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2013 Working Papers

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1034 - Globalized Market for Talents and Inequality: What Can Be Learnt from European Football?

Chrysovalantis Vasilakis

Complex interactions between high-skilled migration and aggregate performance govern the dynamics of growth and inequality across nations. Due to lack of data, these interdependencies have not been extensively studied in the economics literature. This paper takes advantage of the availability of rich panel data on the mobility of talented football players, and the performances of national leagues and teams to quantify the effect of a "globalization" shock, the 1995 Bosman rule, on global efficiency and cross-country inequality in football. I built a micro-founded model endogenizing migration decisions, inequality and training; I estimated its structural parameters; and I used numerical simulations to compare actual data with a counterfactual no-Bosman trajectory. My analysis reveals that the Bosman shock (i) increased global efficiency in football, (ii) increased inequality across leagues, and (iii) decreased inequality across national teams. I quantify the effect of the Bosman rule on the football hierarchy f UEFA and FIFA. Countries from Africa, South (except Argentina and Brazil) and Central America have produced more talents and benefitted from brain-gain type effects. My results also show that this brain-gain mechanism is the major source of efficiency gains. However, it plays only a minor role in explaining the rising inequality

1033 - Rationality and Dynamic Consistency under Risk and Uncertainty

Peter J. Hammond and Horst Zank

For choice with deterministic consequences, the standard rationality hypothesis is ordinality|i.e., maximization of a weak preference ordering. For choice under risk (resp. uncertainty), preferences are assumed to be represented by the objectively (resp. subjectively) expected value of a von Neumann{ Morgenstern utility function. For choice under risk, this implies a key independence axiom; under uncertainty, it implies some version of Savage's sure thing principle. This chapter investigates the extent to which ordinality, independence, and the sure thing principle can be derived from more fundamental axioms concerning behaviour in decision trees. Following Cubitt (1996), these principles include dynamic consistency, separability, and reduction of sequential choice, which can be derived in turn from one consequentialist hypothesis applied to continuation subtrees as well as entire decision trees. Examples of behavior violating these principles are also reviewed, as are possible explanations of why such violat ons are often observed in experiments.

1032 - The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports

Rocco Macchiavello and Ameet Morjaria

This paper provides evidence on the importance of reputation, intended as beliefs buyers hold about seller’s reliability, in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. We show that 1) the value of the relationship increases with the age of the relationship; 2) during an exogenous negative supply shock sellers prioritize relationships consistently with the predictions of the model; and 3) reliability at the time of the shock positively correlates with future survival and relationship value. Models exclusively focussing on enforcement or insurance considerations cannot account for the evidence.

1031 - Too Good to Be True: Asset Pricing Implications of Pessimism

Pablo F. Beker and Emilio Espino

We evaluate whether the introduction of pessimistic homogeneous beliefs in the frictionless Lucas-Mehra-Prescott model and the Kehoe-Levine-Alvarez-Jermann model with endogenous borrowing constraints, helps explain the equity premium, the risk-free rate and the equity volatility puzzles as well as the short-term momentum and long-term reversal of excess returns. We calibrate the model to U.S. data as in Alvarez and Jermann [4] and we find that the data does not contradict the qualitative predictions of the models. When the preferences parameters are disciplined to match both the average annual risk-free rate and equity premium, the Lucas-Mehra- Prescott model gives a more quantitatively accurate explanation for short-term momentum than the Kehoe-Levine-Alvarez-Jermann model but the latter gives a more quantitatively accurate explanation for the equity volatility puzzle. Long-term reversal remains quantitatively unexplained in both models.

1030 - Do Research Joint Ventures Serve a Collusive Function?

Michelle Sovinsky and Eric Helland

Every year thousands of firms are engaged in research joint ventures (RJV), where all knowledge gained through R&D is shared among members. Most of the empirical literature assumes members are non-cooperative in the product market. But many RJV members are rivals leaving open the possibility that firms may form RJVs to facilitate collusion. We examine this by exploiting variation in RJV formation generated by a policy change that affects the collusive benefits but not the research synergies associated with a RJV. We use data on RJVs formed between 1986 and 2001 together with firm-level information from Compustat to estimate a RJV participation equation. After correcting for the endogeneity of R&D and controlling for RJV characteristics and firm attributes, we find the decision to join is impacted by the policy change. We also find the magnitude is significant: the policy change resulted in an average drop in the probability of joining a RJV of 34% among telecommu- nications firms, 33% among computer and semiconductor manufacturers, and 27% among petroleum refining firms. Our results are consistent with research joint ventures serving a collusive function.

1028 - On the Origin of the Family

Marco Francesconi, Christian Ghiglino and Motty Perry

We present a game theoretic model to explain why people form life long monogamous families. Three components are essential in our framework, paternal investment, fatherhood uncertainty, and, perhaps the most distinctive feature of all, the overlap of children of dif- ferent ages. When all three conditions are present, monogamy is the most ecient form of sexual organization in the sense that it yields greater survivorship than serial monogamy, group marriage, and polygyny. Monogamy is also the only configuration that fosters altruistic ties among siblings. Finally, our result sheds light to the understanding of why most religions center around the monogamous delity family.

1027 - Productivity and the Welfare of Nations

Susanto Basu, Luigi Pascali and Fabio Schiantarelli

We show that the welfare of a country’s infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare di¤erences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advaned and developing countries.

1026 - Banks and Development: Jewish Communities in the Italian Renaissance and Current Economic Performance

Luigi Pascali

Are differences in local banking development long-lasting? Do they a¤ect long-term economic performance? I answer these questions by relying on an historical development that occurred in Italian cities during the 15th century. A sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities that were hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews were the only people in Italy who were allowed to lend for a profit and, second, the Franciscan reaction to Jewish usury led to the creation of charity lending institutions, the Monti di Pietà, that have survived until today and have become the basis of the Italian banking system. Using Jewish demography in 1500 as an instrument, I provide evidence of (1) an extraordinary persistence in the level of banking development across Italian cities (2) large effects of current local banking development on per-capita income. Additional firm-level analyses suggest that well-functioning local banks exert large effects on aggregate productivity by reallocating resources toward more efficient firms. I exploit the expulsion of the Jews from the Spanish territories in Italy in 1541 to argue that my results are not driven by omitted institutional, cultural and geographical characteristics. In particular, I show that, in Central Italy, the difference in current income between cities that hosted Jewish communities and cities that did not exists only in those regions that were not Spanish territories in the 16th century.

1025 - Financing Experimentation

Rocco Macchiavello

Entrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is financed by a lender? Under common scenarios, i.e., when there is the opportunity to learn by "starting small" or when "no-compete" clauses cannot be enforced ex-post, we show that financing experimentation can become harder precisely when it is more profitable, i.e., for lower values of the known-arm and for more optimistic priors. Endogenous collateral requirements (like those frequently observed in micro-credit schemes) are shown to be part of the optimal contract.

1024 - Implementing the "Wisdom of the Crowd"

Ilan Kremer, Yishay Mansour and Motty Perry

We study a novel mechanism design model in which agents each arrive sequentially and choose one action from a set of actions with unknown rewards. The information revealed by the principal affects the incentives of the agents to explore and generate new information. We characterize the optimal disclosure policy of a planner whose goal is to maximize social welfare. One interpretation of our result is the implementation of what is known as the "wisdom of the crowd". This topic has become increasingly relevant with the rapid spread of the Internet over the past decade.

1023 - Parliamentary Questions and the Probability of Re-election in the UK House of Commons

Luc Tucker

Members of worldwide parliaments partake in debates, where they have the opportunity to hold governments to account by asking pre-submitted questions. The UK House of Commons uses a ballot system to determine which members are selected to ask a question from those who expressed an interest in doing so. This paper is the first in the literature to exploit this randomization to show that the asking of such questions increases a member’s chances of being reelected by their constituents. It is shown that while the ordering of parliamentary questions is determined at random, the practicalities of conducting debates introduce a potentially endogenous element to the determination of which questions receive oral answers (particularly the speed at which questions are answered). This paper uses a matched sampling approach to cope with such non-random cases, but also includes alternative results, to show that the findings are not reliant on the use of this technique.

1022 - Why Blame?

Mehmet Gurdal, Joshua B. Miller & Aldo Rustichini

We provide experimental evidence that subjects blame others based on events they are not responsible for. In our experiment an agent chooses between a lottery and a safe asset; payment from the chosen option goes to a principal who then decides how much to allocate between the agent and a third party. We observe widespread blame: regardless of their choice, agents are blamed by principals for the outcome of the lottery, an event they are not responsible for. We provide an explanation of this apparently irrational behavior with a delegated-expertise principal-agent model, the subjects’ salient perturbation of the environment.

1021 - A Political Economy of the Separation of Electoral Origin

In democratic politics, voters delegate competing policy-making responsibilities to multiple elected agents: one agent is frequently tasked with initiating policies (the proposer) whilst the other is charged with scrutinizing and either passing or rejecting these policies (the veto player ). A fundamental distinction lies in whether both oces are subject to direct and separate election, or whether the voter instead may directly elect only one oce. Why should the voter benefit from a relatively coarse electoral instrument? When politicians' abilities are private information, actions taken by one agent provide information about both agents' types. A system in which their electoral fates are institutionally fused reduces the incentives of the veto player to build reputation through the specious rejection of the proposer's policy initiatives. This can improve the voter's welfare, relative to a system in which the survival of the veto player is institutionally separated from that of the proposer.

1020 - Defying the LATE? Identification of local treatment effects when the instrument violates monotonicity

Clement de Chaisemartin

The instrumental variable method relies on a strong no-defiers condition, which requires that the instrument affect every subject's treatment decision in the same direction. This paper shows that no-defiers can be replaced by a weaker compliers- defiers condition, which requires that a subgroup of compliers have the same size and the same distribution of potential outcomes as defiers. This condition is necessary and sucient for IV to capture causal effects for the remaining part of compliers. In many applications, compliers-defiers is a very weak condition. For instance, in Angrist & Evans (1998), 94% of DGPs compatible with the data satisfy compliers-defiers, while 0% satisfy no-defiers.

1019 - Discrimination or Social Networks? Industrial Investment in Colonial India

Bishnupriya Gupta

Industrial investment in Colonial India was segregated by the export oriented industries, such as tea and jute that relied on British firms and the import substituting cotton textile industry that was dominated by Indian firms. The literature emphasizes discrimination against Indian capital. Instead informational factors played an important role. British entrepreneurs knew the export markets and the Indian entrepreneurs were familiar with the local markets. The divergent flows of entrepreneurship can be explained by the comparative advantage enjoyed by social groups in information and the role of social networks in determining entry and creating separate spheres of industrial investment.

1018 - Rearmament to the Rescue? New Estimates of the Impact of ‘Keynesian’ Policies in 1930s’ Britain

Nicholas Crafts and Terence Mills

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and ‘defense news’. We find that the government expenditure multiplier was in the range 0.3 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was less than is generally supposed. We find that rearmament gave a smaller boost to real GDP than previously claimed. Rearmament may, however, have had a larger impact than a temporary public works program of similar magnitude if private investment anticipated the need to add capacity to cope with future defense spending.

1017 - Bidding Markets with Financial Constraints

Pablo Beker and Angel Hernando-Veciana

We develop a model of bidding markets with financial constraints a la Che and Gale (1998b) in which two firms optimally choose their budgets. First, we provide an alternative explanation for the dispersion of markups and “money left on the table” across procurement auctions. Interestingly, this explanation does not hinge on significant private information but on differences, both endogenous and exogenous, in the availability of financial resources. Second, we explain why the empirical analysis of the size of markups may be biased downwards or upwards with a bias positively correlated with the availability of financial resources when the researcher assumes that the data are generated by the standard auction model. Third, we show that large concentration and persistent asymmetries in market shares together with occasional leadership reversals can arise as a consequence of the firms internal financial decisions even in the absence of exogenous shocks.

1016 - How Beneficial Was the Great Moderation After All?

Roberto Pancrazi

In this paper I compute the welfare e¤ect of the Great Moderation, using a consumption based asset pricing model. The Great Moderation is modelled according to the data properties of consumption and dividend growth, which display a reduction of their innovation-volatility and increased persistence. The theoretical model (a long-run risk model), calibrated to match average asset pricing variables in the data, is able to capture the two features of the Great Moderation, and it predicts a welfare loss caused by the Great Moderation (-0.9 percent), due mainly to the utility cost of a late uncertainty resolution.

1015 - Accounting for Secrets

Mark Harrison

The Soviet dictatorship used secrecy to shield its processes from external scrutiny. A system of accounting for classified documentation assured the protection of secrets. The associated procedures resemble a turnover tax applied to government transactions. There is evidence of both compliance and evasion. The burden of secrecy was multiplied because the system was also secret and so had to account for itself. Unique documentation of a small regional bureaucracy, the Lithuania KGB, is exploited to yield an estimate of the burden. Measured against available benchmarks, the burden looks surprisingly heavy.

1014 - Fiscal Rules and Discretion under Persistent Shocks

Marina Halac and Pierre Yared

This paper studies the optimal level of discretion in policymaking. We consider a scal policy model where the government has time-inconsistent preferences with a present-bias towards public spending. The government chooses a scal rule to trade o its desire to commit to not overspend against its desire to have exibility to react to privately observed shocks to the value of spending. We analyze the optimal scal rule when the shocks are persistent. Unlike under i.i.d: shocks, we show that the ex-ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex-ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run.

1013 - Technology Persistence and Monetary Policy

Roberto Pancrazi and Marija Vukotic

In this paper, by using several statistical tools, we provide evidence of increased persistence of the U.S. total factor productivity. In a forward-looking model, agents’ optimal behavior depends on the autocorrelation structure of the exogenous shocks. Since many monetary models are driven by exogenous technology shocks, we study the implications of a change in technology persistence on monetary policy using a New Keynesian framework. First, we analytically derive the interaction between the TFP persistence, monetary policy parameters, and output gap and in‡ation. Second, we show that change in the TFP persistence a¤ects the optimal behavior of monetary policy.

1012 - Asymmetric Parametric Division Rules

John Stovall

We describe and characterize the family of asymmetric parametric division rules for the adjudication of conflicting claims on a divisible homogeneous good. As part of the characterization, we present two novel axioms which restrict how a division rule indirectly allocates between different versions of the same claimant. We also show that such division rules can alternately be represented as the maximization of an additively separable social welfare function.

1011 - Constructing Social Division to Support Cooperation: Theory and Evidence from Nepal

James Choy

Many societies are divided into multiple smaller groups. The defining feature of these groups is that certain kinds of interaction are more likely to take place within a group than across groups. I build a model in which group divisions are enforced through a reputational penalty for interacting with members of different groups. Agents who interact with members of different groups find that they can support lower levels of cooperation in the future. The model explains why agents may be punished by the other members of their group for interacting with members of different groups and why agents are punished for interacting with members of some groups but not others. I test the empirical implication that there should be less cooperation among members of groups that make up a larger percentage of their communities. I discuss the origin and possible future of social division.

1010 - Optimal Resource Allocation in General Cournot-competitive Equilibrium

Inger Sommerfelt Ervik and Christian Soegaard

Conventional economic theory stipulates that output in Cournot competition is too low relative to that which is attained in perfect competition. We revisit this result in a General Cournot-competitive Equilibrium model with two industries that differ only in terms of productivity. We show that in general equilibrium, the more efficient industry produces too little and the less efficient industry produces too much compared to an optimal scenario with perfect competition.

1009 - Growth, Fairness and Job Satisfaction: Implications for Nominal and Real Wage Rigidity

Jennifer C Smith

Theories of wage rigidity often rely on a positive relationship between pay changes and utility, arising from concern for fairness or gift exchange. Supportive evidence has emerged from laboratory experiments, but the link has not yet been established with field data. This paper contributes a first step, using representative British data. Workers care about the level and the growth of earnings. Below-median wage increases lead to an insult effect except when similar workers have real wage reductions or firm production is falling. Nominal pay cuts appear insulting even when the firm is doing badly.

1008 - Extending the Original Position: Revisiting the Pattanaik Critique of Vickrey/Harsanyi Utilitarianism

Peter J. Hammond

Harsanyi's original position treats personal identity, upon which each individual's utility depends, as risky. Pattanaik's critique is related to the problem of scaling \state-dependent" von Neumann{Morgenstern utility when determining subjective probabilities. But a unique social welfare functional, incorporating both level and unit interpersonal comparisons, emerges from contemplating an \extended" original position allowing the probability of becoming each person to be chosen. Moreover, the paper suggests the relevance of a \Harsanyi ethical type space", with types as both causes and objects of preference.

1007 - An Oligopolistic Theory of Regional Trade Agreements

Christian Soegaard

Why are trade agreements regional? I address this question in a model of oligopoly featuring product variety. Tariffs have the effect of manipulating a country's terms of trade and shifting profits towards the domestic market at the expense of foreign trade partners. Countries endogenously form into regional trade agreements or global free trade in a framework where any agreement must be sustained by repeated interaction. A crucial parameter determining the degree of regionalism is product variety. I demonstrate that for a given trade cost and discount factor, increases in product variety leads to greater scope for global free trade relative to regional trade agreements.

1006 - Efficient Upgrading in Network Goods : Is Commitment Always Good?

Thanos Athanasopoulos

In this article I explore an incumbent monopolist’s incentives to upgrade in the future his durable network product in the presence of overlapping generations of customers and a potential entrant who may also sell a version of the same quality. When the incumbent has commitment power and entry cannot be deterred, he decides to withhold the upgrade when network effects are weak, as strategic complementarity between the competitors’ intertemporal pricing decisions allows him to charge sufficiently patient forward-looking consumers more in the present market. On the other hand, he commits to upgrade when network effects are strong, as there is strategic substitutability between firms ’prices. Regarding welfare, the frequency of new products is not socially optimal when the quality improvement is negligible and smaller than their adoption cost. I find that both potential or actual competition and the incumbent’s commitment power are sources of inefficiency.

1005 - An example of Strategic Market Game with Infinitely Many Commodities

Simone Tonin

This short paper shows in an example of strategic market game that the Cournot-Nash equilibrium converges to the Walras equilibrium, even in the case of an exchange economy with infinitely many commodities.

1004 - Cable Regulation in the Internet Era

Gregory S. Crawford

The market for multi-channel video programming has undergone considerable change in the last 15 years. Direct-Broadcast Satellite service, spurred by 1999 legislation that leveled the playing field with cable television systems, has grown from 3% to 33% of the U.S. MVPD (cable, satellite, and telco video) market. Telephone operators have entered in some parts of the US and online video distributors are a growing source of television viewing. This chapter considers the merits of cable television regulation in light of these developments. It surveys the dismal empirical record on the effects of price regulation in cable and the more encouraging but incomplete evidence on the benefits of satellite and telco competition. It concludes with a consideration of four open issues in cable markets: horizontal concentration and vertical integration in the programming market, bundling by both cable systems and programmers, online video distribution, and temporary programming blackouts from failed carriage negotiatio s for both broadcast and cable programming. While the distribution market is clearly now more competitive, concerns in each of these areas remain.

1003 - Not the Opium of the People : Income and Secularization in a Panel of Prussian Counties

Sascha O. Becker and Ludger Woessmann

The interplay between religion and the economy has occupied social scientists for long. We construct a unique panel of income and Protestant church attendance for six waves of up to 175 Prussian counties spanning 1886-1911. The data reveal a marked decline in church attendance coinciding with increasing income. The cross-section also shows a negative association between income and church attendance. But the association disappears in panel analyses, including firstdifferenced models of the 1886-1911 change, panel models with county and time fixed effects, and panel Granger-causality tests. The results cast doubt on causal interpretations of the religioneconomy nexus in Prussian secularization.

1002 - Do entrepreneurs matter?

Sascha O. Becker and Hans K.Hvide

In the large literature on firm performance, economists have given little attention to entrepreneurs. We use deaths of more than 500 entrepreneurs as a source of exogenous variation, and ask whether this variation can explain shifts in firm performance. Using longitudinal data, we find large and sustained effects of entrepreneurs at all levels of the performance distribution. Entrepreneurs strongly affect firm growth patterns of both very young firms and for firms that have begun to mature. We do not find significant differences between small and larger firms, family and non-family firms, nor between firms located in urban and rural areas,but we do find stronger effects for founders with high human capital. Overall, the results suggest that an often overlooked factor individual entrepreneurs plays a large role in affecting firm performance.