This paper analyzes the link between asset bubbles, endogenous labor and capital. The question is whether endogenous labor, per se, can explain a crowding-in effect of the bubble, i.e. higher levels of capital and labor. With respect to the existing literature, our contribution is twofold. First, we explicitly and theoretically derive the conditions to have a crowding-in effect of the bubble. Second, the utility function we consider allows us to show that this result does not require an arbitrarily high elasticity of intertemporal substitution in consumption. Our result still holds for a unit value of this elascticity (Cobb-Douglas utility).
We propose a new measure of systemic risk based on interconnectedness, defined as the level of direct and indirect links between financial institutions in a correlation-based network. Deriving interconnectedness in terms of risk, we empirically show that within a financial network, indirect links are strengthened during systemic events. The relevance of our measure is illustrated at both local and global levels. Our framework offers policymakers a useful toolbox for exploring the real-time topology of the complex structure of dependencies in financial systems and for measuring the consequences of regulatory decisions.
On March 15, about 20, 000, 000 voters cast their vote for the first round of the 2020 French municipal elections. We investigate the extent to which this event contributed to the COVID-19 epidemics in France. To this end, we first predict each département's own dynamics using information up to the election to calibrate a standard logistic model. We then take advantage of electoral turnout differences between départements to distinguish the impact of the election on prediction errors in hospitalizations from that of simultaneously implemented anti-contagion policies. We report a detrimental effect of the election in locations that were at relatively advanced stages of the epidemics by the time of the election. In contrast, we show that the election did not contribute to the epidemics in départements with lower infection levels by March 15. All in all, our estimates suggest that elections accounted for about 4, 000 excess hospitalizations by the end of March, which represents 15% of all hospitalizations by this time. They also suggest that holding elections in June may not be as detrimental.
The non-take-up of social assistance has been receiving increased attention among policy makers in recent years as it would apparently underpin the effectiveness of public intervention in alleviating poverty. We examine whether receipt of private transfers affects the household decision to take-up social assistance in Germany between 2009 and 2011. We exploit the follow-up of households in the SOEP to reconstruct family links and estimate a model of welfare participation with endogenous private transfers and sample selection of the instruments. We find that 20% of the non-take-up rate is due to monetary substitution of private transfers lowering the welfare program costs. However, we find that social assistance is more effective in alleviating poverty and its intensity than private transfers.
This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.
Family history is usually seen as a significant factor insurance companies look at when applying for a life insurance policy. Where it is used, family history of cardiovascular diseases, death by cancer, or family history of high blood pressure and diabetes could result in higher premiums or no coverage at all. In this article, we use massive (historical) data to study dependencies between life length within families. If joint life contracts (between a husband and a wife) have been long studied in actuarial literature, little is known about child and parents dependencies. We illustrate those dependencies using 19th century family trees in France, and quantify implications in annuities computations. For parents and children, we observe a modest but significant positive association between life lengths. It yields different estimates for remaining life expectancy, present values of annuities, or whole life insurance guarantee, given information about the parents (such as the number of parents alive). A similar but weaker pattern is observed when using information on grandparents.
An in-depth econometric analysis of US state-level data on an annual frequency, from 1976 to 2008, sheds new light on a plausible causal link between infrastructure investments, namely public spending on highways, and income inequality. This causal relationship is drawn out by using the number of seats in the US House of Representatives Committee on Appropriations (HRCA) as an instrument to identify quasi-random variations in state-level spending on highways. An exogenous pattern which emerges when a state gains an additional member to the HRCA is that it is allocated with new federal grants. This increase in federal transfers for infrastructure financing results in slashing of expenditures on highways and a crowding-out effect of federal funding for state investments on highways. Spending cuts on highways produced by a new HRCA member being attained by a state can unwittingly cause income inequality to rise over a short two-year time horizon. Similar challenges with decentralized development to finance infrastructure via federal transfers to state and sub-national governments may be encountered by other industrially advanced, emerging and low-income developing economies. US data over the mentioned period reveal a strong positive correlation with state spending on highways and wages paid for construction jobs. Suggestive evidence indicates that the construction sector also plays an important role in the transmission channel from a rise in state spending on highways to lowering income inequality, albeit during specific intervals, as opposed to on a long-term basis.
In this paper, we revisit the theory of spatial externalities. In particular, we depart in several respects from the important literature studying the fundamental pollution free riding problem uncovered in the associated empirical works. First, instead of assuming ad hoc pollution diffusion schemes across space, we consider a realistic spatiotemporal law of motion for air and water pollution (diffusion and advection). Second, we tackle spatiotemporal non-cooperative (and cooperative) differential games. Precisely, we consider a circle partitioned into several states where a local authority decides autonomously about its investment, production and depollution strategies over time knowing that investment/production generates pollution, and pollution is transboundary. The time horizon is infinite. Third, we allow for a rich set of geographic heterogeneities across states while the literature assumes identical states. We solve analytically the induced non-cooperative differential game under decentralization and fully characterize the resulting long-term spatial distributions. We further provide with full exploration of the free riding problem, reflected in the so-called border effects. In particular, net pollution flows diffuse at an increasing rate as we approach the borders, with strong asymmetries under advection, and structural breaks show up at the borders. We also build a formal case in which a larger number of states goes with the exacerbation of pollution externalities. Finally, we explore how geographic discrepancies affect the shape of the border effects.
The occurrence of some revolutionary episodes seems initially puzzling. For example, before the 'Arab Spring', macroeconomic conditions were improving, the political leaders had been in power for a long time, and the autocrats had shown an apparent interest in the welfare of their population by investing in human capital. We argue that such a paradox can be solved by considering that high education levels are incompatible with the features characterising strong neopatrimonial states. We develop this intuition in a simple theoretical model and we test our prediction in a sequential empirical study of regime changes and regime breakdowns in a large panel of countries. We indeed find that a regime change is more likely in countries combining high neopatrimonialism and high education levels. Moreover, when a regime change happens under these circumstances, a revolution is the most likely type of regime breakdown. These results help to understand the 'Arab Spring' but are not specific to the Arab world.
This paper asks whether local savings and credit associations help poor rural households hit by climatic shocks. Combining data from an original field experiment with meteorological data, I investigate how Self-Help Groups (SHGs) allow households to cope with rainfall shocks in villages of East India over a sevenyear period. I show that SHGs withstand large rainfall shocks remarkably, and that credit flows are very stable in treated villages. As a result, treated households experience a higher food security during the lean season following a drought and increase seasonal migration to mitigate future income shocks. These results imply that small-scale financial institutions like SHGs help to finance temporary risk management strategies and to cope with important covariate income shocks such as droughts.
Can people remember correctly their past well-being? We study three national surveys of the British, German and French population, where more than 50,000 European citizens were asked questions about their current and past life satisfaction. We uncover systematic biases in recalled subjective well-being: on average, people tend to overstate the improvement in their well-being over time and to understate their past happiness. But this aggregate figure hides a deep asymmetry: while happy people recall the evolution of their life to be better than it was, unhappy ones tend to exaggerate its worsening. It thus seems that feeling happy today implies feeling better than yesterday. These results offer an explanation of why happy people are more optimistic, perceive risks to be lower and are more open to new experiences.
In this paper, we reexamine the predictive power of the yield spread across countries and over time. Using a dynamic panel/dichotomous model framework and a unique dataset covering 13 OECD countries over a period of 45 years, we empirically show that the yield spread signals recessions. This result is robust to different econometric specifications, controlling for recession risk factors and time sampling. Using a new cluster analysis methodology, we present empirical evidence of a partial homogeneity of the predictive power of the yield spread. Our results provide a valuable framework for monitoring economic cycles.
The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt hold by domestic households is high enough, global indeterminacy does not occur.
Tests are crucial to know about the number of people who have fallen ill with COVID-19 and to understand in real-time whether the dynamics of the pandemic is accelerating or decelerating. But tests are a scarce resource in many countries. The key but still open question is thus how to allocate tests across sub-national levels. We provide a data-driven and operational criterion to allocate tests efficiently across regions or provinces, with the view to maximize detection of people who have been infected. We apply our criterion to Italian regions and compute the shares of tests that should go to each region, which are shown to differ significantly from the actual distribution.
Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection , but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the-liquidity or collateral-role attributed to the bubble. We finally extend our analysis to a stochas-tic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.
The radical uncertainty around the current COVID19 pandemics requires that governments around the world should be able to track in real time not only how the virus spreads but, most importantly, what policies are effective in keeping the spread of the disease under check. To improve the quality of health decision-making, we argue that it is necessary to monitor and compare acceleration/deceleration of confirmed cases over health policy responses, across countries. To do so, we provide a simple mathematical tool to estimate the convexity/concavity of trends in epidemiological surveillance data. Had it been applied at the onset of the crisis, it would have offered more opportunities to measure the impact of the policies undertaken in different Asian countries, and to allow European and North-American governments to draw quicker lessons from these Asian experiences when making policy decisions. Our tool can be especially useful as the epidemic is currently extending to lower-income African and South American countries, some of which have weaker health systems.
We study intergenerational wealth mobility and its evolution in France over the period 1960-2015. More precisely, we identify the persistence of homeownership between parents and children as indicator of wealth mobility in France. We also provide evidence about different sources of heterogeneity in intergenerational homeownership associations in terms of education and geographic areas. Finally, we study the main transmission mechanism: direct financial transfers. We use all available French wealth surveys since 1986 and perform a data panelization using retrospective information. We document multiple results. First, intergenerational correlation in homeownership status has dramatically increased, particularly since the 1990s. Second, this rise is concentrated among people aged between 20 and 39 years old. Third, we observe higher wealth persistence at the top. Four, we find a strong significant effect of direct wealth transfers on the probability of becoming homeowner, which lasts 5 years. Moreover, parental support is substantially more important for households with no diploma, suggesting a crucial role of human capital on wealth formation. Finally, this phenomenon is intensified in areas with high urban concentration; highlighting the potential role of house prices as determinant of wealth social determinism.
This paper provides a tool to build climate change scenarios to forecast Gross Domestic Product (GDP), modelling both GDP damage due to climate change and the GDP impact of mitigating measures. It adopts a supply-side, long-term view, with 2060 and 2100 horizons. It is a global projection tool (30 countries / regions), with assumptions and results both at the world and the country / regional level. Five different types of energy inputs are taken into account according to their CO2 emission factors. Full calibration is possible at each stage, with estimated or literature-based default parameters. In particular, Total Factor Productivity (TFP), which is a major source of uncertainty on future growth and hence on CO2 emissions, is endogenously determined, with a rich modeling encompassing energy prices, investment prices, education, structural reforms and decreasing return to the employment rate. We present four scenarios: Business As Usual (BAU), with stable energy prices relative to GDP price; Decrease of Renewable Energy relative Price (DREP), with the relative price of non CO2 emitting electricity decreasing by 2% a year; Low Carbon Tax (LCT) scenario with CO2 emitting energy relative prices increasing by 1% per year; High Carbon Tax (HCT) scenario with CO2 emitting energy relative prices increasing by 3% per year. At the 2100 horizon, global GDP incurs a loss of 12% in the BAU, 10% in the DREP, 8% in the Low Carbon Tax scenario and 7% in the High Carbon Tax scenario. This scenario exercise illustrates both the "tragedy of the horizon", as gains from avoided climate change damage net of damage from mitigating policies are negative in the medium-term and positive in the long-term, and the "tragedy of the commons", as climate change damage is widely dispersed and particularly severe in developing economies, while mitigating policies should be implemented in all countries, especially in advanced countries modestly affected by climate change but with large CO2 emission contributions.
Although it is widely acknowledged that non-cognitive skills matter for adult outcomes, little is known about the role played by family environment in the formation of these skills. We use a longitudinal survey of children born in the UK in 2000-2001, the Millennium Cohort Study by the Centre for Longitudinal Studies, to estimate the effect of family size on socio-emotional skills, measured by the Strengths and Difficulties Questionnaire. To account for the endogeneity of fertility decisions, we use a well-known instrumental approach that exploits parents' preference for children's gender diversity. We show that the birth of a third child negatively affects the socio-emotional skills of the first two children in a persistent manner. However, we show that this negative effect is entirely driven by girls. We provide evidence that this gender effect is partly driven by an unequal response of parents' time investment in favour of boys and, to a lesser extent, by an unequal demand for household chores.
How to allocate limited resources among children is a crucial household decision, especially in developing countries where it might have strong implications for children and family survival. We study how variations in parental income in the early life of their children affect subsequent child health and parental investments across siblings, using micro data from multiple waves of the Demographic and Health Survey (DHS) spanning 54 developing countries. Variations in the world prices of locally produced crops are used as measures of local income. We find that children born in periods of higher income durably enjoy better health and receive better human capital (health and education) investments than their siblings. Children whose older siblings were born during favourable income periods receive less investment and exhibit worse health in absolute terms. We interpret these within-household reallocations in light of economic and evolutionary theories that highlight the importance of efficiency considerations in competitive environments. Finally, we study the implications of these for aggregate child health inequality, which is found to be higher in regions exposed to more volatile crop prices.
Most enlightenment philosophers argued that the separation between Church and State would prevent capture of resources by one state religion. We formalize and test a theory that addresses a different danger. We demonstrate that a reduction in the separation between Church and State can be corrosive to political institutions, especially the Judiciary. We show that religious leaders use their high legitimacy to gain political office, and become particularly abusive politicians, misusing their political authority to undermine the independence of the Judiciary. We provide a theoretical framework and estimate the structural equations of our theory using data from Pakistan. Our empirical strategy exploits the plausibly exogenous timing of a military coup to provide causal evidence for the key predictions of our theory.
In this paper, we consider a spatiotemporal growth model where a social planner chooses the optimal location of economic activity across space by maximization of a spatiotemporal utilitarian social welfare function. Space and time are continuous, and capital law of motion is a parabolic partial differential diffusion equation. The production function is AK. We generalize previous work by considering a continuum of social welfare functions ranging from Benthamite to Millian functions. Using a dynamic programming method in infinite dimension, we can identify a closed-form solution to the induced HJB equation in infinite dimension and recover the optimal control for the original spatiotemporal optimal control problem. Optimal stationary spatial distributions are also obtained analytically. We prove that the Benthamite case is the unique case for which the optimal stationary detrended consumption spatial distribution is uniform. Interestingly enough, we also find that as the social welfare function gets closer to the Millian case, the optimal spatiotemporal dynamics amplify the typical neoclassical dilution population size effect, even in the long-run.