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Showing papers in "The Review of Economic Studies in 2013"


Journal ArticleDOI
TL;DR: In this article, the authors exploit exogenous price shocks in inter-national commodity markets and a rich dataset on civil war in Colombia to assess how dierent income shocks aect armed conflict.
Abstract: How do income shocks aect armed con‡ict? Theory suggests two op- posite eects. If labor is used to appropriate resources violently, higher wages may lower con‡ict by reducing labor supplied to appropriation. This is the opportunity cost eect. Alternatively, a rise in contestable income may increase violence by raising gains from appropriation. This is the rapacity eect. Our paper exploits exogenous price shocks in inter- national commodity markets and a rich dataset on civil war in Colombia to assess how dierent income shocks aect con‡ict. We examine changes in the price of agricultural goods (which are labor intensive) and natural resources (which are capital intensive). We focus on coee and oil, the two largest exports. We …nd that a sharp fall in coee prices in the 1990s increased violence dierentially in regions growing more coee, by lower- ing wages and the opportunity cost of joining armed groups. In contrast, a rise in oil prices increased violence dierentially in the oil region, by in- creasing municipal revenue siphoned through rapacity. This pattern holds in several other agricultural and natural resource sectors, providing robust evidence that price shocks aect con‡ict in opposite directions depending on the factor intensity of the commodity.

928 citations


Journal ArticleDOI
TL;DR: The authors identified and quantified the three mechanisms through which credit constraints severely restrict international trade: the selection of hetero- geneous products into domestic production, selection of domestic manufacturers into exporting, and the level of exports.
Abstract: Financial market imperfections severely restrict international trade ‡ows because exporters require external capital This paper identi…es and quanti…es the three mechanisms through which credit constraints aect trade: the selection of hetero- geneous …rms into domestic production, the selection of domestic manufacturers into exporting, and the level of …rm exports I incorporate …nancial frictions into a heterogeneous-…rm model and apply it to aggregate trade data for a large panel of countries I establish causality by exploiting the variation in …nancial development across countries and the variation in …nancial vulnerability across sectors About 20%-25% of the impact of credit constraints on trade is driven by reductions in total output Of the additional, trade-speci…c eect, one third re‡ects limited …rm entry into exporting, while two thirds are due to contractions in exporters'sales Finan- cially developed economies export more in …nancially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product These results have important policy implications for less developed nations that rely on exports for economic growth but suer from weak …nancial institutions

626 citations


Journal ArticleDOI
TL;DR: This article analyzed the effect of immigration on wages of native workers and found that immigrants downgrade considerably upon arrival, and that the overall wage effect is slightly positive, although modest, too large to be explained by an immigration surplus.
Abstract: This paper analyses the effect immigration has on wages of native workers. Unlike most previous work, we estimate wage effects along the distribution of wages. We derive a flexible empirical strategy that does not rely on pre-allocating immigrants to particular skill groups. In our empirical analysis, we demonstrate that immigrants downgrade considerably upon arrival. As for the effects on native wages, we find that immigration depresses wages below the 20th percentile of the wage distribution, but leads to slight wage increases in the upper part of the wage distribution. The overall wage effect of immigration is slightly positive. The positive wage effects we find are, although modest, too large to be explained by an immigration surplus. We suggest alternative explanations, based on the idea that immigrants are paid less than the value of what they contribute to production, generating therefore a surplus, and we assess the magnitude of these effects.

595 citations


Journal ArticleDOI
TL;DR: In this article, the authors developed a model of endogenous productivity change to examine the impact of investment in knowledge on the productivity of firms and derived a novel estimator for production functions in this setting.
Abstract: We develop a model of endogenous productivity change to examine the impact of the investment in knowledge on the productivity of firms. Our dynamic investment model extends the tradition of the knowledge capital model of Griliches (1979) that has remained a cornerstone of the productivity literature. Rather than constructing a stock of knowledge capital from a firm’s observed R&D expenditures, we consider productivity to be unobservable to the econometrician. Our approach accounts for uncertainty, nonlinearity, and heterogeneity across firms in the link between R&D and productivity. We also derive a novel estimator for production functions in this setting. Using an unbalanced panel of more than 1800 Spanish manufacturing firms in nine industries during the 1990s, we provide evidence of nonlinearities as well as economically significant uncertainties in the R&D process. R&D expenditures play a key role in determining the differences in productivity across firms and the evolution of firm-level productivity over time.

456 citations


Journal ArticleDOI
TL;DR: In this article, a collective model of household behavior was proposed and estimated, which permits identification and estimation of concepts such as "indifference scales" and consumption economies of scale, as well as other related concepts.
Abstract: How much income would a woman living alone require to attain the same standard of living that she would have if she were married? What percentage of a married couple's expenditures are controlled by the husband? How much money does a couple save on consumption goods by living together versus living apart? We propose and estimate a collective model of household behaviour that permits identification and estimation of concepts such as these. We model households in terms of the utility functions of its members, a bargaining or social welfare function, and a consumption technology function. We demonstrate generic non-parametric identification of the model, and hence of a version of adult equivalence scales that we call "indifference scales", as well as consumption economies of scale, the household's resource sharing rule or members' bargaining power, and other related concepts. Copyright 2013, Oxford University Press.

358 citations


Journal ArticleDOI
Adam Storeygard1
TL;DR: It is found that an oil price increase of the magnitude experienced between 2002 and 2008 induces the income of cities near that port to increase by 7 percent relative to otherwise identical cities 500 kilometers farther away, which implies an elasticity of city economic activity with respect to transport costs.
Abstract: Transport costs are widely considered an important barrier to local economic activity but their impact in developing countries is not well-studied. This paper investigates the role of inter-city transport costs in determining the income of Sub-Saharan African cities, using two new data sources. Specifically, it asks how important access to a large port city is for the income of hinterland cities in 15 countries. Satellite data on lights at night proxy for city economic activity, and shortest routes between cities are calculated using new road network data. Cost per unit of distance is identified by world oil prices. The results show that an oil price increase of the magnitude experienced between 2002 and 2008 induces the income of cities near a major port to increase by 6 percent relative to otherwise identical cities 500 kilometers farther away. Cities connected to the port by paved roads are chiefly affected by transport costs to the port, while cities connected to the port by unpaved roads are more affected by connections to secondary centers. These are important findings for economic development in Sub-Saharan Africa since the majority of its population growth over the next few decades is expected to be in urban areas.

322 citations


Journal ArticleDOI
TL;DR: This paper showed that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more, and the solution to the allocation puzzle lies at the nexus between growth, saving and international reserve accumulation.
Abstract: The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more. We call this puzzle the “allocation puzzle”. Using a wedge analysis, we find that the pattern of capital flows is driven by national saving: the allocation puzzle is a saving puzzle. Further disaggregation of capital flows reveals that the allocation puzzle is also related to the pattern of accumulation of international reserves. The solution to the “allocation puzzle”, thus, lies at the nexus between growth, saving, and international reserve accumulation. We conclude with a discussion of some possible avenues for research.

300 citations


Journal ArticleDOI
TL;DR: In this paper, a follow-up public goods experiment revealed that clients initially assigned to weekly groups interact more often and exhibit a higher willingness to pool risk with group members from their first loan cycle nearly two years after the experiment.
Abstract: Microfinance clients were randomly assigned to repayment groups that met either weekly or monthly during their first loan cycle, and then graduated to identical meeting frequency for their second loan. Long-run survey data and a follow-up public goods experiment reveal that clients initially assigned to weekly groups interact more often and exhibit a higher willingness to pool risk with group members from their first loan cycle nearly two years after the experiment. They were also three times less likely to default on their second loan. Evidence from an additional treatment arm shows that, holding meeting frequency fixed, the pattern is insensitive to repayment frequency during the first loan cycle. Taken together, these findings constitute the first experimental evidence on the economic returns to social interaction, and provide an alternative explanation for the success of the group lending model in reducing default risk.

232 citations


Journal ArticleDOI
TL;DR: In this paper, the authors investigate collective denial and willful blindness in groups, organizations, and markets, and identify a fundamental tension in organizations' attitudes towards dissent, which can generate multiple social cognitions of reality and imply that realism and delusion will trickle down from the leaders.
Abstract: This article investigates collective denial and willful blindness in groups, organizations, and markets. Agents with anticipatory preferences, linked through an interaction structure, choose how to interpret and recall public signals about future prospects. Wishful thinking (denial of bad news) is shown to be contagious when it is harmful to others, and self-limiting when it is beneficial. Similarly, with Kreps--Porteus preferences, willful blindness (information avoidance) spreads when it increases the risks borne by others. This general mechanism can generate multiple social cognitions of reality, and in hierarchies it implies that realism and delusion will trickle down from the leaders. The welfare analysis differentiates group morale from groupthink and identifies a fundamental tension in organizations' attitudes towards dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes. Copyright 2013, Oxford University Press.

216 citations


Journal ArticleDOI
TL;DR: In this paper, the authors present a model of information manipulation and political regime change, where a regime can be overthrown but only if enough citizens participate in an uprising and the regime can engage in propaganda that makes the regime seem stronger than it truly is.
Abstract: This article presents a model of information manipulation and political regime change. There is a regime that can be overthrown but only if enough citizens participate in an uprising. Citizens are imperfectly informed about the regime’s ability to resist an uprising and the regime can engage in propaganda that, taken at face-value, makes the regime seem stronger than it truly is. This coordination game with endogenous information manipulation has a unique equilibrium and the article gives a complete analytic characterization of the equilibrium’s comparative statics. Holding fixed the number of signals available to citizens, if the per-unit signal precision is sufficiently high then the regime is harder to overthrow. In contrast, if the number of signals increases, so that both total signal precision and the regime’s costs of manipulation rise together, then the regime is easier to overthrow unless there are strong economies of scale in information control.

215 citations


Journal ArticleDOI
TL;DR: In this paper, a simple method for constructing a scoring rule to elicit an agent's belief about a random variable that is incentive compatible irrespective of her risk-preference is introduced, where the agent receives a fixed prize when her prediction error, defined by a loss function specified in the incentive scheme, is smaller than an independently generated random number and earns a smaller prize otherwise adjusting the loss function according to the belief elicitation objective.
Abstract: We introduce a simple method for constructing a scoring rule to elicit an agent's belief about a random variable that is incentive compatible irrespective of her risk-preference The agent receives a fixed prize when her prediction error, defined by a loss function specified in the incentive scheme, is smaller than an independently generated random number and earns a smaller prize otherwise Adjusting the loss function according to the belief elicitation objective, the scoring rule can be used in a rich assortment of situations Moreover, the scoring rule can be incentive compatible even when the agent is not an expected utility maximizer Results from our probability elicitation experiments show that subjects' predictions are closer to the true probability under this scoring rule compared to the quadratic scoring rule Copyright 2013, Oxford University Press

Journal ArticleDOI
TL;DR: This paper constructed a simple Malthusian model with two sectors and multiple steady states, and used it to explain why European per capita incomes and urbanization rates increased during the period 1350-1700.
Abstract: How did Europe escape the “Iron Law of Wages?” We construct a simple Malthusian model with two sectors and multiple steady states, and use it to explain why European per capita incomes and urbanization rates increased during the period 1350–1700. Productivity growth can only explain a small fraction of the rise in output per capita. Population dynamics—changes of the birth and death schedules—were far more important determinants of steady states. We show how a major shock to population can trigger a transition to a new steady state with higher per-capita income. The Black Death was such a shock, raising wages substantially. Because of Engel’s Law, demand for urban products increased, and urban centers grew in size. European cities were unhealthy, and rising urbanization pushed up aggregate death rates. This effect was reinforced by diseases spread through war, financed by higher tax revenues. In addition, rising trade also spread diseases. In this way higher wages themselves reduced population pressure. We show in a calibration exercise that our model can account for the sustained rise in European urbanization as well as permanently higher per capita incomes in 1700, without technological change. Wars contributed importantly to the “Rise of Europe”, even if they had negative short-run effects. We thus trace Europe’s precocious rise to economic riches to interactions of the plague shock with the belligerent political environment and the nature of cities.

Journal ArticleDOI
TL;DR: In this article, the authors propose a model in which a leader helps to overcome a misalignment of followers' incentives that inhibits coordination, while adapting the organization to a changing environment.
Abstract: What is the role of leaders in large organizations? We propose a model in which a leader helps to overcome a misalignment of followers’ incentives that inhibits coordination, while adapting the organization to a changing environment. Good leadership requires vision and special personality traits such as conviction or resoluteness to enhance the credibility of mission statements and to eectively rally agents around them. Resoluteness allows leaders to overcome

Journal ArticleDOI
TL;DR: In this article, an elementary theory of global supply chains is developed, where a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods and one final good is considered.
Abstract: This article develops an elementary theory of global supply chains. We consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Using this simple theoretical framework, we offer a first look at how vertical specialization shapes the interdependence of nations.

Journal ArticleDOI
TL;DR: In this article, the authors consider a dynamic Mirrlees economy in a life-cycle context and study the optimal insurance arrangement and derive a first-order approach in discrete and continuous time.
Abstract: We consider a dynamic Mirrlees economy in a life-cycle context and study the optimal insurance arrangement. Individual productivity evolves as a Markov process and is private information. We use a first-order approach in discrete and continuous time and obtain novel theoretical and numerical results. Our main contribution is a formula describing the dynamics for the labour-income tax rate. When productivity is an AR(1) our formula resembles an AR(1) with a trend where: (i) the auto-regressive coefficient equals that of productivity; (ii) the trend term equals the covariance productivity with consumption growth divided by the Frisch elasticity of labour; and (iii) the innovations in the tax rate are the negative of consumption growth. The last property implies a form of short-run regressivity. Our simulations illustrate these results and deliver some novel insights. The average labour tax rises from 0% to 37% over 40 years, whereas the average tax on savings falls from 12% to 0% at retirement. We compare the second best solution to simple history-independent tax systems, calibrated to mimic these average tax rates. We find that age-dependent taxes capture a sizable fraction of the welfare gains. In this way, our theoretical results provide insights into simple tax systems. Copyright 2013, Oxford University Press.

Journal ArticleDOI
Ian Martin1
TL;DR: In this paper, the authors extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth processes.
Abstract: I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth processes. Information about the higher moments—equivalently, cumulants—of consumption growth is encoded in the cumulantgenerating function (CGF). I express four observable quantities (the equity premium, riskless rate, consumption-wealth ratio and mean consumption growth) and the HansenJagannathan bound in terms of the CGF, and present applications. Models in which consumption is subject to occasional disasters can be handled easily and flexibly within the framework. The importance of higher cumulants is a double-edged sword: those model parameters which are most important for asset prices, such as disaster parameters, are also the hardest to calibrate. It is therefore desirable to make statements which do not depend on a particular calibrated consumption process. First, I use properties of the CGF to derive restrictions on the time-preference rate and elasticity of intertemporal substitution that must hold in any Epstein-Zin-i.i.d. model which is consistent with the observable quantities. Second, I show that “good deal” bounds on the maximal Sharpe ratio can be used to derive restrictions on preference parameters without calibrating the consumption process. Third, given preference parameters, I calculate the welfare cost of uncertainty directly from mean consumption growth and the consumption-wealth ratio without having to estimate the amount of risk in the economy. Fourth, I analyze heterogeneous-agent models with jumps.

Journal ArticleDOI
TL;DR: In this article, the authors provide the first dynamic stochastic general equilibrium analysis of a popular class of search wage-posting models, drawing in part from the literature on recursive contracts under moral hazard.
Abstract: We study a stochastic economy where both employed and unemployed workers search randomly for labor contracts posted by firms, while aggregate productivity is subject to persistent shocks. Our exercise provides the first dynamic stochastic general equilibrium analysis of a popular class of search wage-posting models, drawing in part from the literature on recursive contracts under moral hazard. Each firm oers and commits to a (Markov) contract, which specifies a wage contingent on all payorelevant states, but must pay equally all of its workers, who have limited commitment and are free to quit at any time. An equilibrium of this contract-posting game is RankPreserving [RP] if larger firms oer a larger value to their workers in all states of the

Journal ArticleDOI
TL;DR: In this paper, the authors examined the evolution of inflation and output over the last 50 years through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks.
Abstract: The evolution of inflation and output over the last 50 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, the behavior of the Federal Reserve is identified by repeated fluctuations between a Hawk- and a Dove- regime, instead of by the traditional pre- and post- Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late `70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a Bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with Markov-switching regimes.

Journal ArticleDOI
TL;DR: This paper showed that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors, i.e., bias in judgement, strategic lying, or both.
Abstract: Evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others. We test three theories that predict such relative overconfidence. The first theory argues that overconfidence can be generated by Bayesian updating from a common prior and truthful statements if individuals do not know their true type. The second theory suggests that self-image concerns asymmetrically affect the choice to receive new information about one's abilities, and this asymmetry can produce overconfidence. The third theory is that overconfidence is induced by the desire to send positive signals to others about one's own skill; this suggests either a bias in judgement, strategic lying, or both. We formulate this theory precisely. Using a large data set of relative ability judgements about two cognitive tests, we reject the restrictions imposed by the Bayesian model and also reject a key prediction of the self-image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self-image. We provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling. Our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors. Copyright 2013, Oxford University Press.

Journal ArticleDOI
TL;DR: In this article, the authors explore which financial constraints matter the most in the choice of becoming an entrepreneur and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received.
Abstract: We explore which financial constraints matter the most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare program in rural Mexico and show that cash transfers signi cantly increase entry into entrepreneurship. We then exploit the cross-household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occupational choice model, we argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints.

Journal ArticleDOI
TL;DR: In this paper, the authors present the results of a natural field experiment on taxi rides in Athens, G reece, set up to measure different types of fraud and to examine the influence of passengers' p resumed information and income on the extent of fraud.
Abstract: Credence goods are characterized by informational a symmetries between sellers and consumers that invite fraudulent behavior by seller s. This paper presents the results of a natural field experiment on taxi rides in Athens, G reece, set up to measure different types of fraud and to examine the influence of passengers’ p resumed information and income on the extent of fraud. Results reveal that taxi drivers c heat passengers in systematic ways: Passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system l eads to manipulated bills. Higher income seems to lead to more fraud.

Journal ArticleDOI
TL;DR: In this article, the authors developed and estimated a model of on-the-job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset.
Abstract: In this paper I develop and estimate a model of on-the-job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset. I derive the implications for optimal savings behavior in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on-the-job search. Savings behavior depends in a very intuitive way on the rate at which offers are received, the rate at which jobs are destroyed, and a worker’s current rank in the wage distribution. The implication is that workers, who are identical in terms of preferences and opportunities, have substantially different savings behavior depending on their history and current position in the wage distribution. The mechanism that generates the substantial differences in savings behavior in the model is the dynamic of the “wage ladder” resulting from the search process. There is an important asymmetry between the incremental wage increases generated by onthe-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). The behavior of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behavior of workers near the top of the distribution is driven by the possibility of job loss. The distributions of earnings, wealth and consumption implied by the model (suitably aggregated) align reasonably well with the data, with the notable exception of implying substantially less concentration of wealth among the richest one percent of the population. In this paper I develop and estimate a model of on-the-job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset. I derive the implications for optimal savings behavior in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on-the-job search. Savings behavior depends in a very intuitive way on the rate at which offers are received, the rate at which jobs are destroyed, and a worker’s current rank in the wage distribution. The implication is that workers at different point in the wage distribution have substantially different savings behavior, resulting in wealth dispersion that is much greater than earnings dispersion. The mechanism that generates the high degree of wealth dispersion in the model is the dynamic of the “wage ladder” resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). This feature of the model generates differential savings behavior at different points in the earnings distribution. The behavior of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behavior of workers near the top of the distribution is primarily driven by the possibility of job loss. The wage growth expected by low wage workers, combined with the fact that their earnings are not much higher than unemployment benefits, causes them to dissave. As a worker’s wage increases, the incentive to save increases: the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss. The fact that high wage and low wage workers have such different savings behavior leads to a wealth distribution that is much more unequal 1

Journal ArticleDOI
TL;DR: In this article, a first-order approach is proposed to find efficient allocations in a dynamic private information economy with a continuum of idiosyncratic shocks that are persistent, where the social planner decreases the informational rent of the agent today at the cost of providing higher insurance in the future.
Abstract: This article studies efficient allocations in a dynamic private information economy with a continuum of idiosyncratic shocks that are persistent. I develop a first-order approach for this environment and show that the problem has a simple recursive structure that relies on only a small number of state variables, making the problem tractable. I find sufficient conditions that guarantee that the first-order approach is valid. To illustrate the first-order approach I numerically compute the efficient allocations in a Mirrleesean economy with productivity shocks that follow a random walk and verify the validity of the first-order approach. I show that persistent shocks create a new trade-off where the social planner decreases the informational rent of the agent today at the cost of providing higher insurance in the future. Copyright 2013, Oxford University Press.

Journal ArticleDOI
TL;DR: This paper developed a structural model to identify the sources of local-currency price stability and applied it to micro data from the beer market and found that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own-brand price adjustment costs, and 1% to indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares.
Abstract: The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a structural model to identify the sources of this local-currency price stability and applies it to micro data from the beer market. The empirical procedure exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments following exchange-rate changes to quantify the relative importance of local non-traded cost components, markup adjustment by manufacturers and retailers, and nominal price rigidities in the incomplete transmission of such changes to prices. We find that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own-brand price adjustment costs, and 1% to the indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares.

Journal ArticleDOI
TL;DR: In this paper, a model of marital bargaining in which time allocations are determined jointly with equilibrium marriage and divorce rates was developed and calibrated to US time-use survey data, and the results suggest that bargaining effects raised married men's labor supply by about 2.1 weekly hours over the period, and reduced that of married women by 2.7 hours.
Abstract: Are macro-economists mistaken in ignoring bargaining between spouses? This paper argues that models of intra-household allocation could be useful for understanding aggregate labor supply trends in the US since the 1970s. A simple calculation suggests that the standard model without bargaining predicts a 19% decline in married-male labor supply in response to the narrowing of the gender gap in wages since the 1970s. However married-men's paid labor remained stationary over the period from the mid 1970s to the recession of 2001. This paper develops and calibrates to US time-use survey data a model of marital bargaining in which time allocations are determined jointly with equilibrium marriage and divorce rates. The results suggest that bargaining effects raised married men's labor supply by about 2.1 weekly hours over the period, and reduced that of married women by 2.7 hours. Bargaining therefore has a relatively small impact on aggregate labor supply, but is critical for trends in female labor supply. Also, the narrowing of the gender wage gap is found to account for a weekly 1.5 hour increase in aggregate labor supply.

Journal ArticleDOI
TL;DR: In this article, the authors construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade, which bears a set of testable predictions, such as the probability of future conflicts increases after each conflict episode, and that accidental conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts.
Abstract: We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

Journal ArticleDOI
TL;DR: In this article, the optimal dynamic incentive contract in a standard continuoustime agency setting where the agent has a shirking action was derived, and the relationship between optimal contracting and taxes, bargaining and renegotiation was explored.
Abstract: I explicitly derive the optimal dynamic incentive contract in a standard continuoustime agency setting where the agent has a shirking action. My solution generates two dynamic contracts new to the literature. Both contracts include phases when the agent frequently shirks. In one contract, the shirking phases are relaxation periods rewarding the agent for good performance. In the other, the shirking phases are suspension-type arrangements punishing the agent for poor performance. In addition, I also explore the relationships between optimal contracting and taxes, bargaining and renegotiation.

Journal ArticleDOI
TL;DR: In this paper, the authors present a theoretical framework that highlights three mechanisms for how internet use may affect reported sex crime, namely a reporting effect, a matching effect on potential offenders and victims, and a direct effect on crime propensity.
Abstract: Does internet use trigger sex crime? We use unique Norwegian data on crime and internet adoption to shed light on this question. A public program with limited funding rolled out broadband access points in 2000-2008, and provides plausibly exogenous variation in internet use. Our instrumental variables and fixed effect estimates show that internet use is associated with a substantial increase in reported incidences of rape and other sex crimes. We present a theoretical framework that highlights three mechanisms for how internet use may affect reported sex crime, namely a reporting effect, a matching effect on potential offenders and victims, and a direct effect on crime propensity. Our results indicate that the direct effect is non-negligible and positive, plausibly as a result of increased consumption of pornography.

Journal ArticleDOI
TL;DR: In this article, the role of natural amenities in neighborhood dynamics, suburbanization, and variation across cities in the persistence of the spatial distribution of income is highlighted, and a model generates three predictions that confirm using a novel database of consistent-boundary neighbourhoods in U.S. metropolitan areas, 1880-2010.
Abstract: We present theory and evidence highlighting the role of natural amenities in neighbourhood dynamics, suburbanization, and variation across cities in the persistence of the spatial distribution of income. Our model generates three predictions that we confirm using a novel database of consistent-boundary neighbourhoods in U.S. metropolitan areas, 1880–2010, and spatial data for natural features such as coastlines and hills. First, persistent natural amenities anchor neighbourhoods to high incomes over time. Secondly, naturally heterogeneous cities exhibit persistent spatial distributions of income. Thirdly, downtown neighbourhoods in coastal cities were less susceptible to the widespread decentralization of income in the mid-twentieth century and experienced an increase in income more quickly after 1980.

Journal ArticleDOI
TL;DR: In this article, the authors develop a model where banks take deposits and make investments; their liabilities facilitate third-party transactions, and characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyse how this interacts with banking.
Abstract: We develop a model where: (i) banks take deposits and make investments; (ii) their liabilities facilitate third-party transactions. Other models have (i) or (ii), not both, although we argue they are intimately connected: we show that they both emerge from limited commitment. We describe an environment, characterize desirable allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. As a technical contribution, we characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyse how this interacts with banking. We also confront the theory with economic history. Copyright 2013, Oxford University Press.