Latest publications from

Signalling, Incumbency Advantage, and Optimal Reelection Rules

Francesco Caselli Tom Cunningham Massimo Morelli Inés Moreno de Barreda

CEPDP1122. February 2012.Much literature on political behavior treats politicians as motivated by reelection, choosing actions to signal their types to voters. We identify two novel implications of models in which signalling incentives are important. First, because incumbents only care about clearing a reelection hurdle, signals will tend to cluster just above the threshold needed for reelection. This generates a skew distribution of signals leading to an incumbency advantage in the probability of election. Second, voters can exploit the signalling behavior of politicians by precommitting to a higher threshold for signals received. Raising the threshold discourages signalling effort by low quality politicians but encourages effort by high quality politicians, thus increasing the separation of signals and improving the selection function of an election. This precommitment has a simple institutional interpretation as a supermajority rule, requiring that incumbents exceed some fraction of votes greater than 50% to be reelected. A simple calibration suggests the average quality of US Congress members would be maximised by requiring a 57% vote share for reelection.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1122.pdf

Why Has China Grown So Fast? The Role of International Technology Transfer

John Van Reenen Linda Yueh

CEPDP1121. February 2012.Chinese economic growth has been spectacular in the last 30 years. We investigate the role of International Joint Ventures with Technology Transfer agreements, an understudied area. Technology transfer is the traditional mechanism for developing countries to “catch up” and has been a key component of Chinese economic policy. We collect original survey data on Chinese firms and their joint ventures and match this to administrative data on firm performance. To identify the causal effect of joint ventures we use time-varying and province-specific policies at the time when a firm was born. International joint ventures have large effects on productivity especially when combined with a technology transfer component. We estimate that without International joint ventures China’s growth would have been about one percentage point lower per annum over the last three decades.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1121.pdf

The Household Effects of Government Spending

Francesco Giavazzi Michael McMahon

CEPDP1120. February 2012.This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1120.pdf

The Determinants of Intrafirm Trade: Evidence from French Firms

Gregory Corcos Delphine M. Irac Giordano Mion Thierry Verdier

CEPDP1119. January 2012.How well does the theory of the firm explain the choice between intrafirm and arms' length trade? This paper uses firm-level import data from France to look into this question. We find support for three key predictions of property-rights theories of the multinational firm. Intrafirm imports are more likely: (i) in capital- and skill-intensive firms; (ii) in highly productive firms; (iii) from countries with well-functioning judicial institutions. We further bridge previous aggregate findings with our investigation by decomposing intrafirm imports into an extensive and intensive margin. Doing so we uncover interesting patterns in the data that require further theoretical investigation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1119.pdf

Institutions and Export Dynamics

Luis Araujo Giordano Mion Emanuel Ornelas

CEPDP1118. January 2012.We study the role of contract enforcement in shaping the dynamics of international trade at the firm level. We develop a theoretical model to describe how agents build reputations to overcome the problems created by weak enforcement of international contracts. We find that, all else equal, exporters start their activities with higher volumes and remain as exporters for a longer period in countries with better contracting institutions. However, conditional on survival, the growth rate of a firm’s exports to a country decreases with the quality of the country’s institutions. We test these predictions using a rich panel of Belgium exporting firms from 1995 to 2008 to every country in the world. We adopt two alternative empirical strategies. In one specification we use firm-year fixed effects to control for time-varying firm-specific characteristics. Alternatively, we model selection more explicitly with a two-step Heckman procedure using “extended gravity” variables as our exclusion restrictions. Results from both specifications support our predictions. Overall, our findings suggest that weak contracting institutions cannot be thought simply as an extra sunk or fixed cost to exporting firms; they also significantly affect firms’ trade volumes and have manifold implications for firms’ dynamic patterns in foreign markets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1118.pdf

Preferential Trade Agreements and the Labor Market

Emanuel Ornelas

CEPDP1117. January 2012.Labor market consequences are at the forefront of most debates on the merits of trade liberalization. Preferential trade agreements (PTAs) have become the primary form of trade liberalization in most countries, and several studies have shown that discriminatory and nondiscriminatory trade liberalization can lead to very different outcomes. Yet to date there has not been any attempt to study the specific labor market implications of preferential liberalization. In this article I argue that the labor market consequences of unilateral or multilateral non-discriminatory trade liberalization and those stemming from integration in the context of PTAs can indeed be quite distinct, and therefore the latter must be given closer scrutiny. I provide a short summary of both the theoretical literature on trade and the labor market and the literature on preferential liberalization. Relying on the insights from those two—largely independent—lines of research, I then discuss why liberalization through PTAs can have consequences for the labor market that are considerably different from the effects of lowering trade barriers in a non-discriminatory fashion. Examples of areas where those differences are likely to be meaningful include the nature of labor market adjustment costs, the incentives for firms to start exporting, and the effects on “job rents.”

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1117.pdf

The Provision of Relative Performance Feedback Information: An Experimental Analysis of Performance and Happiness

Ghazala Azmat Nagore Iriberri

CEPDP1116. January 2012.This paper studies the effect of providing relative performance feedback information on individuals’ performance and affective response, under both piece-rate and flat-rate incentives. In a laboratory setup, agents perform a real effort task and when receiving feedback, they are asked to rate their happiness, arousal and feeling of dominance. Control subjects learn only their absolute performance, while the treated subjects additionally learn the average performance in the session. Under piece-rate, performance is 17 percent higher when relative performance feedback is provided. Furthermore, although feedback increases the performance independent of the content (i.e., performing above or below the average), the content is determinant for the affective response. When subjects are treated, the inequality in the happiness and the feeling of dominance between those subjects performing above and below the average increases by 8 and 6 percentage points, respectively. Under flat-rate, we do not find any effect on either of the outcome variables.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1116.pdf

Fiscal Multipliers over the Business Cycle

Pascal Michaillat

CEPDP1115. January 2012.This paper illustrates why fiscal policy becomes more effective as unemployment rises in recessions. The theory is based on the equilibrium unemployment model of Michaillat (forthcoming), in which jobs are rationed in recessions. Fiscal policy takes the form of government spending on public-sector jobs. Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively. Formally the fiscal multiplier—the reduction in unemployment rate achieved by spending one dollar on public-sector jobs—is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1115.pdf

Gravity Redux: Measuring International Trade Costs with Panel Data

Dennis Novy

CEPDP1114. January 2012.Barriers to international trade are known to be large but due to data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1114.pdf

Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation

Alex Bryson Richard Freeman Claudio Lucifora Michele Pellizzari Virginie Perotin

CEPDP1112. January 2012.We present new comparable data on the incidence of performance pay schemes in Europe and the USA. We find that the percentage of employees exposed to incentive pay schemes ranges from around 10-15 percent in some European countries to over 40 percent in Scandinavian countries and the US. Individual pay and profit/gain sharing schemes are widely diffused, whereas share ownership schemes are much less common, particularly in Europe. We document a number of empirical regularities. Incentive pay is less common in countries with a higher share of small firms. Higher product and labour market regulation are associated with lower use of incentive pay. Capital market development is a necessary requirement for a wider diffusion of incentive pay, particularly sharing and ownership schemes. When we control for a large set of individual characteristics and company attributes, we find that the probability that a worker is covered by an incentive scheme is higher in large firms and in high-skilled occupations, while it is much lower for females.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1112.pdf

Left, Right, Left: Income and Political Dynamics in Transition Economies

Michael Carter John Morrow

CEPDP1111. January 2012.The political left turn in Latin America, which lagged its transition to liberalized market economies by a decade or more, challenges conventional economic explanations of voting behavior. While the implications of upward mobility for the political preferences of forward-looking voters have been studied, neither the upward mobility model nor conventional myopic median voter models are well equipped to explain Latin America’s political transformation. This paper generalizes the forward-looking voter model to consider a broad range of dynamic processes. When voters have full information on the nature of income dynamics in a transition economy, we show that strong support for redistributive policies will materialize rapidly if income dynamics offer few prospects of upward mobility for key sections of the electorate. In contrast, when voters have imperfect information, our model predicts a slow and politically polarizing shift toward redistributive voter preferences under these same non-concave income dynamics. Simulation using fitted income dynamics for two Latin American economies suggests that the imperfect information model better accounts for the observed shift back to the left in Latin America, and that this generalized, forward-looking voter approach may offer additional insights about political dynamics in other transition economies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1111.pdf

Assimilation in Multilingual Cities

Javier Ortega Gregory Verdugo

CEPDP1110. December 2011.Using the Public Use Microdata Files of the 2001 and 2006 Canadian Censuses, we study the determinants of the assimilation of language minorities into the city majority language. We show that official minority members (i.e. francophones in English-speaking cities and anglophones in French-speaking cities) assimilate less than the "allophones" (the individuals with a mother tongue other than English or French), and that immigrants generally assimilate less than natives. In addition, the language composition of cities is shown to be an important determinant of assimilation both for allophones and for official minorities. Finally, we show that assimilation into French in French-majority cities is lower than assimilation into English in English-majority cities even when controlling for the language composition of the cities and including a rich set of language dummmies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1110.pdf

Management Practices Across Firms and Countries

Nicholas Bloom Christos Genakos Raffaella Sadun John Van Reenen

CEPDP1109. December 2011.For the last decade we have been using double-blind survey techniques and randomized sampling to construct management data on over 10,000 organizations across twenty countries. On average, we find that in manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China and India tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are worse managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the heterogeneity in the spread of performance in these sectors. One factor linked to this variation is ownership. Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder and private-equity owned firms are typically well managed. Stronger product market competition and higher worker skills are associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance based promotion.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1109.pdf

Spatial Frictions

Kristian Behrens Giordano Mion Yasusada Murata Jens Südekum

CEPDP1108. December 2011.The world is replete with spatial frictions. Shipping goods across cities entails trade frictions. Commuting within cities causes urban frictions. How important are these frictions in shaping the spatial economy? We develop and quantify a novel framework to address this question at three different levels: Do spatial frictions matter for the city-size distribution? Do they affect individual city sizes? Do they contribute to the productivity advantage of large cities and the nature of competition in cities? The short answers are: no, yes, and it depends.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1108.pdf

Service Trade and Occupational Tasks: An Empirical Investigation

Andrea Ariu Giordano Mion

CEPDP1107. December 2011.Using micro data for Belgium we investigate the relationship between occupational tasks changes and the rise of service trade. We focus the analysis on the extensive margin and look at the heterogeneous proliferation of firms involved in exports and imports of services across sectors characterized by different tasks changes patterns. Occupational tasks changes display an extremely consistent relationship with participation to service trade across firm groups pointing to strong churning effects. The change in analytical (interactive and routine cognitive) tasks intensity has a positive (negative) impact across the board meaning that, in industries characterized by larger changes, firms have experienced both higher (lower) likelihood of entry and exit. The negative relationship between the change in interactive tasks and service exports participation underlines the special role that proximity between demand and supply plays for services. Interestingly, we find exactly the opposite result (a positive relationship) between the extensive margin of goods exports and interactive tasks. Moreover, our analysis suggests that the change in IT use per se does not strike as being a key underlying force behind the increase in the extensive margin of service exports.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1107.pdf

Do Cash Transfers Improve Birth Outcomes? Evidence from Matched Vital Statistics, Social Security and Program Data

Verónica Amarante Marco Manacorda Edward Miguel Andrea Vigorito

CEPDP1106. December 2011.There is limited empirical evidence on whether unrestricted cash social assistance to poor pregnant women improves children’s birth outcomes. Using program administrative micro-data matched to longitudinal vital statistics on the universe of births in Uruguay, we estimate that participation in a generous cash transfer program led to a sizeable 15% reduction in the incidence of low birthweight. Improvements in mother nutrition and a fall in labor supply, out-of-wedlock births and mother’s smoking all appear to contribute to the effect. We conclude that, by improving child health, unrestricted unconditional cash transfers may help break the cycle of intergenerational poverty.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1106.pdf

Assignment Reversals: Trade, Skill Allocation and Wage Inequality

Thomas Sampson

CEPDP1105. December 2011.Understanding the allocation of skilled labor across industries is necessary to explain inter-industry wage differences and the effect of trade on wages. This paper develops a multi-sector assignment model with both heterogeneous labor and a non-labor input in which high skill agents match with high input productivity sectors where they can best leverage their talent. When the ranking of sectors by input productivity differs across countries, their ranking by workforce skill also differs – this is an assignment reversal. In a two sector, two country model the existence of an assignment reversal implies that each country has a comparative advantage in its high skill sector. Consequently, trade integration causes both the relative wage of high skill workers, and wage inequality within the high skill sector, to increase in both countries. Using exogenous differences in capital productivity induced by a country’s proximity to major capital exporters the paper shows that international variation in the industry wage structure supports the existence of assignment reversals and is consistent with the model’s sorting predictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1105.pdf

Immigrant Enclaves and Crime

Brian Bell Stephen Machin

CEPDP1104. December 2011.There is conflicting evidence on the consequences of immigrant neighbourhood segregation for individual outcomes, with various studies finding positive, negative or insubstantial effects. In this paper, we document the evolution of immigrant segregation in England over the last 40 years. We show that standard measures of segregation point to gentle declines over time for all immigrant groups. However, this hides a significant increase in the number of immigrant enclaves where immigrants account for a substantial fraction of the local population. We then explore the link between immigrant segregation, enclaves and crime using both recorded crime and self-reported crime victimization data. Controlling for a rich set of observables, we find that crime is substantially lower in those neighbourhoods with sizeable immigrant population shares. The effect is non-linear and only becomes significant in enclaves. It is present for both natives and immigrants living in such neighbourhoods. Considering different crime types, the evidence suggests that such neighbourhoods benefit from a reduction in more minor, non-violent crimes. We discuss possible mechanisms for the results we observe.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1104.pdf

Trading Away Wide Brands for Cheap Brands

Swati Dhingra

CEPDP1103. December 2011.Firms face competing needs to expand product variety and reduce production costs. Trade policy affects firm investments in product variety and production processes differently. Access to larger markets enables innovation to reduce costs. Although firm scale increases, foreign competition reduces markups. Firms react by narrowing their product varieties to recapture these lost markups. I provide a theory detailing this conflicting impact of trade policy and address welfare gains from trade. Accounting for firm heterogeneity, I show support for the theoretical predictions with firm-level innovation data from Thailand’s manufacturing sector which experienced unilateral home tariff changes during 2003-2006.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1103.pdf

A Note on Schooling in Development Accounting

Francesco Caselli Antonio Ciccone

CEPDP1102. December 2011.How much would output increase if underdeveloped economies were to increase their levels of schooling? We contribute to the development accounting literature by describing a nonparametric upper bound on the increase in output that can be generated by more schooling. The advantage of our approach is that the upper bound is valid for any number of schooling levels with arbitrary patterns of substitution/complementarity. We also quantify the upper bound for all economies with the necessary data, compare our results with the standard development accounting approach, and provide an update on the results using the standard approach for a large sample of countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1102.pdf

How Local Are Labour Markets? Evidence from a Spatial Job Search Model

Alan Manning Barbara Petrongolo

CEPDP1101. December 2011.This paper uses data on very small UK geographies to investigate the effective size of local labour markets. Our approach treats geographic space as continuous, as opposed to a collection of nonoverlapping administrative units, thus avoiding problems of mismeasurement of local labour markets encountered in previous work. We develop a theory of job search across space that allows us to estimate a matching process with a very large number of areas. Estimates of this model show that the cost of distance is relatively high - the utility of being offered a job decays at exponential rate around 0.3 with distance (in km) to the job - so that labour markets are indeed quite ‘local’. Also, workers are discouraged from applying to jobs in areas where they expect relatively strong competition from other jobseekers. The estimated model replicates fairly accurately actual commuting patterns across neighbourhoods, although it tends to underpredict the proportion of individuals who live and work in the same ward. Finally, we find that, despite the fact that labour markets are relatively ‘local’, local development policies are fairly ineffective in raising the local unemployment outflow, because labour markets overlap, and the associated ripple effects in applications largely dilute the impact of local stimulus across space.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1101.pdf

Spatial Exporters

Fabrice Defever Benedikt Heid Mario Larch

CEPDP1100. December 2011.In this paper, we provide evidence that expanding firms tend to serve new markets which are geographically close and culturally related to their prior export destinations. We quantify the impact of this spatial pattern using a Chinese firm-level data set. To ensure an exogenous set of potential new destinations (25 EU countries, US and Canada) and an exogenous timing of entry, we focus on firms that benefited from the abrupt end of the textile quota restrictions in 2005. Controlling for firmproduct and destination specific effects and ac- counting for possible multiple new export destinations we show that the probability to export to a country increases by 15 to 38 percent for each prior export destination with a geographical or cultural link with this country.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1100.pdf

Change and Persistence in the German Model of Collective Bargaining and Worker Representation

John T. Addison Alex Bryson André Pahnke Paulino Teixeira

CEPDP1099. November 2011.This paper depicts and examines the decline in collective bargaining coverage in Germany. Using repeat cross-section and longitudinal data from the IAB Establishment Panel, we show the overwhelming importance of behavioral as opposed to compositional change and, for the first time, document workplace transitions into and out of collective agreeements via survival analysis. We provide estimates of the median duration of coverage, and report that the factors generating entry and exit are distinct and symmetric.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1099.pdf

Anorexia, Body Image and Peer Effects: Evidence from a Sample of European Women

Joan Costa Font Mireia Jofre-Bonet

CEPDP1098. November 2011.Excessive preoccupation with self-image (or identity) is regarded as a factor contributing to the proliferation of food disorders, especially among young women. This paper models how self-image and peer effects influence health-related behaviours, specifically food disorders. We empirically test our claims using data from the European survey. Our findings suggest that the larger the peers’ body-mass, the lower the likelihood of being anorexic. Self-image is correlated with body weight. We use several definitions of peers’ body mass and we find that all are negatively associated with the likelihood of women being thin or extremely thin.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1098.pdf

HRM and Workplace Motivation: Incremental and Threshold Effects

Alex Bryson Michael White

CEPDP1097. November 2011.The HRM-performance linkage often invokes an assumption of increased employee commitment to the organization and other positive effects of a motivational type. We present a theoretical framework in which motivational effects of HRM are conditional on its intensity, utilizing especially the idea of HRM ‘bundling’. We then analyse the association between HRM practices and employees’ organisational commitment (OC) and intrinsic job satisfaction (IJS). HRM practices have significantly positive relationships with OC and IJS chiefly at high levels of implementation, but with important distinctions between the domain-level analysis (comprising groups of practices for specific domains such as employee development) and the across-domain or HRM-system level. Findings support a threshold interpretation of the link between HRM domains and employee motivation, but at the system-level both incremental and threshold models receive some support.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1097.pdf

Worktime Regulations and Spousal Labor Supply

Dominique Goux Eric Maurin Barbara Petrongolo

CEPDP1096. November 2011.We investigate cross-hour effects in spousal labor supply exploiting independent variation in hours worked generated by the introduction of the short workweek in France in the late 1990s. We find that female and male employees treated by the shorter legal workweek reduce their weekly labor supply by about 2 hours, and do not experience any reduction in their monthly earnings. While wives of treated men do not seem to adjust their working time at either the intensive or extensive margins, husbands of treated wives respond by cutting their labor supply by about half an hour to one hour per week, according to specifications and samples. Further tests reveal that husbands’ labor supply response did not entail the renegotiation of usual hours with employers or changes in earnings, but involved instead a reduction in (unpaid) work involvement, whether within a given day, or through an increase in the take-up rate of paid vacation and/or sick leave. These margins of adjustment are shown to have no detrimental impact on men’s (current) earnings. The estimated cross-hour effects are consistent with the presence of spousal leisure complementarity for husbands, though not for wives.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1096.pdf

Does High Involvement Management Improve Worker Wellbeing?

Alex Bryson Petri Böckerman Pekka Ilmakunnas

CEPDP1095. November 2011.Employees exposed to high involvement management (HIM) practices have higher subjective wellbeing, fewer accidents but more short absence spells than “like” employees not exposed to HIM. These results are robust to extensive work, wage and sickness absence history controls. We present a model which highlights the possibility of higher short-term absence in the presence of HIM because it is more demanding than standard production and because multi-skilled HIM workers cover for one another’s short absences thus reducing the cost of replacement labour faced by the employer. We find direct empirical support for the assumptions in the model. Consistent with the model, because long-term absences entail replacement labour costs for HIM and non-HIM employers alike, long-term absences are independent of exposure to HIM.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1095.pdf

Measuring the (Income) Effect of Disability Insurance Generosity on Labour Market Participation

Olivier Marie Judit Vall Castello

CEPDP1094. November 2011.We analyze the employment effect of a law that provides for a 36 percent increase in the generosity of disability insurance (DI) for claimants who are, as a result of their lack of skills and of the labour market conditions they face, deemed unlikely to find a job. The selection process for treatment is therefore conditional on having a low probability of employment, making evaluation of its effect intrinsically difficult. We exploit the fact that the benefit increase is only available to individuals aged 55 or older, estimating its impact using a regression discontinuity approach. Our first results indicate a large drop in employment for disabled individuals who receive the increase in the benefit. Testing for the linearity of covariates around the eligibility age threshold reveals that the age at which individuals start claiming DI is not continuous: the benefit increase appears to accelerate the entry rate of individuals aged 55 or over. We obtain new estimates excluding this group of claimants, and find that the policy decreases the employment probability by 8 percent. We conclude that the observed DI generosity elasticity of 0.22 on labour market participation is mostly due to income effects since benefit receipt is not work contingent in the system studied.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1094.pdf

Gender Gaps Across Countries and Skills: Supply, Demand and the Industry Structure

Claudia Olivetti Barbara Petrongolo

CEPDP1093. November 2011.The gender wage gap varies widely across countries and across skill groups within countries. Interestingly, there is a positive cross-country correlation between the unskilled- to-skilled gender wage gap and the corresponding gap in hours worked. Based on a canonical supply and demand framework, this positive correlation would reveal the presence of net demand forces shaping gender differences in labor market outcomes across skills and countries. We use a simple multi-sector framework to illustrate how differences in labor demand for different inputs can be driven by both within-industry and between-industry factors. The main idea is that, if the service sector is more developed in the US than in continental Europe, and unskilled women tend to be over-represented in this sector, we expect unskilled women to suffer a relatively large wage and/or employment penalty in the latter than in the former. We find that, overall, the between-industry component of labor demand explains more than half of the total variation in labor demand between the US and the majority of countries in our sample, as well as one-third of the correlation between wage and hours gaps. The between-industry component is relatively more important in countries where the relative demand for unskilled females is lowest.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1093.pdf

Wishful Thinking

Guy Mayraz

CEPDP1092. November 2011.An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset's historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging, subjects gaining from high prices made significantly higher predictions than those gaining from low prices. The magnitude of the bias was smaller in charts with less subjective uncertainty, but was independent of the amount paid for accurate predictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1092.pdf

Resource Windfalls, Political Regimes, and Political Stability

Francesco Caselli Andrea Tesei

CEPDP1091. November 2011.We study theoretically and empirically whether natural resource windfalls affect political regimes. We document the following regularities. Natural resource windfalls have no effect on the political system when they occur in democracies. However, windfalls have significant political consequences in autocracies. In particular, when an autocratic country receives a positive shock to its flow of resource rents it responds by becoming even more autocratic. Furthermore, there is heterogeneity in the response of autocracies. In deeply entrenched autocracies the effect of windfalls on politics is virtually nil, while in moderately entrenched autocracies windfalls significantly exacerbate the autocratic nature of the political system. To frame the empirical work we present a simple model in which political incumbents choose the degree of political contestability by deciding how much to spend on vote-buying, bullying, or outright repression. Potential challengers decide whether or not to try to unseat the incumbent and replace him. The model uncovers a reason for the asymmetric impact of resource windfalls on democracies and autocracies, as well as the differential impact within autocratic regimes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1091.pdf

Factor Proportions and International Business Cycles

Keyu Jin Nan Li

CEPDP1090. November 2011.Positive investment comovements across OECD economies as observed in the data are difficult to replicate in open-economy real business cycle models, but also vary substantially in degree for individual country-pairs. This paper shows that a two-country stochastic growth model that distinguishes sectors by factor intensity (capital-intensive vs. labor-intensive) gives rise to an endogenous channel of the international transmission of shocks that first, can substantially ameliorate the “quantity anomalies” that mark large open-economy models, and second, generate a cross-sectional prediction that is strongly supported by the data: investment correlations tend to be stronger for country-pairs that exhibit greater disparity in the factor-intensity of trade. In addition, three new pieces of evidence support the central mechanism: (1) the production composition of capital versus labor-intensive sectors changes over the business cycle; (2) the prices of capital-intensive goods and labor-intensive goods are respectively, procyclical and countercyclical; (3) a positive productivity shock in the U.S. tilts the composition of production towards capital-intensive sectors in other countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1090.pdf

Do Giant Oilfield Discoveries Fuel Internal Armed Conflicts?

Yu-Hsiang Lei Guy Michaels

CEPDP1089. November 2011.We use new data to examine the effects of giant oilfield discoveries around the world since 1946. On average, these discoveries increase per capita oil production and oil exports by up to 50 percent. But these giant oilfield discoveries also have a dark side: they increase the incidence of internal armed conflict by about 5-8 percentage points. This increased incidence of conflict due to giant oilfield discoveries is especially high for countries that had already experienced armed conflicts or coups in the decade prior to discovery.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1089.pdf

Firm Performance and Wages: Evidence from Across the Corporate Hierarchy

Brian Bell John Van Reenen

CEPDP1088. November 2011.Does it matter whether you work for a successful company? And if so, does it matter who you are? To answer these questions we construct a unique panel dataset covering the pay of all CEOs, senior managers and a fully representative sample of workers for a large group of publicly-listed companies covering just under 90% of the market capitalization of the UK stock market. We show that senior management appear to have pay that is strongly associated with various measures of firm performance (such as shareholder return), while workers’ pay is only weakly associated with such measures. A 10% increase in firm value is associated with an increase of 3% in CEO pay but only 0.2% in average workers’ pay. Falls in firm performance are also followed by CEO pay cuts (but not as aggressively as upside rewards) and significantly more CEO firings. This is essentially a result of the responsiveness of flexible pay to performance and only senior executives have a large enough share of pay in bonuses to generate a sizeable overall effect on pay. Accounting for firm performance over the last decade can potentially explain between one-quarter and one-half of the rise in the gap between CEO pay and the pay of workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1088.pdf

The Role of Educational Quality and Quantity in the Process of Economic Development

Amparo Castelló-Climent Ana Hidalgo-Cabrillana

CEPDP1087. November 2011.We develop a theory of human capital investment to study the channels through which students react to school quality when deciding on investments in secondary education and above, and to study how educational quality affects economic growth. In a dynamic general equilibrium closed economy, primary education is mandatory but there is an opportunity to continue on in education, which is a private choice. High-quality education increases the returns to schooling, and hence the incentives to accumulate human capital. This is caused by two main effects: higher quality makes higher education accessible to more people (extensive channel), and once individuals decide to participate in higher education, higher quality increases the volume of investment made per individual (intensive channel). Furthermore, educational quality plays a central role in explaining the composition of human capital and the long-run level of income. Cross-country data evidence shows that the proposed channels are quantitatively important and that the effect of the quality and quantity of education on growth depends on the stage of development.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1087.pdf

Mass Education or a Minority Well Educated Elite in the Process of Development: the Case of India

Amparo Castelló-Climent Abhiroop Mukhopadhyay

CEPDP1086. November 2011.This paper analyses whether in developing countries mass education is more growth enhancing than to have a minority well educated elite. Using the Indian census data as a benchmark and enrollment rates at different levels of education we compute annual attainment levels for a panel of 16 Indian states from 1961 to 2001. Results indicate that if the reduction of illiteracy stops at the primary level of education, it is not worthwhile for growth. Instead, the findings reveal a strong and robust significant effect on growth of a greater share of population completing tertiary education. The economic impact is also found to be very large: if one percent of the adult population were to complete tertiary education instead of completing only primary, the annual growth rate could increase by about 4 percentage points. Moreover, we find that a one percentage change in tertiary education has the same effect on growth as a decrease in illiteracy by 13 percentage points. A sensitivity analysis shows the results are unlikely to be driven by omitted variables, structural breaks, reverse causation or atypical observations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1086.pdf

Heterogeneous Firm-Level Responses to Trade Liberalisation: A Test Using Stock Price Reactions

Holger Breinlich

CEPDP1085. November 2011.This paper presents novel empirical evidence on key predictions of heterogeneous firm models by examining stock market reactions to the Canada-United States Free Trade Agreement of 1989 (CUSFTA). Using the uncertainty surrounding the agreement’s ratification, I show that the pattern of abnormal returns of Canadian manufacturing …firms was broadly consistent with the predictions of a class of models based on Melitz (2003). Increases in the likelihood of ratification led to stock market gains of exporting firms relative to non-exporters. Moreover, gains were higher in sectors with larger cuts in U.S. import tariffs. Decreases in the likelihood of ratification led to opposite stock market reactions. Results for the impact of Canadian tariff reductions are less conclusive but most specifications suggest that exporters also gained relative to non-exporters in response to such reductions. Translating stock market gains into implied profit changes, I find that CUSFTA increased expected per-period profits of exporters by around 6-7% relative to non-exporters.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1085.pdf

The Empirics of Firm Heterogeneity and International Trade

Andrew B. Bernard J. Bradford Jensen Stephen J. Redding Peter K. Schott

CEPDP1084. October 2011.This paper reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of inter- national trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multi-product firms, offshoring, intra-firm trade and firm export market dynamics.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1084.pdf

In Search of a Theory of Debt Management

Elisa Faraglia Albert Marcet Andrew Scott

CEPDP1083. October 2011.A growing literature integrates debt management into models of optimal fiscal policy. One promising theory argues the composition of government debt should be chosen so that fluctuations in its market value offsets changes in expected future deficits. This complete market approach to debt management is valid even when governments only issue non-contingent bonds. Because bond returns are highly correlated it is known this approach implies asset positions which are large multiples of GDP. We show, analytically and numerically, across a wide range of model specifications (habits, productivity shocks, capital accumulation, persistent shocks, etc) that this is only one of the weaknesses of this approach. We find evidence of large fluctuations in positions, enormous changes in portfolios for minor changes in maturities issued and no presumption it is always optimal to issue long term debt and invest in short term assets. We show these extreme, volatile and unstable features are undesirable from a practical perspective for two reasons. Firstly the fragility of the optimal portfolio to small changes in model specification means it is frequently better for fear of model misspecification to follow a balanced budget rather than issue the optimal debt structure. Secondly we show for even miniscule levels of transaction costs governments would prefer a balanced budget rather than the large and volatile positions the complete market approach recommends. We conclude it is difficult to insulate fiscal policy from shocks using the complete markets approach. Due to the yield curve’s limited variability maturities are a poor way to substitute for state contingent debt. As a result the recommendations of this approach conflict with a number of features we believe are integral to bond market incompleteness e.g. allowing for transaction costs, liquidity effects, robustness etc. Our belief is that market imperfections need to be explicitly introduced into the model and incorporated into the portfolio problem. Failure to do so means that the complete market approach applied in an incomplete market setting can be seriously misleading.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1083.pdf

A Many-Country Model of Industrialization

Holger Breinlich Alejandro Cuñat

CEPDP1082. September 2011.We draw attention to the role of economic geography in explaining important cross-sectional facts which are difficult to account for in existing models of industrialization. By construction, closed-economy models that stress the role of local demand in generating sufficient expenditure on manufacturing goods are not suited to explain the strong and negative correlation between distance to the world’s main markets and levels of manufacturing activity in the developing world. Secondly, open-economy models that emphasize the importance of comparative advantage are at odds with a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. This paper provides a potential explanation for these puzzles by nesting the above theories in a multi-location model with trade costs. Using a number of simple analytical examples and a full-scale multi-country calibration, we show that the model can replicate the above stylized facts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1082.pdf

Productivity, Wages and Marriage: The Case of Major League Baseball

Francesca Cornaglia Naomi E. Feldman

CEPDP1081. September 2011.The effect of marriage on productivity and, consequently, wages has been long debated in economics. A primary explanation for the impact of marriage on wages has been through its impact on productivity, however, there has been no direct evidence for this. In this paper, we aim to fill this gap by directly measuring the impact of marriage on productivity using a sample of professional baseball players from 1871 - 2007. Our results show that only lower ability men see an increase in productivity, though this result is sensitive to the empirical specification and weakly significant. In addition, despite the lack of any effect on productivity, high ability married players earn roughly 16 - 20 percent more than their single counterparts. We discuss possible reasons why employers may favor married men.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1081.pdf

The Wealth and Poverty of Nations: True PPPs for 141 Countries

Nicholas Oulton

CEPDP1080. September 2011.I set out a new method for estimating true (Konüs) PPPs. Household consumption per head deflated by these PPPs answers the question: by how much must the average expenditure per head of poor country A be increased to enable the typical inhabitant of A to enjoy the same utility level as the typical inhabitant of rich country B? Conventional multilateral PPPs for household consumption, such as the ones published by the World Bank, are not based explicitly on economic theory. So it is not clear that they can answer the question above, particularly if consumer demand is not homothetic. And there is overwhelming empirical evidence against homotheticity. The estimates of the standard of living in this paper are based on the economic theory of consumer demand. The main tool is the expenditure function. It turns out that it is not necessary to estimate all the parameters of the expenditure function but only the relatively small number which measure the consumer’s response to income changes. This makes the method feasible even when there are large numbers of products. The method is applied to 141 countries included in the World Bank’s 2005 International Comparison Program, at the level of 100 products. The results give strong support for nonhomotheticity and also for the importance of background factors such as climate, demography, culture and religion. The gap between the richest and the poorest countries is wider than when household consumption is deflated by a conventional multilateral index such as the World Bank’s PPP for consumption.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1080.pdf

Fear and the Response to Terrorism: An Economic Analysis

Gary S. Becker Yona Rubinstein

CEPDP1079. September 2011.This paper offers a rational approach to the economics and psychology of fear and provides empirical evidence that supports our theory. We explicitly consider both the impact of danger on emotions and the distortive effect of fear on subjective beliefs and individual choices. Yet, we also acknowledge individuals’ capacity to manage their emotions. Though costly, people can learn to control their fear and economic incentives affect the degree to which they do so. Since it does not pay back the same returns to everyone, people will differ in their reaction to impending danger. We then empirically examine the response of Israelis to terror incidents during the "Al-Aqsa" Intifada. Consistent with our theory, the overall impact of attacks on the usage of goods and services subject to terror attacks (e.g. bus services, coffee shops) reflects solely the reactions of occasional users. We find no impact of terrorist attacks on the demand for these goods and services by frequent users. Education and the exposure to media coverage also matters. We find a large impact of suicide attacks during regular media coverage days, and almost no impact of suicide attacks when they are followed by either a holiday or a weekend, especially among the less educated families and among occasional users.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1079.pdf

Optimal Unemployment Insurance Over the Business Cycle

Camille Landais Pascal Michaillat Emmanuel Saez

CEPDP1078. September 2011.This paper characterizes optimal unemployment insurance (UI) over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession. It offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. In addition to the usual statistics (risk aversion and micro-elasticity of unemployment with respect to UI), a macro-elasticity appears in the formula to capture the macroeconomic impact of UI on unemployment. In a model with job rationing, the formula implies that optimal UI is countercyclical. This result arises because in recession, jobs are lacking irrespective of job search. Therefore (1) a higher aggregate search effort cannot reduce aggregate unemployment much; and (2) individual search effort creates a negative externality by reducing other jobseekers’ probability of finding a job as in a rat race. Hence the social benefits of job search are low. In a calibrated model, optimal UI increases significantly in recession. This quantitative result holds whether the government adjusts the level or duration of benefits; whether it balances its budget each period or uses deficit spending.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1078.pdf

Stock Market Volatility and Learning

Klaus Adam Albert Marcet Juan Pablo Nicolini

CEPDP1077. September 2011.We study a standard consumption based asset pricing model with rationally investing agents but allow agents’ prior beliefs about price and dividend behavior to deviate slightly from rational expectations priors. Learning about stock price behavior then causes the model to become quantitatively consistent with a range of basic asset prizing ‘puzzles’: stock returns display momentum and mean reversion, asset prices become volatile, the price-dividend ratio displays persistence, long-horizon returns become predictable and a risk premium emerges. Comparing the moments of the model with those in the data using confidence bands from the method of simulated moments, we show that our findings are robust to different assumptions on the system of beliefs and other model features. We depart from previous studies of asset prices under learning in that agents form expectations about future stock prices using past price observations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1077.pdf

The Minimum Wage and Inequality - The Effects of Education and Technology

Zsófia L. Bárány

CEPDP1076. September 2011.While there has been intense debate in the empirical literature about the effects of minimum wages on inequality in the US, its general equilibrium effects have been given little attention. In order to quantify the full effects of a decreasing minimum wage on inequality, I build a dynamic general equilibrium model, based on a two-sector growth model where the supply of high-skilled workers and the direction of technical change are endogenous. I find that a permanent reduction in the minimum wage leads to an expansion of low-skilled employment, which increases the incentives to acquire skills, thus changing the composition and size of high-skilled employment. These permanent changes in the supply of labour alter the investment flow into R&D, thereby decreasing the skill-bias of technology. The reduction in the minimum wage has spill-over effects on the entire distribution, affecting upper-tail inequality. Through a calibration exercise, I find that a 30 percent reduction in the real value of the minimum wage, as in the early 1980s, accounts for 15 percent of the subsequent rise in the skill premium, 18.5 percent of the increase in overall inequality, 45 percent of the increase in inequality in the bottom half, and 7 percent of the rise in inequality at the top half of the wage distribution.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1076.pdf

Rising Wage Inequality and Postgraduate Education

Joanne Lindley Stephen Machin

CEPDP1075. September 2011.This paper considers what has hitherto been a relatively neglected subject in the wage inequality literature, albeit one that has been becoming more important over time, namely the role played by increases in postgraduate education. We document increases in the number of workers with a postgraduate qualification in the United States and Great Britain. We also show their relative wages have risen over time as compared to all workers and more specifically to graduates with only a college degree. Consideration of shifts in demand and supply shows postgraduates and college only workers to be imperfect substitutes in production and that there have been trend increases over time in the relative demand for postgraduate vis-à-vis college only workers. These relative demand shifts are significantly correlated with technical change as measured by changes in industry computer usage and investment. Moreover, the skills sets possessed by postgraduates and the occupations in which they are employed are significantly different to those of college only graduates. Over the longer term period when computers have massively diffused into workplaces, it turns out that the principal beneficiaries of this computer revolution has not been all graduates, but those more skilled workers who have a postgraduate qualification. This has been an important driver of rising wage inequality amongst graduates over time.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1075.pdf

First Impressions Matter: Signalling as a Source of Policy Dynamics

Stephen Hansen Michael McMahon

CEPDP1074. September 2011.We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better fits the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts’ policy choices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1074.pdf

Advertising Expenditure and Consumer Prices

Ferdinand Rauch

CEPDP1073. August 2011.This paper studies the effect of a change in the marginal costs of advertising on advertising expenditures of firms and consumer prices across industries. It makes use of a unique policy change that caused a decrease of the taxation on advertising expenditures in parts of Austria and a simultaneous increase in other parts. Advertising expenditures move immediately in the opposite direction to the marginal costs of advertising. Simultaneously the price reaction to advertising is negative in some industries (food, education) and positive in other industries (alcohol, tobacco, transportation, hotels and restaurants), depending on the information content of advertising. The paper reconciles these findings using a model that contains informative and persuasive forces of advertising.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1073.pdf

Trading and Enforcing Patent Rights

Alberto Galasso Mark Schankerman Carlos J. Serrano

CEPDP1072. August 2011.We study how the market for innovation affects enforcement of patent rights. Conventional wisdom associates the gains from trade with comparative advantage in manufacturing or marketing. We show that these gains imply that patent transactions should increase litigation risk. We identify a new source of gains from trade, comparative advantage in patent enforcement, and show that transactions driven by this motive should reduce litigation. Using data on trade and litigation of individually-owned patents in the U.S., we exploit variation in capital gains tax rates as an instrument to identify the causal effect of trade on litigation. We find that taxes strongly affect patent transactions, and that reallocation of patent rights reduces litigation risk, on average. The impact of trade on litigation is heterogeneous, however. Patents with larger potential gains from trade are more likely to change ownership, suggesting that the market for innovation is efficient. We also show that the impact of trade on litigation depends on characteristics of the transactions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1072.pdf

A Model for the Delivery of Evidence-Based PSHE (Personal Wellbeing) in Secondary Schools

John Coleman Daniel Hale Richard Layard

CEPDP1071. August 2011.Personal Social Health and Economic (PSHE) education is a non-statutory school subject designed to facilitate the delivery of a number of key competencies relevant to health, safety and wellbeing. As well as contributing to learning objectives in regards to these topics PSHE education has been ascribed with weighty expectations for outcomes well beyond the classroom relating to physical, mental, sexual and emotional health and safety. This paper reviews a programme of research aimed at providing guidance for the evidence-based provision of PSHE education, including a summary of the major impediments and facilitators of evidence-based programming, as well as a model curriculum for the delivery of evidence-based PSHE. An extensive literature review was conducted along with a series of interviews with programme developers, researchers, teachers and other school practitioners with the aim of developing a cohesive rationale for PSHE education and identifying evidence-based programmes which could be implemented to contribute to PSHE aims. The proposed model curriculum is comprised of evidence-based programmes which are PSHE-relevant and applicable or adaptable to the PSHE-education implementation context. While the provision of evidence-based PSHE presents a number of challenges and is limited by a lack of resources and evidence of effectiveness, with appropriate guidance PSHE education can be improved so that a comprehensive syllabus of evidence-based programmes is enacted in secondary schools. This will increase the likelihood that PSHE has the intended effect on adolescent mental and physical health and wellbeing.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1071.pdf

Individual Voice in Employment Relationships: A Comparison Under Different Forms of Workplace Representation

David Marsden

CEPDP1070. August 2011.This article considers the role of individual employee voice in regulating the ‘zone of acceptance’ within the employment relationship, and examines the extent to which different models of collective voice inhibit or foster the operation of individual voice. It focuses especially on the role of representatives who deal with job-level grievances who operate within contrasted frameworks of collective voice. In one, representation is negotiated with the employer, and in the other, it is based on rights established in employment law. The former is commonly associated with shop stewards and unions, and the latter with employee delegates and works councils. It is argued that whereas in the negotiated model individual and collective voice are substitutes, in the rights-based one they are complements. The article also considers how this may alter under dual-channel representation based on both unions and councils, which is very common in European workplaces. Britain provides an example of the negotiated model, and France of both the rights-based and dual-channel models. These ideas are tested using data from the 2004 British and French workplace employment relations surveys, and confirmed using data from the 1998 surveys.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1070.pdf

Racial Discrimination and Competition

Ross Levine Alexey Levkov Yona Rubinstein

CEPDP1069. August 2011.We provide the first assessment of whether an intensification of product market competition reduces the racial wage gap exactly where taste-based theories predict that competition will reduce labor market discrimination. in economies where employers have strong racial prejudices. We use bank deregulation across the U.S. states to identify an intensification of competition among banks, which in turn lowered entry barriers facing nonfinancial firms, especially firms that depend heavily on bank credit. Consistent with taste-based theories, we find that competition boosted blacks’ relative residual wages within the banking industry and bank-dependent industries, but only in states with strong tastes for discrimination.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1069.pdf

Internal Rationality, Imperfect Market Knowledge and Asset Prices

Klaus Adam Albert Marcet

CEPDP1068. August 2011.We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors’ expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents’ market knowledge.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1068.pdf

A Simple Theory of Managerial Talent, Pay Contracts and Wage Distribution

Yanhui Wu

CEPDP1067. August 2011.This paper develops a simple theory of pay structures and pay levels across heterogeneous agents by bringing together optimal contracts inside the firm and competitive resource allocation in the market. The central idea is that more talented people tend to create greater value but face larger conflicts of interest in their employment relationship, and different pay contracts are optimally designed to mitigate different levels of agency problems. Sorted by their talent, people are stratified into production workers, self-employed, salaried managers with low-powered performance pay, and CEOs with high-powered equity-based pay. In a general equilibrium framework, I show that the sorting of managerial talent into pay contracts is tied to firm size. The theory highlights that high-powered incentive pay and large scales of operations cause the disproportionately large wage earnings at the top, and are the main source of income inequality. Market forces that reallocate resources from smaller to larger firms tend to increase the threshold talent for becoming a manager, increase the prevalence of high-powered incentive pay, raise the top earnings, and spread out the wage distribution.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1067.pdf

Managerial Incentives and Compensation in a Global Market

Yanhui Wu

CEPDP1066. August 2011.This paper embeds a principal-agent firm in an otherwise standard trade model a la Melitz (2003) to investigate the impact of globalization on the provision of managerial incentives and on the distribution of managerial compensation. Facing contractual frictions due to limited liability, firms with heterogeneous productivity endogenously sort into different pay structures to mitigate different levels of agency problems. More productive firms use a higher-powered incentive contract while less productive firms use a lowered- powered one. International trade within an industry enhances market competition, inducing resources reallocated from low productivity domestic firms to high productivity exporting .rms. The uneven effects of international trade on firms that differ in their exporting status and pay structure result in more prevalence of high-powered incentive pay, a larger wage gap between managers and production workers, and a higher level of wage inequality among managers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1066.pdf

The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries

Nicholas Bloom Helena Schweiger John Van Reenen

CEPDP1065. July 2011.We have conducted the first survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below emerging countries such as Brazil, China and India. In contrast, the central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of western European countries such as Germany. Since we find these practices are strongly linked to firm performance, this suggests poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. This implies that the continued opening of markets to domestic and foreign competition, privatisation of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1065.pdf

House Price Booms and the Current Account

Klaus Adam Pei Kuang Albert Marcet

CEPDP1064. July 2011.A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes’ rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model correctly predicts the heterogeneous response of house prices across the G7, following the fall in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents’ beliefs at the time of the interest rate reduction, which are a function of the prior history of disturbances hitting the economy. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1064.pdf

How Experts Decide: Identifying Preferences versus Signals from Policy Decisions

Stephen Hansen Michael McMahon

CEPDP1063. July 2011.A large theoretical literature assumes that experts di ffer in terms of preferences and the distribution of their private signals, but the empirical literature to date has not separately identi ed them. This paper proposes a novel way of doing so by relating the probability a member chooses a particular policy decision to the prior belief that it is correct. We then apply this methodology to study diff erences between internal and external members on the Bank of England's Monetary Policy Committee. Using a variety of proxies for the prior, we provide evidence that they di ffer significantly on both dimensions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1063.pdf

A Step towards Valuing Utility the Marginal and Cardinal Way

Paul Dolan Daniel Fujiwara Robert Metcalfe

CEPDP1062. July 2011.Income has a direct impact on our utility as well as an indirect impact through the goods, services and life events it allows us to purchase. The indirect effect of income is not properly accounted for in existing research that uses measures of cardinal utility for economic analysis. We propose a new approach for appropriately attributing the full effects of income on utility and we show the implications of our approach using a longitudinal dataset that contains reports of subjective wellbeing (SWB). We show that income has a much greater effect on SWB when indirect effects are considered. These results have important implications for how we value the marginal benefits of non-market goods and we explore some of these issues in the paper

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1062.pdf

Autoregressions in Small Samples, Priors about Observables and Initial Conditions

Marek Jarocinski Albert Marcet

CEPDP1061. July 2011.We propose a benchmark prior for the estimation of vector autoregressions: a prior about initial growth rates of the modelled series. We first show that the Bayesian vs frequentist small sample bias controversy is driven by different default initial conditions. These initial conditions are usually arbitrary and our prior serves to replace them in an intuitive way. To implement this prior we develop a technique for translating priors about observables into priors about parameters. We find that our prior makes a big difference for the estimated persistence of output responses to monetary policy shocks in the United States.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1061.pdf

Leveraging Monopoly Power by Degrading Interoperability: Theory and Evidence from Computer Markets

Christos Genakos Kai Uwe Kühn John Van Reenen

CEPDP1060. July 2011.When will a monopolist have incentives to foreclose a complementary market by degrading compatibility/interoperability of his products with those of rivals? We develop a framework where leveraging extracts more rents from the monopoly market by “restoring” second degree price discrimination. In a random coefficient model with complements we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft’s strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system which allows for complements (PCs and servers). Our estimates suggest that there were incentives to reduce interoperability which were particularly strong at the turn of the 21st Century.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1060.pdf

Booms and Busts in Asset Prices

Klaus Adam Albert Marcet

CEPDP1059. July 2011.We show how low-frequency boom and bust cycles in asset prices can emerge from Bayesian learning by investors. Investors rationally maximize infinite horizon utility but hold subjective priors about the asset return process that we allow to differ infinitesimally from the rational expectations prior. Bayesian updating of return beliefs then gives rise to selfreinforcing return optimism that results in an asset price boom. The boom endogenously comes to an end because return optimism causes investors to make optimistic plans about future consumption. The latter reduces the demand for assets that allow to intertemporally transfer resources. Once returns fall short of expectations, investors revise return expectations downward and set in motion a self-reinforcing price bust. In line with available survey data, the learning model predicts return optimism to comove positively with market valuation. In addition, the learning model replicates the low frequency behavior of the U.S. price dividend ratio over the period 1926-2006.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1059.pdf

The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment

Michael W. L. Elsby Jennifer C. Smith Jonathan Wadsworth

CEPDP1058. July 2011.Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this variation. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased jobfinding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1058.pdf

Incomplete Contracts and the Impact of Globalization on Consumer Welfare

Fabrice Defever

CEPDP1057. July 2011.We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier's component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less componentintensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1057.pdf

The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited

Fadi Hassan

CEPDP1056. June 2011.It is conventional wisdom that richer countries have a higher price level than poorer countries. This paper provides evidence that the price-income relationship is non-linear and that it turns negative, or at best flat, in low income countries. The result is robust along both cross-section and time-series dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1056.pdf

Recursive Contracts

Albert Marcet Ramon Marimon

CEPDP1055. June 2011.We obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization (sup) problems non recursive. Our approach consists of studying a recursive Lagrangian. Under standard general conditions, there is a recursive saddle-point (infsup) functional equation (analogous to a Bellman equation) that characterizes the recursive solution to the planner's problem and forward-looking constraints. Our approach has been applied to a large class of dynamic contractual problems, such as contracts with limited enforcement, optimal policy design with implementability constraints, and dynamic political economy models.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1055.pdf

Success and Failure of African Exporters

Olivier Cadot Leonardo Iacovone Denisse Pierola Ferdinand Rauch

CEPDP1054. June 2011.Using a novel dataset with transactions level exports data from four African countries (Malawi, Mali, Senegal and Tanzania), this paper uncovers evidence of a high degree of experimentation at the extensive margin associated with low survival rates, consistent with high and middle income country evidence. Consequently, the authors focus on the questions of what determines success and survival beyond the first year and find that survival probability rises with the number of firms exporting the same product to the same destination from the same country, pointing towards the existence of crossfirm synergies. Accordingly the evidence is consistent with the hypothesis that those synergies may be driven by information spillovers. More intuitively and consistently with multi-product firms models, the analysis also finds that firms more diversified in terms of products, but even more in terms of markets, are more likely to be successful and survive beyond the first year.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1054.pdf

Gender, Productivity and the Nature of Work and Pay: Evidence from the Late Nineteenth-Century Tobacco Industry

Björn Eriksson Tobias Karlsson Tim Leunig Maria Stanfors

CEPDP1053. June 2011.Women have, on average, been less well-paid than men throughout history. Prior to 1900, most economic historians see the gender wage gap as a reflection of men’s greater strength and correspondingly higher productivity. This paper investigates the gender wage gap in cigar making around 1900. Strength was rarely an issue, but the gender wage gap was large. Two findings suggest that employers were not sexist. First, differences in earnings by gender for workers paid piece rates can be fully explained by differences in experience and other productivity-related characteristics. Second, conditioning on those characteristics, women were just as likely to be promoted to the better paying piece rate section. Neither finding is compatible with a simple model of sex-based discrimination. Instead, the gender wage gap can be decomposed into two components. First, women were typically less experienced, in an industry in which experience mattered. Second there were some jobs that required strength, for which men were better suited. Because strength was so valuable in the other jobs at this time, men commanded a wage premium in the general labour market, raising their reservation wage. Hiring a man required the firm to pay a ‘man’s wage’. This implies that firms that were slow to feminise their time rate workforce ended up with a higher cost structure than those that made the transition more quickly. We show that firms with a higher proportion of women in their workforce in 1863 were indeed more likely to survive 35 years later.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1053.pdf

The Impact of Chernobyl on Health and Labour Market Performance

Hartmut Lehmann Jonathan Wadsworth

CEPDP1052. May 2011.Using longitudinal data from Ukraine we examine the extent of any long-lasting effects of radiation exposure from the Chernobyl disaster on the health and labour market performance of the adult workforce. The variation in the local area level of radiation fallout from the Chernobyl accident is considered as a random exogenous shock with which to try to establish its causal impact on poor health, labour force participation, hours worked and wages. There appears to be a significant positive association between local area-level radiation dosage and perception of poor health, though much weaker associations between local area-level dosage and other specific self-reported health conditions. There is also some evidence to suggest that those more exposed to Chernobyl-induced radiation have significantly lower levels of labour market performance twenty years on.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1052.pdf

Money and Happiness: Evidence from the Industry Wage Structure

Jörn-Steffen Pischke

CEPDP1051. May 2011.There is a well-established positive correlation between life-satisfaction measures and income in individual level cross-sectional data. This paper attempts to provide some evidence on whether this correlation reflects causality running from money to happiness. I use industry wage differentials as instruments for income. This is based on the idea that at least part of these differentials is due to rents, and part of the pattern of industry affiliations of individuals is random. To probe the validity of these assumptions, I compare estimates for life satisfaction with those for job satisfaction, present fixed effects estimates, and present estimates for married women using their husbands’ industry as the instrument. All these specifications paint a fairly uniform picture across three different data sets. IV estimates are similar to the OLS estimates suggesting that most of the association of income and well-being is causal.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1051.pdf

Spinning Welfare: the Gains from Process Innovation in Cotton and Car Production

Tim Leunig Joachim Voth

CEPDP1050. May 2011.Economists and economic historians want to know how much better life is today than in the past. Fifty years ago economic historians found surprisingly small gains from 19th century US railroads, while more recently economists have found relatively large gains from electricity, computers and cell phones. In each case the implicit or explicit assumption is that researchers were measuring the value of a new good to society. In this paper we use the same techniques to find the value to society of making existing goods cheaper. Henry Ford did not invent the car, and the inventors of mechanised cotton spinning in the industrial revolution invented no new product. But both made existing products dramatically cheaper, bringing them into the reach of many more consumers. That in turn has potentially large welfare effects. We find that the consumer surplus of Henry Ford’s production line was around 2% by 1923, 15 years after Ford began to implement the moving assembly line, while the mechanisation of cotton spinning was worth around 6% by 1820, 34 years after its initial invention. Both are large: of the same order of magnitude as consumer expenditure on these items, and as large or larger than the value of the internet to consumers. On the social savings measure traditionally used by economic historians, these process innovations were worth 15% and 18% respectively, making them more important than railroads. Our results remind us that process innovations can be at least as important for welfare and productivity as the invention of new products.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1050.pdf

Crime and Mental Wellbeing

Francesca Cornaglia Andrew Leigh

CEPDP1049. April 2011.Most estimates of the cost of crime focus on victims. Yet it is plausible that an even larger cost of crime occurs via its indirect impact on the mental wellbeing of non-victims. To test how crime affects individuals’ mental outcomes, we exploit detailed panel data on mental wellbeing, allowing us to observe the relationship between changes in crime in a local area and changes in the mental wellbeing of resident non-victims in that area (controlling for changes in local economic conditions). Our results suggest that increases in crime rates have a negative impact on the mental wellbeing of residents, with the biggest impacts arising from violent crime. We also find that local press coverage of criminal activity enhances the effect of crime on mental well-being.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1049.pdf

Portfolio Allocation and International Risk Sharing

Gianluca Benigno Hande Küçük-Tuger

CEPDP1048. April 2011.Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/cepdp1048.pdf

Priors and Desires

Guy Mayraz

CEPDP1047. March 2011.This paper offers a simple but powerful model of wishful thinking, cognitive dissonance, and related biases. Choices maximize subjective expected utility, but beliefs depend on the decision maker's interests as well as on relevant information. Simplifying assumptions yield a representation in which the payoff in an event affects beliefs as if it were part of the evidence about its likelihood. A single parameter determines both the direction and weight of this `evidence', with positive values corresponding to optimism and negative values to pessimism. Changes to a person's interests amount to new `evidence', and can alter beliefs even in the absence of new information. The magnitude of the bias increases with the degree of uncertainty and the strength of the decision maker's interests. High stakes can reduce the bias indirectly by increasing incentives to acquire information, but are otherwise consistent with substantial bias. Exploring applications, I show that wishful thinking can lead investors to become progressively more exposed to risk, and that while improved policing unambiguously deters crime, increased punishment may have little or no deterrent value.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1047.pdf

Does High Involvement Management Lead to Higher Pay?

Alex Bryson Petri Böckerman Pekka Ilmakunnas

CEPDP1046. February 2011.Using nationally representative survey data for Finnish employees linked to register data on their wages and work histories we find wage effects of high involvement management (HIM) practices are generally positive and significant. However, employees with better wage and work histories are more likely to enter HIM jobs. The wage premium falls substantially having accounted for employees’ work histories suggesting that existing studies’ estimates are upwardly biased due to positive selection into HIM. Results do not differ significantly when using propensity score matching as opposed to standard regression techniques. The premium rises with the number of HIM practices and differs markedly across different types of HIM practice.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1046.pdf

Seesaw in the Air: Interconnection Regulation and the Structure of Mobile Tariffs

Christos Genakos Tommaso Valletti

CEPDP1045. February 2011.Interconnection rates are a key variable in telecommunications markets. Every call that is placed must be terminated by the network of the receiving party, thus the termination end has the characteristic of an economic bottleneck and is subject to regulation in many countries. This paper examines the impact of regulatory intervention to cut termination rates of calls to mobile phones. We argue that regulatory cuts should have a differential impact according to the type of tariff the mobile customer subscribes to. While all mobile customers may pay higher prices because of a “waterbed” effect, termination rates also affect competition among mobile operators. We show that the waterbed effect is diluted, but not eliminated, for customers with pre-paid cards, where regulation also acts as impediment to “raise-each-other’s-cost” collusive strategies that mobile networks can adopt. The waterbed effect is instead strongest for consumers with monthly (post-paid) subscription contracts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1045.pdf

Managers' Mobility, Trade Status and Wages

Giordano Mion Luca David Opromolla

CEPDP1044. February 2011.This paper investigates whether the arrival of managers with export experience, i.e. experience acquired through participation in the export activity of previous employers, is related to firms' international trade status and to what extent this relationship is of a causal nature. We construct a worker-firm matched panel dataset which enables us to track managers across different firms over time and observe firms' trading stance as well as a large set of workers' and firms' characteristics. Contrary to blue and white collars, we find that managers are paid a sizeable premium for export experience which has both a level and a trend component. Conditioning for the firm past trade status, we find that a one standard deviation increase in the firm's share of managers' with export experience corresponds to about 35% more chances of starting to export. The impact is stronger for larger firms and is roughly of the same order of magnitude of the firm productivity effect. On the contrary, export experience acquired by managers from previous employers positively affects the capacity to keep exporting in small firms only. To give a causality flavor to our findings, we use in a final step an IV strategy that mimics a random matching between managers with export experience and firms. IV estimations indicate that export experience matters even more for entry while it has no effect on exit.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1044.pdf

Immigration and the Occupational Choice of Natives: A Factor Proportions Approach

Javier Ortega Gregory Verdugo

CEPDP1043. January 2011.This paper evaluates the impact of immigration on the labor market outcomes of natives in France over the period 1962-1999. Combining large (up to 25%) extracts from six censuses and data from Labor Force Surveys, we exploit the variation in the immigrant share across education/experience cells and over time to identify the impact of immigration. In the Borjas (2003) specification, we find that a 10% increase in immigration increases native wages by 3%. However, as the number of immigrants and the number of natives are positively and strongly correlated across cells, the immigrant share may not be a good measure of the immigration shock. When the log of natives and the log of immigrants are used as regressors instead, the impact of immigration on natives’ wages is still positive but much smaller, and natives’ wages are negatively related to the number of natives. To understand this asymmetry and the positive impact of immigration on wages, we explore the link between immigration and the occupational distribution of natives within education/ experience cells. Our results suggest that immigration leads to the reallocation of natives to better-paid occupations within education/experience cells.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1043.pdf

Does Management Matter? Evidence from India

Nicholas Bloom Benn Eifert Aprajit Mahajan David McKenzie John Roberts

CEPDP1042. January 2011.A long-standing question in social science is to what extent differences in management cause differences in firm performance. To investigate this we ran a management field experiment on large Indian textile firms. We provided free consulting on modern management practices to a randomly chosen set of treatment plants and compared their performance to the control plants. We find that adopting these management practices had three main effects. First, it raised average productivity by 11% through improved quality and efficiency and reduced inventory. Second, it increased decentralization of decision making, as better information flow enabled owners to delegate more decisions to middle managers. Third, it increased the use of computers, necessitated by the data collection and analysis involved in modern management. Since these practices were profitable this raises the question of why firms had not adopted these before. Our results suggest that informational barriers were a primary factor in explaining this lack of adoption. Modern management is a technology that diffuses slowly between firms, with many Indian firms initially unaware of its existence or impact. Since competition was limited by constraints on firm entry and growth, badly managed firms were not rapidly driven from the market.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1042.pdf

Did Vietnam Veterans Get Sicker in the 1990s? The Complicated Effects of Military Service on Self-Reported Health

Joshua D. Angrist Stacey H. Chen Brigham R. Frandsen

CEPDP1041. December 2010.The veterans disability compensation (VDC) program, which provides a monthly stipend to disabled veterans, is the third largest American disability insurance program. Since the late 1990s, VDC growth has been driven primarily by an increase in claims from Vietnam veterans, raising concerns about costs as well as health. We use the draft lottery to study the long-term effects of Vietnam-era military service on health and work in the 2000 Census. These estimates show no significant overall effects on employment or work-related disability status, with a small effect on non-work-related disability for whites. On the other hand, estimates for white men with low earnings potential show a large negative impact on employment and a marked increase in non-work-related disability rates. The differential impact of Vietnam-era service on low-skill men cannot be explained by more combat or wartheatre exposure for the least educated, leaving the relative attractiveness of VDC for less skilled men and the work disincentives embedded in the VDC system as a likely explanation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1041.pdf

Anatomy of a Paradox: Management Practices, Organisational Structure and Energy Efficiency

Ralf Martin Mirabelle Muûls Ulrich J. Wagner Laure B. de Preux

CEPDP1039. December 2010.This paper presents new evidence on managerial and organizational factors that explain firm level energy efficiency and TFP. We interviewed managers of 190 randomly selected manufacturing plants in the UK and matched their responses with official business microdata. We find that ‘climate friendly’ management practices are associated with lower energy intensity and higher TFP. Firms that adopt more such practices also engage in more R&D related to climate change. We show that the variation in management practices across firms can be explained in part by organizational structure. Firms are more likely to adopt climate friendly management practices if climate change issues are managed by the environmental or energy manager, and if this manager is close to the CEO. Our results support the view that the “energy efficiency paradox” can be explained by managerial factors and highlight their importance for private-sector innovation that will sustain future growth in energy efficiency.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1039.pdf

Import Competition from and Outsourcing to China: A Curse or Blessing for Firms?

Giordano Mion Linke Zhu

CEPDP1038. December 2010.We use Belgian manufacturing firm-level data over the period 1996- 2007 to analyze the impact of imports from different origins on firm growth, exit, and skill upgrading. For this purpose we use both industry-level and firm-level imports by country of origin and distinguish between firm-level outsourcing of final versus intermediate goods. Results indicate that China is different from both other low-wage and OECD countries. Industry-level import competition and firm-level outsourcing to China reduce firm employment growth and induce skill upgrading. In contrast, industry-level imports have no effect on Belgian firm survival, while firm-level outsourcing of finished goods to China even increased firm's probability of survival. In terms of skill upgrading, the effect of Chinese imports is large. Import competition from China accounts for 42% (20%) of the within firm increase in the share of skilled workers (non-production workers) in Belgian manufacturing over the peri od of our analysis, but these effects, as well as the employment reducing effect, remain mainly in low-tech industries. Firm-level outsourcing to China further accounts for a small but significant increase in the share of non-production workers. This change in employment structure is in line with predictions of recent model of trade-induced technological change and offshoring.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1038.pdf

Individualisation and Growing Diversity of Employment Relationships

William Brown David Marsden

CEPDP1037. December 2010.At a time when the economic recession is more severe, and trade unions are weaker, than at any time since the War, it would be unproductive to speculate about the extent to which these changes have been imposed, acquiesced, or agreed by the workers concerned. Instead we focus on recent changes in employment relationships in Britain, and their consequences, and then on the winners and losers, which provides a cue for considering the longer term desirability of some of these developments for social justice and cohesion.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1037.pdf

Does Competition Raise Productivity Through Improving Management Quality?

John Van Reenen

CEPDP1036. December 2010.A classic question in industrial organization is whether competition raises productivity and if so, through what mechanism? I discuss recent empirical evidence from both large-scale databases and specific industries which suggests that tougher competition does indeed raise productivity and one of the main mechanisms is through improving management practices. To establish this, I report on new research seeking to quantify management. I relate this to theoretical perspectives on the economics of competition and management, arguing that management should be seen at least in part as a transferable technology. A range of recent econometric studies suggest that (i) competition increases management quality and (ii) improved management quality boosts productivity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1036.pdf

School Proximity and Child Labor Evidence from Rurul Tanzania

Florence Kondylis Marco Manacorda

CEPDP1035. December 2010.Is improved school accessibility an effective policy tool for reducing child labor in developing countries? We address this question using micro data from rural Tanzania and a regression strategy that attempts to control for non-random location of households around schools as well as classical and non-classical measurement error in self-reported distance to school. Consistent with a simple model of child labor supply, but contrary to what appears to be a widespread perception, our analysis shows that school proximity leads to a rise in school attendance but no fall in child labor.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1035.pdf

Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching

Lars Boerner Albrecht Ritschl

CEPDP1034. December 2010.Communal responsibility, a medieval institution studied by Greif (2006), supported the use of credit among European merchants in the absence of modern enforcement technologies. This paper shows how this mechanism helps to overcome enforcement problems in anonymous buyer/seller transactions. In a village economy version of the Lagos and Wright (2005) model, agents trading anonymously in decentralized markets can be identified by their citizenship and thus be held liable for each other. Enforceability within each village's centralized afternoon market ensures collateralization of credit in decentralized markets. In the resulting equilibrium, money and credit coexist in decentralized markets if the use of credit is costly. Our analysis easily extends itself to other payment systems like credit cards that provide a group identity to otherwise anonymous agents.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1034.pdf

Second-Order Approximation of Dynamic Models with Time-Varying Risk

Gianluca Benigno Pierpaolo Benigno Salvatore Nisticò

CEPDP1033. December 2010.This paper provides first and second-order approximation methods for the solution of nonlinear dynamic stochastic models in which the exogenous state variables follow conditionally-linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally-linear model in which risk is still timevarying but has no distinct role - separated from the primitive stochastic disturbances - in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1033.pdf

Financial Crises and Macro-Prudential Policies

Gianluca Benigno Huigang Chen Christopher Otrok Alessandro Rebucci Eric R. Young

CEPDP1032. December 2010.Stochastic general equilibrium models of small open economies with occasionally binding financial frictions are capable of mimicking both the business cycles and the crisis events associated with the sudden stop in access to credit markets (Mendoza, 2010). In this paper we study the inefficiencies associated with borrowing decisions in a two-sector small open production economy. We find that this economy is much more likely to display "under-borrowing" rather than "over-borrowing" in normal times. As a result, macro-prudential policies (i.e. Tobin taxes or economy-wide controls on capital inflows) are costly in welfare terms in our economy. Moreover, we show that macro-prudential policies aimed at minimizing the probability of the crisis event might be welfare-reducing in production economies. Our analysis shows that there is a much larger scope for welfare gains from policy interventions during financial crises. That is to say that, within our modeling approach, ex post or crisis-management policies dominate ex ante or macro-prudential ones.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1032.pdf

International Trade Without CES: Estimating Translog Gravity

Dennis Novy

CEPDP1031. December 2010.This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country’s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1031.pdf

The Evolution of the Modern Worker: Attitudes to Work

Alex Bryson John Forth

CEPDP1030. December 2010.This paper examines how employees’ experiences of, and attitudes towards, work have changed over the last quarter of a century. It assesses the extent to which any developments relate to the economic cycle and to trends in the composition of the British workforce. Many of the findings are broadly positive, particularly when compared with a picture of deterioration in the late 1980s and 1990s. The onset of a major recession in the late 2000s might have been expected to herald a fundamental shift in employees’ attitudes to paid work and their working environment. The impression at the time of writing is, instead, of a more muted reaction than was seen in the early 1990s – in keeping with the more muted impact of the current recession on the labour market as a whole.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1030.pdf

The Spatial Organization of Multinational Firms

Fabrice Defever

CEPDP1029. December 2010.Using six years of firm-level data covering 224 regions of the enlarged European Union, we evaluate the importance to a firm of locating its activities (production, headquarters, R&D, logistics and sales) close together. We find that, after controlling for regional characteristics, being closely located to a previous investment positively affects firm location choice. However, the impact of distance is dependent on the type of investment (production or service). While within-firm co-location is important for both service and production activities, only production plants are likely to be located close to prior production investments. In this latter case, national borders have a surprisingly positive effect, increasing the probability of choosing a nearby location, but on the other side of the border.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1029.pdf

Trade and Labor Market Outcomes

Elhanan Helpman Oleg Itskhoki Stephen Redding

CEPDP1028. December 2010.This paper reviews a new framework for analyzing the interrelationship between inequality, unemployment, labor market frictions, and foreign trade. This framework emphasizes firm heterogeneity and search and matching frictions in labor markets. It implies that the opening of trade may raise inequality and unemployment, but always raises welfare. Unilateral reductions in labor market frictions increase a country’s welfare, can raise or reduce its unemployment rate, yet always hurt the country’s trade partner. Unemployment benefits can alleviate the distortions in a country’s labor market in some cases but not in others, but they can never implement the constrained Pareto optimal allocation. We characterize the set of optimal policies, which require interventions in product and labor markets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1028.pdf

Long Term Implications of the ICT Revolution: Applying the Lessons of Growth Theory and Growth Accounting

Nicholas Oulton

CEPDP1027. November 2010.How big a boost to long run growth can countries expect from the ICT revolution? I use the results of growth accounting and the insights from a two-sector growth model to answer this question. The use of a two-sector rather than a one-sector model is required because of the very rapid rate at which the prices of ICT products have fallen in the past and are expected to fall in the future. According to the two-sector model, the main boost to growth comes from ICT use, not ICT production. Even a country which has zero ICT production can benefit via improving terms of trade. In the long run, the falling relative price of ICT products boosts the growth of GDP and consumption by inducing faster accumulation of ICT capital. I quantify this effect on the long run growth rate of 15 European and 4 non-European countries, using data from the EU KLEMS database. The ICT intensity of production (the ICT income share) is much lower in many European countries than it is in the United States or Sweden. Nevertheless the contribution to the long run growth of labour productivity stemming from even the current levels of ICT intensity is substantial: about half a percent per annum on average in the countries studied here. Eventually, the ICT revolution may diffuse more widely so ICT intensity may reach at least the same level as currently in the U.S. or Sweden, which would add a further 0.2 percentage points per annum to long run growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1027.pdf

Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions

Maarten Goos Alan Manning Anna Salomons

CEPDP1026. November 2010.This paper shows the employment structure of 16 European countries has been polarizing in recent years with the employment shares of managers, professionals and low-paid personal services workers increasing at the expense of the employment shares of middling manufacturing and routine office workers. To explain this job polarization, the paper develops and estimates a simple model to capture the effects of technology, globalization, institutions and product demand effects on the demand for different occupations. The results suggest that the routinization hypothesis of Autor, Levy and Murnane (2003) is the single most important factor behind the observed shifts in employment structure. We find some evidence for offshoring to explain job polarization although its impact is much smaller. We also find that shifts in product demand are acting to attenuate the polarizing impact of routinization and that differences or changes in wage-setting institutions play little role in explaining job polarization in Europe.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1026.pdf

The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment

David H. Autor Alan Manning Christopher L. Smith

CEPDP1025. November 2010.We reassess the effect of state and federal minimum wages on U.S. earnings inequality, attending to two issues that appear to bias earlier work: violation of the assumed independence of state wage levels and state wage dispersion, and errors-in-variables that inflate impact estimates via an analogue of the well known division bias problem. We find that the minimum wage reduces inequality in the lower tail of the wage distribution (the 50/10 wage ratio), but the impacts are typically less than half as large as those reported in the literature and are almost negligible for males. Nevertheless, the estimated effects extend to wage percentiles where the minimum is nominally non-binding, implying spillovers. We structurally estimate these spillovers and show that their relative importance grows as the nominal minimum wage becomes less binding. Subsequent analysis underscores, however, that spillovers and measurement error (absent spillovers) have similar implications for the effect of the minimum on the shape of the lower tail of the measured wage distribution. With available precision, we cannot reject the hypothesis that estimated spillovers to non-binding percentiles are due to reporting artifacts. Accepting this null, the implied effect of the minimum wage on the actual wage distribution is smaller than the effect of the minimum wage on the measured wage distribution.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1025.pdf

Do Matching Frictions Explain Unemployment? Not in Bad Times

Pascal Michaillat

CEPDP1024. November 2010.This paper models unemployment as the result of matching frictions and job rationing. Job rationing is a shortage of jobs arising naturally in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor. During recessions, job rationing is acute, driving the rise in unemployment, whereas matching frictions contribute little to unemployment. Intuitively, in recessions jobs are lacking, the labor market is slack, recruiting is easy and inexpensive, so matching frictions do not matter much. In a calibrated model, cyclical fluctuations in the composition of unemployment are quantitatively large.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1024.pdf

Bank Bailouts, International Linkages and Cooperation

Friederike Niepmann Tim Schmidt-Eisenlohr

CEPDP1023. November 2010.Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, no burden sharing and free-riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1023.pdf

Monetary Policy Rules and Foreign Currency Positions

Bianca De Paoli Hande Küçük-Tuger Jens Søndergaard

CEPDP1022. November 2010.Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation targeting regimes are associated with a short position in foreign currency, while the opposite is true for noninflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilization).

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1022.pdf

Is the WTO Article XXIV Bad?

Monika Mrázová David Vines Ben Zissimos

CEPDP1021. November 2010.This paper shows that the WTO's Article XXIV increases the likelihood of free trade, but may worsen world welfare when free trade is not reached and customs unions (CUs) form. We consider a model of many countries. Article XXIV prevents a CU from raising its common external tariff, which makes CU formation less attractive and explains why free trade is more likely. In an equilibrium where two CUs do form, one is necessarily larger than the other. We show that Article XXIV has a 'composition effect' on CU formation, whereby CUs are (endogenously) more symmetric in size so more goods are subject to tariff distortions as they move between CUs; thus Article XXIV may be 'bad' for world welfare.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1021.pdf

Revisiting Overborrowing and Its Policy Implications

Gianluca Benigno Huigang Chen Chris Otrok Alessandro Rebucci Eric Young

CEPDP1020. October 2010.This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a robust feature of this class of model economies: it depends on the structure of the economy and its parametrization. Specifically, we find underborrowing in a production economy with our baseline calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment economies display overborrowing regardless of parameter values, but they do not allow for policy intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from implementing the constrained-efficient allocation are always larger near crisis times than in normal ones. In production economies, they are one order of magnitude larger than in endowment economies both i n crisis and normal times. This suggests that the scope for economy-wide macro-prudential policy interventions (e.g. prudential taxation of capital flows and capital controls) is weak in this class of models.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1020.pdf

Do Salaries Improve Worker Performance?

Alex Bryson Babatunde Buraimo Rob Simmons

CEPDP1019. October 2010.We establish the effects of salaries on worker performance by exploiting a natural experiment in which some workers in a particular occupation (football referees) switch from short-term contracts to salaried contracts. Worker performance improves among those who move onto salaried contracts relative to those who do not. The finding is robust to the introduction of worker fixed effects indicating that it is not driven by better workers being awarded salary contracts. Nor is it sensitive to workers sorting into or out of the profession. Improved performance could arise from the additional effort workers exert due to career concerns, the higher income associated with career contracts (an efficiency wage effect) or improvements in worker quality arising from off-the-job training which accompanies the salaried contracts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1019.pdf

The Impact of Asymmetric Information Among Competing Insurgent Groups: Estimating an 'Emboldenment' Effect

Radha Iyengar

CEPDP1018. October 2010.This paper uses asymmetric access to information to test if an insurgency is factionalized. If it is factionalized, regional variation in information should influence attack levels as groups use violence to compete over visibility, resources and support. Using plausibly exogenous variation in satellite access, we show that attacks increased after the release of information on satellite television about US commitment to remain in Iraq. Because insurgents shift attacks toward more difficult (military) targets, the relative increase in attacks is offset by fewer total fatalities. Our findings illustrate that insurgent groups may be decentralized strategic actors subject to competitive forces.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1018.pdf

I'd Rather be Hanged for a Sheep than a Lamb The Unintended Consequences of 'Three-Strikes' Laws

Radha Iyengar

CEPDP1017. October 2010.Strong sentences are common “tough on crime” tool used to reduce the incentives for individuals to participate in criminal activity. However, the design of such policies often ignores other margins along which individuals interested in participating in crime may adjust. I use California’s Three Strikes law to identify several effects of a large increase in the penalty for a broad set of crimes. Using criminal records data, I estimate that Three Strikes reduced participation in criminal activity by 20 percent for second-strike eligible offenders and a 28 percent decline for third-strike eligible offenders. However, I find two unintended consequences of the law. First, because Three Strikes flattened the penalty gradient with respect to severity, criminals were more likely to commit more violent crimes. Among thirdstrike eligible offenders, the probability of committing violent crimes increased by 9 percentage points. Second, because California’s law was more harsh than the laws of other nearby states, Three Strikes had a “beggar-thy-neighbor” effect increasing the migration of criminals with second and third-strike eligibility to commit crimes in neighboring states. The high cost of incarceration combined with the high cost of violent crime relative to non-violent crime implies that Three Strikes may not be a cost-effective means of reducing crime.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1017.pdf

How Big (Small?) are Fiscal Multipliers?

Ethan Ilzetzki Enrique G. Mendoza Carlos A. Végh

CEPDP1016. October 2010.We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1016.pdf

Heterogeneous Worker Ability and Team-Based Production: Evidence from Major League Baseball, 1920-2009

Alex Bryson Rafael Gomez Kerry L. Papps

CEPDP1015. October 2010.A detailed longitudinal dataset is assembled containing annual performance and biographical data for every player over the entire history of professional major league baseball. The data are then aggregated to the team level for the period 1920-2009 in order to test whether teams built on a more even distribution of observed talent perform better than those teams with a mixture of highly able and less able players. The dependent variable used in the regressions is the percentage of games a team wins each season. We find that conditioning on average player ability, dispersion of both batting and pitching talent displays an optimal degree of inequality, in that teams with too high or too low a spread in player ability perform worse than teams with a more balanced distribution of offensive and defensive talent. These findings have potentially important applications both inside and outside of the sporting world.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1015.pdf

Adjusting to Capital Account Liberalization

Kosuke Aoki Gianluca Benigno Nobuhiro Kiyotaki

CEPDP1014. October 2010.We study theoretically how the adjustment to liberalization of international financial transaction depends upon the degree of domestic financial development. Using a model with domestic and international borrowing constraints, we show that, when the domestic financial system is underdeveloped, capital account liberalization is not necessarily beneficial because TFP stagnates in the long-run or employment decreases in the short-run. Government policy, including allowing foreign direct investment, can mitigate the possible loss of employment, but cannot eliminate it unless the domestic financial system is improved.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1014.pdf

A Task-Based Approach to Organization: Knowledge, Communication and Structure

Luis Garicano Yanhui Wu

CEPDP1013. October 2010.We bridge a gap between organizational economics and strategy research by developing a task-based approach to analyze organizational knowledge, process and structure, and deriving testable implications for the relation between production and organizational structure. We argue that organization emerges to integrate disperse knowledge and to coordinate talent in production and is designed to complement the limitations of human ability. The complexity of the tasks undertaken determines the optimal level of knowledge acquisition and talent. The relations between tasks, namely, complementarities or substitutabilities and synergies, determine the allocation of knowledge among members of the organization. Communication shapes the relation between individual talent, and governs the organizational process and structure that integrates disperse knowledge to perform tasks more efficiently. Organization structure can also be deliberately designed ex ante to correct bias of individual judgement, the extent to which is dependent on the attributes of tasks. Organization process and the routinized organizational structure are the core of organizational capital, which generates rent and sustains organizational growth. This task-based approach enriches the existing body of organization studies, in particular the knowledge-based theory of the firm and the dynamic capabilities theory.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1013.pdf

Police and Thieves in the Stadium: Measuring the (Multiple)Effects of Football Matches on Crime

Olivier Marie

CEPDP1012. October 2010.During large sporting events criminal behaviour may be affected via three main channels: (i) fan concentration, (ii) self incapacitation, and (iii) police displacement. In this paper I exploit information on football (soccer) matches for nine London teams linked to detailed recorded crime data at the area level to empirically estimate these different effects. My findings show that only property crime significantly increases in the communities hosting football matches but that they experience no changes in violent offences. These results are robust to controlling for a large number of game type and outcome characteristics. There is no evidence of temporal displacement of criminal activity. Our conceptual model suggests that the away game attendance effect on crime is due to voluntary incapacitation of potential offenders. I argue that the police displacement effect of hosting a match increases property crime by 7 percentage point for every extra 10,000 supporters.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1012.pdf

Do Higher Wages Come at a Price?

Erling Barth Alex Bryson Harald Dale-Olsen

CEPDP1011. October 2010.Using linked employer-employee data for Britain we find job satisfaction and job anxiety are negatively correlated but higher wages are associated with higher job satisfaction and higher job anxiety. However, we observe a positive association between higher wages and non-pecuniary job satisfaction, which disappears with the inclusion of our effort measures. Thus high effort levels provide high levels of non-pecuniary job satisfaction and higher wages, in contrast to what compensating wage differentials predicts. On the other hand, the positive association between wages and pay satisfaction and the positive association between wages and job anxiety are both robust to the inclusion of our effort measures and rich job controls. Mean wages of co-workers are positively associated with pay satisfaction but there is no significant association with non-pecuniary job satisfaction or job anxiety. Thus there is a positive spill-over to workers from being in a high-wage workplace and there is no support for the proposition that within-workplace wage differentials are a source of job anxiety.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1011.pdf

Discussion Sessions Coupled with Microfinancing May Enhance the Roles of Women in Household Decision-Making in Burundi

Giulia Ferrari Radha Iyengar

CEPDP1010. October 2010.The empowerment of women within households remains a major issue around the world including in Africa. We have conducted a study in Burundi coupling discussion sessions with microfinancing to determine if they enhance the role of women in decisions regarding household purchases and the reduction of domestic violence. We compare our findings to that from a published study in South Africa that combined discussion sessions on life skills and health on reduction in domestic violence and decisions on economic issues. Both studies used randomized controlled experiments. Both studies show a trend towards increases in household authority, with the Burundi study showing statistical significance. In South Africa there was a large, albeit short lived decrease in domestic violence. In Burundi there was small reduction but trend suggest a longer duration. The effects on overall empowerment are small. These studies suggest that a more sustained use of discussion sessions could be beneficial. Future research could focus on the longer term effects of the use of discussion sessions and investigate how the observed impacts can be sustained in magnitude and duration.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1010.pdf

Political Competition, Policy and Growth: Theory and Evidence from the United States

Timothy Besley Torsten Persson Daniel M. Sturm

CEPDP1009. October 2010.This paper develops a simple model to analyze how a lack of political competition may lead to policies that hinder economic growth. We test the predictions of the model on panel data for the US states. In these data, we find robust evidence that lack of political competition in a state is associated with anti-growth policies: higher taxes, lower capital spending and a reduced likelihood of using right-to-work laws. We also document a strong link between low political competition and low income growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1009.pdf

Industrial Structure and Child Labor: Evidence from the Brazilian Population Census

Furio Camillo Rosati Marco Manacorda

CEPDP1008. October 2010.This paper uses micro data from the 1980, 1991 and 2000 population censuses to investigate the role of changes in the industry mix in accounting for the differential trends in the incidence of child work (ages 10-15) across Brazilian states. We find that exogenous compositional changes account for around 20% of the observed fall in child employment in rural areas.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1008.pdf

Employment, Inequality and the UK National Minimum Wage over the Medium-Term

Peter Dolton Chiara Rosazza-Bondibene Jonathan Wadsworth

CEPDP1007. October 2010.This paper assesses the impact of the National Minimum Wage (NMW) on employment and inequality in the UK over the decade since its introduction in 1999. Identification is facilitated by using variation in the bite of the NMW across local labour markets and the different sized year on year up ratings of the NMW. We use an 'incremental differences-in-differences' (IDiD) estimator which allows us to estimate the effects of the NMW in each year since its introduction. We find that an increased bite of the NMW is associated with falls in lower tail wage inequality. Moreover, while the average employment effect of the NMW over the entire period is broadly neutral, there are small but significant positive employment estimates from 2003 onward, when the average bite of the NMW was at its highest since its introduction.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1007.pdf

Individual Voice in Employment Relationships: A Comparison Under Different Collective Voice Regimes

David Marsden

CEPDP1006. October 2010.This article examines the relationship between individual and collective employee voice, and management-led voice (appraisal), under contrasted collective voice regimes. In the first, collective workplace voice depends on voluntary recognition by the employer, and in the second, it is based on statutory rights. It is argued that in the first, individual and collective voice act as substitutes, and in the second they act as complements. Management-led voice is also influenced by whether the preceding forms are substitutes or complements. The argument is tested using data from the British and French workplace employment relations surveys for 2004, combining responses from employees and from management. Within country differences are used to aid identification. In conclusion, it finds broad support for the main hypothesis.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1006.pdf

Spreading the Word: Geography, Policy and Knowledge Spillovers

Sharon Belenzon Mark Schankerman

CEPDP1005. September 2010.Using new data on citations to university patents and scientific publications, we study how geography affects university knowledge spillovers. Citations to patents decline sharply with distance up to about 150 miles and are strongly constrained by state borders. Distance also constrains citations to scientific publications, but the impact is less sharp and persists over greater distances. The state border effect for publications is significant only for lower quality public universities. We show that the state border effect is heterogeneous, and is strongly influenced by university and state characteristics and policies. It is larger for public universities and those with strong local development policies. The border effect is larger in states with strong non-compete laws that facilitate intrastate labor mobility, states with greater reliance on in-state educated scientists and engineers, and states with lower rates of interstate scientific labor mobility. We also confirm the impact of non-compete statutes by studying a policy reform in Michigan.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1005.pdf

There Will Be Money

Luis Araujo Bernardo Guimaraes

CEPDP1004. September 2010.A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents’ beliefs and behavior are completely determined by fundamentals.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1004.pdf

Trade Union Membership and Influence 1999-2009

Alex Bryson John Forth

CEPDP1003. September 2010.This paper analyses the continued decline of trade unions in Britain and examines the possible implications for workers, employers, and unions themselves. Membership of trade unions declined precipitously in the 1980s and 1990s. The rate of decline has slowed in the most recent decade, but we find that unions remain vulnerable to further erosion of their membership and influence.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1003.pdf

The Effect of Market Entry on Innovation: Evidence from UK University Incubators

Christian Helmers

CEPDP1002. September 2010.This paper investigates the effect of market entry of new firms on incumbent firms' innovative activity measured as patent applications. The basic assumption is that the effect of entry varies by geographical distance between entrants and incumbents due to the presence of localized unobserved spillovers. In order to avoid endogeneity problems commonly associated with the timing of entry and entrants' location choice, I analyze entry induced by the establishment of university business incubators, which are usefully exogenous in time and space. The results show that entry has a statistically and economically significantly positive strategic effect on incumbent patenting which is attenuated by the geographical distance between entrant and incumbent.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1002.pdf

To Join or Not to Join? Factors Influencing Employee Share Plan Membership in a Multinational Corporation

Alex Bryson Richard Freeman

CEPDP1001. September 2010.Many firms encourage employees to own company stock through share plans that subsidize the price at favorable rates, but even so many employees do not buy shares. Using a new survey of employees in a multinational with a share ownership plan, we find considerable variation in joining among observationally equivalent workers and explore the reasons for the variation. Participation in the plan is higher the greater the potential pay-off from joining the share plan, which indicates that rational economic calculations affect the decision to join. But there is also evidence that psychological factors affect the decision to join. Some nonmembers say they intend to join in the future, which means they forgo the benefits of immediate membership. The proportion of workers who purchase shares varies across workplaces beyond what we predict from worker characteristics. This suggests that coworker behavior influences decisions. Indeed, workers say that they pay most attention to other workers and little attention to company HR management in their decision on joining.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1001.pdf

Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity

Nicholas Bloom Mirko Draca John Van Reenen

CEPDP1000. January 2011.We examine the impact of Chinese import competition on broad measures of technical change - patenting, IT, R&D, TFP and management practices – using new panel data across twelve European countries between 1996-2007. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization. Chinese import competition (1) led to increased technical change within firms; and (2) reallocated employment between firms towards more technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for 15% of European technology upgrading over 2000-2007 (and even higher when allowing for offshoring to China). Rising Chinese import competition also led to falls in employment, profits, prices and the share of unskilled workers. By contrast, import competition from developed countries had no effect on innovation. We develop a simple “trapped factor” model that is consistent with these empirical findings.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp1000.pdf

Trade as an Engine of Creative Destruction: Mexican Experience with Chinese Competition

Leonardo Iacovone Ferdinand Rauch L. Alan Winters

CEPDP0999. September 2010.This paper exploits the surge in Chinese exports from 1994 to 2004 as a natural experiment to evaluate the effects of a unilateral low wage trade and competition shock to producers in Mexico. We find that this shock causes selection at both firm and product levels as its impact is highly heterogeneous both on the intensive and extensive margins. Sales of smaller plants and more marginal products are compressed and are more likely to cease, while larger plants and products exhibit an opposite response. Similar results hold both for the domestic market and for competition facing Mexican exporters in a third market (i.e. the United States).

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0999.pdf

The End of National Models in Employment Relations?

David Marsden

CEPDP0998. September 2010.The erosion of a number of national systems of employment relations, and the evidence from large scale workplace surveys has brought attention to the considerable diversity of employment systems within major economies. This essay applies the theory of evolutionary games to explain the diffusion of different employment systems within national economies, and how they interact with established sectoral and national level institutions. This also helps to explain potential tipping points in their expansion and retreat. Evidence to support the argument is taken from the British and French workplace employment relations surveys and the European Working Conditions Survey.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0998.pdf

Productivity Spreads, Market Power Spreads and Trade

Ralf Martin

CEPDP0997. September 2010.Much of recent Trade theory focuses on heterogeneity of firms and the differential impact trade policy might have on firms with different levels of productivity. A common problem is that most firm level dataset do not contain information on output prices of firms which makes it difficult to distinguish between productivity differences and differences in market power between firms. This paper develops a new econometric framework that allows estimating both firm specific productivity and market power in a semi-parametric way based on a control function approach. The framework is applied to Chilean firm level data from the early 1980, shortly after the country underwent wide ranging trade reforms. The finding is that in all sectors of the economy market power declined and productivity increased. In sectors with higher import penetration productivity particularly at the bottom end of the distribution increased faster. At the same time market power declined particularly so at the top end of the market power distribution. We also show, that ignoring the effect on market power leads to an underestimation of the positive effects of increased import penetration on productivity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0997.pdf

A Map of Mental Health

Rachel Smithies

CEPDP0996. September 2010.This paper provides a comprehensive picture of mental health services in England, including staffing and expenditure, and the number of people in need and the number treated. Historically, this information has been split across sub-sections of the health and social services; and the readily available information often appeared to give inconsistent answers. This paper brings together and interprets the available evidence to provide a single coherent map of mental health need and services, from children to older adults and across both health and social care services, in England.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0996.pdf

Trade Crisis? What Trade Crisis?

Kristian Behrens Gregory Corcos Giordano Mion

CEPDP0995. August 2010.We provide an analysis of the 2008-2009 trade collapse using microdata from a small open economy, Belgium. First, we find that changes in firm-country-product exports and imports occurred mostly at the intensive margin: the number of firms, the average number of destination and origin markets per firm, and the average number of products per market changed only very little. Second, econometric analysis reveals some composition effects in the intensive margin fall along firm, product and country characteristics. The most important factor explaining changes in exports is the destination country's growth rate of GDP. Had growth rates in 2008{2009 been the same as in 2007{2008, Belgian exports would have fallen by about 57% less than what we observe. Trade in consumer durables and capital goods fell more severely than trade in other product categories, which explains another 22% of the observed fall. Financial variables and involvement in global value chains have some explanatory power on the exports and imports fall respectively, but appear to have affected domestic operations in equal proportion. More generally, exports-to-turnover and imports-to-intermediates ratios at the firm level did neither systematically decrease nor reveal strong firm- or sector-specific patterns. Overall, our results point to a demand-side explanation: the fall in trade was mostly driven by the fall in economic activity. It is not a trade crisis | just a trade collapse.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0995.pdf

Theories of Heterogeneous Firms and Trade

Stephen Redding

CEPDP0994. August 2010.This paper reviews the recent theoretical literature on heterogeneous firms and trade, which emphasizes firm selection into international markets and reallocations of resources across firms. We discuss the empirical challenges that motivated this research and its relationship to traditional trade theories. We examine the implications of firm heterogeneity for comparative advantage, market size, aggregate trade, the welfare gains from trade, and the relationship between trade and income distribution. While a number of studies examine the endogenous response of firm productivity to trade liberalization, modelling internal firm organization and the origins of firm heterogeneity remain interesting areas of ongoing research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0994.pdf

Revolving Door Lobbyists

Jordi Blanes i Vidal Mirko Draca Christian Fons-Rosen

CEPDP0993. August 2010.Washington's 'revolving door' - the movement from government service into the lobbying industry- is regarded as a major concern for policy-making. We study how ex-government staffers benefit from the personal connections acquired during their public service. Lobbyists with experience in the office of a US Senator suffer a 24% drop in generated revenue when that Senator leaves office. The effect is immediate, discontinuous around the exit period and long-lasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in revenue is increasing in the seniority of and committee assignments power held by the exiting politician.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0993.pdf

The Impact of the Diffusion of a Financial Innovation on Company Performance: An Analysis of SWIFT Adoption

Susan Scott John Van Reenen Markos Zachariadis

CEPDP0992. August 2010.How does a major financial network innovation influence firm performance? Despite much speculation we have little hard quantitative evidence about the impact of technology diffusion in financial services. In this paper we use the entire adoption history for SWIFT (the Society for Worldwide Interbank Financial Telecommunication - standards provider and messaging carrier) matched to bank-level panel data for the US, Canada and 27 European countries. Our dataset covers almost 7,000 banks (including 1,689 SWIFT adopters) between 1998 and 2005. We find that adoption appears to have large effects on profitability, but it takes several years before any positive return is discernible, consistent with the idea of significant complementarities between new technologies and firm organization. The profitability effect operates by both raising sales and decreasing operating costs and is greater for smaller firms than larger firms. Although the long-run effects are similar, US and UK banks appear to reap the benefits from adoption more quickly than their Continental European counterparts. This is consistent with the idea that the impact of information and communication technologies is stronger in the US than Europe due to lower adjustment costs.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0992.pdf

Spillovers in Space: Does Geography Matter?

Sergey Lychagin Joris Pinkse Margaret E. Slade John Van Reenen

CEPDP0991. August 2010.We simultaneously assess the contributions to productivity of three sources of research and development spillovers: geographic, technology and product– market proximity. To do this, we construct a new measure of geographic proximity that is based on the distribution of a firm’s inventor locations rather than its headquarters, and we report both parametric and semiparametric estimates of our geographic–distance functions. We find that: i) Geographic space matters even after conditioning on horizontal and technological spillovers; ii) Technological proximity matters; iii) Product–market proximity is less important; iv) Locations of researchers are more important than headquarters but both have explanatory power; and v) Geographic markets are very local.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0991.pdf

Towards a New Architecture for Financial Stability: Seven Principles

Luis Garicano Rosa Lastra

CEPDP0990. July 2010.In this paper we use insights from organizational economics and financial regulation to study the optimal architecture of supervision. We suggest that the new architecture should revolve around the following principles: (i) banking, securities and insurance supervision should be further integrated; (ii) macro prudential supervisory function must be in the hands of the central bank; (iii) the relation between macro and micro supervisors must be articulated through a management by exception system involving direct authority of the macro supervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuring output on supervisory tasks, the systemic risk supervisor must necessarily be more accountable and less independent than Central Banks are on their monetary task; (v) the supervisory agency cannot rely on high powered incentives to motivate supervisors, and must rely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii) the international system should substitute the current loose, networked structure for a more centralized and hierarchical one.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0990.pdf

The Growth of Extended 'Entry Tournaments' and the Decline of Institutionalised Occupational Labour Markets in Britain

David Marsden

CEPDP0989. June 2010.In recent years, British labour markets have been characterised by a decline of institutional regulation of entry routes into many occupations and internal labour markets. This paper examines this change by comparing occupational labour markets for selected occupations in which institutional regulation has remained largely intact with those in which entry has become more fluid. It argues that in the latter case, structured entry paths, which were characterised by competition at the ports of entry, have given way to extended entry tournaments in which competition is spread over a much longer time period. Using data from the New Earnings Survey panel for 1975-2001, it relates the comparatively greater growth in earnings inequality in these occupations to the emergence of extended entry tournaments. As pay at the top has risen, greater competition for entry at the bottom has held down pay and depressed conditions. It argues that many of the aspirant members of these occupations compete for entry for too long, and then become trapped as it is too late to change occupation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0989.pdf

Does Hospital Competition Improve Efficiency? An Analysis of the Recent Market-Based Reforms to the English NHS

Zack Cooper Steve Gibbons Simon Jones Alistair McGuire

CEPDP0988. June 2010.This paper uses a difference-in-difference estimator to test whether the introduction of patient choice and hospital competition in the English NHS in January 2006 has prompted hospitals to become more efficient. Efficiency was measured using hospitals’ average length of stay (LOS) for patients undergoing elective hip replacement. LOS was broken down into its two key components: the time from a patient’s admission until their surgery and the time from their surgery until their discharge. Our results illustrate that hospitals exposed to competition after a wave of market-based reforms took steps to shorten the time patients were in the hospital prior to their surgery, which resulted in a decrease in overall LOS. We find that hospitals shortened patients’ LOS without compromising patient outcomes or by operating on healthier, wealthier or younger patients. Our results suggest that hospital competition within markets with fixed prices can increase hospital efficiency.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0988.pdf

Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years

Guy Michaels Ashwini Natraj John Van Reenen

CEPDP0987. June 2010.OECD labor markets have become more “polarized” with employment in the middle of the skill distribution falling relative to the top and (in recent years) also the bottom of the skill distribution. We test the hypothesis of Autor, Levy, and Murnane (2003) that this is partly due to information and communication technologies (ICT) complementing the analytical tasks primarily performed by highly educated workers and substituting for routine tasks generally performed by middle educated workers (with little effect on low educated workers performing manual non-routine tasks). Using industry level data on the US, Japan, and nine European countries 1980-2004 we find evidence consistent with ICT-based polarization. Industries with faster growth of ICT had greater increases in relative demand for high educated workers and bigger falls in relative demand for middle educated workers. Trade openness is also associated with polarization, but this is not robust to controls for technology (like R&D). Technologies can account for up to a quarter of the growth in demand for the college educated in the quarter century since 1980.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0987.pdf

Currency Unions in Prospect and Retrospect

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0986. June 2010.We critically review the recent literature on currency unions, and discuss the methodological challenges posed by the empirical assessment of their costs and benefits. In the process, we provide evidence on the economic effects of the euro. In particular, and in contrast with estimates of the trade effect of other currency unions, we find that the impact of the euro on trade has been close to zero. After reviewing the costs and benefits, we conclude with some open questions on normative and positive aspects of the theory of currency unions, emphasizing the need for a unified welfare-based framework to weigh their costs and gains.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0986.pdf

Quality Matters - the Expulsion of Professors and Ph.D. Student Outcomes in Nazi Germany

Fabian Waldinger

CEPDP0985. June 2010.I investigate the effect of faculty quality on Ph.D. student outcomes. To address the endogeneity of faculty quality I use exogenous variation provided by the expulsion of mathematics professors in Nazi Germany. I find that faculty quality is a very important determinant of short and long run Ph.D. student outcomes. A one standard deviation increase in faculty quality increases the probability of publishing the dissertation in a top journal by 13 percentage points, the probability of becoming full professor by 10 percentage points, the probability of having positive lifetime citations by 16 percentage points, and the number of lifetime citations by 6.3.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0985.pdf

Crime and Immigration: Evidence from Large Immigrant Waves

Brian Bell Francesco Fasani Stephen Machin

CEPDP0984. June 2010.This paper examines the relationship between immigration and crime in a setting where large migration flows offer an opportunity to carefully appraise whether the populist view that immigrants cause crime is borne out by rigorous evidence. We consider possible crime effects from two large waves of immigration that recently occurred in the UK. The first of these was the late 1990s/early 2000s wave of asylum seekers, and the second the large inflow of workers from EU accession countries that took place from 2004. A simple economics of crime model, when dovetailed with facts about the relative labour market position of these migrant groups, suggests net returns to criminal activity are likely to be very different for the two waves. In fact, we show that the first wave led to a small rise in property crime, whilst the second wave had no such impact. There was no observable effect on violent crime for either wave. Nor were immigrant arrest rates different to natives. Evidence from victimization data also suggests that the changes in crime rates during the immigrant waves cannot be ascribed to crimes against immigrants. Overall, our findings suggest that focusing on the limited labour market opportunities of asylum seekers could have beneficial effects on crime rates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0984.pdf

The Impact of Competition on Management Quality: Evidence from Public Hospitals

Nicholas Bloom Carol Propper Stephan Seiler John Van Reenen

CEPDP0983. May 2010.Testing the causal effect of product market competition on management quality (and firm performance) is confounded by the endogeneity of market structure. To address this we analyze the English public hospital sector where entry and exit are controlled by the central government. Because closing hospitals in areas where the governing party has a small majority (“marginals”) is rare due to the fear of electoral defeat, we can use political contestability as an instrumental variable for the number of hospitals in a geographical area. We find that management quality - measured using a new survey tool - is strongly correlated with financial and clinical outcomes (such as survival rates from emergency heart attack admissions). We find that higher competition is positively correlated with management quality, and this relationship strengthens when we instrument the number of rival hospitals with whether these rivals are located in marginal districts. Adding a rival hospital increases management quality by 0.4 standard deviations and increases heart-attack survival rates by 9.5%. We confirm the validity of our IV strategy by conditioning on own hospital marginality and running a placebo test of marginality on schools, a public service where the central government has no formal influence.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0983.pdf

Human Resource Management and Productivity

Nicholas Bloom John Van Reenen

CEPDP0982. May 2010.In this chapter we examine the relationship between Human Resource Management (HRM) and productivity. HRM includes incentive pay (individual and group) as well as many nonpay aspects of the employment relationship such as matching (hiring and firing) and work organization (e.g. teams, autonomy). We place HRM more generally within the literature on management practices and productivity. We start with some facts on levels and trends of both HRM and productivity and the main economic theories of HRM. We look at some of the determinants of HRM – risk, competition, ownership and regulation. The largest section analyses the impact of HRM on productivity emphasizing issues of methodology, data and results (from micro-econometric studies). We conclude briefly with suggestions of avenues for future frontier work.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0982.pdf

Imperfect Competition in the Labour Market

Alan Manning

CEPDP0981. May 2010.It is increasingly recognized that labour markets are pervasively imperfectly competitive, that there are rents to the employment relationship for both worker and employer. This chapter considers why it is sensible to think of labour markets as imperfectly competitive, reviews estimates on the size of rents, theories of and evidence on the distribution of rents between worker and employer, and the areas of labour economics where a perspective derived from imperfect competition makes a substantial difference to thought.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0981.pdf

The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

Ana Fernandes Heiwai Tang

CEPDP0980. May 2010.Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing trade. We exploit the coexistence of two regulatory export processing regimes in China, which specify who owns and controls the imported components for export processing. We find that in the regime that Chinese plants own the imported components, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with the property- rights theory of intra-firm trade. However, in the regime that foreign firms own the imported components, no significant relationship is found between the prevalence of vertical integration, headquarter intensity and input contractibility across sectors. The positive relationship between productivity dispersion and the export share of integrated plants across sectors, as suggested by the existing literature, is found only in the regime that foreign firms own the imported components. These results are consistent with our model, which considers ownership of imported components as an alternative to asset ownership to alleviate the hold-up problem by the export-processing plant.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0980.pdf

The Crime Reducing Effect of Education

Stephen Machin Olivier Marie Suncica Vujic

CEPDP0979. May 2010.In this paper, we present evidence on empirical connections between crime and education, using various data sources from Britain. A robust finding is that criminal activity is negatively associated with higher levels of education. However, it is essential to ensure that the direction of causation flows from education to crime. Therefore, we identify the effect of education on participation in criminal activity using changes in compulsory school leaving age laws over time to account for the endogeneity of education. In this causal approach, for property crimes, the negative crime-education relationship remains strong and significant. The implications of these findings are unambiguous and clear. They show that improving education can yield significant social benefits and can be a key policy tool in the drive to reduce crime.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0979.pdf

Intra-Firm Trade and Product Contractibility (Long Version)

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0978. May 2010.This paper examines the determinants of intra-firm trade in U.S. imports using detailed countryproduct data. We create a new measure of product contractibility based on the degree of intermediation in international trade for the product. We find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intra-firm trade is high for products with low levels of contractability sourced from countries with weak governance, for skillintensive products from skill-scarce countries, and for capital-intensive products from capitalabundant countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0978.pdf

Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931

Albrecht Ritschl Samad Salferaz

CEPDP0977. May 2010.This paper examines the role of currency and banking in the German financial crisis of 1931 for both Germany and the U.S. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. We find that monetary transmission through the Gold Standard played only a minor role in causing and propagating the crisis, while financial distress was important. We also find evidence of crisis propagation from Germany to the U.S. via the banking channel. Banking distress in both economies was apparently not endogenous to monetary policy. Results confirm Bernanke's (1983) conjecture that an independent, non-monetary financial channel of crisis propagation was operative in the Great Depression.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0977.pdf

The Credibility Revolution in Empirical Economics: How Better Research Design is taking the Con out of Econometrics

Joshua D. Angrist Jörn-Steffen Pischke

CEPDP0976. May 2010.This essay reviews progress in empirical economics since Leamer’s (1983) critique. Leamer highlighted the benefits of sensitivity analysis, a procedure in which researchers show how their results change with changes in specification or functional form. Sensitivity analysis has had a salutary but not a revolutionary effect on econometric practice. As we see it, the credibility revolution in empirical work can be traced to the rise of a design-based approach that emphasizes the identification of causal effects. Design-based studies typically feature either real or natural experiments and are distinguished by their prima facie credibility and by the attention investigators devote to making the case for a causal interpretation of the findings their designs generate. Design-based studies are most often found in the microeconomic fields of Development, Education, Environment, Labor, Health, and Public Finance, but are still rare in Industrial Organization and Macroeconomics. We explain why IO and Macro would do well to embrace a design-based approach. Finally, we respond to the charge that the design-based revolution has overreached.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0976.pdf

Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement

Holger Breinlich Alejandro Cuñat

CEPDP0975. May 2010.We examine the qualitative and quantitative predictions of a heterogeneous firm model à la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We calibrate our model to the pre-trade liberalization stage, simulate the trade liberalization, and compute the resulting growth rates of Canadian industry productivity, exports and imports. We compare them with Trefler’s (2004) estimates of the effects of CUSFTA. Our results show that our model performs well in replicating the qualitative aspects of Trefler’s results. In particular, we correctly predict that US tariff cuts have smaller productivity enhancing effects than Canadian tariff reductions due to the entry of less efficient exporters. Quantitatively, the model tends to underpredict the impact of CUSFTA on growth rates of productivity, but overpredicts the increase in Canadian exports and imports. We discuss how liberalization-induced changes in the firm-level productivity distribution can reconcile the model with the evidence.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0975.pdf

Sequential Exporting

Facundo Albornoz Hector Calvo-Pardo Gregory Corcos Emanuel Ornelas

CEPDP0974. March 2010.Firms need to incur substantial sunk costs to break in foreign markets, yet many give up exporting shortly after their first experience, which typically involves very small sales. Conversely, other new exporters shoot up their foreign sales and expand to new destinations. We investigate a simple theoretical mechanism that can rationalize these patterns. A firm discovers its profitability as an exporter only after actually engaging in exporting. The profitability is positively correlated over time and across foreign destinations. Accordingly, once the firm learns how good it is as an exporter, it adjusts quantities and decides whether to exit and whether to serve new destinations. Thus, it is the possibility of profitable expansion at both the intensive and extensive margins what makes incurring the sunk costs to enter a single foreign market worthwhile despite the high failure rates. Using a census of Argentinean firm-level manufacturing exports from 2002 to 2007, we find empirical support for several implications of our proposed mechanism, indicating that the practice of “sequential exporting” is pervasive. Sequential exporting has broad but subtle implications for trade policy. For example, a reduction in trade barriers in a country has delayed entry effects in its own market, while also promoting entry in other markets. This trade externality poses challenges for the quantification of the effects of trade liberalization programs, while suggesting neglected but critical implications of international trade agreements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0974.pdf

The 'Emulator Effect' of the Uruguay Round on US Regionalism.

Marco Fugazza Frédéric Robert-Nicoud

CEPDP0973. March 2010.Using a detailed data set at the tariff line level, we find an emulator effect of multilateralism on subsequent regional trade agreements involving the US. We exploit the variation in the frequency with which the US has granted immediate duty free access (IDA) to its Free Trade Area partners across tariff lines. A key finding is that the US has granted IDA status especially on goods for which it had cut the multilateral MFN tariff during the Uruguay round the most. Thus, the Uruguay Round (multilateral) ‘concessions’ have emulated subsequent (preferential) trade liberalisation. We conclude from this that past liberalisation sows the seeds of future liberalisation and that multilateral and preferential trade agreements are dynamic complements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0973.pdf

The Interrelationship between HR, Strategy and Profitability in Service SMEs: Empirical Evidence from the UK Tourism Hospitality and Leisure Sector

Andreas Georgiadis Christos N. Pitelis

CEPDP0972. March 2010.We investigate the strategies, HR attributes and their synergies that are associated with superior performance in service SMEs using data from the UK Tourism Hospitality and Leisure (THL) sector. A major advantage of our analysis is that our sample includes information also on very small firms which makes results representative of the industry but also sheds light on a very little investigated area related to the nature of HRM and its link with performance of micro businesses. Our results suggest that high-performing SMEs in the THL sector are managed by more experienced entrepreneurs. Moreover, they employ a combination of technological and know-how firm differentiation strategies together with a highly skilled workforce, and/or a combination of (product) differentiation strategies based on quality of service and personal attention to customers, and a generous compensation package and attention to employees development.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0972.pdf

Slip Sliding Away: Further Union Decline in Germany and Britain

John T. Addison Alex Bryson André Pahnke Paulino Teixeira

CEPDP0971. March 2010.This paper presents the first comparative analysis of the decline in collective bargaining in two European countries where that decline has been most pronounced. Using workplace-level data and a common model, we present decompositions of changes in collective bargaining and worker representation in the private sector in Germany and Britain over the period 1998-2004. In both countries within-effects dominate compositional changes as the source of the recent decline in unionism. Overall, the decline in collective bargaining is more pronounced in Britain than in Germany, thus continuing a trend apparent since the 1980s. Although workplace characteristics differ markedly across the two countries, assuming counterfactual values of these characteristics makes little difference to unionization levels. Expressed differently, the German dummy looms large.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0971.pdf

Recent Advances in the Empirics of Organizational Economics

Nicholas Bloom Raffaella Sadun John Van Reenen

CEPDP0970. February 2010.We present a survey of recent contributions in the empirical organizational economics, focusing on management practices and decentralization. Productivity dispersion between firms and countries has motivated the improved measurement of firm organization across industries and countries. There appears to be substantial variation in management practices and decentralization between countries, but especially within countries. Much of the poorer average management quality in countries like Brazil and India seems due to a “long tail” of poorly managed firms, which barely exist in the US. Many basic economic theories are supported by this new data. Some stylized facts include: (1) competition seems to foster improved management and decentralization; (2) larger firms, skillintensive plants and foreign multinationals appear better managed and are more decentralized; (3) family owned and managed firms appear to have worse management; (4) firms facing an environment of lighter labor market regulations, and more human capital intensive organizations specialize relatively more in “people management”. There is evidence for complementarities between ICT, decentralization and management, but the relationship is complex and identification of the productivity effects of organizational practices remain a challenge for future research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0970.pdf

New Approaches to Measuring Management and Firm Organization

Nick Bloom John Van Reenen

CEPDP0969. February 2010.We detail the methodology that we have been using to quantify managerial and organizational practices across firms and countries in recent years. This has been used in many pieces of research at the Centre for Economic Performance. We discuss the pros and cons of such survey tools, describing how our methods lie between the traditional surveys used by economists and the case studies more common in other parts of social science.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0969.pdf

Wholesalers and Retailers in U.S. Trade (Long Version)

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0968. February 2010.International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which U.S. exports and imports flow through wholesalers and retailers versus .producing and consuming firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0968.pdf

Depression Econometrics: A FAVAR Model of Monetary Policy During the Great Depression

Pooyan Amir Ahmadi Albrecht Ritschl

CEPDP0967. January 2010.The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdom since Friedman and Schwartz (1963). This paper presents evidence on both the surprise and the systematic components of monetary policy between 1929 and 1933. Doubts surrounding GDP estimates for the 1920s would call into question conventional VAR techniques. We therefore adopt the FAVAR methodology of Bernanke, Boivin, and Eliasz (2005), aggregating a large number of time series into a few factors and inserting these into a monetary policy VAR. We work in a Bayesian framework and apply MCMC methods to obtain the posteriors. Employing the generalized sign restriction approach toward identification of Amir Ahmadi and Uhlig (2008), we find the effects of monetary policy shocks to have been moderate. To analyze the systematic policy component, we back out the monetary policy reaction function and its response to aggregate supply and demand shocks. Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicate only moderate effects. We further analyze systematic policy through conditional forecasts of key time series at critical junctures, taken with and without the policy instrument. Effects are again quite moderate. Our results caution against a predominantly monetary interpretation of the Great Depression.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0967.pdf

Does Product Market Competition Lead Firms to Decentralize?

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0966. January 2010.There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms - including their decentralization decisions - across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country. We analyze data on almost 4,000 firms across twelve countries in Europe, North America and Asia. We find that competition does indeed seem to foster greater decentralization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0966.pdf

Why is the US so Energy Intensive? Evidence from US Multinationals in the UK

Ralf Martin

CEPDP0965. January 2010.At present the USA is - in per capita terms - the top greenhouse gas polluter among the world’s major economies. This is mirrored by the high energy intensity of all sectors of the US economy including manufacturing industries. A potential explanation for the higher energy intensity is lower US energy price levels. However, common price elasticity estimates are not high enough to explain the observed differences between countries. Alternative explanations include firstly geographic or other locational differences and secondly firm specific technology differences between US firms and others. This study explores this latter possibility by comparing establishments of US firms in Britain with other comparable firms thereby ruling out locational differences. The findings are that on average US firms are not more energy intensive when operating in Britain. However, US firms that have only recently entered the UK market are found to be significantly more energy intensive at an order of magnitude corresponding to the between country US-UK gap. This difference vanishes with an increased duration of stay in the UK; however, with a considerable time lag. This suggests firstly, that barriers to knowledge diffusion are an important concern and secondly, that the long term response to a sustained price increase might be stronger than common price elasticity estimates suggest. The study also provides, for the first time, estimates of energy price elasticities for the UK on the basis of representative plant level panel data for the manufacturing sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0965.pdf

On the Origins of Land Use Regulations: Theory and Evidence from US Metro Areas

Christian A. L. Hilber Frédéric Robert-Nicoud

CEPDP0964. December 2009.We model residential land use constraints as the outcome of a political economy game between owners of developed and owners of undeveloped land. Land use constraints benefit the former group (via increasing property prices) but hurt the latter (via increasing development costs). More desirable locations are more developed and, as a consequence of political economy forces, more regulated. Using an IV approach that directly follows from our model we find strong and robust support for our predictions. The data provide weak or no support for alternative hypotheses whereby regulations reflect the wishes of the majority of households or efficiency motives.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0964.pdf

Wage Bargaining and the Boundaries of the Multinational Firm

Maria Bas Juan Carluccio

CEPDP0963. December 2009.Do variations in labor market institutions across countries affect the cross-border organization of the firm? Using firm-level data on multinationals located in France, we show that firms are more likely to outsource the production of intermediate inputs to external suppliers when importing from countries with empowered unions. Moreover, this effect is stronger for firms operating in capital-intensive industries. We propose a theoretical mechanism that rationalizes these findings. The fragmentation of the value chain weakens the union's bargaining position, by limiting the amount of revenues that are subject to union extraction. The outsourcing strategy reduces the share of surplus that is appropriated by the union, which enhances the firm's incentives to invest. Since investment creates relatively more value in capital-intensive industries, increases in union power are more likely to be conducive to outsourcing in those industries. Overall, our findings suggest that multinational firms use their organizational structure strategically when sourcing intermediate inputs from unionized markets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0963.pdf

Welfare Policy and the Distribution of Hours of Work

L. Rachel Ngai Christopher A. Pissarides

CEPDP0962. December 2009.We examine the distribution of hours of work across industrial sectors in OECD countries. We find large disparities when sectors are divided into three groups: one that produces goods without home substitutes and two others that have home substitutes — health and social work, and all others. We attribute the disparities to the countries’ tax and subsidy policies. High taxation substantially reduces hours in sectors that have close home substitutes but less so in other sectors. Health and social care subsidies increase hours in that sector. We compute these effects for nineteen OECD countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0962.pdf

Regional Trade Agreements

Caroline Freund Emanuel Ornelas

CEPDP0961. December 2009.This paper reviews the theoretical and the empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the last fifteen years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all of these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization have materialized, while the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0961.pdf

Do Oil Windfalls Improve Living Standards? Evidence from Brazil

Francesco Caselli Guy Michaels

CEPDP0960. December 2009.We use variation in oil output among Brazilian municipalities to investigate the effects of resource windfalls. We find muted effects of oil through market channels: offshore oil has no effect on municipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDP composition. However, oil abundance causes municipal revenues and reported spending on a range of budgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, surveybased measures of social transfers, public good provision, infrastructure, and household income increase less (if at all) than one might expect given the increase in reported spending. To explain why oil windfalls contribute little to local living standards, we use data from the Brazilian media and federal police to document that very large oil output increases alleged instances of illegal activities associated with mayors.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0960.pdf

Collective Agreements, Wages and Restructuring in Transition

Iga Magda David Marsden Simone Moriconi

CEPDP0959. November 2009.Using a large matched employer-employee dataset, the authors investigate the relationship between collective agreements, wages and restructuring in transition in three former centrally planned economies (Czech Republic, Hungary and Poland). They adopt a natural experiment approach and capture the restructuring process triggered by the launch of transition by means of cohort effects among firms founded before or at different stages of this process which enable them to control for the heterogeneity of firms in different cohorts. They find that the wage premium associated with different levels of collective agreements depends on restructuring and its timing in the transition. In early-middle transition firms, industry level agreements protect low skilled wages; whereas in late transition ones, firm level agreements increase medium and especially high skilled wages. Some cross country differences emerge in the structure of the wage premium as a result of country specific features of restructuring.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0959.pdf

Recovering the Sunk Costs of R&D: the Moulds Industry Case

Carlos Daniel Santos

CEPDP0958. November 2009.Sunk costs for R&D are an important determinant of the level of innovation in the economy. In this paper I recover them using a Markov equilibrium framework. The contribution is twofold. First, a model of industry dynamics which accounts for selection into R&D, capital accumulation and entry/exit is proposed. The industry state is summarized by an aggregate state with the advantage that it avoids the "curse of dimensionality". Second, the estimated sunk costs of R&D for the Portuguese moulds industry are shown to be important (3.4 million Euros). They become particularly relevant since the industry is mostly populated by small firms. Institutional changes in the early 1990s generated an increase in demand from European car makers and created the incentives for firms to pay the costs of investment. Trade-induced innovation reinforced the selection effect by which international trade leads to productivity growth. Finally, using the estimated parameters, simulations evaluate the effects of changes in market size, sunk costs and entry costs.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0958.pdf

Rates of Return and Alternative Measures of Capital Input: 14 Countries and 10 Branches, 1971-2005

Nicholas Oulton Ana Rincon-Aznar

CEPDP0957. November 2009.We employ the EU KLEMS database to estimate the real rate of return to capital in 14 countries (11 in the EU, three outside the EU) in 10 branches of the market economy plus the market economy as a whole. Our measure of capital is an aggregate over seven types of asset: three ICT assets (computers, communications equipment, and software) and four non-ICT assets (machinery and equipment, nonresidential structures, transport equipment, and other). The real rate of return in the market economy does not vary very much across countries, with the exception of Spain where it is exceptionally high and in Italy where it is exceptionally low. The real rate appears to be trendless in most countries. Within each country however, the rate varies widely across the 10 branches, often being implausibly high or low. We also estimate the growth of capital services by two different methods: ex-post and exante, and the contribution of capital to output growth by three methods: ex-post, ex-ante and hybrid. Our implementation of the ex-ante method uses an estimate of the required rate of return for each country instead of the actual, average rate of return to calculate user costs and also employs the expected growth of asset prices rather than the actual growth. These estimates are derived from exactly the same data as for the ex-post method, ie without any extraneous data being employed. For estimating the contribution of capital to output growth, the ex-ante method uses ex-ante profit as the weight, while both the ex-post and the hybrid method use ex-post profit. We find that the three methods produce very similar results at the market economy level. But differences are much larger at the branch level, particularly between the ex-post and ex-ante methods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0957.pdf

Networks in the Premodern Economy: the Market for London Apprenticeships, 1600-1749

Tim Leunig Chris Minns Patrick Wallis

CEPDP0956. November 2009.This paper examines the importance of social and geographical networks in structuring entry into skilled occupations in premodern London. Using newly digitised records of those beginning an apprenticeship in London between 1600 and 1749, we find little evidence that networks strongly shaped apprentice recruitment. The typical London apprentice did not have an identifiable connection to his master in the form of a kin link, shared name, or shared place or county of origin. The majority of migrant apprentices’ fathers came from outside of the craft sector. Our results suggest that the market for apprenticeship was strikingly open: well-to-do families of all types were able to access a wide range of craft and trade apprenticeships, and would-be apprentices had considerable scope to match their perceived ability and aptitude to opportunity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0956.pdf

Can Family-Support Policies Help Explain Differences in Working Hours Across Countries?

Urban Sila

CEPDP0955. October 2009.It has been suggested in the literature that taxes and subsidies play an important role in explaining the differences in working hours across countries. In this paper I test whether public programmes for family support play a role in explaining this variation. I analyse two types of policies: childcare subsidies and family cash benefits. I distinguish between people with children and people without children. Childcare subsidies should increase working hours in the economy and these effects should differ between people with children and people without children. Public support to families is also expected to decrease the amount of time people spend in childcare at home. I test this using household data for a set of European countries and the US. Empirical analysis, however, does not support the family-policy explanation. The effects of the policies on working hours are weak and insignificant. In regressions with time spent caring for children as a dependent variable, the estimates of the effects contradict the predictions of the theory. Furthermore, I don’t find evidence for the expected differences in effects between parents and nonparents. I conclude that family policies are not helpful in explaining the variation in working hours across countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0955.pdf

The Extent of Collective Bargaining and Workplace Representation: Transitions between States and their Determinants. A Comparative Analysis of Germany and Great Britain

John T. Addison Lutz Bellman Alex Bryson André Pahnke Paulino Teixeira

CEPDP0954. October 2009.Industrial relations are in flux in many nations, perhaps most notably in Germany and Britain. That said, comparatively little is known in any detail of the changing pattern of the institutions of collective bargaining and worker representation in Germany and still less in both countries about firm transitions between these institutions over time. The present paper maps changes in the importance of the key institutions, 1998-2004, and explores the correlates of two-way transitions, using successive waves of the German IAB Establishment Panel and both cross-sectional and panel components of the British Workplace Employment Relations Survey. We identify the workplace correlates of the demise of collective bargaining in Britain and the erosion of sectoral bargaining in Germany, and identify the respective roles of behavioral and compositional change.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0954.pdf

How Does Innovation Affect Worker Well-being?

Erling Barth Alex Bryson Harald Dale-Olsen

CEPDP0953. October 2009.We explore the effects of management innovations on worker well-being using private sector linked employer-employee data for Britain. We find management innovations are associated with lower worker well-being and lower job satisfaction, an effect which becomes more pronounced when we account for the endogeneity of innovation. This is the case for three different count measures of innovation – a global measure of innovation and measures for labour innovations and capital innovations. The effects are ameliorated when workers are covered by a collective bargaining agreement.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0953.pdf

US Real Interest Rates and Default Risk in Emerging Economies

Nathan Foley-Fisher Bernardo Guimaraes

CEPDP0952. October 2009.We empirically analyse the appropriateness of indexing emerging market sovereign debt to US real interest rates. We find that policy-induced exogenous increases in US rates raise default risk in emerging market economies, as hypothesised in the theoretical literature. However, we also find evidence that omitted variables which simultaneously increase US real interest rates and reduce the risk of default dominate the hypothesised relationship. We can only conclude that it’s not a good idea to index emerging market bonds to US real interest rates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0952.pdf

The Economic Situation of First- and Second-Generation Immigrants in France, Germany and the United Kingdom

Yann Algan Christian Dustmann Albrecht Glitz Alan Manning

CEPDP0951. October 2009.A central concern about immigration is the integration into the labour market, not only of the first generation, but also of subsequent generations. Little comparative work exists for Europe’s largest economies. France, Germany and the United Kingdom have all become, perhaps unwittingly, countries with large immigrant populations albeit with very different ethnic compositions. Today, the descendants of these immigrants live and work in their parents’ destination countries. This paper presents and discusses comparative evidence on the performance of first- and second-generation immigrants in these countries in terms of education, earnings, and employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0951.pdf

The Effect of Bans and Taxes on Passive Smoking

Jérôme Adda Francesca Cornaglia

CEPDP0950. October 2009.This paper evaluates the effect of smoking bans in public places on the exposure to tobacco smoke of non-smokers and contrasts it with the effect of excise taxes. Exploiting data on cotinine - a metabolite of nicotine - as well as state and time variation in anti-smoking policies across US states, we show that smoking bans in public places can perversely increase the exposure of non-smokers to tobacco smoke by displacing smokers to private places where they contaminate non-smokers, and in particular young children. In contrast, we find that higher taxes are an efficient way to decrease exposure to tobacco smoke, especially for those most exposed. We supplement this analysis by showing that bans have little effect on smoking cessation, and present evidence of displacement from public places using data on time use.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0950.pdf

How to Measure Living Standards and Productivity

Nicholas Oulton

CEPDP0949. September 2009.This paper sets out a general algorithm for calculating true cost-of-living indices or true producer price indices when demand is not homothetic, i.e. when not all expenditure elasticities are equal to one. In principle, economic theory tells us how we should calculate a true cost-of-living index or Konüs price index: first estimate the consumer’s expenditure function (cost function) econometrically and then calculate the Konüs price index directly from that. Unfortunately this is impossible in practice since real life consumer (producer) price indices contain hundreds of components, which means that there are many more parameters than observations. Index number theory has solved this problem, at least when demand is homothetic (all income elasticities equal to one). Superlative index numbers are second order approximations to any acceptable expenditure (cost) function. These index numbers require data only on prices and quantities over the time period or cross section under study. Unfortunately, there is overwhelming evidence that consumer demand is not homothetic (Engel’s Law). The purpose of the present paper is to set out a general algorithm for the nonhomothetic case. The solution is to construct a chain index number using compensated, not actual, expenditure shares as weights. The compensated shares are the actual shares, adjusted for changes in real income. These adjustments are made via an econometric model, where only the responses of demand to income changes need to be estimated, not the responses to price changes. This makes the algorithm perfectly feasible in practice. The new algorithm can be applied (a) in time series, e.g. measuring changes over time in the cost of living; (b) in cross section, e.g. measuring differences in the cost of living and hence the standard of living across countries; and (c) to cost functions, which enables better measures of technical progress to be developed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0949.pdf

The Returns to Scarce Talent: Footedness and Player Remuneration in European Soccer

Alex Bryson Bernd Frick Rob Simmons

CEPDP0948. September 2009.We investigate the salary returns to the ability to play football with both feet. The majority of footballers are predominantly right footed. Using two data sets, a cross-section of footballers in the five main European leagues and a panel of players in the German Bundesliga, we find robust evidence of a substantial salary premium for two-footed ability, even after controlling for available player performance measures. We assess how this premium varies across the salary distribution and by player position.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0948.pdf

Did the National Minimum Wage Affect UK Prices?

Jonathan Wadsworth

CEPDP0947. August 2009.One potential channel through which the effects of the minimum wage could be directed is that firms who employ minimum wage workers could have passed on any higher labour costs resulting from the minimum wage in the form of higher prices. This study looks at the effects of the minimum wage on the prices of UK goods and services by comparing prices of goods produced by industries in which UK minimum wage workers make up a substantial share of total costs with prices of goods and services that make less use of minimum wage labour. Using sectoral-level price data matched to LFS survey data on the share of minimum wage workers in each sector, it is hard to find much evidence of significant price changes in the months that correspond immediately to the uprating of the NMW. However over the longer term, prices in several minimum wage sectors – notably take-away foods, canteen meals, hotel services and domestic services - do appear to have risen significantly faster than prices of non-minimum wage sectors. These effects were particularly significant in the four years immediately after the introduction of the minimum wage.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0947.pdf

The Paradox of Performance Related Pay Systems: 'Why Do We Keep Adopting Them in the Face of Evidence that they Fail to Motivate?'

David Marsden

CEPDP0946. August 2009.This paper considers one of the paradoxes of incentive pay used in Britain’s public services, namely that despite much evidence that it does not motivate employees, it continues to be widely used. It is argued that behind this evidence, there are significant examples in which its use has been associated with improved performance. A good part of this is to be explained by the way performance pay links pay and appraisal, and the pressure this puts on line managers to set clearer goals for their staff. There is also some evidence that the goal setting is the outcome of a form of integrative, or positive sum, negotiation between individual employees and their managers, and that it is not just ‘top down’.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0946.pdf

Participation in Organisations: Economic Approaches

Almudena Cañibano David Marsden

CEPDP0945. August 2009.Under the auspices of the debate about high performance work systems, it has been suggested that the evidence of positive results is disappointing and that one reason is that there has been a lack of theory. This paper argues that there is indeed a great deal of theory that could be used to reformulate the basic research questions, much of it coming from labour economics broadly understood. It includes a meta-survey of research on the effects of participation on performance since the landmark survey by Levine and Tyson in 1990 which was very positive. It finds that the evidence is less clear cut now. It is argued that this is due in part to consideration of a wider range of performance outcomes, improved data and methods, and to the wider diffusion of such practices compared with the 1980s. It is also suggested that the debate needs to be widened to include a broader range of participatory structures.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0945.pdf

One Nation Under a Groove? Identity and Multiculturalism in Britain

Andreas Georgiadis Alan Manning

CEPDP0944. July 2009.There is a lot of evidence that identity matters for behavior. There is a widespread belief that societies will function better if they manage to establish a common sense of identity among the population. And there are also contemporary fears that this common identity is threatened in several countries. In this paper we investigate the correlates of various measures of identity in the UK, a country currently greatly concerned about a perceived failure to build a common identity from a collection of diverse cultures. We find that the alleged failure to establish a British identity among ethnic minorities is exaggerated – for most their ethnicity and religion seem no barrier to a British identity. But there is a segment of the white population that clearly feels neglected and alienated, and are hostile to the multicultural agenda.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0944.pdf

Theory of Values

Andreas Georgiadis Alan Manning

CEPDP0943. July 2009.Economists have a well-developed theory of value but the theory of why people hold the values they do is rudimentary at best. In spite of the fact that it is common to argue that values are important, most work on values is normative and the positive theory of values is relatively under- developed. In this paper we propose a simple yet general way to think about values – they are about how one trades-off one own’s utility against that of others – and argue that we can draw on the large literature on pro-social behavior for hypotheses on how people will choose values. Then, using data from the UK’s Citizenship Survey we show how models of self-interest, fairness, reciprocity and identity, can explain many of the patterns that we observe in the data across a wide variety of values.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0943.pdf

Trade, Wages and Productivity

Kristian Behrens Giordano Mion Yasusada Murata Jens Südekum

CEPDP0942. July 2009.We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose border effects into a pure border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0942.pdf

Institutions and the Management of Human Resources: Incentive Pay Systems in France and Great Britain

Richard Belfield David Marsden

CEPDP0941. July 2009.Using data from large-scale establishment surveys in Britain and France, we show that incentive pay for non-managers is more widespread in France than in Britain. We explain this finding in terms of the ‘beneficial constraint’ arising from stronger employment protection in France, which provides an impulse to develop incentive pay; employer networking activities in France, which facilitate joint learning about its development and operation; and government fiscal incentives for profit-sharing, which reduces the cost of its operation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0941.pdf

Inequality and Unemployment in a Global Economy

Elhanan Helpman Oleg Itskhoki Stephen Redding

CEPDP0940. July 2009.This paper develops a new framework for examining the distributional consequences of international trade that incorporates firm and worker heterogeneity, search and matching frictions in the labor market, and screening of workers by firms. Larger firms pay higher wages and exporters pay higher wages than non-exporters. The opening of trade enhances wage inequality and raises unemployment, but expected welfare gains are ensured if workers are risk neutral. And while wage inequality is larger in a trade equilibrium than in autarky, reductions of trade impediments can either raise or reduce wage inequality.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0940.pdf

Educational Returns, Ability Composition and Cohort Effects: Theory and Evidence for Cohorts of Early-Career UK Graduates

Norman Ireland Robin A. Naylor Jeremy Smith Shqiponja Telhaj

CEPDP0939. July 2009.An increase over time in the proportion of young people obtaining a degree is likely to impact on the relative ability compositions (i) of graduates and non-graduates and (ii) across graduates with different classes of degree award. In a signalling framework, we examine the implications of this on biases across cohorts in estimates of educational returns. In an empirical analysis, we exploit administrative data on whole populations of UK university students for ten graduate cohorts to investigate the extent to which early labour market outcomes vary with class of degree awarded. Consistent with our theoretical model, we find that returns by degree class increased across cohorts during a period of substantial graduate expansion. We also corroborate the empirical findings with evidence from complementary data on graduate sample surveys.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0939.pdf

Life Satisfaction and Relative Income: Perceptions and Evidence

Guy Mayraz Jürgen Schupp Gert G. Wagner

CEPDP0938. July 2009.Using a unique dataset we study both the actual and self-perceived relationship between subjective well-being and income comparisons against a wide range of potential comparison groups, enabling us to investigate a broader range of questions than in previous studies. In questions inserted into a 2008 module of the German-Socio Economic Panel Study we ask subjects to report (a) how their income compares to various groups, such a co-workers, friends, and neighbours, and (b) how important these income comparisons are to them. We find substantial gender differences, with income comparisons being much better predictors of subjective well-being in men than in women. Generic (same-gender) comparisons are the most important, followed by within profession comparisons. Once generic and within-profession comparisons are controlled for, income relative to neighbours has a negative coefficient, implying that living in a high-income neighbourhood increases happiness. The perceived importance of income comparisons is found to be uncorrelated with its actual relationship to subjective well-being, suggesting that people are unconscious of its real impact. Subjects who judge comparisons to be important are, however, significantly less happy than subjects who see income comparisons as unimportant. Finally, the marginal effect of relative income on subjective well-being does not depend on whether a subject is below or above the reference group income.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0938.pdf

The Organization of Firms Across Countries

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0937. June 2009.We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational’s country of origin and subsidiary’s country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0937.pdf

Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment

Jean-Baptiste Michau

CEPDP0936. June 2009.This paper emphasizes the two-way causality between the provision of unemployment insurance and the cultural transmission of work ethic. Values affect the size of the moral-hazard problem and, hence, the policy to be implemented. Conversely, when parents rationally choose how much effort to exert to raise their children to work hard, they form expectations on the policy that will be implemented by the next generation. In this context, I determine the dynamics of preferences across generations and show that the different cultural traits, i.e. high and low work ethics, are complementary. The model could generate a lag between the introduction of unemployment insurance and a deterioration of the work ethic. Relying on a calibration, I argue that it can account for a substantial fraction of the history of European unemployment since World War II. As this explanation is compatible with the co- existence of generous unemployment insurance and low unemployment in the 1950s and 1960s, it could be seen as an alternative to the dominant story that relies on the occurrence of large shocks since the 1970s. Supportive empirical evidence is provided.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0936.pdf

Trading Partners and Trading Volumes: Implementing the Helpman-Melitz-Rubinstein Model Empirically

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0935. June 2009.Helpman, Melitz, and Rubinstein (2008)–HMR–present a rich theoretical model to study the determinants of bilateral trade flows across countries. The model is then empirically implemented through a two-stage estimation procedure. This note seeks to clarify some econometric aspects of the estimation approach used by HMR and explore the consequences of possible departures from the maintained distributional assumptions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0935.pdf

The Century of Education

Christian Morrisson Fabrice Murtin

CEPDP0934. June 2009.This paper presents a historical database on educational attainment in 74 countries for the period 1870-2010, using perpetual inventory methods before 1960 and then the Cohen and Soto (2007) database. The correlation between the two sets of average years of schooling in 1960 is equal to 0.96. We use a measurement error framework to merge the two databases, while correcting for a systematic measurement bias in Cohen and Soto (2007) linked to differential mortality across educational groups. Descriptive statistics show a continuous spread of education that has accelerated in the second half of the twentieth century. We find evidence of fast convergence in years of schooling for a sub-sample of advanced countries during the 1870-1914 globalization period, and of modest convergence since 1980. Less advanced countries have been excluded from the convergence club in both cases.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0934.pdf

Further Simulation Evidence on the Performance of the Poisson Pseudo-Maximum Likelihood Estimator

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0933. May 2009.We extend the simulation results given in Santos-Silva and Tenreyro (2006, ‘The Log of Gravity’, The Review of Economics and Statistics, 88, pp.641-658) by considering data generated as a finite mixture of gamma variates. Data generated in this way can naturally have a large proportion of zeros and is fully compatible with constant elasticity models such as the gravity equation. Our results confirm that the Poisson pseudo maximum likelihood estimator is generally well behaved.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0933.pdf

On the Existence of the Maximum Likelihood Estimates for Poisson Regression

J. M. C. Santos Silva Silvana Tenreyro

CEPDP0932. May 2009.We note that the existence of the maximum likelihood estimates for Poisson regression depends on the data configuration. Because standard software does not check for this problem, the practitioner may be surprised to find that in some applications estimation of the Poisson regression is unusually difficult or even impossible. More seriously, the estimation algorithm may lead to spurious maximum likelihood estimates. We identify the signs of the non-existence of the maximum likelihood estimates and propose a simple empirical strategy to single out the regressors causing this type of identification failure.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0932.pdf

What if Congress Doubled R&D Spending on the Physical Sciences?

Richard Freeman John Van Reenen

CEPDP0931. May 2009.Many business, academic, and scientific groups have recommended that the Congress substantially increase R&D spending in the near future. President Bush’s American Competitiveness Initiative calls for a doubling of spending over the next decade in selected agencies that deal with the physical sciences, including the National Science Foundation. We consider the rationale for government R&D spending in the context of globalization and as an investment in human capital and knowledge creation with gestation times far longer than Federal funding cycles. To assess the impact of a large increase in R&D spending on the science job market, we examine the impact of the 1998- 2003 doubling of the NIH budget on the bio-medical sciences. We find that the rapid increase in NIH spending and ensuing deceleration created substantial adjustment problems in the market for research and failed to address long-standing problems with scientific careers that are likely to deter many young people from choosing a scientific career. We argue that because research simultaneously produces knowledge and add to the human capital of researchers, which has greater value for young scientists because of their longer future career life span than to older scientists, there is reason for funding agencies to tilt their awards to younger researchers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0931.pdf

The ASEAN Free Trade Agreement: Impact on Trade Flows and External Trade Barriers

Hector Calvo-Pardo Caroline Freund Emanuel Ornelas

CEPDP0930. May 2009.Using detailed data on trade and tariffs from 1992-2007, we examine how the ASEAN Free Trade Agreement has affected trade with non-members and external tariffs facing non-members. First, we examine the effect of preferential and external tariff reduction on import growth from ASEAN insiders and outsiders across HS 6-digit industries. We find no evidence that preferential liberalization has led to lower import growth from non-members. Second, we examine the relationship between preferential tariff reduction and MFN tariff reduction. We find that preferential liberalization tends to precede external tariff liberalization. To examine whether this tariff complementarity is a result of simultaneous decision making, we use the scheduled future preferential tariff reductions (agreed to in 1992) as instruments for actual preferential tariff changes after the Asia crisis. The results remain unchanged, suggesting that there is a causal relationship between preferential and MFN tariff reduction. We also find that external liberalization was relatively sharper in the products where preferences are likely to be most damaging, proving further support for a causal effect. Overall, our results imply that the ASEAN agreement has been a force for broader liberalization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0930.pdf

Anatomy of a Health Scare: Education, Income and the MMR Controversy in the UK

Dan Anderberg Arnaud Chevalier Jonathan Wadsworth

CEPDP0929. May 2009.One theory for why there is an education gradient in health outcomes is that more educated individuals more quickly absorb new health-related information. The measles, mumps, and rubella (MMR) controversy provides a case where, for a short period, some publicized research suggested that the particular childhood vaccine could have serious side-effects. As the controversy unfolded, uptake of the vaccine by more educated parents decreased relative to that of less educated parents, turning a positive education gradient into a negative one. We also consider the response in terms of uptake of other childhood vaccines and purchases of alternatives to the MMR.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0929.pdf

Risk Taking and Performance in Multistage Tournaments: Evidence from Weightlifting Competitions

Christos Genakos Mario Pagliero

CEPDP0928. May 2009.We analyze the impact of interim ranking on the risk taking and performance behaviour of professional athletes participating in international weightlifting competitions. Weightlifting competitions are multistage tournaments with the unique characteristic that the athletes must announce in advance the amount they intend to lift at each stage, thus allowing quantification of the riskiness of their choices. We present two key findings. First, risk taking exhibits an inverted-U relationship with rank: risk taking increases up to rank six, but athletes then revert to safer strategies towards the bottom of the ranking. Second, athletes systematically underperform when ranked closer to the top, despite higher incentives to perform well. An athlete is more than 30 percent less likely to lift the announced weight when ranked first than tenth. Athletes also underperform in relatively more prestigious competitions, when the competition is more intense, and when the potential gain from a successful lift is higher. Taken together, these findings suggest that athletes may systematically “choke under pressure”.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0928.pdf

The Distinct Effects of Information Technology and Communication Technology on Firm Organization

Nick Bloom Luis Garicano Raffaella Sadun John Van Reenen

CEPDP0927. May 2009.Empirical studies on information communication technologies (ICT) typically aggregate the ‘information’ and ‘communication’ components together. We show theoretically and empirically that this is problematic. Information and communication technologies have very different effects on the decisions taken at each level of an organization. Better information access pushes decisions down by allowing employees lower in the hierarchy to make decisions more effectively. Better communication pushes decisions up by allowing employees to pass decisions up to the top of the hierarchy more easily. Using an original dataset of firms from the US and seven European countries we study the impact of ICT on worker autonomy, plant manager autonomy and span of control. Consistently with the theory we find that better information technologies (Enterprise Resource Planning, ERP, for plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span of control. By contrast, communication technologies (like data networks) decrease autonomy for both workers and plant managers. Treating technology as endogenous using instrumental variables (distance from the birthplace of ERP and heterogeneous telecommunication costs arising from different regulatory regimes) strengthen our results.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0927.pdf

Long-Term Health Effects on the Next Generation of Ramadan Fasting During Pregnancy

Reyn van Ewijk

CEPDP0926. April 2009.Each year, many pregnant women fast from dawn to sunset during the Islamic holy month of Ramadan. Medical theory suggests that this may have negative long-term health effects on their offspring. Building upon the work of Almond and Mazumder (2008), and using Indonesian crosssectional data, I show that people who were exposed to Ramadan fasting during their mother’s pregnancy have a poorer general health and are sick more often than people who were not exposed. This effect is especially pronounced among older people, who, when exposed, also report health problems more often that are indicative of coronary heart problems and type 2 diabetes. The exposed are a bit smaller in body size and weigh less. Among Muslims born during, and in the months after, Ramadan, the share of males is lower, which is most likely to be caused by death before birth. I show that these effects are unlikely to be an artifact of common health shocks, correlated to the occurrence of Ramadan, or o f fasting mainly occurring among women who, irrespective of fasting or not, would have had unhealthier children anyway.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0926.pdf

The Empirics of New Economic Geography

Stephen Redding

CEPDP0925. April 2009.Although a rich and extensive body of theoretical research on new economic geography has emerged, empirical research remains comparatively less well developed. This paper reviews the existing empirical literature on the predictions of new economic geography models for the distribution of income and production across space. The discussion highlights connections with other research in regional and urban economics, identification issues, potential alternative explanations and possible areas for further research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0925.pdf

Employee Voice and Private Sector Workplace Outcomes in Britain, 1980-2004

Alex Bryson Rafael Gomez Tobias Kretschmer P Willman

CEPDP0924. April 2009.Non-union direct voice has replaced union representative voice as the primary avenue for employee voice in the British private sector. This paper provides a framework for examining the relationship between employee voice and workplace outcomes that explains this development. As exit-voice theory predicts, voice is associated with lower voluntary turnover, especially in the case of union voice. Union voice is also associated with greater workplace conflict and poorer productivity. Nonunion voice is associated with better workplace financial performance than other voice regimes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0924.pdf

Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy

Bianca De Paoli

CEPDP0923. April 2009.Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly affects optimal monetary policy and the performance of standard policy rules. In particular, when comparing complete and incomplete markets, the ranking of policy rules is entirely reversed, and so are the policy prescriptions regarding the optimal level of exchange rate volatility.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0923.pdf

Hot and Cold Seasons in the Housing Market

L. Rachel Ngai Silvana Tenreyro

CEPDP0922. April 2009.Every year during the second and thirdquarters (the “hot season”) housing markets in the UK and the US experience systematic above-trend increases in both prices and transactions. During the fourth and first quarters (the “cold season”), house prices and transactions fall below trend. We propose a search-and-matching framework that sheds new light on the mechanisms governing housing market fluctuations. The model has a “thick-market” effect that can generate substantial differences in the volume of transactions and prices across seasons, with the extent of seasonality in prices depending crucially on the bargaining power of sellers. The model can quantitatively mimic the seasonal fluctuations in transactions and prices observed in the UK and the US.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0922.pdf

Capital Flows and Asset Prices

Kosuke Aoki Gianluca Benigno Nobuhiro Kiyotaki

CEPDP0921. April 2009.After liberalizing international transactions of financial assets, many countries experience large swings in asset prices, capital flows, and aggregate production. This paper studies how the adjustment to capital account liberalization depends upon the degree of development of a domestic financial system, and why the economy with an underdeveloped financial system may be vulnerable to shocks to the domestic and foreign finance. We construct a model of a small open economy in which it is difficult to enforce debtors to repay their debts unless the debts are secured by collateral, and assets usable as collateral for international borrowing are more restricted than domestic borrowing.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0921.pdf

Unions and Workplace Performance in Britain and France

Alex Bryson John Forth Patrice Laroche

CEPDP0920. April 2009.Using nationally representative workplace surveys we examine the relationship between unionization and workplace financial performance in Britain and France. We find that union bargaining is detrimental to workplace performance in Britain and that this effect is larger when unionization is endogenized. In France, union bargaining is associated with poorer workplace performance but the effect disappears once unionization is treated as endogenous. However, high levels of union density do have a negative impact on workplace performance in France. In Britain the union effect does not rise with union density.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0920.pdf

'The Value of Rude Health': Employees' Well Being, Absence and Workplace Performance

David Marsden Simone Moriconi

CEPDP0919. April 2009.This paper brings new evidence on the relationship between employees' well being, sickness absence and four dimensions of workplace performance i.e. productivity, efficiency, quality of service and profitability. It uses a new panel dataset with monthly observations over two years for 48 local units of a large multi-site organisation in the logistics sector. It finds that good consultation and communication at the local level are associated with lower absenteeism. It also finds that lower absence is associated with higher efficiency, productivity, quality of the service and profitability of the firm. Finally, the authors suggest that the link between workers’ absence and this firm’s profitability runs through the increased use of replacement labour which raises short-run costs and reduces quality of service.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0919.pdf

Does Relative Income Matter? Are the Critics Right?

Richard Layard Guy Mayraz Stephen Nickell

CEPDP0918. March 2009.Do other peoples’ incomes reduce the happiness which people in advanced countries experience from any given income? And does this help to explain why in the U.S., Germany and some other advanced countries, happiness has been constant for many decades? The answer to both questions is ‘Yes’. We provide 4 main pieces of evidence. 1) In the U.S. General Survey (repeated samples since 1972) comparator income has a negative effect on happiness equal in magnitude to the positive effect of own income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfaction as the dependant variable. We also use the Panel to compare the effect of income comparisons and of adaptation as factors explaining the stable level of life-satisfaction: income comparisons emerge as much the more important. 3) When in our U.S. analysis we introduce “perceived” relative income as a potential explanatory variable, its effect is as large as the effect of actual relative income – further supporting the view that comparisons matter. 4) Finally, for a panel of European countries since 1973 we estimate the effect of average income upon average lifesatisfaction, splitting income into two components: trend and cycle. The effect of trend income is small and ill-defined. Our conclusions relate to time series and to advanced countries only. They differ from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies are largely cross-sectional and mostly include non-advanced as well as advanced countries.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0918.pdf

The Impacts of the Climate Change Levy on business: Evidence from Microdata

Ralf Martin Ulrich J. Wagner Laure B. de Preux

CEPDP0917. March 2009.We estimate the impacts of the Climate Change Levy (CCL) on manufacturing plants using panel data from the UK production census. Our identification strategy builds on the comparison of outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy after joining a Climate Change Agreement (CCA). Exploiting exogenous variation in eligibility for CCA participation, we find that the CCL had a strong negative impact on energy intensity and electricity use. We cannot reject the hypothesis that the tax had no detrimental effects on economic performance and on plant exit.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0917.pdf

Convergence of Firm-Level Productivity, Globalisation, Information Technology and Competition: Evidence from France

Paul-Antoine Chevalier Rémy Lecat Nicholas Oulton

CEPDP0916. March 2009.Studies of firm-level data have shown that there is a huge dispersion of productivity across firms even when industries are narrowly defined. So there is a significant opportunity for the least productive firms to catch up to the most productive. The formers’ convergence could therefore constitute an important part of productivity growth at the macroeconomic level. This article sheds light on this convergence process in the 1990s and the 2000s in France and on some of the factors which can explain it. Productivity convergence was stronger for labour productivity than for total factor productivity. But most importantly the speed of convergence has slowed during the course of the 1990s, a fact which is explained principally by the acceleration of the productivity of firms on the technological frontier. Three possible explanations of these stylised facts are considered: globalisation, information technology, and competition. Globalisation and information technology may have benefited the most productive firms more and the growth of competition may at the same time have stimulated the productivity of firms at the frontier while discouraging the convergence of the least productive firms.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0916.pdf

The Importance of Relative Performance Feedback Information: Evidence from a Natural Experiment using High School Students

Ghazala Azmat Nagore Iriberri

CEPDP0915. March 2009.We study the effect of providing relative performance feedback information on performance under piece-rate incentives. A natural experiment that took place in a high school offers an unusual opportunity to test this effect in a real-effort setting. For one year only, students received information that allowed them to know whether they were above (below) the class average as well as the distance from this average. We exploit a rich panel data set and find that the provision of this information led to an increase of 5% in students’ grades. Moreover, the effect was significant for the whole distribution. However, once the information was removed the effect disappeared. To rule out the concern that the effect may be driven by teachers within the school, we verify our results using national level exams (externally graded) for the same students, and the effect remains.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0915.pdf

Accounting for Research and Productivity Growth Across Industries

L. Rachel Ngai Roberto M. Samaniego

CEPDP0914. March 2009.What factors underlie industry differences in research intensity and productivity growth? We develop a multi-sector endogenous growth model allowing for industry specific parameters in the production functions for output and knowledge, and in consumer preferences. We find that industry differences in both productivity growth and R&D intensity mainly reflect differences in "technological opportunities", interpreted as parameters of knowledge production. These include the capital intensity of R&D, knowledge spillovers, and diminishing returns to R&D. Among these parameters, we find that the degree of diminishing returns to R&D is the dominant factor when the model is calibrated to account for crossindustry differences in the US.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0914.pdf

Leader Behavior and the Natural Resource Curse

Francesco Caselli Tom Cunningham

CEPDP0913. March 2009.We discuss political economy mechanisms which can explain the resource curse, in which an increase in the size of resource rents causes a decrease in the economy’s total value added. We identify a number of channels through which resource rents will alter the incentives of a political leader. Some of these induce greater investment by the leader in assets that favour growth (infrastructure, rule of law, etc.), others lead to a potentially catastrophic drop in such activities. As a result, the effect of resource abundance can be highly non-monotonic. We argue that it is critical to understand how resources affect the leader’s "survival function", i.e. the reduced-form probability of retaining power. We also briefly survey decentralised mechanisms, in which rents induce a reallocation of labour by private agents, crowding out productive activity more than proportionately. We argue that these mechanisms cannot be fully understood without simultaneously studying leader behaviour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0913.pdf

Government Transfers and Political Support

Marco Manacorda Edward Miguel Andrea Vigorito

CEPDP0912. March 2009.We estimate the impact of a large anti-poverty program – the Uruguayan PANES – on political support for the government that implemented it. The program mainly consisted of a monthly cash transfer for a period of roughly two and half years. Using the discontinuity in program assignment based on a pre-treatment score, we find that beneficiary households are 21 to 28 percentage points more likely to favor the current government (relative to the previous government). Impacts on political support are larger among poorer households and for those near the center of the political spectrum, consistent with the probabilistic voting model in political economy. Effects persist after the cash transfer program ends. We estimate that the annual cost of increasing government political support by 1 percentage point is roughly 0.9% of annual government social expenditures.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0912.pdf

Innovation and Institutional Ownership

Philippe Aghion John Van Reenen Luigi Zingales

CEPDP0911. February 2009.We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0911.pdf

Peer Effects in Science - Evidence from the Dismissal of Scientists in Nazi Germany

Fabian Waldinger

CEPDP0910. February 2009.This paper analyzes peer effects among university scientists. Specifically, it investigates whether the number of peers and their average quality affects the productivity of researchers in physics, chemistry, and mathematics. The usual endogeneity problems related to estimating peer effects are addressed by using the dismissal of scientists by the Nazi government as a source of exogenous variation in the peer group of scientists staying in Germany. Using a newly constructed panel dataset covering the universe of physicists, chemists, and mathematicians at all German universities from 1925 until 1938 I investigate peer effects at the local level and among co-authors. There is no evidence for localized peer effects, as neither department level (e.g. the physics department) nor specialization level (e.g. all theoretical physicists in the department) peers affect a researcher's productivity. Among co-authors, however, there is strong and significant evidence that peer quality affects a researcher's productivity. Loosing a co-author of average quality reduces the productivity of an average scientist by about 13 percent in physics and 16.5 percent in chemistry.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0910.pdf

The Macroeconomic Role of Unemployment Compensation

Tomer Blumkin Yossi Hadar Eran Yashiv

CEPDP0909. February 2009.The standard motivation for unemployment compensation is consumption smoothing and most papers in the literature have analyzed trade-offs involving consumption smoothing and moral hazard. This paper shows how such policy can increase output by enhancing the assignment of workers to jobs in the face of firm productivity heterogeneity and skill-biased technological change. It shows that in order to do so policy needs to be a function of the properties of the firm’s productivity distribution. The paper undertakes an empiricallygrounded, normative analysis of this issue. The analysis also bears upon the wage distribution, showing how optimal unemployment compensation policy is affected by wages and affects them in turn. A key insight emerging from the analysis is that the degree of firm productivity heterogeneity, in terms of skewness and variance, matters for the design of the time path of unemployment compensation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0909.pdf

International Trade Integration: A Disaggregated Approach

Natalie Chen Dennis Novy

CEPDP0908. January 2009.This paper investigates the sources and size of trade barriers at the industry level. We derive a micro-founded measure of industry-specific bilateral trade integration that has an in-built control for time-varying multilateral resistance. This trade integration measure is consistent with a broad range of recent trade models including the Anderson and van Wincoop (2003) framework, the Ricardian model by Eaton and Kortum (2002) and heterogeneous firms models. We use it to explore trade barriers for manufacturing industries in European Union countries between 1999 and 2003. We find a large degree of trade cost heterogeneity across industries. The most important trade barriers are transportation costs and policy factors such as Technical Barriers to Trade. Trade integration is generally lower for countries that opted out of the Euro or did not abolish border controls in accordance with the Schengen Agreement. Reductions in trade barriers explain about one-half of the growth in trade over the period 1999-2003 and are therefore a major driving force of the EU Single Market.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0908.pdf

To Leave or Not to Leave? A Regression Discontinuity Analysis of the Impact of Failing the High School Exit Exam

Dongshu Ou

CEPDP0907. January 2009.The high school exit exam (HSEE) is rapidly becoming a standardized assessment procedure for educational accountability in the United States. I use a unique state-specific dataset to identify the effect of failing the HSEE on the likelihood that a student drops out early based on a Regression Discontinuity design. It shows that students who barely fail the exam are more likely to exit than those who barely pass despite being offered retest opportunities. The discontinuity amounts to a large proportion of the dropout probability of barely-failers, particularly for minority and low-income students, suggesting that the potential benefit of raising educational standards might come at the cost of increasing inequalities in the educational system.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0907.pdf

The Margins of US Trade

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0906. January 2009.Recent research in international trade emphasizes the importance of firms’ extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed U.S. trade statistics to provide a broad overview of how the margins of trade contribute to variation in U.S. imports and exports across trading partners, types of trade (i.e. arm’s-length versus related-party) and both short and long time horizons. Among other results, we highlight the differential behaviour of related-party and arm’s-length trade in response to the 1997 Asian financial crisis.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0906.pdf

On the International Dimension of Fiscal Policy

Gianluca Benigno Bianca De Paoli

CEPDP0905. January 2009.This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0905.pdf

Economic Geography: A Review of the Theoretical and Empirical Literature

Stephen Redding

CEPDP0904. January 2009.This paper reviews the new economic geography literature, which accounts for the uneven distribution of economic activity across space in terms of a combination of love of variety preferences, increasing returns to scale and transport costs. After outlining the canonical core and periphery model, the paper examines the empirical evidence on three of its central predictions: the role of market access in deter- mining factor prices, the related home market effect in which demand has a more than proportionate effect on production, and the potential existence of multiple equilibria. In reviewing the evidence, we highlight issues of measurement and identification, alternative potential explanations, and remaining areas for further research.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0904.pdf

Change and Continuity Among Minority Communities in Britain

Andreas Georgiadis Alan Manning

CEPDP0903. January 2009.There is widespread concern currently that some ethnic minority communities within Britain, especially Muslim, are not following the stereotypical immigrant path of economic and cultural assimilation into British society. Indeed, many seem to have the impression that differences between Muslims and non-Muslims are widening. In this paper we compare the two largest Muslim communities in Britain (Pakistanis and Bangladeshis) with other ethnic minorities to ask the questions ‘are Muslims different?’ and ‘is their behaviour changing over time?’ The indicators we look at are the gender gap in education, age at marriage, cohabitation and inter-marriage, fertility and the employment of women. In all these dimensions we find that the Muslim communities are different but we also find evidence of change. This is partly because those born in Britain generally have markedly different behaviours from those born in the country of origin, but also because there is change within both the UK-born and foreign-born communities. The evidence suggests there is, along almost all dimensions, a movement towards convergence in behaviour.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0903.pdf

Trade, Technology Adoption and Wage Inequalities: Theory and Evidence

Maria Bas

CEPDP0902. December 2008.This paper develops a model of trade that features heterogeneous firms, technology choice and different types of skilled labor in a general equilibrium framework. Its main contribution is to explain the impact of trade integration on technology adoption and wage inequalities. It also provides empirical evidence to support the model’s predictions using plant-level panel data from Chile’s manufacturing sector (1990-1999). The theoretical framework offers a possible explanation of the puzzling increase in skill premium in the developing countries. The key mechanism is found in the effects of trade policy on the number of new firms upgrading technology and on the skill-intensity of labor. Trade liberalization pushes up export revenues, raising the probability that the most productive exporters will upgrade their technology. These firms then increase their relative demand for skilled labor, thereby raising inequalities.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0902.pdf

Service Traders in the UK

Holger Breinlich Chiara Criscuolo

CEPDP0901. December 2008.We provide a novel set of stylized facts on firms engaging in international trade in services, using unique firm-level data on services exports and imports in the United Kingdom in 2000- 2005. Less than 10% of firms trade in services but they can be found in all sectors of the UK economy. While the services sector accounts for 80% of total exports and imports, the frequency and trade intensity of services traders is often higher in sectors such as high- tech manufacturing. Services traders are bigger, more productive and are more likely to be foreign owned or part of a multinational enterprise. These ‘trade premia’ are smaller then for goods traders, however, with the exception of skill intensity which is higher among services traders. There are also significant differences between exporters and importers of services. Furthermore, we show that most firms only export or import a single service type and trade with a small number of countries. Trade volume, employment, turnover and value added are highly concentrated among a small group of firms trading with many countries and/or in many services types. These firms are characterised by bigger size and higher than average productivity, all of which seem to be principally correlated with more trade along the intensive margin (trade per services and country) .although there are a number of noteworthy exceptions. Interestingly, trade is also concentrated within .rms. The top export and import destination make up 70% of the average firm’s total trade and the top services type around 90%. This strong concentration is still present among firms trading with many countries and/or in many products.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0901.pdf

Protection and International Sourcing

Emanuel Ornelas John L. Turner

CEPDP0900. December 2008.We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing party, thereby improving its bargaining position. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive firms or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0900.pdf

Central Bank's Two-Way Communication with the Public and Inflation Dynamics

Kosuke Aoki Takeshi Kimura

CEPDP0899. November 2008.Using a model of island economy where financial markets aggregate dispersed information of the public, we analyze how two-way communication between the central bank and the public affects inflation dynamics. When inflation target is observable and credible to the public, markets provide the bank with information about the aggregate state of the economy, and hence the bank can stabilize inflation. However, when inflation target is unobservable or less credible, the public updates their perceived inflation target and the information revealed from markets to the bank becomes less perfect. The degree of uncertainty facing the bank crucially depends on how two-way communication works.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0899.pdf

Understanding the Gender Pay Gap: What's Competition Got to Do with It?

Alan Manning Farzad Saidi

CEPDP0898. November 2008.A number of papers have recently argued that men and women have different attitudes and behavioural responses to competition. Laboratory experiments suggest that these gender differences are very large but it is important to be able to map these findings into real world differences. In this paper, we use performance pay as an indicator of competition in the workplace and compare the gender gap in incidence of performance pay and earnings and work effort under these contracts. Women are less likely to found in performance pay contracts but the gender gap is small. Furthermore, the effect of performance pay on earnings is modest and does not differ markedly by gender. Consequently the ability of these theories to explain the gender pay gap seems very limited.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0898.pdf

Improving Access to Psychological Therapy: Initial Evaluation of the Two Demonstration Sites

David M. Clark Richard Layard Rachel Smithies

CEPDP0897. November 2008.The Government’s Improving Access to Psychological Therapy (IAPT) programme aims to implement NICE Guidance for people with depression and anxiety disorders. In the first phase of the programme, two demonstration sites were established in Doncaster and Newham with funding to provide increased availability of cognitive-behaviour therapy-based (CBT) services to those in the community who need them. The services opened in late summer 2006. This paper documents the achievements of the sites up to September 2007 (roughly their first year of operation) and makes recommendations for the future roll out of IAPT services.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0897.pdf

Does Family Control Affect Trade Performance? Evidence for Italian Firms

Giorgio Barba Navaretti Riccardo Faini Alessandra Tucci

CEPDP0896. November 2008.This paper examines whether the export decision of firms is affected by their ownership structure, specifically it looks at whether family control is an obstacle to entering foreign markets. The underlying assumption is that family firms are risk averse. Risk aversion may be an obstacle to entering foreign markets, as far as these are perceived as more volatile and risky than the domestic one, particularly when such choice entices bearing relatively high sunk costs. We develop an illustrative theoretical model that shows how the combination between high risk aversion and low initial productivity may hinder family firms’ decision to enter foreign markets, particularly distant ones. The empirical analysis, based on a detailed panel data set of Italian firms covering the years from 1995 to 2003, confirms such predictions by showing that family controlled firms do indeed export less than other type of companies even after controlling for firm heterogeneity in productivity, size, technology and access to credit.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0896.pdf

Why Capital does not Migrate to the South: A New Economic Geography Perspective

Jang Ping Thia

CEPDP0895. November 2008.This paper explains why capital does not flow from the North to the South - the Lucas Paradox - with a New Economic Geography model that incorporates mobile capital, immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories, the results show that even a small difference in the ex-ante productivity distribution between North and South can a have significant impact on the location of firms. Despite differences in aggregate capital to labour ratios, wage and rental rates continue to be the same in both locations. The paper also analyses the effects of risk on industrial locations, and shows why ‘low-tech’ industries tend to migrate to the South, while ‘high-tech’ industries continue to locate in the North.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0895.pdf

Survival of the Fittest in Cities: Agglomeration, Selection, and Polarisation

Kristian Behrens Frédéric Robert-Nicoud

CEPDP0894. October 2008.Empirical studies consistently report that labour productivity and TFP rise with city size. The reason is that cities attract the most productive agents, select the best of them, and make the selected ones even more productive via various agglomeration economies. This paper provides a microeconomically founded model of vertical city differentiation in which the latter two mechanisms (`agglomeration' and `selection') operate simultaneously. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, and how they interact through the channels of trade. We then uncover stylised facts and suggestive econometric evidence that are consistent with the most distinctive equilibrium features of our model. We show, in particular, that larger cities are both more productive and more unequal (`polarised'), that inter-city trade is associated with higher income inequalities, and that the proximity of large urban centres inhibits the development of nearby cities.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0894.pdf

Motivation and Sorting in Open Source Software Innovation

Sharon Belenzon Mark Schankerman

CEPDP0893. October 2008.This paper studies the role of intrinsic motivation, reputation, and reciprocity in driving open source software innovation. Unlike previous literature based on survey data, we exploit the observed pattern of contributions - the .revealed preference. of developers - to infer the underlying incentives driving the decision to contribute source code. Using detailed information on code contributions and project membership, we classify software developers into distinct types and study how contributions from each developer type vary according to the open source license type and other project characteristics. We find that developers strongly sort by license type, project size, and corporate sponsorship, and that reciprocity is important only for a small subset of projects. We also show that contributions have a substantial impact on the performance of open source projects.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0893.pdf

Urbanisation and Structural Transformation

Guy Michaels Ferdinand Rauch Stephen Redding

CEPDP0892. October 2008.This paper presents new evidence on urbanization using sub-county data for the United States from 1880-2000 and municipality data for Brazil from 1970-2000. We show that the two central stylized features of population growth for cities – Gibrat’s Law and a stable population distribution - are strongly rejected when both rural and urban areas are considered. Population growth exhibits a U-shaped relationship with initial population density, and only becomes uncorrelated with initial population density at the high densities found in predominantly urban areas. We provide evidence that the explanation for these patterns lies in different employment growth dynamics in the agricultural and non-agricultural sectors and the process of structural transformation away from the agricultural sector.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0892.pdf

Modern Management: Good for the Environment or Just Hot Air?

Nick Bloom Christos Genakos Ralf Martin Raffaella Sadun

CEPDP0891. October 2008.We use an innovative methodology to measure management practices in over 300 manufacturing firms in the UK. We then match this management data to production and energy usage information for establishments owned by these firms. We find that establishments in better managed firms are significantly less energy intensive. They use less energy per unit of output, and also in relation to other factor inputs. This is quantitatively substantial: going from the 25th to the 75th percentile of management practices is associated with a 17.4% reduction in energy intensity. This negative relationship is robust to a variety of controls for industry, location, technology and other factor inputs. Better managed firms are also significantly more productive. One interpretation of these results is that well managed firms are adopting modern lean manufacturing practices, which allows them to increase productivity by using energy more efficiently. This suggests that improving the management practices of manufacturing firms may help to reduce greenhouse gas emissions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0891.pdf

Comparing Willingness-to-Pay and Subjective Well-Being in the Context of Non-Market Goods

Paul Dolan Robert Metcalfe

CEPDP0890. October 2008.In order to value non-market goods, economists estimate individuals’ willingness to pay (WTP) for these goods using revealed or stated preference methods. We compare these conventional approaches with subjective well-being (SWB), which is based on individuals’ ratings of their happiness or life satisfaction rather than on their preferences. In the context of a quasi- experiment in urban regeneration, we find that monetary estimates from SWB data are significantly higher than from revealed and stated preference data. Stigma in revealed preferences, mental accounting in stated preferences and unspecified duration in SWB ratings might explain some of the difference between the valuation methods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0890.pdf

Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes

Alberto Galasso Mark Schankerman

CEPDP0889. August 2008.We study how fragmentation of patent rights (‘patent thickets’) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ‘pro-patent shift’ of CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0889.pdf

Does Planning Regulation Protect Independent Retailers?

Raffaella Sadun

CEPDP0888. August 2008.Entry regulations against big-box retailers have been introduced in many countries to protect smaller independent stores. Using a new dataset from the UK, I show that in fact these entry regulations have been associated with greater employment declines in independent stores they were meant to protect. The reason is that when large retail chains are prevented from entering a new area with a big-box store, they typically enter instead using a smaller in-town store format. These smaller format stores compete more directly with independent stores. To causally identify this impact I use the changing nature of local political control in the UK from 1993 to 2003. Since local politicians directly control planning regulation in the UK, and political parties have very different views on the ideal amount of planning control, this provides exogenous variation in the ease of entry for big-box retailers. I estimate that 15% of the employment decline experienced by independent retailers between 1998 and 2004 can be attributed to the perverse effect of planning regulation.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0888.pdf

Sales and Monetary Policy

Bernardo Guimaraes Kevin D. Sheedy

CEPDP0887. August 2008.A striking fact about prices is the prevalence of ``sales'': large temporary price cuts followed by a return exactly to the former price. This paper builds a macroeconomic model with a rationale for sales based on firms facing consumers with different price sensitivities. Even if firms can vary sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility of prices at the micro level due to sales does not translate into flexibility at the macro level.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0887.pdf

Effort and Comparison Income: Experimental and Survey Evidence

Andrew E. Clark David Masclet Marie-Claire Villeval

CEPDP0886. August 2008.This paper considers the effect of status or relative income on work effort, combining experimental evidence from a gift-exchange game with the analysis of multi-country ISSP survey data. We find a consistent negative effect of others’ incomes on individual effort in both datasets. The individual’s rank in the income distribution is a stronger determinant of effort than is others’ average income, suggesting that comparisons are more ordinal than cardinal. In the experiment, effort is also affected by comparisons over time: those who received higher income offers or enjoyed higher income rank in the past exert lower levels of effort for a given current income and rank.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0886.pdf

How Does Shared Capitalism Affect Economic Performance in the UK?

Alex Bryson Richard Freeman

CEPDP0885. August 2008.This paper uses nationally representative linked workplace-employee data from the British 2004 Workplace Employment Relations Survey to examine the operation of shared capitalist forms of pay – profit-sharing and group pay for performance, employee share ownership, and stock options—and their link to productivity. It shows that shared capitalism has grown in the UK, as it has in the US; that different forms of shared capitalist pay complement each other and other labour practices in the sense that firms use them together more than they would if they chose modes of pay and work practices independently; and that workplaces switch among schemes frequently, which suggests that they have trouble optimizing and the transactions cost of switching are relatively low. Among the single schemes, share ownership has the clearest positive association with productivity, but its impact is largest when firms combine it with other forms of shared capitalist pay and modes of organization.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0885.pdf

Trading Places: Employers, Unions and the Manufacture of Voice

Alex Bryson Rafael Gomez P Willman

CEPDP0884. August 2008.Using nationally representative workplace data for Britain we show that over the last quarter century union voice – especially union-only voice – has been associated with poorer climate, more industrial action, poorer financial performance and poorer labour productivity than nonunion voice and, in particular, direct voice. On the other hand, union-based voice regimes have experienced lower quit rates than non-union and “no voice” regimes, as theory predicts. Over that time, while the workplace incidence of voice has remained constant, with roughly 8 workplaces out of 10 providing some form of voice, there has been a big shift from union to non-union voice, particularly direct employer-made voice. Thus employers are prepared generally to bear the costs of voice provision and manifest a reluctance to engage with their workforce without voice mechanisms in place. The associations between non-union voice mechanisms and desirable workplace outcomes suggest that these costs may be lower than the benefits voice generates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0884.pdf

The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty

Jang Ping Thia

CEPDP0883. July 2008.This paper presents a model with monopolistic competition, productively heterogeneous firms, and business cycle aggregate shocks. With firm-specific productive heterogeneity, weaker firms quit when faced with a negative aggregate shock. Consequently, trade does not always increase firm-level aggregate productivity as negative shocks on the home market can be compensated for by positive shocks elsewhere. Weaker firms, which would otherwise quit in autarky, can continue to operate by exporting. Despite this, trade can still improve welfare for risk-averse consumers by reducing aggregate price fluctuations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0883.pdf

When Workers Share in Profits: Effort and Responses to Shirking

Richard Freeman

CEPDP0882. July 2008.This paper summarizes new evidence from the “Shared Capitalism” Project on the extent to which workers’ earnings depend on the performance of their firm or work group in the US and advanced European countries and on the impact of sharing arrangements on economic behavior. The evidence shows that: 1) a large and growing proportion of workers are covered by shared capitalism through worker profit-sharing, bonuses, or worker ownership of shares; 2) outcomes for workers and firms are higher under shared capitalism than under other work and pay arrangements; and 3) that worker co-monitoring helps overcome the free rider problem that arises when part of workers pay depends on the productivity and effort of all workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0882.pdf

Organizational Commitment: Do Workplace Practices Matter?

Alex Bryson Michael White

CEPDP0881. July 2008.Using nationally-representative linked employer-employee data for Britain this paper considers whether employers are able to influence the organizational commitment (OC) of their employees through the practices they deploy. We examine the association between OC and two broad groups of HRM practices emphasised in two different strands of the literature, namely “High-Performance Workplace Practices” (HPWPs) and practices associated with “Perceived Organizational Support” (POS). We consider their associations with mean workplace-level OC and individual employees’ OC. Although employers may be able to engender greater OC on the part of their employees, the practices that do so are not those emphasized in the HPWP literature, with the exception of consultation and the involvement of employees in decision-taking. POS practices fare a little better but, again, the findings are far from unequivocal. Furthermore, those practices that are ‘effective’ in engendering higher OC such as tolerance of absence, recruiting on ‘values’ and allowing employees to make decisions, tend to have a fairly low incidence in British workplaces. There is, however, one finding which chimes with the ideas underpinning the HPWP literature, namely that there are returns to the use of practices in combination. Analyses of both mean workplace-level OC and individual employee OC find an independent positive association between OC and the deployment of multiple practices in combination. This evidence is consistent with practices having synergies, as emphasised in some of the HPWP literature.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0881.pdf

Minimum Wages and Earnings Inequality in Urban Mexico. Revisiting the Evidence

Mariano Bosch Marco Manacorda

CEPDP0880. July 2008.This paper explores the contribution of the minimum wage to the well documented rise in earnings inequality in Mexico between the late 1980 and the late 1990s. In contrast to the view that sees minimum wages as an ineffective redistributive tool in developing countries, we find that the deterioration in the real bite of the minimum wage is responsible for the entire rise in inequality at the bottom of the distribution. Our result challenges the widespread perception that trade induced shocks are the single most important factor behind the recent rise in earnings inequality in several less developed economies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0880.pdf

Relative Factor Endowments and International Portfolio Choice

Alejandro Cuñat Christian Fons-Rosen

CEPDP0879. July 2008.This paper presents a model of international portfolio choice based on cross-country differences in relative factor abundance. Countries have varying degrees of similarity in their factor endowment ratios, and are subject to aggregate productivity shocks. Risk averse consumers can insure against these shocks by investing their wealth at home and abroad. In a many-good setup, the change in relative prices after a positive shock in a particular country provides insurance to countries that have dissimilar factor endowment ratios, but is bad news for countries with similar factor endowment ratios, since their incomes will worsen. Therefore countries with similar relative factor endowments have a stronger incentive to invest in one another for insurance purposes than countries with dissimilar endowments. Empirical evidence linking bilateral international investment positions to a proxy for relative factor endowments supports our theory: the similarity of host and source countries in their relative capital-labor ratios has a positive effect on the source country’s investment position in the host country. The effect of similarity is enhanced by the size of host countries as predicted by the theory.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0879.pdf

The Cost of Grade Retention

Marco Manacorda

CEPDP0878. July 2008.This paper uses administrative longitudinal micro data on the universe of Junior High school students in Uruguay to measure the effect of grade failure on students' subsequent school outcomes. Exploiting the discontinuity induced by a rule establishing automatic grade failure for pupils missing more than 25 days, I show that grade failure leads to substantial drop-out and lower educational attainment even after 4 to 5 years since the time when failure first occurred. Complementary evidence based on a change in the regime of grade promotion leads to very similar conclusions, suggesting that non-random sorting around the discontinuity point is unlikely to drive my results.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0878.pdf

A 'New Trade' Theory of GATT/WTO Negotiations

Ralph Ossa

CEPDP0877. June 2008.I develop a novel theory of GATT/WTO negotiations. This theory provides new answers to two prominent questions in the trade policy literature: first, what is the purpose of trade negotiations? And second, what is the role played by the fundamental GATT/WTO principles of reciprocity and nondiscrimination? Relative to the standard terms-of-trade theory of GATT/WTO negotiations, my theory makes two main contributions: first, it builds on a ‘new trade’ model rather than the neoclassical trade model and therefore sheds new light on GATT/WTO negotiations between similar countries. Second, it relies on a production relocation externality rather than the terms-of-trade externality and therefore demonstrates that the terms-of-trade externality is not the only trade policy externality which can be internalized in GATT/WTO negotiations.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0877.pdf

Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s

Monique Ebell Albrecht Ritschl

CEPDP0876. June 2008.We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0876.pdf

Evolution of Locations, Specialisation and Factor Returns with Two Distinct Waves of Globalisation

Jang Ping Thia

CEPDP0875. June 2008.This paper presents an economic geography model with two differentiated sectors that exhibit weaker inter and stronger intra-industry input-output linkages. Labour is also differentiated according to skills in a hierarchy of tasks they can perform. Globalisation occurs in two distinct phases, leading to the agglomeration of an industry (manufacturing) in the first wave, which is subsequently displaced by the other industry (services) when the second wave of globalisation takes place. Because of agglomeration effects, the increase in relative endowment of a factor may increase its relative wages, leading to more inequality. Within and between nations inequality can result.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0875.pdf

Product Market Deregulation and the U.S. Employment Miracle

Monique Ebell Christian Haefke

CEPDP0874. June 2008.We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual bargaining. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980's and 1990's could be attributed to product market deregulation. Under a traditional calibration, our results suggest that a decrease of less than two-tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount. Under a small surplus calibration, however, product market deregulation can account for the entire decline in US trend unemployment over the 1980's and 1990's.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0874.pdf

Resurrecting the Participation Margin

Monique Ebell

CEPDP0873. June 2008.This paper considers a real business cycle model with search frictions in the labor market and labor supply which is elastic along the participation margin. Previous authors have found that such models generate counterfactually procyclical unemployment and a positively-sloped Beveridge curve. This paper presents a calibrated model which succeeds at generating countercyclical unemployment and a negatively-sloped Beveridge curve despite the presence of a participation margin.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0873.pdf

Wage Setting Patterns and Monetary Policy: International Evidence

Giovanni Olivei Silvana Tenreyro

CEPDP0872. June 2008.Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto presents the most well-known case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of the calendar year. In contrast, wage agreements in Germany are well-spread within the year, implying a relatively uniform degree of rigidity. We exploit variation in the timing of wagesetting decisions within the year in Japan, the United States, Germany, the United Kingdom, and France to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage-rigidity plays a key role in the transmission of monetary policy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0872.pdf

Vulnerability of Currency Pegs: Evidence from Brazil

Bernardo Guimaraes

CEPDP0871. June 2008.This paper analyses predictions of a simple model of currency crises in which the peg will be abandoned when the currency overvaluation hits a certain threshold, unknown to the agents. Due to learning about the threshold, some features usually observed in the data and identified with models with multiple equilibria arise in the model. But the model yields distinctive predictions about the behaviour of the probability and the expected magnitude of a currency devaluation. The paper identifies the probability and expected magnitude of a devaluation of Brazilian Real in the period leading up to the end of the Brazilian pegged exchange rate regime, using data on exchange rate options. The empirical results are consistent with model predictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0871.pdf

Was Germany Ever United? Evidence from Intra- and International Trade 1885-1933

Nikolaus Wolf

CEPDP0870. May 2008.This paper asks whether Germany was ever an economically integrated area. I explore the geography of trade costs in a new data set of about 40,000 observations on regional trade flows within and across the borders of Germany over the period 1885 – 1933. There are three key results. First, the German Empire before 1914 was a poorly integrated economy, both relative to integration across the borders of the German state and internally. Second, this internal fragmentation had its origins in administrative borders within Germany, in a geographical barrier that divided Germany roughly along natural trade routes into east and west, and in a considerable cultural heterogeneity within Germany prior to 1919. Third, internal integration improved along with external disintegration in the wake of the war, partly due to border changes along the lines of ethno-linguistic heterogeneity and again with the Great Depression. By the end of the Weimar Republic in 1933, Germany was reasonably well integrated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0870.pdf

Mapping Prices into Productivity in Multisector Growth Models

L. Rachel Ngai Roberto M. Samaniego

CEPDP0869. May 2008.Two issues related to mapping a multi-sector model into a reduced-form value-added model are often neglected: the composition of intermediate goods, and the distinction between value added productivity and gross output productivity. We demonstrate their quantitative significance for the case of the well known model of Greenwood, Hercowitz and Krusell (1997), who find that about 60% of economic growth can be attributed to investment-specific technical change (ISTC). When we recalibrate their model to allow for even a small equipment share of intermediates, we find that ISTC accounts for almost the entirety of postwar US growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0869.pdf

Does Regionalism Affect Trade Liberalization Towards Non-Members?

Antoni Estevadeordal Caroline Freund Emanuel Ornelas

CEPDP0868. May 2008.We examine the effect of regionalism on unilateral trade liberalization using industry-level data on applied MFN tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these “complementarity effects” of preferential liberalization on external liberalization do not arise in customs unions. Overall, our results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0868.pdf

A Tale of Two Countries: Unions, Closures and Growth in Britain and Norway

Alex Bryson Harald Dale-Olsen

CEPDP0867. May 2008.Using linked private sector employer-employee panel data for Britain and Norway we explore the effects of unionization on workplace closure and employment growth over the period 1997-2004. Unions prolonged the life of low-wage workplaces in Britain, whereas Norwegian unions increased (reduced) closure hazards in high (low) waged workplaces. Contrary to earlier studies, unions had no effect on workplace growth in Britain. In Norway, union workplaces experienced 4 percent per annum lower growth. However, the estimation of a dynamic panel data model for Norway indicates positive long-term causal effects of union density on employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0867.pdf

Multinational Firms, Monopolistic Competition and Foreign Investment Uncertainty

Arunish Chawla

CEPDP0866. April 2008.This is a model of multinational firms, which introduces option value of foreign direct investment, into a framework of Dixit-Stiglitz type monopolistic competition. Starting from a pure trading equilibrium and solving for the optimal investment rule gives a scale-up factor which implies existence of a wedge between markup revenues and foreign investment costs. Greater volatility and risk aversion increase this scale-up over foreign investment costs implying a delay in the exercise of FDI option, while growing market size and national income facilitate early exercise. The model is extended to include a Poisson jump process, which has policy implications for FDI reforms and explains ‘wait and watch’ behaviour of multinational firms better than a pure comparative advantage-trade cost framework does. While investment under uncertainty literature is based on the theory of call options, I solve ‘FDI option’ as a put option, thereby also enriching the theory of real options.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0866.pdf

Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship

Niko Matouschek P Ramezzana Frédéric Robert-Nicoud

CEPDP0865. April 2008.We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0865.pdf

Union Decline in Britain

David Blanchflower Alex Bryson

CEPDP0864. April 2008.This paper investigates the demise of unionisation in British private sector workplaces over the last quarter century. We show that dramatic union decline has occurred across all types of workplace. Although the union wage premium persists it is quite small in 2004. Negative union effects on employment growth and financial performance are largely confined to the 1980s. Managerial perceptions of the climate of relations between managers and workers has deteriorated since the early 1980s across the whole private sector, whether the workplace is unionised or not.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0864.pdf

Policy Uncertainty and Precautionary Savings

Francesco Giavazzi Michael F. McMahon

CEPDP0863. April 2008.In 1997 Chancellor Kohl proposed a major pension reform: he pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law - one that is crucial for our identification strategy - is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke of the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labor market choices: we find evidence of a labor supply response by those workers who can use the margin offered by part-time employment.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0863.pdf

Delayed Doves: MPC Voting Behaviour of Externals

Stephen Hansen Michael F. McMahon

CEPDP0862. April 2008.The use of independent committees for the setting of interest rates, such as the Monetary Policy Committee (MPC) at the Bank of England, is quickly becoming the norm in developed economies. In this paper we examine the issue of appointing external members (members who are outside the staff of the central bank) to these committees. We construct a model of MPC voting behaviour, and show that members who begin voting for similar interest rates should not systematically diverge from each other at any future point. However, econometric results in fact show that external members initially vote in line with internal members, but after a year, begin voting for substantially lower interest rates. The robustness of this effect to including member fixed effects provides strong evidence that externals behave differently from internals because of institutional differences between the groups, and not some unobserved heterogeneity. We then examine whether career concerns can explain these findings, and conclude that they cannot.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0862.pdf

Private Sector Employment Growth, 1998-2004: A Panel Analysis of British Workplaces

Alex Bryson Satu Nurmi

CEPDP0861. April 2008.Using nationally representative panel data for British private sector workplaces this paper points to the importance of distinguishing between workplace and firm size when analysing employment growth, and finds that the factors associated with growth differ markedly between single independent establishments and those belonging to multi-site firms. Results also differ according to whether one adjusts for sample selection arising from workplace survival, and according to whether one distinguishes between growth per se and internal, organic employment growth. We find evidence at the plant level that is consistent with creative job destruction.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0861.pdf

Tax Cuts in Open Economies

Alejandro Cuñat Szabolcs Deak Marco Maffezzoli

CEPDP0860. March 2008.A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income tax cut is partly - or, depending on parameter values, even completely - offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate the internaional trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0860.pdf

Union Density and Varieties of Coverage: The Anatomy of Union Wage Effects in Germany

Bernd Fitzenberger Karsten Kohn Alexander C. Lembcke

CEPDP0859. March 2008.Collective bargaining in Germany takes place either at the industry level or at the firm level; collective bargaining coverage is much higher than union density; and not all employees in a covered firm are necessarily covered. This institutional setup suggests to distinguish explicitly union power as measured by net union density (NUD) in a labor market segment, coverage at the firm level, and coverage at the individual level. Using linked employer-employee data and applying quantile regressions, this is the first empirical paper which simultaneously analyzes these three dimensions of union influence on the structure of wages. Ceteris paribus, a higher share of employees in a firm covered by industry-wide or firm-level contracts is associated with higher wages. Yet, individual bargaining coverage in a covered firm shows a negative impact both on the wage level and on wage dispersion. A higher union density is negative at all points in the wage distribution for uncovered employees. In line with an insurance motive, higher union density compresses the wage structure and, at the same time, it is associated with a uniform leftward movement of the distribution for uncovered employees.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0859.pdf

International Trade, Minimum Quality Standards and the Prisoners' Dilemma

Dimitra Petropoulou

CEPDP0858. February 2008.Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0858.pdf

Efficiency Wages and the Economic Effects of the Minimum Wage: Evidence from a Low-Wage Labour Market

Andreas Georgiadis

CEPDP0857. February 2008.We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0857.pdf

Employment Outcomes in the Welfare State

L. Rachel Ngai Christopher A. Pissarides

CEPDP0856. February 2008.We examine the implications of tax and subsidy policies for employment in the "three worlds of welfare", Anglo-Saxon, Continental European and Scandinavian. We argue that home production is key to a proper evaluation of the employment outcomes. Anglo-Saxon low-support policies encourage more overall market employment. Continental transfer polilcies encourage more home production in services with close substitutes at home. Scandinavian policies give incentives to move home production in social services to the market but discourage other service activity. We find support for our claims in sectoral employment data for five representative countries, United States, Britain, France, Italy and Sweden.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0856.pdf

Talking Less and Moving the Market More: Is this the Recipe for Monetary Policy Effectiveness? Evidence from the ECB and the Fed

Carlo Rosa

CEPDP0855. February 2008.This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First we do a comparative study exercise. We find that on monetary policy committee meeting days both the ECB and the Fed can move market rates using either monetary policy or news shocks. However, the response of the long-end of the American term structure to the surprise component of Fed's statements is significantly larger than the reaction of European long-term yields to ECB's announcements. This result is intimately related to the higher transparency of U.S. Fed statements compared to ECB announcements rather than to the different institutional mandate of the two central banks. Second, we investigate the cross-effects i.e. the Fed's ability to move European interest rates and the corresponding ECB's capacity to move American rates. We find that the Fed has been more able to move the European interst rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0855.pdf

Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly

Dimitra Petropoulou

CEPDP0854. February 2008.A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolistic service providers to some contacts but duopolists over contacts they share in their network overlap. the intermediaries' inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0854.pdf

The Ins and Outs of European Unemployment

Barbara Petrongolo Christopher A. Pissarides

CEPDP0853. February 2008.In this paper we study the contribution of inflows and outflows to the dynamics of unemployment in three European countries, the United Kingdom, France and Spain. We compare performance in these three countries making use of both administrative and labor force survey data. We find that the impact of the 1980s reforms in Britain is evident in the contributions of the inflow and outflow rates. The inflow rate became a bigger contributor after the mid 1980s, although its significance subsided again in the late 1990s and 2000s. In France the dynamics of unemployment are driven virtually entirely by the outflow rate, which is consistent with a regime with strict employment protection legislation. In Spain, however, both rates contribute significantly to the dynamics, very likely as a consequence of the prominence of fixed-term contracts since the late 1980s.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0853.pdf

Panic on the Streets of London: Police, Crime and the July 2005 Terror Attacks

Mirko Draca Stephen Machin Robert Witt

CEPDP0852. February 2008.In this paper we study the causal impact of police on crime by looking at what happened to crime before and after the terror attacks that hit central London in July 2005. The attacks resulted in a large redeployment of police officers to central London boroughs as compared to outer London - in fact, police deployment in central London increased by over 30 percent in the six weeks following the July 7 bombings. During this time crime fell significantly in central relative to outer London. Study of the timing of the crime reductions and their magnitude, the types of crime which were more likely to be affected and a series of robustness tests looking at possible biases all make us confident that our research approach identifies a causal impact of police on crime. Implementing an instrumental variable approach shows an elasticity of crime with respect to police approximately -0.3, so that a 10 percent increase in police activity reduces crime by around 3 percent.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0852.pdf

On the Relative Gains to Immigration: A Comparison of the Labour Market Position of Indians in the USA, the UK and India

Jonathan Wadsworth Augustin de Coulon

CEPDP0851. February 2008.While most studies of the decision to immigrate focus on the absolute income differences between countries, we argue that relative change in purchasing power or status, as captured by an individual’s ranking in the wage distribution, may also be important. This will in turn be influenced by differential levels of supply, demand and migration costs across the skill distribution and across countries. Using data on Indian immigrants in the United States and the UK matched to comparable data on individuals who remained in India, we show that the average Indian immigrant will experience a fall in their relative ranking in the wage distribution compared to the position they would have achieved had they remained in the origin country. The fall in relative rankings is larger for immigrants to the UK than to the US, and largest of all for those with intermediate skills.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0851.pdf

A Swing-State Theory of Trade Protection in the Electoral College

Mirabelle Muûls Dimitra Petropoulou

CEPDP0849. February 2008.This paper develops an infinite-horizon, political agency model with a continuum of political districts, in which incumbent politicians can improve their re-election probability by attracting swing voters in key states through strategic trade protection. A unique equilibrium is shown to exist where incumbents build a reputation of protectionism through their policy decisions. We show that strategic trade protection is more likely when protectionist swing voters have a lead over free-trade supporters in states with relatively strong electoral competition that represent a larger proportion of Electoral College votes. US data is used to test the hypothesis that industrial concentration in swing and decisive states is an important determinant of trade protection of that industry. The empirical findings provide support for the theory and highlight an important, and previously overlooked, determinant of trade protection in the US Electoral College.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0849.pdf

Information Costs, Networks and Intermediation in International Trade

Dimitra Petropoulou

CEPDP0848. February 2008.This paper presents a pairwise matching model with two-sided information asymmetry to analyse the impact of information costs on endogenous network building and matching by information intermediaries. The framework innovates by examining the role of information costs on incentives for trade intermediation, thereby endogenising the pattern of direct and indirect trade. Intermediation is shown to unambiguously raise expected trade volume and social welfare by expanding the set of matching technologies available to traders. Moreover, convexity in network-building costs is necessary for both direct and indirect trade to arise in equilibrium while the pattern of trade is shown to depend on the level of information costs as well as the relative effectiveness of direct and indirect matching technologies with changing information costs. The model sheds light on the relationship between information frictions and aggregate trade volume, which may be non-monotonic as a result of conflicting effects of information costs on the incentives for direct and indirect trade.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0848.pdf

Optimal External Debt and Default

Bernardo Guimaraes

CEPDP0847. February 2008.This paper analyses whether sovereign default episodes can be seen as contingencies of optimal international lending contracts. The model considers a small open economy with capital accumulation and without commitment to repay debt. Taking first order approximations of Bellman equations, I derive analytical expressions for the equilibrium level of debt and the optimal debt contract. In this environment, debt relief generated by reasonable fluctuations in productivity is an order of magnitude below that generated by shocks to world interest rates. Debt relief prescribed by the model following the interest rate hikes of 1980-81 accounts for a substantial part of the debt forgiveness obtained by the main Latin American countries through the Brady agreements.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0847.pdf

On the Extent of Re-Entitlement Effects in Unemployment Compensation

Javier Ortega Laurence Rioux

CEPDP0846. January 2008.A dynamic labor matching economy is presented, in which the unemployed are either entitled to unemployment insurance (UI) or unemployment assistance (UA), and the employees are either eligible for UI or UA upon future separations. Eligibility for UI requires a minimum duration of contributions and UI benefits are then paid for a limited duration. Workers are risk-averse and wages are determined in a bilateral Nash bargain. As eligibility for UI does not automatically follow from employment, the two types of unemployed workers have different threat points, which delivers equilibrium wage dispersion. Most of the variables and parameters of the model are estimated using the French sample of the European Community Household Panel (1994-2000). We show that extending the UI entitlement improves the situation of all groups of workers and slightly lowers unemployment, while raising UI benefits harms the unemployed on assistance and raises unemployment. Easier eligibility fo r UI also improves the situation of all groups of workers and favors relatively more the least well-off than longer entitlement. The re-entitlement effect in France lowers by 10% the rise in the wage and by 13% the rise in unemployment following a 10% increase in benefit levels.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0846.pdf

A Simple Model of the Juggernaut Effect of Trade Liberalisation

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0845. January 2008.This paper posits a formal political economy model where the principle of reciprocity in multilateral trade talks results in the gradual elimination of tariffs. Reciprocity trade talks turn each nation’s exporters into anti-protectionists at home; they lower foreign tariffs by convincing their own government to lower home tariffs. Due to the new array of political forces, each government finds it politically optimal to remove tariffs that it previously found politically optimal to impose. The one-off global tariff cut then reshapes the political economy landscape via entry and exit – reducing the size/influence of import-competing sectors and increasing that of exporters. In the next round of trade talks governments therefore find it politically optimal to cut tariffs again. The process may continue until tariffs are eliminated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0845.pdf

Labor Market Institutions Around the World

Richard Freeman

CEPDP0844. January 2008.This paper documents the large cross-country differences in labor institutions that make them a candidate explanatory factor for the divergent economic performance of countries and reviews what economists have learned about the effects of these institutions on economic outcomes. It identifies three ways in which institutions affect economic performance: by altering incentives, by facilitating efficient bargaining, and by increasing information, communication, and trust. The evidence shows that labor institutions reduce the dispersion of earnings and income inequality, which alters incentives, but finds equivocal effects on other aggregate outcomes, such as employment and unemployment. Given weaknesses in the crosscountry data on which most studies focus, the paper argues for increased use of micro-data, simulations, and experiments to illuminate how labor institutions operate and affect outcomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0844.pdf

Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance

Emma Hall Carol Propper John Van Reenen

CEPDP0843. January 2008.Labor market regulation can have harmful unintended consequences. In many markets, especially for public sector workers, pay is regulated to be the same for individuals across heterogeneous geographical labor markets. We would predict that this will mean labor supply problems and potential falls in the quality of service provision in areas with stronger labor markets. In this paper we exploit panel data from the population of English acute hospitals where pay for medical staff is almost flat across the country. We predict that areas with higher outside wages should suffer from problems of recruiting, retaining and motivating high quality workers and this should harm hospital performance. We construct hospital-level panel data on both quality - as measured by death rates (within hospital deaths within thirty days of emergency admission for acute myocardial infarction, AMI) - and productivity. We present evidence that stronger local labor markets significantly worsen hospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a 4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals in high outside wage areas having to rely more on temporary “agency staff” as they are unable to increase (regulated) wages in order to attract permanent employees. By contrast, we find no systematic role for an effect of outside wages of performance when we run placebo experiments in 42 other service sectors (including nursing homes) where pay is unregulated.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0843.pdf

Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data

Fabrice Defever Farid Toubal

CEPDP0842. December 2007.We investigate the role of a firm’s total factor productivity in its decision to import from their affiliates rather than from independent input suppliers. We propose a slightly modified version of the Antràs and Helpman (2004) model. We assume higher fixed costs under outsourcing and a firm-specific production function. We use detailed French firm-level data that provides a geographical breakdown of French firms’ import at product level and their sourcing modes in 1999. We find strong empirical support for the theoretical predictions of the model. In particular, high-productivity firms that have a production process intensive in suppliers’ inputs source their inputs through independent foreign suppliers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0842.pdf

What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform

Barbara Petrongolo

CEPDP0841. December 2007.This paper investigates long-term returns from unemployment compensation, exploiting variation from the UK JSA reform of 1996, which implied a major increase in job search requirements for eligibility and in the related administrative hurdle. Search theory predicts that such changes should raise the proportion of non-claimant nonemployed, with consequences on search effort and labor market attachment, and lower the reservation wage of the unemployed, with negative effects on post-unemployment wages. I test these ideas on longitudinal data from Social Security records (LLMDB). Using a difference in differences approach, I find that individuals who start an unemployment spell soon after JSA introduction, as opposed to six months earlier, are 2.5-3% more likely to move from unemployment into Incapacity Benefits spells, and 4% less likely to have positive earnings in the following year. This latter employment effect only vanishes four years after the initial unemployment shock. At the same time, earnings for the treated individuals seem to be lower than for the non treated, but the confidence intervals around these estimated effects are quite large to exclude a wider variety of scenarios. These results suggest that while tighter search requirements were successful in moving individuals off unemployment benefits, they were not successful in moving them onto new or better jobs, with fairly long lasting unintended consequences on a number of labor market outcomes.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0841.pdf

Robustly Optimal Monetary Policy

Kevin D. Sheedy

CEPDP0840. November 2007.This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0840.pdf

The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?

Christopher A. Pissarides

CEPDP0839. November 2007.I study the cyclical behavior of an equilibrium search model with endogenous job creation and destruction, with focus on the model’s failure to match the observed cyclical volatility of unemployment. Job creation in the model is influenced by wages in new matches. I summarize microeconometric evidence on wages in new matches and show that the key model elasticities are consistent with the evidence. Therefore explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages. I discuss some extensions of the model that can increase cyclical unemployment volatility through mechanisms other than wage stickiness.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0839.pdf

Inflation Persistence When Price Stickiness Differs Between Industries

Kevin D. Sheedy

CEPDP0838. November 2007.There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change after a shock has dissipated, making inflation persistence much harder to explain.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0838.pdf

Intrinsic Inflation Persistence

Kevin D. Sheedy

CEPDP0837. November 2007.It is often argued that the New Keynesian Phillips curve is at odds with the data because it cannot explain inflation persistence — the difficulty of returning inflation immediately to target after a shock without any loss of output. This paper explains how a model where newer prices are stickier than older prices is consistent with this phenomenon, even though it introduces no deviation from optimizing, forwards-looking price setting. The probability of adjusting new and old prices is estimated using a novel method that draws only on macroeconomic data, and the findings strongly support the premise of the model.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0837.pdf

Lags and Leads in Life Satisfaction: A Test of the Baseline Hypothesis

Andrew E. Clark Ed Diener Yannis Georgellis Richard E. Lucas

CEPDP0836. November 2007.We look for evidence of habituation in twenty waves of German panel data: do individuals, after life and labour market events, tend to return to some baseline level of well-being? Although the strongest life satisfaction effect is often at the time of the event, we find significant lag and lead effects. We cannot reject the hypothesis of complete adaptation to marriage, divorce, widowhood, birth of child, and layoff. However, there is little evidence of adaptation to unemployment. Men are somewhat more affected by labour market events (unemployment and layoffs) than are women, but in general the patterns of anticipation and adaptation are remarkably similar by sex.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0836.pdf

Creative Destruction with On-the-Job Search

Jean-Baptiste Michau

CEPDP0835. November 2007.This paper is about the labour market consequences of creative destruction with on-the-job search. We consider a matching model in an economy with embodied technological progress and show that its dynamics are profoundly affected by allowing on-the-job search. We obtain that the elasticity of unemployment with respect to growth shrinks from 1.63 to 0.13. Moreover, the underlying transmission channels change as the flow of obsolete jobs practically disappears and is replaced by a flow of job-to-job transitions. These effects persist even if employed job seekers are significantly less efficient in the search process than the unemployed. Thus, we show that, rather than contributing to unemployment, creative destruction induces a direct reallocation of workers from low to high productivity jobs. These results could be strengthened by assuming that search efforts are unobservable by firms which induces more on-the-job search. However, the action of worker is no longer surplus maximizing and, hence, the worker’s welfare is increasing in the cost of search which acts as a commitment device. Finally, we show that the model could be extended by allowing for variable search intensity.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0835.pdf

Scylla and Charybdis. The European Economy and Poland's Adherence to Gold, 1928-1936

Nikolaus Wolf

CEPDP0834. November 2007.This paper examines the timing of exit from the gold-exchange standard for European countries based on a panel of monthly observations 1928-1936 for two purposes: first it aims to understand the enormous variation in monetary policy choices across Europe. I show that the pattern of exit from gold can be understood in terms of variation in factors commonly suggested in the theoretical literature, which makes it possible to predict with reasonable accuracy the very month when a country will exit gold in the 1930s. Second, I analyse the case of Poland more closely because it appears to be an intriguing outlier. Poland did not leave gold until April 1936 and suffered through one of the worst examples of a depression, with massive deflation and a complete collapse of industrial production. The estimated model fares worst for Poland, and predicts an exit even later than April 1936. By closer inspection, the factors that drive this prediction are the non-democratic character of the regime and a surprisingly high degree of trade integration with France. I argue that Poland’s monetary policy was determined by attempts of the Piłsudski regime to defend Poland against foreign (esp. German) aggression. I provide evidence that strongly supports this view until about mid-1933. Ironically, just when Poland had joined the gold-bloc there were signs of a broad strategic reorientation, which paved the way for an exit in 1936.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0834.pdf

Innovation in Business Groups

Sharon Belenzon Tomer Berkovitz

CEPDP0833. November 2007.Using novel data on European firms, this paper examines the effect of business group affiliation on innovation. We find that business groups foster the scale and novelty of corporate innovation. Group affiliation is particularly important in industries that rely more on external finance and have a higher degree of information asymmetry. We also find that the innovation of affiliates is less sensitive to operating cash flows. We interpret our results as supporting the ‘bright side’ of business group internal capital markets and explain how legal boundaries between group affiliates mitigate the inefficiencies found in internal capital markets of US conglomerates.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0833.pdf

Incentives in Competitive Search Equilibrium

Espen R. Moen A Rosen

CEPDP0832. November 2007.This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0832.pdf

U.S. Labor Market Dynamics Revisited

Eran Yashiv

CEPDP0831. November 2007.The picture of U.S. labor market dynamics is opaque. Empirical studies have yielded contradictory findings and debates have emerged regarding their implications. This paper aims at clarifying the picture, which is important for the understanding of the operation of the labor market, for the study of business cycles, for the explanation of wage behavior, and for the formulation of policy. The paper determines what facts can be established, what are their implications, and what remains to be further investigated. The main contributions made here are: (i) Listing of data facts that can be agreed upon. These indicate that there is considerable cyclicality and volatility of both accessions to employment and separations from it. Hence, both are important for the understanding of the business cycle. (ii) Presenting the business cycle facts of key series. (iii) Pointing to specific gaps in the data picture: disparities in the measurement of the sizeable flows between employment and the pool of workers out of the labor force, disagreements about the relative volatility of job finding and separation rates across data sets, and the fact that the fit of the gross flows data with net employment growth data differs across studies and is not high. The definite characterization of labor market dynamics depends upon the closing of these data gaps.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0831.pdf

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

Laura Alfaro Andrew Charlton

CEPDP0830. November 2007.In this paper we distinguish different “qualities” of FDI to re-examine the relationship between FDI and growth. We use ‘quality’ to mean the effect of a unit of FDI on economic growth. However this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure Hence, we differentiate “quality FDI” in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0830.pdf

Cost-Benefit Analysis of Psychological Therapy

David Clark Martin Knapp Richard Layard Guy Mayraz

CEPDP0829. October 2007.At present six million people are suffering from clinical depression or anxiety disorders, but only a quarter of them are in treatment. NICE Guidelines prescribe the offer of evidence-based psychological therapy, but they are not implemented, due to lack of therapists within the NHS. We therefore estimate the economic costs and benefits of providing psychological therapy to people not now in treatment. The cost to the government would be fully covered by the savings in incapacity benefits and extra taxes that result from more people being able to work. On our estimates the cost could be recovered within two years – and certainly within five. And the benefits to the whole economy are greater still. This is not because we expect the extra therapy to be targeted especially at people with problems about work. It is because the cost of the therapy is so small (£750 in total), the recovery rates are so high (50%) and the cost of a person on IB is so large (£750 per month). These findings strongly reinforce the humanitarian case for implementing the NICE Guidelines. Current proposals for doing this would require some 8,000 extra psychological therapists within the NHS over the next six years.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0829.pdf

Maternal Smoking During Pregnancy and Early Child Outcomes

Emma Tominey

CEPDP0828. October 2007.We estimate the harm from smoking during pregnancy upon child birth outcomes, using a rich dataset on a cohort of mothers and their births. We exploit a fixed effects approach to disentangle the correlation between smoking and birth weight from the causal effect. We find that, despite a detailed set of controls for maternal traits, around one-third of the harm from smoking is explained by unobservable traits of the mother. Smoking tends to reduce birth weight by 1.7%, but has no significant effect on the probability of having a low birth weight child, pre-term gestation or weeks of gestation. Exploring heterogeneity in the effect on birth weight, it is mothers who smoke for the 9 months of gestation that suffer the harm, whereas there is an insignificant effect for mothers who chose to quit by month 5. Additionally, there is evidence of potential complementarity in investment of human capital, as the impact on birth weight of smoking is much greater for low educated mothers, even controlling for the quantity of cigarettes they smoke. We suggest policy should target the low educated mothers, offering a more holistic approach to improving child health, as quitting smoking is only half of the battle.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0828.pdf

Testing the "Waterbed" Effect in Mobile Telephony

Christos Genakos Tommaso Valletti

CEPDP0827. October 2007.This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the “waterbed” effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile network industry. Using a uniquely constructed panel of mobile operators’ prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0827.pdf

Information Technology, Organization, and Productivity in the Public Sector: Evidence from Police Departments

Luis Garicano Paul Heaton

CEPDP0826. October 2007.We examine how information technology (IT) contributes to organizational change, labor demand, and improved productivity in the public sector using a new panel data set of police departments covering 1987-2003. While IT adoption is associated with increased administrative and organizational complexity and use of more highly educated officers, IT itself does not appear to enhance crimefighting effectiveness. These results are robust to various methods for controlling for agency-level characteristics and the endogeneity of IT use. IT investments do, however, appear to improve police productivity when complemented with particular management practices–in this case, those associated with the Compstat program.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0826.pdf

Intra-Industry Foreign Direct Investment

Laura Alfaro Andrew Charlton

CEPDP0825. October 2007.We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries—close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms’ final good that they appear identical at the two-digit level. We call these proximate subsidiaries ‘intra-industry’ vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0825.pdf

Technological Diversification

Miklos Koren Silvana Tenreyro

CEPDP0824. October 2007.Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find th at for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0824.pdf

The Shimer Puzzle and the Correct Identification of Productivity Shocks

Régis Barnichon

CEPDP0823. August 2007.Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks an ampiflication mechanism because it cannot generate the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the correct identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005a) may not correctly identify the shocks driving unemployment. Using a New- Keynesian framework with search unemployment, this paper estimates that close to 50% of the Shimer puzzle is due to the misidentification of productivity shocks. In addition, I show that extending the search model with an aggregate demand side remarkably improves the ability of the standard search model to match the moments of key labor market variables.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0823.pdf

Search Frictions, Real Rigidities and Inflation Dynamics

Carlos Thomas

CEPDP0822. August 2007.The standard New Keynesian model suffers from the so-called .macro-micro pricing conflict: in order to match the dynamics of inflation implied by macroeconomic data, the model needs to assume an average duration of price contracts which is much longer than what is observed in micro data. Here I show how departing from the standard model’s assumption of a perfectly competitive labor market can help resolve the pricing conflict. I do so by assuming search frictions in the labor market. In this framework, labor becomes firm-specific and marginal cost curves become upward-sloping. This mechanism reduces the slope of the New Keynesian Phillips curve given a frequency of price adjustment. Conversely, given an estimate of this slope, my model implies shorter price durations than the standard model. For a plausible calibration and for different slope values, my model consistently delivers price durations that are roughly half of those implied by the standard model.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0822.pdf

The Evolution of Inequality in Productivity and Wages: Panel Data Evidence

Giulia Faggio Kjell Salvanes John Van Reenen

CEPDP0821. August 2007.There has been a remarkable increase in wage inequality in the US, UK and many other countries over the past three decades. A significant part of this appears to be within observable groups (such as age-gender-skill cells). A generally untested implication of many theories rationalizing the growth of within-group inequality is that firm-level productivity dispersion should also have increased. Since the relevant data do not exist in the US we utilize a UK longitudinal panel dataset covering the manufacturing and non-manufacturing sectors since the early 1980s. We find evidence that productivity inequality has increased. Existing studies have underestimated this increased dispersion because they use data from the manufacturing sector which has been in rapid decline. Most of the increase in individual wage inequality has occurred because of an increase in inequality between firms (and within industries). Increased productivity dispersion appears to be linked with new technologies as suggested by models such as Caselli (1999) and is not primarily due to an increase in transitory shocks, greater sorting or entry/exit dynamics.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0821.pdf

Trust-Based Trade

Luis Araujo Emanuel Ornelas

CEPDP0820. August 2007.Weak enforcement of international contracts can substantially reduce international trade. We develop a model where agents build reputations to overcome the difficulties that this institutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. We find that the conditional probability that a firm will stop exporting decreases and its foreign sales increase as the firm acquires greater export experience. The reason is that the informational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of both current and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0820.pdf

Productivity, Aggregate Demand and Unemployment Fluctuations

Régis Barnichon

CEPDP0819. August 2007.This paper presents new empirical evidence on the cyclical behavior of US unemployment that poses a challenge to standard search and matching models. The correlation between cyclical unemployment and the cyclical component of labor productivity switched sign at the beginning of the Great Moderation in the mid 80s: from negative it became positive, while standard search models imply a negative correlation. I argue that the inconsistency arises because search models do not allow output to be demand determined in the short run. I present a search model with nominal rigidities that can rationalize the empirical findings, and I document two new facts about the Great Moderation that can account for the large and swift increase in the unemployment-productivity correlation in the mid-80s.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0819.pdf

Is Distance Dying at Last? Falling Home Bias in Fixed Effects Models of Patent Citations

Rachel Griffith Sokbae Lee John Van Reenen

CEPDP0818. August 2007.We examine the “home bias” of international knowledge spillovers as measured by the speed of patent citations (i.e. knowledge spreads slowly over international boundaries). We present the first compelling econometric evidence that the geographical localization of knowledge spillovers has fallen over time, as we would expect from the dramatic fall in communication and travel costs. Our proposed estimator controls for correlated fixed effects and censoring in duration models and we apply it to data on over two million citations between 1975 and 1999. Home bias declines substantially when we control for fixed effects: there is practically no home bias for the more “modern” sectors such as pharmaceuticals and information/communication technologies.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0818.pdf

Measuring Organization Capital in Japan: An Empirical Assessment Using Firm-Level Data

YoungGak Kim Tsutomu Miyagawa

CEPDP0817. August 2007.Globalization and the ICT revolution of the 1990s have forced many firms to reorganize in order to survive in a more competitive market. There are several approaches that can be used to assess the measurement of organization capital since it is unobservable. Using an optimizing firm model and assuming that a firm holds multiple assets as suggested by Yang and Brynjolfsson (2001) and Cummins (2005), we examined whether organization capital is accumulated with investment in several types of assets. In contrast to Cummins’s (2005) results, we found that the accumulation of organization capital is associated with investment in R&D assets and marketing assets. Using these results and following Basu, Fernald, Oulton, and Srinivasan (2003), we measured the contribution of organization capital to the conventional TFP growth. The estimation results implied that the growth of organization capital did not have significant effects on productivity growth.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0817.pdf

Spend It Like Beckham? Inequality and Redistribution in the UK, 1983-2004

Andreas Georgiadis Alan Manning

CEPDP0816. August 2007.A main activity of the state is to redistribute resources. Models of the political process generally predict that a rise in inequality will lead to more redistribution. This paper shows that, for the UK in the period 1983-2004, a plausibly exogenous rise in income inequality has not been associated with increased redistribution. We then explore this further using attitudinal data. We show that the demand for redistribution, having shown considerable variation over time, is at an all-time low. We argue that the decline in the demand for redistribution can mostly be accounted for by an increasing belief in the importance of incentives though changes in preferences over the distribution of income have been important in some sub-periods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0816.pdf

Freedom Fries

Guy Michaels Xiaojia Zhi

CEPDP0815. July 2007.Do firms choose inputs that minimize their cost of production, ignoring the attitudes of their owners and employees? We examine this question using an episode of worsening relations between the US and France: from February 2002 to March 2003, France's favorability rating in US public opinion polls fell from 83 percent to 35 percent. Very negative attitudes towards France became common even among college educated Americans with high levels of income, so they were likely prevalent among managers. Using data from 1999-2005, we find that the worsening relations reduced US imports from France by about 15 percent and US exports to France by about 8 percent, compared to other Eurozone or OECD countries. This decline was due in large part to a fall in France's share of the quantity of inputs traded between the Eurozone and the US; this decline is significant even after we control for changes in the product composition of trade flows. We also find that the decline in trade w as accompanied by a similar drop in both business trips and tourist visitations of US residents to France compared to Western Europe. Taken together, our findings suggest that competition cannot eliminate the effect of attitudes on firms' choice of inputs.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0815.pdf

Trade Liberalization, Outsourcing, and Firm Productivity

Ralph Ossa

CEPDP0814. July 2007.Empirical evidence suggests that trade liberalization increases firm productivity. This paper offers a novel explanation for this finding. I develop a simple general equilibrium model of trade in which trade liberalization leads to outsourcing as firms focus on their core competencies in response to tougher competition. Since firms are the better at performing tasks the closer they are to their core competencies, this outsourcing increases firm productivity. Moreover, I also investigate the links between various technological parameters and outsourcing. In particular, I analyze how technological progress, changes in fixed costs, and changes in internal governance costs affect firms’ integration decisions.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0814.pdf

Wage Distributions by Bargaining Regime: Linked Employer-Employee Data Evidence from Germany

Karsten Kohn Alexander C. Lembcke

CEPDP0813. July 2007.Using linked employer-employee data from the German Structure of Earnings Survey 2001, this paper provides a comprehensive picture of the wage structure in three wage-setting regimes prevalent in the German system of industrial relations. We analyze wage distributions for various labor market subgroups by means of kernel density estimation, variance decompositions, and individual and firm-level wage regressions. Unions’ impact through collective and firm-level bargaining mainly works towards a higher wage level and reduced overall and residual wage dispersion. Yet observed effects are considerably heterogeneous across different labor market groups. There is no clear evidence for wage floors formed by collectively bargained low wage brackets which would operate as minimum wages for different groups of workers.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0813.pdf

The Effect of Information and Communication Technologies on Urban Structure

Y Ioannides Henry Overman Esteban Rossi-Hansberg Kurt Schmidheiny

CEPDP0812. July 2007.The geographic concentration of economic activity occurs because transport costs for goods, people and ideas give individuals and organisations incentives to locate close to each other. Historically, all of these costs have been falling. Such changes could lead us to predict the death of distance. This paper is concerned with one aspect of this prediction: the impact that less costly communication and transmission of information might have on cities and the urban structure. We develop a model which suggests that improvements in ICT will increase the dispersion of economic activity across cities making city sizes more uniform. We test this prediction using cross country data and find empirical support for this conclusion.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0812.pdf

The Division of Labor, Coordination, and the Demand for Information Processing

Guy Michaels

CEPDP0811. July 2007.Since Adam Smith’s time, the division of labor in production has increased significantly, while information processing has become an important part of work. This paper examines whether the need to coordinate an increasingly complex division of labor has raised the demand for clerical office workers, who process information that is used to coordinate production. In order to examine this question empirically, I introduce a measure of the complexity of an industry’s division of labor that uses the Herfindahl index of occupations it employs, excluding clerks and managers. Using US data I find that throughout the 20th century more complex industries employed relatively more clerks, and recent Mexican data shows a similar relationship. The relative complexity of industries is persistent over time and correlated across these two countries. I further document the relationship between complexity and the employment of clerks using an early information technology (IT) revolution that took place around 1900, when telephones, typewriters, and improved filing techniques were introduced. This IT revolution raised the demand for clerks in all manufacturing industries, but significantly more so in industries with a more complex division of labor. Interestingly, recent reductions in the price of IT have enabled firms to substitute computers for clerks, and I find that more complex industries have substituted clerks more rapidly.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0811.pdf

Intergenerational Mobility and the Informative Content of Surnames

Maia Güell José V. Rodríguez Mora Chris Telmer

CEPDP0810. July 2007.We propose an alternative method for measuring intergenerational mobility. Traditional methods based on panel data provide measurements that are scarce, difficult to compare across countries and almost impossible to get across time. In particular this means that we do not know how intergenerational mobility is correlated with growth, income or the degree of inequality. Our proposal is to measure the informative content of surnames in one census. The more information does the surname have on the income of an individual, the more important is background in determining outcomes; and thus, the less mobility there is. The reason for this is that surnames inform on family relationships because the distribution of surnames is necessarily much skewed. A large percentage of the population is bound to have a very unfrequent surname. For them the partition generated by surnames is very informative on family linkages. First, we develop a model whose endogenous variable is the joint distribution of surnames and income. Then we explore the relationship between mobility and the informative content of surnames. We allow for assortative mating to be a determinant of both. Then, we use our methodology to show that in a large Spanish region the informative content of surnames is large and consistent with the model. We also show that it has increased over time, indicating a substantial drop in the degree of mobility. Finally, using the peculiarities of the Spanish surname convention we show that the degree of assortative mating has also increased over time, in such a manner that might explain the decrease in mobility observed. Our method allows us to provide measures of mobility comparable across time. It should also allow us to study other issues related to inheritance.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0810.pdf

History and Industry Location: Evidence from German Airports

Stephen Redding Daniel M. Sturm Nikolaus Wolf

CEPDP0809. July 2007.A central prediction of a large class of theoretical models is that industry location is not necessarily uniquely determined by fundamentals. In these models, historical accident or expectations determine which of several steady-state locations is selected. Despite the theoretical prominence of these ideas, there is surprisingly little systematic evidence on their empirical relevance. This paper exploits the combination of the division of Germany after the Second World War and the reunification of East and West Germany as an exogenous shock to industry location. We focus on a particular economic activity and establish that division caused a shift of Germany’s air hub from Berlin to Frankfurt and there is no evidence of a return of the air hub to Berlin after reunification. We develop a body of evidence that the relocation of the air hub is not driven by a change in economic fundamentals but is instead a shift between multiple steady-states.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0809.pdf

The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries

Anna Lipinska

CEPDP0808. July 2007.The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the micro founded loss function that represents the objective function of the optimal monetary policy not constrained to satisfy the criteria. I find that the optimal monetary policy should not only target inflation rates in the domestic sectors and aggregate output fluctuations but also domestic and international terms of trade. Second, I show how the loss function changes when the monetary policy is constrained to satisfy the Maastricht criteria. The loss function of such a constrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the optimal monetary policy violates two criteria: concerning the CPI inflation rate and the nominal interest rate. The constrained optimal policy is characterized by a deflationary bias. This results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms) than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. Such a policy leads to additional welfare costs amounting to 30% of the optimal monetary policy loss.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0808.pdf

The Beveridge Curve

Eran Yashiv

CEPDP0807. June 2007.The Beveridge curve depicts a negative relationship between unemployed workers and job vacancies, a robust finding across countries. The position of the economy on the curve gives an idea as to the state of the labour market. The modern underlying theory is the search and matching model, with workers and firms engaging in costly search leading to random matching. The Beveridge curve depicts the steady state of the model, whereby inflows into unemployment are equal to the outflows from it, generated by matching.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0807.pdf

Privatization, Entry Regulation and the Decline of Labor's Share of GDP: A Cross-Country Analysis of the Network Industries

Ghazala Azmat Alan Manning John Van Reenen

CEPDP0806. June 2007.Labor’s share of GDP in most OECD countries has declined over the last two decades. Some authors have suggested that these changes are linked to deregulation of product and labor markets. To examine this we focus on a large quasi-experiment in the OECD: the privatization of many network industries (e.g. telecommunications and utilities). We present a model with agency problems, imperfect product market competition and worker bargaining which makes clear predictions on how the labor share, employment and wages respond to privatization and other regulatory changes. We exploit cross-country panel data on several network industries and find that privatization can account for a significant proportion of the fall of labor’s share (a fifth overall, but over half in Britain and France). The impact of privatization has been offset by falling barriers to entry, which consistent with theory, dampens profit margins.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0806.pdf

Economic Linkages Across Space

Henry Overman Patricia Rice Anthony J. Venables

CEPDP0805. June 2007.We develop a diagrammatic framework that can be used to study the economic linkages between regions or cities. Hitherto, such linkages have not been the primary focus of either the theoretical or empirical literatures. We show that our general framework can be used to interpret both the New Economic Geography and Urban Systems literatures to help us understand spatial economic linkages. We then extend the theoretical framework to allow us to consider a number of additional issues which may be particularly important for analyzing the impact of policy. Such policy analysis will also require empirical work to identify the nature of key relationships. In a final section, we consider what the existing empirical literature can tell us about these relationships.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0805.pdf

The Returns to Temporary Migration to the United States: Evidence from the Mexican Urban Employment Survey

Benjamin Aleman-Castilla

CEPDP0804. June 2007.Mexican migration to the United States has been a very important issue throughout the twentieth century, and its relevance has reached unprecedented levels during the last two decades. Even though there is a huge body of literature that analyses many different aspects of this phenomenon, the economic performance of migrants with respect to the Mexican labour markets has received very little attention. This paper aims at filling this gap by presenting new evidence on the effect that migration to the United States has on labour market outcomes of Mexican workers. It uses data from the Mexican National Survey of Urban Labour (ENEU) for the period 1994-2002. Among other advantages, the panel structure of the survey is ideal for minimizing the problems of self-selection bias that are common in most of the alternative data sources. Fixed-effects estimation indicates that Mexican workers that migrate temporarily to the United States obtain significantly higher earnings in the U.S. labour market than in the Mexican one during the period of migration. They also tend to work longer hours and face a generally higher likelihood of non employment during the period of return migration. Finally, the gains from temporary migration are lower for more skilled workers and for those migrating from the most distant regions in Mexico, relative to the United States.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0804.pdf

Labor Search and Matching in Macroeconomics

Eran Yashiv

CEPDP0803. June 2007.The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: how are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and — when inserted into business cycle models — improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0803.pdf

Jeremy Greenwood and Per Krusell, "Growth Accounting with Investment-Specific Technological Progress: A Discussion of Two Approaches" A Rejoinder

Nicholas Oulton

CEPDP0802. June 2007.The May 2007 issue of the Journal of Monetary Economics published a paper of mine entitled ‘Investment-Specific Technological Progress and Growth Accounting’ which critiqued the work of Greenwood, Hercowitz and Krusell. I argued that the Greenwood-Hercowitz-Krusell (GHK) model is a special case of a two-sector, neoclassical growth model with differing rates of technical progress in the two sectors; that a version of Jorgensonian growth accounting can be constructed for this two-sector model and hence for the GHK model; and that there is therefore a mapping between the growth accounting concepts of total factor productivity (TFP) growth in each of the two sectors, and GHK’s concepts of investment specific and neutral technological progress. The same issue of the JME published a response by Greenwood and Krusell (‘Growth Accounting with Investment-Specific Technological Progress: a Discussion of Two Approaches’). This paper is a rejoinder to theirs. It attempts to delineate both the common ground and the remaining areas of disagreement.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0802.pdf

Imports and Exports at the Level of the Firm: Evidence from Belgium

Mirabelle Muûls Mauro Pisu

CEPDP0801. June 2007.This paper explores a newly-available panel data set merging balance sheet and international trade transaction data for Belgium. Both imports and exports appear to be highly concentrated among few firms and seem to have become more so over time. Focusing on manufacturing, we find that facts previously reported in the literature for exports only actually apply to imports too. We note that the number of trading firms diminishes as the number of export destinations or import origins increases. The same is true if we consider the number of products traded. With regard to productivity differentials, firms that both import and export appear to be the most productive, followed, in descending order, by importers only, exporters only and non-traders. These results point to the presence of fixed costs; not only of exporting, but also of importing and to a process of self-selection in both export and import markets. Also, the productivity advantage of exporters reported in the literature may be overstated because imports were not considered.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0801.pdf

Protection for Sale Made Easy

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0800. June 2007.Formal analysis of the political economy of trade policy was substantially redirected by the appearance of Gene Grossman and Elhanan Helpman’s 1994 paper, “Protection for Sale”. Before that article a fairly wide range of approaches were favoured by various authors on various issues, but afterwards, the vast majority of theoretical tracts on endogenous trade policy have used the Protection for Sale framework (PFS for short) as their main vehicle. The reason, of course, is that the framework is both respectable – because its microfoundations are distinctly firmer than were those of the earlier lobbying approaches – and it is very easy to work with. Despite the popularity of the PFS framework, it appears that no one has presented a simple diagram that illustrates how the PFS frameworks and explains why it is so easy. This short note aims to remedy that ommission.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0800.pdf

Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage

Alejandro Cuñat Marc J. Melitz

CEPDP0799. June 2007.This paper studies the link between volatility, labor market flexibility, and international trade. International differences in labor market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm-specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labor markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbush, Fisher and Samuelson (1977). We also show how our model can be extended to multiple factors of production.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0799.pdf

Job Destruction, Job Creation and Unemployment in Transition Countries: What Can We Learn?

Giulia Faggio

CEPDP0798. May 2007.Sixteen years into the transition, the problem of high joblessness has not been solved. Of the three explanations commonly discussed (i.e. ongoing reallocation; finished reallocation with redundant labour; wrong choice of institutional framework), we concentrated on the ongoing reallocation hypothesis. We show that there is a negative correlation between job creation in the private sector and unemployment. We also show that long-term unemployment depends on current and past values of short-term unemployment and that this path-dependence fades away as soon as we reach time t-3. We interpret this result as an indication that the process of reallocation started at the beginning of the 1990s still influences today’s labour market. We address three components of the transition debate: shock therapy versus gradualism; privatization; and political change. Contrary to Godoy and Stiglitz (2006), we do not find gradualism superior to shock therapy in terms of private sector growth. In addition, we confirm that full privatization is positively associated with job destruction in the state sector. Finally, we show that during early years of democratization the state sector was dismantled more vigorously than in other periods.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0798.pdf

Chain Indices of the Cost of Living and the Path-Dependence Problem: An Empirical Solution

Nicholas Oulton

CEPDP0797. May 2007.This paper proposes an empirically feasible method for correcting the path-dependence bias of chain indices of the cost of living. Chain indices are discrete approximations to Divisia indices and it is well known that the latter are path-dependent: the level of a Divisia index is affected not just by the level of prices at the two endpoints but also by the path between the endpoints. It is also well-known that a Divisia index of the cost of living is path-independent if and only if all income elasticities are equal to one, a restriction that is decisively rejected by studies of consumer demand. In theory, the true cost of living index (or Konüs price index) could be derived by estimating the expenditure function. But this seems impractical due to data limitations: the number of independent parameters rises roughly in proportion to the square of the number of commodities and consumer price indices contain hundreds of items. This paper shows how this problem can in fact be overcome empirically using a flexible model of demand like the “Quadratic Almost Ideal Demand System”. The proposed method requires data only on prices, aggregate budget shares and aggregate expenditure. The method is applied to estimate Konüs price indices for 70 products covering nearly all the UK’s Retail Prices Index over 1974-2004, with each year in turn as the base. The choice of base year for utility is found to have a significant effect on the index, even in the low inflation period since 1990.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0797.pdf

Incentive Pay Systems and the Management of Human Resources in France and Great Britain

Richard Belfield Salima Benhamou David Marsden

CEPDP0796. May 2007.Incentive pay systems have undergone major changes in recent decades. This paper investigates use of incentive pay systems in British and French private sector establishments in 2004, focusing on payment-by-results, merit pay, and profit sharing, using British and French workplace surveys: WERS and Réponse. Despite the stereotypes of Britain as a deregulated economy and France as a more coordinated social-market economy, French firms make considerably greater use of incentive pay, and particularly, merit pay. The paper explores the organisational and institutional determinants of this. It finds that personnel economics and management theories explain a significant share of the within country variation in use of incentive pay systems.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0796.pdf

Firms in International Trade

Andrew B. Bernard J. Bradford Jensen Stephen Redding Peter K. Schott

CEPDP0795. May 2007.Despite the fact that importing and exporting are extremely rare firm activities, economists generally devote little attention to the role of firms when discussing international trade. This paper summarizes key differences between trading and non-trading firms, demonstrates how these differences present a challenge to standard trade models and shows how recent “heterogeneous-firm” models of international trade address these challenges. We then make use of transaction-level U.S. trade data to introduce a number of new stylized facts about firms and trade. These facts reveal that the extensive margins of trade – that is, the number of products firms trade as well as the number of countries with which they trade – are central to understanding the well-known role of distance in dampening aggregate trade flows.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0795.pdf

Offshoring: General Equilibrium Effects on Wages, Production and Trade

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0794. May 2007.A simple model of offshoring is used to integrate the complex gallery of results that exist in the theoretical offshoring/fragmentation literature. The paper depicts offshoring as ‘shadow migration’ and shows that this allows straightforward derivation of the general equilibrium effects on prices, wages, production and trade (necessary and sufficient conditions are provided). We show that offshoring requires modification of the four HO theorems, so econometricians who ignore offshoring might reject the HO theorem when a properly specified version held in the data. We also show that offshoring is an independent source of comparative advantage and can lead to intra-industry trade in a Walrasian setting.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0794.pdf

Respect

Alan Manning

CEPDP0793. May 2007.Becker (1974) introduced to modern economics the idea that others care about what others think about them and derived many useful insights from this assumption. But he did not provide a very complete description of the general equilibrium of an economy in which people both demand respect from and supply respect to others. This paper analyzes the equilibrium price of respect, showing how it depends on the distribution of material endowments and discussing whether we would expect that, as society gets richer, the market for respect becomes more or less important. It explains why a demand for respect is a human universal in terms of Becker’s observation that this helps to provide insurance where markets are absent. Although the demand for respect is universal, the activities that command respect have enormous cultural diversity – the paper explains how there can be many Nash equilibria if respect is withheld from those who violate prescribed behaviour. Finally the paper discusses where, in a modern economy, respect is demanded and supplied arguing it is primarily bundled up with other goods and services because of the nature of the costs of supplying it.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0793.pdf

Uncertainty and the Dynamics of R&D

Nick Bloom

CEPDP0792. May 2007.Uncertainty varies strongly over time, rising by 50% to 100% in recessions and by up to 200% after major economic and political shocks. This paper shows that higher uncertainty reduces the responsiveness of R&D to changes in business conditions - a “caution-effect” - making it more persistent over time. Thus, uncertainty will play a critical role in shaping the dynamics of R&D through the business cycle, and its response to technology policy. I also show that if firms are increasing their level of R&D then the effect of uncertainty will be negative, while if firms are reducing R&D then the effect of uncertainty will be positive.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0792.pdf

Entry and Asymmetric Lobbying: Why Governments Pick Losers

Richard E. Baldwin Frédéric Robert-Nicoud

CEPDP0791. May 2007.Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create rents. In expanding industries, entry tends to erode such rents, but in declining industries, sunk costs rule out entry as long as the rents are not too high. This asymmetric appropriability of rents means losers lobby harder. Thus it is not that government policy picks losers, it is that losers pick government policy.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0791.pdf

Culture Clash or Culture Club? The Identity and Attitudes of Immigrants in Britain

Alan Manning Sanchari Roy

CEPDP0790. April 2007.There is economic evidence that diversity has consequences for economic performance (see Alesina and La Ferrara, 2005). This might have consequences for immigration policy – how many immigrants to allow into a country and from what cultural background. But, central to such a discussion is the pace of cultural assimilation among immigrants – this under-researched topic is the focus of this paper. It investigates the extent and determinants of British identity among those living in Britain and the views on rights and responsibilities in societies. We find no evidence for a culture clash in general, and one connected with Muslims in particular. The vast majority of those born in Britain, of whatever ethnicity or religion, think of themselves as British and we find evidence that third-generation immigrants are more likely to think of themselves as British than second generation. Newly arrived immigrants almost never think of themselves as British but the longer they remain in the UK, the more likely it is that they do. This process of assimilation is faster for those from poorer and less democratic countries, even though immigrants from these countries are often regarded as a particular cause for concern. Our analysis of rights and responsibilities finds much smaller differences in views between the UK-born and immigrants than within the UK-born population.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0790.pdf

Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market

Giorgio Gobbi Roberta Zizza

CEPDP0789. April 2007.The paper investigates the relationship between underground activities and financial deepening. The access to external finance requires entrepreneurs to disclose credible information through formal documentation. This requirement may be impossible to oblige to for many informal producers who lack a proper book-keeping of their operations. For the same reason irregular workers may find difficult to borrow for financing both consumption and housing purchase. Using panel data on Italian regional credit markets we find a strong negative impact of the share of irregular employment on outstanding credit to the private sector. According to our estimates a shift of 1 per cent of the employees from regular activities to irregular ones corresponds to a decline of about 2 percentage points in the volume of business lending and of 0.3 percentage points in outstanding credit to households, both expressed as ratios to GDP. Conversely, the feedback effects from financial deepening to the size of the informal sector are weak and statistically not significant. Through a difference-in-difference approach exploiting the regularisation program for immigrant workers launched in 2002 we also identify a negative effect of the irregular labour on banks’ entry decisions in the local credit markets, now defined in terms of provinces.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0789.pdf

Americans Do I.T. Better: US Multinationals and the Productivity Miracle

Nick Bloom Raffaella Sadun John Van Reenen

CEPDP0788. April 2007.The US has experienced a sustained increase in productivity growth since the mid-1990s, particularly in sectors that intensively use information technologies (IT). This has not occurred in Europe. If the US “productivity miracle” is due to a natural advantage of being located in the US then we would not expect to see any evidence of it for US establishments located abroad. This paper shows in fact that US multinationals operating in the UK do have higher productivity than non-US multinationals in the UK, and this is primarily due to the higher productivity of their IT. Furthermore, establishments that are taken over by US multinationals increase the productivity of their IT, whereas observationally identical establishments taken over by non-US multinationals do not. One explanation for these patterns is that US firms are organized in a way that allows them to use new technologies more efficiently. A model of endogenously chosen organizational form and IT is developed to explain these new micro and macro findings.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0788.pdf

The Effect of Marital Breakup on the Income Distribution of Women with Children

Elizabeth O. Ananat Guy Michaels

CEPDP0787. April 2007.Having a female firstborn child significantly increases the probability that a woman’s first marriage breaks up. Recent work has exploited this exogenous variation to measure the effect of marital breakup on economic outcomes, and has concluded that divorce has little effect on women’s average household income. Employing an Abadie (2003) technique that allows us to look at the impact of marital breakup throughout the income distribution, however, we find that divorce greatly increases the probability that a woman lives in a household with income in the bottom quartile. While women partially offset the loss of spousal earnings with child support, welfare, combining households, and substantially increasing their labor supply, divorce significantly increases the odds that a woman with children is poor.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/dp0787.pdf