Showing papers in "Econometrica in 2020"

Financial Heterogeneity and the Investment Channel of Monetary Policy

Abstract: We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk—those with low debt burdens and high “distance to default”— are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low‐risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.

Sampling‐Based versus Design‐Based Uncertainty in Regression Analysis

Abstract: Consider a researcher estimating the parameters of a regression function based on data for all 50 states in the United States or on data for all visits to a website. What is the interpretation of the estimated parameters and the standard errors? In practice, researchers typically assume that the sample is randomly drawn from a large population of interest and report standard errors that are designed to capture sampling variation. This is common even in applications where it is difficult to articulate what that population of interest is, and how it differs from the sample. In this article, we explore an alternative approach to inference, which is partly design‐based. In a design‐based setting, the values of some of the regressors can be manipulated, perhaps through a policy intervention. Design‐based uncertainty emanates from lack of knowledge about the values that the regression outcome would have taken under alternative interventions. We derive standard errors that account for design‐based uncertainty instead of, or in addition to, sampling‐based uncertainty. We show that our standard errors in general are smaller than the usual infinite‐population sampling‐based standard errors and provide conditions under which they coincide.

Social Media and Protest Participation: Evidence From Russia

Abstract: Do new communication technologies, such as social media, alleviate the collective action problem? This paper provides evidence that penetration of VK, the dominant Russian online social network, led to more protest activity during a wave of protests in Russia in 2011 As a source of exogenous variation in network penetration, we use the information on the city of origin of the students who studied with the founder of VK, controlling for the city of origin of the students who studied at the same university several years earlier or later We find that a 10% increase in VK penetration increased the probability of a protest by 46% and the number of protesters by 19% Additional results suggest that social media induced protest activity by reducing the costs of coordination rather than by spreading information critical of the government We observe that VK penetration increased pro‐governmental support, with no evidence of increased polarization We also find that cities with higher fractionalization of network users between VK and Facebook experienced fewer protests, and the effect of VK on protests exhibits threshold behavior

Heterogeneity and Persistence in Returns to Wealth

Abstract: We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway’s administrative tax records. We document a number of novel results. First, in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile. Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, for wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

On the Geography of Global Value Chains

Abstract: This paper develops a multi-stage general-equilibrium model of global value chains (GVCs) and studies the specialization of countries within GVCs in a world with barriers to international trade. With costly trade, the optimal location of production of a given stage in a GVC is not only a function of the marginal cost at which that stage can be produced in a given country, but is also shaped by the proximity of that location to the precedent and the subsequent desired locations of production. We show that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central locations. We also develop and estimate a tractable, quantifiable version of our model that illustrates how changes in trade costs affect the extent to which various countries participate in domestic, regional or global value chains, and traces the real income consequences of these changes.

Heterogeneous Markups, Growth, and Endogenous Misallocation

Abstract: The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic considerations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart.

Age of Marriage, Weather Shocks, and the Direction of Marriage Payments

Abstract: We study how aggregate economic conditions affect the timing of marriage, and particularly child marriage, in Sub‐Saharan Africa and in India. In both regions, substantial monetary or in‐kind transfers occur with marriage: bride price across Sub‐Saharan Africa and dowry in India. In a simple equilibrium model of the marriage market in which parents choose when their children marry, income shocks affect the age of marriage because marriage payments are a source of consumption smoothing, particularly for a woman's family. As predicted by our model, we show that droughts, which reduce annual crop yields by 10 to 15% and aggregate income by 4 to 5%, have opposite effects on the marriage behavior of a sample of 400,000 women in the two regions: in Sub‐Saharan Africa they increase the annual hazard into child marriage by 3%, while in India droughts reduce such a hazard by 4%. Changes in the age of marriage due to droughts are associated with changes in fertility, especially in Sub‐Saharan Africa, and with declines in observed marriage payments. Our results indicate that the age of marriage responds to short‐term changes in aggregate economic conditions and that marriage payments determine the sign of this response. This suggests that, in order to design successful policies to combat child marriage and improve investments in daughters' human capital, it is crucial to understand the economic role of marriage market institutions.

Labor Share Decline and Intellectual Property Products Capital

Abstract: We study the behavior of the U.S. labor share over the past 90 years. We find that the observed decline of the labor share is entirely explained by the capitalization of intellectual property products in the national income and product accounts.

Frontier Culture: The Roots and Persistence of “Rugged Individualism” in the United States

Abstract: The presence of a westward-moving frontier of settlement shaped early U.S. history. In 1893, the his- torian Frederick Jackson Turner famously argued that the American frontier fostered individualism. We investigate the Frontier Thesis and identify its long-run implications for culture and politics. We track the frontier throughout the 1790–1890 period and construct a novel, county-level measure of to- tal frontier experience (TFE). Historically, frontier locations had distinctive demographics and greater individualism. Long after the closing of the frontier, counties with greater TFE exhibit more perva- sive individualism and opposition to redistribution. This pattern cuts across known divides in the U.S., including urban–rural and north–south. We provide suggestive evidence on the roots of fron- tier culture: selective migration, an adaptive advantage of self-reliance, and perceived opportunities for upward mobility through effort. Overall, our findings shed new light on the frontier’s persistent legacy of rugged individualism.

Geography, Transportation, and Endogenous Trade Costs

Abstract: In this paper, we study the role of the transportation sector in world trade. We build a spatial model that centers on the interaction of the market for (oceanic) transportation services and the market for world trade in goods. The model delivers equilibrium trade flows, as well as equilibrium trade costs (shipping prices). Using detailed data on vessel movements and shipping prices, we document novel facts about shipping patterns; we then flexibly estimate our model. We use this setup to demonstrate that the transportation sector (i) attenuates differences in the comparative advantage across countries; (ii) generates network effects in trade costs; and (iii) dampens the impact of shocks on trade flows. These three mechanisms reveal a new role for geography in international trade that was previously concealed by the frequently‐used assumption of exogenous trade costs. Finally, we illustrate how our setup can be used for policy analysis by evaluating the impact of future and existing infrastructure projects (e.g., Northwest Passage, Panama Canal).

Liberation Technology: Mobile Phones and Political Mobilization in Africa

Abstract: Can digital information and communication technology (ICT) foster mass political mobilization? We use a novel geo-referenced dataset for the entire African continent between 1998 and 2012 on the coverage of mobile phone signal together with geo-referenced data from multiple sources on the occurrence of protests and on individual participation in protests to bring this argument to empirical scrutiny. We find that mobile phones are instrumental to mass mobilization during economic downturns, when reasons for grievance emerge and the cost of participation falls. Estimated effects are if anything larger once we use an instrumental variable approach that relies on differential trends in coverage across areas with different incidence of lightning strikes. The results are in line with insights from a network model with imperfect information and strategic complementarities in protest provision. Mobile phones make individuals more responsive to both changes in economic conditions - a mechanism that we ascribe to enhanced information - and to their neighbors’ articipation - a mechanism that we ascribe to enhanced coordination. Empirically both effects are at play, highlighting the channels through which digital ICT can alleviate the collective action problem.

Endogenous Production Networks

Abstract: We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity and various distortions may affect costs and prices. We establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology/input choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input–output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount—that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2n−1 to 2n, thus enabling significantly more pronounced cost reductions from choice of input combinations. These cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs.

Credible Auctions: A Trilemma

Abstract: Consider an extensive‐form mechanism, run by an auctioneer who communicates sequentially and privately with bidders. Suppose the auctioneer can deviate from the rules provided that no single bidder detects the deviation. A mechanism is credible if it is incentive‐compatible for the auctioneer to follow the rules. We study the optimal auctions in which only winners pay, under symmetric independent private values. The first‐price auction is the unique credible static mechanism. The ascending auction is the unique credible strategy‐proof mechanism.

Testing Models of Social Learning on Networks: Evidence From Two Experiments

Abstract: We theoretically and empirically study an incomplete information model of social learning. Agents initially guess the binary state of the world after observing a private signal. In subsequent rounds, agents observe their network neighbors' previous guesses before guessing again. Agents are drawn from a mixture of learning types—Bayesian, who face incomplete information about others' types, and DeGroot, who average their neighbors' previous period guesses and follow the majority. We study (1) learning features of both types of agents in our incomplete information model; (2) what network structures lead to failures of asymptotic learning; (3) whether realistic networks exhibit such structures. We conducted lab experiments with 665 subjects in Indian villages and 350 students from ITAM in Mexico. We perform a reduced‐form analysis and then structurally estimate the mixing parameter, finding the share of Bayesian agents to be 10% and 50% in the Indian‐villager and Mexican‐student samples, respectively.

Targeting Interventions in Networks

Abstract: Individuals interact strategically with their network neighbors. A planner can shape incentives in pursuit of an aggregate goal, such as maximizing welfare or minimizing volatility. We analyze a variety of targeting problems by identifying how a given profile of incentive changes is amplified or attenuated by the strategic spillovers in the network. The optimal policies are simplest when the budget for intervention is large. If actions are strategic complements, the optimal intervention changes all agents' incentives in the same direction and does so in proportion to their eigenvector centralities. In games of strategic substitutes, the optimal intervention is very different: it moves neighbors' incentives in opposite directions, dividing local communities into positively and negatively targeted agents, with few links across these two categories. To derive these results and characterize optimal interventions more generally, we introduce a method of decomposing any potential intervention into principal components determined by the network. A particular ordering of principal components describes the planner's priorities across a range of network intervention problems.

Dynamic Spatial Panel Models: Networks, Common Shocks, and Sequential Exogeneity

Abstract: This paper considers a class of generalized methods of moments (GMM) estimators for general dynamic panel models, allowing for weakly exogenous covariates and cross‐sectional dependence due to spatial lags, unspecified common shocks, and time‐varying interactive effects. We significantly expand the scope of the existing literature by allowing for endogenous time‐varying spatial weight matrices without imposing explicit structural assumptions on how the weights are formed. An important area of application is in social interaction and network models where our specification can accommodate data dependent network formation. We consider an exemplary social interaction model and show how identification of the interaction parameters is achieved through a combination of linear and quadratic moment conditions. For the general setup we develop an orthogonal forward differencing transformation to aid in the estimation of factor components while maintaining orthogonality of moment conditions. This is an important ingredient to a tractable asymptotic distribution of our estimators. In general, the asymptotic distribution of our estimators is found to be mixed normal due to random norming. However, the asymptotic distribution of our test statistics is still chi‐square.

State capacity, reciprocity and the social contract

Abstract: This paper explores the role of civic culture in expanding fiscal capacity by developing a model based on reciprocal obligations: citizens pay their taxes and the state provides public goods. Civic culture evolves over time according to the relative payoff of civic‐minded and materialist citizens. A strong civic culture manifests itself as high tax revenues sustained by high levels of voluntary tax compliance and provision of public goods. This captures the idea of government as a reciprocal social contract between the state and its citizens. The paper highlights the role of political institutions and common interests in the emergence of civic culture.

Leave‐Out Estimation of Variance Components

Abstract: We propose leave-out estimators of quadratic forms designed for the study of linear models with unrestricted heteroscedasticity. Applications include analysis of variance and tests of linear restrictions in models with many regressors. An approximation algorithm is provided that enables accurate computation of the estimator in very large datasets. We study the large sample properties of our estimator allowing the number of regressors to grow in proportion to the number of observations. Consistency is established in a variety of settings where plug-in methods and estimators predicated on homoscedasticity exhibit first-order biases. For quadratic forms of increasing rank, the limiting distribution can be represented by a linear combination of normal and non-central χ2 random variables, with normality ensuing under strong identification. Standard error estimators are proposed that enable tests of linear restrictions and the construction of uniformly valid confidence intervals for quadratic forms of interest. We find in Italian social security records that leave-out estimates of a variance decomposition in a two-way fixed effects model of wage determination yield substantially different conclusions regarding the relative contribution of workers, firms, and worker-firm sorting to wage inequality than conventional methods. Monte Carlo exercises corroborate the accuracy of our asymptotic approximations, with clear evidence of non-normality emerging when worker mobility between blocks of firms is limited.

Cheap Talk With Transparent Motives

Abstract: We study a model of cheap talk with one substantive assumption: The sender's preferences are state independent. Our main observation is that such a sender gains credibility by degrading self‐serving information. Using this observation, we examine the sender's benefits from communication, assess the value of commitment, and explicitly solve for sender‐optimal equilibria in three examples. A key result is a geometric characterization of the value of cheap talk, described by the quasiconcave envelope of the sender's value function.

The Global Diffusion of Ideas

Abstract: We provide a tractable, quantitatively‐oriented theory of innovation and technology diffusion to explore the role of international trade in the process of development We model innovation and diffusion as a process involving the combination of new ideas with insights from other industries or countries We provide conditions under which each country's equilibrium frontier of knowledge converges to a Frechet distribution, and derive a system of differential equations describing the evolution of the scale parameters of these distributions, that is, countries' stocks of knowledge The model remains tractable with many asymmetric countries and generates a rich set of predictions about how the level and composition of trade affect countries' frontiers of knowledge We use the framework to quantify the contribution of bilateral trade costs to long‐run changes in TFP and individual post‐war growth miracles For our preferred calibration, we find that both gains from trade and the fraction of variation of TFP growth accounted for by changes in trade more than double relative to a model without diffusion

Understanding HANK: Insights From a PRANK

Abstract: Using an analytically tractable heterogeneous agent New Keynesian model, we show that whether incomplete markets resolve New Keynesian “paradoxes” depends on the cyclicality of income risk. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these “puzzles.” Procyclical risk permits determinacy under a peg; countercyclical risk may generate indeterminacy even under the Taylor principle. By affecting the cyclicality of risk, even “passive” fiscal policy influences the effects of monetary policy.

Diversity and Conflict

Abstract: This research advances the hypothesis and establishes empirically that interpersonal population diversity has contributed significantly to the emergence, prevalence, recurrence, and severity of intrasocietal confl icts. Exploiting an exogenous source of variations in population diversity across nations and ethnic groups, it demonstrates that population diversity, as determined predominantly during the exodus of humans from Africa tens of thousands of years ago, has contributed significantly to the risk and intensity of historical and contemporary internal confl icts, accounting for the confounding effects of geographical, institutional, and cultural characteristics, as well as for the level of economic development. These findings arguably reflect the adverse effect of population diversity on interpersonal trust, its contribution to divergence in preferences for public goods and redistributive policies, and its impact on the degree of fractionalization and polarization across ethnic, linguistic, and religious groups.

Eliminating Uncertainty in Market Access: The Impact of New Bridges in Rural Nicaragua

Abstract: We estimate the impact of new bridges in rural Nicaraguan villages facing seasonal floods that unpredictably eliminate access to outside markets. We collect detailed annual household surveys over three years and conduct weekly telephone followups with a subset of households for sixty-four weeks, both before and after construction. This information is collected in villages where bridges are built, and in comparable villages where no bridge was built for only engineering-related reasons. We find that bridges eliminate uncertainty in market access driven by floods: in absence of a bridge, household income falls significantly during floods. Bridges completely eliminate this effect. Compared to households in villages where no bridges are built, bridges cause substantial reallocation of activities between farming and wage work. There are also significant effects on agricultural choices: increased fertilizer spending, increased yields on farms, and lower crop storage. We develop a model of occupational choice and risky farm investment, and show that these results are a rational response to reduced market income risk from the bridges. We provide evidence that these results are not due to lower trade costs outside of flooding periods, nor due to looser collateral constraints.

Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

Abstract: The four most important models of post-schooling wage determination in economics are almost certainly human capital, the Roy model, the compensating differentials model, and the search model. All four lead to wage heterogeneity. While separating human capital accumulation from the others is quite common, we know remarkably little about the relative importance of the other three sources of inequality. The key aspect of the Roy model is comparative advantage in which some workers earn more than others as a result of different skill levels at labor market entry. Workers choose the job for which they achieve the highest level of earnings. By contrast, in a compensating wage differentials model a worker is willing to be paid less in order to work on a job that they enjoy more. Thus, workers with identical talent can earn different salaries. Finally, workers may have had poor luck in finding their ideal job. This type of search friction can also lead to heterogeneity in earnings as some workers may work for higher wage firms. In short, one worker may earn more than another a) because he has more talent at labor market entry (Roy Model), b) because he has accu- mulated more human capital while working (human capital), c) because he has chosen more unpleasant job (compensating differentials), or d) because he has had better luck in finding a good job (search frictions). The goal of this work is to uncover the contribution of these different components to overall earnings inequality.

Segmentary Lineage Organization and Conflict in Sub‐Saharan Africa

Abstract: We test the longstanding hypothesis that ethnic groups organized around “segmentary lineages” are more prone to conflict. Ethnographic accounts suggest that in such societies, which are characterized by strong allegiances to distant relatives, individuals are obligated to come to the aid of fellow lineage members when they become involved in conflicts. As a consequence, small disagreements often escalate into larger‐scale conflicts involving many individuals. We test for a link between segmentary lineage organization and conflict across ethnic groups in sub‐Saharan Africa. Using a number of estimation strategies, including a regression discontinuity design at ethnic boundaries, we find that segmentary lineage societies experience more conflicts, and particularly ones that are retaliatory, long in duration, and large in scale.

Sequential Information Design

Abstract: We study games of incomplete information as both the information structure and the extensive form vary. An analyst may know the payoff‐relevant data but not the players' private information, nor the extensive form that governs their play. Alternatively, a designer may be able to build a mechanism from these ingredients. We characterize all outcomes that can arise in an equilibrium of some extensive form with some information structure. We show how to specialize our main concept to capture the additional restrictions implied by extensive‐form refinements.

Mechanism Design With Aftermarkets: Cutoff Mechanisms

Abstract: I study a mechanism design problem in which a designer allocates a single good to one of several agents, and the mechanism is followed by an aftermarket—a post‐mechanism game played between the agent who acquired the good and third‐party market participants. The designer has preferences over final outcomes, but she cannot design the aftermarket. However, she can influence its information structure by publicly disclosing information elicited from the agents by the mechanism. I introduce a class of allocation and disclosure rules, called cutoff rules, that disclose information about the buyer's type only by revealing information about the realization of a random threshold (cutoff) that she had to outbid to win the object. When there is a single agent in the mechanism, I show that the optimal cutoff mechanism offers full privacy to the agent. In contrast, when there are multiple agents, the optimal cutoff mechanism may disclose information about the winner's type; I provide sufficient conditions for optimality of simple designs. I also characterize aftermarkets for which restricting attention to cutoff mechanisms is without loss of generality in a subclass of all feasible mechanisms satisfying additional conditions.

Randomization and Ambiguity Aversion

Abstract: We propose a model of preferences in which the effect of randomization on ambiguity depends on how the unknown probability law is determined. We adopt the framework of Anscombe and Aumann (1963) and relax the axioms. In the resulting representation of the individual's preference, the individual has a collection of sets of priors M. She believes that before she moves, nature has chosen an unknown scenario (a set of priors) from M, and from that scenario, nature will choose a prior after she moves. The representation illustrates how randomization may partially eliminate the effect of ambiguity.

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Abstract: We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.

Misinterpreting Others and the Fragility of Social Learning

Abstract: We exhibit a natural environment, social learning among heterogeneous agents, where even slight misperceptions can have a large negative impact on long‐run learning outcomes. We consider a population of agents who obtain information about the state of the world both from initial private signals and by observing a random sample of other agents' actions over time, where agents' actions depend not only on their beliefs about the state but also on their idiosyncratic types (e.g., tastes or risk attitudes). When agents are correct about the type distribution in the population, they learn the true state in the long run. By contrast, we show, first, that even arbitrarily small amounts of misperception about the type distribution can generate extreme breakdowns of information aggregation, where in the long run all agents incorrectly assign probability 1 to some fixed state of the world, regardless of the true underlying state. Second, any misperception of the type distribution leads long‐run beliefs and behavior to vary only coarsely with the state, and we provide systematic predictions for how the nature of misperception shapes these coarse long‐run outcomes. Third, we show that how fragile information aggregation is against misperception depends on the richness of agents' payoff‐relevant uncertainty; a design implication is that information aggregation can be improved by simplifying agents' learning environment. The key feature behind our findings is that agents' belief‐updating becomes “decoupled” from the true state over time. We point to other environments where this feature is present and leads to similar fragility results.