School of Economics

Featured Publications

The American Economic ReviewLaw and norms: Empirical evidence

American Economic Review (2023)

School’s author: Silvia Sonderegger

A large theoretical literature argues laws exert a causal effect on norms, but empirical evidence remains scant. Using a novel identification strategy, we provide a compelling empirical test of this proposition. We use incentivized vignette experiments to directly measure social norms relating to actions subject to legal thresholds. Our large-scale experiments (n = 7,000) run in the United Kingdom, United States, and China show that laws can causally influence social norms. Results are robust across different samples and methods of measuring norms, and are consistent with a model of social image concerns where individuals care about the inferences others make about their underlying prosociality.


Economic JournalUnraveling firms: Demand, productivity and markups heterogeneity

Economic Journal (2023)

School’s author: Giordano Mion

We develop a novel framework that simultaneously allows recovering heterogeneity in demand, quantity total factor productivity and markups across firms while leaving the correlation between the three dimensions unrestricted. We accomplish this by explicitly introducing demand heterogeneity and systematically exploiting assumptions used in previous productivity estimation approaches. In doing so, we provide an exact decomposition of revenue productivity in terms of the underlying heterogeneities, thus bridging the gap between quantity and revenue productivity estimations. We use Belgian firms’ production data to quantify total factor productivity, demand and markups, and show how they are correlated with each other across time and with measures obtained from other approaches.

In doing so, we find quantity total factor productivity and demand to be strongly negatively correlated with each other, so suggesting a trade-off between the quality of a firm’s products and their production cost. We also show how our framework provides deeper and sharper insights on the response of firms to increasing import competition from China. In particular, we find that changes in revenue productivity materialise as the outcome of complex and sometimes offsetting changes in quantity total factor productivity, demand, markups and production scale.


Journal of Economic HistoryOpening heaven’s door: Public opinion and congressional votes on the 1965 Immigration Act

Journal of Economic History (forthcoming)

School’s author: Giovanni Facchini

The 1965 Immigration Act represented a radical shift in US policy, which has been credited with dramatically expanding the volume and changing the composition of immigration. Its passing has often been described as the result of political machinations negotiated within Congress, without regard to public opinion. We show that congressional voting was consistent with public opinion on abolishing the country-of-origin quotas but not with the desire to limit the volume of immigration. While the former initially reflected attitudes over civil rights, the latter is consistent with contemporary expectations that the expansion in numbers would be modest.


Journal of Business and Economic StatisticsBonferroni type tests for return predictability and the initial condition

Journal of Business and Economic Statistics (2023)

School’s authors: David Harvey and Steve Leybourne

We develop tests for predictability that are robust to both the magnitude of the initial condition and the degree of persistence of the predictor. While the popular Bonferroni Q test of Campbell and Yogo displays excellent power properties for strongly persistent predictors with an asymptotically negligible initial condition, it can suffer from severe size distortions and power losses when either the initial condition is asymptotically non-negligible or the predictor is weakly persistent.

The Bonferroni t test of Elliott, and Stock, although displaying power well below that of the Bonferroni Q test for strongly persistent predictors with an asymptotically negligible initial condition, displays superior size control and power when the initial condition is asymptotically nonnegligible. In the case where the predictor is weakly persistent, a conventional regression t test comparing to standard normal quantiles is known to be asymptotically optimal under Gaussianity.

Based on these properties, we propose two asymptotically size controlled hybrid tests that are functions of the Bonferroni Q, Bonferroni t, and conventional t tests. Our proposed hybrid tests exhibit very good power regardless of the magnitude of the initial condition or the persistence degree of the predictor. An empirical application to the data originally analyzed by Campbell and Yogo shows our new hybrid tests are much more likely to find evidence of predictability than the Bonferroni Q test when the initial condition of the predictor is estimated to be large in magnitude.


Management ScienceCovid-19 vaccines as a condition of employment: Impact on uptake, staffing and mortality in elderly care homes

Management Sciences (forthcoming)

School’s author: Sourafel Girma

Laws mandating vaccination against Covid-19 as a condition of employment in health and care sectors were commonplace during the pandemic. Using weekly data at the local authority level, we examine the impact of the vaccine mandate for elderly care homes in England on vaccine take-up, staffing levels, and mortality. Our identification strategy involves 1. comparing take-up and staffing in English elderly care homes relative to other social care settings unaffected by the mandate; 2. comparing take-up and staffing in English elderly care homes relative to those in Wales where the mandate also did not apply; 3. comparing Covid-19 mortality among English elderly care home residents relative to mortality in domestic homes in England and to care homes in Wales.

Our results suggest that the mandate substantially decreased the proportion of care home workers who remained unvaccinated (equivalent to between 28,000 and 41,000 fewer unvaccinated staff), but this came at the cost of a reduction in staffing levels of between 3 and 4 percent (equivalent to 14,000 to 18,000 staff). We observe this effect most strongly in areas of low unemployment. Our results do not provide evidence that the vaccine mandate was successful in its primary aim of reducing care home deaths. Relatively wide confidence intervals mean inferences regarding mortality are more uncertain than for vaccination uptake and staffing.


American Economic Journal: Economic PolicyTax audits as scarecrows: Evidence from a large-scale field experiment

American Economic Journal: Economic Policy (2023)

School's author: Guillermo Cruces

The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with a tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than US$200 million in taxes per year. We find that providing information about audits significantly affected tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972).


The Review of Economics and StatisticsMeasuring “group cohesion” to reveal the power of social relationships in team production

The Review of Economics and Statistics (2023)

School's authors: Simon Gaechter and Chris Starmer

We introduce "group cohesion" to study the economic relevance of social relationships in team production. We operationalize measurement of group cohesion, adapting the "oneness scale" from psychology. A series of experiments, including a pre-registered replication, reveals strong positive associations between group cohesion and performance assessed in weak-link coordination games, with high-cohesion groups being very likely to achieve superior equilibria. In exploratory analysis, we identify beliefs rather than social preferences as the primary mechanism through which factors proxied by group cohesion influence group performance. Our evidence provides proof-of-concept for group cohesion as a useful tool for economic research and practice.


Review of Economic StudiesEquilibrium analysis in behavioral one-sector growth models

Review of Economic Studies (2023)

School's author: Martin Jensen

Rich behavioral biases, mistakes and limits on rational decision-making are often thought to make equilibrium analysis much more intractable. We establish that this is not the case in the context of one-sector growth models such as Ramsey-Cass-Koopmans or Bewley-Aiyagari models. We break down the response of the economy to a change in the environment or policy into two parts: the direct response at the given (pre-tax) prices, and the equilibrium response which plays out as prices change.

Our main result demonstrates that under weak regularity conditions, regardless of the details of behavioral preferences, mistakes and constraints on decision-making, the long-run equilibrium will involve a greater capital-labor ratio if and only if the direct response (from the corresponding consumption-saving model) involves an increase in aggregate savings. One implication of this result is that, from a qualitative point of view, behavioral biases matter for long-run equilibrium if and only if they change the direction of the direct response. We provide detailed illustrations of how this result can be applied and generates new insights using models of misperceptions, self-control and temptation, and naive and sophisticated quasi-hyperbolic discounting.


Economic JournalUnraveling firms: Demand, productivity and markups heterogeneity

Economic Journal (2023)

School's author: Giordano Mion

We develop a novel framework that simultaneously allows recovering heterogeneity in demand, quantity TFP and markups across firms while leaving the correlation between the three dimensions unrestricted. We accomplish this by explicitly introducing demand heterogeneity and systematically exploiting assumptions used in previous productivity estimation approaches. In doing so, we provide an exact decomposition of revenue productivity in terms of the underlying heterogeneities, thus bridging the gap between quantity and revenue productivity estimations.

We use Belgian firms production data to quantify TFP, demand and markups and show how they are correlated with each other, across time and with measures obtained from other approaches. In doing so, we find quantity TFP and demand to be strongly negatively correlated with each other so suggesting a trade-off between the quality of a firm's products and their production cost. We also show how our framework provides deeper and sharper insights on the response of firms to increasing import competition from China. In particular, we find that changes in revenue productivity materialise as the outcome of complex, and sometimes offsetting, changes in quantity TFP, demand, markups and production scale.


The Review of Economics and StatisticsThe impact of Covid-19 on productivity

Review of Economics and Statistics (forthcoming)

School's authors: Paul Mizen and Gregory Thwaites

We analyse the impact of Covid-19 on productivity using data from an innovative monthly firm survey that asks for quantitative impacts of Covid-19 on inputs and outputs. We find total factor productivity (TFP) fell by up to 6% during 2020-21. The overall impact combined large reductions in 'within-firm' productivity, with offsetting positive 'between-firm' effects as less productive sectors, and less productive firms within them, contracted. Despite these large pandemic effects, firms' post-Covid forecasts imply surprisingly little lasting impact on aggregate TFP. We also see significant heterogeneity over firms and sectors, with the greatest impacts in those requiring extensive in-person activity.


Journal of the European Economic AssociationProcrastination in the field: Evidence from tax filing

Journal of the European Economic Association (2022)

School's author: Seung-Keun Martinez

Understanding the structure of time preferences allows for accurate predictions of the effects of changing intertemporal incentives. Behavioral models of present bias are used to rationalize field data seemingly at odds with exponential discounting, leveraging additional degrees of freedom to improve in-sample fit. Largely lacking to date are the critical out-of-sample tests necessary to ensure predictive accuracy.

This paper contrasts exponential discounting with present-biased procrastination for around 22,000 tax filers, advancing the literature in this domain by providing novel out-of-sample tests for both theories. Present bias provides qualitatively better in-sample fit, matching substantial increases in filing probability as the tax deadline approaches. Present bias also has improved out-of-sample predictive power for responsiveness to the 2008 Stimulus Act, and experimental data demonstrate a link between present bias and filing times. Without present bias, predicted responses to changed incentives are inaccurate, demonstrating its necessity in research and policy applications.


The Review of Economics and StatisticsValue of managers’ export experience: Lessons from the Angolan Civil War

Review of Economics and Statistics (2022)

School’s authors: Facundo Albornoz Crespo and Giordano Mion

We investigate how managers help firms grow by entering a new export market. We conduct an event study on the decision to export to Angola using data on Portuguese firms and workers. We evaluate the impact of the presence of managers with experience in exporting to the Angolan market on a firm's entry success in the aftermath of an exogenous shock: the sudden end of the Angolan civil war. We show that the presence of managers doubles the probability of a firm entering the market. We do not find any significant impact on the intensive margin of exports.


Journal of Business and Economic StatisticsChangepoint detection in heteroscedastic random coefficient autoregressive models

Journal of Business and Economic Statistics (2022)

School’s author: Lorenzo Trapani

We propose a family of CUSUM-based statistics to detect the presence of changepoints in the deterministic part of the autoregressive parameter in a Random Coefficient Autoregressive (RCA) sequence. Our tests can be applied irrespective of whether the sequence is stationary or not, and no prior knowledge of stationarity or lack thereof is required. Similarly, our tests can be applied even when the error term and the stochastic part of the autoregressive coefficient are non iid, covering the cases of conditional volatility and shifts in the variance, again without requiring any prior knowledge as to the presence or type thereof. In order to ensure the ability to detect breaks at sample endpoints, we propose weighted CUSUM statistics, deriving the asymptotics for virtually all possible weighing schemes, including the standardized CUSUM process (for which we derive a Darling-Erdős theorem) and even heavier weights (so-called Rényi statistics). Simulations show that our procedures work very well in finite samples. We complement our theory with an application to several financial time series.


Economic JournalDoes homeownership reduce crime? A radical housing reform form the UK

Economic Journal (forthcoming)

School’s author: John Gathergood

“Right to Buy” (RTB), a large-scale natural experiment whereby incumbent tenants in public housing could buy properties at heavily-subsidised prices, increased the UK homeownership rate by over 10 percentage points between its 1980 introduction and the 1990s. This paper studies the impact of this reform on crime by leveraging exogenous variation in eligibility for the policy. Results show that RTB generated significant property crime reductions. Behavioural changes of incumbent tenants and renovation of public properties were the main drivers of this crime reduction. This is evidence of a novel means by which subsidised homeownership and housing policy can reduce criminality.


Games and Economic BehaviorPreferences and perceptions in provision and maintenance public goods

Games and Economic Behaviour (2022)

School’s author: Simon Gaechter

We study two generic versions of public goods problems: in Provision problems, the public good does not exist initially and needs to be provided; in Maintenance problems, the public good already exists and needs to be maintained. In four lab and online experiments (n=,105), we document a robust asymmetry in preferences and perceptions in two incentive-equivalent versions of these public good problems. We find fewer conditional cooperators and more free riders in Maintenance than Provision, a difference that is replicable, stable, and reflected in perceptions of kindness. Incentivized control questions administered before gameplay reveal dilemma-specific misperceptions but controlling for them neither eliminates game-dependent conditional cooperation, nor differences in perceived kindness of others' cooperation. Thus, even when sharing the same game form, Maintenance and Provision are different social dilemmas that require separate behavioral analyses.


Journal of the American Statistical AssociationInterference in heavy-tailed non-stationary multivariate time series

Journal of the American Statistical Association (2022)

School’s author: Lorenzo Trapani

We study inference on the common stochastic trends in a non-stationary, N-variate time series yt, in the possible presence of heavy tails. We propose a novel methodology which does not require any knowledge or estimation of the tail index, or even knowledge as to whether certain moments (such as the variance) exist or not, and develop an estimator of the number of stochastic trends m based on the eigenvalues of the sample second moment matrix of yt.

We study the rates of such eigenvalues, showing that the first m ones diverge, as the sample size T passes to infinity, at a rate faster by O(T)O(T) than the remaining N – m ones, irrespective of the tail index. We thus exploit this eigen-gap by constructing, for each eigenvalue, a test statistic which diverges to positive infinity or drifts to zero according to whether the relevant eigenvalue belongs to the set of the first m eigenvalues or not. We then construct a randomised statistic based on this, using it as part of a sequential testing procedure, ensuring consistency of the resulting estimator of m. We also discuss an estimator of the common trends based on principal components and show that, up to a an invertible linear transformation, such estimator is consistent in the sense that the estimation error is of smaller order than the trend itself.

Importantly, we present the case in which we relax the standard assumption of i.i.d. innovations, by allowing for heterogeneity of a very general form in the scale of the innovations. Finally, we develop an extension to the large dimensional case. A Monte Carlo study shows that the proposed estimator for m performs particularly well, even in samples of small size. We complete the paper by presenting two illustrative applications covering commodity prices and interest rates data.


Journal of Political EconomyRace, representation and local government in the US South: The effect of the Voting Rights Act

Journal of Political Economy (2023)

School’s authors: Giovanni Facchini and Cecilia Testa

The Voting Rights Act of 1965 redefined race relations in the United States. Yet, evidence on its effect on black office-holding remains scant. Using novel data on black elected officials between 1962-1980, we assess the impact of the VRA on the racial make-up of local governments in the Deep South. Exploiting predetermined differential exposure of Southern counties to the mandated federal intervention, we show that the latter fostered local black office-holding, particularly in the powerful county commissions, controlling local public finances. In the presence of election by district, covered counties experienced black representation gains and faster capital spending growth.


The Review of Economics and StatisticsThe effects of transit systems on international trade

Review of Economics and Statistics (2022)

School’s author: Alejandro Graziano

In this paper, we estimate the trade effects of a transit system upgrading that streamlines border processing in developing countries. Our empirical approach combines transaction level export data from El Salvador with unique data that distinguishes export flows that were processed on the transit system. Our results indicate that the new transit system lowered regulatory border costs and raised exports. At the low end, our back-of-the-envelope estimate of the return to investment is US$ 3-to-1. This evidence informs a policy covered by the 2013 WTO Agreement of Trade Facilitation.


Games and Economic BehaviorThe order of presentation in trials: Plaintive plaintiffs

Games and Economic Behavior (2022)

School’s author: Daniel Seidmann

Is it better to present evidence first or second in trials if witnesses cannot lie, and the litigants share all available witnesses? We address this question by defining preferences over playing games via their equilibrium correspondences. Exploiting this partial ordering over games, we show that litigants cannot prefer to lead, but can prefer to follow; the judge/jury may also prefer some litigant to lead, but only if the litigants each prefer to follow. Allowing a litigant to choose whether to lead after observing the available witnesses does not benefit either that litigant or the judge/jury.


Journal of Development EconomicsMeasuring honesty and explaining adulteration in naturally occurring markets

Journal of Development Economics (2022)

School’s author: Devesh Rustagi

There is astounding variation in product quality sold in markets even when quality is difficult to ascertain and rules are poorly enforced. We investigate whether sellers differ in innate honesty (incur private cost to provide good quality) and whether this explains the variation in quality. Our study takes place in milk markets in India, where milkmen collude on price, customer rarely switch, and it is difficult to establish reputation. We invite milkmen to take part in a novel behavioural experiment to measure dishonesty. We then measure quality objectively as the percentage of water added to a litre of milk sold to customers.

Our results show that dishonest milkmen add significantly more water to milk. Evidence from milk-testing tournament confirms that milk quality is difficult to verify. These results suggest that some sellers are willing to forego monetary gains to provide good quality in return for utility from being honest, even in an environment that encourages cheating.


Journal of Money, Credit and BankingSuperkurtosis

Journal of Money, Credit and Banking (2022)

School’s author: Lorenzo Trapani

Very little is known on how traditional risk metrics behave under intraday trading. We fill this void by examining the finiteness of the returns' moments and assessing the impact of their infinity in a risk management framework. We show that when intraday trading is considered, assuming finite higher order moments, potential losses are materially larger than what the theory predicts, and they increase exponentially as the trading frequency increases-a phenomenon we call superkurtosis. Hence, the use of the current risk management techniques under intraday trading impose threats to the stability of financial markets, given that capital ratios may be severely underestimated.


European Economic ReviewIs assisted suicide a substitute for unassisted suicide?

European Economic Review (2022)

School’s author: Sourafel Girma

Posner hypothesised that the legalisation of assisted suicide may substitute for unassisted (unregulated) suicide. We test predictions arising from this hypothesis using data from US states that have legalised assisted suicide. Event study regression estimates provide strong evidence that legalisation of assisted suicide is associated with an increase in total suicides, especially for females and older people. There is some evidence that assisted suicide laws are also associated with a smaller increase in unassisted suicide, though the statistical significance is weaker than for total suicides. Results using the synthetic control method (SCM) are generally consistent with the regression estimates. Overall the US experience to date provides little evidence in support of the Posner substitution hypothesis.


European Economic ReviewDemocracy, growth, heterogeneity and robustness

European Economic Review (2022)

School’s authors: Markus Eberhardt and Daniel Seidmann

I motivate and empirically investigate differential long-run growth effects of democratisation across countries. While the existing literature recognises the potential for such heterogeneity, empirical implementations to date unanimously assume a common democracy-growth nexus across countries. Adopting novel methods for causal inference in policy evaluation I relax this assumption to confirm that in the long-run democracy has a positive average effect on per capita income of around 10%, adopting a range of alternative definitions for regime change in the form of binary indicators. Guided by existing hypotheses, additional analysis probes the patterns of the heterogeneous 'democratic dividend' across countries. A second common feature of this literature as well as cross-country growth empirics more generally is the absence of concerns for sample selection or influential observations. I carry out two rule-based robustness exercises to demonstrate that my empirical findings are highly robust to substantial changes to the sample.


Journal of Economic HistoryInternal borders and population geography in the Unification of Italy

Journal of Economic History (forthcoming)

School's author: Valeria Rueda

We offer new evidence on the spatial economic impact of Italian unification. Adopting municipal population as a proxy for local economic activity, we construct a new geocoded dataset spanning the pre- and post-unification periods, and discover robust evidence of an acceleration in growth near the former borders. A disproportionate improvement in market access boosted growth in these locations when barriers to trade were dismantled. Indirectly, unification’s decisive contribution to intraregional market integration, local specialisation and exchange, and economic development is revealed.


Journal of International Money and Finance

Fundamentals, regimes and exchange rate forecasts: Insights from a meta exchange rate model

Journal of International Money and Finance (2022)

School’s author: Kevin Lee

A ‘meta’ model of the exchange rate combines a range of models distinguished by the drivers of the rate and by regime duration. Alternative model weights are proposed, including those obtained from a novel non-nested hypothesis-testing technique that accommodates periods of stability and slowly-evolving or abruptly-changing regimes involving multiple drivers.

Focusing on density forecasts, the meta models perform well, demonstrating that all the sets of fundamentals considered can be useful for forecasting when the model is estimated over an appropriate time frame, but that the ability to exploit the changing relevance of different sets of fundamentals over time is important too.



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