Working papers

Abstract 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.
Keywords Inflation targeting JEL classification E44, E52, E58, F31, G15, Vicious circle, Interest rate differential, Carry trades, Index terms-Capital inflows
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Abstract 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.
Keywords Dependence, Joint life insurance, Family history, Genealogy, Grandparents-grandchildren, Annuities, Collaborative data, Information, Whole life insurance, Parents-children
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Abstract This study examines how minimum wage laws affect the share of immigrants receiving welfare benefits. Minimum wage increases might have larger effects among low-skilled immigrants than among low-skilled natives because, on average, immigrants are less productive. We develop an analytical framework in which a government legislated minimum wage increase promotes a decrease in labor demand and an increase in the earned wage. The net impact on the expected wage is then ambiguous and so is the impact on search effort of unemployed. However, we expect the reduction in labor demand to be more important for immigrants due to their lower productivity. Immigrants remain unemployed and eventually become welfare recipients. Using the French Labor Force Surveys 2003-2016 we exploit the 2006 and 2012 government legislated minimum wage increases and find consistent evidence that a discretionary increase in the minimum wage induces a rise in the share of immigrants receiving welfare benefits which is more important than the rise estimated for natives. This result is driven by low-skilled immigrants and no significant effect arises for high-skilled. Endogeneity issues are addressed through an IV approach.
Keywords Minimum wage, Welfare benefits, Immigrants
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Abstract Our 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 e˙ect 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.
Keywords Public infrastructure, Highways, Income inequality, US state panel data, Instrument variable
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Abstract 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.
Keywords Transboundary pollution, Environmental federalism, Infinite dimensional optimal control problems, Differential games in continuous time and space, Spatial diffusion, Spatial externalities
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Abstract 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.
Keywords Education, Neopatrimonialism, Regime breakdown, Regime change, Revolution
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Abstract 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.
Keywords Seasonal migration, Food security, Risk management, Weather shocks, Microfinance
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Abstract We consider agents organized in an undirected network of local complementarities. A principal with a limited budget offers costly bilateral contracts in order to increase the sum of agents' effort. We study excess-effort linear payment schemes, i.e. contracts rewarding effort in excess to the effort made in absence of principal. The analysis provides the following main insights. First, for all contracting costs, the optimal unit returns offered to every targeted agent are positive and generically heterogeneous. This heterogeneity is due to the presence of outsiders, who create asymmetric interaction between contracting agents. Second, when contracting costs are low, it is optimal to contract with everyone and optimal unit returns are identical for all agents. Third, when contracting costs are sufficiently high, it becomes optimal to target a subset of agents, and optimal targeting can lead to NP-hard problems. In particular, when the intensity of complementarities is sufficiently low, a correspondence is established between optimal targeting and the densest k subgraph problem. Overall, the optimal targeting problem involves a trade-off between centrality and budget spending-central agents are influential, but are also more budget-consuming. These considerations can lead the principal to not target central agents.
Keywords Networked synergies, Aggregate effort, Optimal group targeting, Linear contract
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Abstract 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.
Keywords Intra-personal comparisons, Memory biases, Remembered utility, Life satisfaction
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Abstract 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.
Keywords Yield Spread, Recession, Panel Binary Model, Cluster Analysis
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