Contributions in Merlin

Are competitive mechanisms perceived as just sources of economic inequality? Perceptions of fairness violations can have severe economic consequences, as they may cause counterproductive behavior such as rulebook slowdowns or quality shading. To analyze fairness perceptions associated with competitive mechanisms, we run laboratory experiments where a single powerful buyer can trade with one of several sellers—an environment that can lead to pronounced inequality among the interacting parties. Once the terms of trade are determined, sellers can engage in counterproductive behavior. We robustly find that low procurement prices, which allocate most of the surplus from trade to the buyer, trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our data demonstrate that competitive mechanisms, in addition to their capability to produce efficient allocations, can reduce conflict and inefficient reactions by increasing justification for economic inequality.

Can infrastructure investment win "hearts and minds"? We analyze a famous case in the early stages of dictatorship - the building of the motorway network in Nazi Germany. The Autobahn was one of the most important projects of the Hitler government. It was intended to reduce unemployment, and was widely used for propaganda purposes. We examine its role in increasing support for the NS regime by analyzing new data on motorway construction and the 1934 plebiscite, which gave Hitler great powers as head of state. Our results suggest that road building was highly effective, reducing opposition to the nascent Nazi regime.

SBTC is a powerful mechanism in explaining the increasing gap between educated and uneducated wages. However, SBTC cannot mimic the US within-group wage inequality. This paper provides an explanation for the observed intra-college group inequality by showing that the top decile earners' significant wage growth is underpinned by the link between ex ante ability, math-heavy college majors and highly quantitative occupations. We develop a general equilibrium model with multiple education outcomes, where wages are driven by individuals' ex ante abilities and acquired math skills. A large portion of within-group and general wage inequality is explained by math-biased technical change (MBTC).

While China has been pivotal in discussions and academic research on global imbalances, little is known about macroeconomic external imbalances among Chinese regions and the factors driving them. We use aggregate regional data and estimate provincial total factor productivity growth over 1984-2010. We observe that provinces that caught up relatively to national TFP had capital outflows while those that fell behind had capital inflows: there seems to be a capital allocation puzzle at the regional level inside China. We follow up by identifying the drivers of this pattern using the methodology developed in Gourinchas and Jeanne (2013) to compute regional investment and saving wedges. By relating those frictions with TFP catch-up parameters, we find an investment and a saving puzzle: regions that caught up relative to the rest of China seem to have lower investment rate (higher investment tax) and higher saving (lower saving tax) relative to the prediction of the neoclassical model. We exploit Chinese cross-regional variation in key characteristics suggested by the literature and find robust explanatory variables of the wedges: factors related to the ownership type, the level of integration into the world economy and the economic structure are highly correlated with the identified frictions.

A stated objective of the Australian Plain Packaging Act 2011 is to reduce smoking prevalence. We use the Roy Morgan Single Source (Australia) data set over the time period January 2001 to December 2013 to analyze whether this goal has been achieved in the first year since the implementation. In particular, we carry out a statistical trend analysis to study the (possible) effect of plain packaging on smoking prevalence. Two informative analyses help to draw conclusions on the (actual) effect of plain packaging on smoking prevalence in Australia. First, we look at the year of data before plain packaging was introduced, which happened in December 2012. Second, we compute confidence intervals around the estimated treatment effects. Our main results can be summarized as follows. First, if a statistical significance level of 5% is required, then there is no evidence at all for a plain packaging effect on smoking prevalence. Second, if one is willing to accept a relatively low level of statistical significance (that is, 10%), then there is evidence for a very short-lived plain packaging effect on smoking prevalence, namely in December 2012 only (after which smoking prevalence is statistically indistinguishable from its pre-existing trend). A formal power analysis demonstrates that the power of our inference methods is remarkably high.

We develop a theory of intergenerational transmission of preferences that rationalizes the choice between alternative parenting styles (as set out in Baumrind 1967). Parents maximize an objective function that combines Beckerian altruism and paternalism towards children. They can affect their children's choices via two channels: either by influencing children's preferences or by imposing direct restrictions on their choice sets. Different parenting styles (authoritarian, authoritative, and permissive) emerge as equilibrium outcomes, and are affected both by parental preferences and by the socioeconomic environment. Parenting style, in turn, feeds back into the children's welfare and economic success. The theory is consistent with the decline of authoritarian parenting observed in industrialized countries, and with the greater prevalence of more permissive parenting in countries characterized by low inequality.

This paper analyzes the relationship between work-promoting policies and child development. First, we provide new comprehensive evidence of the unintended consequences for child development of the Earned Income Tax Credit expansions during the 1990s in the United States. Second, our theory-driven empirical model reconciles this result by shedding light on the trade-off between the income effect (economic resources) and the substitution effect (time and quality of the parent-child interactions) on a child's cognitive and behavioral development. This money versus time trade-off is most pronounced for disadvantaged mothers. Overall, our results call for a policy debate on how to design targeted supplements for disadvantaged families to support working mothers and their children.

The Hotelling game of pure location allows interpretations in spatial competition, political theory, and professional forecasting. In this paper, the doubly symmetric mixed-strategy equilibrium for n ≥ 4 firms is characterized as the solution of a well-behaved boundary value problem. The analysis suggests that, in contrast to the cases n = 3 and n → ∞ , the equilibrium for a finite number of n ≥ 4 firms tends to overrepresent locations at the periphery of its support interval. Moreover, in the class of examples considered, an increase in the number of firms universally leads to a wider range of location choices and to a more dispersed distribution of individual locations. The results are used to comment on the potential benefit of competition in forecasting markets.

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms — which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration — have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment.

This paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a modern time series framework. We evaluate the effects of monetary policy against nonmonetary alternatives in a Bayesian updating framework with time-varying parameters. The predictive power of monetary policy for output is very small for the early phase of the depression and breaks down almost entirely after 1931. During the propagation phase of 1930-31, monetary policy is able to forecast correctly at short time horizons put invariably predicts recovery at longer horizons. In contrast, nonmonetary leading indicators on residential construction and equipment investment have impressive predictive power. Recursive calculation of the impulse response functions exhibits remarkable structural instability and strong reactions to monetary regime changes during the depression, just as predicted by the Lucas (1976) critique.