We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.
Low Inflation: High Default Risk AND High Equity Valuations -- by Harjoat S. Bhamra, Christian Dorion, Alexandre Jeanneret, Michael Weber
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Information Costs and Sequential Information Sampling -- by Benjamin Hebert, Michael Woodford
We propose a new approach to modeling the cost of information structures in rational inattention problems, the "neighborhood-based" cost functions. These cost functions have two properties that we view as desirable: they summarize the results of a sequential evidence accumulation problem, and they capture notions of "perceptual distance." The first of these properties is connected to an extensive literature in psychology and neuroscience, and the second ensures that neighborhood-based cost functions, unlike mutual information, make accurate predictions about behavior in perceptual experiments. We compare the implications of our neighborhood-based cost functions with those of a mutual-information cost function in a series of applications: security design, global games, modeling perceptual judgments, and a linear-quadratic-Gaussian tracking problem.
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Unions and Wage Inequality: The Roles of Gender, Skill and Public Sector Employment -- by David Card, Thomas Lemieux, W. Craig Riddell
We examine the changing relationship between unionization and wage inequality in Canada and the United States. Our study is motivated by profound recent changes in the composition of the unionized workforce. Historically, union jobs were concentrated among low-skilled men in private sector industries. With the steady decline in private sector unionization and rising influence in the public sector, half of unionized workers are now in the public sector. Accompanying these changes was a remarkable rise in the share of women among unionized workers. Currently, approximately half of unionized employees in North America are women. While early studies of unions and inequality focused on males, recent studies find that unions reduce wage inequality among men but not among women. In both countries we find striking differences between the private and public sectors in the effects of unionization on wage inequality. At present, unions reduce economy-wide wage inequality by less than 10%. However, union impacts on wage inequality are much larger in the public sector. Once we disaggregate by sector the effects of unions on male and female wage inequality no longer differ. The key differences in union impacts are between the public and private sectors - not between males and females.
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Elite Schools and Opting-In: Effects of College Selectivity on Career and Family Outcomes -- by Suqin Ge, Elliott Isaac, Amalia Miller
Using College and Beyond data and a variant on Dale and Krueger's (2002) matched-applicant approach, this paper revisits the question of how attending an elite college affects later-life outcomes. We expand the scope along two dimensions: we do not restrict the sample to full-time full-year workers and we examine labor force participation, human capital, and family formation. For men, our findings echo those in Dale and Krueger (2002): controlling for selection eliminates the positive relationship between college selectivity and earnings. We also find no significant effects on men's educational or family outcomes. The results are quite different for women: we find effects on both career and family outcomes. Attending a school with a 100-point higher average SAT score increases women's probability of advanced degree attainment by 5 percentage points and earnings by 14 percent, while reducing their likelihood of marriage by 4 percentage points. The effect of college selectivity on own earnings is significantly larger for married than for single women. Among married women, selective college attendance significantly increases spousal education.
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Why is Math Cheaper than English? Understanding Cost Differences in Higher Education -- by Steven W. Hemelt, Kevin M. Stange, Fernando Furquim, Andrew Simon, John E. Sawyer
The private return to postsecondary investment varies widely by field, but the resources required by different fields are not well known. This paper establishes five new facts about college costs using novel department-level data. First, costs vary widely across field, ranging from electrical engineering (109 percent higher costs than English) to math (22 percent lower). Costs are generally higher in fields where graduates earn more and in pre-professional programs. Second, this pattern is explained statistically by differences in class size and faculty pay, though differences in production technology enable some fields to offset higher salaries with larger classes. Third, some STEM fields experienced steep declines in expenditures over the past fifteen years while others saw increases. Fourth, increases in class size and teaching loads alongside a shift in faculty composition toward contingent faculty explain these trends. Finally, online instruction is associated with a modest reduction in cost per student, but only for undergraduate instruction. Recent policy efforts to promote enrollment in high-earning fields will thus have important implications for postsecondary costs and the social return on investment in higher education.
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Stock Price Rewards to Climate Saints and Sinners: Evidence from the Trump Election -- by Stefano Ramelli, Alexander F. Wagner, Richard J. Zeckhauser, Alexandre Ziegler
Donald Trump's 2016 election and the subsequent nomination of Scott Pruitt, a climate skeptic, to lead the Environmental Protection Agency drastically downshifted expectations on US climate change policy. Firms' stock-price reactions to these events reveal whether their climate strategies affected their valuations. As widely reported, firms in industries with high carbon intensity benefited, at least briefly. It might be expected that companies with "responsible" strategies on climate change would also have lost value, since they were paying for actions that seemed less urgent. In fact, investors actually rewarded such firms. The analysis shows that this observed climate responsibility premium results, at least in part, from the strategic behavior of long-horizon investors who looked into the future to assess the valuation of corporations.
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Policy Evolution under the Clean Air Act -- by Richard Schmalensee, Robert N. Stavins
The U.S. Clean Air Act, passed in 1970 with strong bipartisan support, was the first environmental law to give the Federal government a serious regulatory role, established the architecture of the U.S. air pollution control system, and became a model for subsequent environmental laws in the United States and globally. We outline the Act's key provisions, as well as the main changes Congress has made to it over time. We assess the evolution of air pollution control policy under the Clean Air Act, with particular attention to the types of policy instruments used. We provide a generic assessment of the major types of policy instruments, and we trace and assess the historical evolution of EPA's policy instrument use, with particular focus on the increased use of market-based policy instruments, beginning in the 1970s and culminating in the 1990s. Over the past fifty years, air pollution regulation has gradually become much more complex, and over the past twenty years, policy debates have become increasingly partisan and polarized, to the point that it has become impossible to amend the Act or pass other legislation to address the new threat of climate change.
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Women, Wealth Effects, and Slow Recoveries -- by Masao Fukui, Emi Nakamura, Jon Steinsson
Business cycle recoveries have slowed in recent decades. This slowdown comes entirely from female employment: as women's employment rates converged towards men's over the past half-century, the growth rate of female employment slowed. We ask whether this slowdown in female employment caused the slowdown in overall employment during recent business cycle recoveries. Standard macroeconomic models with "balanced growth preferences" imply that this cannot be the cause, since the entry of women "crowds out" men in the labor market almost one-for-one. We estimate the extent of crowd out of men by women in the labor market using state-level panel data and find that it is small, contradicting the standard model. We show that a model with home production by women can match our low estimates of crowd out. This model - calibrated to match our cross-sectional estimate of crowd out - implies that 70% of the slowdown in recent business cycle recoveries can be explained by female convergence.
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Do Children Benefit from Internet Access? Experimental Evidence from Peru -- by Ofer Malamud, Santiago Cueto, Julian Cristia, Diether W. Beuermann
This paper provides experimental evidence for the impact of home internet access on a broad range of child outcomes in Peru. We compare children who were randomly chosen to receive laptops with high-speed internet access to (i) those who did not receive laptops and (ii) those who only received laptops without internet. We find that providing free internet access led to improved computer and internet proficiency relative to those without laptops and improved internet proficiency compared to those with laptops only. However, there were no significant effects of internet access on math and reading achievement, cognitive skills, self-esteem, teacher perceptions, or school grades when compared to either group. We explore reasons for the absence of impacts on these key outcomes with survey questions, time-diaries, and computer logs.
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The Returns to Parental Health: Evidence from Indonesia -- by Dara Lee Luca, David E. Bloom
This paper investigates the economic returns to parental health. To account for potential endogeneity between parental health and child outcomes, we leverage longitudinal microdata from Indonesia to estimate individual fixed effects models. Our results show that the economic returns to parental health are high. We show that maternal health not only significantly affects her children's health, but is also intrinsically linked to her spouse's labor market status and earnings. Paternal health appears to be more linked to child schooling outcomes, especially for girls. When both parents are in poor health, the negative effects on their children are compounded. Additionally, the consequences of poor parental health are enduring. Longer-run effects of poor parental health manifest in a lower likelihood of high school completion, fewer years of schooling, and poorer adult health.
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Treatment Effects with Multiple Outcomes -- by John Mullahy
This paper proposes strategies for defining, identifying, and estimating features of treatment-effect distributions in contexts where multiple outcomes are of interest. After describing existing empirical approaches used in such settings, the paper develops a notion of treatment preference that is shown to be a feature of standard treatment-effect analysis in the single-outcome case. Focusing largely on binary outcomes, treatment-preference probability treatment effects (PTEs) are defined and are seen to correspond to familiar average treatment effects in the single-outcome case. The paper suggests seven possible characterizations of treatment preference appropriate to multiple-outcome contexts. Under standard assumptions about unconfoundedness of treatment assignment, the PTEs are shown to be point identified for three of the seven characterizations and set identified for the other four. Probability bounds are derived and empirical approaches to estimating the bounds--or the PTEs themselves in the point-identified cases--are suggested. These empirical approaches are straightforward, involving in most instances little more than estimation of binary-outcome probability models of what are commonly known as composite outcomes. The results are illustrated with simulated data and in analyses of two microdata samples. Finally, the main results are extended to situations where the component outcomes are ordered or categorical.
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Taking Time Use Seriously: Income, Wages And Price Discrimination -- by Daniel S. Hamermesh, Jeff Biddle
The American Time Use Survey 2003-15, the French Enquete Emploi du Temps, 2009-10, and the German Zeitverwendungserhebung, 2012-13, have sufficient observations to allow examining the theory of household production in much more detail than ever before. We identify income effects on time use by non-workers, showing that relatively time-intensive commodities--sleep and TV-watching--are inferior. For workers we identify income and substitution effects separately, with both in the same direction on these commodities as the income effects among non-workers. We rationalize the results by generalizing Becker's (1965) "commodity production" model, allowing both substitution between time and goods in household production and substitution among commodities in utility functions. We then use the evidence of price discrimination in product markets against minorities in the U.S. and immigrants in France to motivate an extension of the model that predicts how household production differs between members of these groups and the majority. We find the predicted results--minorities engage in more time-intensive activities, sleep and TV-watching, than otherwise identical majority-group members.
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Free for Children? Patient Cost-sharing and Healthcare Utilization -- by Toshiaki Iizuka, Hitoshi Shigeoka
This study exploits over 5,000 variations in subsidy generosity across ages and municipalities in Japan to examine how children respond to healthcare prices. We find that free care significantly increases outpatient spending, with price elasticities considerably smaller than for adults. Price responses are substantially larger when small copayments are introduced, indicating more elastic demand around a zero price. We also find that increased utilization primarily reflects low-value and costly care: increased outpatient spending neither reduces subsequent hospitalization by "avoidable" conditions nor improves short- or medium-term health outcomes. By contrast, inappropriate use of antibiotics and costly after-hours visits increase.
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Testing, Stress, and Performance: How Students Respond Physiologically to High-Stakes Testing -- by Jennifer A. Heissel, Emma K. Adam, Jennifer L. Doleac, David N. Figlio, Jonathan Meer
A potential contributor to socioeconomic disparities in academic performance is the difference in the level of stress experienced by students outside of school. Chronic stress - due to neighborhood violence, poverty, or family instability - can affect how individuals' bodies respond to stressors in general, including the stress of standardized testing. This, in turn, can affect whether performance on standardized tests is a valid measure of students' actual ability. We collect data on students' stress responses using cortisol samples provided by low-income students in New Orleans. We measure how their cortisol patterns change during high-stakes testing weeks relative to baseline weeks. We find that high-stakes testing does affect cortisol responses, and those responses have consequences for test performance. Those who responded most strongly - with either a large increase or large decrease in cortisol - scored 0.40 standard deviations lower than expected on the on the high-stakes exam.
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The Abolition of Immigration Restrictions and the Performance of Firms and Workers: Evidence from Switzerland -- by Andreas Beerli, Jan Ruffner, Michael Siegenthaler, Giovanni Peri
We study a reform that granted European cross-border workers free access to the Swiss labor market. Our Differences-in-Differences estimations leverage the fact that regions close to the border were affected more intensely and earlier. The greater availability of cross-border workers increased their employment but also wages and possibly employment of highly educated native workers although the new cross-border workers were also highly educated. The reason is a simultaneous increase in labor demand in skill-intensive firms: the reform increased the size, productivity, innovation performance of some incumbent firms, attracted new firms, and created opportunities for natives to pursue managerial jobs.
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The Effect of the Economic Collapse in Iceland on the Probability of Cardiovascular Events -- by Kristin H. Birgisdottir, Arna Hauksdottir, Christopher J. Ruhm, Unnur Anna Valdimarsdottir, Tinna Laufey Asgeirsdottir
We explore whether the 2008 economic collapse in Iceland and subsequent economic crisis affected the probability of ischemic heart disease (IHD) events, independent of regular cyclical effects attributed to typical economic conditions. We estimate linear probability models using administrative data on IHD events, earnings and balance-sheet status, as well as unemployment for all Icelanders aged 16 and older in 2000-2014. We find that the sharp change in economic conditions in 2008 had a positive long-term effect on the probability of cardiovascular events in both males and females. In absolute terms these effects were small but often statistically significant and contrast with the finding that general business-cycle fluctuations operated in the opposite direction. Several potential mediators were correlated with the probability of IHD events, but their inclusion had little effect on the estimated economic crisis coefficients. A statistically significant business-cycle effect is found for both genders indicating. Thus the general business cycle and the economic collapse in 2008 and subsequent crisis can be thought of as separate phenomena with differing effects on IHD. This research contributes to the literature by exploiting a unique circumstance affecting a whole population to explore its effects on individuals, using exceptional register data.
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In the Shadows of the Government: Relationship Building During Political Turnovers -- by Hanming Fang, Zhe Li, Nianhang Xu, Hongjun Yan
We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially private firms) headquartered in that city significantly increase their "perk spending." Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. Moreover, local political turnover in a city tends to be followed by changes of Chairmen or CEOs of state-owned firms that are controlled by the local government. However, the Chairmen or CEOs who have connections with local government officials are less likely to be replaced.
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The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy -- by Ernesto Pasten, Raphael Schoenle, Michael Weber
We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks.
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Money Markets, Collateral and Monetary Policy -- by Fiorella De Fiore, Marie Hoerova, Harald Uhlig
Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
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Shackling the Identification Police? -- by Christopher J. Ruhm
This paper examines potential tradeoffs between research methods in answering important questions versus providing more cleanly identified estimates on problems that are potentially of lesser interest. The strengths and limitations of experimental and quasi-experimental methods are discussed and it is postulated that confidence in the results obtained may sometimes be overvalued compared to the importance of the topics addressed. The consequences of this are modeled and several suggestions are provided regarding possible steps to encourage greater focus on questions of fundamental importance.
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