Recent Working Papers
969. Gary Biglaiser, University of North Carolina at Chapel Hill, Fei Li, University of North Carolina at Chapel Hill, Charles Murry, Boston College, Yiyi Zhou, Stony Brook University, "Intermediaries and Product Quality in Used Car Markets", (12/18; PDF)
Abstract: We examine used car dealers’ roles as intermediaries. We present empirical evidence supporting that cars sold by dealers have higher quality: (1) dealer transaction prices are higher than private market prices and this dealer premium increases in the age of the car as a ratio and is hump-shaped in dollar value, and (2) used cars purchased from dealers are less likely to be resold immediately. We formalize a model to show that these empirical facts can be rationalized either when dealers serve to alleviate information asymmetry between sellers and buyers or when dealers facilitate assortative matching between heterogenous-quality cars and heterogeneous consumers. Lastly, based on predictions of the model, we use the data to distinguish these two theories and find evidence for both, but the preponderance of the evidence supports the asymmetric information theory.
968. Gaurab Aryal, University of Virginia, Charles Murry, Boston College, and Jonathan W. Williams, University of North Carolina - Chapel Hill, "Price Discrimination in International Airline Markets". (11/18; PDF)
Abstract: We develop a model of inter-temporal and intra-temporal price discrimination by airlines to study the ability of different discriminatory mechanisms to remove sources of inefficiency and the associated distributional implications. To estimate the model’s multi-dimensional distribution of preference heterogeneity, we use unique data from international airline markets with flight-level variation in prices across time and cabins, and information on passengers’ reason for travel. We find that current pricing practices grant late-arriving business passengers substantial informational rents and yield 81% of first-best welfare, with stochastic demand and asymmetric information accounting for 65% and 35% of the gap, respectively.
967. J. Ignacio Gimenez-Nadal, Universidad de Zaragoza, and José Alberto Molina, Departamento de Análisis Económico, Universidad de Zaragoz, "Daily feelings of US workers and commuting time", (11/18; PDF)
Abstract: Millions of individuals commute every day in the US. Despite commuting has been shown to have negative consequences for workers, no evidence has been about how commuting is related to feelings in other episodes. We analyzed the relationship between the feelings reported by American workers throughout the day and the time devoted to commuting. Methods: We used the Well-Being Module of the American Time Use Survey for the years 2010, 2012, and 2013, and analyzed the relationship between commuting duration and the feelings reported (e.g,. happiness, sadness, stress, fatigue and pain) in both commuting and non-commuting episodes. Results: We found that more time spent on the daily commute was related to higher levels of fatigue and stress during commuting, while also being associated with higher levels of sadness and fatigue during activities of child care. In particular, we found that a 1% increase in the time devoted to commuting during the episode was related to increases of 12 percent and 13 percent of a standard deviation for stress and fatigue, while a 1% increase in the time devoted to commuting during the day was related to increases of 5 percent and 7 percent of one standard deviation in the levels of sadness and stress during child care activities. Conclusions: Our results indicated that longer commutes may be related to higher levels of stress and fatigue of workers, which may in turn affect the quality of the time parents devote to caring for their children.
966. José Alberto Molina, Departamento de Análisis Económico, Universidad de Zaragoza, David Iñiguez, Fundación ARAID, Diputación General de Aragón, Gonzalo Ruiz, Instituto de Biocomputación y Física de Sistemas Complejos (BIFI), Zaragoza, and Alfonso Tarancón, Departamento de Física Teórica, Universidad de Zaragoza, "The Nobel Prize in Economics: individual or collective merits?", 10/2018; PDF)
Abstract: We analyse the research production of Nobel laureates in Economics, employing the JCR Impact Factor (IF) of their publications. We associate this production indicator with the level of collaboration established with other authors, using Complex Networks techniques applied to the co-authorship networks. We study both individual and collaborative behaviours, and how the professional output, in terms of publications, is related to the Nobel Prize. The study encompasses a total of 2,150 papers published between 1935 and the end of 2015 by the laureates in Economics awarded between 1969 and 2016. Our results indicate that direct collaborations among laureates are, in general, rare, but when we add all the co-authors of the laureates, the network becomes more dense, and appears as a giant component containing 70% of the nodes, which means that more than two thirds of the laureates can be connected through only two steps. We have been able to measure that, in general, a higher level of collaboration leads to a larger production. Finally, when looking at the evolution of the research output of the laureates, we find that, for most of those awarded up to the mid-1990s, the production is more stable, with a gradual decrease after the awarding of the Prize, and those awarded later experience a sharp growth in the IF before the Prize, a decrease during the years immediately following, and a new increase afterwards, returning to high levels of impact.
965. Christopher F. Baum, Boston College, Linda Dastory, CESIS, KTH Royal Institute of Technology, Hans Lööf, CESIS, KTH Royal Institute of Technology, and Andreas Stephan, Jönköping International Business School, "Migrant STEM Entrepreneurs", (10/2018; PDF)
Abstract: STEM workers are considered to be key drivers for economic growth in the developed world. Migrant workers play an increasing role in the supply of this occupational category. We study the universe of STEM workers in the Swedish economy over the period 2003-2015 and find that migrants are less likely to form their own business, but those who are entrepreneurs earn income at least as large as that of their native-born counterparts. While the income differential for labor migrants may be partially explained by self-selection, the estimated effect is not significantly different between natives and refugee migrants.
964. Sushil Bikhchandani, UCLA Anderson School of Management, and Uzi Segal, Boston College, "Regret in the Small and in the Large", (10/2018; PDF)
Abstract: We propose a model of local-regret behavior that allows the separation of regret behavior between random variables that are close to each other and between random variables that are far apart. This enables a reinterpretation of evidence related to intransitive behavior in the laboratory. When viewed through this paper’s analysis of regret, the laboratory evidence need not imply intransitive behavior for large risky decisions such as investment choices and insurance.
963. Christopher F. Baum, Boston College, Hans Lööf, CESIS, KTH Royal Institute of Technology, and Andreas Stephan, Jönköping International Business School, "Refugee immigrants, occupational sorting and wage gaps", (10/2018; PDF)
Abstract: This paper analyzes wage income differences between native born workers and refugee immigrants in Sweden within occupations delineated in accordance with the augmented canonical model of occupational assignment. The identification strategy is based on a control group of matched native born persons with similar characteristics as the refugees and by using panel data methods capturing unobserved heterogeneity. The econometric results from a Swedish employer-employee panel data set document a narrowed wage gap over time, showing that the remaining difference can be explained to a large extent by the sorting into different types of occupations. Based on an Blinder–Oaxaca decomposition, we find a persistent wage gap in cognitive non-routine occupations but also, surprisingly, task categories where refugees have higher earning than natives.
962. Christopher F. Baum, Boston College, Hans Lööf, CESIS, KTH Royal Institute of Technology, and Andreas Stephan, Jönköping, International Business School, "Economic impact of STEM immigrant workers", (10/2018; PDF)
Abstract: STEM-focused industries are critical to the innovation-driven economy. As many firms are running short of STEM workers, international immigrants are increasingly recognized as a potential for high-tech job recruitment. This paper studies STEM occupations in Sweden 2011–2015 and tests hypotheses on new recruitment and the economic impact of foreign STEM workers. The empirical analysis shows that the probability that a new employee is a STEM immigrant increases with the share of STEM immigrants already employed, while the marginal effect on average firm wages is positively associated with the share of immigrant STEM workers. We also document heterogeneity in the results, suggesting that European migrants are more attractive for new recruitment, but non-EU migrants have the largest impact on wage determination.
961. Claudia Olivetti, Boston College, and Barbara Petrongolo, Queen Mary University, "The Economic Consequences of Family Policies: Lessons from a Century of Legislation in High-Income Countries".
Abstract: We draw lessons from existing work and our own analysis on the effects of parental leave and other interventions aimed at aiding families. The outcomes of interest are female employment, gender gaps in earnings and fertility. We begin with a discussion of the historical introduction of family policies ever since the end of the nineteenth century and then turn to the details regarding family policies currently in effect across high-income nations. We sketch a framework concerning the effects of family policy to motivate our country- and micro-level evidence on the impact of family policies on gender outcomes. Most estimates of the impact of parental leave entitlement on female labor market outcomes range from negligible to weakly positive. The verdict is far more positive for the beneficial impact of spending on early education and childcare.
960. Tamara L. Sheldon, University of South Carolina, and Chandini Sankaran, Boston College, "Transboundary Pollution in Southeast Asia: Welfare and Avoidance Costs in Singapore from the Forest Burning in Indonesia", (12/2016; PDF)
Abstract: Forest burning in Indonesia results in severe episodes of “seasonal haze” in neighboring Singapore. We offer the first causal analysis of the transboundary health effects of the Indonesian forest burning. Using a two-stage approach and instrumenting for air pollution with satellite fire data, we estimate the impacts of the Indonesian fires on Singaporean polyclinic attendances for acute upper respiratory tract infections and acute conjunctivitis. We also estimate the change in electricity demand in Singapore attributable to the fires, finding that demand increases as people respond to haze episodes by staying indoors. We estimate partial health and avoidance costs of US$333 million from January 2010 to June 2016. Our estimates suggest avoidance behavior is significant, accounting for over three quarters of our estimate.
959. Rossella Calvi, Rice University, Arthur Lewbel, Boston College, and Denni Tommasi, ECARES, Université Libre de Bruxelles, "Women’s Empowerment and Family Health: Estimating LATE with Mismeasured Treatment", (05/2018; PDF)
Abstract: We study the causal effect of women’s empowerment on family health in India. We define treatment as a woman having primary control over household resources and use changes in inheritance laws as an instrument. Due to measurement difficulties and sharing of goods, treatment cannot be directly observed and must be estimated using a structural model. Treatment mismeasurement may therefore arise from model misspecification and estimation errors. We provide a new estimation method, MR-LATE, that can consistently estimate local average treatment effects when treatment is mismeasured. We find that women’s control of substantial household resources improves their and their children’s health.
958. Arthur Lewbel, Boston College, Samuel Norris, University of Chicago, Krishna Pendakur, Simon Fraser University, and Xi Qu, Shagnai Jiao Tong University, "Consumption Peer Effects and Utility Needs in India" (08/2018; PDF)
Abstract: We construct a peer effects model of consumption where mean expenditures of consumers in one’s peer group affects one’s utility through perceived consumption needs. We show model identification with standard household-level consumer expenditure survey microdata, even when most members of each peer group are not observed. We find that in India, each additional rupee spent by one’s peers increases one’s perceived needs, thereby reducing money metric utility, by 0.5 rupees. One implication is that welfare gains of hundreds of billions of rupees per year might be possible by replacing private government transfers with the provision of public goods.
957. Arthur Lewbel, Boston College, "The Identification Zoo - Meanings of Identification in Econometrics", (09/2018; PDF)
Abstract: Over two dozen different terms for identification appear in the econometrics literature, including set identification, causal identification, local identification, generic identification, weak identification, identification at infinity, and many more. This survey: 1. gives a new framework unifying existing definitions of point identification, 2. summarizes and compares the zooful of different terms associated with identification that appear in the literature, and 3. discusses concepts closely related to identification, such as normalizations and the differences in identification between structural models and causal, reduced form models.
956. John Gordanier, University of South Carolina, William Hauk, University of South Carolina, and Chandini Sankaran, Boston College, "Early Intervention in College Classes and Improved Student Outcomes", (09/2018; PDF)
Abstract: This research investigates the effectiveness of an early academic intervention in Principles of Economics courses at a large public university. After the end of the fourth week of classes, students who fell below a 70% threshold on a performance measure, or had an attendance rate below 75%, were referred to the university’s Student Success Center for additional academic support. A referral consisted of students being given optional assistance in course specific skills through tutoring, as well as training in general skills like time management and study skills. Using a regression discontinuity framework at the referral threshold, we find that the performance intervention improved student scores on common questions on the final exam by 6.5 to 7.5 percentage points for students at or near the performance threshold. The gains are particularly large for students who entered college with below average math placement scores. These results indicate that low-cost light-touch interventions may significantly affect student academic performance.
955. Michael T. Belongia, University of Mississippi, and Peter Ireland, Boston College, "Monetary Policy Lessons from the Greenbook", (07, 2018; PDF)
Abstract: From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by a Greenbook forecast-based version of the rule consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters. Other statistical properties of Greenbook forecasts also point to an overlooked role for monetary aggregates, particularly Divisia monetary aggregates, in the Federal Reserve's forecasting process and subsequent monetary policy decisions made by the FOMC.
954. Zvi Safra, Warwick Business School, and Uzi Segal, Boston College, "A Lot of Ambiguity", (05/2018; PDF)
Abstract: We consider a risk averse decision maker who dislikes ambiguity as in the Ellsberg urns and compare the certainty equivalent of this gamble with the certainty equivalent of the anchoring probabilistic lottery. We deal first with the Choquet EU model and show that under some conditions on the capacity nu, when independent ambiguous gambles are repeated and the expected value of the anchoring lottery is zero, the difference between the average ambiguous and risky certainty equivalents converges to zero. When the parallel expected value is positive, we show that if the average certainty equivalent of the risky lottery is non-negative, then so is the limit of the average value for the ambiguous model. These results do not extend to the maxmin model or to the smooth recursive model.
953. Liyuan Chen, University of York, Paola Zerilli, University of York, and Christopher F Baum, Boston College, "Leverage effects and stochastic volatility in spot oil returns: A Bayesian approach with VaR and CVaR applications", (01/2018; PDF)
Abstract: The crude oil markets have been quite volatile and risky in the past few decades due to the large fluctuations of oil prices. We contribute to the current debate by testing for the existence of the leverage effect when considering daily spot returns in the WTI and Brent crude oil markets and by studying the direct impact of the leverage effect on measures of risk such as VaR and CVaR. More specifically, we model spot crude oil returns using Stochastic Volatility (SV) models with various distributions of the errors. We find that the introduction of the leverage effect in the traditional SV model with Normally distributed errors is capable of adequately estimating risk for conservative oil suppliers in both the WTI and Brent markets while it tends to overestimate risk for more speculative oil suppliers. Our results also show that the choice of financial regulators, both on the supply and on the demand side, would not be affected by the introduction of leverage. Focusing instead on firm’s internal risk management, our results show that the introduction of leverage would be useful for firms who are on the demand side for oil, who use VaR for risk management and who are particularly worried about the magnitude of the losses exceeding VaR while wanting to minimize the opportunity cost of capital. Using the same logic, firms who are on the supply side would be better off not considering the leverage effect.
952. Christopher F Baum, Boston College, Paola Zerilli, University of York, and Liyuan Chen, University of York, "Stochastic volatility, jumps and leverage in energy and stock markets: evidence from high frequency data", (09/2018; PDF)
Abstract: The study of volatility in crude oil and natural gas markets and its interaction with returns (leverage) has a broad range of Önancial impacts both from a hedging point of view and also for forecasting purposes.The main limitation of using daily data is that volatility is not observable. In contrast, intra-day data provide an almost continuous observation of the return series, making volatility observable. From an econometric point of view, the employment of intra-day data leads to the estimation of structural parameters of stochastic volatility models using simple moment conditions while fitting all the relevant empirical features of energy and stock index returns. This paper contributes to the current debate by: 1) exploring evidence of leverage effects and jumps in energy futures markets versus financial stock indexes (S&P500) and 2) evaluating the impact of leverage on risk forecasting in a VaR and CVaR sense. We find significant evidence of a leverage effect for S&P500 and crude oil markets: a negative shock to returns increases volatility in these markets. We also Önd evidence of an inverse leverage effect for the natural gas market: volatility becomes higher when energy returns increase. We also find evidence for jumps in the energy futures markets. We show that the introduction of leverage improves the forecasting ability of the SV model using the RMSE and MAE criteria for all the markets considered while introducing jumps improves only the ability of modeling the behaviour of the volatility for the crude oil futures market.
951. Haluk Ergin, University of California at Berkeley, Tayfun Sönmez, Boston College, and M. Utku Ünver, Boston College, "Efficient and Incentive-Compatible Liver Exchange", (05/2018; PDF)
Abstract: Liver exchange has been practiced in small numbers, mainly to overcome blood-type incompatibility between patients and their living donors. A donor can donate either his smaller left lobe or the larger right lobe, although the former option is safer. Despite its elevated risk, right-lobe transplantation is often utilized due to size-compatibility requirement with the patient. We model liver exchange as a market-design problem, focusing on logistically simpler two-way exchanges. First, with two patient-donor sizes, we introduce an algorithm when only the safer left-lobe transplantation is feasible. We then introduce an individually rational, Pareto-efficient, and incentive-compatible mechanism that truthfully elicits the right- lobe-donation willingness of donors, and finally extend these results to a general model with any number of patient/donor sizes. The generalization requires new technical tools regarding bilateral exchanges under partial-order-induced preferences. Through simulations we show that not only liver exchange can increase the number of transplants by more than 30%, it can also increase the share of the safer left-lobe transplants.
950. S Anukriti, Boston College, Sonia Bhalotra, University of Essex, and Hiu Tam, University of Oxford, "On the Quantity and Quality of Girls: Fertility, Parental Investments, and Mortality", (01/2018; PDF)
Abstract: The introduction of prenatal sex-detection technologies in India has led to a phenomenal increase in abortion of female fetuses. We examine fertility and investment responses to these technologies. We find a moderation of son-biased fertility stopping, erosion of gender gaps in parental investments in breastfeeding and immunization, and convergence in the under-5 mor- tality rates of boys and girls. For every three aborted girls, roughly one additional girl survives to age five. We also find a shift in the distribution of girls in favor of low-socioeconomic status families. Our findings have implications not only for counts of missing girls but also for the later life outcomes of girls conditioned by greater early life investments in them.
949. S Anukriti, Boston College, Sungoh Kwon, University of Connecticut, and Nishith Prakash, University of Connecticut, "Household Savings and Marriage Payments: Evidence from Dowry in India", ( 04/2018; PDF)
Abstract: This paper examines how traditional marriage market institutions affect households’ financial decisions. We study how bride-to-groom marriage payments, i.e., dowries, influence saving behavior in rural India. Exploiting variation in firstborn gender and heterogeneity in dowry amounts across marriage markets, we find that the prospect of paying higher dowry increases household savings, which are primarily financed through increased paternal labor supply. This is the first paper that highlights this alternative motive for savings in dowry-paying societies. However, we find no impacts of dowry expectations on son-preferring fertility behaviors and investments in girls.
948. Giovanni Cerulli, CNR-IRCrES, Maria Ventura, STICERD, London School of Economics, and Christopher F. Baum, Boston College, "The Economic Determinants of Crime: an Approach through Responsiveness Scores", (03/2018; PDF)
Abstract: Criminality has always been part of human social interactions, shaping the way peoples have constructed states and legislation. As social order became a greater concern for the public authorities, interest in investigating incentives pushing individuals towards engaging in illegal activities has become a central issue of the political agenda. Building on the existing literature, this paper proposes to focus on a few primary determinants of crime, whose effect is in-vestigated using a Responsiveness Scores (RS) approach performed over 50 US states during the period 2000–2012. The RS approach allows us to account for unit heterogeneous response to each single determinant, thus paving the way to a more in-depth analysis of the relation between crime and its drivers. We attempt to overcome the limitations posed by standard regression methods, which assume a single coefficient for all determinants, thus contributing to the literature in the field with stronger evidence on determinants’ effects and the geographical patterns of responsiveness scores.
947. Songnian Chen, HKUST, Shakeeb Khan, Boston College, and Xun Tang, Rice University, "Exclusion Restrictions in Dynamic Binary Choice Panel Data Models", (02/2018; PDF)
Abstract: In this note we revisit the use of exclusion restrictions in the semiparametric binary choice panel data model introduced in Honore and Lewbel (2002). We show that in a dynamic panel data setting (where one of the pre-determined explanatory variables is the lagged dependent variable), the exclusion restriction in Honore and Lewbel (2002) implicitly re- quires serial independence condition on an observed regressor, that if violated in the data will result in their procedure being inconsistent. We propose a new identification strategy and estimation procedure for the semiparametric binary panel data model under exclusion restrictions that accommodate the serial correlation of observed regressors in a dynamic setting. The new estimator converges at the parametric rate to a limiting normal distri- bution. This rate is faster than the nonparametric rates of existing alternative estimators for the binary choice panel data model, including the static case in Manski (1987) and the dynamic case in Honore and Kyriazidou (2000).
946. Shakeeb Khan, Boston College, Denis Nekipelov, University of Virginia, and Justin Rao, Microsoft Research, "Measuring the Return to Online Advertising: Estimation and Inference of Endogenous Treatment Effects", (02/2018; PDF)
Abstract: In this paper we aim to conduct inference on the “lift” effect generated by an online advertisement display: specifically we want to analyze if the presence of the brand ad among the advertisements on the page increases the overall number of consumer clicks on that page. A distinctive feature of online advertising is that the ad displays are highly targeted- the advertising platform evaluates the (unconditional) probability of each consumer clicking on a given ad which leads to a higher probability of displaying the ads that have a higher a priori estimated probability of click. As a result, inferring the causal effect of the ad display on the page clicks by a given consumer from typical observational data is difficult. To address this we use the large scale of our dataset and propose a multi-step estimator that focuses on the tails of the consumer distribution to estimate the true causal effect of an ad display. This “identification at infinity” (Chamberlain (1986)) approach alleviates the need for independent experimental randomization but results in nonstandard asymptotics. To validate our estimates, we use a set of large scale randomized controlled experiments that Microsoft has run on its advertising platform. Our dataset has a large number of observations and a large number of variables and we employ LASSO to perform variable selection. Our non-experimental estimates turn out to be quite close to the results of the randomized controlled trials.
945. Ryo Kawasaki, Hideo Konishi, Boston College, and Junki Yukawa, "Equilibria in Bottleneck Games", (01/2018; PDF)
Abstract: This paper introduces a bottleneck game with finite sets of commuters and departing time slots as an extension of congestion games by Milchtaich (1996). After characterizing Nash equilibrium of the game, we provide sufficient conditions for which the equivalence between Nash and strong equilibria holds. Somewhat surprisingly, unlike in congestion games, a Nash equilibrium in pure strategies may often fail to exist, even when players are homogeneous. In contrast, when there is a continuum of atomless players, the existence of a Nash equilibrium and the equivalence between the set of Nash and strong equilibria hold as in congestion games (Konishi, Le Breton, and Weber, 1997a).
944. Hideo Konishi, Boston College and Chen-Yu Pan, Wuhan University, "Silent Promotion of Agendas: Campaign Contributions and Ideological Polarization", (07/2018; PDF)
Abstract: Until recently, both Republican and Democratic administrations have been promoting free trade and market deregulation for decades without intensive policy debates. We set up a two-party electoral competition model in a two-dimensional policy space with campaign contributions by an interest group that promotes a certain agenda. Assuming that voters are impressionable to campaign spending for/against candidates, we analyze incentive compatible contracts between the interest group and the candidates on agenda policy positions and campaign contributions. The interest group asks the candidates to commit to its agenda in exchange for campaign contributions, letting them compete over the other (ideological) dimension only. It is shown that, as the agenda is pushed further by the interest group, ideological policy polarization and campaign contributions surge.
943. Rosen Valchev, Boston College, "Bond Convenience Yields and Exchange Rate Dynamics", (10/2017; PDF)
Abstract: This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalize both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as compensation for endogenous fluctuations in bond convenience yield differentials. Due to the interaction of monetary and fiscal policy, the impulse response of the equilib- rium convenience yield is non-monotonic, which generates the reversal of the puzzle. The model fits exchange rate dynamics very well, and I also find direct evidence that convenience yields indeed drive excess currency returns.
942. Filippo De Marco, Bocconi University, Marco Macchiavelli, Federal Reserve Board, and Rosen Valchev, Boston College, "Beyond Home Bias: Portfolio Holdings and Information Heterogeneity", (01/2018; PDF)
Abstract: We investigate whether information frictions are important determinants of banks’ sovereign debt portfolios. Going beyond the classic home versus foreign distinction in holdings, we study the heterogeneity within the foreign sovereign portfolio. First, we propose a modified version of the Van Nieuwerburgh and Veldkamp (2009) model with a two-tiered information structure that links portfolio holdings and information acquisition. Second, we find strong support for the key predictions of the model in the data: if a bank makes a forecast for a given country, it is more likely to hold debt of that country. Moreover, more optimistic and more precise forecasts predict larger portfolio holdings.
941. Rosen Valchev, Boston College, "Dynamic Information Acquisition and Portfolio Bias", (06/2017; PDF)
Abstract: While international portfolios are still heavily biased towards home assets, the home bias has exhibited a clear downward trend in the last few decades. Interestingly, the underlying rise in foreign investment has been primarily directed to just a handful of OECD countries, and has not given rise to an across the board increase in all foreign investments. To understand the evolution of the home bias, this paper develops a dynamic model of information acquisition and portfolio choice. The dynamic framework introduces two new endogenous forces due to the fact that asset payoffs depend on the future asset prices and hence on the future information sets. First, there is a measure of endogenous unlearnable uncertainty in asset payoffs which generates decreasing returns to information when agents are sufficiently well informed about an asset, and hence gives a reason to diversify information and portfolios. In addition, the dynamic framework introduces a strategic complementarity in learning, due to the “beauty contest” of dynamic asset markets, which is absent in the benchmark static model where learning is purely a strategic substitute. As a result of both of these new endogenous forces, the model can explain the high overall level of the home bias, its decline over time and the fact that the rise in foreign investment has been coordinated on just a handful of destination countries. Moreover, the model predicts that the home bias decline is linked to the fall in information costs, and I find direct evidence of this in the data.
940. Cosmin Ilut, Duke University, Rosen Valchev, Boston College, "Paralyzed by Fear: Rigid and Discrete Pricing under Demand Uncertainty", (03/2016; PDF)
Abstract: Price rigidity is central to many predictions of modern macroeconomic models, yet, standard models are at odds with certain robust empirical facts from micro price datasets. We propose a new, parsimonious theory of price rigidity, built around the idea of demand uncertainty, that is consistent with a number of salient micro facts. In the model, the monopolistic firm faces Knightian uncertainty about its competitive environment, which has two key implications. First, the firm is uncertain about the shape of its demand function, and learns about it from past observations of quantities sold. This leads to kinks in the expected profit function at previously observed prices, which act as endogenous costs of changing prices and generate price stickiness and a discrete price distribution. Second, the firm is uncertain about how aggregate prices relate to the prices of its direct competitors, and the resulting robust pricing decision makes our rigidity nominal in nature.
939. Christopher F. Baum, Boston College, Mustafa Caglayan, Heriot-Watt University, and Bing Xu, Heriot-Watt University, "The Impact of Uncertainty on Financial Institutions", (rev. 09/2018; PDF)
Abstract: We examine the effects of uncertainty on several facets of the financial sector. Using a large country-level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks’ efficiency and operational performance, evidenced by lower returns and increased reliance on non-interest income activities; and distorts sectoral stability, as liquidity, banks’ appetite for risk and credit risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty harms the overall health of the financial sector.
938. Peter N. Ireland, Boston College, "Allan Meltzer’s Model of the Transmission Mechanism and Its Implications for Today", (11/2017; PDF)
Abstract: Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed’s policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion.
937. Michael T. Belongia, University of Mississippi and Peter N. Ireland, Boston College, "The Demand for Divisia Money: Theory and Evidence", (11/2017; PDF)
Abstract: A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to spending or income as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear in quarterly United States data spanning the period from 1967:1 through 2017:2, especially for the Divisia M2 aggregate. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.
936. Christopher F. Baum, Boston College, Madhavi Pundit, Asian Development Bank, and Arief Ramayandi, Asian Development Bank, "Capital Flows and Financial Stability in Emerging Economies", (10/2017; PDF)
Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting cross equation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
Note: This paper was first circulated by the Asian Development Bank as ADB Economics Working Paper 522
935. Ryan Chahrour, Boston College and Kyle Jurado, Duke University, "Recoverability", (11/2017; PDF)
Abstract: When can structural shocks be recovered from observable data? We present a necessary and sufficient condition that gives the answer for any linear model. Invertibility, which requires that shocks be recoverable from current and past data only, is sufficient but not necessary. This means that semi-structural empirical methods like structural vector autoregression analysis can be applied even to models with non-invertible shocks. We illustrate these results in the context of a simple model of consumption determination with productivity shocks and non-productivity noise shocks. In an application to postwar U.S. data, we find that non-productivity shocks account for a large majority of fluctuations in aggregate consumption over business cycle frequencies.
934. Ryan Chahrour, Boston College, and Rosen Valchev, Boston College, "International Medium of Exchange: Privilege and Duty", (10/6/17; PDF)
Abstract: The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.
933. Luca Benati, University of Bern, and Peter N. Ireland, Boston College, “Money-Multiplier Shocks”, (8/1/17; PDF)
Abstract: Shocks to the M1 multiplier–in particular, shocks to the reserves/deposits ratio–played a key role in driving U.S. macroeconomic fluctuations during the interwar period, but their role in the post-WWII era has been almost uniformly negligible. The only exception are shocks to the currency/deposits ratio, which played a sizeable role for inflation and M1 velocity. By contrast, shocks to the multiplier of the non-M1 component of M2, which had been irrelevant in the interwar period, have played a significant role in driving the nominal side of the
economy during the post-WWII period up to the collapse of Lehman Brothers, in particular during the Great Inflation episode. During either period, the multiplier of M2-M1 has been cointegrated with the short rate. The monetary base had exhibited a non-negligible amount of permanent variation during the interwar period, whereas it has been trend-stationary during the post-WWII era. In spite of the important role played by shocks to the multiplier of M2-M1 during the post-WWII period, we still detect a non-negligible role for a nonmonetary
permanent inflation shock, which has the natural interpretation of a disturbance originating from the progressive de-anchoring of inflation expectations which started in the mid-1960s, and their gradual re-anchoring following the beginning of the Volcker disinflation.
932. Tayfun Sönmez, Boston College, and M. Utku Ünver, Boston College, “Market Design for Living-Donor Organ Exchanges: An Economic Policy Perspective”, (6/30/17; PDF)
Abstract: Within the last decade kidney exchanges emerged as a modality of transplantation to better utilize living donation possibilities as a cross disciplinary success of medical doctors and ethicists, market design economists, and computer scientists. This paper summarizes at which fronts these efforts have been successful and what needs to be done further to increase their impact. Also this paradigm is partially
being applied to liver exchanges. There are other organs for which living donation is possible and gains from exchange can be much bigger than kidneys. Recent academic work on single-graft liver and dual-donor organ exchanges for lobar lung, dual-graft liver, and simultaneous liver-kidney transplantation are also discussed.
931. Tayfun Sönmez, Boston College, M. Utku Ünver, Boston College, and M. Bumin Yenmez, Boston College, “Incentivized Kidney Exchange”, (04/2018; PDF)
Abstract: Within the last decade, kidney exchange has become a mainstream paradigm to increase the number of transplants. However, compatible pairs do not participate, and the full benefits from exchange can be realized only if they do. In this paper, we propose a new scheme, incentivizing participation of compatible pairs in exchange via insurance for a future renal failure in the patient. Efficiency and equity analyses of this scheme are conducted and compared with that of living-donor exchange in a new dynamic continuum model of kidney transplantation. We also calibrate the model with data from the US and quantify our predictions.
930. James Anderson, Boston College, "N-S Trade with Weak Institutions", (06/2017; PDF)
Abstract: States with weak institutions can lose from trade with strong states when trade is subject to predation. The happy liberal idea of trade fostering better institutions and peace can be turned on its head. The Ricardian model of trade subject to predation offered here implies imperialism without capital, contra Marxists. Weak and poor South trades with strong and rich North. Poor South labor is attracted to predation. Labor market effects of predation and enforcement amplify opposing interests in the terms of trade, potentially obviating the standard gains from trade that allows bargaining solutions to surplus division.
929. Raffaele Santioni, Bank of Italy, Fabio Schiantarelli, Boston College, and Philip E. Strahan, Boston College and NBER, "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy", (05/2017; PDF)
Abstract: Italy’s economic and banking systems have been under stress in the wake of the Global Financial Crisis and Euro Crisis. Firms in business groups have been more likely to survive this challenging environment, compared to unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow. We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favorable investment opportunities. The ability to borrow externally provides additional funds that are shared across group affiliated firms. Our results highlight the benefits of internal capital markets when external capital markets are tight or distressed.
928. James Anderson, Boston College, and Yoto V. Yotov, Drexel University, "Short Run Gravity", (05/2017; PDF)
Abstract: Short run gravity is a geometric weighted average of long run gravity and bilateral capacity. The model features (i) joint trade costs endogenous to bilateral volumes, (ii) long run gravity as a limiting case of efficient investment in bilateral capacities, (iii) a structural ratio of short run to long run trade elasticities equal to a microfounded buyers' incidence elasticity, and (iv) tractable short and long run models of the extensive margin. Application to manufacturing trade of 52 countries during the globalization period 1988-2006 strongly supports the model. Results solve several time invariance and trade elasticity puzzles in the literature.
927. Arthur Lewbel, Boston College, "Identification and Estimation Using Heteroscedasticity Without Instruments: The Binary Endogenous Regressor Case", (12/2016; PDF)
Abstract: Lewbel (2012) provides an estimator for linear regression models containing an endogenous regressor, when no outside instruments or other such information is available. The method works by exploiting model heteroscedasticity to construct instruments using the available regressors. Some authors have considered the method in empirical applications where an endogenous regressor is binary (e.g., endogenous Diff-in-Diff or endogenous binary treatment models), without proving validity of the estimator in that case. The present paper shows that the assumptions required for Lewbel’s estimator can indeed be satisfied when an endogenous regressor is binary.
926. Hideo Konishi, Boston College, and Chen-Yu Pan, Wuhan University, "Campaign Contributions for Free Trade: Salient and Non-salient Agendas", (05/2017; PDF)
Abstract: Although protectionism became a salient issue in the 2016 presidential election campaign, both Republican and Democratic adminis- trations have been silently promoting free trade for decades. We set up a two-party electoral competition model in a two-dimensional policy space with campaign contributions by a group (exporting/multinational firms) that is interested in promoting free trade, for which voters do not have positive sentiment. Assuming that voters are impressionable to campaign spending for/against candidates, we analyze the optimal contract between the interest group and the candidates on policy is- sues and campaign contributions. If voters' negative sentiment to free trade is not too strong, the interest group tends to contribute to both candidates to make free trade a nonsalient issue, and the candidates compete over the other (ideological) dimension only. If votersíneg- ative sentiment to free trade is strong, the interest group tends to contribute to a more malleable candidate only.
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