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2011 Working Papers

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975 - Pricing in inflationary times- the penny drops

Ratula Chakraborty, Paul Dobson, Jonathan S. Seaton and Michael Waterson

We investigate micro pricing behaviour in groceries (the UK’s most important consumer market) over eight years including the inflationary period of early 2008. We find behaviour sharply distinguished from most previous work, namely that overall basket prices rise but more individual prices fall than rise! This is consistent with retailers obscuring the fact of rising basket prices. We employ a significant new source of data that captures cross-competitor interplay in prices at a very detailed level. Unusually but importantly, our work takes into account that consumers buy baskets of goods, rather than individual products, when shopping at supermarkets

974 - Is Anonymity the Missing Link Between Commercial and Industrial Revolution?

Stephen Broadberry , Sayantan Ghosal and Eugenio Proto

The Industrial Revolution is often characterized as the culmination of a process of commercialisation; however, the precise nature of such a link remains unclear. This paper models and analyses one such link: the impact of a higher degree of anonymity of market transactions on relative factor prices. Commercialisation raises wages as impersonal labour market transactions replace personalized customary relations. This leads, in equilibrium, to higher real wages to prevent shirking. To the extent that capital and labor are (imperfect) substitutes, the resulting shift in relative factor prices leads to the adoption of a more capital-intensive production technology which, in turn, results in a faster rate of technological progress via enhanced learning by doing. We provide evidence using European historical data that England was among the most urbanized and the highest wage countries at the onset of the industrial revolution.

973 - Context and Decision: Utility on a Union of Mixture Spaces

Patrick O’Callaghan

Suppose a decision-maker is willing to make statements of the form: “I prefer to choose alternative a when in context p, than to choose alternative b when in context q”. Contexts p and q may refer to given probability distributions over a set of states, and b and c to alternatives such as: “turn left” or “turn right” at a junction. In such decision problems, the set of alternatives is discrete and there is a continuum of possible contexts. I assume there is a is a mixture operation on the space of contexts (eg. convex combinations of lotteries), and propose a model that defines preferences over a collection of mixture spaces indexed by a discrete set. The model yields a spectrum of possibilities: some decision-makers are well represented by a standard von Neumann–Morgenstern type of utility function; whilst for others, utility across some or all the mixture spaces is only ordinally comparable.An application to the decision problem of Karni and Safra (2000) leads to a generalization, and shows that state-dependence and comparability are distinct concepts. A final application provides a novel way of modeling incomplete preferences and explaining the Allais paradox.

972 - Credibility and Strategic Learning in Networks

Kalyan Chatterjee and Bhaskar Dutta

This paper studies a model of diffusion in a fixed, finite connected network. There is an interested party that knows the quality of the product or idea being propagated and chooses an implant in the network to influence other agents to buy or adopt. Agents are either innovators, who adopt immediately, or rational. Rational consumers buy if buying rather than waiting maximizes expected utility. We consider the conditions on the network under which efficient diffusion of the good product with probability one is a perfect Bayes equilibrium. Centrality measures and the structure of the entire network are both important. We also discuss various inefficient equilibria

971 - Which Impulse Response Function?

David Ronayne

This paper compares standard and local projection techniques in the production of impulse response functions both theoretically and empirically. Through careful selection of a structural decomposition, the comparison continues to an application of US data to the textbook ISLM model. It is argued that local projection techniques offer a remedy to the bias of the conventional method especially at horizons longer than the vector autoregression‘s lag length. The application highlights that the techniques can have different answers to important questions.

970 - Maternal Autonomy and the Education of the Subsequent Generation : Evidence from three contrasting states in India

Marco Alfano, Wiji Arulampalam and Uma Kambhampati

This paper makes a significant contribution on both conceptual and methodological fronts, in the analysis of the effect of maternal autonomy on school enrolment age of children in India. The school entry age is modelled using a discrete time duration model where maternal autonomy is entered as a latent characteristic, and allowed to be associated with various parental and household characteristics which also conditionally affect school entry age. The model identification is achieved by using proxy measures collected in the third round of the National Family Health Survey of India, on information relating to the economic, decision-making, physical and emotional autonomy of a woman. We concentrate on three very different states in India – Andhra Pradesh, Kerala and Uttar Pradesh. Our results indicate that female autonomy is not associated with socio-economic characteristics of the woman or her family in Kerala (except maternal education), while it is strongly correlated to these characteristics in both Andhra Pradesh and Uttar Pradesh. Secondly, while female autonomy is significant in influencing the school starting age in UP, it is less important in AP and not significant at all in Kerala.

968 - False Consensus in Economic Agents

Eugenio Proto and Daniel Sgroi

967 - A Rough Examination of the value of gas storage

Monica Giulietti, Luigi Grossi and Michael Waterson

This paper studies the impact of a re in 2006 which removed the possibility of access to the Rough gas storage facilities covering over 80% of total UK storage, at a time when major withdrawals from storage would have likely taken place. Implicitly, it shows the value of such gas storage facilities, in a country with relatively little storage, where we might therefore see a considerable impact. We find that the major effect on activity was through an increased sensitivity of supply to prices and an increased variance in this sensitivity, not through physical shortages of gas.

966 - Knocking on Heaven’s Door? Protestantism and Suicide

Sascha O. Becker and Ludger Woessmann

We model the effect of Protestant vs. Catholic denomination in an economic theory of suicide, accounting for differences in religious-community integration, views about man’s impact on God’s grace, and the possibility of confessing sins. We test the theory using a unique micro-regional dataset of 452 counties in 19th century Prussia, when religiousness was still pervasive. Our instrumental-variable model exploits the concentric dispersion of Protestantism around Wittenberg to circumvent selectivity bias. Protestantism had a substantial positive effect on suicide in 1816-21 and 1869-71. We address issues of bias from mental illness, misreporting, weather conditions, within-county heterogeneity, religious concentration, and gender composition.

965 - Wage Inequality, Minimum Wage Effects and Spillovers

Mark B. Stewart

This paper investigates possible spillover effects of the UK minimum wage. The halt in the growth in inequality in the lower half of the wage distribution (as measured by the 50:10 percentile ratio) since the mid 1990s, in contrast to the continued inequality growth in the upper half of the distribution, suggests the possibility of a minimum wage effect and spillover effects on wages above the minimum. This paper analyses individual wage changes, using both a difference-in-differences estimator and a specification involving cross-uprating comparisons, and concludes that there have not been minimum wage spillovers. Since the UK minimum wage has always been below the 10th percentile, this lack of spillovers implies that minimum wage changes have not had an effect on the 50:10 percentile ratio measure of inequality in the lower half of the wage distribution.

964 - Classroom Games in Economics : A Quantitative Assessment of the `Beer Game'

Michael McMahon

Rather than an endorsement or a criticism of classroom games, the conclusion is cautionary advice on how to best make use of games within an overall course.

963 - How Experts Decide : Identifying Preferences versus Signals from Policy Decisions

Stephen Hansen and Michael McMahon

Consider an expert who must take one of two decisions whose consequences are uncertain. Two individual characteristics can potentially guide her decision. First, there are her preferences over the outcomes associated with each decision. Second, in an idea going back to Condorcet (1785), she might receive private signals that allow her to update her beliefs about the probabilities of the dierent outcomes being realized. Many papers in the theory literature, especially in the area of committees,1 explicitly model both dimensions and allow each to in uence decision making.

962 - The role of worker flows in the dynamics and distribution of UK unemployment

Michael W. L. Elsby, Jennifer C. Smith and Jonathan Wadsworth

Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this variation. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job-finding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.

961 - Nonclassical Measurement Error in a Nonlinear (Duration) Model

Daniel Gutknecht

In this paper, we study nonclassical measurement error in the continuous dependent variable of a semiparametric transformation model. The latter is a popular choice in practice nesting various nonlinear duration and censored regression models. The main complication arises because we allow the (additive) measurement error to be correlated with a (continuous) component of the regressors as well as with the true, unobserved dependent variable itself. This problem has not yet been studied in the literature, but we argue that it is relevant for various empirical setups with mismeasured, continuous survey data like earnings or durations. We develop a framework to identify and consistently estimate (up to scale) the parameter vector of the transformation model. Our estimator links a two-step control function approach of Imbens and Newey (2009) with a rank estimator similar to Khan (2001) and is shown to have desirable asymptotic properties. We prove that `m out of n' bootstrap can be used to obtain a consistent approximation of the asymptotic variance and study the estimator's nite sample performance in a Monte Carlo Simulation. To illustrate the empirical usefulness of our procedure, we estimate an earnings equation model using annual data from the Health and Retirement Study (HRS). We find some evidence for a bias in the coecients of years of education and age, emphasizing once again the importance to adjust for potential measurement error bias in empirical work.

960 - Incentive Schemes for Local Government : Theory and Evidence from Comprehensive Performance Assessment in England (updated)

Ben Lockwood and Francesco Porcelli

This paper studies Comprehensive Performance Assessment, an explicit incentive scheme for local government in England. Motivated by a simple theoretical political agency model, we predict that CPA should increase service quality and local taxation, but have an ambiguous effect on the efficiency of service provision. We test these predictions using a difference in difference approach, using Welsh local authorities as a control group, exploiting the fact that local authorities in Wales were not subject to the same CPA regime. To do this, we construct original indices of service quality and efficiency, using Best Value Performance Indicators. We estimate that CPA increased the e¤ective band D council tax rate in England relative to Wales by 4%, and increased our index of service quality output also by about 4%, but had no signi…cant effect on our efficiency indices. There is evidence of heterogenous e¤ects of CPA on efficiency, with some evidence that CPA impacted more on less efficient councils, and the "harder test" from 2005-8 having a much bigger effect.

959 - Understanding the macroeconomic effects of working capital in the United Kingdom

Emilio Fernandez-Corugedo, Michael McMahon, Stephen Millard and Lukasz Rachel

In this paper we rst document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard exibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effcts on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to oset such shocks.

958 - Quantile estimates of counterfactual distribution shifts and the impact of minimum wage increases on the wage distribution

Mark B. Stewart

This paper presents a method for estimating the effects of a policy change on an outcome distribution that uses a comparator quantile rather than a control group and provides methods for estimating the variances of the estimators. The empirical analysis presents estimates of “spillover” effects of increases in the UK minimum wage, i.e. effects on the wages of those already above the minimum, under different counterfactual distribution shift assumptions. Evidence is presented against a simple scaled counterfactual. On the basis of the proposed counterfactual estimated spillover effects are small and in most cases do not reach above the 5th. percentile.

957 - Individual Welfare and Subjective Well-Being : Commentary Inspired by Sacks, Stevenson and Wolfers

Peter J. Hammond, Federica Liberini and Eugenio Proto

Sacks, Stevenson and Wolfers (2010) question earlier results like Easterlin's showing that long-run economic growth often fails to improve individuals' average reports of their own subjective well-being (SWB). We use World Values Survey data to establish that the proportion of individuals reporting happiness level h, and whose income falls below any fixed threshold, always diminishes as h increases. The implied positive association between income and reported happiness suggests that it is possible in principle to construct multi-dimensional summary statistics based on reported SWB that could be used to evaluate economic policy.

956 - Do Professional Forecasters Pay Attention to Data Releases?

Michael P. Clements

We present a novel approach to assessing the attentiveness of professional forecasters to news about the macroeconomy. We fi…nd evidence that professional forecasters, taken as a group, do not always update their estimates of the current state of the economy to refl‡ect the latest releases of revised estimates of key data.