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DP16250 Independent Media and Religiosity
Author(s): Irena Grosfeld, Etienne Madinier, Seyhun Orcan Sakalli, Ekaterina Zhuravskaya
Date of Publication: June 2021
Programme Area(s): DE, PE
Keyword(s): Religiosity, media, TV, pedophilia scandals, Propaganda
Abstract: Can media affect religious behavior? We study the effect of a drastic change in media landscape on religious participation in Poland, a country, where vast majority of the population considers itself religious Catholics. Before 2015, news on mainstream public and private media outlets had a similar moderately-liberal slant. In 2015, a right-wing populist party Law and Justice (PiS) came to power and took control of the editorial policy of public media, introducing a substantial conservative pro-government and pro-Church bias in public-media broadcast. A private TV network, TVN, remained the main source of freely available independent-from-the-government news on Polish television. In a difference- in-differences setting, we exploit spatial variation in TVN signal, sufficiently good for reception in about two-thirds of the country, and the overtime change in the content of the major state-owned TV network, which has good reception almost everywhere. We document that, after PiS came to power, religious participation fell more in municipalities with access to TVN compared to municipalities receiving only state TV signal. Using a large-scale online randomization experiment, we examine the effects of exposure to different types of content available only via independent media. We show that exposing both the pedophilia within the Church and the mutual financial and political support between the Church and the ruling PiS party decreases trust in religious institutions, but the effect of exposing pedophilia scandals is stronger. The experiment’s results persist for at least three weeks.
DP16249 International Trade with Heterogeneous Firms: Theory and Evidence
Author(s): Rosario Crinò, Alessandra Bonfiglioli, Gino Gancia
Date of Publication: June 2021
Programme Area(s): IT
Keyword(s): Firm Heterogeneity, Top Firms, selection, reallocation, margins of trade
Abstract: International trade is dominated by a small number of very large firms. Models of trade with heterogeneous firms have been developed to study the causes and consequences of this observation. The canonical model of trade with heterogeneous firms shows that trade leads to between-firm reallocations and selection: it shifts employment towards firms with the best attributes and forces marginal firms to exit. The model also illustrates the role of heterogeneity, and its various sources, in explaining the volume of trade and the firm-level margins of adjustment. Consistent with the model, earlier empirical studies have documented that exporting is a rare activity, that exporting firms are larger and more productive than other firms, and that trade liberalization reallocates market shares towards the best-performing firms in various countries. More recent studies using transaction-level data have unveiled additional salient features of trade flows. First, sales by foreign firms are very heterogeneous and highly concentrated. Second, both the extensive margin (number of exporting firms) and the intensive margin (average export per firm) are important in explaining the level of exports and its changes over time. More heterogeneity in sales across firms is associated with a higher volume of trade along both margins. Third, increased foreign competition reallocates market shares towards top firms and hence can increase concentration from any country of origin. Numerous extensions of the benchmark model have been proposed to study other important aspects, such as the relevance of multi-product and multinational firms and the extent to which heterogeneity is endogenous to firms' choices, but some open challenges still remain.
DP16248 The Unemployed with Jobs and without Jobs
Author(s): Robert E. Hall, Marianna Kudlyak
Date of Publication: June 2021
Programme Area(s): LE, MEF
Keyword(s): Business cycle, recovery, unemployment, Recession, layoffs, Recall
Abstract: Potential workers are classified as unemployed if they seek work but are not working. The unemployed population contains two groups---those with jobs and those without jobs. Those with jobs are on furlough or temporary layoff. This group expanded tremendously in April 2020. They wait out periods of non-work with the understanding that their jobs still exist and that they will be recalled. We show that the resulting temporary-layoff unemployment dissipates quickly following a spike. Potential workers without jobs constitute what we call jobless unemployment. Shocks that elevate jobless unemployment have much more persistent effects. Historical major adverse shocks, such as the financial crisis in 2008, created mostly jobless unemployment and consequently caused extended periods of elevated unemployment. The pandemic of 2020 created a large volume of temporary-layoff unemployment, mostly starting in April. It was mostly dissipated by the end of 2020. It also created a bulge in jobless unemployment.
DP16247 The Great Transition: Kuznets Facts for Family-Economists
Author(s): Jeremy Greenwood, Nezih Guner, Ricardo Marto
Date of Publication: June 2021
Programme Area(s): LE, MG
Keyword(s): Fertility, Housework, Kuznets, leisure, market work, Marriage, neutral technological progress, price of labor-saving household durables, skilled-biased technological change, white-collar jobs
Abstract: The 20th century beheld a dramatic transformation of the family. Some Kuznets style facts regarding structural change in the family are presented. Over the course of the 20th century in the United States fertility declined, educational attainment waxed, housework fell, leisure increased, jobs shifted from blue to white collar, and marriage waned. These trends are also observed in the cross-country data. A model is developed, and then calibrated, to address the trends in the US data. The calibration procedure is closely connected to the underlying economic logic. Three drivers of the great transition are considered: neutral technological progress, skilled-biased technological change, and drops in the price of labor-saving household durables.
DP16246 Investment Timing and Technological Breakthrough
Author(s): Jean-Paul Décamps, Fabien Gensbittel, Thomas Mariotti
Date of Publication: June 2021
Programme Area(s): FE
Keyword(s):
Abstract: We study the optimal investment policy of a firm facing both technological and cash-flow uncertainty. At any point in time, the firm can decide to invest in a stand-alone technology or to wait for a technological breakthrough. Breakthroughs occur when market conditions become favorable enough, exceeding a certain threshold value that is ex-ante unknown to the firm. A microfoundation for this assumption is that a breakthrough occurs when the share of the surplus from the new technology accruing to its developer is high enough to cover her privately observed cost. We show that the relevant Markov state variables for the firm's optimal investment policy are the current market conditions and their current historic maximum, and that the firm optimally invests in the stand-alone technology only when market conditions deteriorate enough after reaching a maximum. Empirically, investments in new technologies requiring the active cooperation of developers should thus take place in booms, whereas investments in state-of-the-art technologies should take place in busts. Moreover, the required return for investing in the stand-alone technology is always higher than if this were the only available technology and can take arbitrarily large values following certain histories. Finally, a decrease in development costs, or an increase in the value of the new technology, makes the firm more prone to bear downside risk and to delay investment in the stand-alone technology.
DP16245 Global Risk and the Dollar
Author(s): Georgios Georgiadis, Gernot Müller, Ben Schumann
Date of Publication: June 2021
Programme Area(s): IMF
Keyword(s): Us dollar, safe-haven currencies, risk shocks, trade channel, financial channel, Bayesian proxy structural VAR, minimum relative entropy, counterfactual, monetary policy
Abstract: Global risk shocks appreciate the US dollar as well as other safe-haven currencies and induce an economic contraction, synchronized across the US and the rest of the world. We establish these results in an estimated Bayesian proxy SVAR model and construct counterfactuals to shed light on the role of the dollar for the transmission of global risk. They show that the appreciation of the dollar has little bearing on US trade flows; instead it induces a sharp contraction of cross-border credit. As a result, the dollar appreciation amplifies the contractionary effects of global risk shocks in the rest of the world.
DP16244 Five Facts about the UIP Premium
Author(s): Sebnem Kalemli-Ozcan, Liliana Varela
Date of Publication: June 2021
Programme Area(s): IMF, MG
Keyword(s): Fama regression, Excess return, risk premia, Expectations, Policy Credibility
Abstract: We document five novel facts about Uncovered Interest Parity (UIP) deviations vis-a-vis the U.S. dollar for 34 currencies of advanced economies and emerging markets. First, the UIP premium co-moves with global risk aversion (VIX) for all currencies, whereas only for emerging market currencies there is a negative comovement between the UIP premium and capital inflows. Second, the comovement of the UIP premium and the VIX is explained by changes in interest rate differentials in emerging markets, and by expected changes in exchange rates in advanced countries. Third, country risk measured by the degree of policy uncertainty can explain the negative comovement of the UIP premium with capital inflows in emerging markets. Fourth, there are no overshooting and predictability reversal puzzles -for any currency- when using exchange rate expectations to calculate the UIP premium. In emerging markets, a transitory increase in interest rate differentials caused by a policy uncertainty shock leads to lower than required expected depreciations, which creates persistent expected excess returns. In advanced economies, a shock to interest rate differentials leads to a permanent expected depreciation that offsets the shock. Fifth, consistent with these dynamic facts, the classical Fama puzzle disappears in advanced economies in expectations, but it remains for emerging markets. As a result, while global investors expect zero excess returns and earn actual positive returns in the short run and negative returns in the long run by investing in advanced country currencies, the same global investors always expect and earn positive excess returns from emerging market currencies. In emerging markets, the UIP premium arises from investors charging an “excess” risk premium to compensate for policy uncertainty -a premium that is over and above the expected and actual depreciation of these currencies.
DP16243 Hybrid Platform Model
Author(s): Simon P Anderson, Özlem Bedre-Defolie
Date of Publication: June 2021
Programme Area(s): IO
Keyword(s): Trade platform, hybrid business model, Antitrust Policy, Tax policy
Abstract: We provide a canonical and tractable model of a trade platform enabling buyers and sellers to transact. The platform charges a percentage fee on third-party product sales and decides whether to be "hybrid", like Amazon, by selling its own product. It thereby controls the number of differentiated products (variety) it hosts and their prices. Using the mixed market demand system, we capture interactions between monopolistically competitive sellers and a sizeable platform product. Using long-run aggregative games with free entry, we endogenize seller participation through an aggregate variable manipulated by the platform's fee. We show that a higher quality (or lower cost) of the platform's product increases its market share and the seller fee, and lowers consumer surplus. Banning hybrid mode benefits consumers. The hybrid platform might favor its product and debase third-party products if the own product advantage is sufficiently high. We also provide some tax policy implications.
DP16242 The Economic Consequences of the Opium War
Author(s): Wolfgang Keller, Carol H Shiue
Date of Publication: June 2021
Programme Area(s): EH, IT, MG
Keyword(s): Treaty ports, extraterritoriality, Capital Markets, Legal origins
Abstract: This paper studies the economic consequences of the West's foray into China after the Opium War (1840-42), when Western colonial institutions were introduced in dozens of so-called treaty ports. Among these institutions was the Maritime Customs Service, organizing trade and tariff collection, as well as consular courts that projected Western legal traditions into China. The paper finds, first, that Western countries had a positive impact on China's economy over the 19th century. Regions with Western influence exhibited a higher rate of growth of modern firms and more investment into advanced machinery; moreover, Western influence brought down local interest rates by almost a quarter, with much of this due to Western institutions providing enhanced security and lower risk as opposed to additional capital. Second, both legal and trade institutions contributed to the lowering of risk; firm growth, investment, and technology adoption were closely affected by trade institutions while legal institutions played a stronger role for capital market performance. We also assess individual elements of extraterritorialty in China such as the scope of jurisdiction, appeal process, court proceedings, and sentencing. Third, we demonstrate that the geographic scope of influence went far beyond the immediate vicinity of treaty ports, customs houses, and consulates. Western institutions affected Chinese areas up to 400 kilometers away, influencing a large part, perhaps even the majority, of China during this period.
DP16241 Devotion or Deprivation: Did Catholicism Retard French Development?
Author(s): Morgan Kelly
Date of Publication: June 2021
Programme Area(s): EH
Keyword(s):
Abstract: Squicciarini (AER, 2020) finds that the parts of France with the most refractory clergy during the Revolution had the lowest industrial employment in 1901, and concludes that Catholicism retarded development. However, because the richest regions were the ones that industrialized, whereas the poorest ones were the most devout, the relationship may be confounded by living standards. If we add a range of simple controls for living standards the claimed result immediately disappears, as it does if alternative measures of religiosity are employed. Regarding education, I find that Catholic schools were established in areas that historically had the fewest public schools and the lowest enrolment of girls relative to boys. Instead of simply indoctrinating children, religious orders appear to have provided a basic education in impoverished places where it was otherwise unavailable, for girls especially.
DP16240 Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort
Author(s): Martina Jasova, Luc Laeven, Caterina Mendicino, José Luis Peydró, Dominik Supera
Date of Publication: June 2021
Programme Area(s): FE
Keyword(s): Central Bank Liquidity, haircuts, Collateral, Bank Risk Concentration, systemic risk
Abstract: We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness and associated systemic risk. Using novel micro-level data, we analyze the haircut gap channel of LOLR--the difference between the private market and central bank haircuts. LOLR increases interconnectedness by incentivizing banks to pledge higher haircut gap bonds, especially issued by similar banks and by systemically important banks. LOLR also exacerbates cross-pledging of bank bonds. Higher haircut gaps only incentivize banks, not other intermediaries without LOLR access, to increase bank bond holdings. Finally, LOLR revives bank bond issuance associated with higher haircut gaps.
DP16239 Credit Risk and the Life Cycle of Callable Bonds: Implications for Corporate Financing and Investing
Author(s): Bo Becker, Murillo Campello, Dong Yan, Viktor Thell
Date of Publication: June 2021
Programme Area(s): FE
Keyword(s): Callable bonds, credit risk, Debt overhang, Investment Decisions
Abstract: Call provisions allow bond issuers to redeem their bonds early. While commonly observed, existing research offers limited insight into the purpose of this contract feature. We show that bond callability is designed to mitigate agency problems, with call features and execution being determined by credit spreads and issuer quality. Callable bonds have significantly higher yields and lower secondary market prices than non-callable bonds ("cost of callability"). Issuers call bonds when their credit quality improves. We provide novel evidence that callability reduces debt overhang affecting decisions ranging from capital investment to takeovers. Our results help explain the prevalence of call features and suggest that callability improves economic efficiency.
DP16238 Coinsurance vs. copayments: reimbursement rules for a monopolistic medical product with competitive health insurers
Author(s): Helmuth Cremer, Jean-Marie Lozachmeur
Date of Publication: June 2021
Programme Area(s): PE
Keyword(s): ex post moral hazard, health insurance competition, copayments, Imperfect Competition
Abstract: This paper studies a market for a medical product in which there is perfect competition among health insurers, while the good is sold by a monopolist. Individuals differ in their severity of illness and there is ex post moral hazard. We consider two regimes: one in which insurers use coinsurance rates (ad valorem reimbursements) and one in which insurers use copayments (specific reimbursements). We show that the induced equilibrium with copayments involves a lower producer price and a higher level of welfare for consumers. This results provides strong support for a reference price based reimbursement policy.
DP16237 Couples' Time-Use and Aggregate Labor Market Outcomes
Author(s): Monika Merz, Almut Balleer, Tamas K. Papp
Date of Publication: June 2021
Programme Area(s): LE, MG
Keyword(s): time-use, spouses' labor supply, aggregation, Bayesian estimation
Abstract: We present a model of the time-allocation decision of spouses in order to study the role of heterogeneity in preferences and wages for couples’ labor supply. Spouses differ in their tastes for market consumption and non-market goods and activities, and also in their offered or earned wages. They interact in their choices of market hours, homework, and leisure. We estimate the model for married or cohabiting couples in the 2001/02 wave of the German Time-Use Survey using Bayesian techniques. We generate gender-specific own- and cross-wage elasticities of market hours in the cross-section. Elasticities are significantly larger, if the wage shock is asymmetric across partners, not symmetric. Aggregating preferences and wages by gender and comparing outcomes for a representative couple with those from heterogeneous couples yields a discrepancy between the alternative aggregate wage-elasticities. Its size varies with the type of wage shock and the distribution of spouses across the preference-wage space.
DP16236 The Effectiveness of a Negative Interest Rate Policy
Author(s): Marco Onofri, Gert Peersman, Frank Smets
Date of Publication: June 2021
Programme Area(s): MEF
Keyword(s): Negative interest rate policy, monetary policy, Euro Area
Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a financial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.
DP16235 Sequencing Bilateral Negotiations with Externalities
Author(s): Johannes Münster, Markus Reisinger
Date of Publication: June 2021
Programme Area(s): IO
Keyword(s): bargaining power, Sequential negotiations, Externalities, Bilateral contracting, Endogenous timing
Abstract: In bilateral negotiations between a principal and two agents, we show that the agents' bargaining strengths are crucial for the determination of the bargaining sequence and the efficiency of decisions. In a general framework with externalities between agents, we find that the surplus is highest if the principal negotiates with the stronger agent first, regardless of externalities being positive or negative. The principal chooses the efficient sequence with negative externalities, but often prefers the inefficient sequence with positive externalities. We show that our results extend to a general number of agents and provide conditions for simultaneous negotiations to be optimal.
DP16234 Life-Cycle Risk-Taking with Personal Disaster Risk
Author(s): Giovanna Nicodano, Fabio-Cesare Bagliano, Carolina Fugazza
Date of Publication: June 2021
Programme Area(s): FE
Keyword(s): disaster risk, Portfolio choice, non-linear income process, beta distribution
Abstract: This paper examines households' self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.
DP16233 Demand for Online News under Government Control: Evidence from Russia
Author(s): Andrey Simonov, Justin Rao
Date of Publication: June 2021
Programme Area(s): DE, IO, PE
Keyword(s): media, media capture, Censorship, Demand for News, product differentiation, Text as Data
Abstract: We examine the nature of consumer demand for government-controlled online news outlets in Russia, testing whether such demand reflects a preference for pro-government ideological coverage, or other factors unrelated to outlets' ideological positions. We detect government-sensitive topics and measure outlets' news reporting decisions from news article texts, and estimate a structural model of demand for news using detailed browsing data that traces individual-level consumption. The average consumer has a distaste for pro-government ideology but a strong persistent taste for state-owned outlets, primarily driven by third-party referrals and non-sensitive news content. We discuss implications for online media control and media power.
DP16232 Currency Hedging: Managing Cash Flow Exposure
Author(s): Laura Alfaro, Mauricio Calani, Liliana Varela
Date of Publication: June 2021
Programme Area(s): IMF, MG
Keyword(s): Foreign currency hedging, FX derivatives, Cash flow, foreign currency debt, currency mismatch, trade credit
Abstract: Foreign currency derivative markets are among the largest in the world, yet their role in emerging markets is relatively understudied. We study firms' currency risk exposure and their hedging choices by employing a unique dataset covering the universe of FX derivatives transactions in Chile since 2005, together with firm-level information on sales, international trade, trade credits and foreign currency debt. We uncover four novel facts: (i) natural hedging of currency risk is limited, (ii) financial hedging is more likely to be used by larger firms and for larger amounts, (iii) firms in international trade are more likely to use FX derivatives to hedge their gross -not net- cash currency risk, and (iv) firms are more likely to pay higher premiums for longer maturity contracts. We then show that financial intermediaries can affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms' use of FX derivatives and increased the forward premiums.
DP16231 Attention Oligopoly
Author(s): Andrea Prat, Tommaso Valletti
Date of Publication: June 2021
Programme Area(s): IO
Keyword(s): Digital Platforms, mergers, targeted advertising
Abstract: We model digital platforms as attention brokers that have proprietary information about their users' product preference and sell targeted ad space to retail product industries. Retail producers - incumbents or entrants - compete for access to this attention bottleneck. We discuss when increased concentration among attention brokers results in a tightening of the attention bottleneck, leading to higher ad prices, fewer ads being sold to entrants, and lower consumer welfare in the product industries. The welfare effect is characterized in terms of patterns of individual usage across platforms. A merger assessment that relies on aggregate platform usage alone can be highly biased.
DP16230 The Effect of Mergers on Variety in Grocery Retailing
Author(s): Tomaso Duso, Elena Argentesi, Paolo Buccirossi, Roberto Cervone, Alessia Marrazzo
Date of Publication: June 2021
Programme Area(s): IO
Keyword(s): Variety, Assortment, mergers, Ex-Post Evaluation, Retail sector, Supermarkets, Grocery
Abstract: We study the effect of a merger between two Dutch supermarket chains to assess its effect on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger's effects, controlling for selection on observables through a matching procedure when defining our control group. We show that the merger led the merging parties to reposition their assortment to avoid cannibalization in the areas where they directly competed before the merger. While the low-variety target's stores reduced the depth of their assortment when in direct competition with the acquirer, the latter increased their assortment. This suggests that variety is a strategic variable in retail chains' response to changes in local competition.
DP16229 The Value of a Coordination Game
Author(s): Willemien Kets, Wouter Kager, Alvaro Sandroni
Date of Publication: June 2021
Programme Area(s): OE
Keyword(s):
Abstract: The value of a game is the payoff a player can expect (ex ante) from playing the game. Understanding how the value changes with economic primitives is critical for policy design and welfare. However, for games with multiple equilibria, the value is difficult to determine. We therefore develop a new theory of the value of coordination games. The theory delivers testable comparative statics on the value and delivers novel insights relevant to policy design. For example, policies that shift behavior in the desired direction can make everyone worse off, and policies that increase everyone's payoffs can reduce welfare.
DP16228 Cupid's Invisible Hand: Social Surplus and Identification in Matching Models
Author(s): Alfred Galichon, Bernard Salanié
Date of Publication: June 2021
Programme Area(s): LE
Keyword(s): Matching, Marriage, Assignment, Hedonic prices
Abstract: We investigate a model of one-to-one matching with transferable utility and general unobserved heterogeneity. Under a separability assumption that generalizes Choo and Siow (2006), we first show that the equilibrium matching maximizes a social gain function that trades off exploiting complementarities in observable characteristics and matching on unobserved characteristics. We use this result to derive simple closed-form formulae that identify the joint matching surplus and the equilibrium utilities of all participants, given any known distribution of unobserved heterogeneity. We provide efficient algorithms to compute the stable matching and to estimate parametric versions of the model. Finally, we revisit Choo and Siow’s empirical application to illustrate the potential of our more general approach.
DP16227 The Intergenerational Mortality Tradeoff of COVID-19 Lockdown Policies
Author(s): Lin Ma, Gil Shapira, Damien De Walque, Quy-Toan Do, Jed Friedman, Andrei A. Levchenko
Date of Publication: June 2021
Programme Area(s): DE, MG
Keyword(s): COVID-19, child mortality, lockdown, SIR-macro
Abstract: In lower-income countries, the economic contractions that accompany lockdowns tocontain the spread of COVID-19 can increase child mortality, counteracting the mortality reductions achieved by the lockdown. To formalize and quantify this effect, we build a macro-susceptible-infected-recovered model that features heterogeneous agents and a country-group-specific relationship between economic downturns and child mortality, and calibrate it to data for 85 countries across all income levels. We find that in low-income countries, a lockdown can potentially lead to 1.76 children’s lives lost due to the economic contraction per COVID-19 fatality averted. The ratio stands at 0.59 and 0.06 in lower-middle and upper-middle income countries, respectively. As a result, in some countries lockdowns actually can produce net increases in mortality. The optimal lockdowns are shorter and milder in poorer countries than in rich ones, and never produce a net mortality increase.
DP16226 Redistributive Taxation With Skill Biased Technologies
Author(s): Pietro Reichlin
Date of Publication: June 2021
Programme Area(s): MG, PE
Keyword(s): Dynamic optimal taxation
Abstract: I study the optimal redistributive tax structure on capital and labor in a version of the Judd (1985)’s model supplemented by skill biased technology and perfect correlation between skills and wealth. Assuming that the planner is forced to implement a log-linear (progressive) tax and transfer function of pre-tax labor income (often used in public finance), and that low skilled households are hand to mouth consumers, I show that the optimal long-run capital tax rate is positive and the labor marginal tax rate can be positive or negative, depending on demand elasticities as well as on the impact of capital on the skill premium. A positive capital tax serves the purpose of reducing tax distortions arising from redistribution, and it survives for any parametrization of the log-linear tax scheme except for a fully progressive system.
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