School of Economics

Featured Publications

Nature Human BehaviourPeople prefer coordinated punishment in cooperative interactions

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.

Nature Human Behaviour (2019)

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

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.

Management Science (2019)

EconometricaPreferences for truth telling

School's author: Daniele Nosenzo

The decision whether to lie or to tell the truth is at the heart of many everyday activities, from a self-employed shopkeeper reporting her income to the tax authorities to an applicant describing his skills in a job interview. It is very difficult to find out how much people lie in such situations, since the truth is not known. Recently, laboratory experiments have been used by researchers in economics, psychology and sociology to find out.

In this paper, we conduct a meta-analysis of the experimental literature, covering 90 experimental studies containing 429 treatment conditions and more than 44,000 subjects. We find that a large fraction of individuals are surprisingly honest, even in conditions in which lying is materially advantageous. We show that most existing behavioural theories cannot explain the findings of the meta study. Using newly-designed experiments, we show that this “preference for truth-telling” has two main sources: an intrinsic desire to be honest and a desire to appear as honest.

Econometrica (2019)

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

School's author: Marta Aloi

We develop a model of sluggish firm entry to explain short-run labor responses to technology shocks. We show that the labor response to technology and its persistence depend on the degree of returns to labor and the rate of firm entry. Existing empirical results support our theory based on short-run labor responses across US industries. We derive closed-form transition paths that show the result occurs because labor adjusts instantaneously whilst 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 Money, Credit and Banking (2019)

American Economic JournalCoercive trade policy

School's authors: Vincent Anesi and Giovanni Facchini

Coercion is used by one government (the "sender") to influence the trade practices of another (the "target"). We build a two-country trade model in which coercion can be exercised unilaterally or channeled through a "weak" international organization without enforcement powers. We show that unilateral coercion may be ineffective because signaling incentives lead the sender to demand a concession so substantial to make it unacceptable to the target. If the sender can instead commit to the international organization's dispute settlement mechanism, then compliance is more likely because the latter places a cap on the sender's incentives to signal its resolve.

American Economic Journal: Microeconomics (2019)

European Economic ReviewLabor Market Reforms: An Evaluation of the Hartz Policies in Germany

School's author: Jake Bradley

How do workers and firms respond to comprehensive labor market reforms? We use detailed micro data to analyse the German Hartz Reforms through the lens of a structural model of the labor market. These reforms aimed at reducing unemployment, by increasing working hour flexibility, job matching and work incentives.

In our setting, reforms directly affect the model parameters, which are estimated using matched data on 430,000 workers in 340,000 firms. Contrary to previous findings, our analysis shows that, although the reforms shortened the typical duration of unemployment, they did not reduce unemployment as a whole and led to a decline in wages. Low-skilled workers suffered the most in terms of employment and wage losses. Furthermore, we decompose the contribution of each reform wave to employment and wage changes, finding that the reduction in generosity of unemployment benefits was the principle driver in reducing wages.

European Economic Review (2019)

EconomicaCredit constraints and the inverted‐U relationship between competition and innovation

School's author: Roberto Bonfatti

Empirical studies have uncovered an inverted‐U relationship between product‐market competition and innovation. This is inconsistent with the original Schumpeterian model, where greater competition always reduces the profitability of innovation and thus the incentives to innovate. We show that the model can predict the inverted‐U if the innovators' talent is heterogeneous and asymmetrically observable. When competition is low and profitability is high, talented innovators are credit‐constrained, since untalented innovators are eager to mimic them.

As competition increases and profitability decreases, untalented innovators become less eager to mimic, and talented innovators can invest more. This generates the increasing part of the relationship. When competition is high and profitability is low, credit constraints disappear, and the relationship is decreasing. Our theory generates additional specific predictions that are well borne out by the existing evidence.

Economica (2019)

Journal of International Economics China's "Great Migration": The impact of the reduction in trade policy uncertainty

School's author: Giovanni Facchini

We analyse the effect of China's integration into the world economy on workers in the country and show that one important channel of impact has been internal migration. Specifically, we study the changes in internal migration rates triggered by the reduction in trade policy uncertainty faced by Chinese exporters in the U.S. This reduction is characterized by plausibly exogenous variation across products, which we use to construct a local measure of treatment, at the level of a Chinese prefecture, following Bartik (1991). This allows us to estimate a difference-in-difference empirical specification based on variation across Chinese prefectures before and after 2001.

We find that prefectures facing the average decline in trade policy uncertainty experienced a 24% increase in their internal in-migration rate – this result is driven by migrants who are "non-hukou", skilled, and in their prime working age. Finally, in those prefectures, working hours of "native" unskilled workers significantly increased, and internal migrants found employment in the places they migrated to.

Journal of International Economics (2019)

Journal of Money, Credit and BankingMacroprudential policies in a low interest-rate environment

School's author: Margarita Rubio

In this paper, we analyse the use of macroprudential policies in a low interest-rate environment, where an occasionally-binding zero lower bound (ZLB) reenforces financial frictions to give rise to greater economic instability. We calibrate a DSGE model with collateral constraints and a monetary policy rule that is subject to the ZLB for a low interest-rate world.

We find that the occasionally binding ZLB creates additional scope for macroprudential intervention. Under perfect coordination between monetary and macroprudential policies, the optimal policy mix calls for independence between the two policies when interest rates are high. However, in the low interest-rate environment, macroprudential policy is more intertwined with monetary policy.

Journal of Money, Credit and Banking (2019)

Cooperation in polygynous households Cooperation in polygynous households

In this publication in the American Economic Journal: Applied Economics, Abigail Barr and co-authors show that, compared to monogamous husbands and wives, polygynous husbands and wives are less cooperative, one with another, and that this difference cannot be attributed to less cooperative people selecting into polygyny.

Occupational choice with endogenous spilloversOccupational choice with endogenous spillovers

In this publication in the Economic Journal, Facundo Albornoz, Antonio Cabrales and Esther Hauk study a model that integrates productive and socializing efforts with occupational choice, and endogenous spillovers. The researchers show that more talented individuals work harder and contribute more to externalities, but also have incentives to segregate.

R&D outsourcing The role of international and domestic R&D outsourcing for firm innovation

In this publication in the Journal of Economic Behaviour and Organization, María García-Vega and Elena Huergo empirically investigate whether R&D outsourcing increases innovation, distinguishing between national and international R&D outsourcing and firms’ exporting status.

Multi-product firms and product qualityMulti-product firms and product quality

In this publication in the Journal of International Economics, Kalina Manova and Zhihong Yu present a theory on the behaviour of multi-product firms when cost and quality competitiveness jointly determine export performance. Using Chinese data, they find that firms’ production and sales activity across products and markets is governed by a product hierarchy based on quality. This phenomenon also determines how firms respond to economic shocks.

Testing for randomness Testing for randomness in a Random Coefficient AutoRegression model

In this publication in the Journal of Econometrics, Lajos Horvath and Lorenzo Trapani develop a testing procedure to check whether an AutoRegressive process has a random or non-random coefficient.

Coercive trade policy Coercive trade policy

In this publication in the American Economic Journal: Microeconomics, Vincent Anesi and Giovanni Facchini provide a theoretical rationale for empirical evidence suggesting that trade coercion exercised unilaterally is significantly less likely to induce concessions than coercion exercised through an international organization, and for how “weak” international institutions might be effective, even if their rulings cannot be directly enforced.

Teaching by example Teaching by example and induced beliefs in a model of cultural transmission

In this publication in the Journal of Economic Behaviour and Organization, Fabrizio Adriani, Jesse A. Matheson and Silvia Sonderegger build a model of cultural transmission where children learn about the world from parental behaviour.


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