2019 Working Papers

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1238 - Fundamental Utilitarianism and Intergenerational Equity with Extinction Discounting

Graciela Chichilnisky, Peter J. Hammond & Nicholas Stern

Ramsey famously condemned discounting “future enjoyments” as “ethically indefensible”. Suppes enunciated an equity criterion which, when social choice is utilitarian, implies giving equal weight to all individuals’ utilities. By contrast, Arrow (1999a, b) accepted, perhaps reluctantly, what he called Koopmans’ (1960) “strong argument” implying that no equitable preference ordering exists for a suﬃciently unrestricted domain of inﬁnite utility streams. Here we derive an equitable utilitarian objective for a ﬁnite population based on a version of the Vickrey–Harsanyi original position, where there is an equal probability of becoming each person. For a potentially inﬁnite population facing an exogenous stochastic process of extinction, an equitable extinction biased original position requires equal conditional probabilities, given that the individual’s generation survives the extinction process. Such a position is well-deﬁned if and only if survival probabilities decline fast enough for the expected total number of individuals who can ever live to be ﬁnite. Then, provided that each individual’s utility is bounded both above and below, maximizing expected “extinction discounted” total utility — as advocated, inter alia, by the Stern Review on climate change — provides a coherent and dynamically consistent equitable objective, even when the population size of each generation can be chosen

1237 - Is there a paradox of pledgeability?

Dan Bernhardt, Kostas Koufopoulos and Giulio Trigilia

Donaldson, Gromb and Piacentino (2019) suggest that, in the presence of limited commitment, increasing the fraction of a ﬁrm’s cash ﬂows that can be pledged as collateral might make the ﬁrm worse oﬀ. We show that, in fact, ﬁrms can never be hurt by increased pledgeability of cash ﬂows in their framework. We then show that the ﬁrst best can always be implemented by non-state contingent collateralized debt contracts that diﬀer from the ones they consider.

1236 - Searching for Answers: The Impact of Student Access to Wikipedia

Laura Derksen, Catherine Michaud Leclerc and Pedro CL Souza

Young people across the developing world are gaining access to the internet. Can schools introduce the internet in a way that promotes reading and learning? We provide Wikipedia access to a random subset of secondary school students in Malawian boarding schools. This setting is unique: students otherwise have limited study resources and no internet access. Students used Wikipedia intensively, and found it accessible and trustworthy. They developed a preference for Wikipedia over other online sources, including for information about news events and safe sex. We ﬁnd a large impact on English ﬁnal exam scores (.11 standard deviations), especially for low achievers(.21 standard deviations). Students also used Wikipedia to study for Biology, and exam scores increased for low achievers (.17 standard deviations). Our result simply that Wikipedia is a source of simple and engaging reading material, and can improve English language skills. It is also a source of accessible study material that increases study time productivity for low achievers.

1235 - Terror and Tourism: The Economic Consequences of Media Coverage

Timothy Besley, Thiemo Fetzer and Hannes Mueller

This paper studies the economic effects of news-coverage of violent events. To do so, we combine monthly aggregated and anonymized credit card data on tourism spending from 114 origin countries and 5 tourist destinations (Turkey, Egypt, Tunisia, Israel and Morocco) with a large corpus of more than 446 thousand newspaper articles covering news on the 5 destination countries from a subset of 57 tourist origin countries. We document that violent events in a destination are followedbysharpspikesinnegativereportingatoriginandcontractionsintourist activity. Media coverage of violence has a large independent effect on tourist spending beyond what can be accounted for by controlling for the incidence of violence. We develop a model in which tourist beliefs, actual violence and media reporting are modelled together. This model allows us to quantify the effect of violent events and reporting.

1234 - Exchange Rates and Consumer Prices : Evidence from Brexit

Holger Breinlich, Elsa Leromain, Dennis Novy and Thomas Sampson

This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identiﬁcation strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inﬂation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.

1233 - Markups, Quality, and Trade Costs

Natalie Chen and Luciana Juvenal

We investigate theoretically and empirically how exporters adjust their mark ups across destinations depending on bilateral distance, tariffs, and the quality of their exports. Under the assumption that trade costs are both ad valorem and per unit, our model predicts that mark ups rise with distance and fall with tariffs, but these effects are heterogeneous and are smaller in magnitude for higher quality exports. We find strong support for the predictions of the model using a unique data set of Argentinean firm-level wine exports combined with experts wine ratings as a measure of quality.

1232 - Housing insecurity, homelessness and populism: Evidence from the UK

Thiemo Fetzer, Srinjoy Sen & Pedro CL Souza

Homelessness and precarious living conditions are on the rise across much of theWesternworld. Thispaperexploitsexogenousvariationintheaffordability of rents due to a cut that substantially lowered housing beneﬁt – a welfare beneﬁt aimed at helping low income households pay rent. Before April 2011, local housing allowance covered up to the median level of market rents; from April 2011 onwards, only rents lower than the 30th percentile were covered. We exploit that the extent of cuts signiﬁcantly depend on statistical noise due to estimation of percentiles. We document that the affordability shock caused a signiﬁcant increase in: evictions; individual bankruptcies; property crimes; share of households living in insecure temporary accommodation; statutory homelessness and actual rough sleeping. The ﬁscal savings of the cut are much smaller than anticipated. We estimate that for every pound saved by the central government, council spending to meet statutory obligations for homelessness prevention increases by 53 pence. We further document political effects: the housing beneﬁt cut causes lower electoral registration rates and is associated with lower turnout and higher support for Leave in the 2016 EU referendum, most likely driven by its unequal impact on the composition of those that engage with democratic processes.

1231 - Erasing Ethnicity? Propaganda, Nation Building and Identity in Rwanda

Arthur Blouin & Sharun W. Mukand

This paper examines whether propaganda broadcast over radio helped to change interethnic attitudes in post-genocide Rwanda. We exploit variation in exposure to the government’s radio propaganda due to the mountainous topography of Rwanda. Results of lab-in-the-ﬁeld experiments show that individuals exposed to government propaganda have lower salience of ethnicity, increased inter-ethnic trust and show more willingness to interact face-to-face with members of another ethnic group. Our results suggest that the observed improvement in inter-ethnic behavior is not cosmetic, and reﬂects a deeper change in interethnic attitudes. The ﬁndings provide some of the ﬁrst quantitative evidence that the salience of ethnic identity can be manipulated by governments.

1230 - High Dimensional Latent Panel Quantile Regression with an Application to Asset Pricing

Alexandre Belloni, Mingli Chen, Oscar Hernan Madrid Padilla, and Zixuan (Kevin) Wang

We propose a generalization of the linear panel quantile regression model to accommodate both sparse and dense parts: sparse means while the number of covariates available is large, potentially only a much smaller number of them have a nonzero impact on each conditional quantile of the response variable; while the dense part is represented by a low-rank matrix that can be approximated by latent factors and their loadings. Such a structure poses problems for traditional sparse estimators, such as the `1-penalised Quantile Regression, and for traditional latent factor estimator, such as PCA. We propose a new estimation procedure, based on the ADMM algorithm, that consists of combining the quantile loss function with `1 and nuclear norm regularization. We show, under general conditions, that our estimator can consistently estimate both the nonzero coefﬁcients of the covariates and the latent low-rank matrix. Our proposed model has a “Characteristics + Latent Factors” Asset Pricing Model interpretation: we apply our model and estimator with a large-dimensional panel of ﬁnancial data and ﬁnd that (i) characteristics have sparser predictive power on latent factors were controlled (ii) the factors and coefﬁcients at upper and lower quantiles are different from the median.

1229 - Monte Carlo Sampling Processes and Incentive Compatible Allocations in Large Economies (Updated October 2020)

Peter J. Hammond, Lei Qiao & Yeneng Sun

Monte Carlo simulation is used in Hammond and Sun (2008) to characterize a standard stochastic framework involving a continuum of random variables that are conditionally independent given macro shocks. This paper presents some general properties of such Monte Carlo sampling processes, including their one-way Fubini extension and regular conditional independence. In addition to the almost sure convergence of Monte Carlo simulation considered in Hammond and Sun (2008), here we also consider norm convergence when the random variables are square integrable. This leads to a necessary and sufficient condition for the classical law of large numbers to hold in a general Hilbert space. Applying this analysis to large economies with asymmetric information shows that the conflict between incentive compatibility and Pareto efficiency is resolved asymptotically for almost all sampling economies, corresponding to some results in McLean and Postlewaite (2002) and Sun and Yannelis (2007).

1228 - Is There a Link Between Air Pollution and Impaired Memory? Evidence on 34,000 English Citizens

Nattavudh Powdthavee and Andrew J. Oswald

It is known that people feel less happy in areas with higher levels of nitrogen dioxide NO2 (MacKerron and Mourato, 2009). What else might air pollution do to human wellbeing? This paper uses data on a standardized word-recall test that was done in the year 2011 by 34,000 randomly sampled English citizens across 318 geographical areas. We find that human memory is worse in areas where NO2 and PM10 levels are greater. The paper provides both (i) OLS results and (ii) instrumental-variable estimates that exploit the direction of the prevailing westerly wind and levels of population density. Although caution is always advisable on causal interpretation, these results are concerning and are consistent with laboratory studies of rats and other non-human animals. Our estimates suggest that the difference in memory quality between England’s cleanest and most-polluted areas is equivalent to the loss of memory from 10 extra years of ageing.

1227 - Tariffs and Politics: Evidence from Trump’s Trade Wars

Thiemo Fetzer and Carlo Schwarz

We use the recent trade escalation between the US and its trade partners to study whether retaliatory tariffs are politically targeted. We find comprehensive evidence using individual- and aggregate voting data suggesting that retaliation is carefully targeted to hurt Trump. We develop a simulation approach to construct counterfactual retaliation responses allowing us to both quantify the extent of political targeting, while also studying potential tradeoffs. China, appears to put a large weight on achieving maximal political targeting. The EU seems successful in maximizing political targeting, while at the same time minimizing the potential damage to its economy.

1226 - A Game of Hide and Seek in Networks

Francis Bloch, Bhaskar Dutta & Marcin Dziubinski

We propose and study a strategic model of hiding in a network, where the network designer chooses the links and his position in the network facing the seeker who inspects and disrupts the network. We characterize optimal networks for the hider, as well as equilibrium hiding and seeking strategies on these networks. We show that optimal networks are either equivalent to cycles or variants of a core-periphery networks where every node in the periphery is connected to a single node in the core.

1225 - Patent-Based News Shocks

Danilo Cascaldi-Garcia & Marija Vukotic

In this paper we exploit ﬁrm-level data on patent grants and subsequent reactions of their stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patent-based news shocks resemble diﬀusion news in that they do not aﬀect total factor productivity in the short-run but account for about 20 percent of its variations after ﬁve years. These shocks induce positive co-movement between consumption, output, investment and hours. Unlike the existing empirical evidence, patent-based news shocks generate a positive response in inﬂation and the federal funds rate, in line with a standard New Keynesian model. Patenting activity in electronic and electrical equipment industries within the manufacturing sector and computer programming and data processing services within the services sector play a crucial role in driving our results.

1224 - E-governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India

Abhijit Banerjee, Esther Duflo, Clement Imbert, Santhosh Mathew & Rohini Pande

Can e-governance reforms improve government policy? By making information available on a real time basis, information technologies may reduce the theft of public funds. We analyze a large field experiment and the nationwide scale-up of a reform to India's workfare program. Advance payments were replaced by "just-in-time" payments, triggered by e-invoicing, making it easier to detect misreporting. Leakages went down: program expenditures dropped by 24%, while employment slightly increased; there were fewer fake households in the official database; program officials' personal wealth fell by 10%. However, payment delays increased. The nationwide scale-up resulted in a persistent 19% reduction in program expenditure.

1223 - The Political Economy of the Prussian Three-class Franchise

Sascha O. Becker and Erik Hornung

Did the Prussian three-class franchise, which politically over-represented the economic elite, affect policy-making? Combining MP-level political orientation, derived from all roll call votes in the Prussian parliament (1867–1903), with constituency characteristics, we analyze how local vote inequality, determined by tax payments, affected policymaking during Prussia’s period of rapid industrialization. Contrary to the predominant view that the franchise system produced a conservative parliament, higher vote inequality is associated with more liberal voting, especially in regions with large-scale industry. We argue that industrialists preferred self-serving liberal policies and were able to coordinate on suitable MPs when vote inequality was high.

1222 - Analysis of Networks via the Sparse β-Model

Mingli Chen, Kengo Kato & Chenlei Leng

Data in the form of networks are increasingly available in a variety of areas, yet statistical models allowing for parameter estimates with desirable statistical properties for sparse networks remain scarce. To address this, we propose the Sparse β-Model (SβM), a new network model that interpolates the celebrated Erdos-Renyi model and the β-model that assigns one diﬀerent parameter to each node. By a novel reparameterization of the β-model to distinguish global and local parameters, our SβM can drastically reduce the dimensionality of the β-model by requiring some of the local parameters to be zero. We derive the asymptotic distribution of the maximum likelihood estimator of the SβM when the support of the parameter vector is known. When the support is unknown, we formulate a penalized likelihood approach with the `0-penalty. Remarkably, we show via a monotonicity lemma that the seemingly combinatorial computational problem due to the `0-penalty can be overcome by assigning nonzero parameters to those nodes with the largest degrees. We further show that a β-min condition guarantees our method to identify the true model and provide excess risk bounds for the estimated parameters. The estimation procedure enjoys good ﬁnite sample properties as shown by simulation studies. The usefulness of the SβM is further illustrated via the analysis of a microﬁnance take-up example.

1221 - The Pre-1914 UK Productivity Slowdown: A Reappraisal

Nicholas Crafts and Terence C. Mills

This paper re-examines UK productivity growth in the decades before World War I using a new dataset compiled by Thomas and Dimsdale (2017). We find that the productivity slowdown of the early 20th century was quite modest and does not deserve to be called a climacteric. A more serious slowdown in labour productivity growth occurred in the 1870s. Neither of these episodes should be regarded as a precedent for the current severe deterioration in UK productivity performance. Nor should a late-Victorian productivity slowdown be attributed to the end of the steam age despite the popularity of this belief.

1220 - Can Workfare Programs Moderate Conflict? Evidence from India

Thiemo Fetzer

Can public interventions persistently reduce conﬂict? Adverse weather shocks, through their impact on incomes, have been identiﬁed as robust drivers of conﬂict in many contexts. An effective social insurance system moderates the impact of adverse shocks on house hold in comes,and hence,could attenuate the link between these shocks and conﬂict. This paper shows that a public employment program in India, by providing an alternative source of income through a guarantee of 100 days of employment at minimum wages, effectively provides insurance. This has an indirect pacifying effect. By weakening the link between productivity shocks and incomes, the program uncouples productivity shocks from conﬂict, leading persistently lower conﬂict levels.

1219 - Education and Polygamy: Evidence from Cameroon

Pierre André and Yannick Dupraz

We take advantage of a wave of school constructions in Cameroon after World War II and use variations in school supply at the village level to estimate labor and marriage market returns to education in the 1976 population census. Education increases the likelihood to be in a polygamous union for men and for women, as well as the overall socioeconomic status of the spouse. We argue that education increases polygamy for women because it allows them to marry more educated and richer men, who are more likely to be polygamists. To show this, we estimate a structural model of marriage with polygamy. The positive aﬃnity between a man’s polygamy and a woman’s education is mostly explained by the aﬃnity of education.

1218 - How Polarized are Citizens? Measuring Ideology from the Ground-Up

Mirko Draca and Carlo Schwarz

Strong evidence has been emerging that major democracies have become more politically polarized, at least according to measures based on the ideological positions of political elites. We ask: have the general public (‘citizens’) followed the same pattern? Our approach is based on unsupervised machine learning models as applied to issue position survey data. This approach firstly indicates that coherent, latent ideologies are strongly apparent in the data, with a number of major, stable types that we label as: Liberal Centrist, Conservative Centrist, Left Anarchist and Right Anarchist. Using this framework, and a resulting measure of ‘citizen slant’, we are then able to decompose the shift in ideological positions across the population over time. Specifically, we find evidence of a ‘disappearing center’ in a range of countries with citizens shifting away from centrist ideologies into anti-establishment ‘anarchist’ ideologies over time. This trend is especially pronounced for the US.

1217 - On Target? The Incidence of Sanctions Across Listed Firms in Iran

Mirko Draca, Jason Garred, Leanne Stickland and Nele Warrinnier

How successful are sanctions at targeting the economic interests of political elites in affected countries? We study the efficacy of targeting in the case of Iran, using information on the stock exchange-listed assets of two specific political entities with substantial influence over the direction of Iran’s nuclear program. Our identification strategy focuses on the process of negotiations for sanctions removal, examining which interests benefit most from news about diplomatic progress. We find that the stock returns of firms owned by targeted political elites respond especially sharply to such news, though other listed firms unconnected to these elites also benefit from progress towards sanctions relief. These results indicate the ‘bluntness’ of sanctions on Iran, but also provide evidence of their effectiveness in generating economic incentives for elite policymakers to negotiate a deal for sanctions relief.

1216 - The Sources of British Economic Growth since the Industrial Revolution: Not the Same Old Story

Nicholas Crafts

This paper updates the classic growth accounting research of the early 1980s taking account of improved data that has subsequently become available. The picture of long-run growth which results from incorporating many revisions is considerably different. The long-run path of productivity growth is now that of a roller-coaster with twin peaks in the third quarters of the 19th and 20th centuries rather than a U-shape. Productivity growth appears to have been very slow to accelerate in the Industrial Revolution, the notion of an Edwardian climacteric is not persuasive and the current productivity slowdown stands out as unprecedented.

1215 - Is the UK Productivity Slowdown Unprecedented?

Nicholas Crafts and Terence C. Mills

We estimate trend UK labour productivity growth using a Hodrick-Prescott filter method. We use the results to compare downturns where the economy fell below its pre-existing trend. We find that the current productivity slow down has resulted in productivity being 19.7% below the pre-2008 trend path in 2018. This is nearly double the previous worst productivity short fall ten years after the start of a downturn. On this criterion the slow down is unprecedented in the last 250 years. We conjecture that this reflects a combination of adverse circumstances, namely, a financial crisis, a weakening impact of ICT and impending Brexit

1214 - Experimentation in Dynamic R&D Competition

Anastasios Dosis & Abhinay Muthoo

We study a two-stage, winner-takes-all, R&D race, in which, at the outset, ﬁrms are uncertain regarding the viability of the project. Learning through experimentation introduces a bilateral (dynamic) feedback mechanism. For relatively low-value products,the equilibrium stopping time coincides with the socially efﬁcient stopping time although ﬁrms might experiment excessively in equilibrium; for relatively high-value products, ﬁrms might reduce experimentation and stop rather prematurely due to the fundamental free-riding effect. Perhaps surprisingly, a decrease in the value of the product can spur experimentation.

1213 - Identification with External Instruments in Structural VARs under Partial Invertibility

Silvia Miranda-Agrippino & Giovanni Ricco

This paper discusses the conditions for identification in SVAR-IVs when only the shock of interest or a subset of the structural shocks can be recovered as a linear combination of the VAR residuals. This condition of partial invertibility is very general, often of empirical relevance, and less stringent than the standard full invertibility that is routinely assumed in the SVAR literature. We show that, under partial invertibility, the dynamic responses can be correctly recovered using an external instrument even when this correlates with leads and lags of other invertible shocks. We call this a limited lead-lag exogeneity condition. We evaluate our results in a simulated environment, and provide an empirical application to the case of monetary policy shocks.

1212 - Rent extraction with securities plus cash

Tingjun Liu & Dan Bernhardt

Auctions employing steeper securities generate greater revenues when bidders have equal opportunity costs. However, when opportunity costs rise sufficiently quickly with valuations, security bids decrease in NPV and steeper securities reduce seller revenues. We show that when such adverse selection obtains, using combinations of securities with differing steepness can generate higher revenues than using securities of the same steepness. We determine the optimal combination of cash plus equity; identify a novel way of implementing the optimal mechanism via decreasing royalty rates; establish the robustness of the mechanism; and identify when auction designs combining cash with steeper-than-equity securities increase seller revenues.

1211 - The Night and Day of Amihud’s (2002) Liquidity Measure

Yashar H. Barardehi, Dan Bernhardt, Thomas G. Ruchti & Marc Weidenmier

Amihud’s (2002) stock (il)liquidity measure averages the daily ratio of absolute closeto-close return to dollar volume, including overnight returns, while trading volumes come from regular trading hours. Our modified measure addresses this mis-match by using open-to-close returns. It better explains cross-sections of returns, doubling estimated liquidity premia over 1964–2017. Using non-synchronous trading near close as an instrument reveals that overnight returns are primarily information-driven and orthogonal to price impacts of trading. Thus, including them in liquidity proxies magnifies measurement error, understating liquidity premia. Our modification especially matters when applications in finance and accounting render use of intraday data infeasible/undesirable.

1210 - Selective Hiring and Welfare Analysis in Labor Market Models

Christian Merkl & Thijs van Rens

Firms select not only how many, but also which workers to hire. Yet, in most labor market models all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. We set up a model that is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but implications for welfare are different for two reasons. First, a hiring externality occurs with random but not with selective hiring. Second, the welfare costs of unemployment are much larger with selective hiring, because unemployment risk is distributed unequally across workers.

1209 - Positive and Negative Campaigning in Primary and General Elections

Dan Bernhardt & Meenakshi Ghosh

We analyze primary and general election campaigning. Positive campaigning builds a candidate’s reputation; negative campaigning damages a rival’s. Each primary candidate hopes to win the general election; but failing that, he wants his primary rival to win. We establish that general elections always feature more negative campaigning than positive, as long as reputations are easier to tear down than build up. In contrast, if the effects of primary campaigns strongly persist, primary elections always feature more positive campaigning than negative. This reflects that a primary winner benefits only from his positive primary campaigning in general elections, and negative campaigning by a rival hurts.

1208 - Taxation and Supplier Networks: Evidence from India

Lucie Gadenne, Tushar K. Nandi and Roland Rathelot

Do tax systems distort firm-to-firm trade? This paper considers the effect of tax policy on supplier networks in a large developing economy, the state of West Bengal in India. Using administrative panel data on firms, including transaction data for 4.8 million supplier-client pairs, we first document substantial segmentation of supply chains between firms paying Value-Added Taxes (VAT) and non-VAT-paying firms. We then develop a model of firms’ sourcing and tax decisions within supply chains to understand the mechanisms through which tax policy interacts with supply networks. The model predicts partial segmentation in equilibrium because of both supply-chain distortions (taxes affect how much firms trade with each other) and strategic complementarities in firms’ tax choices. Finally, we test the model’s predictions using variations over time within-firm and within supplier-client pairs. We find that the tax system distorts firms’ sourcing decisions, and suggestive evidence of strategic complementarities in firms’ tax choices within supplier networks.

1207 - Externalities and financial crisis – enough to cause collapse?

Marcus Miller and Lei Zhang

After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.

1206 - Malas Notches

Ben Lockwood

This paper shows that the sufficient statistic approach to the welfare properties of income (and other) taxes does not easily extend to tax systems with notches, because with notches, changes in bunching induced by changes in tax rates have a first-order effect on tax revenues. In an income tax setting, we show that the marginal excess burden (MEB) of a change in the top rate of tax is given by the Feldstein (1999) formula for the MEB of a proportional tax, plus a correction term. These correction terms cannot be calculated just from knowledge of the elasticity of taxable income and quantitatively, they can be large. An application to VAT is discussed; with a calibration to UK data, the MEB of the VAT is roughly three times what is would be if VAT was simply a proportional tax.

1205 - Accounting for Mismatch Unemployment

Thijs van Rens and Benedikt Herz

We investigate unemployment due to mismatch in the United States over the past three and a half decades. We propose an accounting framework that allows us to estimate the contribution of each of the frictions that generated labor market mismatch. Barriers to job mobility account for the largest part of mismatch unemployment, with a smaller role for barriers to worker mobility. We find little contribution of wage-setting frictions to mismatch.

1204 - A test of speculative arbitrage: is the cross-section of volatility invariant?

Yashar H. Barardehi, Dan Bernhardt & Thomas G. Ruchti

We derive testable implications of Kyle and Obizhaeva’s (2016) notion of “bet invariance” for the cross-section of trade-time volatilities. We jointly develop theoretical foundations of “no speculative arbitrage” whose implications incorporate those of bet invariance. Our proposed test circumvents the unobservable nature of “bets.” Utilizing a large sample of U.S. stocks post decimilization, we show that using realized volatilities rather than expected volatilities introduces noise that substantially biases the tests. This leads us to use estimates of normalized volatilities based on running 24 month windows. We find strong support for no speculative arbitrage at a moment in time, but not across time.

1203 - Blockholder Disclosure Thresholds and Hedge Fund Activism

Guillem Ordonez-Calafi & Dan Bernhardt

Blockholder disclosure thresholds are under scrutiny due to their impact on the incentives for hedge fund activism, which in equilibrium are jointly determined with real investment and managerial behavior. We set up and study a comprehensive framework of the key mechanisms at play: initial investors in a firm—who value the disciplining effects of activism on management, but incur costs trading with activists who know their own value-enhancing potential; activists—who value higher thresholds when establishing equity stakes, but incur costs if high thresholds reduce real investment or discourage managerial misbehavior; and firm managers—who weigh private benefits of value-reducing actions against potential punishment if activists intervene. We characterize the optimal thresholds for initial investors, activist funds and society. When managers are unresponsive to threat of activism, initial investors and society value tighter disclosure thresholds than activists. In contrast, activists value tighter thresholds when managerial behavior is responsive to the threat of activism.

1202 - When do co-located firms selling identical products thrive?

Dan Bernhardt, Evangelos Constantinou & Mehdi Shadmehr

When consumers only see prices once they visit stores, and some consumers have time to comparison shop, co-location commits stores to compete and lower prices, which draws consumers away from isolated stores. Profits of co-located firms are a single-peaked function of the number of shoppers—co-located firms thrive when there are some shoppers, but not too many. When consumers know in advance whether they have time to shop, effects are enhanced: co-located stores may draw enough shoppers to drive the expected price paid by a non-shopper below that paid when consumers do not know if they will have time to shop

1201 - Wage Offers and On-the-job Search

Tristan Potter & Dan Bernhardt

We study the wage-setting problem of an employer with private information about demand for its product when workers can engage in costly on-the-job search. Employers understand that low wage offers may convey bad news that induces workers to search. The unique perfect sequential equilibrium wage strategy is characterized by: (i) pooling by intermediate-revenue employers on a common wage that just deters search; (ii) discontinuously lower revealing offers by low-revenue employers for whom the benefit of deterring search fails to warrant the required high pooling wage; and (iii) high revealing offers by high-revenue employers seeking to deter aggressive raiders.

1200 - Costly auction entry, royalty payments, and the optimality of asymmetric designs

Dan Bernhardt, Tingjun Liu, and Takeharu Sogo

We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more.

1199 - News We Like to Share: How News Sharing on Social Networks Influences Voting Outcomes

Kirill Pogorelskiy & Matthew Shum

More voters than ever get political news from their friends on social media platforms. Is this bad for democracy? Using context-neutral laboratory experiments, we find that biased (mis)information shared on social networks affects the quality of collective decisions relatively more than does segregation by political preferences on social media. Two features of subject behavior underlie this finding: 1) they share news signals selectively, revealing signals favorable to their candidates more often than unfavorable signals; 2) they naıvely take signals at face value and account for neither the selection in the shared signals nor the differential informativeness of news signals across different sources.

1198 - The Dynamic Effects of Tax Audits

Arun Advani, William Elming and Jonathan Shaw

Understanding causes of and solutions to non-compliance is important for a tax authority. In this paper we study how and why audits affect reported tax in the years after audit – the dynamic effect – for individual income taxpayers. We exploit data from a random audit program covering more than 53,000 income tax self assessment returns in the UK, combined with data on the population of tax filers between 1999 and 2012. We first document that there is substantial non-compliance in this population. One in three filers underreports the tax owed. Third party information on an income source does not predict whether a taxpayer is non-compliant on that income source, though it does predict the extent of underreporting. Using the random nature of the audits, we provide evidence of dynamic effects. Audits raise reported tax liabilities for at least five years after audit, implying an additional yield 1.5 times the direct revenue raised from the audit. The magnitude of the impact falls over time, and this decline is faster for less autocorrelated income sources. Taking an event study approach, we further show that the change in reporting behaviour comes only from those found to have made errors in their tax report. Finally, using an extension of the Allingham-Sandmo (1972) model, we show that these results are best explained by audits providing the tax authority with information, which then constrains taxpayers’ ability to misreport.

1197 - Trade Blocs and Trade Wars during the Interwar Period

David S. Jacks and Dennis Novy

What precisely were the causes and consequences of the trade wars in the 1930s? Were there perhaps deeper forces at work in reorienting global trade prior to the outbreak of World War II? And what lessons may this particular historical episode provide for the present day? To answer these questions, we distinguish between long-run secular trends in the period from 1920 to 1939 related to the formation of trade blocs (in particular, the British Commonwealth) and short-run disruptions associated with the trade wars of the 1930s (in particular, large and widespread declines in bilateral trade, the narrowing of trade imbalances, and sharp drops in average traded distances). We argue that the trade wars mainly served to intensify pre-existing efforts towards the formation of trade blocs which dated from at least 1920. More speculatively, we argue that the trade wars of the present day may serve a similar purpose as those in the 1930s, that is, the intensification of China- and US-centric trade blocs.

1196 - Testing for collusion in bus contracting in London

Michael Waterson and Jian Xie

We investigate the London bus market, a large market with regular procurement of bus services, for possible collusion using a wide variety of techniques, making use of the data at our disposal. There is little evidence of collusion in bidding for contracts apparent from our data, despite some features of the market that might lead to collusive behaviour.

1195 - Search Frictions and Evolving Labour Market Dynamics

Michael Ellington, Chris Martin & Bingsong Wang

This paper puts search frictions models under novel empirical scrutiny and tests their ability to match empirical observations. To capture changing dynamics we fit an extended Bayesian time-varying parameter VAR to US labour market data from 1962–2016. We find strong evidence against key predictions of the search frictions model, namely a large surge in vacancy creation in response to productivity shocks and a negative relationship between the volatilities of unemployment and wages. Our results question the amplification mechanism embedded in search frictions models and cast doubt on wage rigidity as a source of unemployment volatility.

1194 - How to Improve Tax Compliance? Evidence from Population wide Experiments in Belgium

Jan-Emmanuel De Neve, Clement Imbert, Johannes Spinnewijn, Teodora Tsankova & Maarten Luts

We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran five experiments spanning the tax process which varied the communication of the tax administration with all income taxpayers in Belgium. A consistent picture emerges across experiments: (i) simplifying communication increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective. Even tax morale messages that improve knowledge and appreciation of public services do not raise compliance. In fact, heterogeneity analysis with causal forests shows that tax morale treatments backfire for most taxpayers. In contrast, simplification has large positive effects on compliance, which diminish over time due to follow-up enforcement. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. Simplification is far more cost-effective, allowing for substantial savings on enforcement costs, and also improves compliance in the next tax cycle.

1193 - Discrimination in Hiring Based on Potential and Realized Fertility: Evidence from a Large-Scale Field Experiment

Sascha O. Becker, Ana Fernandes and Doris Weichselbaumer

Due to conventional gender norms, women are more likely to be in charge of childcare than men. From an employer’s perspective, in their fertile age they are also at “risk” of pregnancy. Both factors potentially affect hiring practices of firms. We conduct a largescale correspondence test in Germany, Switzerland, and Austria, sending out approx. 9,000 job applications, varying job candidate’s personal characteristics such as marital status and age of children. We find evidence that, for part-time jobs, married women with older kids, who likely finished their childbearing cycle and have more projectable childcare chores than women with very young kids, are at a significant advantage vis-àvis other groups of women. At the same time, married, but childless applicants, who have a higher likelihood to become pregnant, are at a disadvantage compared to single, but childless applicants to part-time jobs. Such effects are not present for full-time jobs, presumably, because by applying to these in contrast to part-time jobs, women signal that they have arranged for external childcare.

1192 - Mostly Harmless Simulations? Using Monte Carlo Studies for Estimator Selection

Arun Advani, Toru Kitagawa and Tymon Słoczyński

We consider two recent suggestions for how to perform an empirically motivated Monte Carlo study to help select a treatment effect estimator under unconfoundedness. We show theoretically that neither is likely to be informative except under restrictive conditions that are unlikely to be satisfied in many contexts. To test empirical relevance, we also apply the approaches to a real-world setting where estimator performance is known. Both approaches are worse than random at selecting estimators which minimise absolute bias. They are better when selecting estimators that minimise mean squared error. However, using a simple bootstrap is at least as good and often better. For now researchers would be best advised to use a range of estimators and compare estimates for robustness.

1191 - Small Talk and Theory of Mind in Strategic Decision-Making

Neha Bose and Daniel Sgroi

Small talk is a ubiquitous feature of social interaction but almost by deﬁnition seems to have little strategic importance and has hardly been studied within the social sciences. In a laboratory setting with 338 subjects, we show that short seemingly unimportant communication between players who know nothing about the games that are to follow (and so cannot engage in cheap talk) nevertheless has a dramatic and important eﬀect. Through small talk players were able to better predict the personalities of their partners (especially their level of extraverion) building a sensible “theory of mind” which in turn boosted their payoﬀs in subsequent public goods and level-k reasoning games. Important psychological factors such as perceived similarity and self-projection also proved important. Additional insight is provided by text analysis on the language used during communication which indicates how theory of mind can be developed through trivial and seemingly irrelevant small talk.

1190 - Interview of Peter J Hammond

Philippe Mongin, GREGHEC, Paris

Following an initiative of Social Choice and Welfare, this is the result of an interview conducted by email exchange during the period from July 2017 to February 2018, with minor adjustments later in 2018. Apart from some personal history, topics discussed include: (i) social choice, especially with interpersonal comparisons of utility; (ii) utilitarianism, including Harsanyi’s contributions; (iii) consequentialism in decision theory and in ethics; (iv) the independence axiom for decisions under risk; (v) welfare economics under uncertainty; (vi) incentive compatibility and strategy-proof mechanisms, especially in large economies; (vii) Pareto gains from trade, and from migration; (viii) cost–benefit analysis and welfare measurement; (ix) the possible future of normative economics.

1189 - Community Origins of Industrial Entrepreneurship in Pre-Independence India

Bishnupriya Gupta, Dilip Mookherjee, Kaivan Munshi, & Mario Sanclemente

We argue that community networks played an important role in the emergence of Indian entrepreneurship in the early stages of the cotton textile and jute textile industries in the late 19th and early 20th century respectively, overcoming the lack of market institutions and government support. From business registers, we construct a yearly panel dataset of entrepreneurs in these two industries. We find no evidence that entry is affected by prior trading experience or price shocks in the corresponding upstream sector. Firm directors exhibited a high degree of clustering of entrepreneurs by community. The dynamics of entry is consistent with a model of network-based dynamics.

1188 - Organizing Competition for the Market

Elisabetta Iossa, Patrick Rey & Michael Waterson

The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighbouring incumbents) benefit from a cost advantage. The paper first compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other firms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms

1187 - Rigidities and adjustments of daily prices to costs: Evidence from supermarket data

Monica Giulietti, Jesus Otero, & Michael Waterson

We assess the extent of inertia in grocery retail prices using data on prices and costs from a large supermarket chain in Colombia. Relative to previous work our analysis benefits from the daily frequency of the data and the availability of reliable replacement cost data. We uncover evidence supporting the existence of significant nominal rigidities in reference prices (three months) and even more so in reference costs (about five months). There is evidence that the price and cost rigidities differ depending on the type of product, being on average smaller in the case of perishable goods. Using an Error Correction Model framework, we examine the path of prices relative to costs, to determine the speed of adjustment of prices to shocks.

1186 - Historical Analysis of National Subjective Wellbeing using millions of Digitized Books

Thomas Hills, Eugenio Proto & Daniel Sgroi

In addition to improving quality of life, higher subjective wellbeing leads to fewer health problems, higher productivity, and better incomes. For these reasons subjective wellbeing has become a key focal issue among scientific researchers and governments. Yet no scientific investigator knows how happy humans were in previous centuries. Here we show that a new method based on quantitative analysis of digitized text from millions of books published over the past 200 years captures reliable trends in historical subjective wellbeing across four nations. This method uses psychological valence norms for thousands of words to compute the relative proportion of positive and negative language, indicating relative happiness during national and international wars, financial crises, and in comparison to historical trends in longevity and GDP. We validate our method using Eurobarometer survey data from the 1970s onwards and in comparison with economic, medical, and political events since 1820 and also use a set of words with stable historical meanings to support our findings. Finally we show that our results are robust to the use of diverse corpora (including text derived from newspapers) and different word norms.