Showing papers in "Quarterly Journal of Economics in 2019"

The Effect of Minimum Wages on Low-Wage Jobs

Abstract: We estimate the eect of minimum wages on low-wage jobs using 138 prominent state-level minimum wage changes between 1979 and 2016 in the U.S using a dierence-in-dierences approach. We first estimate the eect of the minimum wage increase on employment changes by wage bins throughout the hourly wage distribution. We then focus on the bottom part of the wage distribution and compare the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it to infer the employment eect. We find that the overall number of low-wage jobs remained essentially unchanged over the five years following the increase. At the same time, the direct eect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution. Our estimates by detailed demographic groups show that the lack of job loss is not explained by labor-labor substitution at the bottom of the wage distribution. We also find no evidence of disemployment when we consider higher levels of minimum wages. However, we do find some evidence of reduced employment in tradable sectors. We also show how decomposing the overall employment eect by wage bins allows a transparent way of assessing the plausibility of estimates.

Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?

Abstract: This article provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Even if central bankers' communications jargon has evolved considerably in recent decades, it is apparent that many still place a large implicit weight on the exchange rate. The U.S. dollar scores as the world's dominant anchor currency by a very large margin. By some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled. We argue that in addition to the usual safe assets story, the record accumulation of reserves since 2002 may also have to do with many countries' desire to stabilize exchange rates in an environment of markedly reduced exchange rate restrictions or, more broadly, capital controls: an important amendment to the conventional portrayal of the macroeconomic trilemma.

Channeling Fisher: Randomization Tests and the Statistical Insignificance of Seemingly Significant Experimental Results

Abstract: I follow R. A. Fisher's The Design of Experiments (1935), using randomization statistical inference to test the null hypothesis of no treatment effects in a comprehensive sample of 53 experimental papers drawn from the journals of the American Economic Association. In the average paper, randomization tests of the significance of individual treatment effects find 13\% to 22\% fewer significant results than are found using authors’ methods. In joint tests of multiple treatment effects appearing together in tables, randomization tests yield 33\% to 49\% fewer statistically significant results than conventional tests. Bootstrap and jackknife methods support and confirm the randomization results.

Firming Up Inequality

Abstract: Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.

Firm-Level Political Risk: Measurement and Effects

Abstract: We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm's actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is neither captured by the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.

The price ain’t right? Hospital prices and health spending on the privately insured

Abstract: We use insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance in the US between 2007 and 2011 to examine the variation in health spending and in hospitals’ transaction prices. We document the variation in hospital prices within and across geographic areas, examine how hospital prices influence the variation in health spending on the privately insured, and analyze the factors associated with hospital price variation. Four key findings emerge. First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.

Implicit Stereotypes: Evidence from Teachers’ Gender Bias

Abstract: I study whether exposure to teacher stereotypes, as measured by the Gender-Science Implicit Association Test, affects student achievement. I provide evidence that the gender gap in math performance, defined as the score of boys minus the score of girls in standardized tests, substantially increases when students are assigned to math teachers with stronger gender stereotypes. Teacher stereotypes induce girls to underperform in math and self-select into less demanding high schools, following the track recommendation of their teachers. These effects are at least partially driven by lower self-confidence on math ability of girls exposed to gender-biased teachers. Stereotypes impair the test performance of girls, who end up failing to achieve their full potential. I do not detect statistically significant effects on student outcomes of literature teacher stereotypes.

Food Deserts and the Causes of Nutritional Inequality

Abstract: We study the causes of “nutritional inequality”: why the wealthy eat more healthfully than the poor in the United States. Exploiting supermarket entry and household moves to healthier neighborhoods, we reject that neighborhood environments contribute meaningfully to nutritional inequality. We then estimate a structural model of grocery demand, using a new instrument exploiting the combination of grocery retail chains’ differing presence across geographic markets with their differing comparative advantages across product groups. Counterfactual simulations show that exposing low-income households to the same products and prices available to high-income households reduces nutritional inequality by only about 10%, while the remaining 90% is driven by differences in demand. These findings counter the argument that policies to increase the supply of healthy groceries could play an important role in reducing nutritional inequality.

Busting the “Princelings”: The Campaign Against Corruption in China’s Primary Land Market

Abstract: Using data on over a million land transactions during 2004–2016 where local governments are the sole seller, we find that firms linked to members of China's supreme political elites—the Politburo—obtained a price discount ranging from 55.4% to 59.9% compared with those without the same connections. These firms also purchased slightly more land. In return, the provincial party secretaries who provided the discount to these “princeling” firms are 23.4% more likely to be promoted to positions of national leadership. To curb corruption, President Xi Jinping stepped up investigations and strengthened personnel control at the province level. Using a spatially matched sample (e.g., within a 500-meter radius), we find a reduction in corruption of between 42.6% and 31.5% in the provinces either targeted by the central inspection teams or whose party secretary was replaced by one appointed by Xi. Accordingly, this crackdown on corruption has also significantly reduced the promotional prospects of those local officials who rely on supplying a discount to get ahead.

What do Workplace Wellness Programs do? Evidence from the Illinois Workplace Wellness Study

Abstract: Workplace wellness programs cover over 50 million U.S. workers and are intended to reduce medical spending, increase productivity, and improve well-being. Yet limited evidence exists to support these claims. We designed and implemented a comprehensive workplace wellness program for a large employer and randomly assigned program eligibility and financial incentives at the individual level for nearly 5,000 employees. We find strong patterns of selection: during the year prior to the intervention, program participants had lower medical expenditures and healthier behaviors than nonparticipants. The program persistently increased health screening rates, but we do not find significant causal effects of treatment on total medical expenditures, other health behaviors, employee productivity, or self-reported health status after more than two years. Our 95% confidence intervals rule out 84% of previous estimates on medical spending and absenteeism.

The Mission: Human Capital Transmission, Economic Persistence, and Culture in South America

Abstract: This article examines the long-term consequences of a historical human capital intervention. The Jesuit order founded religious missions in 1609 among the Guarani, in modern-day Argentina, Brazil, and Paraguay. Before their expulsion in 1767, missionaries instructed indigenous inhabitants in reading, writing, and various crafts. Using archival records, as well as data at the individual and municipal level, I show that in areas of former Jesuit presence—within the Guarani area—educational attainment was higher and remains so (by 10%–15%) 250 years later. These educational differences have also translated into incomes that are 10% higher today. The identification of the positive effect of the Guarani Jesuit missions emerges after comparing them with abandoned Jesuit missions and neighboring Franciscan Guarani missions. The enduring effects observed are consistent with transmission mechanisms of structural transformation, occupational specialization, and technology adoption in agriculture.

Regressive Sin Taxes, With an Application to the Optimal Soda Tax

Abstract: A common objection to “sin taxes”—corrective taxes on goods that are thought to be overconsumed, such as cigarettes, alcohol, and sugary drinks—is that they often fall disproportionately on low-income consumers. This paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable formulas for sufficient statistics for the optimal commodity tax. The optimal sin tax is increasing in the price elasticity of demand, increasing in the degree to which lower-income consumers are more biased or more elastic to the tax, decreasing in the extent to which consumption is concentrated among the poor, and decreasing in income effects, because income effects imply that commodity taxes create labor supply distortions. Contrary to common intuitions, stronger preferences for redistribution can increase the optimal sin tax, if lower-income consumers are more responsive to taxes or are more biased. As an application, we estimate the optimal nationwide tax on sugar-sweetened beverages, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, our estimates imply an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.

Who becomes an inventor in America? The importance of exposure to innovation

Abstract: We characterize the factors that determine who becomes an inventor in America by using de-identified data on 1.2 million inventors from patent records linked to tax records. We establish three sets of results. First, children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. There are similarly large gaps by race and gender. Differences in innate ability, as measured by test scores in early childhood, explain relatively little of these gaps. Second, exposure to innovation during childhood has significant causal effects on children's propensities to become inventors. Growing up in a neighborhood or family with a high innovation rate in a specific technology class leads to a higher probability of patenting in exactly the same technology class. These exposure effects are gender-specific: girls are more likely to become inventors in a particular technology class if they grow up in an area with more female inventors in that technology class. Third, the financial returns to inventions are extremely skewed and highly correlated with their scientific impact, as measured by citations. Consistent with the importance of exposure effects and contrary to standard models of career selection, women and disadvantaged youth are as under-represented among highimpact inventors as they are among inventors as a whole. We develop a simple model of inventors' careers that matches these empirical results. The model implies that increasing exposure to innovation in childhood may have larger impacts on innovation than increasing the financial incentives to innovate, for instance by cutting tax rates. In particular, there are many “lost Einsteins” - individuals who would have had highly impactful inventions had they been exposed to innovation

Who profits from patents? rent-sharing at innovative firms.

Abstract: This article analyzes how patent-induced shocks to labor productivity propagate into worker compensation using a new linkage of U.S. patent applications to U.S. business and worker tax records. We infer the causal effects of patent allowances by comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected. To identify patents that are ex ante valuable, we extrapolate the excess stock return estimates of Kogan et al. (2017) to the full set of accepted and rejected patent applications based on predetermined firm and patent application characteristics. An initial allowance of an ex ante valuable patent generates substantial increases in firm productivity and worker compensation. By contrast, initial allowances of lower ex ante value patents yield no detectable effects on firm outcomes. Patent allowances lead firms to increase employment, but entry wages and workforce composition are insensitive to patent decisions. On average, workers capture roughly 30 cents of every dollar of patent-induced surplus in higher earnings. This share is roughly twice as high among workers present since the year of application. These earnings effects are concentrated among men and workers in the top half of the earnings distribution and are paired with corresponding improvements in worker retention among these groups. We interpret these earnings responses as reflecting the capture of economic rents by senior workers, who are most costly for innovative firms to replace.

Take-up and Targeting: Experimental Evidence from SNAP

Abstract: This paper develops a framework for evaluating the welfare impact of various interventions designed to increase take-up of social safety net programs in the presence of potential behavioral biases. We calibrate the key parameters using a randomized field experiment in which 30,000 elderly individuals not enrolled in – but likely eligible for – the Supplemental Nutrition Assistance Program (SNAP) are either provided with information that they are likely eligible, provided with this information and also offered assistance in applying, or are in a "status quo" control group. Only 6 percent of the control group enrolls in SNAP over the next 9 months, compared to 11 percent of the Information Only group and 18 percent of the Information Plus Assistance group. The individuals who apply or enroll in response to either intervention receive lower benefits and are less sick than the average enrollee in the control group. The results are consistent with the existence of optimization frictions that are greater for needier individuals, suggesting that the poor targeting properties of the interventions reduce their welfare gains.

Ever Failed, Try Again, Succeed Better: Results from a Randomized Educational Intervention on Grit

Abstract: We show that grit, a non-cognitive skill that has been shown to be highly predictive of achievement, is malleable in the childhood period and can be fostered in the classroom environment. Our evidence comes from an evaluation of a randomized educational intervention implemented in elementary schools in Istanbul. Outcomes are measured via a novel incentivized real effort task and actual school grades on core subjects. We find that treated students are 1) more likely to choose to undertake a more challenging and more rewarding task against an easier but less rewarding alternative, 2) less likely to give up after failure, 3) more likely to exert effort to accumulate task-specific ability, and consequently, 4) more likely to succeed and collect higher payoffs. The intervention also has a significant impact on school grades: We find that treated students are about 3 percentage points more likely to receive top grades in core academic subjects.

Capitalists in the Twenty-First Century

Abstract: How important is human capital at the top of the U.S. income distribution? A primary source of top income is private “pass-through” business profit, which can include entrepreneurial labor income for tax reasons. This paper asks whether top pass-through profit mostly reflects human capital, defined as all inalienable factors embodied in business owners, rather than financial capital. Tax data linking 11 million firms to their owners show that top pass-through profit accrues to working-age owners of closely-held, mid-market firms in skill-intensive industries. Pass-through profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of pass-through profit as human capital income, we find that the typical top earner derives most of her income from human capital, not financial capital. Growth in pass-through profit is explained by both rising productivity and a rising share of value added accruing to owners.

Consequences of the Clean Water Act and the Demand for Water Quality

Abstract: Since the 1972 U.S. Clean Water Act, government and industry have invested over $1 trillion to abate water pollution, or $100 per person-year. Over half of U.S. stream and river miles, however, still violate pollution standards. We use the most comprehensive set of files ever compiled on water pollution and its determinants, including 50 million pollution readings from 240,000 monitoring sites and a network model of all U.S. rivers, to study water pollution's trends, causes, and welfare consequences. We have three main findings. First, water pollution concentrations have fallen substantially. Between 1972 and 2001, for example, the share of waters safe for fishing grew by 12 percentage points. Second, the Clean Water Act's grants to municipal wastewater treatment plants, which account for $650 billion in expenditure, caused some of these declines. Through these grants, it cost around $1.5 million (2014 dollars) to make one river-mile fishable for a year. We find little displacement of municipal expenditure due to a federal grant. Third, the grants' estimated effects on housing values are smaller than the grants' costs; we carefully discuss welfare implications.

Industrial Policies in Production Networks

Abstract: Many developing economies adopt industrial policies favoring selected sectors Is there an economic logic to this type of intervention? I analyze industrial policy when economic sectors form a production network via input-output linkages Market imperfections generate distortionary effects that compound through backward demand linkages, causing upstream sectors to become the sink for imperfections and have the greatest size distortions My key finding is that the distortion in sectoral size is a sufficient statistic for the social value of promoting that sector; thus, there is an incentive for a well-meaning government to subsidize upstream sectors Furthermore, sectoral interventions’ aggregate effects can be simply summarized, to first order, by the cross-sector covariance between my sufficient statistic and subsidy spending My sufficient statistic predicts sectoral policies in South Korea in the 1970s and modern-day China, suggesting that sectoral interventions might have generated positive aggregate effects in these economies

From Hyperination to Stable Prices: Argentina's Evidence on Menu Cost Models

Abstract: We review and extend several comparative statics results of xed menu cost models of price setting rms facing real idiosyncratic shocks, such as the type studied by Golosov and Lucas (2007) as well as by many others. These results are confronted with their empirical counterparts using the micro data underlying Argentina’s consumer price index for a time period where ination rates vary from almost 5000% per year

Protests as Strategic Games: Experimental Evidence from Hong Kong's Antiauthoritarian Movement

Abstract: Social scientists have long viewed the decision to protest as strategic, with an individual’s participation a function of their beliefs about others’ turnout. We conduct a framed field experiment that recalibrates individuals’ beliefs about others’ protest participation, in the context of Hong Kong’s ongoing antiauthoritarian movement. We elicit subjects’ planned participation in an upcoming protest and their prior beliefs about others’ participation, in an incentivized manner. One day before the protest, we randomly provide a subset of subjects with truthful information about others’ protest plans and elicit posterior beliefs about protest turnout, again in an incentivized manner. After the protest, we elicit subjects’ actual participation. This allows us to identify the causal effects of positively and negatively updated beliefs about others’ protest participation on subjects’ own turnout. In contrast with the assumptions of many recent models of protest participation, we consistently find evidence of strategic substitutability. We provide guidance regarding plausible sources of strategic substitutability that can be incorporated into theoretical models of protests.

Regional Heterogeneity and the Refinancing Channel of Monetary Policy

Abstract: We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts, but these effects vary over time with changes in the regional distribution of house price growth. We build a heterogeneous household model of refinancing with mortgage borrowers and lenders and use it to explore the monetary policy implications arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.

Kinship, Cooperation, and the Evolution of Moral Systems

Abstract: Across the social sciences, a key question is how societies manage to enforce cooperative behavior in social dilemmas such as public goods provision or bilateral trade. According to an influential body of theories in psychology, anthropology, and evolutionary biology, the answer is that humans have evolved moral systems: packages of functional psychological and biological mechanisms that regulate economic behavior, including a belief in moralizing gods; moral values; negative reciprocity; and emotions of shame, guilt, and disgust. Based on a stylized model, this article empirically studies the structure and evolution of these moral traits as a function of historical heterogeneity in extended kinship relationships. The evidence shows that societies with a historically tightly knit kinship structure regulate behavior through communal moral values, revenge taking, emotions of external shame, and notions of purity and disgust. In loose kinship societies, on the other hand, cooperation appears to be enforced through universal moral values, internalized guilt, altruistic punishment, and an apparent rise and fall of moralizing religions. These patterns point to the presence of internally consistent but culturally variable functional moral systems. Consistent with the model, the relationship between kinship ties, economic development, and the structure of the mediating moral systems amplified over time.

Shift-Share Designs: Theory and Inference

Abstract: We study inference in shift-share regression designs, such as when a regional outcome is regressed on a weighted average of sectoral shocks, using regional sector shares as weights. We conduct a placebo exercise in which we estimate the effect of a shift-share regressor constructed with randomly generated sectoral shocks on actual labor market outcomes across U.S. commuting zones. Tests based on commonly used standard errors with 5% nominal significance level reject the null of no effect in up to 55% of the placebo samples. We use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares, independent of their geographic location. We derive novel inference methods that are valid under arbitrary cross-regional correlation in the regression residuals. We show using popular applications of shift-share designs that our methods may lead to substantially wider confidence intervals in practice.

The Macro Effects of Unemployment Benefit Extensions: A Measurement Error Approach

Abstract: By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We apply our estimates to the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point.

Inputs, Incentives, and Complementarities in Education: Experimental Evidence from Tanzania

Abstract: We present results from a large-scale randomized experiment across 350 schools in Tanzania that studied the impact of providing schools with (i) unconditional grants, (ii) teacher incentives based on student performance, and (iii) both of the above. After two years, we find (i) no impact on student test scores from providing school grants, (ii) some evidence of positive effects from teacher incentives, and (iii) significant positive effects from providing both programs. Most important, we find strong evidence of complementarities between the programs, with the effect of joint provision being significantly greater than the sum of the individual effects. Our results suggest that combining spending on school inputs (the default policy) with improved teacher incentives could substantially increase the cost-effectiveness of public spending on education.

Uniform Pricing in US Retail Chains

Abstract: We show that most U.S. food, drugstore, and mass-merchandise chains charge nearly uniform prices across stores, despite wide variation in consumer demographics and competition. Demand estimates reveal substantial within-chain variation in price elasticities and suggest that the median chain sacrifices ${\$}$16 million of annual profit relative to a benchmark of optimal prices. In contrast, differences in average prices between chains are broadly consistent with the optimal benchmark. We discuss a range of explanations for nearly uniform pricing, highlighting managerial inertia and brand image concerns as mechanisms frequently mentioned by industry participants. Relative to our optimal benchmark, uniform pricing may significantly increase the prices paid by poorer households relative to the rich, dampen the response of prices to local economic shocks, alter the analysis of mergers in antitrust, and shift the incidence of intranational trade costs.

The Unequal Gains from Product Innovations: Evidence from the U.S. Retail Sector

Abstract: This article examines how product innovations led to inflation inequality in the United States from 2004 to 2015. Using scanner data from the retail sector, I find that annual inflation for retail products was 0.661 (std. err. 0.0535) percentage points higher for the bottom income quintile relative to the top income quintile. When including changes in product variety over time, this difference increases to 0.8846 (std. err. 0.0739) percentage points a year. In CEX-CPI data covering the full consumption basket, the annual inflation difference is 0.368 (std. err. 0.0502) percentage points. I investigate the following hypothesis: (i) the relative demand for products consumed by high-income households increased because of growth and rising inequality; (ii) in response, firms introduced more new products catering to such households; (iii) as a result, the prices of continuing products in these market segments fell due to increased competitive pressure. Using a shift-share research design, I find causal evidence that increasing relative demand leads to increasing product variety and lower inflation for continuing products. A calibration indicates that the hypothesized channel accounts for a large fraction (over 50%) of observed inflation inequality.

Forward and Spot Exchange Rates in a Multi-currency World

Abstract: Separate literatures study violations of uncovered interest parity (UIP) using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based facts and to estimate the joint restrictions they put on models of currency returns. Subject to standard assumptions on investors’ information sets, we find that the forward premium puzzle (FPP) and the “dollar trade” anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the “carry trade” anomaly is driven largely by cross-sectional violations of UIP. The simplest model that the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the U.S. dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.

Strategic default in the international coffee market

Abstract: This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.