Latest publications from CEP

Education in a Devolved Scotland:A Quantitative Analysis

Stephen Machin Sandra McNally Gill Wyness

CEPSP30. May 2013.Education is an area that is highly devolved in the UK, and the fact that all four constituent countries have pursued very different policies in the recent past provides a good testing ground to undertake a comparative review of the merits or otherwise of the education reforms that have taken place. There is, of course, an important policy context to such an analysis. Examining the performance of children educated in the devolved Scottish system in comparison to those educated in England, Wales and Northern Ireland has potential to offer a unique and valuable insight into the impact of Scottish devolution in a high profile area of public policy. When deciding whether or not to seek independence from the UK, the Scottish electorate will need to consider how a devolved Scotland has fared in educating its nation under its own terms – and hence how they might fare when taking ownership of other policy areas. In examining the key differences in attainment bearing in mind these differences, this report will help answer this question.

Full discussion paper: http://cep.lse.ac.uk/pubs/download/special/cepsp30.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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: http://cep.lse.ac.uk/pubs/download/dp1207.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 ofmonopolistic competition has recently re-emerged due to the availability of an appropriateand parsimonious framework to deal with firm heterogeneity. Within this framework weshow that non-separable utility, variable demand elasticity and endogenous firmheterogeneity cause the market equilibrium to err in many ways, concerning the number ofproducts, the size and the choice of producers, the overall size of the monopolisticallycompetitive sector. More crucially with respect to the existing literature, we also show thatthe extent of the errors depends on the degree of firm heterogeneity. In particular, theinefficiency of the market equilibrium seems to be largest when selection amongheterogeneous firms is needed most, that is, when there are relatively many firms with lowproductivity and relatively few firms with high productivity.

Full discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: http://cep.lse.ac.uk/pubs/download/dp1198.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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: http://cep.lse.ac.uk/pubs/download/dp1193.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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 discussion paper: 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 occupationsusing 3,000 verbs from around 12,000 occupational descriptions in the Dictionary ofOccupational Titles (DOTs). Using micro-data from the United States from 1880-2000, wefind an increase in the employment share of interactive occupations within sectors over timethat is larger in metro areas than non-metro areas. We provide evidence that this increase inthe interactiveness of employment is related to the dissemination of improvements intransport and communication technologies. Our findings highlight a change in the nature ofagglomeration over time towards an increased emphasis on human interaction.

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

Investing for Prosperity: Skills, Infrastructure and Innovation

CEPSP28. January 2013.What institutions and policies are neededto sustain UK economic growth in thedynamic world economy of the twentyfirstcentury? After years of inadequateinvestment in skills, infrastructure andinnovation, there are longstandingstructural weaknesses in the economy,all rooted in a failure to achieve stableplanning, strategic vision and a politicalconsensus on the right policy frameworkto support growth. This must change if weare to meet our current challenges andthose that may arise in the future.

Full discussion paper: 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 thismean that GDP growth was overstated too? The answer is no. It is truer to say that if banking outputwas 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 thereal growth of GDP primarily from the expenditure side. And from the expenditure side most of theproblematic part of banking output drops out since it constitutes intermediate consumption not finalexpenditure. Consequently, the effect of any mis-measurement of banking output on GDP growth inthe boom of 2000-2007 is likely to have been small: GDP growth might have been overstated by about 0.1% p.a.

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

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

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 discussion paper: http://cep.lse.ac.uk/pubs/download/dp1184.pdf