This week from CEPR: January 13

Thursday, January 13, 2022

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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    • New Discussion Papers


    • 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. 



    THE BITCOIN CHALLENGE: How to tame a digital predator

    Ulrich Bindseil, Patrick Papsdorf, Jürgen Schaaf             
    07 January 2022

    Bitcoin’s market capitalisation reached new peaks in November 2021, yet a study by Ulrich Bindseil, Patrick Papsdorf and Jürgen Schaaf suggests it is hard to find arguments supporting the cryptocurrency’s current valuation. Even if the financial stability risks of a Bitcoin collapse could be contained, the burst of the bubble would imply painful losses for many retail investors and society at large. 

    The authors argue that public authorities should refrain from taking measures supporting additional investment flows into Bitcoin and should treat it as rigorously as the conventional financial industry to combat illicit payments, money laundering, and terrorist financing.

     

    HOW EFFECTIVE IS EU MERGER POLICY? 

    Pauline Affeldt, Tomaso Duso, Klaus Gugler, Joanna Piechucka                
    10 January 2022

    Writing at Vox, Pauline Affeldt, Tomaso Duso, Klaus Gugler and Joanna Piechucka use a new database covering over 1,000 mergers scrutinised by the European Commission to show that, under certain assumptions, compensating efficiencies appear too large to be achievable for a large part of the mergers in the sample. The Commission's view on required efficiencies might have been too optimistic and it appears to have been too lax in enforcing its merger policy. 


    REDUCING SEXUAL-ORIENTATION DISCRIMINATION THROUGH INFORMATION 

    Cevat Giray Aksoy, Christopher S. Carpenter, Ralph De Haas, Mathias Dolls, Lisa Windsteiger              
    09 January 2022

    Writing at Vox, Cevat Aksoy, Christopher Carpenter, Ralph De Haas, Mathias Dolls and Lisa Windsteiger show that when informed about the economic costs of discrimination, individuals in countries with strong views about the immorality of homosexuality can still voice support for non-discrimination policies. In addition, views about the acceptability of homosexuality itself can be modestly affected by the provision of basic information, particularly when framed in the context of institutions that people trust.


    WHAT FACEBOOK CAN TELL US ABOUT THE PREFERENCE DIFFERENCES BETWEEN WOMEN AND MEN

    Ángel Cuevas Rumin, Ruben Cuevas Rumin, Klaus Desmet, Ignacio Ortuño-Ortin             
    08 January 2022

    Using information on the shares of male and female Facebook users that are interested in over 45,000 different topics, a study by Ángel Cuevas Rumin, Ruben Cuevas Rumin, Klaus Desmet and Ignacio Ortuño-Ortin finds that differences are larger in gender-equal societies for interests that are systematically biased towards the same gender across the globe (such as football, war, or children), while the opposite is true for interests that do not show a gender bias (such as fitness, travel, or horses).


    THE ZERO LOWER BOUND ON INFLATION EXPECTATIONS

    Yuriy Gorodnichenko, Dmitriy Sergeyev               
    11 January 2022

    Writing at Vox, Yuriy Gorodnichenko and Dmitriy Sergeyev use survey evidence to show that households and firms almost never expect deflation, even when it is a clear possibility. This apparent zero lower bound on inflation expectations has important implications for macroeconomic dynamics and the effectiveness of monetary policy. Unconventional policies, such as forward guidance, which aim to increase inflation expectations may be less effective when expectations are stuck at the zero lower bound.


    ‘POTENTIAL CAPITAL’, WORKING FROM HOME, AND ECONOMIC RESILIENCE

    Janice Eberly, Jonathan Haskel, Paul Mizen             
    13 January 2022


     

    The impact of an economic shock depends both on its severity and the resilience of the response. The COVID-19 pandemic caused a widespread decline in recorded GDP, but this was buffered by an unprecedented and spontaneous deployment of ‘potential capital’ – the dwelling/residential capital and connective technologies used while working from home. 

    Writing at Vox, Janice Eberly, Jonathan Haskel and Paul Mizen estimate that together, potential capital and labour working from home provided additional output margins and capacity which roughly halved the decline in GDP in the US and revises downwards the estimated total productivity gains in the business sector during the pandemic. 


    THE SERVICES SECTOR DESERVES MORE CREDIT FOR HELPING DRIVE ECONOMIC TRANSFORMATION

    Elwyn Davies, Mary Hallward-Driemeier, Gaurav Nayyar             
    12 January 2022

    Traditionally, services have not been thought to hold much promise for driving development. Using firm-level data from 20 developing economies, a study by Elwyn Davies, Mary Hallward-Driemeier and Gaurav Nayyar finds that while services establishments are smaller than manufacturing establishments, this matters less for their productivity. Services firms can scale up without sizing up through investments in human and other more intangible forms of capital can leverage the diffusion of digital technologies. 


    HOW GLOBAL RISK PERCEPTIONS AFFECT ECONOMIC GROWTH

    Jon Danielsson, Marcela Valenzuela, Ilknur Zer                
    13 January 2022

    Writing at Vox, Jon Danielsson, Marcela Valenzuela and Ilknur Zer show that perceptions of high risk unambiguously harm growth, while perceived low risk has an initial positive impact, which eventually turns negative. The research finds that global risk has a stronger effect on growth than local risk, via its impact on capital flows, investment, and debt-issuer quality, challenging monetary policy independence..



    PRICE DISPERSION IN WINES: Does the Law of One Price apply?

    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