Working papers

Scrambled Questions Penalty in Multiple Choice Tests: New Evidence from French Undergraduate Students
Morgan Raux, Marc Sangnier, Tanguy Van Ypersele

This note evaluates the scrambled questions penalty using multiple choice tests taken by first-year undergraduate students who follow a microeconomics introductory course. We provide new evidence that students perform worse at scrambled questionnaires than at logically ordered ones. We improve on previous studies by explicitly modeling students individual skills thanks to a fixed effects regression. We further show that the scrambled questions penalty does not differ along gender but varies along the distribution of students’ skills and mostly affects students with lower-intermediate skills.

Keywords: multiple choice tests, scrambled questions, student performance
Download PDF icon wp_2016_-_nr_44.pdf (598.26 KB)
Absolute Qualified Majoritarianism: How Does the Threshold Matter?
Ali Ihsan Ozkes, M. Remzi Sanver

We study absolute qualified majority rules in a setting with more than two alternatives. We show that given two qualified majority rules, if transitivity is desired for the societal outcome and if the thresholds of one of these rules are at least as high as the other's for any pair of alternatives, then at each preference profile the rule with higher thresholds results in a coarser social ranking. Hence all absolute qualified majority rules can be expressed as specific coarsenings of the simple majority rule.

Keywords: simple majority rule, qualified majority rules
Download PDF icon wp_2016_-_nr_43.pdf (580.56 KB)
Education Politics, Schooling Choice and Public School Quality: The Impact of Income Polarisation
Majda Benzidia, Michel Lubrano, Paolo Melindi-Ghidi

Do communities with the same level of inequality but a different level of income polarisation perform differently in terms of public schooling? To answer this question, we extend the theoretical model of schooling choice and voting developed by de la Croix and Doepke (2009), introducing a more general income distribution characterised by a three-member mixture instead of a single uniform distribution. We show that not only income inequality, but also income polarisation, matters in explaining disparities in public education quality across communities. Public schooling is an important issue for the middle class, which is more inclined to pay higher taxes in return for better public schools. Contrastingly, poorer households may be less concerned about public education, while rich parents are more willing to opt-out of the public system, sending their children to private schools. Using micro-data covering 724 school districts of California and introducing a new measure of income polarisation, we find that school quality in low-income districts depends mainly on income polarisation, while in richer districts it depends mainly on income inequality.

Keywords: schooling choice, income polarisation, probabilistic voting, education politics, Bayesian inference
Download PDF icon wp_2016_-_nr_42.pdf (986.64 KB)
Growth and Agglomeration in the Heterogeneous Space: A Generalized AK Approach
Raouf Boucekkine, Giorgio Fabbri, Salvatore Federico, Fausto Gozzi

We provide with an optimal growth spatio-temporal setting with capital accumulation and diffusion across space in order to study the link between economic growth triggered by capital spatio-temporal dynamics and agglomeration across space. We choose the simplest production function generating growth endogenously, the AK technology but in sharp contrast to the related literature which considers homogeneous space, we derive optimal location outcomes for any given space distributions for technology (through the productivity parameter A) and population. Beside the mathematical tour de force, we ultimately show that agglomeration may show up in our optimal growth with linear technology, its exact shape depending on the interaction of two main effects, a population dilution effect versus a technology space discrepancy effect.

Keywords: growth, agglomeration, heterogeneous and continuous space, capital mobility, infinite dimensional optimal control problems
Download PDF icon wp_2016_-_nr_41.pdf (3.75 MB)
Is it Better to Work When We Are Older? An Empirical Comparison Between France and Great Britain
Kadija Charni

Classical literature uses the cross-sectional age-earnings profile to describe how the earnings evolve over the life cycle. Using a cohort analysis, I argue that this interpretation of age-earnings profile is not correct. I show that the cohort effects largely explain the decline observed at older ages. I illustrate this point by using a rotating panel data from France and a British longitudinal panel dataset for the period 1991 to 2007. I find no clear evidence that the earnings decline at older age, although the profiles are different between countries. Earnings for French workers rise linearly with age, with a further increase at the end of career, while it becomes flat for older workers in Great Britain. Overlapping cohorts provide an explanation of the observed decline of earnings for older workers in cross-sectional data. This suggests that cross-section age-earnings profile fails to represent the individual age-earnings profile.

Keywords: age-earnings profile, older workers, cohort analysis
Download PDF icon wp_2016_-_nr_40.pdf (2.28 MB)
The Tree that Hides the Forest: A Note on Revealed Preference
João V. Ferreira

The common interpretation given to choice behavior that satisfies the traditional revealed preference axioms is that it results from the maximization of a single preference. We show that choice data alone does not enable one to rule out the possibility that the choice behavior that satisfies the revealed preference axioms is instead the result of the aggregation of a collection of distinct preferences. In particular, we show that any ordering is observationally equivalent to a majoritarian aggregation of a collection of distinct dichotomous orderings. We also show that any ordering is observationally equivalent to a Borda’s aggregation of a collection of distinct linear orderings.

Keywords: revealed preference theory, rationalization, dichotomous preferences, aggregation rules, choice data
Download PDF icon wp_2016_-_nr_39.pdf (553.99 KB)
Israel's Open-Secret Trade
Lorenzo Rotunno, Pierre-Louis Vézina

This paper uncovers and quantifies Israel’s exports to countries that ban trade with Israel. Israel exported a total of $6.4 billion worth of merchandise to boycott countries between 1962 and 2012, and most of this trade is illicit, i.e. not recorded by the importers. We find that electronic exports to Malaysia account for the lion’s share of this trade but it also includes a wide array of products from footwear to fruit and vegetables. Our estimates suggest Israel’s exports to these countries would be 10 times larger without the boycott. On top of providing further evidence on the unintended consequences of unilateral trade bans, this paper provides a case study on the role of politics in international trade.

Keywords: trade policy, Israel, illegal trade
Download PDF icon wp_2016_-_nr_38.pdf (609.55 KB)
Implementation of the Lindahl Correspondance via Simple Indirect Mechanisms
Hassan Benchekroun, Charles Figuières, Mabel Tidball

Our paper proposes an original angle to study the free-rider problem in the provision of public goods when the regulator has no information about agents' preferences. For a given outcome - specifically a Lindahl allocation - we ask what assumptions have to be imposed on simple mechanisms (in a precisely defined sense) that have the ability to Nash-implement it. Our answer lies in two main results: i) transfers necessarily belongs to a class of mechanisms that are linear in individual contributions to the public good, ii) there exists a subset of this class that fully implement Lindahl allocations. This subset encompasses, but does not reduce to, Walker (1981).

Keywords: Lindahl allocations, mechanism design
Download PDF icon wp_2016_-_nr_37.pdf (520.75 KB)
Job Protection, Housing Market Regulation and the Youth
Antoine Bonleu, Bruno Decreuse, Tanguy Van Ypersele

Young Europeans experience high unemployment rates, job instability and late emancipation. Meanwhile they do not support reforms weakening protection on long-term contracts. In this paper, we suggest a possible rationale for such reform distaste. When the rental market is very regulated, landlords screen applicants with regard to their ability to pay the rent. Protecting regular jobs offers a second-best technology to sort workers, thereby increasing the rental market size. We provide a model where non-employed workers demand protected jobs despite unemployment and the share of short-term jobs increase, whereas rents, wages and the individual risk of dismissal are unaffected.

Keywords: labor market dualism, rent default, screening
Download PDF icon wp_2016_-_nr_36.pdf (1.11 MB)
Political Connections and Insider Trading
Thomas Bourveau, Renaud Coulomb, Marc Sangnier

This paper investigates whether political connections affect individuals’ propensity to engage in illegal activities in financial markets. We use the 2007 French presidential election as marker of change in the value of political connections, in a difference-in-differences research design. We examine the behavior of directors of publicly listed companies who are connected to the future president through campaign donations or direct friendships, relative to that of other non-connected directors, before and after the election. We uncover indirect evidence that connected directors do more illegal insider trading after the election. More precisely, we find that purchases by connected directors trigger larger abnormal returns, and that connected directors are more likely not to comply with trading disclosure requirements and to trade closer to major corporate events.

Keywords: political connections, white-collar crime, insider trading
Download PDF icon wp_2016_-_nr_35.pdf (799.3 KB)
Wage Inequality and Skill Supplies in a Globalised World
Lorenzo Rotunno, Adrian Wood

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results resolve a conflict between the predictions of standard trade theory and experience of how labour markets work. We show that relative wages respond to variation in relative skill supplies in countries that trade, as intuition and much other evidence suggest, but also that the wage response decreases as trade barriers fall and that, as trade theory suggests, is weak in very open economies.

Keywords: Heckscher-Ohlin, trade and wages, wage inequality, labour markets
Download PDF icon wp_2016_-_nr_34.pdf (968.45 KB)
Production Networks
Kenan Huremovic, Fernando Vega-Redondo

In this paper, we model the economy as a production network of competitive firms that interact in a general-equilibrium setup. First, we find that, at the unique Walrasian equilibrium, the profit of each active firm is proportional to (a suitable generalization of) its Bonacich centrality. We also determine consumer welfare at equilibrium and characterize efficient networks. Then we proceed to conduct a broad range of comparative-static analyses. These include the effect on profits and welfare of: (a) distortions (e.g. tax/subsidies) imposed on the whole economy or specific firms; (b) structural changes such as the addition of links and the elimination of nodes; (c) productivity and preference changes. We discover that the induced effects are in general nonmonotone, depend on global network features, and impinge on each sector depending on the pattern of incentralities displayed by its input providers and output users. Furthermore, the inter-sector “linkages” underlying these effects can usually be decomposed – following the heuristic dichotomy proposed by Hirschman (1958) – into a forward (push) component and a backward (pull) one. Finally, we undertake some preliminary analysis of firm dynamics and illustrate that, when evaluating policies of support and shock mitigation from a dynamic viewpoint, the reliance on strict market-based criteria can be quite misleading in terms of social welfare.

Keywords: production, networks, distortions, centrality, profit
Download PDF icon wp_2016_-_nr_33.pdf (1.02 MB)
Employment, Hours and the Welfare Effects of Intra-Firm Bargaining
Maarten Dossche, Vivien Lewis, Céline Poilly

Intra-firm bargaining between a multiple-worker firm and an individual employee leads to overhiring. Taking advantage of the decreasing returns to scale in employment, the firm can reduce the marginal product by hiring an additional worker, thereby reducing the bargaining wage paid to all existing employees. We show that this externality is amplified when firms can adjust hours per worker as well as employment. Hours are too low at the steady state. This misallocation of labor leads to sizeable welfare losses. Our finding is important for economies in which hours adjustment play an important role as it does in many Euro Area countries.

Keywords: intra-firm bargaining, distortions, optimal monetary policy
Download PDF icon wp_2016_-_nr_32.pdf (750.5 KB)
La Visibilité comme Ressource dans la Gouvernance des Circuits Courts : Une Approche Institutionnaliste de l'Évaluation pour l'Observatoire des Circuits Courts de PACA
Noé Guiraud, Juliette Rouchier

Les circuits courts semblent à l'heure actuelle dans une phase d’institutionnalisation avérée, en particulier du fait du positionnement croissant des politiques publiques et des mises en réseau multi-scalaires et inter-sectorielles des acteurs. Les observatoires se multiplient : nous étudions celui mis en place par le Conseil Régional PACA. À travers une approche inspirée du cadre d'analyse d'Elinor Ostrom, nous identifions l'impact de cet observatoire sur la capacité des acteurs et participants à faire émerger des règles qui résolvent les dilemmes sociaux liés à la ressource clef du système : la visibilité, à la fois produite et consommée au sein de l'observatoire.

Keywords: observatoire, Institutional Analysis and Developement, visibilité, circuits courts
Download PDF icon wp_2016_-_nr_31.pdf (8.6 MB)
Non-Existence of Optimal Programs in Continuous Time
Giorgio Fabbri, Silvia Faggian, Giuseppe Freni

We report an example of a two-dimensional undiscounted convex optimal growth model in continuous time in which, although there is a unique "golden rule", no overtaking optimal solutions exists in a full neighborhood of the steady state. The example proves, for optimal growth models, a conjecture advanced in 1976 by Brock and Haurie that the minimum dimension for non-existence of overtaking optimal programs in continuous time is 2.

Keywords: optimal growth, overtaking, continuous time models
Download PDF icon wp_2016_-_nr_30.pdf (654.66 KB)
Inequality, Educational Choice and Public School Quality in Income Mixing Communities
Paolo Melindi-Ghidi

Why, in some urban communities, do rich and poor households cohabit while, in others, we observe sorting by income? To answer this question I develop a two-community general equilibrium framework of school quality, residential choice and tax decision with probabilistic voting. The model predicts that in highly unequal societies in which households segregate by schooling, low- and high-income households choose to live in the same community. When there is less inequality, we observe the typical sorting by income across communities. The theoretical model suggests that the effect of inequality on the quality of public schooling is ambiguous and depends on the relative endowments of housing in the two communities. When inequality increases, if housing in the community where rich and poor households cohabit is affordable, then an inflow of high-income middle class households towards this community emerges. As a consequence, inequality negatively impacts the quality of public schooling due to an ends-against-the-middle coalition that pushes tax rates down.

Keywords: Inequality, probabilistic voting, segregation, income mixing equilibrium
Download PDF icon wp_2016_-_nr_29.pdf (1.41 MB)
A Bayesian Look at American Academic Wages: The Case of Michigan State University
Majda Benzidia, Michel Lubrano

The paper investigates academic wage formation inside Michigan State University and develops tools in order to detect the presence of possible superstars. We model wage distributions using a hybrid mixture formed by a lognormal distribution for regular wages and a Pareto distributions for higher wages, using a Bayesian approach, particularly well adapted for inference in hybrid mixtures. The presence of superstars is detected by studying the shape of the Pareto tail. Contrary to usual expectations, we did found some evidence of superstars, but only when recruiting Assistant Professors. When climbing up the wage ladder, superstars disappear. For full professors, we found a phenomenon of wage compression as if there were a higher bound, which is just the contrary of a superstar phenomenon. Moreover, a dynamic analysis shows that many recruited superstars did not fulfill the university expectations as either they were not promoted or left for lower ranked universities.

Keywords: academic market, wage formation, superstars, tournaments theory, Bayesian inference, hybrid mixtures
Download PDF icon wp_2016_-_nr_28.pdf (692.59 KB)
Power-Law Distribution in the External Debt-to-Fiscal Revenue Ratios: Empirical Evidence and a Theoretical Model. Appendices
Gilles Dufrenot, Anne-Charlotte Paret-Onorato

This paper provides evidence that the external debt-to-fiscal revenue ratio in the emerging countries follows a power-law distribution. Such a distribution reflects the fact that external debt distress or debt crises correspond to extreme events that have been found to happen fairly often. We formally test the hypothesis of a power-law, going further than the usual visual inspection of the distribution of the variable of interest on a doubly logarithmic scale. We further show that such a distribution can be derived from a theoretical model in which uncertainty comes from tax evasion and corruption. Using the framework of an optimal stochastic growth model, we model the external debt-to-fiscal revenue ratio as a diffusion process for which the stochastic steady state distribution is derived using the properties of Itô diffusion processes.

Keywords: power-law, stochastic growth, external debt, emerging countries
Download PDF icon wp_2016_-_nr_27.pdf (644.37 KB)
Violence against Rich Ethnic Minorities: A Theory of Instrumental Scapegoating
Yann Bramoullé, Pauline Morault

In many parts of the developing world, ethnic minorities play a central role in the economy. Examples include Chinese throughout Southeast Asia, Indians in East Africa and Lebanese in West Africa. These rich minorities are often subject to popular violence and extortion, and are treated ambiguously by local politicians. We analyze the impact of the presence of a rich ethnic minority on violence and on interactions between a rent-seeking local elite and a poor majority. We find that the local elite can always make use of the rich minority to maintain its hold on power. When the threat of violence is high, the government may change its economic policies strategically to sacrifice the minority to popular resentment. We investigate the conditions under which such instrumental scapegoating emerges, and the forms it takes. We then consider some social integration capturing, for instance, mixed marriages and shared education. Social integration reduces violence and yields qualitative changes in economic policies. Overall, our results help explain documented patterns of violence and segregation.

Keywords: elites, popular violence, ethnic minority, scapegoat
Download PDF icon wp_2016_-_nr_26.pdf (724.66 KB)
"The Falling Sperm Counts Story": A Limit to Growth?
Johanna Etner, Natacha Raffin, Thomas Seegmuller

We develop an overlapping generations model of growth, in which agents differ through their ability to procreate. Based on epidemiological evidence, we assume that pollution is a cause of this health heterogeneity, affecting sperm quality. Nevertheless, agents with impaired fertility may incur health treatments in order to increase their chances of parenthood. In this set-up, we analyse the dynamic behaviour of the economy and characterise the situation reached in the long run. Then, we determine the optimal solution that prevails when a social planner maximises a Millian utilitarian criterion and propose a set of available economic instruments to decentralise the optimal solution. We underscore that to correct for both the externalities of pollution and the induced-health inefficiency, it is necessary to tax physical capital while it requires to overall subsidy mostly harmed agents within the economy. Hence, we argue that fighting against the sources of an altered reproductive health is more relevant than directly inciting agents to incur health treatments.

Keywords: Pollution, growth, fertility, Health
Download PDF icon wp_2016_-_nr_25.pdf (901.61 KB)
Viable Nash Equilibria in the Problem of Common Pollution
Noël Bonneuil, Raouf Boucekkine

Two countries produce goods and are penalized by the common pollution they generate. Each country maximizes an inter-temporal utility criterion, taking account of the pollution stock to which both contribute. The dynamic is in continuous time with possible sudden switches to less polluting technologies. The set of Nash equilibria, for which solutions also remain in the set of constraints, is the intersection of two manifolds in a certain state space. At the Nash equilibrium, the choices of the two countries are interdependent: different productivity levels after switching lead the more productive country to hasten and the less productive to delay the switch. In the absence of cooperation, efforts by one country to pollute less motivate the other to pollute more, or encourage the country that will be cleaner or less productive country after switching to delay its transition.

Keywords: Pollution, dynamic game, Nash, viability theory
Download PDF icon wp_2016_-_nr_24.pdf (1011.88 KB)
On the Number of Social Reforms in MENA Economies
Christophe Muller, Klarizze Anne Martin Puzon

By constructing a novel measure on the frequency of changes in social protection policies, we provide preliminary, yet new evidence on the determinants of social security reforms in Middle East and North Africa (MENA) countries. This fills a gap in literature where analyses of MENA social policies have been lacking due to limited data. Using panel data for seventeen countries from 1961 to 2015, we estimate RE Poisson regression models. Our results indicate that growth in national income and the frequency of social reform in MENA countries are related, first positively for low growth rates, then negatively for high growth rates. This finding is completed by the negative effects of oil production and of the population size on the number of social reforms. Among the avenues of interpretation we examined - investment model, social objectives pursued by the government, and socio-political equilibrium - this is the first one which seems to be better able to fit our results, accompanied by political disturbances.

Keywords: social protection, welfare programs, Middle-East and North-Africa
Download PDF icon wp_2016_-_nr_23.pdf (494.93 KB)
Heterogeneous Entrepreneurs, Government Quality and Optimal Industrial Policy
Michele Di Maio, Giorgio Fabbri, Vincenzo Lombardo

This paper presents a theoretical model exploring the effects of industrial policy (IP) when entrepreneurs are characterized by different ability levels and sectors are heterogeneous as for their profitability and social externalities generated. The optimal structure of IP in terms of monetary transfers is shown to crucially depend on the distribution of entrepreneurs abilities. Moreover, we find that IP increases aggregate welfare under very general conditions, also in the presence of Government failures. In an extension of the model, we consider the case in which the Government can use also the provision of business training to entrepreneurs as an additional instrument of IP. Based on these results, policy implication for industrial policy in developing countries are discussed.

Keywords: industrial policy, entrepreneurs, heterogeneous abilities, training
Download PDF icon wp_2016_-_nr_22.pdf (1.23 MB)
Statistical Discrimination in a Search Equilibrium Model: Racial Wage and Employment Disparities in the US
Bruno Decreuse, Linas Tarasonis

In the US, black workers spend more time in unemployment, lose their jobs more rapidly, and earn lower wages than white workers. This paper quantifies the contributions of statistical discrimination, as portrayed by negative stereotyping and screening discrimination, to such employment and wage dis- parities. We develop an equilibrium search model of statistical discrimination with learning based on Moscarini (2005) and estimate it by indirect inference. We show that statistical discrimination alone cannot simultaneously explain the observed differences in residual wages and monthly job loss probabilities between black and white workers. However, a model with negative stereotyping, larger unemployment valuation and faster learning about the quality of matches for black workers can account for these facts. One implication of our findings is that black workers have larger returns to tenure.

Keywords: Learning, screening discrimination, job search, indirect inference
Download PDF icon wp_2016_-_nr_21.pdf (773.75 KB)
The Changing Nature of Gender Selection into Employment: Europe over the Great Recession
Juan J. Dolado, Cecilia Garcia-Peñalosa, Linas Tarasonis

The aim of this paper is to evaluate the role played by selectivity issues induced by nonemployment in explaining gender wage gap patterns in the EU since the onset of the Great Recession. We show that male selection into the labour market, traditionally disregarded, has increased. This is particularly the case in peripheral European countries, where dramatic drops in male unskilled jobs have taken place during the crisis. As regards female selection, traditionally positive, we document mixed findings. While it has declined in some countries, as a result of increasing female LFP due to an added-worker effect, it has become even more positive in other countries. This is due to adverse labour demand shifts in industries which are intensive in temporary work where women are over-represented. These adverse shifts may have more than offset the rise in unskilled female labour supply.

Keywords: sample selection, Gender Wage Gap
Download PDF icon wp_2016_-_nr_20.pdf (701.61 KB)
Is the Distribution of Cardiovascular Risks Really Improving ? A Robust Analysis for France.
Fatiha Bennia, Nicolas Gravel

In this paper, we appraise the recent evolution of the distribution of individuals’ risk of cardiovascular diseases (CVD) in France among both men and women using new normative criteria. An individual risk of CVD is described by a probability of getting such a disease. Building on the framework of Gravel and Tarroux (2015), we assume that individuals, who differ by their income, have Von Neuman-Morgenstern (VNM) preferences over such risks. We appeal to Harsanyi’s aggregation theorem to provide empirically implementable dominance criteria that coincide with the unanimity, taken over a large class of such individual preferences, of anonymous and Pareto-inclusive VNM social rankings of distributions of individuals’ risk of CVD. The implementable criteria that we obtain are Sequential headcount poverty dominance and Sequential headcount affluence dominance. We apply these criteria to the distribution of cardiovascular risks among French men and women on the 2006-2010 period. Probabilities of CVD are assigned to individuals on the basis of a logit model estimated on both the men and the women samples for each of the two years. Our main empirical result is that men and women were differently affected by evolution in the distribution of CVD risks between 2006 and 2010. Specifically, the distribution improved for women but did not improve for men.

Keywords: Risk, Dominance, ex ante social welfare, state-dependent expected utility, poverty, Health, cardiovascular diseases
Download PDF icon wp_2016_-_nr_19.pdf (905.98 KB)
The Value of Network Information: Assortative Mixing Makes the Difference
Mohamed Belhaj, Frédéric Deroïan

We study the value of network information in a context of monopoly pricing in the presence of local network externalities. We compare a setting in which all players, i.e. the monopoly and consumers, know the network structure and consumers' private preferences with a setting in which players only know the joint distribution of preferences, in-degrees and out-degrees. We give conditions under which network information increases profit or/and consumer surplus. The analysis reveals the crucial role played by four properties: degree assortativity, homophily (in preferences), preference-degree assortativity and preference-Bonacich centrality assortativity.

Keywords: monopoly, network effects, price discrimination, Bonacich Centrality, network information, degree assortativity, homophily, preference-degree assortativity, preference-Bonacich centrality assortativity
Download PDF icon wp_2016_-_nr_18.pdf (870.16 KB)
Liquidity Trap and Stability of Taylor Rules
Antoine Le Riche, Francesco Magris, Antoine Parent

We study a productive economy with fractional cash-in-advance constraint on consumption expenditures. Government issues safe bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a Liquidity Trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turn, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the Liquidity Trap equilibrium is indeterminate. The stability of the Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint: for low amplitudes of the latter, the Leeper equilibrium, can be indeed stable. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be reached for infinitely many agents’ beliefs. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the Liquidity Trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.

Keywords: cash-in-advance, liquidity trap, Monetary policy, Multiple equilibria
Download PDF icon wp_2016_-_nr_17.pdf (515.98 KB)
Infinite Dimensional Weak Dirichlet Processes and Convolution Type Processes
Giorgio Fabbri, Francesco Russo

The present paper continues the study of infinite dimensional calculus via regularization, started by C. Di Girolami and the second named author, introducing the notion of weak Dirichlet process in this context. Such a process X, taking values in a Banach space H, is the sum of a local martingale and a suitable orthogonal process. The concept of weak Dirichlet process fits the notion of convolution type processes, a class including mild solutions for stochastic evolution equations on infinite dimensional Hilbert spaces and in particular of several classes of stochastic partial differential equations (SPDEs). In particular the mentioned decomposition appears to be a substitute of an Itô’s type formula applied to to f(t, X(t)) where f : [0, T ] × H → R is a C0,1 function and X a convolution type processes.

Keywords: covariation and quadratic variation, calculus via regularization, infinite dimensional analysis, tensor analysis, Dirichlet processes, generalized Fukushima decomposition, convolution type processes, stochastic partial differential equations
Download PDF icon wp_2016_-_nr_16.pdf (1.04 MB)
Inefficient Lock-in with Sophisticated and Myopic Players
Aidas Masiliunas

Path-dependence in coordination games may lead to lock-in on inefficient outcomes, such as adoption of inferior technologies (Arthur, 1989) or inefficient economic institutions (North, 1990). We aim to find conditions under which lock-in is overcome by developing a solution concept that makes ex-ante predictions about the adaptation process following lock-in. We assume that some players are myopic, forming beliefs according to fictitious play, while others are sophisticated, anticipating the learning process of the myopic players. We propose a solution concept based on a Nash equilibrium of the strategies chosen by sophisticated players. Our model predicts that no players would switch from the efficient to the inefficient action, but deviations in the other direction are possible. Three types of equilibria may exist: in the first type lock-in is sustained, while in the other two types lock-in is overcome. We determine the existence conditions for each of these equilibria and show that the equilibria in which lock-in is overcome are more likely and the transition is faster when sophisticated players have a longer planning horizon, or when the history of inefficient coordination is shorter.

Keywords: game theory, Learning, lock-in, farsightedness, coordination
Download PDF icon wp_2016_-_nr_15.pdf (839.82 KB)
Conditional Expected Utility Criteria for Decision Making under Ignorance or Objective Ambiguity
Nicolas Gravel, Thierry Marchant, Arunava Sen

We provide an axiomatic characterization of a family of criteria for ranking completely uncertain and/or ambiguous decisions. A completely uncertain decision is described by the set of all its consequences (assumed to be finite). An ambiguous decision is described as a finite set of possible probability distributions over a finite set of prices. Every criterion in the family compares sets on the basis of their conditional expected utility, for some probability function taking strictly positive values and some utility function both having the universe of alternatives as their domain.

Keywords: Ignorance, Ambiguity, conditional probabilities, expected utility, Ranking Sets, axioms
Download PDF icon wp_2016_-_nr_14.pdf (790.54 KB)
Household Fuel Use in Developing Countries: Review of Theory and Evidence
Christophe Muller, Huijie Yan

Because of recent concerns about the negative externalities of traditional fuel use on the environment and health, the issue of the household fuel transition in developing countries, from dirty fuels towards clean fuels, has received growing research attention. This paper provides an up-to-date survey of the economic literature on household fuel use in these countries. First, we present the conceptual and theoretical frameworks. Then, we discuss the empirical results that show how a wide range of factors drive the household fuel transition. Finally, we suggest priorities for policy initiatives and highlight areas of future research.

Keywords: household decisions, fuel transition, energy consumption
Download PDF icon wp_2016_-_nr_13.pdf (707.1 KB)
Democracy for Polarized Committees: The Tale of Blotto's Lieutenants
Alessandra Casella, Jean-François Laslier, Antonin Macé

In a polarized committee, majority voting disenfranchises the minority. By allowing voters to spend freely a fixed budget of votes over multiple issues, Storable Votes restores some minority power. We study a model of Storable Votes that highlights the hide-and-seek nature of the strategic game. With communication, the game replicates a classic Colonel Blotto game with asymmetric forces. We call the game without communication a decentralized Blotto game. We characterize theoretical results for this case and test both versions of the game in the laboratory. We find that, despite subjects deviating from equilibrium strategies, the minority wins as frequently as theory predicts. Because subjects understand the logic of the game – minority voters must concentrate votes unpredictably – the exact choices are of secondary importance. The result is an endorsement of the robustness of the voting rule.

Keywords: Storable Votes, polarization, Colonel Blotto, tyranny of the majority, committees
Download PDF icon wp_2016_-_nr_12.pdf (1.36 MB)
Currency Diversification of Banks: A Spontaneous Buffer Against Financial Losses
Justine Pedrono

The Basel Committee on Banking Supervision has introduced in December 2010 a Basel III framework for more resilient banks and banking system. We posit in this paper that, in addition to the current regulatory instruments currently under the review of authorities, the currency diversification of banks’ balance sheets can be a source of banking stability considering both assets and liabilities simultaneously. Our conclusions are based on a simplified definition of a globalized bank’s balance sheet. As banks’ balance sheets are expressed in domestic currency, our model implies an exchange rate conversion of each foreign component. Risks are introduced with stochastic processes in assets, liabilities and exchange rate. In accordance with the Basel III framework and the Basel III Leverage ratio, the bank’s leverage ratio is limited. Our model provides detailed information in each risk faced by global banks including foreign exchange risk. Although our conclusions depend on the variance covariance matrix of assets, liabilities and foreign exchange rate, our main results confirm the positive impact of currency diversification on banking stability considering the current banking system.

Keywords: Basel III, bank, financial integration, financial stability, currency diversification, financial volatility
Download PDF icon wp_2016_-_nr_11.pdf (3.2 MB)
Banks' Capital Structure and US Dollar Diversification of Assets: Does Reduction in Systemic Risk Offset Agency Costs?
Justine Pedrono, Aurélien Violon

Multinational Corporation (MNCs) should gain advantage from international diversification by lowering their systemic risk and reducing their bankruptcy cost. Hence, internationalization should induce larger leverage. However, it may imply additional agency costs due to wider informal gaps and higher cost of investigation induced by the multiplication of markets. To examine how currency diversification of asset may change the bank’s systemic risk, we provide a theoretical framework based on relative CAPM by introducing explicitly the exchange rate risk. Due to exchange rate dynamics asset diversification may reduce systemic risk even through the two assets are perfectly correlated. Using innovative micro data on credit institutions located in France between 1999 and 2014 we expand our analysis to the net effect of US dollar diversification of assets. Contrary to past studies, this measure of financial internationalization take into consideration the exchange rate risk. Although our results highlight the two opposite effects of diversification, they posit the importance of international agency costs in the capital structure decision.

Keywords: bank, capital structure, leverage, currency, diversification, internationalization
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Overcoming Coordination Failure in a Critical Mass Game: Strategic Motives and Action Disclosure
Aidas Masiliunas

We study whether coordination failure is more often overcome if players can easily disclose their actions. In an experiment subjects first choose their action and then choose whether to disclose this action to other group members, and disclosure costs are varied between treatments. We find that no group overcomes coordination failure when action disclosure costs are high, but half of the groups do so when the costs are low. Simulations with a belief learning model can predict which groups will overcome coordination failure, but only if it is assumed that players are either farsighted, risk-seeking or pro-social. To distinguish between these explanations we collected additional data on individual preferences and the degree of farsightedness. We find that in the low cost treatment players classified as more farsighted more often deviate from an inefficient convention and disclose this action, while the effect of risk and social preferences is not significant.

Keywords: lock-in, coordination failure, Learning, strategic teaching, Information, collective action, critical mass
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Variable Markups in the Long-Run: A Generalization of Preferences in Growth Models
Raouf Boucekkine, Hélène Latzer, Mathieu Parenti

This paper introduces variable mark-ups in a horizontal-differentiation growth model by considering a larger class of preferences that nests the classic “CES” specification usually present in the workhorse love-for-variety models. Our first result is to obtain a generalized characterization of the Euler condition for this broader class of utility functions: in our model, the Euler rule features a supplementary term aiming at compensating the consumer for variations in the preference for variety along the consumption level. We are then also able to demonstrate that in our generalized framework, the economy’s balanced growth path displays both endogenous markups and a strictly positive growth rate of the number of available varieties (being the engine of growth). Finally, we show that under endogenous markups, the economy’s growth rate and firms’ market power can display a negative correlation, as opposed to the standard result obtained in the CES framework.

Keywords: endogenous growth, variable markups, indirectly additive preferences
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Sunspot Fluctuations in Two-Sector Models with Variable Income Effects
Frédéric Dufourt, Kazuo Nishimura, Carine Nourry, Alain Venditti

We analyze a version of the Benhabib and Farmer [3] two-sector model with sector-specific externalities in which we consider a class of utility functions inspired from the one considered in Jaimovich and Rebelo [14] which is flexible enough to encompass varying degrees of income effect. First, we show that local indeterminacy and sunspot fluctuations occur in 2-sector models under plausible configurations regarding all structural parameters – in particular regarding the intensity of income effects. Second, we prove that there even exist some configurations for which local indeterminacy arises under any degree of income effect. More precisely, for any given size of income effect, we show that there is a non-empty range of values for the Frisch elasticity of labor and the elasticity of intertemporal substitution in consumption such that indeterminacy occurs. This contrasts with the results obtained in one-sector models in both Nishimura et al. [19], in which it is shown that indeterminacy cannot occur under either GHH and KPR preferences, and in Jaimovich [13] in which local indeterminacy only arises for intermediary income effects.

Keywords: Indeterminacy, sunspots, income and substitution effects, sector-specific externalities, infinite-horizon two-sector model
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Growth and Public Debt: What Are the Relevant Tradeoffs?
Kazuo Nishimura, Carine Nourry, Thomas Seegmuller, Alain Venditti

The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents’ expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.

Keywords: endogenous growth, public spending, public debt, sunspot fluctuations
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The Wild West is Wild: The Homicide Resource Curse
Mathieu Couttenier, Pauline Grosjean, Marc Sangnier

We document interpersonal violence as a dimension of the resource curse. We rely on a historical natural experiment in the United States, where mineral discoveries occurred sometimes before, sometimes after formal institutions were established in the county of discovery. In places where mineral discoveries occurred before formal institutions were established, there were more homicides per capita historically and the effect has persisted to this day. Today, the share of homicides and assaults explained by the historical circumstances of mineral discoveries is comparable to the effect of education or income. Our results imply that short-term and quasi-exogenous variations in the institutional environment can lead to large and persistent differences in cultural and institutional development.

Keywords: homicide, resource curse, mineral discoveries, US
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Protectionism and the Education-Fertility Trade-off in Late 19th Century France
Vincent Bignon, Cecilia Garcia-Peñalosa

The assumption that education and fertility are endogenous decisions that react to economic circumstances is a cornerstone of the unified growth theory that explains the transition to modern economic growth, yet evidence that such a mechanism was in operation before the 20th century is limited. This paper provides evidence of how protectionism reversed the education and fertility trends that were well under way in late 19th-century France. The Méline tariff, a tariff on cereals introduced in 1892, led to a substantial increase in agricultural wages, thus reducing the relative return to education. Since the importance of cereal production varied across regions, we use these differences to estimate the impact of the tariff. Our findings indicate that the tariff reduced education and increased fertility. The magnitude of these effects was substantial, and in regions with large shares of employment in cereal production the tariff offset the time trend in education for up to 15 years. Our results thus indicate that even in the 19th century, policies that changed the economic prospects of their offspring affected parents’ decisions about the quantity and quality of children.

Keywords: Education, fertility, unified growth theory, protectionism, France
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L’Observatoire Régional des Circuits Courts : Un Dispositif de Coordination pour une Gouvernance Alimentaire Régionale
Noé Guiraud, Juliette Rouchier

La région Provence-Alpes-Côte-d'Azur (PACA) a décidé d'initier, suite à des rencontres qui ont débuté en 2010, un observatoire régional des circuits courts. Son but affiché est de coordonner les acteurs et de mutualiser les moyens des différents circuits courts déjà existants dans la région dans la perspective du développement de nouvelles initiatives. Cet article présente une évaluation préliminaire de l'« Observatoire régional des circuits courts » décrit comme un dispositif institutionnel, en considérant son objectif affiché d’initier un processus de gouvernance. L'analyse de la participation à l'observatoire et de ce qui a été produit dans son cadre (références, données, modes d'organisation) a été mené de 2010 à 2014. Cette étude identifie ainsi l’activation d'une proximité organisée et permet de définir l'observatoire comme un dispositif de coordination des acteurs opérationnel. Le processus de gouvernance initié demeure néanmoins fragile.

Keywords: observatoire, proximité organisée, dispositif de coordination, circuits courts
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The French Pension Reforms and their Impact on Unemployed Older Workers
Kadija Charni

This paper analyzes labour market position of unemployed older individuals after the implementation of two major pension reforms in France. We use the French Force Labour Survey for the period 2003-2011 to assess the effects of the 2003 and the 2010 pension reforms on the exit rate from unemployment of individuals aged over 54. Using a difference-in-differences approach, we look at the effects of these reforms on the exit from unemployment to employment, and into inactivity. We find that the 2003 pension reform reduces significantly the exit to employment, while there is no significant impact of the pension reform on the exit to inactivity. For the 2010 reform, we show that the reform leads to an increase of the probability to go back to work. At the same time, the transition out of labour force through inactivity exit also rises. Unemployment and other social schemes are used as a bridge to retire early.

Keywords: pension reforms, unemployed older workers, difference-in-differences estimation
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Multidimensional Poverty in Seychelles
Christophe Muller, Asha Kannan, Roland Alcindor

The typically used multidimensional poverty indicators in the literature do not appear to be relevant for middle-income countries like Seychelles and can yield unrealistic estimates of poverty. In particular, the deprivations typically considered in such measures little occurs in middle-income economies. In this paper, we propose a new approach to measuring multidimensional poverty in Seychelles based on a mix of objective and subjective information about households living conditions, and on how these households view their spending priorities. The empirical results based on our new approach show that a small but non-negligible minority of Seychellois can be considered as multidimensionally poor, mostly as not being able to satisfy their shelter and food basic needs. Finally, the Seychelles social aid programs run by the Agency for Social Protection is poorly targeted whether evaluated in terms of multidimensional poverty or in terms of one-dimensional monetary poverty.

Keywords: poverty, multidimensional wellbeing, destitution, Seychelles
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