RATIONAL HEURISTICS? EXPECTATIONS AND BEHAVIORS IN EVOLVING ECONOMIES WITH HETEROGENEOUS INTERACTING AGENTS

We analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent-based model populated by heterogeneous, interacting firms. Agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change, imperfect information, coordination hurdles, and structural breaks. In these circumstances, we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naïve learning rules. Our results suggest that fast and frugal robust heuristics may not be a second-best option but rather “rational” responses in complex and changing macroeconomic environments. (JEL C63, D8, E32, E6, O4)     

INFORMATION,INSTITUTIONS, AND BANKING SECTOR DEVELOPMENT IN WEST AFRICA

Using a new West African panel data set, we provide evidence on the determinants of individual banks' loans and assets in some of the poorest countries in the world. Higher loan default rates reduce both the loans to assets ratio and the volume of assets. However, the size of these effects is sensitive to bank age and ownership structure. Younger, private, domestically owned banks are most affected, suggesting that such banks face the most severe informational disadvantages. Very old government‐owned banks benefit from high default rates. We also explore how the quality of governance impacts on loans and assets. (JEL G21, O16)     

A SPATIAL PERSPECTIVE ON EUROPEAN INTEGRATION: HETEROGENEOUS WELFARE AND MIGRATION EFFECTS FROM THE SINGLE MARKET AND THE BREXIT

We use a quantitative model to study the implications of European integration for welfare and net migration flows across 1,280 European regions. The model suggests that an increase of trade barriers to the level of 1957 reduces welfare by about 5%–8% on average, depending on the presumed trade elasticity. However, remote regions may face initial welfare losses of up to 10%. These heterogeneous welfare effects cause estimated net migration of 1.9% of the population to the European geographic center implying that the dismantling of trade barriers in Europe has led to a more homogeneous spatial distribution of economic activity. With regard to the Brexit, we find moderate welfare losses for the United Kingdom of 1.05% in the most pessimistic scenario while continental Europe's welfare declines by 0.41%. (JEL F15, R12, R13, R23)     

FEAR,ANGER, AND CREDIT. ON BANK ROBBERIES AND LOAN CONDITIONS

We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences between the conditions of loans granted after a robbery and changes in loan conditions that occur contemporaneously at unaffected branches. In general, loan officers seem to adopt so-called avoidance behavior. In accordance with the literature on posttraumatic stress, their avoidance behavior is halved within 2 weeks following the robbery and the effect further varies depending on the presence, or absence, of a firearm during the robbery. (JEL G02, G2)     

COSTLY INTERMEDIATION AND CONSUMPTION SMOOTHING

This paper studies quantitatively how intermediation costs affect household consumption loans and welfare. Agents face uninsurable idiosyncratic shocks to labor productivity in a production economy with costly financial intermediation and a borrowing limit. Reducing intermediation costs has two effects: (1) For a given decrease in the interest rate on borrowing, agents' ability to smooth consumption over time improves. (2) The demand for loans increases, which increases the interest rate. The net welfare gain of reducing intermediation costs from 3.927% (U.S. level) to 1% is about 1.14% of equivalent consumption in the baseline economy for an endogenous interest rate and 1.90% for an exogenous interest rate. The gains are distributed unevenly: households at the bottom wealth decile improve welfare by 3.96% and 5.86% of equivalent consumption, while those at the top decile have welfare gains of 0.35% and 0.2%, respectively. Sufficiently high intermediation costs eliminate borrowing and hence the welfare gain of reducing costs is not substantial. The welfare analysis includes transitional dynamics between steady states. (JEL D91, E60, G38)     

MINIMUM WAGES,IMPORT STATUS,AND FIRMS' INNOVATION: THEORY AND EVIDENCE FROM CHINA

This study explores the heterogeneous effects of minimum wage on innovation of different types of firms. We develop an open‐economy R&D‐based growth model and obtain the following result: raising the minimum wage reduces innovation of firms that use domestic inputs but increases innovation of firms that import foreign inputs. We test this result using city‐level data on minimum wages and firm‐level patent data in China. In accordance with our theory, we find that raising the minimum wage is associated with more innovation by importing firms and less by non‐importing firms. This result survives a battery of robustness checks. (JEL E24, F43, O31)     

THE MATCHING OF HETEROGENEOUS FIRMS AND POLITICIANS

We use a Chinese firm‐director panel dataset to examine the matching of heterogeneous firms and politicians. On the basis of 36,308 detailed biographies, we identify individuals who previously held bureaucratic positions and classify the rank of each position in the Chinese political hierarchy. Using this direct measure of political capital, we examine how firms with heterogeneous productivity match politicians with different political strength. Our results indicate a positive assortative matching in the political capital market. More productive firms are paired with more powerful politicians. Furthermore, the preference for political capital relative to conventional human capital increases in firms' dependence on external financing and the inefficiency of local governments. Conditional on the endogenous matching, new hires with political capital receive more compensation than their co‐workers in the same cohort. The marginal effect of a one‐step rise on the political ladder significantly exceeds the marginal effect of raising education attainment from, for example, high school to college. (JEL D21, D73, J24, J31, O12)     

FUNDING FORMS,MARKET CONDITIONS,AND DYNAMIC EFFECTS OF GOVERNMENT R&D SUBSIDIES: EVIDENCE FROM CHINA

We examine various factors that influence the effects of government‐subsidized research and development (R&D) programs on firm productivity. Based on a panel dataset of Chinese firms, we find the effects of the Innovation Fund for Small and Medium Technology Based Firms (Innofund) are dynamic over time and are heterogeneous depending on funding forms and the level of marketization and economic development across regions. In general, Innfound has significant and positive effects on firm productivity in both the short and long run. However, the short‐term effects of Innofund are stronger than the long‐term ones. Additionally, the positive effects of Innofund are stronger for firms backed by interest‐free bank loans than those supported by appropriation. Meanwhile, Innofund has stronger positive effects in provinces that are less market‐oriented or less developed economically. Finally, the short‐term effects of Innofund stay stronger than the long‐term ones even after we control the funding forms and the market conditions across regions. Identification and selection concerns are addressed through the propensity score matching approach and two‐stage estimation. (JEL G28 O38 H76)     

BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

THE IMPACT OF TRADE COSTS ON FIRM ENTRY,EXPORTING, AND SURVIVAL IN KOREA

This study examines how changes in trade costs have affected entry, exit, productivity, and exporting in the Korean manufacturing sector. We verify several predictions of heterogeneous‐firm models of international trade. For example, falling import‐trade costs are associated with less entry and lower market shares among existing domestic firms, and higher total factor productivity for Korean manufacturing as a whole. The size of firms plays an important role in many of our results. New domestic firms are more likely to be small, but large firms are less likely to exit and more likely to have an increase in total factor productivity. (JEL F10, D24)     

THE EFFECTS OF PERCEIVED AND ACTUAL FINANCIAL LITERACY ON FINANCIAL BEHAVIORS

A combined measure of financial literacy that includes both a test score of actual financial literacy and a self‐rating of overall financial literacy is used in this study. We find that the combined measure appears to provide greater understanding about how financial literacy affects financial behaviors. A large national survey of U.S. adults and households (n = 28,146) was used to investigate how this overall financial literacy is likely to change financial behaviors across five financial topics: credit cards, investments, loans, insurance, and financial advice. For each topic, we include 4–5 financial behaviors (22 in total) to demonstrate the consistency of the findings within and across topics. Although we are unable to identify a causal relationship, the results from the probit analysis show that both actual and perceived financial literacy appear to influence financial behaviors and that perceived financial literacy may be as important as actual financial literacy. (JEL D14, G00)     

MAKING FRIENDS TO INFLUENCE OTHERS: ENTRY AND CONTRIBUTION DECISIONS THAT AFFECT SOCIAL CAPITAL IN AN ASSOCIATION

We examine factors affecting entry and contribution to an association that provides different goods using social capital formed by heterogeneous firms that lobby in a political economy environment. We identify how associations attract the most productive firms or the least productive firms in an industry and explain how such associations differ in their intensive and extensive marginal contributions to social capital. We find that the level of regulatory stringency, association products including capital goods for members or lobbying to influence regulation, and government influenceability affect membership and contribution decisions. These results vary with firm productivity. Often, an increase in government influenceability increases social capital in associations composed of highly productive firms because they prefer to influence policy while less productive firms prefer more association‐produced production inputs. (JEL D71, D73)     

GROWTH OPPORTUNITIES,STRATEGIC SAVINGS,AND THE DOT‐COM BOOM AND BUST

Data from the dot‐com boom‐bust episode suggest that growth opportunities played an important role in explaining firms' financing strategy during this understudied episode. The low leverage of this sector was mainly driven by high growth firms which increased their leverage following the crash despite suffering a much larger fall in their market value. We present a parsimonious dynamic firm financing model where growth opportunities alone can generate the heterogeneous patterns in the financing and performance between high and low growth information technology firms prior to and following the market crash. The calibrated model also sheds light on the role played by monetary policy during that episode. (JEL G32, E22, E5)     

ASSET DYNAMICS,LIQUIDITY, AND INEQUALITY IN DECENTRALIZED MARKETS

The Kiyotaki and Wright model has exerted a considerable influence on the monetary search literature. We argue that the model also delivers important insights into a broader range of macroeconomic and development issues. The analysis studies how market frictions and the liquidity of assets affect the distribution of income. Experiments illustrate how the economy adjusts to shocks to asset returns and to the matching technology. They also deal with long‐run transition. An experiment interprets the reversal of fortune hypothesis as a situation in which an economy with a low‐return asset takes over a similar economy with a high‐return asset. (JEL C61, C63, E41, E27, D63)     

ENDOWMENTS,PERCEIVED SIMILARITY,AND DICTATOR GIVING

A common assumption of money is that it is fungible. An implication of this assumption is that the source of money does not affect economic decision making. We find evidence contradicting this fungibility assumption. Specifically, we explore how the perception of an endowment source influences amounts sent in a dictator game. We find perceived similarity to the endowment provider to be negatively correlated with dictator offers. Dictators who consider themselves relatively more similar to their endowment provider send significantly smaller amounts to their partners. Our results demonstrate that economic decision making can be influenced by the provider of income shocks. (JEL C78, C91, C99, D31, D64, D74)     

VOLUNTARY DISCLOSURE AND EARNINGS EXPECTATIONS IN MULTI-LEVEL MARKETING

Multi-level marketing (MLM) firms recruit individuals into a business opportunity but are not required to disclose the earnings of past participants. Some MLMs voluntarily create income disclosures, which may serve both marketing and risk-management functions. We create an economic experiment to explore the impact of MLM income disclosure on consumer interest and expectations. Results suggest that disclosure does not significantly alter interest in the business opportunity but does reduce expectations, on average, when subjects are asked to estimate annual income in a lab environment. We discuss findings in the context of current regulatory policy. (JEL D18, D82, M38)     

FISCAL POLICY, EXPECTATION TRAPS, AND CHILD LABOR

This paper develops a dynamic model with overlapping generations where there are two possible equilibria: one without child labor, and one with it. It is shown that intergenerational transfers can eliminate the child labor equilibrium and that this intervention is Pareto improving. However, if society does not believe that the government will implement the transfer program, it won't, reinforcing society's expectations. This is true even if the transfer program would have been implemented in the absence of uncertainty. Thus a government may be powerless to prevent the child labor equilibrium if it does not command the confidence of their populace, leaving the country in an expectations trap. ( JEL D91, E60, J20, O20)     

A CLEAR AND PRESENT MINORITY: HETEROGENEITY IN THE SOURCE OF ENDOWMENTS AND THE PROVISION OF PUBLIC GOODS

We conduct public goods experiments in which participant groups are heterogeneous in regards to the source of their endowments. We find that this dimension of heterogeneity significantly reduces contributions to the public good, yielding strong support for the Nash prediction of minimal contributions. These minimal contributions arise in environments in which there exists a clear minority in terms of source of endowments. We discuss these results in light of current research on the influence of heterogeneous populations on public goods provision and redistributive policies. (JEL C9, D63, H4, J15)     

Social class and approaches to shaping educational expectations

Scholars have recognized young people's educational expectations as a key factor in predicting educational outcomes, but few studies have attempted a comprehensive classification of how young people's educational expectations are shaped. In this article, I outline a typology of how young people from different social class origins shape their educational expectations. Drawing on 100 interviews with 15-year-olds, I find two underlying dimensions in young people's accounts of their educational expectations: how risk aware they are and how goal oriented they are. These dimensions translate into a heuristic model for understanding the structure of young people's educational expectations. I identify four major approaches to shaping educational expectations - the confident, the determined, the explorative, and the anxious - and show how these approaches connect to the young people's class origin. The typology of approaches offers a conceptual framework for understanding the mechanisms that lead young people to shape their expectations in qualitatively different ways.