This week from CEPR: September 19

Thursday, September 19, 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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    • PRODUCTIVITY ADVANTAGES OF HIGH-TECH CLUSTERS: Evidence from the United States

    THE EFFECT OF HIGH-TECH CLUSTERS ON THE PRODUCTIVITY OF TOP INVENTORS 
    Enrico Moretti
    CEPR DP No. 13992 | 12 September

    Why do inventors tend to locate near other inventors in the same field despite the higher costs? A new study by Enrico Moretti uses data on patents in the United States over the period from 1971 to 2007 to examine the productivity advantages of Silicon Valley-style clusters and their larger implications. Among the findings: 

    • When an inventor moves to a larger cluster, she experiences significant increases in the number of patents produced and the number of citations received.
    • There are potential macroeconomic benefits of clustering for the nation as a whole.
    • If all cities have the same number of inventors in each field, the overall number of patents produced in the United States in a year would be 11% smaller.

    The geographical concentration of high-tech sectors has important implications for cities and states. The presence of a high-tech sector is a key driver of local economic growth as innovation-oriented industries have taken on larger roles. At the same time, clustering of the high-tech sector may exacerbate inequality in earnings across communities.


    • ASSESSING THE EFFECT OF BREXIT ON THE UK ECONOMY

    THE BREXIT VOTE, PRODUCTIVITY GROWTH AND MACROECONOMIC ADJUSTMENTS IN THE UNITED KINGDOM
    Ben Broadbent, Federico DiPace, Thomas Drechsel, Richard Harrison, Silvana Tenreyro 
    CEPR DP No. 13993 | 13 September

    The UK economy has experienced significant macroeconomic changes following the 2016 referendum on whether to remain or leave the European Union. A new CEPR study by Ben Broadbent Federico DiPace, Thomas Drechsel, Richard Harrison and Silvana Tenreyro shows that many of the effects of the referendum result can be thought of as news about a future slowdown in productivity growth in the tradable sector. 

    The results show that while overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in the tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector; tradable output growth rises and net exports increase. 

    These developments reverse after the productivity decline in the tradable sector materialises. The negative news about productivity in the tradable sector also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable.

    While Brexit encompasses a variety of economic mechanisms, this study provides a concise framework in which macroeconomic adjustments to this momentous historical event can be interpreted. 

    Figure 1: Adjustments of the UK economy following the Brexit Vote


    • RISING TEMPERATURES FUEL DOMESTIC VIOLENCE: Evidence from Russia

    EXTREME TEMPERATURE AND EXTREME VIOLENCE ACROSS AGE AND GENDER: Evidence from Russia
    Vladimir Otraschenko, Olga Popova, José Tavares  
    CEPR DP No. 13989 | 12 September

    A new CEPR study by Vladimir Otraschenko, Olga Popova and José Tavares examines the relationship between extreme temperatures and domestic violence across Russian regions, with implications for the social costs of climate change. The study assesses the unequal impact of temperature shocks across gender and age groups by exploring a dataset on temperature and violence in Russia, between the years 1989 and 2015. Among the findings: 

    • Days with average temperatures above 25°C lead to an increase in both female and male victims, while days with lower temperatures do not affect violent mortality.
    • The likelihood of victimisation during weekends rises noticeably for women, with those between 25 and 59 more victimised at weekends. 
    • In regions that are poorer, less developed and with higher consumption of spirits, the likelihood of female victimisation during both hot and cold days is greater.

    The results suggest that female victimisation on hot days would be mitigated by increases in regional income and job opportunities, and on cold days, by decreasing the consumption of spirits. 

    Figure 1: Average Monthly Temperature in June-August, Russia 1990-2012

    Note: Authors’ construction based on data from the Climate Change Knowledge Portal of the World Bank.



    HOW PENSION PLANS CHANGE FAMILY TRADITIONS: Evidence from Ghana and Indonesia

    Natalie Bau 
    14 September 2019

    Families’ attitudes towards educational investment and lifetime saving are underpinned by longstanding cultural attitudes that must be considered in policy design.

    A study by Natalia Bau shows that in Ghana and Indonesia – two culturally distinct societies – families historically invested in the education of those children who would look after parents in old age. The level of this investment declined after the introduction of pensions in both countries.


    HOW MONEY INFLUENCES ELECTORAL RESULTS: Evidence from French elections

    Yasmine Bekkouche, Julia Cagé  
    14 September 2019

    A new study by Yasmine Bekkouche and Julia Cagé uses data from French elections since 1993 to show that an increase in spending per voter has consistently increased a candidate’s vote share. Caps on spending may increase this impact, as marginal effects are large. The price of a vote varies widely and is most expensive for the extreme right. 


    THE CONTRIBUTIONS OF MARTIN WEITZMAN TO ENVIRONMENTAL ECONOMICS

    Robert Stavins  
    14 September 2019

    Environmental economist Martin Weitzman passed away in August. This short intellectual biography by Robert Stavins, his long-time co-host of the Harvard Seminar on Environmental Economics and Policy, outlines how his contributions have advanced the thinking of environmental economists and policymakers on many fundamental issues, including policy instrument choice, discounting, species diversity, and environmental catastrophes. 


    THE EFFECTS OF NATURAL DISASTERS ON ECONOMIC SUPPLY CHAINS: Evidence from Japan

    Hiroyasu Inoue, Yasuyuki Todo  
    10 September 2019

    A new study by Hiroyasu Inoue and Yasuyuki Todo uses the example of the Great East Japan Earthquake in 2011 to investigate how natural disasters can have enormous economic consequences that affect firms both directly and indirectly.

    The results show that the propagation of shocks varies with the characteristics of supply chains. It finds that the indirect effects are far larger than the direct effects. Shocks propagate more widely and are more persistent if supply networks have complex cycles and low input substitutability. These findings can be applied to other sources of supply-chain disruptions, including trade wars. 


    RULES OF ORIGIN IN TRADE ARRANGEMENTS: Largely unnecessary, simply protectionist

    Gabriel Felbermayr, Feodora Teti, Erdal Yalcin   10 September 2019

    Rules of origin exist to avoid trade deflection, but they distort global value chains and are costly to abide by.

    A new study by Gabriel Felbermayr, Feodora Teti and Erdal Yalcin shows that in preferential trade agreements, trade deflection is unlikely to be profitable because tariffs are generally low, that countries in a common free trade agreement tend to have similar external tariff levels, and that when tariff levels differ, deflection is profitable at most for one country in the pair. Moreover, transport costs create a natural counterforce. It appears that rules of origin are primarily used to limit trade, and hence represent an instrument for trade protection. 

     

    PATRONAGE CAN BOOST PERFORMANCE: Evidence of selection and success in the Age of Sail 

    Guo Xu, Hans-Joachim Voth  
    16 September 2019

    A new study by Guo Xu and Hans-Joachim Voth examines the battle performance of British Royal Navy officers during the Age of Sail and finds that patronage ‘worked’. On average, officers with connections to the top of the naval hierarchy did better on every possible measure of performance than those without a family connection.

    The findings do not imply that patronage is always a good thing, but that it can be used for good and bad. Having the right kind of top managers was therefore key, but so was a highly ‘competitive’ environment, with many European navies vying for sea power. Where top administrators have internalised meritocratic values and competition punishes underperformance, patronage may actually enhance overall performance by selecting better individuals.  


    MACROECONOMIC FACTORS – RATHER THAN BILATERAL TARIFFS – HAVE BEEN THE KEY DRIVERS OF THE EVOLUTION OF BILATERAL TRADE BALANCES

    Johannes Eugster, Florence Jaumotte, Margaux MacDonald, Roberto Piazza  
    10 September 2019

    A new study by Johannes Eugster, Florence Jaumotte, Margaux MacDonald and Roberto Piazza shows that while tariffs have played a modest role in the evolution of bilateral balances, declines in tariffs have lifted productivity by allowing a greater international division of labour, including through participation in global value chains. A sharp increase in tariffs would therefore create significant spillovers, leaving the global economy worse off. 


    NAZI OCCUPATION LEFT CONTRASTING LEGACIES FOR EASTERN AND WESTERN EUROPE 

    Hein Klemann 
    11 September 2019

    Taken together, the economies of the Nazi-occupied countries were roughly twice the size of the German economy, but Berlin obtained less than 30% of its war expenditures from them. 

    A new study by Hein Klemann argues that, in that sense, exploitation failed, but the way that Germany tried to exploit its empire had important consequences. In Western Europe, where productivity was higher and Berlin took a substantial share of production, mortality was limited and post-war recovery was rapid. In Poland and the USSR, where productivity was lower, continuous warfare and Nazi racism spread destruction and raised mortality, impeding recovery.

    This study is part of the Vox debate on The Economics of the Second World War: Eighty Years On. Contributing new data and original analytical insights, join the debate here.


    GLOBAL TRADE PROTECTION AND THE ROLE OF NON‑TARIFF BARRIERS

    Luisa Kinzius, Alexander Sandkamp, Erdal Yalcin  
    16 September 2019

    Since the inauguration of Donald Trump, the world has experienced an unprecedented rise in border tariffs. But a new study by Luisa Kinzius, Alexander Sandkamp and Erdal Yalcin shows that trade protection had in fact started much earlier, in the form of non-tariff barriers.

    Their results show that the average trade-dampening effect of such barriers is comparable to that of trade defence instruments such as anti-dumping duties.But this negative effect can be mitigated by free trade agreements.


    GENDER IDENTITY NORMS ARE POSSIBLE DRIVERS OF PERSISTENT GENDER INEQUALITIES: Evidence from Sweden 

    Andrea Ichino, Martin Olsson, Barbara Petrongolo, Peter Skogman Thoursie  
    11 September 2019

    A new study by Andrea Ichino and colleagues examines how households in Sweden changed their allocation of home production in response to the introduction of a tax credit that altered the marginal tax rates (and the relative take-home pay) in different ways for spouses in couples. 

    The results show that immigrant couples, who tend to come from countries with more traditional gender norms than Sweden, responded more strongly to a reduction in the husband’s tax rate than the wife’s. By not responding to wives’ tax cuts, these couples may forgo as much as £2,000 per year in household disposable income.


    THE TWO SIDES OF GOVERNMENT GUARANTEES FOR BANKS

    Taneli Mäkinen, Lucio Sarno, Gabriele Zinna  
    11 September 2019

    During the recent financial crisis, government guarantees helped to reduce the funding costs of banks by providing them with insurance, thus curbing panic in banking systems and financial markets. 

    A study Taneli Mäkinen, Lucio Sarno and Gabriele Zinna argues that these beneficial effects can be reduced when guarantees are risky in the sense that they offer weaker protection in recessions, when the guarantor is more vulnerable, or the guarantees are less certain. Analysing data on a large international panel of banks, a significant risk premium is found to be associated with implicit government guarantees.


    ONLINE ADVERTISING: Greater buyer power hits search engines’ revenues

    Francesco Decarolis, Gabriele Rovigatti  
    12 September 2019

    Despite concentration of supply of online ad space among tech giants, advertisers’ growing delegation of ad purchases to demand-side intermediaries has generated countervailing buyer power capable of leading to marked reductions in online ad prices, That is the central conclusion of a new study by Francesco Decarolis and Gabriele Rovigatii. 

    Concentration in the supply of online advertisement space among a few tech giants has led to careful scrutiny by competition authorities in both the European Union and the United States, and some large fines for abuse of dominant position. 

    This research discusses new evidence suggesting that even without these policy interventions, the market is changing in ways that are reducing the ability of the ad space sellers to gain from their dominant position. 


    IMMIGRATION PATHWAYS TO THE UNITED STATES: Lessons from the great Italian migration in the early 20th century

    Santiago Pérez  
    15 September 2019

    The United States and Argentina were the two most common destinations for Italian migrants in the early 20th century. But their experiences as immigrants in each country differed widely. In Argentina, Italians became homeowners and skilled labourers; in the United States, there were limited prospects for upward mobility. 

    A new study by Santiago Pérez examines the source of these differences and seeks to understand why so many Italians chose to settle in a country that offered them limited prospects for upward mobility. His findings raise doubts about the importance of immigration policy as a determinant of assimilation. Moreover, the fact that Italians moved in large numbers to both countries despite different assimilation experiences highlights the importance of path dependence in shaping migrants’ destination choices. 


    REPLACING LIBOR: Concerns about progress on preparing for a world without the most important global benchmark interest rate

    Stephen Cecchetti, Kim Schoenholtz   
    12 September 2019

    Most financial experts know that LIBOR will likely cease at the end of 2021. Yet, it remains by far the most important global benchmark interest rate, forming the basis for an estimated $400 trillion of contracts.

    A new study by Stephen Cecchetti and Kim Schoenholtz examines the US dollar LIBOR transition process, highlighting both the substantial progress and the major obstacles that still lie ahead. Regulators in the US and elsewhere are well aware of the risks of delay and are now pushing hard for LIBOR users – especially financial institutions and markets under their supervision – to prepare for a world without LIBOR.


    AUTOMATION AND JOBS: When technology boosts employment

    James Bessen  
    12 September 2019

    The policy challenge of labour-saving technology is not mass unemployment but how to help workers make the transition from industries, occupations and regions where automation has destroyed jobs to those where jobs have been created. That is the conclusion of a new study by James Bessen. 

    His research shows that manufacturing employment grew along with productivity for a century or more, and only later decreased. The results show that the changing nature of demand was behind this pattern, which led to market saturation. This implies that the main impact of automation in the near future may be a major reallocation of jobs, not necessarily massive job losses.


    FACEBOOK’S NEW CURRENCY ‘LIBRA’ COULD PAVE THE WAY FOR A CENTRAL BANK DIGITAL CURRENCY

    Dirk Niepelt  
    12 September 2019

    A new study by Dirk Niepelt argues that while we may be witnessing a seismic shift in the monetary system, Libra’s role in that shift will be an indirect one. By taking the status quo option off the table, Libra or its next best replica will force monetary authorities and regulators to choose between central bank-managed digital currency and riskier private digital tokens. Rather than being the protagonist, Libra will be a catalyst for monetary change – a change that is driven by regulators, central banks and traditional financial intermediaries.

    This study is part of the VoxEU debate on the future of digital money. New financial technologies are creating opportunities that could have far-reaching consequences. You can join the debate here.


    LEGALISATION OF SAME-SEX MARRIAGE BOOSTS PARTNERSHIP STABILITY: Evidence from the Netherlands

    Shuai Chen, Jan van Ours  
    13 September 2019

    A new study by Shuai Chen and Jan van ours examines how the Dutch same-sex marriage legalisation in 2001 affected the stability of same-sex registered partnerships that were introduced in the Netherlands in 1998. 

    The results show that same-sex marriage legalisation caused a number of registered partnerships to separate. But for both men and women, the transformation to marriage had strong and significant effects of on the stability of their relationships. Due to their being little economic or legal difference between registered partnerships and marriage, the results suggest that the symbolism of marriage encourages long-term relationship stability in ways that registered partnerships do not.


    THE FINANCIAL ORIGIN OF THE EURO AREA FISCAL WOUND

    Alberto Caruso, Lucrezia Reichlin, Giovanni Ricco  
    13 September 2019

    A new study by Alberto Caruso, Lucrezia Reichlin and Giovanni Ricco argues that the joint behaviour of the public deficit and public debt in the euro area from 2008 to 2013 – characterised by high and persistent public debt despite a severe fiscal consolidation since 2009 – cannot be explained by the unprecedented collapse in output and the historical relationship between macroeconomic, fiscal and financial variables. Rather, it reflects specific characteristics of the crisis years and the size and nature of the public support to the financial sector. 

    THE IMPACT OF ACCESS TO CREDIT ON PRODUCTIVITY

    Philippe Aghion, Antonin Bergeaud, Gilbert Cette, Rémy Lecat, Helene Maghin   
    13 September 2019

    A new study by Philippe Aghion and colleagues shows that tighter access to credit makes it more difficult for entrepreneurs to invest and innovate, with detrimental long-run effects on productivity. But reduced credit access also drives less efficient incumbent firms out of the market, easing the entry of new and potentially more efficient innovators. Combining these two opposite effects, the overall relationship between credit access and productivity takes the shape of an inverted-U.


    HOW THE 1906 SAN FRANCISCO EARTHQUAKE SHAPED ECONOMIC ACTIVITY IN THE AMERICAN WEST

    Philipp Ager, Katherine Eriksson, Casper Worm Hansen, Lars Lønstrup   
    15 September 2019

    A new study by Philipp Ager, Katherine Eriksson, Casper Worm Hansen and Lars Lønstrup uses the example of the 1906 San Francisco earthquake to demonstrate that high geographic mobility is one of the reasons why a temporary but large shock can influence the evolution of relative city sizes even in the longer run.  

    INDUSTRIAL POLICY AND WELFARE CONSEQUENCES: Lessons from China

    Panle Jia Barwick, Myrto Kalouptsidi, Nahim Bin Zahur  
    11 September 2019

    Despite the prevalence of industrial policies around the world, few empirical studies directly evaluate their welfare consequences. A new study by Panle Barwick, Myrto Kalouptsidi and Nahim Bin Zahur reveals that the scale of China’s industrial policy targeting the shipbuilding industry is massive, with the lion’s share going to entry subsidies. 

    The results show that the effectiveness of different policy instruments is mixed, and the efficacy of industrial policy is significantly affected by the presence of boom and bust cycles, and by heterogeneity in firm efficiency. The ‘white list’ of firms chosen for government support did not include the most efficient firms. 



    DOES FOREIGN INVESTMENT CREATE GREEN GROWTH?

    Beata Javorcik interviewed by Tim Phillips

    13 September 2019

    Economists argue whether foreign direct investment in developing economies exports pollution or generates green growth. Beata Javorcik, the new chief economist at the European Bank for Reconstruction and Development, talks to Tim Phillips about a surprising conclusion from factory-level research.