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Environmental and Energy Economics

The Derivation of Discount Rates with an Augmented Measure of Income. Nicholas Z. Muller

Most developed economies invest in public goods such as national defense, education, infrastructure, and the environment. Expenditures on public projects entail a diversion of funds away from investments in private capital. Discount rates used to evaluate such projects should reflect the rate of return on the current mix of investment opportunities. The present paper derives discount rates using an augmented measure of national income inclusive of non-market goods. The discount rate reflects three key factors: the productivity of private capital, the opportunity cost of direct expenditure on public projects, and the returns to public investment that accrete outside of the market boundary. The difference between this social rate and the market rate depends on the latter two factors. In the first empirical calculation of discount rates in this setting, the paper reports that, in the U.S. economy, the difference between augmented and market discount rates amounts to 1.24 percent from 1999 to 2002 and under 1 percent from 2002 to 2011.

From Science to Technology: The Value of Knowledge From Different Energy Research Institutions David Popp

Using an original data set of both scientific articles and patents pertaining to alternative energy technologies, this paper provides new evidence on the flows of knowledge between university, private sector, and government research. Better understanding of the value of knowledge from these institutions can help decision makers target R&D funds where they are most likely to be successful. I use citation data from both scientific articles and patents to answer two questions. First, what information is most useful to the development of new technology? Does high quality science lead to commercial success? I find that this is the case, as those articles most highly cited by other scientific articles are also more likely to be cited by future patents. Second, which institutions produce the most valuable research? Are there differences across technologies? Research performed at government institutions appears to play an important translational role linking basic and applied research, as government articles are more likely to be cited by patents than any other institution, including universities. Universities play a less important role in wind research than for solar and biofuels, suggesting that wind energy research is at a more applied stage where commercialization and final product development is more important than basic research.

Do Low Levels of Blood Lead Reduce Children's Future Test Scores? Anna Aizer, Janet Currie, Peter Simon, Patrick Vivier

We construct a unique individual-level longitudinal dataset linking preschool blood lead levels with third grade test scores for eight birth cohorts of Rhode Island children born between 1997 and 2005. Using these data, we show that reductions of lead from even historically low levels have significant positive effects on children's reading test scores in third grade. Our preferred estimates use the introduction of a lead remediation program as an instrument in order to control for the possibility of confounding and for considerable error in measured lead exposures. The estimates suggest that a one unit decrease in average blood lead levels reduces the probability of being substantially below proficient in reading by 3.1 percentage points (on a baseline of 12 percent). Moreover, as we show, poor and minority children are more likely to be exposed to lead, suggesting that lead poisoning may be one of the causes of continuing gaps in test scores between disadvantaged and other children.

Industrial Organization

Imputation in U.S. Manufacturing Data and Its Implications for Productivity Dispersion T. Kirk White, Jerome P. Reiter, Amil Petrin

In the U.S. Census Bureau's 2002 and 2007 Censuses of Manufactures 79% and 73% of observations respectively have imputed data for at least one variable used to compute total factor productivity. The Bureau primarily imputes for missing values using mean-imputation methods which can reduce the true underlying variance of the imputed variables. For every variable entering TFP in 2002 and 2007 we show the dispersion is significantly smaller in the Census mean-imputed versus the Census non-imputed data. As an alternative to mean imputation we show how to use classification and regression trees (CART) to allow for a distribution of multiple possible impute values based on other plants that are CART-algorithmically determined to be similar based on other observed variables. For 90% of the 473 industries in 2002 and the 84% of the 471 industries in 2007 we find that TFP dispersion increases as we move from Census mean-imputed data to Census non-imputed data to the CART-imputed data.

Direct-to-Consumer Advertising and Online Search Matthew Chesnes, Ginger Zhe Jin

Beginning in 1997, the Food and Drug Administration (FDA) allowed television advertisements to make major statements about a prescription drug, while referring to detailed drug information on the internet (FDA 1997; 2015). The hope was that consumers would seek additional information online to fully understand the risks and benefits of taking the medication. To better understand the effects of the policy, we analyze direct-to-consumer advertising (DTCA) and search engine click-through data on a set of drugs over a three-year period.

Regression analysis shows that advertising on a prescription drug serves to increase the frequency of online search and subsequent clicks for that drug, as well as search for other drugs in the same class. We find the relationship between DTCA and search is stronger for younger drugs, for those drugs that treat acute conditions, those drugs that are less likely to be covered by insurance, and those whose searcher population tends to be older. These findings suggest that DTCA motivates consumers to search online for drug information, but the magnitude of the effect is heterogeneous and potentially associated with clicks on websites that are more promotional in nature.

What Goes on Under the Hood? How Engineers Innovate in the Automotive Supply Chain Susan Helper, Jennifer Kuan

The questions addressed in this volume are motivated by the recognition that engineers play an important role in generating innovation and economic growth. In this chapter, we seek to offer some description of engineering work by looking in detail at a specific manufacturing industry—firms that supply automakers—to gain insight into how engineers create innovation. Autos account for 5% of US GDP and in 2011, 70% of auto suppliers contributed design effort, a task typically performed by engineers, making the auto supply chain an important context in which to study engineering and innovation.

Some highlights from our original survey data include a wide range in terms of size and strategies of supply chain companies; a majority was small- to medium-sized, often family-owned. We observed barriers to patenting for manufacturing firms developing process rather than product innovations. And interviews revealed the importance of customers for the innovative efforts of supplier firms. Certain Japanese customers were preferred because they shared expertise and helped suppliers improve, while other, American, customers were viewed as having unreasonable demands for regular, incremental price reductions and did not offer technical or organizational support.

Health Economics

Who Should Own and Control Urban Water Systems? Historical Evidence from England and Wales Brian Beach, Werner Troesken, Nicola Tynan

Nearly 40% of England’s privately built waterworks were municipalised in the late 19th century. We examine how this affected public health by pairing annual mortality data for over 600 registration districts, spanning 1869 to 1910, with detailed waterworks information. Identification is aided by both institutional hurdles and idiosyncratic delays in the municipalisation process. Municipalisation lowered deaths from typhoid fever, a waterborne disease, by nearly 20% but deaths from non-waterborne causes were unaffected. Results are also robust to the adoption of several strategies that control for the possibility of mean reversion and other potential confounds.

Legal Access to Alcohol and Criminality Benjamin Hansen, Glen R. Waddell

Previous research has found strong evidence that legal access to alcohol is associated with sizable increases in criminality. We revisit this relationship using the census of judicial records on criminal charges filed in Oregon Courts, the ability to separately track crimes involving firearms, and to track individuals over time. We find that crime increases at age 21, with increases mostly due to assaults lacking in premeditation, and alcohol-related nuisance crimes. We find no evident increases in rape or robbery. Among those with no prior criminal records, increases in crime are 50 percent larger; still larger for the most socially costly crimes of assault and drunk driving. This suggests that deterring criminality through increased punishments would likely prove difficult.

Smoke Gets in Your Eyes: Medical Marijuana Laws and Tobacco Use Anna Choi, Dhaval Dave, Joseph J. Sabia

This study comprehensively examines whether medical marijuana laws (MMLs) have affected the trajectory of a decades-long decline in adult tobacco use in the United States. Using data from three large national datasets — the Behavioral Risk Factor Surveillance Survey (BRFSS), the Current Population Survey Tobacco Use Supplements (CPS-TUS), and the National Survey of Drug Use and Health (NSDUH) — we estimate the relationship between MMLs and cigarette consumption. Our results show that the enactment of MMLs between 1990 and 2012 are associated with a 0.3 to 0.7 percentage-point reduction in tobacco consumption among US adults, though this estimate is somewhat sensitive to controls for state-specific linear time trends. These findings suggest that tobacco and marijuana are substitutes for many users. However, this average response masks heterogeneity in the effects of MMLs among early versus late-adopting states and across the age distribution.

International Trade and Investment

Israel and the 1990-2015 Global Developments: Riding with the Global Flows and Weathering the Storms Assaf Razin, Steven Rosefielde

The global economy has been buffeted by several unprecedented economic events during the past 35 years. We survey the impact of these events on Israel’s development, institutions, and economic policies. Israel had a remarkable development during this time, from a low income high-inflation developing economy in the 1970s, to a medium to high income stable- inflation advanced economy in the 2000s, while increasingly integrated into the world economy. The extraordinary events surveyed include: (1) The collapse of the Soviet Union and the massive immigration to Israel which followed; (2) The Great Moderation in inflation and employment fluctuations in the advanced economies; (3) The 2008 global financial crisis, epi-centered in the US, and the contagion of the financial crisis to Europe; and (4) The rise of East Asia high-growth economies.

Moderating spillovers from the advanced economies during the Great Moderation, the global information technology revolution, the influx of skilled immigrants from the former Soviet Union, the gradual buildup of robust and well-regulated financial institutions over decades after the hyper-inflation crisis, and the deep and extensive integration into the global economy, all provided the Israeli economy with an entry “ticket” to the OECD; the 35-member group of the world advanced economies. It came, however at a cost of rising income inequality.

The Economic Consequences of the 1953 London Debt Agreement Gregori Galofré-Vilà, Martin McKee, Christopher M. Meissner, David Stuckler

In 1953 the Western Allied powers implemented a radical debt-relief plan that would, in due course, eliminate half of West Germany’s external debt and create a series of favourable debt repayment conditions. The London Debt Agreement (LDA) correlated with West Germany experiencing the highest rate of economic growth recorded in Europe in the 1950s and 1960s. In this paper we examine the economic consequences of this historical episode. We use new data compiled from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s. These reports not only provide detailed statistics of the German finances, but also a narrative on the evolution of the German economy on a monthly basis. These sources also contain special issues on the LDA, highlighting contemporaries’ interest in the state of German public finances and public opinion on the debt negotiation. We find evidence that debt relief in the LDA spurred economic growth in three main ways: creating fiscal space for public investment; lowering costs of borrowing; and stabilising inflation. Using difference-in-differences regression models comparing pre- and post-LDA years, we find that the LDA was associated with a substantial rise in real per capita social expenditure, in health, education, housing, and economic development, this rise being significantly over and above changes in other types of spending that include military expenditure. We further observe that benchmark yields on long-term debt, an indication of default risk, dropped substantially in West Germany when LDA negotiations began in 1951 and then stabilised at historically low rates after the LDA was ratified. The LDA coincided with new foreign borrowing and investment, which in turn helped promote economic growth. Finally, the German currency, the deutschmark, introduced in 1948, had been highly volatile until 1953, after which time we find it largely stabilised.

Multinational Firms and International Business Cycle Transmission Javier Cravino, Andrei A. Levchenko

We investigate how multinational firms contribute to the transmission of shocks across countries using a large multi-country firm-level dataset that contains cross-border ownership information. We use these data to document two novel empirical patterns. First, foreign affiliate and headquarter sales exhibit strong positive comovement: a 10% growth in the sales of the headquarter is associated with a 2% growth in the sales of the affiliate. Second, shocks to the source country account for a significant fraction of the variation in sales growth at the source-destination level. We propose a parsimonious quantitative model to interpret these findings and to evaluate the role of multinational firms for international business cycle transmission. For the typical country, the impact of foreign shocks transmitted by all foreign multinationals combined is non-negligible, accounting for about 10% of aggregate productivity shocks. On the other hand, since bilateral multinational production shares are small, interdependence between most individual country pairs is minimal. Our results do reveal substantial heterogeneity in the strength of this mechanism, with the most integrated countries significantly more affected by foreign shocks.

Labor Studies

Financial Aid, Debt Management, and Socioeconomic Outcomes: Post-College Effects of Merit-Based Aid Judith Scott-Clayton, Basit Zafar

Prior research has demonstrated that financial aid can influence both college enrollments and completions, but less is known about its post-college consequences. Even for students whose attainment is unaffected, financial aid may affect post-college outcomes via reductions in both time to degree and debt at graduation. We utilize two complementary quasi-experimental strategies to identify causal effects of the WV PROMISE scholarship, a broad-based state merit aid program, up to 10 years post-college-entry. This study is the first to link college transcripts and financial aid information to credit bureau data later in life, enabling us to examine important outcomes that have not previously been examined, including homeownership, neighborhood characteristics, and financial management (credit risk scores, defaults, and delinquencies). We find that even as graduation impacts fade out over time, impacts on other outcomes emerge: scholarship recipients are more likely to earn a graduate degree, more likely to own a home and live in higher-income neighborhoods, less likely to have adverse credit outcomes, and are more likely to be in better financial health than similar students who did not receive scholarships.

Do Minimum Wage Increases Influence Worker Health? Brady P. Horn, Joanna Catherine Maclean, Michael R. Strain

This study investigates whether minimum wage increases in the United States affect an important non-market outcome: worker health. To study this question, we use data on lesser-skilled workers from the 1993-2014 Behavioral Risk Factor Surveillance Surveys coupled with differences-in-differences and triple-difference models. We find little evidence that minimum wage increases lead to improvements in overall worker health. In fact, we find some evidence that minimum wage increases may decrease some aspects of health, especially among unemployed male workers. We also find evidence that increases reduce mental strain among employed workers.

Identifying and Estimating Neighborhood Effects Bryan S. Graham

Residential segregation by race and income are enduring features of urban America. Understanding the effects of residential segregation on educational attainment, labor market outcomes, criminal activity and other outcomes has been a leading project of the social sciences for over half a century. This paper describes techniques for measuring the effects of neighborhood of residence on long run life outcomes.

A Time to Make Laws and a Time to Fundraise? On the Relation between Salaries and Time Use for State Politicians Mitchell Hoffman, Elizabeth Lyons

Paying higher salaries is often believed to enhance worker effort, leading workers to work harder to avoid getting fired. However, workers may also respond to higher salaries by focusing on tasks that most directly affect getting fired (as opposed to those that contribute most to productivity). We explore these issues by analyzing the relationship between the level of compensation and time use for US state legislators. Using data on time use and legislator salaries, we show that higher salary is associated with legislators spending more time on fundraising. In contrast, higher salary is also associated with less time spent on legislative activities and has no clear relation to time spent on constituent services. Subgroup analysis broadly supports our interpretation of the data.

The Political Economy of Debt and Entitlements Laurent Bouton, Alessandro Lizzeri, Nicola Persico

This paper presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove five main results. First, debt and entitlement are strategic substitutes in the sense that constraining debt increases entitlements (and vice versa). Second, if entitlements are unconstrained, it is sometimes welfare-improving to relax debt constraints, even in the absence of shocks that require smoothing. This is because borrowing constraints lead to higher entitlement spending and reduces overall provision of public goods. Third, equilibrium entitlements are excessive from a utilitarian perspective because they transfer resources to powerful agents who are already in a privileged position. However, very tight constraints in entitlements limit agents' opportunities to smooth consumption. Fourth, debt and entitlements respond in opposite ways to political instability and, in contrast with prior literature, political instability may even reduce debt when entitlements are endogenous. Finally, we identify a possible explanation for the joint growth of debt and entitlements.

The Effects of Unemployment Insurance Benefits: New Evidence and Interpretation Johannes F. Schmieder, Till von Wachter

The Great Recession has renewed interest in Unemployment Insurance (UI) programs around the world. At the same time, there have been important advances in both theory and measurement of UI. In this paper, we first use the theory to present a unified treatment of the welfare effects of UI benefit levels and durations and derive convenient expressions of the disincentive effect of UI. We then discuss recent estimates of the effect of UI benefit levels and durations on labor supply based, to a large extent, on high-quality research designs and administrative data. We relate these estimates directly to the sufficient statistics identified by the model. We also discuss several active and open areas of research on UI. These include the effect of UI on aggregate labor market outcomes, the effect of UI on job outcomes, the long-term effects of UI, the effects of UI under non-standard behavioral assumptions, and the interactions of UI with other programs. While our review of the new experimental estimates confirms the range of negative labor supply effects of the previous literature, we show based on the model that these estimates are imperfect proxies for the actual disincentive effects. We also isolate several important areas in need for additional research, including estimates of the social value of UI as well as the effects of UI in less-developed countries.

The Effects of the Early Retirement Age on Retirement Decisions Dayanand S. Manoli, Andrea Weber

We present quasi-experimental evidence on the effects of increasing the Early Retirement Age (ERA) on older workers' retirement decisions. The analysis is based on social security reforms in Austria in 2000 and 2004, and administrative data allows us to distinguish between pension claims and job exits. Using a Regression Kink Design, we estimate that, within a birth cohort, a 1.0-year increase in the ERA leads to a 0.4-year increase in the average job exiting age and a 0.5-year increase in the average pension claiming age. When the ERA increases, many older workers remain in their jobs longer.

Match or Mismatch? Automatic Admissions and College Preferences of Low- and High-Income Students Jane Arnold Lincove, Kalena E. Cortes

We examine the role of information in the college matching behavior of low- and high-income students, exploiting a state automatic admissions policy that provides some students with perfect a priori certainty of college admissions. We find that admissions certainty encourages college-ready low-income students to seek more rigorous universities. Low-income students who are less college-ready are not influenced by admissions certainty and are sensitive to college entrance exams scores. Most students also prefer campuses with students of similar race, income, and high school class rank, but only highly-qualified low-income students choose institutions where they have fewer same-race and same-income peers.

Public Economics

The Lifecycle of the 47% Don Fullerton, Nirupama S. Rao

We assess the concentration and duration of zero tax liabilities and of transfer receipts, using data for households with ten to forty years of observations from the Panel Survey of Income Dynamics. We find that neither is strongly concentrated. Nearly 68% owe no federal tax in at least one year, approximately 78% receive some type of transfer in at least one year, and more than 58% receive transfers other than Social Security in at least one year. Of those who do not owe federal tax in any given year, 18% pay tax the following year, and 39% contribute within five years. Of those who receive transfers other than Social Security within a given year, nearly 44% stop receiving such transfers the next year, and more than 90% stop within ten years.

Social Capital, Trust and Well-being in the Evaluation of Wealth Kirk Hamilton, John F. Helliwell, Michael Woolcock

We combine theory with data from different domains to provide an empirical analysis of the scale and variability of social capital as wealth. This is used to argue, given what we have learned in the literature on social capital, that the welfare returns to investing in trust could be substantial. Using social trust data from 132 nations covered by the Gallup World Poll, we present a range of estimates of social trust’s wealth-equivalent values. The estimates of the wealth embodied in social capital are very large, and with a structure and distribution quite different from those for physical capital. These estimates reflect values above and beyond what social trust contributes to supporting incomes and health. Although social trust is an important component of total wealth in all regions and country groupings, there are nonetheless big variations within and among regions, ranging from as low as 12% of total wealth in Latin America to 28% in the OECD.

Macro and Monetary Economics

Monetary Policy and Asset Valuation: Evidence From a Markov-Switching cay Francesco Bianchi, Martin Lettau, Sydney C. Ludvigson

This paper presents evidence of infrequent shifts, or "breaks," in the mean of the consumption-wealth variable cay{t}, an asset market valuation ratio driven by fluctuations in stock market wealth relative to economic fundamentals. Conventional estimates of cay{t}, which presume a constant mean, display increasing persistence over the sample. We introduce a Markov-switching version of cay{t} that adjusts for infrequent shifts in its mean. The Markov-switching cay{t}, denoted cay_{t}^{MS}, is less persistent and has superior forecasting power for excess stock market returns compared to the conventional estimate. Evidence from a Markov-switching VAR shows that these low frequency swings in post-war asset valuation are strongly associated with low frequency swings in the long-run expected value of the Federal Reserve's primary policy rate, with low expected values for the real federal funds rate associated with high asset valuations, and vice versa. By contrast, there is no evidence that the infrequent shifts to high asset valuations and low policy rates are associated with higher expected economic growth or lower economic uncertainty; indeed the opposite is true.

The Outlook for U.S. Labor-Quality Growth Canyon Bosler, Mary C. Daly, John G. Fernald, Bart Hobijn

Over the past 15 years, labor-quality growth has been very strong—defying nearly all earlier projections—and has added around 0.5 percentage points to an otherwise modest U.S. productivity picture. Going forward, labor quality is likely to add considerably less and may even be a drag on productivity growth in the medium term. Using a variety of methods, we project that potential labor-quality growth in the longer run (7 to 10 years out) is likely to fall in the range of 0.1 to 0.25 percent per year. In the medium term, labor-quality growth could be lower or even negative, should employment rates of low-skilled workers make a cyclical rebound towards pre-recession levels. The main uncertainties in the longer run are whether the secular decline in employment of low-skilled workers continues and whether the Great Recession pickup in educational attainment represents the start of a new boom or is simply a transitory reaction to a poor economy.

The Effect of Unconventional Fiscal Policy on Consumption Expenditure Francesco D’Acunto, Daniel Hoang, Michael Weber

Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results.

Development

Predicting Experimental Results: Who Knows What? Stefano DellaVigna, Devin Pope

Academic experts frequently recommend policies and treatments. But how well do they anticipate the impact of different treatments? And how do their predictions compare to the predictions of non-experts? We analyze how 208 experts forecast the results of 15 treatments involving monetary and non-monetary motivators in a real-effort task. We compare these forecasts to those made by PhD students and non-experts: undergraduates, MBAs, and an online sample. We document seven main results. First, the average forecast of experts predicts quite well the experimental results. Second, there is a strong wisdom-of-crowds effect: the average forecast outperforms 96 percent of individual forecasts. Third, correlates of expertise---citations, academic rank, field, and contextual experience--do not improve forecasting accuracy. Fourth, experts as a group do better than non-experts, but not if accuracy is defined as rank ordering treatments. Fifth, measures of effort, confidence, and revealed ability are predictive of forecast accuracy to some extent, especially for non-experts. Sixth, using these measures we identify `superforecasters' among the non-experts who outperform the experts out of sample. Seventh, we document that these results on forecasting accuracy surprise the forecasters themselves. We present a simple model that organizes several of these results and we stress the implications for the collection of forecasts of future experimental results.

Finance

The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds Jacob Boudoukh, Jordan Brooks, Matthew Richardson, Zhikai Xu

It is well-documented that government bonds with almost identical cash flows can trade at different prices. The explanation is that due to higher liquidity the most recently issued bond tends to trade at a premium to previously issued bonds. This paper analyzes the cross-section of bond spreads across developed countries over a 17-year time period. Indeed, liquidity has commonality across countries in the expected direction. However, the paper documents a novel finding that questions the standard view of liquidity. Under certain conditions, especially related to credit deterioration and flight to quality, new issue bond spreads tighten and can be negative. In other words, the liquid bonds become cheaper, not more expensive, relative to their less liquid counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds. Of some interest, we are able to reconcile the differential behavior of bond spreads of the U.S. and Germany versus Belgium, Spain and Italy during the Eurozone crisis period.

Econometrics

Exclusion Bias in the Estimation of Peer Effects Bet Caeyers, Marcel Fafchamps

We formalize a noted [Guryan et al., 2009] but unexplored source of bias in peer effect estimation, arising because people cannot be their own peer. We derive, for linear-in-means models with non-overlapping peer groups, an exact formula of the bias in a test of random peer assignment. We demonstrate that, when estimating endogenous peer effects, the negative exclusion bias dominates the positive reflection bias when the true peer effect is small. We discuss conditions under which exclusion bias is aggravated by adding cluster fixed effects. By imposing restrictions on the error term, we show how to consistently estimate, without the need for instruments, all the structural parameters of an endogenous peer effect model with an arbitrary peer-group or network structure. We show that, under certain conditions, 2SLS do not suffer from exclusion bias. This may explain the counter-intuitive observation that OLS estimates of peer effects are often larger than their 2SLS counterpart.