Discussion Papers https://cepr.org/ en DP18181 Pension Systems (Un)sustainability and Fiscal Constraints: A Comparative Analysis https://cepr.org/publications/dp18181 Using an overlapping generations model, two new indicators of public pension system sustainability are proposed: the pension space, which measures the capacity to pay for pension expenditures out of labour taxation, and the pension space exhaustion probability reflecting demographic uncertainties. These measures reveal that the pension spaces of advanced economies are strikingly different. Most nations have little scope to further finance pensions out of labour income taxation over the next thirty years. There is no one-size-fits-all solution. Risk-equivalent pension reforms enhance welfare in the long run, particularly for rapidly ageing nations, but also entail non-negligible transitional costs. 2023-05-30T23:00:00+0000 Burkhard Heer, Vito Polito, Michael R. Wickens c231a7e9-182c-46bd-bdc4-b4200bd34b6b Discussion paper DP18181 Public Economics DP18180 Preregistration and Credibility of Clinical Trials https://cepr.org/publications/dp18180 Preregistration at public research registries is considered a promising solution to the credibility crisis in science, but empirical evidence of its actual benefit is limited. Guaranteeing research integrity is especially vital in clinical research, where human lives are at stake and investigators might suffer from financial pressure. This paper analyzes the distribution of p-values from pre-approval drug trials reported to ClinicalTrials.gov, the largest registry for research studies in human volunteers, conditional on the preregistration status. The z-score density of non-preregistered trials displays a significant upward discontinuity at the salient 5% threshold for statistical significance, indicative of p-hacking or selective reporting. The density of preregistered trials appears smooth at this threshold. With caliper tests, we establish that these differences between preregistered and non-preregistered trials are robust when conditioning on sponsor fixed effects and other design features commonly indicative of research integrity, such as blinding and data monitoring committees. Our results suggest that preregistration is a credible signal for the integrity of clinical trials, as far as it can be assessed with the currently available methods to detect p-hacking. 2023-05-29T23:00:00+0000 Christian Decker, Marco Ottaviani 77e631d2-18c2-4a64-b371-19ade4ffc768 Discussion paper DP18180 Industrial Organization, Organizational Economics, Public Economics DP18179 VAT Pass-Through and Competition: Evidence from the Greek Islands https://cepr.org/publications/dp18179 We examine how competition affects VAT pass-through in isolated oligopolistic markets as defined by the Greek islands. Using daily gasoline prices and a difference-in-differences methodology, we investigate how changes in VAT rates are passed through to consumers in islands with different market structure. We show that pass-through increases with competition, going from 50% in monopoly to around 80% in more competitive markets, but remains incomplete. We also discover a rapid rate of adjustment for VAT changes, as well as a positive relationship between competition and the rate of price adjustment. Finally, we document higher pass-through for products with more inelastic demand. 2023-05-29T23:00:00+0000 Lydia Dimitrakopoulou, Christos Genakos, Themistoklis Kampouris, Stella Papadokonstantaki d4d7faaa-9de4-418e-ad2a-3e37745c6368 Discussion paper DP18179 Industrial Organization DP18178 Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock https://cepr.org/publications/dp18178 Previous research finds that the greater geographic mobility of foreign than native-born workers following economic shocks helps to facilitate local labor market adjustment to shifting regional economic conditions. We examine the role that immigration may have played in enabling U.S. commuting zones to respond to manufacturing job loss caused by import competition from China. Although population headcounts of the foreign-born fell by more than those of the native-born in regions exposed to the China trade shock, the overall contribution of immigration to labor market adjustment in this episode was small. Because most U.S. immigrants arrived in the country after manufacturing regions were already mature, few took up jobs in industries<br /> that would later see increased import penetration from China. The foreign-born share of the working-age population in regions with high trade exposure was only three-fifths that in regions with low exposure. Immigration thus appears more likely to aid adjustment to cyclical shocks, in which job loss occurs in regions that had recent booms in hiring, rather than facilitating<br /> adjustment to secular regional decline, in which hiring booms occurred in the more distant past. 2023-05-29T23:00:00+0000 David Autor, David Dorn, Gordon Hanson 49032637-5e61-45b3-a749-25df4c0a2c0c Discussion paper DP18178 International Trade and Regional Economics, Labour Economics DP18176 Artificial Intelligence, Algorithmic Recommendations and Competition https://cepr.org/publications/dp18176 This paper proposes a methodology for examining the effects of algorithmic recommendations on competition in product markets. It addresses concerns raised in both academic and policy circles about the potential anti-competitive impact of recommender systems (RSs). The analysis shows that RSs can increase market concentration, raise prices, and enable platforms to manipulate recommendations to their advantage. However, RSs can also have pro-competitive effects by enhancing the match between products and consumers and reducing the need for costly search. For reasonable parameter values, recommender systems are overall likely to lead to higher consumer surplus. However, increasing data available to the algorithms may result in reduced consumer surplus. We also explore the potential for manipulation of recommendations and its impact on competition, finding it more likely represents an exclusionary abuse than an exploitative one. 2023-05-28T23:00:00+0000 Emilio Calvano, Giacomo Calzolari, Vincenzo Denicolo, Sergio Pastorello 5d93924b-ad1c-4379-9de2-becff6c59eef Discussion paper DP18176 Industrial Organization DP18173 FinTech, investor sophistication and financial portfolio choices https://cepr.org/publications/dp18173 This paper analyses the links between advances in financial technology, investors’ sophistication, and the composition and returns of their financial portfolios. We develop a simple portfolio choice model under asymmetric information and derive some theoretical predictions. Using detailed microdata from Banca d’Italia, we test these predictions for Italian households over the period 2004-20. In general, heterogeneity in portfolio composition and in returns between sophisticated and unsophisticated investors grows with improvements in financial technology. This heterogeneity is reduced only if financial technology is accessible to everyone and if investors have a similar capacity to use it. 2023-05-28T23:00:00+0000 Leonardo Gambacorta, Romina Gambacorta, Roxana Mihet 5386bb3c-90b6-481e-aa68-f3c4bd79644c Discussion paper DP18173 Banking and Corporate Finance DP18177 Regulating Online Search in the EU: From the Android Case to the Digital Markets Act and Digital Services Act https://cepr.org/publications/dp18177 This paper offers an analysis of the impacts of public regulations of internet search. Through a theoretical model, we consider three regulations adopted by the EU. The first is the Android choice screen implemented in the European Economic Area in 2020. The other two are the recently adopted Digital Markets Act (DMA) and Digital Services Act (DSA). We find that interventions involving user choice, like the Android choice screen, can be strengthened by other interventions focused on search engine quality and data portability. Since the regulations in the DMA target these multiple dimensions simultaneously, we expect it to deliver the strongest and most effective impacts on the online search market. We also argue that the impacts of the regulations may vary over different time horizons: when first implemented, the DSA may simply direct users to search engines with better privacy protection, but over time it has the potential to change user tastes for privacy and, hence, drive search engines to invest more in privacy protection. 2023-05-28T23:00:00+0000 Francesco Decarolis, Muxin Li aa6b5e39-3f13-4585-85ee-48a3ccbff22b Discussion paper DP18177 Industrial Organization DP18175 Supervisory Policy Stimulus: Evidence from the Euro Area Dividend Recommendation https://cepr.org/publications/dp18175 At the onset of the Covid-19 outbreak central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses. In this paper we estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting some forms of pro-cyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and ”zombie” firms. 2023-05-28T23:00:00+0000 Ernest Dautović, Leonardo Gambacorta, Alessio Reghezza f7cec948-f9e3-4569-81aa-fff8f2ce450d Discussion paper DP18175 Banking and Corporate Finance DP18174 Climate tech 2.0: social efficiency versus private returns https://cepr.org/publications/dp18174 Billions of dollars in private and public capital have poured into climate tech in the United States since 2005. This raises questions around the social efficiency and financial performance of these investments. We find that more private capital is allocated to technologies with a higher emission reduction potential and that investors have prioritised more mature technologies. Moreover, more private capital is directed to innovative companies as the sector matures and grows and financial frictions abate. Higher allocative efficiency of investments is in turn associated with better financial performance, both at the company level and at the investor level. US government subsidies have been allocated more to technologies attracting less private capital. Their crowding-in effect is greater when allocated to nascent technologies that are not yet patented. 2023-05-28T23:00:00+0000 Giulio Cornelli, Jon Frost, Leonardo Gambacorta, Ouarda Merrouche bd59d139-4d7a-47da-be6f-33eb4eb2fa86 Discussion paper DP18174 Banking and Corporate Finance DP18171 The Cost of Banking with Naivety and Adverse Selection https://cepr.org/publications/dp18171 We build a two-stage model of competition in the banking market to study the combined price of accounts and credit. We include naivety, adverse selection, and imperfect screening. We show that credit market profits are not competed away in the (primary) market for accounts. We establish an Information Penalty: the total cost of banking to consumers is V -shaped in the quality of screening in free banking markets. This implies better AI or use of Big Data first lowers then raises the cost of banking in countries similar to the US/UK. While in paid banking markets we establish a Sophistication Penalty: the cost of banking is ∩-shaped in customer sophistication. This implies improving financial literacy can raise banking costs in countries similar to France/Germany. 2023-05-26T23:00:00+0000 John Thanassoulis, Tamas Vadasz 9d972b0a-52a9-4c74-a207-5c95dc496bd6 Discussion paper DP18171 Industrial Organization, Banking and Corporate Finance DP18172 Campaign Connections https://cepr.org/publications/dp18172 This paper explores the labor market returns to working on a victorious political campaign. Using unique administrative data from Brazil, we track the earnings and employment of campaign workers before and after close elections spanning nearly 20 years. We identify sizable returns to working for a winning campaign, especially in areas with a large informal sector and for workers connected to newly elected challengers. The returns are concentrated in the public sector, where connected hires are relatively more qualified. Our results suggest a potential upside to patronage as campaign connections create new pathways to public administration for young, high-ability workers.<br /> 2023-05-26T23:00:00+0000 Samuel Bazzi, Claudio Labanca c6252dc4-588c-480a-88f4-d50b2aec4f61 Discussion paper DP18172 Development Economics, Labour Economics, Organizational Economics, Political Economy, Public Economics DP18169 Job levels and Wages https://cepr.org/publications/dp18169 Job levels summarize the complexity, autonomy, and responsibility of task execution. Conceptually, job levels are related to the organization of production, are distinct from occupations, and can be constructed from data on task execution. We highlight their empirical role in matched employer-employee data for life-cycle wage dynamics, refine a task-based view of wage determination, and demonstrate that differences in job levels account for most of the observed wage differences. We also show, within a structural framework, that a job-level perspective provides a novel and fruitful interpretation of widely studied phenomena such as the gender wage gap and the returns to education and seniority. 2023-05-25T23:00:00+0000 Christian Bayer, Moritz Kuhn 7a1a43f1-7d3d-4c2f-af51-324a9957abe4 Discussion paper DP18169 Labour Economics, Macroeconomics and Growth DP18170 Concrete Thinking About Development https://cepr.org/publications/dp18170 Misallocation is increasingly recognized as an important factor in explaining productivity differences across countries. This paper uses new micro-data on key input prices in the construction sector and market structure at a global level to study distortions in construction sector inputs and their consequences. We document that (i) there is large dispersion in construction sector input prices and that cement prices are particularly high in the poorest countries; (ii) cement prices are highest in countries with few firms; (iii) cement plays a significant role in construction sector expenditures, particularly in the poorest countries. To understand the reasons for price differences in cement we estimate a model of oligopoly using both a demand-based instrument and exploiting geological variation in the dispersion of limestone deposits within countries. Our results suggest that lower levels of competition lead to significantly higher prices. Firm-level financial accounts data point toward substantial economic rents. We then embed the oligopoly structure into a dynamic general equilibrium network model to analyse the consequences of distortions on the wider economy. We find that due to cement&#039;s network position, distortions have large effects on steady-state output: for every dollar increase in cement profits, steady-state output falls by two. Finally, we find that common ownership in cement is an important source of distortions accounting for between 75% and 85% of the wedge due to markups in cement. 2023-05-25T23:00:00+0000 Keelan Beirne, Martina Kirchberger 3b8bb611-bee6-49cd-ab5b-c216e1ecf35a Discussion paper DP18170 Development Economics, International Trade and Regional Economics, Macroeconomics and Growth DP18167 Accounting for the Duality of the Italian Economy https://cepr.org/publications/dp18167 After 162 years of political unification, Italy still displays large regional economic differences. In 2019, the per capita GDP of Lombardia was 39,700 euros, but Calabria&#039;s per capita GDP was only 17,300 euros. We build a two-region, two-sector model of the Italian economy to measure the wedges that could account for the differences in aggregate variables between the North and the South. We find that the largest driver of the regional disparity in per capita output is the difference in total factor productivity, followed by fiscal redistribution. These two factors, together, account for more than 70 percent of the output disparity between the North and the South. 2023-05-24T23:00:00+0000 Jesús Fernández-Villaverde, Dario Laudati, Lee Ohanian, Vincenzo Quadrini 5fc8c969-6ba9-4491-8b13-ce5742aad449 Discussion paper DP18167 Monetary Economics and Fluctuations DP18165 The Dynastic Transmission of Power, Exit Options and the Coevolution of Rent-seeking Elites https://cepr.org/publications/dp18165 We introduce a dynamic model that investigates the persistence and evolution of elite-dominated societies, where inherited political capital determines one’s social standing. Our analysis highlights the critical role of the distribution of exit options in the evolution of political inclusiveness across generations. An elite comparatively more mobile than the masses generally entrenches a politically stratified society, whereas a more widespread distribution of exit options can encourage inclusiveness. Under certain conditions differential mobility may still induce political inclusiveness across generations. Exit options across different political entities lead to a joint evolution of local power structures. 2023-05-24T23:00:00+0000 Arthur Silve, Thierry Verdier ce9eff0a-8c86-4e49-a9ca-c1138ee2b136 Discussion paper DP18165 Development Economics, International Trade and Regional Economics, Political Economy, Public Economics DP18164 Industrial policy for electric vehicle supply chains and the US-EU fight over the Inflation Reduction Act https://cepr.org/publications/dp18164 The Inflation Reduction Act (IRA) of 2022 provoked a transatlantic trade spat. After the law was passed, the Biden administration addressed some of the concerns raised by the European Union by writing controversial rules to implement the legislation. These regulations are expected to have complex effects that, in some instances, may offset the intended impact of other provisions in the original legislation. This paper examines how the law, its implementing regulations, policy decisions on leasing, as well as potential critical minerals agreements all have the potential to affect the electric vehicle (EV) supply chain. The EV case study showcases the political-economic complications involved in US and EU attempts to cooperate over clean energy transition policy to address the global externality of carbon dioxide emissions. EVs are but one example of the challenge facing partners with integrated supply chains and similar levels of economic development that share concerns about climate change, rising inequality, workers, other social issues, and democracy itself. The EV conflict laid bare the differing US and EU prioritization of these issues relative to economic efficiency, World Trade Organization rules, the approach to nonmarket economies, and national security vulnerabilities that arise from depending on an authoritarian regime such as China for import sourcing of critical inputs. 2023-05-24T23:00:00+0000 Chad Bown 7247e01a-a5e5-4747-b92d-feffeacb38d0 Discussion paper DP18164 International Trade and Regional Economics DP18163 Financial Crises and the Global Supply Network: Evidence from Multinational Enterprises https://cepr.org/publications/dp18163 This paper empirically examines the effects of financial crises on the organization of production of multinational enterprises. We construct a panel of European multinational networks from 2003 through 2015. We use as a financial shock the increase in risk premia between August 2007 and July 2012 and build a multinational-specific shock based on the network structure before the shock. Multinationals facing a larger financial shock perform worse in terms of revenue, employment, and growth in the number of affiliates. Lower growth in the number of affiliates operates through a negative effect on domestic and foreign affiliates, and is concentrated in affiliates in a vertical relationship with the parent. These effects built up slowly over time. Negative effects are driven by multinationals with initially more leveraged parents, who adjust to the financial shock by reducing relatively more the number of foreign affiliates. These findings lend support to the hypothesis of financial frictions shaping multinational activity. 2023-05-24T23:00:00+0000 Sergi Basco, Giulia Felice, Bruno Merlevede, Martí Mestieri da7f14b2-4d80-40f2-9d94-254ef3affcc0 Discussion paper DP18163 International Trade and Regional Economics DP18166 Decomposing the monetary policy multiplier https://cepr.org/publications/dp18166 Financial markets play an important role in generating monetary policy transmission asymmetries in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary tightening than to an expansion. At a one year horizon, the ‘financial multiplier’ of monetary policy—defined as the ratio between the cumulative responses of employment and credit spreads—is zero for a monetary expansion, -2 for a monetary tightening, and -4 for a monetary tightening that takes place under strained credit market conditions. These results have important policy implications: the central bank may inadvertently over-tighten in times of financial uncertainty. 2023-05-24T23:00:00+0000 Piergiorgio Alessandri, Òscar Jordà, Fabrizio Venditti f6e71e18-85d5-44b5-84b8-edae73e28459 Discussion paper DP18166 Monetary Economics and Fluctuations DP18168 Inequality and the Zero Lower Bound https://cepr.org/publications/dp18168 This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households&#039; precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. 2023-05-24T23:00:00+0000 Jesús Fernández-Villaverde, Joël Marbet, Galo Nuño, Omar Rachedi 7aeb37f8-2f9f-45e8-92ac-f0901985699b Discussion paper DP18168 Monetary Economics and Fluctuations DP18162 The Empire Project: Trade Policy in Interwar Canada https://cepr.org/publications/dp18162 This paper uses a new dataset on the universe of Canadian imports and tariffs between 1924 and 1936, disaggregated into 1697 goods originating in 112 countries, to analyze the impact on Canadian imports of interwar Canadian trade policy, including the 1932 Ottawa trade agreements. Rather than use a dummy variable approach, we compute the impact of individual tariffs which varied substantially across goods, trade partners, and time. We develop a novel method of controlling for multilateral resistances in the context of a one-country dataset, and perform a variety of counterfactual exercises to determine the impact of tariffs on trade flows. The overall impact of post-1929 tariff shifts, including the 1932 agreements, was relatively small, reflecting the fact that Canadian trade policy was already highly protectionist: trade agreements can have heterogenous effects on participants because the shocks involved are different. Compared with a free trade counterfactual, the impact of the overall structure of protection on the level and composition of trade was large. 2023-05-24T23:00:00+0000 Markus Lampe, Kevin O'Rourke, Lorenz Reiter, Yoto Yotov 3b0586de-ca52-4f1d-a64e-befa8fa6c24d Discussion paper DP18162 Economic History, International Trade and Regional Economics DP18159 Publication Bias and Model Uncertainty in Measuring the Effect of Class Size on Achievement https://cepr.org/publications/dp18159 Class size reduction mandates are frequent and invariably justified by studies reporting positive effects on student achievement. Yet other studies report no effects, and the literature as a whole awaits correction for potential publication bias. Moreover, if identification drives results systematically, the relevance of individual studies will vary. We build a sample of 1,767 estimates collected from 62 studies and for each estimate codify 42 factors reflecting estimation context. We employ recently developed nonlinear techniques for publication bias correction and Bayesian model averaging techniques that address model uncertainty. The results suggest publication bias among studies featured in top five economics journals, but not elsewhere. The implied class size effect is zero for all identification approaches except Tennessee&#039;s Student/Teacher Achievement Ratio project. The effect remains zero for disadvantaged students and across subjects, school types, and countries. 2023-05-23T23:00:00+0000 Matej Opatrny, Tomas Havranek, Zuzana Irsova, Milan Scasny 184f78bf-6fe3-4a4d-a05a-b8797af6e507 Discussion paper DP18159 Labour Economics DP18161 Occupations Shape Retirement Across Countries https://cepr.org/publications/dp18161 We study how occupations shape individual and aggregate retirement behavior. First, we document large differences in individual retirement ages across occupations in U.S. data. We then show that retirement behavior among European workers is strongly correlated with U.S. occupational retirement ages, indicating an inherent association between occupations and retirement that is present across institutional settings. Finally, we find that occupational composition is highly predictive of aggregate retirement behavior across 45 countries. Our findings suggest that events affecting occupational structure, such as skill-biased technological change or international trade, have consequences for aggregate retirement behavior and social security systems. 2023-05-23T23:00:00+0000 Philip Sauré, Arthur Seibold, Elizaveta Smorodenkova, Hosny Zoabi 9093c1e2-1e3d-4d20-a387-fc0db351cf6b Discussion paper DP18161 Labour Economics, Macroeconomics and Growth, Public Economics DP18160 Rural Migrants and Urban Informality: Evidence from Brazil https://cepr.org/publications/dp18160 This paper studies the economic effects of rural-urban migration on Brazilian cities. Using a shift-share IV design, we show that immigration lowers formal and informal wages, increases the number of formal firms and jobs, reduces the share of informal workers, and has no effect on unemployment. These findings contradict the traditional “Harris-Todaro-Fields” view that rural-urban migration contributes to urban informality and unemployment. To explain these surprising results, we develop and estimate a model of firm dynamics and informality. The model generates “Harris-Todaro-Fields” predictions if we impose formal wage rigidity but, once we allow formal wages to adjust, the model replicates the IV results. It also reveals that many new formal firms come from the informal sector, which serves as a “stepping-stone”. However, the economic benefits of immigration are higher in a counterfactual with no informality. 2023-05-23T23:00:00+0000 Clément Imbert, Gabriel Ulyssea bc72e794-bbd2-4b4a-8db3-d84491826cd8 Discussion paper DP18160 Development Economics, Labour Economics DP18158 The Impact of the Prehistoric Out-of-Africa Migration on Cultural Diversity https://cepr.org/publications/dp18158 Evidence suggests that the prehistoric out-of-Africa migration has impacted the degree of intra-population genetic and phenotypic diversity across the globe. This paper provides the first evidence that this migration has shaped cultural diversity. Leveraging a folklore catalogue of 958 oral traditions across the world, we find that ethnic groups further away from Africa along the migratory routes have lower folkloric diversity. This pattern is consistent with the compression of genetic, phenotypic, and phonemic traits along the out-of-Africa migration routes, setting conditions for the emergence and proliferation of differential cultural diversity and economic development across the world. 2023-05-21T23:00:00+0000 Oded Galor, Marc Klemp, Daniel Wainstock c16c9a57-6f67-4fa9-86bb-646a2c62b168 Discussion paper DP18158 Development Economics, Economic History, Macroeconomics and Growth DP18157 For Better or Worse? Subjective Expectations and Cost-Benefit Trade-Offs in Health Behavior https://cepr.org/publications/dp18157 We provide a framework to disentangle the role of preferences and beliefs in health behavior, and we apply it to compliance behavior during the acute phase of the COVID-19 pandemic. Using rich data on subjective expectations collected during the spring 2020 lockdown in the UK, we estimate a simple model of compliance behavior with uncertain costs and benefits, which we employ to quantify the utility trade-offs underlying compliance, to decompose group differences in compliance plans, and to compute the monetary compensation required for people to comply. We find that, on average, individuals assign the largest disutility to passing away from COVID-19 and being caught transgressing, and the largest utility to preserving their mental health. But we also document substantial heterogeneity in preferences and/or expectations by vulnerability status, gender, and other<br /> individual characteristics. In our data, both preferences and expectations matter for explaining gender differences in compliance, whereas compliance differences by vulnerability status are mainly<br /> driven by heterogeneity in preferences. We also investigate the relationship between own and others’ compliance. When others fail to comply and trust breaks down, individuals respond heterogeneously<br /> depending on their own circumstances and characteristics. When others around them comply less, those with higher risk tolerance and those without prior COVID-19 experience plan to comply less<br /> themselves, while the vulnerables plan to comply more. When a high-level public figure breaches the rules, supporters of the opposing political party plan to comply less. These findings emphasize the need for public health policies to account for heterogenous beliefs, preferences, and responses to others in citizens’ health behaviors. 2023-05-20T23:00:00+0000 Gabriella Conti, Pamela Giustinelli 8ec72b7e-6450-4ef5-b2d1-574a73e0d07a Discussion paper DP18157 Public Economics DP18156 Free to Fail? Paternalistic Preferences in the United States https://cepr.org/publications/dp18156 We study paternalistic preferences in two large-scale experiments with participants from the general population in the United States. Spectators decide whether to intervene to prevent a stakeholder, who is mistaken about the choice set, from making a choice that is not aligned with the stakeholders’ own preferences. We find causal evidence for the nature of the intervention being of great importance for the spectators’ willingness to intervene. Only a minority of the spectators implement a hard intervention that removes the stakeholder’s freedom to choose, while a large majority implement a soft intervention that provides information without restricting the choice set. This finding holds regardless of the stakeholder’s responsibility for being mistaken about the choice set – whether the source of mistake is internal or external – and in different subgroups of the population. We introduce a theoretical framework with two paternalistic types – libertarian paternalists and welfarists – and show that the two types can account for most of the spectator behavior. We estimate that about half of the spectators are welfarists and that about a third are libertarian paternalists. Our results shed light on attitudes toward paternalistic policies and the broad support for soft interventions. 2023-05-20T23:00:00+0000 Björn Bartling, Alexander Cappelen, Henning Hermes, Marit Skivenes, Bertil Tungodden 9e60d81e-1bc5-49d3-9eb2-0a31dfba2410 Discussion paper DP18156 Political Economy, Public Economics DP18154 Helping and Antisocial Behavior in the Workplace https://cepr.org/publications/dp18154 We offer a comprehensive analysis of the organizational and behavioral foundations of employees’ helping and antisocial behavior as an integral part of a firm’s workplace culture and working climate. Using representative employer-employee panel data of larger German private-sector firms, we document a large variation in helping and antisocial behavior across firms. Our regression results show that differences in supervisors’ people skills, as well as workforce trust, social preferences, and personality traits explain these firm-level differences in helping and antisocial behavior in the workplace. Our measures are derived from established survey constructs and include preference items that have been behaviorally validated in experimental games by prior research. Together, the results corroborate the importance of both leadership quality and workforce composition for the manifestation of helpful and hostile workplace cultures. 2023-05-19T23:00:00+0000 Michael Haylock, Patrick Kampkötter, Michael Kosfeld, Ferdinand Von Siemens 5d8a8d97-0a8e-4ee2-b7ae-a136df7d5143 Discussion paper DP18154 Organizational Economics DP18155 Labor Associations: The Blue Wall of Silence https://cepr.org/publications/dp18155 We develop a model showing that when labor demand is inelastic and individual behavior is easily monitored a firm’s employees may prefer to protect its shirkers. By optimally reducing overall effort and increasing wages for all, a labor association rationally uses its monopoly power as described in the left wing labor slogan “work less so that all may work.” In addition, employees have a strong incentive to conceal information about peers’ performance from firms, what has been infamously known as the blue wall of silence in the case of the police. We argue that a number of recently proposed remedies to this problem are unlikely to succeed and suggest a more promising alternative: increase competition. 2023-05-19T23:00:00+0000 David K. Levine, Andrea Mattozzi, Salvatore Modica a05be1d1-abf1-4fc5-aae0-320576b87885 Discussion paper DP18155 Political Economy DP18152 Central Bank Communication by ??? The Economics of Public Policy Leaks https://cepr.org/publications/dp18152 Leaks of confidential information emanating from public institutions have been the focus of a longstanding line of research. Yet, their determinants as well as their potential impact on public views and on policy effectiveness remain elusive. We construct a database of anonymous monetary policy leaks in the euro area as reported by newswires. We provide evidence that many of these leaks are likely placed by individual insiders with minority opinions. Central banks offer a unique setting to study the effects of leaks because associated changes in public views are instantaneously reflected in financial markets. While we find that leaks have large effects on markets and weaken official policy announcements, the evidence also suggests that leaks do not lock in decision-makers, and that attributed communication can mitigate some of their effects. 2023-05-18T23:00:00+0000 Michael Ehrmann, Phillipp Gnan, Kilian Rieder b2758072-d3f1-4c23-9b40-83a448976e97 Discussion paper DP18152 Monetary Economics and Fluctuations DP18153 Do Gamblers Understand Complex Bets? Evidence From Asian Handicap Betting on Soccer https://cepr.org/publications/dp18153 The Asian Handicap is a way to bet on soccer matches where payouts depend on an adjustment to the score that favors the weaker team. These bets are more complex than traditional betting on soccer because they require assessing the likely goal difference in the match rather than just the probabilities of a home win, away win or draw and because they can feature the possibility of all or half the bet being refunded. We show that bettors systematically<br /> lose more money on the type of Asian Handicap bets where refunds are not possible than they do when it is possible to obtain a half refund and that bets with the possibility of a full refund have the lowest loss rates. Bookmakers do not appear to adjust odds to equate the expected return on these bets. We show that the pattern of differences in loss rates across bets is predictable based on the odds quoted. 2023-05-18T23:00:00+0000 Tadgh Hegarty, Karl Whelan 04e0a2a4-7831-47e1-8430-8e87b2a67a48 Discussion paper DP18153 Asset Pricing DP18151 Leveraging Trading Networks to Improve Tax Compliance: Experimental Evidence from Uganda https://cepr.org/publications/dp18151 We use information on firms’ trading networks from VAT return data to design a randomized tax compliance intervention in Uganda. In treated pairs, either the seller, the buyer, or both receive letters listing discrepancies detected in past tax returns. The amendment rate is 22 percentage points higher in the treatment group, compared to 1.8% in the control group. We find spillover effects within treated firm pairs and in transactions with their untreated trading partners. Overall, there is a small increase in VAT liability for the amended returns. The intervention also leads to fewer discrepancies in subsequent tax declarations. 2023-05-16T23:00:00+0000 Miguel Almunia, David J. Henning, Justine Knebelmann, Dorothy Nakyambadde, Lin Tian cf33cedd-dd0a-4eb7-bc5d-22c701c3a40f Discussion paper DP18151 Public Economics DP18150 “A Fed for Our Times”, a review essay on Twentieth Century Monetary Policy by Ben Bernanke https://cepr.org/publications/dp18150 This essay reviews 21st Century Monetary Policy by Ben Bernanke, a fascinating account of the evolution of the Fed since the 1950s, and a stalwart defense of the status quo: of the Fed’s remit, its independence, and the tools and practices it now uses to pursue its mandate. The essay supports many of Bernanke’s key points and brings the experience of the ECB to illuminate them by contrast. However, it argues that the book understates the significance of the changes in institutional architecture that have emerged since the crisis. Questions that we thought had been settled are going to have to be addressed anew, albeit in slightly different guises. This will have implications for all aspects of economic governance. 2023-05-16T23:00:00+0000 Lucrezia Reichlin f2b4bfb9-55fe-4d75-bf1a-d593b21d270d Discussion paper DP18150 Economic History, Monetary Economics and Fluctuations DP18149 Forward-Looking Labor Supply Responses to Changes in Pension Wealth: Evidence from Germany https://cepr.org/publications/dp18149 We provide new evidence of forward-looking labor supply responses to changes in pension wealth. We exploit a 2014 German reform that increased pension wealth for mothers by an average of 4.4% per child born before January 1, 1992. Using administrative data on the universe of working histories, we implement a difference-in-differences design comparing women who had their first child before versus after January 1, 1992. We document significant reductions in labor earnings, driven by intensive margin responses. Our estimates imply that, on average, an extra euro of pension wealth in a given period reduces unconditional labor earnings by 54 cents. 2023-05-16T23:00:00+0000 Elisabeth Artmann, Nicola Fuchs-Schündeln, Giulia Giupponi 357b1f1a-83b0-4a2e-b81c-b9de911be0f9 Discussion paper DP18149 Labour Economics, Macroeconomics and Growth, Public Economics DP18148 Nudging in complex environments https://cepr.org/publications/dp18148 We study the effects of reminder nudges using a novel experimental approach based on a computer game. The game exposes subjects to a complex environment in which they have to pay attention to and perform multiple actions within a short period of time. The set-up allows us, first, to test the effect of reminders both on reminded and non-reminded actions and thus to observe whether reminders have (positive or negative) spillovers. Second, we investigate spillovers between multiple nudges by testing the effect of scaling up the number of reminded actions. Third, we study intertemporal spillovers by investigating whether the effects of having been exposed to reminders persist after reminders are withdrawn. We observe that <br /> reminders have positive effects in the short run -- multiple reminders more so than single reminders: while reminders lead to crowding-out of non-reminded actions, the positive effect on the reminded actions dominates. Yet, after withdrawal of the reminders, the negative spillover effect persists, while the positive effect partially fades out so that, overall, reminders have no effect. 2023-05-16T23:00:00+0000 Alexander K Koch, Dan Mønster, Julia Nafziger 9499375d-b209-4738-be00-f85153e1a697 Discussion paper DP18148 Organizational Economics, Public Economics DP18147 Inventors among the “Impoverished Sophisticate” https://cepr.org/publications/dp18147 This paper examines the identity and origins of Swedish inventors prior to World War I drawing on the universe of patent records linked to census data. We document that the rise of innovation during Sweden’s industrialization can largely be attributed to a small industrial elite belonging to the upper-tail of the economic, educational, and social status distribution. Analyzing children’s opportunities to become an inventor, we show that inventors were disproportionately drawn from privileged family backgrounds. However, among the middle- and working-class children that managed to overcome the barriers to entry, innovation was a path to upward mobility. 2023-05-14T23:00:00+0000 Thor Berger, Erik Prawitz 5cf2144b-40e8-4a2a-82c4-a1ae5ce30369 Discussion paper DP18147 Economic History DP18146 Organized Crime, Violence and Support for the State https://cepr.org/publications/dp18146 Citizens’ support is crucial to effectively combat organized crime. Contrary to prior studies<br /> that have identified a negative correlation between victimization and trust in the state, we find<br /> that exposinga representative sample of 6,000 individuals in Italy to journalistic images of organized<br /> crime-related violence increases trust towards institutions and state performance. We attribute this<br /> finding to a &quot;rally around the flag&quot; effect, rather than to the decrease in homicide rates occurring<br /> over the last decades – in fact, individuals wrongly believe that homicides have increased during such<br /> period. Updating beliefs on the real trend in violence does not appear to modify this relationship.<br /> Overall, these findings highlight how exposure to violence, especially when linked to organized groups,<br /> might strengthen state support. 2023-05-13T23:00:00+0000 Gianmarco Daniele, Paolo Pinotti 7e2348fb-d1b5-4e6b-8726-0ebc1c9a3bc5 Discussion paper DP18146 Political Economy DP18145 The Network Origins of Entry https://cepr.org/publications/dp18145 We develop a model of the process of entry under social learning via word-of-mouth (WOM). An incumbent&#039;s product is known to the consumers, while the success of a potential entrant hinges on creating consumers&#039; awareness of the entrant&#039;s product through WOM. We model WOM as a percolation process on a random graph. We show that whether an entrant can gain a non-negligible level of awareness depends on the social network structure via two sufficient statistics, which are the ratios of different factorial moments of the degree distribution. We categorize the different pricing equilibria into the classical blockaded, deterred, and accommodated entry taxonomy. Under deterred entry, our model produces a model of limit pricing by an incumbent to prevent an entrant gaining a non-negligible level of awareness. When we focus on a multinomial-logit demand, we show that increasing the network density shifts the pricing equilibrium from blockaded to deterred, and finally to accommodated entry. We also show that the aggregate consumer surplus may be non-monotonic with respect to network density. Finally, if the incumbent has knowledge about the consumer&#039;s number of friends and can charge personalised prices, we find that it is optimal for the incumbent to charge lower prices to more connected consumers. 2023-05-09T23:00:00+0000 Arthur Campbell, Philip Ushchev, Yves Zenou 436a9b7a-412a-4c73-9d62-681d94873fe6 Discussion paper DP18145 Industrial Organization DP18144 Disagreement and Market Structure in Betting Markets: Theory and Evidence from European Soccer https://cepr.org/publications/dp18144 Online sports betting is growing rapidly around the world. We describe how the competitive structure of the bookmaking market affects odds when bettors disagree about the probabilities of the outcomes of sporting events but are on average correct. We show that the demand for bets on longshots is less sensitive to the odds than bets on favorites. This means monopolistic bookmakers will set odds exhibiting favorite-longshot bias while competitive bookmaking markets will not have this feature. We develop a version of the model for soccer matches and use these results to explain empirical findings on odds for over 80,000 European soccer games from two different bookmaking markets. 2023-05-07T23:00:00+0000 Tadgh Hegarty, Karl Whelan db0e22cd-157e-40b5-bce0-e6ea3f8df05a Discussion paper DP18144 Industrial Organization DP18143 Social Organizations and Political Institutions: Why China and Europe Diverged https://cepr.org/publications/dp18143 This paper discusses the historical and social origins of the bifurcation in the political institutions of China and Western Europe. An important factor, recognized in the literature, is that China centralized state institutions very early on, while Europe remained politically fragmented for much longer. These initial differences, however, were amplified by the different social organizations (clans in China, corporate structures in Europe) that spread in these two societies at the turn of the first millennium AD. State institutions interacted with these organizations, and were shaped and influenced by this interaction. The paper discusses the many ways in which corporations contributed to the emergence of representative institutions and gave prominence to the rule of law in the early stages of state formation in Europe, and how specific features of lineage organizations contributed to the consolidation of the Imperial regime in China. 2023-05-05T23:00:00+0000 Joel Mokyr, Guido Tabellini 297a5c93-0422-413e-80ed-3d2c249aa43e Discussion paper DP18143 Political Economy DP18139 Fiscal Consequences of Corporate Tax Avoidance https://cepr.org/publications/dp18139 We study the consequences of multinational tax avoidance on the structure of government tax revenues. To motivate our analysis, we show that countries with high revenue losses due to profit shifting have lower corporate tax revenues and rates and higher indirect tax revenues and rates. To establish causality, we use German municipal data and analyse how changes in municipal trade tax rates levied on corporate profits affect local tax revenue structure. Following a trade tax rate increase, we find that municipalities with high exposure to aggressive multinationals experience a significant decline in trade tax revenue levels and shares. 2023-05-04T23:00:00+0000 Katarzyna Bilicka, Evgeniya Dubinina, Petr Janský af59c049-a4a4-4370-bd07-244b8a6fdbf1 Discussion paper DP18139 Public Economics DP18142 Inflation and wage growth since the pandemic https://cepr.org/publications/dp18142 Following the worst of the COVID-19 pandemic, inflation surged to levels last seen in the 1980s. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and its feedback to wages. We exploit the differences in pandemic support to identify the effect that these programs had on inflation and the passthrough to wages. Our empirical approach focuses on a novel dynamic difference-in-differences method based on local projections. Our estimates suggest that an increase of 5 percentage points in direct transfers (relative to trend) translates into about a peak 3 percentage points boost to inflation and wage growth. Moreover, higher inflation accentuates the role of inflation expectations on wage-setting dynamics.<br /> 2023-05-04T23:00:00+0000 Òscar Jordà, Fernanda Nechio c3504a54-7630-42bc-a7b4-83feb66e50eb Discussion paper DP18142 International Macroeconomics and Finance, Monetary Economics and Fluctuations DP18140 Subjective Well-being in Spain’s Decline https://cepr.org/publications/dp18140 Spain experienced economic decline from the 1570s to 1650, recovering gradually thereafter and only reaching its early 1570s per capita income in the 1820s. How did economic decline impact on people’s perception of well-being and inequality? We provide an answer based on an unexplored source, the Bulls of the Crusade, an alms that, after 1574, was annually collected by the Spanish Monarchy in its territories, and that, to some material benefits, added spiritual benefits: plenary indulgencies that erased the penance for guilt after sinning. An inexpensive but fixed price alms was massively bought by those aged 12 and above. The number of bulls sold relative to the relevant population provides a measure of spiritual comfort and, hence, of subjective well-being. A subjective inequality measure, the ratio of the 8 Reales bulls sold, intended for wealthy and high social status people, to the 2 Reales bulls sold, intended for the common people, is also estimated. Our results suggest that subjective well-being deteriorated during the late sixteenth and early seventeenth century improving during its last third, while subjective inequality increased from 1600-1640 to fall in the third quarter of the century. Thus, improvements in subjective well-being were accompanied by a decline in subjective inequality 2023-05-04T23:00:00+0000 Carlos Álvarez-Nogal, Leandro Prados de la Escosura b490a789-536d-46d1-a90c-be201d62eba5 Discussion paper DP18140 Economic History DP18141 A Local Projections Approach to Difference-in-Differences Event Studies https://cepr.org/publications/dp18141 Many of the challenges in the estimation of dynamic heterogeneous treatment effects can be resolved with local projection (LP) estimators of the sort used in applied macroeconometrics. This approach provides a convenient alternative to the more complicated solutions proposed in the recent literature on Difference-in-Differences (DiD). The key is to combine LPs with a flexible ‘clean control’ condition to define appropriate sets of treated and control units. Our proposed LP-DiD estimator is clear, simple, easy and fast to compute, and it is transparent and flexible in its handling of treated and control units. Moreover, it is quite general, including in its ability to control for pre-treatment values of the outcome and of other time-varying covariates. The LP-DiD estimator does not suffer from the negative weighting problem, and indeed<br /> can be implemented with any weighting scheme the investigator desires. Simulations demonstrate the good performance of the LP-DiD estimator in common settings. Two recent empirical applications illustrate how LP-DiD addresses the bias of conventional fixed effects estimators, leading to potentially different results. 2023-05-04T23:00:00+0000 Arindrajit Dube, Daniele Girardi, Òscar Jordà, Alan Taylor 3c6c7149-ca86-4598-b8f3-27a5f569d3c1 Discussion paper DP18141 International Macroeconomics and Finance, Labour Economics, Monetary Economics and Fluctuations, Public Economics DP18138 The taxation of couples https://cepr.org/publications/dp18138 This paper studies the tax treatment of couples. We develop two different approaches. One is tailored to the analysis of tax systems that stick to the principle that the tax base for couples is the sum of their incomes. One is tailored to the analysis of reforms toward individual taxation. We study the US federal income tax since the 1960s through the lens of this framework. We find that, in the recent past, realizing efficiency gains requires lowering marginal tax rates for secondary earners. We also find that revenue-neutral reforms towards individual taxation are in the interest of couples with high secondary earnings while couples with low secondary earnings are worse off. The support for such a reform recently passed the majority threshold. It is rejected, however, by a Rawlsian social welfare function. Thus, there is a tension between Rawlsian and Feminist notions of social welfare. 2023-05-04T23:00:00+0000 Felix Bierbrauer, Pierre Boyer, Andreas Peichl, Daniel Weishaar b54e7200-3599-4db3-915c-2a0ae356c9cc Discussion paper DP18138 Public Economics DP18135 Labour Market Reallocation Effects of COVID-19 Policies in Spain: A Tale of two Recessions https://cepr.org/publications/dp18135 This paper studies short-time work arrangements (ERTEs) when aggregate risk is partially sector-specific. In Spain, the Great Recession and the pandemic recession (aka the Great Contagion)<br /> can both be understood as being driven partially by large sector-specific shocks. However, the latter shows much less labor reallocation because ERTEs were available to firms. We show<br /> that ERTEs stabilize unemployment rates by allowing workers to remain with their employers in highly affected sectors. However, they crowd-out labor hoarding of employers, increase the<br /> volatility of the rate of people working and, consequently, of output, and slowdown worker reallocation away from the sectors badly hit by the recession. 2023-05-03T23:00:00+0000 Antonia Díaz, Juan J Dolado, Alvaro Jañez, Felix Wellschmied e45a4816-5ef2-4cd9-9f41-b763629ffb0e Discussion paper DP18135 Labour Economics DP18134 Neighborhood Spillover Effects of Early Childhood Interventions https://cepr.org/publications/dp18134 This study explores the role of neighborhoods on human capital formation at an early age. We do so by estimating the spillover effects of an early childhood intervention on the educational attainment of a large sample of disadvantaged children in the United States. We document large spillover effects on the cognitive skills of children living near treated children, which amount to approximately 40\% of the direct treatment effects. Interestingly, these spillover effects are localized and decrease with the spatial distance to treated neighbors. We do not find evidence of spillover effects on non-cognitive skills. Perhaps our most novel insight is the underlying mechanisms at work: the spillover effect on cognitive scores is very localized and seems to operate through the child&#039;s social network, mostly between treated kids. We do not find evidence that parents&#039; or children&#039;s social networks are effective for non-cognitive skills. Overall, our results reveal the importance of public programs and neighborhoods on human capital formation at an early age, highlighting that human capital accumulation is fundamentally a social activity. 2023-05-03T23:00:00+0000 John List, Fatemeh Momeni, Michael Vlassopoulos, Yves Zenou 33596d99-f426-4d85-a83f-9e88ceeda981 Discussion paper DP18134 Labour Economics DP18137 Diversity, Equity, and Inclusion https://cepr.org/publications/dp18137 This paper measures diversity, equity, and inclusion (DEI) using proprietary data on survey responses used to compile the Best Companies to Work For list. We identify 13 of the 58 questions as being related to DEI, and aggregate the responses to form our DEI measure. This variable has low correlation with gender and ethnic diversity in the boardroom, in senior management, and within the workforce, suggesting that DEI captures additional dimensions missing from traditional measures of demographic diversity. DEI is also unrelated to general workplace policies and practices, suggesting that DEI cannot be improved by generic initiatives. However, DEI is higher in small growth firms and firms with high financial strength. DEI is associated with higher future accounting performance across a range of measures, higher future earnings surprises, and higher valuation ratios, but demographic diversity is not. DEI perceptions among professional workers, such as R&amp;D employees, are significantly correlated with the number and quality of patents. However, DEI exhibits no link with future stock returns. 2023-05-03T23:00:00+0000 Alex Edmans, Caroline Flammer, Simon Glossner ed8354c3-57e9-4409-8a14-4e8db96b128b Discussion paper DP18137 Labour Economics, Banking and Corporate Finance DP18136 Revisiting the public-private wage gap in Spain: New evidence and interpretation https://cepr.org/publications/dp18136 This paper updates the available evidence on the public-private wage gap in Spain, which dates back to 2012. Through microdata drawn from the last three waves of the Wage Structure<br /> Survey (2010, 2014 and 2018) we study how this gap and its distribution by gender and education have evolved during and after the Great Recession. Conventional Oaxaca-Blinder decompositions<br /> are used to divide the raw wage gap into a component explained by differences in characteristics and another one capturing differences in returns and endogenous selection. The main findings are: (i) a strong wage compression by skills, and (ii) a wage premium for less-skilled women in the public sector. Both empirical results can be rationalised by a monopoly-union wage setting model with monopsonistic features and the presence of female statistical discrimination 2023-05-03T23:00:00+0000 Alba Couceiro de León, Juan J Dolado 65a7543f-e27d-4b76-82ee-2aff91980174 Discussion paper DP18136 Labour Economics DP18132 Trade and development in the Middle East, 1500-1914 https://cepr.org/publications/dp18132 During the early modern era most of the Middle East became unified by the Ottomans, who kept control of it for 400 years. Located at the crossroads of three continents, the Ottoman Empire was one of the longest-lasting dynasties in world history. This paper discusses trends in economic development in the Middle East drawing on existing estimates of population density at the city level, trade flows and GDP per capita, highlighting the high degree of spatial and temporal heterogeneity across the region. 2023-05-02T23:00:00+0000 Laura Panza 2a3f64c4-5fa1-4ce5-81bb-ca8962a6d297 Discussion paper DP18132 Economic History DP18133 Debt and Deficits: Fiscal Analysis with Stationary Ratios https://cepr.org/publications/dp18133 We study cointegrating relationships among fiscal variables and output and use them to introduce a new measure of the government&#039;s fiscal position. In the US since World War II, we find that the primary surplus-GDP ratio and the government debt-GDP ratio are nonstationary, which invalidates standard analytical approaches that assume them to be stationary. The tax revenue-debt ratio and the government expenditure-debt ratio are also nonstationary but their difference, the primary surplus-debt ratio, is stationary, as is the tax revenue-GDP ratio. We develop a new framework for fiscal analysis that takes account of these facts. Empirically, we find that a deterioration in the fiscal position forecasts a decline in government spending over the long run. It does not forecast increases in tax revenue; nor does it forecast low returns for bondholders. Fiscal adjustment to tax and expenditure shocks<br /> occurs primarily through mean-reversion in tax and expenditure growth, with a negligible contribution from expected and unexpected debt returns. We find similar results for postwar UK data. 2023-05-02T23:00:00+0000 John Y Campbell, Can Gao, Ian Martin b9964a34-94d7-481d-9e14-c3a30edf6ec9 Discussion paper DP18133 Macroeconomics and Growth, Monetary Economics and Fluctuations, Asset Pricing