Latest LSE Research Lab Papers

Urbanity

Gabriel M. Ahfeldt

SERCDP0136. May 2013.

I define a composite amenity that provides aesthetic and consumption value to local residents: Urbanity. A novel data set of geo-tagged photos shared in internet communities serves as a proxy for urbanity. From the spatial pattern of house prices and photos I identify the value of urbanity in two of the largest cities in Europe: Berlin and London. I find an elasticity of indirect utility with respect to urbanity of about 1%. The aggregated willingness-to-pay equates to about $1bn per year in each city. The results demonstrate the important role cities play as centers of leisure, consumption, and beauty.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0136.pdf

The Urban Wage Growth Premium: Sorting or Learning?

Sabine D'Costa, Henry G. Overman

SERCDP0135. May 2013.

This paper is concerned with the urban wage premium and addresses two central issues about which the field has not yet reached a consensus. First, the extent to which sorting of high ability individuals into urban areas explains the urban wage premium. Second, whether workers receive this wage premium immediately, or through faster wage growth over time. Using a large panel of worker-level data from Britain, we first demonstrate the existence of an urban premium for wage levels, which increases in city size. We next provide evidence of a city size premium on wage growth, but show that this effect is driven purely by the increase in wage that occurs in the first year that a worker moves to a larger location. Controlling for sorting on the basis of unobservables we find no evidence of an urban wage growth premium. Experience in cities does have some impact on wage growth, however. Specifically, we show that workers who have at some point worked in a city experience faster wage growth than those who have never worked in a city.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0135.pdf

SPECIFICATION FOR LATTICE PROCESSES

Javier Hidalgo, Myung Hwan Seo

EM/2013/562. May 2013.

We consider an omnibus test for the correct speci…cation of the dynamics of a sequence fx (t)gt2Zd in a lattice. As it happens with causal models and d = 1, its asymptotic distribution is not pivotal and depends on the estimator of the unknown parameters of the model under the null hypothesis. One of our main goals of the paper is to provide a transformation to obtain an asymptotic distribution that is free of nuisance parameters. Secondly, we propose a bootstrap analogue of the transformation and show its validity. Third, we discuss the results when fx (t)gt2Zd are the errors of a parametric regression model. As a by product, we also discuss the asymptotic normality of the least squares estimators under very mild conditions. Finally, we present a small Monte Carlo experiment to shed some light on the …nite sample behaviour of our test.

Full article: http://sticerd.lse.ac.uk/dps/em/em562.pdf

Pushing On a String: US Monetary Policy is Less Powerful in Recessions

Silvana Tenreyro, Gregory Thwaites

CEPDP1218. May 2013.

We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.

Full article: http://cep.lse.ac.uk/pubs/download/dp1218.pdf

The Financial Resource Curse

Gianluca Benigno, Luca Fornaro

CEPDP1217. May 2013.

This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non-tradable consumption requires a shift of productive resources toward the non-tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare-enhancing and can be used as a second best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.

Full article: http://cep.lse.ac.uk/pubs/download/dp1217.pdf

Innovation, Reallocation and Growth

Daron Acemoglu, Ufuk Akcigit, Nicholas Bloom, William R. Kerr

CEPDP1216. May 2013.

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

Full article: http://cep.lse.ac.uk/pubs/download/dp1216.pdf

Has Job Polarization Squeezed the Middle Class? Evidence from the Allocation of Talents

Michael J. Boehm

CEPDP1215. May 2013.

Over the last two decades, earnings in the United States increased at the top and at the bottom of the wage distribution but not in the middle - the intensely debated middle class squeeze. At the same time there was a substantial decline of employment in middle-skill production and clerical occupations - so-called job polarization. I study whether job polarization has caused the middle class squeeze. So far little evidence exists about this because the endogenous selection of skills into occupations prevents credible identification of polarization’s effect on wages. I solve the selection-bias problem by studying the changes in returns to occupation-specific skills instead of the changes in occupational wages using data over the two cohorts of the National Longitudinal Study of Youth (NLSY). This data features multidimensional and pre-determined test scores, which predict occupational sorting and thus measure relative occupation-specific skills. My estimation equations are derived from the Roy (1951) model over two cross-sections with job polarization amounting to a shift in the occupation-specific skill prices. In line with polarization, I find that a one percentage point higher propensity to enter high- (low-) as opposed to middle-skill occupations is associated with a .29 (.70) percent increase in expected wages over time. I then compute a counterfactual wage distribution using my estimates of the shifts in occupation-specific skill prices and show that it matches the increase at the top of the wage distribution but fails to explain the increase at the bottom. Thus, despite the strong association of job polarization with changes in the returns to occupation-specific skills, there remains room for alternative (e.g. policy related) explanations about the increase in the lower part of the wage distribution.

Full article: http://cep.lse.ac.uk/pubs/download/dp1215.pdf

The Marginal Income Effect of Education on Happiness: Estimating the Direct and Indirect Effects of Compulsory Schooling on Well-Being in Australia

Warn N. Lekfuangfu, Nattavudh Powdthavee, Mark Wooden

CEPDP1214. May 2013.

Many economists and educators favour public support for education on the premise that education improves the overall well-being of citizens. However, little is known about the causal pathways through which education shapes people’s subjective well-being (SWB). This paper explores the direct and indirect well-being effects of extra schooling induced through compulsory schooling laws in Australia. We find the net effect of schooling on later SWB to be positive, though this effect is larger and statistically more robust for men than for women. We then show that the compulsory schooling effect on male’s SWB is indirect and is mediated through income.

Full article: http://cep.lse.ac.uk/pubs/download/dp1214.pdf

Mental Health: The New Frontier for Labour Economics

Richard Layard

CEPDP1213. May 2013.

This lecture argues that mental health is a major factor of production. It is the biggest single influence on life satisfaction, with mental health eight years earlier a more powerful explanatory factor than current income. Mental health also affects earnings and educational success. But, most strikingly, it affects employment and physical health. In advanced countries mental health problems are the main illness of working age – amounting to 40% of all illness under 65. They account for over one third of disability and absenteeism in advanced countries. They can also cause or exacerbate physical illness. It is estimated that in the absence of mental illness, the costs of physical healthcare for chronic diseases would be one third lower. The good news is that cost-effective treatments for the most common mental illnesses now exist (both drugs and psychological therapy). But only a quarter of those who suffer are in treatment. Yet psychological therapy, such as cognitive behavioural therapy, if more widely available would pay for itself in savings on benefits and lost taxes. The lecture ends by illustrating how rational policy can be made using life-course models of wellbeing. Such policies should include a much greater role for the treatment and prevention of mental illness.

Full article: http://cep.lse.ac.uk/pubs/download/dp1213.pdf

The Geography of Inter-State Resource Wars

Francesco Caselli, Massimo Morelli, Dominic Rohner

CEPDP1212. May 2013.

We establish a theoretical as well as empirical framework to assess the role of resource endowments and their geographic location for inter-State conflict. The main predictions of the theory are that conflict tends to be more likely when at least one country has natural resources; when the resources in the resource-endowed country are closer to the border; and, in the case where both countries have natural resources, when the resources are located asymmetrically vis-a-vis the border. We test these predictions on a novel dataset featuring oilfield distances from bilateral borders. The empirical analysis shows that the presence and location of oil are significant and quantitatively important predictors of inter-State conflicts after WW2.

Full article: http://cep.lse.ac.uk/pubs/download/dp1212.pdf

Estimating Bayesian Decision Problems with Heterogeneous Priors

Stephen Hansen, Michael McMahon

CEPDP1211. May 2013.

In many areas of economics there is a growing interest in how expertise and preferences drive individual and group decision making under uncertainty. Increasingly, we wish to estimate such models to quantify which of these drive decision making. In this paper we propose a new channel through which we can empirically identify expertise and preference parameters by using variation in decisions over heterogeneous priors. Relative to existing estimation approaches, our “Prior-Based Identification” extends the possible environments which can be estimated, and also substantially improves the accuracy and precision of estimates in those environments which can be estimated using existing methods.

Full article: http://cep.lse.ac.uk/pubs/download/dp1211.pdf

Unemployment in the Great Recession

Christopher A. Pissarides

CEPDP1210. May 2013.

This paper studies the responses of unemployment in Germany, the United States and Britain to the Great Recession of 2008-09 by making use of Beveridge curve analysis, and in the entire OECD with other techniques. It is shown that Britain suffered from recession but no structural problems; the United States suffered from structural unemployment during the recovery; Germany exhibited a much better performance both during and after the recession. The rise in OECD unemployment is broken down into parts due to aggregate activity, the construction sector and a residual attributed to policies and institutions, which is used to reach conclusions about policy.

Full article: http://cep.lse.ac.uk/pubs/download/dp1210.pdf

Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting

Kevin D. Sheedy

CEPDP1209. May 2013.

Financial markets are incomplete, thus for many agents borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating agents' nominal incomes from aggregate real shocks, this policy effectively completes the market by stabilizing the ratio of debt to income. The paper argues that the objective of nominal GDP should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.

Full article: http://cep.lse.ac.uk/pubs/download/dp1209.pdf

Decision–Making and Implementation in Teams

Jordi Blanes i Vidal, Marc Möller

CEPDP1208. May 2013.

We use a mechanism–design approach to study a team whose members choose a joint project and exert individual efforts to execute it. Members have private information about the qualities of alternative projects. Information sharing is obstructed by a trade–off between adaptation and motivation. We determine the conditions under which first–best project and effort choices are implementable and show that these conditions can become relaxed as the team grows in size. This contrasts with the common argument (based on free–riding) that efficiency is harder to achieve in larger teams. We also characterize the second–best mechanism and find that decision–making may be biased either in favor or against the team’s initially preferred alternative.

Full article: http://cep.lse.ac.uk/pubs/download/dp1208.pdf

Concentration Versus Re-Matching? Evidence About the Locational Effects of Commuting Costs

Michael J. Boehm

CEPDP1207. May 2013.

Using administrative employer-employee data from Germany, I exploit two reductions of tax breaks for commuting in 2003/4 and 2006/7 to estimate commuting costs’ effect on the decision to switch job and move house. Standard theory predicts that higher commuting costs should lead to increased concentration in urban centers. However, I find that re-matching of existing jobs and houses to reduce commuting distances is much more prevalent in the data. With these estimates I calculate the effect of a complete abolition of the tax breaks on overall travel distance, fuel usage, greenhouse gas emissions, the tax base, and the de-population of the countryside.

Full article: http://cep.lse.ac.uk/pubs/download/dp1207.pdf

The Distribution of Local Government Finance by Local Authority-Level Deprivation

Alex Fenton, Amanda Fitzgerald, Ruth Lupton

SPCCRN005. April 2013.

Full article: http://sticerd.lse.ac.uk/dps/case/spcc/rn005.pdf

Re-visiting the conceptual framework for public/private boundaries in welfare

Tania Burchardt

SPCCRN002. April 2013.

Full article: http://sticerd.lse.ac.uk/dps/case/spcc/rn002.pdf

Social Policy in a Cold Climate: A Framework for Analysing the Effects of Social Policy

Tania Burchardt, John Hills, Ruth Lupton, Kitty Stewart, Polly Vizard

SPCCRN001. April 2013.

Full article: http://sticerd.lse.ac.uk/dps/case/spcc/RN001.pdf

Does Better Rail Access Improve Homeowners’ Happiness?: Evidence Based on Micro Surveys in Beijing

Wenjie Wu

SERCDP0134. April 2013.

Development of urban transport infrastructures is a key policy focus---particularly in countries like China which have experienced fast urbanisation over the past decade. While existing studies provide marginal values for rail access on the real estate market, little is known about the consequences of local public goods improvements for homeowners’ subjective wellbeing using reported happiness data. This paper uses a difference-in-difference method to empirically measure the impact of rail access on homeowners’ happiness. My identification strategy takes advantage of micro happiness survey data conducted before-and-after the opening of new rail stations in 2008 Beijing. I deal with the potential concern about the endogeneity in sorting effects by focusing on “stayers” and using non-market (fang gai) housings with pre-determined locations. I find the significantly heterogeneity in the effects from better rail access on homeowners’ happiness with respect to different dimensions of residential environment. The welfare estimates suggest that better rail access provided substantial benefits to homeowners’ happiness, but these benefits have strong social-spatial differentiations. These findings add to the evidence that transport improvement has an important role to play in influencing local residents’ subjective wellbeing.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0134.pdf

Do Large Departments Make Academics More Productive? Agglomeration and Peer Effects in Research

Clément Bosquet, Pierre-Philippe Combes

SERCDP0133. April 2013.

We study the effect of a large set of department characteristics on individual publication records. We control for many individual time-varying characteristics, individual fixed-effects and reverse causality. Department characteristics have an explanatory power that can be as high as that of individual characteristics. The departments that generate most externalities are those where academics are homogeneous in terms of publication performance and have diverse research fields, and, to a lesser extent, large departments, with more women, older academics, star academics and foreign co-authors. Department specialisation in a field also favours publication in that field. More students per academic does not penalise publication. At the individual level, women and older academics publish less, while the average publication quality increases with average number of authors per paper, individual field diversity, number of published papers and foreign co-authors.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0133.pdf

Mobility in China

Yi Chen, Frank A Cowell

PEP 18. April 2013.

We examine the evidence on rank and income mobility in China during the decades immediately preceding and immediately following the millennium using panel data from the China Health and Nutrition Survey. We show that rank mobility changed markedly over the period: in this respect China is becoming markedly more rigid. By contrast income mobility has carried on increasing; so has income inequality.

Full article: http://sticerd.lse.ac.uk/dps/pep/pep18.pdf

Do We Value Mobility?

PEP 17. April 2013.

Is there a trade-o between people's preference for income equality and income mobility? Testing for the existence of such a trade-o is dicult because mobility is a multifaceted concept. We analyse results from a questionnaire experiment based on simple precise concepts of income inequality and income mobility. We nd no direct trade-o in preference between mobility and equality, but an indirect trade-o, applying when more income mobility can only be obtained at the expense of some income inequality. Mobility preference but not equality preference appears to be driven by personal experience of mobility.

Full article: http://sticerd.lse.ac.uk/dps/pep/pep17.pdf

Can Basic Entrepreneurship Transform the Economic Lives of the Poor?

EOPP 43. April 2013.

The world’s poorest people lack capital and skills and toil for others in occupations that others shun. Using a large-scale and long-term randomized control trial in Bangladesh this paper demonstrates that sizable transfers of assets and skills enable the poorest women to shift out of agricultural labor and into running small businesses. This shift, which persists and strengthens after assistance is withdrawn, leads to a 38% increase in earnings. Inculcating basic entrepreneurship, where severely disadvantaged women take on occupations which were the preserve of non-poor women, is shown to be a powerful means of transforming the economic lives of the poor.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp43.pdf

Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters

Antonella Nocco, Gianmarco I. P. Ottaviano, Matteo Salto

CEPDP1206. April 2013.

After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogeneous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.

Full article: http://cep.lse.ac.uk/pubs/download/dp1206.pdf

Patents and Cumulative Innovation: Causal Evidence from the Courts

Alberto Galasso, Mark Schankerman

CEPDP1205. April 2013.

Cumulative innovation is central to economic growth. Do patent rights facilitate or impede such follow-on innovation? This paper studies the effect of removing patent protection through court invalidation on the subsequent research related to the focal patent, as measured by later citations. We exploit random allocation of judges at the U.S. Court of Appeal for the Federal Circuit to control for the endogeneity of patent invalidation. We find that patent invalidation leads to a 50 percent increase in subsequent citations to the focal patent, on average, but the impact is highly heterogeneous. Patent rights appear to block follow-on innovation only in the technology fields of computers, electronics and medical instruments. Moreover, the effect is entirely driven by invalidation of patents owned by large patentees that triggers entry of small innovators, suggesting that patents may impede the ‘democratization’ of innovation.

Full article: http://cep.lse.ac.uk/pubs/download/dp1205.pdf

Gender Gaps and the Rise of the Service Economy

L. Rachel Ngai, Barbara Petrongolo

CEPDP1204. April 2013.

This paper explains the narrowing of gender gaps in wages and market hours in recent decades by the growth of the service economy. We propose a model with three sectors: goods, services and home production. Women have a comparative advantage in the production of services in the market and at home. The growth of the services sector, in turn driven by structural transformation and marketization of home services, acts as a gender-biased demand shift and leads to a rise in women’s wages and market hours relative to men. Quantitatively, the model accounts for an important share of the observed rise in women’s relative wage and market hours and the fall in men’s market hours.

Full article: http://cep.lse.ac.uk/pubs/download/dp1204.pdf

Relational Knowledge Transfers

Luis Garicano, Luis Rayo

CEPDP1203. April 2013.

An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players’ discount rate. After that, the novice’s total value of knowledge grows at the players’ discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert’s artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players.

Full article: http://cep.lse.ac.uk/pubs/download/dp1203.pdf

Smoking, Income and Subjective Well-Being: Evidence from Smoking Bans

Abel Brodeur

CEPDP1202. April 2013.

This paper investigates the effects of local smoking bans on different outcomes using county and time variation over the last 20 years in the US. First, I find no evidence that local smoking bans in bars, restaurants and workplaces decrease the prevalence of smoking. The estimates are very small and not statistically significant. Well-being is also affected by these policies: public smoking bans make smokers who do not quit more satisfied with their life. I verify the robustness of this result throughout, and validate my findings with two distinct data sources. I discuss and test the mechanisms behind this seemingly paradoxical relationship. The evidence suggests that smokers adapt to bans since the impact on satisfaction is negative just before the implementation and positive afterward. Last, I found evidence that smokers do not favor the implementation of smoking bans. Yet, once they are exposed to a public smoking ban, they are less opposed to those policies. Together the evidence suggests that current smokers are time-inconsistent and benefit from smoking policies.

Full article: http://cep.lse.ac.uk/pubs/download/dp1202.pdf

The Surprisingly Dire Situation of Children's Education in Rural West Africa: Results from the CREO Study in Guinea-Bissau

CEPDP1201. April 2013.

We conducted a survey covering 20% of villages with 200-1000 population in rural Guinea-Bissau. We interviewed household heads, care-givers of children, and their teachers and schools. We analysed results from 9,947 children, aged 7-17, tested for literacy and numeracy competency. Only 27% of children were able to add two single digits, and just 19% were able to read and comprehend a simple word. Our unannounced school checks found 72% of enrolled children in grades 1-4 attending their schools, but the schools were poorly equipped. Teachers were present at 86% of schools visited. Despite surveying 351 schools, we found no examples of successful schools where children reached reasonable levels of literacy and numeracy for age. Our evidence suggests that interventions that raise school quality in these villages, rather than those which target enrolment, may be most important to generate very sharp improvements in children’s educational outcomes.

Full article: http://cep.lse.ac.uk/pubs/download/dp1201.pdf

Firm Heterogeneity and Aggregate Welfare

Marc J. Melitz, Stephen J. Redding

CEPDP1200. April 2013.

We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have different aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogenous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.

Full article: http://cep.lse.ac.uk/pubs/download/dp1200.pdf

Outsourcing and the Rise in Services

Giuseppe Berlingieri

CEPDP1199. April 2013.

This paper investigates the impact of outsourcing on sectoral reallocation in the U.S. over the period 1947-2007, and on the rise in services in particular. Roughly 40% of the growth of the service sector comes from professional and business services. This is an unusual industry as more than 90% of its output is an intermediate input to other firms, and it is where most of the service outsourcing activity is concentrated. These facts are essential to understanding the structure of the economy: professional and business services have experienced an almost fourfold increase in their forward linkage, the largest change in input-output linkages over the past 60 years. Using a simple gross output accounting framework, I calculate the contribution of the change in the composition of intermediates and their sourcing mode to the reallocation of employment across sectors. I find that the evolution of the input-output structure accounts for up to 33% of the increase in service employment, and professional and business services outsourcing alone contributes almost half of that amount.

Full article: http://cep.lse.ac.uk/pubs/download/dp1199.pdf

The Great Stagnation: What Can Policymakers Do?

Sushil B. Wadhwani

CEPDP1198. April 2013.

Although the economic recovery in the UK has been disappointing, it is inappropriate to either assert that Japan’s two lost decades illustrate the ineffectiveness of stimulative monetary policy or that the UK is predestined to perform as badly as Japan. Recall that the UK has, so far, avoided the deflation that held back the Japanese economy. One could, instead, argue that Japan illustrates the pitfalls associated with insufficiently aggressive monetary policy. Hence, it is appropriate to consider how we might make monetary policy more effective in the UK.

Full article: http://cep.lse.ac.uk/pubs/download/dp1198.pdf

How best to measure pension adequacy

Aaron George Grech

CASE/172. April 2013.

Though the main benchmark used to assess pension reforms continues to be the expected resulting fall in future government spending, the impact of policy changes on pension adequacy is increasingly coming to the fore. As yet, there does not seem to be a broad consensus in policymaking circles and academic literature on what constitutes the best measure of pension adequacy. While various indicators have been developed and utilised, no single measure appears to offer a clear indication of the extent to which reforms will impact on the achievement of pension system goals. Many indicators appear ill-suited to study the effective impact of reforms, particularly those that change the nature of the pension system from defined benefit to defined contribution. Existing measures are frequently hard to interpret as they do not have an underlying benchmark which allows their current or projected value to be assessed as adequate or inadequate. Currently used pension adequacy indicators tend to be point-in-time measures which ignore the impact of benefit indexation rules. They also are unaffected by very important factors, such as changes in the pension age and in life expectancy. This tends to make existing indicators minimise the impact of systemic reforms on the poverty alleviation and income replacement functions of pension systems. The emphasis on assumptions which are very unrepresentative of real-life labour market conditions also makes current indicators deceptive, particularly in relation to outcomes for women and those on low incomes. This paper posits that these defects can be remedied by using adequacy indicators based on estimates of pension wealth (i.e. the total projected flow of pension benefits through retirement) calculated using more realistic labour market assumptions. These measures are used to give a better indication of the effective impact of pension reforms enacted since the 1990s in ten major European countries. They suggest that these reforms have decreased generosity significantly, but that the poverty alleviation function remains strong in those countries where minimum pensions were improved. However, moves to link benefits to contributions have raised clear adequacy concerns for women and for those on low incomes which policymakers should consider and tackle.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/casepaper172.pdf

How Far Do England’s Second-Order Cities Emulate London as Human-Capital ‘Escalators’?

Tony Champion, Mike Coombes, Ian Gordon

SERCDP0132. March 2013.

In the urban resurgence accompanying the growth of the knowledge economy, second-order cities appear to be losing out to the principal city, especially where the latter is much larger and benefits from substantially greater agglomeration economies. The view that any city can make itself attractive to creative talent seems at odds with the idea of a country having just one ‘escalator region’ where the rate of career progression is much faster, especially for in-migrants. This paper takes the case of England, with its highly primate city-size distribution, and tests how its second- order cities (in size order, Birmingham, Manchester, Leeds, Newcastle, Bristol, Sheffield, Liverpool, Nottingham and Leicester) compare with London as human- capital escalators. The analysis is based on the ONS Longitudinal Study of linked census records, primarily for 1991-2001, and uses one key indicator of upward social mobility, the transition from White Collar Non-core to White Collar Core. For non- migrants, the transition rates for all the second-order cities are found to fall well short of London’s. In only one case – Manchester – is the rate significantly higher than the average for other areas outside the Greater South East (GSE) and its performance is matched by the non-London part of the GSE. Those moving to the second-order cities during the decade experienced much stronger upward social mobility than their non-migrants. This ‘migrant premium’ was generally similar to that for London, suggesting that it results from people moving only after they have secured a better job. If so, second-order cities cannot rely on the speculative migration of talented people but need suitable jobs ready for them to access.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0132.pdf

My Precious! The Location and Diffusion of Scientific Research: Evidence from the Synchrotron Diamond Light Source

Christian Helmers, Henry Overman

SERCDP0131. March 2013.

We analyze the impact of the establishment of a GBP 380 million basic scientific research facility in the UK on the geographical distribution of related research. We investigate whether the siting of the Diamond Light Source, a 3rd generation synchrotron light source, in Oxfordshire induced a clustering of related research in its geographic proximity. To account for the potentially endogenous location choice of the synchrotron, we exploit the availability of a `runner-up' site near Manchester. We use both academic publications and patent data to trace the geographical distribution of related knowledge and innovation. Our results suggest that the siting of the synchrotron in Oxfordshire created a highly localized cluster of related scientific research.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0131.pdf

Real Wages, Amenities and the Adjustment of Working Hours Across Regional Labour Markets

Teresa Schlüter

SERCDP0130. March 2013.

This article establishes a link between the traditional labour economics and the urban economics literature by analyzing differences in working hours across regional labour market areas in the UK. Using a real wage index reflecting skill adjusted earnings net of quality adjusted house prices in Britain and panel data on working hours the effect of regional real wages on labour supply is assessed. The identification strategy relies on workers who move across 157 labour market areas in Britain and includes individual fixed effects. The main finding is that working hours are significantly higher in labour market areas that offer lower real wages. Decreasing real wages by £1000 results in an increase of working hours of 0.3 %. Real wage differentials can be seen as a proxy for the local amenity level. I can replicate my finding including a set of amenities instead of the real wage index. The effect is mainly due to labour supply decisions of low skilled workers who work significantly longer hours in low real wage areas than high skilled workers. This indicates that low skilled workers are willing to increase their labour supply in order to afford living in high amenity areas.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0130.pdf

Top Team Demographics, Innovation and Business Performance: Findings from English Firms and Cities 2008-9

Max Nathan

SERCDP0129. March 2013.

High levels of net migration to the UK have contributed to growing cultural diversity, and researchers are turning their attention to the long-term effects of diversity on productivity. Yet little is known about these issues. This paper asks: what are the links between the composition of firms' top teams and business performance? What role do ethnic diversity and co-ethnic networks play? And do cities amplify or dampen these channels? I explore using a rich dataset of over 6,000 English firms. Owners, partners and directors set firms' strategic direction. Top team demography might generate production externalities through diversity (a wider range of ideas/ experiences, helping problem solving) and/or 'sameness' (via specialist knowledge or better access to international markets). These channels may be balanced by internal downsides (lower trust) and external barriers (discrimination), so that overall effects on business performance are unclear. In addition, urban locations (particularly big cities) may amplify any demographics-performance effects. I create a repeat cross-section of firms from the RDA National Business Survey. I construct measures of diversity and sameness across ethnicity and gender 'bases', alongside information on revenues, product and process innovation. I then regress these measures of business performance on top team demographics, plus firm level controls, area, year and detailed industry fixed effects. My results suggest a non-linear link between diversity and business performance, which is net positive for process innovation and net negative for turnover. Further tests on diverse and minority/female-headed firms find positive links for diverse top teams, negative for minority and female-only top teams. This implies that while diversity has internal and external benefits, penalties from being 'too diverse' probably result from external constraints. Further tests for intervening effects of capital cities, metropolitan hierarchies and urban form find some evidence of amplifying and dampening effects – which are generally stronger in London and larger cities.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0129.pdf

Motivating Knowledge Agents: Can Incentive Pay Overcome Social Distance?

Erlend Berg, Maitreesh Ghatak, R Manjula, D Rajasekhar, Sanchari Roy

EOPP 42. March 2013.

This paper studies the interaction of incentive pay and social distance in the dissemination of information. We analyse theoretically as well as empirically the effect of incentive pay when agents have pro-social objectives, but also preferences over dealing with one social group relative to another. In a randomised field experiment undertaken across 151 villages in South India, local agents were hired to spread information about a public health insurance programme. Relative to at pay, incentive pay improves knowledge transmission to households that are socially distant from the agent, but not to households similar to the agent.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp42.pdf

School Structure, School Autonomy and the Tail

Stephen Machin, Olmo Silva

CEPSP29. March 2013.

In this paper, we survey the UK-based literature on school structures and school autonomy to identify settings in which alternative and more autonomous school arrangements can improve the educational attainments of pupils in the bottom tail of the achievement distribution. We also present new evidence on the effect of school academies on the age-16 GCSE attainment of students of different abilities up to 2009, before the Coalition Government changed the nature of the Labour academy programme. Within the UK education system, academies enjoy substantial autonomy in terms of management of their staff, taught curriculum, length of the school day and other aspects of their day-to-day functioning. Our results show that schools that converted to academies between 2002 and 2007 improved their overall age-16 GCSEs results by further raising the attainments of students in the top half of the ability distribution, and in particular pupils in the top 20% tail. Conversely, we find little evidence that academies helped pupils in the bottom 10% and 20% of the ability distribution. Finally, we find little evidence that late converters (2008 and 2009) had any beneficial effects on pupils of any ability. We conclude our research by comparing the experience of UK academies to that of US charter schools and Swedish free schools, and by providing some insights into the reasons why UK academies did not serve ‘the tail’ as is the case for some US charter schools.

Full article: http://cep.lse.ac.uk/pubs/download/special/cepsp29.pdf

Incomplete Contracts and the Internal Organisation of Firms

Phillipe Aghion, Nicholas Bloom, John Van Reenen

CEPOP36. March 2013.

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op036.pdf

Fast-Tracking 'Green' Patent Applications: An Empirical Analysis

Antoine Dechezleprêtre

CEPDP1197. March 2013.

This paper presents the first empirical analysis of programmes to fast-track ‘green’ patent applications in place in seven Intellectual Property offices around the world. We find that only a small share of green patent applications (between 1% and 20% depending on the patent office) request accelerated examination, suggesting that patent applicants have a strong incentive to keep their patent applications in the examination process for as long as possible. Fast-tracking programmes reduce the examination process by several years compared to patents going through normal examination procedure and have seemingly accelerated the diffusion of technological knowledge in green technologies. In addition, we find that applicants require accelerated examination for patents of relatively higher value and that fast-tracking programmes seem to be particularly appealing to start-up companies in the green technology sector that are currently raising capital but still generate small revenue.

Full article: http://cep.lse.ac.uk/pubs/download/dp1197.pdf

Where the Streets Have a Name: Income Comparisons in the US

Abel Brodeur, Sarah Flèche

CEPDP1196. March 2013.

This paper analyses how neighbors' income affect agents' well-being using unprecedented data from the BRFSS and the City of Somerville. We conduct a multi-scale approach at the county, ZIP code and street-levels and find that the association between well-being and neighbors' income follows an inverted U-shaped pattern in the size of the area. We find a negative relationship between well-being and neighbors' income in the county of residence, but the opposite at the ZIP code-level. Our results are consistent with the fact that agents enjoy living in a rich ZIP code but also having poor faraway neighbors since they have preferences for high social status. We test explicitly this interpretation by including amenities and the relative rank in the local income distribution in our model. At the street-level, we find a negative association between neighbors' income and self-reported well-being indicating the presence of income comparisons between very close neighbors.

Full article: http://cep.lse.ac.uk/pubs/download/dp1196.pdf

Really Uncertain Business Cycles

Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten, Stephen Terry

CEPDP1195. March 2013.

We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.

Full article: http://cep.lse.ac.uk/pubs/download/dp1195.pdf

Does Working from Home Work? Evidence from a Chinese Experiment

Nicholas Bloom, James Liang, John Roberts, Zhichun Jenny Ying

CEPDP1194. March 2013.

About 10% of US employees now regularly work from home (WFH), but there are concerns this can lead to “shirking from home.” We report the results of a WFH experiment at CTrip, a 16,000-employee, NASDAQ-listed Chinese travel agency. Call center employees who volunteered to WFH were randomly assigned to work from home or in the office for 9 months. Home working led to a 13% performance increase, of which about 9% was from working more minutes per shift (fewer breaks and sick-days) and 4% from more calls per minute (attributed to a quieter working environment). Home workers also reported improved work satisfaction and experienced less turnover, but their promotion rate conditional on performance fell. Due to the success of the experiment, CTrip rolled-out the option to WFH to the whole firm and allowed the experimental employees to re-select between the home or office. Interestingly, over half of them switched, which led to the gains from WFH almost doubling to 22%. This highlights the benefits of learning and selection effects when adopting modern management practices like WFH.

Full article: http://cep.lse.ac.uk/pubs/download/dp1194.pdf

What are the Channels for Technology Sourcing? Panel Data Evidence from German Companies

Dietmar Harhoff, Elisabeth Mueller, John Van Reenen

CEPDP1193. March 2013.

Innovation processes within corporations increasingly tap into international technology sources, yet little is known about the relative contribution of different types of innovation channels. We investigate the effectiveness of different types of international technology sourcing activities using survey information on German companies complemented with information from the European Patent Office. German firms with inventors based in the US disproportionately benefit from R&D knowledge located in the US. The positive influence on total factor productivity is larger if the research of the inventors results in co-applications of patents with US companies. Moreover, research cooperation with American suppliers also enables German firms to better tap into US R&D, but cooperation with customers and competitors does not appear to aid technology sourcing. The results suggest that the “brain drain” to the US can have upsides for corporations tapping into American know-how.

Full article: http://cep.lse.ac.uk/pubs/download/dp1193.pdf

Equal access to high quality early education and care? Evidence from England and lessons from other countries

Ludovica Gambaro, Kitty Stewart, Jane Waldfogel

CASEbrief 32. March 2013.

Full article: http://sticerd.lse.ac.uk/dps/case/cb/CASEbrief32.pdf

A question of quality: Do children from disadvantaged backgrounds receive lower quality early years education and care in England?

Ludovica Gambaro, Kitty Stewart, Jane Waldfogel

CASE/171. March 2013.

This paper examines how the quality of formal early childhood education and care is associated with children’s background. By using different indicators of quality, the research also explored how the relationship varies depending on the way quality is measured. The analysis combines information from three administrative datasets – the Early Years Census, the Schools Census and the Office for Standards in Education, Children’s Services and Skills (Ofsted) dataset on inspections (2010-11). The results suggest that children from disadvantaged background have access to better qualified staff. However, services catering for more disadvantaged children are more segregated and receive poorer quality ratings from Ofsted, the national inspectorate.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper171.pdf

What Gives? Household Consumption Patterns and the 'Big Trade Off' with Public Consumption

Francesca Bastagli, John Hills

CASE/170. March 2013.

At the centre of politics in Britain and other countries is what is sometimes called 'the big trade-off'- where to strike the balance between private consumption and collective goods and social spending – and hence the sacrifices that would be entailed by the higher taxation required to fund otherwise desirable forms of social provision. In this paper we use aggregate national accounts data to compare the composition of household consumption between otherwise similar countries with higher and lower levels of public consumption. We concentrate in particular on spending patterns in ten countries where ‘total potential consumption’ (the sum of public and household consumption and household saving) is similar to that in the UK, using data from 2005. While the strengths of the inferences that can be drawn from a small number of countries are limited, overall these results suggest that there is a hierarchy in the forms of consumption that citizens of different countries sacrifice when they have greater government consumption (and so higher taxes). The trade-off at the margin is not with all kinds of consumption equally, but particularly with consumption of particular kinds – such as spending on restaurants and hotels, vehicle purchase, household furnishings, or clothing and footwear. But there are also items, such as education, where government spending may act as a substitute for what private households would have to spend. Such findings could colour our views of what the ‘big trade-off’ between public and private consumption really entails.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper170.pdf

The relationship between EU indicators of persistent and current poverty

Stephen P Jenkins, Philippe Van Kerm

CASE/169. March 2013.

The current poverty rate and the persistent poverty rate are both included in the EU’s portfolio of primary indicators of social inclusion. We show that there is a near-linear relationship between these two indicators across EU countries drawing on empirical analysis of EU-SILC and ECHP data. Using a prototypical model of poverty dynamics, we explain how the near-linear relationship arises and show how the model can be used to predict persistent poverty rates from current poverty information. In the light of the results, we discuss whether the EU’s persistent poverty measure and the design of EU-SILC longitudinal data collection require modification.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper169.pdf

Accounting for cross-country differences in wealth inequality

Frank A Cowell, Eleni Karagiannaki, Abigail McKnight

CASE/168. March 2013.

This paper adopts a counterfactual decomposition analysis to analyse cross-country differences in the size of household wealth and levels of household wealth inequality. The findings of the paper suggest that the biggest share of cross-country differences is not due to differences in the distribution of household demographic and economic characteristics but rather reflect strong unobserved country effects.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper168.pdf

Access All Areas? The Impact of Fees and Background on Student Demand for Postgraduate Higher Education in the UK

Philip Wales

SERCDP0128. February 2013.

This paper analyses participation in postgraduate higher education in the UK at the micro-level makes several contributions to the literature. Firstly, it describes trends in postgraduate participation in the UK. Secondly, it introduces a hitherto unavailable dataset of postgraduate tuition fees by institution and subject: the first of its kind. Thirdly, it attempts to control for several potential forms of endogeneity to assess the extent to which tuition fees affect demand. It adopts an instrumental variables approach to partially control for the potential endogeneity of tuition fees and includes a broad array of fixed effects to mitigate the impact of sorting into universities and endogenous residential selection. The results suggest that (1) there is substantial variation in tuition fees across and within institutions and that (2) tuition fees reduce demand for postgraduate places. In our preferred specification a 10% increase in tuition fees reduces the probability of progression by 1.7%.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0128.pdf

House Prices and Rents: Micro Evidence from a Matched Dataset in Central London

Philippe Bracke

SERCDP0127. February 2013.

Using the proprietary dataset of a real estate agency, I analyse tens of thousands of housing sale and rental transactions in Central London during the 2005-2011 period. I run hedonic regressions on both prices and rents and show that price-rent ratios are higher for bigger and more central units. Since this result could be driven by differences in unobserved characteristics between properties for sale and properties for rent, I replicate my analysis using only units that were both sold and rented out within 6 months, and get similar results. I discuss several possible explanations for my findings.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0127.pdf

ON TESTABILITY OF COMPLEMENTARITY IN MODELS WITH MULTIPLE EQUILIBRIA

Taisuke Otsu, Yoshiyasu Rai

EM/2013/560. February 2013.

This paper revisits testability of complementarity in economic models with multiple equilibria studied by Echenique and Komunjer (2009). We find that Echenique and Komunjer’s (2009) testable implications on extreme quantiles can be implied by a weaker version of their tail condition without complementarity, and on the other hand, a slightly stronger version of complementarity implies their testable implications without the tail condition.

Full article: http://sticerd.lse.ac.uk/dps/seminarpapers/em05022013.pdf

Bankers and their bonuses

Brian Bell, John Van Reenen

CEPOP35. February 2013.

The pay of financial sector workers (“bankers”) is a focus of public concern especially since the onset of the financial crisis. We document the remarkable rise in the share of aggregate pay going to those at the very top of the distribution over the last decade in the UK and highlight the role of the financial sector. Rising bonuses paid to bankers accounted for around two-thirds of the increase in the national wage bill (“earnings pie”) taken by the top one percent of workers since 1999. Surprisingly, even after the crisis bankers took at least as large a share of the earnings pie in 2011 as they did at the peak of the boom in 2007 and saw no worsening in their employment outcomes relative to other similar workers. Having described the scale of bankers’ pay, we discuss the policy responses that have been proposed to address the issue such as transparency, numerical bonus targets, bonus clawbacks and taxation.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op035.pdf

Extreme Wage Inequality: Pay at the Very Top

Brian Bell, John Van Reenen

CEPOP34. February 2013.

We provide new evidence on the growth in pay at the very top of the wage distribution in the UK. Sectoral decompositions show that workers in the financial sector have accounted for the majority of the gains at the top over the last decade. New results are also presented on the pay of CEOs in the UK. We show how improved measurement of pay points to a stronger pay-performance link than previously estimated. This link is stronger, and more symmetric, for those firms in which institutional investors play a larger role.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op034.pdf

CEO Incentive Contracts in China: Why Does City Location Matter?

Alex Bryson, John Forth, Minghai Zhou

CEPDP1192. February 2013.

CEO incentive contracts are commonplace in China but their incidence varies significantly across Chinese cities. We show that city and provincial policy experiments help explain this variance. We examine the role of two policy experiments: the use of Special Economic Zones (SEZs) to attract foreign direct investment (FDI), and the rate at which state owned enterprises (SOEs) were privatised. CEO incentive contracts are negatively correlated with foreign ownership and with the introduction of FDI via SEZs. However, the SEZ effect disappears having accounted for the city-level composition of firms and executives. Rapid SOE privatisation is associated with higher city and firm-level adoption of CEO incentive contracts, irrespective of the firm's own current ownership status. The positive effect of privatisation is robust to various estimation techniques and model specifications.

Full article: http://cep.lse.ac.uk/pubs/download/dp1192.pdf

When the Cat is Near, the Mice Won't Play: The Effect of External Examiners in Italian Schools

Marco Bertoni, Giorgio Brunello, Lorenzo Rocco

CEPDP1191. February 2013.

We use a natural experiment to show that the presence of an external examiner has both a direct and an indirect negative effect on the performance of monitored classes in standardized educational tests. The direct effect is the difference in the test performance between classes of the same school with and without external examiners. The indirect effect is the difference in performance between un-monitored classes in schools with an external examiner and un-monitored classes in schools without external monitoring. We find that the overall effect of having an external examiner in the class is to reduce the proportion of correct answers by 5.5 to 8.5% - depending on the grade and the test - with respect to classes in schools with no external monitor. The direct and indirect effects range between 4.3 and 6.6% and between 1.2 and 1.9% respectively. Using additional supporting evidence, we argue that the negative impact of the presence of an external examiner on measured test scores is due to reduced cheating (by students and/or teachers) rather than to the negative effects of anxiety or distraction from having a stranger in the class.

Full article: http://cep.lse.ac.uk/pubs/download/dp1191.pdf

Moving Up and Sliding Down: An Empirical Assessment of the Effect of Social Mobility on Subjective Wellbeing

Paul Dolan, Grace Lordan

CEPDP1190. February 2013.

Many people remain in the same income group as their parents and this is a cause of much discussion and some concern. In this work, we examine how intergenerational mobility affects subjective wellbeing (SWB) using the British Cohort Study. Our SWB measures encapsulate life satisfaction and mental health. We find that relative income mobility is a significant predictor of life satisfaction and mental health whether people move upward or downward. For absolute income, mobility is only a predictor of SWB and mental health outcomes if the person moves downward. We also explore pathways through which income mobility can impact on these outcomes. In particular, we present evidence that suggests much of the effect of income mobility on SWB is due to changes in the perception of financial security. But those who slide down are still less satisfied with their lives over and above any effect of financial insecurity. Overall, there is an asymmetric effect of income mobility: the losses of sliding on down are larger than the gains of moving up.

Full article: http://cep.lse.ac.uk/pubs/download/dp1190.pdf

A Trapped Factors Model of Innovation

Nicholas Bloom, Paul Romer, Stephen Terry, John Van Reenen

CEPDP1189. February 2013.

When will reducing trade barriers against a low wage country cause innovation to increase in high wage regions like the US or EU? We develop a model where factors of production have costs of adjustment and so are partially “trapped” in producing old goods. Trade liberalization with a low wage country reduces the profitability of old goods and so the opportunity cost of innovating falls. Interestingly, the “China shock” is more likely to induce innovation than liberalization with high wage countries. These implications are consistent with a range of recent empirical evidence on the impact of China and offers a new mechanism for positive welfare effects of trade liberalization over and above the standard benefits of specialization and market expansion. Calibrations of our model to the recent experience of the US with China suggests that there will be faster long-run growth through innovation in the US and that, in the short run, this is magnified by the trapped factor effect.

Full article: http://cep.lse.ac.uk/pubs/download/dp1189.pdf

Survive Another Day: Does Uncertain Financing Affect the Composition of Investment?

Luis Garicano, Claudia Steinwender

CEPDP1188. February 2013.

We expect firms that face financial constraints to prioritize shorter term investments over longer term ones. Using a high quality panel data set, and a difference-in-differences approach to control for demand effects, we study whether this has been indeed the case after the sharp deterioration of the financial conditions for firms in the European periphery. Specifically, we compare Spanish manufacturing firms which are foreign owned (and thus have alternative financing channels) to those which are Spanish owned (and thus financially constrained) along a large number of dimensions before and after the financial crisis. We show that, allowing for firm fixed effects to control for unobserved heterogeneity and for industry specific time effects, firms which are capital constrained reduce employment substantially more (by 6%); reduce investment drastically (by 19%); and reduce very substantially process innovation and information technology investment; but they increase their information technology outsourcing and do not significantly reduce advertising. This suggests lack of access to financing is indeed forcing Spanish owned firms to cut future oriented investments in order to survive for another day. Our findings are robust to a number of alternative approaches to control for unobserved, time varying heterogeneity, e.g. inverse propensity score reweighting, or comparing only within multinationals.

Full article: http://cep.lse.ac.uk/pubs/download/dp1188.pdf

Are You Happy While You Work?

Alex Bryson, George MacKerron

CEPDP1187. February 2013.

Recent work in psychology and economics has investigated ways in which individuals experience their lives. This literature includes influences on individuals’ momentary happiness. We contribute to this literature using a new data source, Mappiness (www.mappiness.org.uk), which permits individuals to record their wellbeing via a smartphone. The data contain more than a million observations on tens of thousands of individuals in the UK, collected since August 2010. We explore the links between individuals’ wellbeing measured momentarily at random points in time and their experiences of paid work. We explore variation in wellbeing within-individual over time having accounted for fixed unobservable differences across people. We quantify the effects of working on individuals’ affect relative to other activities they perform. We consider the effects of working on two aspects of affect: happiness and relaxation. We find paid work is ranked lower than any of the other 39 activities individuals engage in, with the exception of being sick in bed. Although controlling for other factors, including person fixed effects, reduces the size of the association its rank position remains the same and the effect is still equivalent to a 7-8% reduction in happiness relative to circumstances in which one is not working. Paid work has a similar though slightly larger negative impact on being relaxed. However, precisely how unhappy or anxious one is while working depends on the circumstances. Wellbeing at work varies significantly with where you work (at home, at work, elsewhere); whether you are combining work with other activities; whether you are alone or with others; and the time of day or night you are working.

Full article: http://cep.lse.ac.uk/pubs/download/dp1187.pdf

Task Specialization in U.S. Cities from 1880-2000

Guy Michaels, Ferdinand Rauch, Stephen J. Redding

CEPDP1186. February 2013.

We develop a new methodology for quantifying the tasks undertaken within occupations using 3,000 verbs from around 12,000 occupational descriptions in the Dictionary of Occupational Titles (DOTs). Using micro-data from the United States from 1880-2000, we find an increase in the employment share of interactive occupations within sectors over time that is larger in metro areas than non-metro areas. We provide evidence that this increase in the interactiveness of employment is related to the dissemination of improvements in transport and communication technologies. Our findings highlight a change in the nature of agglomeration over time towards an increased emphasis on human interaction.

Full article: http://cep.lse.ac.uk/pubs/download/dp1186.pdf

The Importance of Time Zone Assignment: Evidence from Residential Electricity Consumption

Felix Weinhardt

SERDDP0126. January 2013.

This paper presents the first nationwide empirical assessment of residential electricity use in response to the timing of daylight. Employing Geographical Information Systems (GIS) solar times of sunrise and sunset are calculated for all geographical locations in mainland USA. This is used to uncover the non-standard variation in sunrise times in standard local time over space, depending on time zone, daylight saving time, and geographical position within time zone. This variation is subsequently used to uncover county-level responses in residential electricity consumption to changes in sunlight. I find no robust overall effect of sunrise times, but early sunrise is associated with lower residential electricity use in the North, but higher consumption in the South. These results would suggest that additionally splitting the USA into time-zones horizontally could reduce the total annual residential electricity bill, but further research is needed to examine the behavioral channels that could give rise to these effects.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0126.pdf

Rocketing Rents The magnitude and attenuation of agglomeration economies in the commercial property market

Hans R. A. Koster

SERCDP0125. January 2013.

Rocketing rents in urban areas are likely explained by agglomeration economies. This paper measures the impact of these external economies on commercial property values using unique micro]data on commercial rents and employment. A measure of agglomeration is employed that is continuous over space, avoiding the modifiable areal unit problem. To distinguish agglomeration economies from unobserved endowments and shocks, I use temporal variation in densities and instrumental variables. The spatial extent of agglomeration economies is determined by estimating a spatial bandwidth within the model. The results show that agglomeration economies have a considerable impact on rents: a standard deviation increase in employment density leads to an increase in rents of about 10 percent. The geographical extent of these benefits is about 15 kilometres. The bias of ignoring time]invariant unobserved endowments and unobserved shocks seems to be limited.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0125.pdf

Historic Amenities, Income and Sorting of Households

Hans R. A. Koster, Piet Rietveld, Jos Van Ommeren

SERCDP0124. January 2013.

We test the impact of historic amenities on house prices and sorting of households within cities. Conservation area boundaries enable us to employ a semiparametric regression-discontinuity approach to measure the impact of historic amenities. The approach allows for household-specific preferences. Conditional on neighbour attributes, the price difference at the conservation boundary is about 3 percent. Internal historic amenities are also important, as listed houses are about 6 percent more expensive. It is shown that rich households sort themselves in conservation areas and in listed buildings, because they have a higher willingness to pay for historic amenities. The results contribute to an explanation for the substantial spatial income differences within cities.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0124.pdf

Taxation and Development

Timothy Besley, Torsten Persson

EOPP 41. January 2013.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp41.pdf

Investing for Prosperity: Skills, Infrastructure and Innovation

CEPSP28. January 2013.

What institutions and policies are needed to sustain UK economic growth in the dynamic world economy of the twentyfirst century? After years of inadequate investment in skills, infrastructure and innovation, there are longstanding structural weaknesses in the economy, all rooted in a failure to achieve stable planning, strategic vision and a political consensus on the right policy framework to support growth. This must change if we are to meet our current challenges and those that may arise in the future.

Full article: http://cep.lse.ac.uk/pubs/download/special/cepsp28.pdf

Has the Growth of Real GDP in the UK been Overstated because of Mis-Measurement of Banking Output?

Nicholas Oulton

CEPOP33. January 2013.

If official figures overstated the growth of banking output in the UK in the recent boom, does this mean that GDP growth was overstated too? The answer is no. It is truer to say that if banking output was overstated then the output of some other industry or industries must have been understated, leaving GDP relatively unaffected. The reason is that the Office for National Statistics measures the real growth of GDP primarily from the expenditure side. And from the expenditure side most of the problematic part of banking output drops out since it constitutes intermediate consumption not final expenditure. Consequently, the effect of any mis-measurement of banking output on GDP growth in the boom of 2000-2007 is likely to have been small: GDP growth might have been overstated by about 0.1% p.a.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op033.pdf

Long and Short-Term Effects of the Financial Crisis on Labour Productivity, Capital and Output

Nicholas Oulton, María Sebastiá-Barriel

CEPDP1185. January 2013.

The behaviour of labour productivity in the United Kingdom since the onset of the recession in early 2008 constitutes a puzzle. Over four years after the recession began labour productivity is still below its previous peak level. This paper considers the hypothesis that economic capacity can be permanently damaged by financial crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labour productivity and a long-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The main finding is that a banking crisis as defined by Reinhart and Rogoff on average reduces the short-run growth rate of labour productivity by between 0.6% and 0.7% per year and the long-run level by between 0.84% and 1.1% (depending on the method of estimation), for each year that the crisis lasts. A banking crisis also reduces the long-run level of capital per worker by an average of about 1%. The effect on GDP per capita is about double the effect on GDP per worker since there is a long-run, negative effect on the employment ratio.

Full article: http://cep.lse.ac.uk/pubs/download/dp1185.pdf

Bank of England Working Paper No.470 http://www.bankofengland.co.uk/publications/Pages/workingpapers/2013/wp470.aspx

Free Trade Aggreements and the Consolidation of Democracy

Xuepeng Liu, Emanuel Ornelas

CEPDP1184. January 2013.

We study the relationship between participation in free trade agreements (FTAs) and the sustainability of democracy. Our model shows that FTAs can critically reduce the incentive of authoritarian groups to seek power by destroying protectionist rents, thus making democracies last longer. This gives governments in unstable democracies an extra motive to form FTAs. Hence, greater democratic instability induces governments to boost their FTA commitments. In a dataset with 116 countries over 1960-2007, we find robust support for these predictions. They help to rationalize the rapid simultaneous growth of regionalism and of worldwide democratization since the late 1980s.

Full article: http://cep.lse.ac.uk/pubs/download/dp1184.pdf

The Causal Effect of Credit Guarantees for SMEs: Evidence from Italy

Alessio D'Ignazio, Carlo Menon

SERCDP0123. December 2012.

We evaluate the effectiveness of a partial credit guarantee program implemented in a large Italian region using unique microdata from a broad set of firms. Our results show that the policy was effective to the extent that it resulted in an improved financial condition for the beneficiary firms. While the total amount of bank debt was unaffected, firms showed a significant increase in the long-term component. Furthermore, targeted firms benefited from a substantial decrease in interest rates. On the other hand, there is some evidence that the probability of default increases as a consequence of the treatment, although the effect is only marginally significant. There are, instead, no effects on the real outcomes.

Full article: http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0123.pdf

The Size Distribution Across All "Cities": A Unifying Approach

Kristian Giesen, Jens Suedekum

SERCDP0122. December 2012.

Older cities in the US tend to be larger than younger ones. The distribution of city sizes is, therefore, systematically related to the country's city age distribution. We introduce endogenous city creation into a dynamic economic model of an urban system. All cities exhibit the same long-run growth rate (Gibrat's law), but young cities initially grow faster. The double Pareto lognormal (DPLN) emerges as the city size distribution in our model. The DPLN unifies the lognormal and the Pareto distribution (Zipf's law), and closely fits US city size data. This evidence can potentially resolve several debates from the recent literature.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0122.pdf

Specialization and Regional Economic Development

Thomas Kemeny, Michael Storper

SERCDP0121. December 2012.

Debates about urban growth and change often center on specialization.However, arguments linking specialization to metropolitan economic development contain diverse, and sometimes conflicting, claims. Is it better to be highly specialized or diversified? Does specialization refer to the absolute scale of an activity in a region, its share within the regional economy, or its share in the nation’s economy? Does specialization have static effects, or is its impact chiefly evolutionary? This paper starts by investigating these different theoretical claims. We then turn to an empirical inquiry into the roles of relative and absolute specialization. By analyzing local agglomerations over time, we find that growing absolute specialization is positively linked to wages, while changes in relative concentration are not significantly associated with wage dynamics. This supports notions of specialization based on the absolute size of an agglomeration, and casts doubt on notions of specialization based on shares of an activity in the regional economy.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0121.pdf

Social Policies and Labor Market Outcomes in Latin America and the Caribbean: A Review of the Existing Evidence

Mariano Bosch, Marco Manacorda

CEPOP32. December 2012.

Latin America and the Caribbean have become in the last decade or so a formidable laboratory for the design and implementation of innovative social policies. In the face of an unprecedented surge in the number of non-contributory social assistance benefit programs in the region, there is a renewed interest - among policy makers and academics alike - as to whether such programs have "perverse" labor market effects, in particular discouraging participation and formal employment. After having revisited the theoretical arguments behind this concern, this paper reviews the existing quasi experimental empirical evidence for the region. Our reading of the evidence suggests that, consistent with zero income elasticity of leisure among the poor, social assistance has no large significant effects on participation and overall employment, other than possibly among the elderly. Some particular policies are, however, generating a substitution away from formal to informal employment.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op032.pdf

Heterogeneous Firms and Trade

Marc J. Melitz, Stephen J. Redding

CEPDP1183. December 2012.

This paper reviews the new approach to international trade based on firm heterogeneity in differentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these empirical patterns reveals new mechanisms through which the aggregate economy is affected by trade liberalization, including endogenous increases in average industry and firm productivity.

Full article: http://cep.lse.ac.uk/pubs/download/dp1183.pdf

China's Pure Exporter Subsidies

Fabrice Defever, Alejandro Riaño

CEPDP1182. December 2012.

One third of Chinese exporters sell more than ninety percent of their production abroad. We argue that this distinctive pattern is attributable to a wide range of subsidies that provide incentives to these “pure exporters”. We propose a heterogeneous firm model in which firms exporting all their output receive an ad-valorem sales subsidy. Using microdata on manufacturing firms matched with custom transactions for the years 2000-2006, we measure sizable differences in productivity and paid taxes between pure exporters and domestic firms and between pure and regular exporters, in line with the predictions of our model. Embedding a pure-exporter subsidy in a two-country general equilibrium environment, we show that this instrument is worse from a welfare standpoint than a standard export subsidy, partly because it increases protection of the domestic market. A counterfactual analysis suggests that eliminating these subsidies would result in a welfare gain for China comparable to halving its trade costs.

Full article: http://cep.lse.ac.uk/pubs/download/dp1182.pdf

Productivity As If Space Mattered: An Application to Factor Markets Across China

Wenya Cheng, John Morrow, Kitjawat Tacharoen

CEPDP1181. December 2012.

Optimal production decisions depend on local market characteristics. This paper develops a model to explain firm labor demand and firm density across regions. Firms vary in their technology to combine imperfectly substitutable worker types, and locate across regions with distinct distributions of workers and wages. Firm technologies which best match regional labor markets explain both productivity differences and firm density. Estimating structural model parameters is simple and relies on a two stage OLS procedure. The first stage estimates local market conditions using firm employment and regional data, while the second incorporates regional costs into production function estimation. The method is applied to Chinese manufacturing, population census and geographic data to estimate local market costs and production technologies. In line with the model, we find that labor markets which provide cost advantages explain substantial differences in firm productivity. Furthermore, regions which have lower optimal hiring costs attract more firms per capita.

Full article: http://cep.lse.ac.uk/pubs/download/dp1181.pdf

Pride and Prejudice: Using Ethnic-Sounding Names and Inter-Ethnic Marriages to Identify Labor Market Discrimination

Dror Brenner, Yona Rubinstein

CEPDP1180. December 2012.

We use non-random sorting into interethnic marriage and salient differences between Sephardic and Ashkenazi surnames to evaluate the causal impact of Sephardic affiliation on wages. Using the 1995 Israeli Census, we estimate the effect of a Sephardic affiliation on wages. We first compare the wages of Israeli Jewish males born to Sephardic fathers and Ashkenazi mothers (SA), who are more likely to carry a Sephardic surname, with the wages of Israeli Jewish males born to Ashkenazi fathers and Sephardic mothers (AS). We find that SA workers earn significantly less than their AS counterparts. We then exploit the custom of women to adopt their husbands. surnames to disentangle actual ethnicity from the ethnicity perceived by the market. Consistent with our interpretation of the results for males, we find that it is father-in-law’s ethnicity - rather than father’s ethnicity - that shapes female wage rates, yet only for daughters of interethnic couples and others with mild skin tone who have equal chances to be perceived either as an Ashkenazi or as a Sephardic group member.

Full article: http://cep.lse.ac.uk/pubs/download/dp1180.pdf

America's fiscal cliff

Ethan Ilzetzki, Jonathan Pinder

CEPCP388. December 2012.

The US economy is still suffering from its most severe recession in seven decades. This article covers the key issue of taxes, spending and public debt, a major point of disagreement between the two candidates in the 2012 US election, President Obama and Governor Romney.

Full article: http://cep.lse.ac.uk/pubs/download/cp388.pdf

'Stop fighting and wealth will follow'

Timothy Besley, Hannes Mueller

CEPCP387. December 2012.

The article uses house prices to measure the peace dividend in Northern Ireland - and draws lessons for other parts of the world that have endured long conflicts.

Full article: http://cep.lse.ac.uk/pubs/download/cp387.pdf

Science: why the gender gap?

Thomas Breda, Son Thierry Ly

CEPCP386. December 2012.

Stereotypes, role models played by teachers and social norms influence girls’ academic self-concept and push girls to choose humanities rather than science. Do recruiters reinforce this strong selection by discriminating more against girls in more scientific subjects? Using the entrance exam of a French higher education institution (the Ecole Normale Supérieure) as a natural experiment, we show the opposite: discrimination goes in favor of females in more male-connoted subjects (e.g. math, philosophy) and in favor of males in more female-connoted subjects (e.g. literature, biology), inducing a rebalancing of sex ratios between students recruited for a research career in science and humanities majors. We identify discrimination by systematic differences in students’ scores between oral tests (non-blind toward gender) and anonymous written tests (blind toward gender). By making comparisons of these oral/written scores differences between different subjects for a given student, we are able to control both for a student’s ability in each subject and for her overall ability at oral exams. The mechanisms likely to drive this positive discrimination toward the minority gender are also discussed.

Full article: http://cep.lse.ac.uk/pubs/download/cp386.pdf

Sexism at work

Björn Erikssoon, Tobias Karlsson, Tim Leunig, Maria Stanfors

CEPCP385. December 2012.

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 article: http://cep.lse.ac.uk/pubs/download/cp385.pdf

Working or shirking?

Nicholas Bloom, James Liang, John Roberts, Zhichun Jenny Ying

CEPCP384. December 2012.

Over 10% of US employees now regularly work from home (WFH), but there is widespread skepticism over its impact highlighted by phrases like “shirking from home”. We report the results of a WFH experiment at Ctrip, a 13,000 employee NASDAQ listed Chinese multinational. Call center employees who volunteered to WFH were randomly assigned to work from home or in the office for 9 months. Work from home led to a 13% performance increase, of which about 9.5% is from working more minutes per shift (fewer breaks and sick-days) and 3.5% from more calls per minute (attributed to a quieter working environment). Home workers also reported improved work satisfaction and their job attrition rate fell by 50%. After the experiment, the firm rolled the program out to all employees, letting them choose home or office working. Interestingly, only half of the volunteer group decided to work at home, with the other half changing their minds in favor of office working. After employees were allowed to choose where to work, the performance impact of WFH more than doubled, highlighting the benefits of choice alongside modern management practices like home working.

Full article: http://cep.lse.ac.uk/pubs/download/cp384.pdf

Hooray for GDP!

Nicholas Oulton

CEPCP383. December 2012.

The idea of having GDP growth as the main target of economic policy has been under attack in recent years. The article answers some of the criticisms and argues that continued GDP growth would be good for the UK - and not just in the short term to reduce high levels of unemployment.

Full article: http://cep.lse.ac.uk/pubs/download/cp383.pdf

The UK's housing crises

Henry Overman

CEPCP382. December 2012.

The UK is facing not one but two housing crises. The first is a short-term fall in prices and construction whcih is both driven by and driving the recession. The second and more profound is the overall shortage of housing and the problems of affordability that this generates.

Full article: http://cep.lse.ac.uk/pubs/download/cp382.pdf

Immigration and the UK Labour Market

David Metcalf

CEPCP381. December 2012.

David Metcalf, chair of the Migration Advisory Committee (MAC), outlines recent changes in the regulatory framework for immigrant workers.

Full article: http://cep.lse.ac.uk/pubs/download/cp381.pdf

On 'Consistent' Poverty

Rod Hick

CASE/167. December 2012.

The measurement of poverty as ‘consistent’ poverty offers a solution to one of the primary problems of poverty measurement within Social Policy of the last three decades. Often treated as if they were synonymous, ‘indirect’ measures of poverty, such as low income measures, and ‘direct’ measures, such as indices of material deprivation, identify surprisingly different people as being poor. In response to this mismatch, a team of Irish researchers put forward a measure which identified respondents in as being in poverty when they experienced both a low standard of living, as measured by deprivation indicators, and a lack of resources, as measured by a low income line. Importantly, they argued that the two measures required an equal weight. In this paper, I present a reconsideration of the consistent poverty measure from both conceptual and empirical perspectives. In particular, I examine the claim that low income and material deprivation measures should be given an ‘equal weight’. I argue that, from a conceptual perspective, the nature of the indicators at hand means that a deprivation-led measurement approach might be understood to align with the definition of poverty which Nolan and Whelan outline and, from an empirical perspective, that it is the material deprivation measure – and not the low income measure – which is particularly effective in identifying individuals at risk of multiple forms of deprivation.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper167.pdf

Wealth accumulation in Great Britain 1995-2005: The role of house prices and the life cycle

Francesca Bastagli, John Hills

CASE/166. December 2012.

This paper examines trends in the distribution of household wealth in Great Britain from 1995 to 2005 using the British Household Panel Survey (BHPS). The data show that wealth is very unevenly distributed and reveal a widening absolute gap over the period between wealthier households and those with no or negative wealth. However, in relative terms, wealth grew fastest for households in the middle of the distribution and inequality measured by the Gini coefficient decreased. This mainly reflected housing wealth becoming a greater share of total net worth, more equally distributed, and the highest percentage increase in housing wealth taking place in the middle of the distribution. To estimate the distributional impact of the remarkable rise in house prices which defined this period, we simulate the distribution of net 2005 wealth in the hypothetical scenario in which house prices remained at their 1995 levels in real terms and find that the reduction in wealth inequality is almost entirely accounted for by changes in house prices. The paper also finds that, controlling for factors such as age, households that gained most from the house price boom were mortgagors, in particular those that were initially wealthier, and were advantaged in other ways such as by level of educational qualification.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper166.pdf

Free to Choose? Reform and Demand Response in the English National Health Service

Martin Gaynor, Carol Propper, Stephan Seiler

CEPDP1179. November 2012.

The impacts of choice in public services are controversial. We exploit a reform in the English National Health Service to assess the impact of relaxing constraints on patient choice. We estimate a demand model to evaluate whether increased choice increased demand elasticity faced by hospitals with regard to clinical quality and waiting time for an important surgical procedure. We find substantial impacts of the removal of restrictions. Patients became more responsive to clinical quality. Sicker patients and better informed patients were more affected. We leverage our model to calculate potential benefits. We find increased demand responsiveness led to a significant reduction in mortality and an increase in patient welfare. The elasticity of demand faced by hospitals increased post-reform, giving hospitals potentially large incentives to improve their quality of care and find suggestive evidence that hospitals responded strongly to the enhanced incentives due to increased demand elasticity. The results suggests greater choice can enhance quality.

Full article: http://cep.lse.ac.uk/pubs/download/dp1179.pdf

Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry

CEPDP1178. November 2012.

Can directed technical change be used to combat climate change? We construct new firm-level panel data on auto industry innovation distinguishing between “dirty” (internal combustion engine) and “clean” (e.g. electric and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively more in clean technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation both from aggregate spillovers and from the firm's own innovation history. Using our model we simulate the increases in carbon taxes needed to allow clean to overtake dirty technologies.

Full article: http://cep.lse.ac.uk/pubs/download/dp1178.pdf

Minimum Wages and Wage Inequality: Some Theory and an Application to the UK

Tim Butcher, Richard Dickens, Alan Manning

CEPDP1177. November 2012.

Research suggests that, at the levels set in countries like the US and the UK, minimum wages have little effect on employment but do have impacts on wage inequality. However we lack models that can explain these facts – this paper presents one based on imperfect labour markets. The paper also investigates the impact of the UK’s National Minimum Wage on wage inequality finding it can explain a sizeable part of the evolution of wage inequality in the bottom half of the distribution in the period 1998-2010. We also present evidence that the impact of the NMW reaches up to 40% above the NMW in 2010 which corresponds to the 25th percentile. These spillovers are larger in low-wage segments.

Full article: http://cep.lse.ac.uk/pubs/download/dp1177.pdf

Estimating the Influence of Life Satisfaction and Positive Affect on Later Income Using Sibling Fixed-Effects

Jan-Emmanuel De Neve, Andrew J. Oswald

CEPDP1176. November 2012.

The question of whether there is a connection between income and psychological well-being is a long-studied issue across the social, psychological, and behavioral sciences. Much research has found that richer people tend to be happier. However, relatively little attention has been paid to whether happier individuals perform better financially in the first place. This possibility of reverse causality is arguably understudied. Using data from a large US representative panel we show that adolescents and young adults who report higher life satisfaction or positive affect grow up to earn significantly higher levels of income later in life. We focus on earnings approximately one decade after the person’s well-being is measured; we exploit the availability of sibling clusters to introduce family fixed-effects; we account for the human capacity to imagine later socio-economic outcomes and to anticipate the resulting feelings in current wellbeing. The study’s results are robust to the inclusion of controls such as education, IQ, physical health, height, self-esteem, and later happiness. We consider how psychological well-being may influence income. Sobel-Goodman mediation tests reveal direct and indirect effects that carry the influence from happiness to income. Significant mediating pathways include a higher probability of obtaining a college degree, getting hired and promoted, having higher degrees of optimism and extraversion, and less neuroticism.

Full article: http://cep.lse.ac.uk/pubs/download/dp1176.pdf

The Enduring Impact of Childhood Experience on Mental Health: Evidence Using Instrumented Co-Twin Data

Rachel Berner Shalem, Francesca Cornaglia, Jan-Emmanuel De Neve

CEPDP1175. November 2012.

The question of whether there is a lasting effect of childhood experience on mental health has eluded causal measurement. We draw upon identical twin data and econometric instrumentation to provide an unbiased answer. We find that 55% of a one standard deviation change in mental health due to idiosyncratic experience at age 9 will still be present three years later. Extending the analysis, we find such persistence to vary with age at impact, gender, and mental health sub-categories. This investigation allows us to get a grasp on the degree to which childhood events influence health and socio-economic outcomes by way of their lagged effect on subsequent mental health. A better understanding of the evolution of mental health also helps identifying when mental health issues can be most effectively treated.

Full article: http://cep.lse.ac.uk/pubs/download/dp1175.pdf

Mapping and measuring the distribution of household wealth: A cross-country analysis

Frank A Cowell, Eleni Karagiannaki, Abigail McKnight

CASE/165. November 2012.

In this paper we compare the level, composition and distribution of household wealth in five industrial countries: the UK, US, Italy, Finland and Sweden. We exploit the harmonized data within the Luxembourg Wealth Study, which we have extended to allow us to examine trends in the UK and the US between the mid-1990s and the mid-2000s. Remaining differences between surveys, variable definitions and coverage are highlighted to the extent that they impact on cross-country comparisons. We find that the Nordic countries have lower average wealth holdings, smaller absolute gaps between low wealth and high wealth households but high relative measures of wealth inequality. Italian households hold very little debt and are much more likely to own their homes outright, leading to relatively high median levels of wealth. In contrast American households tend to hold much more housing debt well into retirement. Increases in owner occupation and house prices 2000-05 in the UK has led to substantial increases in wealth, particularly median wealth holdings and this had led to falls in relative measures of wealth inequality such as the Gini coefficient even though absolute gaps between high and low wealth households have grown substantially. We show that there are underlying country differences in terms of distributions of age, household composition, educational attainment and income as well as wealth and debt portfolios. Educational loans are increasing in their size and prevalence in some countries and look set to create some marked differences in the distribution of wealth for different age cohorts.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper165.pdf

Driving Up Wages: The Effects of Road Construction in Great Britain

Rosa Sanchis-Guarner

SERCDP0120. October 2012.

This paper estimates the effects of road construction on individual labour market outcomes using micro-data from Great Britain between 2002 and 2008. To capture these effects, I use a measure of accessibility to employment through the road network at a very detailed geographical level. I test the effect of accessibility changes on weekly wages and hours worked. In order to tackle potential sources of bias, I use an instrumental variable which exploits the variation in employment accessibility stemming only from changes in minimum travel times between locations. I argue that, conditional on controls, small scale spatial variation in the accessibility impact of road construction can be considered to be exogenous because road schemes are aimed to improve connectivity and reduce congestion for wider and more distant areas. I further use home and work location specific individual fixed-effects to control for endogenous sorting of workers and I also restrict the sample to workers who are located very close to the projects. I find a positive impact of accessibility from work location on weekly wages and total hours worked but no effect of accessibility from home neither on wages nor hours, conditional on commuting time. These effects are not due to selection into employment as a result of road construction. I also find evidence of accessibility from home reducing commuting travel time. Increased spatial competition or agglomeration externalities are potential explanations for the findings.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0120.pdf

Inequality and opportunity: the return of a neglected debate

Stephen Machin, John Van Reenen

CEPUSA004. October 2012.

During this election period many Americans are feeling angry towards the very rich, especially those working in the financial sector, who helped cause the Great Recession and yet were bailed out by the government. Increases in inequality might be tolerable at a time of growing consumption for all, but they become less acceptable when the unemployment rate has hit 10% and real wages continue to stagnate. The chances that those who are born poor will escape from poverty are lower now in the US than in almost any other OECD country. However, neither of the presidential candidates is clear about how they would tackle the fundamental causes of the enormous shift in the US income distribution.

Full article: http://cep.lse.ac.uk/pubs/download/cepusa004.pdf

One page summary (available in Adobe PDF) http://cep.lse.ac.uk/pubs/download/cepusa004sum.pdf

Healthcare Reform: The US Policy Debate

Zack Cooper

CEPUSA003. October 2012.

The ability of the next US president to rein in spending on healthcare and improve the productivity of the healthcare system is largely going to determine the country’s fiscal future. That is one of the conclusions of the latest in a series of US Election Analyses , published by the Centre for Economic Performance.

Full article: http://cep.lse.ac.uk/pubs/download/cepusa003.pdf

One page summary (available in Adobe PDF) http://cep.lse.ac.uk/pubs/download/cepusa003sum.pdf

Economic Recovery and Policy Uncertainty

Scott R. Baker, Nick Bloom, Steven J. Davis, John Van Reenen

CEPUSA002. October 2012.

Until some political mechanism creates incentives to elect moderate representatives who can reach across the ideological divide, the US seems destined to heightened levels of policy uncertainty for many years to come. Some research suggests that such uncertainty, particularly over economic policy, partly explains the sluggish nature of the recovery in America – and - according to one recent study, restoring policy uncertainty to levels that prevailed before the financial crisis would raise employment by an estimated 2.3 million over 18-24 months.

Full article: http://cep.lse.ac.uk/pubs/download/cepusa002.pdf

One page summary (available in Adobe PDF) http://cep.lse.ac.uk/pubs/download/cepusa002sum.pdf

Recession and Recovery: The US Policy Debate on Taxes, Spending and Public Debt

Ethan Ilzetzki, Jonathan Pinder

CEPUSA001. October 2012.

The US economy is still suffering from its most severe recession in seven decades. In the first of a series of US Election Analyses, Ethan Ilzetzki covers the key issue of taxes, spending and public debt, a major point of disagreement between the two candidates, President Obama and Governor Romney.

Full article: http://cep.lse.ac.uk/pubs/download/cepusa001.pdf

One page summary (available in Adobe PDF) http://cep.lse.ac.uk/pubs/download/cepusa001sum.pdf

Selection Effects with Heterogeneous Firms

Monika Mrázová, J. Peter Neary

CEPDP1174. October 2012.

We provide a general characterization of which firms will select alternative ways of serving a market. If and only if firms' maximum profits are supermodular in production and marketaccess costs, more efficient firms will select into the activity with lower market-access costs. Our result applies in a range of models and under a variety of assumptions about market structure. We show that supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are “sub-convex” (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.

Full article: http://cep.lse.ac.uk/pubs/download/dp1174.pdf

Resilience to Economic Shocks and the Long Reach of Childhood Bullying

Nattavudh Powdthavee

CEPDP1173. October 2012.

This paper investigates whether people’s ability to withstand and adapt to one of the most important economic shocks – job loss – is determined early on in childhood. Using nationally representative longitudinal data that tracks almost 3,000 children into adulthood, we show that the negative effect of unemployment on mental health and life satisfaction is almost four times larger for workers who had been bullied a lot in their early life. We also find zero adaptation to unemployment for these individuals over time. Although the results should be viewed as illustrative and more research is needed, their potential implications for economists and policy makers are discussed.

Full article: http://cep.lse.ac.uk/pubs/download/dp1173.pdf

Optimal Policy for Macro-Financial Stability

Gianluca Benigno, Huigang Chen, Chris Otrok, Alessandro Rebucci, Eric Young

CEPDP1172. October 2012.

In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy make r has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.

Full article: http://cep.lse.ac.uk/pubs/download/dp1172.pdf

The Careers of Immigrants

Ana Damas de Matos

CEPDP1171. October 2012.

I use a unique linked employer employee panel covering all wage earners in the private sector in Portugal to shed new light on the careers of immigrants. During the first ten years in the country immigrants close one third of the initial immigrant-native wage gap. I show that one third of this wage catch-up is accounted for by firm heterogeneity: Immigrants remain in the same occupations but get jobs with better paying _rms. Over time immigrants move to larger, more productive firms and with a higher share of native workers. These patterns are similar for all the recent immigrants irrespective of their origin and in particular of whether their mother tongue is the host country's language. Motivated by these new stylized facts, I suggest an economic assimilation mechanism which highlights imperfect information about immigrant productivity. I build an employer learning model with firm heterogeneity and complementarities between worker and firm type. The initial uncertainty over immigrants' productivity prevents them from getting access to the best jobs. Over time, productivity is revealed and immigrants obtain better firm matches. I derive predictions on the immigrant wage distributions over time, on their mobility patterns and on the productivity distribution of firms they are matched with. The predictions of the model are in line with the data and are not trivially derived from competing explanations.

Full article: http://cep.lse.ac.uk/pubs/download/dp1171.pdf

Policy Design in a Model with Swings in Risk Appetite

Bianca De Paoli, Pawel Zabczyk

CEPDP1170. October 2012.

This paper studies the policy implications of habits and cyclical changes in agents' appetite for risk-taking. To do so, it analyses the non-linear solution of a New Keynesian (NK) model, in which slow-moving habits help match the cyclical properties of risk-premia. Our findings suggest that the presence of habits and swings in risk appetite can materially affect policy prescriptions. As in Ljungqvist and Uhlig (2000), a counter-cyclical fiscal instrument can eliminate habit-related externalities. Alternatively, monetary policy can partially curb the associated overconsumption by responding to risk premia. Specifically, periods in which risk premia are elevated (compressed) merit a looser (tighter) policy stance. However, the associated welfare gains appear quantitatively small.

Full article: http://cep.lse.ac.uk/pubs/download/dp1170.pdf

Exporters, Importers and Credit Constraints

Mirabelle Muûls

CEPDP1169. October 2012.

This paper analyses the interaction between credit constraints and trading behaviour. I construct a unique dataset containing firm-level trade transactions data, balance sheets and credit scores from an independent credit insurance company for Belgian manufacturing firms between 1999 and 2007. Firms are more likely to be exporting or importing if they enjoy lower credit constraints. Also, firms that have better credit rating export and import more, and more products to and from more countries. Whilst importing and exporting behavior are very similar in a static view, an analysis of how various margins of trade are related to credit constraints show a significant difference between the two. In the case of exports, it is the extensive margin of exports in terms of destinations that is significantly associated with credit constraints whereas for imports it is the extensive margin in terms of products.

Full article: http://cep.lse.ac.uk/pubs/download/dp1169.pdf

High Rise Hope

Katie Bates, Laura Lane, Anne Power

CASEreport 75. October 2012.

Full article: http://sticerd.lse.ac.uk/dps/case/cr/CASEreport75.pdf

The Impact of Supply Constraints on House Prices in England

Christian A. L. Hilber, Wouter Vermeulen

SERCDP0119. September 2012.

We explore the impact of different types of supply constraints on house prices in England by exploiting a unique panel dataset of 353 local planning authorities ranging from 1974 to 2008. Using exogenous variation from a policy reform, vote shares and historical density to identify the endogenous constraints-measures, we find that: i) Regulatory constraints have a substantive positive long-run impact on the house price-earnings elasticity; ii) The effect of constraints due to scarcity of developable land is largely confined to highly urbanised areas; iii) Uneven topography has a quantitatively less meaningful impact; and iv) The effects of supply constraints are greater during boom than bust periods.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0119.pdf

The Economics of Density: Evidence from the Berlin Wall

Gabriel M. Ahlfeldt, Stephen J. Redding, Daniel M. Sturm, Nikolaus Wolf

SERCDP0118. September 2012.

This paper develops a quantitative model of city structure to separate agglomeration forces, dispersion forces and fundamentals as determinants of location choices. The model remains tractable and amenable to empirical analysis because of stochastic shocks to worker productivity, which yield a gravity equation for commuting flows. To empirically disentangle alternative determinants of location choices, we use Berlin’s division and reunification as a source of exogenous variation in the surrounding concentration of economic activity. Using disaggregated data on land prices, workplace employment and residence employment for thousands of city blocks for 1936, 1986 and 2006, we find that the model can account both qualitatively and quantitatively for the observed changes in city structure.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0118.pdf

New Road Infrastructure: the Effects on Firms

Stephen Gibbons, Teemu Lyytikäinen, Henry Overman, Rosa Sanchis-Guarner

SERCDP0117. September 2012.

This paper estimates the impact of road improvements on firm employment and productivity using plant level longitudinal data for Britain. Exposure to transport improvements is measured by changes in employment accessibility along the road network. These changes are constructed using data on employment for small geographical units, details of the main road network and of road construction schemes carried out between 1998 and 2007. We deal with the central problem of endogenous scheme placement by using changes due to new road links and exploiting the spatial detail in our data to focus on accessibility changes close to new schemes. We find substantial effects on employment and numbers of plants for small-scale geographical areas (electoral wards), but no employment response at plant level. This suggests that road construction affects firm entry and exit, but not the employment of existing firms. We also find effects on labour productivity and wages at the firm level, although these results are less robust.

Full article: http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0117.pdf

What Do We Know About China's CEO's? Evidence from Across the Whole Economy

Alex Bryson, John Forth, Minghai Zhou

OP31. September 2012.

All that we know about the CEO labour market in China comes from studies of public listed companies and state-owned enterprises (SOEs). This paper is the first to examine the operation of the CEO labour market across all sectors of the Chinese economy. We do so using World Bank enterprise data for the first part of the 21st Century. Incentive schemes are commonplace throughout the economy and include contracts linking CEO pay directly to firm performance, annual bonus schemes, the posting of performance bonds, and holding company stock. These incentive mechanisms appear to complement rather than substitute for one another. The elasticity of pay with respect to company performance is one or more in two-fifths of the cases where CEO's have performance contracts, suggesting many face high-powered incentives. CEO's also face a real dismissal threat and financial penalties if they fail to deliver. Incentive contracts are used to attract the most talented executives, as indicated by educational attainment and position in the Communist Party. However, government involvement in the appointment of a CEO reduces the likelihood that the CEO will receive an incentives-based contract, perhaps because governments appoint “bureaucrats” to perform roles which incorporate social and political as well as economic goals. Firms with good corporate governance are more likely to deploy incentive contracts. A picture emerges of a well-functioning labour market for executives in China that exhibits many of the traits common to CEO labour markets in the West.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op031.pdf

Market Structure and Borrower Welfare in Microfinance

Thiemo Fetzer, Maitreesh Ghatak, Jonathan de Quidt

EOPP 40. September 2012.

Motivated by recent controversies surrounding the role of commercial lenders in microfinance, we analyze borrower welfare under different market structures,considering a benevolent non-profit lender, a for-profit monopolist, and a competitive credit market. To understand the magnitude of the effects analyzed, we simulate the model with parameters estimated from the MIX Market database. Our results suggest that market power can have severe implications for borrower welfare, while despite possible information frictions competition typically delivers similar borrower welfare to non-profit lending. In addition, for-profit lenders are less likely to use joint liability than non-profits.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp40.pdf

Testing for Structural Stability in the Whole Sample

Javier Hidalgo, Myung Hwan Seo

EM/2013/561. September 2012.

The paper examines a Lagrange Multiplier type test for the constancy of the parameter in general models with dependent data without imposing any arti…cial choice of the possible location of the break. In order to prove the asymptotic behaviour of the test, we extend a strong approximation result for partial sums of a sequence of random variables. We also present a Monte-Carlo experiment to examine the …nite sample performance of the test and how it compares with tests which assume some knowledge of the possible location of the break.

Full article: http://sticerd.lse.ac.uk/dps/em/em561.pdf

Brain Drain or Brain Gain? Technology Diffusion and Learning On-the-job

Thomas Sampson

CEPDP1168. September 2012.

This paper develops a theory of technology transfer when technology is embodied in human capital and learning requires on-the-job communication between managers and workers. Patterns of knowledge diffusion depend on where high knowledge managers work and how much time they allocate to training workers. Managers appropriate the surplus training creates and in the open economy managers face a cross-country trade-off between labor costs and the value of knowledge transfer. Complementarity between country-wide efficiency and managerial knowledge makes learning more valuable in the North meaning that high knowledge managers choose to work in the North and globalization precipitates a brain drain of high knowledge Southern agents to the North. The brain drain reduces learning opportunities in the South and exacerbates cross-country knowledge differences.

Full article: http://cep.lse.ac.uk/pubs/download/dp1168.pdf

Taxes, Cigarette Consumption, and Smoking Intensity: Reply

Jérôme Adda, Francesca Cornaglia

CEPDP1167. September 2012.

This paper shows that smoking intensity, i.e. the amount of nicotine extracted per cigarette smoked, responds to changes in excise taxes and tobacco prices. We exploit data covering the period 1988 to 2006 across many US states. Moreover, we provide new evidence on the importance of cotinine measures in explaining long-run smoking behaviour and we investigate the sensitivity of smoking cessation to changes in excise taxes and their interaction with smoking intensity.

Full article: http://cep.lse.ac.uk/pubs/download/dp1167.pdf

Musn't Grumble. Immigration, Health and Health Service Use in the UK and Germany

Jonathan Wadsworth

CEPDP1166. September 2012.

A rise in population caused by increased immigration, is sometimes accompanied by concerns that the increase in population puts additional or differential pressure on welfare services which might affect the net fiscal contribution of immigrants. The UK and Germany have experienced significant increases in immigration in recent years and this study uses longitudinal data from both countries to examine whether immigrants differ in their use of health services than native born individuals on arrival and over time. While immigrants to Germany, but not the UK, are more likely to self-report poor health than the native-born population, the samples of immigrants use hospital and GP services at broadly the same rate as the native born populations in both countries. Controls for observed and unobserved differences between immigrants and native-born sample populations make little difference to these broad findings.

Full article: http://cep.lse.ac.uk/pubs/download/dp1166.pdf

The Transferable Scars: A Longitudinal Evidence of Psychological Impact of Past Parental Unemployment on Adolescents in the United Kingdom

Nattavudh Powdthavee, James Vernoit

CEPDP1165. September 2012.

Using a longitudinal data of British youths, this paper explores the consequences of past parental unemployment on the current happiness and self-esteem of the children. We find that a past unemployment spell of the father has important consequences for their children and leads to them having both lower subjective well-being and self-confidence. In addition, this paper also presents evidence that both subjective well-being and self-confidence responds differently to maternal unemployment compared to paternal unemployment. In our final table, we show changes in adolescents’ well-being and self-esteem predicts educational attainments at 16. Together these findings offer new evidence of unemployment scarring on children’s livelihood.

Full article: http://cep.lse.ac.uk/pubs/download/dp1165.pdf

On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations

Natalie Chen, Dennis Novy

CEPDP1164. September 2012.

In this article, we review the literature on the measurement of trade costs in international trade with a special emphasis on nontariff measures and in particular on standards and technical regulations. We distinguish ‘direct’ from ‘indirect’ approaches. The direct approach collects observable data or proxy variables on trade cost components which are then typically used as regressors in a gravity equation of trade. Instead, the indirect approach infers the extent of trade impediments from trade flows. It compares actual trade flows to the trade flows predicted by a hypothetical frictionless benchmark scenario based on a micro-founded trade model, attributing the deviation of actual from predicted trade flows to trade frictions. We argue that economists and policymakers can gain useful insights from both approaches.

Full article: http://cep.lse.ac.uk/pubs/download/dp1164.pdf

A Cautionary Note on Using Industry Affiliation to Predict Income

Jörn-Steffen Pischke, Hannes Schwandt

CEPDP1163. September 2012.

Many literatures investigate the causal impact of income on economic outcomes, for example in the context of intergenerational transmission or well-being and health. Some studies have proposed to use employer wage differentials and in particular industry affiliation as an instrument for income. We demonstrate that industry affiliation is correlated with fixed individual characteristics, specifically parents’ education and own height, conditional on the covariates typically controlled for in these studies. These results suggest that there is selection into industries based on unobservables. As a result the exclusion restriction in many IV studies of this type is likely violated.

Full article: http://cep.lse.ac.uk/pubs/download/dp1163.pdf

Is the International Border Effect Larger than the Domestic Border Effect? Evidence from U.S. Trade

Cletus C. Coughlin, Dennis Novy

CEPDP1162. September 2012.

Many studies have found that international borders represent large barriers to trade. But how do international borders compare to domestic border barriers? We investigate international and domestic border barriers in a unified framework. We consider a data set of exports from individual U.S. states to foreign countries and combine it with trade flows between and within U.S. states. After controlling for distance and country size, we estimate that relative to state-to-state trade, crossing an individual U.S. state’s domestic border appears to entail a larger trade barrier than crossing the international U.S. border. Due to the absence of governmental impediments to trade within the United States, this result is surprising. We interpret it as highlighting the concentration of economic activity and trade flows at the local level.

Full article: http://cep.lse.ac.uk/pubs/download/dp1162.pdf

In brief: Mental illness and the NHS

Richard Layard

CEPCP380. September 2012.

Richard Layard and colleagues reveal the shocking scale of mental illness in Britain - and how little the NHS does about it.

Full article: http://cep.lse.ac.uk/pubs/download/cp380.pdf

This article summarises 'How Mental Illness Loses Out in the NHS', a report by CEP's Mental Health Policy Group. http://cep.lse.ac.uk/pubs/download/special/cepsp26.pdf

Gender gaps in performance

Ghazala Azmat, Rosa Ferrer

CEPCP379. September 2012.

Ghazala Azmat and Rosa Ferrer analyse data on young lawyers to understand what drives differences in earnings between highly skilled men and women.

Full article: http://cep.lse.ac.uk/pubs/download/cp379.pdf

This article summarises 'Gender Gaps in Performance: Evidence from Young Lawyers' by Ghazala Azmat and Rosa Ferrer, CEP Discussion paper No.1136, March 2012 http://cep.lse.ac.uk/pubs/download/dp1136.pdf

In brief: Mother tongue:the economics of language learning

Javier Ortega, Gregory Verdugo

CEPCP378. September 2012.

Javier Ortega and Gregory Verdugo look at the drivers of language assimilation in the English- and French-majority cities in Canada.

Full article: http://cep.lse.ac.uk/pubs/download/cp378.pdf

This article summarises 'Assimilation in Multilingual Cities' by Javier Ortega and Gregory Verdugo, CEP Discussion Paper No.1110, December 2011 http://cep.lse.ac.uk/pubs/download/dp1110.pdf

Are public sector employees overcompensated?

Alexander Danzer, Peter Dolton

CEPCP377. September 2012.

Alexander Danzer and Peter Dolton use the concept of 'total reward' to assess whether public sector pay and pensions are too high relative to the private sector.

Full article: http://cep.lse.ac.uk/pubs/download/cp377.pdf

This article summarises 'Total Reward and Pensions in the UK in the Public and Private Sectors' by Alexander Danzer and Peter Dolton, Labour Economics 19(4): 584-594, August 2012 http://www.sciencedirect.com/science/article/pii/S092753711200053X

Student awareness of the costs and benefits of higher education

Martin McGuigan, Sandra McNally, Gill Wyness

CEPCP376. September 2012.

Sandra McNally and colleagues report the results of a 'light-touch' information campaign about the value and affordability of going to university.

Full article: http://cep.lse.ac.uk/pubs/download/cp376.pdf

This article summarises 'Student Awareness of Costs and Benefits of Educational Decisions: Effects of an Information Campaign' by Martin McGuigan, Sandra McNally and Gill Wyness, Centre for the Economics of Education Discussion Paper No.139, August 2012 http://cee.lse.ac.uk/ceedps/ceedp139.pdf

The doomsday cycle turns: who's next?

Peter Boone, Simon Johnson

CEPCP375. September 2012.

Peter Boone and Simon Johnson believe that there are more and worse financial crises to come.

Full article: http://cep.lse.ac.uk/pubs/download/cp375.pdf

Peter Boone and Simon Johnson are co-founders of The Baseline Scenario, a leading economics blog http://baselinescenario.com

Big ideas: valuing schooling through house prices

Steve Gibbons

CEPCP374. September 2012.

Steve Gibbons describes the development of CEP research showing how much house prices are boosted by the quality of local schools

Full article: http://cep.lse.ac.uk/pubs/download/cp374.pdf

More details on the research discusssed here are in 'Houses and Schools Valuation of School Quality throught he Housing Market', CEP Occasional Paper No.29, May 2011 http://cep.lse.ac.uk/pubs/download/occaional/op029.pdf

Pre-Colonial Political Centralization and Contemporary Development in Uganda

Sanghamitra Bandyopadhyay, Elliott Green

EOPP 039. August 2012.

The importance of pre-colonial history on contemporary African development has become an important .eld of study within development economics in recent years. In particular Gennaioli and Rainer (2007) suggest that pre-colonial political centralization has had an impact on con- temporary levels of development within Africa at the country level. We test the Gennaioli and Rainer (2007) hypothesis at the sub-national level with evidence from Uganda. Using a variety of datasets we obtain results which are striking in two ways. First, we con.rm the Gennaioli and Rainer (2007) hypothesis that pre-colonial centralization is highly correlated with modern- day development outcomes such as GDP, asset ownership and poverty levels, and that these correlations hold at the district, sub-county and individual levels. We also use an instrumental variable approach to con.rm this .nding using the distance from ancient capital of Mubende as an instrument. However, our second .nding is that public goods like immunization coverage and primary school enrolment are not correlated with pre-colonial centralization. These .ndings are thus consistent with a correlation between pre-colonial centralization and private rather than public goods, thereby suggesting the persistence of poverty and wealth from the pre-colonial period to the present.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp39.pdf

Fiscal Consolidation During a Depression

Nitika Bagaria, Dawn Holland, John Van Reenen

CEPSP27. August 2012.

In 2009-10, the UK's budget deficit was about 11 per cent of GDP. A credible plan for fiscal consolidation was introduced in the UK over the fiscal years 2011-12 to 2016-17. In this paper, we assess the impact of the scale and timing of this fiscal consolidation programme on output and unemployment in the UK. During a prolonged period of depression when unemployment is well above most estimates of the NAIRU, the impact of fiscal tightening may be different from that in normal times. We contrast three scenarios: the consolidation plan implemented during a depression; the same plan, but with implementation delayed for three years when the economy has recovered; and no consolidation at all. The modelling confirms that doing nothing was not an option and would have led to unsustainable debt ratios. Under both our "immediate consolidation" scenario and the "delayed consolidation", the necessary increases in taxes and reductions in spending reduce growth and increase unemployment, as expected. But our estimates indicate that the impact would have been substantially less, and less long-lasting, if consolidation had been delayed until more normal times. The impact is partly driven by the heightened magnitude of fiscal multipliers, and exacerbated by the prolongation of their impact due to hysteresis effects. The cumulative loss of output over the period 2011-21 amounts to about £239 billion in 2010 prices, or about 16 per cent of 2010 GDP. And unemployment is considerably higher for longer - still 1 percentage point higher even in 2019.

Full article: http://cep.lse.ac.uk/pubs/download/special/cepsp27.pdf

National Institute Economic Review No. 221 July 2012 http://ner.sagepub.com./content/221/1/F42.full.pdf+html

Hooray for GDP!

Nicholas Oulton

CEPOP30. August 2012.

Should raising the growth rate of GDP per capita be a policy goal of governments in general, and of the British government in particular? Many people would say no, for the following reasons: 1) GDP is hopelessly flawed as a measure of welfare; 2) Growing GDP is pointless since most people don’t benefit; 3) Raising GDP per capita is pointless as it doesn’t make people any happier; and 4) The planet is finite, so further growth of GDP (at least in rich countries) is not feasible anyway. I discuss and reject all four of these objections. I urge the LSE Growth Commission to focus its efforts on policies to increase the growth rate of GDP per capita in the medium and long run.

Full article: http://cep.lse.ac.uk/pubs/download/occasional/op030.pdf

Reserve Accumulation, Growth and Financial Crises

Gianluca Benigno, Luca Fornaro

CEPDP1161. August 2012.

We present a model that reproduces two salient facts characterizing the international monetary system: i) Faster growing countries are associated with lower net capital inflows and ii) Countries that grow faster accumulate more international reserves and receive more net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. We use the model to compare the laissez-faire equilibrium and the optimal reserve policy in an economy that is opening to international capital flows. We find that the optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. We also find that the welfare gains of reserve policy are large, in the order of 1 percent of permanent consumption equivalent.

Full article: http://cep.lse.ac.uk/pubs/download/dp1161.pdf

Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective

CEPDP1160. August 2012.

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the first best unconstrained allocation. In this benchmark economy, prudential capital controls are optimal only when the set of policy tools is restricted so that they are the only policy instrument available.

Full article: http://cep.lse.ac.uk/pubs/download/dp1160.pdf

Student Awareness of Costs and Benefits of Educational Decisions: Effects of an Information Campaign

Marty McGuigan, Sandra McNally, Gill Wyness

CEEDP0139. August 2012.

University fees have recently trebled in England and there are fears that many young people may be put off from participating in further and higher education – especially those from low income backgrounds. This could exacerbate inequalities that are already very stark in the UK. In this paper, we investigate students’ knowledge and their receptiveness to information campaigns about the costs and benefits of staying on in education. We design an ‘information campaign’ that gives some simple facts about economic and financial aspects of educational decisions and test students’ response to this campaign. The fieldwork for our information campaign took place over the period in which the trebling of university fees was announced. This was widely reported in the media, so we also test receptiveness to the surrounding media campaign. The analysis shows evidence of large gaps in students’ knowledge, which are influenced both by the information campaign and media reporting about the increase of tuition fees. However, the latter greatly increased the perception of going to university as ‘too expensive’ – especially among low income groups. Our experiment shows that simple information campaigns can help to mitigate this negative impact on attitudes.

Full article: http://cee.lse.ac.uk/ceedps/ceedp139.pdf

The effect of parental wealth on children’s outcomes in early adulthood

Eleni Karagiannaki

CASE/164. August 2012.

This paper presents the first UK estimates of the association between parental wealth during adolescence and a range of children’s outcomes in early adulthood. Parental wealth is positively associated with all outcomes examined (which include educational attainment, employment, earnings and homeownership). The estimated associations are found to operate over and above parental education and income and in many cases are stronger than them. For labour market outcomes a small share of the association reflects the indirect effect of parental wealth on children’s education whereas for homeownership the estimated association appear to mainly reflect the effect of parental wealth transfers. Further analysis by wealth component shows that degree attainment is more strongly associated with housing wealth than financial wealth. However, important effects are also estimated for financial wealth indicating the existence of financial constraints for low wealth-financial indebted households. For homeownership and earnings the estimated association are stronger for financial wealth.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper164.pdf

Using play to help families learn: Evaluation of Trafford Hall’s Playing 2 Learn Programme 2008-11

Laura Lane, Liz Richardson

CASE/162. August 2012.

The report describes the results of a three-year evaluation by LSE Housing and Communities of a family learning programme called Playing 2 Learn. The Playing 2 Learn programme was open to vulnerable families from low income communities across England. It was delivered by a charity, Trafford Hall, home of the National Communities Resource Centre between 2008 and 2011. It consisted of 26 residential weekend events with 795 adult and child family members from a total of 205 families attending. The weekends used creative, low cost play activities to promote play-based learning. The evaluation used baseline data collected by the programme, self-reported short-, medium- and longer-term outcomes based on written feedback from 62% of participating families, in-depth interviews with the purposive sample of 20 families, assessments from referral agencies, interviews with delivery staff, and observations of the residential events. It finds that the families participating in the programme experienced a series of pressures that undermined their ability to engage positively and spend time with their children at home, including family breakdown and formation, pressures of low-incomes, health and behavioural issues. Outcomes for families from the programme were assessed under four themes. First, there was improved family interaction over the short-, medium- and longer-terms, for example reading together and doing messy play. Second, parents’ and carers’ attitudes towards and input into children’s opportunities for play were also improved, including getting new ideas for affordable play activities and continuing to use them up to two years after attending the weekends. To the extent that the evaluation was able to measure, the impacts on younger children’s ability to learn were much more limited. Fourthly, there were positive impacts on parents’ and carers’ participation in the community for around a quarter of respondents, and wider impacts on parents’ and carers’ self-esteem and confidence, primarily through the support of meeting other families in similar situations. The report concludes that the value of the residential setting was to help families to experience new challenges. The experiential hands-on approach helped to generate long-lasting impacts. Many of the families on the programme were going through tough times that play alone could not resolve. The Programme succeeded in its goals to be a ‘snapshot removed from the everyday’, on which families could draw for inspiration when they return to their often challenging daily lives.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper162.pdf

Does Public Investment Spur the Land Market?: Evidence from Transport Improvement in Beijing

Wenjie Wu

SERCDP0116. July 2012.

Over 140 billion CNY (1GBP=10CNY) has been spent between 2000 and 2012 in Beijing on the construction of new rail transit lines. This massive public investment allows me to examine the consequences of transport improvements for land prices near rail stations. Using unique vacant parcel-specific data, I estimate the significant heterogeneity in the capitalization effects of rail transit development for multiple land uses in Beijing urbanised area. The results show that these transport improvements, identified by the parcel-station distance reductions, give rise to sizeable price premiums in the local residential and commercial land markets. Strikingly, the difference between the increase in the value of residential and commercial land parcels are not distributed evenly. These findings lend to support the evidence that public investment has an essential role to play in spurring the spatially targeted land market and provide implications for further land and transport policy making in China.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0116.pdf

The Effect of the UK Stamp Duty Land Tax on Household Mobility

Christian A. L. Hilber, Teemu Lyytikäinen

SERCDP0115. July 2012.

We estimate the effect of the UK Stamp Duty Land Tax on household mobility using micro data. Exploiting a discontinuity in the tax schedule as a quasi-experimental setting, we isolate the impact of the stamp duty from other determinants of mobility. Our empirical strategy essentially compares similar households with self-assessed house values on either sides of a cut-off value where the tax rate increases from 1 to 3 percent. We find that a higher stamp duty strongly negatively affects a household’s propensity to move: the 2 percentage-point increase in the stamp duty may reduce mobility of homeowners by around 40 percent. This adverse effect is mainly confined to short-distance and non-job related moves.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0115.pdf

Assessing theWelfare Effects of Unemployment Benefits Using the Regression Kink Design

Camille Landais

PEP 16. July 2012.

I investigate in this paper partial equilibrium labor supply responses to unemployment insurance (UI) in the US. I use administrative data on the universe of unemployment spells in five states from 1976 to 1984, and non-parametrically identify the effect of both benefit level and potential duration in the regression kink (RK) design using kinks in the schedule of UI benefits. I provide many tests for the robustness of the RK design, and demonstrate its validity to overcome the traditional issue of endogeneity in UI benefit variations on US data. I also show how one can use the weighted difference between the behavioral response to an increase in potential duration and to an increase in benefit level to identify the pure moral hazard effect of UI. I then use these estimates to calibrate the welfare effects of an increase in UI benefit level and in UI potential duration.

Full article: http://sticerd.lse.ac.uk/dps/pep/pep16.pdf

Decentralization of Health and Education in Developing Countries: A Quality-Adjusted Review of the Empirical Literature

Anila Channa, Jean-Paul Faguet

EOPP 038. July 2012.

We review empirical evidence on the ability of decentralization to enhance preference matching and technical efficiency in the provision of health and education in developing countries. Many influential surveys have found that the empirical evidence of decentralization’s effects on service delivery is weak, incomplete and often contradictory. Our own unweighted reading of the literature concurs. But when we organize the evidence first by substantive theme, and then – crucially – by empirical quality and the credibility of its identification strategy, clear patterns emerge. Higher quality evidence indicates that decentralization increases technical efficiency across a variety of public services, from student test scores to infant mortality rates. Decentralization also improves preference matching in education, and can do so in health under certain conditions, although there is less evidence for both. We discuss individual studies in some detail. Weighting by quality is especially important when evidence informs policy-making. Firmer conclusions will require an increased focus on research design, and a deeper examination into the prerequisites and mechanisms of successful reforms.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp38.pdf

Happy Talk: Mode of Administration Effects on Subjective Well-Being

Paul Dolan, Georgios Kavetsos

CEPDP1159. July 2012.

Research on the measurement of subjective well-being (SWB) has escalated in recent years. This study contributes to the literature by examining how SWB reports differ by mode of survey administration. Using data from the 2011 Annual Population Survey in the UK, we find that individuals consistently report higher SWB over the phone compared to face-to-face interviews. We also show that the determinants of SWB differ significantly by survey mode. We must therefore account for mode of administration effects in research into SWB and its determinants.

Full article: http://cep.lse.ac.uk/pubs/download/dp1159.pdf

Steady-State Equilibrium in a Model of Short-Term Wage-Posting

Alan Manning

CEPDP1158. July 2012.

This paper takes the canonical Burdett-Mortensen model of wage- posting and relaxes the assumption that wages are set once-for-all, instead assuming they can only be committed one period at a time. It derives a closed-form solution for a steady-state Markov Rank-Preserving Equilibrium and shows how this relates to the canonical model and performs some comparative statics on it. By means of example it is shown that a Rank-Preserving Equilibrium may fail to exist and that this non-existence can be a problem for plausible parameter values. The paper discusses how the model can be modified to ensure existence of a Rank-Preserving equilibrium. It is also shown, by means of example, how the opposite, a Rank-Inverting Equilibrium may exist.

Full article: http://cep.lse.ac.uk/pubs/download/dp1158.pdf

Not all Incentives Wash out the Warm Glow: The Case of Blood Donation Revisited

Joan Costa Font, Mireia Jofre-Bonet, Steven T. Yen

CEPDP1157. July 2012.

The issue of the nature of the altruism inherent in blood donation and the perverse effects of financial rewards for blood and/or organ donation has been recently revisited in the economic literature with limited consensus. As Titmuss (1970) famously pointed out, providing monetary incentives to blood donors may crowd out blood supply as purely altruistic donors may feel less inclined to donate if a reward is involved – in addition to having the effect of reducing blood quality. In this paper we examine how favouring different types of incentives are related to the likelihood of donating blood by exploiting a large sample representative of the population of fifteen European countries in 2002 containing information on both donation and attitudes towards incentives. Our results show those who have donated are less likely to favour monetary rewards for blood donation but are more likely to favour non-monetary ones. This is consistent with the idea that while monetary rewards may crowd out blood donation, non-monetary rewards do not.

Full article: http://cep.lse.ac.uk/pubs/download/dp1157.pdf

Female Employment and Fertility - The Effects of Rising Female Wages

Christian Siegel

CEPDP1156. July 2012.

Increases in female employment and falling fertility rates have often been linked to rising female wages. However, over the last 30 years the US total fertility rate has been fairly stable while female wages have continued to grow. Over the same period, we observe that women's hours spent on housework have declined, but men's have increased. I propose a model with a shrinking gender wage gap that can capture these trends. While rising relative wages tend to increase women's labor supply and, due to higher opportunity cost, lower fertility, they also lead to a partial reallocation of home production from women to men, and a higher use of labor-saving inputs into home production. I find that both these trends are important in understanding why fertility did not decline to even lower levels. As the gender wage gap declines, a father's time at home becomes more important for raising children. When the disutilities from working in the market and at home are imperfect substitutes, fertility can stabilize, after an initial decline, in times of increasing female market labor. That parents can acquire more market inputs into child care is what I find important in matching the timing of fertility. In a mode l extension, I show that the results are robust to intrahousehold bargaining.

Full article: http://cep.lse.ac.uk/pubs/download/dp1156.pdf

The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective

Albrecht Ritschl

CEPDP1155. July 2012.

The severity of the Great Depression in Germany has sometimes been blamed on reparations in simplistic fashion. Alternative interpretations relied on American capital exports, the demise of the Gold Standard, or on malfunctions of the domestic economy, such as excessive wage increases during the 1920s. This paper argues for a more subtle link between Germany's slump and these policies. I explain Germany’s foreign borrowing rush before 1929 from transfer protection under the Dawes Plan, which gave commercial credits seniority over reparations. I argue that the Young Plan of 1929 implied a reversal of this seniority scheme, causing a sudden stop and reversal in the German balance of payments that lasted throughout the Great Depression. Invoking basic results of sovereign debt theory, the paper identifies a sequence of reparation regimes with varying degrees of relaxation of Germany's participation constraint in international credit markets. Transfer protection under the Dawes Plan created an incentive for Germany (and her commercial creditors) to drive out reparations. I conclude that the Young Plan could only have worked in the absence of an international recession, and that attempts to salvage it in 1931 were necessarily futile.

Full article: http://cep.lse.ac.uk/pubs/download/dp1155.pdf

Measuring Inequality: Autonomy The degree of empowerment in decisions about one’s own life

Tania Burchardt, Martin Evans, Holly Holder

CASEreport 74. July 2012.

Full article: http://sticerd.lse.ac.uk/dps/case/cr/CASEreport74.pdf

Migrants, Landlords and their Uneven Experiences of the Beijing Olympic Games

Bingqin Li, Hyun Bang Shin

CASE/163. July 2012.

Hosting of mega-events such as the Olympic Games tends to be accompanied by voluminous media coverage on the negative social impact of the Games, and the people in the affected areas are often considered to be one victim group sharing similar experiences. The research in this paper tries to unpack the heterogeneous groups in a particular sector of the housing market, and gain a better understanding of how the Olympic Games affects different resident groups. We take the example of the Beijing Summer Olympic Games and resort to empirical findings in an attempt to critically examine the experience of migrant tenants and Beijing citizens (landlords in particular) in ‘villages-in-the-city’ (known as cheongzhongcun) by delivering their own first-hand accounts of city-wide preparation for the 2008 Beijing Summer Olympiad and the pervasive demolition threats to their neighbourhoods. The paper argues that the Beijing Summer Olympiad produced uneven, often exclusionary, Games experiences for a certain segment of urban population.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper163.pdf

Trade Liberalisation Does Not Always Raise Wage Premia: Evidence from Ugandan Districts

Massimiliano Calì

SERCDP0114. June 2012.

The process of economic integration over the past two decades has been accompanied by an expanding income wedge between skilled and unskilled workers in many developing countries. This was also the case for Ugandan wage employees during the 1990s, which was a period of abrupt trade opening and market reforms. This is a surprising result for an unskilled labour abundant country like Uganda in light of a standard Heckscher-Ohlin (H-O) framework. But was the trade opening responsible for the increase in wage premia? By using a novel district-level analysis, I find that in fact increased trade reduced the returns to schooling in line with the H-O predictions. On the other hand, the intensification of domestic trade across districts during the period was associated with higher returns in those districts relatively endowed with skilled employees. This effect appears to be responsible for at least some of the rising returns to schooling among wage employees in Uganda.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0114.pdf

Spatial Variations in Amenity Values: New Evidence from Beijing, China

Wenjie Wu

SERCDP0113. June 2012.

Using parks as an example, this paper explores the robustness and sources of spatial variation in the estimated amenity values using an extended geographically weighted regression (GWR) technique. This analysis, illustrated with estimates using geo-coded data from Beijing’s residential land market, has three important implications. First, it provides a powerful estimation strategy to evaluate how sensitive GWR parameters are to unobserved amenities and complementarities between amenities. Second, it compares the spatial variation patterns for the marginal prices of proximity to parks, estimated using a range of GWR model specifications. The answers generated using the GWR approach still reveal a significant underlying problem of omitted variables. Finally, it highlights the importance of conceptualizing amenity values not just in terms of their structural characteristics but how those characteristics interact with or are conditioned by local social, economic, and other contextual characteristics.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0113.pdf

Total Factor Productivity Growth in Local Economic Partnership Regions in Britain, 1997-2008

Richard Harris, John Moffat

SERCDP0112. June 2012.

This paper decomposes aggregate TFP growth in Britain for 1997-2008 to show the contribution of different LEPs and the role played by manufacturing and services and UK- and foreign-owned plants within these LEPs. These contributions are further decomposed to show the role of productivity growth in continuing plants vis-à-vis reallocations in output shares. The results show that the largest LEPs, in population terms, with higher levels of job density, greater reliance on manufacturing and skilled worker occupations, higher proportions of workers with NVQ4+ qualifications, and lower turnover of businesses, achieved the highest TFP growth. This strong performance is mostly the result of reallocations of output shares towards high productivity continuing plants and the opening of high productivity plants.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0112.pdf

The Effect of Public Sector Employment on Local Labour Markets

Giulia Faggio, Henry G. Overman

SERCDP0111. June 2012.

This paper considers the impact of public sector employment on local labour markets. Using English data at the Local Authority level for 2003 to 2007 we find that public sector employment has no identifiable effect on total private sector employment. However, public sector employment does affect the sectoral composition of the private sector. Specifically, each additional public sector job creates 0.5 jobs in the nontradable sector (construction and services) while crowding out 0.4 jobs in the tradable sector (manufacturing). When using data for a longer time period (1999 to 2007) we find no multiplier effect for nontradables, stronger crowding out for tradables and, consistent with this, crowding out for total private sector employment.

Full article: http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0111.pdf

How Mental Illness Loses Out in the NHS A report by The Centre for Economic Performance's Mental Health Policy Group

Richard Layard

CEPSP26. June 2012.

Mental illness accounts for a massive share of the total burden of disease. Even when we include the burden of premature death mental illness accounts for 23% of the total burden of disease. Yet, despite the existence of cost-effective treatments, it receives only 13% of NHS health expenditure. The under-treatment of people with crippling mental illnesses is the most glaring case of health inequality in our country. The need for a rethink is urgent. At present mental health care is, if anything, being cut. It should be expanded. This is a matter of fairness, to remedy a gross inequality, and it is a matter of simple economics – the net cost to the NHS would be very small. When everyone praises early intervention, it is particularly shocking that the sharpest cuts today are those affecting children.

Full article: http://cep.lse.ac.uk/pubs/download/special/cepsp26.pdf

Immigration and the UK Labour Market: The latest evidence from economic research

Jonathan Wadsworth

CEPPA014. June 2012.

During periods of strong economic growth, migration is and has always been important for filling gaps in the labour market. On balance, the evidence for the UK labour market suggests that fears about the consequences of rising immigration have been exaggerated. It is hard to find evidence of much displacement of UK workers or lower wages, on average. Immigrants, especially in recent years, tend to be younger and better educated than the UK-born and are less likely to be unemployed. They certainly do not receive preferential access to housing. But there have been some effects. The less skilled may have experienced greater downward pressure on wages and greater competition for jobs than others, but these effects still appear to have been modest. Unfortunately we do not know much about whether the effects of immigration are different in downturns. We also need to understand more about how capital and sectoral shifts in demand respond to immigration over the longer run. Future migration trends will, as ever, depend on relative economic performance and opportunity. But we still need to know more about the effects of rising immigration beyond the labour market in areas like prices, housing, health, crime and welfare.

Full article: http://cep.lse.ac.uk/pubs/download/pa014.pdf

The Economics of Density: Evidence from the Berlin Wall

Gabriel M. Ahlfeldt, Stephen J. Redding, Daniel M. Sturm, Nikolaus Wolf

CEPDP1154. June 2012.

This paper develops a quantitative model of city structure to separate agglomeration forces, dispersion forces and fundamentals as determinants of location choices. The model remains tractable and amenable to empirical analysis because of stochastic shocks to worker productivity, which yield a gravity equation for commuting flows. To empirically disentangle alternative determinants of location choices, we use Berlin’s division and reunification as a source of exogenous variation in the surrounding concentration of economic activity. Using disaggregated data on land prices, workplace employment and residence employment for thousands of city blocks for 1936, 1986 and 2006, we find that the model can account both qualitatively and quantitatively for the observed changes in city structure.

Full article: http://cep.lse.ac.uk/pubs/download/dp1154.pdf

Why Do People Pay for Useless Advice?

Nattavudh Powdthavee, Yohanes E. Riyanto

CEPDP1153. June 2012.

We investigated experimentally whether people can be induced to believe in a non-existent expert, and subsequently pay for what can only be described as transparently useless advice about future chance events. Consistent with the theoretical predictions made by Rabin (2002) and Rabin and Vayanos (2010), we show empirically that the answer is yes and that the size of the error made systematically by people is large.

Full article: http://cep.lse.ac.uk/pubs/download/dp1153.pdf

Selection into Trade and Wage Inequality

Thomas Sampson

CEPDP1152. June 2012.

This paper analyzes the impact of trade integration on wage inequality when there is heterogeneity across both workers and firms. By incorporating labor assignment into the heterogeneous firms literature I develop a model in which positive assortative matching between worker skill and firm technology explains the employer size-wage premium and the exporter wage premium. Under trade, fixed export costs cause the selection of high productivity, high skill firms into exporting and an upwards shift in the firm technology distribution. Consequently, the demand for skill and wage inequality increase in all countries, both on aggregate and within the export sector. This result holds both when firms’ technologies are determined by a random draw and when technology is endogenous to firm level R&D. With endogenous technology, the increased demand for skill caused by trade liberalization results from technology upgrading by new exporters.

Full article: http://cep.lse.ac.uk/pubs/download/dp1152.pdf

Human Capital, Matching and Job Satisfaction

Tim Barmby, Alex Bryson, Barbara Eberth

CEPDP1151. June 2012.

Using a model of wage determination developed by Stevens (2003) we offer an explanation of why tenure has a negative effect when entered in job satisfaction equations. If job satisfaction measures match quality, then the explanation follows from a model of the labour market in which workers accumulate specific human capital at the firm they work and the way in which this accumulation affects the way workers react to outside job opportunities.

Full article: http://cep.lse.ac.uk/pubs/download/dp1151.pdf

Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme

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

CEPDP1150. June 2012.

When industry compensation is offered to prevent relocation of regulated firms, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyze industry compensation rules proposed under the EU Emissions Trading Scheme, which allocate permits for free to carbon and trade intensive industries. We estimate that this practice will result in overcompensation in the order of €6.7 billion every year. Efficient allocation would reduce the aggregate risk of job loss by two thirds without increasing aggregate compensation.

Full article: http://cep.lse.ac.uk/pubs/download/dp1150.pdf

Reparations, Deficits, and Debt Default: the Great Depression in Germany

Albrecht Ritschl

CEPDP1149. June 2012.

Germany’s Great Depression of the early 1930s started in 1929 with a sudden stop in the current account. It ended after a foreign debt default that unfolded in several stages from 1931 to 1933. This chapter reviews Germany’s macroeconomic history between the gold-based stabilisation of 1924 and the transition to autarky and domestic credit expansion in 1933. During the Dawes Plan of 1924-29, German borrowed abroad massively to pay reparations out of credit, a phenomenon that gave rise to the debate about the transfer problem between Keynes and his critics. An incentive based interpretation of the transfer problem is sketched to explain the later current account reversal. Time-varying VARs are employed to trace the propagation of the resulting macroeconomic shock, and to obtain estimates of fiscal multipliers.

Full article: http://cep.lse.ac.uk/pubs/download/dp1149.pdf

The CEO Labour Market in China's Public Listed Companies

Alex Bryson, John Forth, Minghai Zhou

CEPDP1148. June 2012.

Using panel data for all of China’s public listed firms over the period 2001-2010 we examine how firms have recruited and rewarded their executives over a decade of huge growth and turbulence. CEO pay is sensitive to firm performance, although the elasticities are lower than for the United States and Europe, especially with respect to returns on assets (ROA). CEO pay rises with firm size and growth, with elasticities resembling those for the United States. We find no dramatic response to the stock market crash of 2007/08. The elasticity of pay to stock returns falls to zero after the crash, while elasticities with respect to sales and ROA remain significant. Executive cash compensation rose steeply throughout the period – in contrast to the United States. There are steep gradients in executive compensation within firms, consistent with tournament prizes, and around two-thirds of CEO appointments are internal promotions. Within-firm executive compensation rose at a faster rate than executive compensation across firms, helping to explain why CEO turnover rates declined a little over the decade. Turnover rates did not spike with the stock market crash. Privatisation and reforms to corporate governance contributed to growth in executive compensation. A picture emerges of an executive labour market in which firms are linking pay to performance and relying on incentive structures within firms to foster executive talent.

Full article: http://cep.lse.ac.uk/pubs/download/dp1148.pdf

Do Professors Really Perpetuate the Gender Gap in Science? Evidence from a Natural Experiment in a French Higher Education Institution

Thomas Breda, Son Thierry Ly

CEEDP0138. June 2012.

Stereotypes, role models played by teachers and social norms influence girls’ academic self-concept and push girls to choose humanities rather than science. Do recruiters reinforce this strong selection by discriminating more against girls in more scientific subjects? Using the entrance exam of a French higher education institution (the Ecole Normale Supérieure) as a natural experiment, we show the opposite: discrimination goes in favor of females in more male-connoted subjects (e.g. math, philosophy) and in favor of males in more female-connoted subjects (e.g. literature, biology), inducing a rebalancing of sex ratios between students recruited for a research career in science and humanities majors. We identify discrimination by systematic differences in students’ scores between oral tests (non-blind toward gender) and anonymous written tests (blind toward gender). By making comparisons of these oral/written scores differences between different subjects for a given student, we are able to control both for a student’s ability in each subject and for her overall ability at oral exams. The mechanisms likely to drive this positive discrimination toward the minority gender are also discussed.

Full article: http://cee.lse.ac.uk/ceedps/ceedp138.pdf

Do Homeowners Benefit Urban Neighborhoods? Evidence from Housing Prices

Mika Kortelainen, Tuukka Saarimaa

SERCDP0110. May 2012.

Homeownership is heavily subsidized in many countries mainly through the tax code. The adverse effects of lenient tax treatment of owner-occupied housing on economic efficiency and growth are large and well documented in the economics literature. The main argument in favor of subsidizing owner-occupied housing is that it creates positive externalities that offset these adverse effects. This paper tests whether homeowners create positive externalities to their immediate neighborhood that capitalize into housing prices in multi-storey buildings. Using semiparametric hedonic regressions with and without instrumental variables we find no evidence of positive externalities from neighborhood homeownership rate. This result is robust to relaxing the identification assumptions of our instrument using a recently developed set identification method. Our results suggest that the adverse efficiency effects of lenient tax treatment of owner-occupied housing are not offset by positive externalities.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0110.pdf

Does Self-Employment Measure Entrepreneurship? Evidence from Great Britain

Giulia Faggio, Olmo Silva

SERCDP0109. May 2012.

Research on entrepreneurship often uses information on self-employment to proxy for business creation and innovative behaviour. However, little evidence has been collected on the link between these measures. In this paper, we use data from the UK Labour Force Survey (LFS) combined with data from the Business Structure Database (BSD), and the Community Innovation Survey (CIS) to study the relation between self-employment, business creation and innovation. In order to do so, we aggregate individual and firm-level data at the Travel-to-Work Area (TTWA) and investigate how the incidence of self-employment correlates with the density of business start-ups and innovative firms. Our results show that in urban areas a higher incidence of self-employment positively and strongly correlates with more business creation and innovation, but this is not true for rural areas. Further analysis suggests that this urban/rural divide is related to lack of employment opportunities in rural areas, which might push some workers into self-employment as a last resort option.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0109.pdf

Firm Size and Judicial Efficiency in Italy: Evidence from the Neighbour's Tribunal

Silvia Giacomelli, Carlo Menon

SERCDP0108. May 2012.

We investigate the causal relationship between judicial efficiency and firm size across Italian municipalities, exploiting spatial discontinuities in tribunals' jurisdiction for identification. Results show that halving the length of civil proceedings, average firm size would increase by around 8-12%, everything else equal. Results are robust to a number of different specifications, based on two different databases.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0108.pdf

Binary Choice Models with Discrete Regressors: Identification and Misspecification

Tatiana Komarova

EM/2012/559. May 2012.

In semiparametric binary response models, support conditions on the regressors are required to guarantee point identification of the parameter of interest. For example,one regressor is usually assumed to have continuous support conditional on the other regressors. In some instances, such conditions have precluded the use of these models; in others, practitioners have failed to consider whether the conditions are satisfied in their data. This paper explores the inferential question in these semiparametric models when the continuous support condition is not satisfied and all regressors have discrete support. I suggest a recursive procedure that finds sharp bounds on the components of the parameter of interest and outline several applications, focusing mainly on the models under the conditional median restriction, as in Manski (1985). After deriving closed-form bounds on the components of the parameter, I show how these formulas can help analyze cases where one regressor’s support becomes increasingly dense. Furthermore, I investigate asymptotic properties of estimators of the identification set. I describe a relation between the maximum score estimation and support vector machines and also propose several approaches to address the problem of empty identification sets when a model is misspecified. Finally, I present a Monte Carlo experiment and an empirical illustration to compare several estimation techniques.

Full article: http://sticerd.lse.ac.uk/dps/seminarpapers/em24052012.pdf

Immigration, Offshoring and American Jobs

Gianmarco I. P. Ottaviano, Giovanni Peri, Greg C. Wright

CEPDP1147. May 2012.

How do offshoring and immigration affect the employment of native workers? What kinds of jobs suffer, or benefit, most from the competition created by offshore and immigrant workers? In contrast to the existing literature that has mostly looked at the effects of offshoring and immigration separately, we argue that one can gain useful insights by jointly investigating the interactions among native, immigrant and offshore workers. We develop our argument in three steps. First, we present some new facts on 58 U.S. manufacturing industries from 2000 to 2007. Second, we build on Grossman and Rossi-Hansberg (2008) to design a model of task assignment among heterogeneous native, immigrant and offshore workers that fits those facts. Third, we use the model to draw systematic predictions about the effects of immigration and offshoring on native workers and we test these predictions on the data. We find that, within the manufacturing sector, immigrants do not compete much with natives, as these two groups of workers are relatively specialized in tasks at opposite ends of the skill intensity spectrum. Offshore workers, on the other hand, seem to be specialized in tasks of intermediate skill intensity. We also find that offshoring has no effect on native employment in the aggregate, while the effect of immigration on native employment is positive. This hints at the presence of a “productivity effect" whereby offshoring and immigration improve industry efficiency, thereby creating new jobs.

Full article: http://cep.lse.ac.uk/pubs/download/dp1147.pdf

Market Size, Competition, and the Product Mix of Exporters

Thierry Mayer, Marc J. Melitz, Gianmarco I. P. Ottaviano

CEPDP1146. May 2012.

We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.

Full article: http://cep.lse.ac.uk/pubs/download/dp1146.pdf

What Do CEOs Do?

Oriana Bandiera, Luigi Guiso, Andrea Prat, Raffaella Sadun

CEPDP1145. May 2012.

We develop a methodology to collect and analyze data on CEOs’ time use. The idea - sketched out in a simple theoretical set-up - is that CEO time is a scarce resource and its allocation can help us identify the firm’s priorities as well as the presence of governance issues. We follow 94 CEOs of top-600 Italian firms over a pre-specified week and record the time devoted each day to different work activities. We focus on the distinction between time spent with insiders (employees of the firm) and outsiders (people not employed by the firm). Individual CEOs differ systematically in how much time they spend at work and in how much time they devote to insiders vs. outsiders. We analyze the correlation between time use, managerial effort, quality of governance and firm performance, and interpret the empirical findings within two versions of our model, one with effective and one with imperfect corporate governance. The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneficial to the firm and more beneficial to the CEO and that the CEO spends more time with outsiders when governance is poor.

Full article: http://cep.lse.ac.uk/pubs/download/dp1145.pdf

Matching Firms, Managers, and Incentives

Oriana Bandiera, Luigi Guiso, Andrea Prat, Raffaella Sadun

CEPDP1144. May 2012.

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.

Full article: http://cep.lse.ac.uk/pubs/download/dp1144.pdf

The Allocation of Talent over the Business Cycle and its Effect on Sectoral Productivity

Michael Boehm, Martin Watzinger

CEPDP1143. May 2012.

It is well documented that graduates enter different occupations in recessions than in booms. In this article, we examine the impact of this reallocation for long-term productivity and output across sectors. We develop a model in which talent flows to stable sectors in recessions and to cyclical sectors in booms. We find evidence for the predicted change in productivity caused by the business cycle in a setting where output can be readily measured: economists starting or graduating from their PhD in a recession are significantly more productive over the long term than economists starting or graduating in a boom.

Full article: http://cep.lse.ac.uk/pubs/download/dp1143.pdf

Heterogeneity, Demand for Insurance and Adverse Selection

Johannes Spinnewijn

CEPDP1142. May 2012.

Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. I distinguish between heterogeneity in risk preferences and risk perceptions underlying the unexplained variation. Heterogeneous risk perceptions induce a systematic difference between the revealed and actual value of insurance as a function of the insurance price. Using a sufficient statistics approach that accounts for this alternative source of heterogeneity, I find that the welfare conclusions regarding adversely selected markets are substantially different. The source of heterogeneity is also essential for the evaluation of different interventions intended to correct inefficiencies due to adverse selection like insurance subsidies and mandates, risk-adjusted pricing and information policies.

Full article: http://cep.lse.ac.uk/pubs/download/dp1142.pdf

In brief: UK chief executives: paid for performance?

Brian Bell, John Van Reenen

CEPCP373. May 2012.

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 returns and quasi-rents), 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 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. External control matters for pay - firms with lower levels of institutional ownership have smaller pay-performance elasticities for CEOs and do not cut their pay when performance is poor.

Full article: http://cep.lse.ac.uk/pubs/download/cp373.pdf

This article summarises 'Firm Performance and Wages: Evidence from Across the Corporate Hierarchy;, Brian Bell and John Van Reenen, Centre for Economic Performance Discussion Paper No. 1088, May 2012 http://cep.lse.ac.uk/pubs/download/dp1088.pdf

In brief: Two cheers for Anglo-Saxon financial markets?

Philippe Aghion, John Van Reenen, Luigi Zingales

CEPCP372. May 2012.

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 article: http://cep.lse.ac.uk/pubs/download/cp372.pdf

This article summarises 'Innovation and Institutional Ownership' by Philippe Aghion, John Van Reenen and Luigi Zingales, Centre for Economic Performance Discussion Paper No. 911, February 2009 http://cep.lse.ac.uk/pubs/download/dp0911.pdf

Giant oilfields and civil conflict

Yu-Hsiang Lei, Guy Michaels

CEPCP371. May 2012.

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 article: http://cep.lse.ac.uk/pubs/download/cp371.pdf

This article summarises 'Do Giant Oilfield Discoveries Fuel Internal Armed Conflicts?' by Yu-Hsiang Lei and Guy Michaels, Centre for Economic Performance Discussion Paper No. 1089, November 2011 http://cep.lse.ac.uk/pubs/download/dp1089.pdf

In brief: Can industrial policy boost jobs?

Chiara Criscuolo, Ralf Martin, Henry Overman, John Van Reenen

CEPCP370. May 2012.

Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs (“Regional Selective Assistance”). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that “cost per job” of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.

Full article: http://cep.lse.ac.uk/pubs/download/cp370.pdf

This article summarises 'The Causal Effects of an Industrial Policy' by Chiara Criscuolo, Ralf Martin, Henry Overman and John Van Reenen, Centre for Economic Performance Discussion Paper No. 1113, January 2012 http://cep.lse.ac.uk/pubs/download/dp1113.pdf

The polluter-doesn't-pay principle

Ralf Martin, Ulrich J. Wagner, Laure B. de Preux

CEPCP369. May 2012.

By granting discounts on environmental taxes to heavy polluting firms, the government is missing out on significant tax revenues and achieving considerably less in reducing greenhouse gas emissions. That is the central conclusion of research by Ralf Martin and colleagues, which reveals the failings of the UK’s climate change levy. Their study shows that firms that enjoy a discount from the levy, claiming that such measures damage their ability to compete in the global economy, do not in fact face higher risks to their competitiveness. Firms that pay the full climate change levy reduce their energy use and their emissions by more than those that get a tax discount.

Full article: http://cep.lse.ac.uk/pubs/download/cp369.pdf

In brief: Language barriers? The impact of non-native English speakers in the classroom

Charlotte Geay, Sandra McNally, Shqiponja Telhaj

CEPCP368. May 2012.

In recent years there has been an increase in the number of children going to school in England who do not speak English as a first language. We investigate whether this has an impact on the educational outcomes of native English speakers at the end of primary school. We show that the negative correlation observed in the raw data is mainly an artefact of selection: non-native speakers are more likely to attend school with disadvantaged native speakers. We attempt to identify a causal impact of changes in the percentage of non-native speakers within the year group. In general, our results suggest zero effect and rule out negative effects.

Full article: http://cep.lse.ac.uk/pubs/download/cp368.pdf

This article summarises 'Non-native Speakers of English in the Classroom: What are the Effects on Pupil Performance?' by Charlotte Geay, Sandra McNally and Shqiponja Telhaj, Centre for the Economics of Education Discussion Paper No.137, March 2012 http://cee.lse.ac.uk/ceedps/ceedp137.pdf

In brief: Urban schools: does money make a difference?

Steve Gibbons, Sandra McNally, Martina Viarengo

CEPCP367. May 2012.

This research paper is motivated by a long tail at the bottom of the educational distribution, educational inequality between those from high and low socio-economic groups and the question as to what role an increase in school resources has in changing all this. The issue about whether investing more money in schools is effective has long been controversial in the academic literature. It is also a controversial policy issue in this time of public expenditure cuts and reforms to educational finance. With regard to the latter, the Pupil Premium is an important new policy introduced this year – and this paper is useful for considering the potential effects.

Full article: http://cep.lse.ac.uk/pubs/download/cp367.pdf

This article summarises 'Does Additional Spending Help Urban Schools? An Evaluation Using Boundary Discontinuities', by Steve Gibbons, Sandra McNally and Martina Viarengo, Centre for the Economics of Education Discussion Paper No. 128, September 2011 http://cee.lse.ac.uk/ceedps/ceedp128.pdf

Growth and productivity: UK economic performance since 1997

Dan Corry, Anna Valero, John Van Reenen

CEPCP366. May 2012.

A common view is that the performance of the UK economy between 1997 and 2010 under Labour was very weak and that the current economic problems are a consequence of poor policies in this period. In this report, we analyse the historical performance of the UK economy since 1997 compared with other major advanced economies and with performance prior to 1997, notably the years of Conservative government, 1979-97. We focus on measures of business performance, especially productivity growth. This is a key economic indicator as in the long run, productivity determines material wellbeing – wages and consumption. Productivity determines the size of the “economic pie” available to the citizens of a country.

Full article: http://cep.lse.ac.uk/pubs/download/cp366.pdf

This article summarises 'UK Economic Performance Since 1997: Growth, Productivity and Jobs', by Dan Corry, Anna Valero and John Van Reenen, Centre for Economic Performance Special Paper No. 24, December 2011 http://cep.lse.ac.uk/pubs/download/special/cepsp24.pdf

Jobs in a recession

Pascal Michaillat

CEPCP365. May 2012.

This article is based on a paper that 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 article: http://cep.lse.ac.uk/pubs/download/cp365.pdf

CASE Annual Report 2011

CASEreport 73. May 2012.

Full article: http://sticerd.lse.ac.uk/dps/case/cr/CASEreport73.pdf

Evaluating the possible impact of pension reforms on future living standards in Europe

Aaron George Grech

CASE/161. May 2012.

Successive reforms enacted since the 1990s have dramatically changed Europe’s pensions landscape. This paper tries to assess the impact of recent reforms on the ability of systems to alleviate poverty and maintain living standards, using estimates of pension wealth for a number of hypothetical cases. By focusing on all prospective pension transfers rather than just those at the point of retirement, this approach can provide additional insights on the efficacy of pension systems in the light of increasing longevity. Our estimates indicate that while reforms have decreased generosity significantly, in most countries poverty alleviation remains strong. However, moves to link benefits to contributions have made some systems less progressive, raising adequacy concerns for certain groups. In particular, unless the labour market outcomes of women and of lower-income individuals change substantially over the coming decades, state pension transfers will prove inadequate, particularly in Eastern European countries. Similarly while the generosity of minimum pensions appears to have either been safeguarded by pension reforms, or improved in some cases, these transfers generally remain inadequate to maintain individuals above the 60% relative poverty threshold throughout retirement. Our simulations suggest that the gradual negative impact of price indexation on the relative adequacy of state pensions is becoming even more substantial in view of the lengthening of the time spent in receipt of retirement benefits. The consumption smoothing function of state pensions has declined noticeably, strengthening the need for longer careers and additional private saving. When pressed, policymakers, particularly in Western Europe, seem to have been more willing to sacrifice the income smoothing function of pensions rather than its poverty alleviation function. Policymakers in some counties, notably Germany, France and the UK, have sought to refocus state pension systems towards generating better outcomes for people in the bottom half of the income distribution, probably with the insight that middle- to high-income individuals are possibly in a better position to accommodate the effect of state pension reforms by increasing their private saving. However in some cases, notably in Eastern Europe, results suggest that policymakers may not have fully considered the full impact of their policies on those on low incomes, on those with incomplete careers and on women.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper161.pdf

Localisation and the means test: A case study of support for English students from Autumn 2012

John Hills, Ben Richards

CASE/160. May 2012.

The combination of spending cuts, efforts to protect the poorest from some of their effects, and ‘localised’ decision-making are leading to an increase in the numbers of means tests designed by lower level institutions. This paper examines a case study of the effects of this, looking at the means-tested support which has been offered to English students applying to go to 52 universities from Autumn 2012, designed partly to offset the rise in general fees to or towards £9,000. 27 of these universities are offering significant levels of means-tested support through bursaries or fee reductions depending on parental income. Although using a common income definition, each university has designed its own system with widely varying criteria. Taken with the national maintenance grant system, these imply substantially different levels of support for students from lower and higher-income families. Nearly all of them involve significant downward steps or ‘cliff edges’ in support at particular income levels, often involving a drop of several thousand pounds. Just looking at student support by itself, this implies typical marginal withdrawal rates exceeding 40 per cent and even 100 per cent over particular income ranges. Taken together with the effects of other parts of the tax and benefit system that would have affected family income, the effect is marginal effective tax rates on family resources that exceed 50 per cent for the entire income range up to £43,000. They typically reach 180 per cent for £1,000 income variations around income of £25,000. For the most generous case, Oxford University, the £13,050 reduction in subsequent means-tested student support is equivalent to nearly the whole of the £13,250 net income difference between two-child families that earned £17,000 and £44,000 in 2010-11. As well as introducing extra complexity and questions of equity in treatment within student finance, this kind of development runs counter to other parts of government policy, such as Universal Credit, intended to smooth out and simplify means-tests. As localisation is pushed further, and more agencies become responsible for designing their own mean tests, the lack of a system to take an overview of their overlapping effects, and to avoid undesirable design features will become an increasing problem across social policy, not just in this particular area.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper160.pdf

Ambition, Human Capital Acquisition and the Metropolitan Escalator

Ian Gordon

SERCDP0107. April 2012.

This paper examines the relation between ambition, as a form of dynamic human capital, and the escalator role of high order metropolitan regions, as originally identified by Fielding (1989). It argues that occupational progression in such places particularly depends on concentrations both of people with more of this asset and of jobs offering preferential access to valued elements of tacit knowledge, interacting in thick, competitive labour markets. This is partially confirmed with analyses of BHPS data on long term progression showing that only the more ambitious gain from residence in the extended London region, and that they only progress faster there.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0107.pdf

Accounting for Big City Growth in Low Paid Occupations: Immigration and/or Service Class Consumption

Ian Gordon, Ioannis Kaplanis

SERCDP0106. April 2012.

Growth of 'global cities' in the 1980s was supposed to have involved an occupational polarisation, including growth of low paid service jobs. Though held to be untrue for European cities, at the time, some such growth did emerge in London a decade later than first reported for New York. The question is whether there was simply a delay before London conformed to the global city model, or whether another distinct cause was at work in both cases. This paper proposes that the critical factor in both cases was actually an upsurge of immigration from poor countries providing an elastic supply of cheap labour. This hypothesis and its counterpart based on growth in elite jobs are tested econometrically for the British case with regional data spanning 1975-2008, finding some support for both effects, but with immigration from poor countries as the crucial influence in late 1990s London.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0106.pdf

Is Pennine England becoming more Polycentric or more Centripetal? An Analysis of Commuting Flows in a Transforming Industrial Region, 1981-2001

Tony Champion, Mike Coombes

SERCDP0105. April 2012.

This paper examines census-derived commuting data for the world’s earliest major urbanindustrial region, now home to 10 million people. Owing its origins to water power from the Pennine rivers, this region now comprises many closely-spaced cities and towns whose distinct identities have been eroded through the loss of their local industrial specialisms and the long-term growth in mobility. It contains five of the city regions identified by ‘The Northern Way’, a policy initiative designed as part of the Labour government’s 2004 Sustainable Cities Plan for stimulating agglomeration economies across the wider region, with a more polycentric structure being seen as a positive contribution to this development. The paper tests how far this part of Northern England may be evolving into a single polycentric mega-city region, using commuting data from the 1981, 1991 and 2001 Censuses. Two hypotheses are tested; namely, that there is increasing polycentricity within each of the five city regions and that there is increasing linkage between the five city regions. With gravity modelling removing the effects of generic reductions in distance deterrence, evidence is found of trends towards greater polycentricity at both these scales of analysis, albeit modest in scale: there has been some reduction in the five cities’ attraction of commuters living in the other parts of their city regions and the boundaries between the city regions have become somewhat more permeable over time.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0105.pdf

Great Britain's Second-Order City Regions in Recessions, 1978-2010

Tony Champion, Alan Townsend

SERCDP0104. April 2012.

While it is now accepted that the 2008-09 recession accentuated regional differences in Britain, it is more difficult to identify the role of major cities, especially over a longer time scale. Using previously established methods focussed on employment, this paper assesses the record of nine city regions in the 2008-09 recession, both in its own right and in comparison with the previous two recessions. The 2008-09 recession is found to have impacted the nine city regions less than the previous ones in absolute terms but not in relative terms compared with the London city region or the rest of Britain. Over the whole period from 1978, the paper has found the city regions to be fairly tightly in the grip of national cyclical trends of recession and recovery, but generally performing less resiliently than Britain as a whole. In comparison, London showed appreciably more cyclical behaviour between 1989 and 2002 than at other times, with the most remarkable recovery from recession in this period. The public sector helped the performance of second-order city regions from 1997 to 2010, including the peak of growth rates in city regions and their cores in 1998-2002, but its employment reductions will dominate the prospects for provincial cities for several years to come.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0104.pdf

Homeownerhip and Entrepreneurship

Philippe Bracke, Christian Hilber, Olmo Silva

SERCDP0103. April 2012.

We study the link between homeownership and entrepreneurship by exploiting the longitudinal dimension of the British Household Panel Survey (BHPS) and constructing a detailed monthly-spell dataset that tracks individuals‟ job history and tenure choice, coupled with other time-varying characteristics. Our fixed-effects estimates show that purchasing a house reduces the likelihood of starting a business by 20-25%. This result is driven by homeowners with mortgages and persists for several years after entering homeownership. The negative link can be rationalized by portfolio considerations: leveraged housing investments crowd out entrepreneurial investments. Alternative explanations based on credit constraints find little support in our data.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0103.pdf

The Political Economy of Deforestation in the Tropics

Robin Burgess, Matthew Hansen, Benjamin Olken, Peter Potapov, Stefanie Sieber,

EOPP 037. April 2012.

Tropical deforestation accounts for almost one-…fifth of greenhouse gas emissions worldwide and threatens the world’s most diverse ecosystems. The prevalence of illegal forest extraction in the tropics suggests that understanding the incentives of local bureaucrats and politicians who enforce forest policy may be critical to combating tropical deforestation. We …find support for this thesis using a novel satellite-based dataset that tracks annual changes in forest cover across eight years of institutional change in post-Soeharto Indonesia. Increases in the numbers of political jurisdictions are associated with increased deforestation and with lower prices in local wood markets, consistent with a model of Cournot competition between jurisdictions. We also show that illegal logging and rents from unevenly distributed oil and gas revenues are short run substitutes, but this effect disappears over time as political turnover occurs. The results illustrate how incentives faced by local government officials affect deforestation,and provide an example of how standard economic theories can explain illegal behavior.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp37.pdf

Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market

Raphael Calel, Antoine Dechezleprêtre

CEPDP1141. April 2012.

This paper investigates the impact of the EU Emissions Trading Scheme (EU ETS) on technological change. We exploit installations-level inclusion criteria to estimate the impact of the EU ETS on firms patenting. We find that the EU ETS has increased low-carbon innovation among regulated firms by as much as 10%, while not crowding out patenting for other technologies. We also find evidence that the EU ETS has not impacted patenting beyond the set of regulated companies. These results imply that the EU ETS accounts for nearly a 1% increase in European lowcarbon patenting compared to a counterfactual scenario.

Full article: http://cep.lse.ac.uk/pubs/download/dp1141.pdf

Goods Trade, Factor Mobility and Welfare

Stephen J. Redding

CEPDP1140. April 2012.

This paper extends a recent class of quantitative models of international trade to incorporate factor mobility within countries. We present a model-based decomposition of the variance of economic activity into the contributions of locational fundamentals, market access and their covariance. We show how the standard framework for undertaking model-based counterfactuals in trade can be augmented to obtain predictions for endogenous changes in the distribution of economic activity across regions within countries. A region’s trade share with itself is no longer a sufficient statistic for the welfare gains from trade, which also depend on endogenous changes in the distribution of mobile factors.

Full article: http://cep.lse.ac.uk/pubs/download/dp1140.pdf

Span of Control and Span of Activity

Oriana Bandiera, Andrea Prat, Raffaella Sadun, Julie Wulf

CEPDP1139. April 2012.

For both practitioners and researchers, span of control plays an important role in defining and understanding the role of the CEO. In this paper, we combine organizational chart information for a sample of 65 companies with detailed data on how their CEOs allocate their work time, which we define as their span of activity. Span of activity provides a direct measure of the CEO’s management style, including the attention devoted to specific subordinates and functions, the time devoted to individual work and outside constituencies, a preference for multilateral or bilateral interaction, the degree of planning, etc. We find that CEOs with a larger number of reports spend more time with subordinates, more time on large meetings, less time on unplanned activities. The presence of a delegate, such as the COO, allows the CEO to reduce the time spent with insiders and to focus on bilateral and unplanned activities. These results suggest that time-use information is helpful in interpreting how span of control determines management style.

Full article: http://cep.lse.ac.uk/pubs/download/dp1139.pdf

Trade and Inequality: From Theory to Estimation

Elhanan Helpman, Oleg Itskhoki, Marc-Andreas Muendler, Stephen Redding

CEPDP1138. April 2012.

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman, Itskhoki, and Redding (2010) and structurally estimate it with Brazilian data. We show that the estimated model fits the data well, both in terms of key moments as well as in terms of the overall distributions of wages and employment, and find that international trade is important for this fit. In the estimated model, reductions in trade costs have a sizeable effect on wage inequality.

Full article: http://cep.lse.ac.uk/pubs/download/dp1138.pdf

Deliberative research as a tool to make value judgements

Tania Burchardt

CASE/159. April 2012.

The ‘deliberative turn’ in democratic theory has generated a wealth of deliberative experiments. The purpose of deliberation as a research technique (as opposed to policymaking or public consultation) is distinctive: to uncover the public’s informed, considered, and collective view on a normative question. In the social science context, this often arises in relation to research on poverty, well-being and inequality, where there is a need to define and justify the thresholds and concepts adopted on a deeper basis than convention alone can offer. This paper compares deliberative research to more traditional methods of studying the values of the general public, such as in-depth interviewing, attitudinal surveys, and participatory approaches, and reveals that deliberative designs involve a number of assumptions, including a strong fact/value distinction, an emphasis on ‘outsider’ expertise, and a view of participants as essentially similar to each other rather than defined by socio-demographic differences. Normative decisions permeate the design and implementation of deliberative research, so while it has the potential to provide uniquely considered, insightful and well-justified answers to the problem of defining a collective position on key questions in social science, transparency at all stages of the process is essential.

Full article: http://sticerd.lse.ac.uk/dps/case/cp/CASEpaper159.pdf

Politics in Coalition Formation of Local Governments

Tuukka Saarimaa, Janne Tukiainen

SERCDP0102. March 2012.

We analyze empirically the coalition formation of local governments using a novel reduced form econometric procedure that allows for multi-partner mergers. Using Finnish municipal merger data where mergers were decided independently at the local level, we find that merger decisions are largely in line with voter preferences. Most importantly, mergers are clearly less likely when the distance of the median voter to the coalition centre is large. However, councillors seem also to prefer mergers where post-merger political competition is lower which indicates a concern for re-election. Interestingly, municipalities do not seem to be seeking economies of scale through merging. This is possibly due to existing cooperation in service production which we find to be a strong predictor of merging.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0102.pdf

The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts

Silvia Ardagna, Francesco Caselli

CEPSP25. March 2012.

We review the events that led to the May 2010 and July 2011 bailout agreements. We interpret the bailouts as outcomes of political-economy equilibria. We argue that the second bailout was not on the Pareto frontier and sketch political-economy arguments for why this may be so.

Intermediaries in International Trade: Direct Versus Indirect Modes of Export

Andrew B. Bernard, Marco Grazzi, Chiara Tomasi

CEPDP1137. March 2012.

This paper examines the factors that give rise to intermediaries in exporting and explores the implications for trade volumes. Export intermediaries such as wholesalers serve different markets and export different products than manufacturing exporters. In particular, high market-specific fixed costs of exporting, the (lack of) quality of the general contracting environment and product- specific factors play important roles in explaining the existence of export intermediaries. These underlying differences between direct and intermediary exporters have important consequences for trade flows. The ability of export intermediaries to overcome country and product fixed costs means that they can more easily respond along the extensive margin to external shocks. Intermediaries and direct exporters respond differently to exchange rate fluctuations both in terms of the total value of shipments and the number of products exported as well as in terms of prices and quantities. Aggregate exports to destinations with high shares of indirect exports are much less responsive to changes in the real exchange rate than are exports to countries served primarily by direct exporters.

Full article: http://cep.lse.ac.uk/pubs/download/dp1137.pdf

Gender Gaps in Performance: Evidence from Young Lawyers

Ghazala Azmat, Rosa Ferrer

CEPDP1136. March 2012.

This paper documents and studies the gender gap in performance among associate lawyers in the United States. Unlike most high-skilled professions, the legal profession uses widely-accepted and objective methods to measure and reward lawyers’ productivity: the number of hours billed to clients and the amount of new client revenue generated. We find clear evidence of a gender gap in annual performance. Male lawyers bill ten-percent more hours and bring in more than double the new client revenue. We show that the differential impact across genders in the presence of young children and the differences in aspirations to become a law-firm partner account for a large part of the difference in performance. These gaps in performance have important consequences for gender gaps in earnings. While individual and firm characteristics explain up to 50 percent of the gap in earnings, the inclusion of performance measures explains most of the remainder.

Full article: http://cep.lse.ac.uk/pubs/download/dp1136.pdf

CEO Bonding: Who Posts Performance Bonds and Why?

Alex Bryson, John Forth, Minghai Zhou

CEPDP1135. March 2012.

Despite their theoretical value in tackling principal-agent problems at low cost to firms there is almost no empirical literature on the prevalence and correlates of performance bonds posted by corporate executives. Using data for China we examine their incidence and test propositions from principal-agent theory regarding their correlates. Around one-tenth of corporations deploy performance bonds. They are sizeable relative to CEO cash compensation. Ceteris paribus, CEO's posting performance bonds are more likely than other CEO's to have their compensation linked to firm performance in other ways and the elasticity of their pay with respect to firm performance is greater. They are also more likely to hold company stock. Thus bonds appear to be complements to rather than substitutes for other forms of corporate incentive. The negative association between bonds and sales volatility is consistent with principal-agent theory. Positive associations between performance bonds and firm age, the CEOs ranking in the Communist Party, and city-level clustering in the use of bonds are all consistent with "legacy" effects dating back to the use of performance bonds in the early reform period. The only corporate governance measure that is strongly and robustly associated with an increased use of bonds is employee representation on the board of directors.

Full article: http://cep.lse.ac.uk/pubs/download/dp1135.pdf

Why Are Migrants Paid More?

Alex Bryson, Giambattista Rossi, Rob Simmons

CEPDP1134. March 2012.

In efficient global labour markets for very high wage workers one might expect wage differentials between migrant and domestic workers to reflect differences in labour productivity. However, using panel data on worker-firm matches in a single industry over a seven year period we find a substantial wage penalty for domestic workers which persists within firms and is only partially accounted for by individual labour productivity. We show that the differential partly reflects the superstar status of migrant workers. This superstar effect is also apparent in migrant effects on firm performance. But the wage differential also reflects domestic workers' preferences for working in their home region, an amenity for which they are prepared to take a compensating wage differential, or else are forced to accept in the face of employer monopsony power which does not affect migrant workers.

Full article: http://cep.lse.ac.uk/pubs/download/dp1134.pdf

Incentives for Quality over Time - The Case of Facebook Applications

Jörg Claussen, Tobias Kretschmer, Philip Mayrhofer

CEPDP1133. March 2012.

We study the market for applications on Facebook, the dominant platform for social networking and make use of a rule change by Facebook by which high-quality applications were rewarded with further opportunities to engage users. We find that the change led to quality being a more important driver of usage while sheer network size became less important. Further, we find that update frequency helps applications maintain higher usage, while generally usage of Facebook applications declines less rapidly with age.

Full article: http://cep.lse.ac.uk/pubs/download/dp1133.pdf

Cyclical Risk Aversion, Precautionary Saving and Monetary Policy

Bianca De Paoli, Pawel Zabczyk

CEPDP1132. March 2012.

This paper analyzes the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households' propensity to save. It uses a New-Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive - i.e. `lean against the wind' - following positive shocks. Since the size of these `risk-adjustments' is increasing in the degree of macroeconomic volatility, ignoring this channel could lead to larger policy errors in turbulent times - with good luck translating into good policy.

Full article: http://cep.lse.ac.uk/pubs/download/dp1132.pdf

Non-Native Speakers Of English In The Classroom: What Are The Effects On Pupil Performance?

Charlotte Geay, Sandra McNally, Shqiponja Telhaj

CEEDP0137. March 2012.

In recent years there has been an increase in the number of children going to school in England who do not speak English as a first language. We investigate whether this has an impact on the educational outcomes of native English speakers at the end of primary school. We show that the negative correlation observed in the raw data is mainly an artefact of selection: non-native speakers are more likely to attend school with disadvantaged native speakers. We attempt to identify a causal impact of changes in the percentage of non-native speakers within the year group. In general, our results suggest zero effect and rule out negative effects.

Full article: http://cee.lse.ac.uk/ceedps/ceedp137.pdf

Final report of the Hills Independent Fuel Poverty Review: Getting the Measure of Fuel Poverty

John Hills

CASEreport 72. March 2012.

The review confirms that fuel poverty is a serious national problem and shows that it is set to rise rapidly. It affects people with low incomes and energy costs above typical levels. It proposes a new way of measuring the problem, focused both on the number of people affected and the severity of the problem they face. Using the proposed measure: Nearly 8 million people in England, within 2.7 million households, both had low incomes and faced high energy costs in 2009 (the most recent year with available data). These households faced costs to keep warm that added up to £1.1 billion more than middle or higher income people with typical costs. The review’s central projection is that this “fuel poverty gap” – already three-quarters higher than in 2003 – will rise by a further half, to £1.7 billion by 2016. This means fuel poor households will face costs nearly £600 a year higher on average than better-off households with typical costs. The report also argues that: Fuel poverty exacerbates other hardship faced by those on low incomes, has serious health effects (including contributing to extra deaths every winter), and acts as a block to efforts to cut carbon emissions. The current official way of measuring it, based on whether a household would need to spend more than 10 per cent of its income on energy, is flawed, giving a misleading impression of trends, excluding some affected by the problem at some times and including people with high incomes at others. Interventions targeted on the core of the problem – especially those that improve the energy efficiency of homes lived in by people with low incomes – can make a substantial difference, but the impact of those planned to be in place by 2016 is only to reduce the problem by a tenth.

Full article: http://sticerd.lse.ac.uk/dps/case/cr/CASEreport72.pdf

Getting the measure of fuel poverty: Executive summary

John Hills

CASEbrief 31. March 2012.

Abstract

Full article: http://sticerd.lse.ac.uk/dps/case/cb/CASEBrief31.pdf

Conscience Accounting: Emotional Dynamics and Social Behavior

Uri Gneezy, Alex Imas, Kristóf Madarász

TE/2012/563. February 2012.

We develop a dynamic model where people decide in the presence of moral constraints and test the predictions of the model through two experiments. Norm violations induce a temporal feeling of guilt that depreciates with time. Due to such fluctuations of guilt, people exhibit an endogenous temporal inconsistency in social preferences—a behavior we term conscience accounting. In our experiments people first have to make an ethical decision, and subsequently decide whether to donate to charity. We find that those who chose unethically were more likely to donate than those who did not. As predicted, donation rates were higher when the opportunity to donate came sooner after the unethical choice than later. Combined, our theoretical and empirical findings suggest a mechanism by which prosocial behavior is likely to occur within temporal brackets following an unethical choice.

Full article: http://sticerd.lse.ac.uk/dps/te/te563.pdf

A Note on the Value of Foregone Open Space in Sprawling Cities

Jan Rouwendal, Wouter Vermeulen

SERCDP0101. February 2012.

Foregone benefits of the open space that is sacrificed through urban sprawl are hard to quantify. We obtain a simple benchmark measure by introducing a demand for trips beyond the urban boundary into the monocentric city model. The externality arises from the increase in travel costs that expansion of the city imposes on its prior inhabitants. An empirical application illustrates the moderate informational requirements. It indicates that open space externalities warrant rather mild restrictions on urban expansion.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0101.pdf

Taxation and International Migration of Superstars: Evidence from the European Football Market

Henrik Kleven, Camille Landais, Emmanuel Saez

PEP 14. February 2012.

This paper analyzes the effects of top earnings tax rates on the international migration of top football players in Europe. We construct a panel data set of top earnings tax rates, football player careers, and club performances in the first leagues of 14 European countries since 1985. We identify the effects of top earnings tax rates on migration using a number of tax and institutional changes: (a) the 1995 Bosman ruling which liberalized the European football market, (b) top tax rate reforms within countries, and (c) special tax schemes offering preferential tax rates to immigrant football players. We start by presenting reduced-form graphical evidence showing large and compelling migration responses to country-specific tax reforms and labor market regulation. We then set out a theoretical model of taxation and migration, which is tested using all sources of tax variation simultaneously. Our results show that (i) the overall location elasticity with respect to the net-of-tax rate is positive and large, (ii) location elasticities are extremely large at the top of the ability distribution but negative at the bottom due to ability sorting effects, and (iii) cross-tax effects of foreign players on domestic players (and vice versa) are negative and quite strong due to displacement effects. Finally, we estimate tax revenue maximizing rates and draw policy conclusions.d2.asp

Full article: http://sticerd.lse.ac.uk/dps/pep/pep14.pdf

Estimating Taxable Income Responses using Danish Tax Reforms

Henrik Kleven, Esben Anton Schultz

PEP 13. February 2012.

This paper presents evidence on taxable income responses using administrative data that link tax return information to detailed socioeconomic information for the full Danish population over 25 years. The identifying variation is provided by a series of tax reforms that create large tax variation across individuals, income forms, and over time. It is argued that the unique tax variation and data in Denmark makes it possible to control for the biases from non-tax changes in the income distribution and mean reversion that plague much of the existing literature. Using a very large and salient tax reform in the 1980s, we present compelling graphical evidence of taxable income responses by comparing treatment and control groups that experience very similar pre-reform income trends but face very different tax rate changes due to the reform. We then turn to panel regressions using the full population and all reforms over time, which produces the following main findings: (i ) Labor income elasticities are modest overall, around 0.05 for wage earners and 0.10 for self-employed individuals. (ii ) Capital income elasticities are two-three times larger than labor income elasticities. (iii ) Behavioral elasticities are much larger when estimated from large tax reform changes than from small tax reform changes, consistent with the idea that responses to small tax changes are attenuated by optimization frictions such as adjustment costs and inattention. (iv) Cross-tax effects between labor and capital income– for example due to income shifting–are in general small. (v) All of our findings are extremely robust to specification (such as pre-reform income controls), suggesting that we have controlled in a sufficiently rich way for non-tax factors impacting on taxable income.

Full article: http://sticerd.lse.ac.uk/dps/pep/pep13.pdf

The Legacy of Historical Conflict Evidence from Africa

Timothy Besley, Marta Reynal-Querol

EOPP 036. February 2012.

There is a great deal of interest in the causes and consequences of conflict in Africa, one of the poorest areas of the world where only modest economic progress has been made. This paper asks whether post-colonial conflict is, at least in part, a legacy of historical conflict by examining the empirical relationship between conflict in Africa since independence with recorded conflicts in the period 1400 to1700. We find evidence of a legacy of historical conflicts using between-country and withincountry evidence. The latter is found by dividing the continent into 120km_120km grids and measuring the distance from 91 documented historical conflicts. We also provide evidence that historical conflict is correlated with lower levels of trust, a stronger sense of ethnic identity and a weaker sense of national identity.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp36.pdf

Global Value Chains During the Great Trade Collapse: A Bullwhip Effect?

CEPDP1131. February 2012.

This paper analyzes the performance of global value chains during the trade collapse. To do so, it exploits a unique transaction-level dataset on French firms containing information on cross-border monthly transactions matched with data on worldwide intra-.rm linkages as defined by property rights (multinational business groups, hierarchies of firms). This newly assembled dataset allows us to distinguish firm-level transactions among two alternative organizational modes of global value chains: internalization of activities (intra- group trade/trade among related parties) or establishment of supply contracts (arm’s length trade/trade among unrelated parties). After an overall assessment of the role of global value chains during the trade collapse, we document that intra-group trade in intermediates was characterized by a faster drop followed by a faster recovery than arm’s length trade. Amplified fluctuations in terms of trade elasticities by value chains have been referred to as the "bullwhip effect" and have been attributed to the adjustment of inventories within supply chains. In this paper we first con.rm the existence of such an effect due to trade in inter- mediates, and we underline the role that different organizational modes can play in driving this adjustment.

Full article: http://cep.lse.ac.uk/pubs/download/dp1131.pdf

The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition

Swati Dhingra, John Morrow

CEPDP1130. February 2012.

A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.

Full article: http://cep.lse.ac.uk/pubs/download/dp1130.pdf

Agglomeration, Trade and Selection

Gianmarco I. P. Ottaviano

CEPDP1129. February 2012.

This paper studies how firm heterogeneity in terms of productivity affects the balance between agglomeration and dispersion forces in the presence of pecuniary externalities through a selection model of monopolistic competition with variable mark-ups. It shows that firm heterogeneity matters. However, whether it shifts the balance from agglomeration to dispersion or the other way round depends on its specific features along the two defining dimensions of diversity: ‘richness’ and ‘evenness’. Accordingly, the role of firm heterogeneity in selection models of agglomeration cannot be fully understood without paying due attention to various moments of the underlying firm productivity distribution.

Full article: http://cep.lse.ac.uk/pubs/download/dp1129.pdf

Firm Size Distortions and the Productivity Distribution: Evidence from France

Luis Garicano, Claire Lelarge, John Van Reenen

CEPDP1128. February 2012.

A major empirical challenge in economics is to identify how regulations (such as firing costs) affect economic efficiency. Almost all countries have regulations that increase costs when firms cross a discrete size threshold. We show how these size-contingent regulations can be used to identify the equilibrium and welfare effects of regulation through combining a new model with the firm-level distributions of size and productivity. Our framework adapts the Lucas (1978) model to a world with size-contingent regulations and applies this to France where there are sharp increases in firing costs (which we model as a labor tax) when firms employ 50 or more workers. Using administrative data on the population of firms 2002 through 2007, we show how this regulation has major effects on the distribution of firm size (a “broken power law”) and productivity. We then econometrically recover the key parameters of the model in order to estimate the costs of regulation which appear to be nontrivial.

Full article: http://cep.lse.ac.uk/pubs/download/dp1128.pdf

Genes, Economics and Happiness

Nicholas A. Christakis, Jan-Emmanuel De Neve, James H. Fowler, Bruno S. Frey

CEPDP1127. February 2012.

A major finding from research into the sources of subjective well-being is that individuals exhibit a “baseline” level of happiness. We explore the influence of genetic variation by employing a twin design and genetic association study. We first show that about 33% of the variation in happiness is explained by genes. Next, using two independent data sources, we present evidence that individuals with a transcriptionally more efficient version of the serotonin transporter gene (SLC6A4) report significantly higher levels of life satisfaction. These results are the first to identify a specific gene that is associated with happiness and suggest that behavioral models benefit from integrating genetic variation.

Full article: http://cep.lse.ac.uk/pubs/download/dp1127.pdf

Happiness as a Driver of Risk-Avoiding Behavior

CEPDP1126. February 2012.

Most governments try to discourage their citizens from taking extreme risks with their health and lives. Yet, for reasons not understood, many people continue to do so. We suggest a new approach to this longstanding question. First, we show that expected-utility theory predicts that ‘happier’ people will be less attracted to risky behaviors. Second, using BRFSS data on seatbelt use in a sample of 300,000 Americans, we document evidence strongly consistent with that prediction. Our result is demonstrated with various methodological approaches, including Bayesian model-selection and instrumental-variable estimation (based on unhappiness caused by widowhood). Third, using data on road accidents from the Add Health data set, we find strongly corroborative longitudinal evidence. These results suggest that government policy may need to address the underlying happiness of individuals rather than focus on behavioural symptoms.

Full article: http://cep.lse.ac.uk/pubs/download/dp1126.pdf

Does Competition Improve Public Hospitals' Efficiency? Evidence from a Quasi-Experiment in the English National Health Service

Zack Cooper, Stephen Gibbons, Simon Jones, Alistair McGuire

CEPDP1125. February 2012.

This paper uses a difference-in-difference style estimation strategy to test separately the impact of competition from public sector and private sector hospitals on the efficiency of public hospitals. Our identification strategy takes advantage of the phased introduction of a recent set of substantive reforms introduced in the English NHS from 2006 onwards. These reforms forced public sector health care providers to compete with other public hospitals and eventually to face competition from existing private sector providers for care delivered to publicly funded patients. In this study, we measure efficiency using hospitals’ average length of stay (LOS) for patients undergoing elective surgery. For a more nuanced assessment of efficiency, we break LOS down into its two key components: the time from patients’ admission to the hospital until their surgery and the time from their surgery until their discharge. Here, pre-surgery LOS serves as a proxy for hospitals’ lean efficiency. Our results suggest that competition between public providers prompted public hospitals to improve their productivity by decreasing their pre-surgery, overall and post-surgery length of stay. In contrast, competition from private hospitals did not spur public providers to improve their performance and instead left incumbent public providers with a more costly case mix of patients and led to increases in post-surgical LOS.

Full article: http://cep.lse.ac.uk/pubs/download/dp1125.pdf

This paper is an extension of CEP DP 988

Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry

Jörg Claussen, Tobias Kretschmer, Thomas Spengler

CEPDP1124. February 2012.

The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility moderates this process of rebuilding an installed base. Using a structural model of the U.S. market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain market leadership.

Full article: http://cep.lse.ac.uk/pubs/download/dp1124.pdf

A Model of Equilibrium Institutions

Bernardo Guimaraes, Kevin D. Sheedy

CEPDP1123. February 2012.

Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment.

Full article: http://cep.lse.ac.uk/pubs/download/dp1123.pdf

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.

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

Sequential exporting: how firms break into foreign markets

Facundo Albornoz, Hector Calvo-Pardo, Gregory Corcos, Emanuel Ornelas

CEPCP364. February 2012.

Many countries are looking to their export sectors as a source of future growth, but how do domestic companies make a success of selling their output abroad? Research by Emanuel Ornelas and colleagues finds evidence of 'sequential exporting' - firms experimenting in nearby foreign markets before seeking to become big exporters.

Full article: http://cep.lse.ac.uk/pubs/download/cp364.pdf

The letters page

Alan Manning

CEPCP363. February 2012.

Alan Manning questions the value of researchers conducting debates about economic policy through the pages of newspapers.

Full article: http://cep.lse.ac.uk/pubs/download/cp363.pdf

Policy uncertainty: a new indicator

Scott R. Baker, Nicholas Bloom, Steven J. Davis

CEPCP362. February 2012.

The damaging impact of economic uncertainty on growth has been reasonably well studied - but what happens when there is uncertainty about economic policy-making? Nicholas Bloom and colleagues have developed a measure of this distinct kind of uncertainty, one that shows the value of restoring stability to current policy actions.

Full article: http://cep.lse.ac.uk/pubs/download/cp362.pdf

HS2: assessing the costs and benefits

Henry Overman

CEPCP361. February 2012.

Henry Overman considers the arguments for and against building a new high-speed rail line from London to Birmingham.

Full article: http://cep.lse.ac.uk/pubs/download/cp361.pdf

The returns to lobbying

Jordi Blanes i Vidal, Mirko Draca, Christian Fons-Rosen

CEPCP360. February 2012.

Research by Mirko Draca and colleagues on Washington's 'revolving door' lobbyists gives an indication of the value of political connections in the UK.

Full article: http://cep.lse.ac.uk/pubs/download/cp360.pdf

Pupils' progress: how children's perceptions influence their efforts

Amine Ouazad, Lionel Page

CEPCP359. February 2012.

What is the impact of a pupil's perceptions of how their teachers will treat them on their motivation, efforts and educational achievements? To explore this question, Amine Ouazad and Lionel Page have conducted an experiment in which school children could use pocket money to place small bets on their performance in an exam.

Full article: http://cep.lse.ac.uk/pubs/download/cp359.pdf

School inspections: can we trust Ofsted reports?

Iftikhar Hussain

CEPCP358. February 2012.

Ofsted inspections of schools have been a central feature of state education in England for nearly 20 years. Research by Iftikhar Hussain explores the validity of the school ratings that Ofsted produces, the impact of a fail rating on subsequent pupil performance and the extent to which teachers can 'game' the system.

Full article: http://cep.lse.ac.uk/pubs/download/cp358.pdf

This article summarises ‘Subjective Performance Evaluation in the Public Sector: Evidence from School Inspections?’ by Iftikhar Hussain, Centre for the Economics of Education Discussion Paper No. 135, February 2012. http://cee.lse.ac.uk/ceedps/ceedp135.pdf

Crime and mental wellbeing

Francesca Cornaglia, Andrew Leigh

CEPCP357. February 2012.

Francesca Cornaglia and Andrew Leigh measure the impact of crime - and media reporting of crime - on the mental wellbeing of both victims and non-victims

Full article: http://cep.lse.ac.uk/pubs/download/cp357.pdf

Wellbeing in the workplace: the impact of modern management

Alex Bryson, Pekka Ilmakunnas

CEPCP356. February 2012.

How people feel about their jobs is an important part of their overall happiness yet until now, few studies have explored the links between employees' wellbeing and their working environment. Alex Bryson and colleagues analyse data from Finland to assess the impact of modern management practices on wellbeing in the workplace.

Full article: http://cep.lse.ac.uk/pubs/download/cp356.pdf

Big ideas: wellbeing and public policy

Richard Layard

CEPCP355. February 2012.

Richard Layard outlines the development of CEP research on what makes people happy and how society might best be organised to promote happiness.

Full article: http://cep.lse.ac.uk/pubs/download/cp355.pdf

Mental Health and Education Decisions

Francesca Cornaglia, Elena Crivellaro, Sandra McNally

CEEEDP0136. February 2012.

Mental health problems - and depression in particular - have been rising internationally. The link between poor mental health and poor educational outcomes is particularly interesting in the case of the UK which has a low international ranking both on measures of child wellbeing and the probability of early drop-out from the labour market and education. We study this issue using a large longitudinal study of a recent cohort of teenagers in England. We use the General Health Questionnaire to derive measures of poor mental health. We find a large negative association between mental health problems and educational outcomes - where we consider examination results before leaving compulsory education and the probability of being “not in education, employment or training” at a young age. The association is large even after including a very rich set of controls. Results are stronger for girls and also vary according to the different components of the mental health measure. We also explore the potential role of intermediary mechanisms (truancy and risky behaviours).

Full article: http://cee.lse.ac.uk/ceedps/ceedp136.pdf

Subjective Performance Evaluation in the Public Sector: Evidence from School Inspections

Iftikhar Hussain

CEEDP0135. February 2012.

Performance measurement in the public sector is largely based on objective metrics, which may be subject to gaming behaviour. This paper investigates a novel subjective performance evaluation system where independent inspectors visit schools at very short notice, publicly disclose their findings and sanction schools rated fail. First, I demonstrate that inspection ratings can aid in distinguishing between more and less effective schools, even after controlling for standard observed school characteristics. Second, exploiting a natural experiment, I show that a fail inspection leads to test score gains; at least some of these gains persist in the medium term. I find no evidence to suggest that fail schools are able to inflate test score performance by gaming the system. Oversight by inspectors may play an important role in mitigating such strategic behaviour.

Full article: http://cee.lse.ac.uk/ceedps/ceedp135.pdf

Flexible Employment and Cross-Regional Adjustment

Ioannis Kaplanis, Vassilis Monastiriotis

SERCDP0100. January 2012.

Employment flexibility is commonly associated to greater labour mobility and thus faster cross-regional adjustments. The literature however offers very little hard evidence on this and quite limited theoretical guidance. This paper examines empirically the relationship between employment flexibility and cross-regional adjustment (migration) at the regional and local levels in the UK. Employment flexibility is associated to higher labour mobility (but only at a rather localised scale) and at the same time seems to reduce the responsiveness of migration to unemployment. This suggest that rising flexibility may be linked to higher persistence in spatial disparities, as intra-regional adjustments are strengthened while extraregional adjustments weakened.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0100.pdf

External Benefits of Brownfield Redevelopment: An Applied Urban General Equilbirum Analysis

Niels Vermeer, Wouter Vermeulen

SERCDP0099. January 2012.

Does brownfield redevelopment warrant government support? We explore several external benefits in an urban general equilibrium framework. Preferences are modelled such that demand for housing units in the city is downward sloping, which yields a more general setup than the extreme open and closed city cases. We shed light on the relative importance of general equilibrium effects of nonmarginal redevelopment projects and we isolate the external benefits of the removal of a local nuisance, the exploitation of agglomeration economies and the preservation of open space at the urban fringe. A numerical application indicates that local nuisance and agglomeration effects may push social returns significantly beyond the value of redeveloped land that accrues to its owner. However, depending on the price elasticity of urban housing demand and the strength of agglomeration economies, the amount of preserved greenfield land may be small and it only generates additional benefits to the extent that direct land use policies fail to internalize its value as open space.

Full article: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0099.pdf

The Causal Effects of an Industrial Policy

Chiara Criscuolo, Ralf Martin, Henry G. Overman, John Van Reenen

SERCDP0098. January 2012.

Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs (“Regional Selective Assistance”). Area eligibility is governed by pan- European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that “cost per job” of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.

Full article: http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0098.pdf

No Margin, no Mission? A Field Experiment on Incentives for Pro-Social Tasks

Nava Ashraf, Oriana Bandiera, Kelsey Jack

EOPP 035. January 2012.

A substantial body of research investigates the design of incentives in firms, yet less is known about incentives in organizations that hire individuals to perform tasks with positive social spillovers. We conduct a field experiment in which agents hired by a public health organization are randomly allocated to four groups. Agents in the control group receive a standard volunteer contract often offered for this type of task, whereas agents in the three treatment groups receive small financial rewards, large financial rewards, and non-financial rewards, respectively. The analysis yields three main findings. First, non-financial rewards are more effective at eliciting effort than either financial rewards or the volunteer contract. The effect of financial rewards, both large and small, is much smaller and not significantly different from zero. Second, non-financial rewards elicit effort both by leveraging intrinsic motivation for the cause and by facilitating social comparison among agents. Third, contrary to existing laboratory evidence, financial incentives do not crowd out intrinsic motivation in this setting. <

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp35.pdf

LEFT, RIGHT, LEFT: INCOME DYNAMICS AND THE EVOLVING POLITICAL PREFERENCES OF FORWARD-LOOKING BAYESIAN VOTERS

Michael Carter, John Morrow

EOPP 034. 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 article: http://sticerd.lse.ac.uk/dps/eopp/eopp34.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 article: 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 article: 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 article: 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 article: 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 article: 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 article: http://cep.lse.ac.uk/pubs/download/dp1114.pdf

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

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 article: 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 article: http://cep.lse.ac.uk/pubs/download/dp1111.pdf

The Causal Effects of an Industrial Policy

Chiara Criscuolo, Ralf Martin, Henry G. Overman, John Van Reenen

CEPDP01113. January 2012.

Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs (“Regional Selective Assistance”). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that “cost per job” of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.

Full article: http://cep.lse.ac.uk/pubs/download/dp1113.pdf

Fasting During Pregnancy and Children's Academic Performance

Douglas Almond, Bhashkar Mazumder, Reyn van Ewijk

CEEDP0134. January 2012.

We consider the effects of daytime fasting by pregnant women during the lunar month of Ramadan on their children's test scores at age seven. Using English register data, we find that scores are .05 to .08 standard deviations lower for Pakistani and Bangladeshi students exposed to Ramadan in early pregnancy. These estimates are downward biased to the extent that Ramadan is not universally observed. We conclude that the effects of prenatal investments on test scores are comparable to many conventional educational interventions but are likely to be more cost effective and less subject to “fade out”.

Full article: http://cee.lse.ac.uk/ceedps/ceedp134.pdf

Students’ Perceptions of Teacher Biases: Experimental Economics in Schools

Amine Ouazad, Lionel Page

CEEDP0133. January 2012.

We put forward a new experimental economics design with monetary incentives to estimate students’ perceptions of grading discrimination. We use this design in a large field experiment which involved 1,200 British students in grade 8 classrooms across 29 schools. In this design, students are given an endowment they can invest on a task where payoff depends on performance. The task is a written verbal test which is graded non anonymously by their teacher, in a random half of the classrooms, and graded anonymously by an external examiner in the other random half of the classrooms. We find significant evidence that students’ choices reflect perceptions of biases in teachers’ grading practices. Our results show systematic gender interaction effects: male students invest less with female teachers than with male teachers while female students invest more with male teachers than with female teachers. Interestingly, female students’ perceptions are not in line with actual discrimination: Teachers tend to give better grades to students of their own gender. Results do not suggest that ethnicity and socioeconomic status play a role.

Full article: http://cee.lse.ac.uk/ceedps/ceedp133.pdf

Valuing School Quality Using Boundary Discontinuities

Stephen Gibbons, Stephen Machin, Olmo Silva

CEEDP0132. January 2012.

Existing research shows that house prices respond to local school quality as measured by average test scores. However, higher test scores could signal better quality teaching and academic value-added, or higher ability, sought-after intakes. In our research, we show decisively that value-added drives households’ demand for good schooling. However, prior achievement – linked to the background of children in school – also matters. In order to identify these effects, we improve the boundary discontinuity regression methodology by matching identical properties across admissions authority boundaries; by allowing for boundary effects and spatial trends; by re-weighting our data towards transactions that are closest to district boundaries; by eliminating boundaries that coincide with major geographical features; and by submitting our estimates to a number of novel falsification tests. Our results survive this battery of experiments and show that a one-standard deviation change in either school average value-added or prior achievement raises prices by around 3%.

Full article: http://cee.lse.ac.uk/ceedps/ceedp132.pdf