This week from CEPR: August 22

Thursday, August 22, 2019

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    Jakub Cerveny and Jan C. van Ours
    CEPR DP No. 13933 | 18 August

    A new CEPR study by Jakub Cerveny and Jan van Ours examines the prices of cannabis sold over the ‘dark web’ through an anonymous internet marketplace called AlphaBay. The study analyses cannabis prices of 500 listings from 140 sellers originating from 18 countries. The study shows that both listing characteristics and country characteristics affect prices. Among the findings: 

    • Cannabis prices are lower if sold in larger quantities, so there is a clear quantity discount.
    • Cannabis prices increase with perceived quality: strains that had featured highly in the Cannabis Cup rankings are sold, and willingly bought, at a higher price per gram. 
    • Prices of cannabis from countries where it is still an illicit drug are, on average, substantially higher. 
    • Cannabis prices are also higher when the seller is from a country with a higher GDP per capita or higher electricity prices. In countries such as Cambodia and India, the price is substantially lower than in Germany.

    The internet-based cannabis market thus seems to be characterised by ‘monopolistic competition’, where many sellers offer differentiated products with quality variation causing a dispersion of prices and sellers have some control over the prices.  

    Figure 1: Box plot of cannabis prices by country of origin
     


    • HEALTHY COMPETITION IN LA LIGA CONTRIBUTED TO SPAIN’S DOMINANCE OF CHAMPIONS LEAGUE FOOTBALL, 2008-2018

    THE INTERDEPENDENCE OF DOMESTIC AND INTERNATIONAL SUCCESS: The case of the UEFA Champions League
    Juan D. Moreno-Ternero and Shlomo Weber  
    CEPR DP No. 13927 | 13 August

    A new CEPR study by Juan Moreno-Ternero and Shlomo Weber analyses the success of Spanish football teams in the UEFA Champions League during the decade from 2008 to 2018. The success of Spanish teams in this period is linked to the intermediate level of ‘competitive balance’ in its domestic competition – La Liga – with respect to the other big European competitions – the English Premier League, Italy’s Serie A and Germany’s Bundesliga. Among the findings:

    • During that decade, La Liga was characterised by rivalry between two powerhouses (Barcelona and Real Madrid), and involved a significant amount of effort (and stress) to win domestically, unlike Juventus and Bayern Munich, who dominated their domestic leagues. 
    • The low levels of competitive balance in Serie A and the Bundesliga could have hurt efforts to challenge internationally, as these teams would not be seriously challenged on a weekly basis, which would render them unprepared to face much tougher European competition. 
    • With the occasional exception of Atletico Madrid, the rest of the teams in La Liga offered little domestic competition, in contrast, for example, with the English Premier League, which had four different champions in its last seven seasons. 

    The study concludes that neither an extremely high domestic competitive level (as in the Premier League), which might require a strong effort to win the tournament domestically, leaving teams exhausted for the last rounds of the international competition, nor a very low domestic competitive level (as in the Bundesliga or Serie A), which might leave teams out of shape and mentally unprepared for the last rounds of the international competition, is a good situation.

    Table 1: Competitive balance rank averages of the Big 4 Leagues during the period 2013-2018

    NoteH-rank-average: is based on the sum of the quadratic share of points won by each club in a league. CR-rank-average: the ratio of the share of points won by the first 5 clubs compared with the entire league. SDLP-rank-average: standard deviation of league points


    • UNANTICIPATED INCREASES IN HOUSE VALUES BOOST MORTGAGE BORROWING: Evidence from Denmark  

    HOUSING WEALTH EFFECTS AND MORTGAGE BORROWING: THE EFFECT OF SUBJECTIVE UNANTICIPATED CHANGES IN HOME VALUES ON HOME EQUITY EXTRACTION IN DENMARK 
    Henrik Yde Andersen and Søren Leth-Petersen
    CEPR DP No. 13926 | 13 August

    A new CEPR study by Henrik Yde Andersen and Søren Leth-Petersen examines whether changes in home values drive mortgage-based equity extraction. 

    The study uses information about current and expected future home values to calculate unanticipated home value changes. It then links this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. The study finds that:  

    • The marginal propensity to increase mortgage debt is 2-5% of unanticipated home value gains.
    • There is no adjustment to other components of the portfolio, and mortgage extraction leads to an increase in spending.
    • The effect is driven by young households with high loan-to-value ratios, which is consistent with the effect being driven by collateral constraints.
    • The price effect is magnified among fixed-rate mortgage borrowers who have an incentive to refinance their loans to lock in a lower market rate.

    These results point to the importance of the mortgage market in transforming price increases into spending. They suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

    Figure 1: Housing prices and spending

    Note: The left panel shows the evolution of house prices and household sector spending in fixed prices. The right panel shows the evolution of house prices in selected regions in Denmark.



    FIRMS IN DEVELOPING COUNTRIES NEED BIG IMPROVEMENTS IN MANAGEMENT QUALITY: Evidence from India

    Achyuta Adhvaryu, Sadish D, Anant Nyshadham, Jorge Tamayo
    19 August 2019

    Why do firms in developing countries invest so little in improving management despite the potential gains? A new study by Achyuta Adhvaryu, Sadish D, Anant Nyshadham and Jorge Tamayo suggests that firms might not know what constitutes good management or how valuable it is. Using evidence from the India garment industry, the study argues that firms could significantly benefit from screening and training management to achieve higher productivity. 

    LESSONS IN ECONOMICS FROM ALGERIA’S VICTORY IN THE AFRICA CUP OF NATIONS

    Rabah Arezki 
    19 August 2019

    Algeria’s recent victory in the Africa Cup of Nations has united a country whose development model has frustrated its young and educated workforce. Writing at Vox, Rabah Arezki offers four lessons for economic development from the national football team’s success: on the role of competition and market forces, mobilising talent, the role of managers, and the importance of referees (that is, regulation). He concludes that Algeria has a unique window of opportunity to undertake bold reforms and transform its economy. 

    THE LURE OF OFFSHORING: New evidence that US multinationals are behind the rapid decline in US manufacturing employment

    Christoph Boehm, Aaron Flaaen, Nitya Pandalai-Nayar  
    15 August 2019

    What has caused the rapid decline in US manufacturing employment in recent decades? A new study by Christoph Boehm, Aaron Flaaen and Nitya Pandalai-Nayar uses novel data to investigate the role of US multinationals and finds that they were a key driver behind job losses. These firms set up production facilities abroad and imported intermediate goods back to the United States, with the consequence of reduced demand for domestic manufacturing workers.


    EARLY EDUCATION PROGRAMMES BENEFIT TARGET FAMILIES AND THEIR NEIGHBOURS TOO: Evidence from Chicago 

    John List, Fatemeh Momeni, Yves Zenou 
    18 August 2019

    Early childhood interventions delivered to low-income families in Chicago had big positive effects not only on the cognitive and non-cognitive development of young children in the programme but also on those in local neighbourhoods. That is the central finding of a new study by John List, Fatemeh Momeni and Yves Zenou. The research, which examines a large-scale early childhood intervention targeting the educational attainment of over 2,000 disadvantaged children, finds evidence of large positive effects on both ‘treatment’ children and ‘control children’ living nearby. 

    RELIGIOSITY HAMPERS ECONOMIC DEVELOPMENT: Evidence from late 19th-century France

    Mara Squicciarini 
    18 August 2019

    A new study by Mara Squicciarini examines the influence of the Catholic Church on technical education in France during the Second Industrial Revolution. It finds that areas with higher ‘religiosity’ had lower levels of industrial and economic development, suggesting that conservative religion can hamper economic development when it prevents primary schools from adopting technical education.
     

    The findings indicate that the relationship between religion and economic development becomes negative when religion clashes with and hinders the adoption of ‘economically useful’ knowledge, discourages innovative activities and affects the content of education, and thus the accumulation of human capital among the population.


    FOREIGN TAKEOVERS BOOST THE INTERNATIONAL TRANSFER OF ENVIRONMENTALLY FRIENDLY TECHNOLOGIES: Evidence from Indonesia

    Arlan Brucal, Beata Javorcik, Inessa Love 
    16 August 2019


     

    A new study by Arlan Brucal, Beata Javorcik and Inessa Love finds that foreign direct investment (FDI) can serve as a channel for the international transfer of environmentally friendly technologies and practices, thus directly contributing not only to economic growth but also to environmental progress. Using data from the Indonesian manufacturing census, the study shows that plants undergoing foreign acquisitions reduced their energy intensity by about 30% two years after acquisition by multinationals. 

    INTERDEPENDENCE OF BUSINESS CYCLES ACROSS COUNTRIES: New evidence on the role of productivity, technology and trade linkages in the global transmission of economic shocks 

    Zhen Huo, Andrei Levchenko, Nitya Pandalai-Nayar 
    17 August 2019

    The international co-movements of business cycles is a key determinant of trade and monetary policy, but the ways in which it is affected by technology, productivity, and trade openness are not fully understood. A new study by Zhen Huo, Andrei Levchenko and Nitya Pandalai-Nayar shows how such co-movements are affected by trade linkages and technology. It finds that non-technology shocks contribute more to international co-movement than productivity shocks, and that transmission plays a notable but small part in co-movements.


    AUTOMATIC ENROLMENT IN PENSION PLANS DOES NOT RAISE DEBT AND FINANCIAL DISTRESS: Evidence from the US Army 

    John Beshears, James Choi, David Laibson, Brigitte C. Madrian, William Skimmyhorn 
    17 August 2019

    A new study by John Beshears, James Choi, David Laibson, Brigitte Madrian and William Skimmyhorn examines a natural experiment in which the US Army began automatically enrolling its civilian employees in its retirement savings plan. It finds strong evidence against the hypothesis that automatic enrolment increases financial distress and debt. 

    HOW AMPLIFICATION EFFECTS LEAD TO FINANCIAL CRISES

    Marcus Miller, Lei Zhang
    16 August 2019

    A new study by Marcus Miller and Lei Zhang studies the amplification effects that can operate despite ‘value at risk' regulation, which suffers from the ‘fallacy of composition’. The study shows that the magnitudes of booms and busts are amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets.


    INTER-CITY TRADE ESTIMATES CURRENTLY UNDERPREDICT EXPORT FIGURES: A new model of analysis 

    Tomoya Mori, Jens Wrona
    16 August 2019

    The gravity equation has often been used to explain trade between regions or cities within countries. But it assumes that the distribution of industries is exogenous. 
     

    A new study by Tomoya Mori and Jens Wrona argues that the location of cities is endogenous and that all industries that are present in a city of a given size are expected to be also present in all cities of equal or larger size. Using data from Japanese cities, the study shows that exports from large, centrally located cities to their nearby hinterland are systematically underpredicted by aggregate gravity estimations.


    INTERBANK NETWORKS POSE SIGNIFICANT LIQUIDITY RISKS TO BANKS AND THE WIDER ECONOMY IN A CRISIS: Evidence from 20th century America

    Matthew Jaremski, David Wheelock 
    15 August 2019

    A new study by Matthew Jaremski and David Wheelock draw on evidence from 20th century America to show how the founding of the Federal Reserve and the Great Depression affected interbank networks and lending practices. The study argues that the creation of the Fed reduced network concentration and therefore contagion risk, but the system remained vulnerable to local panics.


    PURELY FINANCIAL MARKET PARTICIPANTS IMPROVE SPOT MARKET PERFORMANCE: Evidence from the California energy market

    Akshaya Jha, Frank Wolak 
    14 August 2019

    Does futures trading make spot markets more efficient? A new study by Akshaya Jha and Frank Wolak uses the introduction of purely financial traders in the California energy market to show that their presence reduced average price differences between day-ahead and real-time markets. The introduction of financial trading in high-demand hours saved $23 million in fuel costs, benefits that accrue both to producers and consumers, and reduced emissions and pollution.

    HOW THE DYNAMICS OF HOUSEHOLD ORGANISATION ARE AFFECTED BY LAND SCARCITY AND TECHNICAL CHANGE: Evidence from West Africa

    Catherine Guirkinger, Jean-Philippe Platteau 
    14 August 2019

    There is a longstanding debate between economists and anthropologists about the effects of population pressure and market integration on household composition. Drawing on both traditions, a new study by Catherine Guirkinger and Jean-Philippe Platteau argues that the evolution of family organisation depends on unexpected factors: land scarcity encourages complex households to split into nuclear households, but technical progress encourages farm consolidation. 


    KING LEOPOLD’S GHOST: The legacy of labour coercion in the DRC continues to hurt education, wealth and health

    Sara Lowes, Eduardo Montero 
    14 August 2019

    Between 1885 and 1908, the Congo Free State was the site of some of the worst human rights abuses in Africa’s colonial history. A study by Sara Lowes and Eduardo Montero, taken from a Vox eBook, examines the long-term effects of labour coercion on economic development in what is now the Democratic Republic of Congo (DRC).

    The study demonstrates that the labour coercion during the rubber regime under King Leopold II of Belgium has undermined long-run development in the DRC, despite the regime lasting only 14 years. Areas where labour coercion was implemented have on average 1.5 fewer years of education, are 20% less wealthy and have worse cumulative health status. 

    PUBLIC POLICY HAD LITTLE EFFECT ON TUBERCULOSIS MORTALITY IN THE EARLY 20TH CENTURY: Evidence from the first community-wide health experiment

    Karen Clay, Peter Juul Egedesø, Casper Worm Hansen, Peter Jensen, Avery Calkins
    13 August 2019

    A new study by Karen Clay, Peter Juul Egedesø, Casper Worm Hansen, Peter Jensen and Avery Calkins analyses the effects of the first public health demonstration in Framingham, Massachusetts on TB mortality, total mortality and infant mortality in the early 20th century. Although generally considered a success, the findings suggest that the Framingham Demonstration in fact had little effect on TB mortality.

    HIGH-FREQUENCY TRADING CAN INCREASE MARKET EFFICIENCY AND THE QUALITY OF TRADE

    Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl 
    13 August 2019

    Many policy-makers are concerned that fast trading has adverse effects on markets, although the existing evidence is ambiguous. A new study by Giancarlo Corsetti, Romain Lafarguette and Arnaud Mehl argues that high-frequency trading can increase market efficiency and the quality of trade. By creating noise, fast trades may prevent traders with a herd mentality from pushing prices in one direction. The study sheds new light on the role of entropy in situations of market stress. 

     


    INVESTING IN BREXIT

    Holger Breinlich, Dennis Novy interviewed by Tim Phillips, 16 August 2019

    As Brexit nears (again), are UK firms choosing to invest at home or in other European markets? Are European firms investing in the UK to preserve access to its markets? And has ‘Global Britain’ got off the drawing board yet? Holger Breinlich and Dennis Novy lead Tim Phillips through the numbers.



    WHY US BUSINESS IS BECOMING LESS DYNAMIC

    Ufuk Akcigit , 15 August 2019

    A key factor in the observed decline in US business dynamism is the lack of knowledge diffusion from leader firms to follower firms. New technologies need to be diffused as widely as possible in order for the economy to benefit. Ufuk Akcigit of the University of Chicago explains that the focus needs to be on the secondary market and on antitrust policies.