomes. Female students, however, experienced higher increases in marriage and fertility rates, which most likely interfered with their schooling and labor market outcomes.
Popular protests and palace coups are the two domestic threats to dictators. We show that free media, which informs citizens about their rulers, is a double-edged sword that alleviates one threat, but exacerbates the other. Informed citizens may protest against a ruler, but they may also protest to restore her after a palace coup. We develop a model in which citizens engage in a regime-change global game, and media freedom is a ruler’s instrument for Bayesian persuasion, used to manage the competing risks of coups and protests. A coup switches the status quo from being in the ruler’s favor to being against her. This introduces convexities in the ruler’s Bayesian persuasion problem, causing her to benefit from an informed citizenry. Rulers tolerate freer press when citizens are pessimistic about them, or coups signal information about them to citizens.
We study how the technological importance of inputs—measured by cost shares—is related to the decision to “make” or “buy” that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed input–output tables, we show that multinationals vertically integrate technologically important inputs. A stylized incomplete contracting model with both ex-ante and ex-post inefficiencies explains why: Technologically more important inputs are “made” when transaction cost economics type forces overpower property rights type forces. However, additional results show that both types of forces are needed to explain the full patterns in the data.
This paper proposes a theory of pricing premised upon the assumptions that customers dislike unfair prices—those marked up steeply over cost—and that firms take these concerns into account when setting prices. Because they do not observe firms’ costs, customers must extract costs from prices. The theory assumes that customers infer less than rationally: When a price rises due to a cost increase, customers partially misattribute the higher price to a higher markup—which they find unfair. Firms anticipate this response and trim their price increases, which drives the passthrough of costs into prices below one: Prices are somewhat rigid. Embedded in a New Keynesian model as a replacement for the usual pricing frictions, our theory produces monetary nonneutrality: When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate this perceived unfairness by reducing their markups; in general equilibrium, employment rises. The theory also features a hybrid short-run Phillips curve, realistic impulse responses of output and employment to monetary and technology shocks, and an upward-sloping long-run Phillips curve.
This paper studies how voters’ selective ignorance interacts with policy design by political candidates. It shows that the selectivity empowers voters with extreme preferences and small groups, that divisive issues attract most attention, and that public goods are underfunded. Finer granularity of information increases these inefficiencies. Rational inattention can also explain why competing opportunistic candidates do not always converge on the same policy issues.
Who are “protest voters” and do they affect elections? We study this question using the introduction of a pure protest option (“None Of The Above” (NOTA)) on Indian ballots. Using structural estimation, we find that in elections without NOTA, most protest voters simply abstain. Protest voters who turn out scatter their votes among many candidates and consequently have little impact on election results. From a policy perspective, NOTA may be an effective tool to increase political participation, and can attenuate the electoral impact of compulsory voting.
High-ability agents are more likely to achieve early success in risky experimentation, but learn faster that their project is not promising. These counteracting effects give rise to a signaling model with double-crossing property. This property tends to induce homogenization of quitting times between types, which in turn leads to some pooling in equilibrium. Low-ability agents may hold out to continue their project for the prospect of pooling with the high type, despite having a negative instantaneous net payoff. A war-of-attrition mechanism causes low-ability agents to quit only gradually over time, and to stop quitting for a period immediately before all agents exit.
In 2016, the city of Bogotá doubled police patrols and intensified city services on high-crime streets. They did so based on a criminological consensus that such place-based programs not only decrease crime, but also have beneficial spillovers for nearby streets. To test this, we worked with Bogotá to experiment on an unprecedented scale. We randomly assigned 1,919 streets to either 8 months of doubled police patrols, greater municipal services, both, or neither. Such scale brings econometric challenges. Spatial spillovers in dense networks introduce bias and complicate variance estimation through “fuzzy clustering”. But a design-based approach and randomization inference produce valid hypothesis tests in such settings. In contrast to the consensus, we find intensifying state presence did not generate substantively meaningful or statistically significant reductions in crime. Our estimates suggest modest direct effects but with crime displaced nearby, especially property crimes. Confidence intervals suggest we can rule out total reductions in crime of more than 2% from the two interventions.
This paper estimates the causal effect of a historical midwifery policy experiment on maternal mortality, infant mortality, and stillbirth during the period of 1830–1894 in Sweden. Exploiting sharp changes or “discontinuities” across time and place in the availability of trained and licensed midwives as an exogenous source of variation, we find that a doubling of trained midwives led to a 20%–40% reduction in maternal mortality and a 20% increase in the uptake of midwife-assisted homebirths. The results thus suggest that a 1% increase in the share of midwife-assisted homebirths decreased maternal mortality by as much as 2%, which is a remarkable finding given that midwife training was only 6–12 months at that time. The results of this study contribute to the current debate about the most effective strategy to reduce the unacceptably high rate of maternal mortality in many developing countries, especially in low-resource settings.
This paper incorporates quasi–hyperbolic discounting into a Mirrlees taxation model to study the design of retirement policies for present-biased agents. I show that the government can improve the screening of productivity by exploiting time inconsistency. This is done by providing commitment to sophisticated agents and taking advantage of the incorrect beliefs of naïve agents. This can be achieved even if the degrees of present bias and sophistication are private information. I also demonstrate how the government can implement the optimal mechanism using retirement savings accounts and social security benefits.
This paper investigates the link between social media and hate crime. We show that antirefugee sentiment on Facebook predicts crimes against refugees in otherwise similar municipalities with higher social media usage. To establish causality, we exploit exogenous variation in the timing of major Facebook and internet outages. Consistent with a role for “echo chambers,” we find that right-wing social media posts contain narrower and more loaded content than news reports. Our results suggest that social media can act as a propagation mechanism for violent crimes by enabling the spread of extreme viewpoints.
We study the effects of public pension systems on the retirement timing of older workers and, in turn, the health consequences of delaying retirement by those workers. Causal inference relies on a social security reform in Israel that shifted payments from husbands to their (nonworking) wives, thereby substantially reducing the implied tax on the husband's employment while keeping overall household wealth constant. Using administrative social security data, we estimate extensive-margin labor supply elasticities with respect to the average net-of-tax rate of about 0.43 for men over 65. Using the reform to instrument for employment, we find that working an additional full year at old age decreases longevity. This mortality effect occurs after age 75 and is driven by workers holding blue-collar jobs. Finally, we evaluate the effect of the reform on earnings. The results imply a small value for an additional year of life, suggesting that workers underestimate the health cost of employment at older ages. (JEL: J10, J26, J22, H31)
People exploit flexibility in mental accounting to relax psychological constraints on spending. Four studies demonstrate this in the context of moral behavior. The first study replicates prior findings that people donate more money to charity when they earned it through unethical versus ethical means. However, when the unethically earned money is first “laundered”—the cash is physically exchanged for the same amount but from a different arbitrary source—people spend it as if it was earned ethically. This mental money laundering represents an extreme violation of fungibility. The second study demonstrates that mental money laundering generalizes to cases in which ethically and unethically earned money are mixed. When gains from ethical and unethical sources were pooled, people spent the entire pooled sum as if it was ethically earned. The last two studies provide mixed support for the prediction that people actively seek out laundering opportunities for unethically earned money, suggesting partial sophistication about these effects. These findings provide new evidence for the ease with which people can rationalize misbehavior, and have implications for consumer choice, corporate behavior, and public policy.
A novel decomposition highlights the scope for information to influence 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 covariance of expectations is typically low in macrofinance models, which contributes to the real term premia implied by the models being at least an order of magnitude too small, a result that is unchanged even if we introduce aggregate demand externalities combined with shocks to higher-order beliefs. We argue that generating realistic term premia requires there to be strategic complementarities in the formation of expectations. A quantitative model, in which beliefs are formed in a beauty contest, can explain a significant proportion of observed term premia, when estimated using data on expectations of productivity growth from the Survey of Professional Forecasters.
We study whether the Swiss short-time work (STW) program reduced unemployment in and after the Great Recession using quarterly establishment-level panel data linking administrative data sources. We compare changes in layoffs into unemployment, employment, and establishment survival between establishments that applied successfully and establishments that applied unsuccessfully for STW at cantonal employment agencies. The unsuccessful establishments provide a valid counterfactual for the successful ones because cantonal approval practices are partly idiosyncratic. We find that STW increases establishment survival and prevents rather than postpones dismissals. The 7,857 establishments treated in 2009 would have dismissed 20,600 additional workers into unemployment (0.47% of the labor force) until 2012. Most workers would have been dismissed in the quarters immediately following the application, and more than a third would have become long-term unemployed. The savings on unemployment benefits may have compensated for the spending on STW benefits.
Using a randomized experiment in a public Swiss university, we study the impact of online live streaming of lectures on student achievement and attendance. We find that (i) attending lectures via live streaming lowers achievement for low-ability students and increases achievement for high-ability ones; (ii) students use the live streaming technology only occasionally, apparently when random events make attending in class too costly, and (iii) offering live streaming reduces in-class attendance only mildly. These findings have important implications for the effective design of education policies.
We propose a novel experiment that prevents social learning, thus allowing us to disentangle the underlying mechanisms of social influence. Subjects observe their peer’s incentives, but not their behavior. We find evidence of conformity: When individuals believe that incentives make others contribute more, they also increase their contributions. Conformity is driven by individuals who feel socially close to their peer. However, when incentives are not expected to raise their peer’s contributions, participants reduce their own contributions. Our data are consistent with an erosion of norm adherence when prosocial behavior of the social reference is driven by extrinsic motives, and cannot be explained by incentive inequality or altruistic crowding out. These findings show scope for social influence in settings with limited observability and offer insights into the mediators of conformity.
The tariff-for-revenue argument has been invoked repeatedly in recent years to justify protectionism. It is motivated by the belief that a country with market power can use trade taxes to raise revenue from foreign consumers and producers. This paper develops a new sufficient statistics methodology to evaluate this claim for a wide range of countries. I show that (a) even large countries have limited market power. (b) So, before retaliation by trading partners, the average country can beneficially replace only 16% of its domestic tax revenues with trade taxes. (c) After retaliation, however, 50% of the collected trade tax revenues disappear, governments are forced to increase domestic taxes to counter their shrinking tax base, and real gross domestic product drops across-the-board by an average of 7%. On the flip side, these findings indicate (d) the gains from multilateral trade agreements are also 30% larger once we account for the fiscal cost of trade wars.
We document three stylized facts on marriage and fertility patterns in East Asian societies: (i) their marriage rates are among the highest in the world, but their total fertility is the lowest; (ii) although they have the lowest total fertility, almost all married women have at least one child; and (iii) almost no single women have any children. As these societies have been influenced by Confucianism over millennia, marriage and fertility decisions are potentially shaped by two social norms: the unequal gender division of childcare and the stigma attached to out-of-wedlock births. We present a model incorporating the two social norms, and structurally estimate it using data from South Korea. We find that the social norm of unequal gender division of childcare plays a significant role in the low fertility rates, especially for highly educated women. However, the social stigma attached to out-of-wedlock births has modest effects on the childlessness rate for single women. Our results show that the tension between the persistent gender ideology and the rapid socioeconomic development is the main driving force behind the unique marriage and fertility patterns in East Asian societies.
We exploit the large rise in relative performance awards in the United Kingdom over the last two decades to investigate whether these contracts improve the alignment between CEO pay and firm performance. We first document that corporate governance appears to be stronger when institutional ownership is greater. Then, using hand-collected data from annual reports on explicit contracts, we show that (1) CEO pay still responds more to increases in the firms’ stock performance than to decreases, and, importantly, this asymmetry is stronger when corporate governance is weak as measured by low institutional ownership; and (2) “pay for luck” persists as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A major reason why relative performance contracts do not eliminate pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future in weakly governed firms. We show the mechanism operates both through the quantum of shares and the structure of new contracts. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong corporate governance.
This paper investigates whether political connections affect individuals’ propensity to engage in white-collar crime. We identify connections by campaign donations or direct friendships and use the 2007 French Presidential election as a marker of change in the value of political connections to the winning candidate. We compare the behavior of Directors of publicly listed companies who were connected to the future President to the behavior of other non-connected Directors, before and after the election. Consistent with the belief that connections to a powerful politician can protect someone from prosecution or punishment, we uncover indirect evidence that connected Directors are more likely to engage in suspicious insider trading after the election: Purchases by connected Directors trigger larger abnormal returns, connected Directors are less likely to comply with trading disclosure requirements in a timely fashion, and connected Directors trade closer in time to their firms’ announcements of results. (JEL: D72, G14, G18, G38, K22, K42)
Business practices and performance vary widely across businesses within the same sector. A key outstanding question is why profitable practices do not readily diffuse. We conduct a field experiment among urban retailers in Indonesia to study whether alleviating informational and behavioral frictions can facilitate such diffusion in a cost-effective manner. Through quantitative and qualitative fieldwork, we curate a handbook that associates locally relevant practices with performance, and provides idiosyncratic implementation guidance informed by exemplary local retailers. We complement this handbook with two light-touch interventions to facilitate behavior change. A subset of retailers is invited to a documentary movie screening featuring the paths to success of exemplary peers. Another subset is offered two 30-minute personal visits by a local facilitator. A third group is offered both. Eighteen months later, we find significant impacts on practice adoption when the handbook is coupled with the two behavioral nudges, and up to a 35% increase in profits and 16.7% increase in sales. These findings suggest both informational and behavioral constraints are at play. The types of practices adopted map the performance improvements to efficiency gains rather than other channels. A simple cost–benefit analysis shows such locally relevant knowledge can be codified and scaled successfully at relatively low cost.
This paper investigates whether wage losses after job displacement are driven by lost firm wage premiums or worker productivity depreciations. We estimate losses in wages and firm wage premiums, the latter being measured as firm effects from a two-way fixed-effects wage decomposition. Using new German administrative data on displacements from small and large employers, we find that wage losses are to a large extent explained by losses in firm wage premiums and that premium losses are largely permanent. We show that losses strongly increase with pre-displacement employer size. This provides an explanation for large and persistent wage losses reported in previous displacement studies typically focusing on large employers, only.
This paper uses quasi-experimental variation in payroll tax rates in Finland to investigate how firms use their input factors. We find that higher payroll tax rates lead to large employment responses and have no effects on employee-level earnings. As payroll taxes increase, firms substitute away from low-skilled, routine, and manual workers. Higher firm-level payroll tax rates also slightly decrease the total output of firms. Our results imply that firm-level production and input factor choices are clearly affected by payroll taxes.
How do events that highlight a policy issue impact political preferences? In this paper, I analyze the impact of mass shootings on voter behavior. I show that, conditional on population, mass shootings are largely random events. Using a difference-in-differences strategy, I find that mass shootings result in a 1.7 percentage point loss in Republican vote share in counties where they occur. Identification that relies on comparing successful and failed mass shootings yields similar results. Mass shootings lead to an increase in the salience of gun policy and increase the divide on gun policy among both voters and politicians. Democrats (Republicans) tend to demand even stricter (looser) gun control after mass shootings. These results suggest that increasing the salience of an issue may polarize the electorate.
This paper investigates the medium- to long-term effects on refugee labour market outcomes of the temporary employment bans being imposed on asylum seekers in many countries. Using a newly collected data set on employment restrictions together with individual data for refugees entering European countries between 1985 and 2012, our empirical strategy exploits the geographical and temporal variation in employment bans generated by their staggered introduction and removal coupled with frequent changes at the intensive margin. We find that exposure to a ban at arrival reduces refugee employment probability in post-ban years by 15%, an impact driven primarily by lower labour market participation. These effects are not mechanical, increase non-linearly in ban length, and last up to 10 years post arrival. The detrimental effects of employment bans are concentrated among less educated refugees, translate into lower occupational quality, and seem not to be driven by selective migration. Our causal estimates are robust to several identification tests accounting for the potential endogeneity of employment ban policies, including placebo analysis of non-refugee migrants and an instrumental variable strategy. We estimate a €37.6 billion output loss from the bans imposed on asylum seekers who arrived in Europe during the so-called 2015 refugee crisis.
Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences (“use-dependent brain”). I show that experience effects help understand belief formation and decision-making in a wide range of economic applications, including inflation, home purchases, mortgage choices, and consumption expenditures. I argue that experience-based learning is broadly applicable to economic decision-making and discuss topics for future research in education, health, race, and gender economics.
There is a scientific consensus that human activities, in the form of emissions of carbon dioxide into the atmosphere, cause global warming. These emissions mostly occur in the marketplace, that is, they are undertaken by private individuals and firms. Governments seeking to curb emissions thus need to design policies that influence market behavior in the direction of their goals. Economists refer to Pigou taxation as “the” solution here, since the case of global warming can be seen as a pure (negative) externality. We agree. However, given the reluctance of policymakers to agree with us, there is an urgent need to consider, and compare, suboptimal policies. In this paper, we look at one such instance: setting a global tax on carbon at the wrong level. How costly are different errors? Since there is much uncertainty about how much climate change there will be, and how damaging it is when it occurs, ex-post errors will most likely be made. We compare different kinds of errors qualitatively and quantitatively and find that policy errors based on over-pessimistic views on climate change are much less costly than those made based on over-optimism. This finding is an inherent feature of standard integrated assessment models, even though these models do not feature tipping points or strong linearities.
There has been increasing interest in recent years in monopsony in the labour market. This paper discusses how we can measure monopsony power by combining insights from models based on both frictions and idiosyncrasies. It presents some evidence from the United Kingdom and the United States about how monopsony power varies across the wage distribution within markets, over the business cycle and over time.
We study countries’ compliance with the targets pledged in international climate-change agreements and the impact of those agreements and specific climate laws and policies on greenhouse-gas emissions and economic outcomes. To do so, we compile and codify data on international agreements and measures enacted at the national and sub-national levels. We find that compliance with targets has been mixed. Still, countries that signed the Kyoto Protocol or the Copenhagen Accord experienced significant reductions in emissions when compared to non-signatories. Having quantifiable targets led to further reductions. Effects from the Paris Agreement are not yet evident in the data. Carbon taxes and the introduction of emission-trading schemes led to material reductions in emissions. Other climate laws or policies do not appear to have had, individually, a material effect on emissions. The impact on GDP growth or inflation from most measures was largely insignificant. Overall, much more ambitious targets would be needed to offset the impact of economic and population growth on emissions and contain the expansion of the stock of gases.
Alfred Marshall and Mary Paley Marshall are often described as the first academic economist couple. Both studied at the University of Cambridge, where Paley became one of the first women to take the Tripos exam and the first female lecturer in economics, with Marshall’s encouragement. But in later life, Marshall opposed granting Cambridge degrees to women and their participation in academic economics. This paper recounts Alfred Marshall’s use of gender norms, born out of a separate spheres ideology, to promote and ingrain women’s exclusion in academic economics and beyond. We demonstrate the persistence of this ideology and resultant norms, drawing parallels between gendered inequities in labor market outcomes for Cambridge graduates in the UK post-Industrial Revolution and those apparent in cross-country data today. We argue that the persistence of the norms produced by separate spheres ideologies is likely to reflect, at least in part, the rents associated with preferential access to better paid, high-skilled labor market opportunities. In doing so, we ask who benefits from gender norms, who enforces them, and suggest relevant policy work and areas for future research.
In this paper, we mobilize newly available historical series from the World Inequality Database to construct world income distribution estimates from 1820 to 2020. We find that the level of global income inequality has always been very large, reflecting the persistence of a highly hierarchical world economic system. Global inequality increased between 1820 and 1910, in the context of the rise of Western dominance and colonial empires, and then stabilized at a very high level between 1910 and 2020. Between 1820 and 1910, both between-countries and within-countries inequality were increasing. In contrast, these two components of global inequality have moved separately between 1910 and 2020: Within-countries inequality dropped in 1910–1980 (while between-countries inequality kept increasing) but rose in 1980–2020 (while between-countries inequality started to decline). As a consequence of these contradictory and compensating evolutions, early 21st century neo-colonial capitalism involves similar levels of inequality as early 20th century colonial capitalism, though it is based on a different set of rules and institutions. We also discuss how alternative rules such as fiscal revenue sharing could lead to a significant drop in global inequality. (JEL: N30, O10, O40)
This paper evaluates the effect on crime of creating a fundamental modern-day institution: centralized professional police forces tasked with preventing crime. We study the 1829 formation of the London Metropolitan Police—the first professional force worldwide. Using newly digitized and geocoded crime and police data together with difference-in-differences and pre–post designs, we find evidence of a significant reduction in violent crimes (despite the possibility of offsetting increases in clearance and reporting rates). In contrast, a reduction in property crime is not visible.
We use detailed administrative data to study the adjustment of local labor markets to industrial robots in Germany. Robot exposure, as predicted by a shift-share variable, is associated with displacement effects in manufacturing, but those are fully offset by new jobs in services. The incidence mostly falls on young workers just entering the labor force. Automation is related to more stable employment within firms for incumbents, and this is driven by workers taking over new tasks in their original plants. Several measures indicate that those new jobs are of higher quality than the previous ones. Young workers also adapt their educational choices, and substitute away from vocational training towards colleges and universities. Finally, industrial robots have benefited workers in occupations with complementary tasks, such as managers or technical scientists.
This paper studies the political determinants of inequalities in government interventions under majoritarian (MAJ) and proportional representation (PR) systems. We propose a probabilistic voting model of electoral competition with highly targetable government interventions and heterogeneous localities. We uncover a novel relative electoral sensitivity effect that affects government interventions only under MAJ systems. This effect tends to reduce inequality in government interventions under MAJ systems when districts are composed of sufficiently homogeneous localities. This effect goes against the conventional wisdom that MAJ systems are necessarily more conducive to inequality than PR systems. We illustrate the empirical relevance of our results with numerical simulations on possible reforms of the US Electoral College.
We quantitatively evaluate a model of insurance with limited commitment where the requirement that contracts be immune to deviations by subcoalitions makes group size endogenous, as proposed by Genicot and Ray. We compare the model’s predictions to panel data from rural Indian villages. Apart from predicting a realistic degree of insurance, the model captures the evidence along two new dimensions: First, the largest coalition-proof groups are substantially smaller than typical villages. Second, with strong insurance in small groups, individual consumption responds symmetrically to income rises and falls, while alternative models predict strong counterfactual asymmetry.
Italy and Germany have similar geographical differences in firm productivity—with the North more productive than the South in Italy and the West more productive than the East in Germany—but have adopted different models of wage bargaining. Italy sets wages based on nationwide contracts that allow for limited local wage adjustments, while Germany has moved toward a more flexible system that allows for local bargaining. We find that Italy exhibits limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, while Germany has larger geographic wage differences and a tighter link between local wages and local productivity. As a consequence, in Italy, low-productivity provinces have higher non-employment rates than high-productivity provinces, because employers cannot lower wages, while in Germany the relationship between non-employment and productivity is significantly weaker. We conclude that the Italian system has significant costs in terms of forgone aggregate earnings and employment because it generates a spatial equilibrium where workers queue for jobs in the South and remain unemployed while waiting. If Italy adopted the German system, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively. Our findings are relevant for other European countries.
Previous work on transportation investments has focused on average impacts in high- and middle-income countries. We estimate average and heterogeneous effects in a poor continent, Africa, using roads and cities data spanning 50 years in 39 countries. Using changes in market access due to distant road construction as a source of exogenous variation, we estimate a 30-year elasticity of city population with respect to market access of about 0.08–0.13. Our results suggest that this elasticity is stronger for small and remote cities, and weaker in politically favored and agriculturally suitable areas. Access to foreign cities besides international ports matters little. Additional evidence points suggestively to rural-to-urban migration as the primary source of this population increase, though we cannot fully rule out natural increase or reallocation across cities.
We study the consequences of policy interventions when social norms are endogenous but costly to change. In our environment, a group faces a negative externality that it partially mitigates through incentives in the form of punishments. In this setting, policy interventions can have unexpected consequences. The most striking is that when the cost of bargaining is high, introducing a Pigouvian tax can increase output—yet in doing so increase welfare. An observer who saw that an increase in a Pigouvian tax raised output might wrongly conclude that this harmed welfare and that a larger tax increase would also raise output. This counter-intuitive impact on output is demonstrated theoretically for a general model and found in case studies for public goods subsidies and cartels.
Data-based decision making must account for the manipulation of data by agents who are aware of how decisions are being made and want to affect their allocations. We study a framework in which, due to such manipulation, data become less informative when decisions depend more strongly on data. We formalize why and how a decision maker should commit to underutilizing data. Doing so attenuates information loss and thereby improves allocation accuracy.
We study disappointment and platform exit among new bidders in an online auction marketplace. In particular, we study a hybrid auction format with a “Buy-It-Now” option, which, when executed, will abruptly end the auction and cancel any standing bids. When this happens, if the formerly leading bidder is new to the platform, then they are 6 percentage points more likely to exit the marketplace for every additional day they spent in the lead. This is rationalized by disappointment-averse bidders with outside options and rational expectations about the likelihood of winning. Our explanation is validated by three ancillary predictions: when expectations are lowered by higher competing bids, there is no effect; sensitivity of exit is declining in prior experience; and, for bidders who do not exit, time in the lead during the first experience predicts a subsequent preference for fixed-price, rather than auction, listings.
In July 2011, the Pakistani public learnt that the Central Intelligence Agency (CIA) had used a vaccination campaign as cover to capture Osama Bin Laden. The Taliban leveraged on this information and launched an anti-vaccine propaganda campaign to discredit vaccines and vaccination workers. We evaluate the effects of these events on immunization by implementing a difference-in-differences strategy across cohorts and districts. We find that vaccination rates declined between 23% and 39% in districts in the 90th percentile of Islamist support relative to those in the 10th percentile. These results suggest that information discrediting vaccination campaigns can negatively affect trust in health services and demand for immunization.
We elicit numerical expectations for late-onset dementia and long-term-care (LTC) outcomes in the US Health and Retirement Study. We provide the first empirical evidence on dementia-risk perceptions among dementia-free older Americans and establish important patterns regarding imprecision of subjective probabilities. Our elicitation distinguishes between precise and imprecise probabilities, while accounting for rounding of reports. Imprecise-probability respondents quantify imprecision using probability intervals. Nearly half of respondents hold imprecise dementia and LTC probabilities, while almost a third of precise-probability respondents round their reports. These proportions decrease substantially when LTC expectations are conditioned on hypothetical knowledge of the dementia state. Among rounding and imprecise-probability respondents, our elicitation yields two measures: an initial rounded or approximated response and a post-probe response, which we interpret as the respondent's true point or interval probability. We study the mapping between the two measures and find that respondents initially tend to over-report small probabilities and under-report large probabilities. Using a specific framework for study of LTC insurance choice with uncertain dementia state, we illustrate the dangers of ignoring imprecise or rounded probabilities for modeling and prediction of insurance demand.
We examine how workers reacted to a pay cut in a sales call center setting in the United States. The pay cut was implemented by raising two pre-existing sales targets, that is, by “moving the goalposts”. Using a difference-in-difference approach, we show that among the workers who experienced the pay cut, some chose to leave the firm (exit); others generated abnormally high customer refunds, in a way that hurt both them and the firm. (We define this work practice as counterproductive.) The firm believed, and we present evidence, that these workers intentionally sold the wrong items, as opposed to simply optimally shirking on effort in response to the pay cut. We show that the most loyal workers (those with longer tenure) expressed themselves only through counterproductive work practices and not through exit. Less loyal workers reacted more strongly than loyal workers, and did so through a balanced mix of exit and counterproductive behavior. To our knowledge, this is the first study to document individual-level patterns of exit and (counter-) productivity following a pay cut and, how these differ for high- versus low-loyalty workers.
Retroactive tax legislation is constitutional in most high-income countries. In this paper, we are concerned with the fiscal and macroeconomic consequences stemming from retroactive income taxation. Within the context of a real neoclassical economy, we find that if the government can set taxes retroactively within the fiscal year—or if there is a positive probability that a future government will be able to use retroactive taxation—then there exists a multiplicity of expectations-driven equilibria. In this case, neither fiscal policy nor macroeconomic aggregates are uniquely pinned down by economic fundamentals. Rather, they are determined by expectations about current and future fiscal policies. This implies that the government is a source of macroeconomic instability. In contrast, a constitutional reform banning the government from using retroactive tax legislation would yield a unique equilibrium, thus removing the possibility of expectations-driven fluctuations.
Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of the transactions in our sample invoiced in neither sterling nor the exporter’s currency. We then study the relationship between invoicing currencies and the response of import unit values to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import unit values are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. This result helps to explain why UK inflation turned out higher than expected when sterling depreciated during the Great Recession and after the Brexit referendum. Finally, within a conceptual framework, we show why bilateral exchange rates are not suitable for capturing exchange rate pass-through under vehicle currency pricing. Overall, our results help to clarify why the literature often finds a disconnect between exchange rates and prices when vehicle currencies are not accounted for.
We quantify the implications of voter bias and electoral competition for politicians’ gender composition. Unfavorable voters’ attitudes toward women and local gender earnings gap correlate negatively with the share of female candidates in Parliamentary elections. Using within-candidate variation across the different polling stations of an electoral district in a given election year, we find that female candidates obtain fewer votes in municipalities with higher gender earnings gaps. We show theoretically that when voters are biased against women, parties facing gender quotas select male candidates in the most contestable districts. We find empirical support for such a strategic party response to voter gender bias. Simulating our calibrated model confirms that competition significantly hinders the effectiveness of gender quotas.
I test the land and labor market effects of a property rights reform that computerized rural land records in Pakistan, making digitized records and automated transactions accessible to agricultural landowners and cultivators. Using the staggered roll-out of the program, I find that while the reform does not shift land ownership, landowning households are more likely to rent out land and shift into non-agricultural occupations. At the same time, cultivating households have access to more land, as rented in land and overall farm size increase. I construct measures of farmer-level total factor productivity (TFP) and marginal product of land, and demonstrate evidence of improved allocative efficiency as land is redistributed toward more productive farmers. Aggregate district-level production data suggest a reduction in the dispersion of marginal products of land and an improvement in productivity. The results have implications for both the allocation of land across farmers and the selection of labor into farming, demonstrating that agricultural land market frictions present a constraint to scale farming and structural change in developing countries.
Every year thousands of firms are engaged in research joint ventures (RJV), where all knowledge gained through research and development (R&D) is shared among members. Most of the empirical literature assumes members are non-cooperative in the product market. But many RJV members are rivals leaving open the possibility that firms may form RJVs to facilitate product market collusion. We examine this by exploiting variation in RJV formation generated by a policy change that affects the collusive benefits but not the research synergies associated with a RJV. We use data on RJVs formed between 1986 and 2001 together with firm-level information from Compustat to estimate a RJV participation equation. After correcting for the endogeneity of R&D and controlling for RJV characteristics and firm attributes, we find the decision to join is impacted by the policy change. We also find the magnitude is significant: the policy change resulted in an average drop in the probability of joining a RJV of |$41\%$| among computer and semiconductor manufacturers, |$34\%$| among telecommunications firms, and |$33\%$| among petroleum refining firms. Our results are consistent with research joint ventures serving a collusive function.
Services, which are less traded than goods, rose from 55% of world expenditure in 1970 to 75% in 2015. Using a Ricardian trade model incorporating endogenous structural change, we quantify how this substantial shift in consumption has affected trade. Without structural change, we find that the world trade to GDP ratio would be 13 percentage points higher by 2015, about half the boost delivered from declining trade costs. In addition, a world without structural change would have had about 40% greater welfare gains from the trade integration over the past four decades. Absent further reductions in trade costs, ongoing structural change implies that world trade as a share of GDP would eventually decline. Going forward, higher-income countries gain relatively more from reducing services trade costs than from reducing goods trade costs.
This paper investigates the distributional consequences of monetary policy across generations. We use a life-cycle model with a rich asset structure as well as nominal and real rigidities, calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. Life-cycle considerations allow to demonstrate the key role of maturing assets (in contrast to balance sheet holdings) for properly assessing the redistributive effects of monetary policy. The redistribution is mainly driven by nominal assets and labor income, less by real financial assets and housing. Overall, we find that a typical monetary policy easing redistributes welfare from older to younger generations, and decreases net worth inequality associated with life-cycle motives.
We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the zero lower bound (ZLB) to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.
In the late 2000s, a regulatory reform dramatically strengthened the incentives of French nonprofit (NP) hospitals to attract patients. Exploiting exhaustive data for surgery treatments between 2005 and 2008, and modeling hospitals as supplying utility to patients, we show that increased competitive pressure on NP hospitals caused them to perform more procedures, but did not inflate overall activity at the industry level. Although they have gained market shares over their for-profit (FP) counterparts, NP hospitals have been significantly worse off after the reform. To adjust to stronger financial incentives, they incurred an additional effort (pecuniary and non-pecuniary costs) equivalent to about a quarter of their annual revenue.
We use laboratory experiments to study whether biases in beliefs grow more severe when people socially exchange these beliefs with one another. We elicit subjects’ (naturally biased) beliefs about their relative performance in an intelligence quotient (IQ) test and allow them to update these beliefs in real time. Part of the way through the task we give each subject access to the beliefs of a counterpart who performed similarly on the test and allow them both to observe the evolution of one another’s beliefs. We find that subjects respond to one another’s beliefs in a highly asymmetric way, causing a severe amplification of subjects’ initial bias. We find no such patterns in response to objective public signals or in control treatments without social exchange or scope for motivated beliefs. We also provide evidence that the pattern is difficult to reconcile with Bayesianism and standard versions of confirmation bias. Overall, our results suggest that bias amplification is likely driven by “motivated assignment of accuracy” to others’ beliefs: subjects selectively attribute higher informational value to social signals that reinforce their motivation.
We study spatial variation in criminal sentencing. We show the existence of local sentencing practices varying widely even across geographically proximate areas. Using compulsory rotation of judges in North Carolina, we find that judges arriving in a new court gradually converge toward local sentencing practices. We provide evidence that convergence in sentencing corresponds to a process of learning about local practices, which is accelerated by the presence of senior judges in the district, and that these sentencing practices are correlated with local norms of behavior. Finally, we discuss the theoretical implications of these results for the optimal design of judicial systems.
This paper studies how punishment affects future compliance behavior and isolates deterrence effects mediated by learning. Using administrative data from speed cameras that capture the full driving histories of more than a million cars over several years, we evaluate responses to punishment at the extensive (receiving a speeding ticket) and intensive margins (tickets with higher fines). Two complementary empirical strategies—a regression discontinuity design and an event study—coherently document strong responses to receiving a ticket: The speeding rate drops by a third and re-offense rates fall by 70%. Higher fines produce a small but imprecisely estimated additional effect. All responses occur immediately and are persistent over time, with no backsliding toward speeding even two years after receiving a ticket. Our evidence rejects unlearning and temporary salience effects. Instead, it supports a learning model in which agents update their priors on the expected punishment in a coarse manner.
Locally targeted programs may exploit available information transmitted through local networks to improve the selection of beneficiaries, but the effective use of this information is not granted when the selection of beneficiaries entails balancing multiple targeting criteria that are costly to verify. This paper analyzes how local committees balance issues of neediness, productivity, risk, and favoritism to allocate subsidized loans to Thai villagers. Local committees in charge of managing village funds provided credit to richer, less-productive, and elite-connected villagers threatening the program’s sustainability. Informal markets partially attenuated the targeting distortions by redirecting credit from connected to unconnected households, albeit at high interest rates. Counterfactual exercises show that eliminating the connection-based distortions would reduce within-village inequality by 9.7% and modestly increase village-level output by 0.9%–1.5%.
We study competition for the market in a setting where incumbents (and, to a lesser extent, neighbouring incumbents) benefit from a cost or information advantage. We first compare the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find the timing of tenders interrelates with the likelihood of monopolisation. For high incumbency advantages and/or discount factors, monopolisation is expected, in which case synchronous tendering is preferable as it strengthens the pressure that entrants exercise on the monopolist. For low incumbency advantages and/or discount factors, other firms remain active, in which case staggered tendering is preferable as it maximises competitive pressure coming from the other firms. We use bus tendering in London to illustrate our insights and draw policy implications.
Digital technologies displace labor from routine tasks, raising concerns that labor is racing against the machine. We develop an empirically tractable task-based framework to estimate the aggregate employment effects of routine-replacing technological change (RRTC), along with the labor and product demand channels through which this aggregate effect comes about, focusing on the role of inter-regional trade. While RRTC has indeed had strong displacement effects in Europe between 1999 and 2010, it has simultaneously created new jobs through increased product demand, resulting in net employment growth. However, the distribution of gains from technological progress matters for its job-creating potential.
This paper offers a novel illustration of the political economy of religion by examining the impact of religious elites on development. We compile a unique database on holy Muslim shrines across Pakistani Punjab and construct a historical panel of literacy spanning over a century (1901–2011). Using the 1977 military takeover as a universal shock that gave control over public goods to politicians, our difference-in-differences analysis shows that areas with a greater concentration of shrines experienced a substantially retarded growth in literacy after the coup. Our results suggest that the increase in average literacy rate would have been higher by 13% in the post-coup period in the absence of shrine influence. We directly address the selection concern that shrines might be situated in areas predisposed to lower literacy expansion. Finally, we argue that the coup devolved control over public goods to local politicians, and shrine elites, being more averse to education since it undermines their power, suppressed its expansion in shrine-dense areas.
How can quality be improved in markets in developing countries, which are known to be plagued by substandard and counterfeit (“fake”, in short) products? We study the market for antimalarial drugs in Uganda, where we randomly assign entry of a retailer (non-governmental organization (NGO)) providing a superior product—an authentic drug priced below the market—and investigate how incumbent firms and consumers respond. We find that the presence of the NGO had economically important effects. Approximately one year after the new market actor entered, the share of incumbent firms selling fake drugs dropped by more than 50% in the intervention villages, with higher quality drugs sold at significantly lower prices. Household survey evidence further shows that the quality improvements were accompanied by consumers expecting fewer fake drugs sold by drug stores. The intervention increased use of the antimalarial drugs overall. The results are consistent with a simple model where the presence of a seller committed to high quality, as opposed to an average firm, strengthens reputational incentives for competing firms to improve quality in order to not be forced out of the market, leading to “good driving out bad”.
Behavioral constraints may explain part of the low demand for preventive health products. We test the effects of two light-touch psychological interventions on water chlorination and related health and economic outcomes using a randomized controlled trial among 3,750 women in rural Kenya. One intervention encourages participants to visualize alternative realizations of the future, and the other builds participants’ ability to make concrete plans. After 12 weeks, visualization increases objectively measured chlorination, reduces diarrhea episodes among children, and increases savings. Effects on chlorination and savings persist after almost 3 years. Effects of the planning intervention are weaker and largely insignificant. Analysis of mechanisms suggests both interventions increase self-efficacy—beliefs about one’s ability to achieve desired outcomes. Visualization also increases participants’ skill in forecasting their future utility. The interventions do not differentially affect beliefs and knowledge about chlorination. Results suggest simple psychological interventions can increase future-oriented behaviors, including use of preventive health technologies.
I estimate the effect of additional pension benefits on women’s retirement decisions by examining a German pension subsidy program. The subsidies have a kinked relationship with the recipients’ past pension contributions, creating a sharply different slope of benefits for similar women on either side of the kink point. I find that a 100 euro increase in the monthly benefit induces female recipients to claim their pensions six months earlier. Recipients also adjust their labor supply by using unemployment insurance as a stepping stone to retirement and by reducing the time spent in marginal employment. A back-of-the-envelope calculation suggests that the ratio of behavioral to mechanical costs for this subsidy program is 0.25, which is smaller than that of many other income support programs. (JEL: H55, J18, J21, J26)
We present a model that accounts for the “mystery of original sin” and the surge in local-currency borrowing by emerging economies in the recent decade. We quantitatively investigate the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government's monetary and debt policy: strategic currency debasement and default on sovereign debt. Local-currency debt obligations act as a better consumption hedge against income shocks than foreign-currency debt because their real value can be affected by monetary policy. However, this provides a government with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. Our model predicts that a country with a less credible monetary policy borrows mainly in foreign currency as a substitute for monetary credibility. An important extension demonstrates that in the presence of an expectational Phillips curve, local-currency debt improves the ability of monetary policymakers to commit.
This paper investigates the long-term implications of climate change on global migration and inequality. Accounting for the effects of changing temperatures, sea levels, and the frequency and intensity of natural disasters, we model the impact of climate change on productivity and utility in a dynamic general equilibrium framework. By endogenizing people’s migration decisions across millions of |$5 \times 5$| km spatial cells, our approach sheds light on the magnitude and dyadic, education-specific structure of human migration induced by global warming. We find that climate change strongly intensifies global inequality and poverty, reinforces urbanization, and boosts migration from low- to high-latitude areas. Median projections suggest that climate change will induce a voluntary and a forced permanent relocation of 62 million working-age individuals over the course of the 21st century. Overall, under current international migration laws and policies, only a small fraction of people suffering from the negative effects of climate change manages to move beyond their homelands. We conclude that it is unlikely that climate shocks will induce massive international flows of migrants, except under combined extremely pessimistic climate scenarios and highly permissive migration policies. In contrast, poverty resulting from climate change is a real threat to all of us.
We estimate a structural model of bargaining between a branch of a large transnational gang and pushers using data from detailed records kept by the gang. The model allows for the gang’s relative bargaining power to differ for pushers with different characteristics, such as those with addictions or borrowing problems. Exploiting supply shocks in our data, we use the estimated model to study the effectiveness of various enforcement strategies. We find that targeting pushers is more effective at reducing quantities sold compared to targeting the gang’s upstream supply chain.
How to fight global problems with local tools? When only firms know what externality-producing activities can be relocated, policies shape the location distribution of firm types with different social values. We find that, because of this selection effect, the optimal local policies confront firms’ mobility with elevated corrective externality prices, in contrast with the common remedies for the relocation risk. Our mechanism incentivizes also moving firms to limit the externality, and it influences strategically the distribution of moving firms that comply with policies elsewhere. The magnitude of these effects is illustrated by a quantification for the key sectors in the European Union emissions trading system.
This paper develops a theoretical framework to study the interaction between globalization and political structure. We show that political structure adapts in a non-monotonic way to declining transport costs. Borders hamper trade. At an earlier stage, the political response to expanding trade opportunities consists of removing borders by increasing country size. At a later stage, instead, it consists of removing the cost of borders by creating international unions. This leads to a reduction in country size. Moreover, diplomacy replaces conquest as a tool to ensure market access. These predictions are consistent with historical evidence on trade, territorial changes, and membership of international unions.
Many countries have phased out nuclear power in response to concerns about nuclear waste and the risk of nuclear accidents. This paper examines the shutdown of more than half of the nuclear production capacity in Germany after the Fukushima accident in 2011. We use hourly data on power plant operations and a machine learning approach to estimate the impacts of the phase-out policy. We find that reductions in nuclear electricity production were offset primarily by increases in coal-fired production and net electricity imports. Our estimates of the social cost of the phase-out range from €3 to €8 billion per year. The majority of this cost comes from the increased mortality risk associated with exposure to the local air pollution emitted when burning fossil fuels. Policymakers would have to significantly overestimate the risk or cost of a nuclear accident to conclude that the benefits of the phase-out exceed its social costs. We discuss the likely role of behavioral biases in this setting, and highlight the importance of ensuring that policymakers and the public are informed about the health effects of local air pollution.
Received wisdom suggests that most exporters sell most of their output domestically. We show, however, that the distribution of export intensity varies substantially across countries and is often bimodal, displaying “twin peaks”—that is, large shares of both low- and high-intensity exporters coexisting alongside each other within a country. We reconcile this new stylized fact with an otherwise standard model of trade in which firms face firm-destination-specific revenue shifters that follow a lognormal distribution with sufficiently high dispersion. We structurally estimate the model and show that differences in countries’ size relative to the rest of the world can account for most of the observed cross-country variation in the distribution of export intensity in our data. While policies that incentivize firms to export a high share of their output account for a substantial share of the variation in the dispersion of firm-destination revenue shifters, they cannot fully account for the widespread prevalence of twin peaks around the world.
Early childhood development is becoming the focus of policy worldwide. However, the evidence on the effectiveness of scalable models is scant, particularly when it comes to infants in developing countries. In this paper, we describe and evaluate with a cluster-Randomized Controlled Trial an intervention designed to improve the quality of child stimulation within the context of an existing parenting program in Colombia, known as FAMI. The intervention improved children’s development by 0.16 of a standard deviation (SD) and children’s nutritional status, as reflected in a reduction of 5.8 percentage points of children whose height-for-age is below -1 SD.
Effective policy-making requires that voters avoid electing malfeasant politicians. However, informing voters of incumbent malfeasance in corrupt contexts may not reduce incumbent support. As our simple learning model shows, electoral sanctioning is limited where voters already believed incumbents to be malfeasant, while information’s effect on turnout is non-monotonic in the magnitude of reported malfeasance. We conducted a field experiment in Mexico that informed voters about malfeasant mayoral spending before municipal elections, to test whether these Bayesian predictions apply in a developing context where many voters are poorly informed. Consistent with voter learning, the intervention increased incumbent vote share where voters possessed unfavorable prior beliefs and when audit reports caused voters to favorably update their posterior beliefs about the incumbent’s malfeasance. Furthermore, we find that low and, especially, high malfeasance revelations increased turnout, while less surprising information reduced turnout. These results suggest that improved governance requires greater transparency and citizen expectations.
Using administrative German data, we show that large cities allow for a more efficient matching between workers and firms and this has important consequences for geographical inequality. Specifically, the match between high-quality workers and high-quality plants is significantly tighter in large cities relative to small cities. Wages in large cities are higher not only because of the higher worker quality but also because of a stronger assortative matching. Strong assortative matching in large cities magnifies wage differences caused by worker sorting, and is a key factor in explaining the growth of geographical wage disparities over the last three decades.
Monetary policy shocks affect interest rates at long horizons (10 years or more). Furthermore, the private sectorâs real GDP forecasts are revised upward in response to a monetary tightening. These facts challenge the prevailing theories in academic and policy circles. In this paper, I propose a micro-founded model to rationalize those facts, based on the signaling channel of monetary policy. I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes’ theorem. Policy actions play a signaling role, and may therefore rationalize the above empirical findings.
This paper offers the first systematic historical evidence on the role of a central actor in modern growth theory: the engineer. We construct a database on the share of engineers in the labor force during the Second Industrial Revolution (1870–1914) at the county level for the United States and the state and national levels for the Americas. These measures are robustly correlated with income today after controlling for literacy, other types of higher-order human capital (college graduates, lawyers, physicians, patenting) and demand-side factors, as well as after instrumenting engineering using the 1862 US Land Grant Colleges program. Differences in engineering density in 1880 accounted for 10% of the higher US county incomes today, while national disparities in engineering density can explain approximately a quarter of the income divergence in the Americas. To document the mechanisms through which engineering density works, we show how it is correlated with higher rates of technology adoption and structural transformation across intermediate time periods and with numerous measures of the knowledge economy today.
A long line of laboratory experiments has found that women are less likely to sort into competitive environments. Although part of this effect may be explained by gender differences in risk attitudes and self-confidence, previous studies have attributed the majority of the gender gap to gender differences in a competitiveness trait. I re-examine this result using a novel experiment that allows me to separate competitiveness from alternative explanations using causal treatments. In contradiction to the main conclusion drawn in a long literature, my results imply that the entire gender gap is driven by gender differences in risk attitudes and self-confidence, which has implications for policy and research.
Do private incentives to acquire information reflect the full social value of such information? We show that the answer to this question is typically negative in a canonical business cycle setting, where firms set prices under imperfect information about aggregate productivity. The wedge between private and social values of information is related to market power and ex-post inefficiencies in the use of information. The first reduces the private value of information (relative to its social value), while the second raises it. The overall sign of the inefficiency in information acquisition is therefore ambiguous. Implementing the informationally constrained efficient outcome requires a combination of fiscal and monetary policies—specifically, counter-cyclical revenue subsides as well as a monetary policy rule that targets a counter-cyclical aggregate price level.
We show that the welfare of a country’s infinitely lived representative consumer is summarized, to a first order, by total factor productivity (TFP), appropriately defined, and by the capital stock per capita. The result holds for both closed and open economies, regardless of the type of production technology and the degree of product market competition. Welfare-relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates. We use these results to calculate welfare gaps and growth rates in a sample of developed countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both developed and developing countries.
This paper studies the macroeconomic effects of capital reallocation with financial shocks. I develop a model in which firms face borrowing constraints, idiosyncratic productivity shocks, and idiosyncratic liquidation costs. The idiosyncratic risks of productivity and liquidation costs generate an option value of staying in business and a liquidation delay for unproductive firms. A new feature arises from the delay. Unproductive firms that are not liquidated increase their leverage over time, pushing them to hit the borrowing limit. I show that adverse financial shocks that tighten borrowing constraints can raise the option value, and equilibrium effects can further delay capital liquidation and reallocation. Capital is thus persistently misallocated, leading to long-lasting economic contractions.
We study the effects of Fair Trade (FT) certification of coffee on producers and households in Costa Rica. Examining the production dynamics of all Costa Rican coffee mills from 1999 to 2014, we find that when global coffee prices are lower and the FT guaranteed minimum price is binding, FT certification is associated with a higher sales price, greater sales, and more revenues. We also find that certification reduces the probability of a mill closing down and exiting the industry. Looking at households, we find that certification is associated with higher incomes for farm owners. Part of this is due to a transfer of income from intermediaries whose incomes decrease due to FT. We find no effect of FT on unskilled workers, who are the more disadvantaged group within the coffee sector.
To understand why naiveté about present-biased behavior is so prevalent and persistent, our experiment investigates how well participants learn from their past behavior in a real-effort task. While participants display naive present-biased behavior initially, our novel methodology allows us to establish that their updating is unbiased and would eliminate naiveté in the long run. Moreover, learning is unencumbered by a change in the environment. Our results suggest that persistent naiveté does not result from a fundamental inferential bias. However, participants underestimate their future learning—a bias that may lead to underinvestment in experimentation and a failure to activate self-regulation mechanisms.
How should payment systems of means-tested benefits be designed to improve the financial situation of needy recipients most effectively? We study this question in the context of mandatory health insurance in Switzerland, where recipients initially receive either a cash transfer or subsidized insurance premiums (a form of in-kind transfer). A federal reform in 2014 forced cantons (i.e. states) to universally switch to in-kind provision. We exploit this setting based on a difference-in-differences design, analyzing eight years of rich individual-level accounting data and applying a machine learning approach to identify cash recipients prior to the reform. We find that switching from cash to in-kind transfers persistently reduces the likelihood of late premium payments by about 20% and of government debt collection for long-term missed payments by approximately 12%. There is no evidence for a negative spillover effect on the timely payment of the non-subsidized co-pay bills for health services after the regime change.
This paper studies the effect of emigration on technological change in sending locations after one of the largest migration events in human history, the mass migration from Europe to the United States in the 19th century. To establish causality, we adopt an instrumental variable strategy that combines local growing-season frost shocks with proximity to emigration ports. Using data on patents, we find that emigration led to an increase in innovative activity in sending localities. Using data on capital and labor inputs in agriculture and industry, we find evidence of an increased capital intensity related to new technologies in both sectors. We argue that these results are consistent with theories of induced (labor-saving) innovation due to high labor costs following emigration.
We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates. We focus on the credit card market, in which we observe US consumers borrowing at high and very dispersed interest rates despite receiving many credit card offers. Our framework includes two main features to account for these patterns: the endogenous effort of examining offers and product differentiation. Our calibration suggests that most borrowers examine few of the offers they receive, and thereby forego cards with low interest rates and high non-price benefits. The calibrated model implies that interest-rate caps reduce credit supply and significantly curb lenders’ market power, thereby increasing consumer surplus. Moderate caps may yield larger gains in consumer surplus than tighter ones.
This paper studies the implications of imperfect competition in firm-to-firm trade. Exploiting data on the universe of sales relationships between Belgian firms, we document that firms’ markups increase in the average input shares among their buyers. Motivated by this fact, we develop and estimate a model where firms charge buyer–supplier-specific markups that depend on the bilateral input shares. We find markup dispersion within firms across buyers creates substantial welfare loss: Aggregate welfare increases by around 6% when firms are banned from charging different markups across buyers.
We investigate the importance of co-ethnic networks and diversity in determining immigrant inventors’ settlements in the United States by following the location choices of thousands of them across counties during the Age of Mass Migration. To do so, we combine a unique United States Patent and Trademark Office historical patent dataset on immigrants who arrived as adults with Census data and exploit exogenous variation in both immigration flows and diversity induced by former settlements, WWI, and the 1920s Immigration Acts. We find that co-ethnic networks play an important role in attracting immigrant inventors. Yet, we also find that immigrant diversity acts as an additional significant pull factor. This is mainly due to externalities that foster immigrant inventors’ productivity.
Sectoral contracts in many European countries set wage floors for different occupation groups. In addition, employers often pay a wage premium (or wage cushion) to individual workers. We use administrative data from Portugal, linked to collective bargaining agreements, to study the interactions between wage floors and wage cushions and quantify the impact of sectoral wage floors. Although wages exhibit a “spike” at the wage floor, a typical worker receives a 20% premium over the floor, with larger cushions for older- and better-educated workers and at higher-productivity firms. Cushions also allow wages to covary with firm-specific productivity, even within sectoral agreements. Contract negotiations tend to raise all wage floors proportionally, with increases that reflect average productivity growth among covered firms. As floors rise, however, cushions are compressed, leading to an average passthrough rate of about 50%. Finally, we use a series of counterfactual simulations to show that real wage reductions during the recent financial crisis arose through reductions in real wage floors, reductions in real cushions, and a re-allocation of workers to lower wage floors. Offsetting these effects was a rapid rise in education of new cohorts, which in the absence of other factors would have led to rising real wages.
I develop a tractable model to study the optimal debt maturity structure and fiscal policy in an environment with incomplete markets, lack of commitment, and opportunity to default by the government. I show that the Lucas and Stokey time-consistency result can be extended to environments with an opportunity of outright default. The maturity is used to resolve the time-consistency problem. I show that if both risk-free interest rates and risk premiums can be manipulated, then the optimal maturity structure tends to have a decaying profile: The government issues debt at all maturity dates, but the distribution of payments over time is skewed toward the short end. The model allows for numerical characterization of the optimal maturity structure of debt with an arbitrarily large number of maturities. Debt maturity data across countries are consistent with model predictions.
We construct a new quarterly data set of international capital flows broken down by sector—banks, corporates, and sovereigns—and demonstrate the importance of distinguishing capital flows by the sector of domestic borrowers and lenders. We document four new sets of facts. First, banks account for the largest part of the external debt (stocks and flows) in advanced economies, whereas in emerging markets, banks, corporates, and sovereigns have roughly equal shares. Second, the high correlation between total capital inflows and outflows documented in the literature is driven by banking sector flows; that is, domestic banks’ borrowing from foreigners is highly correlated with domestic banks’ lending to foreigners. Third, sovereign flows behave very differently from and often act as a countervailing force to private sector (banking and corporate) flows, especially in emerging markets. Fourth, different shocks (global financial cycles versus domestic business cycles; banking versus currency versus sovereign crises) generate very distinct patterns of capital inflows and outflows by sector. The stylized facts we document deepen our understanding of the dynamics and behavior of capital flows and have important implications for open economy models.
The quality of bank lending is increasingly viewed as a force driving the buildup and unfolding of crises. In a dynamic general equilibrium model, we show that banks’ access to liquidity and the values of loan portfolios govern banks’ incentives and effectiveness in producing information on loans. Consistent with granular loan-level evidence from US banks, the calibrated model predicts that loan due diligence deteriorates during expansions and intensifies during contractions. This countercyclicality attenuates investment and output effects of liquidity shocks but can moderately amplify loan quality shocks. Credit policies may dilute stabilizing effects of due diligence.
Wages for the vast majority of workers have stagnated since the 1980s while, productivity has grown. We investigate two coexisting explanations based on rising market power: (1) monopsony, where dominant firms exploit the limited mobility of their own workers to pay lower wages; and (2) monopoly, where dominant firms charge too high prices for what they sell, which lowers production and the demand for labor, and hence equilibrium wages economy-wide. Using establishment data from the US Census Bureau between 1997 and 2016, we find evidence of both monopoly and monopsony, where the former is rising over this period and the latter is stable. Both contribute to the decoupling of productivity and wage growth, with monopoly being the primary determinant: In 2016, monopoly accounts for 75% of wage stagnation, monopsony for 25%.
The Jobs of the World Project is a public resource designed to enable research on jobs and poverty across and within countries over the entire development spectrum. At its core is a new dataset assembled by harmonising Demographic and Health Surveys (DHS) and National Censuses (IPUMS) for all countries and all years after 1990 where data is available. The current version covers 115 countries, observed four times on average. We use the data to show how the nature of jobs and their allocation vary within countries by wealth and gender and across countries by stages of development. We discuss evidence that shows how disparities at the micro level lead to a misuse of human potential that links individual poverty to national income.
Two centuries ago, in most countries around the world, women were unable to vote, had no say over their own children or property, and could not obtain a divorce. Women have gradually gained rights in many areas of life, and this legal expansion has been closely intertwined with economic development. We aim to understand the drivers behind these reforms. To this end, we distinguish between four types of women’s rights—economic, political, labor, and body—and document their evolution over the past 50 years across countries. We summarize the political-economy mechanisms that link economic development to changes in women’s rights and show empirically that these mechanisms account for a large share of the variation in women’s rights across countries and over time.
Formal job search has undergone massive transformations in the last two decades with the move to online platforms. This makes more stages of the job search process observable, and allows researchers to intervene in this market and improve the design of the job search process and the information available in it. This paper showcases studies that illustrate the potential of analyzing online job search data and of intervening in the online job search process. It presents the current insights and some open questions and highlights conditions under which some of the recent interventions are likely to improve market outcomes overall, rather than improving only the outcomes for the treated individuals.
We quantify the role of financial leverage behind the sluggish post-crisis investment performance of European firms. We use a cross-country firm-bank matched database to identify separate roles for firm leverage, bank balance sheet weaknesses arising from sovereign risk, and aggregate demand conditions. We find that firms entering the crisis with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries whose banks are weak due to sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is also persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain about 20% of the cumulative decline in aggregate private sector investment over the crisis period.
We assess how firm expectations about future production impact current production and pricing decisions. Our analysis is based on a large survey of firms in the German manufacturing sector. To identify the causal effect of expectations, we rely on the timing of survey responses and match firms with the same fundamentals but different views about the future. Firms that expect their production to increase (decrease) in the future are 15 percentage points more (less) likely to raise current production and prices, compared to firms that expect no change in production. In a second step, we show that expectations also matter even if they turn out to be incorrect. Lastly, we aggregate expectation errors across firms and find that they account for about 15% of aggregate fluctuations.
In this article, we propose a framework to tackle conflict prevention, an issue which has received interest in several policy areas. A key challenge of conflict forecasting for prevention is that outbreaks of conflict in previously peaceful countries are rare events and therefore hard to predict. To make progress in this hard problem, this project summarizes more than four million newspaper articles using a topic model. The topics are then fed into a random forest to predict conflict risk, which is then integrated into a simple static framework in which a decision maker decides on the optimal number of interventions to minimize the total cost of conflict and intervention. According to the stylized model, cost savings compared to not intervening pre-conflict are over US$1 trillion even with relatively ineffective interventions and US$13 trillion with effective interventions.
We suggest a generalized collective model of consumption that extends Browning, Chiappori, and Lewbel to couples with children. Economies of scale are defined using a general form of Barten scales. We identify resource sharing among household members and, originally, the contribution of each parent to the expenditure on children. We provide a tractable estimation approach based on a simple demand system for male and female clothing, that is, two exclusive goods commonly available in standard surveys. We illustrate the method on thirty years of expenditure data for the UK. We relax the independence of the sharing rule on total expenditure and actually find that women’s shares increase with living standards. This, and progress in education levels, explains most of the reduction in intra-household inequality over the period.
We use a research design created by forced migrations to examine the costs and benefits of leaving agriculture in mid-20th century Finland. After World War II, 11% of the Finnish population was resettled from areas ceded to the Soviet Union. Entire rural communities were moved to locations that resembled the origin areas, and displaced farmers were given land and assistance to establish new farms. Despite this policy of reconstructing the pre-war situation, forced migration increased the likelihood of switching to non-agricultural jobs and moving to urban areas. Consequently, forced migration also increased the long-term income of the displaced rural population. By contrast, forced migration decreased the income of the resettled urban population. We examine the extent to which these effects can be explained by the quality of the new farms, human capital investments, networks, and discrimination, but do not find evidence supporting these mechanisms. Instead, we argue that habit formation toward residential locations provides the most compelling rationalization for our results.
I study how local Chinese newspapers report on the national anti-corruption campaign by collecting a large-scale dataset of newspaper articles, internet searches, and comments on social media. Despite greater reader interest, local newspapers underreport, and deemphasise corruption scandals involving high-level officials from their own province. Underreporting is greater when a corrupt official is well connected, and a newspaper does not rely on advertising revenue. City-level newspapers report less about corruption in their own city but are more likely to report about corruption within the provincial government. I present suggestive evidence that this type of localised censorship reduces the accountability of local governments.
We examine the labor market consequences of an exogenous increase in the supply of skilled labor in several municipalities in Norway, resulting from the construction of new colleges in the 1970s. We find that skilled wages increased as a response, suggesting that along with an increase in the supply there was also an increase in demand for skill. We also show that college openings led to an increase in the productivity of skilled labor and investments in R&D. Our findings are consistent with models of endogenous technical change where an abundance of skilled workers may encourage firms to adopt skill-complementary technologies.
It is difficult to identify sources of discrimination in police stop and search data. In part, this is due to uncertainty over the objective of discretionary police stops: Do officers aim to maximize arrests or to minimize crime? In this paper, I compare theoretical predictions implied by these two objectives to data from U.S. cities. Empirical evidence is consistent with a model of arrest maximization and inconsistent with a model of crime minimization. The findings support the validity of existing tests for discrimination that rely on the assumption that police officers maximize arrests.
This paper estimates the effects of economic downturns on the expansion of Pentecostal Evangelicalism in Brazil. Regions more exposed to economic distress experienced a persistent rise both in Pentecostal affiliation and in the vote share of candidates connected to Pentecostal churches in national legislative elections. Once elected, these politicians carry out an agenda with greater emphasis on issues that are sensitive to fundamental religious principles. We, therefore, find that recessions led to the rise of religious fundamentalism in tandem with the transfer of political capital to elected Pentecostal leaders.
We analyze the consequences of monetary policy for sovereign debt sustainability and welfare in a model of a small open economy where the government issues long-term nominal debt without a commitment not to default on it or erode its real value through (costly) inflation. Inflation is a form of partial default, one that is more state-contingent than outright default. This reduces the government’s incentives to default outright and hence enlarges the repayment region, compared to a regime in which debt cannot be inflated away. Moreover, inflation delivers sizable welfare gains in situations of sovereign debt stress, in which its benefits as a debt-stabilizing tool are larger. Over the longer run, however, the welfare gains from inflation are more modest, because the inflationary bias leads the government to create inflation also in situations in which it is less useful for debt-stabilization purposes.
This paper studies how frictions in the acquisition of new customers distort the allocation of activities across heterogeneous producers. We add bilateral search frictions in a Ricardian model of trade and use French firm-to-firm trade data to estimate search frictions faced by French exporters in foreign markets. Estimated coefficients display a strong degree of heterogeneity across countries and products that correlates with various proxies for information frictions. Markets with high estimated frictions are shown to display less dispersion in sales between high- and low-productivity firms, a consequence of the distortive impact of frictions. A counterfactual reduction in the level of search frictions significantly improves the efficiency of the selection process by pushing the least productive exporters out of the market while increasing export sales at the top of the productivity distribution.
This paper estimates the relationship between investments in five distributed generation technologies and hourly net withdrawals from over 2,000 electricity distribution networks in France between 2005 and 2018. We find that investments in distributed wind and solar generation have little or no impact on the annual peak of hourly net withdrawals from the distribution grid, while investments in hydroelectric and thermal distributed generation significantly reduce it. An optimistic analysis of the impact of investments in battery storage suggests that high levels are required for distributed wind and solar to deliver similar reductions in the annual peak of hourly net withdrawals. Our results imply that public policies favoring distributed wind and solar generation over utility-scale generation cannot be rationalized by savings in future grid investments.
This paper derives a European Herfindahl–Hirschman concentration index from 15 micro-aggregated country datasets. In the last decade, European concentration rose due to a reallocation of economic activity toward large and concentrated industries. Over the same period, productivity gains from an increasing allocative efficiency of the European market accounted for 50% of European productivity growth while markups stayed constant. Using country-industry variation, we show that changes in concentration are positively associated with changes in productivity and allocative efficiency. This holds across most sectors and countries and supports the notion that rising concentration in Europe reflects a more efficient market environment rather than weak competition and rising market power.
This paper uses the 2015 Volkswagen (VW) emissions scandal as a natural experiment to provide evidence that collective reputation externalities are economically significant. Using a combination of difference-in-differences and demand estimation approaches, we document a spillover effect from the scandal to the non-VW German auto manufacturers. The spillover amounts to an average drop of $2,057 in consumer valuations of these manufacturers’ vehicles and a 34.6% reduction in their annual sales. We substantiate our interpretation that the estimates reflect a reputation spillover using data on internet search behavior and direct measures of consumer sentiment from Twitter.
Homelessness and precarious living conditions are on the rise across much of the Western world. This paper exploits quasi-exogenous variation in the affordability of rents due to a cut in rent subsidies for low-income households in the United Kingdom in April 2011. Using comprehensive district-level administrative data, we show that the affordability shock caused a significant increase in financial distress, evictions, property crimes, insecure temporary housing arrangements, statutory homelessness, and actual rough sleeping. The most notable rise in statutory homelessness is driven by families with children, lone parents, individuals with existing health conditions, and as a result of having been evicted. We estimate that the fiscal savings were low and shifted toward the local administration: Savings by the central government were partially offset by an increase in council spending to meet statutory obligations for homelessness.
This paper studies how people infer a state of the world from information structures that include additional, payoff-irrelevant states. For example, learning from a customer review about a product’s quality requires accounting for the reviewer’s otherwise-irrelevant taste. This creates an attribution problem common to all information structures with multiple causes. We report controlled experimental evidence for pervasive overinference about states that affect utility—a form of “omitted variable bias” in belief updating, providing an explanation for various misattribution patterns. In studying why systematic misattribution arises, we consistently find that errors are not due to deliberate effort avoidance or a lack of cognitive capacity. Instead, people behave as if they form incomplete mental models of the information structure and fail to notice the need to account for alternative causes. These mental models are not stable but context-dependent: Misattribution responds to a variety of attentional manipulations, but not to changes in the costs of inattention.
This paper examines the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows from investors actively searching for yield on financial markets worldwide gained importance during the post-crisis “second phase of global liquidity”. The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows not only imply elevated asset prices but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the past decade and hold important policy implications for monetary and financial stability.
Bigger cities offer more valuable experiences and opportunities in exchange for higher housing costs. While higher-ability workers benefit more from bigger cities, they are not more likely to move to one. Our model of urban sorting by workers with heterogeneous self-confidence and ability suggests flawed self-assessment is partly to blame. Analysis of the National Longitudinal Survey of Youth 1979 data shows that, consistent with our model, young workers with high self-confidence are more likely to locate in a big city initially. For more experienced workers, ability plays a stronger role in determining location choices, but the lasting impact of earlier choices dampens their incentives to move.
We relate terrorist attacks to media signal coverage and schooling in Kenya to examine how terrorism alters the demand for education through perceived risks and returns. Exploiting variation in wireless signal coverage and attacks across space and time, we establish that media access reinforces negative effects of terrorism on schooling. Our results are robust to instrumenting both media signal and attacks. We also find that attacks raise self-reported fears for households with media access. Based on these insights, we estimate a simple structural model where heterogeneous households experiencing terrorism form beliefs about risks and returns to education. We allow these beliefs to be affected by media and find that households with media access significantly over-estimate fatality risks.
We study the effect of transparency of individual votes in committees where members are heterogeneous in competence and bias, they are career-concerned, and they can abstain. We show that public voting attenuates the biases of competent members and secret voting attenuates the biases of incompetent members. Public voting leads to better decisions when the magnitude of the bias is large, while secret voting performs better otherwise. We present novel experimental evidence consistent with our theory.
Relational contracts are typically modeled as being between a principal and an agent, such as a firm owner and a supplier. Yet, in a variety of organizations, relationships are overseen by an intermediary such as a manager. Such arrangements open the door for collusion between the manager and the agent. This paper develops a theory of such managed relational contracts. We show that managed relational contracts differ from principal–agent ones in important ways. First, kickbacks from the agent can help solve the manager’s commitment problem. When commitment is difficult, this can result in higher agent effort than the principal could incentivize directly. Second, making relationships more valuable enables more collusion and hence can reduce effort. We also analyze the principal’s delegation problem and show that she may or may not benefit from entrusting the relationship to a manager.
We investigate whether the “one-child policy” has contributed to the rise in China’s household saving rate and human capital in recent decades. In a life-cycle model with intergenerational transfers and human capital accumulation, fertility restrictions lower expected old-age support coming from children—inducing parents to raise saving and education investment in their offspring. Quantitatively, the policy can account for at least 30% of the rise in aggregate saving. Using the birth of twins under the policy as an empirical out-of-sample check to the theory, we find that quantitative estimates on saving and education decisions line up well with micro-data.
I show that offering monetary rewards to whistleblowers can backfire as a moral aversion to being paid for harming others can reverse the effect of financial incentives. I run a field experiment with employees of the Afghan Ministry of Education, who are asked to confidentially report on their colleagues’ attendance. I use a two-by-two design, randomizing whether or not reporting absence carries a monetary incentive as well as the perceived consequentiality of the reports. In the consequential treatment arm, where employees are given examples of the penalties that might be imposed on absentees, 15% of participants choose to denounce their peers when reports are not incentivized. In this consequential group, rewards backfire: Only 10% of employees report when denunciations are incentivized. In the non-consequential group, where participants are guaranteed that their reports will not be forwarded to the government, only 6% of employees denounce absence without rewards. However, when moral concerns of harming others are limited through the guarantee of non-consequentiality, rewards do not backfire: The incentivized reporting rate is 12%.
We develop a model of social interactions, as well as strategic interactions that depend on such social activity, and use it to measure social complementarities in the legislative process. Our model allows for partisan bias and homophily in the formation of relationships, which then impact legislative output. We use it to show how increased electoral competition can induce increased social behavior and the nonlinear effects of political polarization on legislative activity. We identify and structurally estimate our model using data on social and legislative efforts of members of each of the 105th–110th U.S. Congresses (1997–2009). We find large spillover effects in the form of complementarities between the efforts of politicians, both within and across parties. Although partisanship and preference differences between parties are significant drivers of socializing, our empirical evidence paints a less polarized picture of the informal connections of legislators than typically emerges from legislative votes alone.
Understanding the structure of time preferences allows for accurate predictions of the effects of changing intertemporal incentives. Behavioral models of present bias are used to rationalize field data seemingly at odds with exponential discounting, leveraging additional degrees of freedom to improve in-sample fit. Largely lacking to date are the critical out-of-sample tests necessary to ensure predictive accuracy. This paper contrasts exponential discounting with present-biased procrastination for around 22,000 tax filers, advancing the literature in this domain by providing novel out-of-sample tests for both theories. Present bias provides qualitatively better in-sample fit, matching substantial increases in filing probability as the tax deadline approaches. Present bias also has improved out-of-sample predictive power for responsiveness to the 2008 Stimulus Act, and experimental data demonstrate a link between present bias and filing times. Without present bias, predicted responses to changed incentives are inaccurate, demonstrating its necessity in research and policy applications.
Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the effects of fiscal policy in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier around 2, an employment multiplier of 1.4, and a cost per job created of approximately €30,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, and durable consumption. The labor share also increases, as do total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrary to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across economic sectors, states of the economy, and member states.
We use estimates of time preferences to customize incentives for polio vaccinators in Lahore, Pakistan. We measure time preferences using intertemporal allocations of effort, and use these estimates to construct individually tailored incentives. We evaluate the effect of matching contract terms to discounting parameters in a subsequent experiment with the same vaccinators. Our tailored policy is compared with alternatives that either rely on atheoretic reduced-form relationships for policy guidance or apply the same policy to all individuals. We find that contracts tailored to individual discounting outperform this range of policy alternatives.
This paper employs newly collected historical data from Finland to present evidence of historically contingent, long-run consequences of a famine. We document high levels of local inequality in terms of income and land distribution until a violent uprising in 1918. These inequalities partly originated from the famine of 1866–1868, which increased the concentration of land and power to large landowners. We further show that regions with more exposure to the famine had more labor coercion by the early 1900s. These inner tensions led to violent conflict following the Russian Revolution and the Finnish independence from the Russian Empire. Using microdata on all the casualties of the 1918 Finnish Civil War, we demonstrate that the famine plausibly contributed to local insurgency participation through these factors. Although unsuccessful in replacing the government, the insurgency led to significant policy changes, including radical land redistribution and a full extension of the franchise. These national reforms led to a more drastic shift toward equality in locations more affected by the famine with greater pre-conflict inequality. Our findings highlight how historical shocks can have large and long-lasting, but not straightforward impacts.
This paper investigates the short- and medium-term impact of a randomized group-based early child development program targeting parents of children aged 6–24 months in a poor, rural district of Rwanda. This low-intensity, short-duration, and low-cost program engaged parents through sessions that included a novel radio show and facilitated discussions during 17 weekly village-level meetings. The intervention included two treatment arms, with different components. Twelve months after baseline, children’s communication, problem-solving, and personal social skills improved in treated groups and persisted almost 3 years later in the full treatment arm. Positive effects on maternal time investments, attitudes, and beliefs, as well as investments in play resources, also persisted over time. A mediation analysis shows that the positive impact observed in child development can be attributed to positive changes in parental and home environment inputs, particularly in the longer term. This study offers important insights for the design and delivery at scale of early child development interventions among some of the most disadvantaged communities in the world.
In the mass movement of sending urban youth to the countryside during China’s Cultural Revolution, many families with multiple age-eligible children were forced to make a send-down choice among the siblings. We exploit this rare social experiment and employ data on urban twins in China to investigate the effect of childhood send-down experience on children’s old-age support to parents. We find that compared with their twin siblings who had stayed in the city, send-downs were less likely to make a monetary transfer to parents and also tended to transfer less. We show that the inferior transfer behavior of send-downs was not due to any income disadvantage or selection of family’s send-down choice in terms of children’s altruism endowment. After ruling out the income and selection channel explanations, we posit that the inferior transfer behavior of send-downs is driven by the adverse effect of childhood send-down experience on children’s willingness to provide old-age support to parents, which could work through both pure altruism and warm glow.
We use a general equilibrium model to show that a decrease in workers’ bargaining power amplifies the contribution to the output gap of adjustments along the extensive versus intensive margin of labour utilization. Under standard assumptions on the disutility of labour, this mechanism reduces the cyclical movements of inflation relative to those of the output gap. Micro-level evidence, based on a survey of Italian firms, provides support to the relationship between bargaining power and adjustments along the extensive margin versus the intensive one, as well as to attenuated price response when firms adjust labour input mainly through the extensive margin. A Bayesian estimation using Italian aggregate data for the samples 1970–1990 and 1991–2014 confirms that the decline in workers’ bargaining power has weakened the inflation–output gap relationship.
Facing an ageing population and historical trends of low employment rates, pay-as-you-go (PAYG) pension systems, currently in place in several European countries, imply very large economic and welfare costs in the coming decades. In an overlapping generations economy with incomplete insurance markets and frictional labour markets, an employment fund, which can be used while unemployed or retired, can enhance production efficiency and social welfare. With an appropriate design, the sustainable Backpack employment fund (BP) can greatly outperform (measured by average social welfare in the economy) existing PAYG systems and also Pareto dominate a full privatization of the pension system, as well as a standard fully funded defined contribution pension system. We show this in a calibrated model of the Spanish economy, by comparing the effect of its ageing transition under these different pension systems and by showing how a front-loaded transition from the PAYG to the BP system can be Pareto improving, while minimizing the cost of the reform.
We examine the immediate and bounce-back effects from six modern health crises that preceded Covid-19. Time-series models for a large cross-section of economies indicate that real GDP growth falls by around 2 percentage points in affected economies relative to unaffected economies in the year of the outbreak. Bounce-back in GDP growth is rapid and strong, especially when compared to non-health crises. Unemployment for less educated workers is higher and exhibits more persistence, and there is significantly greater persistence in female unemployment than male. Moreover, the negative initial effects of pandemics and bounce-back are economically contagious through international trade. The negative effects on GDP and unemployment are felt less in economies with larger first-year responses in government spending, especially on health care. Our estimates imply that the impact effect of the Covid-19 shock on world GDP growth is approximately four standard deviations worse than the average past pandemic.
We compare causal effects of forward guidance about future interest rates on households’ expectations of inflation and nominal mortgage rates to the effects of communication about inflation in a randomized control trial using more than 20,000 U.S. consumers in the Nielsen Homescan Panel. We elicit consumers’ expectations, and then provide 22 different forms of information regarding past, current, and/or future interest rates and inflation. Information treatments about current or future interest rates all have similar and offsetting effects on interest rate and inflation expectations, yielding limited pass-through into perceived real rates. Information about mortgage rates has much more powerful effects on interest rate perceptions, with no offsetting effects on inflation expectations, thereby delivering much larger changes in perceived real rates. Revisions in perceived real rates causally lead to changes in the ex-post purchases of durable goods by households.
Millions of women continue to die during and soon after childbirth, even where the knowledge and resources to avoid this are available. We posit that raising the share of women in parliament can trigger action. Leveraging the timing of gender quota legislation across developing countries, we identify sharp sustained reductions of 7%–12% in maternal mortality. Investigating mechanisms, we find that gender quotas lead to increases in percentage points of 5–8 in skilled birth attendance and 4–8 in prenatal care utilization, alongside a decline in fertility of 6%–7% and an increase in the schooling of young women of about 0.5 years. The results are robust to numerous robustness checks. They suggest a new policy tool for tackling maternal mortality.
We explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) risk, which entails inherent randomness within a given probability model; (2) model ambiguity, which entails uncertainty about the probability model to be used; and (3) model misspecification, which entails uncertainty about the presence of the correct probability model among the set of models considered. Using a new experimental design, we isolate and measure attitudes toward each layer separately. We conduct our experiment on three different subject pools and document the existence of a behavioral distinction between the three layers. In addition to providing new insights into the underlying processes behind ambiguity aversion, we provide the first empirical evidence of the role of model misspecification in decision-making under uncertainty.
The structure of taxes and their burden have undergone large and frequent changes over time. We provide a brief history of U.S. federal income tax reform since the 1960s, calculate effective federal income tax rates for each wave of the Panel Study of Income Dynamics, and discuss how effective taxation changed from 1969 to 2016. We show that most tax regimes are short-lived and that the variation in taxes over time and across groups is large. We also use an estimated dynamic model of couples and singles to show that the various tax regimes that we estimate imply very different labor market and saving behavior. These findings stress the importance of studying and modeling tax changes over time and across groups.
Maritime insurance developed in medieval Europe is the ancestor of all forms of insurance that appeared subsequently. We address the question of why modern insurance was first invented in medieval Europe, and neither earlier nor elsewhere. Drawing from insights from the literature on uncertainty aversion, we show that medieval merchants had to bear more frequently natural risks (they traveled longer distances) and new human risks with unknown probabilities (they faced unpredictable attacks by corsairs due to increased political fragmentation and commercial competition in Europe). The increased demand for protection in medieval seaborne trade met the supply of protection by a small group of wealthy merchants with a broad information network who could pool risks and profit from selling protection through a novel business device: the insurance contract. A new market—the market for insurance—was then born. Next, analyzing more than 7,000 insurance contracts redacted by notaries and about 100 court proceedings housed in the archives of Barcelona, Florence, Genoa, Palermo, Prato, and Venice, we study the main features of medieval trade, the type of risks faced by merchants, and the characteristics of insurance contracts and markets from 1340 to 1500.The empirical analysis delivers two main findings. First, risks related to human activities (e.g., attacks by corsairs) seem to have had a relatively greater impact on insurance premia compared to natural risks (proxied by seasonal risks). Second, distance mattered but the route seems to have had a greater impact on insurance premia. Specific routes (e.g., in the Tyrrhenian and the western Mediterranean) were more plagued by human risks, which were harder to avoid for the majority of merchants who did not have a broad information network compared to the few wealthy merchants, who became the key players in selling insurance in the early stages of the development of insurance markets.
This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or “sparse,” model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of some of the canonical models in macroeconomics and finance. In the life-cycle model, the agent initially does not pay much attention to retirement and undersaves; late in life, he progressively saves more, generating realistic dynamics. In the consumption-savings model, the consumer decides to pay little or no attention to the interest rate and more attention to his income. Ricardian equivalence and the Lucas critique partially fail because the consumer may not pay full attention to taxes and policy changes. In a Merton-style dynamic portfolio choice problem, the agent endogenously pays limited or no attention to the varying equity premium and hedging demand terms. Finally, in the neoclassical growth model, agents act on a simplified model of the macroeconomy; in equilibrium, fluctuations are larger and more persistent.
What utility notion—e.g. flow/lifetime, self/family-centered—do self-reported well-being (SWB) questions measure? Existing applications make different assumptions regarding the (i) life domains, (ii) time horizons, and (iii) other-regarding preferences captured by SWB data. To obtain relevant evidence, we ask survey respondents what they had in mind regarding (i)–(iii) when answering commonly used—life satisfaction, happiness, ladder—and new SWB questions. We find that respondents’ self-reports differ from researchers’ assumptions and differ across SWB questions and sociodemographic groups. At the same time, simple SWB-question wording tweaks are effective in moving self-reports toward desired interpretations. We outline actionable suggestions for SWB researchers. (JEL: D69, D90, I31)
Recruitment intensity is important for the matching process in the labor market. Using unique linked survey–administrative data, we investigate the relationships between hiring and recruitment policies at the establishment level. Faster hiring goes along with higher search effort, lower hiring standards, and more generous wages. We develop a directed search model that links these patterns to the employment adjustments of heterogeneous firms. The model provides a novel structural decomposition of the matching function that we use to evaluate the relative importance of these recruitment policies at the aggregate level. The calibrated model shows that hiring standards play an important role in explaining differences in matching efficiency across labor markets defined as region/skill cross-products and for the impact of labor market policy, whereas search effort and wage policies play only a minor role.
This paper studies the effects of carbon pricing on inflation dynamics. We construct a sample of carbon taxes implemented in Europe and Canada over three decades and estimate the response of inflation and price components to carbon pricing. Our empirical results suggest that carbon taxes did not significantly increase inflation, with dynamic effects estimated around zero in most specifications. Instead we find support for relative price changes, increasing the cost of energy but leaving the price of other goods and services unaffected. This is consistent with previous findings on the limited aggregate economic costs of carbon taxes. Based on the cross-section of taxes in Europe, we provide suggestive evidence that the response of inflation was especially muted in countries with revenue-neutral carbon taxes and autonomous central banks that can accommodate potential inflationary pressure associated with carbon pricing.
In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability, and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that these types of financial frictions play an important role in the transmission of monetary policy.
This study proposes a real-time estimate of inattention, based on micro-level data. I show that a simple specification that estimates the persistence of a forecaster's deviation from the mean provides a direct estimate of parameters of information frictions according to prominent models of expectations. The new estimate can also be interpreted as a hybrid measure of both information frictions and behavioral frictions. Using the new specification, I revise several key findings documented in the previous literature. I find higher levels of inattention and document new forms of variations over time and across variables, horizons, individuals, and types of agents. I also report new results from long-run forecasts and document an unprecedented response to COVID-19.
Prevailing theories of democracy focus on class conflict. In contrast, we study democratic transition when ethnic tensions are more salient than the poor/rich divide, building a model where (i) ethnic groups negotiate about allocating the economic surplus and (ii) military and political mobilizations rest on the unobserved strength of ethnic attachment. Free and fair elections elicit information and restore inter-ethnic bargaining efficiency. Autocrats can rationally choose democratic transition, even if they risk losing power, as elections reduce the opposition’s informational rent. The predictions of our framework are consistent with novel country-level and ethnic group-level panel correlational evidence on democratization in the post-decolonization period.
This paper investigates the consequences of bureaucratic discretion in public procurement. I exploit a Hungarian policy reform, which allows a “high-discretion” procedure below a certain contract value. At the threshold, I document large discontinuities both in procurement outcomes and in the density of contract values, which indicates that buyers manipulate contract values to avoid auctions. I combine the reform and a structural model to find that discretion increases prices and results in the selection of less productive contractors. I also show that high discretion benefits firms with connections to the party of the central government. I use the structural model to document that public buyers are willing to sacrifice more contract value to increase their discretion if more connected firms are operating in the market. I also use the model to simulate the effects of counterfactual procurement thresholds on different procurement outcomes.
As children transition to adulthood, do they remain a major determinant of parental labor supply? To answer this question, we examine how college costs affect the labor supply of mothers and fathers by exploiting the roll-out of nine generous state merit aid programs in the United States from 1993 to 2004, which made college more affordable. Mothers of college-age children decreased their annual hours of work after the introduction of these state-wide programs, while fathers did not adjust their labor supply. Mothers of college-going children were entirely responsible for the decline in hours of work, where mothers of children who did not go to college experienced no change in hours of work. The decline in labor supply was mainly due to adjustments among high-income, married, more educated, and white mothers, whose labor supply was more elastic to college costs.
We present a unified framework to study interconnections between business cycle and international trade models. This unified framework is built upon the standard competitive, representative-firm international real business cycle model and features production externalities in the intermediate and final goods sectors. Our main theoretical result is that this unified framework is equivalent in aggregate implications to dynamic international trade models featuring monopolistic competition, endogenous entry and exit, and heterogeneous firms. We show that a negative capital externality in the intermediate good sector is required to fit the data. This presents a puzzle for the literature because when viewed through the lens of our unified framework, we demonstrate that the standard assumptions used in dynamic trade models imply a positive capital externality.
Standard economic models view risk taking and time discounting as two independent dimensions of decision making. However, mounting experimental evidence demonstrates striking parallels in patterns of risk taking and time discounting behavior and systematic interaction effects, which suggests that there may be common underlying forces driving these interactions. Here, we show that the inherent uncertainty associated with future prospects together with individuals’ proneness to probability weighting generates a unifying framework for explaining a large number of puzzling behavioral findings: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for the timing of the resolution of uncertainty, the differential discounting of risky and certain outcomes, hyperbolic discounting, subadditive discounting, and the order dependence of prospect valuation. Furthermore, all these phenomena can be accommodated by the same set of preference parameter values and plausible levels of inherent uncertainty.
To assess the life-cycle welfare effects of pension reforms, we provide a dynamic stochastic model of saving, portfolio choice, and retirement featuring a rich characterisation of the pension system. Relying on the exogenous variation from a sequence of Italian pension reforms, we identify and estimate the model, which is then used to draw implications of alternative pension policies. The validated model predicts substantial social security wealth effects on retirement, with the offset between public pension wealth and private savings softened when households can adjust their retirement decisions. We further find important distributional effects of pension reforms, with households’ welfare decreasing more the later in the working life they face the reform. Our findings have implications for the design of pension policies and the support they might generate.
Decisions under uncertainty are often made with information whose interpretation is uncertain because multiple interpretations are possible. Individuals may perceive and handle uncertainty about interpretation differently and in ways that are not directly observable to a modeler. This paper identifies and experimentally examines behavior that can be interpreted as reflecting an individual’s attitude toward such uncertainty.
When financial contracts are not fully enforceable and firms observe their own nominal sales before the observation of the aggregate nominal price, the optimal financial contract is not fully indexed to inflation. Because of the limited nominal indexation, which is endogenous in the model, unanticipated inflation affects aggregate investment and future economic activity. The macroeconomic volatility induced by price uncertainty, however, is not monotone: It first increases and then decreases with nominal price uncertainty. We also show that the degree of nominal indexation declines with real idiosyncratic volatility and the impact of an inflation shock decreases with nominal indexation. Using firm-level data from Canada, we find that both predictions are supported by the data.
We exploit a large exogenous shock to study the formation, and updating, of educational plans, and to examine how these plans ultimately impact later educational attainment. Using novel, longitudinal, microdata on cohorts of East German adolescents before and after the German Reunification (a change for the East from state socialism to capitalist democracy), and using differences across cohorts induced by the timing of Reunification, we show that shortly after relative to before that time, college plans among high-school students increased substantially, which was followed by sizable increases in the completion of the college entrance certificate 5 years later. To shed light on the underlying mechanisms, we analyze the elasticity of youths’ beliefs and preferences with respect to the large shock. Perceived educational returns and risk, economic preferences (“consumerism”) and social preferences (“individualism”) adapt quickly and are directly linked to changes in plans and outcomes. Cohorts closer to critical educational junctions at the time of Reunification, however, adjusted their plans to a much lesser extent. While they similarly updated the expected returns to education, they exhibited a slower adjustment in their preferences relative to younger cohorts.
We estimate the impact of increased access to telemedicine following widespread adoption during the March–April 2020 COVID-19 lockdown period. We focus on the post-lockdown period, which was characterized by near-complete reopening. Using a difference-in-differences framework, we compare primary care episodes before and after the lockdown between patients with high and low access to telemedicine, as defined by their primary care physician adoption. Our results show that access to telemedicine leads to slightly more primary care visits but lower spending. Visits involve fewer prescriptions and more follow-ups, but we find no evidence of missed diagnoses or adverse outcomes. Results suggest that telemedicine does not compromise care quality or raise costs.
We introduce an adaptive targeted treatment assignment methodology for field experiments. Our Tempered Thompson Algorithm balances the goals of maximizing the precision of treatment effect estimates and maximizing the welfare of experimental participants. A hierarchical Bayesian model allows us to adaptively target treatments. We implement our methodology in Jordan, testing policies to help Syrian refugees and local jobseekers to find work. The immediate employment impacts of a small cash grant, information and psychological support are small, but targeting raises employment by 1 percentage-point (20%). After 4 months, cash has a sizable effect on employment and earnings of Syrians.
We study the effect of forced migration on public policy setting in the migrant-receiving country. After World War II, eight million expelled Germans arrived in West Germany within 5 years. We use regional variation in the population share of forced migrants across West German cities to estimate the effect of this inflow on cities’ taxation and spending decisions. To identify a causal effect, we pursue an instrumental variable strategy that leverages push factors of the expulsions while being orthogonal to local conditions in the destination regions. Our results show that cities with high inflows of forced migrants increased spending on welfare and education, decreased spending on infrastructure, raised local taxes, and incurred more debt. Part of these effects can be attributed to shifts in political preferences. The migrants held voting rights upon arrival and supported parties that explicitly catered to their interests and needs.
This paper examines the causal effect of a traumatic event experienced by pregnant women on the life-long labor market outcomes of their offspring. We exploit a unique natural experiment that involved randomly placed Nazi raids in municipalities in Italy during WWII. We link administrative data on male private sector workers to information about Nazi raids and war casualties. Our results suggest that prenatal exposure to traumatic events affects offspring earnings throughout the working career and in retirement. The lower earnings are due to lower educational attainment, the type of jobs held, and interruptions in working careers due to unemployment. We further find that prenatal exposure exacerbates the adverse effects of later-life job loss on earnings. We use a medical database on health expenditures to interpret the effect estimates. The prenatally exposed have higher medical expenditures on diseases of the nervous system and mental disorders, indicating that stress is likely to be an important factor driving our findings.
We explore how feedback shapes, and perpetuates, gender gaps in self-assessments. Participants in our experiment take tests of their ability across different domains. We elicit their beliefs of their performance before and after feedback. We find that, even after the provision of highly informative feedback, gender stereotypes influence posterior beliefs, beyond what a Bayesian model would predict. This is primarily because both men and women update their beliefs more positively in response to good news when it arrives in a more gender congruent domain (i.e. more male-typed domains for men, more female-typed domains for women), fueling persistence in gender gaps.
Using Danish matched employer–employee data, I compare the relative pay of men and women to their relative productivity as measured by production function estimation. I find that the gender “productivity gap” is 8%, implying that almost two thirds of the residual gender wage gap is due to productivity differences between men and women. Motherhood plays an important role, yet it also reveals a puzzle: The pay gap for mothers is entirely explained by productivity, whereas the gap for non-mothers is not. In addition, the decoupling of pay and productivity for women without children happens during their prime-child bearing years. These estimates are robust to a variety of specifications for the impact of observables on productivity, and robust to accounting for endogenous sorting of women into less productive firms using a control-function approach. This paper also provides estimates of the productivity gap across industries and occupations, finding the same general patterns for mothers compared to women without children within these subgroups.
In this paper, we develop a life cycle model that features pecuniary and non-pecuniary investments in health in order to rationalize the socioeconomic gradients in health and life expectancy in the United States. Agents accumulate health capital, which affects labor productivity, utility, the distribution of medical spending shocks, and life expectancy. We find that unequal health insurance coverage plays a negligible role in generating the observed gaps in health and longevity. Universal health insurance increases preventive medical spending but not time spent in health promoting activities, as individuals are no longer worried about avoiding high curative medical expenditure shocks due to increased health insurance coverage. Our findings suggest that differences in lifetime income, preferences, and health shocks are the main determinants of inequality in life expectancy.
The pessimistic bias and the cross-sectional dispersion of households’ subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accounts for the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism—to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement—the cross-sectional dispersion of households’ beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the real business-cycle framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accounts for a significant fraction of the business-cycle fluctuations in pessimism, disagreement, and real quantities.
We estimate the distribution of wealth in Italy between 1995 and 2016 using a novel source of inheritance tax files, combined with surveys and national accounts. We find that the level of wealth concentration is in line with other European countries; however, its time trend appears more in line with the US, showing a significant increase over the period studied. The country exhibits one of the greatest declines in the wealth share of the bottom 50%. The paper also shows that age plays a marginal role in explaining wealth concentration. Changes in savings, instead, are the predominant force behind the increase in wealth inequality, even at the top. Equity prices also account for a large share of wealth growth above the 99th percentile, whereas changes in house prices play only a minor role. Finally, we document the growing concentration of life-time wealth transfers, and their increasingly favorable tax treatment.
To better understand institutional differences across space and time, we propose a two-dimensional framework of the power structure among three players in society: the degree of absolute power of the Ruler over the Elites and the People, and the degree of asymmetry between the latter two in terms of their everyday rights and power. Within this framework, we show that a more absolutist Ruler prefers a more balanced Elite–People relationship. This theory helps in particular to reconcile views on the comparison between imperial China and premodern Europe that would seem contradictory in one-dimensional or two-estate frameworks: the Ruler’s absolute power was weaker in Europe, whereas the Elite–People relationship was more balanced in China. Our approach also helps more generally to interpret specific institutions and other variations in power structures.
This paper documents the existence of judge-specific differences on granting compensation for wrongful dismissal and shows that their consequences are different for small low-performing firms than for other firms. Pro-worker judge bias reduces job creation for all firms, increases the destruction of permanent jobs in small and low-performing firms but reduces it in large high-performing firms. Pro-worker bias reduces employment and survival for small and low-performing firms but has no significant effects on these outcomes for the other firms. The probability that permanent incumbent workers keep their job in firms judged by a pro-worker judge increases in large and high-performing firms, while it decreases in small, poorly performing firms.
Violence and delinquency levels in Central America are among the highest in the world and constrain human capital acquisition. We designed and conducted a randomized experiment in El Salvador to measure the impacts of an after-school program aimed at reducing school violence. The program combines a behavioral intervention with extracurricular activities for 10–16 year old students. We find the program reduced the participants’ violent behavior both inside and outside of school and indirectly improved their attendance, attitudes toward school and learning, and academic outcomes. Using state-of-the-art technology, we measured participant brain activity and show that the intervention fosters emotion regulation, enabling treated adolescents to remain calmer when faced with external stimuli.
Colonial trade prompted the colonies to specialise in primary products. Did this eliminate industrialisation opportunities in the colonies, and did it make them more politically dependent on the coloniser? To answer these questions, we examine the impact of the World War I trade shock on industrial growth and support for the anti-colonial movement in India. We find that districts more exposed to a drop in imports experienced faster industrial growth in 1911–1921, thereafter remaining on a higher level of industrial employment. All evidence points to an increase in Indian productivities as the reason for this, suggesting that liberal trade policies may not have been optimal for colonial India. We also find that districts, which industrialised faster thanks to WWI were more likely to support the Indian National Congress. This is consistent with the view that specialisation in primary products made the colonies more politically dependent on the coloniser.
This paper shows that inattention to taxes generates a time-inconsistency problem in the choice of tax policy, leading to higher taxes in equilibrium. These discretionary tax increases are inefficient as they are deviations from the socially optimal commitment policy. We call these deviations a taxation bias. Combining sufficient statistics and structural approaches, we quantify the magnitude of this policy distortion for the U.S. redistributive tax-transfer system. We find that the taxation bias ranges between 3 and 8 percentage points, alters tax-transfer progressivity, and has significant welfare effects. Overall, our findings shed new light on the implications of inattention and misperceptions.
We argue that market forces shaped the geographic distribution of upper-tail human capital across Europe during the Middle Ages, and contributed to bolstering universities at the dawn of the Humanistic and Scientific Revolutions. We build a unique database of thousands of scholars from university sources covering all of Europe, construct an index of their ability, and map the academic market in the medieval and early modern periods. We show that scholars tended to concentrate in the best universities (agglomeration), that better scholars were more sensitive to the quality of the university (positive sorting) and migrated over greater distances (positive selection). Agglomeration, selection, and sorting patterns testify to an integrated academic market, made possible by the use of a common language (Latin).
We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.
In this paper, I analyze the determinants of cohabitation, marriage, and divorce in the USA. I first document that college graduates are more likely to marry, and less likely to cohabit and divorce, than non-college educated individuals. To account for these facts within a unified framework, I build and estimate a life-cycle model of partnership formation and dissolution where income processes differ by gender and education. I find that the main driver of education-based differences in mating strategies is that the gender wage gap is larger among college graduates. Since divorce is more costly than ending a cohabitation, marriages tend to be more stable and therefore offer women more protection from human capital depreciation during non-employment. Consequently, marriage is a more effective means of enforcing household specialization. Since college graduates have more room for household specialization, they are more likely to choose marriage. The variance of income shocks, which affects the demand for consumption insurance, is larger among college graduates. Even if the variance of income shocks could potentially explain partnership choices, simulations suggest a small role of income volatility.
We provide new evidence on the causal effect of higher education on mortality. Our empirical strategy exploits the reduction in college openings introduced by the Pinochet regime after the 1973 coup in Chile, which led to a sharp downward kink in college enrollment among those cohorts reaching college age in the following years. Using administrative data from the vital statistics, we document an upward kink in the age-specific yearly mortality rate of individuals in the affected cohorts. We estimate a negative effect of college on mortality between ages 34–74, which is larger for men, but also sizable for women. Individuals in the affected cohorts experience worse labor market outcomes, are more likely to be enrolled in the public health system, and report lower consumption of health services. This suggests that economic disadvantage and limited access to care play an important mediating role in the link between higher education and mortality.
Conditional cash transfer (CCT) programs are the antipoverty program of choice in many developing countries, aiming to improve human capital and break the intergenerational transmission of poverty. A decade after a randomized 3 year CCT program began, earlier exposure during primary school ages when children were at risk of dropout led to higher labor market participation for young men and women and higher earnings for men. The findings highlight the roles of the different CCT program components with variation in timing of access to nutrition, health, and education investments translating into substantial differential effects on learning outcomes for men and reproductive health outcomes for women.
We present two new databases we have constructed to explore the electoral consequences of structural economic policy reforms. One database measures reforms in domestic finance, external finance, trade, product, and labor markets covering 90 advanced and developing economies from 1973 to 2014. The other chronicles the timing and results of national elections. We find that liberalizing reforms are associated with economic benefits that accrue only gradually over time. Because of this delay, liberalizing reforms are costly to democratic incumbents when they are implemented close to elections. Electoral outcomes also depend on the state of the economy: Reforms are penalized during contractions but are often rewarded in expansions.
We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management—conditional on the effect of adverse selection—accounts for about half of annuity markups, or 8 percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Global Financial Crisis, suggesting new retirees’ opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.
This paper presents a model of consumption behavior that explains the presence of “wealthy hand-to-mouth” consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behavior and for fiscal stimulus policies. Our model matches the recent empirical evidence that Marginal Propensity to Consume remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.
This paper provides evidence showing that people are more prone to engage in nasty behavior, malevolently causing financial harm to other people at own costs, when they make decisions in a group context rather than when making choices individually on their own. We establish this behavioral regularity in a series of large-scale experiments among university students, adolescents, and nationally representative samples of adults—more than ten thousand subjects in total. We test several potential mechanisms, and the results suggest that individual nasty inclinations are systematically more likely to affect behavior when decisions are made under the “cover” of a group, that is, in a group decision-context that creates a perception of diffused responsibility.
We compare men and women who are displaced from similar jobs by applying an event study design combined with propensity score matching and reweighting to administrative data from Germany. After a mass layoff, women’s earnings losses are about 35% higher than men’s, with the gap persisting 5 years after displacement. This is partly explained by women taking up more part-time employment, but even women’s full-time wage losses are almost 50% higher than men’s. Parenthood magnifies the gender gap sharply. Finally, displaced women spend less time on job search and apply for lower-paid jobs, highlighting the importance of labor supply decisions.
We build a dynamic model where the economy is vulnerable to belief-driven slow-moving debt crises at intermediate debt levels, and rollover crises at both low and high debt levels. Vis-à-vis the threat of slow-moving crises, countercyclical deficits generally welfare-dominate debt reduction policies. In a recession, optimizing governments only deleverage if debt is close to the threshold below which belief-driven slow-moving crises can no longer occur. The welfare benefits from deleveraging instead dominate if governments are concerned with losing market access even at low debt levels. Long bond maturities may fully eliminate belief-driven rollover crises but not slow-moving ones.
We examine how the erosion of morals, norms, and norm compliance in markets depends on the market power of individual traders. Previously studied markets allow traders to exchange at most one unit and provide market power to individual traders by de-activating two forces: (i) the replacement logic, whereby immoral trading is justified by the belief that others would trade otherwise and (ii) market selection, by which the least moral trader determines aggregate quantities. In an experiment, we compare single-unit to (more common) multi-unit markets, which may activate these forces. Multi-unit markets, in contrast to single-unit markets, lead to a complete erosion of morals. This is associated primarily with a deterioration in norm compliance: the observed level of immoral trade is in contrast with the prevailing social norm. The replacement logic is the main mechanism driving this finding.
We introduce a model in which people exchange some goods and services informally in their community and others formally on a market. We show that enforcement by informal communities and a formal market are complements: If communities ostracize individuals who are caught cheating on the market, this bolsters incentives to comply with exchanges in both settings. Although transactions within a community generate lower gains from trade than those on the wider market, the enhanced incentives from simultaneously transacting in communities and on the overall market can be welfare-enhancing compared with either extreme. We discuss the implications of informal community exchanges in a country’s development as well as how moral or religious beliefs enhance the complementarity between community and formal enforcement.
This paper examines the extent to which personal biases affect political views, in the context of how antisemitism influences opinions about Israel. Two empirical analyses are conducted. The first one analyzes social media chatter about Jews and Israel in the UK, revealing a strong, positive relationship between negative chatter about both of them at the daily-location level. In order to establish causality, social media chatter about a “Jewish” football team in the English Premier League (Tottenham) is used as an instrument for negative expressions about Jewish people to explain negativity toward Israel. The second empirical analysis uses the 2016 wave of the German Social Survey, which reveals a strong and robust relationship between several commonly used measures of antisemitic beliefs and holding anti-Israel views. A causal interpretation of this finding is supported by an IV analysis motivated by Voigtländer and Voth who show that Nazi indoctrination during the WWII period had a lifelong impact on antisemitic views. In both analyses, the IV estimates are considerably larger than OLS coefficients.
Following the early implementation of the global over-the-counter (OTC) derivatives market reform in the USA and the associated increase in trading costs, US banks shifted up to 60% of their OTC derivatives activity abroad, particularly toward less regulated jurisdictions. Consistent with a cost saving incentive of regulatory arbitrage, we find that this flight abroad is driven by costlier blocks of the reform and subsequently causes a narrowing of swap spreads. We further show that this regulatory arbitrage causes an increase in financial risk as more activity is shifted to more lenient jurisdictions.
Trade liberalization can spur environmental degradation. Concerns over these adverse impacts have led to a debate over the need for environmental provisions in regional trade agreements (RTAs); however, the effectiveness of such provisions is unknown. In this paper, we provide new plausibly causal evidence that environmental provisions are effective in limiting deforestation following the entry into force of RTAs. We exploit high resolution, satellite-derived estimates of deforestation, and identify the content of RTAs using a new dataset with detailed information on individual provisions. Accounting for the potential endogeneity of environmental provisions in RTAs, we find that the inclusion of specific provisions aimed at protecting forests and/or biodiversity almost entirely offsets the net increases in forest loss observed in similar RTAs without such provisions. The effects are particularly strong in tropical, developing countries with greater biodiversity. The inclusion of these provisions limits agricultural expansion and agricultural trade.
We conduct a field experiment in India comparing two ways of delegating selection of microcredit clients among smallholder farmers to local intermediaries: a private trader (TRAIL), versus a local–government appointee (GRAIL). Selected beneficiaries in both schemes were equally likely to take up and repay loans, and experienced similar increases in borrowing and farm output. However farm profits increased and unit costs of production decreased significantly only in TRAIL. While there is some evidence of superior selection by ability and landholding in TRAIL, the results are mainly driven by greater reduction of unit production costs for TRAIL treated farmers than GRAIL treated farmers of similar ability or landholding. We develop and test a model where the TRAIL agents’ role as middlemen in the agricultural supply chain enabled and motivated them to offer treated farmers business advice, which helped them lower unit costs.
Using unique longitudinal probabilistic expectations data from the Berea Panel Study, which cover both college and early post-college periods, we examine young adults’ beliefs about their future incomes. We introduce two new approaches to testing whether, ex ante, agents exhibit Rational Expectations. We show that taking into account the additional information about higher moments of individual belief distributions contained in probabilistic expectations data reveals violations of Rational Expectations that are not detected by existing mean-based tests. Empirically, we find that our subjects underestimate the level of uncertainty they face about future incomes.
Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we can show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.
We develop a model of electoral campaigns in which two office-motivated candidates allocate their budgets over time to affect their odds of winning. We measure the candidates’ evolving odds of winning using a state variable that tends to decay over time, and we refer to it as the candidates’ “relative popularity.” In our baseline model, the equilibrium ratio of spending by each candidate equals the ratio of their initial budgets; spending is independent of past realizations of relative popularity; and there is a positive relationship between the strength of decay in the popularity process and the rate at which candidates increase their spending over time as election day approaches. We use this relationship to recover estimates of the perceived decay rate in popularity leads in U.S. subnational elections.
This paper studies the impact of immigration on U.S. local business dynamics using a comprehensive collection of survey and administrative data. It finds heterogeneous impacts across the employer productivity distribution that favor higher-productivity firms and lead to increases in average local earnings. Responses to immigration along the exit margin are particularly important. Immigrant inflows cull establishments from low-productivity firms while preserving establishments from high-productivity firms. Overall, reduced exit accounts for 43% of immigrant-induced job creation and 41% of immigrant-induced earnings growth. A general equilibrium model proposes a mechanism that ties immigrant workers to high-productivity employers and shows how accounting for changes to the employer productivity distribution can yield substantially larger estimates of immigrant-generated economic surplus than canonical models of labor demand.
This paper analyzes how changes in the concentration of political power affect long-run development. We study Brazil’s military dictatorship whose rise to power dramatically altered the distribution of power of local political elites. We document that municipalities that were more politically concentrated prior to the dictatorship in the 1960s are relatively richer in 2000, despite being poorer initially. Our evidence suggests that this reversal of fortune was the result of the military’s policies aimed at undermining the power of traditional elites. These policies increased political competition among traditional elites, leading to better governance, more public goods, and higher income levels.
Upon assuming power for the first time in 1935, the Norwegian Labour Party delivered on its promise for a major schooling reform. The reform raised minimum instruction time in less-developed rural areas and boosted the resources available to rural schools, reducing class size, and raising teacher salaries. We show that cohorts more intensively affected by the reform increased their education and experienced higher labor income. Our main result is that the schooling reform also boosted support for the Norwegian Labour Party in subsequent elections. This additional support persisted for several decades and was pivotal in maintaining support for the social democratic coalition in Norway. These results are not driven by the direct impact of education and are not explained by higher turnout, or greater attention or resources from the Labour Party targeted toward the municipalities most affected by the reform. Rather, our evidence suggests that cohorts that benefited from the schooling reform, and their parents, rewarded the party for delivering a major reform that was beneficial to them.
An increase in uncertainty is not contractionary per se. What is contractionary is a widening of the left tail of the GDP growth forecast distribution, the downside uncertainty. On the contrary, an increase of the right tail, the upside uncertainty, is mildly expansionary. The reason why uncertainty shocks have been previously found to be contractionary is because movements in downside uncertainty dominate existing empirical measures of uncertainty. The results are obtained using a new econometric approach that combines quantile regressions and structural vector autoregressions (VARs).
We study, both theoretically and experimentally, a communication game with and without seller competition and embed it in a psychological-game framework where players experience costs for lying, misleading others, and being disappointed. We derive the equilibrium predictions of this model, compare them to the setting without psychological payoffs, and test these predictions in a laboratory experiment, in which we induce both material and psychological payoffs. We find that the setting in which players have both material and psychological payoffs features more trade, trades goods of marginally better quality, and does so without welfare losses to either side of the market relative to the setting with material payoffs only. However, the introduction of competition counteracts this improvement and lowers welfare for both sides of the market. This happens due to a surge in dishonesty by sellers in the competitive setting and the buyers’ inability to detect this deception.
We examine the macroeconomic effects of two EU regional structural funds. The European regional development fund (ERDF) has positive short term average consequences, but gains typically dissipate within 3 years. The European Social Fund has insignificant average short term effects, but the medium term effect is positive and economically important. There are regional heterogeneities in terms of location, level of development, EU tenure, Euro area membership, and national borders. The reaction of regional government expenditure to shocks in the structural funds accounts for the differences. The implications for the EU Recovery and Resilience Facility are discussed.
This paper investigates whether NGO-provided basic healthcare crowds out or crowds in similar services provided by the government in rural Uganda. We find that NGO entry reduces the number of government workers, which leads to a reduction in government-provided health services. The results are driven by the NGO often hiring the government worker in places where skilled labor is scarce. In places where skilled labor is relatively abundant, the NGO hires a second person and complements government healthcare.Thus, the effects of NGO entry on government capacity are nuanced.
This paper estimates the welfare effects of TV advertising regulation. I develop a structural model of demand and supply in which both the broadcast content and the amount of advertising are endogenously determined. My results suggest that more varied content, and, in particular, more educational content, can be offered in a laissez-faire equilibrium. Children and teenagers would watch more educational content as more of this type of programming becomes available. Total consumer welfare is higher in a laissez-faire equilibrium than that under the current advertising restrictions.
Policymakers ‘imperfect knowledge about firms’ abatement costs leads to inefficient regulation, reducing the welfare gains from carbon markets around the world. We introduce a “smart” cap and trade system that eliminates these costs. This cap responds endogenously to technology or macroeconomic shocks, relying on the market price of certificates to aggregate information. It allows policy makers to modify existing institutions to achieve more efficient emissions reductions. The paper also shows that the slow diffusion of technology innovations typically makes the optimal carbon price a much steeper function of emissions than suggested by the Social Cost of Carbon.
Time-constant trading thresholds are optimal for a large class of preferences and asset price dynamics, including, Expected Utility and the S-shaped reference-dependent utility of Prospect Theory. Such thresholds imply selling stocks at the maximum price since purchase. We use a large discount brokerage dataset containing US households’ trading records between 1991 and 1996 to document that in 31.6% of cases the stocks sold for a gain are sold on the day when the maximum since purchase occurs. However, not all stocks are sold at a maximum since purchase and the propensity to sell changes depending on how far in time and price the stock is with respect to this past maximum. We find that the propensity to sell initially increases as the price is closer to the past maximum but it then decreases when the price gets in the closest region to the past maximum, leading to an inverse U-shape; and that investors are less likely to sell a gain, the further away in time the maximum price occurred. Studying the joint effect of price and time distance, we find that the propensity to sell is highest at low time distance and high price distance from the maximum since purchase. We relate these findings to regret, belief updating, and attention.
This paper shows that social capital increases economic growth by raising government investment in human capital through better political incentives and selection. We provide empirical evidence that a greater share of output is spent on public education where social capital is higher, both across countries and across U.S. states. We develop a theoretical model of stochastic endogenous growth with imperfect political agency. Only some people correctly anticipate the future returns to current spending on public education. Greater social diffusion of information makes this knowledge more widespread among voters. As a result, social capital alleviates myopic political incentives to underinvest in human capital. It also helps voters select politicians who ensure high productivity in public education. Through this mechanism, we show that social capital raises the equilibrium growth rate of output and reduces its volatility.
Abstract
					Approximately 20 years ago, Peter Diamond and I wrote an article for this journal analyzing contingent valuation methods. At that time Peter's view was that contingent valuation was hopeless, while I was dubious but somewhat more optimistic. But 20 years later, after millions of dollars of largely government-funded research, I have concluded that Peter's earlier position was correct and that contingent valuation is hopeless. In this paper, I selectively review the contingent valuation literature, focusing on empirical results. I find that three long-standing problems continue to exist: 1) hypothetical response bias that leads contingent valuation to
overstatements of value; 2) large differences between willingness to pay and willingness to accept; and 3) the embedding problem which encompasses scope problems. The problems of
embedding and scope are likely to be the most intractable. Indeed, I believe that respondents to contingent valuation surveys are often not responding out of stable or well-defined preferences,
but are essentially inventing their answers on the fly, in a way which makes the resulting data useless for serious analysis. Finally, I offer a case study of a prominent contingent valuation study done by recognized experts in this approach, a study that should be only minimally affected by these concerns but in which the answers of respondents to the survey are implausible and inconsistent.
Abstract
					The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number
of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of
improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.
Abstract
					Between 1974 and 1981, the RAND health insurance experiment provided health insurance to more than 5,800 individuals from about 2,000 households in six different locations across the
United States, a sample designed to be representative of families with adults under the age of 62. More than three decades later, the RAND results are still widely held to be the "gold standard" of
evidence for predicting the likely impact of health insurance reforms on medical spending, as well as for designing actual insurance policies. On cost grounds alone, we are unlikely to see
something like the RAND experiment again. In this essay, we reexamine the core findings of the RAND health insurance experiment in light of the subsequent three decades of work on the
analysis of randomized experiments and the economics of moral hazard. First, we re-present the main findings of the RAND experiment in a manner more similar to the way they would be
presented today. Second, we reexamine the validity of the experimental treatment effects. Finally, we reconsider the famous RAND estimate that the elasticity of medical spending with
respect to its out-of pocket price is -0.2. We draw a contrast between how this elasticity was originally estimated and how it has been subsequently applied, and more generally we caution
against trying to summarize the experimental treatment effects from nonlinear health insurance contracts using a single price elasticity.
Abstract
					Sovereign wealth funds have emerged as major investors in corporate and real resources worldwide. After an overview of their magnitude, we consider the institutional arrangements under which many of the sovereign wealth funds operate. We focus on a specific set of agency problems that is of first-order importance for these funds: that is, the direct involvement of political leaders in the management process. We show that sovereign wealth funds with greater involvement of political leaders in fund management are associated with investment strategies that seem to favor short-term economic policy goals in their respective countries at the expense of longer-term maximization of returns. Sovereign wealth funds face several other issues, like how best to cope with demands for transparency, which can allow others to copy their investment strategies, and how to address the problems that arise with sheer size, like the difficulties of scaling up investment strategies that only work with a smaller value of assets under investment. In the conclusion, we discuss how various approaches cultivated by effective institutional investors worldwide -- from investing in the best people to pioneering new asset classes to compartmentalizing investment activities -- may provide clues as to how sovereign wealth funds might address these issues.
Abstract
					Starting with a blank slate, how could one design the institutions of a central bank for the
United States? This paper explores the question of how to design a central bank, drawing
on the relevant economic literature and historical experiences while staying free from
concerns about how the Fed got to be what it is today or the short-term political
constraints it has faced at various times. The goal is to provide an opinionated overview
that puts forward the trade-offs associated with different choices and identifies areas
where there are clear messages about optimal central bank design.
Abstract
					Computers are now involved in many economic transactions and can capture data associated with these transactions, which can then be manipulated and analyzed. Conventional statistical and econometric techniques such as regression often work well, but there are issues unique to big datasets that may require different tools. First, the sheer size of the data involved may require more powerful data manipulation tools. Second, we may have more potential predictors than appropriate for estimation, so we need to do some kind of variable selection. Third, large datasets may allow for more flexible relationships than simple linear models. Machine learning techniques such as decision trees, support vector machines, neural nets, deep learning, and so on may allow for more effective ways to model complex relationships. In this essay, I will describe a few of these tools for manipulating and analyzing big data. I believe that these methods have a lot to offer and should be more widely known and used by economists.
Abstract
					Data with a large number of variables relative to the sample size—"high-dimensional data"—are readily available and increasingly common in empirical economics. High-dimensional data arise through a combination of two phenomena. First, the data may be inherently high dimensional in that many different characteristics per observation are available. For example, the US Census collects information on hundreds of individual characteristics and scanner datasets record transaction-level data for households across a wide range of products. Second, even when the number of available variables is relatively small, researchers rarely know the exact functional form with which the small number of variables enter the model of interest. Researchers are thus faced with a large set of potential variables formed by different ways of interacting and transforming the underlying variables. This paper provides an overview of how innovations in "data mining" can be adapted and modified to provide high-quality inference about model parameters. Note that we use the term "data mining" in a modern sense which denotes a principled search for "true" predictive power that guards against false discovery and overfitting, does not erroneously equate in-sample fit to out-of-sample predictive ability, and accurately accounts for using the same data to examine many different hypotheses or models.
Abstract
					Modern campaigns develop databases of detailed information about citizens to inform electoral strategy and to guide tactical efforts. Despite sensational reports about the value of individual consumer data, the most valuable information campaigns acquire comes from the behaviors and direct responses provided by citizens themselves. Campaign data analysts develop models using this information to produce individual-level predictions about citizens' likelihoods of performing certain political behaviors, of supporting candidates and issues, and of changing their support conditional on being targeted with specific campaign interventions. The use of these predictive scores has increased dramatically since 2004, and their use could yield sizable gains to campaigns that harness them. At the same time, their widespread use effectively creates a coordination game with incomplete information between allied organizations. As such, organizations would benefit from partitioning the electorate to not duplicate efforts, but legal and political constraints preclude that possibility.
Abstract
					In this paper, we "slice up the global value chain" using a decomposition technique that has recently become feasible due to the development of the World Input-Output Database. We trace the value added by all labor and capital that is directly and indirectly needed for the production of final manufacturing goods. The production systems of these goods are highly prone to international fragmentation as many stages can be undertaken in any country with little variation in quality. We seek to establish a series of facts concerning the global fragmentation of production that can serve as a starting point for future analysis. We describe four major trends. First, international fragmentation, as measured by the foreign value-added content of production, has rapidly increased since the early 1990s. Second, in most global value chains there is a strong shift towards value being added by capital and high-skilled labor, and away from less-skilled labor. Third, within global value chains, advanced nations increasingly specialize in activities carried out by high-skilled workers. Fourth, emerging economies surprisingly specialize in capital-intensive activities.
Abstract
					Due to the rise of global supply chains, gross exports do not accurately measure the amount of value added exchanged between countries. I highlight five facts about differences between gross and value-added exports. These differences are large and growing over time, currently around 25 percent, and manufacturing trade looks more important, relative to services, in gross than value-added terms. These differences are also heterogenous across countries and bilateral partners, and changing unevenly across countries and partners over time. Taking these differences into account enables researchers to obtain better quantitative answers to important macroeconomic and trade questions. I discuss how the facts inform analysis of the transmission of shocks across countries; the mechanics of trade balance adjustments; the impact of frictions on trade; the role of endowments and comparative advantage; and trade policy.
Abstract
					Uncertainty is an amorphous concept. It reflects uncertainty in the minds of consumers, managers, and policymakers about possible futures. It is also a broad concept, including uncertainty over the path of macro phenomena like GDP growth, micro phenomena like the growth rate of firms, and noneconomic events like war and climate change. In this essay, I address four questions about uncertainty. First, what are some facts and patterns about economic uncertainty? Both macro and micro uncertainty appear to rise sharply in recessions and fall in booms. Uncertainty also varies heavily across countries—developing countries appear to have about one-third more macro uncertainty than developed countries. Second, why does uncertainty vary during business cycles? Third, do fluctuations in uncertainty affect behavior? Fourth, has higher uncertainty worsened the Great Recession and slowed the recovery? Much of this discussion is based on research on uncertainty from the last five years, reflecting the recent growth of the literature.
Abstract
					Donating blood, "the gift of life," is among the noblest activities and it is performed worldwide nearly 100 million times annually. The economic perspective presented here shows how the gift of life, albeit noble and often motivated by altruism, is heavily influenced by standard economic forces including supply and demand, economies of scale, and moral hazard. These forces, shaped by technological advances, have driven the evolution of blood donation markets from thin one-to-one "marriage markets" in which each recipient needed a personal blood donor, to thick, impersonalized, diffuse markets. Today, imbalances between aggregate supply and demand are a major challenge in blood markets, including excess supply after disasters and insufficient supply at other times. These imbalances are not unexpected given that the blood market operates without market prices and with limited storage length (about six weeks) for whole blood. Yet shifting to a system of paying blood donors seems a practical impossibility given attitudes toward paying blood donors and concerns that a paid system could compromise blood safety. Nonetheless, we believe that an economic perspective offers promising directions to increase supply and improve the supply and demand balance even in the presence of volunteer supply and with the absence of market prices.
Abstract
					Gremlins intervened in the preparation of my paper "The Economic Effects of Climate Change" published in the Spring 2009 issue of this journal. In Table 1 of that paper, titled "Estimates of the Welfare Impact of Climate Change," minus signs were dropped from the two impact estimates, one by Plambeck and Hope (1996) and one by Hope (2006). In Figure 1 of that paper, titled "Fourteen Estimates of the Global Economic Impact of Climate Change," and in the various analyses that support that figure, the minus sign was dropped from only one of the two estimates. The corresponding Table 1 and Figure 1 presented here correct these errors. Figure 2 titled,"Twenty-One Estimates of the Global Economic Impact of Climate Change" adds two overlooked estimates from before the time of the original 2009 paper and five more recent ones.
Abstract
					An optimal pace of business dynamics—encompassing the processes of entry, exit, expansion, and contraction—would balance the benefits of productivity and economic growth against the costs to firms and workers associated with reallocation of productive resources. It is difficult to prescribe what the optimal pace should be, but evidence accumulating from multiple datasets and methodologies suggests that the rate of business startups and the pace of employment dynamism in the US economy has fallen over recent decades and that this downward trend accelerated after 2000. A critical factor in accounting for the decline in business dynamics is a lower rate of business startups and the related decreasing role of dynamic young businesses in the economy. For example, the share of US employment accounted for by young firms has declined by almost 30 percent over the last 30 years. These trends suggest that incentives for entrepreneurs to start new firms in the United States have diminished over time. We do not identify all the factors underlying these trends in this paper but offer some clues based on the empirical patterns for specific sectors and geographic regions.
Abstract
					There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.
Abstract
					Although a large literature seeks to explain the "missing middle" of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no "missing middle" in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models explaining "the missing middle" in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
Abstract
					A "poverty trap" can be understood as a set of self-reinforcing mechanisms whereby countries start poor and remain poor: poverty begets poverty, so that current poverty is itself a direct cause of poverty in the future. The idea of a poverty trap has this striking implication for policy: much poverty is needless, in the sense that a different equilibrium is possible and one-time policy efforts to break the poverty trap may have lasting effects. But what does the modern evidence suggest about the extent to which poverty traps exist in practice and the underlying mechanisms that may be involved? The main mechanisms we examine include S-shaped savings functions at the country level; "big-push" theories of development based on coordination failures; hunger-based traps which rely on physical work capacity rising nonlinearly with food intake at low levels; and occupational poverty traps whereby poor individuals who start businesses that are too small will be trapped earning subsistence returns. We conclude that these types of poverty traps are rare and largely limited to remote or otherwise disadvantaged areas. We discuss behavioral poverty traps as a recent area of research, and geographic poverty traps as the most likely form of a trap. The resulting policy prescriptions are quite different from the calls for a big push in aid or an expansion of microfinance. The more-likely poverty traps call for action in less-traditional policy areas such as promoting more migration.
Abstract
					Over the past four decades the median length of the papers published in the "top five" economic journals has grown by nearly 300 percent. We study the effects of a page limit policy introduced by the American Economic Review (AER) in mid-2008 and subsequently adopted by the Journal of the European Economic Association (JEEA) in 2009. We find that the imposition of a 40-page limit on submissions led to no change in the flow of new papers to the AER. Instead, authors responded by shortening and reformatting their papers. For JEEA, in contrast, we conclude that the page-limit policy led authors of longer papers to submit to other journals. These results imply that the AER has substantial monopoly power over submissions, while JEEA faces a very competitive market. Evidence from both journals, and from citations to published papers in the top journals, suggests that longer papers are of higher quality than shorter papers, so the loss of longer submissions at JEEA may have led to a drop in quality. Despite a modest impact of the AER's policy on the average length of submissions, the policy had little or no effect on the length of final accepted manuscripts.
Abstract
					We evaluate policies to increase prosocial behavior using a field experiment with 1,500 referees at the Journal of Public Economics. We randomly assign referees to four groups: a control group with a six-week deadline to submit a referee report; a group with a four-week deadline; a cash incentive group rewarded with $100 for meeting the four-week deadline; and a social incentive group in which referees were told that their turnaround times would be publicly posted. We obtain four sets of results. First, shorter deadlines reduce the time referees take to submit reports substantially. Second, cash incentives significantly improve speed, especially in the week before the deadline. Cash payments do not crowd out intrinsic motivation: after the cash treatment ends, referees who received cash incentives are no slower than those in the four-week deadline group. Third, social incentives have smaller but significant effects on review times and are especially effective among tenured professors, who are less sensitive to deadlines and cash incentives. Fourth, all the treatments have little or no effect on rates of agreement to review, quality of reports, or review times at other journals. We conclude that small changes in journals' policies could substantially expedite peer review at little cost. More generally, price incentives, nudges, and social pressure are effective and complementary methods of increasing prosocial behavior.
Abstract
					We study the research productivity of new graduates from North American PhD programs in economics from 1986 to 2000. We find that research productivity drops off very quickly with class rank at all departments, and that the rank of the graduate departments themselves provides a surprisingly poor prediction of future research success. For example, at the top ten departments as a group, the median graduate has fewer than 0.03 American Economic Review (AER)-equivalent publications at year six after graduation, an untenurable record almost anywhere. We also find that PhD graduates of equal percentile rank from certain lower-ranked departments have stronger publication records than their counterparts at higher-ranked departments. In our data, for example, Carnegie Mellon's graduates at the 85th percentile of year-six research productivity outperform 85th percentile graduates of the University of Chicago, the University of Pennsylvania, Stanford, and Berkeley. These results suggest that even the top departments are not doing a very good job of training the great majority of their students to be successful research economists. Hiring committees may find these results helpful when trying to balance class rank and place of graduate in evaluating job candidates, and current graduate students may wish to re-evaluate their academic strategies in light of these findings.
Abstract
					As economists endeavor to build better models of human behavior, they cannot ignore that humans are fundamentally a social species with interaction patterns that shape their behaviors. People's opinions, which products they buy, whether they invest in education, become criminals, and so forth, are all influenced by friends and acquaintances. Ultimately, the full network of relationships—how dense it is, whether some groups are segregated, who sits in central positions—affects how information spreads and how people behave. Increased availability of data coupled with increased computing power allows us to analyze networks in economic settings in ways not previously possible. In this paper, I describe some of the ways in which networks are helping economists to model and understand behavior. I begin with an example that demonstrates the sorts of things that researchers can miss if they do not account for network patterns of interaction. Next I discuss a taxonomy of network properties and how they impact behaviors. Finally, I discuss the problem of developing tractable models of network formation.
Abstract
					A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perspective on production linkages can offer novel insights on how local shocks occurring along this production network can propagate across the economy and give rise to aggregate fluctuations. First, I discuss how production networks can be mapped to a standard general equilibrium setup. In particular, through a series of stylized examples, I demonstrate how the propagation of sectoral shocks—and hence aggregate volatility—depends on different arrangements of production, that is, on different "shapes" of the underlying production network. Next I explore, from a network perspective, the empirical
properties of a large-scale production network as given by detailed US input-output data. Finally I address how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.
Abstract
					My objective in this paper is to lay the groundwork for a new network-based theory of economic development. The first step is to establish that community-based networks are active throughout the developing world. Plenty of anecdotal and descriptive evidence
supports this claim. However, showing that these networks improve the economic outcomes of their members is more of a challenge. Over the course of the paper, I will present multiple strategies that have been employed to directly or indirectly identify network effects. The second step is to look beyond a static role for community networks, one of overcoming market failures and improving the outcomes of their members in the short-run, to examine how these informal institutions can support group mobility. A voluminous literature documents the involvement of communities in internal and international migration, both historically and in the contemporary economy. As with the static analysis, the challenge here is to show statistically that community networks directly support the movement of groups of individuals. I will show how predictions from the theory can be used to infer a link between networks and migration in very different contexts.
Abstract
					American visitors to Scandinavian countries are often puzzled by what they observe: despite large income redistribution through distortionary taxes and transfers, these are very high-income countries. They rank among the highest in the world in terms of
income per capita, as well as most other economic and social outcomes. The economic and social success of Scandinavia poses important questions for economics and for those arguing against large redistribution based on its supposedly detrimental effect on
economic growth and welfare. How can Scandinavian countries raise large amounts of tax revenue for redistribution and social insurance while maintaining some of the strongest economic outcomes in the world? Combining micro and macro evidence, this paper identifies three policies that can help explain this apparent anomaly: the coverage of third-party information reporting (ensuring a low level of tax evasion), the broadness of tax bases (ensuring a low level of tax avoidance), and the strong subsidization of goods that are complementary to working (ensuring a high level of labor force participation). The paper also presents descriptive evidence on a variety of social and cultural indicators that may help in explaining the economic and social success of Scandinavia.
Abstract
					Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think
about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue. We begin by laying out some basic relationships regarding how tax revenue as a share of GDP varies with per capita income and with the breadth of a country's tax base. We sketch a baseline model of what determines a country's tax revenue as a share of GDP. We then turn to our primary focus: why do developing countries tax so little? We begin
with factors related to the economic structure of these economies. But we argue that there is also an important role for political factors, such as weak institutions, fragmented polities, and a lack of transparency due to weak news media. Moreover, sociological and
cultural factors—such as a weak sense of national identity and a poor norm for compliance—may stifle the collection of tax revenue. In each case, we suggest the need for a dynamic approach that encompasses the two-way interactions between these political, social, and cultural factors and the economy.
Abstract
					This article attempts to estimate the magnitude of corporate tax avoidance and personal tax evasion through offshore tax havens. US corporations book 20 percent of their profits in tax havens, a tenfold increase since the 1980; their effective tax rate has declined from
30 to 20 percent over the last 15 years, and about two-thirds of this decline can be attributed to increased international tax avoidance. Globally, 8 percent of the world's personal financial wealth is held offshore, costing more than $200 billion to governments every year. Despite ambitious policy initiatives, profit shifting to tax havens and offshore wealth are rising. I discuss the recent proposals made to address these issues, and I argue that the main objective should be to create a world financial registry.
Abstract
					Left- and right-handed individuals have different neurological wiring, particularly with regard to language processing. Multiple datasets from the United States and the United Kingdom show that lefties exhibit significant human capital deficits relative to righties. Lefties score 0.1 standard deviations lower on cognitive skill measures, have more
behavioral problems, have more learning disabilities such as dyslexia, complete less schooling, and work in occupations requiring less cognitive skill. Most strikingly, lefties have 10-12 percent lower annual earnings than righties, much of which can be explained
by observable differences in cognitive skills and behavioral problems. Lefties work in more manually intensive occupations than do righties, further suggesting their primary labor market disadvantage is cognitive rather then physical. I argue here that handedness
can be used to explore the long-run impacts of differential brain structure generated in part by genetics and in part by poor infant health.
Abstract
					Thomas Piketty's (2013) book, Capital in the 21st Century, follows in the tradition of the great
classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose
and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a
guide to understanding the past or predicting the future because they ignore the central role of
political and economic institutions, as well as the endogenous evolution of technology, in shaping
the distribution of resources in society. We use regression evidence to show that the main
economic force emphasized in Piketty's book, the gap between the interest rate and the growth
rate, does not appear to explain historical patterns of inequality (especially, the share of income
accruing to the upper tail of the distribution). We then use the histories of inequality of South
Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding
economic factors in the context of economic and political institutions, and also that the focus on
the share of top incomes can give a misleading characterization of the true nature of inequality.
Abstract
					Since the early 2000s, research by Thomas Piketty, Emmanuel Saez, and their coauthors has
revolutionized our understanding of income and wealth inequality. In this paper, I highlight some
of the key empirical facts from this research and comment on how they relate to macroeconomics
and to economic theory more generally. One of the key links between data and theory is the Pareto
distribution. The paper describes simple mechanisms that give rise to Pareto distributions for
income and wealth and considers the economic forces that influence top inequality over time and
across countries. For example, it is in this context that the role of the famous r - g expression is
best understood.
Abstract
					I discuss available evidence about the evolution of top wealth shares in the United States over the
course of the 20th century. The three main approaches—the Survey of Consumer Finances, estate
tax multiplier, and capitalization methods—generate generally consistent findings until mid-1980s
but diverge since then, with the capitalization method showing a dramatic increase in wealth
concentration and the other two methods showing at best a small increase. I discuss strengths and
weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven
by a dramatic and puzzling increase in fixed income assets. There is evidence that estate tax
estimates may not be sufficiently accounting for mortality improvements over time. The
nonresponse and coverage issues in the SCF are a concern. I conclude that the changing nature of
top incomes and the increased importance of self-made wealth may explain difficulties in
implementing each of the methods and why the results diverge.
Abstract
					In this essay, we analyze the dominant position of economics within the network of the social
sciences in the United States. We begin by documenting the relative insularity of economics, using
bibliometric data. Next we analyze the tight management of the field from the top down, which
gives economics its characteristic hierarchical structure. Economists also distinguish themselves
from other social scientists through their much better material situation (many teach in business
schools, have external consulting activities), their more individualist worldviews, and their
confidence in their discipline's ability to fix
the world's problems. Taken together, these traits
constitute what we call the superiority of economists, where economists' objective supremacy is
intimately linked with their subjective sense of authority and entitlement. While this superiority
has certainly fueled economists' practical involvement and their considerable influence over the
economy, it has also exposed them more to conflicts of interests, political critique, even derision.
Abstract
					In 2011, Bristol-Myers Squibb set the price of its newly approved melanoma drug ipilimumab—
brand name Yervoy—at $120,000 for a course of therapy. The drug was associated with an
incremental increase in life expectancy of four months. Drugs like ipilimumab have fueled the
perception that the launch prices of new anticancer drugs and other drugs in the so-called
"specialty" pharmaceutical market have been increasing over time and that increases are unrelated
to the magnitude of the expected health benefits. In this paper, we discuss the unique features of
the market for anticancer drugs and assess trends in the launch prices for 58 anticancer drugs
approved between 1995 and 2013 in the United States. We restrict attention to anticancer drugs
because the use of median survival time as a primary outcome measure provides a common,
objective scale for quantifying the incremental benefit of new products. We find that the average
launch price of anticancer drugs, adjusted for inflation and health benefits, increased by 10
percent annually—or an average of $8,500 per year—from 1995 to 2013. We argue that the
institutional features of the market for anticancer drugs enable manufacturers to set the prices of
new products at or slightly above the prices of existing therapies, giving rise to an upward trend in
launch prices. Government-mandated price discounts for certain classes of buyers may have also
contributed to launch price increases as firms sought to offset the growth in the discount segment
by setting higher prices for the remainder of the market.
Abstract
					The window tax provides a dramatic and transparent historical example of the potential distorting
effects of taxation. Imposed in England in 1696, the tax—a kind of predecessor of the modern
property tax—was levied on dwellings with the tax liability based on the number of windows. The
tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the
construction of houses with very few windows. In spite of the pernicious health and aesthetic
effects and despite widespread protests, the tax persisted for over a century and a half: it was
finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of
the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and
political ramifications. Second, we have assembled a dataset from microfilms of local tax records
during this period that indicate the numbers of windows in individual dwellings. Drawing on these
data, we are able to test some basic hypotheses concerning the effect of the tax on the number of
windows and to calculate an admittedly rough measure of the excess burden associated with the
window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or
"deadweight loss") is for economists part of the meat and potatoes of tax analysis. But to the laity
the notion is actually rather arcane; public-finance economists often have some difficulty, for
example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource
allocation. The window tax is a textbook example of how a tax can have serious adverse side effects
on social welfare. In addition to its objectionable consequences for tax equity, the window tax
resulted in obvious and costly misallocations of resources.
Abstract
					The rescue of the US automobile industry amid the 2008-2009 recession and financial crisis was a consequential, controversial, and difficult decision made at a fraught moment for the US economy. Both of us were involved in the decision process at the time, but since have moved back to academia. More than five years have passed since the bailout began, and it is timely to look back at this unusual episode of economic policymaking to consider what we got right, what we got wrong, and why. In this article, we describe the events that brought two of the largest industrial companies in the world to seek a bailout from the US government, the analysis that was used to evaluate the decision (including what the alternatives were and whether a rescue would even work), the steps that were taken to rescue and restructure General Motors and Chrysler, and the performance of the US auto industry since the bailout. We close with general lessons to be learned from the episode.
Abstract
					The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—commonly known as Fannie Mae and Freddie Mac—was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.
Abstract
					The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. Two large bets on real estate made with funding vulnerable to bank-run-like dynamics pushed AIG to the brink of bankruptcy. AIG used securities lending to transform insurance company assets into residential mortgage-backed securities and collateralized debt obligations, ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multisector collateralized debt obligations, backed by real estate assets, ultimately losing more than $30 billion. These activities were apparently motivated by a belief that AIG's real estate bets would not suffer defaults and were "money-good." We find that these securities have in fact suffered write-downs and that the stark "money-good" claim can be rejected. Ultimately, both liquidity and solvency were issues for AIG.
Abstract
					The share of working-age Americans receiving disability benefits from the federal Disability Insurance (DI) program has increased significantly in recent decades, from 2.2 percent in the late 1970s to 3.6 percent in the years immediately preceding the 2007-2009 recession and 4.6 percent in 2013. With the federal Disability Insurance Trust Fund currently projected to be depleted in 2016, Congressional action of some sort is likely to occur within the next several years. It is therefore a good time to sort out the competing explanations for the increase in disability benefit receipt and to review some of the ideas that economists have put forth for reforming US disability programs.
Abstract
					As recently as 15 years ago, the high level of Disability Insurance (DI) enrollment was considered to be one of the major social and economic problems of the Netherlands; indeed, the Netherlands was characterized as the country with the most out-of-control disability program of OECD countries. But since about 2002, the Netherlands has seen a spectacular decline in its Disability Insurance enrollment rate. Radical reforms to the Dutch DI system were implemented over the period 1996 to 2006. We cluster these reforms in three broad categories: 1) reducing the incentives of employers to move workers to disability; 2) increased gatekeeping; and 3) tightening disability eligibility criteria while enhancing worker incentives. The reforms appear to have been very effective. Since 2002, yearly DI inflow rates dropped from 1.5 percent in 2001 to about 0.5 percent of the insured population in 2012. We argue that particularly the interaction of employer incentives and formal employer obligations has contributed to the substantial decrease in DI inflow. On the downside, however, it seems workers with bad health have sorted into temporary employment—without employers bearing the financial responsibility of their benefit costs.
Abstract
					The UK has enacted a number of reforms to the structure of disability benefits that has made it a major case study for other countries thinking of reform. The introduction of Incapacity Benefit in 1995 coincided with a strong decline in disability benefit expenditure, reversing previous sharp increases. From 2008 the replacement of Incapacity Benefit with Employment and Support Allowance was intended to reduce spending further. We bring together administrative and survey data over the period and highlight key differences in receipt of disability benefits by age, sex, and health. These disability benefit reforms and the trends in receipt are also put into the context of broader trends in health and employment by education and sex. We document a growing proportion of claimants in any age group with mental and behavioral disorders as their principal health condition. We also show the decline in the number of older working age men receiving disability benefits to have been partially offset by growth in the number of younger women receiving these benefits. We speculate on the impact of disability reforms on employment.
Abstract
					We offer an evaluation of the Social Security Administration demographic and financial forecasts used to assess the long-term solvency of the Social Security Trust Funds. This same forecasting methodology is also used in evaluating policy proposals put forward by Congress to modify the Social Security program. Ours is the first evaluation to compare the SSA forecasts with observed truth; for example, we compare forecasts made in the 1980s, 1990s, and 2000s with outcomes that are now available. We find that Social Security Administration forecasting errors—as evaluated by how accurate the forecasts turned out to be—were approximately unbiased until 2000 and then became systematically biased afterward, and increasingly so over time. Also, most of the forecasting errors since 2000 are in the same direction, consistently misleading users of the forecasts to conclude that the Social Security Trust Funds are in better financial shape than turns out to be the case. Finally, the Social Security Administration's informal uncertainty intervals appear to have become increasingly inaccurate since 2000. At present, the Office of the Chief Actuary, at the Social Security Administration, does not reveal in full how its forecasts are made. Every future Trustees Report, without exception, should include a routine evaluation of all prior forecasts, and a discussion of what forecasting mistakes were made, what was learned from the mistakes, and what actions might be taken to improve forecasts going forward. And the Social Security Administration and its Office of the Chief Actuary should follow best practices in academia and many other parts of government and make their forecasting procedures public and replicable, and should calculate and report calibrated uncertainty intervals for all forecasts.
Abstract
					In this essay, I begin by identifying the reasons that automation has not wiped out a majority of jobs over the decades and centuries. 
Automation does indeed substitute for labor—as it is typically intended to do. 
However, automation also complements labor, raises output in ways that leads to higher demand for labor, and interacts with adjustments in labor supply. 
Journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor. 
Changes in technology do alter the types of jobs available and what those jobs pay. 
In the last few decades, one noticeable change has been a "polarization" of the labor market, in which wage gains went disproportionately to those at the top and at the bottom of the income and skill distribution, not to those in the middle; however, I also argue, this polarization is unlikely to continue very far into future. 
The final section of this paper reflects on how recent and future advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. 
I argue that the interplay between machine and human comparative advantage allows computers to substitute for workers in performing routine, codifiable tasks while amplifying the comparative advantage of workers in supplying problem-solving skills, adaptability, and creativity.
Abstract
					The importance of a well-functioning legal and regulatory system in creating an effective market economy is now widely accepted. 
One flagship project that tries to measure the environment in which businesses operate in countries across the world is the World Bank's Doing Business project, which was launched in 2002. 
This project gathers quantitative data to compare regulations faced by small and medium-size enterprises across economies and over time. 
The centerpiece of the project is the annual Doing Business report. 
It was first published in 2003 with five sets of indicators for 133 economies, and currently includes 11 sets of indicators for 189 economies. 
The report includes a table that ranks each country in the world according to its scores across the indicators. 
The Doing Business project has become a major resource for academics, journalists, and policymakers. 
The project also enjoys a high public profile with close to ten million hits on its website each year. 
With such interest, it's no surprise that the Doing Business report has come under intense scrutiny. 
In 2012, following discussions by its board, the World Bank commissioned an independent review panel to evaluate the project, on which I served as a member. 
In this paper, I first describe how the Doing Business project works and illustrate with some of the key findings of the 2015 report. 
Next, I address what is valuable about the project, the criticisms of it, and some wider political economy issues illustrated by the report.
Abstract
					What happens in the developing world when stringent regulations characterizing the investment climate meet weak government willingness or capability to enforce those regulations? 
How is business actually done? 
The Doing Business project surveys experts concerning the legally required time and costs of regulatory compliance for various aspects of private enterprise—starting a firm, dealing with construction permits, trading across borders, paying taxes, getting credit, enforcing contracts, and so on—around the world. 
The World Bank's firm-level Enterprise Surveys around the world ask managers at a wide array of firms about their business, including questions about how long it took to go through various processes like obtaining an operating license or a construction permit, or bringing in imports. 
This paper compares the results of three broadly comparable indicators from the Doing Business and Enterprise Surveys. 
Overall, we find that the estimate of legally required time for firms to complete a certain legal and regulatory process provided by the Doing Business survey does not summarize even modestly well the experience of firms as reported by the Enterprise Surveys. 
When strict de jure regulation and high rates of taxation meet weak governmental capabilities for implementation and enforcement, we argue that researchers and policymakers should stop thinking about regulations as creating "rules" to be followed, but rather as creating a space in which "deals" of various kinds are possible.
Abstract
					E-book sales surged after Amazon introduced the Kindle e-reader at the end of 2007 and accounted for about one quarter of all trade book sales by the end of 2013. 
Amazon's aggressive (low) pricing of e-books led to allegations that e-books were bankrupting brick and mortar book booksellers. 
Amazon's commanding position as a bookseller also raises concerns about monopoly power, and publishers are concerned about Amazon's power to displace them in the book value chain. 
I find little evidence that e-books are primarily responsible for the decline of independent booksellers. 
I also conclude that entry barriers are not sufficient to allow Amazon to set monopoly prices. 
Publishers are at risk from Amazon's monopsony (buyer) power and so sought "agency" pricing in an effort to raise the price of ebooks, promote retail competition, and reduce Amazon's influence as an e-retailer. 
(In the agency pricing model, the publisher specifies the retail price with a commission for the retailer. 
In a traditional, "wholesale" pricing model, publishers sell a book to retailers at a wholesale price and retailers set the retail price.) 
Although agency pricing was challenged by the Department of Justice, it may yet prevail in some form as an equilibrium pricing model for e-book sales.
Abstract
					The Indian Gaming Regulatory Act (IGRA), passed by the US Congress in 1988, was a watershed in the history of policymaking directed toward reservation-resident American Indians. IGRA set the stage for tribal government-owned gaming facilities. It also shaped how this new industry would develop and how tribal governments would invest gaming revenues. Since then, Indian gaming has approached commercial, state-licensed gaming in total revenues. Gaming operations have had a far-reaching and transformative effect on American Indian reservations and their economies. Specifically, Indian gaming has allowed marked improvements in several important dimensions of reservation life. For the first time, some tribal governments have moved to fiscal independence. Native nations have invested gaming revenues in their economies and societies, often with dramatic effect.
Abstract
					In this paper, we provide a theoretical and empirical framework that 
allows us to synthesize and assess the burgeoning literature on CEO 
overconfidence. We also provide novel empirical evidence that 
overconfidence matters for corporate investment decisions in a 
framework that explicitly addresses the endogeneity of firms' financing 
constraints.
Abstract
					The past 15-20 years have seen substantial and visible changes in 
the way US retail business is conducted. Explanations about what is 
happening in the retail sector have been dominated by two powerful 
and not fully consistent narratives: a prediction that retail sales will 
migrate online and physical retail will be virtually extinguished, and a prediction that future shoppers will almost all be heading to giant 
physical stores like warehouse clubs and supercenters. Although 
online retail will surely continue to be a force shaping the sector 
going forward and may yet emerge as the dominant mode of 
commerce in the retail sector in the United States, its time for 
supremacy has not yet arrived. We discuss evidence indicating that 
the warehouse clubs/supercenter format has had a greater effect on 
the shape of retail over the past 15-20 years. We begin with an 
overview of the retail sector as a whole, which over the long term 
has been shrinking as a share of total US economic activity and in 
terms of relative employment share. The retail sector has 
experienced stronger-than average productivity growth, but this has
not been accompanied by commensurate wage growth. After 
discussing the important e-commerce and warehouse 
clubs/supercenters segments, we look more broadly at changes 
across the structure of the retail sector, including scale, 
concentration, dynamism, and degree of urbanization. Finally, we 
consider the likely future course of the retail sector.
Abstract
					When two Silicon Valley start-ups, Coursera and Udacity, embarked 
in 2012 on a bold effort to supply college-level courses for free over 
the Internet to learners worldwide, the notion of the Massively Open 
Online Course (MOOC) captured the nation's attention. Although 
MOOCs are an interesting experiment with a role to play in the future of higher education, they are a surprisingly small part of the online 
higher education scene. We believe that online education, at least 
online education that begins to take full advantage of the 
interactivity offered by the web, is still in its infancy. We begin by 
sketching out the several faces of online learning—asynchronous, 
partially asynchronous, the flipped classroom, and others—as well as how the use of online education differs across the spectrum of higher education. We consider how the growth of online education 
will affect cost and convenience, student learning, and the role of 
faculty and administrators. We argue that spread of online education 
through higher education is likely to be slower than many 
commenters expect. We hope that online education will bring 
substantial benefits. But less-attractive outcomes are also possible if, for instance, legislators use the existence of online education as an 
excuse for sharp cuts in higher education budgets that lead to lower-quality education for many students, at the same time that richer, 
more selective schools are using online education as one more 
weapon in the arms race dynamic that is driving costs higher.
Abstract
					For many years prior to the global financial crisis, the Federal Open 
Market Committee set a target for the federal funds rate and achieved 
that target through small purchases and sales of securities in the open 
market. In the aftermath of the financial crisis, with a superabundant 
level of reserve balances in the banking system having been created 
as a result of the Federal Reserve's large-scale asset purchase 
programs, this approach to implementing monetary policy will no 
longer work. This paper provides a primer on the Fed's implementation 
of monetary policy. We use the standard textbook model to illustrate 
why the approach used by the Federal Reserve before the financial 
crisis to keep the federal funds rate near the Federal Open Market 
Committee's target will not work in current circumstances, and explain 
the approach that the Committee intends to use instead when it decides 
to begin raising short-term interest rates.
Abstract
					Household surveys, one of the main innovations in social science 
research of the last century, are threatened by declining accuracy due 
to reduced cooperation of respondents. While many indicators of 
survey quality have steadily declined in recent decades, the literature 
has largely emphasized rising nonresponse rates rather than other 
potentially more important dimensions to the problem. We divide the 
problem into rising rates of nonresponse, imputation, and 
measurement error, documenting the rise in each of these threats to 
survey quality over the past three decades. A fundamental problem in 
assessing biases due to these problems in surveys is the lack of a 
benchmark or measure of truth, leading us to focus on the accuracy of 
the reporting of government transfers. We provide evidence from 
aggregate measures of transfer reporting as well as linked microdata. 
We discuss the relative importance of misreporting of program receipt 
and conditional amounts of benefits received, as well as some of the 
conjectured reasons for declining cooperation and for survey errors. 
We end by discussing ways to reduce the impact of the problem 
including the increased use of administrative data and the possibilities 
for combining administrative and survey data.
Abstract
					This paper investigates very long-run preindustrial economic 
development. New annual GDP per capita data for six European 
countries over the last seven hundred years paint a clearer picture of 
the history of European economic development. We confirm that 
sustained growth has been a recent phenomenon, but reject the 
argument that there was no long-run growth in living standards before 
the Industrial Revolution. Instead, the evidence demonstrates the 
existence of numerous periods of economic growth before the 
nineteenth century—periods of unsustained, but raising GDP per 
capita. We also show that many of the economies experienced 
substantial economic decline. Thus, rather than being stagnant, pre-nineteenth century European economies experienced a great deal of 
change. Finally, we offer some evidence that, from the nineteenth 
century, these economies increased the likelihood of being in a phase 
of economic growth and reduced the risk of being in a phase of 
economic decline.
Abstract
					Scientists believe significant climate change is unavoidable without a drastic reduction in the emissions of greenhouse gases from the combustion of fossil fuels. However, few countries have implemented comprehensive policies that price this externality or devote serious resources to developing low-carbon energy sources. In many respects, the world is betting that we will greatly reduce the use of fossil fuels because we will run out of inexpensive fossil fuels (there will be decreases in supply) and/or technological advances will lead to the discovery of less-expensive low-carbon technologies (there will be decreases in demand). The historical record indicates that the supply of fossil fuels has consistently increased over time and that their relative price advantage over low-carbon energy sources has not declined substantially over time. Without robust efforts to correct the market failures around greenhouse gases, relying on supply and/or demand forces to limit greenhouse gas emissions is relying heavily on hope.
Abstract
					It has been 40 years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists' improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants, and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
Abstract
					Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.
Abstract
					Many of the insights of economics seem to be qualitative, with many fewer reliable quantitative laws. However a series of power laws in economics do count as true and nontrivial quantitative laws—and they are not only established empirically, but also understood theoretically. I will start by providing several illustrations of empirical power laws having to do with patterns involving cities, firms, and the stock market. I summarize some of the theoretical explanations that have been proposed. I suggest that power laws help us explain many economic phenomena, including aggregate economic fluctuations. I hope to clarify why power laws are so special, and to demonstrate their utility. In conclusion, I list some power-law-related economic enigmas that demand further exploration.
Abstract
					In this essay, we discuss the importance of consumption inequality in the debate concerning the measurement of disparities in economic well-being. We summarize the advantages and disadvantages of using consumption as opposed to income for measuring trends in economic well-being. 
We critically evaluate the available evidence on these trends, and in particular discuss how the literature has evolved in its assessment of whether consumption inequality has grown as much as or less than income inequality. We provide some novel evidence on three relatively unexplored themes: inequality in different spending components, inequality in leisure time, and intergenerational consumption mobility.
Abstract
					In this essay, we ask whether the distributions of life expectancy and mortality have become generally more unequal, as many seem to believe, and we report some good news. Focusing on groups of counties ranked by their poverty rates, we show that gains in life expectancy at birth have actually been relatively equally distributed between rich and poor areas. 
Analysts who have concluded that inequality in life expectancy is increasing have generally focused on life expectancy at age 40 to 50. This observation suggests that it is important to examine trends in mortality for younger and older ages separately. Turning to an analysis of age-specific mortality rates, we show that among adults age 50 and over, mortality has declined more quickly in richer areas than in poorer ones, resulting in increased inequality in mortality. 
This finding is consistent with previous research on the subject. However, among children, mortality has been falling more quickly in poorer areas with the result that inequality in mortality has fallen substantially over time. We also show that there have been stunning declines in mortality rates for African Americans between 1990 and 2010, especially for black men. Finally we offer some hypotheses about causes for the results we see, including a discussion of differential smoking patterns by age and socioeconomic status.
Abstract
					Health insurance and other in-kind forms of compensation and government benefits are typically not included in measures of income and analyses of inequality. This omission is important. 
Given the large and growing cost of health care in the United States and the presence of large government health insurance programs such as Medicaid and Medicare, it is crucial to understand how health insurance and related public policies contribute to measured economic well-being and inequality. Our paper assesses the effect on inequality of the primary government programs that affect health insurance.
Abstract
					Popular discussions of changes in American families over the past 60 years have revolved around the "retreat from marriage." Concern has focused on increasing levels of nonmarital childbearing, as well as falling marriage rates that stem from both increases in the age at first marriage and greater marital instability. Often lost in these discussions is the fact that the decline of marriage has coincided with a rise in cohabitation. 
Many "single" Americans now live with a domestic partner and a substantial fraction of "single" mothers are cohabiting, often with the child's father. The share of women who have ever cohabited has nearly doubled over the past 25 years, and the majority of nonmarital births now occur to cohabiting rather than to unpartnered mothers at all levels of education. The emergence of cohabitation as an alternative to marriage has been a key feature of the post–World War II transformation of the American family. 
These changes in the patterns and trajectories of family structure have a strong socioeconomic gradient. The important divide is between college graduates and others: individuals who have attended college but do not have a four-year degree have family patterns and trajectories that are very similar to those of high school graduates.
Abstract
					Crime rates in the United States have declined to historical lows since the early 1990s.  Prison and jail incarceration rates as well as community correctional populations have increased greatly since the mid-1970s. Both of these developments have disproportionately impacted poor and minority communities. In this paper, we document these trends. We then assess whether the crime declines can be attributed to the massive expansion of the US criminal justice system. 
We argue that the crime rate is certainly lower as a result of this expansion and in the early 1990s was likely a third lower than what it would have been absent changes in sentencing practices in the 1980s. However, there is little evidence that further stiffening of sentences during the 1990s—a period when prison and other correctional populations expanded rapidly—have had an impact. Hence, the growth in criminal justice populations since 1990s has exacerbated socioeconomic inequality in the United States without generating much benefit in terms of lower crime rates.
Abstract
					A large and growing share of retail prices all over the world are posted online on the websites of retailers. This is a massive and (until recently) untapped source of retail price information. Our objective with the Billion Prices Project, created at MIT in 2008, is to experiment with these new sources of information to improve the computation of traditional economic indicators, starting with the Consumer Price Index. 
We also seek to understand whether online prices have distinct dynamics, their advantages and disadvantages, and whether they can serve as reliable source of information for economic research. The word "billion" in Billion Prices Project was simply meant to express our desire to collect a massive amount of prices, though we in fact reached that number of observations in less than two years. By 2010, we were collecting 5 million prices every day from over 300 retailers in 50 countries. We describe the methodology used to compute online price indexes and show how they co-move with consumer price indexes in most countries. We also use our price data to study price stickiness, and to investigate the "law of one price" in international economics. 
Finally we describe how the Billion Prices Project data are publicly shared and discuss why data collection is an important endeavor that macro- and international economists should pursue more often.
Abstract
					The employment-to-population ratio among prime-aged adults aged 25–54 has fallen substantially since 2000. The explanations proposed for the decline in the employment-to-population ratio have been of two broad types. One set of explanations emphasizes cyclical factors associated with the recession; the second set of explanations focuses on the role of longer-run structural factors. 
In this paper, we argue that while the decline in manufacturing and the consequent reduction in demand for less-educated workers put downward pressure on their employment rates in the pre-recession 2000–2006 period, the increased demand for less-educated workers because of the housing boom was simultaneously pushing their employment rates upwards. For a few years, the housing boom served to "mask" the labor market effects of manufacturing decline for less-educated workers. 
When the housing market collapsed in 2007, there was a large, immediate decline in employment among these workers, who faced not only the sudden disappearance of jobs related to the housing boom, but also the fact that manufacturing's steady decline during the early 2000s left them with many fewer opportunities in that sector than had existed at the start of the decade.
Abstract
					Students in some countries do far better on international achievement tests than students in other countries. Is this all due to differences in what students bring with them to school--socioeconomic background, cultural factors, and the like? Or do school systems make a difference? This essay argues that differences in features of countries' school systems, and in particular their institutional structures, account for a substantial part of the cross-country variation in student achievement. It first documents the size and cross-test consistency of international differences in student achievement. Next, it uses the framework of an education production function to provide descriptive analysis of the extent to which different factors of the school system, as well as factors beyond the school system, account for cross-country achievement differences. Finally, it covers research that goes beyond descriptive associations by addressing leading concerns of bias in cross-country analysis. The available evidence suggests that differences in expenditures and class size play a limited role in explaining cross-country achievement differences, but that differences in teacher quality and instruction time do matter. This suggests that what matters is not so much the amount of inputs that school systems are endowed with, but rather how they use them. Correspondingly, international differences in institutional structures of school systems such as external exams, school autonomy, private competition, and tracking have been found to be important sources of international differences in student achievement.
Abstract
					We take a closer look at what can be learned about charter schools by pooling data from lottery-based impact estimates of the effect of charter school attendance at 113 schools. On average, each year enrolled at one of these schools increases math scores by 0.08 standard deviations and English/language arts scores by 0.04 standard deviations relative to attending a counterfactual public school. There is wide variation in impact estimates. To glean what drives this variation, we link these effects to school practices, inputs, and characteristics of fallback schools. In line with the earlier literature, we find that schools that adopt an intensive "No Excuses" attitude towards students are correlated with large positive effects on academic performance, with traditional inputs like class size playing no role in explaining charter school effects. However, we highlight that No Excuses schools are also located among the most disadvantaged neighborhoods in the country. After accounting for performance levels at fallback schools, the relationship between the remaining variation in school performance and the entire No Excuses package of practices weakens. No Excuses schools are effective at raising performance in neighborhoods with very poor performing schools, but the available data have less to say on whether the No Excuses approach could help in nonurban settings or whether other practices would similarly raise achievement in areas with low-performing schools. We find that intensive tutoring is the only No Excuses characteristic that remains significant (even for nonurban schools) once the performance levels of fallback schools are taken into account.
Abstract
					The NSF Economics program funds basic research in economics across all its disparate fields. Its budget has experienced a long period of stagnation and decline, with its real value in 2013 below that in 1980 and having declined by 50 percent as a percent of the total NSF budget. The number of grants made by the program has also declined over time, and its current budget is very small compared to that of many other funders of economic research. Over the years, NSF-supported research has supported many of the major intellectual developments in the discipline that have made important contributions to the study of public policy. The public goods argument for government support of basic economic research is strong. Neither private firms, foundations, nor private donors are likely to engage in the comprehensive support of all forms of economic research if NSF were not to exist. Select universities with large endowments are more likely to have the ability to support general economic research in the absence of NSF, but most universities do not have endowments sufficiently large to do so. Support for large-scale general purpose dataset collection is particularly unlikely to receive support from any nongovernment agency. On a priori grounds, it is likely that most NSF-funded research represents a net increase in research effort rather than displacing already-occurring effort by academic economists. Unfortunately, the empirical literature on the net aggregate impact of NSF economics funding is virtually nonexistent.
Abstract
					We can imagine a plausible case for government support of science based on traditional economic reasons of externalities and public goods. Yet when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy. In this essay, we take a more skeptical attitude toward the efforts of the NSF to subsidize economic research. We offer two main sets of arguments. First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. Given these critiques, we suggest some possible ways in which the pattern of NSF funding, and the arguments for such funding, might be improved.
Abstract
					In the past decade, nearly 20 studies have found a strong, persistent pattern in surveys and behavioral experiments from over 40 countries: individual exposure to war violence tends to increase social cooperation at the local level, including community participation and prosocial behavior. Thus while war has many negative legacies for individuals and societies, it appears to leave a positive legacy in terms of local cooperation and civic engagement. We discuss, synthesize, and reanalyze the emerging body of evidence and weigh alternative explanations. There is some indication that war violence enhances in-group or "parochial" norms and preferences especially, a finding that, if true, suggests that the rising social cohesion we document need not promote broader peace.
Abstract
					Immigration has been a steady force acting on population and employment within countries throughout human history. Focusing on the last four decades, we show that the mix of immigrants to rich countries has been, overall, rather balanced between college and non-college educated. The growth of immigration has been driven by immigrants from nonrich countries. The economic impact of immigration on receiving economies needs to be understood by analyzing the specific skills brought by immigrants. The complementarity and substitutability between immigrants and natives in employment, and the response of receiving economies in terms of specialization and technological choices, are important when considering the general equilibrium effects of immigration. In the United States, a balanced composition of immigrants between college and noncollege educated, together with the adjustment of demand and technology, imply that general equilibrium effects on relative and absolute wages have been small.
Abstract
					We classify the empirical literature on the wage impact of immigration into three groups, where studies in the first two groups estimate different relative effects, and studies in the third group estimate the total effect of immigration on wages. We interpret the estimates obtained from the different approaches through the lens of the canonical model to demonstrate that they are not comparable. We then relax two key assumptions in this literature, allowing for inelastic and heterogeneous labor supply elasticities of natives and the "downgrading" of immigrants. "Downgrading" occurs when the position of immigrants in the labor market is systematically lower than the position of natives with the same observed education and experience levels. Downgrading means that immigrants receive lower returns to the same measured skills than natives when these skills are acquired in their country of origin. We show that heterogeneous labor supply elasticities, if ignored, may complicate the interpretation of wage estimates, and particularly the interpretation of relative wage effects. Moreover, downgrading may lead to biased estimates in those approaches that estimate relative effects of immigration, but not in approaches that estimate total effects. We conclude that empirical models that estimate total effects not only answer important policy questions, but are also more robust to alternative assumptions than models that estimate relative effects.
Abstract
					How will worldwide changes in population affect pressures for international migration in the future? We examine the past three decades, during which population pressures contributed to substantial labor flows from neighboring countries into the United States and Europe, and contrast them with the coming three decades, which will see sharp reductions in labor-supply growth in Latin America but not in Africa or much of the Middle East. Using a gravity-style empirical model, we examine the contribution of changes in relative labor-supply to bilateral migration in the 2000s and then apply this model to project future bilateral flows based on long-run UN forecasts of working-age populations in sending and receiving countries. Because the Americas are entering an era of uniformly low population growth, labor flows across the Rio Grande are projected to slow markedly. Europe, in contrast, will face substantial demographically driven migration pressures from across the Mediterranean for decades to come. Although these projected inflows would triple the first-generation immigrant stocks of larger European countries between 2010 and 2040, they would still absorb only a small fraction of the 800-million-person increase in the working-age population of Sub-Saharan Africa that is projected to occur over this period.
Abstract
					Within economics, game theory occupied a rather isolated niche in the 1960s and 1970s. It was pursued by people who were known specifically as game theorists and who did almost nothing but game theory, while other economists had little idea what game theory was. Game theory is now a standard tool in economics. Contributions to game theory are made by economists across the spectrum of fields and interests, and economists regularly combine work in game theory with work in other areas. Students learn the basic techniques of game theory in the first-year graduate theory core. Excitement over game theory in economics has given way to an easy familiarity. This essay first examines this transition, arguing that the initial excitement surrounding game theory has dissipated not because game theory has retreated from its initial bridgehead, but because it has extended its reach throughout economics. Next, it discusses some key challenges for game theory, including the continuing problem of dealing with multiple equilibria, the need to make game theory useful in applications, and the need to better integrate noncooperative and cooperative game theory. Finally it considers the current status and future prospects of game theory.
Abstract
					It has been 40 years since Deng Xiaoping broke dramatically with Maoist ideology and the Maoist variant of socialism. Since then, China has been transformed. Forty years ago, in 1978, China was unquestionably a socialist economy of the familiar and well-studied "command economy" variant, even though it was more decentralized and more loosely planned than its Soviet progenitor. Twenty years ago--that is, by the late 1990s--China had completely discarded this type of socialism and was moving decisively to a market economy. China today is quite different both from the command economy of 40 years ago, and from the "Wild West Capitalism" of 20 years ago. Throughout these enormous changes, China has always officially claimed to be socialist. Does the "socialist" label make sense when applied to China today?
Abstract
					In this paper, we consider the sources and prospects for economic growth in China with a focus on human capital. First, we provide an overview of the role that labor has played in China's 
economic success. We then describe China's hukou policy, which divides China's labor force into two distinct segments, one composed of rural workers and the other of urban 
workers. For the rural labor force, we focus on the challenges of raising human capital by both increasing basic educational attainment rates as well as the quality of education. For the urban 
labor force, we focus on the issues of further expanding enrollment in college education as well as improving the quality of college education. We use a regression model to show the typical 
relationship between human capital and output in economies around the world and demonstrate how that relationship has evolved since 1980. We show that China has made substantial 
strides both in the education level of its population and in the way that education is being rewarded in its labor markets. However, as we look ahead, our results imply that China may find it 
impossible to maintain what appears to be its desired growth rate of 7 percent in the next 20 years; a growth rate of 3 percent over the next two decades seems more plausible. Finally, we 
present policy recommendations, which are rooted in the belief that China continues to have substantial room to improve the human capital of its labor force.
Abstract
					After more than three decades of high growth based on its low-wage advantage and relatively favorable demographics--in combination with market-oriented reforms and openness to 
the world economy--China is at a crossroads with a much higher wage and a shrinking workforce. Future growth will depend, by necessity, more on the generation of increased 
productivity, and domestic innovation will play an important part in this. In this paper, we assess the likelihood that China can make the necessary transition. Using data on 
expenditure on research and development, and patent applications, receipts, and citations, we show that the Chinese economy has become increasingly innovative. We will argue that 
rising wages and expanding markets are among the important drivers of China's growth in innovation. On the other hand, we find evidence of resource misallocation in the innovation 
area: while state-owned firms receive more subsidies, private firms exhibit more innovation results. Innovation can presumably progress even faster if resource misallocation can be 
tackled.
Abstract
					Over the last 30 years, China's economy has boomed. This trend has lifted hundreds of millions of Chinese out of poverty but it has also sharply increased local, regional, and global pollution levels. We look at 
the rise in air pollution over recent decades, and the perhaps surprising finding that in many of China's urban areas, levels of particulates (of less than 10 microns) have been decreasing during the last 10 to 15 
years. We then turn to the costs and tradeoffs of air pollution, including costs to human health, reductions in worker productivity, and how people are seeking to reduce their exposure to pollution as shown by 
compensating differentials in real estate prices and purchases of masks and air filters. We discuss how rising incomes tend to raise the demand for environmental amenities and thus increase political pressure 
for environmental protection, and then we turn to the policy tools that China has used to reduce pollution. We conclude by arguing that as China's government is preparing for an additional 300 million people to 
move to urban areas over the next 30 years, it will have a number of opportunities for China to reduce pollution through a shift from manufacturing to services, along with various steps to improve energy 
efficiency and resource conservation. Overall, it seems that China is on track to improve its environmental performance in the years ahead.
Abstract
					Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014 and are now between two and ten times higher than the construction cost of apartments. At the same time, Chinese developers built 100 billion square feet of residential real estate. This boom has been accompanied by a large increase in the number of vacant homes, held by both developers and households. This boom may turn out to be a housing bubble followed by a crash, yet that future is far from certain. The demand for real estate in China is so strong that current prices might be sustainable, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed. Whether that happens depends on the policies of the Chinese government, which must weigh the benefits of price stability against the costs of restricting urban growth.
Abstract
					In this paper, we document basic facts regarding public debates about controversial political issues on Chinese social media. Our documentation is based on a dataset of 13.2 billion blog posts published on Sina Weibo--the most prominent Chinese microblogging platform--during the 2009-2013 period. Our primary finding is that a shockingly large number of posts on highly sensitive topics were published and circulated on social media. For instance, we find millions of posts discussing protests, and these posts are informative in predicting the occurrence of specific events. We find an even larger number of posts with explicit corruption allegations, and that these posts predict future corruption charges of specific individuals. Our findings challenge a popular view that an authoritarian regime would relentlessly censor or even ban social media. Instead, the interaction of an authoritarian government with social media seems more complex.
Abstract
					In 1979, China introduced its unprecedented one-child policy, under which households exceeding the birth quota were penalized. However, estimating the effect of this policy on family outcomes turns out to be 
complicated. China had already enacted an aggressive family planning policy in the early 1970s, and its fertility rates had already dropped sharply before the enactment of the one-child policy. The one-child 
policy was also enacted at almost the same time as China's market-oriented economic reforms, which triggered several decades of rapid growth, which would also tend to reduce fertility rates. During the same 
period, a number of other developing countries in East Asia and around the world have also experienced sharp declines in fertility. Overall, finding defensible ways to identify the effect of China's one-child policy 
on family outcomes is a tremendous challenge. I expound the main empirical approaches to the identification of the effects of the one-child policy, with an emphasis on their underlying assumptions and 
limitations. I then turn to empirical results in the literature. I discuss the evidence concerning the effects of the one-child policy on fertility and how it might affect human capital investment in children. Finally I 
offer some new exploratory and preliminary estimates of the effects of the one-child policy on divorce, labor supply, and rural-to-urban migration.
Abstract
					A new life cycle of women's employment emerged with cohorts born in the 1950s. For prior cohorts, life-cycle employment had a hump shape; it increased from the twenties to the forties, hit a peak, and then declined starting in the fifties. The new life cycle of employment is initially high and flat, there is a dip in the middle, and a phasing out that is more prolonged than for previous cohorts. The hump is gone, the middle is a bit sagging, and the top has greatly expanded. We explore the increase in cumulative work experience for women from the 1930s to the 1970s birth cohorts using data from the Survey of Income and Program Participation and the Health and Retirement Study. We investigate the changing labor force impact of a birth event across cohorts and by education, and also the impact of taking leave or quitting. We find greatly increased labor force experience across cohorts, far less time out after a birth, and greater labor force recovery for those who take paid or unpaid leave. Increased employment of women in their older ages is related to more continuous work experience across the life cycle.
Abstract
					In this paper, we examine the evolution of the gender gap associated with marriage and parental status, comparing cohorts born between 1936 and 1985. The model of household specialization and division of labor introduced by Becker posits that when forming households, couples will exploit the gains from trade by having one spouse specialize in market work while the other specializes in household work. Given the historical advantage of men in the labor market, the model predicts specialization by gender and therefore an earnings advantage for married men and an earnings disadvantage for married women. Is this model of specialization useful for understanding the evolution of the gender gap across generations of women? And what about children? Academic papers have shown that wages of mothers are significantly lower than those of non-mothers with similar human capital characteristics. We do not attempt to build a structural model here, but rather document how changing associations between marriage and earnings, and between children and earnings, have contributed to the gender gap in an "accounting" sense.
Abstract
					By the early 21st century, most high-income countries have put into effect a host of generous and virtually gender-neutral parental leave policies and family benefits, with the multiple goals of gender equity, 
higher fertility, and child development. What have been the effects? Proponents typically emphasize the contribution of family policies to the goals of gender equity and child development, enabling women to 
combine careers and motherhood, and altering social norms regarding gender roles. Opponents often warn that family policies may become a long-term hindrance to women's careers because of the loss of 
work experience and the higher costs to employers that hire women of childbearing age. We draw lessons from existing work and our own analysis on the effects of parental leave and other interventions aimed 
at aiding families. We present country- and micro-level evidence on the effects of family policy on gender outcomes, focusing on female employment, gender gaps in earnings, and fertility. Most estimates range 
from negligible to a small positive impact. But the verdict is far more positive for the beneficial impact of spending on early education and childcare.
Abstract
					Machines are increasingly doing "intelligent" things. Face recognition algorithms use a large dataset of photos labeled as having a face or not to estimate a function that predicts the presence y of a face from pixels x. This similarity to econometrics raises questions: How do these new empirical tools fit with what we know? As empirical economists, how can we use them? We present a way of thinking about machine learning that gives it its own place in the econometric toolbox. Machine learning not only provides new tools, it solves a different problem. Specifically, machine learning revolves around the problem of prediction, while many economic applications revolve around parameter estimation. So applying machine learning to economics requires finding relevant tasks. Machine learning algorithms are now technically easy to use: you can download convenient packages in R or Python. This also raises the risk that the algorithms are applied naively or their output is misinterpreted. We hope to make them conceptually easier to use by providing a crisper understanding of how these algorithms work, where they excel, and where they can stumble—and thus where they can be most usefully applied.
Abstract
					The United States has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at 
least in part illusory because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges 
to this "mismeasurement hypothesis." First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries' consumption or production 
intensities of information and communication technologies (ICTs, the type of goods most often cited as sources of mismeasurement). Second, estimates from the existing research literature of 
the surplus created by internet-linked digital technologies fall far short of the $3 trillion or more of "missing output" resulting from the productivity growth slowdown. Third, if measurement 
problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs would have 
to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 
2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity 
slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that 
the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.
Abstract
					Following the 2016 US presidential election, many have expressed concern about the effects of false stories ("fake news"), circulated largely through social media. We discuss the economics of fake news and present new data on its consumption prior to the election. Drawing on web browsing data, archives of fact-checking websites, and results from a new online survey, we find: 1) social media was an important but not dominant source of election news, with 14 percent of Americans calling social media their "most important" source; 2) of the known false news stories that appeared in the three months before the election, those favoring Trump were shared a total of 30 million times on Facebook, while those favoring Clinton were shared 8 million times; 3) the average American adult saw on the order of one or perhaps several fake news stories in the months around the election, with just over half of those who recalled seeing them believing them; and 4) people are much more likely to believe stories that favor their preferred candidate, especially if they have ideologically segregated social media networks.
Abstract
					A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. 
The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently the United States. 
Over the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. 
The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world's growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. 
The signature of this growing shortage is a steady increase in the price of safe assets; equivalently, global safe interest rates must decline, as has been the case since the 1980s. 
The early literature, brought to light by Ben Bernanke's famous "savings glut" speech of 2005, focused on a general shortage of assets without isolating its safe asset component. 
The distinction, however, has become increasingly important over time, particularly in the aftermath of the subprime mortgage crisis and its sequels. 
We begin by describing the main facts and macroeconomic implications of safe asset shortages. 
Faced with such a structural conundrum, what are the likely short- to medium-term escape valves? 
We analyze four of them, each with its own macroeconomic and financial trade-offs.
Abstract
					Recently, the key constraint for central banks is the zero lower bound on nominal interest rates. 
Central banks fear that if they push short-term policy interest rates too deeply negative, there will be a massive flight into paper currency. 
This paper asks whether, in a world where paper currency is becoming increasingly vestigial outside small transactions (at least in the legal, tax compliant economy), there might be relatively simple ways to finesse the zero bound without affecting how most ordinary people live. 
Surprisingly, this question gets little attention compared to the massive number of articles that take the zero bound as given and look for out-of-the-box solutions for dealing with it. 
In an inversion of the old joke, it is a bit as if the economics literature has insisted on positing "assume we don't have a can opener," without considering the possibility that we might be able to devise one. 
It makes sense not to wait until the next financial crisis to develop plans. Fundamentally, there is no practical obstacle to paying negative (or positive) interest rates on electronic currency and, as we shall see, effective negative rate policy does not require eliminating paper currency.
Abstract
					We examine the current state of the US public corporation and how it has evolved over the last 40 years. 
After falling by 50 percent since its peak in 1997, the number of public corporations is now smaller than 40 years ago. 
These corporations are now much larger and over the last twenty years have become much older; they invest differently, as the average firm invests more in R&D than it spends on capital expenditures; and compared to the 1990s, the ratio of investment to assets is lower, especially for large firms. 
Public firms have record high cash holdings and, in most recent years, the average firm has more cash than long-term debt. 
Measuring profitability by the ratio of earnings to assets, the average firm is less profitable, but that is driven by smaller firms. 
Earnings of public firms have become more concentrated—the top 200 firms in profits earn as much as all public firms combined. 
Firms' total payouts to shareholders as a percent of earnings are at record levels. 
Possible explanations for the current state of the public corporation include a decrease in the net benefits of being a public company, changes in financial intermediation, technological change, globalization, and consolidation through mergers.
Abstract
					Some observers have argued that the projections for high and rising debt pose a grave threat to the country's economic future and give the government less fiscal space to respond to recessions or other unexpected developments, so they urge significant changes in tax or spending policies to reduce federal borrowing. 
In stark contrast, others have noted that interest rates on long-term federal debt are extremely low and have argued that such persistently low interest rates justify additional federal borrowing and investment, at least for the short and medium term. 
We analyze this controversy focusing on two main issues: the aging of the US population and interest rates on US government debt. It is generally understood that these factors play an important role in the projected path of the US debt-to-GDP ratio. 
What is less recognized is that these changes also have implications for the appropriate level of US debt. We argue that many—though not all—of the factors that may be contributing to the historically low level of interest rates imply that both federal debt and federal investment should be substantially larger than they would be otherwise. 
In conclusion, although significant policy changes to reduce federal budget deficits ultimately will be needed, they do not have to be implemented right away. 
Instead, the focus of federal budget policy over the coming decade should be to increase federal investment while enacting changes in federal spending and taxes that will reduce deficits gradually over time.
Abstract
					Selection (adverse or advantageous) is the central problem that inhibits the smooth, efficient functioning of competitive health insurance markets. Even—and perhaps especially—when consumers are well-informed decision makers and insurance markets are highly competitive and offer choice, such markets may function inefficiently due to risk selection. Selection can cause markets to unravel with skyrocketing premiums and can cause consumers to be under- or overinsured. In its simplest form, adverse selection arises due to the tendency of those who expect to incur high health care costs in the future to be the most motivated purchasers. The costlier enrollees are more likely to become insured rather than to remain uninsured, and conditional on having health insurance, the costlier enrollees sort themselves to the more generous plans in the choice set. These dual problems represent the primary concerns for policymakers designing regulations for health insurance markets. In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We emphasize the two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage (the private plan option available under Medicare) and the state-level individual insurance markets.
Abstract
					In most health insurance markets in the United States, consumers have substantial choice about their health insurance plan. However additional choice is not an unmixed blessing as it 
creates challenges related to both consumer confusion and adverse selection. There is mounting evidence that many people have difficulty understanding the value of insurance coverage, 
like evaluating the relative benefits of lower premiums versus lower deductibles. Also, in most US health insurance markets, people cannot be charged different prices for insurance based on 
their individual level of health risk. This creates the potential for well-known problems of adverse selection because people will often base the level of health insurance coverage they choose 
partly on their health status. In this essay, we examine how the forces of consumer confusion and adverse selection interact with each other and with market institutions to affect how 
valuable it is to have multiple levels of health insurance coverage available in the market.
Abstract
					The promise of randomized controlled trials is that evidence gathered through the evaluation of a specific program helps us—possibly after several rounds of fine-tuning and multiple 
replications in different contexts—to inform policy. However, critics have pointed out that a potential constraint in this agenda is that results from small "proof-of-concept" studies run by 
nongovernment organizations may not apply to policies that can be implemented by governments on a large scale. After discussing the potential issues, this paper describes the journey from the 
original concept to the design and evaluation of scalable policy. We do so by evaluating a series of strategies that aim to integrate the nongovernment organization Pratham's "Teaching at the 
Right Level" methodology into elementary schools in India. The methodology consists of reorganizing instruction based on children's actual learning levels, rather than on a prescribed syllabus, 
and has previously been shown to be very effective when properly implemented. We present evidence from randomized controlled trials involving some designs that failed to produce impacts 
within the regular schooling system but still helped shape subsequent versions of the program. As a result of this process, two versions of the programs were developed that successfully raised 
children's learning levels using scalable models in government schools. We use this example to draw general lessons about using randomized control trials to design scalable policies.
Abstract
					This paper makes the case for greater use of randomized experiments "at scale." We review various critiques of experimental program evaluation in developing countries, and discuss how experimenting at scale along three specific dimensions—the size of the sampling frame, the number of units treated, and the size of the unit of randomization—can help alleviate the concerns raised. We find that program-evaluation randomized controlled trials published over the last 15 years have typically been "small" in these senses, but also identify a number of examples—including from our own work—demonstrating that experimentation at much larger scales is both feasible and valuable.
Abstract
					A difficult issue for organizations is how to assign valuable resources across competing opportunities. This work describes how Feeding America allocates about 300 million pounds of food a year to over two hundred food banks across the United States. It does so in an unusual way: in 2005, it switched from a centralized queuing system, where food banks would wait their turn, to a market-based mechanism where they bid daily on truckloads of food using a "fake" currency called shares. The change and its impact are described here, showing how the market system allowed food banks to sort based on their preferences.
Abstract
					On June 23, 2016, the United Kingdom held a referendum on its membership in the European Union. Although most of Britain's establishment backed remaining in the European Union, 52 percent of 
voters disagreed and handed a surprise victory to the "leave" campaign. Brexit, as the act of Britain exiting the EU has become known, is likely to occur in early 2019. This article discusses the 
economic consequences of Brexit and the lessons of Brexit for the future of European and global integration. I start by describing the options for post-Brexit relations between the United Kingdom 
and the European Union and then review studies of the likely economic effects of Brexit. The main conclusion of this literature is that Brexit will make the United Kingdom poorer than it would 
otherwise have been because it will lead to new barriers to trade and migration between the UK and the European Union. There is considerable uncertainty over how large the costs of Brexit will be, 
with plausible estimates ranging between 1 and 10 percent of UK per capita income. The costs will be lower if Britain stays in the European Single Market following Brexit. Empirical estimates that 
incorporate the effects of trade barriers on foreign direct investment and productivity find costs 2–3 times larger than estimates obtained from quantitative trade models that hold 
technologies fixed.
Abstract
					School enrollment has universally increased over the last 25 years in low-income countries. Enrolling in school, however, does not assure that children learn. A large share of children in low-income countries complete their primary education lacking even basic reading, writing, and arithmetic skills. Teacher quality is a key determinant of student learning, but not much is known about teacher quality in low-income countries. This paper discusses an ongoing research program intended to help fill this void. We use data collected through direct observations, unannounced visits, and tests from primary schools in seven sub-Saharan African countries to answer three questions: How much do teachers teach? What do teachers know? How well do teachers teach?
Abstract
					Rapid population growth in developing countries in the middle of the 20th century led to fears of a population explosion and motivated the inception of what effectively became a 
global population-control program. The initiative, propelled in its beginnings by intellectual elites in the United States, Sweden, and some developing countries, mobilized resources to 
enact policies aimed at reducing fertility by widening contraception provision and changing family-size norms. In the following five decades, fertility rates fell dramatically, with a 
majority of countries converging to a fertility rate just above two children per woman, despite large cross-country differences in economic variables such as GDP per capita, education 
levels, urbanization, and female labor force participation. The fast decline in fertility rates in developing economies stands in sharp contrast with the gradual decline experienced 
earlier by more mature economies. In this paper, we argue that population-control policies likely played a central role in the global decline in fertility rates in recent decades and can 
explain some patterns of that fertility decline that are not well accounted for by other socioeconomic factors.
Abstract
					In this essay, we review the basic economics of housing supply and the functioning of US housing markets to better understand the distribution of home prices, household 
wealth, and the spatial distribution of people across markets. We employ a cost-based approach to gauge whether a housing market is delivering appropriately priced units. 
Specifically, we investigate whether market prices (roughly) equal the costs of producing the housing unit. If so, the market is well-functioning in the sense that it efficiently
 delivers housing units at their production cost. The gap between price and production cost can be understood as a regulatory tax. The available evidence suggests, but does
 not definitively prove, that the implicit tax on development created by housing regulations is higher in many areas than any reasonable negative externalities associated
 with new construction. We discuss two main effects of developments in housing prices: on patterns of household wealth and on the incentives for relocation to high-wage, 
high-productivity areas. Finally, we turn to policy implications.
Abstract
					For decades, it was taken as a given that an increased homeownership rate was a desirable goal. But after the financial crises and Great Recession, in which roughly eight 
million homes were foreclosed on and about $7 trillion in home equity was erased, economists and policymakers are re-evaluating the role of homeownership in the 
American Dream. Many question whether the American Dream should really include homeownership or instead focus more on other aspects of upward mobility, and most 
acknowledge that homeownership is not for everyone. We take a detailed look at US homeownership from three different perspectives: 1) an international perspective, 
comparing US homeownership rates with those of other nations; 2) a demographic perspective, examining the correlation between changes in the US homeownership rate 
between 1985 and 2015 and factors like age, race/ethnicity, education, family status, and income; 3) and, a financial benefits perspective, using national data since 2002 to 
calculate the internal rate of return to homeownership compared to alternative investments. Our overall conclusion: homeownership is a valuable institution. While two 
decades of policies in the 1990s and early 2000s may have put too much faith in the benefits of homeownership, the pendulum seems to have swung too far the other way, 
and many now may have too little faith in homeownership as part of the American Dream.
Abstract
					This article focuses on cities with unprecedented economic success and a seemingly permanent crisis of affordable housing. In the expensive cities, policymakers expend 
great amounts of energy trying to bring down housing costs with subsidies for affordable housing and sometimes with rent control. But these efforts are undermined by 
planning decisions that make housing for most people vastly more expensive than it has to be by restricting the supply of new units even in the face of growing demand. I 
begin by describing current housing policy in the expensive metro areas of the United States. I then show how this combination of policies affecting housing, despite internal 
contradictions, makes sense from the perspective of the political coalitions that can form in a setting of fragmented local jurisdictions, local control over land use policies, 
and homeowner control over local government. Finally, I propose some more effective approaches to housing policy. My view is that the effects of the formal affordable 
housing policies of expensive cities are quite small in their impact when compared to the size of the problem—like sand castles before the tide. I will argue that we 
can do more, potentially much more, to create subsidized affordable housing in high-cost American cities. But more fundamentally, we will need to rethink the broader set of 
exclusionary land use policies that are the primary reason that housing in these cities has become so expensive. We cannot solve the problem unless we fix the housing 
market itself.
Abstract
					Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of 
monetary policy. Second, there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. 
The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policymakers 
should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives.
Abstract
					Using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014, we study whether the granting of tenure leads faculty 
to pursue riskier ideas. We use the extreme tails of ex-post citations as our measure of risk and find that both the number of publications and the portion consisting of "home 
runs" peak at tenure and fall steadily for a decade thereafter. Similar patterns hold for faculty at elite (top 10) institutions and for faculty who take differing time to tenure. We 
find the opposite pattern among poorly cited publications: their numbers rise post-tenure.
Abstract
					About eight cents out of every dollar spent in the United States is spent on imports. What if, because of a wall or some other extreme policy intervention, imports were to remain on the other side of the US border? How much would US consumers be willing to pay to prevent this hypothetical policy change from taking place? The answer to this question represents the welfare cost from autarky or, equivalently, the welfare gains from trade. In this article, we discuss how to evaluate these gains using estimates of the demand for foreign factor services.
Abstract
					We use relatively unexplored dimensions of US microdata to examine how US manufacturing employment has evolved across industries, firms, establishments, and regions. These data provide support for both trade- and technology-based explanations of the overall decline of employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism. Toward that end, we discuss how more careful analysis of these trends might yield sharper insights.
Abstract
					This paper will focus on the relationship between cognitive ability and decision-making under risk and uncertainty. Taken as a
 whole, this research indicates that cognitive ability is associated with risk-taking behavior in various contexts and life domains,
 including incentivized choices between lotteries in controlled environments, behavior in nonexperimental settings, and 
self-reported tendency to take risks. One pattern that emerges frequently in these studies is that cognitive ability tends to be
 positively correlated with avoidance of harmful risky situations, but it tends to be negatively correlated with risk aversion in
 advantageous situations. We conclude by discussing perspectives for future research, in particular the scope for the development
 of richer sets of elicitation instruments and measurement across a wider range of concepts.
Abstract
					Psychology offers conceptual and analytic tools that can advance the discussion on the nature of risk preference and its
 measurement in the behavioral sciences. We discuss the revealed and stated preference measurement traditions, which have
 coexisted in both psychology and economics in the study of risk preferences, and explore issues of temporal stability, convergent
 validity, and predictive validity with regard to measurement of risk preferences. As for temporal stability, does risk preference as a
 psychological trait show a degree of stability over time that approximates what has been established for other major traits, such
 as intelligence, or, alternatively, are they more similar in stability to transitory psychological states, such as emotional states?
 Convergent validity refers to the degree to which different measures of a psychological construct capture a common underlying
 characteristic or trait. Do measures of risk preference all capture a unitary psychological trait that is indicative of risky behavior
 across various domains, or do they capture various traits that independently contribute to risky behavior in specific areas of life,
 such as financial, health, and recreational domains? Predictive validity refers to the extent to which a psychological trait has power
 in forecasting behavior. Intelligence and major personality traits have been shown to predict important life outcomes, such as
 academic and professional achievement, which suggests there could be studies of the short- and long-term outcomes of risk preference—something lacking in current psychological (and economic) research. We discuss the current empirical knowledge on
 risk preferences in light of these considerations.
Abstract
					After decades of centralized control of economic activity in space, NASA and US policymakers have begun to cede the direction of 
human activities in space to commercial companies. NASA garnered more than 0.7 percent of GDP in the mid-1960s, but is only 
around 0.1 percent of GDP today. Meanwhile, space has become big business, with $300 billion in annual revenue. The shift from 
public to private priorities in space is especially significant because a widely shared goal among commercial space's leaders is the 
achievement of a large-scale, largely self-sufficient, developed space economy. Jeff Bezos, has stated that the mission of his firm 
Blue Origin is "millions of people living and working in space." Elon Musk, founder of SpaceX, has laid out plans to build a city of a 
million people on Mars within the next century. Both Neil deGrasse Tyson and Peter Diamandis have been given credit for stating 
that Earth's first trillionaire will be an asteroid-miner. Such visions are clearly not going to become reality in the near future. But 
detailed roadmaps to them are being produced and recent progress in the required technologies has been dramatic. If such 
space-economy visions are even partially realized, the implications for society will be enormous. Though economists should treat 
the prospect of a developed space economy with healthy skepticism, it would be irresponsible to treat it as science fiction. In this 
article, I provide an analytical framework—based on classic economic analysis of the role of government in market economies—for 
understanding and managing the development of the space economy.
Abstract
					At the onset of the recent global financial crisis, the workhorse macroeconomic models assumed frictionless financial markets. These frameworks were thus not able to anticipate the crisis, nor to analyze how the disruption of credit markets changed what initially appeared like a mild downturn into the Great Recession. Since that time, an explosion of both theoretical and empirical research has investigated how the financial crisis emerged and how it was transmitted to the real sector. The goal of this paper is to describe what we have learned from 
this new research and how it can be used to understand what happened during the Great Recession. In the process, we also present some new empirical work. We argue that a complete description of the Great Recession must take account of the financial distress facing both households and banks and, as the crisis unfolded, nonfinancial firms as well. Exploiting both 
panel data and time series methods, we analyze the contribution of the house price decline, versus the banking distress indicator, to the overall decline in employment during the Great Recession. We confirm a common finding in the literature that the household balance sheet channel is important for regional variation in employment. However, we also find that the disruption in banking was central to the overall employment contraction.
Abstract
					What is the role of the financial sector in explaining business cycles? This question is as old as the field of macroeconomics, and an extensive body of research conducted since the Global Financial Crisis of 2008 has offered new answers. The specific idea put forward in this article is that expansions in credit supply, operating primarily through household demand, have been an important driver of business cycles. We call this the credit-driven household demand channel. While this channel helps explain the recent global recession, it also describes economic cycles in many countries over the past 40 years.
Abstract
					This paper discusses empirical approaches macroeconomists use to answer questions like: What does monetary policy do? How large are the effects of fiscal stimulus? What caused the Great Recession? Why do some countries grow faster than others? Identification of causal effects plays two roles in this process. In certain cases, progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy. However, external validity concerns limit what can be learned in
 this way. Carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise. We use the term "identified moments" as a short-hand for "estimates of responses to identified structural shocks," or what applied microeconomists would call "causal effects." We argue that such identified moments are often powerful 
diagnostic tools for distinguishing between important classes of models (and thereby learning about the effects of policy). To illustrate these notions we discuss the growing use of cross-sectional evidence in macroeconomics and consider what the best existing evidence is on the effects of monetary policy.
Abstract
					The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policymakers is how to assess the relative strength of those forces. Economists have a range of tools that can be used to make such assessments. Dynamic stochastic general equilibrium (DSGE) models are the leading tool for making such assessments in an open and transparent manner. We review the state of mainstream DSGE models before the financial crisis and the Great Recession. We then 
describe how DSGE models are estimated and evaluated. We address the question of why DSGE modelers—like most other economists and policymakers—failed to predict the financial crisis and the Great Recession, and how DSGE modelers responded to the financial crisis and its aftermath. We discuss how current DSGE models are actually used by policymakers. We then 
provide a brief response to some criticisms of DSGE models, with special emphasis on criticism by Joseph Stiglitz, and offer some concluding remarks.
Abstract
					In this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies—all within the same framework. In response to the limitations of the representative agent approach to economic fluctuations, a new framework has emerged that combines key features of heterogeneous agents (HA) and New Keynesian (NK) economies. These HANK models 
offer a much more accurate representation of household consumption behavior and can generate realistic distributions of income, wealth, and, albeit to a lesser degree, household balance sheets. At the same time, they can accommodate many sources of macroeconomic fluctuations, including those driven by aggregate demand. In sum, they provide a rich theoretical framework for quantitative analysis of the interaction between cross-sectional distributions and aggregate dynamics. In this article, we outline a state-of-the-art version of 
HANK together with its representative agent counterpart, and convey two broad messages about the role of household heterogeneity for the response of the macroeconomy to aggregate shocks: 1) the similarity between the Representative Agent New Keynesian (RANK) and HANK frameworks depends crucially on the shock being analyzed; and 2) certain important macroeconomic questions concerning economic fluctuations can only be addressed within heterogeneous agent models.
Abstract
					We study how changes in the distribution of occupations have affected the aggregate non-pecuniary costs and benefits of working. The physical toll of work is less now than in 1950, with workers shifting away from occupations in which people report experiencing tiredness and pain. The emotional consequences of the changing occupation distribution vary substantially across demographic groups. Work has become happier and more meaningful for women, but more stressful and less meaningful for men. These changes appear to be concentrated at lower education levels.
Abstract
					Social networks can shape many aspects of social and economic activity: migration and trade, job-seeking, innovation, consumer preferences and sentiment, public health, social mobility, and more. In turn, social networks themselves are associated with geographic proximity, historical ties, political boundaries, and other factors. Traditionally, the unavailability of large-scale and representative data on social connectedness between individuals or geographic regions has posed a challenge for empirical research on social networks. More recently, a body 
of such research has begun to emerge using data on social connectedness from online social networking services such as Facebook, LinkedIn, and Twitter. To date, most of these research projects have been built on anonymized administrative microdata from Facebook, typically by working with coauthor teams that include Facebook employees. However, there is an 
inherent limit to the number of researchers that will be able to work with social network data through such collaborations. In this paper, we therefore introduce a new measure of social connectedness at the US county level. Our Social Connectedness Index is based on friendship links on Facebook, the global online social networking service. Specifically, the Social Connectedness Index corresponds to the relative frequency of Facebook friendship links between every county-pair in the United States, and between every US county and every foreign
 country. Given Facebook's scale as well as the relative representativeness of Facebook's user body, these data provide the first comprehensive measure of friendship networks at a national level.
Abstract
					Most countries, including the United States, have an array of greenhouse gas mitigation policies, which provide subsidies or restrictions typically aimed at specific technologies or sectors. Such 
climate policies range from automobile fuel economy standards, to gasoline taxes, to mandating that a certain amount of electricity in a state comes from renewables, to subsidizing solar and 
wind electrical generation, to mandates requiring the blending of biofuels into the surface transportation fuel supply, to supply-side restrictions on fossil fuel extraction. This paper reviews the
 costs of various technologies and actions aimed at reducing greenhouse gas emissions. Our aim is twofold. First, we seek to provide an up-to-date summary of costs of actions that can be taken
 now using currently available technology. These costs focus on expenditures and emissions reductions over the life of a project compared to some business-as-usual benchmark—for example, 
replacing coal-fired electricity generation with wind, or weatherizing a home. We refer to these costs as static because they are costs over the life of a specific project undertaken now, and they 
ignore spillovers. Our second aim is to distinguish between dynamic and static costs and to argue that some actions taken today with seemingly high static costs can have low dynamic costs, and
 vice versa. We make this argument at a general level and through two case studies, of solar panels and of electric vehicles, technologies whose costs have fallen sharply. Under the right 
circumstances, dynamic effects will offer a justification for policies that have high costs according to a myopic calculation.
Abstract
					In November 2008, the Federal Reserve faced a deteriorating economy and a financial crisis. The federal funds rate had already been reduced to virtually zero. Thus, the Federal Reserve turned to unconventional monetary policies. Through "quantitative easing," the Fed announced plans to buy mortgage-backed securities and debt issued by government-sponsored enterprises. 
Subsequent purchases would eventually lead to a five-fold expansion in the Fed's balance sheet, from $900 billion to $4.5 trillion, and leave the Fed holding over 20 percent of all mortgage-backed securities and marketable Treasury debt. In addition, Fed policy statements in December 2008 began to include explicit references to the likely path of the federal funds interest rate, a 
policy that came to be known as "forward guidance." The Fed ceased its direct asset purchases in late 2014. Starting in October 2017, it has allowed the balance sheet to shrink gradually as 
existing assets mature. From December 2015 through June 2018, the Fed has raised the federal funds interest rate seven times. Thus, the time is ripe to step back and ask whether the Fed's 
unconventional policies had the intended expansionary effects—and by extension, whether the Fed should use them in the future.
Abstract
					Of the 17 Sustainable Development Goals articulated by the United Nations, number one is the elimination of extreme poverty by 2030. While future economic growth should continue to reduce 
poverty, it will not solve the problem by itself; thus, there is a potentially important role for national-level transfer programs that assist poor families in developing countries. Such programs are 
often run by developing country governments. Many countries have implemented transfer programs that seek to target beneficiaries: that is, to identify who is poor and then to restrict transfers 
to those individuals. Some people have begun to advocate for "universal basic income" programs, which dispense with trying to identify the poor and instead provide transfers to everyone. We 
begin by considering the universal basic income as part of the solution to an optimal income-taxation problem, focusing on the case of developing countries, where there is limited income data 
and inclusion in the formal tax system is low. We examine how the targeting of transfer programs is conducted in these settings, and provide empirical evidence on the tradeoffs involved 
between universal basic income and targeted transfer schemes using data from Indonesia and Peru—two countries that run nationwide transfer programs that are targeted to the poor. We 
conclude by linking our findings back to the broader policy debate on what tools should be preferred for redistribution, as well as the practical challenges of administering them in developing 
countries.
Abstract
					Women are still a minority in the economics profession. By the mid-2000s, just under 35 percent of PhD students and 30 percent of assistant professors were female, and these numbers have 
remained roughly constant ever since. Over the past two decades, women's progress in academic economics has slowed, with virtually no improvement in the female share of junior faculty or 
graduate students in decades. Little consensus has emerged as to why, though there has been a renewal of widespread interest in the status and future of women in economics and of the 
barriers they face to professional success. In this paper, we first document trends in the gender composition of academic economists over the past 25 years, the extent to which these trends 
encompass the most elite departments, and how women's representation across fields of study within economics has changed. We then review the recent literature on other dimensions of 
women's relative position in the discipline, including research productivity and income, and assess evidence on the barriers that female economists face in publishing, promotion, and tenure. 
While differences in preferences and constraints may directly affect the relative productivity of men and women, productivity gaps do not fully explain the gender disparity in promotion rates in
 economics. Furthermore, the progress of women has stalled relative to that in other disciplines in the past two decades. We propose that differential assessment of men and women is one 
important factor in explaining this stalled progress, reflected in gendered institutional policies and apparent implicit bias in promotion and tenure processes.
Abstract
					We document wide and persistent variation in women's representation and success across graduate programs in economics. Using new data on early career outcomes for recent graduates, 
including first job placement, publications, and promotion, we rank (anonymized) departments on outcomes for women relative to men graduating from the same program. We then conduct 
interviews with faculty and former students from five programs with better and worse relative outcomes. We find that departments with better outcomes for women also hire more women faculty, 
facilitate advisor-student contact, provide collegial research seminars, and are notable for senior faculty with awareness of gender issues. We offer our qualitative evidence as the first step in 
learning about "what works" in expanding women's representation in economics.
Abstract
					How well equipped are today's macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a 
macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We 
specify and calibrate a package of policy interventions to address these vulnerabilities—policies that include implementing the countercyclical capital buffer, requiring that banks extend the 
maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the 
crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to 
experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK's Financial Policy Committee stands a better chance because it has many of the 
necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its 
actions.
Abstract
					The US government is a major producer of economic and financial data, statistics, analysis, and forecasts that are gathered, compiled, and published as public goods for use by citizens, 
government agencies, researchers, nonprofits, and the business community. There is no market transaction in the publication and dissemination of these government data and therefore no 
market-determined value. The purpose of this paper is to outline and augment our understanding of the value of government data for business decision-making. We provide an overview of the 
topic, including results from government reports and a private sector survey. We then provide concrete examples of how these government data are used to make business decisions focusing on 
three sectors: automotive, energy, and financial services. Examples of new initiatives by the federal government to open access to more data, exploiting technology advances associated with the 
internet, cloud storage, and software applications, are discussed. With the significant growth in the digital economy, we also include discussion and insights around how digital platform 
companies utilize government data in conjunction with their privately generated data (or "big data") to foster more informed business decisions.
Abstract
					We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US 
employment over the recent past. At the center of our framework is the allocation of tasks to capital and labor—the task content of production. Automation, which 
enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, 
automation always reduces the labor share in value added and may reduce labor demand even as it raises productivity. The effects of automation are counterbalanced 
by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because 
of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation 
and new tasks—can be inferred from industry-level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is 
accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in 
previous decades.
Abstract
					Recent advances in artificial intelligence and robotics have generated a robust debate about the future of work. An analogous debate occurred in the late nineteenth century when mechanization first transformed manufacturing. We analyze an extraordinary dataset from the late nineteenth century, the Hand and Machine Labor study carried out by the US Department of Labor in the mid-1890s. We focus on transitions at the task level from hand to machine production, and on the impact of inanimate power, especially of steam power, on labor productivity. Our analysis sheds light on the ability of modern task-based models to account for the effects of historical mechanization.
Abstract
					China is the world's largest user of industrial robots. In 2016, sales of industrial robots in China reached 87,000 units, accounting for around 30 percent of the global 
market. To put this number in perspective, robot sales in all of Europe and the Americas in 2016 reached 97,300 units (according to data from the International 
Federation of Robotics). Between 2005 and 2016, the operational stock of industrial robots in China increased at an annual average rate of 38 percent. In this paper, we 
describe the adoption of robots by China's manufacturers using both aggregate industry-level and firm-level data, and we provide possible explanations from both the 
supply and demand sides for why robot use has risen so quickly in China. A key contribution of this paper is that we have collected some of the world's first data on firms' 
robot adoption behaviors with our China Employer-Employee Survey (CEES), which contains the first firm-level data that is representative of the entire Chinese 
manufacturing sector.
Abstract
					This paper takes stock of what we have learned from the "Renaissance" in fiscal research in the ten years since the financial crisis. I first discuss the new innovations in methodology and various strengths and weaknesses of the main approaches to estimating fiscal multipliers. Reviewing the estimates, I come to the surprising conclusion that the bulk of the estimates for average spending and tax change multipliers lie in a fairly narrow range, 0.6 to 1 for spending multipliers and -2 to -3 for tax change multipliers. However, I identify economic circumstances in which multipliers lie outside those ranges. Finally, I review the debate on whether multipliers were higher for the 2009 Obama stimulus spending in the United States or for fiscal consolidations in Europe.
Abstract
					Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World 
War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot 
explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, 
rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and 
thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design 
features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument versus target criteria.
Abstract
					We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt/GDP ratio. Tax-based plans have the opposite effect and cause large and long-lasting recessions. These results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases.
Abstract
					Over the last half century, US wage growth stagnated, wage inequality rose, and the labor-force participation rate of prime-age men steadily declined. In this article, we 
examine these worrying labor market trends, focusing on outcomes for males without a college education. Though wages and participation have fallen in tandem for this 
population, we argue that the canonical neoclassical framework, which postulates a labor demand curve shifting inward across a stable labor supply curve, does not 
reasonably explain the data. Alternatives we discuss include adjustment frictions associated with labor demand shocks and effects of the changing marriage market—that 
is, the fact that fewer less-educated men are forming their own stable families—on male labor supply incentives. In the synthesis that emerges, the phenomenon of 
declining prime-age male labor-force participation is not coherently explained by a series of causal factors acting separately. A more reasonable interpretation, we argue, 
involves complex feedbacks between labor demand, family structure, and other factors that have disproportionately affected less-educated men.
Abstract
					The economic progress of US men has stagnated in recent decades. The labor force participation rate of men ages 25-54 peaked in the mid-1960s and has declined since 
then (according to the Bureau of Labor Statistics), while men's real median earnings have been flat since the early 1970s. These population averages mask considerably 
larger declines in participation among less-educated and non-white men as well as substantial increases in wage inequality. In this paper, we seek to illuminate the broader 
context in which prime-age men are experiencing economic stagnation. We explore changes for prime-age men over time in education, mortality, morbidity, disability 
program receipt, family structure, and incarceration rates. We focus on prime-age men, namely those ages 25-54, and on the years 1980-2016 (or 2017 when possible), 
encompassing much of the period of reduced economic progress for low-skilled men.
Abstract
					This article sets recent expressions of alarm about the monopoly power of technology giants such as Google and Amazon in the long history of Americans' response to 
big business. I argue that we cannot understand that history unless we realize that Americans have always been concerned about the political and economic dangers 
of bigness, not just the threat of high prices. The problem policymakers faced after the rise of Standard Oil was how to protect society against those dangers without 
punishing firms that grew large because they were innovative. The antitrust regime put in place in the early twentieth century managed this balancing act by focusing 
on large firms' conduct toward competitors and banning practices that were anticompetitive or exclusionary. Maintaining this balance was difficult, however, and it 
gave way over time—first to a preoccupation with market power during the post–World War II period, and then to a fixation on consumer welfare in the late twentieth 
century. Refocusing policy on large firms' conduct would do much to address current fears about bigness without penalizing firms whose market power comes from innovation.
Abstract
					Economic theory suggests that market economies are likely to underprovide innovation because of the public good nature of knowledge. Empirical evidence from the United States and other advanced economies supports this idea. We summarize the pros and cons of different policy instruments for promoting innovation and provide a basic "toolkit" describing which policies are most effective according to our reading of the evidence. In the short run, R&D tax credits and direct public funding seem the most productive, but in the longer run, increasing the supply of human capital (for example, relaxing immigration rules or expanding university STEM admissions) is likely more effective.
Abstract
					Taxes on sugar-sweetened beverages are growing in popularity and have generated an active public debate. Are they a good idea? If so, how high should they be? Are 
such taxes regressive? People in the United States and some other countries consume remarkable quantities of sugar-sweetened beverages, and the evidence 
suggests that this generates significant health costs. Building on recent work, we review the basic economic principles that determine the socially optimal sugar-sweetened beverage tax. The optimal tax depends on (1) externalities, or uninternalized health system costs from diseases caused by sugary drink consumption; (2) 
internalities, or costs consumers impose on themselves by consuming too many sugary drinks due to poor nutrition knowledge and/or lack of self-control; and (3) 
regressivity, or how much the financial burden and the internality benefits from the tax fall on the poor. We summarize the empirical evidence about the key 
parameters that determine how large the tax should be. Our calculations suggest that sugar-sweetened beverage taxes are welfare enhancing and indeed that the 
optimal sugar-sweetened beverage tax rate may be higher than the 1 cent per ounce rate most commonly used in US cities. We end with seven concrete suggestions 
for policymakers considering a sugar-sweetened beverage tax.
Abstract
					In the half century since the founding of the US Environmental Protection Agency, public and private US sources have spent nearly $5 trillion ($2017) to provide clean 
rivers, lakes, and drinking water (annual spending of 0.8 percent of US GDP in most years). Yet over half of rivers and substantial shares of drinking water systems violate 
standards, and polls for decades have listed water pollution as Americans' number one environmental concern. We assess the history, effectiveness, and efficiency of the 
Clean Water Act and Safe Drinking Water Act and obtain four main conclusions. First, water pollution has fallen since these laws were passed, in part due to their 
interventions. Second, investments made under these laws could be more cost effective. Third, most recent studies estimate benefits of cleaning up pollution in rivers 
and lakes that are less than the costs, though these studies may undercount several potentially important types of benefits. Analysis finds more positive net benefits of 
drinking water quality investments. Fourth, economic research and teaching on water pollution are relatively uncommon, as measured by samples of publications, 
conference presentations, and textbooks.
Abstract
					In recent decades, dictatorships based on mass repression have largely given way to a new model based on the manipulation of information. Instead of terrorizing citizens 
into submission, "informational autocrats" artificially boost their popularity by convincing the public they are competent. To do so, they use propaganda and silence 
informed members of the elite by co-optation or censorship. Using several sources, including a newly created dataset on authoritarian control techniques, we document a 
range of trends in recent autocracies consistent with this new model: a decline in violence, efforts to conceal state repression, rejection of official ideologies, imitation of 
democracy, a perceptions gap between the masses and the elite, and the adoption by leaders of a rhetoric of performance rather than one aimed at inspiring fear.
Abstract
					We examine conventional approaches to evaluating the economic impact of protectionist trade policies. We illustrate these conventional approaches by applying them to 

the tariffs introduced by the Trump administration during 2018. In the wake of this increase in trade protection, the United States experienced substantial increases in the 
prices of intermediates and final goods, dramatic changes to its supply-chain network, reductions in availability of imported varieties, and the complete pass-through of the 
tariffs into domestic prices of imported goods. Therefore, the full incidence of the tariffs has fallen on domestic consumers and importers so far, and our estimates imply 
a 
reduction in aggregate US real income of $1.4 billion per month by the end of 2018. We see similar patterns for foreign countries that have retaliated with their own 
tariffs 
against the United States, which suggests that the trade war has also reduced the real income of these other countries.
Abstract
					The Indian state's performance spans the spectrum from woefully inadequate, especially in core public goods provision, to surprisingly impressive in successfully 
managing complex tasks and on a massive scale. It has delivered better on macroeconomic rather than microeconomic outcomes, where delivery is episodic with inbuilt 
exit than where delivery and accountability are quotidian and more reliant on state capacity at local levels, and on those goods and services where societal norms on 
hierarchy and status matter less than where they are resilient. The paper highlights three reasons for these outcomes: under-resourced local governments, the long-term effects of India's "precocious" democracy, and the persistence of social cleavage. However, claims that India's state is bloated in size and submerged in patronage 
have weak basis. The paper concludes by highlighting a reversal of past trends in that state capacity is improving at the micro level even as India's macro performance 
has become more worrisome.
Abstract
					We provide an overview of the integration of refugees into the labor markets of a number of high-income countries. Discussing the ways in which refugees and economic 
migrants are differently selected and so might be expected to perform differently in a host country's labor market, we examine employment and wages for these groups 
over time after arrival. There is significant heterogeneity between host countries, but in general, refugees experience persistently worse outcomes than other migrants. 
While the gaps between the groups can be seen to decrease on a timescale of a decade or two, this is more pronounced in employment rates than it is in wages. We also 
discuss how refugees are distinct in terms of other factors affecting integration, including health, language skills, and social networks. We provide a discussion of insights 
for public policy in receiving countries, concluding that supporting refugees in early labor market attachment is crucial.
Abstract
					In recent years, electrification has reemerged as a key priority in low-income countries, with a particular focus on electrifying households. Yet the microeconomic 
literature examining the impacts of electrifying households on economic development has produced a set of conflicting results. Does household electrification lead to 
measurable gains in living standards or not? Focusing on grid electrification, we discuss how the divergent conclusions across the literature can be explained by 
differences in methods, interventions, potential for spillovers, and populations. We then use experimental data from Lee, Miguel, and Wolfram (2019)—a field experiment 
that connected randomly selected households to the grid in rural Kenya—to show that impacts can vary even across individuals in neighboring villages. Specifically, we 
show that households that were willing to pay more for a grid electrification may gain more from electrification compared to households that would only connect for 
free. We conclude that access to household electrification alone is not enough to drive meaningful gains in development outcomes. Instead, future initiatives may work better if paired with complementary inputs that allow people to do more with power.
Abstract
					This paper seeks to explain why billions of people in developing countries either have no access to electricity or lack a reliable supply. We present evidence that these 
shortfalls are a consequence of electricity being treated as a right and that this sets off a vicious four-step circle. In step 1, because a social norm has developed that all 
deserve power independent of payment, subsidies, theft, and nonpayment are widely tolerated. In step 2, electricity distribution companies lose money with each unit of 
electricity sold and in total lose large sums of money. In step 3, government-owned distribution companies ration supply to limit losses by restricting access and hours of 
supply. In step 4, power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers' incentives to pay. 
The equilibrium outcome is uneven and sporadic access that undermines growth.
Abstract
					The nature of self-employment is changing in most OECD countries. Solo self-employment is increasing relative to self-employment with dependent employees, often 
being associated with the development of gig economy work and alternative work arrangements. We still know little about this changing composition of jobs. Drawing on 
ad-hoc surveys run in the UK, US, and Italy, we document that solo self-employment is substantively different from self-employment with employees, being an 
intermediate status between employment and unemployment, and for some, becoming a new frontier of underemployment. Its spread originates a strong demand for 
social insurance which rarely meets an adequate supply given the informational asymmetries of these jobs. Enforcing minimum wage legislation on these jobs and 
reconsidering the preferential tax treatment offered to self-employment could discourage abuse of these positions to hide de facto dependent employment jobs. 
Improved measures of labor slack should be developed to acknowledge that, over and above unemployment, some of the solo self-employment and alternative work 
arrangements present in today's labor market are placing downward pressure on wages.
Abstract
					This year marks the centennial of the Nineteenth Amendment, which provided American women a constitutional guarantee to the franchise. We assemble data from a 
variety of sources to document and explore trends in women's political participation, issue preferences, and partisanship since that time. We show that in the early years 
following enfranchisement, women voted at much lower rates than men and held distinct issue preferences, despite splitting their votes across parties similarly to men. 
But by the dawn of the twenty-first century, women not only voted more than men, but also voted differently, systematically favoring the Democratic party. We find that 
the rise in women's relative voter turnout largely reflects cross-cohort changes in voter participation and coincided with increasing rates of high school completion. By 
contrast, women's relative shift toward the Democratic party permeates all cohorts and appears to owe more to changes in how parties have defined themselves than to 
changes in issue preferences. The findings suggest that a confluence of factors have led to the unique place women currently occupy in the American electorate, one 
where they are arguably capable of exerting more political influence than ever before.
Abstract
					This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between 5 USD and 216 USD per capita on incentives 
for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. States with higher 
per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, 
and high-skilled service industries, and the average discretionary subsidy is 178M USD for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are 
richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing winning and runner-up locations 
for each deal, we find that average employment within the three-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct 
employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.
Abstract
					German separation in 1949 into a communist East and a capitalist West and their reunification in 1990 are commonly described as a natural experiment to study the enduring effects of communism. We show in three steps that the populations in East and West Germany were far from being randomly selected treatment and control groups. First, the later border is already visible in many socio-economic characteristics in pre-World War II data. Second, World War II and the subsequent occupying forces affected East and West differently. Third, a selective fifth of the population fled from East to West Germany before the building of the Wall in 1961. In light of our findings, we propose a more cautious interpretation of the extensive literature on the enduring effects of communist systems on economic outcomes, political preferences, cultural traits, and gender roles.
Abstract
					We analyze the long-term effects of communism on both policies and preferences in Eastern Europe in four areas in which the communist and capitalist doctrines fundamentally differ: government intervention in markets, political freedom, and inequality in incomes and across genders. Macroeconomic indicators related to these areas show convergence of the East to the West. However, residents in the East express less support for democracy and a stronger desire for redistribution, in line with the communist doctrine. Their preferences for the market economy are on average similar to the ones in the West, and their support of female labor force participation is even lower. To establish an effect of communism on preferences, we recur to cohort differences. In all four areas, older cohorts in the East who have lived under communism for a longer time show preferences more in line with communism than younger cohorts, compared to the same cohort gradient in the West.
Abstract
					Density boosts productivity and innovation, improves access to goods and services, reduces typical travel distances, encourages energy efficient construction and transport, and allows broader sharing of scarce urban amenities. However, density is also synonymous with crowding and makes living and moving in cities more costly. We explore the appropriate measurement of density and describe how it is both a cause and a consequence of the evolution of cities. We then discuss whether and how policy should target density and why, in practice, the tradeoff between its pros and cons is unhappily resolved by both market and political forces.
Abstract
					This paper considers the attenuation of agglomeration economies. Put another way: how close is close? The paper presents evidence of agglomeration effects operating at various levels of spatial aggregation, including the regional, metropolitan, and neighborhood scales. In fact, agglomeration effects also seem to operate below the neighborhood level, including within buildings and organizations. These effects attenuate, with nearby activity exerting the strongest effects. The attenuation of agglomeration economies has implications for urban spatial structure, the microfoundations of agglomeration economies, and commercial real estate. It also affects the ability of governments and businesses to internalize agglomeration economies.
Abstract
					In this article, we review the internal geographic mobility of immigrants and natives in the United States in the recent decades, with a focus on the period since 2000. We 
confirm a continuing secular decline in mobility already pointed out by the existing literature, and we show that it persisted in the post great recession period. We then focus 
on foreign-born and establish that, on average, they did not have total mobility rates higher than that of natives. However, their mobility response to local economic 
conditions was stronger than the response of natives in the period from 1980 to 2017. A review of recent research reveals that the higher elasticity of mobility of immigrants 
to economic conditions is a combination of lower sensitivity to local prices, higher propensity to move in the early years after immigration, and strong economic success of cities that were immigrant enclaves in the 1980s.
Abstract
					Place-based jobs policies seek to create jobs in particular local labor markets. Such policies include business incentives provided by state and local governments, which cost 
almost 50 billion USD annually. The most persuasive rationale for these policies is that they can advance equity and efficiency by increasing long-term employment rates in 
distressed local labor markets. However, current incentives are not targeted at distressed areas. Furthermore, incentives have high costs per job created. Lower costs can be 
achieved by public services to business, such as manufacturing extension, customized job training, and infrastructure. Reforms to place-based jobs policies should focus on greater targeting of distressed areas and using more cost-effective policies. Such reforms could be achieved by state and local governments acting in their residents' 
interests or could be encouraged by federal interventions to cap incentives and provide aid to distressed areas.
Abstract
					Spatial disparities in income levels and worklessness in the European Union are profound, persistent and may be widening. We describe disparities across metropolitan regions and discuss theories and empirical evidence that help us understand what causes these disparities. Increases in the productivity benefits of cities, the clustering of highly educated workers and increases in their wage premium all play a role. Europe has a long-standing tradition of using capital subsidies, enterprise zones, transport investments and other place-based policies to address these disparities. The evidence suggests these policies may have partially offset increasing disparities but are not sufficient to fully offset the economic forces at work.
Abstract
					We describe patterns of urbanization in the developing world and the extent to which they differ from the developed world. We consider the extent to which 
urbanization in the developing world can be explained by conventional models of spatial equilibrium. Despite their relative poverty, developing world cities are relatively 
highly productive and often provide good access to safe water, improved sanitation, schooling, and inoculations. In some parts of the world, they are home to a 
surprisingly small number of factory workers and a surprisingly large number of farmers. Developing world cities seem to do less well at protecting their residents from 
lifestyle diseases and crime, their female residents from domestic violence, and their children from illness. In thinking about these facts, we note that one strand of the 
literature focused on structural transformation has suggested that urbanization in the developing is occurring "too early," while another strand argues that urbanization 
is occurring "too slow" to be consistent with conventional models of spatial equilibrium. Despite many differences between developing and developed world cities, our 
new results combined with those in the literature suggest that models of spatial equilibrium can be adapted as a useful guide to understanding the urbanization process 
in the developing world.
Abstract
					Recently in economics there has been discussion of how to increase diversity in the profession and how to improve the work life of diverse peoples. We conducted surveys and interviews with Black, Latinx and Native American people. These groups have long been underrepresented in the economics profession. Participants were at various stages along the economics career trajectory, or on the trajectory no longer, and used their lived experience to reflect on what helps and hurts underrepresented minorities in economics. We heard a few consistent themes: bias, hostile climate, and the lack of information and good mentoring among them. Respondents' insights and experience point toward action steps that you can take today to increase the presence and improve the work life of underrepresented minorities in the economics profession.
Abstract
					Venture capital is associated with some of the most high-growth and influential firms in the world. Academics and practitioners have effectively articulated the strengths of 
the venture model. At the same time, venture capital financing also has real limitations in its ability to advance substantial technological change. Three issues are 
particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small 
number of venture capital investors who hold and shape the direction of a substantial fraction of capital that is deployed into financing radical technological change; and 3) 
the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms. While our ability to assess the social welfare impact of venture 
capital remains nascent, we hope that this article will stimulate discussion of and research into these questions.
Abstract
					This paper studies the contribution of both labor and non-labor income in the growth in income inequality in the United States and large European economies. The paper first shows that the 
capital to labor income ratio disproportionately increased among high-earnings individuals, further contributing to the growth in overall income inequality. That said, the magnitude of this effect 
is modest, and the predominant driver of the growth in income inequality in recent decades is the growth in labor earnings inequality. Far more important than the distinction between total 
income and labor income, is the way in which educational factors account for the growth in US labor and capital income inequality. Growing income gaps among different education groups as 
well as composition effects linked to a growing fraction of highly educated workers have been driving these effects, with a noticeable role of occupational and locational factors for women. 
Findings for large European economies indicate that inequality has been growing fast in Germany, Italy, and the United Kingdom, though not in France. Capital income and education don't play 
as much as a role in these countries as in the United States.
Abstract
					It is hard to find a negative effect on the employment effect of rises in the minimum wage: the elusive employment effect. It is much easier to find an impact on wages. This paper argues the elusive employment effect is unlikely to be solved by better data, methodology, or specification.  The reasons for the elusive employment effect are the factors contributing to why the link between higher minimum wages and higher labor costs are weaker than one might think and because imperfect competition is pervasive in the labor market.
Abstract
					Cities are increasingly setting their own minimum wages, and this trend has accelerated sharply in recent years. While in 2010 there were only three cities with their own minimum wages exceeding the state or federal standard, by 2020 there were 42. This new phenomenon raises the question: is it desirable to have city-level variation in minimum wage polices? 

We discuss the main trade-offs emerging from local variation in minimum wage polices and evaluate their empirical relevance. First, we document what type of cities raise minimum wages, and we discuss how these characteristics can potentially impact the effectiveness of city-level minimum wage policies. Second, we summarize the evolving evidence on city-level minimum wage changes and provide some new evidence of our own. 

Early evidence suggests that the impact of the policy on wages and employment to date has been broadly similar to the evidence on state- and federal-level minimum wage changes. Overall, city-level minimum wages seem to be able to tailor the policy to the local economic environment without imposing substantial distortions in allocation of labor and businesses across locations.
Abstract
					We review the substantial literature on estimating judicial ideology, from the US Supreme Court to the lowest state court. As a way to showcase the strengths and drawbacks of various measures, we further analyze trends in judicial polarization within the US federal courts. Our analysis shows substantial gaps in the ideology of judges appointed by Republican Presidents versus those appointed by Democrats. Similar to trends in Congressional polarization, the increasing gap is mostly driven by a rightward movement by judges appointed by Republicans. We conclude by noting important avenues for future research in the study of the ideology of judges.
Abstract
					Over 2014–2019, the euro area charted a substantial post-crisis economic recovery while also reducing macro-financial vulnerabilities. The array of post-crisis institutional reforms has improved the capacity of the euro area to withstand adverse shocks, even if the narrowing of imbalances also came at a high cost (especially in the most indebted member countries). The pandemic has provided a new test: the combination of a common central bank and the enlargement of the common fiscal capacity has provided substantial policy support and fostered a narrowing in risk premia, despite significant differences in levels of public debt and exposures to the pandemic shock. While the resilience of the euro is sure to be tested further in the coming years, the extent of the underlying political backing for the common currency should not be underestimated.
Abstract
					One of the pillars of the 1957 Treaty of Rome that ultimately led to the European Union is the commitment to the four freedoms of movement (goods, services, persons, and capital). Over the following decades, as the members expanded in numbers, they also sought to deepen the integration amongst themselves in all four dimensions. This paper estimates the success of these policies based primarily on a gravity framework. Distinct from past evaluations, we augment the traditional equation for international flows with the corresponding intra-national flows, permitting us to distinguish welfare-improving reductions in frictions from Fortress-Europe effects. We complement the gravity approach by measuring the extent of price convergence. We compare both quantity and price assessments of free movement with corresponding estimates for the 50 American states.
Abstract
					The European labor market allows for the border-free mobility of workers across 31 countries that cover most of the continent's population. However, rates of migration across European countries remain considerably lower than interstate migration in the United States, and spatial variation in terms of unemployment or income levels is larger. We document patterns of migration in Europe, which include a sizable migration from east to west in the last twenty years. An analysis of worker-level microdata provides some evidence for an international convergence in wage rates and for modest static gains from migration. We conclude by discussing obstacles to migration that reduce the potential for further labor market integration in Europe.
Abstract
					Decades of evidence reveal a complicated relationship between mammograms and mortality. Mammograms may detect deadly cancers early, but they may also lead to the diagnosis and potentially fatal treatment of cancers that would never progress to cause symptoms. I provide a brief history of the evidence on mammograms and mortality, focusing on evidence from clinical trials, and I discuss how this evidence informs mammography guidelines. I then explore the evolution of all-cause mortality relative to breast cancer mortality within an influential clinical trial. I conclude with some responses to the evolving evidence.
Abstract
					Public attitudes and policies toward LGBTQ individuals have improved substantially in recent decades. Economists are actively shaping the discourse around these policies and contributing to our understanding of the economic lives of LGBTQ individuals. In this paper, we present the most up-to-date estimates of the size, location, demographic characteristics, and family structures of LGBTQ individuals in the United States. We describe an emerging literature on the effects of legal access to same-sex marriage on family and socioeconomic outcomes. We also summarize what is known about the size, direction, and sources of wage differentials related to variation in sexual orientation and gender identity. We conclude by describing a range of open questions in LGBTQ economics.
Abstract
					In 2016, the Brazilian construction firm Odebrecht was fined 2.6 billion USD by the US Department of Justice. It was the largest corruption case ever prosecuted under the US Foreign Corrupt Practices Act. Our examination of judicial documents and media reports on this case provides new insights on the workings of corruption in the infrastructure sector. Odebrecht paid bribes for two reasons: to tailor the terms of the auction in its favor, as well as to obtain favorable terms in contract renegotiations. In projects where Odebrecht paid bribes, costs increased by 70.8 percent on average, compared with 5.6 percent for projects with no bribes. We also find that bribes and profits made from bribing were smaller than documented in most previous studies, in the range of one to two percent of the cost of a project.
Abstract
					Economics research is increasingly performed in teams, and team-authored work has a large and increasing impact advantage. This article considers the benefits and costs of this "rise of teams." Among its benefits, teamwork allows individuals to aggregate knowledge in productive and novel ways. For example, as knowledge accumulates over time, individuals become narrower in their expertise, and teamwork is a natural organizational approach to aggregating expertise and maintaining one's reach. But teamwork also brings costs. For example, teamwork divides and obscures credit, which is central to the reward system of science. By clouding credit assignment, teamwork can undermine individual career progression and exacerbate issues of bias. In addressing the rise of teamwork, this paper further considers institutional innovations, especially those inspired by the hard sciences, that can help limit the costs teamwork imposes while realizing the benefits.
Abstract
					The economic crisis associated with the emergence of the novel corona virus is unlike standard recessions. Demand for workers in high contact and inflexible service occupations has declined while parental supply of labor has been reduced by lack of access to reliable child care and in-person schooling options. This has led to a substantial and persistent drop in employment and labor force participation for women, who are typically less affected by recessions than men. We examine real-time data on employment, unemployment, labor force participation and gross job flows to document the impact of the pandemic by occupation, gender and family status. We also discuss the potential long-term implications of this crisis, including the role of automation in depressing the recovery of employment for the worst hit service occupations.
Abstract
					We measure inequities from the COVID-19 pandemic on mortality and hospitalizations in the United States during the early months of the outbreak. We discuss challenges in measuring health outcomes and health inequality, some of which are specific to COVID-19 and others that complicate attribution during most large health shocks. As in past epidemics, preexisting biological and social vulnerabilities profoundly influenced the distribution of disease. In addition to the elderly, Hispanic, Black and Native American communities were disproportionately affected by the virus, particularly when assessed using the years of potential life lost metric. We provide a conceptual framework and initial empirical analysis that seek to shed light on contributors to pandemic-related health inequality, and we suggest areas for future research.
Abstract
					In 1985, James A. Baker III's "Program for Sustained Growth" proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater 
openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as 
emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after 
stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding 
growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the 
spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but 
taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the 
unprecedented increase in growth that has taken place in EMDEs since the early 1990s.
Abstract
					We take stock of three decades of a love-hate relationship between Latin American policies and the Washington Consensus, reviewing its implementation, national debate, and outcomes. Using regional data and case studies of Brazil, Chile, and Mexico, we discuss the various degrees of the Washington Consensus implementation and evaluate performance. We find mixed results: macroeconomic stability is much improved, but economic growth has been heterogeneous and generally disappointing, despite improvement relative to the 1980s. We discuss the risk that the region could revert parts of the Washington Consensus reforms, which are necessary building blocks for a new agenda more focused on social integration, a fairer and just society, and environmentally sustainable growth based on better education.
Abstract
					Over three decades after market-oriented structural reforms termed "Washington Consensus" policies were first implemented, we revisit the evidence on policy adoption 
and the effects of these policies on socio-economic performance in sub-Saharan African countries. We focus on three key ubiquitous reform policies around privatization, 
fiscal discipline, and trade openness and document significant improvements in economic performance for reformers over the past two decades. Following initial declines in 
per capita economic growth over the 1980s and 1990s, reform adopters experienced notable increases in per capita real GDP growth in the post–2000 period. We 
complement aggregate analysis with four country case studies that highlight important lessons for effective reform. Notably, the ability to implement pro-poor policies 
alongside market-oriented reforms played a central role in successful policy performance.
Abstract
					A key challenge for interpreting published empirical research is the fact that published findings might be selected by researchers or by journals. Selection might be based 
on criteria such as significance, consistency with theory, or the surprisingness of findings or their plausibility. Selection leads to biased estimates, reduced coverage of 
confidence intervals, and distorted posterior beliefs. I review methods for detecting and quantifying selection based on the distribution of p-values, systematic 
replication studies, and meta-studies. I then discuss the conflicting recommendations regarding selection resulting from alternative objectives, in particular, the validity of 
inference versus the relevance of findings for decision-makers. Based on this discussion, I consider various reform proposals, such as deemphasizing significance, pre-analysis plans, journals for null results and replication studies, and a functionally differentiated publication system. In conclusion, I argue that we need alternative 
foundations of statistics that go beyond the single-agent model of decision theory.
Abstract
					Occasional widely publicized controversies have led to the perception that growth statistics from developing countries are not to be trusted. Based on the comparison of 
several data sources and analysis of novel IMF audit data, we find no support for the view that growth is on average measured less accurately or manipulated more in 
developing than in developed countries. While developing countries face many challenges in measuring growth, so do higher-income countries, especially those with 
complex and sometimes rapidly changing economic structures. However, we find consistently higher dispersion of growth estimates from developing countries, lending 
support to the view that classical measurement error is more problematic in poorer countries and that a few outliers may have had a disproportionate effect on 
(mis)measurement perceptions. We identify several measurement challenges that are specific to poorer countries, namely limited statistical capacity, the use of outdated data and methods, the large share of the agricultural sector, the informal economy, and limited price data. We show that growth measurement based on the System of 
National Accounts (SNA) can be improved if supplemented with information from other data sources (for example, satellite-based data on vegetation yields) that address 
some of the limitations of SNA.
Abstract
					The efficiency of any police action depends on the relative magnitude of its crime-reducing benefits and legitimacy costs. Policing strategies that are socially efficient at the city level may be 
harmful at the local level, because the distribution of direct costs and benefits of police actions that reduce victimization is not the same as the distribution of indirect benefits of feeling safe. In 
the United States, the local misallocation of police resources is disproportionately borne by Black and Hispanic individuals. Despite the complexity of this particular problem, the incentives facing 
both police departments and police officers tend to be structured as if the goals of policing were simple—to reduce crime by as much as possible. Formal data collection on the crime-reducing benefits of policing, and not the legitimacy costs, produces further incentives to provide more engagement than may be efficient in any specific encounter, at both the officer and departmental 
level. There is currently little evidence as to what screening, training, or monitoring strategies are most effective at encouraging individual officers to balance the crime reducing benefits and 
legitimacy costs of their actions.
Abstract
					In this article, we review a growing empirical literature on the effectiveness and fairness of the US pretrial system and discuss its policy implications. Despite the importance of this stage of the 
criminal legal process, researchers have only recently begun to explore how the pretrial system balances individual rights and public interests. We describe the empirical challenges that have 
prevented progress in this area and how recent work has made use of new data sources and quasi-experimental approaches to credibly estimate both the individual harms (such as loss of 
employment or government assistance) and public benefits (such as preventing non-appearance at court and new crimes) of cash bail and pretrial detention. These new data and approaches 
show that the current pretrial system imposes substantial short- and long-term economic harms on detained defendants in terms of lost earnings and government assistance, while providing 
little in the way of decreased criminal activity for the public interest. Non-appearances at court do significantly decrease for detained defendants, but the magnitudes cannot justify the economic harms to individuals observed in the data. A second set of studies shows that that the costs of cash bail and pretrial detention are disproportionately borne by Black and Hispanic individuals, 
giving rise to large and unfair racial differences in cash bail and detention that cannot be explained by underlying differences in pretrial misconduct risk. We then turn to policy implications and 
describe areas of future work that would enable a deeper understanding of what drives these undesirable outcomes.
Abstract
					A large social science research literature examines the effects of prisons on crime and socioeconomic inequality, but the penal institution itself is often a black box overlooked in the analysis of its effects. This paper examines prisons and their role in rehabilitative programs and as venues for violence, health and healthcare, and extreme isolation through solitary confinement. Research shows that incarcerated people are participating less today than in the 1980s in prison programs, and they face high risks of violence, disease, and isolation. Prison conditions suggest the mechanisms that impair adjustment to community life after release provide a more complete account of the costs of incarceration and indicate the performance of prisons as moral institutions that bear a responsibility for humane and decent treatment.
Abstract
					The twenty-first century has been a period of rising inequality in both income and health. In this paper, we find that geographic inequality in mortality for midlife Americans increased by about 70 
percent between 1992 and 2016. This was not simply because states like New York or California benefited from having a high fraction of college-educated residents who enjoyed the largest health 
gains during the last several decades. Nor was higher dispersion in mortality caused entirely by the increasing importance of "deaths of despair," or by rising spatial income inequality during the 
same period. Instead, over time, state-level mortality has become increasingly correlated with state-level income; in 1992, income explained only 3 percent of mortality inequality, but by 2016, state-level income explained 58 percent. These mortality patterns are consistent with the view that high-income states in 1992 were better able to enact public health strategies and adopt behaviors that,
 over the next quarter-century, resulted in pronounced relative declines in mortality. The substantial longevity gains in high-income states led to greater cross-state inequality in mortality.
Abstract
					Life expectancy varies substantially across local regions within a country, raising conjectures that place of residence affects health. However, population sorting and other confounders make it difficult to disentangle the effects of place on health from other geographic differences in life expectancy. Recent studies have overcome such challenges to demonstrate that place of residence substantially influences health and mortality. Whether policies that encourage people to move to places that are better for their health or that improve areas that are detrimental to health are desirable depends on the mechanisms behind place effects, yet these mechanisms remain poorly understood.
Abstract
					The fourfold increase in opioid deaths between 2000 and 2017 rivals even the COVID-19 pandemic as a health crisis for America. Why did it happen? Measures of demand for pain relief—physical pain and despair—are high and in many cases rising, but their increase was nowhere near as large as the increase in deaths. The primary shift is in supply, primarily of new forms of allegedly safer narcotics. These new pain relievers flowed in greater volume to areas with more physical pain and mental health impairment, but since their apparent safety was an illusion, opioid deaths followed. By the end of the 2000s, restrictions on legal opioids led to further supply-side innovations, which created the burgeoning illegal market that accounts for the bulk of opioid deaths today. Because opioid use is easier to start than end, America's opioid epidemic is likely to persist for some time.
Abstract
					How does one's place of residence affect individual behavior and long-run outcomes? Understanding neighborhood and place effects has been a leading question for social scientists during the past half-century. Recent empirical studies using experimental and quasi-experimental research designs have generated new insights on the importance of residential neighborhoods in childhood and adulthood. This paper summarizes the recent neighborhood effects literature and interprets the findings. Childhood neighborhoods affect long-run economic and educational outcomes in a manner consistent with exposure models of neighborhood effects. For adults, neighborhood environments matter for their health and well-being but have more ambiguous impacts on labor market outcomes. We discuss the evidence on the mechanisms behind the observed patterns and conclude by highlighting directions for future research.
Abstract
					The paper assesses gender differences in pre-labor market specialization among the college-educated and highlights how those differences have evolved over time. Women choose majors with lower potential earnings (based on male wages associated with those majors) and subsequently sort into occupations with lower potential earnings given their major choice. These differences have narrowed over time, but recent cohorts of women still choose majors and occupations with lower potential earnings. Differences in undergraduate major choice explain a substantive portion of gender wage gaps for the college-educated above and beyond simply controlling for occupation. Collectively, our results highlight the importance of understanding gender differences in the mapping between college major and occupational sorting when studying the evolution of gender differences in labor market outcomes over time.
Abstract
					Manufacturing has made an important contribution to raising living standards in many parts of the world. Concerns about premature deindustrialization have made some observers skeptical 
about the potential for manufacturing to play this role in Africa. But employment in African manufacturing has grown rapidly over the past 20 years. These employment gains have been 
accompanied by: (i) large increases in the number of small manufacturing firms; (ii) limited employment gains in large firms; and (iii) robust labor productivity growth in Africa's large firms. Limited 
employment growth in Africa's large manufacturing firms is partly a result of the capital intensity of the manufacturing subsectors in which African countries are most engaged—the processing of 
resources—and partly a result of rising capital intensity in manufacturing. The potential for manufacturing to raise living standards in Africa depends on indirect job creation by large firms 
through backward and forward linkages and increasing labor productivity in small firms.
Abstract
					Many African countries are still in the early stages of structural transformation. Typically, as economies move through the structural transformation, activities once conducted within the 
household are outsourced to the market. This has particular implications for women's time use. In this paper, we document that current patterns of female time use in home production in 
several African countries closely resemble historical time use patterns in the Untied States. We highlight two stylized facts about women's time use in Africa. First, in North Africa, women spend 
very few hours in market work and female labor force participation overall is extremely low. Second, although extensive margin participation of women is high in sub-Saharan Africa, women 
tend to work in the market for only a few hours each week, with the rest of their work hours spent in home production. These two facts suggest two different types of constraints that could 
slow down the reallocation of female time from home to market as economies grow: social norms related to women's market work, and a lack of infrastructure (e.g., household infrastructure 
and childcare facilities) to facilitate marketizing home production. We discuss recent empirical evidence related to each set of constraints and highlight new avenues for research.
Abstract
					Every year, millions of young adults join the labor market in Africa. This paper harmonizes surveys and censuses from 68 low- and middle-income countries to compare their job prospects to those of their counterparts in other low-income regions. We show that employment rates are similar at similar levels of development but that young adults in Africa are less likely to have a salaried job, especially when the size of their cohort is large. Building on existing evidence on the impacts of interventions targeting both the demand and supply sides of the labor market, we discuss policy priorities for boosting the growth of salaried job creation in the region.
Abstract
					This article studies the role of political distortions in driving economic growth and development in Africa. We first discuss how existing theories based on long-run structural factors (e.g., pre-colonial and colonial institutions, or ethnic diversity) may not capture new data patterns in the region, including changes to political regimes, growth patterns, and their variation across regions 
with similar historical experiences. We then argue that a framework focused on political distortions (i.e., how political incentives impact resource allocation and economic outcomes) may have 
multiple benefits: it encapsulates many distortions observed in practice, including patronage, variations in contract enforcement and the role of political connections in firm outcomes; it unifies 
results in Africa and elsewhere; and it leaves a wide scope for policy analysis. We conclude by overviewing reforms that may curb such distortions, including changes to campaign financing rules, 
bureaucratic reform, free trade agreements, and technology.
Abstract
					This paper focuses on the price of nails since 1695 and the proximate source of changes in those prices. Why nails? They are a basic manufactured product whose form and quality have 
changed relatively little over the last three centuries, yet the process for producing them has changed dramatically. Accordingly, nails provide a useful prism through which to examine a wide 
range of economic and technological developments that touch on multiple areas of both micro- and macroeconomics. Several conclusions emerge. First, from the late 1700s to the mid-twentieth century, real nail prices fell by a factor of about 10 relative to overall consumer prices. These declines had important effects on downstream industries, most notably construction. 
Second, while declining materials prices contribute to reductions in nail prices, the largest proximate source of the decline during this period was multifactor productivity growth in nail 
manufacturing, highlighting the role of the specialization of labor and reorganization of production processes. Third, the share of nails in GDP dropped back from 0.4 percent of GDP in 1810—comparable to today's share of household purchases of personal computers—to a de minimis share more recently; accordingly, nails played a bigger role in American life in that earlier period. 
Finally, real nail prices have increased since the mid-twentieth century, reflecting in part an upturn in materials prices and a shift toward specialty nails in the wake of import competition, 
though the introduction of nail guns partly offset these increases for the price of installed nails.
Abstract
					This paper documents a set of facts about the dramatic decline in birth rates in the United States between 2007 and 2020 and explores possible explanations. The overall reduction in the birth 
rate reflects declines across many groups of women, including teens, Hispanic women, and college-educated white women. The Great Recession contributed to the decline in the early part of this 
period, but we are unable to identify any other economic, policy, or social factor that has changed since 2007 that is responsible for much of the decline beyond that. Mechanically, the falling birth 
rate can be attributed to changes in birth patterns across recent cohorts of women moving through childbearing age. We conjecture that the "shifting priorities" of more recent cohorts, reflecting 
changes in preferences for having children, aspirations for life, and parenting norms, may be responsible. We conclude with a brief discussion about the societal consequences for a declining 
birth rate and what the United States might do about it.
Abstract
					What is the most efficient way to respond to recessions in the labor market? To this question, policymakers on the two sides of the pond gave diametrically opposed answers during the COVID-19 
crisis. In the United States, the focus was on insuring workers by increasing the generosity of unemployment insurance. In Europe, instead, policies were concentrated on saving jobs, with the 
expansion of short-time work programs to subsidize labor hoarding. Who got it right? In this article, we show that far from being substitutes, unemployment insurance and short-time work exhibit 
strong complementarities. They provide insurance to different types of workers and against different types of shocks. Short-time work can be effective at reducing socially costly layoffs against large 
temporary shocks, but it is less effective against more persistent shocks that require reallocation across firms and sectors. We conclude that short-time work is an important addition to the labor 
market policy-toolkit during recessions, to be used alongside unemployment insurance.
Abstract
					The Paycheck Protection Program (PPP) provided small businesses with roughly $800 billion dollars in uncollateralized, low-interest loans during the pandemic, almost all of which will be forgiven. 
With 94 percent of small businesses ultimately receiving one or more loans, the PPP nearly saturated its market in just two months. We estimate that the program cumulatively preserved 
between 2 and 3 million job-years of employment over 14 months at a cost of $169K to $258K per job-year retained. These numbers imply that only 23 to 34 percent of PPP dollars went directly 
to workers who would otherwise have lost jobs; the balance flowed to business owners and shareholders, including creditors and suppliers of PPP-receiving firms. Program incidence was 
ultimately highly regressive, with about three-quarters of PPP funds accruing to the top quintile of households. PPP's breakneck scale-up, its high cost per job saved, and its regressive incidence have a common origin: PPP was essentially untargeted because the United States lacked the administrative infrastructure to do otherwise. Harnessing modern administrative systems, other high-income countries were able to better target pandemic business aid to firms in financial distress. Building similar capacity in the U.S. would enable improved targeting when the next pandemic or 
other large-scale economic emergency inevitably arises.
Abstract
					Economic research on the safety net has evolved over time, moving away from a focus on the negative incentive effects of means-tested assistance on employment, earnings, marriage, and fertility 
to include the potential positive benefits of such programs to children. Initially, this research on benefits to children focused on short-run impacts, but as we accumulated knowledge about skill 
production and better data became available, the research evolved further to include important long-run economic outcomes such as employment, earnings, and mortality. Once the positive long-run benefits to children are considered, many safety net programs are cost-effective. However, the current government practice of limiting the time horizon for cost-benefit calculations of policy 
initiatives often fails to take this into account. Finally, we discuss why child poverty in the United States is still higher than most OECD countries and how research on children and the safety net can 
better inform policy-making.
Abstract
					Using multiple datasets on parental and non-parental care provided to children up to age six, we quantify differences in American children's care experiences by socioeconomic status (SES), proxied 
primarily with maternal education. Increasingly, higher SES children spend less time with their parents and more time in the care of others. Non-parental care for high-SES children is more likely to 
be in childcare centers, where average quality is higher, and less likely to be provided by relatives, where average quality is lower. Even within types of childcare, higher-SES children tend to receive 
care of higher measured quality and higher cost. Inequality is evident at home as well: measures of parental enrichment at home, from both self-reports and outside observers, are on average 
higher for higher-SES children. Parental and non-parental quality are positively correlated, leading to substantial inequality in the total quality of care received from all sources in early childhood.
Abstract
					Foster care provides substitute living arrangements to protect maltreated children. The practice is remarkably common: it is estimated that 5 percent of children in the United States are placed in foster care at some point during childhood. This paper describes the main tradeoffs in child welfare policy and provides background on policy and practice most in need of rigorous evidence. Trends include efforts to prevent foster care on the demand side and to improve foster home recruitment on the supply side. With increasing data availability and a growing interest in evidence-based practices, there are opportunities for economic research to inform policies that protect vulnerable children.
Abstract
					The production of goods and services is central to understanding economies. The textbook description of a firm, typically in agriculture or manufacturing, focuses on its physical "tangible" capital 
(machines), labor (workers), and the state of "know-how." Yet real-world firms, such as Apple, Microsoft, and Google, have almost no physical capital. Instead, their main capital assets are 
"intangible": software, data, design, reputation, supply-chain expertise, and R&D. We discuss investment in these knowledge-based types of capital: How to measure it; how it affects 
macroeconomic data on investment, rates of return, and GDP; and how it relates to growth theory and practical growth accounting. We present estimates of productivity in the US and European 
economies in recent decades including intangibles and discuss why, despite relatively rapid growth in intangible capital and what seems to be a modern technological revolution, productivity 
growth has slowed since the global financial crisis.
Abstract
					Intangible assets are a large and growing part of firms' capital stocks. Intangibles are accumulated via investment--foregoing consumption today for output in the future—but they lack a physical 
presence. Rather than stopping with this "lack," we instead focus on the positive properties of intangibles. Specifically, intangibles must be stored, so characteristics of the storage medium have 
important implications for their value and use. These properties include non-rivalry, allowing the intangible to be used simultaneously in different production streams, and limited excludability, 
which prevents the firm from capturing all the benefits or rents from the intangible. We develop these ideas in a simple way to illustrate how outcomes such as scalability and distribution of 
ownership follow. We discuss how intangibles can help to understand important trends in macroeconomics and finance, including productivity, factor shares, inequality, investment and valuation, 
rents and market power, and firm financing.
Abstract
					US companies invested over $500 billion in 2021 in intangible brand capital, over 2% of GDP. During the past decade, US companies have also been growing their internal marketing capabilities, an often overlooked source of human capital. We discuss the private and social benefits of these intangible brand capital stocks. While the private returns to companies are fairly clear, the academic literature has been divided over the social benefits and costs of advertising and promotion, the two key investment vehicles. We also discuss the implications of brand capital for measured productivity.
Abstract
					This paper synthesizes what economists have learned about human capital since Becker (1962) into four stylized facts. First, human capital explains at least one-third of the variation in labor earnings within countries and at least half of the variation across countries. Second, human capital investments have high economic returns throughout childhood and young adulthood. Third, we know how to build foundational skills such as literacy and numeracy, and resources are often the main constraint. Fourth, higher-order skills such as problem-solving and teamwork are increasingly valuable, and the technology for producing these skills is not well understood. We know that investment in education works and that skills matter for earnings, but we do not always know why.
Abstract
					We review the existing literature on the measurement of human capital. Broadly speaking, economists have proposed three approaches to constructing human capital measures—the indicator 
approach, the cost approach, and the income approach. Studies employing the indicator approach have used single measures such as average years of schooling or indexes of multiple measures. 
The cost approach values human capital investments based on spending. The income approach values human capital investments by looking forward to the increment to expected future earnings 
they produce. The latter two approaches have the significant advantage of consistency with national income accounting practices and measures of other types of capital. Measures based on the 
income approach typically yield far larger estimates of the value of human capital than measures based on the cost approach. We outline possible reasons for this discrepancy and show how 
changes in assumptions can reconcile estimates based on the two approaches.
Abstract
					This paper provides historical context for the relationship between expected and realized inflation. We begin with a discussion of early theoretical thought about how inflation expectations are 
formed. Then, we discuss survey- and asset-based measures of inflation expectations and assess their empirical relationship with realized inflation. Expected and realized inflation are strongly 
correlated over long samples, but over short samples the correlations can weaken. Lastly, to better understand the subtleties of the interaction between expected and realized inflation over short-lived but important events, we provide a narrative account of the relationship during the Great Depression of the 1930s, the Great Inflation of the 1970s, the Great Recession of 2008–2009, and the 
recent COVID-19 pandemic. These episodes offer compelling evidence of the importance of expectations and policy regime changes in inflation dynamics.
Abstract
					Households' and firms' subjective inflation expectations play a central role in macroeconomic and intertemporal microeconomic models. We discuss how subjective inflation expectations are measured, the patterns they display, their determinants, and how they shape households' and firms' economic choices in the data and help us make sense of the observed heterogeneous reactions to business-cycle shocks and policy interventions. We conclude by highlighting the relevant open questions and why tackling them is important for academic research and policymaking.
Abstract
					We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants 
can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. 
Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as 
stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is 
a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data.
Abstract
					A recent flurry of labor movement activity has been driven by younger workers, tight labor markets, and a sympathetic federal government. Nonetheless, US union density remains low, even as unions remain popular. This is because employer opposition and US labor law together imply that workers need to overcome substantial collective action problems at work in order to win union recognition and collective bargaining agreements. These barriers make dense social networks and high levels of social capital at work a prerequisite for unionization. Labor organizing can build this social capital, but faces an uphill battle without policy changes that extend collective bargaining across employers and up the value-chain and make unionization easier. Partnering with labor unions, researchers can study theoretical problems of collective action while also getting a window into what strategies of a renewed labor movement may work.
Abstract
					In this article, we document and discuss salient features of collective bargaining systems in the OECD countries, with the goal of debunking some misconceptions and myths and revitalizing the general interest in wage setting and collective bargaining. We hope that such an interest may help close the gap between how economists tend to model wage setting and how wages are actually set. Canonical models of competitive labor markets, monopsony, and search and matching all assume a decentralized wage setting where individual firms and workers determine wages. In most advanced economies, however, it is common that firms or employer associations bargain with unions over wages, producing collective bargaining systems. We show that the characteristics of these systems vary in important ways across advanced economies, with regards to both the scope and the structure of collective bargaining.
Abstract
					We give an overview of the "German model" of industrial relations. We organize our review by focusing on the two pillars of the model: sectoral collective bargaining and firm-level 
codetermination. Relative to the United States, Germany outsources collective bargaining to the sectoral level, resulting in higher coverage and the avoidance of firm-level distributional conflict. 
Relative to other European countries, Germany makes it easy for employers to avoid coverage or use flexibility provisions to deviate downwards from collective agreements. The greater flexibility 
of the German system may reduce unemployment, but may also erode bargaining coverage and increase inequality. Meanwhile, firm-level codetermination through worker board representation 
and works councils creates cooperative dialogue between employers and workers. Board representation has few direct impacts owing to worker representatives' minority vote share, but works 
councils, which hold a range of substantive powers, may be more impactful. Overall, the German model highlights tensions between efficiency-enhancing flexibility and equity-enhancing 
collective action.
Abstract
					Denmark is one of the richest countries in the world and achieves this in combination with low inequality, low unemployment, and high-income security. This performance is often attributed to 
the Danish labor market model characterized by what has become known as flexicurity. This essay describes and evaluates Danish flexicurity. The Danish experience shows that flexicurity in 
itself, that is, flexible hiring and firing rules for firms combined with high income security for workers, is insufficient for successful outcomes. The flexicurity policy also needs to include 
comprehensive active labor market programs (ALMPs) with compulsory participation for recipients of unemployment compensation. Denmark spends more on active labor market programs 
than any other OECD country. We review theory showing how ALMPs can mitigate adverse selection and moral hazard problems associated with high income security and review empirical 
evidence on the effectiveness of ALMPs from the ongoing Danish policy evaluation, which includes a systematic use of randomized experiments. We also discuss the aptness of flexicurity to meet 
challenges from globalization, automation, and immigration and the trade-offs that the United States (or other countries) would face in adopting a flexicurity policy.
Abstract
					While public debt has risen in the last two decades, the return that it offers to investors has fallen, especially relative to the return on private investment. This creates a revenue for the government as the supplier of the special services offered by public bonds, which include storage of value, safety, liquidity, and reprieve from repression. The present value of this debt revenue is large relative to the stock of public debt, keeping it sustainable even as the present value of primary balances is zero or negative. It gives rise to different policy tradeoffs than the conventional analysis of primary balances and makes different recommendation on the effects of austerity, the optimal amount of debt, or the spillovers between monetary and fiscal policy.
Abstract
					The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of expected inflation, while news about the present value of surpluses drives unexpected inflation. I use fiscal theory to interpret historical episodes, including the rise and fall of inflation in the 1970s and 1980s, the long quiet zero bound of the 2010s, and the reemergence of inflation in 2021, as well as to analyze the gold standard, currency pegs, the ends of hyperinflations, currency crashes, and the success of inflation targets. Going forward, fiscal theory warns that inflation will have to be tamed by coordinated monetary and fiscal policy.
Abstract
					For emerging markets, fiscal space is a very real constraint that can surface under a variety of circumstances, including rising world interest rates, falling commodity prices, or a global recession. Some emerging markets, and the majority of low-income developing economies, are already in debt distress or default. Near-term, making sure that troubled debtor countries are aware of the full menu of options, including heterodox strategies such as default, is important. Longer-term, a rethink of the Bretton Woods financial institutions to incorporate a greater emphasis on outright grants instead of loans, makes more sense than ever.
Abstract
					Taking an interdisciplinary perspective, we examine the evolution of economic sanctions in the post-World War II era and reflect on the lessons that could be drawn from their features and patterns of use. We observe that, during this time, there has been a remarkable increase in the use of sanctions as an instrument of foreign policy. We classify this period into four 'eras' and discuss, in this context, how the evolution of sanctions may be linked to salient features of the contemporaneous international political and economic orders. Our review of the related literatures in economics and political science suggests, among other things, that our understanding of sanction processes could be significantly advanced by marrying these perspectives. We conclude by identifying several questions and challenges, and by discussing how interdisciplinary research could address them.
Abstract
					Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We draw out some implications of this tradeoff for the conduct of monetary policy.
Abstract
					Monetary policy affects financial markets and the broader economy in part by changing the risk appetite of investors. This article provides new evidence for this so-called risk-taking channel of monetary 
policy by revisiting and extending event-study analysis of Federal Open Market Committee announcements. We document significant effects of unexpected monetary policy changes on risk indicators 
drawn from equity, fixed-income, credit, and foreign exchange markets. We develop a new index of risk appetite based on the common component of these indicators. Surprise monetary easing leads to 
strong and persistent increases in our index, and vice versa for tightening surprises, consistent with the view that monetary policy affects asset prices in large part through its effects on risk appetite. We 
discuss the implications of the risk-taking channel for monetary policy transmission, optimal monetary policy, and financial stability.
Abstract
					We ask three questions about the connection between monetary policy and inequality. First, does monetary policy affect inequality? While different households respond to changes in monetary policy for 
different reasons, we argue that the overall consumption effects are relatively evenly distributed across households. Second, does household heterogeneity change our understanding of monetary policy 
transmission? A more careful account of microeconomic consumption behavior materially alters our understanding of transmission channels, but has rather limited effect on our general view of the 
aggregate effects of monetary policy. Third, does inequality affect the optimal conduct of monetary policy? Since monetary policy is a rather blunt distributional tool, we argue that even a central bank 
with an explicit distributional mandate would not deviate much from conventional policy prescriptions.
Abstract
					In 2019, Hispanics in the US had a life expectancy advantage of 3.0 years and 7.1 years over non-Hispanic Whites and non-Hispanic Blacks, respectively, despite having real-household income values 26 
percentage points lower than Non-Hispanic White households. Hispanics appear to have equal or even better health outcomes relative to non-Hispanic Whites across various health measures. This is 
known as the Hispanic health paradox. This paper underscores the importance of disaggregating Hispanics by ancestry and age profile when discussing the paradox across key health outcomes. It also 
provides an overview of the leading explanations, such as the salmon bias and the healthy immigrant effect. Further, it highlights the role of healthcare access and usage in this discussion. Ignoring these 
sources of bias have important consequences for how morbidity and mortality among Hispanics are measured within widely used national datasets.
Abstract
					This article reviews evidence on the labor market performance of Hispanics in the United States, with a particular focus on the US-born segment of this population. After discussing critical issues that 
arise in the US data sources commonly used to study Hispanics, we document how Hispanics currently compare with other Americans in terms of education, earnings, and labor supply, and then we 
discuss long-term trends in these outcomes. Relative to non-Hispanic Whites, US-born Hispanics from most national origin groups possess sizeable deficits in earnings, which in large part reflect 
corresponding educational deficits. Over time, rates of high school completion by US-born Hispanics have almost converged to those of non-Hispanic Whites, but the large Hispanic deficits in college 
completion have instead widened. Finally, from the perspective of immigrant generations, Hispanics experience substantial improvements in education and earnings between first-generation 
immigrants and the second-generation consisting of the US-born children of immigrants. Continued progress beyond the second generation is obscured by measurement issues arising from high rates 
of Hispanic intermarriage and the fact that later-generation descendants of Hispanic immigrants often do not self-identify as Hispanic when they come from families with mixed ethnic origins.
Abstract
					The share of US residents who were born in Latin America and the Caribbean plateaued recently, after a half century of rapid growth. Our review of the evidence on the US immigration wave from the region suggests that it bears many similarities to the major immigration waves of the nineteenth and early twentieth centuries, that the demographic and economic forces behind Latin American migrant inflows appear to have weakened across most sending countries, and that a continued slowdown of immigration from Latin America post-pandemic has the potential to disrupt labor-intensive sectors in many US regional labor markets.
Abstract
					What do recent advances in economic geography teach us about the spatial distribution of economic activity? We show that the equilibrium distribution of economic activity can be determined simply by the intersection of labor supply and demand curves. We discuss how to estimate these curves and highlight the importance of global geography—the connections between locations through the trading network—in determining how various policy relevant changes to geography shape the spatial economy.
Abstract
					We study changing trends in within-city sorting by education over the last 40 years. We show that neighborhoods closest to the centers of large US cities rose from having the lowest levels of college attainment in 1980 to the highest in 2017. We discuss the determinants of changes in sorting patterns, focusing on the role of transportation technology and income growth. We outline various consequences of the recent urbanization of college graduates on neighborhood amenities, house prices, and segregation. We highlight the tendency of college graduates to cluster into select central neighborhoods, likely limiting opportunities for interactions across educational lines.
Abstract
					The US urban population increased by almost 50 percent between 1980 and 2020, with this growth heavily concentrated in the Sun Belt and at the fringes of metropolitan areas. This paper considers the role of housing supply in 
shaping the growth of cities and neighborhoods. Housing supply constraints have meant that demand growth has increasingly manifested as price growth rather than as increases in housing units or population in larger and 
denser metropolitan areas and neighborhoods. New housing is provided at increasingly higher cost in areas that have higher intensity of existing development and more restrictive regulatory environments. Both forces have 
strengthened over time, making quantity supplied less responsive to growing demand, driving housing price growth in many areas, and pushing housing quantity growth further out into urban fringes. As a result of such 
pressures on the cost of new construction, the United States has recently experienced more rapid price growth and a declining influence of new construction on the housing stock.
Abstract
					Economic activity is highly unevenly distributed within cities, as reflected in the concentration of economic functions in specific locations, such as finance in the Square Mile in London. The extent to which this concentration reflects natural advantages versus agglomeration forces is central to a range of public policy issues, including the impact of local taxation and transport infrastructure improvements. This paper reviews recent quantitative urban models, which incorporate both differences in natural advantages and agglomeration forces, and can be taken directly to observed data on cities. We show that these models can be used to estimate the strength of agglomeration forces and evaluate the impact of transportation infrastructure improvements on welfare and the spatial distribution of economic activity.
Abstract
					The United States spends substantially more on health care than most developed countries, yet leaves a greater share of the population uninsured. We argue that incremental insurance expansions focused on addressing market failures will propagate inefficiencies and will fail to facilitate the active policy decisions needed to achieve socially optimal coverage. By instead defining a basic bundle of services that is publicly financed for all, while allowing individuals to purchase additional coverage, policymakers could both expand coverage and maintain incentives for innovation, ensuring universal access to innovative care in an affordable system.
Abstract
					Governments in many low- and middle-income countries are developing health insurance products as a complement to tax-funded, subsidized provision of healthcare through publicly-operated facilities. We discuss two 
rationales for this transition. First, health insurance would boost fiscal revenues for healthcare, as post-treatment out-of-pocket payments to providers would be replaced by pre-treatment insurance premia to health ministries. 
Second, increased patient choice and carefully designed physician reimbursements would increase quality in the healthcare sector. Our essay shows that, at best, these objectives have only been partially met. Despite evidence 
that health insurance has provided financial protection, consumers are not willing to pay for unsubsidized premia. Health outcomes have not improved despite an increase in utilization. We argue that this is not because there 
was no room to improve the quality of care but because behavioral responses among healthcare providers have systematically undermined the objectives of these insurance schemes.
Abstract
					Mental illnesses affect roughly 20 percent of the US population. Like other health conditions, mental illnesses impose costs on individuals; they also generate costs that extend to family members and the larger society. Care for 
mental illnesses has evolved quite differently from the rest of health care sector. While medical care in general has seen major advances in the technology of treatment this has not been the case to the same extent for the 
treatment of mental illnesses. Relative to other illnesses, the cost of care for mental illnesses has grown more slowly and the social cost of illness has grown more rapidly. In this essay we offer evidence about the forces 
underpinning these patterns and emphasize the challenges stemming from the heterogeneity of mental illnesses. We examine institutions and rationing mechanisms that affect the ability to make appropriate matches between 
clinical problems and treatments. We conclude with a review of implications for policy and economic research.
Abstract
					We combine data from longitudinal surveys in seven low- and middle-income countries (plus the United States for comparison) to document that depressive symptoms among those aged 55 and above are prevalent in those countries and, unlike in the United States, increase sharply with age. Depressive symptoms in one survey wave are associated with a greater decline in ability to carry out basic daily activities and a higher probability of death in the next wave. Using additional data from a panel survey we conducted in Tamil Nadu with a focus on elderly living alone, we document that social isolation, poverty, and physical health challenges are strongly correlated with depression. We discuss potential policy interventions in these three domains, including some results from our randomized control trials in the Tamil Nadu sample.
Abstract
					The event study model is a powerful econometric tool used for the purpose of estimating dynamic treatment effects. One of its most appealing features is that it provides a built-in graphical summary of results, which can reveal rich patterns of behavior. Another value of the picture is the estimated pre-event pseudo-"effects", which provide a type of placebo test. In this essay I aim to provide a framework for a shared understanding of these models. There are several (sometimes subtle) decisions and choices faced by users of these models, and I offer guidance for these decisions.
Abstract
					This paper considers the evolution of global transportation usage over the past half century and its implications for supply chains. Transportation usage has more than doubled as costs decreased by a third. Participation of emerging economies in world trade and longer-distance trade between countries contribute to this usage increase, thereby encouraging longer supply chains. We discuss technological advances over this period, and their interactions with endogenous responses from transportation costs and supply chain linkages. Supply chains involving more countries and longer distances are reflective of reliable and efficient transportation, but are also more exposed to disruptions, highlighting the importance of considering the interconnectedness of transportation and supply chains in policymaking and future work.
Abstract
					This paper documents how US firms organize goods production across firm and country boundaries. Most US firms that perform physical transformation tasks in-house using foreign manufacturing plants in 2007 also own US manufacturing plants; moreover, 
manufacturing comprises their main domestic activity. By contrast, "factoryless goods producers" outsource all physical transformation tasks to arm's-length contractors, focusing their in-house efforts on design and marketing. This distinct firm type is 
missing from standard analyses of manufacturing, growing in importance, and increasingly reliant on foreign suppliers. Physical transformation "within-the-firm" thus coincides with substantial physical transformation "within-the-country," whereas its 
performance "outside-the-firm" often also implies "outside-the-country." Despite these differences, factoryless goods producers and firms with foreign and domestic manufacturing plants both employ relatively high shares of US knowledge workers. These 
patterns call for new models and data to capture the potential for foreign production to support domestic innovation, which US firms leverage around the world.
Abstract
					There is a consensus that global value chains have aided developing countries' growth. This essay highlights the governance complexities arising from participating in such chains, drawing from lessons we have learned conducting research in the coffee and garment supply chains. Market power of international buyers can lead to inefficiently low wages, prices, quality standards, and poor working conditions. At the same time, some degree of market power might be needed to sustain long-term supply relationships that are beneficial in a world with incomplete contracts. We discuss how buyers' market power and long-term supply relationships interact and how these relationships at the export-gate could be leveraged to enhance sustainability in the domestic part of the chains. We hope that the lessons learned by combining detailed data and contextual knowledge in two specific chains—coffee and garments—have broader applicability to other global value chains.
Abstract
					Have rich countries improved their environments by importing polluting goods? No, the mix of goods imported has shifted towards those from cleaner industries, not dirtier. Has pollution worsened in poor countries manufacturing goods for export to rich ones? That depends. Emissions intensities for similar industries are higher in poor countries, which means that even balanced trade causes more pollution there, even for the same goods. And proportional growth in trade has increased that gap. Whether we should consider that to be "outsourcing pollution" is debatable. Have environmental regulations enacted by rich countries caused either of the first two changes? No, the evidence does not show that regulations cause outsourcing.
Abstract
					Reductions in greenhouse gas emissions are a global public good, which makes it efficient to act globally when addressing this challenge. We lay out several reasons that high-income countries seeking to mitigate climate change might have greater impact if they invest their resources in opportunities in low- and middle-income countries. Specifically, some of the easiest and cheapest options have already been tapped in high-income countries, land and labor costs are lower in low- and middle-income countries, it is cheaper to build green than to retrofit green, and global targeting matters in integrated economies. We also discuss economic counterarguments such as the challenge of monitoring emissions levels in low- and middle-income countries, ethical considerations, the importance of not double-counting mitigation funding as development aid, and policy steps that might help realize this opportunity.
Abstract
					Jurisdictions adopt climate policies that vary in terms of both ambition and policy approach, with some pricing carbon and others subsidizing clean production. We distinguish two types of policy spillovers from these diverse approaches. First, when countries 
have different levels of climate ambition, free-riders benefit at the expense of more committed countries. Second, when countries pursue different approaches, carbon-intensive producers within cost-imposing jurisdictions are at a relative competitive 
disadvantage compared with producers in subsidizing jurisdictions. Carbon border adjustments and climate clubs respond to these spillovers, but when countries have divergent approaches, one policy alone cannot address both spillovers. We also consider 
the policy dynamics arising from carbon border adjustments and climate clubs; both have the potential to encourage upward harmonization of climate policy, but come with risks. Further, the pressures of international competition may result in subsidy races, 
with attendant risks and benefits.
Abstract
					Replacing fossil fuels in the name of decarbonization is necessary but will be particularly difficult due to their as-yet unrivaled bundle of attributes: abundance, ubiquity, energy density, transportability and cost. There is a growing commitment to electrification as the dominant decarbonization pathway. While deep electrification is promising for road transportation in wealthy countries, it will face steep obstacles. In other sectors and in the developing world, it's not even in pole position. Global transportation decarbonization will require decoupling emissions from economic growth, and decoupling emissions from growth will require not only new technologies, but cooperation in governance. The menu of policy options is replete with grim tradeoffs, particularly as the primacy of energy security and reliability (over emissions abatement) has once again been demonstrated in Europe and elsewhere.
Abstract
					Historically Black colleges and universities are institutions that were established prior to 1964 with the principal mission of educating Black Americans. In this essay, we focus on two main issues. We start by examining how Black College students perform across HBCUs and non-HBCUs by looking at a relatively broad range of outcomes, including college and graduate school completion, job satisfaction, social mobility, civic engagement, and health. HBCUs punch significantly above their weight, especially considering their significant lack of resources. We then turn to the potential causes of these differences and provide a glimpse into the "secret sauce" of HBCUs. We conclude with potential implications for HBCU and non-HBCU policy.
Abstract
					Though all countries struggled to respond to COVID-19, the United States' poor performance during the pandemic was unexpected. Despite having more pandemic preparedness capacities than other countries, the United States experienced more than one 
million COVID-19 deaths, which has contributed to historic declines in national life expectancy. Though some have raised questions as to whether preparedness capacities matter, data that appropriately address cross-country differences in age structure and 
surveillance approaches show that higher levels of national preparedness was associated with reduced mortality during the pandemic. The United States, however, stands out as a clear outlier in COVID-19 mortality comparisons with other highly prepared 
countries. We subsequently discuss and summarize the specific gaps in US pandemic preparedness that may have hampered COVID-19 responses in the country. Additional data and research are urgently needed to more accurately understand why the US 
did not make better use of its prepandemic advantages.
Abstract
					Full days worked at home account for 28 percent of paid workdays among Americans 20–64 years old, as of mid-2023. That's about four times the 2019 rate and ten times the rate in the mid-1990s. We first explain why the big shift to work from home has endured rather than reverting to prepandemic levels. We then consider how work-from-home rates vary by worker age, sex, education, parental status, industry and local population density, and why it is higher in the United States than other countries. We also discuss some implications for pay, productivity, and the pace of innovation. Over the next five years, US business executives anticipate modest increases in work-from-home rates at their own companies. Other factors that portend an enduring shift to work from home include the ongoing adaptation of managerial practices and further advances in technologies, products, and tools that support remote work.
Abstract
					This article discusses the question of data and our perspective on the importance of public, accessible, and contemporaneous data in the face of public crisis. Then, we present data on the extent of school closures during the COVID-19 pandemic, both globally and within the United States. We describe the available data on the degree of these closures, which will provide a set of resources for studying longer-term consequences as they emerge. We also highlight what we know about the demographic patterns of school closures. We then discuss the emerging estimates of the short-term impacts of school closures. A central finding throughout our discussion is that school closures during the pandemic tended to increase inequality, both within and across countries, but that fully understanding the long-run impact of COVID-related school closures on students will take time and will surely be influenced by events and policies in the next few years.
Abstract
					The difference in the average wealth of Black and white Americans narrowed in the first century after the Civil War, but remained large and even widened again after 1980. Given high levels of wealth concentration both historically and today, dynamics at the 
average may not capture important heterogeneity in racial wealth gaps across the distribution. This paper looks into the historical evolution of the Black and white wealth distributions since Emancipation. The picture that emerges is an even starker one than 
racial wealth inequality at the mean. Tracing, for the first time, the evolution of wealth of the median Black household and the gap between the typical Black and white household over time, we estimate that the majority of Black households only began to 
dispose of measurable wealth around World War II. While the civil rights era brought substantial wealth gains for the median Black household, the gap between Black and white wealth at the median has not changed much since the 1970s. The top and the 
bottom of the wealth distribution show even greater persistence, with Black households consistently over-represented in the bottom half of the wealth distribution and under-represented in the top-10 percent over the past seven decades.
Abstract
					Retired households, especially those with high lifetime income, decumulate their wealth very slowly, and many die leaving large estates. The three leading explanations for the "retirement savings puzzle" are the desire to insure against uncertain lifespans and medical expenses, the desire to leave bequests to one's heirs, and the desire to remain in one's own home. We discuss the empirical strategies used to differentiate these motivations, most of which go beyond wealth to exploit additional features of the data. The literature suggests that all the motivations are present, but has yet to reach a consensus about their relative importance.
Abstract
					In this paper, we use comprehensive administrative data on the population of Norway to create a measure of lifetime resources, which generates several stylized facts. First, lifetime resources are highly correlated with net wealth, but net wealth is more unequally distributed. Second, labor income is the most important component of lifetime resources, except among the top 1 percent where capital income and capital gains on financial assets become important. Lastly, lifetime resources are a better predictor of child human capital outcomes than net wealth, suggesting that, in some cases, inequality in lifetime resources may be more relevant than inequality in wealth.
Abstract
					We undertake an assessment of our two decades of research on financial literacy, building on our empirical research and theoretical work casting financial knowledge as a form of investment in human capital. We also draw on recent data to determine who is the most—and least—financially savvy in the United States, and we highlight the similarity of our results in other countries. A number of convincing studies is now available, from which we draw conclusions about the effects and consequences of financial illiteracy, and what can be done to fill these gaps. We conclude by offering our thoughts on implications for teaching, policy, and future research.
Abstract
					Encouraged by the declining cost of grid-scale renewables, recent analyses conclude that the United States could reach net zero carbon dioxide emissions by 2050 at relatively low cost using currently available technologies. While the cost of renewable generation has declined dramatically, integrating these renewables would require a large expansion in transmission to deliver that power. Already there is growing evidence that the United States has insufficient transmission capacity, and current levels of annual investment are well below what would be required for a renewables-dominated system. We describe a variety of challenges that make it difficult to build new transmission and potential policy responses to mitigate them, as well as possible substitutes for some new transmission capacity.
Abstract
					The physics of an electrical grid requires that the supply injected into the grid is always in balance with the quantity consumed. If that balance is not maintained, cascading outages are likely to disrupt supply to all consumers on the grid. In the past, vertically 
integrated monopoly utilities have ensured that supply is adequate to meet demand and maintain grid stability, but with deregulation of generation, assuring adequate supply has become much more complex. The unique characteristics of electricity 
distribution means that there are immense potential externalities among market participants from supply shortfalls. In this paper, we discuss the institutions that US electricity markets have developed to avoid such destabilizing supply shortfalls when there 
are multiple generators and retailers in the market. Though many of the markets rely on standardized requirements for supplier reserves, we conclude that recent technological progress may steer future evolution towards a system that relies to a greater 
extent on economic incentives.
Abstract
					It is well-documented that women and racial and ethnic minorities are underrepresented in the economics profession, relative to both the general population and other academic disciplines. Less is known about the socioeconomic diversity of the economics profession. In this paper, we use data on parental education from the Survey of Earned Doctorates to examine the socioeconomic background of US economics PhD recipients, as compared to other disciplines. We find that economics PhD recipients are substantially more likely to have highly educated parents, and less likely to have parents without a college degree, than PhD recipients in other non-economics disciplines. This is true for both US-born PhD recipients and non-US-born PhD recipients, but is particularly stark for the US-born. The gap in socioeconomic diversity between economics and other PhD disciplines has increased over the last five decades, and particularly over the last two decades.
Abstract
					Economics job candidates face considerable professional and financial uncertainties when deciding between academic and nonacademic career paths. Using novel panel data, we provide a broad picture of PhD economists' early career mobility and earnings growth—both in and outside of academia. We find that academic jobs have fallen to just over half of US placements, with growing shares in tech, consulting, and government. We document considerable early career job mobility and higher earnings growth among job changers, private-sector economists, and men. We also find an earnings premium for graduates of top-ranked PhD programs that grows over early career years in academia while shrinking in the private sector. These different earnings dynamics mean the opportunity cost (in terms of potential earnings) of remaining in academia is generally less for graduates of top-ranked programs, although there is significant dispersion in mid-career earnings among these academics.
Abstract
					Research on international migration and innovation relies heavily on inventor and patent data, with "migrant inventors" attracting a great deal of attention, especially for what concerns their role in easing the international transfer of knowledge. This hides the fact that many of them move to their host country before starting their inventive career or even before completing their education. We discuss the conceptual and practical difficulties that stand in the way of investigating other likely channels of influence of inventor's migration on innovation, namely the easing of skill shortages and the increase of variety in inventive teams, firms, and location.
Abstract
					Income inequality is high and persistent in developing countries. In this paper, we ask what role taxation can or might play in reducing inequality in low and middle-income countries. Drawing on the recent literature, three 
findings emerge. Due to both structural factors and limited enforcement capacity, the effective distributional impacts of taxes often deviate from their 'statutory' objectives, in ways that are hard to predict based on evidence 
from high-income countries. Moreover, administrative reforms which are meant to be distributionally neutral end up having significant equity impacts because of the practical realities of implementation. Finally, the global 
challenges which tax authorities face to tax the very top of the income distribution appear to be even more pronounced in developing countries. We conclude by offering thoughts on future research and emphasize the need to 
carefully study equity characteristics of taxes at each stage of a country's development path.
Abstract
					The value-added tax (VAT) is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of 
revenue. Yet, in many countries there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose its desirable 
properties. We draw on firm-level administrative VAT records from 11 countries at different income levels to examine the functioning of real-world VAT systems. We document four stylized facts that capture departures from the 
textbook VAT model which are particularly pronounced in lower-income countries. We discuss the effects on VAT performance and simulate a counterfactual retail sales tax and a turnover tax. Despite its shortcomings, we 
conclude that the real-world VAT is superior to the alternatives.
Abstract
					The association between immigration and crime has long been a subject of debate, and only recently have we encountered systematic empirical evidence on this issue. Data shows that immigrants, often younger, male, 
and less educated compared to natives, are disproportionately represented among offenders in numerous host countries. However, existing research, inclusive of our analysis of new international data, consistently 
indicates that immigration does not significantly impact local crime rates in these countries. Furthermore, recent studies underscore that obtaining legal status diminishes immigrants' involvement in criminal activities. 
Finally, we discuss potential explanations for the apparent incongruity between immigrants' overrepresentation among offenders and the null effect of immigration on crime rates.
Abstract
					We discuss how the relative importance of factors that contribute to movements of the US Beveridge curve has changed from 1959 to 2023. We review these factors in the context of a simple flow analogy used to capture the 
main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1959 and 2000. A reduction in matching efficiency, that 
depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. 
Finally, we argue that, while the Beveridge curve is a useful tool for relating unemployment and job openings to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge 
curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings.
Abstract
					As of 2022, the share of US income accruing to labor is at its lowest level since the Great Depression. Updating previous studies with more recent observations, I document the continuing decline of the labor share for the United States, other countries, and various industries. I discuss how changes in technology and product, labor, and capital markets affect the trend of the labor share. I also examine its relationship with other macroeconomic trends, such as rising markups, higher concentration of economic activity, and globalization. I conclude by offering some perspectives on the economic and policy implications of the labor share decline.
Abstract
					Benchmark models taught in undergraduate macro do not attribute any role for labor supply as an important determinant of macroeconomic outcomes. The first part of this paper documents three facts. First, differences in 
hours of work across OECD economies are large and imply large differences in GDP per capita. Second, there are large differences in the size of tax and transfer programs across countries, as proxied by differences in 
government revenues relative to the GDP. Third, these two outcomes are strongly negatively correlated. Taken together, these facts suggest an important role for labor supply in affecting macroeconomic outcomes. I conjecture 
that the reason why macro textbooks do not include a discussion of labor supply stems from a belief that labor supply elasticities are sufficiently small that even large differences in work incentives do not generate important 
macroeconomic effects. The second part of this paper argues that this belief is based on incorrect inference linking small elasticities for prime age male to small aggregate labor supply elasticities. The role of labor supply at the 
extensive margin plays a critical role in understanding this mistake in this inference.
Abstract
					In employment relationships, a wage is an installment payment on an implicit long-term agreement between a worker and a firm. The price of labor that impacts firm's hiring decisions, instead, reflects the hiring wage as well as the impact of economic conditions at the time of hiring on future wages. Measured by the labor's user cost, the price of labor is substantially more pro-cyclical than the new-hire wage or the average wage. The strong procyclicality of the price of labor calls for other forces for cyclical labor demand to explain employment fluctuations.
Abstract
					We assess the business provisions of the 2017 Tax Cuts and Jobs Act, the biggest corporate tax cut in US history. We draw five lessons. First, corporate tax revenue fell by 40 percent due to the lower rate and more generous 
expensing. Second, firms with larger declines in their effective tax wedge increased investment relatively more. In aggregate, we suggest a loose consensus from the literature that total tangible corporate investment increased by 
11 percent. Third, the business tax provisions increased economic growth and wages by less than advertised by the Act's proponents, with long-run GDP higher by less than 1 percent and labor income by less than $1,000 per 
employee. Fourth, provisions that increase foreign investment by US-based multinationals also boost their domestic operations. Fifth, some of the expired and expiring provisions, such as accelerated depreciation, generate more 
investment per dollar of tax revenue than others.
Abstract
					We evaluate the Opportunity Zones provision of the Tax Cuts and Jobs Act, focusing on its targeting and effects on investment and resident outcomes. The policy allowed substantial discretion for state governors to designate 
Opportunity Zones that were not necessarily the most distressed, though we find that in aggregate their ultimate selections were still somewhat well-targeted. However, we show that the policy is insufficient to encourage 
investment with a significantly below-market rate of return and provides the largest tax benefits to investment that would have occurred regardless of the policy. Consistent with these features of the policy's design, a substantial 
amount of Opportunity Zone investment has been made, including in many lower-income areas. However, it appears that much of the investment would have occurred anyway, and the evidence to date mostly points to limited 
effects on resident wellbeing.
Abstract
					Economics is among the most popular undergraduate majors, especially in top colleges and universities. However, even at the best research universities and liberal arts colleges men outnumber women by two to one, and 
overall there are about 2.5 males to every female economics major. We discuss why women major in economics less than men and describe a project to increase the number of female economics majors. The Undergraduate 
Women in Economics (UWE) Challenge was a randomized controlled trial, with 20 treatment and 68 control schools, that we ran for one year in AY 2015–16 to evaluate the impact of light-touch interventions to recruit and retain 
female economics majors. Treatment schools received funding, guidance, and access to networking with other treatment schools to implement programs such as providing better information to incoming students about the 
application of economics, exposing students to role models, providing mentoring, and updating course content and pedagogy. Using 2001–2021 data from the NCES-Integrated Postsecondary Education Data System (IPEDS) on 
graduating undergraduates (BAs), we find that UWE was effective in increasing the fraction of female BAs who majored in economics relative to men in liberal arts colleges. Large universities did not show an impact of the 
treatment, although those that implemented their own RCTs showed moderate success in encouraging more women to major in economics. We discuss what we believe worked in the UWE program and speculate on the 
reasons for differential treatment impact.
Abstract
					Economics faces stubborn underrepresentation of minoritized identity groups. Economics instructors also largely use antiquated instructional methods. We leverage the literature from the fields of science, technology, 
engineering, and mathematics education, which have rigorously studied instructional techniques and gathered evidence on a variety of methods that improve learning and reduce demographic gaps. We discuss four broad ideas: 
active and collaborative learning, role model interventions, modernized design of assessments and feedback, and culturally relevant, responsive, and sustaining pedagogy. We frame these approaches in the context of economics 
identity, share evidence regarding efficacy, and give examples of how the techniques have been and can be used in economics. In so doing, we provide a set of changes economics instructors can make, large and small, to improve 
their teaching for all students and to reduce demographic gaps in success and persistence in the field.
Abstract
					At a time when the returns to college and graduate school are at historic highs, why do so many students struggle with their student loans? The increase in aggregate student debt and the struggles of today's student loan 
borrowers can be traced to changes in federal policies intended to broaden access to federal aid and educational opportunities, and which increased enrollment and borrowing in higher-risk circumstances. Starting in the late 
1990s, policymakers weakened regulations that had constrained institutions from enrolling aid-dependent students. This led to rising enrollment of relatively disadvantaged students, but primarily at poor-performing, low-value 
institutions whose students systematically failed to complete a degree, struggled to repay their loans, defaulted at high rates, and foundered in the job market. As these new borrowers experienced similarly poor outcomes, their 
loans piled up, loan performance deteriorated, and with it the finances of the federal program. The crisis illustrates the important role that educational institutions play in access to postsecondary education and student outcomes, 
and difficulty of using broadly-available loans to subsidize investments in education when there is so much heterogeneity in outcomes across institutions and programs and in the ability to repay of students.
Abstract
					Human beings' domination of the planet has not been kind to many species. This is to be expected. Humans have radically altered natural landscapes, harvested heavily from the ocean, and altered the climate in an 
unprecedented way. Recent concerns over the extent and rate of biodiversity loss have led to renewed interest in extinction outcomes and speculation concerning humans' potential role in any future mass extinction. In this 
paper, we discuss the economic causes of extinction in two high-profile cases—sharks and the North American Buffalo—and then extend our analysis to multiple species and discuss the possibility of mass extinction. Throughout, 
we present evidence drawn from authoritative data sources with a focus on shark populations to ground our analysis. Despite large gaps in our data, the available evidence reveals a worrisome trend: extinction risks are rising for 
many species and policymakers have been very slow to react.
Abstract
					We examine the ways in which political realities shape industrial policy through the lens of modern political economy. We consider two broad "governance constraints": (1) the political forces that shape how industrial policy is chosen and (2) the ways in which state capacity affects implementation. The framework of modern political economy suggests that government failure is not a necessary feature of industrial policy; rather, it is more likely to fail when countries pursue industrial policies beyond their governance capacity constraints. As such, our political economy of industrial policy is not fatalist. Instead, it enables policymakers to constructively confront challenges.
Abstract
					Incentive compatibility is core to mechanism design. The success of auctions, matching algorithms, and voting systems all hinge on the ability to select incentives that make it in the individual's interest to reveal their type. But how do we test whether a mechanism that is designed to be incentive compatible is actually so in practice, particularly when faced with boundedly rational agents with nonstandard preferences? We review the many experimental tests that have been designed to assess behavioral incentive compatibility, separating them into two categories: indirect tests that evaluate behavior within the mechanism, and direct tests that assess how participants respond to the mechanism's incentives. Using belief elicitation as a running example, we show that the most popular elicitations are not behaviorally incentive compatible. In fact, the incentives used under these elicitations discourage rather than encourage truthful revelation.
Abstract
					Households in the United States often rely on financial advisers for investment and savings decisions, yet there is a widespread perception that many advisers are dishonest. This distrust is not unwarranted: approximately one in fifteen advisers has a history of serious misconduct, with this rate rising to one in six in certain regions and firms. We explore the economic foundations of the financial advisory industry and demonstrate how heterogeneity in household financial sophistication and conflicts of interest allow poor financial advice to persist. Using data on the universe of financial advisers and the Survey of Consumer Finances, we document who uses financial advisers and the prevalence of misconduct in the industry. Our findings suggest that a lack of financial sophistication is a key friction, making enhanced disclosure a potentially effective policy response. Supporting this, we show through a difference-in-differences approach that "naming and shaming" firms with high misconduct rates was associated with a 10 percent reduction in misconduct.
Abstract
					A central policy issue in pharmaceuticals is how to balance the dynamic benefits of new drugs against the static benefits of low prices for existing drugs. In the United States, that balance is set by the Hatch-Waxman Act. We review the Act's origins and key features, then present evidence on its effects on competition and innovation. On the competition side, we show how the Act creates incentives for brands to accumulate patents and generics to challenge them, with the result being a rough stalemate. We also discuss strategies deployed by brands to delay generic entry. On the innovation side, we show that the Act's patent extension provisions—which aim to allow branded firms to make up for time lost during clinical trials and regulatory review—are incomplete, resulting in potential distortions. The net result is a convoluted and expensive approach to balancing innovation and competition.
Abstract
					Inequality has become a defining challenge for modern economies and a central focus of economic research over the past two decades. I begin by revisiting the foundations of income measurement, showing that standard definitions—taxable income, factor income, and Haig-Simons income—suffer from important conceptual limitations. I contrast these income measures with the ideal notion of income from a welfare perspective—Hicksian income—which captures an individual's ability to consume or save for future consumption. I then examine the drivers of rising top income inequality, with particular attention to the surge in entrepreneurial incomes. I highlight three key forces behind this phenomenon: higher returns on capital (technological factors), lower external financing costs (financial factors), and a lighter tax burden on business owners (fiscal factors).
Despite their documented importance in the labor market, little is known about how workers use social networks to find jobs and their resulting effect on earnings. I use geographically detailed US employer-employee data to infer the role of social networks in connecting workers to jobs in high-paying firms. To identify social interactions in job search, I exploit variation in social network quality within small neighborhoods. Workers are more likely to change jobs, and more likely to move to a higher-paying firm, when their neighbors are employed in high-paying firms. Furthermore, local referral networks help match high-ability workers to high-paying firms.
A public college randomly assigns applicants into a group that can enroll immediately and a group that can do so only after 1 year. One and a half years after the first group enrolled, individuals in that group were 19 percentage points more likely to be enrolled than those who had to wait. I present a model of educational decision making that predicts a substantial effect of deferral on attainment only when opportunity costs (wages) can vary across time within individuals. I estimate the model to project the long-term effect of deferred admission on attainment for different groups of applicants.
Using data from a randomized experiment, we find that having a female teacher lowers the math test scores of female primary school students in disadvantaged neighborhoods. Moreover, we do not find any effect of having a female teacher on male students’ test scores (math or reading) or female students’ reading test scores, which seems to rule out explanations pertaining to the unobserved quality differences between male and female teachers. Finally, this negative effect seems to persist only for female students who were assigned to a female teacher with a limited math background.
Many believe that classroom interactions play an important role in students’ academic achievement, but there is little evidence on peer effects within subclassroom groups. We exploit random seat assignment in a Chinese middle school to estimate how the gender of neighboring students affects a student’s academic achievement. We find that being surrounded by five females rather than five males increases a female’s test scores by 0.2–0.3 standard deviations but has no significant effects on a male’s test scores. These results suggest a low-cost way to potentially improve performance within the world’s largest school system.
We formulate and estimate a dynamic model of marriage, divorce, and remarriage using panel data on two cohorts of Danish men and women. The marital surplus is identified from the probability of divorce and the surplus shares of husbands and wives from their willingness to enter marriage. We find that the educations of husbands and wives are complements. Education raises the share of the marital surplus for men but not for women. As men and women get older, husbands receive a larger share of the marital surplus. The estimated costs of divorce are high both early and late in marriage.
We employ German social security records to investigate intragenerational lifetime earnings inequality and mobility of yearly earnings for 35 cohorts, starting with the birth year 1935. Our main result is a striking secular rise of intragenerational inequality in lifetime earnings: West German men born in the early 1960s are likely to experience about 85% more lifetime inequality than their fathers. In contrast, both short-term and long-term intragenerational mobility are stable. Longer unemployment spells of workers at the bottom of the distribution of younger cohorts contribute to explaining 20%–40% of the overall increase in lifetime earnings inequality.
We examine the impact of relative wages on labor supply in a laboratory experiment. We test the hypothesis that, ceteris paribus, making a given wage high (low) relative to other wage levels will lead to an increase (decrease) in labor supply. We find that labor supply does respond significantly to relative pay, and in the expected direction. However, when a strong enough reason for the relative low pay is given, this difference disappears.
This paper proposes a new measure of gender differences in access to jobs based on a job assignment model. This measure is the probability ratio of getting a job for a female and a male at each rank of the wage ladder. We derive a nonparametric estimator of this access measure and estimate it for French full-time executives aged 40–45 in the private sector. Our results show that the gender difference in the probability of getting a job increases along the wage ladder from 9% to 50%. Females thus have a significantly lower access to high-paid jobs than to low-paid jobs.
This paper documents that the dynamics of occupational segregation are highly nonlinear and exhibit tipping patterns. Occupations experience discontinuous declines in net male employment growth at tipping points ranging from 25% to 45% (from 13% to 30%) female in white-collar (blue-collar) occupations from 1940 to 1990. These patterns appear consistent with a Schelling (1971) social interaction model where tipping results from male preferences toward the fraction female in their occupation. Supporting the model’s predictions, evidence from the General Social Survey indicates that tipping points are lower in regions where males hold more sexist attitudes toward the appropriate role of women.
This paper provides new evidence of gender differences in response to increased competition, focusing on important life tasks performed in a regular social environment. The analysis takes advantage of a major education reform in Ontario that exogenously increased competition for university grades. Comparing students prereform and postreform using rich administrative data, I find that male average grades and the proportion of male students graduating “on time” increased relative to females. Further, the evidence indicates that these changes were due to increased relative effort rather than self-selection. The findings have implications for the delivery of education and incentive provision more generally.
In 1997, the ACT increased the number of free score reports it provided to students from three to four, maintaining a $6 marginal cost for each additional report. In response to this $6 cost change, ACT-takers sent many more score reports and applications relative to SAT-takers. They widened the range of colleges they sent scores to, and low-income ACT-takers attended more-selective colleges. Back-of-the-envelope calculations suggest that the policy substantially increased low-income students’ expected earnings. This sizable behavioral change in response to such a small cost change suggests that in this setting, small policy perturbations can have large effects on welfare.
We conduct a natural field experiment in a retail chain to test predictions of tournament theory regarding prize spread and noise. A random subset of the 208 stores participates in two-stage elimination tournaments. Tournaments differ in the distribution of prize money across winners of the first and second rounds of the tournament. As predicted, we find that a more convex prize spread increases second-round performance at the expense of first-round performance, although the magnitude of these effects is small. Moreover, the treatment effect is larger for stores with more stable past performance.
We conduct laboratory experiments where the market rules mimic labor market institutions and exogenously vary institutions to study the causal impact on subjects’ behaviors. We focus on rules analogous to dismissal barrier institutions, such as employment protection legislation, and on institutions allowing bonus pay. We find that when constrained to fixed wage contracts, dismissal barriers reduce efficiency but parties react by evolving rising compensation profiles. When the option to pay bonuses is introduced, this completely offsets the negative effects of dismissal barriers. In the absence of dismissal barriers, bonus pay reduces frequency of repeated interactions but leaves market efficiency unchanged.
We combine unique administrative and survey data to study the match between firms and managers. The data include manager characteristics, firm characteristics, detailed measures of managerial practices, and outcomes for the firm and the manager. A parsimonious model of matching and incentives generates implications that we test with our data. We use the model to illustrate how risk aversion and talent determine how firms select and motivate managers. We show that empirical links between firm governance, incentives, and performance, which have so far been studied in isolation, can instead all be interpreted within our simple unified matching framework.
Recent empirical findings have cast doubt on the neoclassical model of labor supply. However, estimation issues, and not workers’ behavior, may be responsible for these findings. This paper investigates this possibility by examining the daily labor supply of Florida lobster fishermen. I invariably find that fishermen work more when earnings are temporarily high, behavior that is consistent with a neoclassical model of labor supply. Furthermore, methods that do not control for measurement error and endogeneity of the wage not only produce downward-biased estimates of labor supply elasticities but also generate a spurious negative and significant elasticity of daily hours.
This paper analyzes how changes in the skill mix of local labor supply are absorbed by the economy, distinguishing between three adjustment mechanisms: wages, expansion in size of those production units using the more abundant skill group more intensively, and more intensive use of the more abundant skill group within production units. We contribute to the literature by analyzing these adjustments on the firm rather than industry level, using German administrative data. We show that most adjustments occur within firms through changes in relative factor intensities and that firms entering and exiting the market are an important additional absorption mechanism.
This paper uses 11 years of administrative data from North Carolina public high schools to examine the extent to which the allocation of teachers within and across public high schools is contributing to inequality in student test score performance. The existence of nearly 3,500 teacher transfers allows separate identification of each teacher’s quality from other school-level factors. I find that teaching quality is fairly equitably distributed both within and across high schools: students among the bottom (top) decile of a student background index are taught by teachers who are, on average, at the 41st (57th) percentile of the value-added distribution.
Some firms say they care about the well-being and “happiness” of their employees. But are such claims hype or scientific good sense? We provide evidence, for a classic piece rate setting, that happiness makes people more productive. In three different styles of experiment, randomly selected individuals are made happier. The treated individuals have approximately 12% greater productivity. A fourth experiment studies major real-world shocks (bereavement and family illness). Lower happiness is systematically associated with lower productivity. These different forms of evidence, with complementary strengths and weaknesses, are consistent with the existence of a causal link between human well-being and human performance.
How and by how much do supervisors enhance worker productivity? Using a company-based data set on the productivity of technology-based services workers, we estimate supervisor effects and find them to be large. Replacing a boss who is in the lower 10% of boss quality with one who is in the upper 10% of boss quality increases a team’s total output by more than adding one worker to a nine-member team would. Workers assigned to better bosses are less likely to leave the firm. A separate normalization implies that the average boss is about 1.75 times as productive as the average worker.
This paper examines how sales managers, acting as agents of the firm, game the staffing and incentives of their subordinates. Sales managers on a quota’s cusp have a unique personal incentive to retain and lower quotas for poor-performing subordinates, allowing one to isolate a manager’s interest from the firm’s. Using microdata from 244 firms that subscribe to a cloud-based service for processing sales compensation, I estimate that 13%–15% of both quota adjustments and retentions among poor performers are explained by managers’ incentives around quotas. Although a minority of poor performers are subsequently terminated or transferred, most are retained indefinitely.
College graduates do not always pursue careers related to their major. Science majors working in jobs unrelated to their field of study earn approximately 30% lower wages than those working in related jobs. We develop a structural model of major choice and labor market outcomes that allows for skill uncertainty and differential accumulation of human capital across major. Our findings confirm that the average return to obtaining a science degree and working in a related job remains close to 30%. We also find that individuals are uncertain about their future productivity at the time of the college major decision.
Since 1991 more than two dozen states have adopted merit-based student financial aid programs, intended at least in part to increase the stock of human capital by improving the knowledge and skills of the state’s workforce. At the same time, there has been growing concern that the United States is producing too few college graduates in science, technology, engineering, and mathematics (STEM) fields. Using microdata from the American Community Survey, this paper examines whether recently adopted state merit aid programs have affected college major decisions, with a focus on STEM fields. We find consistent evidence that state merit programs did in fact reduce the likelihood that a young person in the state will earn a STEM degree.
This paper provides the first evidence that value-added education accountability schemes induce dynamic distortions. Extending earlier dynamic moral hazard models, I propose a new test for ratchet effects, showing that classroom inputs are distorted less when schools face a shorter horizon over which they can influence student performance. I then exploit grade span variation using rich educational data to credibly identify the extent of dynamic gaming and find compelling evidence of ratchet effects based on a triple-differences approach. Further analysis indicates that these effects are driven primarily by effort distortions, with teacher reallocations playing a secondary role.
The existence of teacher complementarities across grades can have important implications for the efficient assignment of students to teachers and for the evaluation of teachers using standard value-added models (VAMs). In this paper, I extend the basic VAM to allow for interactive effects between teachers. Using data from North Carolina’s primary schools, I find that teacher complementarities within schools are extremely small. This finding suggests that there is little to gain by assigning students to particular teacher sequences. Moreover, measures of teacher effectiveness generated from a typical VAM are not likely to be biased by interactions with past teacher inputs.
This paper presents a theoretical and empirical analysis of the effects of routine-biased technical change on occupational transition patterns and wage changes of individual workers using a general equilibrium model with endogenous sorting of workers into occupations. Consistent with the predictions of the model, data from the Panel Study of Income Dynamics show strong evidence of selection on ability in the occupational mobility patterns of routine workers, a significant fall in the wage premium in routine occupations, and faster wage growth over long-run horizons for workers switching out of routine jobs relative to those who stay.
The paper investigates the link between the overexposure of African immigrants to unemployment in France and their underrepresentation in jobs in contact with customers. We build a two-sector matching model with ethnic sector–specific preferences, economy-wide employer discrimination, and customer discrimination in jobs in contact with customers. The outcomes of the model allow us to build a test of ethnic discrimination in general and customer discrimination in particular. We run the test on French individual data in a cross section of local labor markets (employment areas). Our results show both ethnic and customer discrimination in the French labor market.
Using a new firm-level data set that includes explicit information on referrals by current employees, we investigate the hiring process and the relationships among referrals, match quality, wage trajectories, and turnover for a single US corporation and test various predictions of theoretical models of labor market referrals. We find that referred candidates are more likely to be hired; experience an initial wage advantage, which dissipates over time; and have longer tenure in the firm. Further, the variances of the referred and nonreferred wage distributions converge over time. The observed referral effects appear to be stronger at lower skill levels. The data also permit analysis of the role of referrer-referee pair characteristics.
Economic theory predicts that agents work harder if they believe in the mission of the organization. We conduct a real-effort experiment with workers whose mission preferences are known, randomly assigning them to organizations with clear missions to create both matches and mismatches. Our estimates suggest that matching is a strong motivator, especially compared to mismatches. Further, we find that performance pay increases effort, though mostly among mismatched workers who substitute pay for matching. Our results suggest the importance of defining a clear mission to an organization and highlight the significance of sorting, screening, and compensation policies.
We use admissions lotteries to estimate effects of attendance at Boston’s charter high schools on college preparation and enrollment. Charter schools increase pass rates on Massachusetts’ high-stakes exit exam, with large effects on the likelihood of qualifying for a state-sponsored scholarship. Charter attendance also boosts SAT scores sharply and increases the likelihood of taking an Advanced Placement (AP) exam, the number of AP exams taken, and AP scores. Charters induce a substantial shift from 2- to 4-year institutions, though the effect on overall college enrollment is modest. Charter effects on college-related outcomes are strongly correlated with charter effects on earlier tests.
Chile is unusual in having long-term experience with nationwide school vouchers. A key criticism of school voucher systems is that they make it easier for private schools to attract better teachers to the detriment of public schools. This paper uses longitudinal data from Chile to estimate a discrete choice dynamic programming (DCDP) model of teacher and nonteacher labor supply decisions and to explore how wage policies affect the composition of the teacher labor force in public and private schools. In the model, individuals first decide whether to get a teaching degree and then choose annually from among five work/home sector alternatives. Empirical results show that private voucher schools attract better teachers than public schools. However, the existence of the private voucher sector also draws higher-productivity individuals into the teaching profession.
I develop a model in which individual time discount rates have a larger effect on human capital accumulation when credit constraints are binding. Impatient individuals obtain less schooling when borrowing constraints limit the ability to finance consumption during school. Using data from the NLSY79, I show that self-reported measures of time preferences have a significantly higher effect on the college attendance decisions of blacks than those of whites and the decisions of low-income youths than those of high-income youths. These results provide new evidence that members of disadvantaged groups obtain lower levels of schooling because they are credit constrained.
This paper analyzes the effects of job displacement on fertility using Finnish longitudinal register data. We focus on couples where one spouse has lost a job due to a plant closure and follow them for several years before and following the job loss. The results show that female job loss decreases fertility. For every 100 displaced females, there are three fewer children born. Male job loss has no impact on fertility despite resulting in a stronger decrease in family income than female job loss. This indicates that the income effect is not the mechanism through which job displacement influences fertility.
The cost of divorce influences the bargaining position of spouses and thus their behavior within the marriage. This study takes advantage of a major and unexpected reduction in divorce costs in Spain to estimate the causal effects on domestic violence. Results suggest a 30% decline in spousal conflict as a consequence of the reform. Spousal violence is found to have decreased among couples who remained married after the modification in the law, which suggests an important role for changes in bargaining within the marriage when divorce becomes a more credible (cheaper) option.
We examine the impact of restructuring active labor market programs for unemployed immigrants in Finland. Exploiting a discontinuity in the phase-in rules of the reform, we find that it increased compliers’ cumulative earnings by 47% over a 10-year follow-up period. We attribute these improvements to a more efficient use of existing resources. The reform did not affect total days in training, but it did modify the content toward training specifically designed for immigrants.
We compare the income and wage trajectories of women to those of their male partners before and after parenthood. Focusing on the within-couple gap allows us to control for both observed and unobserved attributes of the spouse and to estimate both short- and long-term effects of entering parenthood. We find that 15 years after the first child has been born, the male-female gender gaps in income and wages have increased by 32 and 10 percentage points, respectively. In line with a collective labor supply model, the magnitude of these effects depends on counterfactual relative incomes or wages within the family.
We document the growth in higher education costs and tuition over the past 50 years. To explain these trends, we develop a general equilibrium model with skill- and sector-biased technical change. Finding the model’s parameters through a combination of estimation and calibration, we show that it can explain the rise in college costs between 1961 and 2009, along with the increase in college attainment and the change in the relative earnings of college graduates. The model predicts that if college costs had ceased to grow after 1961, enrollment in 2010 would have been 3%–6% higher.
We provide the first estimates of the effects of minimum wages on employment flows in the US labor market, identifying the impact by using policy discontinuities at state borders. We find that minimum wages have a sizable negative effect on employment flows but not on stocks. Separations and accessions fall among affected workers, especially those with low tenure. We do not find changes in the duration of nonemployment for separations or hires. This evidence is consistent with search models with endogenous separations.
Pharmacy today is a highly remunerated female-majority profession with a small gender earnings gap and low earnings dispersion. Using extensive surveys of pharmacists, as well as the US Census, American Community Surveys, and Current Population Surveys, we explore the gender earnings gap, penalty to part-time work, demographics of pharmacists relative to other college graduates, and evolution of the profession during the last half-century. Technological changes increasing substitutability among pharmacists, growth of pharmacy employment in retail chains and hospitals, and related decline of independent pharmacies reduced the penalty to part-time work and contribute to the narrow gender earnings gap in pharmacy.
We use a systems-based econometric method to show that classic and market-based tournament models are empirically distinguishable since the role of risk differs across these models. Implementing the method using a large, Finnish, worker-firm matched panel, we find support for classic tournaments given that promotions depend on relative performance, the firm’s wage structure is convex, promotion probabilities are decreasing in the number of competitors, performance is increasing in the wage spread, and workers and firms adjust their choice variables in opposite directions when the variance of the stochastic component of worker performance changes.
This paper estimates the impact of college teaching on students’ academic achievement and labor market outcomes using administrative data from Bocconi University matched with tax records. The estimation exploits the random allocation of students to teachers in a fixed sequence of compulsory courses. We find that teacher effects on students' academic and labor market outcomes are only mildly positively correlated and that the professors who are best at improving the academic achievement of their students are not always also the ones who boost their earnings the most. For the least able students, the correlation between the academic and labor market effectiveness of teachers turns out to be negative.
We provide a direct empirical test of Montgomery’s 1991 notion that firms hire workers through social ties of productive employees as these workers know others with high unobserved productivity. We focus on coworker networks and show that firms recruit workers with better military draft test scores but shorter schooling when hiring previous colleagues of current employees, suggesting that firms use these networks to attract workers with better qualities in hard-to-observe dimensions. Incumbent workers’ abilities predict the incidence, abilities, and wages of linked entrants. These results suggest that firms rely on the ability density of the studied networks when setting entry wages.
We show that officer training during the Swedish military service has a strong positive effect on the probability of attaining a managerial position later in life. The most intense type of officer training increases the probability of becoming a civilian manager by about 5 percentage points, or 75%. Officer training also increases educational attainment post–military service. We argue that the effect on civilian leadership could be due to the acquisition of leadership-specific skills during the military service, and we present suggestive evidence related to alternative mechanisms, such as signaling, networks, and training unrelated to leadership.
Understanding the employment dynamics of disadvantaged families is increasingly important. We estimate duration models describing these dynamics for disadvantaged single mothers and use them to conduct a rich set of counterfactual analyses. We use a misreporting model to correct for “seam bias,” the problem that too many transitions are reported between reference periods in panel data. We find effects of demographics, minimum wages, unemployment rates, and maximum welfare benefits, but not policy changes introduced through state welfare waivers, on employment dynamics. We find that two commonly used ad hoc methods of addressing seam bias perform substantially worse than our approach.
We use linked employer-employee data from Italy to explore the relationship between exports and wages. Exploiting the 1992 devaluation of the lira, we show that exporting firms both pay a wage premium above what their workers would earn in the outside labor market (the “rent-sharing” effect) and employ workers whose skills command a higher price after the devaluation (the “skill composition” effect). The latter only emerges once we allow for the value of workers’ skills to differ in the pre- and post-devaluation periods. We also document that the export wage premium is larger for workers with more export-related experience.
We show how the effect of grade retention varies by abilities, by timing of retention, and as time since retention elapses. Existing studies of grade retention are not well equipped to deal with the possibility that students retained at different grades differ in unobservable abilities (dynamic selection) and the effects of retention also vary by the student’s abilities and the timing of retention. We extend existing factor analytic methods for identifying treatment effects in such settings. Using ECLS-K data, we find evidence of dynamic selection into retention and of heterogeneous effects of retention by grade and unobservable abilities.
The government has attempted to ameliorate gaps in college access and success by providing need-based grants, but little evidence exists on the long-term impacts of such aid. We examine the effects of the Florida Student Access Grant (FSAG) using a regression-discontinuity strategy and exploiting the cut-off used to determine eligibility. We find that grant eligibility had a positive effect on attendance, particularly at public 4-year institutions. Moreover, FSAG increased the rate of credit accumulation and bachelor’s degree completion within 6 years, with a 22% increase for students near the eligibility cut-off. The effects are robust to sensitivity analysis.
Rising costs of public employee pension plans have caused fiscal stress in many cities and states and have led to calls for reform. To assess the economic consequences of plan changes, it is important to have reliable statistical models of employee retirement behavior. The authors estimate a structural model of teacher retirement using Missouri administrative panel data. A Stock-Wise option value model provides a good fit to the data and predicts well out-of-sample on the effects of pension enhancements during the 1990s. The structural model is used to simulate the effect of alternatives to the current defined benefit plan.
Expert performance is often evaluated assuming that good experts have good outcomes. We examine expertise in medicine and develop a model that allows for two dimensions of physician performance: decision making and procedural skill. Better procedural skill increases the use of intensive procedures for everyone, while better decision making results in a reallocation of procedures from fewer low-risk to high-risk cases. We show that poor diagnosticians can be identified using administrative data and that improving decision making improves birth outcomes by reducing C-section rates at the bottom of the risk distribution and increasing them at the top of the distribution.
We examine how students of varying abilities sort (and are sorted) into colleges of varying qualities. Our data indicate substantial amounts of both academic undermatch (high-ability students at low-quality colleges) and academic overmatch (low-ability students at high-quality colleges). Student application and enrollment decisions, rather than college admission decisions, drive most deviations from academic assortative matching. Financial constraints, information, and the public college options facing students all affect this sorting, but mainly via college quality rather than the match between ability and quality. More informed students attend higher-quality colleges, even when doing so involves overmatching.
We implement a regression discontinuity design using the continuous raw Advanced Placement (AP) exam scores, which are mapped into the observed 1–5 integer scores, for over 4.5 million students. Earning higher AP integer scores positively affects college completion and subsequent exam-taking. Specifically, attaining credit-granting integer scores increases the probability that a student will receive a bachelor’s degree within 4 years by 1–2 percentage points per exam. We also find that receiving a score of 3 over a 2 on junior year AP exams causes students to take between 0.06 and 0.14 more AP exams senior year.
Government employment programs for low-skilled workers typically emphasize rapid placement of participants into jobs, of which many are temporary-help jobs. Using data from Detroit’s welfare-to-work program and the Chernozhukov-Hansen instrumental variables quantile regression method, we find that neither direct-hire nor temporary-help job placements significantly affect the lower tail of the earnings distribution. In the upper tail, direct-hire placements yield sizable earnings increases for over half of participants, while temporary-help placements yield significant earnings losses at higher quantiles. Our results cast doubt on the efficacy of employment programs’ exclusive focus on rapid job placement and their widespread reliance on temporary-help placements.
We estimate a model where workers are heterogeneous both in their own productivity and in their ability to facilitate the productivity of others. We use data from professional basketball to measure the importance of peers in productivity because we have clear measures of output and members of a worker’s group change on a regular basis. Our empirical results highlight that productivity spillovers play an important role in team production. Despite this, we find that worker compensation is largely determined by own productivity with little weight given to productivity spillovers.
We investigate the relationship between housing wealth, property taxes, and elderly labor supply using longitudinal data from the Health and Retirement Survey spanning the recent boom/bust housing cycle. When combined with MSA-specific house price indexes, the data provide plausibly exogenous variation in housing wealth, identified through within-MSA renter/homeowner comparisons. Our findings suggest that elderly households respond to variation in housing wealth and property taxes in the predicted opposing directions, that wealth influences labor supply to a lesser extent than factors like health and marital status, and that the effect of housing wealth on labor supply varies by gender and age.
We study the effect of salience in the social security benefit system on labor earnings by exploiting kinks and notches in budget lines introduced by earnings testing and social security accrual mechanisms for 67- to 69-year-old workers in Norway. An earnings test had large effects on labor earnings, while an accrual system discontinuity had no discernible effects. We interpret the difference as likely to be caused by a lack of salience in the accrual incentives: agents are not able or willing to take into account the value of future benefit increases when considering the relevant rewards for working.
We investigate how workers’ performance is affected by the timing of wages in a real-effort experiment. In all treatments, agents earn the same wage sum, but wage increases are distributed differently over time. We find that agents work harder under increasing wage profiles if they do not know these profiles in advance. A profile that continuously increases wages by small amounts raises performance by about 15% relative to a constant wage. The effort reactions can be organized by a model in which agents reciprocally respond to wage impulses, comparing wages to an adaptive reference standard determined by the previous wage.
Algorithmically recommending workers to employers for the purpose of recruiting can substantially increase hiring: in an experiment conducted in an online labor market, employers with technical job vacancies that received recruiting recommendations had a 20% higher fill rate compared to the control. There is no evidence that the treatment crowded out hiring of nonrecommended candidates. The experimentally induced recruits were highly positively selected and were statistically indistinguishable from the kinds of workers employers recruit “on their own.” Recommendations were most effective for job openings that were likely to receive a smaller applicant pool.
This paper estimates peer effects in a university context where students are randomly assigned to sections. While students benefit from better peers on average, low-achieving students are harmed by high-achieving peers. Analyzing students’ course evaluations suggests that peer effects are driven by improved group interaction rather than adjustments in teachers’ behavior or students’ effort. Building on Angrist’s research, we further show that classical measurement error in a setting where group assignment is systematic can lead to a substantial overestimation of peer effects. However, when group assignment is random—like in our setting—peer effect estimates are biased toward zero.
We investigate the impact of local social pressure on firms’ firing decisions. Using linked employer-employee data, we show that secondary establishments located further away from headquarters have higher dismissal rates than those located closer. The effect of distance on dismissals is stronger, the greater the visibility of the firm in the local community of its headquarters and the larger the degree of selfishness of that community. We show that these findings can be explained by the social pressure exerted by the communities where firms’ headquarters are located, which induces CEOs to refrain from dismissing at short distance from their headquarters.
Social networks are important for finding jobs, but which ties are most useful? Granovetter has suggested that “weak ties” are more valuable than “strong ties,” since strong ties have redundant information, while weak ties have new information. Using 6 million Facebook users’ data, we find evidence for the opposite. We proxy for job help by identifying people who eventually work with a pre-existing friend. Using objective tie strength measures and our job help proxy, we find that most people are helped through one of their numerous weak ties but a single stronger tie is significantly more valuable at the margin.
This paper analyzes the US Lanham Act of 1940, a heavily subsidized and universal child care program administered during World War II. I first estimate its impact on maternal employment using a triple-differences model. I find that employment increased substantially following the introduction of the program. I then study children’s long-run labor market outcomes. Using Census data from 1970 to 1990, I assess well-being in a life-cycle framework by tracking cohorts of treated individuals throughout their prime working years. Results from difference-in-differences models suggest the program had persistent positive effects, with the largest benefits accruing to the most economically disadvantaged adults.
While a large literature has focused on the impact of parental investments on child cognitive development, very little is known about the role of the child’s own investments alongside that of the parents. By using the Child Development Supplement of the Panel Study of Income Dynamics, we model the cognitive production function for adolescents using an augmented value-added model and adopt an estimation method that takes account of unobserved child characteristics. We find that a child’s own investments made during adolescence matter more than the mother’s. Our empirical results appear to be robust to several sensitivity checks.
We provide evidence on the distributional effects of Quebec’s universal child care policy. Our analysis uncovers substantial policy relevant heterogeneity in the estimated effect of access to subsidized child care across two developmental score distributions for children from two-parent families. Whereas past research reported findings of negative effects on mothers and children from these families, igniting controversy, our estimates reveal a more nuanced image that formal child care can indeed boost developmental outcomes for children from some households: particularly disadvantaged single-parent households. We present suggestive evidence that the heterogeneity in policy effects is consistent with differences in home learning environments.
Competing explanations for the long-standing gap between black and white earnings attribute different weight to wage discrimination and human capital differences. Using new data on local school quality, we find that human capital played a predominant role in determining 1940 wage and occupational status gaps in the South despite entrenched racial discrimination in civic life and the lack of federal employment protections. The resulting wage gap coincides with the higher end of the range of estimates from the post–Civil Rights era. We estimate that truly “separate but equal” schools would have reduced wage inequality by 29%–48%.
Private equity firms are often criticized for laying off workers, but the evidence on who loses their jobs and why is scarce. This paper argues that explanations for job polarization also explain layoffs after private equity buyouts. Buyouts reduce agency problems, which triggers automation and offshoring. Using rich employer-employee data, we show that buyouts generally do not affect unemployment incidence. However, unemployment incidence doubles for workers in less productive firms who perform routine or offshorable job tasks. Job polarization is also much more marked among workers affected by buyouts than for the economy at large.
We provide evidence on the distributional effects of Quebec’s universal child care policy. Our analysis uncovers substantial policy relevant heterogeneity in the estimated effect of access to subsidized child care across two developmental score distributions for children from two-parent families. Whereas past research reported findings of negative effects on mothers and children from these families, igniting controversy, our estimates reveal a more nuanced image that formal child care can indeed boost developmental outcomes for children from some households: particularly disadvantaged single-parent households. We present suggestive evidence that the heterogeneity in policy effects is consistent with differences in home learning environments.
We study the impact of a student’s ordinal rank in a high school cohort on educational attainment several years later. To identify a causal effect, we compare multiple cohorts within the same school, exploiting idiosyncratic variation in cohort composition. We find that a student’s ordinal rank significantly affects educational outcomes later in life. Students with a higher rank are significantly more likely to finish high school and to attend college. Exploring potential channels, we find that students with a higher rank have higher expectations about their future career, as well as a higher perceived intelligence.
Does access to 4-year colleges affect degree completion for students who would otherwise attend 2-year colleges? Admission to Georgia’s 4-year public sector requires minimum SAT scores. Regression discontinuity estimates show that access to this sector increases 4-year college enrollment and college quality, largely by diverting students from 2-year colleges. Access substantially increases bachelor’s degree completion rates for these relatively low-skilled students. SAT-retaking behavior suggests students value access to 4-year public colleges, though perhaps less than they should. Our results imply that absolute college quality matters more than match quality, and they suggest potential unintended consequences of free community college proposals.
Recently Gregory Clark and coauthors have argued that social mobility rates are constant across countries and lower than traditionally estimated, hypothesizing that prior estimates of intergenerational persistence are attenuated from focusing on a single proxy for underlying status. We test this proposition by incorporating multiple proxy measures into a “least-attenuated” estimate of persistence for Sweden and conducting a Sweden–United States comparison. We find no evidence of substantial bias in prior estimates or of similarity across countries. We further extend our analysis to mothers, finding that additional measures improve the ability to capture transmission from mothers to both sons and daughters.
We study the impact of a student’s ordinal rank in a high school cohort on educational attainment several years later. To identify a causal effect, we compare multiple cohorts within the same school, exploiting idiosyncratic variation in cohort composition. We find that a student’s ordinal rank significantly affects educational outcomes later in life. Students with a higher rank are significantly more likely to finish high school and to attend college. Exploring potential channels, we find that students with a higher rank have higher expectations about their future career, as well as a higher perceived intelligence.
Recently Gregory Clark and coauthors have argued that social mobility rates are constant across countries and lower than traditionally estimated, hypothesizing that prior estimates of intergenerational persistence are attenuated from focusing on a single proxy for underlying status. We test this proposition by incorporating multiple proxy measures into a “least-attenuated” estimate of persistence for Sweden and conducting a Sweden–United States comparison. We find no evidence of substantial bias in prior estimates or of similarity across countries. We further extend our analysis to mothers, finding that additional measures improve the ability to capture transmission from mothers to both sons and daughters.
I use Swedish registry data to estimate lifetime earnings returns to college and how they vary with observed and unobserved characteristics. The richness of the data also allows me to examine heterogeneity with respect to cognitive and noncognitive ability and parental earnings. Local instrumental variable analysis is used to recover marginal and average treatment effects under selection on gains. The findings support the notion of self-selection, but mainly on observed characteristics. Returns vary little with parental earnings but substantially with respect to both cognitive and noncognitive ability, thus suggesting important complementarities between formal schooling and informal skills.
This paper investigates the role of mechanical ability as a determinant of schooling decisions and labor market outcomes. Using a Roy model with multiple unobserved abilities and longitudinal data from NLSY79, we find that this ability has a positive effect on overall earnings. However, in contrast to cognitive and socioemotional abilities, mechanical ability reduces the likelihood of 4-year college attendance. The rationale for this asymmetry comes from its large estimated impact on earnings conditional on not attending a 4-year college. Our findings highlight the importance of moving beyond the one-size-fits-all discourse to offer individuals alternative educational pathways to successful careers.
Using Norwegian population panel data with nearly career-long earnings histories, we provide a detailed picture of the causal relationship between schooling and earnings over the life cycle. To address selection bias, we apply three commonly used identification strategies. We find that additional schooling gives higher lifetime earnings and a steeper age-earnings profile, in line with predictions from human capital theory. Our preferred estimates imply an internal rate of return of around 11%, suggesting that it was highly profitable to acquire additional schooling. Our analysis reveals that Mincer regressions dramatically understate the returns to schooling because key assumptions are violated.
This paper studies customer discrimination against Arab workers in the Israeli market for labor-intensive services. Relying on surveys, field data, and a natural experiment, we provide evidence consistent with Becker’s customer discrimination model. First, a significant share of Jewish customers prefer to receive labor-intensive services from firms employing Jewish rather than Arab workers; these preferences are most strongly linked to concerns for personal safety. Second, customer preferences affect firms’ hiring decisions. Third, firms employing Arab workers charge significantly lower service prices than those employing only Jewish workers.
Leisure externalities across households have important implications for labor market regulations but have proven very difficult to identify. This paper exploits the unique features of school holidays and paid leave regulations in France to show that exogenous increases in the amount of leisure time enjoyed by workers living with children induce very significant increases in the demand for leisure of workers living in other households. We also provide evidence that these cross effects are driven by complementarities in nonmarket time rather than workplace norms or workplace externalities.
We provide the first evidence of the magnitude and consequences of the Americanization of migrants’ names in the early twentieth century. We construct a longitudinal data set of naturalization records, tracking migrants and their naming choices over time. We consistently find that migrants who Americanized their names experienced larger occupational upgrading than those who did not. Name Americanization embodies an intention to assimilate among low-skilled migrants and reveals the existence of preferences for American names within the labor market. We conclude that the trade-off between individual identity and labor market success was present then as it is today.
We propose a general framework for determining the extent of measurement error bias in ordinary least squares and instrumental variable (IV) estimators of linear models while allowing for measurement error in the validation source. We apply this method by validating Survey of Health, Ageing and Retirement in Europe data with Danish administrative registers. Contrary to most validation studies, we find that measurement error in income is classical once we account for imperfect validation data. We find nonclassical measurement error in schooling, causing a 38% amplification bias in IV estimators of the returns, with important implications for the program evaluation literature.
Most labor market search models ignore the fact that decisions are often made at the household level. We fill this gap by developing and estimating a household search model with on-the-job search and labor supply. We find that ignoring the household as a decision-making unit has relevant empirical consequences. In estimation, the individual search model implies gender wage offer differentials almost twice as large as the household search model. In the application, the individual search model implies female lifetime inequality 30% lower than the household search model. Labor market policy effects on lifetime inequality are also sensitive to the specification.
It is well known that unless worker-firm match quality is controlled for, reduced-form estimates of returns to firm tenure will be biased. In this paper, we show that there is a further pervasive source of bias, namely, the comovement of firm employment and firm wages. We argue that firm-year fixed effects must be used to eliminate this bias. Estimates from two large-panel data sets from Germany and Portugal show that the bias is empirically important. Finally, we show that the results extend to tenure correlates used in macroeconomics, such as the minimum unemployment rate since joining the firm.
We build and estimate a nonstationary structural job search model that incorporates the main stylized features of a typical job search monitoring scheme in unemployment insurance (UI) and acknowledges that search effort and requirements are measured imperfectly. On the basis of Belgian data, monitoring is found to affect search behavior only weakly because assessments were scheduled late and infrequently, the monitoring technology was not sufficiently precise, and lenient Belgian UI results in caseloads that are less responsive to incentives than elsewhere. Simulations show how changing the aforementioned design features can enhance effectiveness and that precise monitoring is key in this.
We use a field experiment to show that referral-based hiring has the potential to disadvantage qualified women, highlighting another potential channel behind gender disparities in the labor market. Through a recruitment drive for a firm in Malawi, we look at men’s and women’s referral choices under different incentives and constraints. We find that men systematically refer few women, despite being able to refer qualified women when explicitly asked for female candidates. Performance pay also did not alter men’s tendencies to refer men. In addition, women did not refer enough high-quality women to offset men’s behavior.
How does firm value change in response to a minimum wage hike? This paper exploits the announcement of a big change in the UK minimum wage that was both totally unanticipated and free of uncertainty. The stock market response to this is examined in an event study setting. The analysis uncovers significant falls in the stock market value of low-wage firms. In light of this finding, the paper concludes by discussing magnitudes of response, including longer-term modes of firm adjustment to the cost shock induced by the minimum wage hike.
Surveying employment-related newspaper advertisements over several centuries, we identify four eras (neither workers nor firms posted ads, mostly workers posted ads, mostly firms posted ads, and both parties regularly posted ads). These eras can be understood in the context of the equilibrium of a matching model that incorporates strategic interactions by both sides of the labor market. Potential explanations for transitions across eras include increasing literacy rates, expansion of social insurance programs, growth in the labor force and firm size, reduction in mobility costs and search frictions, and the internet.
This paper explores the relationship among health at birth, academic outcomes, and the potential role of parental investments using administrative panel data from Chile. Using detailed data on parental investments, we find that investments are compensatory regarding initial health, but not across twins. Twins fixed effects models estimate a persistent effect of birth weight on academic achievement, while ordinary least squares and siblings fixed effects models find this relationship to decline over time. We view these findings in the context of a model of human capital accumulation where parental investments respond to initial endowments and spill over to siblings.
This paper studies the labor market returns to higher-education quality for low-skilled students. Using a regression discontinuity design, we compare students who marginally pass and marginally fail the French high school exit exam on the first attempt. Threshold crossing leads to an improvement in quality but has no effect on quantity of higher education pursued. Specifically, students who marginally pass are more likely to enroll in STEM majors and postsecondary institutions with better peers. Marginally passing also increases earnings by 12.5% at the ages of 27–29.
The use of affirmative action policies to promote female employment remains debated. Do affirmative action policies attract female applicants, and does that come at the expense of deterring highly qualified male applicants? In three field experiments in Colombia, we compare job seekers who are informed of affirmative action selection criteria before they apply with those who are told after applying. We find that the gains in attracting female applicants far outweigh the losses in male applicants. Moreover, our results indicate that affirmative action does not decrease the quality of the top 15th percentile of the pool of applicants.
We study the migration behavior of displaced workers and find that job displacement increases regional mobility. We find, however, that noneconomic factors, such as family ties, are very important for the migration decision and that there is strong heterogeneity in outcomes. We find large income losses for workers who move to regions where they have family or to rural areas, while, for example, rural to urban movers realize a significant long-term earnings increase. We also find that life events related to fertility, divorce, and new relationships correlate with mobility after job loss and may partly explain the large income losses.
We investigate the claim that supervisors do not differentiate enough between high- and low-performing employees when evaluating performance. In a first step, this claim is illustrated in a formal model showing that rating compression reduces performance and subsequent bonus payments. The effect depends on the precision of performance information and may be reversed when cooperation is important. We then investigate panel data spanning different banks and find that stronger differentiation indeed increases subsequent bonus payments. The effect tends to be larger for larger spans of control and at higher hierarchical levels but is reversed at the lowest levels.
We use 20 years of Italian administrative panel data to identify the role of ability in migration from south to north. Using a novel iterative estimation method for a switching regression model with the same worker-specific source of unobserved heterogeneity in selection and outcome equations, we find that returns to ability are lower in the north than the south. Accordingly, migrants are drawn from the lower half of the ability distribution. Higher wages and employment rates each account for around half the gains from migration. Return migration reinforces the original negative selection of migrants, consistent with migrants facing considerable uncertainty.
I evaluate the local economic impacts of contractions in US military personnel between 1988 and 2000. I propose a novel empirical strategy combining the synthetic control and instrumental variables methods and estimate the causal effects on the equilibrium quantities and prices of local labor, housing, and product markets. Contractions in military personnel substantially reduced local civilian employment; however, local populations adjusted quickly, mainly through reduced in-migration, resulting in small changes in wages and large declines in rental prices. Relating these empirical findings to a simple spatial equilibrium model, I show that the welfare cost for workers is small.
The number of workplace sex discrimination charges filed with the Equal Employment Opportunity Commission approaches 25,000 annually. Do the subsequent judicial proceedings suffer from a discriminatory gender bias? Exploiting random assignment of federal district court judges to civil cases, I find that female plaintiffs filing workplace sex discrimination claims are substantially more likely to settle and win compensation whenever a female judge is assigned to the case. Additionally, female judges are 15 percentage points less likely than male judges to grant motions filed by defendants, which suggests that final negotiations are shaped by the emergence of the bias.
Previous studies report a range of estimates for the response of female labor supply and childcare attendance to childcare prices. We shed new light on these questions using a policy reform that raises the price of public day care. After the reform, children are 8 percentage points less likely to attend public day care, which implies a compensated price elasticity of −0.6. There is little labor supply response in the full sample, although there are declines for vulnerable subgroups. Spillover effects on older siblings and fertility decisions show that the policy affects the whole household, not just targeted family members.
I study how teachers’ assigned job tasks—the practices they are asked to use in the classroom—affect the returns to math skills in teacher productivity. The results demonstrate the importance of distinguishing between workers’ skills and job tasks. I examine a randomized trial of different approaches to teaching math, each codified in a set of day-to-day tasks. Teachers were tested to measure their math skills. Teacher productivity—measured by student test scores—is increasing in math skills when teachers use conventional “direct instruction”: explaining and modeling rules and procedures. The relationship is weaker, perhaps negative, for newer “student-led” methods.
This paper examines the role of teacher gender in education production. We extend student outcomes from traditionally focused academic achievement to noncognitive outcomes. Using a representative survey of middle school students in China, we focus on schools where student-teacher assignments are random. Our results show that having a female teacher raises girls’ test scores and improves their mental status and social acclimation relative to those of boys. There is evidence that female teachers provide feedback differently to girls and boys and that having a female teacher alters girls’ beliefs about commonly held gender stereotypes and increases their motivation to learn.
We estimate the returns to college using administrative data on both college enrollment and earnings. Exploiting that colleges dismiss low-performing students on the basis of exact GPA cutoffs, we use a regression discontinuity design to estimate the earnings impacts of college. Dismissal leads to a short-run increase in earnings and tuition savings, but the future fall in earnings is sufficiently large that 8 years after dismissal, persisting students have already recouped their up-front investment with an internal rate of return of 4.1%. We provide a variety of evidence that manipulation of the running variable does not drive our results.
We estimate whether students update the colleges to which they consider applying in response to large, unanticipated information shocks generated by the release of SAT scores—a primary factor in admission decisions. Exploiting population data on the timing of college selection and a policy that induces students to choose colleges prior to taking the exam, we find that students update their portfolios in terms of selectivity, tuition, and sector. However, the magnitude of updating is too modest to significantly reduce unexplained variation across students, suggesting that nonacademic factors are the dominant determinants of college match.
The number of workplace sex discrimination charges filed with the Equal Employment Opportunity Commission approaches 25,000 annually. Do the subsequent judicial proceedings suffer from a discriminatory gender bias? Exploiting random assignment of federal district court judges to civil cases, I find that female plaintiffs filing workplace sex discrimination claims are substantially more likely to settle and win compensation whenever a female judge is assigned to the case. Additionally, female judges are 15 percentage points less likely than male judges to grant motions filed by defendants, which suggests that final negotiations are shaped by the emergence of the bias.
Previous studies report a range of estimates for the response of female labor supply and childcare attendance to childcare prices. We shed new light on these questions using a policy reform that raises the price of public day care. After the reform, children are 8 percentage points less likely to attend public day care, which implies a compensated price elasticity of −0.6. There is little labor supply response in the full sample, although there are declines for vulnerable subgroups. Spillover effects on older siblings and fertility decisions show that the policy affects the whole household, not just targeted family members.
I study how teachers’ assigned job tasks—the practices they are asked to use in the classroom—affect the returns to math skills in teacher productivity. The results demonstrate the importance of distinguishing between workers’ skills and job tasks. I examine a randomized trial of different approaches to teaching math, each codified in a set of day-to-day tasks. Teachers were tested to measure their math skills. Teacher productivity—measured by student test scores—is increasing in math skills when teachers use conventional “direct instruction”: explaining and modeling rules and procedures. The relationship is weaker, perhaps negative, for newer “student-led” methods.
This paper examines the role of teacher gender in education production. We extend student outcomes from traditionally focused academic achievement to noncognitive outcomes. Using a representative survey of middle school students in China, we focus on schools where student-teacher assignments are random. Our results show that having a female teacher raises girls’ test scores and improves their mental status and social acclimation relative to those of boys. There is evidence that female teachers provide feedback differently to girls and boys and that having a female teacher alters girls’ beliefs about commonly held gender stereotypes and increases their motivation to learn.
We estimate the returns to college using administrative data on both college enrollment and earnings. Exploiting that colleges dismiss low-performing students on the basis of exact GPA cutoffs, we use a regression discontinuity design to estimate the earnings impacts of college. Dismissal leads to a short-run increase in earnings and tuition savings, but the future fall in earnings is sufficiently large that 8 years after dismissal, persisting students have already recouped their up-front investment with an internal rate of return of 4.1%. We provide a variety of evidence that manipulation of the running variable does not drive our results.
We estimate whether students update the colleges to which they consider applying in response to large, unanticipated information shocks generated by the release of SAT scores—a primary factor in admission decisions. Exploiting population data on the timing of college selection and a policy that induces students to choose colleges prior to taking the exam, we find that students update their portfolios in terms of selectivity, tuition, and sector. However, the magnitude of updating is too modest to significantly reduce unexplained variation across students, suggesting that nonacademic factors are the dominant determinants of college match.
Despite strong demand for attending high schools with better peers, there is mixed evidence on whether doing so improves academic outcomes. We estimate the cognitive returns to high school quality by comparing the college entrance exam scores of students in China who were barely above and below high school admission thresholds. Results indicate that while peer quality improves significantly across all sets of admission cutoffs, the only increase in performance occurs from attending tier 1 high schools. Further evidence suggests the returns to high school quality are driven by teacher quality rather than peer quality or class size.
We exploit rules of class formation to identify the causal effect of increasing the number of immigrants in a classroom on natives’ test scores, keeping class size and quality of the two types of students constant (pure ethnic composition [PEC] effect). We explain why this is a relevant policy parameter although it has been neglected so far. The PEC effect is sizable and negative (16% of a standard deviation) on language and math scores. For first-generation immigrants, it is more negative (30% of a standard deviation). Estimates that cannot control for endogenous adjustments implemented by principals are instead considerably smaller.
We develop and estimate an equilibrium model of ability tracking in which schools decide how to allocate students into ability tracks and choose track-specific teacher effort; parents choose effort in response. The model is estimated using Early Childhood Longitudinal Study data. Our model suggests that a counterfactual ban on tracking would benefit low-ability students but hurt high-ability students. Ignoring effort adjustments would significantly overstate the impacts. We then illustrate the trade-offs involved when considering policies that affect schools’ tracking decisions. Setting proficiency standards to maximize average achievement would lead schools to redistribute their inputs from low- to high-ability students.
This paper documents differences in lifetime earnings risk across occupations due to wage risk, employment risk, and midcareer occupation changes, which can mitigate other shocks. Total lifetime earnings risk varies considerably across starting occupation, and riskier occupations pay more in expectation. The average worker would give up at least 9% of total lifetime earnings in the least certain occupation to reduce the riskiness of that occupation to the level of the safest starting occupation. The insurance value of occupational mobility is quantitatively important. With mobility, workers absorb only 60%, on average, of negative occupation-specific wage shocks.
Identifying policy-relevant treatment effects from randomized experiments requires the absence of spillovers between participants and nonparticipants (SUTVA) or variation in observed treatment levels. We find that SUTVA is violated for a Danish activation program for unemployed workers. Using a difference-in-differences model, we show that nonparticipants in the experiment regions find jobs more slowly after the introduction of the program than workers in other regions. We estimate an equilibrium search model to identify the policy-relevant treatment effect. A large-scale rollout of the program is shown to decrease welfare, while a standard partial microeconometric cost-benefit analysis concludes the opposite.
Using 4 decades of variation in the federal and state Earned Income Tax Credit (EITC), we estimate the impact of exposure to EITC expansions in childhood on education and employment outcomes in adulthood. Reduced-form results suggest that an additional $1,000 in EITC exposure when a child is 13–18 years old increases the likelihood of completing high school (1.3%), completing college (4.2%), and being employed as a young adult (1.0%) and earnings by 2.2%. Our analysis reveals that the primary channel through which the EITC improves these outcomes is increases in pretax family earnings.
Most research on online education compares student performance across online and in-person formats. We provide the first evidence that online education affects the number of people pursuing education by studying Georgia Tech’s Online MS in Computer Science, the earliest model offering a highly ranked degree at low cost. A regression discontinuity in admission shows that program access substantially increases overall educational enrollment. By satisfying large, previously unmet demand for midcareer training, this program will boost annual production of American computer science master’s degrees by at least 7%. Online options may open opportunities for populations who would not otherwise pursue education.
We study the role of shocks to parental income in determining the labor market outcomes of children entering the labor market. We find that a child whose parent loses a job prior to the child’s labor market entry is, on average, induced to work 9% more in the 3 years following labor market entry than a child whose parents lose a job after the child’s entry. This effect is concentrated on the extensive margin and decreases in magnitude over time. We find no evidence that these shocks affect the quality of the job that entrants find.
Much evidence suggests that having more education leads to higher earnings in the labor market. However, there is little evidence about whether having more education causes employees to experience lower earnings volatility or shelters them from the adverse effects of recessions. We use a large British administrative panel data set to study the impact of the 1972 increase in compulsory schooling on earnings volatility over the life cycle. Our estimates suggest that men exposed to the law change subsequently had lower earnings variability and less procyclical earnings. However, there is little evidence that education affects earnings volatility of older men.
This paper shows that job mobility is a valuable channel that employed workers use to mitigate bad labor market shocks. I estimate a model of wage dynamics jointly with a dynamic model of employment and job mobility. The key feature of the model is the specification of wage shocks at the worker-firm-match level, for workers can respond to these shocks by changing jobs. I find that, relative to the variance of individual-level shocks, the variance of match-level shocks is large and the consequent value of job mobility is substantial, particularly for workers whose match-specific wages are low.
In many professional service firms, new associates work long hours while competing in up-or-out promotion contests. Our model explains why. We argue that the productivity of skilled partners in professional service firms (e.g., law, consulting, investment banking, and public accounting) is quite large relative to the productivity of their peers who are competent and experienced but not well suited to the partner role. Therefore, these firms adopt personnel policies that facilitate the identification of new partners. In our model, both heavy workloads and up-or-out rules serve this purpose.