School of Economics

Featured Publications

Journal of Public EconomicsEconomic uncertainty before and during the Covid-19 pandemic

Journal of Public Economics (2020)

School’s authors: Julia Leather, Paul Mizen and Gregory Thwaites

We consider several economic uncertainty indicators for the US and UK before and during the Covid-19 pandemic: implied stock market volatility, newspaper-based policy uncertainty, Twitter chatter about economic uncertainty, subjective uncertainty about business growth, forecaster disagreement about future GDP growth, and a model-based measure of macro uncertainty.

Four results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly – from a 35% rise for the model-based measure of US economic uncertainty (relative to January 2020) to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: Implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting differences between Wall Street and Main Street uncertainty measures. Fourth, in Cholesky-identified VAR models fit to monthly U.S. data, a Covid-size uncertainty shock foreshadows peak drops in industrial production of 12–19%.


Journal of Applied EconometricsReal‐Time Detection of Regimes of Predictability in the U.S. Equity Premium

Journal of Applied Econometrics (2020)

School’s author: David Harvey and Steve Leybourne

We propose new real‐time monitoring procedures for the emergence of end‐of‐sample predictive regimes using sequential implementations of standard (heteroskedasticity‐robust) regression t‐statistics for predictability applied over relatively short time periods. The procedures we develop can also be used for detecting historical regimes of temporary predictability. Our proposed methods are robust to both the degree of persistence and endogeneity of the regressors in the predictive regression and to certain forms of heteroskedasticity in the shocks.

We discuss how the monitoring procedures can be designed such that their false positive rate can be set by the practitioner at the start of the monitoring period using detection rules based on information obtained from the data in a training period. We use these new monitoring procedures to investigate the presence of regime changes in the predictability of the US equity premium at the 1‐month horizon by traditional macroeconomic and financial variables, and by binary technical analysis indicators.

Our results suggest that the 1‐month‐ahead equity premium has temporarily been predictable, displaying so‐called “pockets of predictability,” and that these episodes of predictability could have been detected in real time by practitioners using our proposed methodology.


Journal of Money, Credit and BankingLabour Responses, Regulation and Business Churn

Journal of Money, Credit and Banking (2020)

School’s author: Marta Aloi

We develop a model of sluggish firm entry to explain short‐run labour responses to technology shocks. We show that the labour response to technology and its persistence depend on the degree of returns to labour and the rate of firm entry. Existing empirical results support our theory based on short‐run labour responses across U.S. industries.

We derive closed‐form transition paths that show the result occurs because labour adjusts instantaneously while firms are sluggish, and closed‐form eigenvalues show that stricter entry regulation results in slower convergence to steady state. Finally, we show that our theoretical results hold in a quantitative model with capital accumulation and interest rate dynamics.


Journal of Economic Behaviour and OrganizationRisk taking and sharing when risk exposure is interdependent

Journal of Economic Behavior and Organization (2020)

School’s authors: Abigail Barr and Trudy Ownes

Using a specially designed experiment, we investigate whether and how interdependence in risk exposure, i.e., risk taking by some members of a potential risk sharing group affecting not only their own but also their co-members' risk exposure, affects both risk taking and ex post sharing. The experimental subjects were Sri Lankan small-holders who face interdependent risk and share when neighbours fall on hard times in everyday life.

We find that the Sri Lankan farmers reward socially responsible risk taking and, under some circumstances, punish socially irresponsible risk taking. Their behaviour is consistent with socially responsible risk taking being cost-dependent, although, here, the statistical evidence is inconclusive. Finally, social responsibility in risk taking and ex post sharing do not appear to be substitutes, rather, they appear to be co-determined.


Journal of International EconomicsEstimating and testing the multicountry endogenous growth model

Journal of International Economics (2020)

School’s author: Markus Eberhardt

We estimate Cobb-Douglas production functions that parameterize unobserved total factor productivity as a global technology process interacted with country-specific absorptive capacities. In contrast to the existing literature, we do not require proxies for these absorptive capacities but instead estimate them as time-varying stochastic processes.

Our implementation allows us to test the contrasting predictions of alternative growth models and our results for a panel of advanced economies support the multicountry endogenous growth model in that an enhancement in absorptive capacity raises a country's long-run productivity level but not its growth rate. This finding is confirmed in an extended model where we allow a set of policy variables (financial development, human capital, competition policy, and knowledge stock) to affect absorptive capacity, none of which induces permanent growth effects. The proxies for financial development and knowledge stock stand out for their significant level effects.


The American Economic ReviewWho Acquires Information in Dealer Markets?

American Economic Review (2020)

School’s author: Adrien Vigier

We study information acquisition in dealer markets. We first identify a one-sided strategic complementarity in information acquisition: the more informed traders are the larger market makers' gain from becoming informed. When quotes are observable, this effect in turn induces a strategic complementarity in information acquisition amongst market makers.

We then derive the equilibrium pattern of information acquisition and examine the implications of our analysis for market liquidity and price discovery. We show that increasing the cost of information can decrease market liquidity and improve price discovery.


Journal of International Money and FinanceCross-country spillovers from macroprudential regulation: Reciprocity and leakage

Journal of International Money and Finance (2020)

School’s author: Margarita Rubio

In a globally interconnected banking system, there can be spillovers from domestic macroprudential policies to foreign banks and vice versa, for example, through the presence of foreign branches in the domestic economy. The lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to those banks with lower regulatory levels, a phenomenon known as “leakage.” This may decrease the effectiveness of macroprudential policies in the pursuit of financial stability.

To explore this topic, I consider a two-country DSGE model with housing and credit constraints. Borrowers can choose whether to borrow from domestic or foreign banks. Macroprudential policies are conducted at a national level and are represented by a countercyclical rule on the loan-to-value ratio.

Results show that when there are some sort of reciprocity agreements on macroprudential policies across countries, financial stability and welfare gains are larger than in a situation of non-reciprocity. An optimal policy analysis shows that, in order to enhance the effectiveness of macroprudential policies, reciprocity mechanisms are desirable although the foreign macroprudential rule does not need to be as aggressive as the domestic one.


EconometricaMicro to Macro: Optimal Trade Policy with Firm Heterogeneity

Econometrica (2020)

School’s author: Andres Rodriguez-Clare

The empirical observation that "large firms tend to export, whereas small firms do not" has transformed the way economists think about the determinants of international trade. Yet, it has had surprisingly little impact on how economists think about trade policy. Under very general conditions, we show that from the point of view of a country that unilaterally imposes trade taxes to maximise domestic welfare, the self-selection of heterogeneous firms into exports calls for import subsidies on the least profitable foreign firms. In contrast, our analysis does not provide any rationale for export subsidies or taxes on the least profitable domestic firms.


Journal of International EconomicsTrade liberalisation, input intermediaries and firm productivity: Evidence from China

Journal of International Economics (2020)

School’s author: Richard Kneller 

We investigate theoretically and empirically the role of wholesalers in mediating the productivity effects of trade liberalisation. Intermediaries provide indirect access to foreign produced inputs. The productivity effects of input tariff cuts on firms that do not directly import therefore depends on the extent that wholesalers are a feature of input supply within an industry. Using firm level data from China, we document that wholesalers play no such role for direct importers. However, other firms experience productivity gains from reducing input tariffs if trade intermediation of foreign inputs within their sector is high. They suffer efficiency losses otherwise.


Management ScienceHow Do Consumers Avoid Penalty Fees? Evidence from Credit Cards

Management Science (2020)

School’s author: John Gathergood

Using data from multiple card issuers, we show that the most common penalty fee type incurred by credit card holders, late payment fees, declines sharply over the first few months of card life. This phenomenon is wholly due to some consumers adopting automatic payments after a late payment event, thereby insuring themselves against future late payment fees. Nonadopters, who remain on manual-only payments, experience an unchanged high likelihood of future fees, despite exhibiting ample levels of available liquidity.

Our results show that heterogeneity in adopting account management features of financial products, such as automatic payments, is important for understanding who avoids financial mistakes.


Journal of Economic TheoryLearning about analysts

Journal of Economic Theory (2020)

School’s author: Adrien Vigier

We examine an analyst with career concerns making cheap talk recommendations to a sequence of traders, each of whom possesses private information concerning the analyst's ability. The recommendations of the analyst influence asset prices that are then used to evaluate the analyst. An endogeneity problem thus arises. In particular, if the reputation of the analyst is sufficiently high then an incompetent but strategic analyst is able to momentarily hide her type. An equilibrium in which the market eventually learns the analyst type always exists. However, under some conditions, an equilibrium also exists in which the incompetent analyst is able to hide her type forever.


Experimental EconomicsAltruism, fast and slow? Evidence from a meta-analysis and a new experiment

Experimental Economics (2020)

School’s author: Trudy Owens

Can we use the lens of dual-system theories to explain altruistic behaviour? In recent years, this question has attracted the interest of both economists and psychologists. We contribute to this emerging literature by reporting the results of a meta-study of the literature and a new experiment.

Our meta-study is based on 22 experimental studies conducted with more than 12,000 subjects. We show that the overall effect of manipulating cognitive resources to promote the "intuitive" system at the expense of the "deliberative" system is very close to zero. One reason for this null result could be that promoting intuition has heterogeneous effects on altruism across different subgroups of subjects or contexts. Another reason could be that there simply is no real effect and that previously reported single results are false positives.

We explore the role of heterogeneity both by performing a mediator analysis of the meta-analytic effect and by conducting a new experiment designed to circumvent the issue of potential heterogeneity in the direction of the effect of promoting intuition. In both cases, we find little evidence that heterogeneity explains the absence of an overall effect of intuition on altruism. Taken together, our results offer little support for dual-system theories of altruistic behaviour.


The RAND Journal of EconomicsRobust pricing with refunds

RAND. Journal of Economics (2020)

School’s author: Toomas Hinnosaar

Before purchase, a buyer of an experience good learns about the product's fit using various information sources, including some of which the seller may be unaware of. The buyer, however, can conclusively learn the fit only after purchasing and trying out the product. We show that the seller can use a simple mechanism to best take advantage of the buyer's post-purchase learning to maximise his guaranteed-profit. We show that this mechanism combines a generous refund, which performs well when the buyer is relatively informed, with non-refundable random discounts, which work well when the buyer is relatively uninformed.


The Review of Economics and StatisticsIncentives and Careers in Academia: Theory and Empirical Analysis

Review of Economics and Statistics (2020)

School’s author: Gianni De Fraja

We study career concerns in Italian academia. We mould our empirical analysis on the standard model of contests, formalised in the multi-unit all-pay auction. The number of posts, the number of applicants, and the relative importance of the criteria for promotion determine academics' effort and output. In Italian universities, incentives operate only through promotion and all appointment panels are drawn from strictly separated and relatively narrow scientific sectors: thus, the parameters affecting payoffs can be measured quite precisely, and we take the model to a newly constructed dataset which collects the journal publications of all Italian university professors.

Our identification strategy is based on a reform introduced in 1999, parts of which affected different academics differently. We find that individual researchers respond to incentives in the manner described by the theoretical model: roughly, more capable researchers respond to increases in the importance of the publications for promotion and in the competitiveness of the scientific sector by exerting more effort; less able researchers are discouraged by competition and do the opposite.


Journal of Economic Behaviour and OrganizationDoes transparency come at the cost of charitable services? Evidence from investigating British charities

Journal of Economic Behavior and Organization (2020)

School’s author: Trudy Owens

Recent high-profile scandals related to misuse of funding and donations have raised the demand for scrutiny over financial transparency and operational activities of non-profit organisations in developed countries. Our analysis challenges the common practice in the sector of using programme ratios and overhead costs as indicators for non-profit accountability. Using Benford's Law to measure irregularities in financial data for a large sample of public charities, we estimate that 25% of the sample potentially misreport their financial information.

We show theoretically and empirically that charities with a higher programme ratio (their level of spending on charitable activities), will be less likely to misreport their financial information only when their overhead costs (spending on governing activities) are also sufficiently high. Tighter monitoring becomes ineffective in increasing the sectoral transparency and accountability unless accompanied by a sufficiently high level of charitable spending.


American Economic JournalAll the Single Ladies: Job Promotions and the Durability of Marriage

American Economic Journal: Applied Economics (2020)

School’s author: Johanna Rickne

We study how promotions to top jobs affect the probability of divorce. We compare the relationship trajectories of winning and losing candidates for mayor and parliamentarian and find that a promotion to one of these jobs doubles the baseline probability of divorce for women, but not for men. We also find a widening gender gap in divorce rates for men and women after being promoted to CEO. An analysis of possible mechanisms shows that divorces are concentrated in more gender-traditional couples, while women in more gender-equal couples are unaffected.


Oxford Economic PapersHow Hard Is It to Maximize Profit? Evidence from a 19th century Italian State Monopoly

Oxford Economic Papers (2020)

School’s author: Gianni De Fraja 

In this paper, we study the ability of the 19th century Italian government to choose profit maximising prices for a multiproduct monopolist. We use very detailed historical data on the tobacco consumption in 62 Italian provinces from 1871 to 1888 to estimate a differentiated product demand system. The demand conditions and the legal environment of the period made this market as close to a textbook monopoly as is practically possible. The government’s stated aim for this industry was profit maximisation: since at the time profits from tobacco were close to 10% of the revenues for the cash-strapped government, the stated aim was very likely the true one.

Our empirical application uses historical price and cost data and suggests that the government was not wide off the mark: the tobacco prices were ‘not far’ from those dictated by the multiproduct monopoly formulae for profit maximisation with interdependent demand functions.


Journal of Economic Behaviour and OrganizationSocial comparisons in job search

Journal of Economic Behavior and Organization (2019)

School’s authors: Martin Sefton and Richard Upward

Using a laboratory experiment, we examine how social comparisons affect behaviour in a sequential search task. In a control treatment subjects search in isolation, while in two other treatments subjects get feedback on the search decisions and outcomes of a partner subject. The average level and rate of decline of reservation wages are similar across treatments. Nevertheless, subjects who are able to make social comparisons search differently from those who search in isolation.

Within a search task, we observe a reference wage effect: when a partner exits, the subject chooses a new reservation wage, which is increasing in partner income. We also observe a social comparison effect between search tasks: subjects whose partners in a previous task searched for longer choose a higher reservation wage in the next task. Our findings imply that the provision of social information can change job-seekers search behaviour.


Nature Human BehaviourPeople prefer coordinated punishment in cooperative interactions

Nature Human Behaviour (2019)

School's authors: Simon Gaechter and Chris Starmer

Human groups can often maintain high levels of cooperation despite the threat of exploitation by individuals who reap the benefits of cooperation without contributing to its costs. Prominent theoretical models suggest that cooperation is particularly likely to thrive if people join forces to curb free riding and punish their non-contributing peers in a coordinated fashion. However, it is unclear whether and, if so, how people actually condition their punishment of peers on punishment behaviour by others.

Here we provide direct evidence that many people prefer coordinated punishment. With two large-scale decision-making experiments (total n = 4,320), we create minimal and controlled conditions to examine preferences for conditional punishment and cleanly identify how the punishment decisions of individuals are impacted by the punishment behaviour by others. We find that the most frequent preference is to punish a peer only if another (third) individual does so as well. Coordinated punishment is particularly common among participants who shy away from initiating punishment.

With an additional experiment, we further show that preferences for conditional punishment are unrelated to well-studied preferences for conditional cooperation. Our results highlight the importance of conditional preferences in both positive and negative reciprocity, and they provide strong empirical support for theories that explain cooperation based on coordinated punishment.


Management ScienceReexamining how utility and weighting functions get their shapes: A quasi-adversarial collaboration providing a new interpretation

Management Science (2019)

School's authors: Chris Starmer and Fabio Tufano

In a paper published in Management Science in 2015, Stewart, Reimers, and Harris (SRH) demonstrated that shapes of utility and probability weighting functions could be manipulated by adjusting the distributions of outcomes and probabilities on offer as predicted by the theory of decision by sampling. So marked were these effects that, at face value, they profoundly challenge standard interpretations of preference theoretic models in which such functions are supposed to reflect stable properties of individual risk preferences.

Motivated by this challenge, we report an extensive replication exercise based on a series of experiments conducted as a quasi-adversarial collaboration across different labs and involving researchers from both economics and psychology. We replicate the SRH effect across multiple experiments involving changes in many design features; importantly, however, we find that the effect is also present in designs modified so that decision by sampling predicts no effect. Although those results depend on model-based inferences, an alternative analysis using a model-free comparison approach finds no evidence of patterns akin to the SRH effect.

On the basis of simulation exercises, we demonstrate that the SRH effect may be a consequence of misspecification biases arising in parameter recovery exercises that fit imperfectly specified choice models to experimental data. Overall, our analysis casts the SRH effect in an entirely new light.



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