Showing papers in "The American Economic Review in 2012"

Credit Spreads and Business Cycle Fluctuations

Abstract: We re-examine the evidence on the relationship between credit spreads and economic activity, by constructing a credit spread index based on an extensive data set of prices of outstanding corporate bonds trading in the secondary market. Compared with the standard default-risk indicators, our credit spread index is a robust predictor of economic activity at both the short- and longer-term horizons. Using an empirical framework, we decompose the index into a predictable component that captures the available firm-specific information on expected defaults and a residual component—the excess bond premium—which we argue likely reflects variation in the price of default risk rather than variation in the risk of default. Our results indicate that the predictive content of credit spreads for economic activity is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that a deterioration in the creditworthiness of broker-dealers—key financial intermediaries in the corporate cash market—causes an increase in the excess bond premium. These findings support the notion that a rise in the excess bond premium represents a reduction in the e!ective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy.

New Trade Models, Same Old Gains?

Abstract: Micro-level data have had a profound influence on research in inter national trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. In this paper we investigate to what extent answers to new micro-level questions have affected answers to an old and central question in the field: how large are the welfare gains from trade? A crude summary of our results is: “So far, not much.” (JEL

The Environment and Directed Technical Change

Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints. The final good is produced from “ dirty” and “ clean” inputs. We show that: (i) when inputs are sufficiently substitutable, sustainable growth can be achieved with temporary taxes/subsidies that redirect innovation toward clean inputs; (ii) optimal policy involves both “ carbon taxes” and research subsidies, avoiding excessive use of carbon taxes; (iii) delay in intervention is costly, as it later necessitates a longer transition phase with slow growth; and (iv) use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire. (JEL O33, O44, Q30, Q54, Q56, Q58)

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Abstract: The financial crisis has refocused attention on money and credit fluctuations, financial crises, and policy responses. We study the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the years 1870-2008. Total credit has increased strongly relative to output and money in the second half of the twentieth century. Monetary policy responses to financial crises have also been more aggressive, but the output costs of crises have remained large. Credit growth is a powerful predictor of financial crises, suggesting that policymakers ignore credit at their peril. (JEL E32, E44, E52, G01, N10, N20)

Measuring Economic Growth from Outer Space

Abstract: GDP growth is often measured poorly for countries and rarely measured at all for cities or subnational regions. We propose a readily available proxy: satellite data on lights at night. We develop a statistical framework that uses lights growth to augment existing income growth measures, under the assumption that measurement error in using observed light as an indicator of income is uncorrelated with measurement error in national income accounts. For countries with good national income accounts data, information on growth of lights is of marginal value in estimating the true growth rate of income, while for countries with the worst national income accounts, the optimal estimate of true income growth is a composite with roughly equal weights. Among poor-data countries, our new estimate of average annual growth differs by as much as 3 percentage points from official data. Lights data also allow for measurement of income growth in sub- and supranational regions. As an application, we examine growth in Sub Saharan African regions over the last 17 years. We find that real incomes in non-coastal areas have grown faster by 1/3 of an annual percentage point than coastal areas; non-malarial areas have grown faster than malarial ones by 1/3 to 2/3 annual percent points; and primate city regions have grown no faster than hinterland areas. Such applications point toward a research program in which "empirical growth" need no longer be synonymous with "national income accounts."

Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts †

Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of

Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks †

Abstract: The financial crisis of 2007-2009 has given way to the sovereign debt crisis of 2010-2012, yet many of the banking issues remain the same. We discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis. This measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by US and European regulators. We argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises.

Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications

Abstract: We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. (JEL E32, E44, E52, G21, G32)

Economic growth, population theory, and physiology: the bearing of long-term processes on the making of economic policy

Abstract: Economic history has contributed significantly to the formulation of economic theory.* Among the economists who have found history an important source for their ideas are Smith, Malthus, Marx, Marshall, Keynes, Hicks, Arrow, Friedman, Solow, and Becker. Failure to take account of history, as Simon Kuznets (1941) stressed, has often led to a misunderstanding of current economic problems by investigators who have not realized that their generalizations rested upon transient circumstances. Nowhere is the need to recognize the role of long-run dynamics more relevant than in such pressing current issues as medical care, pension policies, and development policies.

Inequality at Work: The Effect of Peer Salaries on Job Satisfaction

Abstract: Economists have long speculated that individuals care about both their absolute income and their income relative to others. We use a simple theoretical framework and a randomized manipulation of access to information on peers' wages to provide new evidence on the effects of relative pay on individual utility. A randomly chosen subset of employees of the University of California was informed about a new website listing the pay of all University employees. All employees were then surveyed about their job satisfaction and job search intentions. Our information treatment doubles the fraction of employees using the website, with the vast majority of new users accessing data on the pay of colleagues in their own department. We find an asymmetric response to the information treatment: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. Our findings indicate that utility depends directly on relative pay comparisons, and that this relationship is non-linear.

Americans Do IT Better: US Multinationals and the Productivity Miracle

Abstract: US productivity growth accelerated after 1995 (unlike Europe's), particularly in sectors that intensively use information technologies (IT). Using two new micro panel datasets we show that US multinationals operating in Europe also experienced a "productivity miracle." US multinationals obtained higher productivity from IT than non-US multinationals, particularly in the same sectors responsible for the US productivity acceleration. Furthermore, establishments taken over by US multinationals (but not by non-US multinationals) increased the productivity of their IT. Combining pan-European firm-level IT data with our management practices survey, we find that the US IT related productivity advantage is primarily due to its tougher "people management" practices.

Violent conflict and behavior: A field experiment in Burundi

Abstract: We use a series of field experiments in rural Burundi to examine the impact of exposure to conflict on social, risk, and time preferences. We find that conflict affects behavior: individuals exposed to violence display more altruistic behavior towards their neighbors, are more risk-seeking, and have higher discount rates. Large adverse shocks can thus alter savings and investments decisions, and potentially have long-run consequences-even if the shocks themselves are temporary.

The Impact of Pollution on Worker Productivity

Abstract: As one of the primary factors of production, labor is an essential element in every nation's economy. Investing in human capital is widely viewed as a key to sustaining increases in labor productivity and economic growth. While health is increasingly seen as an important part of human capital, environmental protection, which typically promotes health, has not been viewed through this lens. Indeed, such interventions are typically cast as a tax on producers and consumers, and thus a drag on the labor market and the economy in general. Given the large body of evidence that causally links pollution with poor health outcomes (e.g., Bell et al. 2004; Chay and Greenstone 2003; Currie and Neidell 2005; Dockery et al. 1993; Pope et al. 2002), it seems plausible that efforts to reduce pollution could in fact also be viewed as an investment in human capital, and thus a tool for promoting, rather than retarding, economic growth. The key to this assertion lies in the impacts of pollution on labor market outcomes. While a handful of studies have documented impacts of pollution on labor supply (Carson, Koundouri, and Nauges 2011; Graff Zivin and Neidell forthcoming; Hanna and Oliva 2011; Hausman, Ostro, and Wise 1984; Ostro 1983),1 their focus on the extensive margin, where behavioral responses are nonmarginal, only captures high-visibility labor market impacts. Pollution is also likely to have productivity impacts on the intensive margin, even in cases where labor supply remains unaffected. Since worker productivity is more difficult to monitor than labor supply, these more subtle impacts may be pervasive throughout the workplace, so that even small individual effects may translate into large welfare losses when aggregated across the economy. There is, however, no systematic evidence to date on the direct impact of pollution on worker productivity.2 This paper is the first to rigorously assess this environmental productivity effect. Estimation of this relationship is complicated for two reasons. One, although datasets frequently measure output per worker, these measures do not isolate worker productivity from other inputs (i.e., capital and technology), so that obtaining clean measures of worker productivity is a perennial challenge. Two, exposure to pollution levels is typically endogenous. Since pollution is capitalized into housing prices (Chay and Greenstone 2005), individuals may sort into areas with better air quality depending, in part, on their income, which is a function of their productivity (Banzhaf and Walsh 2008). Furthermore, even if ambient pollution is exogenous, individuals may respond to ambient levels by reducing time spent outside, so that their exposure to pollution is endogenous (Neidell 2009). In this paper, we use a unique panel dataset on the productivity of agricultural workers to overcome these challenges in analyzing the impact of ozone pollution on productivity. Our data on daily worker productivity is derived from an electronic payroll system used by a large farm in the Central Valley of California that pays its employees through piece rate contracts. A growing body of evidence suggests that piece rates reduce shirking and increase productivity over hourly wages and relative incentive schemes, particularly in agricultural settings (Bandiera, Barankay, and Rasul 2005, 2010; Lazear 2000; Paarsch and Shearar 1999, 2000; Shi 2010). Given the incentives under these contracts, our measures of productivity can be viewed as a reasonable proxy for productive capacity under typical work conditions. We conduct our analysis at a daily level to exploit the plausibly exogenous daily fluctuations in ambient ozone concentrations. Although aggregate variation in environmental conditions is largely driven by economic activity, daily variation in ozone is likely to be exogenous. Ozone is not directly emitted but forms from complex interactions between nitrogen oxides (NOx) and volatile organic chemicals (VOCs), both of which are directly emitted, in the presence of heat and sunlight. Thus, ozone levels vary in part because of variations in temperature, but also because of the highly nonlinear relationship with NOx and VOCs. For example, the ratio of NOx to VOCs is almost as important as the level of each in affecting ozone levels (Auffhammer and Kellogg 2011), so that small decreases in NOx can even lead to increases in ozone concentrations, which has become the leading explanation behind the “ozone weekend effect” (Blanchard and Tanenbaum 2003). Moreover, regional transport of NOx from distant urban locations, such as Los Angeles and San Francisco, has a tremendous impact on ozone levels in the Central Valley (Sillman 1999). Given the limited local sources of ozone precursors, this suggests that the ozone formation process coupled with emissions from distant urban activities are the driving forces behind the daily variation in environmental conditions observed near this farm. Furthermore, the labor supply of agricultural workers is highly inelastic in the short run. Workers arrive at the field in crews and return as crews, thus spending the majority of their day outside regardless of environmental conditions. Moreover, since we have measures of both the decision to work and the number of hours worked, we can test whether workers respond to ozone, and in fact we are able to rule out even small changes in avoidance behavior. Thus, focusing on agricultural workers greatly limits the scope for avoidance behavior, further ensuring that exposure to pollution is exogenous in this setting, and that we are detecting productivity impacts on the intensive margin. Although these workers are paid through piece-rate contracts, worker compensation is subject to minimum wage rules, which can alter the incentive for workers to supply costly effort. Since the minimum wage decouples daily job performance from compensation, workers may have an incentive to shirk. If pollution leads to more workers earning the minimum wage, and this in turn induces shirking, linear regression estimates will be upward biased. On the other hand, the threat of termination may provide a sufficient incentive to provide effort, particularly in our setting where output is easily verified and labor contracts are extremely short-lived, in which case linear regression models should be unbiased. After merging this worker data with environmental conditions based on readings from air quality and meteorology stations in the California air monitoring network, we first estimate linear models that relate mean ozone concentrations during the typical workday to productivity. We find that ozone levels well below federal air quality standards have a significant impact on productivity: a 10 parts per billion (ppb) decrease in ozone concentrations increases worker productivity by 5.5 percent. To account for potential concerns about shirking, we artificially induce “bottom- coding” on productivity measures for observations where the minimum wage binds, and estimate censored regression models. Under this specification, the actual measures of productivity when the minimum wage binds no longer influence estimates of the impact of ozone on productivity. Thus, if the marginal effects of productivity on this latent variable differ from the marginal effects from our baseline linear model, this would indicate shirking is occurring. Our results, however, remain unchanged, suggesting that the threat of termination provides sufficient incentives for workers to supply effort even when compensation is not directly tied to output. These impacts are particularly noteworthy as the US Environmental Protection Agency is currently contemplating a reduction in the federal ground-level ozone standard of approximately 10 ppb (Environmental Protection Agency 2010). The environmental productivity effect estimated in this paper offers a novel measure of morbidity impacts that are both more subtle and more pervasive than the standard health impact measures based on hospitalizations and physician visits. Moreover, they have the advantage of already being monetized for use in the regulatory cost-benefit calculations required by Executive Order 12866 (The White House, 1994). In developing countries, where environmental regulations are typically less stringent and agriculture plays a more prominent role in the economy, this environmental productivity effect may have particularly detrimental impacts on national prosperity. The paper is organized as follows. Section I briefly summarizes the relationship between ozone and health, and highlights potentially important confounders. Section II describes the piece-rate and environmental data. Section III provides a conceptual framework that largely serves to guide our econometric model, which is described in Section IV. Section V describes the results, with a conclusion provided in Section VI.

Incentives Work: Getting Teachers to Come to School

Abstract: We use a randomized experiment and a structural model to test whether monitoring and financial incentives can reduce teacher absence and increase learning in India. In treatment schools, teachers' attendance was monitored daily using cameras, and their salaries were made a nonlinear function of attendance. Teacher absenteeism in the treatment group fell by 21 percentage points relative to the control group, and the children's test scores increased by 0.17 standard deviations. We estimate a structural dynamic labor supply model and find that teachers respond strongly to financial incentives. Our model is used to compute cost-minimizing compensation policies. (JEL I21, J31, J45, O15)

Macroeconomic Effects of Financial Shocks

Abstract: In this paper we document the cyclical properties of U.S. rms’ nancial ows. Debt payouts are countercyclical and equity payouts are procyclical. We develop a model with explicit roles for debt and equity nancing and we study its business cycle implications. Standard productivity shocks can only partially explain the observed variations in real variables and nancial ows. We show that nancial shocks that aect rms’ capacity to borrow can bring the model much closer to

The Colonial Origins of Comparative Development: An Empirical Investigation: Comment

Abstract: Acemoglu, Johnson, and Robinson's (2001) seminal article argues property-rights institutions powerfully affect national income, using estimated mortality rates of early European settlers t...

Estimating Time Preferences from Convex Budgets

Abstract: Experimentally elicited discount rates are frequently higher than what seems reasonable for economic decision-making. Such high rates are often attributed to present-biased discounting. A well-known bias of standard measurements is the assumption of linear consumption utility. Attempting to correct this bias using measures of risk aversion to identify concavity, researchers find reasonable discounting but at the cost of exceptionally high utility function curvature. We present a new methodology for identifying time preferences, both discounting and curvature, from simple allocation decisions. We find reasonable levels of both discounting and curvature and, surprisingly, dynamically consistent time preferences. (JEL C91, D12, D81) Understanding and estimating time preferences is obviously of great importance to economists, marketers, and policy makers. Consumers decide how much to invest in savings, education, real estate, and life insurance, how much to diet, exercise, and smoke, whether to marry, when to have children, and what to leave in their wills. While there has been substantial research estimating time preferences using aggregate consumption data, 1 the bulk of the effort has occurred in laboratory environments. 2 Among the many laboratory techniques employed, recent studies have favored multiple price lists (MPL) with monetary payments. 3 With MPLs, individuals are asked multiple times to choose between smaller payment amounts closer to the present and larger amounts further into the future. The interest rate increases monotonically in a price list, such that the point where an individual switches from preferring sooner payments to later payments carries interval

Markups and firm-level export status

Abstract: In this paper, we develop a method to estimate markups using plantlevel production data. Our approach relies on cost-minimizing producers and the existence of at least one variable input of production. The suggested empirical framework relies on the estimation of a production function and provides estimates of plant-level markups without specifying how firms compete in the product market. We rely on our method to explore the relationship between markups and export behavior. We find that markups are estimated significantly higher when controlling for unobserved productivity; that exporters charge, on average, higher markups and that markups increase upon export entry. (JEL D22, D24, F14, L11, L60)

The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit

Abstract: Using an instrumental variables strategy, we estimate the causal effect of income on children’s math and reading achievement. Our identification derives from the large, nonlinear changes in the Earned Income Tax Credit. The largest of these changes increased family income by as much as 20 percent, or approximately $2,100, between 1993 and 1997. Our baseline estimates imply that a $1,000 increase in income raises combined math and reading test scores by 6 percent of a standard deviation in the short run. Test gains are larger for children from disadvantaged families and robust to a variety of alternative specifications. (JEL H24, H31, I21, I38, J13)

Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence

Abstract: We show that unexplained innovations in several variables representing survey responses to forwardlooking questions on the Michigan Survey of Consumers have powerful prognostic implications for the future paths of macroeconomic variables. We attempt to distinguish the hypothesis that these impulse responses indicate a causal channel from autonomous movements in sentiment to economic outcomes (the “animal spirits” view) from the alternative interpretation that the surprise confidence movements summarize information about future economic prospects (the “information” view). In natural rate models, “animal spirits” shocks are associated with “overshooting” of (among other variables) consumption that attenuates when agents come to grips with their overreaction, while “information shocks” about the long future are followed by gradual movements in macroeconomic variables that are not subsequently reversed. In a baseline vector autoregression involving consumption, income, and confidence, the data come down sharply in favor of the information view. The impulse responses of consumption and GDP show no tendency to attenuate even after a number of years. Further, confidence innovations have strong implications for labor productivity many quarters into the future. In somewhat larger VARs with an information block that includes inflation and/or stock prices, the impulse responses to confidence innovations continue to have the permanent shape that defines information shocks, but they are smaller in magnitude. We demonstrate that this is due to the fact that both inflation and stock price innovations have prognostic implications for future productivity that are very similar to the implications of innovations in confidence. Addition of unemployment to the system induces a transitory component that changes the shape of the impulse responses and somewhat weakens the previously airtight case against animal spirits, but it does not provide constructive evidence of such effects.

Fiscal volatility shocks and economic activity

Abstract: We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)

Targeting the Poor: Evidence from a Field Experiment in Indonesia

Abstract: The brief summarizes the targeting the poor: evidence from a field experiment in Indonesia for the period December 2008 - January 2009. This paper reports an experiment in 640 Indonesian villages on three approaches to target the poor: proxy means tests (PMT), where assets are used to predict consumption; community targeting, where villagers rank everyone from richest to poorest; and a hybrid. Defining poverty based on PPP$2 per capita consumption, community targeting and the hybrid perform somewhat worse in identifying the poor than PMT, though not by enough to significantly affect poverty outcomes for a typical program. Elite capture does not explain these results. Instead, communities appear to apply a different concept of poverty.

A structural analysis of disappointment aversion in a real effort competition

Abstract: We develop a novel computerized real effort task, based on moving sliders across a screen, to test experimentally whether agents are disappointment averse when they compete in a real effort sequentialmove tournament. We predict that a disappointment averse agent, who is loss averse around her endogenous choice-acclimating expectations-based reference point, responds negatively to her rival’s effort. We find significant evidence for this discouragement effect, and use the Method of Simulated Moments to estimate the strength of disappointment aversion on average and the heterogeneity in disappointment aversion across the population. (JEL C91, D12, D81, D84)

Revolving Door Lobbyists

Abstract: We study how ex-government ocials benet from the personal connections acquired during public service. Lobbyists with experience in the oce of a US Senator suer a 24% drop in generated revenue when that Senator leaves oce. The eect is immediate, discontinuous around the exit period, and long-lasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in revenue is increasing in the committee assignments power held by the exiting politician.

The Collateral Channel: How Real Estate Shocks affect Corporate Investment

Abstract: What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993-2007 period, the representative US corporation invests $0.06 out of each $1 of collateral.

Ethnicity and Conflict: An Empirical Study †

Abstract: This paper examines the impact of ethnic divisions on conict. The empirical specication is informed by a theoretical model of conict (Esteban and Ray, 2011) in which equilibrium conict is related to just three distributional indices of diversity: ethnic polarization, ethnic fractionalization, and a Greenberg-Gini index constructed across ethnic groups. Our empirical ndings verify that these distributional measures are signicant correlates of conict. The underlying theory permits us to use these results to make inferences about the relative importance of public goods in conict, as well as the extent of within-group cohesion in conictual activity. These eects are further strengthened as we introduce country-specic measures of group cohesion and the relative importance of public goods, and combine them with the distributional measures exactly as specied by the theory.

Risk Preferences Are Not Time Preferences

Abstract: Risk and time are intertwined. The present is known while the future is inherently risky. This is problematic when studying time prefer ences since uncontrolled risk can generate apparently present-biased behavior. We systematically manipulate risk in an intertemporal choice experiment. Discounted expected utility performs well with risk, but when certainty is added common ratio predictions fail sharply. The data cannot be explained by prospect theory, hyperbolic discounting, or preferences for resolution of uncertainty, but seem consistent with a direct preference for certainty. The data suggest strongly a difference between risk and time preferences. (JEL C91 D81 D91) Understanding individual decision-making under risk and over time are two foundations of economic analysis. 1 In both areas there has been research to suggest that standard models of expected utility (EU) and exponential discounting are flawed or incomplete. Regarding time, experimental research has uncovered evidence of a present bias, or hyperbolic discounting (Frederick, Loewenstein, and O’Donoghue 2002). Regarding risk, there are number of well-documented departures from EU, such as the Allais (1953) common consequence and common ratio paradoxes. An organizing principle behind expected utility violations is that they seem to arise as so-called “boundary effects” where certainty and uncertainty are combined. Camerer (1992), Harless and Camerer (1994), and Starmer (2000) indicate that violations of expected utility are notably less prevalent when all choices are uncertain. This observation is especially interesting when considering decisions about risk-taking over time. In particular, certainty and uncertainty are combined in intertemporal decisions: the present is known and certain, while the future is inherently risky. This observation is problematic if one intends to study time preference in isolation from

Measuring the upstreamness of production and trade flows

Abstract: The fragmentation of production across national boundaries has been a distinctive feature of the world economy in recent decades. Production now often entails the sourcing of inputs and components from multiple suppliers based in several countries. These trends may well have interesting implications for trade patterns: For example, are countries specializing in relatively upstream versus downstream stages of global production processes? Addressing this question requires first and foremost an industry-level measure of relative production-line position. In this article, we present two approaches to building a measure of industry “upstreamness” (or average distance from final use). The two approaches are motivated in distinct ways, but we prove that they yield an equivalent measure. Furthermore, we provide two additional economic interpretations

Europe's tired, poor, huddled masses: self-selection and economic outcomes in the age of mass migration

Abstract: During the age of mass migration (1850-1913), one of the largest migration episodes in history, the United States maintained a nearly open border, allowing the study of migrant decisions unhindered by entry restrictions. We estimate the return to migration while accounting for migrant selection by comparing Norway-to-US migrants with their brothers who stayed in Norway in the late nineteenth century. We also compare fathers of migrants and nonmigrants by wealth and occupation. We find that the return to migration was relatively low (70 percent) and that migrants from urban areas were negatively selected from the sending population. "Keep, ancient lands, your storied pomp!" cries she With silent lips. "Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!"--Emma Lazarus (1883).

On the timing and pricing of dividends

Abstract: A central question in economics is how to discount future cash flows to obtain today's value of an asset. For instance, total wealth is the price of a claim to all future consumption (Lucas 1978). Similarly, the value of the aggregate stock market equals the sum of discounted future dividend payments (Gordon 1962). The major ity of the equity market literature has focused on the dynamics of the value of the aggregate stock market. However, in addition to studying the value of the sum of discounted dividends, exploring the properties of the individual terms in the sum, also called dividend strips, provides us with a lot of information about the way stock prices are formed. Analogous to zero-coupon bonds, which contain information about discount rates at different horizons for fixed income securities, having infor mation on dividend strips informs us about discount rates of risky cash flows at dif ferent horizons. Studying dividend strips can therefore improve our understanding of investors' risk preferences and the endowment or technology process in macro finance models. This paper is the first to empirically measure the prices of dividend strips to study the term structure of the equity premium. Our approach requires only no-arbitrage relations and does not rely on a specific model. We shed new light on the composition of the equity risk premium. The equity premium puzzle, identified by Mehra and Prescott (1985), Hansen and Singleton (1982), and Hansen and Singleton (1983), states that, for plausible values of the risk aversion coefficient, the difference in the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance in the growth rate in per capita consumption. When decomposing the index into dividend strips, a natural question that arises is whether dividends at different horizons contrib ute equally to the equity risk premium or whether either short- or long-term dividends contribute proportionally more than the other. We find that short-term dividends have