Bayesian inference in a correlated random coefficients model: Modeling causal effect heterogeneity with an application to heterogeneous returns to schooling

We consider the problem of causal effect heterogeneity from a Bayesian point of view. This is accomplished by introducing a three-equation system, similar in spirit to the work of Heckman and Vytlacil (1998), describing the joint determination of a scalar outcome, an endogenous “treatment” variable, and an individual-specific causal return to that treatment. We describe a Bayesian posterior simulator for fitting this model which recovers far more than the average causal effect in the population, the object which has been the focus of most previous work. Parameter identification and generalized methods for flexibly modeling the outcome and return heterogeneity distributions are also discussed.Combining data sets from High School and Beyond (HSB) and the 1980 Census, we illustrate our methods in practice and investigate heterogeneity in returns to education. Our analysis decomposes the impact of key HSB covariates on log wages into three parts: a “direct” effect and two separate indirect effects through educational attainment and returns to education. Our results strongly suggest that the quantity of schooling attained is determined, at least in part, by the individual’s own return to education. Specifically, a one percentage point increase in the return to schooling parameter is associated with the receipt of (approximately) 0.14 more years of schooling. Furthermore, when we control for variation in returns to education across individuals, we find no difference in predicted schooling levels for men and women. However, women are predicted to attain approximately 1/4 of a year more schooling than men on average as a result of higher rates of return to investments in education.     

A structural dynamic microsimulation model of household savings and labour supply

A structural model of the household is described that represents current best-practice in the analysis of savings and labour supply responses to the policy environment. Care has been taken in specifying the model so that it represents an appropriate basis for the analysis of incentive effects to policy change, and for exploring the empirical support for alternative structural assumptions. Matching the model to survey data for the UK reveals some interesting puzzles in relation to the timing of retirement.     

Choosing and sharing

Implementing a project, like a nationwide nuclear waste disposal, which benefits all involved agents but brings major costs only to the host is often problematic. In practice, revelation issues and redistributional concerns are significant obstacles to achieving stable agreements. We address these issues by proposing the first mechanism to select the efficient site (the host with the lowest cost) while simultaneously allowing for the implementation of any individually rational division of the whole hosting cost. The subgame perfect Nash equilibria of our simple mechanism are efficient, budget-balanced and individually rational. Moreover, the truthful equilibrium is immune to coalitional deviations.     

Incumbent firm invention in emerging fields: evidence from the semiconductor industry

Incumbent firms are often thought to focus on incremental innovations and only respond to a major technological change once its impact on established markets and/or dominant designs becomes clear. We argue, however, that incumbent firms have many reasons to proactively invent early in cycles of technological change. Our interest is in the strategies that allow incumbents to be successful in this endeavor during the infancy of an emerging field—the period before it is clear how the field will affect dominant designs. Our evidence counters the stereotypical view that incumbent firms play a passive role in major technological changes by adhering to incremental inventions in the existing dominant designs. Rather, we find significant inventions by incumbents outside the existing dominant designs and relate their success to their willingness to search novel areas, explore scientific knowledge in the public domain, and form alliances with a balanced portfolio of partners. We find support for our hypotheses using data from the global semiconductor industry between 1989 and 2002. Copyright © 2010 John Wiley & Sons, Ltd.     

Entrepreneurs' responses to semi-formal illegitimate institutional arrangements

While prior research has discussed how entrepreneurs deal with formal institutional voids and informal institutional environments, little is known about how entrepreneurs respond to institutional arrangements involving illegitimate actors. We define such arrangements as semi-formal illegitimate institutions. Using an exploratory study, we examine one such arrangement in Guatemala City, where organized crime dominates the institutional landscape in which entrepreneurs operate. We examine the strategic responses of these entrepreneurs, and find that they vary in the extent to which they resist semi-formal illegitimate institutions; some entrepreneurs engage in defiance, others avoid the illegitimate pressures, while others simply acquiesce. Upon further investigation, we find that the differences in entrepreneurs' network strength and network proximity, combined with their individual perception of threat and resource mobility, help to predict the different strategic responses.     

Semiparametric Bayesian inference in multiple equation models

This paper outlines an approach to Bayesian semiparametric regression in multiple equation models which can be used to carry out inference in seemingly unrelated regressions or simultaneous equations models with nonparametric components. The approach treats the points on each nonparametric regression line as unknown parameters and uses a prior on the degree of smoothness of each line to ensure valid posterior inference despite the fact that the number of parameters is greater than the number of observations. We develop an empirical Bayesian approach that allows us to estimate the prior smoothing hyperparameters from the data. An advantage of our semiparametric model is that it is written as a seemingly unrelated regressions model with independent normal–Wishart prior. Since this model is a common one, textbook results for posterior inference, model comparison, prediction and posterior computation are immediately available. We use this model in an application involving a two‐equation structural model drawn from the labour and returns to schooling literatures. Copyright © 2005 John Wiley & Sons, Ltd.     

Means Testing and Retirement Choices in Europe: A Comparison of the British and Danish Systems*

We develop a simulation model of household behaviour in which both the consumption/saving and labour/leisure choices are endogenous. This model is used to explore the effects of the UK and Danish state tax and benefit systems on the labour supply of workers aged 50 or over. We find that, in broad terms, differences in labour force participation can be accounted for by differences in benefit structures. Furthermore, our simulations suggest that the UK system is preferred by young people while the Danish arrangement – which imposes a larger tax burden and provides larger welfare benefits – is chosen by people of 50 or older. Notably, people older than 60 are in the majority in the simulated population. The Danish system does not promote notably greater equality over the lifetime, but it does underpin a higher level of consumption for people of 50 or older.     

Managing country-of-origin choices: competitive advantages and opportunities

This study investigates the effects of country-of-design/country-of-assembly combinations on consumers' evaluative beliefs about and attitudes toward buying automobiles. The effects are compared across groups of consumers differing with respect to levels of consumer ethnocentrism. Two design countries and two assembly countries (Japan or US) were considered, yielding four possible design-country/assembly-country combinations. The results suggest that manufacturing products in the country in which they are sold not only provides closer access to the market, but also allows multinational manufacturers to ‘blur the boundaries’ regarding a potentially sensitive country-of-origin issue among highly ethnocentric consumers. At the same time, they can leverage their country-brand images to appeal to those customers who recognize a particular country's ability to design high quality cars, regardless of their country of assembly.     

A decision model for selecting protected habitat areas within migratory flyways

A decision model is developed for identifying alternative configurations of new protected habitat areas to augment and enhance major global flyways of migratory birds. New habitat areas are selected to fill in the spatial gaps between existing protected stopovers such as wildlife refuges. The methodology is applied to the US portion of the Atlantic flyway in order to develop alternative networks of habitat stepping stones extending from Maine to Florida. The model is formulated as a zero-one program and solutions are derived using a greedy adding heuristic procedure. Two ecological-economic objectives drive the model: maximizing the geographic coverage of the protected stopovers, and maximizing average stopover quality, as represented by an index based on wetland prevalence and land cost. Thirty-five alternative solutions were generated, indicating the tradeoffs between the objectives. These results are expected to be useful to natural resource agencies and conservation organizations in the development of habitat conservation, preservation, and restoration policies and programs.     

Are Returns to Schooling Concentrated Among the Most Able? A Semiparametric Analysis of the Ability–earnings Relationships1

In this paper I explore the relationship between ability and log waves using flexible estimation techniques. I find evidence of nonlinearities in these relationships that vary across levels of schooling, and argue that ability‐sorting into higher education creates problems for accurately identifying the return to schooling over the entire ability support. Over an ability support that is “common” to those with and without a college education, I find that the college log wage premium is incerasing for the more able, and this premium grew during the period 1984–1994 for individuals at all points in the ability distribution. The growth of this wage premium over time also appears to have followed a “smoother” linear path for high‐ability individuals than individuals of lower ability.