The B.E. Journal of Economic Analysis & Policy

Published by De Gruyter

Volume 11 Issue 1

December 2011

Issue of The B.E. Journal of Economic Analysis & Policy

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Contents
Journal Overview

Advances Article

June 30, 2011

Does One Charitable Contribution Come at the Expense of Another?

David A Reinstein

Abstract

This paper defines, discusses, and measures “expenditure substitution” in charitable giving. Motivated by a model of conditional demand, I consider the extent to which a “temporary shock” that increases an individual's donation to one cause by a particular amount displaces her gifts to other charitable causes. I use the 2001-2007 waves of the PSID/COPPS, the first data set of its kind, to identify this. Households that give more to one type of charity tend to give more to others. However, many of the correlations between the residuals after fixed-effects regressions are negative and significant, particularly for larger donors and for certain categories of charitable giving. Given plausible econometric assumptions, the negative correlations are strong evidence of expenditure substitution. Overall, these results suggest heterogeneous motivations for giving: small givers may be mainly driven by temporary shocks and personal appeals while larger givers may have concave multi-charity warm-glow preferences.

September 29, 2011

Racial Disparities in Credit Constraints in the Great Recession: Evidence from the UK

John Gathergood

Abstract

This paper investigates racial disparities in household credit constraints using UK survey data. We find a widening disparity in the proportion of racial minority households reporting they face credit constraints compared with non-minority households over the period 2006-2009. By 2009 three times as many racial minority households faced credit constraints compared with non-minority households. The difference in credit constraints across racial minority and non-minority households is not explained by a broad set of covariates. While cross-section variation in reported credit constraints might most likely reflect unobservables, we argue this time series variation is very unlikely to arise due to unobservables and is evidence of growing perceived disparity in credit access between racial groups over the period.

November 23, 2011

The Progressivity of Social Security

Julia Lynn Coronado, Don Fullerton, Thomas Glass

Abstract

How much does the current social security system redistribute from rich to poor? We propose alternative concepts of well-being that can be used to classify individuals from rich to poor, and we show how social security redistributes differently under each concept. We use the PSID to estimate lifetime wage profiles and actual earnings each year for a sample of 1778 individuals, and we use mortality probabilities to calculate expected payroll taxes and social security benefits. For a given set of “facts” about the net flows experienced each year by each individual, measured progressivity depends on many assumptions. This paper attempts to capture and to quantify all of the data and characteristics relevant to determine each individual’s “income” under several definitions. We then use each definition of income to classify individuals from rich to poor and to calculate the progressivity of social security. We proceed in seven steps. First, we classify individuals by annual income and use Gini coefficients to find that social security is highly progressive. Second, we reclassify individuals on the basis of lifetime income and find that social security is less progressive. Third, we remove the cap on measured earnings and find that social security is even less progressive. Fourth, we switch from actual to potential lifetime earnings (the present value of the wage rate times 4000 hours each year). This measure captures the value of leisure and home production, so those out of the labor force are less poor, and net payments to them are less progressive. Fifth, we assign to each married individual half of the couple’s income. The low-wage spouse is then not so poor, and social security becomes even less progressive. Sixth, we incorporate mortality probabilities that differ by potential lifetime income. Since the rich live longer and collect benefits longer, social security is no longer progressive. Finally, we increase the discount rate from 2% to 4%, which puts relatively more weight on the earlier-but-regressive payroll tax and less weight on the later-but-progressive benefit schedule. Depending on the definition of income used to classify people, the overall social security system could be deemed progressive, only mildly progressive, or neutral. With an even-higher discount rate, it could even be deemed regressive.

Contributions Article

September 18, 2011

Bertrand Competition in Markets with Network Effects and Switching Costs

Irina Suleymanova, Christian Wey

Abstract

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our model generates four different market patterns: monopolization and market sharing, which can be either preserved or reversed. A critical mass effect where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effects, both monopoly and market sharing equilibria exist. Our welfare analysis reveals a conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms’ incentives for compatibility and incentives to increase switching costs and examine how market outcomes are affected by market expansion and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents’ discount factors.

September 18, 2011

Demanding Customers: Consumerist Patients and Quality of Care

Hai Fang, Nolan H. Miller, John Rizzo, Richard Zeckhauser

Abstract

Consumerism arises when patients acquire and use medical information from sources other than their physicians. This practice has been hailed as a means of improving quality. This need not be the result. Our theoretical model identifies a channel through which consumerism may reduce quality: consumerist patients place additional demands on their doctors’ time, thus imposing a negative externality on other patients. Relative to a world in which consumerism does not exist, consumerism may harm other consumerists, non-consumerists, or both. Data from a large national survey of physicians confirm the negative effects of consumerism: high levels of consumerist patients are associated with lower perceived quality among physicians.

September 29, 2011

The Impact of Class Size on Outcomes in Higher Education

James Monks, Robert M. Schmidt

Abstract

Numerous studies have investigated the impact of class size on student outcomes. This analysis contributes to this discussion by isolating the impact of class size on student outcomes in higher education by utilizing a natural experiment at a selective institution which enables the estimation of class size effects conditional on the total number of students taught by a faculty member. We find that class size negatively impacts student assessments of courses and instructors. Large classes appear to prompt faculty to alter their courses in ways deleterious to students.

November 28, 2011

Estimating Dynamic Income Responses to Tax Reform

Bertil Holmlund, Martin Söderström

Abstract

We study income responses to income tax changes by using a large panel of Swedish tax payers over the period 1991–2002. Changes in statutory tax rates as well as changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. For men, the estimates of the long-run elasticity of income with respect to the net-of-tax rate hover in a range between 0.10 and 0.30. The estimates for women are statistically insignificant. We simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform may have negligible effects on tax revenues when the interactions between income taxes and other taxes are taken into account.

December 11, 2011

Economic Decision-Making in Poverty Depletes Behavioral Control

Dean Spears

Abstract

Economic theory and conventional wisdom suggest that time preference can cause or perpetuate poverty. Might poverty also or instead cause impatient or impulsive behavior? This paper reports a randomized lab experiment and a partially randomized field experiment, both in India, and analysis of the American Time Use Survey. In all three studies, poverty is associated with diminished behavioral control. The primary contribution of this empirical paper is to isolate the direction of causality from poverty to behavior. Three similar possible theoretical mechanisms, found in the psychology and behavioral economics literatures, cannot be definitively separated. One supported theoretical explanation is that poverty, by making economic decision-making more difficult, depletes cognitive control.

December 13, 2011

Are Entry Threats Always Credible?

Utteeyo Dasgupta

Abstract

This paper studies the efficacy of entry threats in a contestable environment using experiments. It is hypothesized here that the entrant firm’s home market profits influence the entrant’s competitive behavior even when entry is costless and completely reversible. In the experiment, entrants and incumbents tacitly collude when each has its own monopoly market. In contrast, an entrant from a competitive market practices hit-and-run entry whenever such opportunities exist, forcing the incumbent monopolist to price at average cost. The experiment results suggest that the usefulness of hit-and-run competitive threat in a contestable environment depends crucially on the relative profits in the entrant’s and the incumbent’s home and entry markets.

December 22, 2011

Why Don't Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertia in Program Selection

Nicholas Turner

Abstract

Tax-based federal student aid is designed to increase postsecondary attendance and ease the financial burden of higher education enrollment by offering students and their families a menu of tax incentives. However, many taxpayers who are eligible for more than one tax-based aid program, and who are limited to one program per student each year, fail to select the single program that offers the largest reduction in taxes. Analyzing a panel dataset of individual income tax returns, I find that in roughly one out of four returns taxpayers and paid preparers fail to select the tax-minimizing tax-based aid program. I find evidence that greater salience of federal tax effects, and inertia in program selection, leads some taxpayers and paid preparers to make non-tax-minimizing selections. Streamlining the set of tax-based aid programs into a single tax incentive is likely to be a more effective way of lowering the costs of postsecondary attendance for students and their families.

December 30, 2011

Medicaid and Ethnic Networks

Emily R. Gee, G. Osea Giuntella

Abstract

Many low-income immigrants are uninsured yet eligible for public health insurance. In this paper, we examine whether language barriers and network effects can explain disparities in insurance Medicaid participation. Using the 2008 and 2009 American Community Survey, we show that linguistic networks facilitate Medicaid enrollment among non-English speaking adults. Our identification method follows Bertrand et al. (2000) and employs local variation in the density of immigrant populations and nationwide variation in Medicaid participation among ethnic groups. Given a hypothetical policy to increase Medicaid enrollment, for every 1 percentage point of direct increase, networks generate a multiplier effect that boosts participation by an additional 0.26 percentage points. Networks have greatest influence on individuals who are not proficient in English or who arrived in the United States more recently. Our results are robust to alternative specifications, including using an ex ante indicator of group-level participation. We also find that the availability of foreign-language Medicaid information online is associated with significantly higher participation.

January 6, 2011

The Influence of Firms on Government

Jeffrey T Macher, John W Mayo, Mirjam Schiffer

Abstract

While interest group explanations have considerably advanced our understanding of governmental outcomes, much remains to be understood about the specific country-level, industry-level and firm-level characteristics that underlie the influence firms have on the establishment of governmental rules, laws and regulations. In this study, we draw upon a unique database of roughly 6000 international firms to investigate the abilities of firms to affect governmental policies. We find that country-level institutional characteristics, such as the legal origin and political diversity of the firm’s home country, significantly affect the ability to influence government. We also find that industry-level characteristics, such as the number of industry competitors, and firm-level characteristics, such as size and age, are determinants of firm influence on governments.

January 14, 2011

Do Rising Top Incomes Lift All Boats?

Dan Andrews, Christopher Jencks, Andrew Leigh

Abstract

Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile’s income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent. However, our estimates imply that it would take 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.

January 25, 2011

Income Distribution, Search and Market Efficiency

Avi Simhon, Arthur Fishman

Abstract

This paper explores the relationship between income distribution, prices, production efficiency and aggregate output in a decentralized search economy. We show that income distribution determines how competitive prices are and thereby affects production efficiency and aggregate output. It is shown that, under reasonable assumptions, it is possible to engineer a judicious transfer of income from high to low income individuals, which increases income equality, leads to more competitive prices, and increases aggregate output.

January 26, 2011

Free Trade, Autarky and the Sustainability of an International Environmental Agreement

Hassan Benchekroun, Halis Murat Yildiz

Abstract

We determine the impact of free trade on the sustainability of an international environmental agreement (IEA) and incorporate it into the assessment of the net benefits of opening up to free trade. We show that such an analysis can reverse the conclusions reached within a standard one-shot game framework. We first examine a one shot game and show that the benefits from an increase in economic activity due to free trade outweigh the extra cost of free trade associated with larger environmental damage. We then consider the infinite repetition of the one-shot game where countries can use trigger strategies and show that there exist circumstances where an IEA is sustainable under autarky but not under free trade. This aggravates the environmental damages caused by free trade and leads to the possibility that welfare may be smaller under free trade than under autarky. This conclusion remains valid even when (i) countries adopt the most cooperative environmental policy when the “fully cooperative” environmental policy is not sustainable or (ii) we consider “intermediate tariff reductions.”

February 2, 2011

Sourcing Premia with Incomplete Contracts: Theory and Evidence

Wilhelm K Kohler, Marcel Smolka

Abstract

Drawing on Grossman & Helpman (2004) and Antràs & Helpman (2004), we identify general conditions that result in an unambiguous mapping of a firm’s productivity level into the organizational form and location of its input sourcing. Using a detailed 2006-2008 data set for Spanish manufacturing firms, we then establish a number of stylized facts about firm-level heterogeneity in sourcing strategies that have largely gone unnoticed in existing literature on input sourcing. Finally, we explore this heterogeneity through econometric estimation of productivity premia associated with different sourcing strategies. We find a robustly significant premium on a strategy that features offshore production of intermediate inputs through a related party (vertical integration). Lower productivity premia are found for strategies that rely on outsourcing to unrelated parties abroad or on vertical integration within the home economy. Across all specifications employed, estimated mean productivity is lowest for domestic-outsourcing firms.

February 13, 2011

Electoral Endorsements and Campaign Contributions

Elena Panova

Abstract

This paper models information transmission in an electoral campaign. The voters have conflicting policy interests, but they are congruent in their desire to elect a competent politician. They hold private information about the candidates for office, and they use endorsements and campaign contributions to signal their information, so as to advertise their most preferred candidates. Endorsements are cheap talk, but campaign contributions are costly, hence, contributions are stronger signals than endorsements. Therefore, contributions help to transmit information when voter interests are relatively divergent (however, not so much that campaigning is useless).

March 1, 2011

Competition and Performance in the Marketplace for Religion: A Theoretical Perspective

Mukesh Eswaran

Abstract

This paper, which contributes to the literature that rigorously models religious markets, offers a theoretical framework that incorporates demand and supply sides. The model can accommodate Adam Smith’s view that competition may possibly improve on monopoly’s performance and also David Hume’s opposite view that, because the clergy have an incentive to distort the message of religion, monopoly might possibly improve on competition. Impacts on religiosity of greater diversity and of increased competition in the marketplace for religion are isolated. It is shown that while greater diversity benefits the devout (as claimed by “supply-side” theorists), increased competition dilutes spiritual standards by encouraging monetary donations at the expense of genuine piety. These opposing effects of diversity and competition help reconcile apparently contradictory empirical findings on the American religious market and also those suggesting European “exceptionalism.”

March 4, 2011

Unitization of Spatially Connected Renewable Resources

Daniel T Kaffine, Christopher Costello

Abstract

Spatial connectivity of renewable resources induces a spatial externality in extraction. We explore the consequences of decentralized spatial property rights in the presence of spatial externalities. We generalize the notion of unitization—developed to enhance cooperative extraction of oil and gas fields—and apply it to renewable resources which face a similar spatial commons problem. We find that unitizing a common pool renewable resource can yield first-best outcomes even when participation is voluntary, provided profit sharing rules can vary by participant.

March 19, 2011

Market Provision of Program Quality in the Television Broadcasting Industry

Panlang Lin

Abstract

This paper uses a simple model of duopoly competition to study the market provision of program quality offered by television broadcasters under three different regimes. In regime 1, two broadcasters are financed only with subscription fees (i.e., fee-based or pay TV). In regime 2, the two broadcasters generate their revenues only from advertising (i.e., free TV). In regime 3, one pay TV broadcaster competes with one free TV broadcaster. We show that the broadcasters in regime 3 (but not in regimes 1 and 2) vertically differentiate their channel programs if, for a given level of advertising market profitability, viewers strongly or weakly dislike the presence of advertising. In such cases, although the two pay TV broadcasters in regime 1 will unambiguously offer higher or lower quality programming than the two free TV broadcasters under regime 2, it is not clear which broadcaster will provide higher or lower program quality in regime 3 because this depends on the degree of horizontal differentiation between the channel programs. However, the levels of quality offered under regimes 1 and 2 fall between the quality levels offered by the two broadcasters in regime 3.

April 11, 2011

Being The New York Times: the Political Behaviour of a Newspaper

Riccardo Puglisi

Abstract

I analyse a dataset of news from The New York Times, from 1946 to 1997. Controlling for the activity of the incumbent president and the U.S. Congress across issues, I find that during a presidential campaign, The New York Times gives more emphasis to topics on which the Democratic party is perceived as more competent (civil rights, health care, labor and social welfare) when the incumbent president is a Republican. This is consistent with the hypothesis that The New York Times has a Democratic partisanship, with some “anti-incumbent” aspects, in that—during a presidential campaign—it gives more emphasis to issues over which the (Republican) incumbent is weak. To the extent that the interest of readers across issues is not systematically related with the political affiliation of the incumbent president and the election cycle, the observed changes in news coverage are consistent with The New York Times departing from demand-driven news coverage. In fact, I show that these findings are robust to controlling for Gallup data on the most important problem facing the country, which I use as a proxy for issue tastes of Times’ readers.

April 12, 2011

The Market Crash and Mass Layoffs: How the Current Economic Crisis May Affect Retirement

Courtney C Coile, Phillip B Levine

Abstract

Recent dramatic declines in U.S. stock and housing markets have led to widespread speculation that shrinking retirement accounts and falling home equity will lead workers to delay retirement. Yet the weakness in the labor market and its impact on retirement are often overlooked. If older job seekers have difficulty finding work, they may retire earlier than expected. The net effect of the current economic crisis on retirement is thus far from clear. In this paper, we use 30 years of data from the March Current Population Survey to estimate models relating retirement decisions to fluctuations in equity, housing, and labor markets. We find that workers age 62 to 69 are responsive to the unemployment rate and to long-run fluctuations in stock market returns. Less-educated workers are more sensitive to labor market conditions and more-educated workers are more sensitive to stock market conditions. We find no evidence that workers age 55 to 61 respond to these fluctuations or that workers at any age respond to fluctuating housing markets. On net, we predict that the increase in retirement attributable to the rising unemployment rate will be almost 50 percent larger than the decrease in retirement brought about by the stock market crash.

April 14, 2011

Comparative Advantage and Skill-Specific Unemployment

Mario Larch, Wolfgang Lechthaler

Abstract

We introduce unemployment and endogenous selection of workers into different skill-classes in a trade model with two sectors and heterogeneous firms. This allows us to identify three different channels through which trade liberalization can affect unemployment: specialization, changes in productivity, and mobility. These three channels may work in opposite directions and their relative importance depends on the type of trade (intra-industry trade vs. inter-industry trade) and the skill-class of a worker. We show that the gains from trade are distributed very unequally. When a skilled worker abundant country opens up to trade with a country that is unskilled worker abundant, the biggest losers are the skilled workers in the import sector in the skill abundant country. However, average unemployment among skilled workers goes down, while average unemployment among unskilled workers goes up.

May 2, 2011

The Labor Supply Consequences of Employment-Limiting Social Insurance Benefits: New Tests for Income Effects

Henry R Hyatt

Abstract

Studies of moral hazard in employment-limiting social insurance programs such as Unemployment Insurance or Workers Compensation have demonstrated that higher benefits discourage work, emphasizing the price distortion inherent in benefit provision. Utilizing administrative data linking Workers’ Compensation claim records to wage records from an Unemployment Insurance payroll tax database, I explore a different explanation and implement tests for “income effects” that exploit the fact that claimants no longer experience a distorted price of non-employment after an employment-limiting benefit ends. A pair of legislative changes to a Workers’ Compensation benefit rate show little or no evidence of income effects and moderate evidence of income effects, respectively.

May 16, 2011

Rent Control Rationing and Community Composition: Evidence from Massachusetts

David P Sims

Abstract

This paper investigates whether rent control affects community socioeconomic composition. In particular, do rent controls increase the presence of poor and minority residents in a locale? Theoretically, the effect of rent control on community composition is ambiguous, as it depends upon several factors including willingness to occupy controlled apartments, landlord imposed rationing mechanisms, and spillover effects of rent controlled housing on uncontrolled units. Using census data on how Cambridge, Massachusetts and nearby communities responded to the state imposed end of rent control, I find evidence that rent control increased the presence of minority residents but also decreased the proportion of poor residents. This evidence is robust to alternate control areas and several specification checks. I also find that despite its positive impact on minority membership, rent control is associated with an increase in traditional measures of residential segregation.

May 16, 2011

Ordering Renewable Resources: Groundwater, Recycling, and Desalination

James Roumasset, Christopher A Wada

Abstract

Optimal recycling of minerals can be thought of as an integral part of the theory of the mine. In this paper, we consider the role that wastewater recycling plays in the optimal extraction of groundwater, a renewable resource. We develop a two-sector dynamic optimization model to solve for the optimal trajectories of groundwater extraction and water recycling. For the case of spatially increasing recycling costs, recycled water serves as a supplemental resource in transition to the steady state. For constant unit recycling cost, recycled wastewater is eventually used as a sector-specific backstop for agricultural users, while desalination supplements household groundwater in the steady state. In both cases, recycling water increases welfare by shifting demand away from the aquifer, thus delaying implementation of costly desalination. The model provides guidance on when and how much to develop resource alternatives.

June 7, 2011

The Wage Impact of Immigration in Germany - New Evidence for Skill Groups and Occupations

Max Friedrich Steinhardt

Abstract

This paper contributes to the ongoing debate regarding the appropriate approach to use in identifying the impact of immigration on native workers’ labor market outcomes. The initial regression analysis makes use of German administrative data and is based on the variation of foreign workers’ shares within education-experience cells over time. It confirms previous findings suggesting that immigration in Germany had no adverse impact on native wages. However, the paper highlights that in Germany immigrants and natives with similar education and experience are likely to work in different occupations. The subsequent analysis based on occupational clustering uses the same data and finds significant adverse wage effects for natives, particularly for those in basic service occupations. The paper argues, therefore, that an identification strategy based on formal education characteristics might lead to biased estimates if a country’s labor market is characterized by occupational segmentation of immigrants.

June 10, 2011

Linking Policy to Statistical Uncertainty in Air Pollution Damages

Nicholas Z Muller

Abstract

This study uses Monte Carlo analysis to characterize the uncertainty associated with per-ton damage estimates for 565 electric generating units (EGUs) in the contiguous United States (U.S.) This analysis focuses on damage estimates produced by an Integrated Assessment Model (IAM) for emissions of five local air pollutants: sulfur dioxide (SO2), nitrogen oxides (NOx), volatile organic compounds (VOCs), ammonia (NH3), and fine particulate matter (PM2.5). For each power plant and pollutant, the Monte Carlo procedure yields an empirical distribution for the damage per ton, or marginal damage. The paper links uncertainty in marginal damages to air pollution policy in two ways. First, the paper characterizes uncertainty in the magnitude of the marginal damages which is relevant to policymakers in determining the stringency of pollution controls. Second, the paper explores uncertainty in the relative damages across power plants. Relative damages are important if policymakers elect to design efficient regulations that vary in stringency according to where emissions are released. The empirical section of the paper finds that the marginal damage distributions are positively skewed and they are more variable for sources in urban areas than rural locations. The paper finds that uncertainty in three input parameters has the greatest impact on uncertainty in the magnitude of damages: the adult mortality dose-response parameter, the mortality valuation parameter, and air quality modeling. The analysis also finds that for each pollutant except for NOx only uncertainty in air quality modeling impacts efficient trading ratios calibrated to each firm's marginal damages.

June 13, 2011

A Deadly Disparity: A Unified Assessment of the Black-White Infant Mortality Gap

Todd E Elder, John H Goddeeris, Steven J Haider

Abstract

We provide a unified assessment of a striking disparity in the United States: the differential rate at which white and black infants die. We separate the overall mortality gap into three temporal components—fitness at birth, conditional neonatal mortality, and conditional post-neonatal mortality—and quantify the extent to which each of the components can be predicted using a flexible reweighting method. Almost 90 percent of the overall mortality gap is due to differential fitness at birth, little of which can be predicted by racial differences in background characteristics. The remaining mortality gap stems from conditional post-neonatal mortality differences, nearly all of which can be predicted by background characteristics. The predictability of the mortality gap has declined substantially over the past two decades, largely because the mortality gap among extremely low-fitness infants is increasingly unrelated to background characteristics.

June 14, 2011

Immigration, Family Responsibilities and the Labor Supply of Skilled Native Women

Lidia Farré, Libertad González, Francesc Ortega

Abstract

We investigate the effect of immigration on the labor supply of skilled women, using data on Spain’s large recent immigration wave. We adopt a spatial correlations approach and instrument for current immigration using ethnic networks. We find that female immigration increases the local availability of household services and reduces their price. It also increases the labor supply of skilled native women, by allowing them to return to work earlier after childbirth, and to continue working while caring for elderly dependents. Immigration can account for one third of the recent increase in the employment rate of college-educated women providing child or elderly care.

June 15, 2011

Distress in the Financial Sector and Economic Activity

Mark A Carlson, Thomas King, Kurt Lewis

Abstract

We construct daily market-based measures of distance to default for large U.S. financial institutions since 1973. These measures have significant predictive power for institution bankruptcy more than one year in advance. We aggregate the distances to default across institutions to provide an index of the overall health of the financial-services industry. We show that deteriorations in this Financial Institution Health Index are associated with tighter lending standards and higher interest rates on bank loans and precede declines in employment and industrial production. We argue that this points to the condition of financial institutions as an independent source of macroeconomic variability, distinct from traditional accelerator mechanisms.

June 15, 2011

Fiscal Reforms in General Equilibrium: Theory and an Application to the Subsidy Debate in Iran

Firouz Gahvari, Farzad Taheripour

Abstract

This paper estimates the pattern of consumer expenditures in Iran in an attempt to measure the welfare cost of price subsidies in that country and shed light on possible fiscal reforms. We use the Quadratic Almost Ideal Demand System (Banks et al. (1997)) as our framework for estimation. We show that the general equilibrium fiscal interaction effects play a crucial role in determining the amount the government saves by eliminating the price subsidy of a particular good. Interestingly, eliminating price subsidies on utilities saves the government little by way of revenues and is welfare reducing. Comparing the gains for non-marginal with marginal reforms a la Ahmad and Stern (1984), we also show that the two approaches may not necessarily recommend the same reform.

June 17, 2011

Technology Licensing by Advertising Supported Media Platforms: An Application to Internet Search Engines

Geza Sapi, Irina Suleymanova

Abstract

We develop a duopoly model with advertising supported platforms and analyze incentives of a superior firm to license its advanced technologies to an inferior rival. We highlight the role of two technologies characteristic for media platforms: the technology to produce content and to place advertisements. Licensing incentives are driven solely by indirect network effects arising from the aversion of users to advertising. We establish a relationship between licensing incentives and the nature of technology, the decision variable on the advertiser side, and the structure of platforms’ revenues. Only the technology to place advertisements is licensed. If users are charged for access, licensing incentives vanish. Licensing increases the advertising intensity, benefits advertisers and harms users. Our model provides a rationale for technology-based cooperations between competing platforms, such as the planned Yahoo-Google advertising agreement in 2008.

June 27, 2011

Does a Minimum Quality Standard Always Reduce the Price of High Quality Products?

John C Panzar, Ian Savage

Abstract

This paper investigates the standard finding that instituting a minimum quality standard within a vertically differentiated market unambiguously benefits consumers of high quality products. A competitive model is specified in which random cost shocks lead some firms to cheat in equilibrium on their reputation for high quality. When cheating occurs, instituting or raising the level of a minimum standard can lead to the price of high quality products either increasing or decreasing. The effect of a minimum quality standard on the price of high quality products becomes an empirical rather than a theoretical issue.

August 2, 2011

Private Schools and Residential Choices: Accessibility, Mobility, and Welfare

Eric A Hanushek, Sinan Sarpça, Kuzey Yilmaz

Abstract

Private schools free households from a strict link between residential location decisions and the tax-school quality bundles they consume. In order to study the impact of private schools on educational outcomes, we develop a general equilibrium model that simultaneously incorporates locational choice built on access and locational choice built on tax-school quality attributes of jurisdictions. We conclude that private school choice enhances the welfare of all households—both those attending private schools and those attending public schools—while also working to reduce the amount of housing and school segregation in equilibrium. Investigation of alternative school policies indicates that greater choice, including using targeted school vouchers, can improve welfare and achievement. Finally, we demonstrate how the fiscal burden arising from some households paying less taxes than they consume in public services varies significantly with the structure of school choice options.

August 5, 2011

Probabilistic Heterogeneous Patent Protection and Innovation Incentives

Luca Spinesi

Abstract

Using a general equilibrium framework, this paper shows that imperfect and heterogeneous patent protection across industries affects the relative innovation incentives of firms and the skill premium. It is found that tighter patent enforcement in some industries allows a patent enforcement externality effect to emerge, whereby varieties with relatively softer patent protection have relatively stronger innovation incentives. The theoretical mechanisms hold for a wide range of the elasticity of substitution between varieties and also hold in a North-South framework when IPR harmonization is considered. A numerical simulation shows that merging both endogenous technological change and institutional aspects in the form of imperfect and heterogeneous IPR protection can contribute to explaining the different innovation and wage inequality performances of the U.S. and the EU regions.

August 8, 2011

Anticommons and Optimal Patent Policy in a Model of Sequential Innovation

Gastón Llanes, Stefano Trento

Abstract

We present a model of sequential innovation in which innovators use several research inputs to invent new goods. We extend work by Shapiro (2001) and Lerner and Tirole (2004) by studying the effects of increases in the number of patented research inputs on innovation incentives and optimal patent policy. We consider not only the effects on the incentives to invent final goods, but also on the incentives to invent research inputs (ex-ante effect). We find increasing complexity has a negative effect on innovation activity in the final goods sector when research inputs are complements. Either limiting market power through weaker patents or reducing the lack of coordination through patent pools may solve this problem. We also find the optimal patent breadth and show it is increasing in the elasticity of substitution between the inputs used in research and decreasing (increasing) in the complexity of the R&D process when research inputs are complements (substitutes).

August 8, 2011

An Economic Analysis of Participation and Time Spent in Physical Activity

Brad R Humphreys, Jane E Ruseski

Abstract

This paper develops and estimates an economic model of physical activity that distinguishes between the participation and duration decisions (extensive and intensive margins). Results from IV estimators indicate that economic factors like income and opportunity cost of time are important determinants of physical activity and affect the participation and time spent decisions differently. Individuals with higher income are more likely to participate but, conditional on participation, spend less time engaged in physical activity. Individual characteristics like gender, race, marital status and having children also play an important role in the participation and duration decisions.

August 15, 2011

The Fragility of Estimated Effects of Unilateral Divorce Laws on Divorce Rates

Jin Young Lee, Gary Solon

Abstract

Following an influential article by Friedberg (1998) on the response of divorce rates to the adoption of unilateral divorce laws, Wolfers (2006) explored the sensitivity of Friedberg’s results to allowing for dynamic response. We in turn explore the sensitivity of Wolfers’s results to variations in estimation method and functional form, and we find that the results are extremely fragile. We conclude first that the impact of unilateral divorce laws remains unclear. Second, we make the methodological point that identification in differences-in-differences research becomes weaker in the presence of dynamics, especially in the presence of unit-specific time trends.

August 15, 2011

When Does Institutional Investor Activism Increase Shareholder Value?: The Carbon Disclosure Project

Eun-Hee Kim, Thomas Lyon

Abstract

This paper presents the first empirical test of the financial impacts of institutional investor activism towards climate change. Specifically, we study the conditions under which share prices are increased for the Financial Times (FT) Global 500 companies due to participation in the Carbon Disclosure Project (CDP), a consortium of institutional investors with $57 trillion in assets. We find no systematic evidence that participation, in and of itself, increased shareholder value. However, by making use of Russia’s ratification of the Kyoto Protocol, which caused the Protocol to go into effect, we find that companies’ CDP participation increased shareholder value when the likelihood of climate change regulation rose. We estimate the total increase in shareholder value from CDP participation at $8.6 billion, about 86% of the size of the carbon market in 2005. Our findings suggest that institutional investor activism towards climate change can increase shareholder value when the external business environment becomes more climate conscious.

August 22, 2011

Behavioral Response to Stock Abundance in Exploiting Common-Pool Resources

Junjie Zhang

Abstract

Successful regulation of common-pool resources calls for a better understanding of resource exploitation behavior. This paper introduces an approach that can measure fishermen's responsiveness to stock changes more accurately. In order to deal with the challenge of the latent fish stock, I adopt the method proposed by Zhang and Smith (2011) that derives a stock index from a heterogeneous production function. I use the imputed stock proxy in a count data model that describes fishing trip frequency. By these two steps, I can estimate the stock elasticity of fishing mortality. In the empirical study of the reef-fish fishery in the northeastern Gulf of Mexico, I find that the popular method that uses catch rate as a stock proxy significantly underestimates fishermen's responses to stock changes. This result suggests that policy predictions based on the traditional method are overly optimistic.

August 24, 2011

Group Decision-Making and Voting in Ultimatum Bargaining: An Experimental Study

Alexander Elbittar, Andrei Gomberg, Laura Sour

Abstract

We conduct a laboratory study of the group-on group ultimatum bargaining with restricted within-group interaction. In this context, we concentrate on the effect of different within-group voting procedures on the bargaining outcomes. Our experimental observations can be summarized in two propositions. First, individual responder behavior across treatments does not show statistically significant variation across voting rules, implying that group decisions may be viewed as aggregations of independent individual decisions. Second, we observe that proposer behavior significantly depends (in the manner predicted by a simple model) on the within-group decision rule in force among the responders and is generally different from the proposer behavior in the one-on-one bargaining.

August 29, 2011

Booms, Busts, and Divorce

Judith K Hellerstein, Melinda Sandler Morrill

Abstract

For almost a century, anecdotes have suggested that divorce rates decline during recessions. However, until very recently there has been surprisingly little formal empirical evidence on whether such a link exists, let alone its magnitude if it does. Moreover, the anticipated direction of the effect is ambiguous theoretically. Although previous studies have concluded that individual job loss destabilizes marriages, macroeconomic conditions may affect divorce probabilities even for those not directly experiencing a job shock. We add to the few existing contemporaneous studies of the effects of macroeconomic shocks on divorce by conducting an empirical analysis of the relationship between state-level unemployment rates and state-level divorce rates using vital statistics data on divorces in the United States from 1976-2009. We find a significant and robust negative relationship between the unemployment and divorce rates, whereby a one percentage point rise in the unemployment rate is associated with a decrease of 0.043 divorces per one thousand people, or about a one percent fall in the divorce rate. The result that divorce is pro-cyclical is robust to a host of alternative empirical specifications, to disaggregating by state characteristics and time period, to expanding the unemployment series back to 1970, and to using alternative measures of local economic conditions.

September 13, 2011

Product Market Competition and Investments in Cooperative R&D

Jeroen Hinloopen, Jan Vandekerckhove

Abstract

Building on the framework developed by Qiu (1997) we investigate the influence of product market competition on incentives to invest in cooperative R&D. For that we disentangle the three components that make up the combined-profits externality. The strategic component is always negative and the size component is always positive. The spillover component is negative (positive) with Bertrand (Cournot) competition. Cournot competition thus yields more cooperative R&D, which could drive the Cournot-Nash price below the Bertrand-Nash price. Our decomposition also explains why, under Cournot competition, cooperative R&D exceeds non-cooperative R&D only if spillovers are “high enough.”

Topics Article

January 6, 2011

Oligopoly on a Salop Circle with Centre

Paul Madden, Mario Pezzino

Abstract

We study an oligopolistic market in which consumers located around the perimeter of a Salop circle buy either from firms around this perimeter (providing horizontally differentiated goods) or from a firm located at the centre of the circle (providing a homogeneous good). An entry-pricing game is studied. The market equilibria and social optima indicate various possible market failures, including cases in which the market is served only by perimeter firms whilst central provision would be socially optimal (in this sense, more extreme than the standard Salop excessive product differentiation). Moreover, for some parameters, the standard Salop result might be reversed.

January 6, 2011

Can Rising Inequality Explain Aggregate Trends in Marriage? Evidence from U.S. States, 1977-2005

Tristan P. Coughlin, Scott D Drewianka

Abstract

We investigate the hypothesis that rising wage inequality caused declines in the U.S. aggregate marriage hazard since 1970. Despite confirming previous findings that inequality accounts for much of the decline among young adults before 1990, we find that the aggregate marriage hazard became much less sensitive to inequality thereafter. Our explanation for the weakened relationship relies on the theoretical prediction, which we verify empirically, that inequality influences marital decisions of young singles much more than those of older singles. The aggregate marriage hazard thus became less responsive to inequality over this period because the unmarried population became older.

January 14, 2011

On the Importance of the Tax System in Marginal Cost of Funds Calculations

Mickael Beaud

Abstract

Several papers have attempted to derive computable analytical formulas for the Marginal Cost of Funds (MCF). However, this literature is often cast in the pure labor supply general equilibrium model, which is not completely consistent with real tax systems where Labor Income Taxation (LIT) is not the only instrument used by governments. Hence, we explicitly introduce Value-Added Taxation (VAT) on consumption goods in the conventional model, and we derive an analytical formula for the MCF which does incorporate general equilibrium interactions between the different tax bases. Then, we illustrate how much this matter for empirical estimates of MCF using French data. Our numerical example suggests that, when computing MCF for a LIT reform, taking account of the impact of LIT reform on tax revenue from VAT can make a great deal of difference, typically increasing MCF and accounting for around 0.2 to 0.8 of estimates. In addition, MCF is then really less likely to be less than one than in the conventional framework.

January 14, 2011

Job Search, Conditional Treatment and Recidivism: The Employment Services for Ex-Offenders Program Reconsidered

Herman J Bierens, Jose R Carvalho

Abstract

The objective of this paper is to re-evaluate the effect of the 1985 “Employment Services for Ex-Offenders” (ESEO) program on recidivism in San Diego, Chicago and Boston. The initial group of program participants was split randomly in a control group and a treatment group. The actual treatment (mainly being job related counseling) only takes place conditional on finding a job and not having been arrested for those selected in the treatment group. We use interval-censored proportional hazard models for job search and recidivism time, where the latter model incorporates the conditional treatment effect, depending on covariates. We find that the effect of the program depends on location and age. The ESEO program reduces the risk of recidivism only for ex-inmates over the age of 27 in San Diego and Chicago and over the age of 36 in Boston, but increases the risk of recidivism for the other ex-inmates in the treatment group.

January 14, 2011

Will Border Carbon Adjustments Work?

Niven Winchester, Sergey Paltsev, John M Reilly

Abstract

The potential for greenhouse gas (GHG) restrictions in some nations to increased emissions in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the impact of border carbon adjustments (BCAs) outlined in the American Clean Energy and Security Act of 2009 (H.R. 2454), using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage, but may be an effective coercion strategy.

February 3, 2011

Determinants of the Differences in the Downstream Vertical Integration and Efficiency Implications in Agricultural Cooperatives

Idana Salazar, Carmen Galve Górriz

Abstract

This study investigates the explanatory variables affecting the agricultural cooperatives decision of downstream vertical integration into the transformation of the products supplied by their members. The study also analyses the effect of the vertical integration decision on the efficiency obtained. This analysis has been carried out by means of a two-step methodology suggested by Heckman (1979) over a sample of Spanish agricultural cooperatives belonging to the Qualified Denomination of Origin La Rioja. The results obtained show that those cooperatives, which have adopted Actualisation Mechanisms of social capital, high dedication to agricultural activity, and high rate of capacity utilization are more likely to integrate within the cooperative another stage of the production cycle. Furthermore, the results show that the most efficient cooperatives are those with a higher level of downstream vertical integration.

February 14, 2011

Tax Policy to Reduce Carbon Emissions in a Distorted Economy: Illustrations from a South Africa CGE Model

Shantayanan Devarajan, Delfin S Go, Sherman Robinson, Karen Thierfelder

Abstract

Noting that developing countries may not have the administrative capacity to levy a “pure” carbon tax, we compare the impact of alternative energy taxes with that of a carbon tax in an economy with multiple distortions. We use a disaggregated computable general equilibrium (CGE) model of the South African economy and simulate a range of tax policies that reduce CO2 emissions by 15 percent. Consistent with a “first-best” economy, a carbon tax will have the lowest marginal cost of abatement. But the relationship between a tax on energy commodities and one on pollution-intensive commodities depends critically on other distortions in the system and on structural rigidities in the economy. We demonstrate that if South Africa were able to remove distortions in the labor market, the cost of carbon taxation would be negligible. We conclude that the welfare costs of taxing carbon emissions in developing countries depend more on other distortions than on the country’s own carbon emissions.

March 7, 2011

Training and Turnover with Equilibrium Unemployment

Thomas J. Carter

Abstract

Government policies that promote on-the-job training have different effects when, due to unemployment, workers value job security. In this case, an increase in specific training leads to greater job security and lower wages. The wage result, although perhaps counterintuitive, is supported by, and helps explain, published empirical work. Even with lower wages, training policies may be Pareto-improving or may lower welfare, depending on the elasticity of demand for labor. Training mandates and subsidies to training, because of their differing impacts on job security, have different unemployment and welfare effects; mandates are preferred. If government policy can influence specific training and job security independently, training is never optimally encouraged. Policies that promote general training and policies that promote specific training can both raise employment, but in different ways. Specific training lowers the employment outflow; general training raises the employment inflow.

March 30, 2011

Advertising Versus Sales in Demand Creation

Gal Hochman, Oded Hochman, Eithan Hochman, Amir Heiman, PingSun Leung

Abstract

We investigate the dynamics of a firm whose advertisements and sales contribute to its customers’ stock of goodwill. An advertising campaign precedes the firm’s sales when the marginal product of advertisement is sufficiently large (e.g., Amazon Kindle and Apple Macintosh), whereas sales of a new brand of a familiar product may start without advertising (e.g. Crocs shoes). When the firm chooses both advertising and sales policies, the optimal solutions can be divided into two groups typified by low and high demand elasticities. When demand elasticity is low, a massive increase in the quantity sold causes a considerable drop in the product's price. Therefore, the firm prefers to use advertising, rather than excess sales. With high demand elasticity, a massive increase in the quantity sold reduces the price only marginally, thus sales becomes a relatively cheap way to build up the stock of goodwill, compared with advertising.

April 11, 2011

Competition and Welfare Effects of VAT Exemptions

Helmut M Dietl, Christian Jaag, Markus Lang, Urs W.O. Trinkner

Abstract

Distortions under the value-added tax (VAT) arise partly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities. We analyze the effects of such asymmetric tax regimes on market shares, optimal prices, tax receipts, and social welfare. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of such tax exemptions depends on the fraction of VAT-rated inputs versus the fraction of non-rated customers. We further elucidate main competitive impacts of VAT policies, while showing their consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. Our paper provides guidance on how to resolve the policy trade-off between a level playing field in the market, consumer surplus, and government tax revenue.

April 12, 2011

Factor Demand Analysis for Ethanol in the U.S. Refinery Industry

Malika Chaudhuri, Glynn T Tonsor, H. Christopher Peterson

Abstract

Ethanol is increasingly being used as a gasoline oxygenate and a volume extender in the refinery and blender industry in the U.S. This paper estimates refinery and blender factor demand and evaluates price responsiveness of inputs. The study also tests hypotheses regarding existence of structural change in the industry’s demand for inputs. It determines the common shift point and adjustment rate characterizing the transition path of structural change for the set of inputs using gradual switching multivariate regression techniques and maximum likelihood methods. Results suggest structural change in factor demand for inputs in the refinery and blender industry has been initiated in January 2001 at slow adjustment rates. Results also suggest that with the exception of labor and capital, demand responsiveness for inputs to own price changes has decreased over time. The Hicks-Allen cross price elasticity estimates also suggests role-reversal for usage of ethanol in the refinery industry across regimes, with the latter being increasingly used as a substitute than as a complement with time.

May 2, 2011

Small Fish Become Big Fish: Mergers in Stackelberg Markets Revisited

Duarte Brito, Margarida Catalão-Lopes

Abstract

This paper analyzes, under convex costs, the price effects of mergers involving two Stackelberg followers that together become a leader and revisits the “merger paradox” and the insiders' dilemma. Contrary to what might be expected, prices are more likely to increase with cost convexity than with linear costs. Also, the incentive to free-ride may reappear.

May 13, 2011

French Automobiles and the Chinese Boycotts of 2008: Politics Really Does Affect Commerce

Canhui Hong, Wei-Min Hu, James E. Prieger, Dongming Zhu

Abstract

We explore the economic impact of boycotts of French automobiles in China during the time of the 2008 Beijing Olympics. Conditions were favorable for a boycott, enabling Chinese consumers to overcome the collective action problems that can prevent boycott success and other voluntary contributions to public goods. We use brand and model level data in a difference-in-difference specification to investigate the boycotts’ effects on sales. A robust pattern of large impacts emerges: sales of French automobile brands fell 25-33 percent or more. Consumers substituted mostly toward Chinese and other Asian cars. The sales of the French models did not experience similar relative sales declines in countries other than China—triple-difference estimates point toward even larger relative loss of market share in China. Our results provide evidence that commerce can be used as an effective political weapon.

May 25, 2011

A Tail-Payoff Puzzle in Dynamic Pollution Control

Antti Iho, Mitri Kitti

Abstract

We analyze dynamic models with negative externalities occurring from production capital and input use. We uncover a puzzle related to such models: evaluated with a social welfare function, the steady-state outcome of a socially optimal policy, and thus the tail of the corresponding payoff sequence, may yield a smaller social payoff than a market outcome. The main questions we address are under what conditions this phenomenon arises and how general it is. We show that there are always Pareto-optimal policies which lead to the puzzle when the discount rate is fixed. In addition to discounting, the driving force of our results is that the periodic pollution and profits are linked to production capital. We demonstrate the puzzle with a model for controlling phosphorus losses from crop production. We argue that the puzzle should be taken into account in the policy analysis of dynamic problems, including negative externalities.

June 3, 2011

Men in Transit and Prostitution: Using Political Conventions as a Natural Experiment

Scott Cunningham, Todd D Kendall

Abstract

Approximately 100,000 visitors came to Denver, Colorado and Minneapolis, Minnesota to attend the 2008 Democratic and Republican National Conventions. Economic theory suggests that men in transit can shift demand for commercial sex work. We estimate the responsiveness of labor supply to these two conventions, focusing on a previously neglected but increasingly important segment of the prostitution market: indoor sex workers who advertise on the Internet. Using a differences-in-differences estimator of prostitution advertisements posted on a major classified ads website, we find that the conventions caused a 29-44 percent increase in advertisements in Minneapolis and a 47-77 percent increase in Denver. Given the key role prostitution plays in the transmission of STIs, these results imply that focusing public health resources on men in transit may be beneficial.

June 18, 2011

Identifying In-Group and Out-Group Effects in the Trust Game

Alexander Smith

Abstract

This paper presents an experiment measuring how lab-induced group identity affects trust and trustworthiness in a repeated trust game with random matching. Identity had positive in-group and negative out-group effects on trust. However, the in-group effect was small and statistically insignificant, while the out-group effect was large. Trustworthiness was determined mainly by reciprocity effects.

July 15, 2011

Does Product Market Competition Increase Credit Availability?

Vittoria Cerasi, Alessandro Fedele

Abstract

With asymmetric information between investors and firms, credit availability is affected by the resale value of collateralized productive assets. If liquidation occurs, investors recover a greater value the higher the probability to find a buyer and the higher his willingness to pay to use the assets for production. We extend the idea of complementarities among firms in the same industry (as in Shleifer and Vishny, 1992) to study under which conditions credit availability is enhanced by competition in the product market when assets are industry specific.

July 26, 2011

Growth and Innovation Policy in a Small, Open Economy: Should You Stimulate Domestic R&D or Exports?

Brita Bye, Taran Faehn, Leo A. Grünfeld

Abstract

In small and open economies, absorption of foreign knowledge through international trade often plays a more important role for domestic innovation and growth than investment in domestic R&D. This suggests that trade policies can increase knowledge spillovers from abroad. Public support to R&D can be motivated both by positive internal knowledge externalities and by its ability to expand absorptive capacity. This dynamic, empirical, general equilibrium analysis models these interplays between R&D, trade and productivity. It compares public R&D support and export promotion of R&D based products with respect to long term growth and welfare impacts. We find that export promotion is inferior to R&D support in spurring R&D. However, it is not outperformed in terms of welfare generation. The reason is that existing and politically persistent policy interventions create inefficiencies that can be counteracted by R&D-based export promotion as a second-best policy.

July 28, 2011

Public Policies, Women's Employment after Childbearing, and Child Well-Being

Elizabeth Washbrook, Christopher J Ruhm, Jane Waldfogel, Wen-Jui Han

Abstract

In this paper, we consider three U.S. public policies that potentially influence the work decisions of mothers of infants—parental leave laws, exemptions from welfare work requirements, and child care subsidies for low-income families. We estimate the effects of these policies on the timing of work participation after birth, and on a range of outcomes in the subsequent four years, using a group difference-in-difference technique suitable for analysis of cross-sectional data. We find that the three policies affect early maternal work participation, but obtain no evidence of significant consequences for child well-being.

August 11, 2011

Decomposing the Relationship between Macroeconomic Conditions and Fatal Car Crashes during the Great Recession: Alcohol- and Non-Alcohol-Related Accidents

Chad Cotti, Nathan Tefft

Abstract

This paper investigates to what extent and in what ways conditions related to the 2007-2008 recession reduced fatal crashes. It hypothesizes that the reduction in fatal automobile accidents operates through both the quantity of driving and changes in behaviors associated with driving. Using state-by-quarter fixed effects models, the study shows that unemployment rate increases significantly reduce fatal accidents. Decomposing the fatal accident rate into accidents per mile traveled and miles traveled per capita reveals that higher unemployment is significantly associated with fewer accidents per mile, and also reveals that fatal accidents associated with alcohol are more responsive to unemployment rate changes than are accidents overall. These results suggest that the recession’s “lost” fatal accidents occurred in areas hit harder by the recession and were in the form of fewer alcohol-related accidents per mile traveled rather than fewer miles traveled overall.

August 17, 2011

The Effect of Minimum Academic Requirements to Participate in Sports on High School Graduation

Marian Vidal-Fernández

Abstract

During the 1970s, state interscholastic associations imposed rules requiring student athletes to pass a certain number of subjects in order to be allowed to participate in school sports. Using the NLSY together with a newly collected dataset on the stringency of the rules, I exploit variation in the rules across states to estimate their effects on high school graduation. I find that requiring students to pass one additional course is associated with a two-percentage-point increase in the likelihood of graduation. This result survives a number of robustness checks, including finding no effect for female students who at the time had limited access to interscholastic competitions.

September 18, 2011

Exclusive Contracts under Financial Constraints

Hiroshi Kitamura

Abstract

This paper constructs a model of anticompetitive exclusive dealing in the presence of financial constraints. Because of the presence of these constraints, the incumbent cannot remain in business if a deviant buyer appears. We argue that the existence of financial constraints eliminates the buyer's profit in deviating from exclusive contracts. As a result, when compared with previous studies, the possibility of exclusion increases. That is, exclusion arises, even when buyers compete less intensively.

September 18, 2011

The Impact of Antitrust Fines on the Formation of Collusive Cartels

David Bartolini, Alberto Zazzaro

Abstract

The literature on collusive cartels has mainly focused on the impact of antitrust fines on the sustainability of cartels, in infinitely repeated games. This approach, however, does not allow us to study the effect of antitrust fines on the incentives to form cartels in the first place. In this paper, we adopt a coalitional game approach to modeling collusive agreements, showing that antitrust fines may drive firms from partial cartels to a monopolistic cartel. Moreover, by introducing uncertainty on market demand, we show that the socially optimal competition policy can call for a finite or even zero antitrust penalty, even if there are no enforcement costs. We provide a sufficient condition for these results to apply to any coalitional game of cartel formation with symmetric firms. Then, we discuss the extension to asymmetric firms and dynamic collusion.

September 23, 2011

The Happiness of Single Mothers after Welfare Reform

John Ifcher

Abstract

U.S. welfare and tax policies targeting single mothers were transformed over a decade ago. What was the impact on single mothers’ happiness? Using data from the General Social Survey, difference in difference estimators are calculated. The results appear to indicate that the package of welfare and tax policy changes increased happiness. The results are largely consistent across three comparison groups and robust to various specification checks. This research nicely complements the literature by examining the impact of the welfare and tax policy changes on a novel outcome measure, self-reported happiness.

October 3, 2011

Labor Market Effects of the Exxon Valdez Oil Spill

John Hore, William J. Carrington

Abstract

We study the labor market effects of the 1989 Exxon Valdez Oil Spill in Prince William Sound, Alaska, which was the largest U.S. oceanic oil spill prior to the 2010 Gulf Oil Spill. We find that employment and average earnings increased in 1989 when the cleanup effort was largest and there appears to have been little, if any, adverse effect on average labor market opportunities in later years. Increased wages elicited increased labor supply in the form of both in-migration of workers and increased weekly hours. While the labor market effects of the spill were largely beneficial, there is some evidence that the effects upon self-employed fishing boat owners in the region may have been more heterogeneous, with some owners signing lucrative cleanup contracts with Exxon and its agents while others did not. The existence of these positive labor effects does not address the significant environmental, psychological and social costs imposed on the region and on the communities whose livelihood and organization were affected by the spill.

October 6, 2011

How Do Editors Select Papers, and How Good are They at Doing It?

Robert Hofmeister, Matthias Krapf

Abstract

Using data on the B.E. Journals that rank articles into four quality tiers, this paper examines the accuracy of the research evaluation process in economics. We find that submissions by authors with strong publication records and authors affiliated with highly-ranked institutions are significantly more likely to be published in higher tiers. Citation success as measured by RePEc statistics also depends heavily on the overall research records of the authors. Finally and most importantly, we measure how successful the B.E. Journals’ editors and their reviewers have been at assigning articles to quality tiers. While, on average, they are able to distinguish more influential from less influential manuscripts, we also observe many assignments that are not compatible with the belief that research quality is reflected by the number of citations.

October 7, 2011

Overestimating the Effect of Complementarity on Skill Demand

Brian K. Kovak

Abstract

Many recent studies estimate cost function parameters to measure the influence of capital-skill complementarity on changes in skill demand. This paper argues that standard cost function estimates assuming quasi-fixed capital systematically overestimate the effect of complementarity when subject to skill-biased technological change. While previous work has considered bias due to measurement error or general endogeneity concerns, this paper shows that upward bias results directly from cost minimizing behavior. I also develop a novel instrumental variables strategy based on the tax treatment of capital to more accurately measure the effect of complementarity. Although somewhat imprecise, the IV results support the model's prediction that the standard approach overestimates the effect of complementarity.

October 14, 2011

Natural Disasters and Vulnerability: Evidence from the 1997 Forest Fires in Indonesia

Po. Yin Wong, Philip H. Brown

Abstract

Few studies have attempted to investigate the link between poverty and vulnerability with respect to natural disasters. By applying a utility model to panel data from Indonesia that brackets a major forest fire, this paper estimates and analyzes households’ vulnerability in both total consumption and food consumption. We find that households with a high degree of exposure to smoke from the fires were more vulnerable in total consumption than households with lower exposure, but that they were no more vulnerable in food consumption.

November 3, 2011

Measuring the Impact of Anti-SLAPP Legislation on Monitoring and Enforcement

Bevin Ashenmiller, Catherine Shelley Norman

Abstract

We examine changes in environmental monitoring and enforcement activity in the presence of state legislation prohibiting Strategic Lawsuits Against Public Participation (anti-SLAPP laws). Using data on the Clean Air Act from the Environmental Protection Agency’s ECHO database, we find evidence that state inspections increase by almost 50% after a state passes anti-SLAPP legislation. In addition, we find strong evidence that the ratio of findings of noncompliance to inspections more than doubles in the presence of anti-SLAPP legislation.

November 4, 2011

Ambiguity Aversion and Portfolio Choice in Small-Scale Peruvian Farming

James C. Engle Warnick, Javier Escobal, Sonia C. Laszlo

Abstract

While the effect of risk aversion on farmers' decision-making has long been documented, far less is known about the effect of ambiguity aversion. We argue that ambiguity aversion is just as relevant to their decision-making process because they are uncertain about the yield distributions generated by new technologies. By experimentally measuring risk and ambiguity aversion in rural Peru, we provide new evidence on the role of ambiguity aversion on farm decisions in developing countries: ambiguity aversion, not risk aversion, reduces the likelihood that farmers plant more than one variety of their main crop.

November 15, 2011

Medicaid and Wealth: A Re-Examination

Maury Gittleman

Abstract

Do public insurance programs crowd out private savings? I examine the relationship between Medicaid and wealth and make a contribution to the literature on this issue in two primary ways. First, I apply the instrumental-variables approach developed by Gruber and Yelowitz (1999) to a different dataset, the National Longitudinal Survey of Youth, 1979 (NLSY79), while at the same time examining an alternative instrument. The results turn out to differ depending on the instrument and, for one of the instruments, to be sensitive to assumptions needed to identify Medicaid’s effects. Second, I make use of the SIPP data employed by Gruber and Yelowitz themselves, and examine the sensitivity of their conclusions to omitted factors that may be related to both Medicaid eligibility and to wealth accumulation. While more robust than the results using the NLSY79, the SIPP estimates are found to depend both on the sample used and on certain specification restrictions. Taken together, the results suggest caution in making inferences about the impact of Medicaid on wealth.

December 22, 2011

Empirical Analyses of U.S. Congressional Voting on Recent FTA

Hyejoon Im, Hankyoung Sung

Abstract

This paper addresses the manner in which political and economic factors affect the voting behavior of House representatives on free trade agreement (FTA) implementation bills in the 108th and 109th Congresses in the U.S., using a simultaneous probit-tobit model consisting of contribution and voting equations. We find that representatives whose districts have relatively higher employment in 'trade-sensitive’ sectors are likely to oppose FTA bills. By comparing our results with the reports of the U.S. International Trade Commission, we discover that the voting behavior of representatives is more receptive to the sectors predicted to be adversely affected by an FTA than to those predicted otherwise. Another finding is that when FTA bills, for which partner countries do not share commonalities, are considered on the same day in the House, members’ voting behavior may be similar.

December 30, 2011

The Economics of the Long Tail

Todd D. Kendall, Kevin Tsui

Abstract

Anderson (2006) argues that e-commerce and other new technologies improve efficiency by encouraging the entry of new producers and innovations, creating a “long tail” of niche products while reducing the market share of previously popular products. We study the strategic interaction between hits and niches in their pricing, entry, and innovation decisions using a model of competition under product differentiation and generalized cost structure. In contrast to the popular view, we show that improvements in information and communication technology can lead to either the long tail effect or an opposite “superstar” effect (Rosen, 1981), depending on (a) how the structure (not simply the level) of producer costs changes, and (b) how disparate are consumer preferences. These two factors also determine whether there is excessive or insufficient product diversity. Post-entry product and technology innovation incentives may be inefficient in the long tail market structure because producers can soften price competition by engaging in excessive product differentiation and adopting technologies with high variable costs. These results have implications for various competition-related policies.

About this journal

Objective
The B.E. Journal of Economic Analysis & Policy (BEJEAP) welcomes submissions that employ microeconomics to analyze issues in organizational economics, consumer behavior, and public policy. Articles submitted to BEJEAP can come in two formats: research papers and letters. Authors should bring to their analysis whatever microeconomic theoretical, experimental or econometric tools are helpful. We publish both empirical work and applied theory (though not more abstract forms of applied theory), and our aim is to disseminate papers that have practical implications for public policy, organizational or individual decision making.

Topics

Design of organizations and institutions
Industrial organization
Health economics
Public finance
Labour Economics
Economics of education, family, development, law, or the environment
Effects of domestic and international policy

Article formats
Research Papers, Letters

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