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Abstract: The aggregated incidence of bilateral trade costs is derived from the gravity model. Incidence is equivalent to a TFP penalty. Sectoral and national differences in TFP have sharp implications for the equilibrium pattern of production and trade in a specific factors model of production. Unskilled labor is intersectorally mobile. Skilled labor acquires sector specific skills. Productivity shocks cause incidence shock that induce ex post inefficient allocation of skilled labor. Below (above) average TFP sectors produce less and have below (above) average skill premia. Ex ante efficient allocation is lower in sectors with riskier TFP incidence, despite risk neutrality.
699. James E. Anderson, "Globalization and Income Distribution: A Specific Factors Continuum" (12/2008)
Abstract: Does globalization widen inequality or increase income risk? Globalization amplifies the effect of idiosyncratic relative productivity shocks. But wider markets reduce the effect of economy-wide supply shocks on world prices. Both forces are at work in the specific factors continuum model of this paper. Ex post equilibrium exhibits positive (negative) premia for export (import-competing) sector specific factors. Globalization widens inequality in North and South. Globalization increases personal income risk from idiosyncratic productivity shocks, but reduces aggregate shock risk acting on the factoral terms of trade. Both forces have their greatest impact on the poorest and least impact for the richest trading sectors, while the distribution in nontraded sectors is unaffected.
698. James E. Anderson and Yoto Yotov (Drexel University), "The Changing Incidence of Geography" (12/2008)
Abstract: Neglected properties of the structural gravity model offer a theoretically consistent method to calculate the incidence of estimated trade costs, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992-2003, incidence is on average some five times higher for sellers than for buyers. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in 'constructed home bias', the disproportionate share of local trade; and large but varying gains in real GDP. Aggregation biases gravity coefficients downward.
697. Robert Moffitt (Johns Hopkins University) and Peter Gottschalk, "Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004" (12/2008)
Abstract: We estimate the trend in the transitory variance of male earnings in the U.S. using the Michigan Panel Study of Income Dynamics from 1970 to 2004. Using both an error components model as well as simpler but more approximate methods, we find that the transitory variance increased substantially in the 1980’s and then remained at this new higher level through 2004 We also find a strong cyclical component to the transitory variance. Its increase accounts for between 30 and 65 percent of the total rise in cross-sectional variance, depending on the time period. The cross-sectional variance has recently increased but this reflects a rise in the variance of the permanent component, not the transitory component. Increases in transitory variance occurred for less educated in the early 1980s and for more educated workers in the later 1980s and early 1990s.
696. Peter Gottschalk, Erika McEntarfer (U.S. Treasury) and Robert Moffitt (Johns Hopkins University), "Trends in the Transitory Variance of Male Earnings in the U.S., 1991-2003: Preliminary Evidence from LEHD data" (12/2008)
Abstract: We estimate the trend in the transitory variance of male earnings in the U.S. from 1991 to 2005 using an administrative data set of Unemployment Insurance wage reports, the Longitudinal Employer-Employer Dynamics data set (LEHD), and compare the findings to those of Moffitt and Gottschalk (2008) obtained from the Michigan Panel Study of Income Dynamics (PSID). Despite substantial differences between the LEHD and the PSID in the levels of cross- sectional variances of male earnings, the changes over time in transitory variances obtained from estimating two of the models in Moffitt and Gottschalk are quite similar in the two data sets. Specifically, over the 1991-2003 period, transitory variances fell slightly, and then rose slightly, returning in 2003 to the same approximate level they had obtained in 1991. Overall, the analysis of the LEHD data confirms the findings based on the PSID that the transitory variance did not show a trend net of cycle over this period.
695. Christopher F Baum and Mustafa Caglayan (University of Sheffield), "The Volatility of International Trade Flows and Exchange Rate Uncertainty" (11/2008: 248 Kb, PDF)
Abstract: Empirical evidence obtained from data covering Eurozone countries, other industrialized countries, and newly industrialized countries (NICs) over 1980–2006 shows that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows. A one standard deviation increase in exchange rate uncertainty leads to an eight per cent increase in trade volatility. These effects differ markedly for trade flows between industrialized countries and NICs, and are not mitigated by the presence of the Eurozone. Contrary to earlier findings, our results also suggest that exchange rate uncertainty does not affect the volume of trade flows of either industrialized countries or NICs.
694. Arthur Lewbel and Krishna Pendakur (Simon Fraser University), "Tricks With Hicks: The EASI Demand System" (05/2008: 158 Kb, PDF)
Abstract: The structural consumer demand methods used to estimate the parameters of collective household models are typically either very restrictive and easy to implement or very general and difficult to estimate. In this paper, we provide a middle ground. We adapt the very general framework of Browning, Chiappori and Lewbel (2007) by adding a simple restriction that recasts the empirical model from a highly nonlinear demand system with price variation to a slightly nonlinear Engel curve system. Our restriction has an interpretation in terms of the behaviour of household scale economies and is testable. Our method identifies the levels of (not just changes in) household resource shares, and a variant of equivalence scales called indifference scales. We apply our methodology to Canadian expenditure data.
693. Francis X. Diebold (Pennsylvania) and Georg Strasser, "On the Correlation Structure of Microstructure Noise in Theory and Practice" (10/2008: 701 Kb, PDF)
Abstract: We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed crosscorrelation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.
692. Karim Chalak and Halbert White (University of California-San Diego), "An Extended Class of Instrumental Variables for the Estimation of Causal Effects" (11/2007: 776 Kb, PDF)
Abstract: This paper examines the ways in which structural systems can yield observed variables, other than the cause or treatment of interest, that can play an instrumental role in identifying and estimating causal effects. We focus speciÖcally on the ways in which structures determine exclusion restrictions and conditional exogeneity relations that act to ensure identification. We show that by carefully specifying the structural equations and by extending the standard notion of instrumental variables, one can identify and estimate causal effects in the endogenous regressor case for a broad range of economically relevant structures. Some of these have not previously been recognized. Our results there create new opportunities for identifying and estimating causal effects in non-experimental situations. Our results for more familiar structures provide new insights. For example, we extend results of Angrist, Imbens, and Rubin (1996) by taking into account an important distinction between cases where Z is an observed exogenous instrument and those where it is a proxy for an unobserved exogenous instrument. A main message emerging from our analysis is the central importance of sufficiently specifying the causal relations governing the unobservables, as these play a crucial role in creating obstacles or opportunities for identification. Because our results exhaust the possibilities for identification, we ensure that there are no other opportunities for identification based on exclusion restrictions and conditional independence relations still to be discovered. To accomplish this characterization, we introduce notions of conditioning and conditional extended instrumental variables (EIVs). These are not proper instruments, as they are endogenous. They nevertheless permit identification and estimation of causal effects. We analyze methods using these EIVs either singly or jointly.
691. Xiaohong Chen (Yale University), Roger Koenker (University of Illinois at Urbana-Champaign) and Zhijie Xiao, "Copula-Based Nonlinear Quantile Autoregression" (10/2008, PDF)
Abstract: Parametric copulas are shown to be attractive devices for specifying quantile autoregressive models for nonlinear time-series. Estimation of local, quantile-specific copula-based time series models offers some salient advantages over classical global parametric approaches. Consistency and asymptotic normality of the proposed quantile estimators are established under mild conditions, allowing for global misspecification of parametric copulas and marginals, and without assuming any mixing rate condition. These results lead to a general framework for inference and model specification testing of extreme conditional value-at-risk for financial time series data.
690. Christopher F Baum, Dorothea Schäfer (DIW Berlin) and Oleksandr Talavera (Aberdeen Business School), "The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis" (rev. 09/2009, PDF)
Abstract: We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide the constrained firms with easier access to external financing.
689. Karim Chalak and Halbert White (University of California-San Diego), "Independence and Conditional Independence in Causal Systems" (09/2008: 568 Kb, PDF)
Abstract: We study the interrelations between (conditional) independence and causal relations in settable systems. We provide definitions in terms of functional dependence for direct, indirect, and total causality as well as for (indirect) causality via and exclusive of a set of variables. We then provide necessary and su¢ cient causal and stochastic conditions for (conditional) dependence among random vectors of interest in settable systems. Immediate corollaries ensure the validity of Reichenbach's principle of common cause and its informative extension, the conditional Reichenbach principle of common cause. We relate our results to notions of d-separation and D-separation in the artificial intelligence literature.
688. Christopher F Baum, Atreya Chakraborty (University of Massachusetts-Boston) and Boyan Liu (Beihang University), "The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage" (08/2008: 131 Kb, PDF; forthcoming, International Journal of Finance & Economics)
Abstract: We investigate the relationship between a firm’s measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm’s ability to borrow. In this paper we investigate how both these channels of influence affects firms' financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance.
687. Shlomo Nael (Hebrew University) and Uzi Segal, "The Talmud On Transitivity" (05/2008: 156 Kb, PDF)
Abstract: Transitivity is a fundamental axiom in Economics that appears in consumer theory, decision under uncertainty, and social choice theory. While the appeal of transitivity is obvious, observed choices sometimes contradict it. This paper shows that treatments of violations of transitivity al- ready appear in the rabbinic literature, starting with the Mishnah and the Talmud (1st–5th c CE). This literature offers several solutions that are similar to those used in the modern economic literature, as well as some other solutions that may be adopted in modern situations. We analyze several examples. One where nontransitive relations are acceptable; one where a violation of transitivity leads to problems with extended choice functions; and a third where a nontransitive cycle is deliberately created (to enhance justice).
686. Christopher F Baum, Mustafa Caglayan (University of Sheffield) and Oleksandr Talavera (Robert Gordon University), "On the Investment Sensitivity of Debt under Uncertainty" (06/2008: 108 Kb, PDF; forthcoming, Economics Letters)
Abstract: We investigate the impact of debt on U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and market-level uncertainty changes. The influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.
685. Hideo Konishi, Carsten Kowalczyk (Tufts University) and Tomas Sjöström (Rutgers University), "Global Free Trade is in the Core of a Customs Union Game" (06/2008: 188 Kb, PDF; forthcoming, Review of International Economics)
Abstract: This paper shows nonemptiness of the core of a customs union game with a status quo equilibrium with tariffs by employing an appropriate notion of the core as in Kowalczyk and Sjöström (1994, Economica). Specifically, we find that if customs unions may have no effects on non-member countries as in Ohyama (1972, Keio Economic Studies) and Kemp and Wan (1976, Journal of International Economics) then a subset of countries forming such a customs union does not block global free trade when accompanied by so-called Grinols transfers (Grinols, 1981, Journal of International Economics).
684. Michael Giandrea (U.S. Bureau of Labor Statistics), Kevin Cahill (The Analysis Group) and Joseph F. Quinn, "Self-Employment Transitions among Older American Workers with Career Jobs " (04/2008: 121 Kb, PDF)
Abstract: What role does self-employment play in the retirement process? Older Americans are staying in the labor force longer than prior trends would have predicted and many change jobs later in life. These job transitions are often within the same occupation or across occupations within wage- and-salary employment. The transition can also be out of wage-and-salary work and into self employment. Indeed, national statistics show that self employment becomes more prevalent with age, partly because self employment provides older workers with opportunities not found in traditional wage-and-salary jobs, such as flexibility in hours worked and independence. This paper analyzes transitions into and out of self employment among older workers who have had career jobs. We utilize the Health and Retirement Study, a nationally-representative dataset of older Americans, to investigate the prevalence of self employment among older workers who made a job transition later in life and to explore the factors that determine the choice of wage- and-salary employment or self employment. We find that post-career transitions into and out of self employment are common and that health status, career occupation, and financial variables are important determinants of these transitions. As older Americans and the country as a whole face financial strains in retirement income in the years ahead, self employment may be a vital part of the pro-work solution.
683. Zvi Safra (Tel Aviv University) and Uzi Segal, "Calibration Results for Betweenness Functionals" (5/2008: 148 Kb, PDF)
Abstract: A reasonable level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. This was demonstrated by Rabin for expected utility theory. Later, Safra and Segal extended this result by showing that similar arguments apply to almost all non-expected utility theories, provided they are Gateaux differentiable. In this paper we drop the differentiability assumption and by restricting attention to betweenness theories we show that much weaker conditions are sufficient for the derivation of similar calibration results.
682. Zvi Safra (Tel Aviv University) and Uzi Segal, "Calibration Results for Non-Expected Utility Theories" (5/2008: 216 Kb, PDF; forthcoming, Econometrica)
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 general non-expected utility theories.
681. Taiji Furusawa (Hitotsubashi University) and Hideo Konishi, "Contributing or Free-Riding? Voluntary Participation in a Public Good Economy" (7/2009: PDF; previously circulated as "Contributing or Free-Riding? A Theory of Endogenous Lobby Formation")
Abstract: We consider a (pure) public goods provision problem with voluntary participation in a quasi-linear economy. We propose a new hybrid solution concept, the free-riding-proof core (FRP-Core), which endogenously determine a contribution group, public good provision level, and its cost-sharing. The definition of the FRP-Core is based on credibility of coalitional deviations. The FRP-Core is always nonempty in public good economy but does not usually achieve global efficiency. The FRP-Core has support from both cooperative and noncooperative games. In particular, it is equivalent to the set of perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET) of a dynamic game with participation decision followed by a common agency game. We illustrate the properties of the FRP-Core with an example. We also show that the equilibrium level of public good shrinks to zero as the economy is replicated.
680. Susanne Schennach (University of Chicago), Halbert White (University of California-San Diego) and Karim Chalak, "Estimating average marginal effects in nonseparable structural systems" (12/2007: 536 Kb, PDF)
Abstract: We provide nonparametric estimators of derivative ratio-based average marginal effects of an endogenous cause, X, on a response of interest, Y, for a system of recursive structural equations. The system need not exhibit linearity, separability, or monotonicity. Our estimators are local indirect least squares estimators analogous to those of Heckman and Vytlacil (1999, 2001) who treat a latent index model involving a binary X: We treat the traditional case of an observed exogenous instrument (OXI) and the case where one observes error-laden proxies for an unobserved exogenous instrument (PXI). For PXI, we develop and apply new results for estimating densities and expectations conditional on mismeasured variables. For both OXI and PXI, we use infinite order flat-top kernels to obtain uniformly convergent and asymptotically normal nonparametric estimators of instrument-conditioned effects, as well as root-n consistent and asymptotically normal estimators of average effects.
679. Richard W. Tresch and Andrei Zlate, "Explorations into the Production of State Government Services: Education, Welfare and Hospitals" (12/2007: 3 Mb, PDF)
Abstract: This paper explores the production characteristics of three important U.S. state government services--public higher education, public welfare, and state psychiatric hospitals—during the last half of the twentieth century. We estimate translog cost functions for the three services and find that their production attributes are similar in a number of respects. First, production exhibits substantial economies of scale; unexploited scale economies are so severe that the average state operates on the negative portion of its marginal cost curve. Second, the analysis of technical change indicates that public education, welfare, and hospitals are affected by severe technical regression in all states, in both the long run and short run. Third, production of all three services is overcapitalized in most states; the provision of these services is not long-run efficient. Finally, we show that the Baumol-Oates cost disease of lagging productivity growth is rampant in all three services; only the short-run productivity growth in education matches the performance of the private sector, as technical regression is more than offset by the productivity-enhancing scale effect of increased enrollments.
Abstract: Consider an observed binary regressor D and an unobserved binary variable D*, both of which affect some other variable Y. This paper considers nonparametric identification and estimation of the effect of D on Y, conditioning on D*=0. For example, suppose Y is a person's wage, the unobserved D* indicates if the person has been to college, and the observed D indicates whether the individual claims to have been to college. This paper then identifies and estimates the difference in average wages between those who falsely claim college experience versus those who tell the truth about not having college. We estimate this average effect of lying to be about 6% to 20%. Nonparametric identification without observing D* is obtained either by observing a variable V that is roughly analogous to an instrument for ordinary measurement error, or by imposing restrictions on model error moments.
677. Anthony Creane (Michigan State University) and Hideo Konishi, "The Unilateral Incentives for Technology Transfers: Predation (and Deterrence) by Proxy" (rev. 06/2008: 280 Kb, PDF; previously circulated as "The Unilateral Incentives for Technology Transfers: Predation by Proxy")
Abstract: In 1984 GM and Toyota began the joint production of automobiles to much controversy over its anti-competitive effects. The argument for the joint production was the considerable efficiency gains GM would obtain. Since then, the anti-trust controversy has died, but a question remains: why would the most efficient manufacturer (Toyota) transfer to its largest rival the knowledge to transform itself into a very efficient rival? We examine when such transfers could be unilaterally profitable, finding that it can serve as a credible way to make the market more competitive, forcing high cost firms to exit (or preventing future entry). This is not without a cost to Toyota since such a transfer also makes the remaining rivals more efficient. Despite this, we find a sufficient (but not necessary) condition for it to be profitable to predate "by proxy": the market satisfies an entry equilibrium condition. Further, we find that it is then optimal to predate on every firm that is vulnerable and so a market with many firms can become a duopoly. Profitable predation implies higher prices, to the detriment of consumers. Yet the improved production efficiency outweighs this loss, resulting enhanced social welfare. In contrast, profitable non-predatory joint production (or technology transfers) may reduce welfare. Paradoxically, the potential for predation could encourage entry ex ante.
676. Xiaohong Chen (Yale University), Yingyao Hu (Johns Hopkins University) and Arthur Lewbel, " Nonparametric Identification and Estimation of Nonclassical Errors-in-Variables Models Without Additional Information" (08/2007: 276 Kb, PDF)
Abstract: This paper considers identification and estimation of a nonparametric regression model with an unobserved discrete covariate. The sample consists of a dependent variable and a set of covariates, one of which is discrete and arbitrarily correlates with the unobserved covariate. The observed discrete covariate has the same support as the unobserved covariate, and can be interpreted as a proxy or mismeasure of the unobserved one, but with a nonclassical measurement error that has an unknown distribution. We obtain nonparametric identification of the model given monotonicity of the regression function and a rank condition that is directly testable given the data. Our identification strategy does not require additional sample information, such as instrumental variables or a secondary sample. We then estimate the model via the method of sieve maximum likelihood, and provide root-n asymptotic normality and semiparametric efficiency of smooth functionals of interest. Two small simulations are presented to illustrate the identification and the estimation results.
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