Working Papers Series
2023
Kristin J. Kleinjans
The fall of the Berlin Wall in November 1989 resulted in a severe economic downturn and a stark temporary decline in fertility in East Germany. But did it also affect the fertility of future generations? In this paper, I investigate early motherhood - a marker of lifetime disadvantage - of those born in the years immediately after the fall of the Berlin Wall. Using data from the German Socioeconomic Panel and a difference-in-differences specification comparing the “Daughters of the Wall” with East Germans born in adjacent years and with West Germans in order to control for region fixed-effects and time-varying confounders, I find that these Daughters of the Wall were more likely to have children in young adulthood if they did not grow up with both of their parents. These results suggest that severe recessions increase early motherhood of those born into disadvantage, increasing the transmission of disadvantage across generations.
Forthcoming, Journal of Economics and Statistics. https://doi.org/10.1515/jbnst-2022-0017.
Nicholas B. Irwin and Mitchell R. Livy
In this paper, we examine the contagion effect of contemporaneous neighborhood house listings on homeowners’ decision to sell their house. Using a spatially-explicit dataset of all residential parcels in the Baltimore, MD MSA from 2013–2015 and the universe of houses listed for sale, we estimate a series of duration models and find compelling evidence of a neighborhood contagion effect across a multiple dimensions of neighborhood size on the order of a 13 to 19 percent in listing likelihood. These results indicate that a positive multiplier effect exists with nearby listings and adds to an under-studied literature on seller motivation.
2022
Amadeu DaSilva and Mira Farka
The zero lower bound (ZLB) may constrain the ability of Federal Reserve (Fed) to influence financial markets and the economy. This note examines the effectiveness of the interest rate channel and the credit channel of conventional and unconventional monetary policy while accounting for business cycle fluctuations. We use intraday industry returns and a number of industry-specific and firm- specific indicators to capture the sensitivity of firms’ demand to interest rates (interest rate channel) and firms’ financial constraints (credit channel). Our results indicate a dramatic change in the effectiveness of the transmission channels across business cycles and across periods. We find that the interest rate channel operates equally well during recessions and expansions pre-ZLB, but that this channel has ceased to function during the ZLB regardless of the stage of the business cycle. In contrast, the credit channel operates only during recessions in the conventional period, while it has been remarkably effective during both recessions and expansions in the ZLB era.
Amadeu DaSilva and Mira Farka
We examine the effectiveness of the interest rate channel and the credit channel of monetary policy before and after the zero lower bound (ZLB), using intra- day stock returns. We construct a number of industry-specific and firm-specific indicators to capture the sensitivity of firms’ demand to interest rates (interest rate channel) and firms’ financial constraints (credit channel). We find that the transmission of monetary policy has shifted across both periods. Conventional monetary policy works through both the neoclassical interest rate channel and the credit channel, while unconventional policy is propagated primarily via the credit channel which became even more effective at the ZLB. Our results indicate that before the ZLB the interest rate channel and the credit channel operate primarily through target rate shocks rather than forward guidance announcements, whereas both forward guidance and Large Scale Asset Purchases were equally important for the credit channel during the ZLB. Our findings are robust with respect to a number of model extensions and alternative specifications.
2022/002R - The Economic Burden of Adolescent Internet Addiction: A Korean Health Case Study (PDF)
Robert W. Mead and Edward Nall
While internet saturation is the source of a number of benefits, such as productivity increases and general economic growth, it has given rise to concerns over the emergence of a new clinical disorder: Internet addiction. Noting the extent of high internet use amongst adolescents in the Republic of Korea, this paper provides some quantification regarding the extent of subsequent health costs upon adolescents in Korea. Using Korea-based health-effects and valuation studies, the authors project, and value in dollar figures, the number of internet addiction related cases of adolescent atopic dermatitis, allergic rhinitis, asthma, obesity, depression, and suicides over a projected 15-year period. The results indicate that these health costs may be substantial: over $29 billion for the study period.
Forthcoming, The Social Science Journal.
Gabriela Best and Yoonyoung Hur
We analyze the determinants of the Federal Reserve's monetary policy decisions since the 1960s justified by potentially evolving beliefs---through a real-time learning process---about the structure of the economy and Markov-switching shifts in policymakers' preferences between dove and hawk regimes. We argue that although central bank learning played an important role in the determination of Fed policy there were several shifts in policy makers' preferences in the post-war period. We find a dovish kind of monetary policy regime present in the 1970s and early 2000s, and before the onset of the Great Recession.
2021
2021/006 - Early Exposure to Nature and Willingness-To-Pay for Grassland Restoration (PDF)
Liqing Li and Amy W. Ando
People, including children, spend less time in nature than in decades past (Pergams and Zaradic, 2008; Larson et al., 2011). Will such change in interaction with nature reduce how much today’s children will be willing to pay to support environmental conservation and restoration when they are adults? Non-market valuation research commonly finds large heterogeneity in people’s preferences for environmental goods, but little of that work explores the connection between childhood exposure to the environment and adult preferences over environmental goods. This paper examines the relationship between adults’ early-life experiences with nature and the values they currently have for features of grassland restoration using a choice experiment survey in Illinois, Iowa, and Minnesota. This paper finds that the average value of grassland restoration with extensive recreational attributes can be large, a finding that can help restoration agents to plan how best to use funds for grassland restoration. The results also show that people who had extensive exposure to grasslands and some outdoor activities in childhood can value grassland restoration projects as much as five times more than those who did not. These patterns lend credence to concerns that reduced human engagement with nature may undermine future motivation to protect nature and create a negative feedback loop for stewarding nature.
2021/005 - Official Visits and Institutions (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines the effect of the number of visits of U.S. Presidents and Secretaries of State to a country on the quality of its institutions. To achieve its objective, the paper develops a model that predicts that high level visits are more likely to lead to an improvement in the quality of economic rather than political institutions. To test the predictions of our model, we compile novel variables on the number of official visits during the period 1960-2015 from the archives of the U.S. State Department. To deal with potential endogeneity, we use a Three-Stage-Least-Squares estimation technique. The estimation results show that the visits of U.S. Presidents have a statistically significant positive effect on the rule of law, voice and accountability, regulatory quality and government effectiveness. This implies that these presidential visits are used to promote the quality of economic institutions that are essential to safeguard the interests of American corporations, investors, creditors, and aid donors. The Propensity Score Matching estimation technique also finds that institutional indicators are larger in countries where the number of visits of U.S. Presidents is higher than the sample mean.
2021/004 - Official Visits and Democracy (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines whether the number of official visits to and from the United States allows the country to adopt a more democratic system of governance. To achieve its objective, the paper develops a model that derives the conditions under which a host invites a guest to persuade or pressure for democratic improvement, and the conditions under which the guest accepts an invitation to visit, and decides to improve the quality of democratic governance after the visit. To test our hypothesis, we introduce novel variables that indicate the number of leader’s trips to the United States, and the number of visits of U.S. Presidents and Secretaries of State to the country, from 1960-2015. The estimation results show that the official visits have a statistically significant and positive effect on democracy. These results are robust to the inclusion of control variables, to the use of alternative econometric techniques and different democracy indicators, and to the exclusion of observations and countries where the democracy score is higher than that of the United States. The paper also uses 3SLS to deal with potential endogeneity. The estimation confirms our previous findings that the official visits have a statistically significant positive effect on democracy. We also explore the channels of transmission and find that American administrations use bilateral trade flows and U.S. aid as an incentive for countries to democratize. This supports our model predictions.
2021/003 - Official Visits and Conflict (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines the effect of official visits to and from a country on the onset of conflict. To achieve our objective, we develop a simple theoretical framework that derives the conditions under which official visits can increase the likelihood of conflict under different political regimes. The model predicts that official visits are more likely to deter conflict in non-democratic countries than in democratic ones. To empirically test the predictions of the model, we use the number of visits of U.S. Presidents and Secretaries of State to a country, and the number of visits by the country’s leader to the United States, derived from the historical archives of the U.S. State Department. To deal with potential endogeneity, we use a Three-Stage-Least-Squares estimation technique. The estimation provides evidence consistent with our model predictions that the number of official visits has a statistically significant positive effect on conflict, especially in democratic countries. This indicates that these official visits induce the insurgents to engage in conflict with an incumbent government that is perceived as a stooge of the United States.
2021/002R - The Effects of Unilateral Divorce Laws on Noncognitive Skills (PDF)
Iryna Hayduk and Kristin J. Kleinjans
This paper provides the first causal evidence on the effect of a change in divorce laws on noncognitive skills in adulthood. We exploit state-cohort variation in the adoption of unilateral divorce laws in the U.S. to assess whether children exposed to this law have different noncognitive skills in adulthood compared to those never exposed or exposed as adults. Using data from the National Survey of Midlife Development in the U.S. (MIDUS) and employing the staggered difference-in-differences identification strategy developed by Callaway and Sant’Anna, we show that divorce reform had a detrimental long-term effect on the conscientiousness of those who were exposed as children. For women but not for men the negative effects are partially driven by changes in monetary and non-monetary parental inputs.
Forthcoming, B.E. Journal of Economic Analysis and Policy. https://doi.org/10.1515/bejeap-2022-0365.
2021/001 - Life Cycle Wage Growth and Internal Migration (PDF)
Alberto Rivera Padilla
I document new facts on spatial variation in life cycle wage growth within three countries along the development scale: Brazil, Mexico, and the United States. I find that rich states tend to have steeper experience-wage profiles than poor states in each country. Differences in educational attainment and industry mix can account for a large share of the covariance between income per capita and profile steepness in both developing countries, while differences in occupation types are key in every case. Evidence from internal migrants supports the notion of substantial gaps in learning environment across space. Using a general equilibrium model with human capital accumulation and internal migration, I estimate meaningful gains in labor productivity from inducing migration to places with higher lifetime wage growth and find that spatial differences in learning environment account for a considerable portion of the overall gains.
2020
Liqing Li, Dede Long, and Mani Rouhi Rad
The spread of COVID-19 in the Spring of 2020 prompted state and local governments to implement a variety of policies, including stay-at-home (SAH) orders and mandatory mask requirements, aimed at reducing infection rates and the severity of the pandemic’s impact. We implement a discrete choice experiment survey in three major U.S. States - California, Georgia, and Illinois - to empirically quantify individuals’ willingness to stay (WTS) home, measured as the number of weeks of a potential new SAH order, to prevent the spread of the COVID-19 disease and explore factors leading to their heterogeneous WTS. Our results demonstrate broad support for statewide mask mandates. In addition, the estimate of WTS to lower new positive cases is quite large, approximately five and half weeks, even though staying home lowers utility. We also find that individuals recognize the trade-offs between case reduction and economic slowdown stemming from SAH orders when they decide to stay home or not. Finally, pandemic related factors such as age, ability to work from home, and unemployment status are the main drivers of the heterogeneity in individuals’ WTS.
Published, PLoS ONE 16(7): e0253910.
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2020/013 -The demographic transition and the business asset supply channel (PDF)
Pedro Amaral
This paper examines the macroeconomic consequences of a demographic transition in an environment where households can hold diverse portfolios of risky and safe assets at different points in their life cycle. These assets are issued by businesses in order to finance their activities. Businesses are heterogeneous with respect to how productive they are in different states of the world, and therefore pursue different combinations of safe and/or risky securities issuance when financing projects. I simulate a demographic transition calibrated to replicate the expected demographic evolution of current West African economies. This results in modest increases in output, larger increases in saving as a whole and, in particular, in a relative increase in saving in the form of safe assets. Lower capital costs lead to business entry (and more asset issuance) and to a tilt towards safe asset issuance; a mechanism I call the business asset supply channel. I show that omitting this channel, as models with a representative firm do, results in an overestimation of the effects of the demographic transition, with larger interest rate reductions and an exaggerated demographic dividend.
Mira Farka
We evaluate the effectiveness of conventional and unconventional monetary policy measures by examining the transmission mechanism through the credit channel before and after the zero lower bound. We focus on the impact of conventional and unconventional policy shocks on the cross-section of portfolio returns sorted on a few characteristics that capture firms' financial constraints (size, book-to-market). Our results show that the credit channel of monetary policy is even more relevant at the ZLB relative to the previous period and its effectiveness is almost entirely attributed to the high sensitivity of financially constrained firms (small and value stocks) to unconventional surprises. We find strong evidence that the reaction of portfolio returns to policy shocks is asymmetric depending on the state of the economy (recession vs. expansion), the type of policy surprises (positive vs. negative surprises), and the aggregate level of market volatility. Our findings are robust with respect to a number of model extensions and robustness checks.
2020/011 - Habit Persistence in Tourist Sub-Industries (PDF)
Adrian R. Fleissig
Habit persistence across six U.S. tourism sub-industries is estimated using a dynamic forward looking model. Estimates show that habits largely determine current expenditure for air transportation, shopping, accommodations, and other transportation. Estimated uncompensated price elasticities find that air transportation and accommodations are price elastic in the short-run and long-run. Shopping is price inelastic in the short-run but price elastic in the long-run. An important result is that air transportation and other transportation are elastic substitutes for price changes in air transportation but inelastic substitutes for price changes in other related transportation. Estimates show that expenditure across most of the tourist sub-industries are closely related because they are gross complements. Food and beverage are necessities, price inelastic and relatively unresponsive to changes in expenditure across the sub-industries. The estimates show that policy makers and tourist marketing should account for habit persistence and differences between the short-run and long-run.
2020/010R - Habit Persistence in Assets Demand (PDF)
Adrian R. Fleissig and James L. Swofford
Habit persistence is typically modeled in consumption when investigating implications for asset demands. We test habit persistence in six asset demand categories using U.S. data and a dynamic forward-looking model. We find habit persistence is greater for liquid assets compared to riskier assets and may in part explain low holdings of risky assets. Cash assets are found to be substitutes with other liquid assets. Consistent with portfolio analysis, riskier asset categories, money market mutual funds, and bonds are found to be complements. Those two risky asset categories and a third risky asset category have budget elasticities greater than unity.
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Kristin J. Kleinjans and Andrew Gill
Recessions negatively impact the health of individuals experiencing hardship. In this paper, we investigate whether there are also long-term effects for those born during difficult economic times through the effects on their health behavior. Based on a theoretical model of parental socialization against smoking and using data from the German Socioeconomic Panel, we assess smoking behavior of children born in the years immediately after the fall of the Berlin Wall in the East. Using a difference-in-differences specification with West Germans as a control group, we find that men born during this time are 40% more likely to smoke in young adulthood than men born during the years before or afterwards. The fall of the Berlin Wall led to enormous social and economic upheaval and resulted in a stark drop in incomes and fertility in East Germany. Fertility, however, dropped least among the lower educated and younger mothers. The resulting negative parental selection, as measured by parental education and childhood family environment, explains about one fifth of the higher incidence of smoking of those born during this time. We posit that the effect of negatively selected parents was amplified by the compounding effect of disadvantage in childhood caused by the economic upheaval, which likely reduced both the amount and quality of parental socialization against smoking, leading to the increased smoking rates that we observe.
Published in Journal of Family and Economic Issues (2022), 43, 799-814. https://doi.org/10.1007/s10834-021-09791-3 (Opens in a new window) .
2020/008 - Leader's Education and Reform Enactments from 1900-2010 (PDF)
Oasis Kodila-Tedika, Sherif Khalifa, and Christian Otchia
This paper examines whether the gap between the educational attainment of the country's leader and the population affects the implementation of land reforms. We combine a dataset on the leaders' education to one on the enactment of land reforms from 1900-2010 to test our hypothesis. The analysis confirms our intuition and shows a statistically significant negative coefficient of educational distance on the probability of the full implementation of reforms in a Multinomial Logistic regression. The sensitivity analysis confirms the robustness of our results even after the inclusion of other control variables and using alternative estimation techniques such as Ordinary Least Squares, Ordered Probit and Logit. To deal with potential endogeneity, we use instrumental variables that indicate the constitutional provisions on the right to education. The Two Stage Least Squares estimation confirms our previous findings.
2020/007 - African Junta and Defense Spending: A Capture Effect or Self-Preservation? (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines the effect of the presence of a military ruler on military expenditure using a panel of sub-Saharan Africa countries. The paper also explores whether the relationship reflects a capture effect, is an outcome of the confrontational climate of the cold war, or is an effort by military rulers for self-preservation. The Pooled OLS and fixed effects OLS estimations show that the presence of a military ruler has a statistically significant negative effect on military spending as a percentage of GDP. The coefficients are also not significantly different before or after the end of the cold war era. This implies that the negative relationship is driven by an effort by military rulers to preempt the ability of their peers to overthrow them from power. We also attempt to deal with potential endogeneity, and consider the possibility of persistence in military spending. The paper uses the Arellano and Bond (1991) estimation technique that shows a negative but insignificant effect of the presence of a military ruler on military expenditure, while military spending shows a high degree of persistence.
Forthcoming, Journal of African Economies: https://doi.org/10.1093/jae/ejaa015 .
2020/006 - The Influence of Hidden Researcher Decisions in Applied Microeconomics (PDF)
Nick Huntington-Klein, Andreu Arenas, Emily Beam, Marco Bertoni, Jeffrey R. Bloem, Pralhad Burli, Naibin Chen, Paul Greico, Godwin Ekpe, Todd Pugatch, Martin Saveedra, and Yaniv Stopnitzky
Researchers make hundreds of decisions about data collection, preparation, and analysis in their research. We use a many-analysts approach to measure the extent and impact of these decisions. Two published causal empirical results are replicated by seven replicators each. We find large differences in data preparation and analysis decisions, many of which would not likely be reported in a publication. No two replicators reported the same sample size. Statistical significance varied across replications, and for one of the studies the effect’s sign varied as well. The standard deviation of estimates across replications was 3-4 times the typical reported standard error.
Published in Economic Inquiry (2021), 59(3): 944-960.
2020/005 - Financial Education and Financial Attitudes: Evidence from a High School Experiment (PDF)
Andrew Gill and Radha Bhattarcharya
We surveyed high-school students in Southern California to investigate whether there is an improvement in financial attitudes from eight class periods of financial literacy intervention in a high-school economics course. We examine whether the money management (MM) and financial investing (FI) components of financial instruction influence attitudes differently and whether they each influence attitudes beyond a standard economics course. We find that the MM treatment influences being thrifty and delaying gratification. Both treatments increase risk-taking behavior, with neither treatment being more important than the other. Within the confines of our experiment, exposure to economics per se did not influence any of the financial attitudes, pointing to the need for financial education to inculcate healthy financial attitudes in high school children.
2020/004 - Monitoring and Competing Principals: A Double-Edged Sword (PDF)
Jen-Wen Chang
Do monitoring technologies increase a principal’s profits if he has to compete with others for an agent? While monitoring improves the risk-incentive tradeoff, it also reduces the costs for a rivaling principal to offer a more attractive contract. We show that when the agent’s prudence is smaller than two times risk aversion, equilibrium profits are lower when monitoring is available if there is some competition. When prudence is larger than two times risk aversion, equilibrium profits are higher when motoring is available. Conversely, the agent benefits from monitoring when competition is intense but can be hurt when it is mild.
Published in Journal of Economic Theory 2020, 189: 105101.
2020/003 - The Economics of Crowdfunding (PDF)
Jen-Wen Chang
An entrepreneur finances her project via crowdfunding. She chooses a funding mechanism (fixed or flexible), a price, and a funding goal. Under fixed funding money is refunded if the goal is not met; under flexible funding there is no refund. Backers observe signals about project value and decide whether to contribute or postpone purchase to the retail stage. Using the linkage principle, we show that the optimal campaign uses fixed funding. Furthermore, we show that an entrepreneur who is not financially-constrained can approximately attract full surplus using fixed funding. Therefore, crowdfunding is attractive to both small and large entrepreneurs.
Published in American Economic Journal: Microeconomics 2020, 12(2): 257-280.
2020/002R - Crop Choice, Trade Costs, and Agricultural Productivity (PDF)
Alberto Rivera Padilla
I argue that the agricultural productivity puzzle is in large part a staple productivity puzzle. Using detailed data from Mexican farms, I show that most farmers grow staple crops, despite the fact that labor productivity in cash crops is substantially higher. To explain this pattern I develop a quantitative general equilibrium framework with multiple regions and crop types, subsistence requirements of staple food, and interregional trade costs. In equilibrium, most farming production is in staple crops because subsistence constraints and high trade costs prevent most farmers from specializing in cash crops. Reducing trade costs in Mexico to the U.S. level would raise the ratio of employment in cash crops to staples by 15 percent and generate a 13 percent increase in agricultural labor productivity.
Forthcoming, Journal of Development Economics.
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2020/001 - Slums, Allocation of Talent, and Barriers to Urbanization (PDF)
Alberto Rivera Padilla
Slums are a prevalent urban phenomenon across developing countries. They are locations with low-quality dwellings, often built on valuable land, that allow poorer households to access urban markets that otherwise would be unattainable. I build a spatial general equilibrium framework to analyze the aggregate effects of anti-slum policies in India. The model takes into account individual selection and location differences in education returns, productivity, and housing rents. I find that demolishing slums in the most productive areas shrinks the size of urban population and reduces labor productivity. In contrast, decreasing formal housing distortions in India to the U.S. level increases the share of urban population by 13% and labor productivity by 1.8%, and generates a 34% reduction in the share of the urban population living in slums.
2019
2019/006 - Instruments with Heterogeneous Effects: Bias, Monotonicity, and Localness (PDF)
Nick Huntington-Klein
In Instrumental Variables (IV) estimation, the effect of an instrument on an endogenous variable may vary across the sample. In this case, IV produces a local average treatment effect (LATE), and if monotonicity does not hold, then no effect of interest is identified. In this paper, I calculate the weighted average of treatment effects that is identified under general first-stage effect heterogeneity, which is generally not the average treatment effect among those affected by the instrument. I then describe a simple set of data-driven approaches to modeling variation in the effect of the instrument. These approaches identify a Super-Local Average Treatment Effect (SLATE) that weights treatment effects by the corresponding instrument effect more heavily than LATE. Even when first-stage heterogeneity is poorly modeled, these approaches considerably reduce the impact of small-sample bias compared to standard IV and unbiased weak-instrument IV methods, and can also make results more robust to violations of monotonicity. In application to a published study with a strong instrument, the preferred approach reduces error by about 20% in small subsamples, and by about 15% in larger subsamples.
Published in Journal of Causal Infererence (2020), 8(1): 182-208.
2019/005 - The Effect of Unemployment on Noncognitive Skills (PDF)
Kristin J. Kleinjans
Unemployment results in lower levels of cognitive skills and has long-term effects on health and economic well-being. In this paper, I show that unemployment also has negative effects on noncognitive skills, at least in the short term. Using a sample of Germans born between 1945 and 1995, I account for potential endogeneity by using state-level unemployment rates as instruments and controlling for past levels of noncognitive skills. The effects of not working are strong, reducing conscientiousness by 0.15 of a standard deviation for women and by 0.25 for men.
Published, Applied Economics Letters (2020), 27(17), 1387-1390.
2019/004 - Trust and Democracy (PDF)
Sherif Khalifa
This paper examines the effect of trust on democracy. To account for potential endogeneity, and to identify a causal effect of trust on democracy, the paper uses new instrumental variables. The instruments used for trust are the mean elevation and the terrain ruggedness. The paper uses the World Values Survey to examine the effect of trust in people from another nationality, trust in people from another religion, trust in people you know personally, trust in people you meet for the first time, trust in your family, trust in your neighborhood, and whether most people can be trusted. The Ordinary Least Squares results show that the trust variables have a statistically significant positive association with democracy. These results are robust after the inclusion of several control variables, with the exception of income per capita and educational attainment. The paper also conducts two stage least squares regressions. The results show that trust, instrumented by these geographic variables, explains cross country variations in democracy. These results are also robust after the inclusion of control variables, with the exception of income per capita and educational attainment. These results imply that trust affects democracy indirectly through the channels of economic development and human capital accumulation.
2019/003 - State History and State Fragility: Evidence from Sub-Saharan Africa (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines the association between the length of experience with statehood, or state history, on the likelihood of state fragility. The argument is that the accumulation of knowledge by state personnel, and the build-up of experience within state institutions, allows the state to avoid the exposure to recurrent crises, which is considered a symptom of weakness. The paper focuses on sub-Saharan African countries and uses Probit estimation techniques. The analysis shows that state history has a negative and statistically significant effect on the state fragility index. This result is robust after the inclusion of a variety of economic, political, institutional and historical variables. We also use extreme fragility as our dependent variable. The Probit and Relogit estimations also show a statistically significant negative effect of state history on extreme fragility. This is the case even after the inclusion of control variables.
2019/002 - Long-Term Vision and Economic Development (PDF)
Oasis Kodila-Tedika and Sherif Khalifa
This paper examines the effect on economic development of whether a country's policy makers adopt a long-term strategic vision. The difficulty in estimating a causal effect is that long-term vision is endogenous to economic development. Therefore, we use the Future-Time-Reference language variables introduced in Chen (2013) as instrumental variables for long-term vision. The results of the ordinary least squares estimations show that the adoption of long-term vision has a statistically significant positive association with economic development. These results are robust even after the inclusion of control variables such as schooling, institutional quality, openness and others. To account for endogeneity, the paper conducts two stage least squares estimations where the language instruments are used in the first stage to find an exogenous source of variation in long-term vision. The results show that long-term vision, instrumented by the linguistic variables, explains cross country variations in economic development. These results are also robust even after the inclusion of the control variables and the exclusion of the outliers.
Forthcoming, The World Economy: https://doi.org/10.1111/twec.12982 .
2019/001 - An Informational Intervention to Increase Semester Credits in College (PDF)
Nick Huntington-Klein and Andrew M. Gill
Increased time to college-degree completion increases tuition and foregone earnings costs. Encouraging college students to take more semester credits is a low-cost way to reduce time to completion. We implemented an experimental informational intervention to increase student course loads by varying the intensity of information about the benefits of taking 15 credits per semester. We find no effect of our treatment on students’ course loads. Our null finding is of interest because of the increasing popularity of low-cost informational interventions. Uncovering null results like these is important for the design of future interventions.
Published in Series of Unsurprising Results in Economics (2019), 1: 1-17.
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2018
2018/011R - Cash-Flow Tranching and the Macroeconomy (PDF)
Pedro Amaral, Dean Corbae, and Erwan Quintin
The volume of cash-flow transformation activities has grown markedly over the past few decades as a result of technological improvements, regulatory arbitrage, and increased appetite for safe assets, among other factors. We develop a dynamic model where the effects of changes in the costs and benefits of security creation activities can be characterized. Reduced tranching costs and increases in foreign appetite for safe assets can both create large increases in the volume of costly security creation with positive effects on GDP and wages, but they have otherwise very different macroeconomic implications. Reductions in tranching costs counterfactually cause yields to rise, implying that household welfare rises significantly more than output. In contrast, increased foreign demand for safe assets brings yields down and also causes the rents associated with cash-flow transformation to increase. These two features as well as several other subsidiary implications of increased foreign demand in our model, are consistent with recent U.S. data.
Forthcoming, International Economics Review.
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2018/010 - Human Capital Vs. Signaling is Empirically Unsolvable (PDF)
Nick Huntington-Klein
Economists offer two major explanations for the fact that we find causal labor market returns to education. The first is human capital accumulation: education improves ability. The second is signaling: education allows initially high-ability students to distinguish themselves. A major point of interest in the economics of education is relative contributions of signaling and human capital. Empirical evidence generally rejects pure human capital or pure signaling models. I argue that exclusions of the pure models effectively form the limits of what can be learned from empirical data about relative contribution. An education returns model with some non-zero contribution of both signaling and human capital cannot be empirically distinguished from another model with different non-zero contributions, making human capital vs. signaling a poor framing for understanding the return as a whole, and for policy decision-making.
Published in revised form in Empirical Economics (2021), 60: 2499-2431.
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2018/009 - Semester Course Load and Student Performance (PDF)
Nick Huntington-Klein and Andrew Gill
Many college students in the United States take longer than the proscribed four years to complete their bachelor’s degrees. Long time-to-degree leads to billions of dollars of additional costs in higher education in the form of education costs and lost wages. Time-to-degree can be reduced if students to take more credits each term. However, an increased course load may lead students to reduce their time investment in each course, harming performance. Using longitudinal data on two cohorts of students at a regional four-year university with a high average time-to-degree, we fail to find any evidence that a high course load has a negative impact on student performance in class. This result is consistent with a model where students substitute time away from non-education activities when their course loads increase.
Published in Research in Higher Education (2021), 62: 623-650.
2018/008R - The Effect of the Fall of the Berlin Wall on Children’s Noncognitive Skills (PDF)
Andrew Gill and Kristin J. Kleinjans
The noncognitive skill of conscientiousness has been linked to favorable labor market and health outcomes. But how is conscientiousness affected by events that happen in childhood? We investigate the effects of negative parental selection and economic and social upheaval on conscientiousness in adulthood using data from the German Socioeconomic Panel (SOEP). Our identification strategy exploits the steep drop in fertility that occurred in the former East Germany following the fall of the Berlin Wall and the collapse of the socialist regime. Using an event study analysis and a difference-in-differences estimator with the former West Germany as a control group, we find that women conceived in East Germany in the three-year period following the fall the Berlin Wall are less conscientious as adults than women born after this period and before the fall of the Berlin Wall. In light of the findings by Chevalier and Marie (2017) that parents who had children coinciding with this collapse in fertility were negatively selected, we interpret our findings as evidence of a detrimental effect of negative parental selection on women’s conscientiousness. In contrast, we find no effects of negative parental selection on the conscientiousness of men.
Published, Applied Economics (2020), 52(51), 5595-5612.
This paper was previously entitled "Negative Parental Selection and Children’s Noncognitive Skills: Evidence from the Fall of the Berlin Wall".
2018/007R - Age-Dependent Increasing Risk Aversion and the Equity Premium Puzzle (PDF)
Amadeu DaSilva, Mira Farka and Christos Giannikos
We introduce a new preference structure -- age-dependent increasing risk aversion (IRA)-- in a three period OLG model with borrowing constraints, and examine a number of asset pricing puzzles (equity premium, saving share, portfolio allocation) in this framework. We find that IRA preferences generate results that are more consistent with U.S. data for the equity premium, level of savings and portfolio shares, without assuming unreasonable levels of risk aversion. We find that the relative difference between the two risk aversions (how much more risk-averse old agents are relative to the middle aged) matters more than the average risk aversion in the economy (how much more risk averse both cohorts are). Our findings are robust with respect to a number of model generalizations.
Published in The Financial Review, 2019, 54(2), 377-412.
2018/ 006 - The Changing Importance of Earnings in College Major Choice (PDF)
Nick Huntington-Klein and Elizabeth Ackert
Prior studies find that undergraduate major choices are responsive to earnings associated with those majors, but weakly suggests that responsiveness has dropped over time. Using data on college graduates from 1973 to 2013, we find that responsiveness of major choice to labor market returns has weakened over time. The weakening response is due to changes within demographic groups rather than demographic changes in the college graduate population over time. If the goal is to maintain or increase the alignment between college major and labor market returns, incentivizing undergraduates to select high-earning majors is necessary.
2018/005 - Student Preference for Guidance and Complexity in College Major Requirements (PDF)
Rachel Baker and Nick Huntington-Klein
In order to graduate with a bachelor’s degree, students must determine which classes they must take in order to satisfy the requirements of their major. These requirements are often complex and difficult to comprehend, leading to some policy interventions that aim to reduce complexity by either increasing the amount of student guidance in course choice or by reducing the amount of complexity-increasing choice. We perform two student preference experiments on students at two large four-year universities to determine how students might respond to increasing guidance or reduced choice in their course-taking options. We find that students do not respond strongly to increases in guidance such as grouping courses into meaningful categories or removing cross-cutting requirements, but strongly reject a reduction in options, even when given a rationale for the reduction. These results suggest that increased-guidance policies have some avenues to operate in without student pushback, but that strong reductions in choice are unlikely to be popular.
2018/004 - Bad Luck, Bad Policy, and Learning? A Markov-Switching Approach to Understanding Postwar (PDF)
U.S. Macroeconomic Dynamics
Gabriela Best and Joonyoung Hur
In this paper we analyze changes in the Federal Reserve behavior and objectives since the 1960s justified by potentially evolving beliefs—through a real-time learning process—about the structure of the economy and shifts in policymakers’ preferences in the late 1970s. In addition, we allow for changes in the volatility of the structural shocks in a medium scale Markov-switching DSGE model. We evaluate the relative contribution of each narrative to the explanation of the Great Inflation and the Great Moderation. We argue that the interplay between central bank learning and a shift in policy makers’ preferences explains movements in the monetary instrument. In addition, the model captures non-policy related high volatility
periods clustered around the late 1960s through the 1970s, specifically supply side shocks that behaved as destabilizing forces driving macroeconomic fluctuations. To conclude, we observe that a change in monetary policy objectives, assumptions about policymakers’ learning process, and Markov-switching volatility are key to fit the model to the U.S. post-war data.
2018/003 - News, Real-time Forecasts, and the Price Puzzle (PDF)
Gabriela Best and Pavel Pavinos
This paper revisits the effects of news shocks in the context of an otherwise standard New Keynesian dynamic general equilibrium (DSGE) model. We use the U.S. real-time forecasts from the Federal Reserve's Green Book to model agents' and the central bank's expectations of future macroeconomic outcomes. We show that unlike with the ex post data where the identification of news shocks is driven by the modeling assumptions, the identification strategy that relies on the Greenbook forecasts ascribes a larger role to news shocks in explaining variation in the model's endogenous variables. Furthermore, we demonstrate that the presence of sizable news shocks explains the emergence of the price puzzle in the structural vector autoregressive framework.
2018/002 - Is the Fed's news perception different from the private sector's? (PDF)
Gabriela Best and Pavel Pavinos
The recent literature on monetary policy has dedicated considerable attention to modelling agents' processing of information about the future in real time. This paper contributes to this growing strand by investigating the implied differences in the so-called news shocks estimated from the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model using the real-time datasets from the Survey of Professional Forecasters (SPF) and the Federal Reserve's Greenbook (GB) forecasts. Alternative specifications with either the SPF or GB forecasts aim to delineate the differences in the private sector's and the Fed's expectations of future macroeconomic outcomes and identify the differences in their perception of news shocks. Our results indicate that while the demand news shocks have very similar distributions in the two datasets, the monetary and cost-push news shocks from the models estimated on the GB data tend to be larger than those from the SPF. These findings suggest that the Federal Reserve's
forecasting methods allow for more variation in future outcomes than the SPF's. These findings mesh well with the extant literature on the superiority of the Fed's forecasts relative to the private sector's and provide a structural explanation for the source of this superiority.
2018/001 - Keeping an Eye Out: Behavior in the Presence of Riskless Ambiguity (PDF)
Nick Huntington-Klein
Past research on choice under ambiguity - decisions made when the probability of each outcome is unknown - has typically focused on scenarios in which ambiguity is presented alongside risks with known probabilities. Understanding the response to ambiguity is then difficult to distinguish from the response to risk, confounding our understanding of how subjects behave in conditions of ambiguity. In this paper I take advantage of the fact that all decisions are necessarily ambiguous to some extent to develop a scenario in which ambiguity is present but is otherwise risk-free. Respondents participate in a task that is very similar to a multi-armed bandit but with no random variation in payouts. I show that respondents anticipate ambiguity in payouts without prompting, continue to do so for long periods of time, respond differently to gains and losses in this context, and that this tendency is independent of risk preference. I offer a basic, clean framework for creating a riskless ambiguous environment for subjects, and argue that these exploratory results make the case for further study of ambiguity in riskless environments.
2017
2017/003 - Cognition and Income in Old Age (PDF)
Emma Aguila and Maria Casanova
Cognitive function in older adults is related to independent living and functional ability, and performance in memory tasks can be used as a screening tool for dementia risk. Due to population aging, the burden of dementia on low- and middle-income countries (LMIC) is expected to increase rapidly over the coming decades. Interventions aimed at countering risk factors for dementia such as diabetes and hypertension are a standard part of clinical practice in high-income countries (HIC), but not in LMIC, where health system preparedness is limited. Cognitive training interventions have been proven successful in high-income countries (HIC), but widespread implementation would likely not be affordable in LMIC. We investigate whether an intervention providing individuals aged 70 and above with supplemental income - a type of intervention often implement in LMIC with the objective of decreasing old-age poverty - was successful at improving cognitive performance. The intervention took place in the Mexican State of Yucatan. The city of Valladolid was randomly selected to be the treatment, and Motul was designated as a control. A representative sample of individuals aged 70 and above was interviewed in the two cities pre- and post-. We used a difference-in-difference (DID) regression model to assess the effect of the intervention on immediate and delayed word recall scores, and found that the intervention increased both scores significantly for both men and women. To test for support for different mechanisms through which the intervention may have affected cognition, we also analyzed a number of secondary outcomes. We found that the intervention did not have an effect on the number of diagnosed risk factors, but improved health care utilization, likely aiding in the managing of already diagnosed chronic conditions. Moreover, the intervention was associated with improvements in anemia and other markers of malnutrition.
2017/002 - Diverging Prices of Novel Goods (PDF)
Nick Huntington-Klein and Alasdair Young
It is well-established that the costs of consumer search lead many markets to exhibit price dispersion in equilibrium. However, relatively little attention is paid to how dispersion changes over time. The presiding assumption is that prices out of equilibrium should converge. We develop a model in which shifts in demand combined with menu costs lead dispersion to naturally rise soon after release for some novel goods. We examine an online market for collectible cards and find that price dispersion increases over time for more than half of the goods in the market.
2017/001R - Security Creation Costs and Economic Development (PDF)
Pedro Amaral and Erwan Quintin
We describe a tractable general equilibrium environment in which producers can transform cash-flows at
a cost to create securities that cater to the needs of heterogeneous investors. We use the resulting model to characterize the theoretical implications of reductions in the cost of cash-flow transformation activities. Those reductions result in a greater volume of cash-flow transformation but have ambiguous effects on capital formation, output, and TFP, in clear contrast to the outcome of traditional financial development exercises.