Discussion Papers

DP19454 Inclusive Teaching: Spotting Social Isolation in the Classroom

Sule Alan, Michela Carlana, Marinella Leone — 2024-09-06T23:00:00+0000

We evaluate an intervention designed to increase teachers’ awareness of social isolation by providing them with their own students' social network and information on developmental risks associated with social exclusion. Using friendship data and incentive-compatible measures of antisocial and prosocial behavior, we find that the intervention reduces social isolation and antisocial behavior without improving prosocial behavior. The reduction in antisocial behavior leads to better economic outcomes in treated classrooms, measured by average payoffs and the Gini coefficient. Our findings highlight the personal and communal benefits of alleviating social exclusion and antisocial peer relationships in schools.

DP19449 Non-Financial Liabilities and Effective Corporate Restructuring

Bo Becker, Jens Josephson — 2024-09-05T23:00:00+0000

Many countries' insolvency systems focus on restructuring financial liabilities, and ignore operational liabilities such as leases and long-term supplier contracts. We model insolvency procedures with and without operational restructuring options. Such options avoid excessive liquidation of firms with significant non-financial obligations. Ex-ante, this option should increase debt capacity, especially in industries with inputs supplied under executory contract. We test this hypothesis around the introduction of a new law in Israel which facilitated the rejection of contracts, and by comparing capital structures for industries with high lease obligations between the U.S. and other countries. Empirical results confirm that operating restructuring is a key aspect of insolvency.

DP19447 Voting Rules, Turnout, and Economic Policies

Enrico Cantoni, Vincent Pons, Jérôme Schäfer — 2024-09-05T23:00:00+0000

In recent years, voter ID laws and convenience voting have generated heated partisan debates. To shed light on these policy issues, we survey the recent evidence on the institutional determinants and effects of voter turnout and broaden the perspective beyond the most debated rules. We begin by discussing the importance of electoral participation both for its consequences on policy choices and for democratic legitimacy. Building on a simple cost-benefit model of voting, we then review (quasi)-experimental work studying the effects of voting procedures and of other election rules. Voting procedures (which determine how people vote) primarily affect the cost of participation. The obstacles they create matter more when they occur ahead of the election, when the stakes are not salient (e.g., voter registration requirements), and less when parties mobilize voters against them and when alternative ways to vote exist (e.g., when people can choose whether to vote by mail or in person). Election rules upstream from the election (such as campaign finance laws) and downstream (such as the use of proportional representation vs. plurality rule to map vote choices into a set of election winners) mostly operate through benefits, for instance by affecting electoral competitiveness and the number of candidates. We conclude by highlighting questions for future research.

DP19445 The resurgence of inflation: Why was emerging Asia different?

Antonio Fatás — 2024-09-05T23:00:00+0000

The post pandemic years have brought inflation back to levels not seen for decades. While this surge has been a global phenomenon, the impact has not been uniformly felt across all regions. Notably, Asia, among the emerging and developing economies, has experienced a comparatively mild rise in inflation, with rates not significantly diverging from those seen in previous inflationary periods. This paper explores the factors that might explain the distinct behavior of Asia. We provide evidence that a combination of weaker post-pandemic recovery, a less aggressive traditional fiscal policy, a strong use of subsidies, minimal depreciation of exchange rates, and a history of lower and less volatile inflation account for this region differential’s response.

DP19451 Common Ownership and Hedge Fund Activism: An Unholy Alliance?

Zohar Goshen, Doron Levit — 2024-09-05T23:00:00+0000

This paper proposes a novel mechanism linking common ownership to anticompetitive outcomes. Common owners promote shareholder-friendly governance policies in their portfolio firms, empowering interventions by activist hedge funds that discourage managers from investing. The cumulative impact of hedge fund activism contributes to anticompetitive outcomes, without collusion between managers. Effectively, and possibly unintentionally, common owners exert monopsonistic power over labor by reducing aggregate investment. Subsequently, the artificially depressed wages result in transfer of wealth to shareholders. While hedge fund activism generally improves social welfare in a competitive equilibrium, it may reduce social welfare under common ownership. The symbiotic relationship between common owners and activist hedge funds can be detrimental to society. The paper establishes a new connection between the rise of institutional ownership, adoption of shareholder-friendly policies, increased hedge fund activism, reduced investment and labor share, and heightened capital market returns.

DP19450 Banking Without Branches

Bo Becker, Niklas Amberg — 2024-09-05T23:00:00+0000

Banks’ branch networks are contracting rapidly in many countries. We study the effects of these large-scale branch closures on firms’ access to credit and real economic activity. Our empirical setting is Sweden, where two thirds of all bank branches have closed in the past two decades. Using a shift-share instrument and micro data comprising the near-universe of Swedish firms and bank branches, we document that corporate lending declines rapidly following branch closures, mainly via reduced lending to small, collateral-poor, and risky firms. The reduced credit supply has substantial real effects: local firms experience a decline in employment and sales and an increase in exit risk after branch closures. Our results thus demonstrate that the disappearance of bank branches have far-reaching implications for the economy.

DP19453 Measuring Local Climate Change Attention: Does it Affect Investors and Firms?

Leonard Kostovetsky, Lin Peng, Christopher Rauh, Muhammed Yönaç — 2024-09-05T23:00:00+0000

What drives people’s attitudes towards climate change and does it matter for economic outcomes? We address these questions by constructing a novel measure of local climate change attention using a comprehensive news dataset extracted from over 5,000 US newspapers from 2000-2022. We document an increasing trend in climate attention and growing polarization in climate-related sentiment across the US. Local climate attention, while comoves with national trends, exhibits significant regional variation. It correlates with local education levels, Democratic party affiliation, and extreme weather events, but not by local greenhouse gas emissions or toxic releases. Exploiting exogenous variation, we find that higher local climate attention is associated with increased individual investment in ESG-focused ETFs and improved environmental performance of local firms. These findings suggest local climate attention significantly influences investment decisions and corporate environmental policies.

DP19446 Democracy, Capitalism, and Equality: The Importance of Impersonal Rules

Naomi Lamoreaux, John Wallis — 2024-09-05T23:00:00+0000

We usually consider it progress when a country begins to shift from an autocratic to a democratic form of government. However, the introduction of elections and other early trappings of democracy often has the perverse effect of exacerbating political instability. It also increases the incentives for those in power to manipulate the economy for political ends and thus often negatively affects economic growth. We argue that the key to getting beyond these pernicious effects—to reconciling democracy and capitalism—is to move to a governance structure based on impersonal rules that apply in the same way to everyone (or at least to broad categories of everyone). We lay out the theoretical basis for this argument and illustrate it with evidence about how the transformation worked (or not) in the case of the United States, United Kingdom, and Germany.

DP19448 Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-backed Securities

Thiemo Fetzer, Benjamin Guin, Felipe Netto, Farzad Saidi — 2024-09-05T23:00:00+0000

This paper uncovers if and how insurance companies react to shocks to collateral in their portfolio of securitized assets. We address this question in the context of commercial real estate cash flow shocks, which are informationally opaque to holders of commercial mortgage-backed securities (CMBS). Using detailed micro data, we show that cash flow shocks during the COVID-19 pandemic predict CRE mortgage delinquency, especially those stemming from lease expiration of offices, reflecting lower demand for these properties. Insurers react to such cash flow shocks by selling more exposed CMBS---mirrored by a surge in small banks holding CMBS---and the composition of their CMBS portfolio affects their trading behavior in other assets. Our results indicate that institutional investors actively monitor underlying asset risk, and even gain an informational advantage over some banks.

DP19452 (Ir)responsible Takeovers

Philip Bond, Doron Levit — 2024-09-05T23:00:00+0000

Takeovers change corporate policies, affecting both firm value and externalities imposed on various stakeholders. How, if at all, do shareholders, bidders and incumbents respond to externalities in takeovers? We study this question by introducing externalities and social preferences into a canonical model of takeovers (Bagnoli and Lipman 1988). Our analysis highlights the interplay between the holdout problem in takeovers (Grossman and Hart 1980) and free riding in public good provision. We show that the dual free-riding problems offset each other. Shareholders' preferences over externalities generated by firms they have divested from play a key role. If shareholders care about such externalities, then acquisitions succeed if and only if they are socially efficient, free-riding problems notwithstanding. Moreover, both incumbents and bidders have incentives to maximize the social value of the firm. In contrast, "warm-glow" shareholders accept some socially inefficient acquisitions while rejecting some socially efficient ones; and incumbents and bidders generally respond by adopting socially inefficient policies. Incumbents use corporate social responsibility as a takeover defense. Social responsibility by bidders is counterproductive if target shareholders care about divested externalities, but helps offset inefficiencies created by warm-glow shareholders. Overall, our analysis sheds light on the intricate interplay between shareholder behavior, social responsibility, and acquisition dynamics.

DP19443 Strategic Diffusion: Public Goods vs. Public Bads

Arthur Campbell, Yves Zenou, D.J. Thornton — 2024-09-05T23:00:00+0000

We study the role of influence in a model of the diffusion of social behaviors in a network. Individual behavior creates either positive spillovers (public goods) or negative spillovers (public bads). Our notion of influence captures the causal effect of an agent's adoption decision on the adoption decision of others in the network. We study a phase transition in equilibrium behavior around which viral equilibria—where diffusion occurs among a nontrivial fraction of the population—emerge. Public goods exhibit a continuous phase transition in equilibrium adoption, while public bads exhibit a discontinuous transition-- they emerge suddenly. Our findings reconcile disparate evidence that attending a public protest is a strategic complement in some settings and a substitute in others.

DP19444 Distorted Prices and Targeted Taxes in the New Keynesian Network Model

Anastasiia Antonova, Gernot Müller — 2024-09-05T23:00:00+0000

The defining feature of the New Keynesian model is that goods prices are adjusted infrequently. In the one-sector version of the model, goods are intrinsically homogeneous and should trade at the same price. By targeting inflation, monetary policy can achieve the efficient allocation. In the network version of the model, sectoral shocks call for an adjustment of relative prices and give rise to a trade-off between adjusting relative prices across sectors and maintaining price stability within sectors. Monetary policy alone can no longer achieve the first best. Against this background, we study the optimal tax response to sectoral shocks. It features twice as many tax instruments as there are sectors, is budget-neutral, and is not confined to the sector where the shock originates. A simple rule that targets sectoral inflation approximates the optimal policy well. We illustrate the quantitative relevance of our results using a calibrated version of the model.

DP19448 Placeholder CEOs

2024-09-05T23:00:00+0000

This study investigates the unique characteristics of placeholder CEOs in family firms, distinguishing them from professional CEOs. Placeholder CEOs, i.e. non-family executives serving between two family CEOs, play a crucial role in maintaining dynastic control during leadership transitions when family heirs are not ready. Case studies of prominent family firms, such as Bering Bank, Estée Lauder, Ford, H&M, Hermes, Toyota, and Zara, illustrate this succession practice. Our empirical analysis of Japanese family firms from 1949 to 2015 shows that placeholder CEOs constitute about 28% of all non-family CEO appointments. Placeholder CEOs are typically older, better educated, and have longer tenures than conventional professional CEOs. Appointed when patriarchs age and without ready family heirs, placeholder CEOs maintain the performance level of family predecessors, while professional CEOs generally improve firm performance.

DP19442 A Market for Airport Slots

Marleen Marra — 2024-09-04T23:00:00+0000

This paper assesses the welfare implications of introducing airport slot auctions, while connecting the parallel worlds of demand-supply and auction models. Given the absence of an existing market and available bids, slot values are derived from airlines' additional profits based on a flight-level structural model. This model considers various factors, such as consumer preferences, scheduling efficiencies, and aircraft-specific costs, with a new flight-level dataset facilitating its estimation. Sizeable network benefits are estimated, which carry through to the market-based allocation and skew the resulting slot allocation towards dominant carriers within their hub airports. The network effects also lead to the unconventional result that a quantity cap reduces how much consumers gain from the auction, despite curtailing the market power of the dominant carrier.

DP19441 The Returns to Skills During the Pandemic: Experimental Evidence from Uganda

Livia Alfonsi, Vittorio Bassi, Imran Rasul, Elena Spadini — 2024-09-04T23:00:00+0000

The Covid-19 pandemic represents one of the most significant labor market shocks to the world economy in recent times. We present evidence from a field experiment to understand whether and why skilled and unskilled workers were differentially impacted by the shock, in the context of a low-income economy, Uganda. We leverage a panel of workers and firms, tracked from 2012 to 2022, including high frequency surveys over the pandemic. In 2013, workers were randomly assigned to receive six months of sector-specific vocational training, in one of eight high productivity sectors. We document that over the pandemic, employment and earnings margins follow V-shaped dynamics, whereby the outcomes of treated (skilled) workers are more severely impacted by lockdowns, they recover more quickly between lockdowns, and remain resilient to the shock as the economy recovers. Cumulatively over the pandemic, skilled workers spend 61% more time than controls employed in one of our study sectors, and their total earnings are 17% higher. We explore supply- and demand-side mechanisms through which the returns to skills are maintained through the crisis. We document that skilled workers are more exposed to the shock because they are more likely to be laid off during the first lockdown as firms respond to the rapid, severe and uncertain shock by immediately laying off higher earning workers. However, skilled workers recover quickly because of their greater accumulation of sector-specific experience pre-pandemic, and the certifiability of their skills that allows them to switch employers in the same sector during the crisis. Our findings have implications for understanding the returns to skills acquired through vocational training in good economic times and times of crisis.

DP19435 Temporary Employment in Markets with Frictions

Pietro Garibaldi, Tito Boeri — 2024-09-03T23:00:00+0000

Temporary employment has spiked in OECD countries over the last 40 years and is now a common feature of their labor market landscape. A large body of empirical literature examines the spread of temporary employment, but no systematic review and interpretation of its findings in light of economic theory exists. This survey aims at filling this gap by interpreting the key empirical results based on the predictions of the macro models in markets with frictions developed to address specific features of temporary employment. Revisions of workhorse models used so far to analyze temporary employment are also suggested.

DP19438 Workers-to-Firms Matching When Skills Become Unbundled

Philippe Choné, Nathael Gozlan, Francis Kramarz — 2024-09-03T23:00:00+0000

In traditional labor markets, workers transform their multidimensional skills into bundles of tasks, which they supply to their employing firms. We examine how labor markets change as new institutions and technologies make it less and less costly for firms and workers to unbundle and trade stand-alone tasks. Our analysis relies on a general equilibrium model of the labor market under bundling, combined with a full model of task unbundling.
The contrast between the old world (where bundling prevails) and the new world (with unbundled tasks) is stark. As unbundling costs fall and outsourcing markets grow, firms reinforce hiring in skills where they have a comparative advantage yielding a more polarized matching equilibrium and a flattened wage schedule. Generalist workers – endowed with a balanced set of skills – tend to benefit whereas specialists tend to be negatively affected by markets opening. Descriptive evidence, using Swedish data sources on workers’ skills and their employing firms, is also presented.

DP19430 The Illusion of Cyclicality in Entry Wages

Ines Black, Ana Figueiredo — 2024-09-03T23:00:00+0000

We show that occupation mobility creates the illusion of cyclical hiring wages. Using administrative data, we find that wages of new hires who remain in the same occupation are no more cyclical than those of existing workers, whereas wages of occupation switchers are highly cyclical. We uncover higher wage cyclicality also among workers who switch occupations within the same firm. Moreover, wage cyclicality increases, the more different current and previous occupations’ required skills. Our results suggest that the widely documented cyclicality of entry wages reflects composition effects due to changes in match quality in worker’s occupation, rather than wage flexibility.

DP19433 Soft Negotiators or Modest Builders? Why Women Earn Lower Real Estate Returns

Laurent Bach, Anastasia Girshina, Paolo Sodini — 2024-09-03T23:00:00+0000

Using repeat-sales data on apartments in Sweden, we estimate the gender gap in real estate returns. We find that transactions executed by women earn 2 percentage points (pp) lower returns compared to those executed by men, which narrows down to less than 0.5 pp once renovations are taken into account. This residual gender gap is fully explained by the fact that women are less likely to select into real estate-relevant occupations and are older on average. We cannot confirm that the gender gap stems from men's higher ability to either time the market or negotiate aggressively.

DP19431 Elite Universities and the Intergenerational Transmission of Human and Social Capital

Andres Barrios Fernandez, Christopher Neilson, Seth Zimmerman — 2024-09-03T23:00:00+0000

Do elite colleges help talented students join the social elite, or help incumbent elites retain their positions? We combine intergenerationally-linked data from Chile with a regression discontinuity design to show that, looking across generations, elite colleges do both. Lower-status individuals who gain admission to elite college programs transform their children’s social environment. Children become more likely to attend highstatus private schools and colleges, and to live near and befriend high-status peers. In contrast, academic achievement is unaffected. Simulations combining descriptive and quasi-experimental findings show that elite colleges tighten the link between social and human capital while decreasing intergenerational social mobility.

DP19434 Health Inequality and Health Types

2024-09-03T23:00:00+0000

While health affects many economic outcomes, its dynamics are still poorly understood. We use k-means clustering, a machine learning technique, and data from the Health and Retirement Study to identify health types during middle and old age. We identify five health types: the vigorous resilient, the fair-health resilient, the fair-health vulnerable, the frail resilient, and the frail vulnerable. They are characterized by different starting health and health and mortality trajectories. Our five health types account for 84% of the variation in health trajectories and are not explained by observable characteristics, such as age, marital status, education, gender, race, health-related behaviors, and health insurance status, but rather, by one’s past health dynamics. We also show that health types are important drivers of health and mortality heterogeneity and dynamics. Our results underscore the importance of better understanding health type formation and of modeling it appropriately to properly evaluate the effects of health on people’s decisions and the implications of policy reforms.

DP19439 Entry Deregulation, Market Turnover, and Efficiency: China’s Business Registration Reform

Panle Barwick, Luming Chen, Shanjun Li, Xiaobo Zhang — 2024-09-03T23:00:00+0000

Although entry regulation is ubiquitous across countries, comprehensive evaluations on how such regulations affect firm dynamics and productivity are lacking. We examine a 2012-2014 pilot program in Guangdong (which later became a national policy) that was designed to reduce firm registration costs and encourage entrepreneurial activities. Using administrative data on firms’ business registrations and annual reports, our analysis shows that the reform increased firm entry by 25% and firm exit by 8.7% in the manufacturing sector. The productivity of post-reform entrants was 1.1% higher than the productivity of pre-reform entrants, likely due to relaxed financial constraints and more intense competition.

DP19427 Admissible Surplus Dynamics and the Government Debt Puzzle

Pierre Collin-Dufresne, Julien Hugonnier, Elena Perazzi — 2024-09-03T23:00:00+0000

Is it possible to reconcile the procyclical Government surplus dynamics with the ‘safe asset status’ of sovereign Debt? In an arbitrage-free market, if the aggregate debt value satisfies a transversality condition that rules out ‘bub- bles’, then it should equal the present value of future government surpluses. This relation seems to fail when the surplus process is calibrated to histor- ical data in the US (Jiang, Lustig, van Nieuwerburgh, and Xiolan (2022)). However, we show that when the government issues only safe bonds in an incomplete but arbitrage-free market, then not all surplus processes are ad- missible in the sense that they are consistent with both the dynamic budget constraint and a transversality condition. We propose a class of admissi- ble surplus processes that matches empirical properties of US government spending and tax claims without generating a ‘debt valuation puzzle.’

DP19437 Who should work how much?

Timo Boppart, Per Krusell, Jonna Olsson — 2024-09-03T23:00:00+0000

A production efficiency perspective naturally leads to the prescription that more productive individuals should work more than less productive individuals. Yet, systematic differences in actual hours worked across high- and low-wage individuals
are barely noticeable. We highlight that the insurance available to households is an important determinant behind this fact. Using a dynamic heterogeneous-agent model with insurance frictions, income effects calibrated to match aggregate hours across time and space, and financial frictions that deliver realistic wealth dispersion, we report stark effects of insurance: perfect insurance would raise aggregate labor productivity by 9.6 percent and decrease hours worked by 7.7 percent.

DP19428 High temperatures and workplace injuries

Matteo Picchio, Jan C. van Ours — 2024-09-03T23:00:00+0000

High temperatures can have a negative effect on workplace safety for a variety of reasons. Discomfort and reduced concentration caused by heat can lead to workers making mistakes and injuring themselves. Discomfort can also be an incentive for workers to report an injury that they would not have reported in the absence of heat. We investigate how temperature affects injuries of professional tennis players in outdoor singles matches. We find that for men injury rates increase with ambient temperatures. For women, there is no effect of high temperatures on injuries. Among male tennis players, there is some heterogeneity in the temperature effects, which seem to be influenced by incentives. Specifically, when a male player is losing at the beginning of a crucial (second) fourth set in (best-of-three) best-of-five matches, the temperature effect is much larger than when he is winning. In best-of-five matches, which are more exhausting, this effect is age-dependent and stronger for older players.

DP19436 Temporary Replacement Workers in a Matching Model With Employment At Will

Pietro Garibaldi, Pedro Gomes — 2024-09-03T23:00:00+0000

In the US almost 3 per cent of employees are absent from their job for reasons other than vacation, but are still technically employed. We argue that firms may find optimal to use temporary replacement workers to fill these vacant positions. We set up a matching model with directed search and double-sided heterogeneity. When a workers is temporarily forced out of the labour market, firms can freely destroy the job, put it in “mothball”, or look for a temporary worker to “keep the seat warm”. When the latter option is optimal, a market for temporary replacement workers emerges in equilibrium. In a quantitative application to the US labor market, replacement workers represent 2.7 per cent of total employment.

DP19429 The Micro and Macro Economics of Short-Time Work

Pierre Cahuc — 2024-09-03T23:00:00+0000

This article provides an overview of the economic literature on short-time work. It presents the main characteristics of short-time work since its emergence in Germany in the 1930s. It analyzes its effectiveness as a job preservation mechanism, drawing on theoretical models and empirical studies. It concludes by highlighting the areas that future research could explore to address the most significant gaps in our understanding of short-time work.

DP19432 Gender Role Models in Education

Sofoklis Goulas, Bhagya Gunawardena, Rigissa Megalokonomou, Yves Zenou — 2024-09-03T23:00:00+0000

Using Greek administrative data, we examine the impact of being randomly assigned to a classroom with a same-gender top-performing student on both short- and long-term educational outcomes. These top performers are tasked with keeping classroom attendance records, which positions them as role models. Both male and female students are influenced by the performance of a same-gender top performer and experience both spillover and conformist effects. However, only female students show significant positive effects from the presence of a same-gender role model. Specifically, female students improved their science test scores by 4 percent of a standard deviation, were 2.5 percentage points more likely to choose a STEM track, and were more likely to apply for and enrol in a STEM university degree 3 years later. These effects were most pronounced in lower-income neighbourhoods. Our findings suggest that same-gender peer role models could reduce the underrepresentation of qualified females in STEM fields by approximately 3 percent. We further validate our findings through a lab-in-the-field experiment, in which students rated the perceived influence of randomized hypothetical top-performer profiles. The results suggest that the influence of same-gender top performers is primarily driven by exposure-related factors (increased perception of distinction feasibility and self-confidence) rather than direct interactions.

DP19440 Quid Pro Quo, Knowledge Spillovers, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry

Panle Barwick, Jie Bai, Shengmao Cao, Shanjun Li — 2024-09-03T23:00:00+0000

This paper studies the impact of FDI via quid pro quo (technology for market access) in facilitating knowledge spillovers and quality upgrading. Our context is the Chinese automobile industry, where foreign automakers are required to set up joint ventures (JVs) with domestic automakers to facilitate technology transfers in return for market access. Our identification strategy exploits a unique dataset of detailed vehicle quality measures and relies on within-product variation across quality dimensions. We show that affiliated domestic automakers tend to adopt the quality strengths of their JV partners, consistent with knowledge spillovers. We rule out alternative explanations, such as endogenous JV formation, geographic proximity, overlapping customer bases, brand image association, and patent transfers. Additional analysis suggests that worker flows and supplier networks mediate knowledge spillovers. Overall, knowledge spillovers due to ownership affiliation under quid pro quo contributed 8.3% of the quality improvement experienced by affiliated domestic models between 2001 and 2014, relative to nonaffiliated domestic models.

DP19424 The Economics of Nation-Building: Methodological Toolkit and Policy Lessons

Dominic Rohner, Ekaterina Zhuravskaya — 2024-09-02T23:00:00+0000

This article reviews the recent burgeoning political economics research on nation-building. We focus on three main aspects of this body of work. First, we discuss methodological issues related to measuring nation-building outcomes and provide a synthesis of studies that employ different techniques, such as surveys on identity, lab-in-the-field methods, and direct observation of actions signaling identity. Second, we explore preconditions for effective nation-building, particularly focusing on ethnolinguistic polarization and segregation, and discuss how these factors may influence policy choices and their effectiveness. We also consider geopolitical factors. Finally, we review advances in the literature evaluating the effects of major nation-building policies, including those that encourage inter-group contact, the choice of national education curriculum, propaganda, leadership, decentralization, and foreign interventions. We highlight instances when these policies work and when they backfire.

DP19425 International Risk Sharing and Wealth Allocation with Higher Order Cumulants

Giancarlo Corsetti, Anna Lipinska, Giovanni Lombardo — 2024-09-02T23:00:00+0000

We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade--- benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices.

DP19426 A Bayesian Approach for Inference on Probabilistic Surveys

Federico Bassetti, Roberto Casarin, Marco Del Negro — 2024-09-02T23:00:00+0000

We propose a nonparametric Bayesian approach for conducting inference on probabilistic surveys. We use this approach to study whether U.S. Survey of Professional Forecasters density projections for output growth and inflation from 1982 to 2022 are consistent with the noisy rational expectations hypothesis. We find that, in contrast to theory, for horizons close to two years there is no relationship whatsoever between subjective uncertainty and forecast accuracy for output growth density projections, both across forecasters and over time, and only a mild relationship for inflation projections. As the horizon shortens, the relationship becomes one-to-one as theory predicts.

DP19422 The Role of Sell Frictions for Inventories and Business Cycles

Wouter Den Haan, Tiancheng Sun — 2024-09-01T23:00:00+0000

Although investment in inventories significantly impacts GDP fluctuations, inventories are often omitted from business-cycle models due to their complex cyclical behavior. We incorporate finished-goods inventories into a New-Keynesian framework by introducing a tractable microfounded "sell friction."
Our approach simplifies existing approaches by avoiding product-specific idiosyncratic shocks while capturing the essence of the popular stockout avoidance motive. Specifically, firms strategically accumulate inventories by bringing more products to the market than they anticipate selling, thereby boosting expected sales. Our setup automatically generates key stylized facts such as the countercyclical nature of the inventory-sales ratio and the greater volatility of output compared to sales under business cycles driven by monetary-policy (demand) shocks. A novel aspect of our analysis is the recognition of an inventory good as an asset and that cyclical fluctuations of its value play a key role following supply shocks. Specifically, the value of an inventory good is robustly countercyclical in our model when the productivity-growth process mirrors the observed positive autocorrelation. This ensures that the model also robustly replicates stylized inventory facts in response to productivity (supply) shocks, which has been a challenge in the literature. Using inventory and sales data to discipline the model, we find that productivity shocks account for a large fraction of GDP fluctuations, ranging from 62.5% to 94%. Furthermore, the goods-market friction yields non-trivial effects on the magnitude of aggregate fluctuations, underscoring the importance of incorporating inventories into macroeconomic models.

DP19420 Asset Pricing and Risk Sharing in Complete Markets: An Experimental Investigation

Bruno Biais, Thomas Mariotti, Sophie Moinas, Sebastien Pouget — 2024-09-01T23:00:00+0000

We study asset pricing and risk sharing in experimental financial markets. We design our experiment to test the key equilibrium implications of rational choice and competitive behavior in complete markets without making parametric assumptions on preferences. We find that participants behave competitively but deviate from rationality, as around 25% of their actions are first-order stochastically dominated. We propose a random-choice model predicting that, as the number of participants grows large, prices and average per-participant trades converge to those in the rational-choice competitive equilibrium. This prediction is supported by our experimental data. We structurally estimate a special case of the random-choice model with CRRA utilities and logit weighting functions and find that only around 80% of participants benefit from participating in the market.

DP19421 Performance and Challenges of Net-Zero Strategies in the Context of the EU Regulation

Fabio Alessandrini, Eric Jondeau, Lou-Salomé Vallée — 2024-09-01T23:00:00+0000

This paper presents a comprehensive comparative analysis of various portfolio construction techniques in the context of decarbonization and the pursuit of net-zero objectives aligned with the 2015 Paris Agreement. Specifically, we examine different strategies that qualify as Article 9 funds under EU regulations, focusing on carbon emissions reduction objectives, such as screening and tracking error minimization techniques. Our findings indicate that all approaches would have achieved the targeted emissions reductions over the 10-year period (2012-2021) analyzed. However, the method of decarbonization significantly affects ex-post tracking errors, with the more ambitious Paris-Aligned Benchmark requiring a substantial departure from the business-as-usual benchmark. Additionally, the tracking error minimization approach involves considerable reallocation of individual securities, potentially leading to, possibly undesirable, idiosyncratic exposures.

DP19423 Network Competition in the Airline Industry: An Empirical Framework

Zhe Yuan, Panle Barwick — 2024-09-01T23:00:00+0000

The Hub-and-Spoke network is a defining feature of the airline industry. This paper is among the first in the literature to introduce an empirical framework for analyzing network competition among airlines. Airlines make market entry decisions and choose flight frequencies in the first stage, followed by price competition to attract passengers in the second stage. A key feature of this model is the linkage between direct and indirect flights, which is described by a technological relationship (and estimated using data) that proxies the Hub-and-Spoke network. The paper estimates the marginal costs of serving passengers and operating flights using first-order conditions, bounds the entry costs using inequalities derived from the reveal-preference argument, and employs a state-of-the-art econometric method to conduct inference for entry cost parameters. Ignoring network externality underestimates the benefits of operating an additional flight by 13.2%, and airlines would schedule 21.53% fewer one-stop flights had they made flight operation decisions independently for each market. To evaluate the impact of a hypothetical merger, the paper proposes a novel equilibrium concept that makes it feasible to compute the industry equilibria. Counterfactual analyses indicate that a hypothetical merger between Alaska and Virgin America would increase consumer surplus as the merged airline would offer direct flights in 10% more markets while the overall post-merger price effect would likely be muted.

DP19419 Markups and Inflation in Oligopolistic Markets: Evidence from Wholesale Price Data

Patrick Alexander, Lu Han, Oleksiy Kryvtsov, Ben Tomlin — 2024-08-31T23:00:00+0000

How do market power and nominal price rigidity influence inflation dynamics? We formulate a tractable model of oligopolistic competition and sticky prices, and derive closed-form expressions for the pass-through of idiosyncratic and common cost shocks to firms' prices. Using unpublished micro data for Canadian wholesale firms, we estimate that idiosyncratic cost pass-through is incomplete and independent of the sector price stickiness, while common cost pass-through declines with price stickiness. The estimates imply a degree of strategic complementarity that lowers the slope of the New Keynesian Phillips curve by 30% in a one-sector model and by 64% in a multi-sector model.

DP19418 Protection for sale without aggregation bias

Jean-Marc Solleder, Fulvio Silvy, Marcelo Olarreaga — 2024-08-31T23:00:00+0000

Estimates of Grossman and Helpman (1994) "Protection For Sale" (PFS) model yield unrealistically high estimates of the weight governments put on social welfare relative to lobbying contributions, with estimates of the former often being more than ten times larger than the latter. We argue this is due to the level of aggregation at which the model has been estimated so far. While protection is determined at the tariff line level, production data is only available at the industry level. Using a new production dataset at the tariff level, our estimates confirm the presence of aggregation bias when estimating the PFS model at the industry level. At the tariff line level, the average weight on social welfare in a sample of 146 countries declines by 80 percent.

DP19412 To Have or Not to Have: Understanding Wealth Inequality

Pavel Brendler, Moritz Kuhn, Ulrike Steins — 2024-08-29T23:00:00+0000

Differences in household saving rates are a key driver of wealth inequality. But what determines these differences in saving rates and wealth accumulation? We provide a new answer to this long-standing question based on new empirical evidence and a new modeling framework. In the data, we decompose U.S. household wealth into its main portfolio components to document two new empirical facts. First, the variation in wealth by income is mainly driven by differences in participation in asset markets rather than by the amounts invested. Wealth differences are a matter of to have or not to have. Second, the large heterogeneity in asset market participation closely follows observed differences in access to asset markets. Combining these two facts, we develop a new model of life-cycle wealth accumulation in which income-dependent market access is the key driver of differences in asset market participation and saving rates by income. The calibrated model accurately captures the joint distribution of income and wealth. Eliminating heterogeneity in access to asset markets increases wealth accumulation in the bottom half of the income distribution by 32%. Facilitating access to employer-sponsored retirement accounts improves broad-based wealth accumulation in the U.S. economy. Historical data support the model's prediction.

DP19416 Money Talks to Autocrats, Bullets Whistle to Democrats: Political Influence under Different Regimes

Thea How Choon, Giovanna Marcolongo, Paolo Pinotti — 2024-08-29T23:00:00+0000

Pressure groups may use bribes, violence, or a combination of both to bend politics to their will, and the choice between these methods of influence can vary depending on the type of institutional regime. We empirically investigate the dynamics of bribes and violence around elections in democracies and autocracies using a novel measure of corruption based on the Panama Papers and other massive data leaks on offshore entities in tax havens, which are often used as vehicles for bribes, and data on attacks against politicians around the world between 1990 and 2015. Evidence from staggered difference-in-differences and regression discontinuity in time models shows that in democracies attacks against politicians escalate before elections, whereas in autocracies bribes increase after elections. These findings align with a theoretical framework in which pressure groups use political violence to sway democratic elections in favor of their preferred candidates, while resorting to bribes to influence the behavior of newly appointed bureaucrats and public officials in autocracies.

DP19414 Drug-related harm reduction and local communities: Evidence from Dutch drug consumption rooms

Sofia Franco, Hans Koster — 2024-08-29T23:00:00+0000

Drug-consumption rooms (DCRs), also known as supervised injection sites or safe injection rooms, provide a secure environment for the consumption of both legal and illegal drugs. The primary goals of DCRs are to enhance the health conditions of drug users and to reduce the public nuisance associated with drug use. Using detailed panel micro-data from the Netherlands, we find that DCRs reduce drug use in the surrounding neighborhoods by about 13 percentage points, equivalent to approximately three-quarters of a standard deviation. Additionally, drug-related crime is reduced by 24%. House prices increase by 2.5%, but this effect is observed only in low-income neighborhoods. These findings indicate that controlled drug use in DCRs can significantly enhance neighborhood quality, particularly in economically disadvantaged areas.

DP19413 Wealth Heterogeneity and the Marginal Propensity to Consume out of Wealth

Bertrand Garbinti, Pierre Lamarche, Frederique Savignac — 2024-08-29T23:00:00+0000

We provide detailed estimates of how the marginal propensity to consume out of wealth (MPC) varies along the distribution of household wealth and by asset composition, and analyse the sources of MPC heterogeneity across euro area countries. To do this, we i) build a household-level panel dataset combining wealth and consumption surveys for five European countries, and ii) use instrumented household-level panel regressions. First, we find heterogeneity across the wealth distribution with lower MPCs for high-wealth households. Second, we account for asset composition and show the significant role of housing wealth in all countries. We show that our results are indicative of a collateral channel. Third, cross-country differences in MPCs are mostly explained by country-specific institutional and socio-economic characteristics in Germany (compared to Spain) and by differences in consumption behaviours for Belgium, Cyprus and Italy. We show that MPC heterogeneity is related to homeownership rates, mortgage markets, demographics, and wealth inequality. Finally, we investigate to what extent heterogeneous MPC and wealth inequality affect consumption inequality.

DP19417 Trust, Business Group Decentralization, and Firm Productivity

Christian Fons-Rosen, Miriam Manchin, Katalin Szemeredi — 2024-08-29T23:00:00+0000

This paper evaluates how trust among affiliates determines the structure of business groups and, in turn, shapes firm productivity. After confirming that greater business group verticality is a desirable trait as it is associated with higher firm productivity, we develop a theoretical model on how bilateral trust impacts group verticality. Testing our predictions on a large European sample, we find that business groups with higher average trust between members have more vertical and complex structures. In addition, firm-level estimations reveal that being a trustworthy affiliate in the business group correlates both with being located in a layer closer to the headquarter and also with greater firm productivity. Results are robust to using somatic and linguistic distance as instruments for bilateral trust.

DP19415 The Turing Valley: How AI Capabilities Shape Labor Income

Enrique Ide, Eduard Talamas — 2024-08-29T23:00:00+0000

Do improvements in Artificial Intelligence (AI) benefit workers? We study how AI capabilities influence labor income in a competitive economy where production requires multidimensional knowledge, and firms organize production by matching humans and AI-powered machines in hierarchies designed to use knowledge efficiently. We show that advancements in AI in dimensions where machines underperform humans decrease total labor income, while advancements in dimensions where machines outperform humans increase it. Hence, if AI initially underperforms humans in all dimensions and improves gradually, total labor income initially declines before rising. We also characterize the AI that maximizes labor income. When humans are sufficiently weak in all knowledge dimensions, labor income is maximized when AI is as good as possible in all di- mensions. Otherwise, labor income is maximized when AI simultaneously performs as poorly as possible in the dimensions where humans are relatively strong and as well as possible in the dimensions where humans are relatively weak. Our results suggest that choosing the direction of AI development can create significant divisions between the interests of labor and capital.

DP19410 A Theory of Recommendations

Jean-Michel Benkert, Armin Schmutzler — 2024-08-28T23:00:00+0000

This paper investigates the value of recommendations for disseminating economic information, with a focus on frictions resulting from preference heterogeneity. We consider Bayesian expected-payoff maximizers who receive non-strategic recommendations by other consumers. The paper provides conditions under which different consumer types accept these recommendations. Moreover, we assess the overall value of a recommendation system and the determinants of that value. Our analysis highlights the importance of disentangling objective information from subjective preferences when designing value-maximizing recommendation systems.

DP19409 Monetary Policy Transmission amid Demand Reallocations

Julien Bengui, Lu Han, Gaelan MacKenzie — 2024-08-28T23:00:00+0000

Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors primarily respond by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future.

DP19407 Assessing the Global Impact of Transit Countries in a Gravity Model

Richard Friberg, Mario Milone, Katrin Tinn — 2024-08-28T23:00:00+0000

We study the global impact of rent extraction by countries that are in favorable locations to intermediate international trade. We propose a geography-based algorithm to measure land-sea distances and estimate a modified gravity trade model (1993-2016) which indicates that transit rents sharply lower trade. We use our model and simulations to gauge the welfare effects of transit rents. While transit countries benefit, general equilibrium price distortions impose substantial costs on all countries, interestingly also on those only indirectly affected (e.g. USA).

DP19408 Firm Heterogeneity and Imperfect Competition in Global Production Networks

Hanwei Huang, Kalina Manova, Oscar Perelló, Frank Pisch — 2024-08-28T23:00:00+0000

We study the role of firm heterogeneity and imperfect competition for global production networks and the gains from trade. We develop a quantifiable trade model with two-sided firm heterogeneity, matching frictions, and oligopolistic competition upstream. More productive buyers endogenously match with more suppliers, thereby inducing tougher competition among them to enjoy lower input costs and superior performance. Transaction-level customs data confirms that downstream French and Chilean firms import higher values and quantities at lower prices as upstream Chinese markets become more competitive over time, with stronger responses by larger firms. Moreover, suppliers charge more diversified buyers lower mark-ups. Counterfactual analysis indicates that entry upstream benefits high-productivity buyers, while lower matching or trade costs benefit all buyers, with the biggest boost to mid-productivity buyers. All three shocks generate sizeable welfare gains, especially under package reforms. Global production networks thus mediate bigger effects and cross-border spillovers from industrial and trade policies.

DP19411 There Is No Excess Volatility Puzzle

Andy Atkeson, Jonathan Heathcote, Fabrizio Perri — 2024-08-28T23:00:00+0000

We present two valuation models which we use to account for the annual data on price per share and dividends per share for the CRSP Value-Weighted Index from 1929 to 2023. We show that it is a simple matter to account for these data based purely on a model of variation over time in the expected ratio of dividends per share to aggregate consumption under two conditions. First, investors must receive news shocks regarding the expected ratio of dividends per share to aggregate consumption in the long run. Second, the discount rate used to evaluate the impact of this news on the current price per share must be low. We use the approach of Campbell and Shiller (1987) and Campbell and Shiller (1988) to argue that the cash flow news in our model is not a stand-in for changes in expected returns: with our model parameters, returns are not predictable and price dividend spreads and ratios predict dividend growth at model-implied magnitudes. We illustrate which parameter choices account for differences between our results and prior findings in the literature. We conclude that the answer to Shiller’s (1981) question “Do stock prices move too much to be justified by subsequent movements in dividends?” is “not necessarily.”

DP19405 Achieving Safety: Personal, Private and Public Provision

Enrico Perotti, Spyros Terovitis — 2024-08-27T23:00:00+0000

We study how a primary need for minimum safety affects investment choices. In addition to risky projects, agents may choose to invest in personal assets they can control. Investing in personal assets serves as self-insurance, as they ensure a higher minimum return but offer a lower expected return than the risky project offers. In autarky, investors can achieve safety only via self-insurance and costly liquidation of the project. Private intermediaries can reduce inefficient self-insurance by offering safe debt backed by self-insured investors holding equity and can resolve the underlying risk conflict by demandable debt. Public debt crowds out the private supply of safe assets, lowering the safe rate and aggregate investment. In contrast, deposit insurance can either decrease or increase the private supply of safe assets, as well as the safe rate and aggregate investment. Our approach explains the vast and inelastic demand for safe assets, which are hard to explain by standard preferences at times of minimal rates.