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Boston College Working Papers in Economics

You can search the BC Economics Working Papers by author, title, keyword, JEL category, and abstract contents via IDEAS or EconPapers.

The BC EC Top 20

Recent Working Papers

854. Ryan Chahrour and Justin Svec (College of the Holy Cross), "Optimal Capital Taxation and Consumer Uncertainty" (04/2014: PDF)

Abstract: This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent.

853. Francesco Giavazzi (Bocconi University), Ivan Petkov (Boston College) and "Fabio Schiantarelli, "Culture: Persistence and Evolution" (03/2014: PDF)

Abstract: This paper presents evidence on the speed of evolution (or lack thereof) of a wide range of values and beliefs of different generations of European immigrants to the US. The main result is that persistence differs greatly across cultural attitudes. Some, for instance deep personal religious values, some family and moral values, and political orientation are very persistent. Other, such as attitudes toward cooperation, redistribution, effort, children independence, premarital sex, and even the frequency of religious practice or the intensity of association with one’s religion, converge rather quickly. Moreover, the results obtained studying higher generation immigrants differ greatly from those obtained limiting the analysis to the second generation, and imply lesser degree of persistence. Finally, we show that persistence is ”culture specific” in the sense that the country from which one’s ancestors came matters for the pattern of generational convergence.

852. Peter Ireland, "Monetary Policy, Bond Risk Premia, and the Economy" (02/2014: PDF)

Abstract: This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.

851. Maria Arbatskaya (Emory University) and Hideo Konishi, "Consumer Referrals" (10/2013)

Abstract: In many industries, firms reward their customers for making referrals. We analyze the optimal policy mix of price, advertising intensity, and a referral fee for monopoly when buyers choose to what extent to refer other consumers to the firm. We find that the firm advertises less under referrals, but does not change its price from the monopoly level in an attempt to manage consumer referrals. We show that referral programs are Pareto-improving and that the firm underprovides referrals while supporting the socially optimum level of advertising. We extend the analysis to the case where consumer referrals can be targeted.

850. Maria Arbatskaya (Emory University) and Hideo Konishi, "Managing Consumer Referrals in a Chain Network" (01/2014)

Abstract: We consider the optimal pricing and referral strategy of a monopoly that uses a simple consumer communication network (a chain) to spread product information. The first-best policy with fully discriminatory position-based referral fees involves standard monopoly pricing and referral fees that provide consumers with strictly positive referral incentives. Effective price discrimination among consumers based on their positions in the chain occurs in both the first-best solution and the second-best solution (with a common referral fee).

849. Taiji Furusawa (Hitotsubashi University) and Hideo Konishi, "International Trade and Income Inequality" (10/2013)

Abstract: We propose a theory that explains why international trade can widen a wage gap between top income earners and others and cause job polarization. In the basic model, we consider two symmetric countries in which individuals with different abilities work either as knowledge workers, who develop products produced in a differentiated-good sector, or as production workers, who engage in actual production processes. In equilibrium, ex ante symmetric firms post different wages for knowledge workers and hence attract workers with different abilities, creating the firm heterogeneity in product quality. International trade will benefit firms that produce high-quality products and harm firms that produce low-quality products. The relative wage gap between individuals with high ability and those with low ability expands as a result. Indeed, we show that international trade increases the real wages for those with lowest and highest abilities but decreases the real wages for those with intermediate abilities. We also extend the basic model to the one with asymmetric countries and show that income inequality worsens in the smaller or talent-scarce country while it lessens in the talent-abundant country as a result of international trade.

848. Katsuya Kobayashi (Hosei University) and Hideo Konishi, "Endogenous Party Line" (12/2013)

Abstract: This paper proposes a model of two-party representative democracy on a single-dimensional political space, in which voters choose their parties in order to influence the parties' choices of representative. After two candidates are selected as the median of each party's support group, Nature determines the candidates' competence levels. Based on the candidates' political positions and competence levels, voters vote for the preferable candidate without being tied to their party's choice. We show that (1) there exists a nontrivial equilibrium under natural conditions, and that (2) depending on voter distribution over their political positions, the equilibrium party line and the ex ante probabilities of the two-party candidates winning can be biased. In particular, we show that if a party has a strong subgroup with extreme positions, then the party tends to alienate its moderate subgroup, and its probability of winning the final election is reduced.

847. Hideo Konishi and Çaglar Yurtseven (Bahçeşehir University), "Market Share Regulation?" (10/2013; published, Japan and the World Economy, 29, 36-45, 2014)

Abstract: In the 1950s and 60s, Japanese and US antitrust authorities occasionally used the degree of concentration to regulate industries. Does regulating firms based on their market shares make theoretical sense? We set up a simple duopoly model with stochastic R&D activities to evaluate market share regulation policy. On the one hand, market share regulation discourages the larger company's R&D investment and causes economic inefficiency. On the other hand, it facilitates the smaller company's survival, and prevents the larger company from monopolizing the market. We show that consumers tend to benefit from market share regulation. However, the social welfare including firms' profits would be hurt if both firms are equally good at R&D innovation. Nonetheless, if the smaller firm can make innovations more efficiently, then protecting smaller firms through market share regulation can improve the social welfare. We relate our analysis to a case study of Asahi Brewery's introducing Asahi Super Dry to become the top market share company in the industry.

846. Sanjay Chugh and Christian Merkl (Friedrich-Alexander-University Erlangen-Nuremberg), "Efficiency and Labor Market Dynamics in a Model of Labor Selection" (04/2013: PDF)

Abstract: We characterize efficient allocations and cyclical fluctuations in a labor selection model. Potential new hires are heterogenous in the cross-section in their degree of training costs. In a calibrated version of the model that identifies costly selection with micro-level data on training costs, efficient fluctuations feature highly volatile unemployment and hiring rates, in line with empirical evidence. We show analytically in a partial equilibrium version of the model that volatility arises from selection effects, rather than general equilibrium effects.

845. Sanjay Chugh and Fabio Ghironi (University of Washington), "Optimal Fiscal Policy with Endogenous Product Variety" (07/2012: PDF)

Abstract: We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation.

844. Sanjay Chugh, "Firm Risk and Leverage Based Business Cycles" (02/2013: PDF)

Abstract: I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity in the U.S. manufacturing sector. Using the estimated dispersion, or "risk," stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces aggregate cyclical movements in the financial conditions of U.S. non-financial firms. In the model, risk shocks calibrated to micro data induce large and empirically-relevant fluctuations in leverage, a nancial measure typically thought to be closely associated with real activity. In terms of aggregate quantities, however, pure risk shocks account for only a small share of GDP fluctuations in the model, less than one percent. Instead, it is standard aggregate productivity shocks that explain virtually all of the model's real fluctuations. These results reveal a dichotomy at the core of a popular class of DSGE financial frictions models: risk shocks induce large financial fiuctuations, but have little effect on aggregate quantity fluctuations.

843. David Dillenberger and Uzi Segal, "Skewed Noise" (11/2013: PDF)

Abstract: Experimental evidence suggests that individuals who face an asymmetric distribution over the likelihood of a specific event might actually prefer not to know the exact value of this probability. We address these findings by studying a decision maker who has recursive, non-expected utility preferences over two-stage lotteries. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a probability distribution over the exact value of the probability and has an average value p. We first propose and characterize a new notion of skewed distributions. We then use this result to provide conditions under which a decision maker who always rejects symmetric noise around p will always reject skewed to the left noise, but might accept skewed to the right noise. The model can be applied to the areas of investment under risk, medical decision making, and criminal law procedures, and can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty.

842. David Arseneau (Federal Reserve Board), Ryan Chahrour, Sanjay Chugh and Alan Finkelstein Shapiro (Universidad de los Andes), "Optimal Fiscal and Monetary Policy in Customer Markets" (11/2013, PDF)

Abstract: This paper presents a model in which some goods trade in "customer markets." In these markets, advertising plays a critical role in facilitating long-lived relationships. We estimate both policy and non-policy parameters of the model (which includes New-Keynesian frictions) on U.S. data, including advertising expenditures. The estimated parameters imply a large congestion externality in the pricing of customer market goods. This pricing inefficiency motivates the analysis of optimal policy. When the planner has access to a complete set of taxes and chooses them optimally, fiscal policy eliminates the externalities with large adjustments in the tax rates that operate directly in customer markets; labor tax volatility remains low. If available policy instruments are constrained to the interest rate and labor tax, then the latter displays large and procyclical fluctuations, while the implications for monetary policy are largely unchanged from the model with no customer markets.

841. Christopher F Baum, Margarita Karpava (MediaCom London), Dorothea Schäfer (DIW Berlin) and Andreas Stephan (Jönköping International Business School), "Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises" (rev. 01/2014, PDF)

Abstract: This paper studies the impact of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities.

840. Stefan Hoderlein and Yuya Sasaki (Johns Hopkins University), "Outcome Conditioned Treatment Effects" (08/2013; PDF)

Abstract: This paper introduces average treatment effects conditional on the outcome variable in an endogenous setup where outcome Y, treatment X and instrument Z are continuous. These objects allow to refine well studied treatment effects like ATE and ATT in the case of continuous treatment (see Florens et al (2008)), by breaking them up according to the rank of the outcome distribution. For instance, in the returns to schooling case, the outcome conditioned average treatment effect on the treated (ATTO), gives the average effect of a small increase in schooling on the subpopulation characterized by a certain treatment intensity, say 16 years of schooling, and a certain rank in the wage distribution. We show that IV type approaches are better suited to identify overall averages across the population like the average partial effect, or outcome conditioned versions thereof, while selection type methods are better suited to identify ATT or ATTO. Importantly, none of the identification relies on rectangular support of the errors in the identification equation. Finally, we apply all concepts to analyze the nonlinear heterogeneous effects of smoking during pregnancy on infant birth weight.

839. Xavier D'Haultfoeuille (CREST), Stefan Hoderlein and Yuya Sasaki (Johns Hopkins University), "Nonlinear Difference-in-Differences in Repeated Cross Sections with Continuous Treatments" (08/2013; PDF)

Abstract: This paper studies the identification of nonseparable models with continuous, endogenous regressors, also called treatments, using repeated cross sections. We show that several treatment effect parameters are identified under two assumptions on the effect of time, namely a weak stationarity condition on the distribution of unobservables, and time variation in the distribution of endogenous regressors. Other treatment effect parameters are set identified under curvature conditions, but without any functional form restrictions. This result is related to the difference-in-differences idea, but does neither impose additive time effects nor exogenously defined control groups. Furthermore, we investigate two extrapolation strategies that allow us to point identify the entire model: using monotonicity of the error term, or imposing a linear correlated random coefficient structure. Finally, we illustrate our results by studying the effect of mother's age on infants' birth weight.

838. Eric Gautier and Stefan Hoderlein, "A Triangular Treatment Effect Model With Random Coefficients In The Selection Equation" (11/2012; PDF)

Abstract: In this paper we study nonparametric estimation in a binary treatment model where the outcome equation is of unrestricted form, and the selection equation contains multiple unobservables that enter through a nonparametric random coefficients specification. This specification is flexible because it allows for complex unobserved heterogeneity of economic agents and non-monotone selection into treatment. We obtain conditions under which both the conditional distributions of Y0 and Y1, the outcome for the untreated, respectively treated, given first stage unobserved random coefficients, are identified. We can thus identify an average treatment effect, conditional on first stage unobservables called UCATE, which yields most treatment effects parameters that depend on averages, like ATE and TT. We provide sharp bounds on the variance, the joint distribution of (Y0, Y1) and the distribution of treatment effects. In the particular case where the outcomes are continuously distributed, we provide novel and weak conditions that allow to point identify the joint conditional distribution of Y0, Y1, given the unobservables. This allows to derive every treatment effect parameter, e.g. the distribution of treatment effects and the proportion of individuals who benefit from treatment. We present estimators for the marginals, average and distribution of treatment effects, both conditional on unobservables and unconditional, as well as total population effects. The estimators use all the data and discard tail values of the instruments when they are too unlikely. We provide their rates of convergence, and analyze their finite sample behavior in a simulation study. Finally, we also discuss the situation where some of the instruments are discrete.

837. Stefan Hoderlein and Robert Sherman, "Identification And Estimation In A Correlated Random Coefficients Binary Response Model" (07/2012; PDF)

Abstract: We study identification and estimation in a binary response model with random coefficients B allowed to be correlated with regressors X. Our objective is to identify the mean of the distribution of B and estimate a trimmed mean of this distribution. Like Imbens and Newey (2009), we use instruments Z and a control vector V to make X independent of B given V. A consequent conditional median restriction helps identify the mean of B given V. Averaging over V identifies the mean of B. This leads to an analogous localize-then-average approach to estimation. We estimate conditional means with localized smooth maximum score estimators and average to obtain a root-n-consistent and asymptotically normal estimator of a trimmed mean of the distribution of B. Under the conditional median restrictions, the procedure can be adapted to produce a root-n-consistent and asymptotically normal estimator of the nonrandom regression coefficients in the models of Manski (1975,1985) and Horowitz (1992). We explore small sample performance through simulations, and present an application.

836. Holger Dette (University of Bochum), Stefan Hoderlein and Natalie Neumeyer (University of Hamburg), "Testing Multivariate Economic Restrictions Using Quantiles: The Example of Slutsky Negative Semidefiniteness" (09/2013; PDF)

Abstract: This paper is concerned with testing rationality restrictions using quantile regression methods. Specifically, we consider negative semidefiniteness of the Slutsky matrix, arguably the core restriction implied by utility maximization. We consider a heterogeneous population characterized by a system of nonseparable structural equations with infinite dimensional unobservable. To analyze this economic restriction, we employ quantile regression methods because they allow us to utilize the entire distribution of the data. Difficulties arise because the restriction involves several equations, while the quantile is a univariate concept. We establish that we may test the economic restriction by considering quantiles of linear combinations of the dependent variable. For this hypothesis we develop a new empirical process based test that applies kernel quantile estimators, and derive its large sample behavior. We investigate the performance of the test in a simulation study. Finally, we apply all concepts to Canadian microdata, and show that rationality is not rejected.

835. Fabian Dunker (University of Goettingen), Stefan Hoderlein and Hiroaki Kaido (Brown University), "Random Coefficients in Static Games of Complete Information" (03/2013; PDF)

Abstract: Individual players in a simultaneous equation binary choice model act differently in different environments in ways that are frequently not captured by observables and a simple additive random error. This paper proposes a random coefficient specification to capture this type of heterogeneity in behavior, and discusses nonparametric identification and estimation of the distribution of random coefficients. We establish nonparametric point identification of the joint distribution of all random coefficients, except those on the interaction effects, provided the players behave competitively in all markets. Moreover, we establish set identification of the density of the coefficients on the interaction effects, and provide additional conditions that allow to point identify this density. Since our identification strategy is constructive throughout, it allows to construct sample counterpart estimators. We analyze their asymptotic behavior, and illustrate their finite sample behavior in a numerical study. Finally, we discuss several extensions, like the semiparametric case, or correlated random coefficients.

834. Christopher F Baum, Marketa Halova Wolfe (Washington State University) and Alexander Kurov (West Virginia University), "Does Regular Economic News from Emerging Countries Move Markets? Evidence from Chinese Macro Announcements" (rev. 02/2014: PDF)

Abstract: We use scheduled macroeconomic announcements made by China to study how regular economic news from an important emerging economy moves the world financial and commodity markets. Using intraday futures data, we show that announcements about China's manufacturing purchasing manager index, industrial production and real gross domestic product have a significant effect on stock, bond, foreign exchange, and industrial commodity markets. This impact is sizeable compared to similar U.S. announcements and continues to grow. The results suggest that market participants view the Chinese macroeconomic announcements primarily as a signal of the state of the global economy rather than merely of China's domestic economy.

833. Scott Fulford, "The changing geography of gender in India" (09/2013: PDF)

Abstract: This paper examines the changing distribution of where women and girls live in India at the smallest scale possible: India's nearly 600,000 villages. The village level variation in the proportion female is far larger than the variation across districts. Decomposing the variance, I show that village India is becoming more homogeneous in its preferences for boys even as that preference becomes more pronounced. A consequence is that 70% of girls grow up in villages where they are the distinct minority. Most Indian women move on marriage, yet marriage migration has almost no gender equalizing influence. Further, by linking all villages across censuses, I show that most changes in village infrastructure are not related to changes in child gender. Gaining primary schools and increases in female literacy decrease the proportion of girls. The results suggests that there are no easy policy solutions for addressing the increasing masculinization of Indian society.

832. Manoj Atolia (Florida State University) and Ryan Chahrour, "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model" (09/2013: PDF)

Abstract: What do firms learn from their interactions in markets, and what are the implications for aggregate dynamics? We address this question in a multi-sector real-business cycle model with a sparse input-output structure. In each sector, firms observe their own productivity, along with the prices of their inputs and the price of their output. We show that general equilibrium market-clearing conditions place heavy constraints on average expectations, and characterize a set of cases where average expectations (and average dynamics) are exactly those of the full-information model. This "aggregate irrelevance" of information can occur even when sectoral expectations and dynamics are quite different under partial information, and despite the fact that each sector represents a non-negligible portion of the overall economy. In numerical examples, we show that even when the conditions for aggregate irrelevance of information are not met, aggregate dynamics remain nearly identical to the full-information model under reasonable calibrations.

831. Eyal Dvir and Georg Strasser, "Does Marketing Widen Borders? Cross-Country Price Dispersion in the European Car Market" (rev. 04/2014: PDF)

Abstract: Pricing-to-market (PTM), the practice of differentiating the price of a good across markets, is commonly attributed to differential distribution and border costs. In this paper we show that some of this price differentiation is sustained by manufacturers selling different versions of an otherwise identical good in different markets. We study price differences across countries in the European car market, using a rich data set which includes detailed technical information on each car model. Relative car prices show no sign of convergence during the period 2003-2011. PTM is pervasive in this market: model-specific real exchange rates for mechanically identical cars differ significantly from unity. They also vary significantly across countries and, within countries, across car manufacturers. We find strong evidence that car manufacturers price discriminate by manipulating the menu of included car options and features available in each country, e.g. by including air conditioning as a standard feature as opposed to pricing it separately. We find that such bundling decisions sustain cross-country price differences of 10% and more.

830. Michael Belongia (University of Mississippi) and Peter Ireland, "Instability: Monetary and Real" (08/2013: PDF)

Abstract: Fifty years ago, Friedman and Schwartz presented evidence of pro-cyclical movements in the money stock, exhibiting a lead over corresponding movements in output, found in historical monetary statistics for the United States. Very similar relationships appear in more recent data. To see them clearly, however, one must use Divisia monetary aggregates in place of the Federal Reserve’s official, simple-sum measures. One must also split the data sample to focus, separately, on episodes before and after 1984 and on a new episode of instability beginning in 2000. A structural VAR draws tight links between Divisia money and output during each of these three periods.

829. Michael D. Grubb and Matthew Osborne (U.S. Bureau of Economic Analysis), "Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock" (02/2012; PDF)

Abstract: By April 2013, the FCC's recent bill-shock agreement with cellular carriers requires consumers be notified when exceeding usage allowances. Will the agreement help or hurt consumers? To answer this question, we estimate a model of consumer plan choice, usage, and learning using a panel of cellular bills. Our model predicts that the agreement will lower average consumer welfare by $2 per year because firms will respond by raising monthly fees. Our approach is based on novel evidence that consumers are inattentive to past usage (meaning that bill-shock alerts are informative) and advances structural modeling of demand in situations where multipart tariffs induce marginal-price uncertainty. Additionally, our model estimates show that an average consumer underestimates both the mean and variance of future calling. These biases cost consumers $42 per year at existing prices. Moreover, absent bias, the bill-shock agreement would have little to no effect.

828. Michael D. Grubb, "Consumer Inattention and Bill-Shock Regulation" (07/2012; PDF)

Abstract: For many goods and services, such as cellular-phone service and debit-card transactions, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are heterogeneous and unbiased, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the e ect of the FCC's recent bill-shock agreement. If inattentive consumers underestimate their demand, however, then bill-shock regulation can lower market prices and protect consumers from exploitation. Hence the Federal Reserve's new opt-in rule for debit-card overdraft protection may substantially benefit consumers.

827. S. Anukriti, "The Fertility-Sex Ratio Tradeoff: Unintended Consequences of Financial Incentives" (07/2013; PDF)

Abstract: Lower fertility can translate into a more male-biased sex ratio if son preference is persistent and technology for sex-selection is easily accessible. This paper investigates whether financial incentives can overcome this trade-off in the context of an Indian scheme, Devirupak, that seeks to decrease both fertility and the sex ratio at birth. First, I construct a model where the effects of incentives are determined by the strength of son preference, the cost of children, and the cost of sex-selection, relative to the size of incentives. Second, I create a woman-year panel dataset from retrospective birth histories and use variation in the composition of pre-existing children as well as the state and the year of program implementation to estimate its causal effect. Devirupak successfully lowers the number of children by 0.9 percent, but mainly through a 1.9 percent decrease in the number of daughters. Faced with a choice between a son and only daughters, couples choose a son despite lower monetary benefits, and thus the sex ratio at birth unintentionally increases. A subsidy worth 10 months of average household consumption expenditure is insufficient to induce parents to give up sons entirely. Instead, Devirupak increases the proportion of one-boy couples by 5 percent. Only the most financially disadvantaged groups exhibit an increase in the proportion of one-girl couples.

826. Marketa Halova Wolfe (Washington State University) and Georg Strasser, "Learning to Argue with Intermediate Macro Theory: A Semester-Long Team Writing Project" (rev. 04/2014: PDF)

Abstract: We describe experiences from integrating a semester-long economic analysis project into an intermediate macroeconomic theory course. Students work in teams of "economic advisors" to write a series of nested reports for a decision-maker, analyzing the current economic situation, evaluating and proposing policies while responding to events during the semester in real-time. The project simulates real-world policy con- sulting with an emphasis on applying economic theory and models. We describe the project setup and how to tailor its theme to current events, explain methods for keep- ing it manageable in larger classes, and document student learning outcomes by survey results and report summaries. Besides improving the learning experience, this project equips economics students to contribute their own views to policy debates and buttress them with tight macroeconomic reasoning.

825. Arthur Lewbel and Thomas Tao Yang, "Identifying the Average Treatment Effect in a Two Threshold Model" (07/2013, PDF; appendix available)

Abstract: Assume individuals are treated if a latent variable, containing a continuous instrument, lies between two thresholds. We place no functional form restrictions on the latent errors. Here unconfoundedness does not hold and identification at infinity is not possible. Yet we still show nonparametric point identification of the average treatment effect. We provide an associated root-n consistent estimator. We apply our model to reinvestigate the inverted-U relationship between competition and innovation, estimating the impact of moderate competitiveness on innovation without the distributional assumptions required by previous analyses. We find no evidence of an inverted-U in US data.

824. Pierluigi Balduzzi (CSOM, Boston College), Emanuele Brancati (University of Rome, Tor Vergata) and Fabio Schiantarelli, "Financial Markets, Banks' Cost of Funding, and Firms' Real Decisions: Lessons from Two Crises" (rev. 04/2014; PDF)

Abstract: We test whether financial market conditions affect firms' decisions through their impact on the level and volatility of banks' cost of funding. We investigate this transmission channel using data on Italian banks and firms during the 2006–2011 period. We use banks' CDS spreads and Tobin's Qs to proxy for their cost of funding. Italian banks experienced two large shocks that lead to heterogeneous variation in their cost of funding: the 2007–2009 financial crisis and the 2010–2012 sovereign debt crisis. The Italian case is particularly interesting because Italian firms are predominantly small and privately held, and rely heavily on bank debt. Hence, most Italian firms are unable to cushion negative shocks to bank credit by resorting to capital markets. In investigating this issue, we take advantage of a newly available data set covering a representative sample of over 3,000 firms and containing information on the identity of the bank(s) each firm has a relationship with. We find robust evidence that an increase in Italian banks' CDS spreads and a decrease in their Tobin's Q leads younger and smaller firms to invest, hire, and borrow less. We conclude that financial market conditions impact even privately held firms, and that the banks' cost of funding is an important channel through which these effects are transmitted.

823. Robert G. Murphy, "Explaining Inflation in the Aftermath of the Great Recession" (rev. 01/2014; PDF)

Abstract: This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I confirm previous findings that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that a Phillips curve modified to allow its slope to vary with uncertainty about regional economic conditions can best explain the recent path of inflation.

822. Christopher F Baum, Mustafa Caglayan (Heriot-Watt University), Abdul Rashid (International Islamic University, Islamabad), "Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?" (04/2013: PDF)

Abstract: We empirically examine the influence of risk on firms' capital structure adjustments. The process of adjustment is asymmetric and depends on the type of risk, its magnitude, the firm's actual leverage with respect to its target, and its financial status. We show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our findings help to explain why managers seek to time equity and debt markets.

821. Hans Gersbach (ETH Zurich), Hans Haller (Virginia Tech University), Hideo Konishi, "Household Formation and Markets" (04/2013, PDF)

Abstract: We consider competitive markets for multiple commodities with endogenous formation of one- or two-person households. Within each two-person household, externalities from the partner's commodity consumption and unpriced actions are allowed. Each individual has two types of traits: observable characteristics and unobservable taste characteristics. Each individual gets utility from his/her own private consumption, from discrete actions such as job-choice, from the partner's observable characteristics such as appearance and hobbies, from some of the partner's consumption vectors, and from the partner's action choices. We investigate competitive market outcomes with an endogenous household structure in which no individual and no man/woman-pair can deviate profitably. We find a set of sufficient conditions under which a stable matching equilibrium exists. We further establish the first welfare theorem for this economy.

820. Scott Fulford, "The Puzzle of Marriage Migration in India" (rev. 10/2013: PDF)

Abstract: Two thirds of all Indian women have migrated for marriage, around 300 million women, but little is known about this vast migration. This paper provides a detailed accounting of the puzzlingly large migration of Indian women and evaluates its causes. Contrary to conventional wisdom, marriage migration does not contribute to risk sharing. Nor is it driven by sex ratio imbalances. Instead, I introduce a simple model in which parents must search for a spouse for their daughter geographically. By adding geographical search frictions, the model helps rationalize the large regional differences.

819. Scott Fulford, "Returns to education in India" (12/2012: PDF)

Abstract: Despite the evidence for high returns to education at an individual level, large increases in education across the developing world have brought disappointing returns in aggregate. This paper shows that the same pattern holds in India by building aggregates from micro-data so that the comparability and quality issues that plague cross-country analyses are not a problem. In India both men and women with more education live in households with greater consumption per capita. Yet in aggregate, comparing across age cohorts and states, better educated male cohorts consume only about 4% more than less well educated ones. Better educated female cohorts do not live in households with higher consumption. This result is robust to: (1) using econometric models that account for survey measurement error, (2) different measures of household consumption and composition, (3) allowing returns to differ by state, and (4) age mismeasurement. Comparing state returns to a measure of school quality, it does not seem that poor quality is responsible for the low returns.

818. Andrew Beauchamp and Mathis Wagner, "Dying to Retire: Adverse Selection and Welfare in Social Security" (rev. 08/2013: PDF)

Abstract: Despite facing some of the same challenges as private insurance markets, little is known about the role of adverse selection in social insurance programs. This paper studies adverse selection in Social Security retirement choices using data from the Health and Retirement Study. We find robust evidence that people who live longer choose larger annuities by delaying the age they first claim benefits, a form of adverse selection. To quantify welfare consequences we develop and estimate a simple model of annuity choice. We exploit variation in longevity, the underlying source of private information, to identify the key structural parameters: the coefficient of relative risk aversion and the discount rate. We estimate that adverse selection reduces social welfare by 2.3-3.5 percent, and increases the costs to the Social Security Trust Fund by 2.1-2.5 percent, relative to the first best allocation. Counterfactual simulations suggest program adjustments could generate both economically significant decreases in costs and small increases in social welfare. We estimate an optimal non-linear accrual rate which would result in welfare gains of 1.4 percent, and cost reductions of 6.1 percent of current program costs.

817. Arthur Lewbel, Xun Lu (Hong Kong University of Science and Technology) and Liangjun Su (Singapore Management University), "Specification Testing for Transformation Models with an Application to Generalized Accelerated Failure-time Models" (rev. 05/2013: PDF)

Abstract: Consider a nonseparable model Y=R(X,U) where Y and X are observed, while U is unobserved and conditionally independent of X. This paper provides the first nonparametric test of whether R takes the form of a transformation model, meaning that Y is monotonic in the sum of a function of X plus a function of U. Transformation models of this form are commonly assumed in economics, including, e.g., standard specifications of duration models and hedonic pricing models. Our test statistic is asymptotically normal under local alternatives and consistent against nonparametric alternatives. Monte Carlo experiments show that our test performs well in finite samples. We apply our results to test for specifications of generalized accelerated failure-time (GAFT) models of the duration of strikes and of marriages.

816. Karim Chalak, "Identification of Average Random Coefficients under Magnitude and Sign Restrictions on Confounding" (12/2012: PDF)

Abstract: This paper studies measuring the average effects of X on Y in a structural system with random coefficients and confounding. We do not require (conditionally) exogenous regressors or instruments. Using proxies W for the confounders U, we ask how do the average direct effects of U on Y compare in magnitude and sign to those of U on W. Exogeneity and equi- or proportional confounding are limit cases yielding full identification. Alternatively, the elements of beta-hat are partially identified in a sharp bounded interval if W is sufficiently sensitive to U, and sharp upper or lower bounds may obtain otherwise. We extend this analysis to accommodate conditioning on covariates and a semiparametric separable specification as well as a panel structure and proxies included in the Y equation. After studying estimation and inference, we apply this method to study the financial return to education and the black-white wage gap.

815. Umut Mert Dur (University of Texas at Austin) and M. Utku Ünver, "Tuition Exchange" (11/2012: PDF)

Abstract: We introduce a new class of matching problems that mimics the tuition exchange programs employed by colleges in the US to enable the dependents of their eligible faculty to use their tuition benefits at other participating institutions. Each participating college has to maintain a balance between exported and imported students; a negative balance with exports exceeding imports is generally penalized by suspension from the program. On the other hand, these programs function through decentralized markets that make it difficult to sustain a balance. We show that any unbalanced market equilibrium respecting stability causes a race to the bottom by discouraging negative–balance colleges from exchange. To correct this failure, we propose a new centralized mechanism, two–sided top trading cycles (2S-TTC), a variant of the well–known TTC mechanism. This is the first time a one–sided matching mechanism has been modified for a two–sided market. This mechanism selects a balanced–efficient matching that cannot be manipulated by students and it respects internal priority bylaws of colleges regarding dependent eligibility. Moreover, it makes full participation a dominant strategy for colleges, thus encouraging exchange. We also show that 2S-TTC is the unique optimal mechanism fulfilling these objectives. There also exist tuition co-ops where maintaining a one–to–one balance is not the first objective. For these programs, to minimize imbalance while respecting stability, we also propose a new flexible mechanism with desirable properties.

814. Scott Fulford, "The precaution of the rich and poor" (09/2012: PDF)

Abstract: Do households use savings to buffer against income fluctuations? Despite its common use to understand household savings decisions, the evidence for the buffer-stock model is surprisingly weak and inconsistent. This paper develops new testable implications based on a property of the model that the assets that households target for precautionary reasons should encapsulate all preferences and risks and the target should scale one for one with permanent income. I test these implications using the Survey of Consumer Finances in the United States. Those with incomes over $60,000 fit the model predictions very well, but below $60,000 households become increasingly precautionary. Income uncertainty is unrelated to the level of precaution. Moreover, households hold substantially weaker precautionary tendencies than standard models with yearly income shocks predict. Instead I propose and estimate a model of monthly disposable income shocks and a minimum subsistence level that can accommodate these findings.

813. Peter Arcidiacono (Duke University), Andrew Beauchamp and Marjorie McElroy (Duke University), "Terms of Endearment: An Equilibrium Model Of Sex and Matching" (rev. 06/2013: PDF)

Abstract: We develop a directed search model of relationship formation which can disentangle male and female preferences for types of partners and for different relationship terms using only a cross-section of observed matches. Individuals direct their search to a particular type of match on the basis of (i) the terms of the relationship, (ii) the type of partner, and (iii) the endogenously determined probability of matching. If men outnumber women, they tend to trade a low probability of a preferred match for a high probability of a less-preferred match; the analogous statement holds for women. Using data from National Longitudinal Study of Adolescent Health we estimate the equilibrium matching model with high school relationships. Variation in gender ratios is used to uncover male and female preferences. Estimates from the structural model match subjective data on whether sex would occur in one's ideal relationship. The equilibrium result shows that some women would ideally not have sex, but do so out of matching concerns; the reverse is true for men.

812. Andrew Beauchamp, "Abortion Costs, Separation and Non-Marital Childbearing" (08/2012: PDF)

Abstract: How do abortion costs affect non-marital childbearing? While greater access to abortion has the first-order effect of reducing childbearing among pregnant women, it could nonetheless lead to unintended consequences via effects on marriage market norms. Single motherhood could rise if lower-cost abortion makes it easier for men to avoid marriage. We identify the effect of abortion costs on separation, cohabitation and marriage following a birth by exploiting the "miscarriage-as-a-natural experiment" methodology in combination with changes in state abortion laws. Recent increases in abortion restrictions appear to have lead to a sizable decrease in a woman's chances of being single and increased the chances of cohabitation. The result underscores the importance of the marriage market search behavior of men and women, and the positive and negative effects of abortion laws on bargaining power for women who abort and give birth respectively.

811. Andrew Beauchamp, "Regulation, Imperfect Competition, and the U.S. Abortion Market" (rev. 10/2013: PDF)

Abstract: The market for abortion in the U.S. has become increasingly concentrated in recent years and many states have tightened abortion regulations aimed at providers. Using unique data on abortion providers I estimate a dynamic model of entry, exit and service provision which captures the effect of regulation on provider behavior. High fixed costs explain the growth of large clinics and estimates show regulation increased entry costs for small providers. A simulation removing all regulations increases entry by smaller providers into incumbent- markets: competition increases as does the number of abortions. Targeted entry subsidies, however, increase access while only slightly increase abortion.

810. Arthur Lewbel, "An Overview of the Special Regressor Method" (09/2012: PDF)

Abstract: This chapter provides background for understanding and applying special regressor methods. This chapter is intended for inclusion in the "Handbook of Applied Nonparametric and Semiparametric Econometrics and Statistics," Co-edited by Aman Ullah, Jeffrey Racine, and Liangjun Su, to be published by Oxford University Press.

809. Laurens Cherchye (University of Leuven), Bram De Rock Université Libre de Bruxelles), Arthur Lewbel and Frederic Vermeulen (Tilburg University), "Sharing Rule Identification for General Collective Consumption Models" (rev. 07/2013: PDF)

Abstract: We propose a method to identify bounds (i.e. set identification) on the sharing rule for a general collective household consumption model. Unlike the effects of distribution factors, it is well known that the level of the sharing rule cannot be uniquely identified without strong assumptions on preferences across households of different compositions. Our new results show that, though not point identified without these assumptions, bounds on the sharing rule can still be obtained. We get these bounds by applying revealed preference restrictions implied by the collective model to the household’s continuous aggregate demand functions. We obtain informative bounds even if nothing is known about whether each good is public, private, or assignable within the household, though having such information tightens the bounds. An empirical application demonstrates the practical usefulness of our method.

808. Arthur Lewbel and Xun Tang (University of Pennsylvania), "Identification and Estimation of Games with Incomplete Information Using Excluded Regressors" (rev. 03/2013: PDF)

Abstract: The existing literature on binary games with incomplete information assumes that either payoff functions or the distribution of private information are finitely parameterized to obtain point identification. In contrast, we show that, given excluded regressors, payoff functions and the distribution of private information can both be nonparametrically point identified. An excluded regressor for player i is a sufficiently varying state variable that does not affect other players’ utility and is additively separable from other components in i’s payoff. We show how excluded regressors satisfying these conditions arise in contexts such as entry games between firms, as variation in observed components of fixed costs. Our identification proofs are constructive, so consistent nonparametric estimators can be readily based on them. For a semiparametric model with linear payoffs, we propose root-N consistent and asymptotically normal estimators for parameters in players’ payoffs. Finally, we extend our approach to accommodate the existence of multiple Bayesian Nash equilibria in the data-generating process without assuming equilibrium selection rules.

807. Yingying Dong (California State University-Irvine) and Arthur Lewbel, "A Simple Estimator for Binary Choice Models With Endogenous Regressors" (06/2012: PDF)

Abstract: This paper provides a few variants of a simple estimator for binary choice models with endogenous or mismeasured regressors, or with heteroskedastic errors, or with panel fixed effects. Unlike control function methods, which are generally only valid when endogenous regressors are continuous, the estimators proposed here can be used with limited, censored, continuous, or discrete endogenous regressors, and they allow for latent errors having heteroskedasticity of unknown form, including random coefficients. The variants of special regressor based estimators we provide are numerically trivial to implement. We illustrate these methods with an empirical application estimating migration probabilities within the US.

806. Scott Duke Kominers (University of Chicago) and Tayfun Sönmez, "Designing for Diversity: Matching with Slot-Specific Priorities" (06/2012: PDF)

Abstract: To encourage diversity, branches may vary contracts' priorities across slots. The agents who match to branches, however, have preferences only over match partners and contractual terms. Ad hoc approaches to resolving agents' indifferences across slots in the Chicago and Boston school choice programs have introduced biases, which can be corrected with more careful market design. Slot-specific priorities can fail the substitutability condition typically crucial for outcome stability. Nevertheless, an embedding into a one-to-one agent--slot matching market shows that stable outcomes exist and can be found by a cumulative offer mechanism that is strategy-proof and respects unambiguous improvements in priority.

805. Orhan Aygün (Boston College) and Tayfun Sönmez, "The Importance of Irrelevance of Rejected Contracts in Matching under Weakened Substitutes Conditions" (06/2012: PDF)

Abstract: We show that Hatfield and Kojima (2010) inherits a critical ambiguity from its predecessor Hatfield and Milgrom (2005), and clearing this ambiguity has strong implications for the paper. Of the two potential remedies, the first one results in the failure of all theorems except one in the absence of an additional irrelevance of rejected contracts (IRC) condition, whereas the second remedy eliminates the transparency of the results, reduces the scope of the model, and contradicts authors' interpretation of the nature of their contributions. Fortunately all results are restored when IRC is explicitly assumed under the first remedy.

804. Orhan Aygün (Boston College) and Tayfun Sönmez, "Matching with Contracts: The Critical Role of Irrelevance of Rejected Contracts" (05/2012: PDF)

Abstract: We show that an ambiguity in setting the primitives of the matching with contracts model by Hatfield and Milgrom (2005) has serious implications for the model. Of the two ways to clear the ambiguity, the first (and what we consider more "clean") remedy renders several of the results of the paper invalid in the absence of an additional irrelevance of removed contracts condition implicitly assumed throughout the paper, whereas the second remedy results in the lack of transparency in presentation of results while at the same time reducing the scope of the analysis with no clear benefit.

803. Ryan Chahrour, "Public Communication and Information Acquisition" (07/2012: PDF)

Abstract: This paper models the tradeoff, perceived by central banks and other public actors, between providing the public with useful information and the risk of overwhelming it with excessive communication. An information authority chooses how many signals to provide regarding an aggregate state and agents respond by choosing how many signals to observe. When agents desire coordination, the number of signals they acquire may decrease in the number released. The optimal quantity of communication is positive, but does not maximize agents' acquisition of information. In contrast to a model without information choice, the authority always prefers to provide more precise signals.

802. Michael Belongia (University of Mississippi) and Peter Ireland, "A "Working" Solution to the Question of Nominal GDP Targeting" (rev. 01/2013: PDF)

Abstract: Although a number of economists have tried to revive the idea of nominal GDP targeting since the financial market collapse of 2008, relatively little has been offered in terms of a specific framework for how this objective might be achieved in practice. In this paper we adopt a strategy outlined by Holbrook Working (1923) and employed, with only minor modifications, by Hallman, et al. (1991) in the P-Star model. We then present a series of theoretical and empirical results to show that Divisia monetary aggregates can be controlled by the Federal Reserve and that the trend velocities of these aggregates, by virtue of the properties of superlative indexes, exhibit the stability required to make long-run targeting feasible.

801. Michael Belongia (University of Mississippi) and Peter Ireland, "Quantitative Easing: Interest Rates and Money in the Measurement of Monetary Policy" (06/2012: PDF)

Abstract: Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears as a radical break from standard practice. Superlative (Divisia) measures of money, however, often help in forecasting movements in key macroeconomic variables, and the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate.


Working Paper Index
 
WP 801-       
WP 776-800  | WP 751-775  | WP 726-750  | WP 701-725
WP 676-700  | WP 651-675  | WP 626-650  | WP 601-625
WP 576-600  | WP 551-575  | WP 526-550  | WP 501-525
WP 476-500  | WP 451-475  | WP 426-450  | WP 401-425
WP 376-400  | WP 351-375  | WP 326-350  | WP 300-325
WP 198-299


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