Private Information and Insurance Rejections

Across a wide set of nongroup insurance markets, applicants are rejected based on observable, often high‐risk, characteristics. This paper argues that private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no‐trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no‐trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents' beliefs. I apply this approach to three nongroup markets: long‐term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance, and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest that private information prevents the existence of large segments of these three major insurance markets.     

Product Differentiation,Multiproduct Firms,and Estimating the Impact of Trade Liberalization on Productivity

This paper studies whether removing barriers to trade induces efficiency gains for producers. Like almost all empirical work which relies on a production function to recover productivity measures, I do not observe physical output at the firm level. Therefore, it is imperative to control for unobserved prices and demand shocks. I develop an empirical model that combines a demand system with a production function to generate estimates of productivity. I rely on my framework to identify the productivity effects from reduced trade protection in the Belgian textile market. This trade liberalization provides me with observed demand shifters that are used to separate out the associated price, scale, and productivity effects. Using a matched plant–product level data set and detailed quota data, I find that correcting for unobserved prices leads to substantially lower productivity gains. More specifically, abolishing all quota protections increases firm‐level productivity by only 2 percent as opposed to 8 percent when relying on standard measures of productivity. My results beg for a serious reevaluation of a long list of empirical studies that document productivity responses to major industry shocks and, in particular, to opening up to trade. My findings imply the need to study the impact of changes in the operating environment on productivity together with market power and prices in one integrated framework. The suggested method and identification strategy are quite general and can be applied whenever it is important to distinguish between revenue productivity and physical productivity.     

Breadth versus Depth: The Timing of Specialization in Higher Education

This paper examines the trade‐off between early and late specialization in the context of higher education. I develop a model in which individuals accumulate field‐specific skills and receive noisy signals of match quality across different fields of study. I derive comparative static predictions between educational regimes with early and late specialization, and examine these predictions across British systems of higher education. Using survey data on 1980 university graduates, I find that individuals who switch to unrelated occupations have lower initial earnings, and that early specialization in England is associated with more costly switches. But higher wage growth among those who switch eliminates the wage difference after several years, and average earnings are not significantly different between England and Scotland.     

ACADEMIC ADMISSIONS STANDARDS: IMPLICATIONS FOR OUTPUT,DISTRIBUTION, AND MOBILITY

We examine the trade‐offs implicit in academic admissions standards when students are charged cost‐based tuition and offered loans that remove liquidity constraints. Lowering entry requirements while holding graduation requirements fixed increases aggregate output and promotes a more equal distribution of wages, but reduces relative income mobility and diminishes the scope for affirmative action. Lowering admissions standards while raising graduation requirements, so that the number of graduates remains constant, has little direct effect on output, distribution, or mobility, but again reduces the scope for affirmative action. Income‐based affirmative action offers a better trade‐off between output and relative mobility than income‐neutral admissions. (JEL: D31, H42, I23, I28, J24)     

Rain and the Democratic Window of Opportunity

We show that democratic change may be triggered by transitory economic shocks. Our approach uses within‐country variation in rainfall as a source of transitory shocks to sub‐Saharan African economies. We find that negative rainfall shocks are followed by significant improvement in democratic institutions. This result is consistent with the economic approach to political transitions, where transitory negative shocks can open a window of opportunity for democratic improvement. Instrumental variables estimates indicate that following a transitory negative income shock of 1 percent, democracy scores improve by 0.9 percentage points and the probability of a democratic transition increases by 1.3 percentage points.     

HAS DEMOCRATIZATION REDUCED INFANT MORTALITY IN SUB‐SAHARAN AFRICA? EVIDENCE FROM MICRO DATA

Does democracy help babies survive in sub‐Saharan Africa? By using retrospective fertility surveys conducted in 28 African countries, I compare the survival of infants born to the same mother before and after democratization to disentangle the effect of democracy from that of changes in population characteristics, which is infeasible with country‐level statistics on infant mortality. I find that infant mortality falls by 1.2 percentage points, 12% of the sample mean, after democratization in the post‐Cold War period. Relevant aspects of democracy appear to be the combination of multiparty elections and leadership change.     

Reconsidering the Effect of Market Experience on the “Endowment Effect”

Simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict. List (2003a) found that the most experienced dealers acting in a well functioning market are not subject to this exchange asymmetry, suggesting that a significant amount of market experience is required to overcome it. To understand this market‐experience effect, we introduce a distinction between two types of uncertainty—choice uncertainty and trade uncertainty—both of which could lead to exchange asymmetry. We conjecture that trade uncertainty is most important for exchange asymmetry. To test this conjecture, we design an experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges eliminates exchange asymmetry in a subsequent test. We discuss why markets might not provide sufficient incentives for learning to overcome exchange asymmetry.     

Prices,Markups, and Trade Reform

This paper examines how prices, markups, and marginal costs respond to trade liberalization. We develop a framework to estimate markups from production data with multi‐product firms. This approach does not require assumptions on the market structure or demand curves faced by firms, nor assumptions on how firms allocate their inputs across products. We exploit quantity and price information to disentangle markups from quantity‐based productivity, and then compute marginal costs by dividing observed prices by the estimated markups. We use India's trade liberalization episode to examine how firms adjust these performance measures. Not surprisingly, we find that trade liberalization lowers factory‐gate prices and that output tariff declines have the expected pro‐competitive effects. However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tariff liberalization. The reason for this incomplete cost pass‐through to prices is that firms offset their reductions in marginal costs by raising markups. Our results demonstrate substantial heterogeneity and variability in markups across firms and time and suggest that producers benefited relative to consumers, at least immediately after the reforms.     

Assessing Markups,Service Quality,and Product Attributes in Music CDs' Internet Retailing

We investigate trade‐offs among markups, service quality, and product attributes across customer, Internet retailer, and wholesaler echelons. Research has documented the reality of retail price dispersion, but little is known about how retail markups, in particular, are related to service quality and product attributes. For example, do Internet retailers deliver superior service in return for high markups? Do product characteristics affect the relationship between service and markups for retailers? To examine these issues, we first developed a model of Internet retail profitability that separates revenues and costs related to sales from other profit sources. This framework allowed us to position our work alongside the extant literature about Internet retailing. Moreover, it led us to synthesize service quality dimensions found in Internet retailing studies. We subsequently developed a critical‐event study based on the profit model and the synthesis of service quality dimensions to delineate service aspects that retailers should emphasize to address buyers' utility. Finally, we collected data from Internet purchases across retailers to isolate markup‐service quality trade‐offs along our delineated service aspects. We find that high markups are associated with superior performance across service quality dimensions. Furthermore, this trade‐off becomes more acutely defined when products with variable popularity are transacted.     

Long‐Term Debt and Optimal Policy in the Fiscal Theory of the Price Level

The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long‐term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long‐term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short‐term debt. The maturity structure of outstanding debt acts as a “budget constraint” determining which periods' price levels the government can affect by debt variation alone. In addition, debt policy—the expected pattern of future state‐contingent debt sales, repurchases and redemptions—matters crucially for the effects of a debt operation. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long‐term debt helps to stabilize inflation. I also find that the optimal policy produces time series that are similar to U.S. surplus and debt time series. To understand the data, I must assume that debt policy offsets the inflationary impact of cyclical surplus shocks, rather than causing price level disturbances by policy‐induced shocks. Shifting the objective from price level variance to inflation variance, the optimal policy produces much less volatile inflation at the cost of a unit root in the price level; this is consistent with the stabilization of U.S. inflation after the gold standard was abandoned.     

Pre‐Colonial Ethnic Institutions and Contemporary African Development

We investigate the role of deeply rooted pre‐colonial ethnic institutions in shaping comparative regional development within African countries. We combine information on the spatial distribution of ethnicities before colonization with regional variation in contemporary economic performance, as proxied by satellite images of light density at night. We document a strong association between pre‐colonial ethnic political centralization and regional development. This pattern is not driven by differences in local geographic features or by other observable ethnic‐specific cultural and economic variables. The strong positive association between pre‐colonial political complexity and contemporary development also holds within pairs of adjacent ethnic homelands with different legacies of pre‐colonial political institutions.     

THE RISE OF THE EAST AND THE FAR EAST: GERMAN LABOR MARKETS AND TRADE INTEGRATION

We analyze the effects of the unprecedented rise in trade between Germany and “the East” (China and Eastern Europe) in the period 1988–2008 on German local labor markets. Using detailed administrative data, we exploit the cross‐regional variation in initial industry structures and use trade flows of other high‐income countries as instruments for regional import and export exposure. We find that the rise of the East in the world economy caused substantial job losses in German regions specialized in import‐competing industries, both in manufacturing and beyond. Regions specialized in export‐oriented industries, however, experienced even stronger employment gains and lower unemployment. In the aggregate, we estimate that this trade integration has caused some 442,000 additional jobs in the economy and contributed to retaining the manufacturing sector in Germany. This is almost exclusively driven by the rise of Eastern Europe, not by China. We also conduct an analysis at the individual worker level, and find that trade had a stabilizing overall effect on employment relationships.     

THE POLITICAL ECONOMY OF FLEXICURITY

We document the presence of a trade‐off in the labor market between the protection of jobs and the support offered to unemployed people. Different countries’ locations along this trade‐off represent stable political‐economic equilibria. We develop a model in which individuals determine the mix of job protection and support for the unemployed in a political environment. Agents are heterogeneous along two dimensions: employment status (insiders and outsiders) and skills (low and high). Unlike previous work on the political economy of labor market institutions, we emphasize the role of job protection and unemployment benefits in the wage‐setting process. A key implication of the model is that flexicurity configurations with low levels of job protection and high levels of support to the unemployed should emerge in the presence of a highly educated workforce. Panel regressions of countries’ locations along this institutional trade‐off are consistent with the implications of our model.     

Enhancing the Practical Relevance of Research

This article seeks to encourage scholars to conduct research that is more relevant to the decisions faced by managers and policymakers, and addresses why research relevance matters, what relevance means in terms of a journal article, and how scholars can increase the relevance of their research. I define relevant research papers as those whose research questions address problems found (or potentially found) in practice and whose hypotheses connect independent variables within the control of practitioners to outcomes they care about using logic they view as feasible. I provide several suggestions for how scholars can enhance research relevance, including engaging practitioners in on‐campus encounters, at managerial conferences, and at crossover workshops; conducting site visits and practitioner interviews; working as a practitioner; and developing a practitioner advisory team. I describe several ways that scholars can convey relevant research insights into practitioners, including presenting at practitioner conferences, writing for practitioners in traditional crossover journals and in shorter pieces like op‐eds and blogs, and attracting the interest of those who write columns, blogs, and articles about research for practitioners. I conclude by describing a few ways that academic institutions can encourage more relevant research, focusing on journals, professional societies, and doctoral programs.     

An Empirical Equilibrium Model of a Decentralized Asset Market

I estimate a search‐and‐bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices, and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business‐aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2 percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.     

WORKERS,WARRIORS, AND CRIMINALS: SOCIAL CONFLICT IN GENERAL EQUILIBRIUM

We incorporate appropriation activities (social conflict) into canonical models of trade and study how economic shocks and policies affect the intensity of conflict. We show that not all shocks that could make society richer reduce conflict: positive shocks to labor‐intensive industries diminish conflict, while positive shocks to capital‐intensive industries increase it. The key requirement is that conflict activities be more labor intensive than the economy as this determines how shocks affect the returns and costs of conflict. Our theory is consistent with several observed patterns of conflict and implies that empirical work should take into account the relative factor intensities of the productive and conflict sectors in each country. Incorporating appropriation into a canonic general equilibrium model affects what policies may be deemed desirable: in order to reduce conflict and generate Pareto‐improvements policy must be distortionary, while reforms that appear efficiency‐enhancing under the unrealistic assumption of perfect property rights may backfire. This offers one explanation for why reforms based on traditional models without appropriation may be delayed and become unpopular when implemented, and why societies may sympathize with seemingly inefficient redistribution.     

Cursed Equilibrium

There is evidence that people do not fully take into account how other people's actions depend on these other people's information. This paper defines and applies a new equilibrium concept in games with private information, cursed equilibrium, which assumes that each player correctly predicts the distribution of other players' actions, but underestimates the degree to which these actions are correlated with other players' information. We apply the concept to common‐values auctions, where cursed equilibrium captures the widely observed phenomenon of the winner's curse, and to bilateral trade, where cursedness predicts trade in adverse‐selections settings for which conventional analysis predicts no trade. We also apply cursed equilibrium to voting and signalling models. We test a single‐parameter variant of our model that embeds Bayesian Nash equilibrium as a special case and find that parameter values that correspond to cursedness fit a broad range of experimental datasets better than the parameter value that corresponds to Bayesian Nash equilibrium.     

When Do Multinational Companies Consider Corporate Social Responsibility? A Multi‐country Study in Sub‐Saharan Africa

While African countries are becoming more and more relevant as host countries for suppliers of multinational companies little is known about corporate social responsibility (CSR) in this region. To fill this gap, the present article explores CSR considerations of foreign affiliates of multinational companies when choosing local African suppliers. The article suggests a model of three types of determinants, namely firm characteristics, exports, and intra‐trade. Analyses of a large‐scale and quite unique firm level data for more than 2,000 foreign owned firms in 19 sub‐Saharan African countries demonstrate that firms importing intermediates from their parent company abroad are more likely to implement CSR. Similarly, CSR plays a larger role for affiliates that export to developed countries. Different determinants affect environmental and social CSR activities.     

Knowledge,Risk Perceptions,and Xenophobic Attitudes: Evidence from Italy During the Ebola Outbreak

The purposes of the current study were twofold: (1) to investigate affective and cognitive responses and social‐contextual factors related to Ebola and their intercorrelations in a developed country without widespread Ebola transmission; and (2) to examine the relationships among risk perception of Ebola, levels of knowledge about Ebola, and (blatant and subtle) prejudice toward African immigrants. Between January 2015 and March 2015, an anonymous cross‐sectional survey was conducted among a convenience sample of 486 Italian adults. Results showed that most participants were not particularly concerned about Ebola and did not feel at risk of acquiring the virus. Cognitive dimensions of risk perception of Ebola (i.e., perceived severity of illness, perceived personal impact, perceived coping efficacy, and likelihood of infection), affective response (or worry) to Ebola, and social‐contextual factors (i.e., perceived preparedness of institutions, family members’ and friends’ levels of worry) were interrelated. Prejudice toward African immigrants was positively related to risk perception of Ebola and negatively related to levels of knowledge about Ebola even when controlling for sociodemographic variables including political preference.     

Managerial Hubris,Trade Associations and Regulatory Knowledge in Micro‐Firms

To avoid breaking the law for regulatory non‐compliance, it is essential that micro‐firm owner‐managers are aware of deficiencies in their knowledge, so that they can seek improvement and avoid over‐confidence (i.e. hubris) in their knowledge levels. Using newly collected survey data from micro‐firms in the English accommodation sector and multivariate techniques, the authors explore the possibility of hubris by making a novel distinction between the Perceived‐Knowledge and Actual‐Knowledge of regulation held by micro‐firm owner‐managers. Both Perceived‐Knowledge (from self‐assessment) and Actual‐Knowledge (from a simple test) over four core areas of regulation are found to be different, generally poor and suggestive of hubris. The relationship between these knowledge levels is further explored by considering the role of trade association membership (since they support members) and attitude (since it effects learning). Attitude is found to be positively associated with both forms of knowledge, while trade association memberships are also found to be associated with enhanced Perceived‐Knowledge, but not Actual‐Knowledge. In light of the results, the authors suggest several priority areas for improving Actual‐Knowledge and self‐assessment skills, and areas for future research.