Financial Health Economics

We provide a theoretical and empirical analysis of the link between financial and real health care markets. This link is important as financial returns drive investment in medical research and development (R&D), which, in turn, affects real spending growth. We document a “medical innovation premium” of 4–6% annually for equity returns of firms in the health care sector. We interpret this premium as compensating investors for government‐induced profit risk, and we provide supportive evidence for this hypothesis through company filings and abnormal return patterns surrounding threats of government intervention. We quantify the implications of the premium for the growth in real health care spending by calibrating our model to match historical trends, predicting the share of gross domestic product (GDP) devoted to health care to be 32% in the long run. Policies that had removed government risk would have led to more than a doubling of medical R&D and would have increased the current share of health care spending by more than 3% of GDP.     

HOW DO ELECTORAL SYSTEMS AFFECT FISCAL POLICY? EVIDENCE FROM CANTONAL PARLIAMENTS, 1890–2000

Using a new data set on Swiss cantons since 1890, we analyze how the adoption of proportional representation affects fiscal policy. In line with economic theory, we show that proportional systems shift spending toward broad goods (like education and welfare benefits) but decrease spending on geographically targetable goods (like roads). We find little evidence that proportional representation increases the overall size of government. An analysis of the underlying theoretical mechanisms reveals that proportional representation increases electoral turnout, left‐wing representation, and political fragmentation. These changes in political representation explain a substantial share of the rise in education spending, but a small share of the rise in welfare spending or the decline in road expenditures.     

GOVERNMENT SPENDING COMPOSITION,TECHNICAL CHANGE,AND WAGE INEQUALITY

In this paper we argue that government spending played a significant role in stimulating the wave of innovation that hit the U.S. economy in the late 1970s and in the 1980s, as well as the simultaneous increase in inequality and in education attainments. Since the late 1970s U.S. policymakers began targeting commercial innovations more directly and explicitly. We focus on the shift in the composition of public demand toward high‐tech goods, which, by increasing the market‐size of innovative firms, functions as a de facto innovation policy tool. We build a quality‐ladders non‐scale growth model with heterogeneous industries and endogenous supply of skills, and show that an increase in the technological content of public spending stimulates R&D, raises the wage of skilled workers, and, at the same time, stimulates human capital accumulation. A calibrated version of the model suggests that government policy explains between 12% and 15% of the observed increase in wage inequality in the period 1976–1991. (JEL: E62, J31, O33, O41)     

POVERTY AND THE POLITICAL ECONOMY OF PUBLIC EDUCATION SPENDING: EVIDENCE FROM BRAZIL

A large body of literature has emphasized the elite capture of democratic institutions as the explanation for the low levels of spending on public education in many low‐income democracies. This paper provides an alternative to that longstanding hypothesis. Motivated by new cross‐country facts and evidence from Brazilian municipalities, we hypothesize that many democratic developing countries might invest less in public education spending because poor decisive voters prefer the government to allocate resources elsewhere. One possible explanation is that low‐income voters could instead favor redistributive programs that increase their incomes in the short run, such as cash transfers. To test for this possibility, we design and implement an experimental survey and an incentivized choice experiment in Brazil. The findings from both interventions support our hypothesis.     

THE POLITICAL COLOR OF FISCAL RESPONSIBILITY

We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left‐ (pro‐public goods) and right‐leaning (pro‐private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left‐leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time‐series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries. (JEL: D72, E62, H41, H62, H63)     

Fiscal Rules and Discretion Under Persistent Shocks

This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time‐inconsistent preferences with a present bias toward public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under independent and identically distributed shocks, we show that the ex ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run.     

Quantifying the Effects of Expert Selection and Elicitation Design on Experts’ Confidence in Their Judgments About Future Energy Technologies

Expert elicitations are now frequently used to characterize uncertain future technology outcomes. However, their usefulness is limited, in part because: estimates across studies are not easily comparable; choices in survey design and expert selection may bias results; and overconfidence is a persistent problem. We provide quantitative evidence of how these choices affect experts’ estimates. We standardize data from 16 elicitations, involving 169 experts, on the 2030 costs of five energy technologies: nuclear, biofuels, bioelectricity, solar, and carbon capture. We estimate determinants of experts’ confidence using survey design, expert characteristics, and public R&D investment levels on which the elicited values are conditional. Our central finding is that when experts respond to elicitations in person (vs. online or mail) they ascribe lower confidence (larger uncertainty) to their estimates, but more optimistic assessments of best‐case (10th percentile) outcomes. The effects of expert affiliation and country of residence vary by technology, but in general: academics and public‐sector experts express lower confidence than private‐sector experts; and E.U. experts are more confident than U.S. experts. Finally, extending previous technology‐specific work, higher R&D spending increases experts’ uncertainty rather than resolves it. We discuss ways in which these findings should be seriously considered in interpreting the results of existing elicitations and in designing new ones.     

Consumption Dynamics During Recessions

Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross‐sectional and time‐series data.     

IS THERE A FISCAL FREE LUNCH IN A LIQUIDITY TRAP?

In this paper, we use a dynamic stochastic general equilibrium model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. However, given this fiscal free lunch, it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.     

Terrorism Risk Assessment,Recollection Bias,and Public Support for Counterterrorism Policy and Spending

Recollection bias (RB) refers to the phenomenon whereby after an adverse event people report that their risk assessment about a similar future event is presently no higher than their recollection of their pre‐event risk assessment. While previous research has outlined this theoretical construct and generated important empirical findings, there were some limitations. We design and employ a new national representative survey to address these limitations in this study. We examine the existence and persistence of RB among the general public in the context of a number of domestic and international terrorist attacks. We further examine the socioeconomic and political base of RB and the influences of RB on a wide range of citizens’ counterterrorism policy preferences. Our data analyses reveal strong evidence showing the occurrence of RB and its persistence across various forms of terrorism risk. With regard to the socioeconomic and political base, we find that females, older people, political conservatives, and Republicans are less likely to be subject to RB. For the effects of RB on public counterterrorism policy preferences, our analyses demonstrate that this bias significantly dampens public support for a wide range of preventive policy measures and government anti‐terrorism spending. Overall, our study, based on a national representative sample and an extended survey design, provides robust evidence of RB in terrorism risk assessment, and adds further evidence to support the idea that RB is likely a generalizable phenomenon. Implications and suggestions for future research are discussed in the conclusion.     

Voting Technology,Political Responsiveness,and Infant Health: Evidence From Brazil

This paper studies the introduction of electronic voting technology in Brazilian elections. Estimates exploiting a regression discontinuity design indicate that electronic voting reduced residual (error‐ridden and uncounted) votes and promoted a large de facto enfranchisement of mainly less educated citizens. Estimates exploiting the unique pattern of the technology's phase‐in across states over time suggest that, as predicted by political economy models, it shifted government spending toward health care, which is particularly beneficial to the poor. Positive effects on both the utilization of health services (prenatal visits) and newborn health (low‐weight births) are also found for less educated mothers, but not for the more educated.     

Do Political Institutions Shape Economic Policy?

Do political institutions shape economic policy? I argue that this question should naturally appeal to economists. Moreover, the answer is in the affirmative, both in theory and in practice. In particular, recent theoretical work predicts systematic effects of electoral rules and political regimes on the size and composition of government spending. Results from ongoing empirical work indicate that such effects are indeed present in the data. Some empirical results are consistent with theoretical predictions: presidential regimes have smaller governments and countries with majoritarian elections have smaller welfare‐state programs and less corruption. Other results present puzzles for future research: the adjustment to economic events appears highly institution‐dependent, as does the timing and nature of the electoral cycle.     

Defining Problems Fast and Slow: The U‐shaped Effect of Problem Definition Time on Project Duration

This study examines how time spent in problem definition affects problem solving in projects such as Six Sigma projects. Our hypotheses are tested using data collected from 1558 Six Sigma projects in a company. The results show evidence of a U‐shaped relationship between the amount of time spent in the Define phase and project duration. This finding suggests that spending too little time on problem definition potentially causes poor problem formulation, which leads to deficient problem solving and lengthens overall project time. On the other hand, too much time spent on problem definition can lead to unneeded delays in project completion due to diminishing returns on problem definition efforts. Furthermore, the optimal balance between spending too little and too much time depends on prior project experience and project complexity. Prior project experience reduced project completion time and weakened the U‐shaped effect. Conversely, complex projects took longer and appeared to show some evidence of a stronger U‐shaped effect; this suggests balancing the time spent in the Define phase was more challenging for complex projects. Our study also underscores the importance of managing project duration, as projects that were completed faster tended to be associated with higher project savings.     

Mitigating the U.S. Drug Shortages Through Pareto‐Improving Contracts

Drug shortages have been a major challenge facing the US pharmaceutical industry and government in recent years. Although the problem has drawn tremendous attention from the government and media, limited academic research has been devoted to this problem, and few solutions have been proposed based on rigorous research. This study addresses the drug shortage problem from a supply chain perspective, a key aspect missing in the literature, and proposes to mitigate shortages through drug purchase contracts. By modeling the drug supply chain, we capture the objectives of various supply chain parties, and investigate Pareto‐improving contracts that mitigate drug shortages, improve drug manufacturer's and group purchasing organization (GPO)'s profits, and cut government spending and healthcare providers’ costs. We explore structural properties of key supply chain decisions and the Pareto‐improving contracts, and conduct scenario analysis with realistic industry data to evaluate shortage mitigation solutions. Our analysis shows that increasing drug prices only, a solution advocated by many, is not very effective in shortage mitigation. Price increases must be paired with strengthened failure‐to‐supply clauses (called the IPS approach) to achieve consistent and significant shortage reduction as well as Pareto improvement. Across all scenarios tested, a 30% price increase under IPS can lead to a minimum, average, and maximum shortage reduction of 25%, 53%, and 70%, respectively. Our analysis also shows the impacts of IPS on different parties in the supply chain and the impacts of various model parameters on shortage mitigation. The IPS approach rewards reliability of drug supply, which is in line with the FDA's strategic plan to reward quality, but is easier to achieve in this regulation‐based industry. Interactions with the government and industry practitioners indicate that IPS also challenges the current mindset in pharmaceutical contracting.     

Critical Assessment of the Foundations of Power Transmission and Distribution Reliability Metrics and Standards

The U.S. federal government regulates the reliability of bulk power systems, while the reliability of power distribution systems is regulated at a state level. In this article, we review the history of regulating electric service reliability and study the existing reliability metrics, indices, and standards for power transmission and distribution networks. We assess the foundations of the reliability standards and metrics, discuss how they are applied to outages caused by large exogenous disturbances such as natural disasters, and investigate whether the standards adequately internalize the impacts of these events. Our reflections shed light on how existing standards conceptualize reliability, question the basis for treating large‐scale hazard‐induced outages differently from normal daily outages, and discuss whether this conceptualization maps well onto customer expectations. We show that the risk indices for transmission systems used in regulating power system reliability do not adequately capture the risks that transmission systems are prone to, particularly when it comes to low‐probability high‐impact events. We also point out several shortcomings associated with the way in which regulators require utilities to calculate and report distribution system reliability indices. We offer several recommendations for improving the conceptualization of reliability metrics and standards. We conclude that while the approaches taken in reliability standards have made considerable advances in enhancing the reliability of power systems and may be logical from a utility perspective during normal operation, existing standards do not provide a sufficient incentive structure for the utilities to adequately ensure high levels of reliability for end‐users, particularly during large‐scale events.     

Labor Force Participation of Women in the EU – What Role do Family Policies Play?

We empirically study the role of different family policies in affecting women's labor market behavior in the European Union. Women tend to assume more family duties than men and, consequently, often participate less in the labor market. Family policies aim to support families in general while a particular focus is on helping women to reconcile family duties with labor market participation. Their impact, however, is not clear, especially when it comes to different forms of labor market activity. We use a static and dynamic panel econometric framework examining the link between financial support for four types of family policies and labor force participation as well as (part‐time and full‐time) employment. The results suggest no stable significant impact of expenditures on family policies on overall labor force participation. However, higher spending on family allowance, cash benefits, and daycare benefits appears to promote part‐time employment, whereas only spending on parental leave schemes is a significant positive determinant of women's full‐time employment.     

Sales Forecasting with Financial Indicators and Experts' Input

We present a method for forecasting sales using financial market information and test this method on annual data for US public retailers. Our method is motivated by the permanent income hypothesis in economics, which states that the amount of consumer spending and the mix of spending between discretionary and necessity items depend on the returns achieved on equity portfolios held by consumers. Taking as input forecasts from other sources, such as equity analysts or time‐series models, we construct a market‐based forecast by augmenting the input forecast with one additional variable, lagged return on an aggregate financial market index. For this, we develop and estimate a martingale model of joint evolution of sales forecasts and the market index. We show that the market‐based forecast achieves an average 15% reduction in mean absolute percentage error compared with forecasts given by equity analysts at the same time instant on out‐of‐sample data. We extensively analyze the performance improvement using alternative model specifications and statistics. We also show that equity analysts do not incorporate lagged financial market returns in their forecasts. Our model yields correlation coefficients between retail sales and market returns for all firms in the data set. Besides forecasting, these results can be applied in risk management and hedging.     

同侪激励机制下政府补贴对制造商绿色研发影响的演化博弈分析

针对地方财政支付压力过大的问题,制定合理的补贴机制激励制造商绿色研发,是实现政企合作双赢的关键。在同侪激励视角下建立政府补贴和企业研发的演化博弈模型,结合静态激励和动态激励两种方案,分析双方博弈中的局部稳定性,探讨同侪激励基金、补贴系数等因素对群体演化路径的影响,从合作机制层面验证了同侪激励的可行性:较低的政府补贴支出仍能激励制造商绿色研发,较高的政府补贴支出可能导致补贴困局,动态调节的同侪激励机制可以协调政企双方不稳定的合作关系。     

11 The Effects of Governments on Management and Organization

Abstract

We review and integrate existing research from organization theory, strategy, organizational behavior, economics, sociology and political science on the effects of governments on organization and management, with a focus on how governing ideology and government capability influence independent organizations’ forms, strategies, and their participants’ behavior. When brought together these works suggest significant research opportunities in the fields of management and organization, as well as new perspectives on public policy challenges. Several avenues of potentially profitable empirical research include more attention to the influence of government on corporate strategies, more research on the strategies of pursuing corruption and government capture for competitive advantage, the role of government in fostering innovation and the growth of entrepreneurial organizations, and extra‐organizational contextual effects on managerial and employee organizational behavior. Possible public policy implications are illustrated with an application to the role of organizations in national wealth generation and dispersion.     

THE MYSTERY OF THE PRINTING PRESS: MONETARY POLICY AND SELF‐FULFILLING DEBT CRISES

We study the conditions under which unconventional (balance sheet) monetary policy can rule out self‐fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers. When purchasing sovereign debt, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate. As central bank purchases reduce the (ex ante) costs of debt, we characterize a critical threshold beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default. Because default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate inefficient inflation. We show that these losses do not necessarily undermine the credibility of a backstop, nor the monetary authorities' ability to pursue its inflation objectives. Backstops are credible if either the central bank enjoys fiscal backing or fiscal authorities are sufficiently averse to inflation. (JEL: E58, E63, H63)