Recent Publications

2020

Daniel Millimet (with Christopher Parmeter), Accounting for Skewed or One-Sided Measurement Error in the Dependent Variable, Political Analysis (forthcoming). [Working paper]

Nonclassical measurement error in the dependent variable, arising from skewed or even one-sided errors, in a linear regression framework can lead to bias, but the stochastic frontier model is shown to be a readily available solution in certain situations.

While classical measurement error in the dependent variable in a linear regression framework results only in a loss of precision, nonclassical measurement error can lead to estimates which are biased and inference which lacks power. Here, we consider a particular type of nonclassical measurement error: skewed errors. Unfortunately, skewed measurement error is likely to be a relatively common feature of many outcomes of interest in political science research. This study highlights the bias that can result even from relatively “small” amounts of skewed measurement error, particularly if the measurement error is heteroskedastic. We also assess potential solutions to this problem, focusing on the stochastic frontier model and nonlinear least squares. Simulations and three replications highlight the importance of thinking carefully about skewed measurement error, as well as appropriate solutions.

Santanu Roy (with Maarten Janssen), Regulating Product Communication, American Economic Journal: Microeconomics (forthcoming). [Working paper]

While it can increase competition and improve information for consumers, the regulation of false advertising and other deceptive communication by firms can lead to unintended consequences, including excessive advertising and over disclosure, that hurt consumers.

Information regulation that penalizes deceptive communication by firms can have significant unintended consequences. We consider a market where competing firms communicate private information about product quality through a combination of pricing and direct communication (advertising or labeling) that may be false. A higher fine for lying reduces the reliance on price signaling, thereby lowering market power and consumption distortions; however, it may lead to excessive disclosure. Low fines are always worse than no fines. High fines are welfare improving only if communication itself is inexpensive. Penalizing false claims may reduce profits of both high and low quality firms.

Klaus Desmet (with Robert Kopp, Scott Kulp, David Nagy, Michael Oppenheimer, Esteban Rossi-Hansberg and Ben Strauss), Evaluating the Economic Cost of Coastal Flooding, American Economic Journal: Macroeconomics (forthcoming) [Working paper]

A high-resolution dynamic model of the world economy projects that permanent flooding will reduce global GDP by 0.19% in present value terms; Ignoring the dynamic response of migration increases the loss in GDP in the year 2200 from 0.11% to 4.5%.

Sea-level rise and ensuing permanent coastal inundation will cause spatial shifts in population and economic activity over the next 200 years. Using a highly spatially disaggregated, dynamic model of the world economy that accounts for the dynamics of migration, trade, and innovation, this paper estimates the consequences of probabilistic projections of local sea-level changes under dierent emissions scenarios. Under an intermediate greenhouse gas concentration trajectory, permanent ooding is projected to reduce global real GDP by an average of 0.19% in present value terms, with welfare declining by 0.24% as people move to places with less attractive amenities. By the year 2200 a projected 1.46% of world population will be displaced. Losses in many coastal localities are more than an order of magnitude larger, with some low-lying urban areas particularly hard hit. When ignoring the dynamic economic adaptation of investment and migration to ooding, the loss in real GDP in 2200 increases from 0.11% to 4.5%. This shows the importance of including dynamic adaptation in future loss models.

Hao Dong (with Taisuke Otsu and Luke Taylor), Average Derivative Estimation Under Measurement Error, Econometric Theory (forthcoming) [Working paper]

This paper derives the asymptotic distribution of the density-weighted average derivative when a regressor is contaminated with a classical measurement error, and shows that the asymptotic distribution of the estimator is the same irrespective of whether the error distribution is estimated or not when the error density is symmetric.

We derive the asymptotic properties of the density-weighted average derivative estimator when a regressor is contaminated with classical measurement error and the density of this error must be estimated. Average derivatives of conditional mean functions are used extensively in economics and statistics, most notably in semiparametric index models. As well as ordinary smooth measurement error, we provide results for supersmooth error distributions. This is a particularly important class of error distribution as it includes the Gaussian density. We show that under either type of measurement error, despite using nonparametric deconvolution techniques and an estimated error characteristic function, we are able to achieve a root-n rate of convergence for the average derivative estimator. Interestingly, if the measurement error density is symmetric, the asymptotic variance of the average derivative estimator is the same irrespective of whether the error density is estimated or not. The promising finite sample performance of the estimator is shown through a Monte Carlo simulation.

James Lake (with Tibor Besedes and Tristan Kohl), Phase Out Tariffs, Phase In Trade?, Journal of International Economics (forthcoming) [Working paper]

The gradual phase-out of tariffs in Free Trade Agreements (e.g. NAFTA) cannot explain the delayed increase in trade flows typically observed after countries form Free Trade Agreements.

An important stylized fact in the empirical Free Trade Agreement (FTA) literature is that member trade ows gradually increase over time following an FTA. Baier & Bergstrand (2007) suggest two explanations: tari phase-out and delayed pass-through of taris into import prices. We examine these hypotheses using 1989{2016 U.S. import growth and product-level data on the tari phase-out negotiated under NAFTA and the earlier Canada-U.S. FTA. We do not nd evidence supporting either hypothesis. While products receiving tari cuts do show delayed import growth relative to products with unchanged taris, the delay in import growth does not correspond to delays in the timing of tari cuts. We also show that tari cuts are fully and immediately passed through to U.S. importers as there are virtually no changes in the prices received by exporters either in the short run or the long run. Rather, we nd evidence for an important role played by NAFTA tari cuts reducing the impact of frictions that, in turn, allow for a spatial expansion of imports across the U.S.

Klaus Desmet (with Marius Brulhart and Gian-Paolo Klinke), The Shrinking Advantage of Market Potential, Journal of Development Economics (2020) [Published article]

Data from 18,961 regions of the world show that as economies develop, market potential loses importance and local density gains importance as determinants of regional growth.

How does a country’s economic geography evolve along the development path? This paper documents recent employment growth in 18,961 regions in eight of the world’s main economies. Overall, market potential is losing importance, and local employment density is gaining importance, as correlates of local growth. In mature economies, growth is strongest in low-marketpotential areas. In emerging economies, the opposite is true, though the association with market potential is also weakening there. Structural transformation away from agriculture can account for some of the observed changes. The part left unexplained by structural transformation is consistent with a standard economic geography model that yields a bell-shaped relation between trade costs and the growth of centrally located regions.

Ömer Özak (with Emilio Depetris-Chauvin),The Origins of the Division of Labor in Pre-Industrial Times, Journal of Economic Growth (2020). [Published article]

Population diversity in intergenerational transmitted traits (e.g., preferences, values, abilities) is a fundamental determinant of the division of labor in pre-modern times, which in turn has had a major impact on the emergence of states and pre-industrial and contemporary economic development.

This research explores the historical roots of the division of labor in pre-industrial societies. Exploiting a variety of identification strategies and a novel ethnic level dataset combining geocoded ethnographic, linguistic and genetic data, it shows that higher levels of intra-ethnic diversity were conducive to economic specialization in the pre-industrial era. The findings are robust to a host of geographical, institutional, cultural and historical confounders, and suggest that variation in intra-ethnic diversity is a key predictor of the division of labor in pre-industrial times.

Thomas Osang (with Jeffry Jacob), Democracy and Growth: A Dynamic Panel Data Study, The Singapore Economic Review (2020). [Published article]

Investigating the nexus between democracy and economic development in a new empirical framework, we find that we find that measures of democracy matter little for a country’s economic performance, in contrast to the growth effects of institutions, regime stability, openness, geography and macro-economic policy variables.

In this paper, we investigate the idea whether democracy has a direct effect on economic growth. We use a system GMM framework that allows us to model the dynamic aspects of the growth process and control for the endogenous nature of many explanatory variables. In contrast to the growth effects of institutions, regime stability, openness, geography and macro-economic policy variables, we find that measures of democracy matter little, if at all, for the economic growth process.

Klaus Desmet (with Avner Greif and Stephen Parente), Spatial Competition, Innovation and Institutions: The Industrial Revolution and the Great Divergence, Journal of Economic Growth (2020). [Published article and Working paper]

This paper argues that differences in the degree of inter-city competition can help us understand the timing of the Industrial Revolution and the Great Divergence between England and China in the 18th and 19th centuries.

This paper considers the possible contribution of spatial competition to the Industrial Revolution and the Great Divergence. Rather than exclusively focusing on the incentives of producers to adopt labor-saving technology, we also consider the incentives of factor suppliers’ organizations such as craft guilds to resist. Once we do so, industrialization no longer depends on market size per se, but on spatial competition between the guilds’ jurisdictions. We substantiate our theory’s claim of spatial competition being an important channel for industrialization (i) by providing historical evidence on the relation between spatial competition, craft guilds and innovation, and (ii) by showing that the calibrated model correctly predicts the timings of the Industrial Revolution and the Great Divergence.

Ömer Özak (with Oded Galor and Assaf Sarid), Linguistic Traits and Human Capital Formation, AEA Papers and Proceedings. [Published Article and Working paper]

Exploiting variations in the languages spoken by children of migrants with identical ancestral countries of origin, we establish that the presence of periphrastic future tense, and its association with long-term orientation has a significant positive impact on educational attainment, whereas the presence of sex-based grammatical gender, and its association with gender bias, has a significant adverse impact on female educational attainment.

This research establishes the influence of linguistic traits on human behavior. Exploiting variations in the languages spoken by children of migrants with identical ancestral countries of origin, the analysis indicates that the presence of periphrastic future tense, and its association with long-term orientation has a significant positive impact on educational attainment, whereas the presence of sex-based grammatical gender, and its association with gender bias, has a significant adverse impact on female educational attainment.

Klaus Desmet (with Joseph Gomes and Ignacio Ortuño), The Geography of Diversity and the Provision of Public Goods, Journal of Development Economics (2020). [Published article and Working paper]

This paper shows that local interaction between individuals of different ethnolinguistic groups improves educational, health and infrastructure outcomes at the national level.

This paper analyzes the importance of local interaction between individuals of diﬀerent ethnolinguistic groups for the provision of public goods at the national level. The conceptual framework we develop suggests that a country’s public goods (i) decrease in its overall ethnolinguistic fractionalization, and (ii) either increase or decrease in its local-global ethnolinguistic complementarity, a measure of how local interaction aﬀects antagonism towards other groups in the society at large. After constructing a 5 km by 5 km dataset on language use for 223 countries, we empirically explore these theoretical predictions. While overall fractionalization worsens public goods outcomes, local interaction mitigates this negative association. Conditional on a country’s overall diversity, public goods outcomes are maximized when there are a few large-sized groups and the diversity of each location mirrors that of the country as a whole

James Lake (with Moise Nken and Murat Yildiz), Tariff Bindings and the Dynamic Formation of Preferential Trade Agreements, Journal of International Economics (2020) [Published article and Working paper]

Tariff binding liberalization has substantial impacts on the nature and extent of PTA formation.

We show that multilateral tariff binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tariff binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tariff binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tariff binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs

Tim Salmon (with Angela de Oliveira, John Ledyard, Charles Plott and Louis Putterman), Introduction to the Symposium on Research on Social Dilemmas, Economic Inquiry (2020). [Published article]

This is the introduction to a special issue of Economic Inquiry associated the seventh in a series of workshops on social dilemmas begun by Elinor Ostrom in 2002 that attracted a large number of high quality submissions over a broad range of topics in the research area.

2019

Rocio Madera (with Antonio Cabrales, Maia Güell and Analia Viola), Income Contingent University Loans: Policy Design and an Application to Spain, Economic Policy (2019) [Published article and Working paper]

This paper offers a general analysis of the distributional effects of income-contingent loan systems to finance tertiary education, followed by an application to Spain.

In Europe, the need for additional funding coming from either budget cuts and/or increased costs due to increased competition has reopened the debate on the financing of university systems. An attractive alternative to the current general-tax-financed subsidies are Income Contingent Loans (ICL), a flexible scheme that puts more weight on private resources while enhancing progressivity. One challenge of the viability of ICL systems is the functioning of the labor market for university graduates. This paper offers a general analysis of the economics of ICL, followed by an application to Spain. We set up a loan laboratory in which we can explore the distributional effects of different loan systems to finance tertiary education at current costs as well as to increase university funding to improve in its quality. We use simulated lifetime earnings of graduates matching the dynamics of employment and earnings in the Spanish administrative social security data to calculate the burden of introducing ICL for individuals at different points of the earnings distribution and for the government. We find that (1) our proposed structure is highly progressive under all specifications, with the top quarter of the distribution paying close to the full amount of the tuition and the bottom 10\% paying almost no tuition; and (2) the share of total university education subsidized by the government is between 16 and 56 percentage points less than under the current system.

Klaus Desmet (with Dávid Krisztián Nagy and Esteban Rossi-Hansberg), The Geography of Development, Journal of Political Economy (2019) [Published article]

This paper develops a dynamic spatial growth model, calibrates it at the 1-degree by 1-degree geographic resolution for the whole world, and shows that fully liberalizing migration would increase global welfare about threefold.

We develop a dynamic spatial growth theory with realistic geography. We characterize the model and its balanced-growth path and propose a methodology to analyze equilibria with different levels of migration frictions. Different migration scenarios change local market size, innovation incentives, and the evolution of technology. We bring the model to the data for the whole world economy at a 1-degree by 1-degree geographic resolution. We then use the model to quantify the gains from relaxing migration restrictions. Our results indicate that fully liberalizing migration would increase welfare about threefold and would signiﬁcantly affect the evolution of particular regions of the world.

Michael Sposi (with B. Ravikumar and Ana Maria Santacreu), Capital Accumulation and Dynamic Gains from Trade, Journal of International Economics (2019). [Published article]

We develop a gradient-free method to compute the welfare gains from trade in a multi-country, dynamic model of trade with capital accumulation and current account dynamics.

We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths following a trade liberalization. We find that (i) larger countries accumulate a current account surplus, and financial resources flow from larger countries to smaller countries, boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset position before the liberalization is positively correlated with the gains. The tradables intensity in consumption goods production determines the static gains, and the tradables intensity in investment goods production determines the dynamic gains that include capital accumulation.

Nate Pattison (with Rajashri Chakrabarti), Auto Credit and the 2005 Bankruptcy Reform: The Impact of Eliminating Cramdowns, The Review of Financial Studies (2019) [Published article]

Exploiting persistent historical variation in states’ bankruptcy patterns, we find that increased creditor protection from a major 2005 bankruptcy reform led to lower interest rates for consumers.

Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform, as Chapter 13 bankruptcy filers can no longer “cramdown” the amount owed on recent auto loans. We estimate the causal effect of this anticramdown provision on the price and quantity of auto credit. Exploiting historical variation in states’ usage of Chapter 13 bankruptcy, we find strong evidence that eliminating cramdowns decreased interest rates and some evidence that loan sizes increased among subprime borrowers. The decline in interest rates is persistent and is robust to a battery of sensitivity checks. We rule out other reform changes as possible causes. Received September 29, 2016; editorial decision January 15, 2019 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Bo Chen (Joint with Yu Chen and David Rietzke), Simple Contracts under Observable and Hidden Actions, Economic Theory (2019). [Published article]

Simple forcing contracts are both optimal and useful for general multitask moral hazard problems with both observable and hidden actions.

We consider a general framework for multitask moral hazard problems with observable and hidden actions. Ideally, the principle in out framework can design optimal contracts that depend on both observable (and verifiable) actions and realized outcomes. Given a mild assumption on the existence of a punishment scheme, we identify a general equivalence result, dubbed the "forcing principle", which states that every optimal contract in our framework is strategically equivalent to a simple forcing contract, which only specifies an outcome-contingent reward scheme and an action profile, and the agent receives the outcome-contingent reward only if he follows the recommended observable actions (and is otherwise punished severely). The forcing principle has useful implications: it confers analytical advantage for the existence and computation of optimal contracts in our setting. It also highlights and makes explicit the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems.

James Lake (with Pravin Krishna), Preferential Trade Agreements: Recent Theoretical and Empirical Developments, Oxford Research Encyclopedia of Economics & Finance (2019) [Published article and Working paper]

This survey chapter pays special attention to the recent literature using game theory models to investigate the interaction between Preferential Trade Agreements and multilateral trade liberalization.

In recent decades, there has been a dramatic proliferation of preferential trade agreements (PTAs) between countries that, while legal, contradict the non-discrimination principle of the world trade system. This raises various issues, both theoretical and empirical, regarding the evolution of trade policy within the world trade system and the welfare implications for PTA members and non-members. The survey starts with the Kemp-Wan-Ohyama and Panagariya-Krishna analyses in the literature that theoretically show PTAs can always be constructed so that they (weakly) increase the welfare of members and non-members. Considerable attention is then devoted to recent developments on the interaction between PTAs and multilateral trade liberalization, focusing on two key incentives: an “exclusion incentive” of PTA members and a “free riding incentive” of PTA non-members. While the baseline presumption one should have in mind is that these incentives lead PTAs to inhibit the ultimate degree of global trade liberalization, this presumption can be overturned when dynamic considerations are taken into account or when countries can negotiate the degree of multilateral liberalization rather than facing a binary choice over global free trade. Promising areas for pushing this theoretical literature forward include the growing use of quantitative trade models, incorporating rules of origin and global value chains, modeling the issues surrounding “mega-regional” agreements, and modelling the possibility of exit from PTAs. Empirical evidence in the literature is mixed regarding whether PTAs lead to trade diversion or trade creation, whether PTAs have significant adverse effects on non-member terms-of-trade, whether PTAs lead members to lower external tariffs on non-members, and the role of PTAs in facilitating deep integration among members

Kathy Hayes (with Shawna Grosskopf, Laura Razzolini, and Lori Taylor), Kids or Cash? Exploring Charter School Responses to Declining Government Revenues, Economic Inquiry (2019) [Published article]

We find that charter schools typically increase enrollments, rather than increasing fundraising, in response to funding cuts.

While the literature is extensive on school districts' revenue sources, less research has been done on the impact of donations on school district funds. In this paper, we extend the theoretical literature on crowding out of private donations by government grants for one type of nonprofit firm, namely charter schools. The theoretical model leads us to focus on the key relationships among fundraising effort, enrollment (which is tied to federal and state funding) and donations. Using a dataset on Texas charter schools we adopt a two‐stage approach to examine the empirical relationship between changes in nondonor revenues and the donations received by charter schools. Like the extensive empirical estimates of the effects of government grants on donations for other types of nonprofit firms, we find evidence of crowding‐out with respect to our sample of charter schools. We also find a significant, positive effect of fundraising on donations with a $1 increase in fundraising associated to a $0.58 increase in donations, a pattern consistent with overinvestment in fundraising. Enrollments exhibit a robust inverse relationship to changes in nondonor revenues.

Daniel Millimet (with Hao Li and Punarjit Roychowdhury), Partial Identification of Economic Mobility, Journal of Business & Economic Statistics (2019). [Published article and Working paper]

This paper discusses the partial identification of income mobility when using error-laden, self-reported data on income at two points in time.

The economic mobility of individuals and households is of fundamental interest. While many measures of economic mobility exist, reliance on transition matrices remains pervasive due to simplicity and ease of interpretation. However, estimation of transition matrices is com- plicated by the well-acknowledged problem of measurement error in self-reported and even administrative data. Existing methods of addressing measurement error are complex, rely on numerous strong assumptions, and often require data from more than two periods. In this paper, we investigate what can be learned about economic mobility as measured via transition matrices while formally accounting for measurement error in a reasonably trans- parent manner. To do so, we develop a nonparametric partial identication approach to bound transition probabilities under various assumptions on the measurement error and mo- bility processes. This approach is applied to panel data from the United States to explore short-run mobility before and after the Great Recession.

Santanu Roy (with Adriana Piazza), Irreversibility and the Economics of Forest Conservation, Economic Theory (2019). [Published article]

Difficulty of regenerating forest on land used for non-forest economic activities can discourage expansion of forests and at the same time, make it optimal to conserve a minimal forested area; low reforestation cost can lead to cyclical fluctuations in optimal forest cover.

For the canonical one sector stochastic optimal growth model, we outline a new set of conditions for a policy function that satisfies the Ramsey-Euler equation to be optimal. An interior Ramsey-Euler policy function is optimal if, and only if, it is continuous or alternatively, if, and only if, both consumption and investment are non-decreasing in output. In particular, we show that under these conditions, the stochastic paths generated by the policy must satisfy the transversality condition; the implication is that in applying our result, one does not need to verify the transversality condition when checking for optimality of a policy function.

Tim Salmon (with Adam Shniderman), Ambiguity in Criminal Punishment, Journal of Economic Behavior & Organization (2019). [Published article]

While many prior studies find evidence that individuals are strongly ambiguity averse, we investigate whether such preferences can be exploited by using increased ambiguity in punishments but find little evidence that behavior is driven by ambiguity aversion in this domain.

There has been substantial prior field research on how the incidence of criminal behavior responds to changes in the probability of punishment. The results of this research are at best mixed in regards to its conformance to the predictions of standard expected utility theory. One possible cause for these mixed results is that punishment probabilities in the field are typically unknown making the choice environment one of ambiguity rather than uncertainty. The presence of this ambiguity could in part explain some of these conflicting results. As a step towards investigating this link, we conduct an experiment framed as being on tax compliance intended to try to understand how individuals respond to ambiguous punishment probabilities and in particular to how they respond to shifts in ambiguous versus known probabilities. We find that when probabilities are known and shift, the standard model works well to explain the response. When the probabilities are ambiguous and shift, the behavioral response is minimal. We also use these experiments as a means of testing whether ambiguity aversion might be present in sufficient degree to be exploitable in how enforcement procedures are advertised to increase their effectiveness at minimal cost. We find at best weak evidence in favor of ambiguity aversion and thus little support for the notion that enforcement regimes could take advantage of ambiguity aversion.

Thomas Osang (with Jared Warren), Retaliatory Antidumping by China: A New Look at the Evidence, Eastern Economic Journal (2019). [Published article]

Examining a large number of factors that may influence China’s decision to retaliate using antidumping filings from 1995 to 2015, we find, among others, that higher levels of China’s country-specific imports as well as lower growth rates of China’s GDP increase the likelihood of retaliation.

China is the most frequent target of antidumping (AD) filings and the sixth most frequent user of antidumping duties. In this paper, we investigate the factors that influence China’s decision to retaliate using AD filings from 1995 to 2015. We consider an AD filing by China to be retaliatory if it occurs within 1 year of an initial AD filing against them and determine the factors that explain retaliatory antidumping filings. We find that higher levels of China’s country-specific imports, lower growth rates of Chinese GDP, and China’s WTO membership increase the likelihood of retaliation. In contrast, higher import growth reduces AD retaliation.

Mike Sposi, Evolving Comparative Advantage, Sectoral Linkages, and Structural Change, Journal of Monetary Economics (2019) [Published article]

Input-output linkages systematically vary with income levels across countries, and these differences are important for explaining the hump shape in the share of industry in aggregate GDP across income levels.

Intermediate-input intensities vary systematically with economic development across countries. These cross-country differences in input–output linkages account for 74% of the curvature in the hump shape in industry’s share in value added across levels of income per capita. This is twice as much as can be accounted for by variation in the composition of final demand. Using a three-sector, open-economy model of structural change I find that this result is robust to general equilibrium effects.

James Lake, Dynamic Formation of Preferential Trade Agreements: The Role of Flexibility, Canadian Journal of Economics (2019). [Published article and Working paper]

A trade–off between coordination and flexibility can explain why, in practice, the number of Free Trade Agreements overwhelmingly outweigh the number of Customs Unions.

In practice, Free Trade Agreements (FTAs) vastly outnumber Customs Unions (CUs). Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs: individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. I show how the relative prevalence of FTAs versus CUs depends on the structure of market size asymmetry across countries and use these predictions to shed some light on FTA versus CU formation in Europe and South America

2018

Mike Sposi, (with Piyusha Mutreja and B. Ravikumar), Capital Goods Trade, Relative Prices, and Economic Development, Review of Economic Dynamics (2018). [Published article]

Trade enables poor countries access to capital goods produced in rich countries, boosting their capital stock, and also improves their TFP by allowing them to specialize in the production of non-capital goods.

International trade in capital goods has quantitatively important effects on economic development through capital formation and TFP. Capital goods trade enables poor countries to access more efficient technologies, leading to lower relative prices of capital goods and higher capital–output ratios. Moreover, poor countries use their comparative advantage and allocate their resources more efficiently, and increase their TFP. We quantify these channels using a multisector, multicountry, Ricardian model of trade with capital accumulation. The model matches several trade and development facts within a unified framework. Frictionless trade in capital goods reduces the income gap between rich and poor countries by 40 percent. More than half of the reduction in the income gap is due to the TFP channel.

Ömer Özak, Distance to the Pre-industrial Technological Frontier and Economic Development, Journal of Economic Growth (2018). [Published article]

This paper establishes that geographical isolation from the technological frontier during the pre-industrial era has had beneficial effects on countries' economic development in the long-run as it fostered a culture of entrepreneurship and innovation.

This research explores the effects of distance to the pre-industrial technological frontiers on comparative economic development in the course of human history. It establishes theoretically and empirically that distance to the frontier had a persistent non-monotonic effect on a country’s pre-industrial economic development. In particular, advancing a novel measure of the travel time to the technological frontiers, the analysis establishes a robust persistent U-shaped relation between distance to the frontier and pre-industrial economic development across countries. Moreover, it demonstrates that countries, which throughout the last two millennia were relatively more distant from these frontiers, have higher contemporary levels of innovation and entrepreneurial activity, suggesting that distance from the frontier may have fostered the emergence of a culture conducive to innovation, knowledge creation, and entrepreneurship.

Bo Chen and Raj Deb, The Role of Aggregate Information in a Binary Threshold Game, Social Choice and Welfare (2018). [Published article and Working paper]

The minimal information (of previous contributions) required for full coordination in sequential contribution for a public good with a known threshold and no refund is not full observation but that the participants' observation is linked in an information chain with certain length.

We analyze the problem of coordination failure in the presence of imperfect information in the context of a binary-action sequential game with a tipping point. An information structure summarizes what each agent can observe before making her decision. Focusing on information structures where only aggregate information from past history can be observed, we characterize information structures that can lead to various (efficient and inefficient) Nash equilibria. When individual decision making can be rationalized using a process of iterative dominance (Moulin 1979), we derive a necessary and sufficient condition on information structures under which a unique and efficient dominance solvable equilibrium outcome is obtained. Our results suggest that if sufficient (and not necessarily perfect) information is available, coordination failure can be overcome without centralized intervention.

Saltuk Ozerturk, Choosing a Media Outlet when Seeking Public Approval, Public Choice (2018). [Published article]

This paper considers the media outlet choice of a politician who seeks public approval for a political agenda and shows that (1) politicians who enjoy sufficient popularity are likely to avoid tough media outlets, and (2) when seeking approval for controversial agendas, politicians are more likely to appear in tougher outlets.

This paper considers the media outlet choice of a politician who seeks public approval for a political agenda in a broadcast interview. The available media outlets differ in their ‘‘toughness’’ towards the politician. An interview with a tougher media outlet is more informative, but is also more likely to yield a negative outcome. The choice of the media outlet determines the accuracy of the information that ﬂows to the public and the volume of citizens who consume that information. The analysis shows that (1) politicians who enjoy sufﬁcient popularity are likely to avoid tough media outlets, (2) when seeking approval for controversial agendas, politicians are more likely to appear in tougher outlets.

Nathan Balke (with Stephen Brown), Oil Supply Shocks and the U.S. Economy: An Estimated DSGE Model, Energy Policy (2018). [Published article]

We quantify the responsiveness of the US economy to oil price increases brought about by oil supply disruptions abroad.

We develop and use a medium-sized DSGE model of the U.S. economy to evaluate how U.S. real GDP responds to oil price movements that originate from global oil supply shocks. The core of the model is a standard macroeconomic DSGE framework that includes nominal and real frictions. The model includes oil as an input in multiple domestic sectors (consumption, intermediate goods, and transportation services). We include a domestic oil production sector for the United States to reflect the recent development in shale oil technology. The model also captures international trade in goods and oil. The model parameters are set through a combination of calibration and Bayesian estimation using quarterly data for 1991 through 2015. Baseline estimation of the model finds the elasticity of U.S. real GDP with respect to an oil price shock of − 0.015, which is among the less elastic estimates in the literature. Using the model to conduct counterfactual analysis, we find that decreasing steady state U.S. oil consumption substantially reduces the response of real GDP to oil prices. Increasing U.S. domestic oil production only modestly reduces the response of real GDP to oil prices.

Thomas Osang (with Jeffry Jacob), Democracy and Growth: A Dynamic Panel Data Study, Singapore Economic Review (2018). [Published article and Working paper]

In this paper we investigate the idea whether democracy has a direct effect on economic growth. We use a system GMM framework that allows us to model the dynamic aspects of the growth process and control for the endogenous nature of many explanatory variables. In contrast to the growth effects of institutions, regime stability, openness, geography and macro-economic policy variables, we find that measures of democracy matter little, if at all, for the economic growth process.

Tom Fomby and Daniel Millimet (with Ian McDonough), Financial Capability and Food Security in Extremely Vulnerable Households, American Journal of Agricultural Economics (2018). [Published article]

Using original survey data collected from food pantry clients throughout North Texas, we find a statistically and economically meaningful causal effect of financial literacy on the food security status of households.

Food insecurity is among the most significant, nutrition-related public health issues facing the United States. Unfortunately, little is known about the determinants of food insecurity except that it is not synonymous with poverty. Many households above the poverty line are food insecure; many below are not. We investigate a lack of financial capability as a potential salient determinant of household-level food security. Using original survey data collected among food pantry clients in North Texas, we assess the impact of financial capacity on food security relying on family background as an exclusion restriction. Our results indicate a strikingly significant effect, both economically and statistically, of financial capability in general and financial behaviors in particular.

Tom Fomby (with Pranavi Sreeramoju, Lucia Dura, Maria Fernandez, Abu Minhajuddin, Kristina Simacek, and Bradley Doebbeling), Using a Positive Deviance Approach to Influence Culture of Patient Safety Related to Infection Prevention, Open Forum Infectious Diseases (2018). [Published article]

A positive deviance approach appeared to have a significant impact on patient safety culture related to infection prevention among health care personnel who received the intervention.

Health care–associated infections (HAIs) are a socio-technical problem. We evaluated the impact of a social change intervention on health care personnel (HCP), called “positive deviance” (PD), on patient safety culture related to infection prevention among HCP. A positive deviance approach appeared to have a significant impact on patient safety culture among HCP who received the intervention. Social network analysis identified HCP who are likely to help disseminate infection prevention information. Systemwide interventions independent of PD resulted in HAI reduction in both intervention and control wards. Health care–associated infections (HAIs) are a socio-technical problem. We evaluated the impact of a social change intervention on health care personnel (HCP), called “positive deviance” (PD), on patient safety culture related to infection prevention among HCP.

2017

Klaus Desmet (with Ignacio Ortuño and Romain Wacziarg), Culture, Ethnicity, and Diversity, American Economic Review (2017). [Published article]

This paper empirically shows that only 1-2% of a country's overall heterogeneity occurs between ethnolinguistic groups, yet the degree of between-group cultural differences are a significant predictor of civil conflicts.

We investigate the empirical relationship between ethnicity and culture, defined as a vector of traits reflecting norms, values, and attitudes. Using survey data for 76 countries, we find that ethnic identity is a significant predictor of cultural values, yet that within group variation in culture trumps between-group variation. Thus, in contrast to a commonly held view, ethnic and cultural diversity are unrelated. Although only a small portion of a country’s overall cultural heterogeneity occurs between groups, we find that various political economy outcomes (such as civil conflict and public goods provision) worsen when there is greater overlap between ethnicity and culture.

James Lake and Santanu Roy, Are Global Trade Negotiations Behind a Fragmented World of "Gated Globalization"?, Journal of International Economics (2017). [Published article and Working paper]

Global tariff negotiations can prevent global free trade precisely because they are successful in lowering global tariffs.

We show that global trade negotiations can prevent global free trade. In a simple model where global tariff negotiations precede sequential Free Trade Agreements (FTAs), we show FTA formation can expand all the way to global free trade in the absence of global tariff negotiations but global free trade never emerges when global tariff negotiations precede FTA formation. This result arises precisely because global tariff negotiations successfully elicit concessions from negotiating countries. Moreover, global tariff negotiations can produce a fragmented world of gated globalization where some countries form FTAs that eliminate tariff barriers among themselves while outsiders continue facing higher tariffs.

Ömer Özak (with Ani Harutyunyan), Culture, Diffusion, and Economic Development: The Problem of Observational Equivalence, Economics Letters (2017). [Published article ]

This paper establishes the difficulty of determining whether cultural values affect economic development directly or by hindering adoption of improved technologies as the recent literature has strived to do.

This research explores the direct and barrier effects of culture on economic development. It shows both theoretically and empirically that whenever the technological frontier is at the top or bottom of the world distribution of a cultural value, there exists an observational equivalence between absolute cultural distances and cultural distances relative to the frontier, preventing the identification of its direct and barrier effects. Since the technological frontier usually has the “right” cultural values for development, it tends to be in the extremes of the distribution of cultural traits, generating observational equivalence and confounding the analysis. These results highlight the difficulty of disentangling the direct and barrier effects of culture. The empirical analysis finds suggestive evidence for direct effects of individualism and conformity with hierarchy, and barrier effects of hedonism.

Daniel Millimet (with Ian McDonough), Missing Data, Imputation Accuracy, and Endogeneity, Journal of Econometrics (2017). [Published article and Working paper]

This paper investigates various methods of addressing missing data on an endogenous covariate in a linear regression framework; recommendations for applied researchers are provided.

Bassmann (1957, 1959) introduced two-stage least squares (2SLS). In subsequent work, Basmann et al. (1971) investigated its finite sample performance. Here we build on this tradition focusing on the issue of 2SLS estimation of a structural model when data on the endogenous covariate is missing for some observations. Many such imputation techniques have been proposed in the literature. However, there is little guidance available for choosing among existing techniques, particularly when the covariate being imputed is endogenous. Moreover, because the finite sample bias of 2SLS is not monotonically decreasing in the degree of measurement accuracy, the most accurate imputation method is not necessarily the method that minimizes the bias of 2SLS. Instead, we explore imputation methods designed to increase the first-stage strength of the instrument(s), even if such methods entail lower imputation accuracy. We do so via simulations as well as with an application related to the medium-run effects of birth weight.

Santanu Roy (with Tapan Mitra), Optimality of Ramsey-Euler Policy in the Stochastic Growth Model, Journal of Economic Theory (2017). [Published article and Working paper]

A continuous (or monotonic) consumption function that satisfies the Euler equation is shown to be always optimal in the standard one sector stochastic growth model; there is no need to verify the cumbersome transversality condition separately.

Tim Salmon (with Roberto Weber), Maintaining Efficiency While Integrating Entrants From Lower-Performing Environments: An Experimental Study, Economic Journal (2017). [Published article]

This study examines the efficacy of different rules on group formation mimicking immigration rules in allowing a highly coordinated group to maintain a high level of cooperation as new entrants join from a less successful group.

Efficiently growing a group often requires integrating individuals from lower performing entities. We explore the effectiveness of policies intended to facilitate such integration, using an experiment that models production as a coordination game. We create an efficient group and an inefficient one. We then allow individuals to move into the efficient group under different mechanisms. We investigate the use of an entry quota, an entry quiz and combinations of the two in order to try to understand if and why the institutions are effective. We find that both restrictions work to maintain efficient coordination but they are effective for different reasons.

Saltuk Ozerturk, Moral Hazard, Skin in the Game Regulation and CRA Performance, International Review of Economics and Finance (2017). [Published article]

This paper develops a theoretical model and shows that, requiring the seller to retain a stake on the security issued (skin in the game) also improves the rating accuracy of a Credit Rating Agency involved in the sale.

This paper investigates the implications of the “issuer skin in the game” regulation for the rating accuracy of a credit rating agency (CRA). The analysis shows that, as well mitigating a moral hazard problem on the issuer's side, skin in the game requirements can also improve the rating accuracy of a CRA involved in the sale. The results also link the accuracy of the CRA's ratings to the severity of the issuer's moral hazard problem. A more nuanced skin in the game rule that accounts for the specifics of the underlying security class can be more desirable rather than the proposed ”one size fits all” rule.

Bo Chen (with Debing Ni), Optimal Bundle Pricing under Correlated Valuations, International Journal of Industrial Organization (2017). [Working paper]

For a multi-product monopolist, the correlation of consumers' component valuations crucially affects the form of the optimal bundle pricing scheme and can be exploited by the monopolist to improve revenue using a random selling mechanism.

We study optimal pricing issues for a monopolist selling two indivisible goods to a continuum of consumers with correlated private valuations over the goods, where the (positive or negative) correlation is modeled using copulas in the Frechet family. We derive explicit optimal pricing schemes and comparative statics results for various environments in our setting. The optimal pricing schemes can take several forms, including pure bundling, partial mixed bundling, and mixed bundling, dependingjointlyonthedegreesofasymmetryandcorrelationoftheconsumers valuations. The explicit optimal pricing schemes also enable us to investigate whether and how the monopolists profit can be further improved via random assignments.

Nathan Balke (with Mike Fulmer and Ren Zhang), Incorporating the Beige Book into a Quantitative Index of Economic Activity, Journal of Forecasting (2017). [Published article]

We show how information in the Beige Book can be used to improve forecasts of economy activity.

We apply customized text analytics to the written description of economic activity contained in the Beige Book (BB) in order to obtain a quantitative measure of current economic conditions. This quantitative BB measure is then incorporated into a dynamic factor index model that also contains other commonly used quantitative economic data. We find that at the time the BB is released it has information about current economic activity not contained in other quantitative data. This informational advantage is relatively short lived. By 3 weeks after their release date, ‘old’ BBs contain little additional information about economic activity not already contained in other quantitative data.

Tom Fomby (with Kun Chang and Rong Chen), Prediction-based Adaptive Compositional Model for Seasonal Time Series Analysis, Journal of Forecasting (2017). Published article]

A new class of seasonal time series models where out-of-sample forecasts show forecasting accuracy at least as good as current state-of-the-art forecasting techniques.

In this paper we propose a new class of seasonal time series models, based on a stable seasonal composition assumption. With the objective of forecasting the sum of the next ℓ observations, the concept of rolling season is adopted and a structure of rolling conditional distributions is formulated. The probabilistic properties, estimation and prediction procedures, and the forecasting performance of the model are studied and demonstrated with simulations and real examples.

Kathy Hayes (with Shawna Grosskopf, Lori Taylor, and William Weber), Would Weighted-Student Funding Enhance Intra-District Equity in Texas? A Simulation Using DEA, Journal of the Operational Research Society (2017). [Published article]

We find that if school districts allocated their resources efficiently, then they would not allocate their resources to campuses according to the Texas School Finance Formula.

We use data envelopment analysis to model the educational production function, and then explore how a shift to weighted student funding using the student weights embedded in the Texas School Finance Formula would alter the allocation of inputs and potential outputs. School outputs are measured as value-added reading and math scores on standard achievement tests. We find that if school districts allocated their resources efficiently, then they would not allocate their resources to campuses according to the funding model weights. Policies that promote greater efficiency would also enhance equity in educational outcomes.

Klaus Desmet (with Jordan Rappaport), The Settlement of the United States, 1800-2000: The Long Transition to Gibrat’s Law, Journal of Urban Economics (2017). [Published article]

This paper analyzes the changing relation between local population growth and initial population in the U.S. between 1800 and 2000.

Gibrat’s law, the orthogonality of growth with initial levels, has long been considered a stylized fact of local population growth. But throughout U.S. history, local population growth has significantly deviated from it. Across small locations, growth was strongly negatively correlated with initial population throughout the nineteenth and early twentieth centuries. This strong convergence gave way to moderate divergence beginning in the mid-twentieth century. Across intermediate and large locations, growth became moderately positively correlated with initial population starting in the late nineteenth century. This divergence eventually dissipated but never completely. A simple-one sector model combining the entry of new locations, a friction from population growth, and a decrease in the congestion arising from the supply of land closely matches these and a number of other evolving empirical relationships.

Thomas Osang (with Shlomo Weber), Immigration Policies, Labor Complementarities, and Cultural Frictions: Theory and Evidence, International Journal of Economic Theory (2017). [Published article]

This paper provides theoretical explanations and empirical evidence on how population size, labor complementarities between native and non-native workers as well as cultural frictions between immigrants and natives shape a country’s immigration policy.

In this paper we consider a model of international migration due to Fujita and Weber, with two heterogeneous countries, and show that in equilibrium the larger country attracts more immigrants, while choosing a lower quota. Moreover, a higher degree of labor complementarity and lower degree of cultural friction between natives and immigrants yield a higher immigration quota. We test the empirical validity of the model by using time-series country-level data. Even in the absence of direct evidence of strategic and non-cooperative choice of countries’ immigration quotas, both cross-section and panel data approaches indicate that cross-country immigration patterns are consistent with the majority of our theoretical ﬁndings.

James Lake Free Trade Agreements as Dynamic Farsighted Networks, Economic Inquiry (2017). [Published article and Working paper]

In the presence of multilateral negotiations, Free Trade Agreements prevent global free trade when there are two larger countries and one smaller country, but Free Trade Agreements are necessary for global free trade when there is one larger country and two smaller countries.

In the presence of multilateral negotiations, are Free Trade Agreements (FTAs) necessary for, or will they prevent, global free trade? I answer this question using a dynamic farsighted model of network formation among asymmetric countries. Ultimately, FTAs prevent global free trade when there are two larger countries and one smaller country but FTAs can be necessary for global free trade when there are two smaller countries and one larger country. The model provides insights into the dynamics of recent real world negotiations and recent results in the literature on the empirical determinants of trade agreements.

Daniel Millimet (with Ian McDonough), Dynamic Panel Data Models with Irregular Spacing: with Applications to Early Childhood Development, Journal of Applied Econometrics (2017). [Published article and Working paper]

This paper discusses the problems that arise when estimating dynamic panel data models using longitudinal data where the timing of the survey waves does not align with the data-generating process; solutions are proposed and an application to the determinants of student achievement in primary school is provided.

With the increased availability of longitudinal data, dynamic panel data models have become commonplace. Moreover, the properties of various estimators of such models are well known. However, we show that these estimators break down when the data are irregularly spaced along the time dimension. Unfortunately, this is an increasingly frequent occurrence as many longitudinal surveys are collected at non-uniform intervals and no solution is currently available when time-varying covariates are included in the model. In this paper, we propose two new estimators for dynamic panel data models when data are irregularly spaced and compare their finite-sample performance to the näive application of existing estimators.We illustrate the practical importance of this issue in an application concerning early childhood development.

Klaus Desmet (with Ignacio Ortuño and Shlomo Weber), Peripheral Diversity: Transfers versus Public Goods, Social Choice and Welfare (2017). [Published article]

This paper theoretically hypothesizes and empirically establishes that higher degrees of ethnolinguistic center-periphery tension are associated with less provision of public goods, but more transfers.

This paper advances the hypothesis that in societies that suffer from ethnolinguistic center-periphery tension it is harder to agree on public goods than on transfers. After micro-founding a new peripheral diversity index, it puts forth a simple theory in which the cost of public goods increases with peripheral ethnolinguistic diversity and tax compliance decreases with overall ethnolinguistic diversity. It then empirically explores the relation between public goods provision, transfers, peripheral diversity and overall diversity. Consistent with the theory, we ﬁnd that higher levels of peripheral diversity are associated with less provision of public goods, but more transfers, whereas higher levels of overall diversity have a negative association with transfers. Public goods and transfers are therefore substitutes in their reaction to a change in peripheral diversity.

Tim Salmon (with Danila Serra), Corruption, Social Judgment and Culture: An Experiment, Journal of Economic Behavior & Organization (2017). [Published article]

Mechanisms involving social observability have been increasingly used in developing countries to work against corruption. We examine their effectiveness and the degree to which their effectiveness is culturally dependent.

Modern societies rely on both formal and social mechanisms to enforce social norms of behavior. Formal enforcement mechanisms rely on monetary or other tangible incentives while social enforcement mechanisms rely on some form of social judgment involving informal sanctions. We experimentally investigate the extent to which social observability and the possibility of social judgment affect individuals’ decisions to engage in corruption at the expense of others. We are also interested in the degree to which culture matters. We use a laboratory experiment with a sample of individuals who live in the U.S. but are also characterized by cultural heterogeneity due to the immigration of their ancestors to the U.S. We find that the possibility of social judgment reduces corruption only among individuals who identify culturally with countries characterized by low levels of corruption. Our findings suggest that the effectiveness of social enforcement mechanisms is at least partly dependent on the sociocultural norms prevailing in the target population.

Klaus Desmet (with Dávid Krisztián Nagy and Esteban Rossi-Hansberg), Asia’s Geographic Development, Asian Development Review (2017). [Published article]

This paper quantitatively explores the importance of transport costs and migration restrictions in the long-run development of Asia.

This paper studies the impact of spatial frictions on Asia’s long-term spatial development. Using the framework provided in Desmet, Nagy, and Rossi-Hansberg (2016), we analyze the evolution of Asia’s economy and the relative performance of speciﬁc regions and countries. We then perform a number of counterfactual experiments and ﬁnd that a worldwide drop in transport costs of 40% increases the present discounted value of real income by 70.7% globally and 78% in Asia.These ﬁgures are much larger than those found in standard quantitative trade models because they include dynamic effects and take into account intracountry transport costs. We also perform exercises in which we upgrade Asia’s road network or relax migratory restrictions between locations in Asia. These exercises emphasize the important role of spatial frictions in the development of Asia’s economy.