This week from CEPR: August 29

Thursday, August 29, 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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    Carsten Bienz, Karin S. Thorburn and Uwe Walz
    CEPR DP No. 13944 | 21 August

    A new CEPR study by Carsten Bienz, Karin Thorburn and Uwe Walz examines the incentive effects of Norwegian private equity professionals' ownership in the funds they manage. The study shows that the greater the managers’ personal investment in the funds, the more likely they are to select less risky firms and use more debt financing. Among the findings:

    • Firm risk decreases and leverage increases with the manager's ownership in the fund, but largely only when scaled with their wealth. 
    • The higher the ownership, the smaller is each individual investment, increasing fund diversification. 

    The study concludes that wealth is of first order importance when designing incentive contracts requiring private equity fund managers to coinvest.


    Lars E.O. Svensson  
    CEPR DP No. 13949 | 23 August

    A new CEPR study by Lars Svensson, former Deputy Governor of the Swedish Central Bank, outlines why the US Federal Reserve should implement forecast targeting. Forecast targeting is the selection of policy rates that will most effectively fulfil the Fed’s dual mandate of price stability and maximum employment, as well as publishing the policy-rate path to justify them. The study argues that: 

    • Publication and justification will contribute to making the policy-rate path and forecasts credible with the financial market and other economic agents and thereby more effectively implement the Fed's policy. 
    • With such information made public, external observers can review Fed policy, both in real time and after the outcomes for inflation and employment have been observed, and the Fed can be held accountable for fulfilling its mandate. 
    • In contrast to simple policy rules that rely on very partial information in a rigid way, forecast targeting allows all relevant information to be taken into account, and it has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. 
    • The Fed is arguably to a considerable extent already practicing forecast targeting.

    Figure 1: Forecast targeting and the Taylor rule: Forward-looking model

    • PROMOTING FARMERS’ WELLBEING IN DEVELOPING COUNTRIES: Evidence from a Sustainable Quality Programme for coffee in Colombia  

    BUYER-DRIVEN UPGRADING IN GVCS: The sustainable quality program in Colombia
    Rocco Macchiavello and Josepa Miquel-Florensa
    CEPR DP No. 13935 | 19 August

    A new CEPR study by Rocco Macchiavello and Josepa Miquel-Florensa evaluates the ‘Sustainable Quality Programme’ in Colombia – a quality upgrading programme involving farmers, intermediaries, exporters and the multinational buyer Nespresso. The study tackles three issues:

    • The impact of the programme on the supply of quality coffee: eligible farmers upgraded their plantations, expanded land under coffee cultivation, increased quality and received higher farm gate prices. 
    • How the programme gains are shared between farmers and intermediaries along the chain: in regions in which the programme was rolled out, surplus along the chain increased by 30%. Eligible farmers kept at least half of the gains and their welfare increased by 20%. 
    • How the programme works conducting counterfactual exercises and comparing the programme price premia along the chain against two prominent non-buyer driven certifications: the programme achieved better transmission of the export gate price premium for quality to the farm gate and curbed market failures that stifled quality upgrading. Contractual arrangements at the export gate significantly contributed to higher farmers welfare in rural areas.

    Figure 1: The Colombia Coffee Chain and The Sustainable Quality Program


    Vincenzo Bove, Leandro Elia, Massimiliano Ferraresi 
    25 August 2019

    A new study by Vincenzo Bove, Leandro Elia and Massimiliano Ferraresi investigates how immigration affects the perception of crime and the allocation of resources in Italy. Using detailed figures on government spending and municipal-level data on the population of foreign-born residents, it finds that immigration led to increased spending for police protection due not to higher crime rates but to the deterioration of social capital and unfounded fears of criminality.


    Giancarlo Corsetti, Meredith A. Crowley, Lu Han 
    26 August 2019

    New research by Giancarlo Corsetti, Meredith Crowley and Lu Han shows that the UK export price response to the sterling depreciation after the Brexit vote depended on the currency in which UK firms invoiced their cross-border transactions. Firms invoicing in sterling gained competitiveness by passing the pound’s weakness through to prices, unlike firms invoicing in vehicle or destination currencies, which adjusted their mark-ups.

    COMPARING HOUSE PRICES ACROSS COUNTRIES: New evidence on the number of years of income needed to  buy an average dwelling

    Jean-Charles Bricongne, Alessandro Turrini  
    21 August 2019

    A new study by Jean-Charles Bricongne and Alessandro Turrini outlines the creation of an integrated database covering advanced and emerging economies on the price per square metre of housing. The model shows that price-to-income ratios vary substantially at the extremes, but that most economies converge around the median level. Country rankings based on housing prices in euros versus PPP also vary significantly. 

    PHYSICIAN BIAS AND RACIAL DISPARITIES IN HEALTH: Evidence from civil war veterans

    Shari Eli, Trevon Logan, Boriana Miloucheva  
    20 August 2019

    A new study by Shari Eli, Trevon Logan and Boriana Miloucheva investigates the continuing mortality gap between blacks and whites in the United States, why the gap has remained so large and why it has persisted over the last century. 

    The study analyses unique data on black and white Civil War veterans to measure one of the earliest known incidences of physician bias against African-Americans. The authors show that physician bias had large effects on income and longevity of blacks relative to whites, and consider the ways in which doctors’ attitudes still contribute to the racial mortality gap today.  


    Hakan Yilmazkuday  
    21 August 2019

    During the Global Crisis, international trade decreased more than overall economic activity, despite standard trade models predicting a one-to-one relationship. This ‘Great Trade Collapse’ has been investigated extensively by researchers, resulting in alternative competing explanations. 

    A new study by Hakan Yilmazkuday evaluates the contribution of each theory using data from the United States. The results show that retail inventories have contributed the most to the collapse and the corresponding recovery, followed by protectionist policies, intermediate-input trade and trade finance. Productivity and demand shocks have played negligible roles. 


    James Heckman, Ganesh Karapakula  
    23 August 2019


    A new study by Nobel laureate James Heckman and Ganesh Karapakula examines the effects of the iconic Perry Preschool Project, a social experiment implemented in the United States in the 1960s, which saw five cohorts of African-American children from low-income families in Ypsilanti, Michigan, randomly assigned to attend free, high-quality pre-school. 

    The results show some lasting benefits, particularly for males, of an early childhood education programme targeted at disadvantaged children – from reduced crime to improved executive functioning, socio-emotional skills, earnings and health. It also documents the intergenerational benefits of the intervention on the children of the original participants.   

    HOW EMPLOYERS RECRUIT THE MOST TALENTED TECH WORKERS: Learning opportunities and modern facilities 

    Prasanna Tambe, Xuan Ye, Peter Cappelli
    22 August 2019

    New research by Prasanna Tambe, Xuan Ye and Peter Cappelli shows how employers entice talented candidates in an increasingly competitive tech sector. The study demonstrates that wages alone do not determine recruitment, and that incentives such as working with more interesting technologies and opportunities to acquire training in a new technology are more decisive. For older and more established technologies, this premium disappears. The effects are also stronger for younger workers. 


    Sarah Cohodes, Elizabeth Setren, Chris Walters  
    22 August 2019

    US 'No Excuses' charter schools share a set of practices including high expectations, strict discipline, increased time in school, frequent teacher feedback, high-intensity tutoring & data-driven instruction. Their success can be scaled up, according to a new study by Sarah Cohodes, Elizabeth Setren and Chris Walters, examines the expansion of the charter school sector in Boston, Massachusetts. 

    The findings reveal that the city’s charter sector maintained effectiveness while doubling in size. The authors conclude that organisational practices and entrusting proven providers in the sector may be an important component of its success at scale.  

    ANALYSING INDIA’S DEMONETISATION: Substantial short-term economic disruption but potential long-term benefits

    Gabriel Chodorow-Reich
    20 August 2019

    A new study by Gabriel Chodorow-Reich uses new data sources to quantify the effects on economic activity and credit growth of the unprecedented natural experiment of India's demonetisation in 2016, which reduced the volume of currency in circulation by 75% overnight. The results show substantial economic disruption in the short term, but some long-run benefits in tax collection, non-cash payments and a shift towards savings in non-financial instruments. These effects can teach us about future events, such as the economic consequences of a country leaving the euro. 

    EVALUATION OF ACADEMIC RESEARCH: Peer review versus bibliometric algorithm

    Gianni De Fraja 
    23 August 2019

    How would units of assessment submitted to the UK’s 2014 evaluation of scholarly research have fared if they had had been assessed using the bibliometric algorithm of the agency for evaluation of research in Italian universities?  

    A new study by Gianni De Fraja and colleagues finds very high correlation between the two methods. In particular, the allocation of government funding to institutions that would have been obtained is essentially identical to that determined by the rules used by the REF2014. The authors conclude that the same results could have been achieved at considerably lower cost.

    MARKET POWER OF FIRMS IN THE EUROZONE: Contrasts with the United States

    Maria Chiara Cavalleri, Alice Eliet, Peter McAdam, Filippos Petroulakis, Ana Soares, Isabel Vansteenkiste  
    24 August 2019

    Recent evidence suggests that competitive intensity has been declining in the United States. A new study by Maria Chiara and colleagues contributes to our understanding of these trends in the euro area. 

    It finds that, in contrast to the US situation, market power metrics in the euro area have been relatively stable over recent years and mark-ups have marginally been trending down since the late 1990s. This suggests that more research on the sectoral level with better data is necessary to analyse the complex welfare and policy implications of these developments. 

    FUNDAMENTAL DRIVERS OF CRYPTOCURRENCY PRICES: Trustworthiness and user network

    Siddharth Bhambhwani, Stefanos Delikouras, George Korniotis  
    24 August 2019

    A new study by Siddharth Bhambhwani, Stefanos Delikouras and George Korniotis argues that there are two fundamental factors that drive cryptocurrency prices in the long run: the trustworthiness of the cryptocurrency’s blockchain; and the number of people using the blockchain. The prices of major cryptocurrencies, such as Bitcoin, Ethereum and Monero, are thus grounded in reality since they are based on these fundamentals. In some periods prices deviate, but they eventually retrace the trend over the long term. 


    Bernard Hoekman, Petros Mavroidis  
    26 August 2019

    A new study by Bernard Hoekman and Petros Mavroidis argues that the Appellate Body of the World Trade Organization (WTO), which could cease to operate in December 2019 unless the United States stops blocking new appointments, should stick to the mandate that was agreed in 1995 and not overstep it. The study also suggests that the WTO adjudication process should be reformed by increasing the use of economics in panel reports, by improving the quality of panellists and Appellate Body members, by reducing the politicisation of appointments and by changing the modus operandi of dispute settlement.  


    Michael Reich interviewed by Tim Phillips, 23 August 2019

    The United States has an epidemic of ‘deaths of despair’. Michael Reich tells Tim Phillips that new research implies that a $15 minimum wage doesn't just cut poverty: it also saves lives. But is Congress listening?


    Rachel Griffith, 22 August 2019

    Rachel Griffith argues that the current corporate tax system needs a rethink if it is to be made fit for modern times. 

    When corporate income is taxed, is it the shareholders who bear the cost or do firms shift it on to workers via lower wages or onto consumers via higher prices? Is the money gained through the tax lost through knock-on disincentives to innovation and growth? In a globalised economy it is no longer clear who has the right to tax a company and how much they should expect them to pay.