Showing papers in "The Review of Economics and Statistics in 2009"

On Modeling and Interpreting the Economics of Catastrophic Climate Change

Abstract: With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of low- probability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical "tail fattening" of posterior-predictive distributions. Such fattened tails have strong im- plications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. This paper shows that the economic consequences of fat-tailed structural uncertainty (along with unsureness about high-temperature damages) can readily outweigh the effects of discounting in climate-change policy analysis.

Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States

Abstract: We estimate international technology spillovers to U.S. manufacturing firms via imports and foreign direct investment (FDI) between 1987 and 1996. In contrast to earlier work, our results suggest that FDI leads to substantial productivity gains for domestic firms. The size of FDI spillovers is economically important, accounting for about 14% of productivity growth in U.S. firms between 1987 and 1996. FDI spillovers are particularly strong in high-tech sectors, whereas they are largely absent in low-tech sectors. Small firms with low productivity benefit more from FDI spillovers than larger productivity firms with more productivity do. The evidence for import spillovers is much weaker.

The effects of entry on incumbent innovation and productivity

Abstract: HERE is a long-standing interest in the effects of entry, which are widely recognized as major drivers of economic growth. Entry can induce reallocation of inputs and outputs, trigger knowledge spillovers, and affect innovation incentives in incumbent firms. The desire to induce entry by foreign firms has spurred widespread policy reforms, particularly in countries or industries behind the technology frontier. However, empirical studies of the effects of market liberalizations and inward direct investment from foreign firms provide mixed results on incumbent reactions. 1 In this paper we explore systematic variation in the response of incumbent firms to entry. We are motivated by the following empirical regularity—we see substantial heterogeneity in the correlation between greenfield foreign firm entry and incumbent productivity growth when we look across industries in the United Kingdom. In industries close to the technology frontier there is a strong and positive correlation, while a weak or even negative one is found in industries that lag behind. This is illustrated in figure 1, where we plot the annual rate of greenfield foreign firm entry in each industry-year against the respective average of subsequent total factor productivity growth in incumbent establishments. The sample is split at the median distance to the technology frontier, as measured by a labor productivity index that relates incumbents in U.K. industries to their U.S. industry equivalent. Our explanation for this variation follows from Schumpeterian growth theory—threat from frontier entrants induces incumbents in sectors that are initially close to the technology frontier to innovate more, and this triggers productivity growth, but entry threat reduces the expected rents from doing R&D for incumbents in sectors further from the frontier. In the former case, incumbent firms close to the frontier know that they can escape and survive entry by innovating successfully, and so they react with more intensive innovation activities aimed at escaping the threat.

Corporate Tax Avoidance and Firm Value

Abstract: Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities. OLS estimates indicate that the effect of tax avoidance on firm value is a function of firm governance, as predicted by an agency perspective on corporate tax avoidance. Instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result, as do several robustness checks. The results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder-manager relations.

The Elusive Curse of Oil

Abstract: Our goal is to show that contrary to the claims made in several recent papers, the effect of a large endowment of oil and other mineral resources on long-term economic growth of countries has been on balance positive. Moreover, the claims of a negative effect of oil and mineral wealth on the countries' institutions are called into question.

The effect of attending the flagship state university on earnings: a discontinuity-based approach

Abstract: This paper examines the effect of attending the flagship state university on the earnings of 28 to 33 year olds by combining confidential admissions records from a large state university with earnings data collected through the state's unemployment insurance program. To distinguish the effect of attending the flagship state university from the effects of confounding factors correlated with the university's admission decision or the applicant's enrollment decision, I exploit a large discontinuity in the probability of enrollment at the admission cutoff. The results indicate that attending the most selective state university causes earnings to be approximately 20% higher for white men.

Trends in Intergenerational Income Mobility

Abstract: Previous studies of recent U.S. trends in intergenerational income mobility have produced widely varying results, partly because of large sampling errors. By making more efficient use of the available information in the Panel Study of Income Dynamics, we generate more reliable estimates of the recent time-series variation in intergenerational mobility. Our results, which pertain to the cohorts born between 1952 and 1975, do not reveal major changes in intergenerational mobility.

Does the welfare state affect individual attitudes toward immigrants? evidence across countries

Abstract: This paper analyzes welfare-state determinants of individual attitudes toward immigrants—within and across countries—and their interaction with labor market drivers of preferences. We consider two mechanisms through which a redistributive welfare system might adjust as a result of immigration. Under the first model, immigration has a larger impact on high-income individuals, while under the second one low-income individuals are those most affected. Individual attitudes are consistent with the first welfare-state model and with labor market determinants. In countries where immigration is unskilled, income is negatively correlated with pro-immigration preferences, while skill is positively correlated with them. These relationships are reversed in economies characterized by skilled migration.

Human Capital, the Structure of Production and Growth

Abstract: We document that countries with higher initial education levels experienced faster value-added and employment growth in schooling-intensive industries in the 1980s and 1990s. This effect is robust to controls for other determinants of international specialization and becomes stronger when we focus on economies open to international trade. Our finding is consistent with schooling fostering the adoption of new technologies if such technologies are skilled-labor augmenting, as was the case in the 1980s and the 1990s. In line with international specialization theory, we also find that countries where education levels increased rapidly experienced stronger shifts in production toward schooling-intensive industries.

Trade Openness and Volatility

Abstract: This paper examines the mechanisms through which output volatility is related to trade openness using an industry-level panel data set of manufacturing production and trade. The main results are threefold. First, sectors more open to international trade are more volatile. Second, trade is accompanied by increased specialization. These two forces imply increased aggregate volatility. Third, sectors that are more open to trade are less correlated with the rest of the economy, an effect that acts to reduce overall volatility. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that the relationship between trade openness and overall volatility is positive and economically significant.

Extreme Weather Events, Mortality, and Migration

Abstract: We estimate the effect of extreme weather on life expectancy in the United States. Using high-frequency data, we find that both extreme heat and cold result in immediate increases in mortality. The increase in mortality following extreme heat appears mostly driven by near-term displacement, while the increase in mortality following extreme cold is long lasting. We estimate that the number of annual deaths attributable to cold temperature is 0.8% of average annual deaths in our sample. The longevity gains associated with mobility from the Northeast to the Southwest account for 4% to 7% of the total gains in life expectancy experienced by the U.S. population over the past thirty years.

Neighborhood Peer Effects in Secondary School Enrollment Decisions

Abstract: This paper identifies neighborhood peer effects on children's school enrollment decisions using experimental evidence from the Mexican PROGRESA program. We use exogenous variation in the school participation of program-eligible children to identify peer effects on the schooling decisions of ineligible children residing in treatment communities. We find that peers have considerable influence on the enrollment decisions of program-ineligible children, and these effects are concentrated among children from poorer households. These findings imply that policies aimed at encouraging enrollment can produce large social multiplier effects.

Gentrification and Neighborhood Housing Cycles: Will America's Future Downtowns be Rich?

Abstract: This paper identifies a new factor, the age of the housing stock, that affects where high- and low-income neighborhoods are located in U.S. cities. High-income households, driven by a high demand for housing services, tend to locate in areas of the city where the housing stock is relatively young. Because cities develop and redevelop from the center outward over time, the location of these neighborhoods varies over the city's history. The model predicts a suburban location for the rich in an initial period, when young dwellings are found only in the suburbs, while predicting eventual gentrification once central redevelopment creates a young downtown housing stock. Controlling for other determinants of where the poor live (e.g., proximity to amenities and public transit), empirical work indicates that if the influence of spatial variation in dwelling ages were eliminated, central-city/suburban disparities in neighborhood economic status would be reduced by up to 10 percentage points. Model estimat...

Does pollution increase school absences

Abstract: LTHOUGH substantial policy initiatives are aimed at reducing air pollution, uncertainty remains about the nature and extent of benefits from these actions. Existing epidemiological studies point to a variety of health impacts, but it remains difficult to assess the economic or social values of these impacts. It is also difficult to be confident that existing studies separate the causal impacts of pollution from correlated effects of neighborhoods, poverty, and a variety of household choices. We focus on how pollution affects school absences. By matching detailed schooling records with variations in the level of specific pollutants, we are able to establish a strong link to school absences. A large literature links child health and human capital attainment. Grossman and Kaestner (1997) summarize this literature and point to school absences as a major causal link in this relationship: children who miss a lot of school achieve poorer grades, are less engaged with school, and are more likely to drop out. Absences are also of concern to parents, who have to miss work, and to school districts, because state funding frequently depends on attendance. In states where funding depends on student attendance, schools can lose as much as $50 per day per unexcused absence. Nonetheless, policy interventions that might reduce absences are less clear. Air pollution is a possible cause of school absence for some children. Children with respiratory problems such as

Chronic Disease Burden and the Interaction of Education, Fertility, and Growth.

Abstract: This study considers the eradication of hookworm disease from the American South (circa 1910) as a test of the quantity-quality (Q-Q) framework of fertility. Eradication was principally a shock to the price of quality because of three factors: hookworm (i) depresses the return to human capital investment, (ii) had a very low case-fatality rate, and (iii) had negligible prevalence among adults. Consistent with the Q-Q model, we find a significant decline in fertility associated with eradication.

Social Interactions and Schooling Decisions

Abstract: The aim of this paper is to study whether a child's schooling choices are affected by the schooling choices of other children. Identification is based on a randomized targeted intervention that grants a cash subsidy conditional on school attendance to a subgroup of eligible children within small rural villages in Mexico (PROGRESA). This policy change spills over to ineligible children if social interactions are relevant. Results indicate that the eligible children tend to attend school more frequently, and the ineligible children acquire more schooling when the subsidy is introduced in their local village. Moreover, the overall effect of PROGRESA on eligible children is the sum of a direct effect due to cash transfers and an indirect effect due to changes in peer group schooling. Interestingly, the social interactions effect is almost as important as the direct effect.

Subsidized Contraception, Fertility, and Sexual Behavior

Abstract: We examine the impact of recent state-level Medicaid policy changes that expanded eligibility for family planning services to higher-income women and to Medicaid clients whose benefits would expire otherwise. We show that the income-based policy change reduced overall births to non-teens by about 2% and to teens by over 4%; estimates suggest a decline of 9% among newly eligible women. The reduction in fertility appears to have been accomplished via greater use of contraception. Our calculations indicate that allowing higher-income women to receive federally funded family planning cost on the order of $6,800 for each averted birth.

A New Look at Racial Profiling: Evidence from the Boston Police Department

Abstract: This paper provides new evidence on the role of preference-based versus statistical discrimination in racial profiling using a unique data set that includes the race of both the motorist and the ocer. We build upon the model presented in Knowles, Persico and Todd (2001) and show that their test is not robust to alternative modelling assumptions. However, we also show that if statistical discrimination alone explains dierences in the rate at which the vehicles of drivers of dierent races are searched, then, all else equal, search decisions should be independent of ocer race. We then test this predic

Multinationals and U.S. Productivity Leadership: Evidence from Great Britain

Abstract: We study the productivity of US owned plants in the UK. Using a new dataset that identifies foreign and domestic MNEs, we find that UK MNEs are less productive than US affiliates, but as productive as non US foreign affiliates. We investigate the source of the US and MNE advantage. We find evidence confirming that the MNE advantage is driven by sharing superior firm level assets across plants and by cherry picking the better plants in a country. The additional superiority of US firms seems entirely driven by their particular ability to takeover the best British plants. Thirdly, the study features a novel approach to TFP calculation.

Why Do More Polarized Countries Run More Procyclical Fiscal Policy

Abstract: We study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances—being expansionary in good times and contractionary in bad times. We develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias. We then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality, even after controlling for other determinants from existing theories. We also find a strong negative impact of fiscal procyclicality on economic growth.

Training and union wages

Abstract: This paper investigates whether unions, through imposing wage floors that lead to wage compression, increase on-the-job training. Our analysis focuses on Germany. Based on a model of unions and firm-financed training, we derive empirical implications regarding apprenticeship training intensity, layoffs, wage cuts, and wage compression in unionized and nonunionized firms. We test these implications using firm panel data matched with administrative employee data. We find support for the hypothesis that union recognition, via imposing minimum wages and wage compression, increases training in apprenticeship programs.

Professor Qualities and Student Achievement

Abstract: This paper analyzes the importance of teacher quality at the college level. Instructors are matched to objective and subjective characteristics of teacher quality to estimate the impact of rank, salary, and perceived effectiveness on student performance and subject interest. Student and course fixed effects, time of day and week controls, and students' lack of knowledge about first-year instructors help minimize selection biases. Subjective teacher evaluations perform well in measuring instructor influences on students, while objective characteristics such as rank and salary do not. Overall, the importance of college instructor differences is small, but important outliers exist.

Colonialism and Modern Income -- Islands as Natural Experiments

Abstract: Using a new database of islands throughout the Atlantic, Pacific, and Indian Oceans we find a robust positive relationship between the number of years spent as a European colony and current GDP per capita. We argue that the nature of discovery and colonization of islands provides random variation in the length and type of colonial experience. We instrument for length of colonization using variation in prevailing wind patterns. We argue that wind speed and direction had a significant effect on historical colonial rule but do not have a direct effect on GDP today. The data also suggest that years as a colony after 1700 are more beneficial than earlier years. We also find a discernable pecking order among the colonial powers, with years under U.S., British, French, and Dutch rule having more beneficial effects than Spanish or Portuguese rule. Our finding of a strong connection between modern income and years of colonization is conditional on being colonized at all since each of the islands in our da...

Using Census and Survey Data to Estimate Poverty and Inequality for Small Areas

Abstract: Household expenditure survey data cannot yield precise estimates of poverty or inequality for small areas for which no or few observations are available. Census data are more plentiful, but typically exclude income and expenditure data. Recent years have seen a widespread use of small-area “poverty maps” based on census data enriched by relationships estimated from household surveys that predict variables not covered by the census. These methods are used to estimate putatively precise estimates of poverty and inequality for areas as small as 20,000 households. In this paper we argue that to usefully match survey and census data in this way requires a degree of spatial homogeneity for which the method provides no basis, and which is unlikely to be satisfied in practice. The relationships that are used to bridge the surveys and censuses are not structural but are projections of missing variables on a subset of those variables that happen to be common to the survey and the census supplemented by local census means appended to the survey. As such, the coefficients of the projections will generally vary from area to area in response to variables that are not included in the analysis. Estimates of poverty and inequality that assume homogeneity will generally be inconsistent in the presence of spatial heterogeneity, and error variances calculated on the assumption of homogeneity will underestimate mean squared errors and overestimate the coverage of calculated confidence intervals. We use data from the 2000 census of Mexico to construct synthetic “household surveys” and to simulate the poverty mapping process using a robust method of estimation; our simulations show that while the poverty maps contain useful information, their nominal confidence intervals give a misleading idea of precision.

Consumption and Children

Abstract: Consumption by couples rises sharply in the beginning and falls later in life; the causes of the early rise are hotly contested. Among the suggestions are rule of thumb behavior, demographics, liquidity constraints, the precautionary motive, and nonseparabilities between consumption and labor supply. We develop two tests of the extreme hypothesis that only changes in family structure matter. We estimate effects of the numbers and ages of children on consumption. These estimates allow us to rationalize all of the increase in consumption without recourse to any of the causal mechanisms. Our estimates can be interpreted either as giving upper bounds on the effects of children or as evidence that the other causes are not important.

The Academic Achievement Gap in Grades 3 to 8

Abstract: Using data for North Carolina public school students in grades 3 to 8, we examine achievement gaps between white students and students from other racial and ethnic groups. We focus on cohorts of students who stay in the state's public schools for all six years. While the black-white gaps are sizable and robust, both Hispanic and Asian students tend to gain on whites as they progress in school. Beyond simple mean differences, we find that the racial gaps in math between low-performing students have tended to shrink as students progress through school, while those for high-performing students have generally widened.

Schooling Externalities, Technology and Productivity: Theory and Evidence from U.S. States

Abstract: The literature on schooling externalities in U.S. cities and states is rather mixed: positive external effects of average education levels are hardly found while positive externalities from the share of college graduates are more often identified. We propose a simple model to reconcile this mixed evidence. Our model predicts positive externalities from increased college education and negligible external effects from high school education. Using compulsory attendance/child labor laws, push-driven immigration of highly educated workers, and the location of land-grant colleges as instruments for schooling attainments, we test and confirm the model predictions with data on U.S. states for the period 1960–2000.

Simultaneous Confidence Regions for Impulse Responses

Abstract: Inference about an impulse response is a multiple testing problem with serially correlated coefficient estimates. This paper provides a method to construct simultaneous confidence regions for impulse responses and conditional bands to examine significance levels of individual impulse response coefficients given propagation trajectories. The paper also shows how to constrain a subset of impulse response paths to anchor structural identification and how to formally test the validity of such identifying constraints. Simulation and empirical evidence illustrate the new techniques. A broad summary of asymptotic analytic formulas is provided to make the methods easy to implement with commonly available statistical software.

Interactions between workers and the technology of production: evidence from professional baseball

Abstract: This paper examines how the effort choices of workers within the same firm interact with each other. In contrast to the existing literature, we show that workers can affect the productivity of their co-workers based on income maximization considerations, rather than relying on behavioral considerations such as peer pressure, social norms, and shame. Theoretically, we show that a worker’s effort has a positive effect on the effort of co-workers if they are complements in production, and a negative effect if they are substitutes. The theory is tested using panel data on the performance of baseball players from 1970 to 2003. The empirical analysis shows that a player’s batting average significantly increases with the batting performance of his peers, but decreases with the quality of the team’s pitching. Furthermore, a pitcher’s performance increases with the pitching quality of his teammates, but is unaffected by the batting output of the team. These results are inconsistent with behavioral explanations which predict that shirking by any kind of worker will increase shirking by all fellow workers. The results are consistent with the idea that the effort choices of workers interact in ways that are dependent on the technology of production. These findings are robust to controlling for individual fixed-effects, and to using changes in the composition of one’s co-workers in order to produce exogenous variation in the performance of one’s peers.

Abortion and Selection

Abstract: HE legalization of abortion in the United States in the early 1970s represents one of the most important changes in American social policy in the twentieth century. This policy change had obvious implications for the likelihood of giving birth in the case of an unintended pregnancy, and resulted in a drop in birth rates. In addition, we will demonstrate that it led to a rise in pregnancy rates. As a result of both of these changes, abortion legalization may have altered the characteristics of birth cohorts. In particular, children’s outcomes may have improved on average, because they were more likely to be born into a household in which they were wanted. Two earlier papers have investigated the implications of such positive selection through abortion for the quality of cohorts born after abortion legalization, but have used different sources of variation that, implicitly, relied on different aspects of the selection process. Gruber, Levine, and Staiger (GLS, 1999) examined the living circumstances of children, and focused on the reduction in births caused by initial legalization. Donohue and Levitt (DL, 2001) examined crime among youths, 1 focusing on differences in abortion rates between states after legalization. This paper builds on those results by considering the impact of abortion access on a broad array of cohort characteristics in adulthood. Since the relevant cohorts were born in the early 1970s, children born at that time are now in their thirties. Using the 2000 Census, we can examine adult characteristics, such as completed educational attainment, employment, and poverty status. Beyond evaluating outcomes in adulthood, this paper also makes important contributions by addressing the inconsistent methodological approaches and the implicit models of selection used in past research. The approach of GLS used, as motivation, that (i) after five states repealed anti-abortion laws in 1970, relative birth rates fell in those states; (ii) after the 1973 Roe v. Wade decision, birth rates converged between early legalizing states and other states. They treated these two changes as a two-part experiment in reducing the rate at which unintended pregnancies translated into births. DL, on the other hand, noted that (i) abortion rates continued to rise after 1973, and that (ii) the abortion rate remained persistently higher in the early legalizing states even after widespread legalization. They used these diverging trends in the abortion rate as a measure of variation in the overall level of selection into pregnancy and birth. In this paper, we note that the post-1973 combination of (i) converging birth rates and (ii) persistent differences in abortion rates implies that in the latter half of the 1970s increased abortions did not map perfectly into fewer births. Instead, it must be the case that pregnancy rates rose in early legalizing states relative to other states in the late 1970s. Since the approaches used by GLS and DL rely on different changes in reproductive behavior, they are not equivalent. We introduce a comprehensive model of selection that identifies the two distinct mechanisms—increased pregnancies and decreased births—by which abortion access may alter cohort characteristics. We argue that in the first part of the decade, decreased births in early legalizing states, out of a steady number of unwanted pregnancies, were the dominant force in the selection process. In the late 1970s, on the other hand, we argue that a larger pool of pregnancies in repeal states, from which a steady number of births were selected, means that early legalizing states could continue to have more positively selected cohorts of children even after widespread legalization.