Working Paper Series Research Articles

Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles

The poor live paycheck to paycheck and are repeatedly exposed to strong cyclical income fluctuations. We investigate whether such income fluctuations affect risk preference among the poor. If risk preference temporarily changes around payday, optimal decisions made before payday may no longer be optimal afterward, which could reinforce poverty. By exploiting Social Security payday cycles in the US, we find that risk preference among the poor relying heavily on Social Security changes around payday. Rather than cognitive decline before payday, the deterioration of mental health and relative deprivation may play a role. We find similar evidence among the Japanese elderly. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

A Behavioral Explanation for the Puzzling Persistence of the Aggregate Real Exchange Rate

At the aggregate level, the evidence that deviations from purchasing power parity (PPP) are too persistent to be explained solely by nominal rigidities has long been a puzzle (Rogoff, 1996). Another puzzle from the micro price evidence of the law of one price (LOP), which is the basic building block of PPP, is that LOP deviations are less persistent than PPP deviations. To reconcile the empirical evidence, we adapt the model of behavioral inattention in Gabaix (2014, 2020) to a simple two-country sticky-price model. We propose a simple test of behavioral inattention and find strong evidence in its favor using micro price data from US and Canadian cities. Calibrating behavioral inattention with our estimates, we show that our model reconciles the two puzzles relating to the PPP and LOP. First, the PPP deviations are more than twice as persistent as PPP deviations explained only by sticky prices. Second, the LOP deviations decrease to less than two-thirds of the PPP deviations in the degree of persistence. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Racial Disparities in the Health Effects From Air Pollution: Evidence From Ports

This study examines the uneven effects of air pollution from maritime ports on physical and mental health across racial groups. We exploit quasi-random variation in vessels in port from weather events far out in the ocean to estimate how port traffic influences air pollution and human health. We find that one additional vessel in a port over a year leads to 3.0 hospital visits per thousand Black residents within 25 miles of the port and only 1.0 per thousand for whites. We assess a port-related environmental regulation and show that the policy can help alleviate racial inequalities in health outcomes. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Changing Relationship between Bodyweight and Longevity in High- and Low-Income Countries

Standard measures of bodyweight (overweight and obese, for example) fail to reflect technological progress over time - and in particular, recent progress disproportionately promoting longevity at higher bodyweights (and differences in access to it). This paper builds on the pioneering work of Hans Waaler (Waaler, 1984) and Robert Fogel (Fogel, 1994) to empirically estimate how technological progress, and differential access to it, have fundamentally transformed the relationship between body mass index (BMI) and longevity in high-, middle-, and low-income countries. Importantly, we show that the combined effect of technological progress and access to it across countries is so profound that the share of national populations above mortality-minimizing bodyweight is not clearly greater in countries with higher overweight and obesity rates (as traditionally defined) - and in fact, relative to current standards, a larger share of low-income countries’ populations can be unhealthily heavy. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Unequal Jury Representation and its Consequences

We analyze the extent and consequences of unequal representation on juries in Harris County, Texas. We first document that residents from predominantly white and high-income neighborhoods are substantially over-represented on juries. Using quasi-random variation in those called for jury duty each day, we next establish that Black defendants are more likely to be convicted and receive longer sentences from juries with more residents from these over-represented neighborhoods. We estimate that equal representation would reduce Black defendants’ median sentence length by 50 percent and the probability of receiving a life sentence by 67 percent. Straightforward remedies could mitigate this severe bias. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Policy Implications of Non-Linear Effects of Tax Changes on Output

In an earlier paper, titled Non-linear effects of tax changes on output: The role of the initial level of taxation, we estimated tax multipliers using (i) a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014, and (ii) the so-called narrative approach developed by Romer and Romer (2010) to properly identify exogenous tax changes. The main finding is that, in line with existing theoretical distortionary and disincentive-based arguments, the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase. This companion paper first shows that these findings have important policy implications, given that the initial level of taxes varies greatly across countries and thus so will the potential output effect of changing tax rates. The paper then turns to some specific policy applications. It focuses on the relevance of the arguments for revenue mobilization in countries with low levels of provision of public goods and social and infrastructure gaps, as well as in commodity-dependent countries. The paper then considers some practical implications for the standard debt sustainability analysis. Lastly, it evaluates the implications of the findings for the Laffer curve. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Optimal Bank Reserve Remuneration and Capital Control Policy

This paper studies optimal capital-control and bank-reserve remuneration policy in an open economy with a banking channel and a collateral constraint that limits household debt by a fraction of income. It finds that the unregulated economy borrows too little relative to what is optimal (underborrowing). This finding contrasts with the standard overborrowing result obtained in the absence of a banking channel. Under optimal policy, the central bank injects bank reserves during recessions. In this way, the monetary authority is able to uncouple household deleveraging from economy-wide deleveraging, thereby ameliorating the severity of the financial crisis. The paper documents that in emerging and developed economies the lending spread (lending rate minus deposit rate) displayed a muted response during the 2007-2009 financial crisis. This fact is consistent with a decline in the demand rather than in the supply of loans and gives credence to models in which the collateral constraint is placed at the level of the nonfinancial sector as opposed to at the level of the bank. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Delayed Creative Destruction: How Uncertainty Shapes Corporate Assets

We show how uncertainty shapes the asset allocation, composition, productivity, and value of capital-intensive firms. We do so using detailed, near-universal data on shipping firms’ new orders, secondary-market transactions, and demolition of ships. Firms curtail both the acquisition and disposal of vessels in response to heightened uncertainty. The mechanism operates primarily through cuts in new ship orders and demolition of older ships — decisions that are costlier to reverse vis-a-vis deals in the used ship market. These dynamics are more pronounced when secondary ship markets are illiquid, as firms face stronger incentives to delay their decisions. The rise of Somali pirate attacks in 2009–2011 is used as a shock to well-defined shipping sectors to corroborate our findings. Critically, uncertainty prompts firms to concentrate their fleets into narrower, less productive portfolios, leading to value losses. Our work is novel in showing that uncertainty hampers creative destruction, slowing both the adoption of innovation embodied in new capital and the disposal of old capital. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Data Privacy Paradox and Digital Demand

A central issue in privacy governance is understanding how users balance their privacy preferences and data sharing to satisfy service demands. We combine survey and behavioral data of a sample of Alipay users to examine how data privacy preferences affect their data sharing with third-party mini-programs on the Alipay platform. We find that there is no relationship between the respondents’ self-stated privacy concerns and their number of data-sharing authorizations, confirming the puzzling data privacy paradox. Instead of attributing this paradox to the respondents’ unreliable survey responses, resignation from active protection of their data privacy, or behavioral factors in making their data-sharing choices, we show that this phenomenon can be explained by a curious finding that users with stronger privacy concerns tend to benefit more from using mini-programs. This positive relationship between privacy concerns and digital demands further suggests that consumers may develop data privacy concerns as a by-product of the process of using digital applications, not because such concerns are innate. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Diversity in Schools: Immigrants and the Educational Performance of U.S. Born Students

We study the effect of exposure to immigrants on the educational outcomes of US-born students, using a unique dataset combining population-level birth and school records from Florida. This research question is complicated by substantial school selection of US-born students, especially among White and comparatively affluent students, in response to the presence of immigrant students in the school. We propose a new identification strategy to partial out the unobserved non-random selection into schools, and find that the presence of immigrant students has a positive effect on the academic achievement of US-born students, especially for students from disadvantaged backgrounds. Moreover, the presence of immigrants does not affect negatively the performance of affluent US-born students, who typically show a higher academic achievement compared to immigrant students. We provide suggestive evidence on potential channels. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Real Credit Cycles

We incorporate diagnostic expectations, a psychologically founded model of overreaction to news, into a workhorse business cycle model with heterogeneous firms and risky debt. A realistic degree of diagnosticity, estimated from the forecast errors of managers of US listed firms, creates financial fragility during good times. This mechanism produces countercyclical credit spreads and yields two key features of observed credit cycles. First, it generates boom-bust dynamics at the firm and aggregate levels: cheap credit predicts future increases in spreads, low bond returns, and investment drops. Second, it produces the spike in spreads observed in 2008-9 from modest negative TFP shocks. Diagnostic expectations offer a parsimonious mechanism generating realistic financial reversals in conventional business cycle models. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Surviving the Fintech Disruption

This paper studies how demand for labor reacts to financial technology (fintech) shocks based on comprehensive databases of fintech patents and firm job postings in the U.S. during the past decade. We first develop a measure of fintech exposure at the occupation level by intersecting the textual information in job task descriptions and fintech patents. We then document a significant decline of job postings in the most exposed occupations, and an increase in industry as well as geographical concentration of these occupations. Firms resort to an upskilling strategy in face of the fintech disruption, requiring “combo” (finance and software) skills, higher education attainments, and longer work experiences in the hiring of fintech-exposed jobs. Financial firms and those with high innovation outputs are able to offset the disruptive effect from the fintech shock. Among innovating firms, however, only inventors (but not acquisition-driven innovators) experience growth in hiring, sales, investment, and enjoy better returns on assets. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Cheap Talk Messages for Market Design: Theory and Evidence from a Labor Market with Directed Search

In a model with cheap talk, employers can send messages about their willingness to pay for higher ability workers, which job-seekers can use to direct their search and tailor their wage bid. Introducing such messages leads—under certain conditions—to an informative separating equilibrium which affects the number of applications, types of applications, and wage bids across firms. This model is used to interpret an experiment conducted in a large online labor market: employers were given the opportunity to state their relative willingness to pay for more experienced workers, and workers can easily condition their search on this information. Preferences were collected for all employers, but only treated employers had their signal revealed to job-seekers. In response to revelation of the cheap talk signal, job-seekers targeted their applications to employers of the right “type” and they tailored their wage bids, affecting who was matched to whom and at what wage. The treatment increased measures of match quality through better sorting, illustrating the power of cheap talk to improve market outcomes. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

How Do Physicians Respond to Malpractice Allegations? Evidence from Florida Emergency Departments

A substantial literature has studied the influence of malpractice pressure on physician behavior. However, these studies generally focus on malpractice pressure stemming from state laws that govern liability exposure, which may be unknown or not salient to physicians. We test how physicians respond to malpractice allegations made directly against them. Our sample is Emergency Department physicians in Florida, where we have the universe of data on patients and how they are treated along with a census of malpractice complaints. We find that physicians oversee 9% fewer discharges after malpractice allegations and treat each discharge 4% more expensively after an allegation. These effects are true for both allegations that result in money paid and allegations which are dropped. Further, the increase in treatment is generalized, i.e., not limited to patients with conditions similar to what the physician is reported for. The results suggest significant, if modest, impacts of malpractice claims on medical practice. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Sovereign Debt Ratchets and Welfare Destruction

An impatient and risk-neutral government can sell bonds at any time to a more patient group of competitive lenders. The key problem: the government cannot commit to either a particular financing strategy, or a default strategy. Despite risk-neutrality, in equilibrium debt adjusts slowly towards a target debt-to-income level, exacerbating booms and busts. Most strikingly, for any debt maturity structure, the gains from trade are entirely dissipated when trading opportunities are continuous, as lenders compete with each other and the government competes with itself. Moreover, citizens who are more patient than their government are strictly harmed by the unrestricted borrowing. We fully characterize debt dynamics, ergodics, and comparative statics when income follows a geometric Brownian motion, and analyze several commitment devices that allow the sovereign to recapture some gains from trade: self-imposed restrictions on debt issuances and levels, as well as “market-imposed” discipline. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Effect of Beverage Taxes on Youth Consumption and BMI: Evidence from Mauritius

Taxes on sugar-sweetened beverages (SSBs) are relatively new and there is little evidence about their impact on SSB consumption or body mass index (as opposed to prices, purchases, or sales), their impact on youth (as opposed to on adults), or their impact in non-Western nations. This paper adds to the evidence base on all of these dimensions by estimating the effect of an SSB tax on the consumption and BMI of youth in Mauritius, an island nation in the Indian Ocean, which we compare to Maldives, another island nation in the Indian Ocean which did not implement an SSB tax during the time of our data. Results of difference-in-differences models indicate that the tax in Mauritius had no detectable impact on the consumption of SSBs or the body mass index of the pooled sample of boys and girls. However, models estimated separately by sex indicate that the probability that boys consumed SSBs fell by 9.4 percentage points (11%). These are among the first estimates of the effect of SSB taxes on youth consumption, and contribute to the limited evidence base on the impact of SSB taxes on weight, or in non-Western countries. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

On the Distribution of Estates and the Distribution of Wealth: Evidence from the Dead

Detailed information about the distribution of estates left at death has commonly served as the basis for the estimation of wealth distributions among the living via the mortality multiplier method. The application of detailed mortality rates by demographics and other determinants of mortality is crucial for obtaining an unbiased representation of the wealth distribution of the living. Yet, in this paper we suggest that a simplified mortality multiplier method, derived using average mortality rates and aggregate tabulations by estate size, may be sufficient to derive compelling estimates of wealth concentration. We show that the application of homogeneous multipliers leads to estimates that are close in level and trend to the concentration of wealth derived in the existing literature with the detailed mortality multiplier method for a variety of countries. The use of mortality rates graduated by estate size does not confute this finding. We also derive the general formal conditions for the similarity between the distributions of wealth of the living and estates at death and discuss the main caveats. These findings may unlock a wide array of aggregate estate tabulations, previously thought to be unusable, for estimating historical trends of wealth concentration. (Stone Center on Socio-Economic Inequality Working Paper Series)

The Complementarity Between Man and Machine in Forecasting

This paper quantifies the amount of noise and bias in analysts’ forecast of corporate earnings at various horizons. We first show analyst forecasts outperform statistical forecasts at short-horizons, but underperform at longer horizons. We next decompose the relative accuracy of these forecasts into three components: (i) noise, (ii) bias and (iii) analysts’ information advantage over statistical forecasts. We find the information advantage is constant across forecasting horizons, while both noise and bias are increase linearly. We then show most existing models lack a mechanism to account for these facts. To generate such a mechanism, we consider a parsimonious variant of the model of Patton and Timmermann (2010) with a noisy cognitive default and show it quantitatively fits the data. The intuition underlying this model is that forecasters rely on their biased and noisy defaults more at longer horizons, as rational forecasts are less accurate. This model also quantitatively matches two non-targeted empirical relationships: (i) analyst disagreement increases with horizon and (ii) noise is an increasing function of volatility. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Uncovering the Hidden Effort Problem

We use machine learning to analyze minute-by-minute Bloomberg online status data and study how the effort provision of top executives in public corporations affects firm value. While executives likely spend most of their time doing other activities, Bloomberg usage data allows us to characterize their work habits. We document a positive effect of effort on unexpected earnings, cumulative abnormal returns following firm earnings announcements, and credit default swap spreads. We form long-short, calendar-time, effort portfolios and show that they earn significant average daily returns. Finally, we revisit several agency issues that have received attention in the prior academic literature on executive compensation. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Effects of Scaling Up Private School Choice Programs on Public School Students

Using a rich dataset that merges student-level school records with birth records, and a student fixed effect design, we explore how the massive scale-up of a Florida private school choice program affected public school students’ outcomes. Expansion of the program produced modestly larger benefits for students attending public schools that had a larger initial degree of private school options, measured prior to the introduction of the voucher program. These benefits include higher standardized test scores and lower absenteeism and suspension rates. Effects are particularly pronounced for lower-income students, but results are positive for more affluent students as well. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.