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Summary of CEPR Discussion Papers for the week ending 08/12/2019

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CEPR Discussion Papers for the week ending 8 December 2019




Summary of Discussion Papers uploaded to our website week ending 08/12/2019 (for details see below).
This email lists all the CEPR Discussion Papers uploaded to in the last week. Clicking on the Discussion Paper number in the list below will take you to the abstract page for that paper and clicking on the PDF link will take you directly to the paper itself if you are a Corporate Member of CEPR, a CEPR Research Fellow or Affiliate or a subscriber to CEPR Discussion Papers.
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DP14178 Rural Transformation, Inequality, and the Origins of Microfinance

Author(s): Nikolaus Wolf, Marvin Suesse

Date of Publication: December 2019

Programme Area(s): DE, EH, MG

Keyword(s): Microfinance, credit cooperatives, rural transformation, Land Inequality, Prussia

Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.



DP14177 Actors in the Child Development Process

Author(s): Daniela Del Boca, Christopher J Flinn, Ewout Verriest, Matthew Wiswall

Date of Publication: December 2019

Programme Area(s): LE

Keyword(s): Time allocation, child development, Household Labor Supply

Abstract: We construct and estimate a model of child development in which both the parents and children make investments in the child's skill development. In each period of the development process, partially altruistic parents act as the Stackelberg leader and the child the follower when setting her own study time. We then extend this non-cooperative form of interaction by allowing parents to offer incentives to the child to increase her study time, at some monitoring cost. We show that this incentive scheme, a kind of internal conditional cash transfer, produces efficient outcomes and, in general, increases the child's cognitive ability. In addition to heterogeneity in resources (wage offers and non-labor income), the model allows for heterogeneity in preferences both for parents and children,and in monitoring costs. Like their parents, children are forward-looking, but we allow children and parents to have different preferences and for children to have age-varying discount rates, becoming more "patient" as they age. Using detailed time diary information on the allocation of parent and child time linked to measures of child cognitive ability, we estimate several versions of the model. Using model estimates, we explore the impact of various government income transfer policies on child development. As in Del Boca et al. (2016), we find that the most effective set of policies are (external) conditional cash transfers, in which the household receives an income transfer given that the child's cognitive ability exceeds a prespecified threshold. We find that the possibility of households using internal conditional cash transfers greatly increases the cost effectiveness of external conditional cash transfer policies.



DP14176 Exchange Rates and Consumer Prices: Evidence from Brexit

Author(s): Holger Breinlich, Elsa Leromain, Dennis Novy, Thomas Sampson

Date of Publication: December 2019

Programme Area(s): IMF, IT

Keyword(s): Brexit, exchange rate pass-through, import costs, inflation

Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.



DP14175 Labour Market Shocks and the Demand for Trade Protection: Evidence from Online Surveys

Author(s): Dani Rodrik, Rafael Di Tella

Date of Publication: December 2019

Programme Area(s): IT, PE


Abstract: We study preferences for government action in response to layoffs resulting from different types of labour-market shocks. We consider: technological change, a demand shift, bad management, and three kinds of international outsourcing. Support for government intervention rises sharply in response to shocks and is heavily biased towards trade protection. Trade shocks generate more demand for protectionism, and among trade shocks, outsourcing to a developing country elicits greater demand for protectionism. The ‘bad management’ shock is the only scenario that induces a desired increase in compensatory transfers. Trump supporters are more protectionist than Clinton supporters, but preferences seem easy to manipulate: Clinton supporters primed with trade shocks are as protectionist as baseline Trump voters. Highlighting labour abuses in the exporting country increases the demand for trade protection by Clinton supporters but not Trump supporters.



DP14174 Signaling Safety

Author(s): Stefano Rossi, Michael Weber, Roni Michaely

Date of Publication: December 2019

Programme Area(s): FE

Keyword(s): dividends, Payout policy, cash-flow volatility, signaling model

Abstract: Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news--and not discount-rate news--drive payout policy, and payout policy conveys information about future cash-flow volatility.



DP14173 Trade Networks and Firm Value: Evidence from the US-China Trade War

Author(s): Yi Huang, Chen Lin, Sibo Liu, Heiwai Tang

Date of Publication: December 2019

Programme Area(s): FE, IMF, IT


Abstract: This paper evaluates the financial implications of policy shocks for global production networks. We use the announcements of tariff increases on a wide range of goods by the US and Chinese governments in 2018-2019 as events, starting with the presidential memorandum issued by the Trump administration on March 22, 2018, to study the impact of trade policy shocks on firms’ stock market performance. Using various novel datasets, we document significantly heterogeneous responses by firms to the announcements. We also show that these responses are determined by the degree to which firms are directly and indirectly exposed to US-China trade through the global value chains. In particular, US firms that are more dependent on exports to and imports from China have lower stock returns and higher default risk around the announcement dates, whereas the reduced import competition from China has a limited effect on the firms. We also find consistent patterns of stock market reactions by Chinese firms. Two reverse experiments in 2019 further validate how the complex structure of global trade shapes stock market reactions to policy shocks.



DP14172 Acquisition for Sleep

Author(s): Lars Persson, Pehr-Johan Norbäck, Charlotta Olofsson

Date of Publication: December 2019

Programme Area(s): IO

Keyword(s): Acquisitions, Innovation, Sleeping patents, IP law, ownership

Abstract: Within the policy debate, there is a fear that large incumbent firms buy small firms' inventions to ensure that they are not used in the market. We show that such "acquisitions for sleep" can occur if and only if the quality of a process invention is small; otherwise, the entry profit will be higher than the entry-deterring value. We then show that the incentive for acquiring for the purpose of putting a patent to sleep decreases when the intellectual property law is stricter because the profit for the entrant then increases more than the entry-deterring value does.



DP14171 Sustainable Investing in Equilibrium

Author(s): Luboš Pástor, Robert F. Stambaugh, Lucian Taylor

Date of Publication: December 2019

Programme Area(s): FE

Keyword(s): sustainable investing, ESG, Socially responsible investing, social impact

Abstract: We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative alphas, whereas brown assets have positive alphas. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors' ESG preferences. When this dispersion shrinks, so does the ESG industry, even if all investors' ESG preferences are strong. Greener assets are more exposed to an ESG risk factor, which captures shifts in customers' tastes for green products or investors' tastes for green holdings. Under plausible conditions, the latter tastes produce positive social impact.



DP14170 The Employment Effects of Ethnic Politics

Author(s): Francesco Amodio, Giorgio Chiovelli, Sebastian Hohmann

Date of Publication: December 2019

Programme Area(s): DE, LE

Keyword(s): ethnic politics, employment, democracy, traditional leaders, Africa

Abstract: This paper studies the labor market consequences of ethnic politics in African democracies. We combine geo-referenced data from 15 countries, 32 parliamentary elections, 62 political parties, 243 ethnic groups, 2,200 electoral constituencies, and 400,000 individuals. We implement a regression discontinuity design that compares individuals from ethnicities connected to parties at the margin of electing a local representative in the national parliament. We find that having a local ethnic politician in parliament increases the likelihood of being employed by 2-3 percentage points. We hypothesize that this effect originates from strategic interactions between ethnic politicians and traditional leaders, the latter retaining the power to allocate land and agricultural jobs in exchange for votes. The available evidence supports this hypothesis. First, the employment effect is concentrated in the historical homelands of ethnicities with strong pre-colonial institutions. Second, individuals from connected ethnicities are more likely to be employed in agriculture, and in those countries where customary land tenure is officially recognized by national legislation. Third, they are also more likely to identify traditional leaders as partisan, and as being mainly responsible for the allocation of land. Evidence shows that ethnic politics shapes the distribution of productive resources across sectors and ethnic groups.



DP14169 Disability Insurance: Error Rates and Gender Differences

Author(s): Hamish Low, Luigi Pistaferri

Date of Publication: December 2019

Programme Area(s): LE, PE

Keyword(s): Disability insurance, gender differences

Abstract: We show the extent of errors made in the award of disability insurance using matched survey-administrative data. False rejections (Type I errors) are widespread,and there are large gender differences in these type I error rates. Women with a severe, work-limiting, permanent impairment are 20 percentage points more likely to be rejected than men, controlling for the type of health condition, occupation, and a host of demographic characteristics. We investigate whether these gender differences in Type I errors are due to women being in better health than men, to women having lower pain thresholds, or to women applying more readily for disability insurance. None of these explanations are consistent with the data. We use evidence from disability vignettes to suggest that there are different acceptance thresholds for men and women. The differences by gender arise because women are more likely to be assessed as being able to find other work than observationally equivalent men. Despite this, after rejection,women with a self-reported work limitation do not return to work, compared to rejected women without a work limitation.



DP14168 Decoupling the CES distribution circle with quality and beyond: equilibrium distributions and the CES-Logit nexus

Author(s): Simon P Anderson, Andre De palma

Date of Publication: December 2019

Programme Area(s): IO, IT

Keyword(s): CES, monopolistic competition, Quality, closed power-family distributions, Pareto, Power, generalised (log-)normal, Logit, Mark-ups, Box-Cox

Abstract: We show for CES demands with heterogeneous productivities that profit, revenue, and output distributions lie in the same closed power-family as the productivity distribution (e.g., the "Pareto circle"). The price distribution lies in the inverse power-family. Equilib- rium distribution shapes are linked by linear relations between their density elasticities. Introducing product quality decouples the CES circle, and reconciles Pareto price and Pareto sales revenue distributions. We use discrete choice underpinnings to find variable mark-ups for a more flexible demand formulation bridging CES to Logit and beyond. For logit demand, exponential (resp. normal) quality-cost distributions generate Pareto (log-normal) economic size distributions.



DP14167 Betting on the Lord: Lotteries and Religiosity in Haiti

Author(s): Emmanuelle Auriol, Delissaint Diego, Maleke Fourati, Josepa Miquel-Florensa, Paul Seabright

Date of Publication: December 2019

Programme Area(s): DE

Keyword(s): risk preferences, religion, field experiment

Abstract: We conducted an experimental study in Haiti testing for the relationship between religious belief and individual risk taking behavior. 774 subjects played lotteries in a standard neutral protocol and subsequently with reduced endowments but in the presence of religious images of Catholic, Protestant and Voodoo tradition. Subjects chose between paying to play a lottery with an image of their choice, and saving their money to play with no image. Those who chose the former are defined as image buyers and those who chose the latter as non-buyers. Image buyers, who tend to be less educated, more rural, and to exhibit greater religiosity, bet more than non-buyers in all games. In addition, in the presence of religious images all participants took more risk, and buyers took more risk when playing in the presence of their chosen images than when playing with other images. We develop a theoretical model calibrated with our experimental data to explore the channels through which religious images might affect risk-taking. Our results suggest that the presence of images tends to increase individuals' subjective probability of winning the lottery, and that subjects therefore believe in a god who intervenes actively in the world in response to their requests.



DP14166 Merger Policy in Digital Markets: An Ex-Post Assessment

Author(s): Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, Salvatore Nava

Date of Publication: December 2019

Programme Area(s): IO

Keyword(s): Digital Markets, mergers, network effects, Big Data, platforms, Ex-post, Antitrust

Abstract: This paper presents a broad retrospective evaluation of mergers and merger decisions in the digital sector. We first discuss the most crucial features of digital markets such as network effects, multi- sidedness, big data, and rapid innovation that create important challenges for competition policy. We show that these features have been key determinants of the theories of harm in major merger cases in the past few years. We then analyse the characteristics of almost 300 acquisitions carried out by three major digital companies –Amazon, Facebook, and Google – between 2008 and 2018. We cluster target companies on their area of economic activity and show that they span a wide range of economic sectors. In most cases, their products and services appear to be complementary to those supplied by the acquirers. Moreover, target companies seem to be particularly young, being four-years-old or younger in nearly 60% of cases at the time of the acquisition. Finally, we examine two important merger cases, Facebook/Instagram and Google/Waze, providing a systematic assessment of the theories of harm considered by the UK competition authorities as well as evidence on the evolution of the market after the transactions were approved. We discuss whether the CAs performed complete and careful analyses to foresee the competitive consequences of the investigated mergers and whether a more effective merger control regime can be achieved within the current legal framework.



DP14165 The Effects of Immigration on the Economy: Lessons from the 1920s Border Closure

Author(s): Ran Abramitzky, Philipp Ager, Leah Boustan, Elior David Cohen, Casper Worm Hansen

Date of Publication: December 2019

Programme Area(s): EH

Keyword(s): Immigration Restrictions, Local Labor Markets, labor mobility

Abstract: In the 1920s, the United States substantially reduced immigrant entry by imposing country-specific quotas. We compare local labor markets with more or less exposure to the national quotas due to differences in initial immigrant settlement. A puzzle emerges: the earnings of existing US-born workers decline after the border closure, despite the loss of immigrant labor supply. We find that more skilled US-born workers – along with unrestricted immigrants from Mexico and Canada – move into affected urban areas, completely replacing European immigrants. By contrast, the loss of immigrant workers encouraged farmers to shift toward capital-intensive agriculture and discourage entry from unrestricted workers.



DP14164 The U.S.-Chinese Trade War: An Event Study of Stock-Market Responses

Author(s): Peter Egger, Jiaqing Zhu

Date of Publication: December 2019

Programme Area(s): IT

Keyword(s): U.S.-China “trade war”, event study, Stock market

Abstract: At the beginning of 2018, President Trump started taking protective tariff measures against products from China in a sequence of events which started a “trade war” between the United States (U.S.) and China. As the value of trade flows affected on both sides rose to a significant amount, this episode will become an interesting research object in the future. A thorough analysis of many outcomes of interest is at this point in time -- and even will be in the next few years -- impossible due to a lack of data which will only become available at a later point. However, as is customary with historical preferential liberalizations in trade agreements and potentially the opposite of it through Brexit, it is possible to gauge consequences of this “trade war” or “trade dispute” when focusing on the stocks of listed companies around related tariff-change announcements or implementations by the U.S. and China in the relevant time span. This paper proposes such an analysis and finds, very much consistent with the rumors from business, that the associated protectionist tariffs appear to have done to a large extent the opposite of what was intended: they hurt domestic firms in targeted and also other, untargeted sectors of an acting country, and they affect third countries and territories which are not even party to the “trade war” or “dispute”.



DP14163 Monetary Policy, Price Setting, and Credit Constraints

Author(s): Almut Balleer, Peter Zorn

Date of Publication: December 2019

Programme Area(s): MEF

Keyword(s): Price Setting, extensive margin, intensive margin, monetary policy, local projections, Menu cost, credit constraints

Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. We find a strong degree of monetary non-neutrality. After expansionary monetary policy, the mass of additional price adjustments is economically small and the average absolute size across all price changes falls. The aggregate price level hardly adjusts, and monetary policy has real effects. These estimates rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments. We provide evidence that monetary policy propagates primarily through production units with weak financial positions.



DP14162 Consumer information and the limits to competition

Author(s): Mark Armstrong, Jidong Zhou

Date of Publication: December 2019

Programme Area(s): IO

Keyword(s): information design, Bertrand Competition, product differentiation, Online platforms

Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relaxing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens differentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.


Sophie Roughton
0207 183 8812






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