Working Papers

  • [1701]

    Juan-José Ganuza, Gerard Llobet

    The Simple Economics of White Elephants


    This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uniformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.

  • [1702]

    Manuel Arellano, Stéphane Bonhomme

    Sample Selection in Quantile Regression: A Survey


    Nonrandom sample selection is a pervasive issue in applied work. In additive models, a number of techniques are available for consistent selection correction. However, progress in the development of non-additive selection corrections has been slower. In this survey we review recent proposals dealing with sample selection in quantile models.

  • [1703]

    Manuel Arellano, Stéphane Bonhomme

    Nonlinear Panel Data Methods for Dynamic Heterogeneous Agent Models


    Recent developments in nonlinear panel data analysis allow identifying and estimating general dynamic systems. In this review we describe some results and techniques for nonparametric identification and flexible estimation in the presence of time-invariant and time-varying latent variables. This opens the possibility to estimate nonlinear reduced forms in a large class of structural dynamic models with heterogeneous agents. We show how such reduced forms may be used to document policy-relevant derivative effects, and to improve the understanding and facilitate the implementation of structural models.

  • [1704]

    Caterina Calsamiglia, Annalisa Loviglio

    Grading on a Curve: When Having Good Peers is not Good


    Student access to education levels, tracks or majors is usually determined by their previous performance, measured either by internal exams, designed and graded by teachers in school, or external exams, designed and graded by central authorities. We say teachers grade on a curve whenever having better peers harms the evaluation obtained by a given student. We use rich administrative records from public schools in Catalonia to provide evidence that teachers indeed grade on a curve, leading to negative peer effects. We find suggestive evidence that school choice is impacted only the year when internal grades matter for future prospects.

  • [1705]

    Jan Eeckhout, Nezih Guner

    Optimal Spatial Taxation: Are Big Cities too Small?


    We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise a given level of revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depends on the level of government spending, the concentration of housing wealth and the strength of agglomeration economies. Our estimates for the US imply higher optimal marginal rates in big cities than in small cities. Under the current Federal Income tax code with progressive taxes, marginal rates are already higher in big cities which have higher wages, but the optimal difference we estimate is lower than what is currently observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 7.6% with 3.4% of the country-wide population moving to bigger cities. The welfare gains however are smaller. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate goods consumption goes up by 1.51% while aggregate housing consumption goes down by 1.70%.

  • [1706]

    Jeremy Greenwood, Nezin Guner, Guillaume Vandenbroucke

    Family Economics Writ Large


    Powerful currents have reshaped the structure of families over the last century. There has been (i) a dramatic drop in fertility and greater parental investment in children; (ii) a rise in married female labor-force participation; (iii) a significant decline in marriage and a rise in divorce; (iv) a higher degree of positive assortative mating; (v) more children living with a single mother; (vi) shifts in social norms governing premarital sex and married women's roles in the workplace. Macroeconomic models explaining these aggregate trends are surveyed. The relentless flow of technological progress and its role in shaping family life are stressed.

  • [1707]

    Samuel Bentolila, J. Ignacio García-Pérez, Marcel Jansen

    Are the Spanish Long-Term Unemployed Unemployable?


    Long-term unemployment reached unprecedented levels in Spain in the wake of the Great Recession and it still affects around 57% of the unemployed. We document the sources that contributed to the rise in long-term unemployment and analyze its persistence using state-of-the-art duration models. We find pervasive evidence of negative duration dependence, while personal characteristics such as mature age, lack of experience, and entitlement to unemployment benefits are key to understand the cross-sectional differences in the incidence of long-term unemployment. The negative impact of low levels of skill and education is muted by the large share of temporary contracts, but once we restrict attention to employment spells lasting at least one month these factors also contribute to a higher risk of long-term unemployment. Surprisingly, workers from the construction sector do not fare worse than similar workers from other sectors. Finally, self-reported reservation wages are found to respond strongly to the cycle, but much less to individual unemployment duration. In view of these findings, we argue that active labour market policies should play a more prominent role in the fight against long-term unemployment while early activation should be used to curb inflows.

  • [1708]

    Tincho Almuzara, Dante Amengual, Enrique Sentana

    Normality Tests for Latent Variables


    We exploit the rationale behind the Expectation Maximization algorithm to derive simple to implement and interpret score tests of normality in the innovations to the latent variables in state space models against generalized hyperbolic alternatives, including symmetric and asymmetric Student ts. We decompose our tests into third and fourth moment components, and obtain one-sided likelihood ratio analogues, whose asymptotic distribution we provide. When we apply them to a cointegrated dynamic factor model which combines the expenditure and income versions of US aggregate real output to improve its measurement, we reject normality if the sample period extends beyond the Great Moderation.

  • [1709]

    Dante Amengual, Marine Carrasco, Enrique Sentana

    Testing Distributional Assumptions Using a Continuum of Moments


    We propose specification tests for parametric distributions that compare theoretical and empirical characteristic functions. Our proposal is the continuum of moment conditions analogue to the usual overidentifying restrictions test, which takes into account the correlation between influence functions for different argument values. We derive its asymptotic distribution for fixed regularization parameter and when this vanishes with the sample size. We show its consistency against any deviation from the null, study its local power and compare it with existing tests. An extensive Monte Carlo exercise confirms that our proposed tests display good power in finite samples against a variety of alternatives.

  • [1710]

    Nezih Guner, Andrii Parkhomenko, Gustavo Ventura

    Managers and Productivity Differences


    We document that for a group of high-income countries (i) mean earnings of managers tend to grow faster than for non managers over the life cycle; (ii) the earnings growth of managers relative to non managers over the life cycle is positively correlated with output per worker. We interpret this evidence through the lens of an equilibrium life-cycle, span-of-control model where managers invest in their skills. We parameterize this model with U.S. observations on managerial earnings, the size-distribution of plants and macroeconomic aggregates. We then quantify the relative importance of exogenous productivity differences, and the size-dependent distortions emphasized in the misallocation literature. Our fi?ndings indicate that such distortions are critical to generate the observed differences in the growth of relative managerial earnings across countries. Thus, observations on the relative earnings growth of managers become natural targets to discipline the level of distortions. Distortions that halve the growth of relative managerial earnings (a move from the U.S. to Italy in our data), lead to a reduction in managerial quality of 27% and to a reduction in output of about 7% ? more than half of the observed gap between the U.S. and Italy. We ?find that cross-country variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.

  • [1711]

    Elena Manresa, Francisco Peñaranda, Enrique Sentana

    Empirical Evaluation of Overspecified Asset Pricing Models


    Asset pricing models with potentially too many risk factors are increasingly common in empirical work. Unfortunately, they can yield misleading statistical inferences. Unlike other studies focusing on the properties of standard estimators and tests, we estimate the sets of SDFs and risk prices compatible with the asset pricing restrictions of a given model. We also propose tests to detect problematic situations with economically meaningless SDFs uncorrelated to the test assets. We confirm the empirical relevance of our proposed estimators and tests with Yogo's (2006) linearized version of the consumption CAPM, and provide Monte Carlo evidence on their reliability in finite samples.

  • [1712]

    Caterina Mendicino, Kalin Nikolov, Javier Suarez

    Equity versus Bail-in Debt in Banking: An Agency Perspective


    We examine the optimal size and composition of banks’ total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.

  • [1713]

    Monica Martinez-Bravo, Andreas Stegmann

    In Vaccines we Trust? The Effects of Anti-vaccine Propaganda on Immunization: Evidence from Pakistan


    In July 2011, the Pakistani public unexpectedly learnt that the CIA had conducted a fake vaccination campaign as part of the operations to capture Osama Bin Laden. This episode was extensively used by Taliban groups to discredit the health system and vaccination campaigns. We implement a Difference-in-Differences strategy to document the effect of the disclosure of this information on demand for health services. We use survey data to compare vaccination rates before and after the disclosure of this information, across regions with different levels of electoral support for Islamist groups. Our results suggest that the disclosure of information on the fake vaccination campaign had a substantial negative effect on immunization rates: a one standard deviation increase in support for Islamist groups lead to a 9 to 13% decline in immunization rates over the sample mean. Our results are consistent with the hypothesis that the disclosure of the vaccination ruse eroded the degree of trust in medical services, and consequently, lead parents to actively refuse the use of formal medicine and vaccines, in particular.

  • [1714]

    Julio A. Crego

    Does Public News Decrease Information Asymmetries? Evidence from the Weekly Petroleum Status Report


    I argue that the arrival of a public signal, regardless of its content, can yield an increase in adverse selection costs in financial markets. To explain its occurrence, I propose a dynamic model with a public signal and risk-averse informed investors. In this set-up, the public signal induces informed investors to participate in the market as it reduces uncertainty. While it increases adverse selection costs, the increase in participation results in more informative prices. Apart from the static effects, the model's dynamics deliver testable hypotheses about price and liquidity before and after the signal's release. Using transaction-level data, I estimate the effect of the release of the Weekly Petroleum Status Report on the bid-ask spread, volume, and midpoint returns via a difference-in-difference strategy. I find that the mean bid-ask spread doubles immediately after the release and that volume increases by 32 percent. Moreover, this effect persists over time, and is independent of the report's content whereas prices react to this information immediately. Nevertheless, liquidity at the end of the trading session is not affected by the report.

  • [1715]

    Julio A. Crego

    Short Selling Ban and Intraday Dynamics


    Since September 2008 regulators from different countries, motivated by suspicions regarding an increase in investors' aggressiveness, have implemented several temporary short selling restrictions. In this paper, I study the effect of such policies in the context of the 2012 Spanish short selling ban. The results of this paper highlight an important policy trade-off: on the one hand, I provide evidence that, in line with regulator beliefs, investor aggressiveness is extremely high prior to the ban and, it reverts just after the ban implementation. On the other hand, using a novel identification strategy, I find that this policy increases the bid-ask spread. The causal interpretation of these results is obtained using intraday data under the assumption that the exact time of the implementation is random. The results obtained under this methodology are much smaller than the ones found in previous literature.

  • [1716]

    Jin Huang

    To Glance or to Peruse: Observational and Active Learning from Peer Consumers


    This paper examines consumer social learning patterns in decision making. I propose a novel model that decomposes the learning process into two stages: observational learning, where a consumer quickly updates the belief about a product after observing its salient social-based characteristics (such as popularity), and time-consuming active learning through descriptive information content (such as consumer reviews). By demonstrating the interplay between the two stages, the model brings together previous literature that studies these separately. I characterize the optimal learning time, and provide comparative statics which show that an increase in the discount rate or in the product’s economic value drives consumers to rely more on observational learning. I test this model using unique transaction-level data for air purifiers sold on a Chinese online platform from January to March 2014. Exploiting an unexpected air pollution crisis in late February 2014, I find that past sales have greater weight as a reference for comparison among products during the pollution crisis than in regular times. I also document that, after the episode, consumers rely less on observational learning compared to periods before the crisis, which is consistent with the model’s predictions as sales made during the crisis convey less information.

  • [1717]

    Julio A. Crego, Jin Huang

    Early Birds and Second Mice in the Stock Market


    This paper studies learning in the stock market. Our contribution is to propose a model to illustrate the endogenous timing decision on trading, taking into account the incentive of learning from others about the fundamental value. The model is similar to Easley and O’Hara (1992), except that we introduce less-informed traders whose private information is inferior to fully-informed traders, but superior to that of random noise traders, and a zero-profit market maker. We also allow both types of informed traders to optimize timing of trading. We show that fully-informed traders act as early birds because it is optimal for them to buy or sell at the earliest possible time; meanwhile, less-informed traders could be better off as second mice by delaying transactions to learn from previous trades. The greater information asymmetry between the less-informed traders and the market maker, the larger profits the former could make even though the latter is learning from all trades.

  • [1718]

    Rafael Repullo

    Hierarchical Bank Supervision


    This paper presents a model in which a central and a local supervisor contribute their efforts to obtain information on the solvency of a local bank, which is then used by the central supervisor to decide on its early liquidation. This hierarchical model is contrasted with the alternatives of decentralized and centralized supervision, where only the local or the central supervisor collects information and decides on liquidation. The local supervisor has a higher bias against liquidation (supervisory capture) and a lower cost of getting local information (proximity). Hierarchical supervision is the optimal institutional design when the bias of the local supervisor is high but not too high and the costs of getting local information from the center are low but not too low. With low (high) bias and high (low) cost it is better to concentrate all responsibilities in the local (central) supervisor.


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