This week from CEPR: January 13
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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10% OF JOBS WOULD NOT BE VIABLE AT CURRENT WAGES IF WORKERS DIDN’T UNDERESTIMATE WHAT THEY COULD EARN ELSEWHERE: Evidence from Germany
WORKER BELIEFS ABOUT OUTSIDE OPTIONS
Simon Jäger, Christopher Roth, Nina Roussille, Benjamin Schoefer
CEPR DP No. 16887 | January 2022
A new CEPR study by Simon Jäger, Christopher Roth, Nina Roussille and Benjamin Schoefer uses survey data from Germany to show that workers believe that wages at comparable firms are much closer to their current wage than they actually are. The authors asked each employed respondent about the expected wage change accompanying a switch to their next-best employer. The results show that workers wrongly anchor their beliefs about outside options on their current wage. In particular, low-paid workers underestimate wages elsewhere.
Such anchoring of beliefs about outside options can give employers monopsony power and lead to labour market segmentation with a high- and a low-wage sector. The research uncovers systematic sorting with objectively low-paying firms employing workers that strongly underestimate their outside options. If workers had correct beliefs about wages paid by other employers, at least 10% of jobs would not be viable at current wages, concentrated among workers employed at firms with the lowest wages.
Why might these biases persist? On the worker side, privacy norms might keep workers from sharing their salary information with one another. On the employer side, firms may have an incentive to cloud and obfuscate their wages.
GOING CASHLESS CAN SIGNIFICANTLY INCREASE TAX REVENUES IN DEVELOPING ECONOMIES: Evidence from India
DOES GOING CASHLESS MAKE YOU TAX-RICH? Evidence from India's demonetization experiment
Satadru Das, Lucie Gadenne, Tushar Nandi, Ross Warwick CEPR DP No. 16891 | January 2022
New data from India’s 2016 demonetisation policy indicates that the greater use of electronic payments leads to firms reporting more sales to the tax authorities. This effect is strong enough to explain roughly half of the large (11 %) increase in reported sales observed during demonetization.
This is the main finding from a new CEPR study by Satadru Das, Lucie Gadenne, Tushar Nandi and Ross Warwick which investigates the effect of electronic payments technology on firms' tax compliance in a large developing economy. The research examines India's 2016 demonetisation policy which, by limiting the availability of cash, led to a large increase in the use of electronic forms of payments. Using data on firms' tax returns and variation in the strength of the demonetization shock across local areas, the authors show that:
- A higher use of electronic payments leads to firms reporting higher sales to the tax authorities.
- This effect is strong enough to explain roughly half of the large increase in reported sales observed during demonetisation.
- The evidence regarding the effect on tax payments is more mixed: with effects of similar sizes but less precisely estimated on total taxes paid.
The research suggests cautious optimism regarding the potential of new payment technologies to increase tax capacity in developing countries.
Figure: Evolution of key tax returns and electronic transaction variables over time
WHY ‘DEEP TECH’ START-UPS STRUGGLE TO ATTRACT FUNDING: The importance of technical and commercial challenges to growth
CAUGHT IN THE MIDDLE: The Bias Against Startup Innovation With Technical And Commercial Challenges
Thomas Rønde, Ashish Arora, Andrea Fosfuri
CEPR DP16862 | January 2022
By applying complex technologies rooted in science and advanced engineering to some of society’s most pressing problems, deep tech innovation promises to bring a large array of new, radical advances to the marketplace. However, set aside a few notable exceptions, deep tech innovation has not delivered up to expectations, and has failed to attract sufficient risk capital. A new CEPR study by Thomas Rønde, Ashish Arora and Andrea Fosfuri shows that deep tech start-ups do not receive sufficient funding because, other things equal, they are privately less valuable relative to the total value they create.
Many deep tech inventions, given their strong dependence on science and basic research, are initiated in start-ups, especially university spinoffs. However, startups often lack the complementary assets that are required to scale up and commercialize such technologies. Complementary assets are typically owned by incumbents.
The analysis shows that the market for start-ups does not work well when technologies display both technical and commercial challenges, which is typical of deep tech innovation. Start-ups that develop projects which entail both types of challenges are ‘caught in the middle’ when negotiating the acquisition price with an incumbent. The upfront investment in addressing the technical challenges exposes them to holdup problems and the follow-on investment in solving the commercial challenges mutes the threat of the start-up commercialising the technology itself.
This results in a low acquisition price for the start-up relative to the societal value created by the technology. Thus, an innovation ecosystem, where start-ups develop new inventions, often based on university discoveries, and incumbents acquire the inventions and commercialise them, which has worked well in many areas of the economy in recent decades is unlikely to deliver significant progress in deep tech innovation. Policies that improve the start-ups’ commercialisation capabilities could be useful to combat these problems.
Pierre Régibeau, Katharine Rockett interviewed by Tim Phillips, 11 January 2022
Does the law of one price hold when we order wine in a restaurant? A team of dedicated economists has analysed more than 900 wine lists to find out.
Read more about the research behind this interview and download the free DP:
Cardebat, J, Gergaud, O, Regibeau, P and Rockett, K. 2021. 'Price Dispersion in Wines'. CEPR