STRATEGIC BIDDING AND CONTRACT RENEGOTIATION

When firms bid in procurement auctions, they take into account the likelihood of future contract renegotiations. If they anticipate that certain input quantities will change ex post, they have an incentive to strategically skew their itemized bids, thereby increasing profits for themselves and costs for the procuring agency. We develop and estimate a structural model of strategic bidding using a data set of road construction projects in Vermont. We find that bidding strategies lead to increased markups for renegotiated items and reduced markups for nonrenegotiated items, results consistent with bid‐skewing.     

Tax structure and economic growth

Past theoretical work predicts that higher corporate tax rates should decrease economic growth rates, while the effects of high personal tax rates are less clear. In this paper, we explore how tax policies in fact affect a country's growth rate, using cross-country data during 1970–1997. We find that statutory corporate tax rates are significantly negatively correlated with cross-sectional differences in average economic growth rates, controlling for various other determinants of economic growth, and other standard tax variables. In fixed-effect regressions, we again find that increases in corporate tax rates lead to lower future growth rates within countries. The coefficient estimates suggest that a cut in the corporate tax rate by 10 percentage points will raise the annual growth rate by one to two percentage points.     

An experimental study of precautionary bidding

Auctions often involve goods exhibiting a common-knowledge ex-post risk. In such auctions, precautionary bidding predicts that under expected utility, DARA bidders reduce their bids by more than the appropriate risk premium. Because the degree of riskiness of an auctioned good and bidders׳ levels of risk aversion are difficult to observe in field settings, we conduct experimental auctions that allow us to identify the precautionary premium directly. We find strong evidence for precautionary bidding. The effect is robust to changes in experimental design features. Our experiment provides the first empirical demonstration of precautionary motives in a strategic setting.     

Market power and markups: Malign markers for the Australian macroeconomy

Research on markups by Hambur (Treasury Working Paper, 2021) shows that markups in Australia have increased since the turn of the century. This is consistent with findings for other advanced economies over the same period. Australia's most digitally intensive firms increased markups the most. Australian industries with the greatest increase in concentration also recorded the greatest increases in markups. This aligns with other economic evidence around declining dynamism. Over recent decades, market concentration has risen, the start-up rate has dropped, and the share of workers starting a new job has declined. Evidence on markups is consistent with a lack of dynamism in the Australian economy.     

How does economic policy uncertainty drive gold–stock correlations? Evidence from the UK

In this article, we investigate the effects of economic policy uncertainty (EPU) on correlations between the UK stock market and gold market. We find that less certain economic policies result in lower correlations, while more certain economic policies result in higher correlations. The correlations are symmetric and show no structural breaks caused by the recent financial crisis. The recent financial crisis has not changed EPU effects on the correlations. The effects of one positive one-standard-deviation shock of the logarithmic change rate of the EPU on the correlations last approximately 19 months.     

Relative performance pay in the shadow of crisis

We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that might explain players׳ behavior.     

Global banking,global crises? The role of the bank balance-sheet channel for the transmission of financial crises

We examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries׳ risk of suffering financial turmoil. We construct a new proxy of shocks to international banks׳ balance-sheets using credit ratings and the structure of their international assets. This allows us investigating the effect of (foreign) bank balance-sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011. Our proxies of shocks towards bank balance-sheets are strong predictors of systemic banking crises in their debtor countries. Confirming these results, bilateral bank flows significantly decrease when creditor banks׳ assets are hit by negative shocks, as measured by credit rating downgrades from third-party countries. Short-term liabilities towards global banks appear to increase roll-over and funding risks, thereby amplifying the impact of shocks to foreign lenders’ balance-sheets. Domestic banking sectors vulnerabilities, such as illiquid assets and a low deposit-asset ratio, are found to increase crisis contagion risk. In contrast, a high level of global liquidity attenuates the transmission of shocks to international banks׳ assets to debtor countries.     

Markups’ cyclical behaviour: the role of demand and supply shocks

We assess how demand and supply shocks (identified via the Blanchard and Quah (1989) structural vector autoregression approach) in 14 OECD countries affect markups. We find that individual responses of markups to demand shocks push down the markup for most countries (confirmed in the panel analysis). On the other hand, a supply shock has a more mixed effect.     

A Kaleckian Perspective on Financialisation and Distribution in Three Main Eurozone Countries before and after the Crisis: France,Germany and Spain

The purpose of this article is twofold. First, we examine if, and to what extent, a general Kaleckian analysis of the potential effects of financialisation on income shares in advanced capitalist economies is of relevance for the three Eurozone countries under investigation—France, Germany and Spain—in the period before the recent financial and economic crisis. Second, we study changes in the financialisation–distribution nexus that have occurred in the course of and after the financial and economic crisis. We find that the countries examined here have shown broad similarities regarding redistribution before the crisis, although there are some differences in the underlying determinants. These differences have continued during the period after the crisis and have led to different results in the development of distribution since then.     

Civil wars beyond their borders: The human capital and health consequences of hosting refugees

In early 1994, Kagera - a region in northwestern Tanzania - was flooded by more than 500,000 refugees fleeing from the genocides of Burundi and Rwanda. I use this population shock and a series of topographic barriers that resulted in variation in refugee intensity to investigate the short- and long-run causal effects of hosting refugees on outcomes of local children. This strategy provides evidence of adverse impacts over one year after the shock: a worsening of children's anthropometrics (0.3 standard deviations), an increase in the incidence of infectious diseases (15-20 percentage points) and an increase in mortality for children under five (7 percentage points). I also find that intra- and inter-cohort variation in childhood exposure to the refugee crisis reduced height in early adulthood by 1.8 cm (1.2%), schooling by 0.2 years (7.1%) and literacy by 7 percentage points (8.6%). Designs using the distance to the border with Rwanda as an alternative identification strategy for refugee intensity support the findings. The estimates are robust across different samples, specifications and estimation methods and provide evidence of a previously undocumented indirect effect of civil wars on the well-being of children and subsequent economic growth in refugee-hosting communities.     

Firm credit in the euro area: a tale of three crises

Using survey data from 2009 to 2011, we analyse the effects of the recent euro area economic, financial and private debt crisis on the supply of and demand for bank finance for small and medium enterprises (SMEs). At the country level, we identify three distinct aspects of the recent crisis in the euro area affecting firm credit through different channels. Controlling for country fixed effects, the impact of a weak real economy on firm credit operates both by reducing firms’ demand for bank financing and by lenders increasing loan rejections and tightening terms and conditions on credit allocated. On the other hand, financial conditions have no significant effect on demand, but they do affect credit supply as we find that financial tensions worsen the chances of obtaining credit and its terms and conditions. We interpret this as evidence of a bank balance sheet channel negatively impacting credit provision. We find that private sector indebtedness has important effects on SMEs’ credit access and its terms and conditions.     

Markups and income inequality: Causal links, 1975-2011

Using data for 20 countries during 1975–2011, this study provides new evidence on the association between the lack of competition, measured by an increase in markups, and income inequality. We find that an increase in markups is positively associated with rising income inequality. More interestingly, not only do extra profits from higher markups accrue to the top-income group, but also, within the top-income group (top 10%), the higher top-income earners (top 1%) tend to benefit disproportionately more than the lower top-income earners (top 5% or 10%). Finally, we highlight the role of labor market policies; the positive relationship between markups and income inequality is less pronounced in countries with better labor protection such as the statutory protection and power of labor unions, generous unemployment benefits, and mandatory minimum wages.     

The tempest: Short- and long-term consequences of a natural disaster for children׳s development

This paper analyzes the short- and long-run consequences of a natural disaster on children׳s education and health. The particular focus lies on variation in idiosyncratic shocks to households using housing damages caused by a super typhoon as a proxy. Relying on individual panel data and a setting in which typhoons are a relatively rare event, we find negative and persistent effects on children׳s education but no effects on children׳s health. Effects on education are likely driven by a shift in parental investments made to cope with the economic consequences of typhoon damages. Subgroup analysis suggests that results are stronger for girls, children with no older siblings, children from poor families, and families with no strong family or social network.     

The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change?

This paper investigates the impact of the 2007 financial crisis on the relationship between real mortgage interest rates and real house prices. It applies a dynamic conditional correlation based methodology that uses fractionally differenced data along with controls for structural breaks and non-interest-rate related factors that influence house prices. The key finding made is that the financial crisis had a long-term structural impact on the monetary transmission relationship. For example, we find that the mean conditional correlation between house prices in England and Wales and the three-year fixed mortgage rate rose by 6.6 percentage points. Similarly, the mean correlation between prices and the standard variable mortgage rate increased 6.4 percentage points to 54%. These findings suggest to us that interest-rate-based monetary policy still has an important role to play in the housing market.     

Price-cost markups in UK industry

This article tests for the presence of monopolistic price markups across UK industrial sectors by testing for a non-zero covariance between the Solow residual and various instruments. This restriction derives from profit maximising conditions for a representative imperfectly competitive firm under the assumption of constant returns to scale. We find evidence of significant markups in the Manufacturing and Services sectors which together account for more than 90% of total employment within the UK.     

Multi‐product exporters,variable markups and exchange rate fluctuations

In this paper we investigate how firms adjust markups across products in response to fluctuations in the real exchange rate. We estimate markups at the market–product–plant level using detailed panel production and cost data from Mexican manufacturing between 1994 and 2007. Exploiting variation in the real exchange rate in the aftermath of the peso crisis in December 1994, we provide robust empirical evidence that plants increase their markups and producer prices in response to a real depreciation and that this increase is greater for products with higher productivity. Thus, we provide direct evidence for the theoretical mechanism of variable markup response behind incomplete and heterogeneous exchange rate pass‐through on producer prices. Our empirical methodology allows us to decompose the producer price response to exchange rate shocks into a markup and a marginal cost component using our markup estimates. Using these estimates, we establish that marginal cost at the product–plant level increases more in response to real exchange rate depreciation if the plant has higher share of imported inputs.     

Wish you were here? Quasi-experimental evidence on the effect of education on self-reported attitude toward immigrants

We use European Social Survey and Labour Force Survey data from 2002 to 2012 to estimate the causal effect of years of education on European natives׳ opinion toward immigration, by exploiting the exogenous discontinuity generated by reforms in compulsory education in Europe in the 1940s through the 1990s. Our findings show that higher levels of education lead to a more positive reported attitude toward immigrants. We also investigate the mechanisms behind the effect of education on reported attitudes by evaluating both economic and non-economic channels. We find that higher levels of education place individuals in occupations that are less exposed to the negative effects of migration, although not in sectors/occupations where the share of migrants is necessarily smaller, suggesting that migrants and low-educated natives may be complementary rather than substitutes in the labour market. In addition, education alters values and the cognitive assessment of the role of immigration in host societies, with a positive effect on reported attitude toward diversity and on the assessment of immigration׳s role in host countries. Our findings suggest that education as a policy instrument can increase social cohesion in societies that are subject to large immigration flows.     

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Economic integration agreements,border effects,and distance elasticities in the gravity equation

Using a novel common econometric specification, we examine the measurement of three important effects in international trade that historically have been addressed largely separately: the (partial) effects on trade of economic integration agreements, international borders, and bilateral distance. First, recent studies focusing on precise and unbiased estimates of effects of economic integration agreements (EIAs) on members׳ trade may be biased upward owing to inadequate control for time-varying exogenous unobservable country-pair-specific changes in bilateral export costs (possibly decreasing the costs of international relative to intranational trade); we find evidence of this bias using a properly specified gravity equation. Second, our novel methodology yields statistically significant estimates of the declining effect of “international borders” on world trade, now accounting for endogenous EIA formations and unobserved country-pair heterogeneity in initial levels. Third, we confirm recent evidence providing a solution to the “distance-elasticity puzzle,” but show that these estimates of the declining effect of distance on international trade are biased upward by not accounting for endogenous EIA formations and unobserved country-pair heterogeneity. We conclude our study with numerical general equilibrium comparative statics illustrating a substantive difference on trade effects of EIAs with and without allowance for the declining effects of international borders on world trade.     

Misallocation and productivity in the lead up to the Eurozone crisis

We use Portuguese firm-level data to investigate whether changes in resource misallocation may have contributed to the poor economic performance of some southern and peripheral European countries leading up to the Eurozone crisis. We extend Hsieh and Klenow’s (2009) methodology to include intermediate inputs and consider all sectors of the economy (agriculture, manufacturing, and services). We find that within-industry misallocation almost doubled between 1996 and 2011. Equalizing total factor revenue productivity across firms within an industry could have boosted valued-added 48% and 79% above actual levels in 1996 and 2011, respectively. This implies that deteriorating allocative efficiency may have shaved around 1.3 percentage points off the annual GDP growth during the 1996–2011 period. Allocative efficiency deterioration, despite being a widespread phenomenon, is significantly higher in the service sector, with 5 industries accounting for 72% of the total variation. Capital distortions are the most important source of potential value-added efficiency gains, especially in the service sector, with a relative contribution increasing over time.