True State Dependence Research Articles

A cycle or a tunnel? A study on unemployment and low-pay dynamics in Italy

We study the extent of persistence in unemployment and low-pay employment in Italy in the period 2014-2017, using the Italian component of the EU-SILC survey merged with administrative data. We model persistence in unemployment and low-pay employment using different dynamic random-effects models accounting for observed and latent individual heterogeneity as well as endogeneity of the initial conditions. We find evidence of true state dependence in place for both unemployment and low-pay employment. Moreover, past unemployment spells increase the probability of being low-paid, conditional on being employed, while the opposite effect is limited. For both processes the degree of reliance on the previous state is considerably greater than the magnitude of cross-effects. Thus, evidence is presented that these processes shape almost independent no-pay/low-pay tunnels leading individuals into two different traps, rather than a cycle between the two states.

State Dependence in Material and Social Deprivation in European Single-Parent Households

This paper explores the dynamics of social exclusion as measured by material and social deprivation in the particularly exposed category of single-parent households. We aim to assess whether there is true state dependence in deprivation and the role of other household factors, as well as that of the macro-economic and social welfare scenario. We use 2015–2018 European Union Statistics on Income and Living Conditions longitudinal data to explore a large set of European countries. We estimate three-level dynamic probit models that enable us to account for micro- and country-level unobserved heterogeneity. Our results suggest that material and social deprivation is likely to be a trap for single-parent households and that this effect is stronger for these households than for those composed of two adults and children. Among single-parent households, those headed by a female are worse off than those headed by a male. The policy implications of these findings are also discussed.

Poverty dynamics in Nairobi's slums; Testing for state dependence and heterogeneity effects

We investigate the factors underlying poverty transitions in Nairobi’s slums focusing on whether differences in characteristics make people more prone to enter poverty and persist in, or whether past experience of poverty matters on future states. Understanding these issues is essential for the design of effective policy programs aimed at enhancing the lives of the poor. The paper uses an endogenous switching model, which accounts for initial conditions, non-random attrition, and unobserved heterogeneity.Estimations are based on a panel dataset from the Nairobi Demographic Surveillance System. Results indicate that true state dependence (TSD) constitutes the major factor driving poverty persistence. There are little heterogeneity effects. Even when household and individual observed characteristics differ notably, the TSD size remains very large. Active anti-poverty programs aimed at breaking the cycle of poverty constitute then the most appropriate policies for taking people out of poverty and preventing them to fall back in.

The persistence and cross-persistence of R&D outsourcing: onshore and offshore strategies

ABSTRACT Research and Development (R&D) outsourcing has rapidly grown in recent decades but little attention has been paid to the persistence with which these contracts are carried out. In this way, this study contributes to the literature by providing new evidence on the extent of true state dependence in explaining the persistence of outsourcing R&D to a type of contractor. Further, we explicitly distinguish between offshore and onshore outsourcing strategies and study their own- and cross-state dependence. In doing so, we estimate a set of dynamic models of strategy adoption using a panel of Spanish manufacturing firms from 2005 to 2014. The data allow for the distinction between five types of contractors and their domestic or foreign origin in each of them. Our results support the idea that R&D outsourcing with a type of contractor exhibits true-state dependence although moderate, with onshore R&D outsourcing being more state-dependent than its offshore counterpart. Results also indicate the existence of cross-state dependence in both directions.

On the Estimation of True State Dependence in the Persistence of Innovation*

AbstractThis paper explores the persistence often found in firms’ innovation and advances current research by investigating its actual nature. Previous studies have aimed at disentangling true state dependence from spurious state dependence by using a random effects (RE) dynamic panel probit approach, thereby imposing strong conditions on the underlying structure of the unobserved heterogeneity. Building on recent advances in the econometric literature, which allows for true fixed effects estimation of dynamic nonlinear panel data models, we demonstrate that relaxing the assumptions on the unobserved heterogeneity can have a considerable effect on the estimates of true state dependence. While we confirm the existence of a strong persistence of innovation in firms, we however find that true state dependence only explains about half of the persistent behaviour displayed by firms; this is in contrast to the popular RE methodology that attributes 70% to 100% of persistence to true state dependence. Our results suggest that policy programs aimed at encouraging initial innovations alone are useful but may not possess a long‐term stimulating effect on innovation activity.

Instrument policy mix and firm size: is there complementarity between R&D subsidies and R&D tax credits?

Nowadays, a rising number of evaluations investigates a multifaceted concept of the policy mix. Our study specifically focuses on the mix of two most frequently used supply-side instruments–R&D subsidies and R&D tax credits. Drawing on the longitudinal sample of Spanish manufacturing firms, we investigate whether there is a complementary interaction between these policy instruments with respect to product and process innovations. Moreover, by employing a dynamic random-effects probit estimator, we account for the persistence of innovation and endogeneity of public support. The results, that are separately estimated for SMEs and large firms, uniformly show evidence of no interplay between two policy instruments either in SMEs or large firms. However, among factors that influence the propensity to product and process innovations, by far, the largest effect is generated by true state dependence. These findings provide some policy implications for fostering product and process innovations in the long run.

Effects of pricing and infrastructure on car ownership: A pseudo-panel-based dynamic model

This study investigates households’ car ownership decisions in response to changes in vehicle quota control and transport infrastructure in Singapore. Unlike previous cross-sectional studies, we calibrate a dynamic car ownership model with a pseudo panel constructed from repeated cross-sectional travel surveys, controlling for the persistence of car ownership and unobserved heterogeneity. We find that the tightening of vehicle quota control and improved rail transit accessibility have reduced households’ desire to purchase cars. The long-run effect of these two policies is larger than their short-run effect due to the existence of true state dependence. The impact of expressway-network expansion is insignificant.

A Note on "Sequential Neighborhood Effects" by Hicks et al. (2018).

We revisit a novel causal model published in Demography by Hicks et al. (2018), designed to assess whether exposure to neighborhood disadvantage over time affects children's reading and math skills. Here, we provide corrected and new results. Reconsideration of the model in the original article raised concerns about bias due to exposure-induced confounding (i.e., past exposures directly affecting future exposures) and true state dependence (i.e., past exposures affecting confounders of future exposures). Through simulation, we show that our originally proposed propensity function approach displays modest bias due to exposure-induced confounding but no bias from true state dependence. We suggest a correction based on residualized values and show that this new approach corrects for the observed bias. We contrast this revised method with other causal modeling approaches using simulation. Finally, we reproduce the substantive models from Hicks et al. (2018) using the new residuals-based adjustment procedure. With the correction, our findings are essentially identical to those reported originally. We end with some conclusions regarding approaches to causal modeling.

Dynamics of Overqualification: Evidence from the Early Career of Graduates

This study analyses the persistence and true state dependence of overqualification, i.e. a mismatch between workers' qualifications and their jobs' educational requirements. Employing individual-level panel data for Germany, I find that overqualification is highly persistent among tertiary graduates over the first ten years of their career cycle. Accounting for unobserved heterogeneity, results from dynamic random-effects probit models suggest that only a small share of the observed persistence can be attributed to a true state dependence effect. Unobserved factors are found to be the main driver of the high persistence of overqualification. In particular, selection into initial overqualification at the start of the career is of high importance. Furthermore, overqualification persistence is shown to be partly attributable to observed heterogeneity in terms of ability and study characteristics.

Dynamics of overqualification: evidence from the early career of graduates

ABSTRACT This study analyses the persistence and true state dependence of overqualification, i.e. a mismatch between workers' qualifications and their jobs' educational requirements. Employing individual-level panel data for Germany, we find that overqualification is highly persistent among university graduates over the first ten years of their career cycle. Accounting for unobserved heterogeneity, results from dynamic random-effects probit models suggest that a moderate share of the persistence can be attributed to true state dependence. Unobserved factors are found to be the main driver of overqualification persistence. However, observed heterogeneity in terms of ability and study characteristics significantly contributes to overqualification persistence.

The persistence of child and adolescence mental healthcare: results from registry data

BackgroundPrevious studies on the persistence of child and adolescent mental healthcare do not consider the role of time-invariant individual characteristics. Estimating persistence of healthcare using standard linear models yields biased estimates due to unobserved heterogeneity and the autoregressive structure of the model. This study provides estimates of the persistence of child and adolescent mental healthcare taking these statistical issues into account.MethodsWe use registry data of more than 80,000 Dutch children and adolescents between 2000 and 2012 from the Psychiatric Case Registry Northern Netherlands (PCR-NN). In order to account for autocorrelation due to the presence of a lagged dependent variable and to distinguish between persistence caused by time-invariant individual characteristics and a direct care effect we use difference GMM-IV estimation. In further analyses we assess the robustness of our results to policy reforms, different definitions of care and diagnosis decomposition.ResultsAll estimation results for the direct care effect (true state-dependence) show a positive coefficient smaller than unity with a main effect of 0.215 (p<0.01), which indicates that the process is stable. Persistence of care is found to be 0.065 (p<0.05) higher for females. Additionally, the majority of persistence of care appears to be associated with time-invariant characteristics. Further analyses indicate that (1) results are robust to different definitions of care and (2) persistence of care does not differ significantly across subgroups.ConclusionsThe results indicate that the majority of mental healthcare persistence for children and adolescents is due to time-invariant individuals characteristics. Additionally, we find that in the absence of further shocks a sudden increase of 10 care contacts in the present year is associated with an average of less than 3 additional care contacts at some point in the future. This result provides essential information about the necessity of budget increases for future years in the case of exogenous increases in healthcare use.

Does solo self-employment serve as a ‘stepping stone’ to employership?

This paper examines the extent to which solo self-employment serves as a vehicle for job creation. Using panel data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, a dynamic multinomial logit model of transitions between labour market states is estimated. The empirical strategy closely follows that used in a previous study employing household data from Germany by Lechmann and Wunder (2017). Estimates of true cross-state dependence between solo self-employment and employership are obtained that are relatively small. Further, the results imply that the probability of a male worker being an employer just two years after transitioning out of solo self-employment is only about 4% (and among women, it is just 2%). The extent of both true cross-state dependence and true state dependence in employership is, however, much greater among individuals who have demonstrated a preference for self-employment in the past. This implies that pro-entrepreneurial policies that target more ‘entrepreneurial’ individuals will have more pronounced and long-term effects in stimulating job creation.

Ageing Workforces, Ill‐health and Multi‐state Labour Market Transitions*

AbstractWe provide novel evidence on the effects of ill‐health on the dynamics of labour state transitions by considering retirement as mobility between full‐time work, part‐time work, self‐employment and inactivity. We employ a dynamic multi‐state model which accounts for state dependence and different types of unobservables. Our model allows for both individual heterogeneity and labour‐state gravity as well as correlations between labour market states. We estimate this model on rich longitudinal data from the Household, Income and Labour Dynamics in Australia Survey. We find that both ill‐health and health shocks greatly increase the probability of leaving full‐time employment and moving into inactivity. Simulated dynamic trajectories suggest larger impacts of long‐term health conditions than those of a one‐off health shock and some evidence of health‐driven retirement pathways via part‐time work and self‐employment. Our findings also indicate that the effects of health changes could be underestimated and the magnitude of true labour market state dependence overestimated if individual effects or labour dynamic transitions are not accounted for in the model.

Labour supply dynamics at the extensive and intensive margins of the UK men and women

PurposeThe purpose of this study is to enhance understanding labour supply dynamics of the UK workers by examining whether and to what extent there is state dependence in the labour supply at both the extensive and intensive margins.Design/methodology/approachA dynamic two-tiered Tobit model is applied to the first seven waves of Understanding Society: the UK Household Longitudinal Study. The model used accounts for observed and unobserved individual heterogeneity and serially correlated transitory shocks to labour supply to draw inferences on state dependence.FindingsThe results show that both observed and unobserved individual heterogeneity contributes to observed inter-temporal persistence of the labour supply of the UK workers, and the persistence remains after these factors are controlled for, suggesting true state dependence at both the extensive and intensive margins of the labour supply. The study also finds that at both the margins, the state dependence of labour supply is larger for females than for males and that for both genders the state dependence is larger for people with low education, mature aged workers and people with long-standing illness or impairment. The results also show that estimates from a conventional Tobit model may produce misleading inferences regarding labour supply at the extensive and intensive margins.Originality/valueThis study adds to the international literature on labour supply dynamics by providing empirical evidence for both the extensive and intensive margins of labour supply, while previous studies tend to focus on the extensive margin of labour force participation only. Also, unlike earlier studies that often focus on females, this study compares labour supply dynamics between males and females. The study also compares the estimates from the more flexible two-tiered Tobit model with that from the conventional Tobit model.

Local Knowledge Spillovers and Innovation Persistence of Firms

Recent empirical evidence has shown that firm’s innovation behavior exhibits high persistency but not much is known about potential contingencies affecting the degree of persistence. This paper focuses on the role of the local knowledge environment and asks how local knowledge spillovers affect firms' innovation persistence. The empirical analysis draws upon a representative panel data set of firms in Germany from 2002-2016, complemented by detailed geographic information of patent activity over discrete distances to proxy local knowledge spillovers. Based on correlated random effects probit models that control for state dependence, unobserved individual heterogeneity and endogenous initial conditions, our results corroborate former evidence that persistency in innovation is driven by true state dependence. More importantly, we find that the local patenting activity positively moderates firms' degree of persistency in innovation behavior. This is a novel firm-level mechanism that can explain the widening of spatial disparities in innovation performance. Estimations with different distance bands show that the strength of knowledge spillovers that contribute to innovation persistence via true state dependence declines rather rapidly with increasing distance.

The Future Strikes Back: Using Future Treatments to Detect and Reduce Hidden Bias.

Conventional advice discourages controlling for postoutcome variables in regression analysis. By contrast, we show that controlling for commonly available postoutcome (i.e., future) values of the treatment variable can help detect, reduce, and even remove omitted variable bias (unobserved confounding). The premise is that the same unobserved confounder that affects treatment also affects the future value of the treatment. Future treatments thus proxy for the unmeasured confounder, and researchers can exploit these proxy measures productively. We establish several new results: Regarding a commonly assumed data-generating process involving future treatments, we (1) introduce a simple new approach and show that it strictly reduces bias, (2) elaborate on existing approaches and show that they can increase bias, (3) assess the relative merits of alternative approaches, and (4) analyze true state dependence and selection as key challenges. (5) Importantly, we also introduce a new nonparametric test that uses future treatments to detect hidden bias even when future-treatment estimation fails to reduce bias. We illustrate these results empirically with an analysis of the effect of parental income on children's educational attainment.

Modelling an early warning system for currency crises: a dynamic panel probit model

Purpose- The probability of currency crisis is attempted to be predicted by analysing the lagged binary crisis variable and some macroeconomic indicators. Methodology- A new generation of early warning system model is developed in order to determine the leading indicators of the financial crises of 17 developing countries and the dynamic structure of the crises are examined by using the dynamic random effects probit model. Findings- The results show that the 12th (C1t-12), 3rd(C1t-3), 2nd(C1t-2) and 1st (C1t-1) lags of the dependent variable have a statistically significant effect in explaining the probability of the currency crisis. Conclusion- The results of the model show that true state dependence has a significant effect on the probability of currency crises in the short term. This clearly indicates that sources of endogenous persistence of crises should be taken into account in order to improve a new generation of EWS on the predictability of currency crisis.

State Dependence in Welfare Benefits in a Non‐Welfare Context

This study investigates state dependence in social assistance benefits in Turkey, where benefit receipt and persistence rates have significantly increased over the past decade. We estimate state dependence through dynamic random‐effects probit models, controlling for observed and unobserved heterogeneity, and endogenous initial conditions. In particular, we employ Wooldridge’s estimator to achieve consistent and correct estimates of state dependence and compare the results with estimates from Heckman’s reduced‐form approach as a sensitivity check. Both estimators enable us to disentangle true state dependence from its spurious components and address the potential bias due to the short panel length. Our results suggest that the receipt of benefits in the last year increases the likelihood of benefit receipt in the current year, namely the structural state dependence, by 17.2–19.5 percentage points.

Poverty Dynamics in Nairobi’s Slums: Testing for True State Dependence and Heterogeneity Effects

We investigate the factors underlying poverty transitions in Nairobi’s slums focusing on whether differences in characteristics make some individuals more prone to enter poverty and persist in, or whether past experience of poverty matters on future poverty situations. Answers to these issues are crucial for designing effective and successful poverty alleviation policies in informal residential settlements in Africa. The paper uses an endogenous switching model, which accounts for initial conditions, non-random attrition, and unobserved heterogeneity. The estimations are based on a two-wave sample of a panel dataset from the Nairobi Urban Health and Demographic Surveillance System (NUHDSS), the first urban-based Health and Demographic Surveillance Systems (HDSS) in Africa. Estimation results indicate that true state dependence (TSD) constitutes the major factor driving poverty persistence. There is little heterogeneity effects; only 10 percent of poverty persistence is likely due to heterogeneity. Moreover, even when household and individual observed characteristics differ notably, the TSD size remains very large. This implies that active anti-poverty programs aimed at breaking the cycle of poverty constitute the most appropriate policies for taking people out of poverty and preventing them to fall back in. Indeed, this does not exclude policies focusing on individual heterogeneities. Active policies for improving individual’s education, personal skills and capacities, or living environment would also allow preventing people entering poverty or persisting in.

Collaboration with External Organizations and Technological Innovations: Evidence from Spanish Manufacturing Firms

Based on the two knowledge dimensions of availability and accessibility, this study investigates the influence of cooperation with external organizations on technological, product, and process innovations. Using longitudinal data from Spanish manufacturing firms, we estimate dynamic random-effects probit models and thus take into account that technological innovations exhibit persistent behavior. We find that cooperation with suppliers and universities is positively associated with both product and process innovations. However, sectoral analysis according to technological intensity reveals that cooperation with suppliers increases the propensity to technological innovation in industries with a higher degree of technological intensity, while cooperation with universities increases the likelihood of innovation in industries with a lower degree of technological intensity. Moreover, empirical results indicate a high degree of true or genuine state dependence in both types of innovations. Based on these findings, we discuss the theoretical, managerial, and policy implications of the study.