Can Early Intervention Policies Improve Well-being? Evidence from a randomized controlled trial

Many authors have proposed incorporating measures of well-being into evaluations of public policy. Yet few evaluations use experimental design or examine multiple aspects of well-being, thus the causal impact of public policies on well-being is largely unknown. In this paper we examine the effect of an intensive early intervention program on maternal well-being in a targeted disadvantaged community. Using a randomized controlled trial design we estimate and compare treatment effects on global well-being using measures of life satisfaction, experienced well-being using both the Day Reconstruction Method (DRM) and a measure of mood yesterday, and also a standardized measure of parenting stress. The intervention has no significant impact on negative measures of well-being, such as experienced negative affect as measured by the DRM and global measures of well-being such as life satisfaction or a global measure of parenting stress. Significant treatment effects are observed on experienced measures of positive affect using the DRM, and a measure of mood yesterday. The DRM treatment effects are primarily concentrated during times spent without the target child which may reflect the increased effort and burden associated with additional parental investment. Our findings suggest that a maternal-focused intervention may produce meaningful improvements in experienced well-being. Incorporating measures of experienced affect may thus alter cost-benefit calculations for public policies.

Legal Uncertainty, Competition Law Enforcement Procedures and Optimal Penalties

In this paper we make three contributions to the literature on optimal Competition Law enforcement procedures. The first (which is of general interest beyond competition policy) is to clarify the concept of “legal uncertainty”, relating it to ideas in the literature on Law and Economics, but formalising the concept through various information structures which specify the probability that each firm attaches – at the time it takes an action – to the possibility of its being deemed anti-competitive were it to be investigated by a Competition Authority. We show that the existence of Type I and Type II decision errors by competition authorities is neither necessary nor sufficient for the existence of legal uncertainty, and that information structures with legal uncertainty can generate higher welfare than information structures with legal certainty – a result echoing a similar finding obtained in a completely different context and under different assumptions in earlier Law and Economics literature (Kaplow and Shavell, 1992). Our second contribution is to revisit and significantly generalise the analysis in our previous paper, Katsoulacos and Ulph (2009), involving a welfare comparison of Per Se and Effects- Based legal standards. In that analysis we considered just a single information structure under an Effects-Based standard and also penalties were exogenously fixed. Here we allow for (a) different information structures under an Effects-Based standard and (b) endogenous penalties. We obtain two main results: (i) considering all information structures a Per Se standard is never better than an Effects-Based standard; (ii) optimal penalties may be higher when there is legal uncertainty than when there is no legal uncertainty.

Consumption Decisions When People Value Conformity

In this paper we assume that for some commodities individuals may wish to adjust their levels of consumption from their normal Marshallian levels so as to match the consumption levels of a group of other individuals, in order to signal that they conform to the consumption norms of that group. Unlike Veblen’s concept of conspicuous consumption this can mean that some individuals may reduce their consumption of the relevant commodities. We model this as a three-stage game in which individuals first decide whether or not they wish to adhere to a norm, then decide which norm they wish to adhere to, and finally decide their actual consumption. We present a number of examples of the resulting equilibria, and then discuss the potential policy implications of this model.

The Inventor Balance and the Functional Specialization in Global Inventive Activities

We study the functional specialization whereby some countries contribute relatively more inventors vs. organizations in the production of inventions at a global scale. We propose a conceptual framework to explain this type of functional specialization, which posits the presence of feedbacks between two distinct sub-systems, each one providing inventors and organizations. We quantify the phenomenon by means of a new metric, the “inventor balance”, which we compute using patent data. We show that the observed imbalances, which are often conspicuous, are determined by several factors: the innovativeness of a country relative to its level of economic development, relative factor endowments, the degree of technological specialization and, last, cultural traits. We argue that the “inventor balance” is a useful indicator for policy makers, and its routine analysis could lead to better informed innovation policies.

Picking the Right Budget Constraint for Scotland

This position paper considers the devolution of further fiscal powers to the Scottish Parliament in the context of the objectives and remit of the Smith Commission. The argument builds on our discussion of fiscal decentralization made in our previous published work on this topic. We ask what sort of budget constraint the Scottish Parliament should operate with. A soft budget constraint (SBC) allows the Scottish Parliament to spend without having to consider all of the tax and, therefore, political consequences, of that spending, which is effectively the position at the moment. The incentives to promote economic growth through fiscal policy – on both the tax and spending sides are weak to non-existent. This is what the Scotland Act, 1998, and the continuing use of the Barnett block grant, gave Scotland. Now other budget constraints are being discussed – those of the Calman Commission (2009) and the Scotland Act (2012), as well as the ones offered in 2014 by the various political parties – Scottish Conservatives, Scottish Greens, Scottish Labour, the Scottish Liberal Democrats and the Scottish Government. There is also the budget constraint designed by the Holtham Commission (2010) for Wales that could just as well be used in Scotland. We examine to what extent these offer the hard budget constraint (HBC) that would bring tax policy firmly into the realm of Scottish politics, asking the Scottish electorate and Parliament to consider the costs to them of increasing spending in terms of higher taxes; or the benefits to them of using public spending to grow the tax base and own-sourced taxes? The hardest budget constraint of all is offered by independence but, as is now known, a clear majority of those who voted in the referendum did not vote for this form of budget constraint. Rather they voted for a significant further devolution of fiscal powers while remaining within a political and monetary union with the rest of the UK, with the risk pooling and revenue sharing that this implies. It is not surprising therefore that none of the budget constraints on offer, apart from the SNP’s, come close to the HBC of independence. However, the almost 25% fall in the price of oil since the referendum, a resource stream so central to the SNP’s economic policy making, underscores why there is a need for a trade off between a HBC and risk pooling and revenue sharing. Ranked according to the desirable characteristic of offering something approaching a HBC the least desirable are those of the Calman Commission, the Scotland Act, 2012, and Scottish Labour. In all of these the ‘elasticity’ of the block grant in the face of failure to grow the Scottish tax base is either not defined or is very elastic – meaning that the risk of failure is shuffled off to taxpayers outside of Scotland. The degree of HBC in the Scottish Conservative, Scottish Greens and Scottish Liberal Democrats proposals are much more desirable from an economic growth point of view, the latter even embracing the HBC proposed by the Holtham Commission that combines serious tax policy with welfare support in the long-run. We judge that the budget constraint in the SNP’s proposals is too hard as it does not allow for continuation of the ‘welfare union’ in the UK. We also consider that in the case of a generalized UK economic slow requiring a fiscal stimulus that the Scottish Parliament be allowed increased borrowing to be repaid in the next economic upturn.

Money Cycles

Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own.We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity. Agents spend their money too quickly – a “hot potato effect of inflation”. We show that inflation can stimulate inefficiently high aggregate output.

International Aid to Tanzania – with some comparisons from Ghana and Uganda

This paper has three principal objectives. First, to review the level of Official Development Assistance (ODA) to Tanzania over the last two to three decades, and to place this into an economic context. This review includes some comparisons with the experience of Ghana and Uganda. Second, to discuss three major issues for the Tanzanian aid: the position of ODA as budget support, corruption, and alignment with the principles of the Paris Declaration on Aid Effectiveness. Third, to review the literature on the Tanzanian aid experience, including a range of official evaluation reports produced by the Tanzanian government and by the donor community. The conclusions, broadly, are that ODA has been at a sustained high level for most of the period reviewed, funding a significant amount of government development expenditure, and that economic growth has been strong, with poverty reduction ‘flat-lining’ in Tanzania but being significant in Ghana and Uganda. Experience with budget support in Tanzania has been mixed, corruption continues as a major concern, and improvements to public finance management have been difficult to achieve. In this context governance adjustments come slowly, requiring patience on the part of both recipient governments and the ODA donor community.

A Theory of Wage Setting Behavior

Concerns for fairness, workers' morale and reciprocity infuence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn in uences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms expectations are key drivers of the propositions derived.

Gender Inequality and the Sex Ratio in Three Emerging Economies

The aim of this paper is to study inequality and deprivations as reflected in the human sex ratio (commonly defined as the number of males per 100 females). The particular focus is on three emerging economies, viz., Russia, India and China. The paper compares and contrasts the experiences of these countries and discusses policy issues. It is noted that while the feminist perspective on the issues surrounding the sex ratio is important, it would be wrong to view these issues always or exclusively through the prism of that perspective . It is also suggested that India and China probably have better prospects of sustained economic growth in the foreseeable future than does Russia.

Computing Markov-Perfect Optimal Policies in Business-Cycle Models

Time-inconsistency is an essential feature of many policy problems (Kydland and Prescott, 1977). This paper presents and compares three methods for computing Markov-perfect optimal policies in stochastic nonlinear business cycle models. The methods considered include value function iteration, generalized Euler-equations, and parameterized shadow prices. In the context of a business cycle model in which a scal authority chooses government spending and income taxation optimally, while lacking the ability to commit, we show that the solutions obtained using value function iteration and generalized Euler equations are somewhat more accurate than that obtained using parameterized shadow prices. Among these three methods, we show that value function iteration can be applied easily, even to environments that include a risk-sensitive scal authority and/or inequality constraints on government spending. We show that the risk-sensitive scal authority lowers government spending and income-taxation, reducing the disincentive households face to accumulate wealth.

The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information

This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.

Fiscal multipliers in a two-sector search and matching model

This paper evaluates the effects of policy interventions on sectoral labour markets and the aggregate economy in a business cycle model with search and matching frictions. We extend the canonical model by including capital-skill complementarity in production, labour markets with skilled and unskilled workers and on-the-job-learning (OJL) within and across skill types. We first find that, the model does a good job at matching the cyclical properties of sectoral employment and the wage-skill premium. We next find that vacancy subsidies for skilled and unskilled jobs lead to output multipliers which are greater than unity with OJL and less than unity without OJL. In contrast, the positive output effects from cutting skilled and unskilled income taxes are close to zero. Finally, we find that the sectoral and aggregate effects of vacancy subsidies do not depend on whether they are financed via public debt or distorting taxes.

Transaction Costs and Institutions: Investments in Exchange

This paper proposes a simple model for understanding transaction costs for their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues.

Co-Movement, Spillovers and Excess Returns in Global Bond Markets

This paper investigates global term structure dynamics using a Bayesian hierarchical factor model augmented with macroeconomic fundamentals. More than half of the variation in bond yields of seven advanced economies is due to global co-movement, which is mainly attributed to shocks to non-fundamentals. Global fundamentals, especially global inflation, affect yields through a ‘policy channel’ and a ‘risk compensation channel’, but the effects through two channels are offset. This evidence explains the unsatisfactory performance of fundamentals-driven term structure models. Our approach delineates asymmetric spillovers in global bond markets connected to diverging monetary policies. The proposed model is robust as identified factors has significant explanatory power of excess returns. The finding that global inflation uncertainty is useful in explaining realized excess returns does not rule out regime changing as a source of non-fundamental fluctuations.

US Monetary and Fiscal Policies - Conflict or Cooperation?

Most of the literature estimating DSGE models for monetary policy analysis ignores fiscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both fiscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We find that US monetary and fiscal policy have often been in conflict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing fiscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing fiscal regime may actually be welfare improving.