Giacomo Bressan, Anja Duranovic, Irene Monasterolo, Stefano Battiston, Asset-level assessment of climate physical risk matters for adaptation finance, In: SSRN, No. 4062275, 2023. (Working Paper)
Climate physical risk assessment is crucial to inform adaptation policies and finance. However, science-based and transparent solutions to assess climate physical risks are still missing. This is a main limitation to fill the adaptation gap. We provide a methodology that quantifies physical risks on geolocalized productive assets, considering their exposure to both chronic and acute impacts (hurricanes) across the scenarios of the Intergovernmental Panel on Climate Change. Then, we translate asset-level shocks into economic and financial losses. We illustrate the methodology in an application to Mexico, a country that is highly exposed to physical risks, and attracts adaptation finance and foreign investments. We find that investor losses are underestimated up to 70% when neglecting asset-level information, and up to 82% when neglecting acute risks. Therefore, neglecting the asset-level and acute dimensions of physical risks can lead to large errors in the identification of the relevant adaptation policy response, investments and finance tools aimed to build resilience to climate change. |
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Irena Barjašić, Stefano Battiston, Vinko Zlatić, Credit Valuation Adjustment in Financial Networks, In: ArXiv.org, No. 2305.16434, 2023. (Working Paper)
Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct counterparty can depend substantially on the default probabilities of indirect counterparties. We develop a model to clarify when and how these network effects matter for CVA, in particular in the presence of correlation among counterparties defaults. We provide an approximate analytical solution for the default probabilities. This solution allows for identifying conditions on key parameters such as network degree, leverage and correlation, where network effects yield large differences in CVA (e.g. above 50%), and thus relevant for practical applications. Moreover, we find evidence that network effects induce a multi-modal distribution of CVA values. |
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Marc Paolella, Pawel Polak, Patrick Walker, Risk Parity Portfolio Optimization under Heavy-Tailed Returns and Time-Varying Volatility, In: SSRN, No. 4652551, 2023. (Working Paper)
Risk parity portfolio optimization, using expected shortfall as the risk measure, is investigated when asset returns are fat-tailed and heteroscedastic. The conditional return distribution is modeled by an elliptical multivariate generalized hyperbolic distribution, allowing for fast parameter estimation, via an expectation-maximization algorithm and a semi-closed form of the risk contributions. The efficient computation of non-Gaussian risk parity weights sidesteps the need for numerical simulations or Cornish-Fisher-type approximations. Accounting for fat-tailed returns, the risk parity allocation is less sensitive to volatility shocks, thereby generating lower portfolio turnover, in particular during market turmoils such as the global financial crisis. Although risk parity portfolios are surprisingly robust to the misuse of the Gaussian distribution, a more realistic model for conditional returns and time-varying volatilies can improve risk-adjusted returns, reduces turnover during periods of market stress and enables the use of a holistic risk model for portfolio and risk management. |
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Sandro Ambühl, Sebastian Blesse, Philipp Doerrenberg, Christoph Feldhaus, Axel Ockenfels, Politicians’ social welfare criteria: an experiment with German legislators, In: CESifo Working Papers, No. 10329, 2023. (Working Paper)
Much economic analysis derives policy recommendations based on social welfare criteria intended to model the preferences of a policy maker. Yet, little is known about policy maker’s normative views in a way amenable to this use. In a behavioral experiment, we elicit German legislators’ social welfare criteria unconfounded by political economy constraints. When resolving preference conflicts across individuals, politicians place substantially more importance on least-favored than on most-favored alternatives, contrasting with both common aggregation mechanisms and the equal weighting inherent in utilitarianism and the Kaldor-Hicks criterion. When resolving preference conflicts within individuals, we find no support for the commonly used “long-run criterion” which insists that choices merit intervention only if the lure of immediacy may bias intertemporal choice. Politicians’ and the public’s social welfare criteria largely coincide. |
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Larry Samuelson, Jakub Steiner, Growth and likelihood, In: CEPR Discussion Papers, No. 18339, 2023. (Working Paper)
We examine a stochastic growth process that can alternatively be interpreted as a model of economic growth, financial portfolio management, statistical inference, or biological population growth. For the economic interpretation, we find that the growth-maximizing policy satisfies a meritocracy principle: it minimizes the discrepancy between the resource shares allocated to the agents and the agents' ``merits.'' For the statistical interpretation, the setting is equivalent to a model of predictive coding, in which a misspecified system maximizes the fit of data. A consistency principle analogous to the meritocracy principle requires the optimal fit to minimize a degree of Bayes inconsistency. |
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Jiyuan Huang, Per Nils Anders Östberg, Difference-in-differences with Economic Factors and the Case of Housing Returns, In: Swiss Finance Institute Research Paper, No. 23-55, 2023. (Working Paper)
This paper studies how to incorporate observable factors in difference-in-differences and document their empirical relevance. We show that even under random assignment directly adding factors with unit-specific loadings into the difference-in-differences estimation results in biased estimates. This bias, which we term the “bad time control problem” arises when the treatment effect covaries with the factor variation. Researchers often control for factor structures by using: (i) unit time trends, (ii) pre-treatment covariates interacted with a time trend and (iii) group-time dummies. We show that all these methods suffer from the bad time control problem and/or omitted factor bias. We propose two solutions to the bad time control problem. To evaluate the relevance of the factor structure we study US housing returns. Adding macroeconomic factors shows that factors have additional explanatory power and estimated factor loadings differ systematically across geographic areas. This results in substantially altered treatment effects. |
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Daron Acemoglu, Philippe Aghion, Lint Barrage, David Hémous, Green innovation and the transition toward a clean economy, In: PIIE Working Papers, No. 23-14, 2023. (Working Paper)
To combat climate change without sacrificing long-term economic growth, innovation must be redirected toward green technologies. In this paper, we review a recent literature that has developed a directed technical change framework where innovation can be endogenously targeted either toward fossil-fuel enhancing technologies or clean energy sources (such as renewables). We provide empirical evidence of path dependence in firms’ choice between green and dirty innovation. We then draw implications of this path dependence for the design of environmental policy and for economic growth. In particular, we show that our framework has distinctive implications regarding unilateral environmental policies, international cooperation, the use of intermediate energy sources such as natural gas, and the role of civil society. |
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Iraj Khalid, Belina Rodrigues, Hippolyte Dreyfus, Solène Frileux, Karin Meissner, Philippe Fossati, Todd Anthony Hare, Liane Schmidt, Taste matters: mapping expectancy-based appetitive placebo effects onto the brain, In: bioRxiv, No. 527858, 2023. (Working Paper)
Expectancies, which are higher order prognostic beliefs, can have powerful effects on experiences, behavior and brain. However, it is unknown where, how, and when, in the brain, prognostic beliefs influence appetitive interoceptive experiences and related economic behavior. This study combined a placebo intervention on hunger with computational modelling and functional magnetic resonance imaging of value-based decision-making. The results show that prognostic beliefs about hunger shape hunger experiences, how much participants value food and food-value encoding in the prefrontal cortex. Computational modelling further revealed that these placebo effects were underpinned by how much and when during the decision process taste and health information are integrated into the accumulation of evidence toward a food choice. The drift weights of both sources of information further moderated ventromedial and dorsolateral prefrontal cortex interactions during choice formation. These findings provide novel insights into the neurocognitive mechanisms that translate higher order prognostic beliefs into non-aversive interoceptive sensitivity and shape decision-making. |
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Leonardo Bursztyn, Alexander W Cappelen, Bertil Tungodden, Alessandra Voena, David Yanagizawa-Drott, How are gender norms perceived?, In: NBER Working Paper Series, No. 31049, 2023. (Working Paper)
Actual and perceived gender norms are key to understanding gender inequality in society. In this paper, using newly collected nationally representative datasets from 60 countries that cover over 80% of the world population, we study gender norms on two distinct policy issues: 1) basic rights, allowing women to work outside of the home, and 2) affirmative action, prioritizing women when hiring for leadership positions. We establish that misperceptions of gender norms are pervasive across the world. The nature of the misperception, however, is context-dependent. In less gender-equal countries, people underestimate support for both policies, particularly among men; in more gender-equal countries, people overestimate support for affirmative action, particularly among women, and underestimate support for basic rights. We provide evidence of gender stereotyping and overweighting of the minority view as potential drivers of the global patterns of misperceptions. Together, our findings indicate how misperceptions of gender norms may obstruct progress toward gender equality, but also may contribute to sustaining gender policies that are not necessarily favored by women themselves. |
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Michel Maréchal, Alain Cohn, Jeffrey Yusof, Raymond Fisman, Whose preferences matter for redistribution: cross-country evidence, In: NBER Working Paper Series, No. 31974, 2023. (Working Paper)
Using cross-sectional data from 93 countries, we investigate the relationship between the desired level of redistribution among citizens from different socioeconomic backgrounds and the actual extent of government redistribution. Our focus on redistribution arises from the inherent class conflicts it engenders in policy choices, allowing us to examine whose preferences are reflected in policy formulation. Contrary to prevailing assumptions regarding political influence, we find that the preferences of the lower socioeconomic group, rather than those of the median or upper strata, are most predictive of realized redistribution. This finding contradicts the expectations of both leading experts and regular citizens. |
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Alessandro Ferrari, Sébastien Laffitte, Mathieu Parenti, Farid Toubal, Profit shifting frictions and the geography of multinational activity, In: CEPR Discussion Papers, No. 17801, 2023. (Working Paper)
International tax rules are commonly viewed as obsolete as multinational corporations exploit loopholes to move their profits to tax havens. This paper uncovers how international tax reforms can curb profit shifting and impact real income and welfare across nations. We build a model of international corporate tax avoidance under imperfect competition that disentangles profits that stem from real economic activity from paper profits that are booked in tax havens. Our framework delivers a set of ``triangle identities'' through which we recover bilateral profit-shifting flows. Using different data sources ranging from publicly available to firm-level datasets, we find an elasticity of paper profits that is three times larger than the elasticity of the tax base. In our quantitative model, a global minimum tax increases welfare by inducing higher tax revenues and public good provision. It also encourages countries to raise their statutory corporate tax rates as it effectively reduces tax competition. Instead, a border adjustment tax (BAT) that eliminates profit shifting distorts multinational production and may result in welfare losses. A tax reform in the spirit of the destination-based cash-flow tax, combining a BAT with a reduction in the corporate income tax rate may induce efficiency gains at the expense of public good provision. |
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Elliot Beck, Damian Kozbur, Michael Wolf, Hedging forecast combinations with an application to the random forest, In: ArXiv.org, No. 2308.15384, 2023. (Working Paper)
This papers proposes a generic, high-level methodology for generating forecast combinations that would deliver the optimal linearly combined forecast in terms of the mean-squared forecast error if one had access to two population quantities: the mean vector and the covariance matrix of the vector of individual forecast errors. We point out that this problem is identical to a mean-variance portfolio construction problem, in which portfolio weights correspond to forecast combination weights. We allow negative forecast weights and interpret such weights as hedging over and under estimation risks across estimators. This interpretation follows directly as an implication of the portfolio analogy. We demonstrate our method's improved out-of-sample performance relative to standard methods in combining tree forecasts to form weighted random forests in 14 data sets. |
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Ana Costa-Ramon, Meltem Daysal, Ana Rodríguez-González, The oral contraceptive pill and adolescents' mental health, In: CEPR Discussion Papers, No. 18269, 2023. (Working Paper)
What is the impact of the oral contraceptive pill on the mental health of adolescent girls? Using administrative data from Denmark and exploiting the variation in the timing of pill initiation in an event study design, we find that the likelihood of a depression diagnosis and antidepressant use increases shortly after pill initiation. We then uncover substantial variation in primary care providers' tendency to prescribe the pill to adolescents, unrelated to patient characteristics. Being assigned to a high prescribing physician strongly predicts pill use by age 16 and leads to worse mental health outcomes between ages 16-18. |
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David Dorn, Philipp Kircher, Oliver Salzmann, The effect of national industry shocks on local employment: impacts on geographical inequality and inefficiency, In: CORE Discussion Papers, No. 2023/25, 2023. (Working Paper)
We analyse the effect of national industry shocks on local employment. By providing a novel structural view on the Bartik framework, we show that the difference in national and regional employment growth trends can be attributed to within-region spillovers. These spillovers can be quantified in a simple regression of regional employment change predictions versus actual regional employment changes, where regional employment change predictions are based on national shocks. We find consistent evidence that a predicted change in employment by 1% is associated with a 1.3% change in actual employment in a region. We hypothesize that agglomeration plays a key role in explaining the difference between the predicted and the actual employment growth. When we allow for non-linearities in a variety of setups, we find that the main driver of agglomeration effects are regions with particularly strong growth in employment which outperform their predictions. Taking the employment weighted mean as inflection point, regions with below mean predicted employment growth show a roughly 1:1 translation of predicted job creation to actual job creation. For regions with above mean predictions this ratio increases to 1:1.7. |
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Ernst Fehr, Thomas Epper, Julien Senn, Social preferences and redistributive politics, In: iRisk Working Paper Series, No. 2023-05, 2023. (Working Paper)
Increasing inequality and associated egalitarian sentiments have put redistribution on the political agenda. In this paper, we take advantage of Swiss direct democracy, where people voted several times on strongly redistributive policies in national plebiscites, to study the link between social preferences and a behaviorally validated measure of support for redistribution in a broad sample of the Swiss population. Using a novel nonparametric Bayesian clustering algorithm, we uncover the existence of three fundamentally distinct preference types in the population: predominantly selfish, inequality averse and altruistic individuals. We show that inequality averse and altruistic individuals display a much stronger support for redistribution, particularly if they are more affluent. In addition, we show that previously identified key motives underlying opposition to redistribution – such as the belief that effort is an important driver of individual success – play no role for selfish individuals but are highly relevant for other-regarding individuals. Finally, while inequality
averse individuals display strong support for policies that primarily aim to reduce the incomes of the rich, altruistic individuals are considerably less supportive of these policies. Thus, knowledge about the qualitative properties of social preferences and their distribution in the population also provides insights into which preference type supports specific redistributive policies, which has implications for how policy makers may design redistributive packages to maximize political support for them. |
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Sascha O Becker, Hans-Joachim Voth, From the Death of God to the rise of Hitler, In: CEPR Discussion Papers, No. 18543, 2023. (Working Paper)
Can weakened religiosity lead to the rise of totalitarianism? The Nazi Party set itself up as a political religion, emphasizing redemption, sacrifice, rituals, and communal spirit. This had a major impact on its success: Where the Christian Church only had shallow roots, the Nazis received higher electoral support and saw more party entry. "Shallow Christianity" reflects the geography of medieval Christianization and the strength of pagan practices, which we use as sources of exogenous variation. We also find predictive power at the individual level: Within each municipality, the likelihood of joining the Nazi Party was higher for those with less Christian first names. |
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Rod Garratt, Marek Pycia, Efficient bilateral trade, In: CEPR Discussion Papers, No. 18188, 2023. (Working Paper)
Can two parties reach an ex-post Pareto efficient trade agreement? The importance of the question was elucidated by Coase (1960), and Myerson and Satterthwaite (1983) provided a commonly accepted negative answer that such agreement is impossible when the parties are privately informed. We show that this negative answer depends on the assumption of quasi-linear preferences: efficient trade is possible if risk- aversion or wealth effects are sufficiently large or if agents’ utility is not too responsive to private information. Under empirically-grounded specifications of risk aversion and elasticity of trade, two parties can trade efficiently despite substantial asymmetry of information. |
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Kristóf Madarász, Marek Pycia, Information choice: cost over content, In: CEPR Discussion Papers, No. 18252, 2023. (Working Paper)
When supplying information, agents choose between options that differ both in their contents and in their costs. We establish a “cost-over-content” theorem for a large class of dynamic trading environments where buyers choose from arbitrary sets of processes (experiments) that reveal information to the seller. When all experiments are equally costly, choosing any given experiment is a perfect equilibrium. However, when experiments differ in costs, there is a unique equilibrium: all buyers choose the cheapest experiment, regardless of the information it pro- vides. We explore implications for market performance, privacy, data sale, and defaults in market regulation. |
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Marek Pycia, Kyle Woodward, Pollution permits: efficiency by design, In: SSRN, No. 4453956, 2023. (Working Paper)
The annual adverse effects of pollution are on the order of 10% of world GDP. Many approaches are used or have been proposed to control the growing pollution problem, but none of them allows for efficient pollution control in settings in which the marginal cost of pollution is increasing and polluters are better informed than regulators about the costs of abatement. We propose a simple primary market mechanism, True-Cost Pay as Bid, that implements efficient pollution control and does not depend on how much information the regulators have about the abatement costs. |
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Jeremy Zuchuat, Rafael Lalive, Aderonke Osikominu, Lorenzo Pesaresi, Josef Zweimüller, Duration dependence in finding a job: applications, interviews, and job offers, In: CEPR Discussion Papers, No. 18600, 2023. (Working Paper)
The job finding rate declines with the duration of unemployment. While this is a well established fact, the reasons are still disputed. We use monthly search diaries from Swiss public employment offices to shed new light on this issue. Search diaries record all applications sent by job seekers, including the outcome of each application – whether the employer followed up with a job interview and a job offer. Based on more than 600,000 applications sent by 15,000 job seekers, we find that job applications and job interviews decrease, but job offers (after an interview) increase with duration. A model with statistical discrimination by firms and learning from search outcomes by workers replicates these empirical duration patterns closely. The structurally estimated model predicts that 55 percent of the decline in the job finding rate is due to “true” duration dependence, while the remaining 45 percent is due to dynamic selection of the unemployment pool. We also discuss further drivers of the observed duration patterns, such as human capital depreciation, stock-flow matching, depletion of one’s personal network, and changes in application targeting or quality. |
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