Showing papers in "International Economic Review in 2009"

The impact of oil price shocks on the u.s. stock market

Abstract: It is shown that the reaction of U.S. real stock returns to an oil price shock differs greatly depending on whether the change in the price of oil is driven by demand or supply shocks in the oil market. The demand and supply shocks driving the global crude oil market jointly account for 22% of the long-run variation in U.S. real stock returns. The responses of industry-specific U.S. stock returns to demand and supply shocks in the crude oil market are consistent with accounts of the transmission of oil price shocks that emphasize the reduction in domestic final demand.

Occupational specificity of human capital

Abstract: We find that returns to occupational tenure are substantial. Everything else being constant, 5 years of occupational tenure are associated with an increase in wages of 12%–20%. Moreover, when occupational experience is taken into account, tenure with an industry or employer has relatively little importance in accounting for the wage one receives. This finding is consistent with human capital being occupation specific.

Firm heterogeneity and the labor market effects of trade liberalization

Abstract: This article develops a model that incorporates workers' fair wage preferences into a general equilibrium framework with heterogeneous firms. In a setting where the wage considered to be fair by workers depends on the productivity of the firm they are working in, we study the determinants of profits, involuntary unemployment and within-group wage inequality. We use this model to investigate the effects of globalization, thereby pointing to distributional conflicts that have so far not been accounted for: a simultaneous increase of average profits and involuntary unemployment as well as a surge in within-group wage inequality.

Estimating multicountry var models

Abstract: This article presents a method to estimate the coefficients, to test specification hypotheses, and to conduct policy exercises in multicountry VAR models with cross-unit interdependencies, unit-specific dynamics, and time variations in the coefficients. The framework of analysis is Bayesian: A prior flexibly reduces the Q1 dimensionality of the model and puts structure on the time variations; Markov chain Monte Carlo (MCMC) methods are used to obtain posterior distributions; and marginal likelihoods to check the fit of various specifications. Impulse responses and conditional forecasts are obtained with the output of an MCMC routine. The transmission of certain shocks across countries is analyzed.

The effects of fiscal shocks on employment and the real wage

Abstract: We study the transmission of fiscal shocks in the labor market. We employ a structural VAR and base identification on the restrictions that shocks to government consumption, investment, and employment must raise output and deficits. These restrictions hold in both prototype Real Business Cycle (RBC) and New Keynesian models. Shocks to government consumption and investment increase real wages and employment contemporaneously, both at state level and in the aggregate. The dynamics in response to employment shocks are mixed: Increases in government employment raise the real wage and total employment in the aggregate. However, in one third of the states they reduce total employment.

Technology shocks and robust sign restrictions in a euro area svar

Abstract: We use a model-based identification strategy to estimate the impact of technology shocks on hours worked and employment in the euro area. The sign restrictions applied in the vector autoregression (VAR) analysis are consistent with a large class of dynamic stochastic general equilibrium (DSGE) models and are robust to parameter uncertainty. The results are in line with the conventional Real Business Cycle (RBC) interpretation that hours worked rise as a result of a positive technology shock. By comparing the sign restrictions method to the long-run restriction approach of Gali (Quaterly Journal of Economics (1992) 709-38), we show that the results do not depend on the stochastic specification of the hours worked series or the data sample but only on the identification scheme.

The transmission of monetary policy in a multisector economy

Abstract: This article constructs and estimates a sticky-price, Dynamic Stochastic General Equilibrium model with heterogeneous production sectors. Firms in different sectors vary in their price rigidity, production technology, and the combination of material and investment inputs. In particular, firms buy inputs from all sectors using the actual Input–Output Matrix and Capital Flow Table of the U.S. economy. By relaxing the standard assumption of symmetry, this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks. The model is estimated by the Generalized Method of Moments using sectoral and aggregate U.S. time series.

Heterogeneous borrowers in quantitative models of sovereign default

Abstract: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.

Negative intra-group externalities in two-sided markets

Abstract: Two types of agents interact on a pre-existing free platform. Agents value positively the presence of agents of the other type but may value negatively the presence of agents of their own type. We ask whether a new platform can find fees and subsidies so as to divert agents from the existing platform and make a profit. We show that this might be impossible if intra-group negative externalities are sufficiently (but not too) strong with respect to positive inter-group externalities.

Time‐inconsistency and welfare program participation: evidence from the nlsy*

Abstract: We empirically implement a dynamic structural model of labor supply and welfare program participation for agents with potentially time-inconsistent preferences. Using panel data on the choices of single women with children from the NLSY 1979, we provide estimates of the degree of time-inconsistency, and of its influence on the welfare take-up decision. With these estimates, we conduct counterfactual experiments to quantify the utility loss stemming from the inability to commit to future decisions, and the potential utility gains from commitment mechanisms such as welfare time limits and work requirements.

The saving rate in Japan: Why it has fallen and why it will remain low

Abstract: This paper quantifies the role of alternative shocks in accounting for the recent declines in the Japanese saving rate and provides some projections about its future course. We consider three distinct sources of variation in the saving rate: changes in fertility rates, changes in survival rates, and changes in technology. The empirical relevance of these factors is explored using a computable dynamic OLG model. Our model successfully explains historical variation in the saving rate and other aggregate variables including the after-tax real interest rate, hours per worker and output. Model projections indicate that the Japanese saving rate will be much lower in future years and will not recover to levels of 15 percent that were seen as recently as 1990.

Formal home health care, informal care, and family decision making*

Abstract: We use the 1993 wave of the Assets and Health Dynamics Among the Oldest Old (AHEAD) data set to estimate a game-theoretic model of families' decisions concerning the provision of informal and formal care for elderly individuals. The outcome is the Nash equilibrium where each family member jointly determines her consumption, transfers for formal care, and allocation of time to informal care, market work, and leisure. We use the estimates to decompose the effects of adult children's opportunity costs, quality of care, and caregiving burden on their propensities to provide informal care. We also simulate the effects of a broad range of policies of current interest. © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Simultaneous Measurement of Time and Risk Preferences: Stated Preference Discrete Choice Modeling Analysis Depending on Smoking Behavior

Abstract: Measuring time and risk preferences and relating them to economic behaviors are important topics in behavioral economics. We developed a new method to simultaneously measure the rate of time preference and the coefficient of risk aversion. Analyzing the individual-level relationships between preference parameters and cigarette smoking, we conclude that current smokers are more impatient and risk-prone than non-smokers. Heavy smokers are the most impatient and risk-prone, while ex-smokers are the most patient and risk-averse. Among non-smokers, neither age-related nor gender-related differences were found. On the other hand, risk and time preferences are significantly different according to age and gender for smokers.

Optimal Unemployment Insurance, with Human Capital Depreciation, and Duration Dependence.

Abstract: This paper studies the effect of human capital depreciation and duration dependence on the design of an optimal unemployment insurance (UI) scheme. Our results partially confirm those obtained in most previous studies: benefits should decrease with unemployment duration. The optimal program also generates two main novel features, which are not present in stationary models. First, if human capital depreciates rapidly enough during unemployment, UI transfers are bounded below by a minimal “assistance” level that arises endogenously in the efficient program. Second, we study the optimality of imposing a history contingent wage tax after reemployment. Our numerical simulations based on the Spanish and US economies show that the wage tax should decrease with the length of worker’s previous unemployment spell, and become a wage subsidy for long-term unemployed workers. As a by-product of our study, we develop a systematic approach suitable for studying recursively a wide range of dynamic moral-hazard problems, and other models with similar characteristics.

Why do Europeans Work so Little

Abstract: Market work per person is roughly 10% higher in the United States than in Sweden. However, if we include the work carried out in home production, the total amount of work only differs by 1%. I set up a model and show that differences in policy—mainly taxes—can account for the discrepancy in both labor supply and home production between Sweden and the United States. These results are independent of the elasticity of labor supply.

Bidding to give: an experimental comparison of auctions for charity

Abstract: We experimentally compare three mechanisms used to raise money for charities: first-price winner-pay auctions, first-price all-pay auctions, and lotteries. We stay close to the characteristics of most charity auctions by using an environment with incomplete information and independent private values. Our results support theoretical predictions by showing that the all-pay format raises substantially higher revenue than the other mechanisms.

Why has home ownership fallen among the young

Abstract: We document that home ownership of households with “heads\" aged 25-44 years fell substantially between 1980 and 2000 and recovered only partially during the 2001-2005 housing boom. The 1980-2000 decline in young home ownership occurred as improvements in mortgage opportunities made it easier to purchase a home. This paper uses an equilibrium life-cycle model calibrated to micro and macro evidence to understand why young home ownership fell over a period when it became easier to own a home. Our findings indicate that a trend toward marrying later and the increase in household earnings risk that occurred after 1980 account for 3/5 to 4/5 of the decline in young home ownership

Consumer search, price dispersion, and international relative price fluctuations ∗

Abstract: This article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price (LOP) and relative price fluctuations. Search frictions lead firms to price discriminate across markets based on the opportunity cost of search, which depends on the local wage. With productivity and taste shocks estimated from the data, deviations from the LOP are as volatile and persistent as in the data. Fluctuations in relative wages, real exchange rates, and the terms of trade are also consistent with the data.

Subjective probabilities in games: an application to the overbidding puzzle*

Abstract: This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first-price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed.

Prior Elicitation in Multiple Change-point Models

Abstract: This paper discusses Bayesian inference in change-point models. The main existing approaches either attempt to be noninformative by using a Uniform prior over change-points or use an informative hierarchical prior. Both these approaches assume a known number of change-points. We show how they have some potentially undesirable properties and discuss how these properties relate to the imposition of a …xed number of change-points. We develop a new Uniform prior which allows some of the change-points to occur out-of sample. This prior has desirable properties, can reasonably be interpreted as “noninformative”and handles the case where the number of change-points

Housing over time and over the life cycle: A structural estimation

Abstract: We estimate a structural model of optimal life-cycle housing and nonhousing con- sumption in the presence of labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost. Our estimationts the cross-sectional and time-series household wealth and housing proles from the Panel Study of Income Dynamics (1984 to 2005) reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0.487. The low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost. We then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011. We show that the responses depend importantly on the housing adjustment cost and the elasticity of sub- stitution between housing and nonhousing consumption. In particular, compared with the benchmark, the impact of the shocks on homeownership rates is reduced, but the impact on nonhousing consumption is magnied when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable.

The 2009 lawrence r. klein lecture: diversified treatment under ambiguity*

Abstract: This article develops a broad theme about treatment under ambiguity through study of a particular decision criterion. The broad theme is that a planner may want to cope with ambiguity by diversification, assigning observationally identical persons to different treatments. Study of the minimax-regret (MR) criterion substantiates the theme. The article significantly extends my earlier analysis of one-period planning with an individualistic treatment and a linear welfare function. I show that MR treatment allocations are fractional in a large class of planning problems with nonlinear welfare functions, interacting treatments, learning, and noncooperative aspects.

Firm fragmentation and urban patterns

Abstract: We document several empirical regularities regarding the evolution of urban structure in the largest U.S. metropolitan areas over the period 1980‐90. These regularities relate to changes in resident population, employment, occupations, as well as the number and size of establishments in different sections of the metropolitan area. We then propose a theory of urban structure that emphasizes the location and internal structure decisions of firms. In particular, firms can decide to locate their headquarters and operation plants in different regions of the city. Given that cities experienced positive population growth throughout the 1980s, we show that firm fragmentation produces the diverse set of facts documented in the article.

Consistent trade policy aggregation

Abstract: Most empirical policy work requires policy aggregation. Trade policy aggregation exemplifies the aggregation problem poignantly, with thousands of highly dispersed trade barriers. This article provides methods of policy aggregation that are consistent with two common objectives of empirical work. One is to preserve real income. The other is to preserve the real volume of activity in the parts of the economy being aggregated. Both objectives must be achieved for consistent multicountry policy modeling. An application to India shows that the standard atheoretic method of aggregation overstates India’s real income by around three times the global gains from free trade. Aggregation of policy variables is unavoidable in empirical work. Data limitations and computational burdens dictate that extremely detailed policies must be combined into summary indices. The focus of this article is on trade policy aggregation, a particularly poignant form of the problem, 2 but the discussion applies to other policy aggregation problems as well. The dirty little secret of trade policy empirical work is that atheoretic policy aggregation contaminates the results. How much could not previously be even guessed at because no consistent aggregation concept existed against which to measure standard practice. This article develops aggregation methods that are consistent with two common intermediate objectives of empirical work: to preserve the relationship between the policy and real income and to preserve the relationship between the policy and the real volume of activities in sectors of the economy that are relevant to the purpose of the work. An application of the methods of this article to evaluation of Indian trade policy shows that aggregation bias is large. “Getting the policy wedges right” is important for getting real income right, as suggested by intuition based on dead weight loss triangles: The loss is roughly proportional to the square of the policy wedge. Reasoning developed below shows

On the living arrangements of elderly widows

Abstract: Between 1970 and 1990, the share of elderly widows living alone grew by 23.2% in the United States, whereas those living with their children decreased by a similar amount. We pose a variety of models for determining the living arrangements in which living together increases consumption because of economies of scale and may also provide utility directly. We estimate these models using the 1970 data and obtain an excellent fit. The estimated models predict that changes in the incomes of both the widow and her offspring generate three-quarters of the increase in the number of widows living alone.

Market size and intellectual property protection

Abstract: Intellectual property (IP) protection involves a trade-off be- tween the undesirability of monopoly and the desirable encouragement ofcreationandinnovation. Optimalpolicydependsontherelativestrength of these two forces. We give a quantitative assessment of current IP poli- cies. We focus particularly on the scale of the market, showing that as it increases, due either to growth or to the expansion of trade, IP protection should be reduced.

Competitive growth in a life‐cycle model: existence and dynamics*

Abstract: The dynamic behavior of the capital growth rate is analyzed using an overlapping-generations model with continuous trading. Assuming a technology satisfying constant social returns to capital, the equilibrium growth rate is piecewise-defined by functional differential equations with both delayed and advanced terms. The main result concerns the existence of a solution expressed as a series of exponentials, which is shown to crucially depend on the initial wealth distribution among cohorts. Upon existence, the dynamics of the capital growth rate has a saddle-point trajectory that converges to a unique steady state. Along the transition path, the growth rate exhibits exponentially decreasing oscillations.

Should You Allow Your Agent to Become Your Competitor? - On Non-Compete Agreements in Employment Contracts

Abstract: We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option con- tract for retaining the agent, she will never prefer a strict non-compete agreement.

Population policy through tradable procreation entitlements

Abstract: One of the first tradable rights proposal is Boulding's (The Meaning of the Twentieth Century, London: George Allen and Unwin Ltd, 1964), dealing with overpopulation. We discuss both tradable procreation allowances and exemptions domestically and globally, to address underpopulation as well. We focus on three effects. Notably, the rights' tradability entails that whereas exemptions or expensive enough allowances benefit the poor, cheap allowances benefit the rich. A natalist policy also worsens the average education level of the next generation, whereas population control enhances it. Also, if procreation rights are grandfathered to countries, the scheme redistributes further. Our analysis suggests that procreation entitlements may be efficient in controlling population, without being necessarily anti-redistributive.

Jumping the curse: early contracting with private information in university admissions*

Abstract: This article introduces a new model of early contracting. Employers who have private information about the applicant's ability worry that applicants who accept their offer are precisely those who were not offered other jobs. To avoid this winner's curse, employers anticipate the time of contracting. The model is developed in the context of university admissions, and is shown to be consistent with several stylized facts in that “market.” We show that, in contrast to received wisdom, allocative efficiency may be improved by the presence of early contracting.