• DP14054 Behavioral Responses to Wealth Taxes: Evidence from Switzerland
  Author(s): Marius Brülhart, Jonathan Gruber, Matthias Krapf, Kurt Schmidheiny
  PE
• DP14052 Hysteresis from Employer Subsidies
  Author(s): David Seim, Emmanuel Saez, Benjamin Schoefer
  LE, PE
• DP14051 On Money As a Latent Medium of Exchange
  Author(s): Ricardo Lagos, Shengxing Zhang
  MEF
• DP14050 Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms
  Author(s): Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton
  FE, MEF
• DP14049 Electoral Sentencing Cycles
  Author(s): David Abrams, Roberto Galbiati, Emeric Henry, Arnaud Philippe
  PE
• DP14048 Rules versus Discretion in Bank Resolution
  Author(s): Lucy White, Ansgar Walther
  FE
• DP14047 Facts and Fiction in Oil Market Modeling
  Author(s): Lutz Kilian
  IMF
• DP14046 Undiscounted Bandit Games
  Author(s): R Godfrey Keller, Sven Rady
  IO
• DP14045 How do trade and communication costs shape the spatial organization of firms?
  Author(s): Toshitaka Gokan, Sergey Kichko, Jacques-François Thisse
  IT
• DP14044 Procuring Medical Devices: Evidence from Italian Public Tenders
  Author(s): Francesco Decarolis, Vincenzo Atella
  IO
• DP14043 A Theory of Simplicity in Games and Mechanism Design
  Author(s): Marek Pycia, Peter Troyan
  IO
• DP14042 Reopening Pandora’s Box in Search of a WTO-Compatible Industrial Policy? The Brazil -Taxation Dispute
  Author(s): Emanuel Ornelas, Laura Puccio
  IT
• DP14041 Are political and economic integration intertwined?
  Author(s): Bernt Bratsberg, Giovanni Facchini, Tommaso Frattini, Anna Rosso
  LE, PE
• DP14040 The geography of EU discontent
  Author(s): Lewis Dijkstra, Hugo Poelman, Andrés Rodríguez-Pose
  IT

DP14054 Behavioral Responses to Wealth Taxes: Evidence from Switzerland

Author(s): Marius Brülhart, Jonathan Gruber, Matthias Krapf, Kurt Schmidheiny

Date of Publication: October 2019

Programme Area(s): PE

Keyword(s): Wealth Taxation, Behavioral Responses, taxpayer mobility, evasion, Switzerland

Abstract: We study how reported wealth responds to changes in wealth tax rates. Exploiting rich intra-national variation in Switzerland, the country with the highest revenue share of annual wealth taxation in the OECD, we find that a 1 percentage point drop in the wealth tax rate raises reported wealth by at least 43% after 6 years. Administrative tax records of two cantons with quasi-randomly assigned differential tax reforms suggest that 24% of the effect arise from taxpayer mobility and 20% from house price capitalization. Savings responses appear unable to explain more than a small fraction of the remainder, suggesting sizable evasion responses in this setting with no third-party reporting of financial wealth.

DP14052 Hysteresis from Employer Subsidies

Author(s): David Seim, Emmanuel Saez, Benjamin Schoefer

Date of Publication: October 2019

Programme Area(s): LE, PE

Keyword(s):

Abstract: This paper uses administrative data to analyze a large and 8-year long employer payroll tax rate cut in Sweden for young workers aged 26 or less. First, we document that while active, the reform raised youth employment among the treated workers. The long-run effects are twice as large as the medium-run effects and likely driven by labor demand (as workers’ take-home wages did not respond). Second, we document novel labor-demand-driven “hysteresis” from this policy – i.e. persistent employment effects even after the subsidy no longer applies – along two dimensions. Over the lifecycle, employment effects persist even after workers age out of eligibility. Two years after the repeal, employment remains elevated at the maximal reform level in the formerly subsidized ages. These hysteresis effects triple the direct employment effects of the reform. Discrimination against young workers in job posting fell during the reform and does not bounce back after repeal, potentially explaining our results.

DP14051 On Money As a Latent Medium of Exchange

Author(s): Ricardo Lagos, Shengxing Zhang

Date of Publication: October 2019

Programme Area(s): MEF

Keyword(s): Cashless, credit, liquidity, money, monetary policy

Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.

DP14050 Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms

Author(s): Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton

Date of Publication: October 2019

Programme Area(s): FE, MEF

Keyword(s): monetary policy, negative rates, Lending Channel, corporate channel

Abstract: Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors without experiencing a contraction in funding and that the tendency to charge negative rates becomes stronger as policy rates move deeper into negative territory. The negative interest rate policy (NIRP) provides stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound.

DP14049 Electoral Sentencing Cycles

Author(s): David Abrams, Roberto Galbiati, Emeric Henry, Arnaud Philippe

Date of Publication: October 2019

Programme Area(s): PE

Keyword(s):

Abstract: Exploiting features of the North-Carolina judicial system, elections and forced rotation of judges, we overcome major challenges hampering the identification of the existence and source of sentencing variation over the electoral cycle. We show that when elections approach, sentencing for felonies increase. This increase is driven by decisions taken by judges present in their district of election, and only when elections are contested. When judges operate outside their district of elections, sentencing decisions do not significantly vary over the electoral cycle. Our results demonstrate the existence of strategic sentencing by judges in an attempt to please voters and allow us to discard alternative explanations for the rise along the cycle, such as behavioral motives or contextual explanations.

DP14048 Rules versus Discretion in Bank Resolution

Author(s): Lucy White, Ansgar Walther

Date of Publication: October 2019

Programme Area(s): FE

Keyword(s): bank resolution, financial crises, bail-in, bail-out, bank runs

Abstract: Recent reforms give regulators broad powers to “bail-in” bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signalling negative private information to creditors. Therefore, optimal bail-ins in bad times depend only on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.

DP14047 Facts and Fiction in Oil Market Modeling

Author(s): Lutz Kilian

Date of Publication: October 2019

Programme Area(s): IMF

Keyword(s): oil supply elasticity, Oil demand elasticity, IV estimation, structural VAR, Bayesian inference, oil price, global real activity

Abstract: Baumeister and Hamilton (2019a) assert that every critique of their work on oil markets by Kilian and Zhou (2019a) is without merit. In addition, they make the case that key aspects of the economic and econometric analysis in the widely used oil market model of Kilian and Murphy (2014) and its precursors are incorrect. Their critiques are also directed at other researchers who have worked in this area and, more generally, extend to research using structural VAR models outside of energy economics. The purpose of this paper is to help the reader understand what the real issues are in this debate. The focus is not only on correcting important misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

DP14046 Undiscounted Bandit Games

Author(s): R Godfrey Keller, Sven Rady

Date of Publication: October 2019

Programme Area(s): IO

Keyword(s): strategic experimentation, Two-Armed Bandit, Strong Long-Run Average Criterion, Markov perfect equilibrium, HJB Equation, Viscosity Solution

Abstract: We analyze undiscounted continuous-time games of strategic experimentation with two-armed bandits. The risky arm generates payoffs according to a Lévy process with an unknown average payoff per unit of time which nature draws from an arbitrary finite set. Observing all actions and realized payoffs, players use Markov strategies with the common posterior belief about the unknown parameter as the state variable. We show that the unique symmetric Markov perfect equilibrium can be computed in a simple closed form involving only the payoff of the safe arm, the expected current payoff of the risky arm, and the expected full-information payoff, given the current belief. In particular, the equilibrium does not depend on the precise specification of the payoff-generating processes.

DP14045 How do trade and communication costs shape the spatial organization of firms?

Author(s): Toshitaka Gokan, Sergey Kichko, Jacques-François Thisse

Date of Publication: October 2019

Programme Area(s): IT

Keyword(s): Region, Transportation Costs, Communication costs, horizontal firm, vertical firm

Abstract: We consider an economic geography setting in which firms are free to choose one of the following organizational types: (i) integrated firms, which perform all their activities at the same location, (ii) horizontal firms, which operate several plants producing the same good at different locations, and (iii) vertical firms, which perform distinct activities at separated locations. We show that there exists a unique organizational equilibrium, which typically involves the coexistence of various organizational forms. We also give necessary and sufficient conditions for the three types of firms to coexist within the same region and show that transportation and communication costs have opposite effects on firms' organizational choices. This suggests that, depending on its nature, the supply of a new transportation infrastructure may lead to contrasted locational patterns.

DP14044 Procuring Medical Devices: Evidence from Italian Public Tenders

Author(s): Francesco Decarolis, Vincenzo Atella

Date of Publication: October 2019

Programme Area(s): IO

Keyword(s): Procurement auctions, medical devices, orthopaedic prosthesis, tender characteristics, Italy

Abstract: The public procurement of medical devices is increasingly relying on auction mechanisms to move toward more transparent procedures and to promote competition between suppliers in a market where the quality of the products matters enormously and an improper auction design could be very harmful. Based on Italian hospital data, we present new evidence on the performance of the public tenders to procure orthopaedic prosthesis for hips, knees and shoulders. Focusing on three main outcomes, the number of participants, the presence of a single firm bidding and the winning rebate, for the first time we describe how features related to the tender, hospital, region and bidders' competition all contribute to explain the functioning of the procurement auctions. The evidence we obtain can meaningfully help policy makers in designing and implementing better public procurement systems.

DP14043 A Theory of Simplicity in Games and Mechanism Design

Author(s): Marek Pycia, Peter Troyan

Date of Publication: October 2019

Programme Area(s): IO

Keyword(s):

Abstract: We introduce a general class of simplicity standards that vary the foresight abilities required of agents in extensive-form games. Rather than planning for the entire future of a game, agents are presumed to be able to plan only for those histories they view as simple from their current perspective. Agents may update their so-called strategic plan as the game progresses, and, at any point, for the called-for action to be simply dominant, it must lead to unambiguously better outcomes, no matter what occurs at non-simple histories. We use our approach to simplicity to provide characterizations of simple mechanisms in general social choice environments both with and without transfers, including canonical mechanisms such as ascending auctions, posted prices, and serial dictatorship-style mechanisms. As a final application, we explain the widespread popularity of the well-known Random Priority mechanism by characterizing it as the unique mechanism that is efficient, fair, and simple to play.

DP14042 Reopening Pandora’s Box in Search of a WTO-Compatible Industrial Policy? The Brazil -Taxation Dispute

Author(s): Emanuel Ornelas, Laura Puccio

Date of Publication: October 2019

Programme Area(s): IT

Keyword(s): trade policy, Dispute Settlement, industry subsidies, international trade rules, National Treatment, local content requirements

Abstract: The Brazil-Taxation dispute concerns the complaints taken to the World Trade Organisation by the European Union and Japan against seven different Brazilian industrial subsidy programmes. One concerned the automotive sector and represents a clear case of policies dictated by strong domestic political-economy forces, with little attention to impacts on consumers or imports. The ensuing WTO dispute raises important issues concerning the WTO-compatibility of subsidy measures. In particular, the Appellate Body (AB) reversed the panel findings with respect to two issues: the extent to which subsidy measures can be exempted from complying with National Treatment rules under the General Agreement on Tariffs and Trade, and the identification of local content requirements (LCRs), which are prohibited under the Agreement on Subsidies and Countervailing Measures (SCM). In particular, the AB considered that subsidies, if not based on discriminatory taxation, could be justified under the GATT and could have some discriminatory elements without violating the National Treatment disciplines. Furthermore, it concluded that legitimate eligibility criteria under a subsidy programme should not be construed as prohibited LCRs under the SCM. However, the test devised by the AB to distinguish legitimate eligibility criteria from prohibited LCRs could facilitate circumvention of the LCRs prohibition under the SCM.

DP14041 Are political and economic integration intertwined?

Author(s): Bernt Bratsberg, Giovanni Facchini, Tommaso Frattini, Anna Rosso

Date of Publication: October 2019

Programme Area(s): LE, PE

Keyword(s): Immigration, Local Elections, Candidacy Decision, labour markets

Abstract: Economic incentives play a key role in the decision to run for office, but little is known on how they shape immigrants' selection into candidacy. We study this question using a two-period Roy model and show that if returns to labour market experience are higher for migrants than natives, migrants will be less likely to seek office than natives. We empirically assess this prediction using administrative data from Norway, a country with a very liberal regime for participation in local elections. Our results strongly support our theoretical model and indicate that immigrants' political and economic integration are closely intertwined.

DP14040 The geography of EU discontent

Author(s): Lewis Dijkstra, Hugo Poelman, Andrés Rodríguez-Pose

Date of Publication: October 2019

Programme Area(s): IT

Keyword(s): Anti-Europeanism, anti-system voting, populism, economic decline, industrial decline, education, migration, European Union

Abstract: Support for parties opposed to EU-integration has risen rapidly and a wave of discontent has taken over the EU. This discontent is purportedly driven by the very factors behind the surge of populism: differences in age, wealth, education, or economic and demographic trajectories. This paper maps the geography of EU discontent across more than 63,000 electoral districts in the EU-28 and assesses which factors push anti-EU voting. The results show that anti-EU vote is mainly a consequence of local economic and industrial decline in combination with lower employment and a less educated workforce. Many of the other suggested causes of discontent, by contrast, matter less than expected or their impact varies depending on levels of opposition to European integration.