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Subject:                           CEPR Discussion Paper Update Week Ending 18/02/2018


Summary of CEPR Discussion Papers for the week ending 18/02/2018

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CEPR Discussion Papers for the week ending 18 February 2018




Summary of Discussion Papers uploaded to our website week ending 18/02/2018 (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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DP12732 Does the Potential to Merge Reduce Competition?

Author(s): Dirk Hackbarth, Bart Taub

Date of Publication: February 2018

Programme Area(s): FE

Keyword(s): Competition, imperfect information, Industry Structure, market power, Horizontal mergers

Abstract: We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.



DP12731 The Greek Justice System: Collapse and Reform

Author(s): Stavroula Karatza, Elias Papaioannou

Date of Publication: February 2018

Programme Area(s): IMF, MG, PE

Keyword(s): law and economics, contractual institutions, investor protection, bankruptcy

Abstract: This paper discusses the key structural deficiencies of the Greek justice system and proposes some concrete policy reforms. In the first part, we provide an anatomy of the Greek legal system using cross-country indicators reflecting the formalism, quality, and speed of the resolution mechanisms. The analysis shows that the Greek justice system is failing to protect citizens, as delays in all types of courts exceed five years and in some instances reach a decade. At the same the quality of laws protecting investors, even property, is low. Using comparative data from other EU jurisdictions, we show that the key reasons behind these failures are the absence of information technology, the lack of supporting to judges staff, the absence of specialized courts and tribunals, and a hugely dysfunctional administration. At the same time, there are minimal checks and balances. In the second part, we detail a set of policy proposals. Our proposals consist of immediate measures for clearing the large backlog and a set of more ambitious medium-term reforms (many of which require a constitutional amendment). Our proposals aim to make the Greek justice system professionally administered, less formalistic, suitably flexible, more responsive and more accountable to society at large. Given the strong link between legal institutions and development, justice reform is an absolute priority of the reform agenda and a sine qua non-condition for the much-needed sustainable recovery of the Greek economy.



DP12730 Public Communication and Collusion in the Airline Industry

Author(s): Gaurab Aryal, Federico Ciliberto, Benjamin Leyden

Date of Publication: February 2018

Programme Area(s): IO

Keyword(s): Collusion, Airlines, communication, Capacity Discipline, Text Data

Abstract: We investigate whether the top management of all legacy U.S. airlines used their quarterly earnings calls as a mode of communication with other airlines to coordinate output reduction (fewer passenger seats) on competitive routes. We build an original and novel dataset on the public communication content from the earnings calls, and use Natural Language Processing techniques from computational linguistics to parse and code the text from earnings calls by airline executives to measure communication. Then we determine if mentioning terms associated with ``capacity discipline'' is a way to sustain collusion on capacity. The estimates show that when all legacy carriers in a market communicate ``capacity discipline,'' it leads to a substantial reduction in the number of seats offered in the market. We find that the effect is driven entirely by legacy carriers, and also that the reduction is larger in smaller markets. Finally, we leverage our high-dimensional text data to develop novel approaches to implement falsification tests and check conditional exogeneity, and confirm that our finding ---legacy airlines use public communication regarding capacity discipline to collude ---is not spurious.



DP12729 Unclogging the Credit Channel: on the Macroeconomics of Banking frictions

Author(s): Egle Jakucionyte, Sweder van Wijnbergen

Date of Publication: February 2018

Programme Area(s): IMF

Keyword(s): Banking frictions, Fiscal policy, Capital requirements, volatility Shocks

Abstract: We explore the consequences of different financial frictions on the corporate and banking level for macroeconomic policy responsiveness to major policy measures. We show that both corporate and bank debt overhang reduce the effectiveness of fiscal policy: multipliers turn negative with debt overhang in either sector. The negative impact of banking frictions on macro outcomes increases when a larger part of working capital is financed through credit in addition to investment. Debt overhang in banks leads to positive NPV loans being rejected; but after banks increase their equity ratio and subsequently engage less in risk shifting behavior, a decline in lending emerges. Thus the macroeconomic response to higher capital requirements depends on which friction is dominant: when there is debt overhang in banks higher capital leads to more, not less loans and is expansionary; while higher capital requirements lower loan volumes and have a recessionary impact when risk shifting is the problem in banks.We trace the differential importance of corporate versus banking debt overhang back to the different approaches followed on each side of the Atlantic in response to the undercapitalization of the banks after the onset of the financial crisis. We similarly trace macrodevelopment differences in the Southern periphery of Europe and the Northern European countries to differences in the problems and policies in their financial sector.



DP12728 Exports and labor costs: Evidence from a French Policy

Author(s): Clément Malgouyres, Thierry Mayer

Date of Publication: February 2018

Programme Area(s): IT

Keyword(s): labor costs, firm-level exports, competitiveness

Abstract: We investigate the role that labor costs hold in exporters' performance. To do so, we exploit a large-scale French reform that granted most firms a tax credit proportional to the wagebill of their employees paid below a given threshold. This policy effectively translated into a cut in labor cost whose magnitude varies depending on firm-specific wage structures. We use the predicted treatment intensity based on pre-reform composition of the labor force as an instrument for the actual policy-induced firm-level change in labor costs. Although our point estimates are consistent with commonly estimated firm-level trade elasticities combined with reasonable labor shares in total costs, coefficients are found to be very noisy, suggesting lack of robust evidence of a causal effect of the policy. We discuss several potential explanations for our results as well as their implications.



DP12727 Misallocation, Markups, and Technology

Author(s): Christian Bayer, Matthias Meier

Date of Publication: February 2018

Programme Area(s): MG

Keyword(s): productivity, Development, Misallocation, Competition

Abstract: Hsieh and Klenow (2009) quantifies aggregate TFP losses from misallocation through factor productivity dispersions and finds misallocation important in explaining international TFP differences. Using micro data from Chile, Colombia, Indonesia, and Germany, we document that dispersion in factor productivities is driven by dispersion in technology and markup. Relative to Germany, misallocation losses for the developing economies are explained to 1/3 by larger technology and to 2/3 by larger markup dispersion. Finally, we show that increased competition reduces technology dispersions but can cause larger markup dispersions as does more innovation. Hence, looking at markup dispersions alone might be misleading.



DP12726 Understanding the Effects of Legalizing Undocumented Immigrants

Author(s): Ferran Elias, Joan Monras, Javier Vázquez Grenno

Date of Publication: February 2018

Programme Area(s): IT

Keyword(s): Immigration, undocumented immigrants, public policy

Abstract: This paper investigates the consequences of the legalization of around 600,000 immigrants by the unexpectedly elected Spanish government of Zapatero following the terrorist attacks of March 2004 (Montalvo, 2011). Using detailed data from payroll-tax revenues, we estimate that each newly legalized immigrant increased local payroll-tax revenues by 4,189 euros on average. This estimate is only 55 percent of what we would have expected from the size of the influx of newly documented immigrants, which suggests that newly legalized immigrants probably earned lower wages than other workers and maybe affected the labor-market outcomes of those other workers. We estimate that the policy change deteriorated the labor-market outcomes of some low-skilled natives and immigrants and improved the outcomes of high-skilled natives and immigrants. This led some low-skilled immigrants to move away from high-immigrant locations. Correcting for internal migration and selection, we obtain that each newly legalized immigrant increased payroll-tax revenues by 4,801 euros, or 15 percent more than the estimates from local raw payroll-tax revenue data. This shows the importance of looking both at public revenue data and the labor market to understand the consequences of amnesty programs fully.



P12725 Regional lobbying and Structural funds. Do regional representation offices in Brussels deliver?

Author(s): Julie Courty, Andrés Rodríguez-Pose

Date of Publication: February 2018

Programme Area(s): IT

Keyword(s): regional representation, regional offices, Lobbying, European regional development policy, Structural funds, EU

Abstract: In recent years regional representation offices have proliferated in Brussels. Among the many aims of these offices are influencing the allocation and securing the transfer of European Structural and Cohesion funds to their respective regions. However, our knowledge about whether they have succeeded in this goal is limited. In this paper we assess the extent to which regional offices in Brussels have managed to affect the territorial commitment and payment of Structural and Cohesion funds for regional development beyond the main officially stated economic criteria of eligibility. The paper uses a custom-made survey of regional offices in Brussels, complemented by economic, institutional, and political data involving factors that should determine how much money is channelled to and disbursed in each region. The results of the Fixed Effects and Instrumental Variable analyses for a total of 123 regions over the period 2009-2013 highlight that the capacity - proxied by the budget and staff of the office - of the regional representation offices to influence the commitment and payment of Structural and Cohesion funds has been negligible, when not outright negative. Regional lobbying in Brussels does not lead to more funds or to an easier disbursement of regional development funds.



DP12724 Waiting for the payday? The market for startups and the timing of entrepreneurial exit

Author(s): Ashish Arora, Andrea Fosfuri, Thomas Rønde

Date of Publication: February 2018

Programme Area(s): IO

Keyword(s): Entrepreneurial exit, markets for technology, absorptive capacity

Abstract: Most technology startups are set up for exit through acquisition by large corporations. In choosing when to sell, startups face a tradeoff. Early acquisitions reduce execution errors but later acquisitions improve the likelihood of finding a better match because there are fewer buyers in the early market as early acquisitions require costly absorptive capacity. Moreover, the decision of buyers to invest in absorptive capacity is related to the decision of startups on the timing of the exit sale. In this paper, we build a model to capture this complexity and the related tradeoffs. We find that the early market for startups is inefficiently thin when the timing of exit is a strategic choice, i.e. startups have to commit whether to go early or late. Too few startups are sold early and too few buyers invest in absorptive capacity. Venture capital paradoxically aggravates the inefficiency. Instead, when the timing of exit is a tactical choice, i.e., startups can choose to go late after observing the early offers, there are too many early acquisitions and too much investment in absorptive capacity by incumbents.



DP12723 The Optimal Inflation Target and the Natural Rate of Interest

Author(s): Philippe Andrade, Jordi Galí, Hervé Lebihan, Julien Matheron

Date of Publication: February 2018

Programme Area(s): MEF

Keyword(s): inflation target, effective lower bound

Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.



DP12722 Firms' Expectations of New Orders, Employment, Costs and Prices: Evidence from Micro Data

Author(s): Lena Boneva, James Cloyne, Martin Weale, Tomasz Wieladek

Date of Publication: February 2018

Programme Area(s): MEF

Keyword(s): Firm expectations, pricing setting, rationality, survey data; inflation expectations

Abstract: Firms' expectations play a central role in forward-looking macroeconomic models, but little is known empirically about how these are formed or whether they matter. Using a novel panel data set of firms' expectations about new orders, employment, unit costs, prices and wage rates for the United Kingdom, we document a range of stylized facts about the properties of firms' expectations and their relationship with recent pricing decisions. Expected future price and wage growth are influenced by firm-specific and aggregate factors. Price expectations are more correlated with cost and inflation indicators, wage expectations are more correlated with activity indicators. Expectations of new orders are influenced by aggregate conditions, while expected employment and unit costs seem to be influenced more by firm-specific factors. We also provide micro evidence to support the idea that actual price movements are influenced by expected future price movements, although firms' expectations do not seem to be fully rational.



DP12721 AI as the next GPT: a Political-Economy Perspective

Author(s): Manuel Trajtenberg

Date of Publication: February 2018

Programme Area(s): IO

Keyword(s): AI, GPT, skills

Abstract: History suggests that dismal prophecies regarding the impact of great technological advances rarely come to pass. Yet, as many occupations will indeed vanish with the advent of AI as the new General Purpose Technology (GPT), we should search for ways to ameliorate the detrimental effects of AI, and enhance its positive ones, particularly in: (1) education and skills development: need to move away from the centuries-old "factory model" of education, and develop instead skills relevant for an AI-based economy - analytical, creative, interpersonal, and emotional. (2) The professionalization of personal care occupations, particularly in healthcare and education; these are to provide the bulk of future employment growth, yet as performed today involve little training and technology, and confer low wages. New, higher standards and academic requirements should be set for these occupations, which would enable AI to benefit both providers and users. (3) Affect the direction of technical advance - we distinguish between "human-enhancing innovations" (HEI), that magnify and enhance sensory, motoric, and other such human capabilities, and "human-replacing innovations" (HRI), which replace human intervention, and often leave for humans mostly "dumb" jobs. AI-based HEI's have the potential to unleash a new wave of creativity and productivity, particularly in services, whereas HRI's might just decrease employment and give rise to unworthy jobs.



DP12720 Agency Conflicts over the Short and Long Run: Short-termism, Long-termism, and Pay-for-Luck

Author(s): Sebastian Gryglewicz, Simon Mayer, Erwan Morellec

Date of Publication: February 2018

Programme Area(s): FE


Abstract: We develop a dynamic agency model in which the agent controls current earnings via short-term effort and firm growth via long-term effort and the firm is subject to both short- and long-run shocks. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts compared to first best, leading to short- or long-termism in corporate policies. Exposure to long-run shocks introduces pay-for-luck in incentive compensation but only after sufficiently good performance due to incentive compatibility, thereby rationalizing the asymmetric benchmarking observed in the data. Correlated short- and long-run shocks to earnings and firm size lead to externalities in incentive provision over different time horizons.



DP12719 Perceived Wages and the Gender Gap in STEM Fields

Author(s): Aderonke Osikominu, Gregor Pfeifer

Date of Publication: February 2018

Programme Area(s): LE

Keyword(s): Gender Gap, wage expectations, college major choice, STEM

Abstract: We estimate gender differences in elicited wage expectations among German University students applying for STEM and non-STEM fields. Descriptively, women expect to earn less than men and also have lower expectations about wages of average graduates across different fields. Using a two-step estimation procedure accounting for self-selection, we find that the gender gap in own expected wages can be explained to the extent of 54-69% by wage expectations for average graduates across different fields. However, gender differences in the wage expectations for average graduates across different fields do not contribute to explaining the gender gap in the choice of STEM majors.



DP12718 (The Struggle for) Refugee Integration into the Labour Market: Evidence from Europe

Author(s): Francesco Fasani, Tommaso Frattini, Luigi Minale

Date of Publication: February 2018

Programme Area(s): LE

Keyword(s): Assimilation, asylum seekers, refugee gap, asylum policies

Abstract: In this paper, we use repeated cross-sectional survey data to study the labour market performance of refugees across several EU countries and over time. In the first part, we document that labour market outcomes for refugees are consistently worse than those for other comparable migrants. The gap remains sizeable even after controlling for individual characteristics as well as for unobservables using a rich set of fixed effects and interactions between area of origin, entry cohort and destination country. Refugees are 11.6 percent less likely to have a job and 22.1 percent more likely to be unemployed than migrants with similar characteristics. Moreover, their income, occupational quality and labour market participation are also relatively weaker. This gap persists until about 10 years after immigration. In the second part, we assess the role of asylum policies in explaining the observed refugee gap. We conduct a difference-in-differences analysis that exploits the differential timing of dispersal policy enactment across European countries: we show that refugee cohorts exposed to these polices have persistently worse labour market outcomes. Further, we find that entry cohorts admitted when refugee status recognition rates are relatively high integrate better into the host country labour market.



DP12717 Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk

Author(s): Dirk Krueger, Alexander Ludwig

Date of Publication: February 2018

Programme Area(s): MEF, MG, PE

Keyword(s): Idiosyncratic Risk, Taxation of Capital, Overlapping Generations, precautionary saving

Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.



DP12716 Quantile Factor Models

Author(s): Liang Chen, Juan J. Dolado, Jesus Gonzalo

Date of Publication: February 2018

Programme Area(s): FE


Abstract: In contrast to Approximate Factor Models (AFM), our proposed Quantile Factor Models (QFM) allow for unobserved common factors shifting some parts of the distribution other than the means of observed variables in large panel datasets. When such extra factors exist, the standard estimation tools for AFM fail to extract them and their quantile factor loadings (QFL). Two alternative approaches are developed to estimate consistently the whole factor structure of QFM: (i) a two-step estimation procedure which is only valid when the same factors shift the means and the quantiles; and (ii) an iterative procedure which is able to extract (potentially) quantile-dependent factors and their QFL at a given quantile even when both sets of factors differ. Simulation results confirm that our QFM estimation approaches perform reasonably well in finite samples, while four empirical applications provide evidence that extra factors shifting quantiles could be relevant in practice.



DP12715 Banker My Neighbour: Matching and Financial Intermediation in Savings Groups

Author(s): Rachel Cassidy, Marcel Fafchamps

Date of Publication: February 2018

Programme Area(s): DE

Keyword(s): Microfinance, commitment savings, savings groups, financial inclusion

Abstract: Efforts to promote financial inclusion have largely focused on microcredit and microsaving separately, and less so on promoting financial intermediation across poor borrowers and savers. Village Savings and Loan Associations (VSLAs) and other Self-Help Groups have features of both a borrowing and a commitment savings technology, potentially enabling savers and borrowers to meet each other's needs. Intermediation may however be impeded by limited liability and imperfect information. To investigate this, we use a large-scale survey of mature VSLA groups in rural Malawi to analyse how members sort across groups. Wefindthat present-biased members tend to group with time-consistent members, suggesting that the former may be gaining a commitment savings technology by lending to the latter. In contrast, members of the same occupation sort into groups together, suggesting unrealised intermediation possibilities between farming and non-farming households. This has implications for the design of such groups.



DP12714 Intuitive Donating: Testing One-Line Solicitations for $1 Donations in a Large Online Experiment

Author(s): Samantha Horn, Dean S. Karlan

Date of Publication: February 2018

Programme Area(s): PE

Keyword(s): Charitable Giving

Abstract: We partnered with a large online auction website to test differing messages' effects on the decision to donate to charity at checkout. Our setting, where impulsive decisions are likely to be driving donations, allows us to evaluate intuitive responses to messages prompting a donation. We find that shorter messages, matching grants, and descriptions of a charity's mission increase both the likelihood that a user donates, as well as the average amount donated. Conversely, displaying the impact of the donated amount, the popularity of the charity, and that a charity uses scientific evidence do not improve donation rates. These results contribute to our understanding of how framing requests drives the decision to donate and are practically relevant to the many retail sites which promote giving at point of sale.



DP12713 Uncertainty and Economic Activity: A Multi-Country Perspective

Author(s): Ambrogio Cesa-Bianchi, M Hashem Pesaran, Alessandro Rebucci

Date of Publication: February 2018

Programme Area(s): FE, IMF, MEF

Keyword(s): uncertainty, Business cycle, Common Factors, Real and Financial Global Shocks, Multi-Country, identification, Volatility.

Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of realized volatility. Using this theoretical insight, two common factors, a `real' and a `financial' one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance.



DP12712 The Price of Gold: Dowry and Death in India

Author(s): Sonia Bhalotra, Abhishek Chakravarty, Selim Gulesci

Date of Publication: February 2018

Programme Area(s): DE

Keyword(s): dowry, commodity price shocks, gold price, son preference, missing girls, neonatal mortality

Abstract: We provide evidence that dowry costs motivate son-preferring behaviors in India. Since gold is an integral part of dowry, we study parental responses to shocks in the world gold price. Exploiting monthly variation in gold prices across 35 years, as well as an event study around a massive gold price hike in December 1979, we find that monthly changes in gold prices lead to an increase in girl relative to boy neonatal mortality and that the surviving girls are shorter. After the introduction of prenatal sex determination technology, we find that gold price shocks increase female foeticide.



DP12711 "Since you're so rich, you must be really smart": Talent and the Finance Wage Premium

Author(s): Michael Böhm, Daniel Metzger, Per Johan Strömberg

Date of Publication: February 2018

Programme Area(s): FE, LE

Keyword(s): Sectoral Wage Premia; Talent Allocation; Earnings Inequality; Compensation in Financial Industry

Abstract: Wages in the financial sector have experienced an extraordinary increase over the last few decades. A proposed explanation for this trend has been that the demand for skill has risen more in finance compared to other sectors. We use Swedish administrative data, which include detailed cognitive and non-cognitive test scores as well as educational performance, to examine the implications of this hypothesis for talent allocation and relative wages in the financial sector. We find no evidence that the selection of talent into finance has improved, neither on average nor at the top of the talent and wage distributions. A changing composition of talent or their returns cannot account for the surge in the finance wage premium. While these findings alleviate concerns about a "brain drain" into finance at the expense of other sectors, they also suggest that finance workers are capturing substantial rents that have increased over time.



Sophie Roughton
0207 183 8812



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