POLITICIANS AT WORK: THE PRIVATE RETURNS AND SOCIAL COSTS OF POLITICAL CONNECTIONS

We quantify the private returns and social costs of political connections exploiting a unique longitudinal dataset that combines matched employer–employee data for a representative sample of Italian firms with administrative archives on the universe of individuals appointed in local governments over the period 1985–1997. According to our results, the revenue premium granted by political connections amounts to 5.7% on average, it is obtained through changes in domestic sales but not in exports, and it is not related to improvements in firm productivity. The connection premium is positive for upstream producers for the public administration only, and larger (up to 22%) in areas characterized by high public expenditure and high levels of corruption. These findings suggest that the gains in market power derive from public demand shifts towards politically connected firms. We estimate that such shifts reduce the provision of public goods by approximately 20%.     

TEAM INCENTIVES: EVIDENCE FROM A FIRM LEVEL EXPERIMENT

Many organizations rely on teamwork, and yet field evidence on the impacts of team‐based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by 14%, whereas introducing a tournament increases it by 24%. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team‐based incentives crowds out the productivity‐enhancing effect of social connections under team production.     

COMPETITION AND RELATIONAL CONTRACTS: THE ROLE OF UNEMPLOYMENT AS A DISCIPLINARY DEVICE

Abstract When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long‐term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.     

REDUCING OVERREACTION TO CENTRAL BANKS' DISCLOSURES: THEORY AND EXPERIMENT

Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to only a fraction of market participants (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). In theory, overreaction can be similarly reduced by either communication strategy. A laboratory experiment shows that both communication strategies succeed in reducing overreaction, though not as much as theory predicts. The opportunity in our information age for central banks to choose between partial publicity and partial transparency to control the market reaction is then discussed.     

KNOWING THE RIGHT PERSON IN THE RIGHT PLACE: POLITICAL CONNECTIONS AND RESISTANCE TO CHANGE

We use a political economy model of Schumpeterian growth with entry to investigate how an incumbent politician can strategically use the level of red tape to acquire incumbency advantage. By setting sufficiently high red tape, the politician induces the incumbent firm in the intermediate sector to invest in political connections, which are valued also by voters, who recognize that bureaucratic costs can be reduced by connected firms. Within this framework, we study the Markov perfect equilibria of an infinitely repeated game among politicians, firms, and voters, and show that all equilibria are characterized by investments in political connections and the re‐election of the incumbent politician. Political connections may prevent entry of advanced competitors and cause the economy to lag behind the technological frontier. Our model provides a possible explanation for the persistence of inefficient democracies and political barriers to technology development, where these reflect shared rather than conflicting interests.     

JOB MARKET SIGNALING OF RELATIVE POSITION,OR BECKER MARRIED TO SPENCE

This paper considers a matching model of the labor market where workers, who have private information on their quality, signal to firms that also differ in quality. Signals allow assortative matching in which the highest‐quality workers send the highest signals and are hired by the best firms. Matching is considered both when wages are rigid (nontransferable utility) and when they are fully flexible (transferable utility). In both cases, equilibrium strategies and payoffs depend on the distributions of worker and firm types. This is in contrast to separating equilibria of the standard model, which do not respond to changes in supply or demand. With sticky wages, despite incomplete information, equilibrium investment in education by low‐ability workers can be inefficiently low, and this distortion can become worse in a more competitive environment. In contrast, with flexible wages, greater competition improves efficiency.     

The Effects of Personality Traits on Wages: A Matching Approach

I use the National Longitudinal Survey of Youth 1979 to estimate the effects of adolescent measurements of self‐esteem and locus of control on adult wages using propensity score matching. An adolescent possessing high self‐esteem will experience between 8.5 and 9.2 per cent higher wages as an adult. This result is statistically significant and robust to the addition of cognitive skill and family background characteristics. When cognitive skill and family background characteristics are controlled for, locus of control as an adolescent is insignificant in explaining adult wages. This result is contrary to findings in the literature.     

A New Look at the Public Wage Premium in Italy: The Role of Schooling Endogeneity

This paper uses a sample of male workers to estimate public and private wage structures and the public wage premium for Italy. Results from a model with endogenous sector and schooling suggest that public employees have on average lower unobserved wage potentials in both sectors than private employees, but work in the sector where they benefit from a comparative wage advantage. Schooling is positively correlated with wages in both sectors, and controlling for that is crucial to get more reliable estimates and predictions. The associated average unconditional public wage premium is 12 per cent. The net premium is 9 per cent, but not statistically significant.     

THE TRADEOFF BETWEEN PERFORMANCE AND QUITTING IN HIGH POWER TOURNAMENTS

Tournaments may be characterized by the performance they induce as well as by the rate of quitting and dropouts of participants. Although most of the attention in the literature is on the performance induced by high power incentives, there are many daily situations in which dropouts and quitting are a major concern. Using a field experiment in schools and a model of dynamic tournament we examine the effect of different levels of rewards on the rate of quitting. Our experiment indicates that there is a possible tradeoff between performance and quitting. Strong incentives tournaments induced participants to exert more effort and exhibit a better performance but, at the same time, it induces a higher rate of quitting. We present a multi‐stage tournament model that gives rise to a similar characterization.     

UNCERTAINTY,PERSISTENCE, AND HETEROGENEITY: A PANEL DATA PERSPECTIVE

The purpose of this paper is to review newly developed identification and estimation tools that are relevant for the analysis of dynamic dependence structures of income risk. I present an application to nonlinear permanent–transitory models of household income using data from the Panel Study of Income Dynamics (PSID), but the empirical approach is more generally applicable. Household income processes are of interest because the size of shocks, the nature of their persistence, and cross‐household heterogeneity are all important to understand how income inequality varies with age and cohort and how it translates into consumption inequality. I argue that going from an econometrics of autocovariances to an econometrics of flexible distributions is feasible and has the potential to reveal richer aspects of risk—for example, nonlinear persistence of unusual shocks.     

A MECHANISM DESIGN APPROACH TO CLIMATE‐CHANGE AGREEMENTS

We take a mechanism design perspective to investigate how environmental agreements should account for multilateral externalities, incentive compatibility, and voluntary participation by sovereign countries. The optimal mechanism involves a tradeoff between a free rider problem in the effort provision of participating countries and the necessity of inducing countries to ratify the agreement. This mechanism can be approximated by a simple menu with attractive implementation and robustness properties. Limits on enforcement and commitment might nevertheless hinder the performance of this menu, making the “business as usual” scenario more likely.     

MONITORING IN TEAMS: USING LABORATORY EXPERIMENTS TO STUDY A THEORY OF THE FIRM

Alchian and Demsetz’s influential explanation of the classical business firm (The American Economic Review, 1972, 62, 777–795) argues that there is need for a concentrated residual claim in the hands of a central agent, to motivate the monitoring of workers. We model monitoring as a way to transform team production from a collective action dilemma with strong free riding incentives to a productivity‐enhancing opportunity with strong private marginal incentives to contribute effort. In an experiment, we have subjects experience team production without monitoring, team production with a central monitor, and team production with peer monitoring. Then subjects vote on whether to employ the central monitor, who gets to keep a fixed share of the team output, or to rely on peer monitoring, which entails a coordination or free riding problem. Our subjects usually prefer peer monitoring but they switch to the specialist when unable to successfully self‐monitor. We provide evidence for situations in which team members resist the appointing of a central monitor and succeed in overcoming coordination and free riding problems as well as for a situation in which an Alchian–Demsetz‐like firm grows in the laboratory.     

Transitions in the Labour Market: Discouragement Effect and Individual Characteristics

The present work analyses the unemployment gender gap in Italy for the period 2004–11. We present a methodology for decomposing the natural rate of unemployment, thus defining it in terms of equilibrium labour market flows between the aggregate states of the labour market (Employment, Unemployment, Inactivity). In addition, we offer estimates of the determinants of the unemployment gender gap to pinpoint the relative role of individual characteristics and structural factors in determining this difference.     

The Union Effect on Wages in Chile: A Two‐Stage Approach Using Panel Data

We estimate the union effect on wages in Chile to be between 18 and 24 per cent. We follow a two‐stage procedure that allows us to correct the endogeneity of union status and to separate true from spurious dependence, by exploiting the union history of individuals using panel data. We find evidence of comparative‐advantage sorting in union status, strong true state dependence and a re‐distributional effect of union membership (i.e. wage gains from unionization are larger for lower‐wage earners).     

The Implications of Temporary Jobs on the Distribution of Wages in Italy: An Unconditional IVQTE Approach

Using Italian data, this paper investigates the wage implications of temporary jobs across the whole pay profile using unconditional quantile regression (UQR) models. Results clearly indicate that the wage penalty associated to temporary jobs is significantly larger at the bottom of wage profile and is almost absent for high‐wage jobs. This is in line with the sticky floors hypothesis, supporting the idea that the wage gap for temporary employees depends on their position in the wage distribution for low‐paid jobs. To recover a causal interpretation, I employ an instrumental variable (IV) strategy. I adopt the unconditional instrumental variable quantile treatment effects (IVQTE) estimator proposed by Frolich and Melly, which corrects for endogenous selection in temporary contracts. The IVQTE estimates yield similar results to standard UQR, even if the wage penalty is larger in size at the bottom of the wage distribution and disappears at the top quantiles. This evidence highlights that policies aimed at increasing flexibility may reinforce the two‐tier nature of the Italian labour market and the relative wage inequality.     

Social Network and Wage: Evidence from Cameroon

Using Cameroonian data, this paper investigates the effects of social network on wage. Social network is measured in terms of using friends and relatives while looking for a job. In order to evaluate the effectiveness of social network with regard to wage, we make use of Heckman selection model. Our findings contrast with previous studies. After factoring the endogeneity and sample selection, we find that Job seekers who make use of social network exhibit a wage premium of 1.53 per cent of average wage. We also find that social network contributes to explain wage differential according to gender and institutional sectors (formal versus informal).     

PROXYING FOR UNOBSERVABLE VARIABLES WITH INTERNET DOCUMENT‐FREQUENCY

The internet contains billions of documents. We show that document frequencies in large decentralized textual databases can capture the cross‐sectional variation in the occurrence frequencies of social phenomena. We characterize the econometric conditions under which such proxying is likely. We also propose using recently‐introduced internet search volume indexes as proxies for fundamental locational traits, and discuss their advantages and limitations. We then successfully proxy for a number of economic and demographic variables in US cities and states. We further obtain document‐frequency measures of corruption by country and US state and replicate the econometric results of previous research studying its covariates. Finally, we provide the first measure of corruption in American cities. Poverty, population size, service‐sector orientation, and ethnic fragmentation are shown to predict higher levels of corruption in urban America.     

Informal Referrals,Employment, and Wages: Seeking Causal Relationships

Employers and job seekers rely extensively on informal referrals to fill vacancies or to find a job. The widespread use of job contacts has been largely associated with labor outcomes, such as finding a job or even affecting wages. This paper explores whether the use of informal referrals on the job search process affects labor market outcomes of Colombian urban workers. Results indicate that informal referrals are slightly more successful than other job search strategies in term of job seeker's placement. However, referred workers earn in average less than their non‐referred counterparts. Yet, this is only true in formal‐sector positions.     

Non‐linear Effects of Comparison Income in Quit Decisions: Status versus Signal!

This research note utilizes German matched employer–employee data to investigate the relationship between mobility and relative wage positions within establishments for workers without university degrees. The main innovation involves the examination of non‐linear effects, because previous literature mainly analyses mean linear effects. Our random‐effects probit estimates of mobility suggest a non‐linear U‐shaped effect with respect to relative standing. This is plausible because workers in low relative wage positions might quit because of their low status and those in high relative wage positions because of their low career advancement opportunities. Consideration of non‐linearities, thus, is a major improvement for the analysis of the effects of relative wage positions.     

Workplace Job Satisfaction in Britain: Evidence from Linked Employer–Employee Data

The paper examines the nature of workplace job satisfaction in Britain using an ‘overall’ and domain‐specific job satisfaction outcomes from linked employer–employee data. A measure of aggregate job satisfaction alone might mask domain‐specific differences in satisfaction, something the combined approach in this paper addresses. As well as controlling for a rich set of correlates on employees and their workplaces, the paper deploys alternative empirical models that account for employee‐ and workplace‐level unobserved heterogeneity. The paper reports interesting results on the link between job satisfaction and observed as well as unobserved characteristics of employees and their workplaces.