A two-country model is developed in this paper to examine the implications of fiscal competition in public education expenditure under international mobility of high-skilled labor. The authors allow for educational choice, asymmetry of countries with respect to total factor productivity, and tax base effects of migration in source and host country. As the latter may give rise to multiplicity of equilibrium, alternative belief structures of mobile high-skilled workers are carefully taken into account. The paper also looks at the consequences of bilateral policy coordination. While in line with other studies on tax competition, bilateral coordination can reduce the under-investment problem in public education spending, it also tends to hinder migration or may even reverse the direction of the migration flow that materializes under non-cooperative policy setting. As a result of its potentially adverse effects on migration patterns, bilateral coordination may therefore reduce global welfare and bring the world economy further away from the social planner's solution.
The paper offers an empirical taxonomy of the factors driving China’s current account. A simple present-value model with non-tradeable goods explains more than 70 percent
of current account variability over the period 1982-2007, including the persistent surpluses since 2001. It also correctly predicts the decline of China’s current account
since 2008. Expected increases in the prices of on-tradeables (e.g. housing and medical care) and expected declines in net output (GDP less investment and government
spending) are the main channels of external adjustment. Much of China’s current
account surplus seems driven by shocks that have global effects by persistently depressing
the world real interest rate. This is consistent with recent theoretical models
that suggest that factors related to China’s domestic financial development are key in
understanding global imbalances.
We explore bargaining, using ultimatum games, when one party, the proposer, possesses private information about the pie size and can either misrepresent this information through untruthful statements (explicit deception) or through information-revealing actions (implicit deception). Our study is the first such direct comparison between two ways in which people can deceive. We find that requiring informed parties to make an explicit statement yields greater deception than when information is communicated implicitly, particularly for larger stakes. However, allowing the explicit statement to be accompanied by a promise of truthfulness reverses this effect. In contrast with many previous studies, we generally observe very high frequencies of dishonesty.
The presence of workers who reciprocate higher wages with greater effort can have important consequences for labor markets. Knowledge about the determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in workers’ performance in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only workers who display positive reciprocity in a lab experiment show reciprocal performance responses in the field, while workers who lack positive reciprocity in the lab do not respond to the wage increase even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers’ performance response to a wage increase. They are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature.
Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.
Covariance matrix estimation and principal component analysis (PCA) are two cornerstones of multivariate analysis. Classic textbook solutions perform poorly when the dimension of the data is of a magnitude similar to the sample size, or even larger. In such settings, there is a common remedy for both statistical problems: nonlinear shrinkage of the eigenvalues of the sample covariance matrix. The optimal nonlinear shrinkage formula depends on unknown population quantities and is thus not available. It is, however, possible to consistently estimate an oracle nonlinear shrinkage, which is motivated on asymptotic grounds. A key tool to this end is consistent estimation of the set of eigenvalues of the population covariance matrix (also known as the spectrum), an interesting and challenging problem in its own right. Extensive Monte Carlo simulations demonstrate that our methods have desirable finite-sample properties and outperform previous proposals.
We analyze intergenerational redistribution in emerging economies with the aid of an overlapping generations model with endogenous labor supply. Growth is initially high but declines over time. A version of the model calibrated to China is used to analyze the welfare effects of alternative pension reforms. Although a reform of the current system is necessary to achieve financial sustainability, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations.
A key ingredient of many popular asset pricing models is that investors exhibit countercyclical risk aversion, which helps explain major economic puzzles such as the strong and systematic variation in risk premiums over time and the high volatility of asset prices. There is, however, surprisingly little evidence for this assumption because it is difficult to control for the host of factors that change simultaneously during financial booms and busts. We circumvent these control problems by priming financial professionals with either a boom or a bust scenario and by subsequently measuring their risk aversion in two experimental investment tasks with real monetary stakes. Subjects who were primed with a financial bust were substantially more risk averse than those who were primed with a boom. Subjects were also more fearful in the bust than in the boom condition, and their fear is negatively related to investments in the risky asset, suggesting that fear may play an important role in countercyclical risk aversion. The mechanism described in this paper is relevant for theory and has important implications, as it provides the basis for a self- reinforcing process that amplifies market dynamics.
This article examines the effects of market structure on the variety of research projects undertaken and the amount of duplication of research. A characterization of the equilibrium market portfolio of R&D projects and the socially optimal portfolio is provided. It is shown that a merger decreases the variety of developed projects and decreases the amount of duplication of research. An increase in the intensity of competition among firms leads to an increase in the variety of developed projects and a decrease in the amount of duplication of research.
This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. The trade-off of optimal UI between consumption smoothing and moral hazard requires accounting for the entire early retirement system, which often includes extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (increased take-up of UI followed by DI and/or regular retirement benefits) and program substitution (increased take-up of UI instead of DI). Exploiting Austria's regional extended benefit program, which extended regular UI benefits to up to 4 years, we find: (i) program complementarity is quantitatively important for workers aged 50+; and (ii) program substitution is quantitatively relevant for workers aged 55+. We derive a simple rule for optimal UI that accounts for program complementarity and program substitution. Using the sufficient statistics approach, we conclude that UI for older workers was too generous and the regional extended benefit program was a suboptimal policy.
