School of Economics

Featured Publications

The Review of Economics and Statistics

Regime stability and the persistence of traditional practices

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 Behaviour and Organization

Confidence snowballing and relative performance feedback

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

Testing for common trends in non-stationary large datasets

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

Commodity prices and banking crisis

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

Growing like China: Firm performance and global production line position

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

The political economy of preferential trade agreements: An empirical investigation

Economic Journal

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 LiteratureForeign influence and domestic policy

Journal of Economic Literature

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 JournalFees, Reputation and Information Production in the Credit Rating Industry

American Economic Journal: Microeconomics

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.


Review of Economic StudiesSkill-Biased Structural Change

Review of Economic Studies (forthcoming)

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 EconometricsSimple tests for stock return predictability with good size and power properties

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 EconomicsThe rhetoric of closed borders: Quotas, lax enforcement and illegal immigration

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 BehaviourThe association between gambling and financial, social and health outcomes in big financial data

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 EconomicsThe Anatomy of Behavioural Responses to Social Assistance when Informal Employment is High

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 JournalDynamic Persuasion with Outside Information

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 JournalBrexit Uncertainty and Trade Disintegration

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 TheoryOptimal similarity judgments in intertemporal choice (and beyond)

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.


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.


EconometricaPreferences for truth telling

Econometrica (2019)

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.


American Economic JournalCoercive trade policy

American Economic Journal: Microeconomics (2019)

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 organisation 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 organisation's dispute settlement mechanism, then compliance is more likely because the latter places a cap on the sender's incentives to signal its resolve.


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

European Economic Review (2019)

School's author: Jake Bradley

How do workers and firms respond to comprehensive labour market reforms? We use detailed micro data to analyse the German Hartz Reforms through the lens of a structural model of the labour 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.


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

Journal of International Economics (2019)

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

Journal of Money, Credit and Banking (2019)

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.



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