Review of Economic Studies

Aizawa, Naoki; Kim, Soojin; Rhee, Serena

doi: 10.1093/restud/rdae015pmid: N/A

This article studies how firms’ screening incentives in the labour market affect the optimal design of social insurance programs and quantitatively assesses the U.S. disability policies accounting for firms’ screening of the disabled. We develop an equilibrium search model where workers with different productivities have heterogeneous preferences over non-wage benefits and firms cannot offer an employment contract that explicitly depends on worker types. In this environment, firms may use contracts to screen out a certain type of workers, distorting employment rates and contracts in equilibrium. Therefore, the optimal structure of social insurance policies depends on firms’ screening incentives. We extend and structurally estimate this framework to quantitatively understand the inefficiencies arising from firms’ incentives to screen out disabled workers and examine the optimal joint design of disability insurance (DI) and various forms of firm subsidies. We find that hiring subsidies mitigate screening distortions; at the same time, they interact with DI by reducing the labour supply disincentives it generates. The optimal policy structure leads to a considerable welfare gain by simultaneously making firm subsidies and DI benefits more generous.

Ashlagi, Itai; Monachou, Faidra; Nikzad, Afshin

doi: 10.1093/restud/rdae013pmid: N/A

We study non-monetary markets where objects that arrive over time are allocated to unit-demand agents with private types, such as in the allocation of public housing or deceased-donor organs. An agent’s value for an object is supermodular in her type and the object quality, and her payoff is her value minus her waiting cost. The social planner’s objective is a weighted sum of allocative efficiency (i.e. the sum of values) and welfare (i.e. the sum of payoffs). We identify optimal mechanisms in the class of direct-revelation mechanisms. When the social planner can design the information disclosed to the agents about the objects, the optimal mechanism has a simple implementation: a first-come first-served waitlist with deferrals. In this implementation, the object qualities are partitioned into intervals; only the interval containing the object quality is disclosed to agents. When the planner places a higher weight on welfare, optimal disclosure policies become coarser.

Beraja, Martin; Zorzi, Nathan

doi: 10.1093/restud/rdae019pmid: N/A

How should the government respond to automation? We study this question in a heterogeneous agent model that takes worker displacement seriously. We recognize that displaced workers face two frictions in practice: reallocation is slow and borrowing is limited. We analyze a second best problem where the government can tax automation but lacks redistributive tools to fully alleviate borrowing frictions. The equilibrium is (constrained) inefficient and automation is excessive. Firms do not internalize that automation depresses the income of automated workers early on during the transition, precisely when they become borrowing constrained. The government finds it optimal to slow down automation on efficiency grounds, even when it does not value equity. Quantitatively, the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves efficiency and delivers meaningful welfare gains.

Bronsoler, Ari; Gruber, Jonathan; Seira, Enrique

doi: 10.1093/restud/rdae024pmid: N/A

Public health systems are dominant in much of the world but often face fiscal constraints that lead to rationing of care. As a result, private sector healthcare providers could in theory beneficially supplement public systems, but evaluating the benefits of private alternatives has been challenging. We evaluate a private supplement to the free public health system for one of the world’s deadliest health problems, diabetes. We estimate enormous impacts of the private supplement, increasing the share of those treated who are under control by 69%. This effect arises through both improved treatment compliance and health behavior. We find diabetes complications fall in the short run, and that the net costs of this intervention are one-third of the gross costs. The returns to private care do not appear to reflect more productive delivery but rather more attachment to medical care, offering lessons for improving the public system.

Chen, Xiaohong; Christensen, Timothy; Kankanala, Sid

doi: 10.1093/restud/rdae025pmid: N/A

We introduce two data-driven procedures for optimal estimation and inference in nonparametric models using instrumental variables. The first is a data-driven choice of sieve dimension for a popular class of sieve two-stage least-squares estimators. When implemented with this choice, estimators of both the structural function h0 and its derivatives (such as elasticities) converge at the fastest possible (i.e. minimax) rates in sup-norm. The second is for constructing uniform confidence bands (UCBs) for h0 and its derivatives. Our UCBs guarantee coverage over a generic class of data-generating processes and contract at the minimax rate, possibly up to a logarithmic factor. As such, our UCBs are asymptotically more efficient than UCBs based on the usual approach of undersmoothing. As an application, we estimate the elasticity of the intensive margin of firm exports in a monopolistic competition model of international trade. Simulations illustrate the good performance of our procedures in empirically calibrated designs. Our results provide evidence against common parameterizations of the distribution of unobserved firm heterogeneity.

Cole, Harold L; Neuhann, Daniel; Ordoñez, Guillermo

doi: 10.1093/restud/rdae017pmid: N/A

We develop a theory of information spillovers in sovereign bond markets in which investors can learn about default risk before trading in primary and secondary markets. If primary markets are structured as multi-unit discriminatory-price auctions, an endogenous winner’s curse leads to strategic complementarities in information acquisition. Shocks to default risk in one country may trigger crisis episodes with widespread information acquisition, sharp increases in the level and volatility of yields in risky countries, low and stable yields in safe countries, market segmentation, and arbitrage profits between primary and secondary markets. These predictions are consistent with the dynamics of auction informativeness during the Eurozone Sovereign Debt Crisis, which we measure using the reaction of secondary market yields to primary market yields.

D’Haultfœuille, X; Gaillac, C; Maurel, A

doi: 10.1093/restud/rdae022pmid: N/A

We study partially linear models when the outcome of interest and some of the covariates are observed in two different datasets that cannot be linked. This type of data combination problem arises very frequently in empirical microeconomics. Using recent tools from optimal transport theory, we derive a constructive characterization of the sharp identified set. We then build on this result and develop a novel inference method that exploits the specific geometric properties of the identified set. Our method exhibits good performances in finite samples, while remaining very tractable. We apply our approach to study intergenerational income mobility over the period 1850–1930 in the U.S. Our method allows us to relax the exclusion restrictions used in earlier work, while delivering confidence regions that are informative.

Farhi, Emmanuel; Tirole, Jean

doi: 10.1093/restud/rdae028pmid: N/A

Authorities’ support policies shape the location and continuation of industrial and banking activity on their soil. Firms’ locus of activity depends on their prospect of receiving financial assistance in distress and therefore on factors such as countries’ relative resilience. We predict that global firms are global in life and national in death; and that they become less global when competition is more intense, times are turbulent, and international risk sharing (say, through swap lines) weak. We analyse the competitive benefits of industrial and banking policies as well as their limitations, such as currency appreciation.

Folini, Doris; Friedl, Aleksandra; Kübler, Felix; Scheidegger, Simon

doi: 10.1093/restud/rdae011pmid: N/A

To analyse climate change mitigation strategies, economists rely on simplified climate models—so-called climate emulators—that provide a realistic quantitative link between CO2 emissions and global warming at low computational costs. In this paper, we propose a generic and transparent calibration and evaluation strategy for these climate emulators that are based on freely and easily accessible state-of-the-art benchmark data from climate sciences. We demonstrate that the appropriate choice of the free model parameters can be of key relevance for the predicted social cost of carbon. The key idea we put forward is to calibrate the simplified climate models to benchmark data from comprehensive globalclimate models that took part in the coupled model intercomparison project, phase 5 (CMIP5). In particular, we propose to use four different test cases that are considered pivotal in the climate science literature: two highly idealized tests to separately calibrate and evaluate the carbon cycle and temperature response, an idealized test to quantify the transient climate response, and a final test to evaluate the performance for scenarios close to those arising from economic models, and that include exogenous forcing. As a concrete example, we re-calibrate the climate part of the widely used DICE-2016, fathoming the CMIP5 uncertainty range of model responses: the multi-model mean as well as extreme, but still permissible climate sensitivities and carbon cycle responses. We demonstrate that the functional form of the climate emulator of the DICE-2016 model is fit for purpose, despite its simplicity, but its carbon cycle and temperature equations are miscalibrated, leading to the conclusion that one may want to be skeptical about predictions derived from DICE-2016. We examine the importance of the calibration for the social cost of carbon in the context of a partial equilibrium setting where interest rates are exogenous, as well as the simple general equilibrium setting from DICE-2016. We find that the model uncertainty from different consistent calibrations of the climate system can change the social cost of carbon by a factor of 4 if one assumes a quadratic damage function. When calibrated to the multi-model mean, our model predicts similar values for the social cost of carbon as the original DICE-2016, but with a strongly reduced sensitivity to the discount rate and about 1 degree less long-term warming. The social cost of carbon in DICE-2016 is oversensitive to the discount rate, leading to extreme comparative statics responses to changes in preferences.

Gulzar, Saad; Khan, Muhammad Yasir

doi: 10.1093/restud/rdae026pmid: N/A

How can we motivate good politicians—those that will carry out policy that is responsive to citizens’ preferences—to enter politics? In a field experiment in Pakistan, we vary how political office is portrayed to ordinary citizens. Emphasizing prosocial motives for holding political office instead of personal returns—such as the ability to help others versus enhancing one’s own respect and status—raises the likelihood that individuals run for office and that voters elect them. A year later, the treatment improves the alignment of policy with citizens’ preferences. These effects emerge only when treatments are randomly delivered in a public setting. Taken together, the results demonstrate that how politics is perceived shapes who decides to run for office, who is elected, as well the policies that democracies deliver.