Showing papers in "The Review of Economics and Statistics in 1998"
TL;DR: The authors presented conditions under which a simple extension of common nonparametric covariance matrix estimation techniques yields standard error estimates that are robust to very general forms of spatial and temporal dependence as the time dimension becomes large.
Abstract: Many panel data sets encountered in macroeconomics, international economics, regional science, and finance are characterized by cross-sectional or “spatial” dependence. Standard techniques that fail to account for this dependence will result in inconsistently estimated standard errors. In this paper we present conditions under which a simple extension of common nonparametric covariance matrix estimation techniques yields standard error estimates that are robust to very general forms of spatial and temporal dependence as the time dimension becomes large. We illustrate the relevance of this approach using Monte Carlo simulations and a number of empirical examples.
3,763 citations
TL;DR: Mixed logit as mentioned in this paper is a generalization of standard logit that does not exhibit the restrictive independence from irrelevant alternatives property and explicitly accounts for correlations in unobserved utility over repeated choices by each customer.
Abstract: Mixed logit models, also called random-parameters or error-components logit, are a generalization of standard logit that do not exhibit the restrictive “independence from irrelevant alternatives” property and explicitly account for correlations in unobserved utility over repeated choices by each customer. Mixed logits are estimated for households' choices of appliances under utility-sponsored programs that offer rebates or loans on high-efficiency appliances.
2,192 citations
TL;DR: In this article, the authors explore the recent explosion in university patenting as a source of insight into the changing relationship between the university and the private sector and find that between 1965 and 1988, the rate of increase of important patents from universities was much less than their overall rate of increasing patenting.
Abstract: This paper explores the recent explosion in university patenting as a source of insight into the changing relationship between the university and the private sector. Before the mid-1980s, university patents were more highly cited, and were cited by more diverse patents, than a random sample of all patents. More recently several significant shifts in university patenting behavior have led to the disappearance of this difference. Thus our results suggest that between 1965 and 1988 the rate of increase of important patents from universities was much less than their overall rate of increase of patenting.
1,076 citations
Abstract: Bias-corrected bootstrap confidence intervals explicitly account for the bias and skewness of the small-sample distribution of the impulse response estimator, while retaining asymptotic validity in stationary autoregressions. Monte Carlo simulations for a wide range of bivariate models show that in small samples bias-corrected bootstrap intervals tend to be more accurate than delta method intervals, standard bootstrap intervals, and Monte Carlo integration intervals. This conclusion holds for VAR models estimated in levels, as deviations from a linear time trend, and in first differences. It also holds for random walk processes and cointegrated processes estimated in levels. An empirical example shows that bias-corrected bootstrap intervals may imply economic interpretations of the data that are substantively different from standard methods.
936 citations
TL;DR: This paper examined the out-of-sample performance of various financial variables as predictors of U.S. recessions and found that stock prices are useful with one- to three-quarter horizons, as are some well-known macroeconomic indicators.
Abstract: This paper examines the out-of-sample performance of various financial variables as predictors of U.S. recessions. Series such as interest rates and spreads, stock prices, and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators. The analysis focuses on out-of-sample performance from one to eight quarters ahead. Results show that stock prices are useful with one- to three-quarter horizons, as are some well-known macroeconomic indicators. Beyond one quarter, however, the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables.
859 citations
TL;DR: In this article, the authors used the same set of income and population growth assumptions as the Intergovernmental Panel on Climate Change (IPCC) and found that the IPCC's widely used emissions growth projections exhibit significant and substantial departures from the implications of historical experience.
Abstract: Emissions of carbon dioxide from the combustion of fossil fuels, which may contribute to long-term climate change, are projected through 2050 using reduced-form models estimated with national-level panel data for the period of 1950–1990. Using the same set of income and population growth assumptions as the Intergovernmental Panel on Climate Change (IPCC), we find that the IPCC's widely used emissions growth projections exhibit significant and substantial departures from the implications of historical experience. Our model employs a flexible form for income effects, along with fixed time and country effects, and we handle forecast uncertainty explicitly. We find clear evidence of an “inverse U” relation with a within-sample peak between carbon dioxide emissions (and energy use) per capita and per-capita income.
670 citations
TL;DR: In this article, the authors employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration, and find the estimated efficiency cost of concentration to be several times larger than the social loss from mispricing as traditionally measured by the welfare triangle.
Abstract: Traditional concerns about concentration in product markets have centered on the social loss associated with the mispricing that occurs when market power is exercised. This paper focuses on a potentially greater loss from market power—a reduction in cost efficiency brought about by the lack of market discipline in concentrated markets. We employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration. We find the estimated efficiency cost of concentration to be several times larger than the social loss from mispricing as traditionally measured by the welfare triangle.
616 citations
TL;DR: In this article, the authors estimate the model for U.S. data and attempt to address three questions: are both features of the business cycle empirically relevant? Might the implied new index of coincident indicators be a useful one in practice? Do the resulting estimates of regime switches show evidence of duration dependence?
Abstract: The synthesis of the dynamic factor model of Stock and Watson (1989) and the regime-switching model of Hamilton (1989) proposed by Diebold and Rudebusch (1996) potentially encompasses both features of the business cycle identified by Burns and Mitchell (1946): (1) comovement among economic variables through the cycle and (2) nonlinearity in its evolution. However, maximum-likelihood estimation has required approximation. Recent advances in multimove Gibbs sampling methodology open the way to approximation-free inference in such non-Gaussian, nonlinear models. This paper estimates the model for U.S. data and attempts to address three questions: Are both features of the business cycle empirically relevant? Might the implied new index of coincident indicators be a useful one in practice? Do the resulting estimates of regime switches show evidence of duration dependence? The answers to all three would appear to be yes.
482 citations
TL;DR: This paper examined whether monetary policy has similar effects across regions in the United States and found that a core of regions (New England, Mideast, Plains, Southeast, and the Far West) respond to monetary policy changes in ways that closely approximate the U.S. average response.
Abstract: This paper examines whether monetary policy has similar effects across regions in the United States. Impulse response functions from an estimated structural vector autoregression reveal a core of regions—New England, Mideast, Plains, Southeast, and the Far West— that respond to monetary policy changes in ways that closely approximate the U.S. average response. Of the three noncore regions, one (Great Lakes) is noticeably more sensitive to monetary policy changes, and two (Southwest and Rocky Mountains) are found to be much less sensitive. A state-level version of the model is estimated and used to provide evidence on the channels for monetary policy.
473 citations
TL;DR: In this paper, the authors investigated the relationship between financial sector GDP and manufacturing total factor productivity in the OECD countries and found that the relationship is characterized by long-run causality in the sense of Granger and Lin.
Abstract: Recent theoretical models conjecture that the development of the financial sector is essential for economic growth. We investigate this hypothesis from a time-series perspective and find that financial sector GDP is cointegrated for many OECD countries not so much with manufacturing GDP but mostly with manufacturing total factor productivity. Moreover, this relation is in some instances characterized by long-run causality in the sense of Granger and Lin. However, even within this homogeneous group of countries, the variety of results suggests a more complex picture than is apparent from cross-sectional evidence.
459 citations
TL;DR: In this paper, the standard cost model is modified to account for the role of financial capital in banking and the cost function is conditioned on the level of capital, but the demand for financial capital is modeled as a cushion against insolvency for potentially risk-averse managers and as a signal of risk for less informed outsiders.
Abstract: We amend the standard cost model to account for the role of financial capital in banking. The cost function is conditioned on the level of capital, but we model the demand for financial capital so that it can serve as a cushion against insolvency for potentially risk-averse managers and as a signal of risk for less informed outsiders. Scale economies are then computed without assuming that the bank chooses a level of capitalization that minimizes cost. We find evidence of substantial scale economies and that bank managers are risk averse and use the level of financial capital to signal the level of risk.
TL;DR: The authors used an improved SIPP survey design to present new evidence regarding the degree to which child care prices impede mothers' employment behavior, with additional evidence of the difference in these elasticities across marital status, empirical technique, and equation specification.
Abstract: Because women typically serve as primary care providers for their children, female labor force participation behavior is likely to be affected significantly by the costs associated with replacing maternal care with nonmaternal care. While some evidence of this phenomenon exists in the economics literature, discrepancies across studies make it difficult to provide conclusive evidence of the employment effects of these child care costs. This paper uses an improved SIPP survey design to present new evidence regarding the degree to which child care prices impede mothers' employment behavior, with additional evidence of the difference in these elasticities across marital status, empirical technique, and equation specification. This permits linking this paper to the existing evidence, drawing the conclusion that child care prices impede mothers' employment behavior significantly, with single mothers exhibiting less responsiveness in their labor force participation behavior to child care price changes than marri...
TL;DR: In this paper, the authors estimate how much of the wealth of a sample of PSID respondents is held because some households face more income uncertainty than others, and find that between 39 and 46 percent of wealth in their sample is attributable to the extra uncertainty that some consumers face compared to the lowest-uncertainty group.
Abstract: We estimate how much of the wealth of a sample of PSID respondents is held because some households face more income uncertainty than others. We begin by solving a theoretical model of saving, which we use to develop appropriate measures of uncertainty. We then regress measures of wealth on our measures of uncertainty, and find evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest-uncertainty group. We find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest-uncertainty group.
TL;DR: In this article, the authors provide empirical evidence on the role of targeting in regulatory compliance and propose that self-reporting by a firm is used to demonstrate that firms are willing to cooperate.
Abstract: Targeting is the practice of inspecting firms most likely to violate a regulation. This paper provides empirical evidence on the role of targeting in regulatory compliance. I propose that self-reporting by a firm is used to demonstrate that firms are willing to cooperate. The results indicate that there is a one-quarter penalty period following a violation. Inspections are also determined by the economic situation of the surrounding community, demonstrating that targeting opens the door to interest-group influence. Inspections that detect violations encourage self-reporting, showing that firms demonstrate their desire to cooperate with regulators by disclosing violations.
TL;DR: In this article, a discrete choice regression is estimated over a large sample of participating and non-participating firms to examine whether firms' characteristics influence their decision to join the Environmental Protection Agency's voluntary Green Lights program.
Abstract: The literature on energy efficiency provides numerous examples of apparently profitable technologies that are not universally adopted. Yet according to the standard neoclassical theory of investment, profit-maximizing firms should undertake all investments with a positive net present value. The standard theory also holds that the discount rate for computing the present value of a project should be the return available on other projects in the same risk class, and therefore should not depend on characteristics of the firm. This model as applied to energy-saving investments is tested by examining whether firms'characteristics influence their decision to join the Environmental Protection Agency's voluntary Green Lights program. A discrete choice regression is estimated over a large sample of participating and nonparticipating firms. Missing values in the data matrix are replaced with multiple imputations from a distribution estimated using the expectation—maximization algorithm. The results show that (1) sub...
TL;DR: In this paper, a simple agency model was used to motivate an econometric model of the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm's shareholders.
Abstract: I analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm's shareholders. I use a simple agency model to motivate an econometric model of this relationship. Estimating this model on chief executive officer (CEO) compensation data using nonlinear least squares, I determine that pay-performance sensitivity (as defined by Jensen and Murphy (1990b)) appears to be approximately inversely proportional to the square root of firm size (however measured). I also analyze the properties of pay- performance sensitivity for “teams” of executives working for the same firm and show it to have similar properties as CEO pay-performance sensitivity.
TL;DR: The authors proposed alternative tests using different and more direct information on borrowing constraints obtained from the 1983 Survey of Consumer Finances, which indicated stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach.
Abstract: Previous tests for liquidity constraints using consumption Euler equations have frequently split the sample on the basis of wealth, arguing that low-wealth consumers are more likely to be constrained. We propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 Survey of Consumer Finances. In a first stage we estimate probabilities of being constrained, which are then utilized in a second sample, the Panel Study of Income Dynamics, to estimate switching regression models of the Euler equation. Our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach.
TL;DR: This paper examined the effects of school pupil-teacher ratios and type of school on educational attainment and wages using the British National Child Development survey (NCDS), and found evidence that those who attend selective schools have better educational outcomes and, in the case of men, higher wages at the age of 33.
Abstract: The paper examines the effects of school pupil-teacher ratios and type of school on educational attainment and wages using the British National Child Development survey (NCDS). The NCDS is a panel survey which has followed a cohort of individuals born in March 1958, and has a rich set of background variables recorded throughout the individual's life. The results suggest that, once we control for ability and family background, the pupil-teacher ratio has no impact on educational qualifications or on male wages. It has an impact on women’s wages at the age of 33, particularly those of low ability. We also find evidence that those who attend selective schools have better educational outcomes and, in the case of men, higher wages at the age of 33. The impact is higher for the type of individuals who are less likely not to attend selective schools, but for whom a comparison group does exist among those attending.
TL;DR: The authors examine a large sample of countries and find that a majority exhibit a significant structural break in their postwar growth rates, though not all of them exhibit significant structural change in the early 1970s.
Abstract: This paper proposes an explicit test for determining the significance and the timing of slowdowns in economic growth. We examine a large sample of countries and find that a majority—though not all—exhibit a significant structural break in their postwar growth rates. We find that (a) most industrialized countries experienced postwar growth slowdowns in the early 1970s, though (b) the United States, Canada, and the United Kingdom did not, and (c) developing countries (and in particular, Latin American countries) tended to experience much more severe slowdowns which, in contrast with the more developed countries, began nearly a decade later.
TL;DR: In this paper, the authors provided empirical evidence on the leading factors affecting the prices of new pharmaceuticals, both at introduction and after 4, 6, and 8 years, and found that the number of branded substitutes has a substantial negative effect on launch prices, which reflects the importance of competitive pressures.
Abstract: This paper provides empirical evidence on the leading factors affecting the prices of new pharmaceuticals, both at introduction and after 4, 6, and 8 years. Most important is the extent of therapeutic advance embodied in a new product. For drugs which represent important therapeutic gains, launch prices can be two or three times those of existing drugs used for the same purposes, while drugs that largely duplicate the actions of currently available products are typically priced at comparable levels. In addition, the number of branded substitutes has a substantial negative effect on launch prices, which reflects the importance of competitive pressures. Duplicate products thereby play an important economic role in pharmaceutical markets.
TL;DR: In this article, the authors compare the empirical performance of different financial variables (coverage ratio, cash stocks, and cash flow) used in previous research to test for the presence of financing constraints.
Abstract: This study provides new evidence of the importance of financing constraints for explaining the dramatic cycles in inventory investment. We compare the empirical performance of different financial variables (coverage ratio, cash stocks, and cash flow) used in previous research to test for the presence of financing constraints. The comparison is undertaken in a common framework with an identical sample and high-frequency (quarterly) firm panel data. Cash flow is much more successful than cash stocks or coverage in explaining the facts about inventory investment across firm size, different inventory cycles, and different manufacturing sectors.
TL;DR: This article developed an efficiency-wage model where input prices affect the equlibrium rate of unemployment and showed that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessnss.
Abstract: The paper develops an efficiency-wage model where input prices affect the equlibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessnss. The equations do well in forecasting unemployment many out-of-sample, and provide evidence that the oil price spike associated with Iraq's invasion of Kuweit appears to be a component of the "mystery" recession which followed.
TL;DR: The authors found no difference by age in the probability that an article submitted to a leading journal will be accepted, and the probability of acceptance is increasingly related to the author's quality rather than the author age.
Abstract: Economists' productivity over their careers and as measured by publication in leading journals declines very sharply with age. There is no difference by age in the probability that an article submitted to a leading journal will be accepted. Rates of declining productivity are no greater among the very top publishers than among others, and the probability of acceptance is increasingly related to the author's quality rather than the author's age.
TL;DR: In this paper, the authors argue that the generally higher level (and volatility) of domestic share prices is consistent with the simplest asset pricing model, assuming plausible differences-about four percentage points-in expected rates of return by foreign and domestic investors.
Abstract: Many companies on China's stock markets have traditionally had separate, restricted classes of shares for domestic residents and foreigners. These shares are identical other than for who can own them, but foreigners have generally paid only about one-quarter the price paid by domestic residents. We argue that the generally higher level (and volatility) of domestic share prices is consistent with the simplest asset pricing model, assuming plausible differences-about four percentage points-in expected rates of return by foreign and domestic investors. We attribute low Chinese expected returns to the limited alternative investments available in China. We then estimate how various company characteristics (including capital asset pricing model (CAPM) betas, company size, market liquidity, and other characteristics) affect the relative price paid by foreigners in a panel of companies. We find, for example, that foreigners pay a lower relative price for companies with a higher proportion owned by the state-refle...
TL;DR: The authors analyzed the cross-sectional variation in expectations, revisions of expectations between the spring and the fall of 1993, and the relationship between 1993 expectations and the distribution of spring 1994 earnings realizations.
Abstract: During the spring and the fall of 1993, respondents to a national household survey were asked to report expectations of spring 1994 weekly earnings. Elicited in the form of subjective probabilities, these data are potentially much more informative than are typical reports of economic expectations. Subjective probability distributions of future weekly earnings are estimated for each respondent, based on his or her reports of a series of subjective probabilities. This paper analyzes the cross-sectional variation in expectations, revisions of expectations between the spring and the fall of 1993, and the relationship between 1993 expectations and the distribution of spring 1994 earnings realizations. Generally positive findings on the validity of the data bode well for the prospects of eliciting expectations in future surveys.
TL;DR: In this article, a switching regression model of investment is developed, in which the probability of a firm facing a high premium on external finance is endogenously determined, and this approach allows on...
Abstract: In this paper we develop a switching regression model of investment, in which the probability of a firm facing a high premium on external finance is endogenously determined. This approach allows on...
TL;DR: In this article, a structural econometric model of the joint decisions regarding investment and income shifting, and estimating the model using firm-level data on the activity U.S. corporations in Puerto Rico.
Abstract: The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the United States. This lowers the tax penalty on investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate. This paper investigates these two interrelated impacts of taxation by developing a structural econometric model of the joint decisions regarding investment and income shifting, and estimating the model using firm-level data on the activity U.S. corporations in Puerto Rico. The results suggest that the income shifting advantages are the predominant reason for U.S. investment in Puerto Rico.
TL;DR: This article examined the relationship between productivity, investment, and plant age for over 14,000 plants in the U.S. manufacturing sector for the period of 1972 to 1988 and found that plant heterogeneity and fixed effects are more important determinants of observable productivity patterns than sunk costs or capital reallocation.
Abstract: This paper examines the relationship between productivity, investment, and plant age for over 14,000 plants in the U.S. manufacturing sector for the period of 1972 to 1988. Productivity patterns vary significantly due to plant heterogeneity. Initially productivity increases with respect to plant age, but then it decreases. Productivity and growth in productivity are found to be systematically correlated with plant size and industry. However, there is virtually no observable relationship between investment and productivity or productivity growth. Overall the results indicate that plant heterogeneity and fixed effects are more important determinants of observable productivity patterns than sunk costs or capital reallocation.
TL;DR: This article argued that the effect of wives' earnings can be assessed meaningfully only by comparing the observed distribution of income with a reference distribution and suggested several intuitive counterfactual reference distributions and illustrate their use with 1979 and 1989 U.S. data.
Abstract: We argue that the effect of wives' earnings can be assessed meaningfully only by comparing the observed distribution of income with a reference distribution. The components of the standard decomposition of the Gini coefficient have no implicit reference distribution and therefore should not be interpreted as a measure of the effect of an income source on inequality. We suggest several intuitive counterfactual reference distributions and illustrate their use with 1979 and 1989 U.S. data. We conclude that wives' earnings reduced inequality in that the income distribution would have been less equal in their absence. Alternative measures of the impact have mixed results.
TL;DR: The authors used data from the National Longitudinal Survey of Youth to distinguish empirically between mover-stayer, search-good, and experience-good models of job mobility and found that workers who undergo persistent mobility have lower log-wage paths than less mobile workers.
Abstract: This study uses data from the National Longitudinal Survey of Youth to distinguish empirically between mover—stayer, “search good,” and “experience good” models of job mobility. We estimate wage models in which the pattern of overall job mobility affects both the level and tenure slope of the log-wage path. After controlling for the correlation between mobility patterns and time-constant person- and job-specific unobservables, we find that workers who undergo persistent mobility have lower log-wage paths than less mobile workers. This finding is consistent with models in which job mobility is driven by time-varying unobservables, such as “experience good” models, where changes in perceived match quality cause turnover.