Wednesday 17th February
Location: S2.77, 2nd floor, Social Sciences Building
Session I: International Economics and Trade
International Trade and Supply Chain Management: The Anti-Globalisation Effects of Just-In-Time
Frank Pisch (LSE)
Vladimir Tyazhelnikov (UC Davis)Global value chains are the production facilities of virtually all consumer goods today – from the most basic staple foods to smartphones and cars. Intermediates regularly travel far between stages of production before they reach their destination for final assembly and how international exchange relationships along supply chains are managed determines the success of the final product. Surprisingly little is known, however, about how supply chain management affects international trade patterns. I present three stylised facts linked to the philosophy of Just-in-Time (JIT) or ‘lean manufacturing’: trade flows that occur within JIT supply chains are shorter in both time and space (1) and happen more often within the boundaries of firms (2). The latter effect is amplified if relationship specific investments are important (3). Since over half of the firms in my sample are parts of JIT supply chains, these differences are significant for aggregate trade. I present a general equilibrium model of international trade that explains these stylised facts and offers further predictions. Firms that differ in their productivity decide how to organise production (JIT vs. non-JIT) and with which type of governance to conduct their transactions (outsourcing vs. integration). Integration is more prevalent if adaptation costs due to ex post and non-contractible disturbances are important relative to production inefficiencies caused by lower effort in hierarchies. JIT organisation of supply chains leads to higher expected adaptation costs – especially if productive assets are very relationship specific – and to a higher sensitivity of imports to shipping time. In exchange it conveys the benefit of lower inventories and hence higher productivity. Due to a fixed adoption cost, only the largest firms engage in JIT. TO DO: I expand the model for quantification and use the parameter values identified through the stylised facts to study what a world without JIT would look like in terms of gravity, intra-firm trade, and welfare.
The View from Space: Theory-Based Time-Varying Distances in the Gravity Model
Julian Hinz (PSE and Panthéon-Sorbonne)
Nadzeya Laurentsyeva (Munich)In this paper I compute distances used in the gravity model of international trade that improve the existing measures along multiple lines and help remedy the border puzzle. First I derive a trade cost aggregation that is agnostic to the underlying gravity framework, but yields concrete instructions on the method of computation and data to be used. The key parameter of the aggregation turns out to be the elasticity of trade to the respective trade cost, which, conveniently, can be estimated in the gravity model. Based on this method I then compute aggregate bilateral and internal country distances. For data on the economic geography of countries I turn to nightlight satellite imagery that provides information on the location and approximate intensity of economic activity in virtually all populated areas on Earth in very fine detail. Its annual periodicity allows me to compute a time series of distances for each country pair and year since 1992, accounting for changes in the economic geography. Employing these computed distances in a standard gravity equation yields a number of noteworthy results. By exploiting the time-variation of the distances, I can estimate the distance coefficient while controlling for unobserved country-pair characteristics. The distance elasticity estimate is in the vicinity of -1, in line with customary cross-section estimations in the related literature. The coefficient, as laid out in the theoretical part of the paper, calls for the use of harmonic mean distances, as opposed to the traditional arithmetic mean. This in turn yields important consequences for other gravity variables: the border coefficient, i.e. the often puzzlingly large relative difference between internal and external trade, is reduced by between 30% and 50%. Additionally, the coefficient on trade with a neighboring country is affected by a similar reduction, depending on the estimation method. Regressions using simulated data confirm the theoretical and empirical findings and support the magnitude of the estimated effects.
Session II: Theory
Preference Discovery and Experimentation
Kevin Cooke (Boston)
Peter Bayer (Maastricht)I provide axiomatic foundations for a model of taste uncertainty with endogenous learning through consumption. In this setting, uncertainty is over an unobservable, subjective state space. Choice data on lottery-menu pairs is sufficient to identify the state space and the learning process. In this model, the agent is viewed as learning the utility of an object upon its consumption. This information is used to improve choice from the follow-on menu. This implies a trade-off between consumption value and information leading to experimentation behavior. While the literature focuses on identifying subjective states through a demand for flexibility, I show that experimentation also (partially) identifies taste uncertainty. Furthermore, under a weak assumption, only choice data on a small set of binary menus (analogous to financial options) is required to uniquely identify model parameters. Finally, the compromise effect can often be understood as rational experimentation.
Optimal Monitoring in Dynamic Procurement Contracts
Andreas Asseyer (Humboldt)
Ayush Pant (Warwick)Which information should government authorities monitor when they procure goods from private suppliers? I analyze this question in a principal-agent model of procurement with moral hazard concerning cost-reducing investments and dynamic adverse selection about investment cost and a production cost shock. The principal can monitor the investment, the shock, or both at a cost. I show that it is never optimal to monitor investment and shock. Monitoring investment is always at least as effective as monitoring the shock. The two instruments are equivalent if the level of investment cost is high. Monitoring may decrease efficiency in the optimal contract.
Reputation with Strategic Information Disclosure
Harry Di Pei (MIT)
Irina Kholodenko (Warwick)I study the dynamics of an agent's reputation for competence when the labour market's information about his performance is disclosed strategically by an intermediary. I show that this game admits a unique Markov Perfect Equilibrium (MPE). When players are patient, the agent's effort is inverse U- shaped, while the rate of information disclosure is decreasing over time. I illustrate the inefficiencies of the unique MPE by comparing it with the equilibrium in the benchmark scenario in which the market automatically observes all breakthroughs. I characterize a tractable subclass of non-Markov Equilibria and explain why allowing players to coordinate on payoff irrelevant events can improve efficiency on top of the unique MPE. My model can be applied to professional service industries, such as law and consulting.
Lunch - Bar Fusion
Session III: Applied Economics I
Diverse Expertise, Knowledge Spillover and Productivity: Does Diversity in Idea Space Matter?
Wei Si (Stockholm)
Jan Sebastian Nimczik (Mannheim)This paper empirically explores whether diversity in idea space between collaborators affects the magnitude of spillovers and productivity. To precisely measure the diversity in idea space between knowledge producers, we introduce and calculate a novel index — the cognitive distance between two researchers, based on their publication distribution and citation relations among scholarly journals in which they have publications. Using individual-level panel data from the Thomson Reuters Web of Science (WoS) database of academic papers published since 1980 to 2013, we estimate the changes in productivity of the coauthors of 65 active life scientists who passed away unexpectedly and prematurely during 1995 and 2009, and examine whether the effect of the adverse shock differs in the cognitive distance between a scientist and her lost collaborator. Results show that following the death of an active and prominent life scientist, a coauthor’s productivity lastingly decreases in general, while the cognitive distance between a coauthor and a deceased scientist offsets the negative shock, but the relation appears to be non-linear for different measures of productivity. The results indicate that both knowledge spillovers and skill complementarity play a role in collaborations; nevertheless, the former has impacts on both quantity and quality of research output and the latter mainly affects quantity. Knowledge spillovers are more likely to happen between two researchers who are close in the idea space, while coauthors with a high level of cognitive diversity are more likely to benefit from skill complementarity. The findings suggest that after losing a preeminent collaborator, the loss of an irreplaceable source of ideas causes a more adverse impact on a scientist’s productivity than that caused by the potential imperfect skill substitution.
The Housing Market Effects of a Credible Terrorist Threat
Yael Elster (Hebrew)
Jorge Bouchot-Viveros (Birmingham)This paper explores the economic costs of conflict using a unique experiment. We analyze the effects of Hezbollah’s massive surprise rocket attack against northern Israel during the 2006 Second Lebanon War and the continued threat posed by the organization’s expanding rocket arsenal on the housing market, the labor market and patterns of migration flows and sorting. Relying on hedonic and repeat sales approaches and using a difference-in-differences identification strategy for 2000-2012, we show that the attack led to a 6-7 percent decline in house prices and rents in the most severely hit localities relative to other localities in northern Israel. These effects persisted until 2012, suggesting that the public continued to view the rocket threat as credible. In contrast, we find practically no effect on labor market conditions, migration flows and sorting. The results are consistent with a standard spatial equilibrium model.
Does the Identity of Leaders Matter for Education? Evidence from the First Black Governor in the US
Mery Ferrando (Louvain)
Torben Fischer (Mannheim)This paper analyzes whether political leaders from disadvantaged minorities improve educational outcomes of teenagers and young adults from the same minority. Specifically, we analyze the impact of the first ever elected African American governor in the United States, Douglas Wilder, who became governor of the State of Virginia in 1990. Using individual level survey data, we study how the educational achievements of black teenagers from Virginia evolved after the election of Douglas Wilder and we study the channels for the potential effect. The empirical specification follows a double and triple-difference strategy, using whites and other states as controls. The results show that, following the election, there was a significant and sizeable increase in the probability of black teenagers with respect to whites in Virginia of getting a high school diploma. Our findings suggest that policy changes alone cannot explain these improvements and we find evidence that the aspirations of black students improved. This indicates that Douglas Wilder may have been a role model for black teenagers in Virginia.
Session IV: Political Economy
The Price of Silence. Media Competition, Capture and Electoral Accountability
Federico Trombetta (Warwick)
Martijn Huysmans (Leuven)Is competition in the mass media market a good deterrent against media capture, i.e. against attempts, from the political side, to influence the contents of media reports? In this paper we show (both theoretically and empirically) that this is not always the case. Building on the mainstream models of media capture, we allow for voters’ heterogeneity in their interest for political news and we model the media market as a two-sided one, proving that the effect of competition on the possibility of capture can be non-monotonic. In particular, when competition increases above a certain threshold, then it may make cheaper, for a bad politician, to capture enough media outlets and to stay in power. Intuitively, even if competition increases the number of information providers that the bad politician has to silence in order to win the elections, it also reduces their profits. And, when profits are low, media outlets may be more willing to sacrifice their independence in exchange for bribes. When this second effect prevails, the total equilibrium cost of capture decreases in the number of outlets. On top of this, we show that the “deterrence effect” of competition increases with the fraction of voters interested in politics. Finally, we study the consequences of those results in terms of welfare and political accountability, and we test empirically our main findings in a cross-country comparison.
Disclosing Decision Makers' Private Interests
Antoni-Italo de Moragas (EUI)
Federico Trombetta (Warwick)In this paper I study how disclosure of the private interests of decision makers affects their behaviour. I propose a model where all decision makers are biased towards one decision, but while good decision makers care about taking the right decision, bad decision makers care about taking the decision they are biased to. In addition to that, decision makers are careerist and they care about building a good reputation. I find that the effect of disclosure is ambiguous because it can distort the incentives of good decision makers. When career concerns are low, disclosure does not change the behaviour of decision makers. When career concerns are intermediate, disclosure can induce bad decision makers to take right decisions more often. Finally, when career concerns are high, disclosure can induce both good and bad decision makers to take right decision less often.
Exit, Voice and Political Change: Evidence from Swedish Mass Migration to the United States
Mounir Karadja (IIES)
Matteo Gamalerio (Warwick)During the Age of Mass Migration, 30 million Europeans immigrated to the United States. We study the long-term political effects of this large-scale migration episode on origin communities using detailed historical data from Sweden, a major sending country in the period. To instrument for emigration cumulated over several decades, we exploit severe local frost shocks that sparked an initial wave of emigration, interacted with within-country travel costs. Because Swedish emigration was highly path dependent, the initial shocks strongly predict total emigration over 50 years. Our estimates show that emigration substantially increased membership in local labor organizations, the strongest political opposition groups at the time. Furthermore, emigration caused greater strike participation, and mobilized voter turnout and support for left-wing parties in national elections. We interpret these findings as an increase in citizens’ bargaining power and demand for political change. Emigration also had effects on the supply of political change. Municipalities with more emigration exhibit higher welfare expenditures per capita, both before and after the introduction of democracy. In addition, local governments become more likely to adopt inclusive political institutions. Together, our findings indicate that large-scale emigration can achieve significant and long-lasting effects on the political equilibrium in origin communities.
Day 1 Close
Thursday 18th February
Location: S2.79, 2nd floor, Social Sciences Building
Session V: Applied Economics II
Congestion in the Maternity Ward: Keep Calm and Call the Surgeon
Gabriel Facchini (EUI)
Chiara Ardito (Turin)During the past decades an increasing number of maternity wards have been closed in developed countries arguing lack of sufficient resources to provide proper care to parturient women. This paper uses an innovative natural experiment to provide causal estimates of the effects of congestion in the maternity ward on patients’ treatment. Results suggest that, among women who attempt labor and to have a vaginal delivery, those facing a ratio of patients to midwives higher than 1.25 (5 patients for every 4 midwives) see a 21% rise in the probability of delivering by C-section. Because C-sections are performed by a gynecologist, changing a patient’s treatment releases the workload of midwives in the labor and delivery room. When looking at the congestion effect for each staff shift, the rise in C-section is only present in the morning and afternoon -shifts with more surgeons on call-. Furthermore, the effect of congestion is only present for single women, less educated women, and first-time mothers.
Moral Incentives: Experimental Evidence from Repayments of an Islamic Credit Card
Stefano Fiorin (UCLA Anderson)
Andis Sofianos (Warwick)We study the role of morality in the decision to repay debts. Using a field experiment with a large Islamic bank in Indonesia, we find that moral appeals strongly increase credit card repayments. In our setting, all of the bank's late-paying credit card customers receive a basic reminder to repay their debt one day after they miss the payment due date. In addition, two days before the end of a ten-day grace period, clients in a treatment group also receive a text message that quotes an Islamic religious text stating that non-repayment of debts by someone who is able to repay is an injustice." This message increases the share of customers meeting their minimum payments by nearly 20%. By contrast, sending either a simple reminder or an Islamic quote that is unrelated to debt repayment has no effect on the share of customers making the minimum payment. Clients also respond more strongly to this moral appeal than to substantial financial incentives: receiving the religious message increases repayments by more than offering a cash rebate equivalent to 50% of the minimum repayment. Finally, we find that removing religious aspects from the quote does not change its effectiveness, suggesting that the moral appeal of the message does not necessarily rely on its religious connotation.
Poster Session (with coffee)
Lunch - Bar Fusion
Session VI: Macroeconomics
Effect of Household Credit and Sectoral Composition: Evidence from Mexico
Jagdish Tripathy (Pompeu Fabra)
Vaclav Zdarek (Warwick)This paper uses a natural experiment to study the effect of a drop in household credit on economic activity. I identify a negative shock to household credit supply in Mexico resulting from macro-prudential regulations in early 2012 in Spain. I use the variation in exposure to this shock across Mexican municipalities to measure the local demand effect of the drop in lending to households on the local industries in the tradable and non-tradable sector. Municipalities with higher shares of Spanish banks experienced greater drops in the growth rate of household credit, with a 10% higher pre-shock share of Spanish banks predicting a 2.5% drop in the growth rate of household credit. I show a slow-down in lending to the non-tradable sector in high-exposure municipalities and estimate elasticity of investments in the non-tradable sector to household credit ranging from 1.6-3.5. Investments in the tradable sector do not respond to the drop in lending to households. Numerous robustness checks provide evidence that the identified effects are not biased by the transmission of shocks across municipalities or by direct sector-specific shocks.
Earnings Inequality and the Minimum Wage: Evidence from Brazil
Niklas Engbom (Princeton)
Luis Valenzuela (Oxford)We assess the extent to which a rise in the minimum wage can account for three facts characterizing a large decline in earnings inequality in Brazil from 1996–2012: (i) the decline is more pronounced towards the bottom of the distribution; (ii) one quarter of the decline stems from an increase in relative pay at less productive firms; and (iii) another quarter is attributable to falling pay differences due to worker heterogeneity. To this end, we build an equilibrium search model with heterogeneity in worker ability and firm productivity. The central feature of the model is the presence of spillover effects of the minimum wage on higher earnings ranks due to monopsonistic competition among firms for workers. We estimate the model using indirect inference and find that the rise in the minimum wage explains 70 percent of the decline in the variance of log earnings. Spillover effects of the minimum wage account for more than half of this decline and quantitatively match the three empirical facts. Our results suggest that labor market dynamics can lead to large effects of policy on earnings inequality.
Session VII: Development Economics
Prenatal Stress and Cooperation: Evidence from a Public Goods Game in Post-Conflict Uganda
Jan Duchoslav (Wageningen)
Yang Huang (PSE)We study the impact of prenatal stress on later-life social preferences. We play a public goods game with Ugandan children born during a conflict characterized by high civilian victimization. To proxy for prenatal stress we use the 2D:4D digit ratio—a marker of fetal hormone exposure associated with maternal distress during early fetal development. We find that a rise in our proxy robustly reduces the probability of cooperation. Our findings extend the fetal origins literature to the domain of preferences. If severe prenatal stress affects next generation’s taste for cooperation, violent conflict may have farther reaching consequences than previously thought.
Income Hiding and Informal Redistribution: A Lab-in-the-field Experiment in Senegal
Paola Villar (PSE)
Andreas Ferrara (Warwick)This paper estimates the hidden cost of informal redistribution in economies where people heavily rely on their social networks and have limited access to financial markets. It is based on a lab-in-the-field experiment conducted in Senegal which uniquely combines a small-scale randomized controlled trial (RCT) and a lab experiment. The lab component allows us to estimate the cost of this informal redistribution, by eliciting the willingness-to-pay to hide income, and to identify the relevant population: two-thirds of the experiment participants are ready to forgo up to 14% of their gains to keep them private. Based on the RCT component, we find that giving people fearing the redistributive pressure the opportunity to hide allows them to decrease by 27% the share of gains they to kin as measured out of the lab. They reallocate this extra money to health and personal expenses. This is the first paper to both identify the individual cost of this informal redistribution and to relate it to real-life resource-allocation decisions in a controlled setting.
Electoral Rules and Leader Selection: Experimental Evidence from Ugandan Community Groups
Miri Stryjan (IIES)
Marc Witte (Oxford)This paper studies leadership selection in community groups. Despite a large body of work documenting how electoral systems affect policy outcomes, less is known about their impact on leader selection. We compare two types of participatory decision making in Ugandan community saving groups: vote by secret ballot and open discussion with consensus. Random assignment of electoral rules allows us to estimate the causal impact of the rules on leader types and on social service delivery. We find that vote groups elect leaders more similar to the average member while discussion group leaders are positively selected on socio-economic characteristics. Further, dropout rates are significantly higher in discussion groups, particularly for the poorer members. After 3.5 years, vote groups are larger in size and their members save less and get smaller loans. We conclude that the secret ballot vote creates more inclusive groups while open discussion groups are more exclusive and favor the economically successful. The appropriate method for leader selection thus ultimately depends on the objective and target group of the program. Our findings offer important contributions to the literature on leader selection and to the understanding of public service delivery in developing countries.
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