Economics Research Reports

Substitution and Dropout Bias in Social Experiments: A Study of an Influential Social Experiment

James Heckman et al. — Wed, 09 Sep 2009 17:51:45 PDT

This paper considers the interpretation of evidence from social experiments when persons randomized out of a program being evaluated have good substitutes for it, and when persons randomized into a program drop out to pursue better alternatives. Using data from an experimental evaluation of a classroom training program, we document the empirical importance of control group substitution and treatment group dropping out. Evidence that one program is ineffective relative to close substitutes is not evidence that the type of service provided by all of the programs is ineffective, although that is the way the experimental evidence is often interpreted.

Motor Vehicle Taxes as Environmental Instruments: The Case of Singapore

Ngee-Choon Chia — Wed, 09 Sep 2009 17:51:44 PDT

With small geographical size, land scarcity poses a potential constraint for economic growth in Singapore. Restraining car ownership and car use through motor vehicle taxes is part of the land-transport policy to ensure smoother traffic flow. The scale and scope of the motor vehicle taxes used have implications on government revenue and the environment. This paper analyses the use of motor vehicle taxes as environmental instruments. It compares the effectiveness of ownership versus use tax as tools to internalise congestion externality. Economic issues arising from motor vehicle taxes are also highlighted. It concludes that motor vehicle taxes offer Singapore a double dividend.

Serially Correlated Wages in a Dynamic, Discrete Choice Model of Teacher Attrition

Todd R. Stinebrickner — Wed, 09 Sep 2009 17:51:44 PDT

This paper suggests and implements a method for dealing with the problems which are encountered during the estimation of dynamic, discrete choice models with serially correlated unobservables. The method takes advantage of Gaussian quadrature integral approximation techniques and is based on a new, non-parametric value function approximation algorithm which allows the econometrician to avoid potentially problematic functional form specifications. A desirable property of the approach is that the econometrician has complete control over the factors which ensure that parameter estimates from an approximate solution to a model with serial correlation can be made arbitrarily close to the true parameter estimates. This property potentially allows the econometrician to gauge how close the approximate solution to a model with serially correlated unobservables is to the true solution. The method is illustrated using an example of the occupational choice decisions of certified elementary and high school teachers. Tests of the approximation quality suggest that the estimation of dynamic, discrete choice models with serial correlation can often be achieved with little approximation bias, even without incurring large amounts of computational costs.

Taxes and Marriage: A Two-Sided Search Analysis

Hector Chade et al. — Wed, 09 Sep 2009 17:51:43 PDT

This paper analyzes the effects that differential tax treatment of married and single individuals has on marriage behavior, using a version of the two-sided search model of Burdett-Wright (1998). The main results are the following: i) an increase in the 'marriage tax' reduces the number of marriages; ii) an indirect strategic effect due to two-sided search considerations mitigates the impact that changes in the 'marriage tax' have on marriage formation; iii) the quantitative analysis of the model indicate that, in the US, large increases in the 'marriage tax' are associated with small changes in the number of marriages.

Dual Betweenness

Zvi Safra et al. — Tue, 08 Sep 2009 17:17:52 PDT

A key feature of the rank dependent model for decision making under risk is that the weighting of an outcome depends on its relative rank. This theory received numerous axiomatizations, however, all these sets of axioms need to make an explicit reference to the ranking of the outcomes. This situation is unsatisfactory, as it seems to be desirable to get the ranking property of this model as a consequence of the model, rather than as an assumption. Yaari offered a special version of this model (called dual theory), where the utility function is linear. This paper offers a set of axioms implying a generalization of Yaari's dual theory, without making any reference to the order of the outcomes. The main axiom is called dual betweenness, which, unlike the usual case, is made on random variables rather than distribution functions.

The Design of Policy Frameworks and the Role of the Policy Advisor

J. Clark Leith — Tue, 08 Sep 2009 17:17:20 PDT

Semiparametric Maximum Likelihood Estimation of GARCH Models

Jian Yang — Tue, 08 Sep 2009 17:17:19 PDT

We consider a semiparametric GARCH model where the functional form for the conditional density of the errors is unknown. Adaptive conditions of the parameters are examined. Semiparametric Maximum Likelihood (SML) estimators are constructed by maximizing the nonparametric pseudo log-likelihood function computed using the residuals from initial root-n consistent estimates. SML estimators are shown to be adaptive for the adaptively estimable parameters and consistent for all identifiable parameters. Monte Carlo results suggest that SML estimators outperform quasi maximum likelihood estimators and the adaptive maximum likelihood estimators in finite samples.

Exchange Rate Effects of Portfolio Shifts?

Malte Krüger — Tue, 08 Sep 2009 17:17:18 PDT

Using the Branson model as an example, this paper seeks to clarify the role of interest rate and exchange rate changes in asset market models. Focusing on short- erm adjustments, it is shown that portfolio shifts mainly affect relative interest rates in different countries. Only to the extent that portfolio shifts lead to changes in the money demand or money supply, are exchange rates affected as well. The announcement of German monetary union in 1990 is used as an example to illustrate the relative significance of interest rate changes as shock absorbers.

Monitoring Competitive Bidding in the Public Sector

Gervan Fearon — Tue, 08 Sep 2009 17:17:18 PDT

This paper investigates the impact of program budget size on monitoring and competitive bidding in the public sector. A sequential game is developed involving a ministry and bureau strategically interacting in the provision of a public sector good. The ministry copes with imperfect information about the bureau's costs by choosing to monitor or to conduct a first price sealed bid auction between the bureau and a set of firms. In this respect, this study represents an extension of the Niskanen budget maximizing bureau framework. The results predict that the ministry will tend to conduct competitive bidding at low and high levels of budgetary allocation. Otherwise, the bureau is monitored. Second, increases in the budget expand the range of costs over which the bureau can win the competitive bid. Third, increases in management compensation tends to reduce the spread between the bureau's costs and its reported cost for providing the public sector good.

Canadian Tax Deferred Savings Plans and the Foreign Property Rule

David Burgess et al. — Mon, 07 Sep 2009 15:07:28 PDT

This paper argues that the Foreign Property Rule, which limits the foreign content of a Registered Savings plan to no more than 20% of book value, should be removed as quickly as possible. Given the globalization of financial markets, the FPR does not protect what it meant to protect - a pool of savings for investment in Canada. Instead, it distorts the allocation of credit among firms, and forces agents to use more costly instruments - derivatives - to achieve desired foreign risk exposure. Since the FPR lowers the return on registered savings without benefiting any identifiable group, removing it would be an unequivocal gain to Canadians.

Housing Taxation and Capital Accumulation

Martin Gervais — Mon, 07 Sep 2009 15:07:27 PDT

This paper studies the impact of the preferential tax treatment of housing capital in a model economy that includes the main housing tax provisions currently in place in the U.S. and a minimum downpayment requirement upon purchasing non-divisible houses. Distortions arise because the tax code makes the return on housing capital larger than that on business capital. The wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility. Simulations show that either taxing imputed rents or eliminating mortgage interest deductibility substantially increases welfare. Moreover, welfare gains accrue to individuals at every income level and distributional effects are much smaller than conventionally believed.

Copyright, Copy Protection and Feist

Philip A. Curry — Mon, 07 Sep 2009 15:07:26 PDT

Modern consumers of intellectual property, and especially software, find that the products they buy are protected by ever more sophisticated forms of copy protection. This occurs despite the presence of legislative protection. The economics literature within the area has begun to take note, yet there has been very little formal modelling to date. This paper sets up a model for analyzing the impact of alternative forms of copy protection on works subject to copyright protection. It outlines a model of intellectual property creation with endogenous protection choice as well as legislative copyright and examines the welfare implications. It also relates the results to two court cases and discusses the impact they may have on future copyright law.

Productivity Growth During the First Industrial Revolution: Inferences from the Pattern of British External Trade

C. Knick Harley et al. — Mon, 07 Sep 2009 15:07:25 PDT

This paper examines British trade and growth in general equilibrium. It rejects Peter Temin's contention that the Crafts-Harley 'new view' of sectorally concentrated productivity growth during the Industrial Revolution is inconsistent with actual industrial exports. A CGE trade model with diminishing returns in agriculture that also emphasizes demand conditions indicates that while technological change in cottons and iron were major spurs to exports, the demand for food imports generated by population growth and diminishing returns in agriculture also stimulated trade. The trade data are compatible with the 'new view' and any implied adjustment to TFP growth estimates is slight.

Technology Adoption and Schooling: Amplifier Income Effects of Policies Across Countries

Diego Restuccia — Mon, 07 Sep 2009 15:07:24 PDT

Neoclassical growth models require large productivity/distortion differences across countries to produce the observed disparities in the wealth of nations. In this paper I develop an otherwise very standard neoclassical model with technology adoption and schooling decisions, and show that in this environment the required productivity/distortion differences are much smaller. The schooling and technology adoption features of the model amplify the effects of productivity/distortion differences on income disparity. In particular, for a reasonable parameterization, the model generates 3 times more income disparity than a standard model. Moreover, I find that it is the interaction between the technology adoption and schooling features of the model, and not each in isolation, what accounts for most of the amplifier effect. I show that the model is consistent with the observed patterns of the schooling differences across countries. Standard neoclassical models with schooling have the implication that schooling levels are constant across economies, since wage differences affect in the same proportion the marginal benefit and the opportunity cost of schooling. In my model, average levels of schooling do vary across economies since education is more useful in modern technologies and rich economies use these technologies more intensively.

Dynamic Hedging in Currency Crisis

Malte Krüger — Mon, 07 Sep 2009 15:07:24 PDT

Garber and Spencer have argued that dynamic hedging may lead to perverse results when interest rates are used to defend an exchange rate. This paper shows that interest rate changes have little effects on dynamic hedgers when volatility is high.

Optimal Taxation in Life-cycle Economies

Andrés Erosa et al. — Mon, 07 Sep 2009 15:07:23 PDT

This paper studies optimal taxation in an overlapping generations economy. We characterize the optimal path of fiscal policy, both in the long run and in the transition to the steady state. The implications of this study are in sharp contrast with the prescription offered by infinitely-lived agent models. First, the government's desire to tax initial holdings of capital at confiscatory rates is endogenously curtailed by intergenerational redistributional considerations. Second, because of life-cycle elements, capital income taxes are in general different from zero even in the steady state. The tax rate on capital income should only be zero if it is optimal to tax consumption goods uniformly over the lifetime of individuals. The conditions for uniform taxation of consumption depend, in turn, on preferences, the age-profile of labor productivity, and the set of taxes available to the government.

Household Structure and Labor Demand in Agriculture: Testing for Separability in Rural China

Audra J. Bowlus et al. — Mon, 07 Sep 2009 15:07:21 PDT

Economic reforms in China have brought rapid growth in nonagricultural employment in rural areas and a substantial shift in the structure of rural employment. These changes have led researchers to question the conventional view of rural China as a labor surplus economy with poorly functioning factor markets. We contribute to this debate by testing for separability between the labor demand and supply decisions of households in a typical rural county in northern China. Our test, which makes use of unique panel data that enable us to control for time-invariant unobservable household characteristics, yields the following results: (1) separability is rejected across a variety of specifications, indicating that factor markets in the early 1990s remained underdeveloped; (2) the conventional view of surplus labor oversimplifies the situation as we find that, while some localities have a labor surplus, others may face labor shortages; and (3) separability does hold in areas where substantial employment opportunities exist at the township level, suggesting the need for employment opportunities that transcend village borders so as to create competitive pressures on villages and promote the inter-village movement of resources.

Is the Threat of Training More Effective Than Training Itself? Experimental Evidence from the UI System

Dan A. Black et al. — Sun, 06 Sep 2009 16:12:47 PDT

This paper examines the effect of the Worker Profiling and Reemployment Services (WPRS) system. This program "profiles" UI claimants to determine their probability of benefit exhaustion (or expected spell duration) and then provides mandatory employment and training services to claimants with high predicted probabilities (or long expected spells). Using a unique experimental design, we estimate that the WPRS program reduces mean weeks of UI benefits receipt by about 2.2 weeks, reduces mean UI benefits received by about $143, and increases subsequent earnings by over $1,050. Much (but not all) of the effect results from a sharp increase in early exits from UI in the experimental treatment group compared to the experimental control group. These exits coincide with claimants finding out about their mandatory program obligations rather than with actual receipt of employment and training services. While the program targets those with the highest expected durations of UI benefit receipt, we find no evidence that these claimants benefit disproportionately from the program. In addition, we find strong evidence against the "common effect" assumption, as the estimated treatment effect differs dramatically across quantiles of the untreated outcome distribution. Overall, the profiling program appears to successfully reduce the moral hazard associated with the UI program without increasing the take-up rate.

Tax Incidence with Three Goods and Two Primary Factors: Theory and Applications

Kul B. Bhatia — Sun, 06 Sep 2009 16:12:46 PDT

A three-good-two-primary-factor (3x2) general equilibrium model, along with parallel numerical illustrations, is developed to analyze the incidence and welfare cost of several taxes. The approach, blending theory and computed examples, enriches some well-known tax models and provides more insights than either the text-book two-by-two treatments or purely numerical models in areas such as environmental taxation and value-added tax (vat). It is ideal for considering factor taxes in intermediate-good industries (e.g., profit- and payroll taxes in mining industries) which are widely used but not much discussed in the literature. Their incidence, generally, turns out to be very different from similar taxes in final-good industries. A stylized application incorporating zero-rating and exemptions, two key features of the vat system in many countries, further illustrates the usefulness of this framework.

Solutions for Some Dynamic Problems with Uncertainty Aversion

Hiroyuki Ozaki et al. — Sun, 06 Sep 2009 16:12:45 PDT

In a discounted expected-utility problem, tomorrow's utilities are aggregated across tomorrow's states by the expectation operator. In our problems, this aggregation is accomplished by a Choquet integral of the form iudPa, where a specifies uncertainty aversion. We solve all finite-state problems by either a closed form or a finite- imensional iteration, and show that uncertainty aversion reduces the perceived return on investment, thereby decreasing the saving rate given elastic preferences and increasing the saving rate given inelastic preferences.