Featured Publications
Journal of Economic Geography (2021)
School’s author: Marta Aloi
We analyse how spatial disparities in innovation activities, coupled with migration costs, affect economic geography, market structure, growth and regional inequality. We provide conditions for existence and uniqueness of a spatial equilibrium, and for the endogenous emergence of industry clusters. Spatial variations in knowledge spillovers lead to spatial concentration of more innovative firms. Migration costs, however, limit the concentration of economic activities in the most productive region. Narrowing the gap in knowledge spillovers across regions raises growth, and reduces regional inequality by making firms more sensitive to wage differentials. The associated change in the industry concentration has positive welfare effects.
Experimental Economics (2021)
School’s authors: Marit Hinnosaar and Toomas Hinnosaar
Are there positive or negative externalities in knowledge production? We analyse whether current contributions to knowledge production increase or decrease the future growth of knowledge. To assess this, we use a randomised field experiment that added content to some pages in Wikipedia while leaving similar pages unchanged. We compare subsequent content growth over the next four years between the treatment and control groups.
Our estimates allow us to rule out effects on four-year growth of content length larger than twelve percent. We can also rule out effects on four-year growth of content quality larger than four points, which is less than one-fifth of the size of the treatment itself. The treatment increased editing activity in the first two years, but most of these edits only modified the text added by the treatment.
Our results have implications for information seeding and incentivizing contributions. They imply that additional content may inspire future contributions in the short- and medium-term but do not generate large externalities in the long term.
American Political Science Review (2021)
School’s author: Valeria Rueda
What are the origins of the ethnic landscapes in contemporary states? Drawing on a preregistered research design, we test the influence of dual socioeconomic revolutions that spread throughout Africa during the nineteenth and twentieth centuries—export agriculture and print technologies. We argue these changes transformed ethnicity via their effects on politicization and boundary-making. Print technologies strengthened imagined communities, leading to more salient—yet porous—ethnic identities. Cash crop endowments increased groups’ mobilizational potential but with more exclusionary boundaries to control agricultural rents.
Using historical data on cash crops and African language publications, we find that groups exposed to these historical forces are more likely to be politically relevant in the postindependence period, and their members report more salient ethnic identities. We observe heterogenous effects on boundary-making as measured by interethnic marriage; relative to cash crops, printing fostered greater openness to assimilate linguistically related outsiders. Our findings illuminate not only the historical sources of ethnic politicization but also mechanisms shaping boundary formation.
Journal of International Money and Finance (2021)
School’s author: Paul Mizen
In this paper, we focus on the surprising phenomenon in which firms face difficulty issuing in domestic currency even in the home market, especially in emerging markets. Could this be due to "original sin" which has been familiar to sovereign bond issuance? In its new incarnation, original sin refers to the difficulty firms in many emerging markets have in borrowing domestically long-term, even in the local currency. We infer the nature of original sin from 5,901 financing decisions by firms in seven Asian emerging markets over a period of 20 years.
Our sample period covers an episode when bond issuers had a choice between a less developed but growing onshore market, which varied across countries in the level of development, and a deep and liquid offshore market. We find that even in countries with onshore markets, it is often easier for unseasoned firms to issue offshore (in foreign currency) than to issue onshore, but changes in market development reverses this effect. In addition, once such a firm becomes a seasoned issuer, it is absolved from domestic original sin and is then able to act opportunistically and go to the market favoured by interest differentials.
Review of Economics and Statistics (2021)
School’s author: Mikhail Poyker
I examine why the harmful tradition of female genital mutilation persists in certain countries while in others it has been eradicated. People are more willing to abandon their traditions if they are confident that the government is durable enough to set up long-term replacements for them. Using a country-ethnicity panel dataset spanning 23 countries from 1970 to 2013 and artificial partition of African ethnic groups by national borders, I show that a one-standard-deviation larger increase in political regime durability leads to a 0.1-standard-deviation larger decline in the share of newly-circumcised women, conditional on the presence of an anti-FGM government policy.
Journal of Economic Behavior and Organization (2021)
School’s author: Chris Starmer
We investigate whether uninformative relative performance feedback can create biases in confidence leading it to ‘snowball’. We study elicited confidence about own performance, relative to other group members, in three stages. As subjects move across stages, we change group composition so that new groups contain either only top performers or only bottom performers, from the previous stage. Between treatments, we manipulate whether subjects know about their own past relative performance or that of currently matched group members. In a treatment where subjects receive no feedback between stages, their confidence remains calibrated and stable across the stages. When subjects receive feedback in the other two treatments, their confidence snowballs in the direction of the feedback, both when feedback is fully informative and completely uninformative of their future performance. The results suggest the possibility of confidence biases emerging and snowballing in a potentially wide range of field settings.
Journal of Business and Economic Statistics (2021)
School’s author: Lorenzo Trapani
We propose a testing based procedure to determine the number of common trends in a large non-stationary dataset. Our procedure is based on a factor representation, where we determine whether there are (and how many) common factors (i) with linear trends, and (ii) with stochastic trends. Cointegration among the factors is also permitted.
Our analysis is based on the fact that those largest eigenvalues of a suitably scaled covariance matrix of the data corresponding to the common factor part diverge, as the dimension N of the dataset diverges, whilst the others stay bounded. Therefore, we propose a class of randomised test statistics for the null that the p-th largest eigenvalue diverges, based directly on the estimated eigenvalue.
The tests only requires minimal assumptions on the data generating process. Monte Carlo evidence shows that our procedure has very good finite sample properties, clearly dominating competing approaches when no common trends are present. We illustrate our methodology through an application to US bond yields with different maturities observed over the last 30 years.
Journal of International Economics (2021)
School’s author: Markus Eberhardt
Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalisation in LICs.
We corroborate our main findings with historical data for 40 ‘peripheral’ economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets.
Journal of International Economics (2021)
School’s author: Zhihong Yu
Global value chains have fundamentally transformed international trade and development in recent decades. We use matched firm-level customs and manufacturing survey data, together with Input-Output tables for China, to examine how Chinese firms position themselves in global production lines and how this evolves with productivity and performance over the firm lifecycle.
We document a sharp rise in the upstreamness of imports, stable positioning of exports, and rapid expansion in production stages conducted in China over the 1992–2014 period, both in the aggregate and within firms over time. Firms span more stages as they grow more productive, bigger and more experienced. This is accompanied by a rise in input purchases, value added in production, fixed costs incurred, and profits. We rationalise these patterns with a stylised model of the firm lifecycle with complementarity between the scale of production and the scope of stages performed.
Economic Journal (2021)
School’s author: Giovanni Facchini
We develop a political economy model to study the decision of representative democracies to join a preferential trading agreement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis shows that bilateral trade imbalances and income inequality are important factors determining the formation of PTAs, whereas the patterns of geographic specialisation explain whether a CU or an FTA will emerge. Our empirical analysis-using a comprehensive panel dataset spanning 187 countries over the period 1960-2015-provides strong support for these predictions.
Journal of Economic Literature (2021)
School’s author: Facundo Albornoz-Crespo
In an interconnected world, economic and political interests inevitably reach beyond national borders. Since policy choices generate external economic and political costs, foreign state and non-state actors have an interest in influencing policy actions in other sovereign countries to their advantage.
Foreign influence is a strategic choice aimed at internalising these externalities and takes three principal forms: (i) voluntary agreements, (ii) policy interventions based on rewarding or sanctioning the target country to obtain a specific change in policy, and (iii) institution interventions aimed at influencing the political institutions in the target country.
We propose a unifying theoretical framework to study when foreign influence is chosen and in which form, and use it to organise and evaluate the new political economics literature on foreign influence along with work in cognate disciplines.
American Economic Journal: Microeconomics (2021)
School’s author: Adrien Vigier
We compare a credit rating agency's incentives to acquire costly information when it is only paid for giving favourable ratings to the corresponding incentives when the agency is paid upfront, i.e. irrespective of the ratings assigned. We show that, in the presence of moral hazard, contingent fees provide stronger dynamic incentives to acquire information than upfront fees and may induce higher social welfare. When the fee structure is chosen by the agency, contingent fees arise as an equilibrium outcome, in line with the way the market for credit rating actually works.
Skill-Biased Structural Change
Review of Economic Studies (2021)
School’s author: Juan Vizcaino
Using a broad panel of advanced economies we document that increases in GDP per capita are associated with a systematic shift in the composition of value added to sectors that are intensive in high-skill labour, a process we label as skill-biased structural change. It follows that further development in these economies leads to an increase in the relative demand for skilled labour. We develop a quantitative two-sector model of this process as a laboratory to assess the sources of the rise of the skill premium in the US and a set of ten other advanced economies, over the period 1977 to 2005.
For the US, we find that the sector-specific skill neutral component of technical change accounts for 18-24% of the overall increase of the skill premium due to technical change, and that the mechanism through which this component of technical change affects the skill premium is via skill biased structural change.
Journal of Econometrics (2021)
School’s authors: David Harvey and Steve Leybourne
We develop easy-to-implement tests for return predictability which, relative to extant tests in the literature, display attractive finite sample size control and power across a wide range of persistence and endogeneity levels for the predictor. Our approach is based on the standard regression t-ratio and a variant where the predictor is quasi-GLS (rather than OLS) demeaned. In the strongly persistent near-unit root environment, the limiting null distributions of these statistics depend on the endogeneity and local-to-unity parameters characterising the predictor.
Analysis of the asymptotic local power functions of feasible implementations of these two tests, based on asymptotically conservative critical values, motivates a switching procedure between the two, employing the quasi-GLS demeaned variant unless the magnitude of the estimated endogeneity correlation parameter is small. Additionally, if the data suggests the predictor is weakly persistent, our approach switches to the standard t-ratio test with reference to standard normal critical values.
Journal of International Economics (2021)
School’s authors: Cecilia Testa and Giovanni Facchini
Governments do not always enforce their laws, even when they have the means of doing so, and lax enforcement is common in the domain of immigration policy. To explain this paradox we develop a political agency model where gains from migration are unevenly distributed, and an elected government chooses both quotas and their enforcement.
We show that distributional concerns can have perverse effects on migration policy since a utilitarian government may set a quota to appease the electorate, but then strategically under-invest in its enforcement. Under-investment is more likely, the larger the preference gap between median and average voter, and the higher the likelihood of a populist challenger gaining office.
Our analysis also indicates that redistributive taxation reducing the share of enforcement cost borne by the median voter exacerbate the problem, whereas a compensatory tax rebate financed through a tax on profits from migration alleviates the conflict of interest, thus reducing illegal immigration.
Nature Human Behaviour (2021)
School’s author: John Gathergood
Gambling is an ordinary pastime for some people, but is associated with addiction and harmful outcomes for others. Evidence of these harms is limited to small sample, crosssectional self-reports, such as prevalence surveys. We examine the association between gambling as a proportion of monthly income and 31 financial, social, and health outcomes using anonymous data provided by a UK retail bank, aggregated for up to 6.5 million individuals over up to seven years.
Gambling is associated with higher financial distress and lower financial inclusion and planning, and negative lifestyle, health, well-being, and leisure outcomes. Gambling is associated with higher rates of future unemployment, physical disability, and, at the highest levels, substantially increased mortality. Gambling is persistent over time, growing over the sample period, and has higher negative associations among the heaviest gamblers. Our findings inform the debate over the relationship between gambling and life experiences across the population.
Journal of Public Economics (2021)
School’s author: Guillermo Cruces
The disincentive effects of social assistance programs on registered (or formal) employment are a first-order policy concern in developing and middle-income countries. We study the impact of a conditional cash transfer (CCT) program in Uruguay on the employment of adult members in beneficiary households in a context of high informality.
Our research design relies on the sharp discontinuity introduced by program eligibility rules around a poverty score threshold combined with longitudinal administrative data. We find reductions of about 6 percentage points (a 13% drop) in formal labour force participation among all beneficiaries and of 8.7 percentage points (a 19% drop) for single mothers. The implied elasticity of participation in the formal sector with respect to the net-of-tax rate is about 0.78 for the full sample and about 1.3 for single mothers. The reduction in labour supply is stronger among individuals who have a medium propensity to be formally employed, with a smaller reduction in the case of infra-marginal individuals. We also present suggestive evidence that the reduction in formal employment increases inactivity and informal work in equal proportions.
Finally, despite pervasive informality in the context of the Family Allowance assistance program (AFAM), the program’s marginal value of public funds of 0.61 implies an efficiency cost within the range of cash transfer programs targeted to families in the United States.
American Economic Journal: Microeconomics (2021)
School’s author: Adrien Vigier
A principal seeks to persuade an agent to accept an offer of uncertain value before a deadline expires. The principal can generate information, but exerts no control over exogenous outside information. The combined effect of the deadline and outside information creates incentives for the principal to keep uncertainty high in the first periods so as to persuade the agent close to the deadline. We characterise the equilibrium, compare it to the single-player decision problem in which exogenous outside information is the agent's only source of information, and examine the welfare implications of our analysis.
Economic Journal (2020)
School’s author: Alejandro Graziano
We estimate the uncertainty effects of preferential trade disagreements. Increases in the probability of Britain’s exit from the European Union (Brexit) reduce bilateral export values and trade participation. These effects are increasing in trade policy risk across products. We estimate that at the average disagreement tariff of 4.5% the increase in the probability of Brexit after the referendum lowered EU–UK bilateral export values between 11–20%. Neither the EU nor UK exporters believed a trade war was likely.
Journal of Economic Theory (2020)
School’s author: Silvia Sonderegger
We use a simple cost-benefit analysis to derive optimal similarity judgments – addressing the question: when should we expect a decision maker to distinguish between different time periods or different prizes?
Our key premise is that cognitive resources are costly and are to be deployed only where they really matter. We show that this simple insight can explain a number of observed anomalies, such as: (i) time inconsistency, (ii) magnitude effects, (iii) interval length effects. For each of these phenomena, our approach allows to identify the direction of the bias relative to the benchmark case where cognitive resources are costless.
Finally, we show that, when applied to choice under risk, the same insights predict anomalies such as the ratio and certainty effects, and rationalise Rabin's risk aversion paradox. This suggests that the theory may provide a parsimonious explanation of behavioural anomalies in different contexts.