Quantitative Economics, May 2022, Volume 13, Issue 2, is now online

TABLE OF CONTENTS, May 2022, Volume 13, Issue 2
Full Issue

Articles
Abstracts follow the listing of articles.

Wandering astray: Teenagers' choices of schooling and crime
Chao Fu, Nicolás Grau, Jorge Rivera

Child work and cognitive development: Results from four low to middle income countries
Michael Keane, Sonya Krutikova, Timothy Neal

Economic uncertainty and structural reforms: Evidence from stock market volatility
Alessandra Bonfiglioli, Rosario Crinò, Gino Gancia

Identification in ascending auctions, with an application to digital rights management
Joachim Freyberger, Bradley J. Larsen

Market counterfactuals and the specification of multiproduct demand: A nonparametric approach
Giovanni Compiani

Strategic interactions in U.S. monetary and fiscal policies
Xiaoshan Chen, Eric M. Leeper, Campbell Leith

Like father, like son: Occupational choice, intergenerational persistence and misallocation
Salvatore Lo Bello, Iacopo Morchio

Social distancing and supply disruptions in a pandemic
Martin Bodenstein, Giancarlo Corsetti, Luca Guerrieri

Valuation risk revalued
Oliver Groot, Alexander W. Richter, Nathaniel A. Throckmorton

Revealing a preference for mixtures: An experimental study of risk
Paul Feldman, John Rehbeck

Why are open ascending auctions popular? The role of information aggregation and behavioral biases
Theo Offerman, Giorgia Romagnoli, Andreas Ziegler

The development of randomization and deceptive behavior in mixed strategy games
Isabelle Brocas, Juan D. Carrillo

Wandering astray: Teenagers' choices of schooling and crime
Chao Fu, Nicolás Grau, Jorge Rivera

Abstract

We build and estimate a dynamic model of teenagers' choices of schooling and crime, incorporating four factors that may contribute to the different paths taken by different teenagers: heterogeneous endowments, unequal opportunities, uncertainties about one's own ability, and contemporaneous shocks. We estimate the model using administrative panel data from Chile that link school records with juvenile criminal records. Counterfactual policy experiments suggest that, for teenagers with disadvantaged backgrounds, interventions that combine mild improvement in their schooling opportunities with free tuition (by adding 157 USD per teenager‐year to the existing high school voucher) would lead to an 11% decrease in the fraction of those ever arrested by age 18 and a 13% increase in the fraction of those consistently enrolled throughout primary and secondary education.

Teenage crime education information friction institutional friction dynamic model structural estimation I2 K42
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Child work and cognitive development: Results from four low to middle income countries
Michael Keane, Sonya Krutikova, Timothy Neal

Abstract

 

We study the impact of child work on cognitive development in four Low‐ and Middle‐Income Countries. We advance the literature by using cognitive test scores collected regardless of school attendance. We also address a key gap in the literature by controlling for children's complete time allocation budget. This allows us to estimate effects of different types of work, like chores and market/farm work, relative to specific alternative time‐uses, like school or study or play/leisure. Our results show child work is more detrimental to child development to the extent that it crowds out school/study time rather than leisure. We also show the adverse effect of time spent on domestic chores is similar to time spent on market and farm work, provided they both crowd out school/study time. Thus, policies to enhance child development should target a shift from all forms of work toward educational activities.

Child labor child development education time use item response theory value added models I25 J13 J24 O15
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Economic uncertainty and structural reforms: Evidence from stock market volatility
Alessandra Bonfiglioli, Rosario Crinò, Gino Gancia

Abstract

 

Does economic uncertainty promote the implementation of structural reforms? We answer this question using one of the most exhaustive cross‐country panel data sets on reforms in six major areas and measuring economic uncertainty with stock market volatility. To identify causality, we exploit exogenous differential variation in countries' exposure to foreign volatility shocks due to predetermined and time‐invariant bilateral characteristics. Across all specifications, we find that stock market volatility has a positive and significant effect on the adoption of reforms. This result is robust to the inclusion of a large number of controls, such as political variables, economic variables, crisis indicators, and a host of country, reform and time fixed effects, as well as across various approaches for accommodating heterogeneous trends and contemporaneous shocks. Overall, this evidence suggests that times of market turmoil, which are characterized by a high degree of uncertainty, may facilitate the implementation of reforms that would otherwise not pass.

Liberalizations stock market volatility reforms uncertainty E02 E60 L51
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Identification in ascending auctions, with an application to digital rights management
Joachim Freyberger, Bradley J. Larsen

Abstract

 

This study provides new identification and estimation results for ascending (traditional English or online) auctions with unobserved auction‐level heterogeneity and an unknown number of bidders. When the seller's reserve price and two order statistics of bids are observed, we derive conditions under which the distributions of buyer valuations, unobserved heterogeneity, and number of participants are point identified. We also derive conditions for point identification in cases where reserve prices are binding and present general conditions for partial identification. We propose a nonparametric maximum likelihood approach for estimation and inference. We apply our approach to the online market for used iPhones and analyze the effects of recent regulatory changes banning consumers from circumventing digital rights management technologies used to lock phones to service providers. We find that buyer valuations for unlocked phones dropped by 39% on average after the unlocking ban took effect, from $231.30 to $141.50.

Ascending auctions nonparametric identification unobserved heterogeneity unknown number of bidders sieve maximum likelihood digital rights Digital Millennium Copyright Act grey‐market activity smartphone unlocking C10 D44 K11 K24 L10 L96 O34
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Market counterfactuals and the specification of multiproduct demand: A nonparametric approach
Giovanni Compiani

Abstract

 

Demand estimates are essential for addressing a wide range of positive and normative questions in economics that are known to depend on the shape—and notably the curvature—of the true demand functions. The existing frontier approaches, while allowing flexible substitution patterns, typically require the researcher to commit to a parametric specification. An open question is whether these a priori restrictions are likely to significantly affect the results. To address this, I develop a nonparametric approach to estimation of demand for differentiated products, which I then apply to California supermarket data. While the approach subsumes workhorse models such as mixed logit, it allows consumer behaviors and preferences beyond standard discrete choice, including continuous choices, complementarities across goods, and consumer inattention. When considering a tax on one good, the nonparametric approach predicts a much lower pass‐through than a standard mixed logit model. However, when assessing the market power of a multiproduct firm relative to that of a single‐product firm, the models give similar results. I also illustrate how the nonparametric approach may be used to guide the choice among parametric specifications.

Nonparametric demand estimation incomplete tax pass‐through multiproduct firm L1 L66
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Strategic interactions in U.S. monetary and fiscal policies
Xiaoshan Chen, Eric M. Leeper, Campbell Leith

Abstract

 

We estimate a model in which fiscal and monetary policy obey the targeting rules of distinct policy authorities, with potentially different objective functions. We find: (1) Time‐consistent policy fits U.S. time series at least as well as instrument‐rules‐based behavior; (2) American policies often do not conform to the conventional mix of conservative monetary policy and debt‐stabilizing fiscal policy, although economic agents expect fiscal policy to stabilize debt eventually; (3) Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high inflation of the 1970s could have been effectively mitigated by either a switch to a fiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscal behavior follows its historic norm to eventually stabilize debt, current high debt levels produce only modest inflation; if confidence in those norms erodes, high debt may deliver substantially more inflation.

Bayesian estimation monetary and fiscal policy interactions targeting rules Markov switching C11 E31 E63
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Like father, like son: Occupational choice, intergenerational persistence and misallocation
Salvatore Lo Bello, Iacopo Morchio

Abstract

 

We develop a dynamic quantitative model of occupational choice and search frictions with multiple channels of intergenerational transmission (comparative advantage, social contacts, and preferences), and use it to decompose the occupational persistence observed in the UK. In the model, workers who choose their father's occupation find jobs faster and earn lower wages, which is consistent with patterns found in UK data. Quantitatively, parental networks account for 79% of total persistence. Shutting down parental networks or the transmission of preferences improves the allocation of workers, and thus yields welfare gains, while removing the transmission of comparative advantage generates welfare losses.

Comparative advantage labor productivity mismatch occupational mobility social contacts J24 J62 J64
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Social distancing and supply disruptions in a pandemic
Martin Bodenstein, Giancarlo Corsetti, Luca Guerrieri

Abstract

 

We integrate an epidemiological model, augmented with contact and mobility analyses, with a two‐sector macroeconomic model, to assess the economic costs of labor supply disruptions in a pandemic. The model is designed to capture key characteristics of the U.S. input–output tables with a core sector that produces intermediate inputs not easily replaceable by the other sectors, possibly subject to minimum‐scale requirements. Using epidemiological and mobility data to inform our exercises, we show that the reduction in labor services due to the observed social distancing (spontaneous and mandatory) could explain up to 6–8 percentage points of the roughly 12% U.S. GDP contraction in the second quarter of 2020. We show that public measures designed to protect workers in core industries and occupations with tasks that cannot be performed from home, can flatten the epidemiological curve at reduced economic costs—and contain vulnerabilities to supply disruptions, namely a new surge of infections. Using state‐level data for the United States, we provide econometric evidence that spontaneous social distancing was no less costly than mandated social distancing.

Infectious disease pandemic recession COVID‐19 E1 E3 I1
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Valuation risk revalued
Oliver Groot, Alexander W. Richter, Nathaniel A. Throckmorton

Abstract

 

This paper shows the success of valuation risk—time‐preference shocks in Epstein–Zin utility—in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature is at odds with several desirable properties of recursive preferences because the weights in the time‐aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash‐flow dynamics.

Recursive utility asset pricing equity premium puzzle risk‐free rate puzzle C15 D81 G12
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Revealing a preference for mixtures: An experimental study of risk
Paul Feldman, John Rehbeck

Abstract

 

Using a revealed preference approach, we conduct an experiment where subjects make choices from linear convex budgets in the domain of risk. We find that many individuals prefer mixtures of lotteries in ways that systematically rule out expected utility behavior. We explore the extent to which an individual's preference to choose mixtures is related to a preference for randomization by comparing choices from a convex choice task to the decisions made in a repeated discrete choice task. We find that a preference to mix is positively correlated with behavior from repeated discrete choice tasks.

Risk preferences preference for randomization stochastic choice revealed preferences C91 D81 D91
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Why are open ascending auctions popular? The role of information aggregation and behavioral biases
Theo Offerman, Giorgia Romagnoli, Andreas Ziegler

Abstract

 

The popularity of open ascending auctions is often attributed to the fact that openly observable bidding allows to aggregate dispersed information. Another reason behind the frequent utilization of open auction formats may be that they activate revenue enhancing biases. In an experiment, we compare three auctions that differ in how much information is revealed and in the potential activation of behavioral biases: (i) the ascending Vickrey auction, a closed format; and two open formats, (ii) the Japanese–English auction, and (iii) the Oral Outcry auction. Even though bidders react to information conveyed in others' bids, information aggregation fails in both open formats. In contrast, the Oral Outcry raises higher revenue than the other two formats by stimulating bidders to submit unprofitable jump bids and triggering a quasi‐endowment effect.

Ascending auctions information aggregation jump bidding auction fever C90 D44 D82
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The development of randomization and deceptive behavior in mixed strategy games
Isabelle Brocas, Juan D. Carrillo

Abstract

 

We study the foundations for the development of optimal randomization in mixed strategy games. We consider a population of children and adolescents (7 to 16 years old) and study in the laboratory their behavior in a nonzero sum, hide‐and‐seek game with a unique interior mixed strategy equilibrium where each location has a known but different value. The vast majority of participants favor the high‐value location not only as seekers (as predicted by theory) but also as hiders (in contradiction with theory). The behavior is extremely similar across all ages, and also similar to that of the college students control adult group. We also study the use of cheap talk (potentially deceptive) messages in this game. Hiders are excessively truthful in the messages they send while seekers have a slight tendency to (correctly) believe hiders. In general, however, messages have a small impact on outcomes. The results point to a powerful (erroneous) heuristic thinking in two‐person randomization settings that does not get corrected, even partially, with age.

Developmental decision making laboratory experiment mixed strategy randomization C72 C93

 

 

Publication Date: 
Tuesday, May 3, 2022

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