Extensive Margin Effects Research Articles

A possible mechanism for partial crowding‐out of R&D subsidies in developing countries

AbstractWe analyze the effectiveness of R&D subsidies on firms' R&D efforts in a developing country like Ecuador. We use the National Survey of Innovation Activities. Methodologically, we employ a structural framework that considers simultaneity and selection issues. Our results indicate that subsidies have an extensive margin effect, as they encourage firms to carry out R&D activities, and an intensive margin effect, as they increase firms' total innovation effort. However, this is compatible with partial crowding‐out of private efforts by public funds. One possible mechanism to explain this result is that, in developing countries with less developed capital markets, firms with financial constraints may divert part of the subsidy to invest in fixed capital. We find some support for this hypothesis, as the most financially constrained firms both explain the crowding‐out effect and increase their fixed capital investment when receiving a subsidy. For other firms, we observe crowding‐in, and their fixed capital investment remains insensitive to the subsidy.

Minimum Wages and Labour Supply in an Emerging Market: The Case of Mauritius

Abstract This paper investigates the effect of multiple minimum wages, known as remuneration orders, on employment and working hours in Mauritius. Using data between 2005 and 2014, the analysis finds no effect on overall employment and different effects in sign for men and women. The minimum wage has a positive long-term effect on women's employment (0.141) and a negative effect on male employment (−0.097). The estimated employment elasticity magnitudes for men and women are within the range of elasticities found in previous studies of employment effects of minimum wages in low- and middle-income countries. The aggregate employment effect of the minimum wage in Mauritius is not significant, due to the larger share of men who are employed. The extensive margin effect of minimum wages is also associated with a 2.2% increase in average working hours for men but a 1.3% decline in average working hours for women in the covered sector. In the uncovered sector, the significant positive effect along the intensive margin, estimated at 4.6%, is driven by changes in labour supply among men.

The impact of cash transfer participation on unhealthy consumption in Brazil

We assess the impact of the Brazilian government’s conditional cash transfer program Bolsa Família on unhealthy consumption by households, proxied by expenses with ultra-processed food, alcohol, and tobacco products. Using machine learning techniques to improve the propensity score estimation, we analyze the intensive and extensive margin effects of participating in the program on the household purchase of unhealthy products. Our results reveal that program participants spend more on food in general, but not necessarily more on unhealthy options. While we find evidence that participants increase their probability of spending more on food away from home, they do not significantly alter their expenditures on packaged food, alcohol, or tobacco products.

Impacts of climate and weather on irrigation technology adoption and agricultural water use in the U.S. pacific northwest

AbstractIn this article, we model long‐run responses to climate expectations that are predetermined before the growing season and short‐run responses to weather realizations during the growing season. The model is applied to a climatically diverse region, the U.S. Pacific Northwest, and the most comprehensive dataset on irrigation in the United States to estimate the impact of extreme weather on irrigation technology adoption and agricultural water use. Impacts on agricultural water use were driven more by adjustments to irrigated acreage (extensive margin effects) than by adjustments to the water application rate (intensive margin effects). The model captures the two mechanisms for irrigation to mitigate freeze damage to crops: wetting the soil (heat retention) and over‐head sprinkler irrigation (latent heat). Realized late spring freeze caused water use for orchard/vineyard to increase by 3%, but this represents less than a 1% increase in total agricultural water use. Expected spring freeze variability encouraged adoption of sprinkler irrigation technology for some crops.

The Effects of Product Standards on Trade: Quasi‐Experimental Evidence from China

AbstractUsing China Compulsory Certification (CCC) as a case study, we investigate how compulsory certification schemes impact China's imports. A difference‐in‐difference approach is used with China customs data to measure the impact of CCC on imports. Our findings show that the CCC regulation increases China's market access for products requiring certification. The results show that the import‐promoting effects of CCC regulation are due to an increase in the intensive margin effect rather than to an increase in the extensive margin effect. We also find that product quality plays no significant mediation role in the effect of CCC regulation on China's imports.

Implications of State-Dependent Pricing for DSGE Model-Based Policy Analysis in Indonesia

This paper studies the implications of state-dependent pricing in a small open-economy dynamic stochastic general equilibrium (DSGE) model for Indonesia. I show that variations in the timing and frequency of price adjustment inherent in a state-dependent pricing assumption could have important implications for DSGE model-based policy analysis in Indonesia. This extensive margin effect produces disparities in the conditional variance decompositions and the impulse responses to various shocks responsible for business cycle fluctuations. An investigation into the impact of COVID-19 pandemic shocks indicates that such variations non-trivially affect the analysis on the appropriate degree of monetary policy response to the shocks. A state-dependent pricing model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by a traditional time-dependent pricing model. The broader implication is clear. For modelling and analyzing the Indonesian economy, in which the inflation rates have historically been moderate-to-high and highly variable, state-dependent pricing is an essential model feature.

Fracking and risky sexual activity

This paper examines the impact of the U.S. fracking boom on local STI transmission rates and prostitution activity as measured by online prostitution review counts. We first document significant and robust positive effects on gonorrhea rates in fracking counties at the national level. But we find no evidence that fracking increases prostitution when using our national data, suggesting sex work may not be the principal mechanism linking fracking to gonorrhea growth. To explore mechanisms, we then focus on remote, high-fracking production areas that experienced large increases in sex ratios due to male in-migration. For this restricted sample we find enhanced gonorrhea transmission effects and moderate evidence of extensive margin effects on prostitution markets. This study highlights public health concerns relating to economic shocks and occupational conditions that alter the local demographic composition.

The role of search frictions in the long-run relationships between inflation, unemployment and capital

This paper explores the long-run relationships between inflation, unemployment and capital accumulation by proposing a model with search frictions in both goods and labor markets. This framework allows us to identify a negative extensive margin effect of inflation on the number of firms demanding capital and a positive intensive margin effect of inflation on the capital demanded per firm. The two effects together generate a hump-shaped relationship between long-run inflation and aggregate capital. These results are consistent with our empirical evidence from a cross-section of 76 countries, which suggests a non-monotonic relationship between inflation and investment to GDP ratio in the long run. Our calibrated results are also consistent with empirical findings from the U.S. data on the effect of inflation on capital stock, unemployment and the real interest rates.

Pound for Pound Export Diversification

We propose a short-run model of the extensive margin of trade and deploy it to distinguish and quantify domestic and cross-border margins. Our empirical focus is on the domestic extensive margin of trade (domestic distribution of a product) and its importance for quantifying policy and globalization effects on the international extensive margin of trade. We build a dataset that combines data on the domestic extensive margin and the standard international extensive margin. It reveals significant and intuitive variation in the domestic extensive margin across countries and over time. We quantify the extensive margin effects of European Union (EU) integration, 2008-2018, and demonstrate that these effects cannot be identified without the domestic extensive margin. We find strong and highly heterogeneous effects, both across countries and directionally.

Innovation and the Creative Destruction of Trade: A Study of the Intensive and Extensive Margins of Trade for French Firms

AbstractOur study of French exporters examines the causal relationship between innovation and extensive and intensive margins of trade using a propensity score matching and difference‐in‐differences approach. Results show innovation has a positive impact on total exports driven primarily through the intensive margin. To understand the absence of an extensive margin effect, we show new and terminated product–country transactions increase at similar rates in the year of innovation for the treated and control groups but net trade creation for innovators outstrips that of non‐innovators in the following two years implying firms need to innovate in order to survive in export markets.

The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets

This paper examines the relationship between foreign and domestic investment activity of multinational enterprises. The empirical analysis is based on micro data of German firms and their operations at home and abroad, including information on investment in fixed assets. The empirical approach, which rests upon extensive and intensive margin variation, is shown to produce very robust results. These suggest a positive relationship between foreign and home investment in real capital. This positive effect seems to be mainly related to additional opportunities for tax planning and better access to financing capital. In contrast, we do not find evidence that improved production processes and technology upgrading cause the positive effect on investment at home. Our empirical approach allows us to distinguish between an extensive and intensive margin effect: setting up a new foreign affiliate leads to an immediate positive effect of about EUR 460,000 additional investment; the investment elasticity at the intensive margin is estimated to be approximately 0.13.

The child health effects of terrorism: evidence from the Boko Haram Insurgency in Nigeria

ABSTRACTThis study examines the effect of terrorism on height-for-age z-scores, weight-for-age z-scores, weight-for-height z-scores, stunting, and wasting. Using the Boko Haram Insurgency, it compares outcomes in Boko Haram high-active and low-active areas. A difference-in-difference and regression model identifies the extensive and intensive margin effects respectively. The study uses data from the Nigeria Demographic and Health Survey and the Global Terrorism Database. The results suggest that the Boko Haram Insurgency reduces weight-for-age and weight-for-height z-scores and increases the probability of wasting. The evidence suggests that policies targeting healthcare services may mitigate the long-term impacts of the Boko Haram Insurgency on human capital production.

Repeated treatment in a GOTV field experiment: Distinguishing between intensive and extensive margin effects

Technological advancements and the increasingly large amounts spent for elections have made it easier for get-out-the-vote (GOTV) campaigns to contact potential voters many times prior to elections. However, the effects of repeated exposure to GOTV treatment have received little attention in the academic literature. Multiple treatments can increase the intensive margin of treatment—by increasing the number of times that treated individuals are exposed to the treatment—or the extensive margin of treatment—by increasing the number of people who are exposed to at least one treatment attempt. We analyze the differences between a treatment with one automated GOTV call and a treatment with three GOTV calls to isolate the effect of changes in the extensive and intensive margins of treatment on voting rates. On the intensive margin, we find that answering one additional call is associated with an approximately 0.6% point increased probability to vote. On the extensive margin, we find that answering one additional call is associated with an approximately one percentage point increased probability to vote. This evidence is consistent with the academic literature on commercial advertising, which finds that repeated exposures to commercial advertisements have diminishing marginal effects.

The Effect of Investing Abroad on Investment at Home: On the Role of Technology, Tax Savings, and Internal Capital Markets

This paper examines the relationship between foreign and domestic investment activity of multinational enterprises. The empirical analysis is based on micro data of German firms and their operations at home and abroad, including information on investment in fixed assets. The empirical approach, which rests upon extensive and intensive margin variation, is shown to produce very robust results. These suggest a positive relationship between foreign and home investment in real capital. This positive effect seems to be mainly related to additional opportunities for tax planning and better access to financing capital. In contrast, we do not find evidence that improved production processes and technology upgrading cause the positive effect on investment at home. Our empirical approach allows us to distinguish between an extensive and intensive margin effect: setting up a new foreign affiliate leads to an immediate positive effect of about EUR 450,000 additional investment; the investment elasticity at the intensive margin is estimated to be approximately 0.13.

Extensive and Intensive Margin Effects in Sample Selection Models: Racial Effects on Wages

Summary In sample selection models, a treatment can influence the observed outcome in two ways: by affecting the binary selection or participation decision and by affecting the latent outcome. The former is called the ‘extensive margin effect’, and the latter is called the ‘intensive margin effect’. Despite the popularity of these effects, however, the intensive margin effect does not have the traditional causal parameter interpretation because it is conditioned on the selecting or participating decision, which is a post-treatment variable possibly affected by the treatment. The paper presents a causal framework for sample selection models and introduces various subpopulation effects. It is difficult to separate such effects in general; however, in certain popular models (nearly parametric sample selection models, semiparametric ‘independence models’, semiparametric zero-censored models and ‘polynomial approximation’ models) with linear latent equations, they are separately identified and easily estimable with probit and least squares estimators. An empirical analysis is provided to illustrate these causal effects in sample selection models.

The Intensive and Extensive Margins of Real Wage Adjustment

Using 35 years of data from the Current Population Survey we decompose fluctuations in real median weekly earnings growth into the part driven by movements in the intensive margin–wage growth of individuals continuously full-time employed–and movements in the extensive margin–wage differences of those moving into and out of full-time employment. The relative importance of these two margins varies significantly over the business cycle. When labor markets are tight, continuously full-time employed workers drive wage growth. During labor market downturns, the procyclicality of the intensive margin is largely offset by net exits out of full-time employment among workers with lower earnings. This leads aggregate real wages to be largely acyclical. Most of the extensive margin effect works through the part-time employment margin. Notably, the unemployment margin accounts for little of the variation or cyclicality of median weekly earnings growth. JEL classification codes: E24, J3, J6.

The Democratization of Credit and the Rise in Consumer Bankruptcies

Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the “new” cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.

The Impact of Female Education on Teenage Fertility: Evidence from Turkey

Abstract This paper explores the causal relationship between female education and teenage fertility by exploiting a change in the compulsory schooling law (CSL) in Turkey. Using variation in the exposure to the CSL across cohorts and variation across provinces by the intensity of additional classrooms constructed in the birth provinces as an instrumental variable, the results indicate that primary school completion reduces teenage fertility by 0.37 births and the incidence of teenage childbearing by around 28 percentage points. Exploring heterogeneous effects indicates that female education reduces teenage fertility more in provinces with lower population density and higher agricultural activity. This paper also disentangles intensive- and extensive-margin effects and explores various channels, such as postponing marriage and contraceptive use, linking education and fertility. Finally, this paper demonstrates that there are additional social benefits of education in terms of child health.

Import Response to Exchange Rate Fluctuations: A Micro-Level Investigation

This paper presents theory and evidence on firms' import responses to exchange rate fluctuations using highly disaggregated data of Chinese imports from OECD countries. The paper first develops a heterogeneous-firm trade model and predicts firms' import responses at both the extensive and intensive margins: when domestic currency appreciates, more firms start importing and more products are added into the imported inputs bundle (extensive margin effect), and the import value by each firm also increases (intensive margin effect). The model also predicts that those import responses are more profound for firms in ordinary trade than for those in processing trade. Next, the paper empirically investigates firms' import responses to exchange rate fluctuations at extensive and intensive margins in both the short run and the long run, and all the model predictions are confirmed. The predicted pattern is more robust in the long run than in the short run. We also find variations among import responses under different exchange rate regimes (including a fixed exchange rate regime, an expected appreciation regime, and a confirmed appreciation regime). Finally, we investigate the exchange rate pass-through to import prices and find that incomplete pass-through has declined.

A New Look at the Extensive Trade Margin Effects of Trade Facilitation

We estimate the effects of trade facilitation on extensive margins of trade. Using OECD Trade Facilitation Indicators – which closely reflect the Trade Facilitation Agreement negotiated at the Bali WTO Ministerial Conference of December 2013 – we show that trade facilitation in a given exporting country is positively correlated with the number of products exported by destination and with the number of export destinations served by product. To address the issue of causality, we employ an identification strategy whereby only exports of new products, or exports to new destinations, are taken into account when computing the respective margins of trade. Our findings therefore imply a positive causal impact of trade facilitation on the country-level extensive margins of trade. The results are, to a large extent, robust to alternative definitions of country-level trade margins, to different sets of controls variables and to various estimation methods. Simulating the effect of an increase to the regional or global median values of trade facilitation, we are able to quantify the potential extensive margin gains of trade facilitation reform in different regions.