The distribution of talent across contests

Do the contests with the largest prizes attract the most able contestants? Towhat extent do contestants avoid competition? In this paper, we show, theoreticallyand empirically, that the distribution of abilities plays a crucial role in determiningcontest choice. Sorting exists only when the proportion of high-ability contestantsis sufficiently small. As this proportion increases, contestants shy away from competitionand sorting decreases, such that, reverse sorting becomes a possibility. Wetest our theoretical predictions using a large panel data set containing contest choiceover three decades. We use exogenous variation in the participation of highly-ablecompetitors to provide empirical evidence for the relationship among prizes, competition,and sorting.

Austerity and anarchy: Budget cuts and social unrest in Europe, 1919-2008

Does fiscal consolidation lead to social unrest? Using cross-country evidencefor the period 1919 to 2008, we examine the extent to which societies becomeunstable after budget cuts. The results show a clear correlation between fiscalretrenchment and instability. Expenditure cuts are particularly potent infueling protests; tax rises have only small and insignificant effects. We test ifthe relationship simply reflects economic downturns, using a recently-developedIMF dataset on exogenous expenditure shocks, and conclude that this is not thecase. While autocracies and democracies show broadly similar responses to budgetcuts, countries with more constraints on the executive are less likely to seeunrest after austerity measures. Growing media penetration does not strengthenthe effect of cut-backs on the level of unrest. We also find that austerity episodesthat result in unrest lead to quick reversals of fiscal policy.

Endogenous credit cycles

I develop an overlapping-generations framework in which changes in lending standards generateendogenous cycles. In my economy, entrepreneurs who are privately informed about thequality of their projects need to borrow funds. Intermediaries screen entrepreneurs both throughthe amount of investment undertaken and through the level of entrepreneurial net worth.I show that endogenous regime switches in financial contracts from pooling to separatingand vice-versa may generate fluctuations even in the absence of exogenous shocks. Whenthe economy is in the pooling (separating) regime, lending standards seem lax ( tight ) andinvestment is high (low). Differently from the existing literature, my model does not requireentrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregateinvestment.

When to carry eccentric products? Optimal retail assortment under consumer returns

To understand whether retailers should consider consumer returns when merchandising, we study howthe optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects itsassortment from an exogenous set of horizontally differentiated products. Consumers make purchase andkeep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortmenthas a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the mostpopular and most eccentric products when the refund amount is sufficiently low, which can be viewed asa form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, orwhen returns are disallowed, optimal assortment is composed of only the most popular products (a commonfinding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results:more eccentric products have higher probability of return conditional on purchase. In light of our analyticalfindings and managerial insights, we conclude that retailers should take their return policies into accountwhen merchandising.

Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production

A new algorithm called the parameterized expectations approach(PEA) for solving dynamic stochastic models under rational expectationsis developed and its advantages and disadvantages are discussed. Thisalgorithm can, in principle, approximate the true equilibrium arbitrarilywell. Also, this algorithm works from the Euler equations, so that theequilibrium does not have to be cast in the form of a planner's problem.Monte--Carlo integration and the absence of grids on the state variables,cause the computation costs not to go up exponentially when the numberof state variables or the exogenous shocks in the economy increase. \\As an application we analyze an asset pricing model with endogenousproduction. We analyze its implications for time dependence of volatilityof stock returns and the term structure of interest rates. We argue thatthis model can generate hump--shaped term structures.

Shared knowledge

Agents use their knowledge on the history of the economy in orderto choose what is the optimal action to take at any given moment of time,but each individual observes history with some noise. This paper showsthat the amount of information available on the past evolution of theeconomy is an endogenous variable, and that this leads to overconcentrationof the investment, which can be interpreted as underinvestment in research.It presents a model in which agents have to invest at each period in one of$K$ sectors, each of them paying an exogenous return that follows a welldefined stochastic path. At any moment of time each agent receives an unbiasednoisy signal on the payoff of each sector. The signals differ across agents,but all of them have the same variance, which depends on the aggregate investmentin that particular sector (so that if almost everybody invests in it theperceptions of everybody will be very accurate, but if almost nobody doesthe perceptions of everybody will be very noisy). The degree of hetereogeneityacross agents is then an endogenous variable, evolving across time determining,and being determined by, the amount of information disclosed.As long as both the level of social interaction and the underlying precisionof the observations are relatively large agents behave in a very preciseway. This behavior is unmodified for a huge range of informational parameters,and it is characterized by an excessive concentration of the investment ina few sectors. Additionally the model shows that generalized improvements in thequality of the information that each agent gets may lead to a worse outcomefor all the agents due to the overconcentration of the investment that thisproduces.

Globalization and wage inequality in South and East Asia, and Latin America: A gender approach

In this paper we analyse the reasons behind the evolution of the gender gap and wage inequality in South and East Asian and Latin American countries. Health human capital improvements, the exposure to free market openness and equal treatment enforcement laws seem to be the main exogenous variables affecting women s economic condition. During the second globalization era (in the years 1975-2000) different combinations of these variables in South East Asian and Latin American countries have had as a result the diminution of the gender gap. The main exception to this rule according to our data is China where economic reforms have been simultaneous to the increase of gender differences and inequality between men and women.This result has further normative consequences for the measure of economic inequality. Theimprovement of women s condition has as a result the diminution of the dispersion of wages.Therefore in most of the countries analysed the consequence of the diminution of the gender gapduring the second global era is the decrease of wage inequality both measured with Gini and Theil indexes.

The impact of interest-rate subsidies on long-term household debt: Evidence from a large program

The responsiveness of long-term household debt to the interest rate is acrucial parameter for assessing the effectiveness of public policies aimedat promoting specific types of saving. This paper estimates the effect ofa reform of Credito Bonificado, a large program in Portugal that subsidizedmortgage interest rates, on long-term household debt. The reform establisheda ceiling in the price of the house that could be financed through theprogram, and provides plausibly exogenous variation in incentives. Usinga unique dataset of matched household survey data and administrative recordsof debt, we document a large decrease in the probability of signing a newloan after the removal of the subsidy.

Incomplete markets, labor supply and capital accumulation

In this paper we explore the accumulation of capital in the presence oflimited insurance against idiosyncratic shocks, borrowing constraintsand endogenous labor supply. As in the exogenous labor supply case(e.g. Aiyagari 1994, Huggett 1997), we find that steady states arecharacterized with an interest rate smaller than the rate of timepreference. However,wealsofind that when labor supply is endogenous thepresence of uncertainty and a borrowing limit are not enough to giverise to aggregate precautionary savings .

Further evidence on the statistical properties of real GNP

The well-known lack of power of unit root tests has often been attributed to the shortlength of macroeconomic variables and also to DGP s that depart from the I(1)-I(0)alternatives. This paper shows that by using long spans of annual real GNP and GNPper capita (133 years) high power can be achieved, leading to the rejection of both theunit root and the trend-stationary hypothesis. This suggests that possibly neither modelprovides a good characterization of these data. Next, more flexible representations areconsidered, namely, processes containing structural breaks (SB) and fractional ordersof integration (FI). Economic justification for the presence of these features in GNP isprovided. It is shown that the latter models (FI and SB) are in general preferred to theARIMA (I(1) or I(0)) ones. As a novelty in this literature, new techniques are appliedto discriminate between FI and SB models. It turns out that the FI specification ispreferred, implying that GNP and GNP per capita are non-stationary, highly persistentbut mean-reverting series. Finally, it is shown that the results are robust when breaksin the deterministic component are allowed for in the FI model. Some macroeconomicimplications of these findings are also discussed.

Judges' cognition and market order

We argue that during the crystallization of common and civil law in the 19th century, the optimal degree of discretion in judicial rulemaking, albeit influenced by the comparative advantages of both legislative and judicial rulemaking, was mainly determined by the anti-market biases of the judiciary. The different degrees of judicial discretion adopted in both legal traditions were thus optimally adapted to different circumstances, mainly rooted in the unique, market-friendly, evolutionary transition enjoyed by English common law as opposed to the revolutionary environment of the civil law. On the Continent, constraining judicial discretion was essential for enforcing freedom of contract and establishing a market economy. The ongoing debasement of pro-market fundamentals in both branches of the Western legal system is explained from this perspective as a consequence of increased perceptions of exogenous risks and changes in the political system, which favored the adoption of sharing solutions and removed the cognitive advantage of parliaments and political leaders.

Why England? Demand, growth and inequality during the Industrial Revolution

Why was England first? And why Europe? We present a probabilistic model that builds on big-push models by Murphy, Shleifer and Vishny (1989), combined with hierarchical preferences. The interaction of exogenous demographic factors (in particular the English low-pressure variant of the European marriage pattern)and redistributive institutions such as the old Poor Law combined to make an Industrial Revolution more likely. Essentially, industrialization is the result of having a critical mass of consumers that is rich enough to afford (potentially) mass-produced goods. Our model is then calibrated to match the main characteristics of the English economy in 1750 and the observed transition until 1850.This allows us to address explicitly one of the key features of the British IndustrialRevolution unearthed by economic historians over the last three decades the slowness of productivity and output change. In our calibration, we find that the probability of Britain industrializing is 5 times larger than France s. Contrary to the recent argument by Pomeranz, China in the 18th century had essentially no chance to industrialize at all. This difference is decomposed into a demographic and a policy component, with the former being far more important than the latter.

World population growth and fertility patterns, 1960-2000. A simple model explaining the evolution of world's fertility during the second half of the 20th Century

In this paper we attempt to describe the general reasons behind the world populationexplosion in the 20th century. The size of the population at the end of the century inquestion, deemed excessive by some, was a consequence of a dramatic improvementin life expectancies, attributable, in turn, to scientific innovation, the circulation ofinformation and economic growth. Nevertheless, fertility is a variable that plays acrucial role in differences in demographic growth. We identify infant mortality, femaleeducation levels and racial identity as important exogenous variables affecting fertility.It is estimated that in poor countries one additional year of primary schooling forwomen leads to 0.614 child less per couple on average (worldwide). While it may bepossible to identify a global tendency towards convergence in demographic trends,particular attention should be paid to the case of Africa, not only due to its differentdemographic patterns, but also because much of the continent's population has yet toexperience improvement in quality of life generally enjoyed across the rest of theplanet.

A structural model of Australia as a small open economy

This paper sets up and estimates a structuralmodel of Australia as a small open economyusing Bayesian techniques. Unlike other recentstudies, the paper shows that a small microfoundedmodel can capture the open economydimensions quite well. Specifically, the modelattributes a substantial fraction of the volatilityof domestic output and inflation to foreigndisturbances, close to what is suggested by unrestrictedVAR studies. The paper also investigatesthe effects of various exogenous shockson the Australian economy.

Monetary policy shocks and transmission in Italy: A VAR analysis

This paper provides updated empirical evidence about the real and nominal effects of monetary policy in Italy, by using structural VAR analysis. We discuss different empirical approaches that have been used in order to identify monetary policy exogenous shocks. We argue that the data support the view that the Bank of Italy, at least in the recent past, has been targeting the rate on overnight interbank loans. Therefore, we interpret shocks to the overnight rate as purely exogenous monetary policy shocks and study how different macroeconomic variables react to such shocks.