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Abstract: My goal here is to provide some synthesis of recent results regarding unobserved heterogeneity in nonlinear and semiparametric models, using as a context Matzkin (2005a) and Browning and Carro (2005), which were the papers presented in the Modeling Heterogeneity session of the 2005 Econometric Society World Meetings in London. These papers themselves consist of enormously heterogeneous content, ranging from high theory to Danish milk, which I will attempt to homogenize. The overall theme of this literature is that, in models of individual economic agents, errors at least partly reflect unexplained heterogeneity in behavior, and hence in tastes, technologies, etc.,. Economic theory can imply restrictions on the structure of these errors, and in particular can generate nonadditive or nonseparable errors, which has profound implications for model specification, identification, estimation, and policy analysis.
649. Peter Gottschalk and Minh Huynh (U.S. Social Security Administration), "Are Earnings Inequality and Mobility Overstated? The Impact of Non-Classical Measurement Error" (08/2006: 681 Kb, PDF format)
Abstract: Measures of inequality and mobility based on self-reported earnings reflect attributes of both the joint distribution of earnings across time and the joint distribution of measurement error and earnings. While classical measurement error would increase measures of inequality and mobility there is substantial evidence that measurement error in earnings is not classical. In this paper we present the analytical links between non-classical measurement error and measures of inequality and mobility. The empirical importance of non-classical measurement error is explored using the Survey of Income and Program Participation matched to tax records. We find that the effects of non-classical measurement error are large. However, these non-classical effects are largely offsetting when estimating mobility. As a result SIPP estimates of mobility are similar to estimates based on tax records, though SIPP estimates of inequality are smaller than estimates based on tax records.
Abstract: The paper derives the optimal organizational response of a bank (the principal) which faces a risk of collusion between the credit manager (the agent) and the credit-seeking firms. The bank can deter collusion either through internal incentives or by distorting the credit contracts. The model thus explicitly takes into account the interaction between internal (collusion) risks and external (default) risks in the optimal design of the internal organization as well as of the credit contracts. We investigate this question in two settings. In the first one, we adopt the standard assumption that the agent is always willing to collude (is corruptible) if that increases his monetary payoff. In the second one, he is corruptible with some probability only, and honest otherwise. A novel feature of our approach is to allow for screening among corruptible and honest agents. We find that if the probability that the agent is honest is sufficiently large, collusion occurs in equilibrium.
647. Robert G. Murphy and Nicholas G. Tresp (UBS Investment Bank), "Government Policy and the Effectiveness of Foreign Aid" (rev. 08/2006: 248 Kb, PDF)
Abstract: This paper reconsiders the role of economic policy in determining the effectiveness of foreign aid for generating economic growth in developing countries. We update and modify the data set originally used by Burnside and Dollar (2000) in order to more fully consider the critique presented by Easterly et al. (2004). Our findings suggest that the relationship among foreign aid, government policy, and economic growth is tenuous and depends importantly on the subset of countries included in the analysis. Good policy enhances the effectiveness of foreign aid in spurring growth when we use the original set of countries included in Burnside and Dollar, but this relationship disappears for an expanded set of countries. Because the relationship among aid, policy, and growth is likely to be nonlinear, we present an alternative probit model emphasizing growth thresholds. Our results from this alternative analysis confirm the conclusions of Easterly et al., finding little support for the view that good policy increases the probability that foreign aid contributes to growth.
646. Christopher F Baum, Mustafa Caglayan (University of Sheffield) and Oleksandr Talavera (DIW Berlin), "Uncertainty Determinants of Firm Investment" (02/2007: 140 Kb, PDF; published, Economics Letters, 98:3, 282-287, 2008)
Abstract: We investigate the impact of measures of uncertainty on firms' capital investment behavior using a panel of U.S. firms. Increases in firm-specific and CAPM-based measures have a significant negative impact on investment spending, while market-based uncertainty has a positive impact.
645. Zvi Safra (Tel Aviv University) and Uzi Segal, "Calibration Results for Non-Expected Utility Theories" (07/2006: 204 Kb, PDF)
Abstract: Rabin proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin's arguments strongly depend on expected utility theory, but we show that similar arguments apply to almost all non-expected utility theories.
644. Marvin Kraus, "Returns to Scale in Networks" (07/2006: 2.6 Mb, PDF)
643. Ingela Alger and Jörgen W. Weibull (Stockholm School of Economics), "Altruism and Climate" (07/2006: 560 Kb, PDF)
Abstract: Recognizing that individualism, or weak family ties, may be favorable to economic development, we ask how family ties interact with climate to determine individual behavior and whether there is reason to believe that the strength of family ties evolves differently in different climates. For this purpose, we develop a simple model of the interaction between two individuals who are more or less altruistic towards each other. Each individual exerts effort to produce a consumption good under uncertainty. Outputs are observed and each individual chooses how much, if any, of his or her output to share with the other. We analyze how the equilibrium outcome depends on altruism and climate for ex ante identical individuals. We also consider (a) "coerced altruism," that is, situations where a social norm dictates how output be shared, (b) the effects of insurance markets ,and (c) the role of institutional quality. The evolutionary robustness of altruism is analyzed and we study how this depends on climate.
Abstract: A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon.
Abstract: We present an empirical investigation of the hypotheses that exchange rate volatility may have an impact on both the volume and variability of trade flows by considering a broad set of industrial countries' bilateral real trade flows over the period 1980-1998. Similar to the findings of earlier theoretical and empirical research, our first set of results shows that the impact of exchange rate uncertainty on trade flows is indeterminate. Our second set of results provides new and novel findings that exchange rate volatility has a consistent positive and significant effect on the volatility of bilateral trade flows, helping us better understand macroeconomic volatility.
640. Tayfun Sˆnmez and M. Utku ‹nver (University of Pittsburgh), "Kidney Exchange with Good Samaritan Donors: A Characterization" (02/2006: 260 Kb, PDF)
Abstract: We analyze mechanisms to kidney exchange with good samaritan donors where exchange is feasible not only among donor-patient pairs but also among such pairs and non-directed alturistic donors. We show that you request my donor-I get your turn mechanism (Abdulkadiroglu and Sonmez [1999]) is the only mechanism that is Pareto efficient, individually rational, strategy-proof, weakly neutral and consistent.
639. Atila Abdulkadiroglu (Columbia University), Parag A. Pathak (Harvard University), Alvin E. Roth (Harvard University), Tayfun Sˆnmez, "Changing the Boston School Choice Mechanism" (01/2006: 1.1 Mb, PDF)
Abstract: In July 2005 the Boston School Committee voted to replace the existing Boston school choice mechanism with a deferred acceptance mechanism that simplifies the strategic choices facing parents. This paper presents the empirical case against the previous Boston mechanism, a priority matching mechanism, and the case in favor of the change to a strategy-proof mechanism. Using detailed records on student choices and assignments, we present evidence both of sophisticated strategic behavior among some parents, and of unsophisticated strategic behavior by others. We find evidence that some parents pay close attention to the capacity constraints of different schools, while others appear not to. In particular, we show that many unassigned students could have been assigned to one of their stated choices with a different strategy under the current mechanism. This interaction between sophisticated and unsophisticated players identifies a new rationale for strategy-proof mechanisms based on fairness, and was a critical argument in Boston's decision to change the mechanism. We then discuss the considerations that led to the adoption of a deferred acceptance mechanism as opposed to the (also strategy-proof) top trading cycles mechanism.
638. Christopher F Baum, Mustafa Caglayan (University of Sheffield) and Oleksandr Talavera (Aberdeen Business School), "On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty" (rev. 04/2008: 211 Kb, PDF; previously circulated as "Firm Investment and Financial Frictions")
Abstract: We investigate the analytical and empirical linkages between cash flow, uncertainty and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow.
637. Christopher F Baum, Dorothea Schäfer (DIW Berlin) and Oleksandr Talavera (DIW Berlin), "The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany" (rev. 08/2006: 188 Kb, PDF)
Abstract: This paper investigates the link between the optimal level of non-financial firms' liquid assets and industry-level uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as industry-level uncertainty increases the firm will increase its optimal level of liquidity. We test this hypothesis using a panel of German firms drawn from the Bundesbank's balance sheet database and show that greater uncertainty at the industry level causes firms to increase their cash holdings. The strength of these effects differ among subsamples of the firms with different characteristics.
636. Christopher F Baum, Dorothea Schäfer (DIW Berlin) and Oleksandr Talavera (DIW Berlin), "The Effects of Short-Term Liabilities on Profitability: A Comparison of German and US Firms" (rev. 04/2007: 164 Kb, PDF)
Abstract: The paper adopts the methodology of the empirical finance literature to analyze a common question that liability maturity structure has an impact on firm performance. A comparison is made between two countries, the US and Germany, with different types of financial systems. We find that German firms that rely more heavily on short-term liabilities are likely to be more profitable. The link between liability maturity structure and profitability does not appear in the results from the US sample, which reflects the importance of institutional factors.
635. Mariano Kulish (Reserve Bank of Australia), "Should Monetary Policy use Long-term Rates?" (11/2005: 760 Kb, PDF)
Abstract: This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. It is shown that in both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high.
Abstract: This paper investigates the link between the optimal level of non-financial firms' liquid assets and uncertainty. We develop a partial equilibrium model of precautionary demand for liquid assets showing that firms change their liquidity ratio in response to changes in either macroeconomic or idiosyncratic uncertainty. We test this proposition using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1993-2002. The results indicate that firms increase their liquidity ratios when macroeconomic uncertainty or idiosyncratic uncertainty increases.
Abstract: Rabin proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin's arguments strongly depend on expected utility theory, but we show that similar arguments apply to almost all non-expected utility theories and even to theories dealing with uncertainty. The set of restrictions needed in order to avoid such absurd behavior may suggest that the assumption of universality of preferences over final wealth is too strong.
632. J. Michael Finger (World Bank) and Andrei Zlate, "Antidumping: Prospects for Discipline from the Doha Negotiations" (11/2005: 272 Kb, PDF; published, Journal of World Investment and Trade, 6:4, 2005)
Abstract: Maintaining an economically sensible trade policy is often a matter of managing pressures for exceptions--for protection for a particular industry. Good policy becomes a matter of managing interventions so as to strengthen the politics of openness and liberalization--of avoiding rather than of imposing such restrictions in the future. In the 1990s, antidumping measures emerged as the instrument of choice to accomplish this, despite the fact that they satisfy neither of these criteria. Its economics is ordinary protection; it considers the impact on the domestic interests that will benefit while excluding the domestic interests that will bear the costs. Its unfair trade rhetoric undercuts rather than supports a policy of openness. As to what would be better, the key issue in a domestic policy decision should be the impact on the domestic economy. Antidumping reform depends less on the good will of WTO delegates toward the "public interest" than on those business interests that are currently treated by trade law as bastards insisting that they be given the same standing as the law now recognizes for protection seekers.
631. Luigi Benfratello (Università di Torino), Fabio Schiantarelli and Alessandro Sembenelli (Università di Torino), "Banks and Innovation: Microeconometric Evidence on Italian Firms" (rev. 06/2007: 328 Kb, PDF)
Abstract: This paper contains a detailed empirical investigation of the effect of local banking development on firms' innovative activities, using a rich data set on innovation at the firm level for a large number of Italian firms over the 90's. There is evidence that banking development affects the probability of process innovation, particularly for small firms and for firms in high(er) tech sectors and in sectors more dependent upon external finance. There is also some evidence that banking development reduces the cash flow sensitivity of fixed investment spending, particularly for small firms, and that it increases the probability they will engage in R&D.
630. Francis M. McLaughlin, "Economics as Vocation: Lessons for the Church in the 21st Century" (11/2005: 144 Kb, PDF)
629. Matteo Iacoviello, "Household Debt and Income Inequality, 1963-2003" (rev. 10/2007: 553 Kb, PDF; forthcoming, Journal of Money, Credit and Banking)
Abstract: I construct an economy with heterogeneous agents that mimics the time-series behavior of the earnings distribution in the United States from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks that drive the model using data on income inequality, aggregate income, and measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt, and the diverging patterns in consumption and wealth inequality over time. While business cycle fluctuations can account for the short-run changes in household debt, its prolonged rise of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.
Abstract:The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment.† Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets.† Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
627. Richard Arnott, "Spatial Competition between Parking Garages and Downtown Parking Policy" (09/2005: 437 Kb, PDF)
Abstract: This paper looks at parking policy in dense urban districts ("downtown"), where spatial competition between parking garages is a key feature. The paper has four parts. The first looks at the "parking garage operator's problem". The second derives the equilibrium in the parking garage market when there is no on-street parking, compares the equilibrium to the social optimum, and examines parking policy in this context. The third considers how the presence of on-street parking alters the analysis, and the fourth extends the analysis to include mass transit.
626. Kevin E. Cahill (Tinari Economics Group), Michael D. Giandrea (U.S. Bureau of Labor Statistics) and Joseph F. Quinn, "Are Traditional Retirements a Thing of the Past? New Evidence on Retirement Patterns and Bridge Jobs" (09/2005: 372 Kb, PDF)
Abstract: This paper investigates whether permanent, one-time retirements are coming to an end just as the trend towards earlier and earlier retirements did nearly 20 years ago. We explore how common bridge jobs are among today's retirees, and how uncommon traditional retirements have become. Methods: Using data from the Health and Retirement Study (HRS), we explore the work histories and retirement patterns of a cohort of retirees aged 51 to 61 in 1992 over a ten-year time period in both a cross-sectional and longitudinal context. Bridge job determinants are examined using bivariate comparisons and a multinomial logistic regression model of the bridge job decision. Results: We find that one-half to two-thirds of the HRS respondents with full-time career jobs take on bridge jobs before exiting the labor force completely. We also find that bridge job behavior is most common among younger respondents, respondents without defined-benefit pension plans, and respondents at the lower- and upper-end of the wage distribution. Implications: The evidence suggests that changes in the retirement income landscape since the 1980s appear to be taking root. Going forward, traditional retirements will be the exception rather than the rule.
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