2009 Discussion Papers: Abstracts

Abstract:
The use of robust regression estimators has gained popularity among applied econometricians. The main argument invoked to justify the use of the robust estimators is that they provide efficiency gains in the presence of outliers or non-normal errors. Unfortunately, most practitioners seem to be unaware of the fact that heteroskedastic and skewed errors can dramatically affect the properties of these estimators. In this paper we reconsider the interpretation of the specific robust estimator that has become popular in applied econometrics, and conclude that its use in this context cannot be generally recommended.

Abstract:
In a standard search model the expected duration of unemployment is independent of the duration of previous employment, as well as of the current length of the unemployment spell. This paper offers a network mechanism to generate these correlations. Here, employed workers invest in social contacts with other employed workers, which will help them find jobs in the event of unemployment. These social contacts "depreciate" because they can also become unemployed and unemployed contacts are assumed to be useless. In this model the longer you have been working, the more contacts you are likely to have, and the more contacts you have the shorter your expected unemployment duration will be. The model is a simple and tractable way of introducing network ideas in one of the workhorses of labour and macroeconomics. The model also suggests that networks are less productive during periods of high unemployment, mainly because high unemployment destroys part of the network. In addition, the model provides guidance for indirect inference of network effects from the data.

Abstract:
We extend the simulation results given in Santos Silva and Tenreyro (2006, “The log of gravity,” The Review of Economics and Statistics, 88, 641-658) by considering data generated as a finite mixture of gamma variates. Data generated in this way can naturally have a large proportion of zeros and is fully compatible with constant elasticity models such as the gravity equation. Our results confirm that the Poisson pseudo maximum likelihood estimator is generally well behaved.

Abstract:
The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy’s steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications.

Abstract:
We introduce a tractable model of cheap talk among players located on networks. In our model, a player can send a message to another player if and only if he is linked to him. We derive a sharp equilibrium and welfare characterization which reveals two basic insights. In equilibrium, the willingness of a player to communicate with a neighbor decreases with the number of opponents who communicate with the neighbor. The ex-ante equilibrium welfare of every player increases not only with the number of truthful reports transmitted in the network, but also when truthful reports are more evenly distributed across players. We apply our findings to the analysis of homophily in communities, to organization design, and to the study of endogenous network formation. Communication across communities decreases as communities become larger, and communication may be asymmetric: From large communities to small ones. In our set up, fully decentralized organizations maximize all players’ welfare. Further, decentralized networks, where information may flow asymmetrically, endogenously form in equilibrium. Finally, we introduce the possibility of public communication in networks, and identify conditions under which public communication Pareto dominates private communication.

Abstract:
Technological change is transforming media industries. Digitization lowers the cost of recording, storage, reproduction and distribution, while computer-based editing facilitates higher quality and special effects. With electronic distribution, a vast range of content can be made available to consumers at little cost. Meanwhile, the distribution of industry production and sales appears to be shifting: the late 20th century was the era of the “hit parade”, but in the 21st attention has shifted to the “long tail”. This paper develops a free entry model of differentiated products with endogenous quality and heterogeneous types to examine the implications of technological change for market structure, quality, and the distribution of firms in media industries. This framework can be used to assess current and future trends in media industries.

Abstract:
Religion and ritual have been characterized as costly ways for conditional cooperators to signal their type, and thus identify and interact with one another. But an effective signal may be prohibitively expensive: if the cost of participation is too small, freeriders may send the signal and behave selfishly later. However, if the ritual reveals only the average level of signaling in a group, free-riders can behave selfishly without being detected, and even a low cost signal can separate types. While individuals cannot be screened out, members can learn the group’s profile of types. Under specified conditions, this information gain leads to greater cooperation and hence increases expected welfare. Furthermore, if crowding is unimportant relative to the conditional cooperation term, anonymous rituals will be preferred to ones which reveal individuals’ behavior. Examples of anonymous institutions include church collections, voting, music, dance, and military customs.

Abstract:
I analyse the effects of a downstream merger in a differentiated oligopoly when there is bargaining between downstream firms and upstream agents (firms or unions). Bargaining outcomes can be observable or unobservable by rivals. When competition is in quantities, upstream agents are independent and bargaining is over a uniform input price, a merger between downstream firms may raise consumer surplus and overall welfare. However, when competition is in prices or the upstream agents are not independent or bargaining is over a two-part tariff or bargaining covers both the input price and the level of output, the standard welfare results are restored: a downstream merger always reduces consumer surplus and overall welfare.

Abstract:
Women and men may differ in their propensity to choose a risky outcome because of innate preferences or because pressure to conform to gender-stereotypes encourages girls and boys to modify their innate preferences. Single-sex environments are likely to modify students' risk-taking preferences in economically important ways. To test this, we designed a controlled experiment in which subjects were given an opportunity to choose a risky outcome - a real-stakes gamble with a higher expected monetary value than the alternative outcome with a certain payoff - and in which the sensitivity of observed risk choices to environmental factors could be explored. The results of our real-stakes gamble show that gender differences in preferences for risk-taking are indeed sensitive to whether the girl attends a single-sex or coed school. Girls from single-sex schools are as likely to choose the real-stakes gamble as boys from either coed or single sex schools, and more likely than coed girls. Moreover, we found that gender differences in preferences for risk-taking are sensitive to the gender mix of the experimental group, with girls being more likely to choose risky outcomes when assigned to all-girl groups. This suggests that observed gender differences in behaviour under uncertainty found in previous studies might reflect social learning rather than inherent gender traits.

Abstract:
Using a controlled experiment, we examine the role of nurture in explaining the stylized fact that women shy away from competition. Our subjects (students just under 15 years of age) attend publicly-funded single-sex and coeducational schools. We found robust differences between the competitive choices of girls from single-sex and coed schools. Moreover, girls from single-sex schools behave more like boys even when randomly assigned to mixed-sex experimental groups. Thus it is untrue that the average female avoids competitive behaviour more than the average male. This suggests that observed gender differences might reflect social learning rather than inherent gender traits.

Abstract:  In the last twenty years the divorce rate in the United States has being decreasing, differentiating the US trend from those of most Western countries. In this paper I explore the possibility to study this phenomenon by relating the patterns in the divorce rates to the role played by “time use complementarities” within the household. The changes in time consumption of couples in the last forty years are used as proxies for the changes in consumption habits and are analyzed through the American Time Use Data. The relation between time management and the likelihood of divorce is then studied making use of several datasets from the National Longitudinal Study, covering the period 1967-2004. The results show the emergence of relevant differences in the way American couples shape their time together during the last four decades. Spouses devote more time to joint leisure activities, while togetherness does not relate anymore to household chores and childcare. Furthermore the link between the way partners share household responsibilities and the hazard rate of divorce tends to vanish over time, suggesting a reduction in production complementarities as a deciding factor in the success of marriages.  

Abstract:  This paper addresses the issue of the presence and the extent of equalizing differences between temporary and permanent workers. The assumption of perfect competition in the labour market is directly questioned and a simple duopsonistic model is developed with the aim of capturing the main sources of differentiation among workers. The empirical analysis, based on several waves of the UK Labour Force Data, tends to confirm several of the hypotheses suggested by the model and emphasizes how in the short run workers who have experienced a change in their job status can expect a career trajectory in line with the theory on compensating differentials. In particular, shifts from temporary to permanent contracts tend to relate to a reduction in wage and a simultaneous increase in travel-to-work distance, while the wage dynamic related to the workers shifting from a temporary contract to another temporary position appears to be directly linked to individual characteristics.

Abstract:  The paper shows that the principal can enhance her control over the agent's human capital by acquiring the physical capital that is critical for him to create value. However, the enhancement in the control necessarily reduces his incentive to make human capital investment ex ante and to exert e¤ort ex post. This trade-off between control and incentive thus decides the boundary of the firm. The paper also presents a rationale for M-form firms: centralized ownership of physical capital to facilitate coordination, and dispersed payoff rights to incentivize divisions.

Abstract:  The paper proposes that the organization of financial markets is decided by the allocation of the liability to repay investors. Based on the liability allocation, the paper examines all possible modes of organizing finance and monitoring in an economy a la Townsend (1979). The equilibrium mode is either Financial Intermediation (FI) where the monitor alone takes the liability, or Conglomeration where it is taken by a Conglomerate composed of entrepreneurs and the monitor. Conglomeration also implements the benefit of diversification, which thus does not drive FI. Moreover, opposed to what Diamond (1984) would predict, monitoring costs advantage FI.

Abstract:  This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds.

Abstract:  Many empirical and theoretical studies explore the effects of ex-ante risk and ex-post shocks on child education. While scholars share the opinion that shocks reduce investment in education, there is no general agreement over the effects of uncertainty on child schooling. This work uses the Indonesian Family Life Survey to explore the effects of ex-ante risk and ex-post shocks on school progression in rural Indonesia. We develop a model of household school transition decisions from elementary to junior education and from junior to senior school considering different sources of uncertainty related both to parental and adult income, and under the assumption that withdrawal from school is permanent. In this way, temporary interruptions in child schooling have long term impacts on the child human capital. We show that there is no simple answer to the question of how uncertainty affects schooling decisions. Econometric results suggest that uncertainty about parental income for the time the child may be potentially at school increases the probability of attending junior school while uncertainty about expected earnings from education has a negative and significant effect only for senior school attendance. Finally, positive (negative) income shocks increase (decrease) the probability of attending junior school.

Abstract:  Several papers have documented that when subjects play with standard laboratory “endowments” they make less self-interested choices then when they use money they have either earned through a laboratory task or brought from outside the lab. In the context of a charitable giving experiment we decompose common "house money" effects into two components: the tangibility of cash in hand relative to money (or ecu's) promised on a computer screen, and the desert of earned money relative to random windfall gains. While both components are found to be significant in non-parametric tests, the former effect, which has been neglected in previous studies, has a stronger effect on total donations. These results have clear implications for experimental design, and also suggest that the availability of less tangible payment methods may increase charitable donations.

Abstract:  We examine the dynamic properties of inflation in a model of optimal discretionary fiscal and monetary policies. The lack of commitment and the presence of nominally risk-free debt provide the government with an incentive to implement policies which induce positive and persistent inflation rates. We show that this property obtains already in an environment with flexible prices and perfectly competitive product markets. Introducing nominal rigidities and imperfect competition has no qualitative but important quantitative implications. In particular, with a modest degree of price stickiness our model generates inflation dynamics very similar to those experienced in the U.S. since the Volcker disinflation of the early 1980s.