This week from CEPR: March 7

Thursday, March 7, 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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    • New Discussion Papers

    • TRUMP’S TRADE WAR: US consumers, not foreigners, are paying all of the 2018 tariffs

    The Impact of the 2018 Trade War on US Prices and Welfare
    Mary Amiti, Stephen Redding and David Weinstein
    CEPR DP No. 13564  2 March 2019 

    A new CEPR study of the effects of the Trump administration’s trade policy finds that the full incidence of the tariffs introduced in 2018 falls on domestic consumers, with a reduction in US real income of $1.4 billion per month by the end of 2018. The researchers detect similar patterns for foreign countries that have retaliated against the United States, indicating that the trade war also reduced their real incomes.

    Over the course of 2018, the United States experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply chain network, reductions in availability of imported varieties, and complete pass-through of the tariffs into domestic prices of imported goods.


    Figure 3: 12-month Proportional Change in Import Prices by Tariff Wave

    Notes: Proportional change in an import-share-weighted average of 12-month relative changes in U.S. import unit values inclusive of tariffs (import values divided by input quantities) for each tariff wave and for unaffected countries and products; proportional changes for each wave are normalized to equal zero in the month prior to the introduction of the tariff; tariff waves are defined in Section 2 of the paper.

    • COMPOSITION OF US IMPORTS: Evidence of intensified competition in global markets but growing concentration at the national level

    Concentration in International Markets: Evidence from US Imports
    Alessandra Bonfiglioli, Rosario Crinò and Gino Gancia
    CEPR DP No. 13566  3 March 2019

    New CEPR research uses transaction-level data to study changes in the concentration of US imports. The study finds that concentration has fallen in the typical industry, while it is stable by industry and country of origin. The fall in concentration is driven by the extensive margin: the number of exporting firms has grown; and the number of exported products has fallen more for top firms. Instead, average revenue per product of top firms has increased.

    At the industry level, top firms are converging, but top firms within countries are diverging. These facts suggest that intensified competition in international markets co-exists with growing concentration among national producers.


    Preferences and Beliefs in the Marriage Market for Young Brides
    Abigail Adams and Alison Andrew
    CEPR DP No. 13567 3 March 2019

    Parents in Rajasthan, India, have a strong preference for delaying a daughter’s marriage until the age of 18 but no further. That is the central conclusion of a new CEPR study, which uses using hypothetical vignettes to elicit average parental preferences over a daughter’s education and age of marriage, and subjective beliefs about the evolution of her prospects in the marriage market.

    The researchers find that conditional on a marriage match, parents place little intrinsic value on a daughter’s education. But they believe that the probability of receiving a good marriage offer increases strongly with a daughter’s education but deteriorates quickly with her age on leaving school.

    Figure 1: Ex Post Experiment: Visual Aid

    • EFFECTS OF AUSTERITY: Contrasting effects of spending-based deficit reduction policies and tax-based plans

    Effects of Austerity: Expenditure- and Tax-based Approaches
    Alberto Alesina, Carlo Favero and Francesco Giavazzi
    CEPR DP No. 13565  3 March 2019

    Spending-based deficit reduction policies are remarkably less costly than tax-based plans, according to a new CEPR study of ‘austerity’. The research finds that the former have on average a close to zero effect on output and lead to a reduction of the ratio of public debt to GDP. Tax-based plans have the opposite effect and cause large and long lasting recessions.

    The researchers claim that discussions of austerity in general have distracted commentators and policy-makers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Their results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases.

    • MERGERS AND ACQUISITIONS: Too much talk of creating value from intangible assets suggests bidders are being over-optimistic

    The Intangibles Song in Takeover Announcements: Good Tempo, Hollow Tune
    Zoran Filipović and Alexander Wagner
    CEPR DP No. 13560 1 March 2019

    Announcements of corporate takeovers that feature more talk about creating value from intangible assets complete more quickly. But the value of these deals to the acquiring form is questionable: the greater the ‘intangibles talk’, the lower the returns to bidders at the time of announcement.

    These are the conclusions of a new CEPR study that develops a novel word list of intangibles and applies it to takeovers. Payment mode choices and insider trades suggest that intangibles talk reflects managerial over-optimism. Overall, the researchers conclude, takeover announcements can provide important information about the quality of deals.

    Figure 1: The most frequent intangibles words in takeover announcements

    • WEALTH BEGETS WEALTH, EVEN IN RELATIVELY EGALITARIAN SWEDEN: Evidence on intergenerational mobility

    Understanding Intergenerational Mobility: The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviors
    Sandra Black, Paul Devereux, Petter Lundborg and Kaveh Majlesi
    CEPR DP No. 13559  28 February 2019

    Wealth transmission from one generation to the next is not primarily because children from wealthier families are inherently more talented. Rather, it is that even in relatively egalitarian Sweden, wealth begets wealth. That is the central conclusion of a new CEPR study, which uses administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. 

    Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, the researchers find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for pre-birth factors. They find little evidence that nature/nurture interactions are important. When bequests are taken into account, the role of adoptive parental wealth becomes much stronger.

    The study also finds that environmental influences are relatively more important for wealth-related variables, such as savings and investment decisions, than for human capital. The authors conclude by studying consumption as an overall measure of welfare and find that, like wealth, it is more determined by environment than by biology.


    It’s Not Just for Boys! Understanding Gender Differences in STEM
    Judith Delaney and Paul Devereux
    CEPR DP No. 13558  28 February 2019

    Differential subject choices and grades in secondary school explain a substantial proportion of the under-representation of women in university programmes in science, technology, engineering, and mathematics (STEM). That is one of the findings of a new CEPR study, which uses unique data on preference rankings for all secondary school students who apply for college in Ireland and detailed information on school subjects and grades to decompose the sources of the gender gap in STEM.

    The research finds that of the raw gap of 22 percentage points, about 13 percentage points are explained by differential subject choices and grades. Subject choices are more important than grades: the male comparative advantage in STEM (as measured by subject grades) explains about 3 percentage points of the gender gap. Differences in overall achievement between girls and boys have a negligible effect.

    Strikingly, there remains a gender gap of 9 percentage points even for young people who have identical preparation at the end of secondary school (in terms of both subjects studied and grades achieved); but this gap is only 4 percentage points for STEM-ready students. Gender gaps are smaller among high-achieving students and for students who go to school in more affluent areas. And there is no gender gap in science: the large gaps are in engineering and technology.


    Girls’ and Boys’ Performance in Competitions: What We Can Learn from a Korean Quiz Show
    Alison Booth and Jungmin Lee
    CEPR DP No. 13552  27 February 2019

    A comparison of the performance of high-ability adolescent girls and boys who participated in a long-running Korean TV quiz show finds a gender gap in performance – in favour of boys – across episodes of the show. To investigate underlying mechanisms that might explain this, a new CEPR study explores how male and female performance varies under different rules of the game.

    The researchers find that there are no gender gaps when stress is kept to a minimum -- that is, in games without fastest-finger buzzers, knockouts or penalties. But in games with these features, there are significant gender gaps. There are also larger gender gaps in performance in Round 2 of the shows, which is consistent with girls being increasingly hindered by psychological stress and risk aversion when competition is higher.

    Finally, the study uses panel data to estimate performance in the games in which all players stay in for 25 questions. Here, the researchers find that girls are less likely to respond faster especially when their winning probability is higher. Further, the gender gap is more salient at the end of the game. These results are also consistent with gendered behavioural responses to psychological pressure.

    Figure 1. Gender Differences in Score between Round 1 and 2

    Note: The horizontal axis represents Round 1 score quintiles and the vertical axis the average score of Round 2 for each
    quintile. B represents boys and G girls. The lines are simple regression lines.

    • REVEALING IMPLICIT STEREOTYPES: Evidence from immigrants in Italian schools

    Revealing Stereotypes: Evidence from Immigrants in Schools
    Alberto Alesina, Michela Carlana, Eliana La Ferrara and Paolo Pinotti
    CEPR DP No. 13555  28 February 2019

    Revealing schoolteachers’ unconscious biases affects their grading of immigrant and native students, according to a CEPR study in Italian schools. The research also finds that mathematics teachers with stronger stereotypes give lower grades to immigrants compared with natives with the same performance, but literature teachers do not differentially grade immigrants based on their own stereotypes.

    There is a lively debate about whether biased behaviour can be changed through the use of ‘implicit bias training’ or awareness of stereotypes, but until now, there has been little evidence to guide this debate. Using data on teachers’ stereotypes about immigrants elicited through an Implicit Association Test, the new research suggests that revealing biases may be a powerful intervention to reduce discrimination; but it may also induce a reaction from individuals who were not acting in a biased way.

    Figure 4: The impact of revealing bias to teachers on grading of immigrant and native students

    Notes: This graph shows the distribution of grades given to native and immigrant children by math and literature teachers eligible (light blue bars) and non-eligible (striped bars) for receiving feedback about own IAT score before end of semester grading.

    • FADING STARS: New evidence on superstar firms in the US economy

    Fading Stars
    Thomas Philippon
    CEPR DP No. 13553  27 February 2019

    Contrary to common wisdom, ‘superstar’ firms have not become larger and more productive. What’s more, their contribution to aggregate US productivity growth has fallen by more than one third since 2000. These are the conclusions of new CEPR research, which studies the evolution of superstar firms in the US economy over the past 60 years.

    Figure 5: Total Contributions of the Stars

    Note: the figure plots the contributions of star firms to US labor productivity growth. The dashed lines show the averages for 1960-2000, and 2001-2016. Top 20 averages: 33 bps down to 19 bps. Top 4 by Industry averages: 72 bps down to 43 bps.

    • IMPACT OF ECONOMIC SANCTIONS: Evidence from Russia, Europe and America

    Which Sanctions Matter? Analysis of the EU/Russian Sanctions of 2014
    Matej Belin and Jan Hanousek
    CEPR DP No. 13549  25 February 2019

    Russian sanctions imposed on European and American food imports resulted in about an eight times stronger decline in trade flows than those imposed by the European Union (EU) and the United States on exports of extraction equipment. That is the central finding of CEPR analysis of a natural experiment of reciprocal imposition of trade sanctions by Russia and the EU since 2014.

    Using UNCTAD/BACI bilateral flows data, the researchers investigate the effectiveness of narrow versus broadly defined sanctions, and differences in the effectiveness of sanctions imposed on exports and imports. Their results do not appear to be driven by diversion of trade flows via non-sanctioning countries. Hence the difference in sanctions’ effectiveness can be attributed to the broader range of sanctioned goods and potentially to a stronger position of enforcement of sanctions on imports rather than exports.


    THE GLOBAL ROLE OF THE EURO: A view from the European Central Bank

    Benoît Coeuré
    25 February 2019

    A stronger global role for the euro could help facilitate the transmission of monetary policy across Eurozone financial markets and reduce perilous fragmentation. That is one of the conclusions of European Central Bank (ECB) executive board member Benoît Coeuré, writing at Vox. 

    There is a growing debate about whether recent shifts in global governance should be seen as a reason to strengthen the global role of the euro. Coeuré explains that while the ECB does not take a view on foreign policy questions, the alignment between policies that will strengthen the euro’s global role and policies that are needed to make the Eurozone more robust make the debate relevant to the central bank.

    He draws two tentative conclusions. The first is that the decline in the euro’s international role in recent years is primarily a symptom of the initial fault lines of Europe’s monetary union (EMU). Efforts that help to overcome shortcomings in the design of EMU may, therefore, also foster a stronger international role for the euro.

    The second conclusion is that a stronger global role for the euro may have tangible consequences for the conduct of monetary policy, all of which would need to be understood and taken into account. But provided the right economic policies are adopted, a stronger global role could help facilitate the transmission of monetary policy.

    PHILIP LANE: the next ECB chief economist

    26 February 2019

    Philip Lane, a CEPR Research Fellow, will soon become the ECB’s chief economist. A selection of his Vox columns illustrates his opinions on the Eurozone, financial stability and monetary policy.


    Davide Furceri, Swarnali Ahmed Hannan, Jonathan D. Ostry, Andrew Rose
    27 February 2019

    Protectionism just weakens the macroeconomy, according to research by Andrew Rose and colleagues that analyses data spanning several decades and 151 countries.

    The study finds that tariff increases have, on average, engendered adverse macroeconomic and distributional consequences: a fall in output and labour productivity, higher unemployment, higher inequality and negligible effects on the trade balance (probably owing to real exchange rate appreciation when tariffs rise). The researchers conclude that the aversion of the economics profession to the deadweight loss caused by protectionism seems warranted.


    Cristian Badarinza, Vimal Balasubramaniam, Tarun Ramadorai
    26 February 2019

    Analysis of data from six emerging economies – China, India, Bangladesh, the Philippines, Thailand and South Africa – reveals the many differences in the management of wealth between emerging economy and advanced economy households.

    The study by Cristian Badarinza, Vimal Balasubramaniam and Tarun Ramadorai creates harmonised measures of household assets and liabilities. The findings suggest that there is still much work to be done truly to financialise household balance sheets.

    CHINA SYNDROME REDUX: New results on global labour reallocation

    Harald Hau, Difei Ouyang, Weidi Yuan
    1 March 2019

    For every US manufacturing job lost between 1999 and 2007, almost six new Chinese manufacturing jobs were created, according to research by Harald Hau, Difei Ouyang and Weidi Yuan. Their study concludes that international trade did not contribute to faster wage rises for Chinese industrial workers but instead channelled agricultural and non-participating workers into the industrial labour market.

    IMMIGRANT NETWORKING: Evidence from shared workspaces in Boston and St Louis

    Sari Pekkala Kerr, William Kerr
    1 March 2019


    Immigrants make a growing contribution to innovation and entrepreneurship in the United States, but little is known about if or how the processes used by immigrants and natives differ. New research by Sari Pekkala Kerr and William Kerr analyses surveys of individuals working in shared workspaces in Boston and St Louis to examine how immigrant entrepreneurs network and how their networking behaviour differs from natives.

    The findings suggest that immigrants take more advantage of networking opportunities at the workspaces, especially around the exchange of advice.

    IMMIGRATION AND WAGE DYNAMICS: Evidence from the Mexican peso crisis

    Joan Monras
    3 March 2019

    Arguments over the effect of immigration on labour market outcomes focus on a single number: the impact on low-skill wages. Research by Joan Monras analyses the adjustment process of labour markets in the United States to the Mexican peso crisis of 1995 to show that there is a difference between short-run and long-run effects. The results suggest that state-level policies are unlikely to be effective.


    Michael Darden, Nicholas W. Papageorge
    2 March 2019

    Selective serotonin reuptake inhibitors, which were approved in the United States in the mid-1980s for the treatment of depression, appear to have had an indirect benefit by reducing the consumption of alcohol as an alternative form of self-medication for depression. That is the central finding of research by Michael Darden and Nicholas Papageorge. Their study illustrates the importance of considering the behavioural ramifications of new medication and therapy.

    The researchers note that when people lack options to manage pain, many choose to ‘self-medicate’, turning to substances that are dangerous and ‘off label’ in an effort to seek relief. Their study tests a theory of rational self-medication in the context of alcohol and depression.


    Jacques Bughin
    26 February 2019

    The United States and China are clear leaders in investment in, and the adoption of, artificial intelligence (AI). Research by Jacques Bughin argues that while Europe lags in these areas, it is home to high levels of developer talent and to significant AI hubs. European AI may thrive if its human capital and innovation culture are combined with levels of investment seen elsewhere.


    Francesco Bianchi, Diego Comin, Howard Kung, Thilo Kind
    26 February 2019

    Austerity measures taken in response to fiscal distress, as in several European countries, slow down the adoption of new technologies and depress productivity growth in the medium run. The negative consequences are particularly strong if the austerity programme relies on labour taxes.

    These are the central conclusions of research by Francesco Bianchi, Diego Comin, Howard Kung and Thilo Kind. They note that during the Great Recession, several European countries implemented fiscal austerity measures to reduce sovereign debt. Such policies affect the decision to adopt new technologies, leading to slow recoveries. These, in turn, can make the fiscal stabilisation unnecessarily costly. Fiscal austerity is desirable only if it is able to reduce the cost of financing debt quickly.


    Wouter Dessein, Andrea Prat
    25 February 2019

    A growing body of empirical work documents how management is a key production factor, both in terms of management practices and managerial talent. Research by Wouter Dessein and Andrea Prat distinguishes three disparate theories, proposing a new framework that reconciles the insights of each.

    Contingency theory holds that firms always make optimal decisions, while the organisation-centric and leader-centric approaches hold that firms adopt better management practices, or hire better chief executives, respectively. The new framework integrates leadership quality and organisational capital, and generates new testable hypotheses.


    Peter Egger, Katharina Erhardt, Christian Keuschnigg
    25 February 2019

    Evidence from over 35,000 firms in 17 European countries reveals very different investment responses to corporate and dividend taxation among different types of firm, including entrepreneurial versus managerial and cash-constrained versus cash-rich.

    The study of the very heterogeneous effects of taxes on firm-level investments shows that the impact of corporate taxation is up to 70% higher for entrepreneurial firms than for managerial ones, while dividend taxation negatively affects the investment of financially constrained firms but entails no significant impact on cash-rich firms.

    Researchers Peter Egger, Katharina Erhardt and Christian Keuschnigg conclude that policy should provide targeted tax relief to the most constrained firms, where taxes are most harmful, if other policies are unsuccessful in improving access to external funds.

    US MONETARY POLICY AFTER THE CRISIS: Household indebtedness did not make it less effective

    Gaston Gelos, Federico Grinberg, Shujaat Khan, Tommaso Mancini-Griffoli, Machiko Narita, Umang Rawat
    28 February 2019

    New analysis of US household-level data shows that while the responsiveness of household consumption to monetary policy has diminished since the crisis, households with the highest indebtedness have responded the most to monetary policy shocks. Since the distribution of debt did not change after the crisis, this suggests that household debt did not contribute to lessening the effects of monetary policy over time. 


    Emine Boz, Nan Li, Hongrui Zhang
    28 February 2019

    It is commonly observed that economies specialising in sectors, such as services, that face relatively high trade costs tend to run current account deficits, while those specialising in more easily tradable sectors tend to run surpluses. Research by Emine Boz, Nan Li and Hongrui Zhang tests the causality of this observation by constructing a measure of effective trade costs.

    Their results show that although higher effective exporting costs are associated with lower current account balances, the impact of those costs is quantitatively limited. The findings suggest that the contribution of trade costs to observed global imbalances has been modest.

    THE AGENCY OF COCOS: Why contingent convertible bonds aren’t for everyone

    Roman Goncharenko, Steven Ongena, Asad Rauf
    3 March 2019

    During the next financial crisis, banks with outstanding ‘CoCos’ (contingent convertible bonds) may have even fewer incentives to recapitalise, which could make the next credit crunch even worse. That is the conclusion of research by Roman Goncharenko, Steven Ongena and Asad Rauf.

    The study notes that most regulators grant contingent convertible bonds the status of equity. But theory suggests that these securities can distort banks’ incentives to issue new equity. Analysing European data, the researchers shows that banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment.


    Carlo Altavilla, Wolfgang Lemke, Roberto Motto, Natacha Valla
    28 February 2019

    Twenty years ago, Alan Blinder commented: ‘There has long been a symbiosis between practical central banking and academic research on monetary policy. But while this symbiotic relationship continues, I believe that large potential gains from trade in ideas between practitioners and academics remain unexploited.’
    Writing at Vox, Carlo Altavilla and colleagues report on a recent ECB conference that provided a forum for academic research and the practice of central banking to meet.  This report discusses the interaction of monetary policy and financial markets, the relevance of banks and credit flows for monetary policy transmission, and the current challenges for monetary policy frameworks and strategies.


    Laura Veldkamp interviewed by Tim Phillips, 01 March 2019

    The digital economy makes it possible for data-savvy firms to grow very large, very quickly. Laura Veldkamp of Columbia Business School tells Tim Phillips about her new project to model the Big Data economy.

    The Economics of Fintech and Digital Currencies

    Edited by Antonio Fatás

    The rapid rise and sudden crash in the price of Bitcoin over the last two years have been a wake-up call to early optimistic views about the disruptive possibilities of cryptocurrencies and other new financial technologies (‘fintech’). Yet while the price of Bitcoin remains far from its record levels, there are many areas of fintech where progress is happening, and these new technologies still receive the attention of aspiring entrepreneurs, established financial institutions as well as central banks and regulators.

    A new eBook from CEPR and VoxEU summarises the latest research evidence on the impact of the new technologies, as well as the views of policymakers on how to manage the possible disruption in financial markets. Eleven chapters bring together contributions from leading economists involved in CEPR's new Research & Policy Network on “Fintech and Digital Currencies”:

    Read the VoxEU column introducing the eBook here
    Download the eBook here