Browsing by Department "Economics"

Social attitudes, attitudes toward financial risk and attitudes toward deferred gratification are thought to influence many important economic decisions over the life-course. In economic theory, these attitudes are key components in diverse models of behavior, including collective action, saving and investment decisions and occupational choice. The relevance of these attitudes have been confirmed empirically. Yet, the factors that influence them are not well understood. This research evaluates how these attitudes are affected by large disruptive events, namely, a natural disaster and a civil conflict, and also by an individual-specific life event, namely, having children.

By implementing rigorous empirical strategies drawing on rich longitudinal datasets, this research project advances our understanding of how life experiences shape these attitudes. Moreover, compelling evidence is provided that the observed changes in attitudes are likely to reflect changes in preferences given that they are not driven just by changes in financial circumstances. Therefore the findings of this research project also contribute to the discussion of whether preferences are really fixed, a usual assumption in economics.

In the first chapter, I study how altruistic and trusting attitudes are affected by exposure to the 2004 Indian Ocean tsunami as long as ten years after the disaster occurred. Establishing a causal relationship between natural disasters and attitudes presents several challenges as endogenous exposure and sample selection can confound the analysis. I take on these challenges by exploiting plausibly exogenous variation in exposure to the tsunami and by relying on a longitudinal dataset representative of the pre-tsunami population in two districts of Aceh, Indonesia. The sample is drawn from the Study of the Tsunami Aftermath and Recovery (STAR), a survey with data collected both before and after the disaster and especially designed to identify the impact of the tsunami. The altruistic and trusting attitudes of the respondents are measured by their behavior in the dictator and trust games. I find that witnessing closely the damage caused by the tsunami but without suffering severe economic damage oneself increases altruistic and trusting behavior, particularly towards individuals from tsunami affected communities. Having suffered severe economic damage has no impact on altruistic behavior but may have increased trusting behavior. These effects do not seem to be caused by the consequences of the tsunami on people’s financial situation. Instead they are consistent with how experiences of loss and solidarity may have shaped social attitudes by affecting empathy and perceptions of who is deserving of aid and trust.

In the second chapter, co-authored with Ryan Brown, Duncan Thomas and Andrea Velasquez, we investigate how attitudes toward financial risk are affected by elevated levels of insecurity and uncertainty brought on by the Mexican Drug War. To conduct our analysis, we pair the Mexican Family Life Survey (MxFLS), a rich longitudinal dataset ideally suited for our purposes, with a dataset on homicide rates at the month and municipality-level. The homicide rates capture well the overall crime environment created by the drug war. The MxFLS elicits risk attitudes by asking respondents to choose between hypothetical gambles with different payoffs. Our strategy to identify a causal effect has two key components. First, we implement an individual fixed effects strategy which allows us to control for all time-invariant heterogeneity. The remaining time variant heterogeneity is unlikely to be correlated with changes in the local crime environment given the well-documented political origins of the Mexican Drug War. We also show supporting evidence in this regard. The second component of our identification strategy is to use an intent-to-treat approach to shield our estimates from endogenous migration. Our findings indicate that exposure to greater local-area violent crime results in increased risk aversion. This effect is not driven by changes in financial circumstances, but may be explained instead by heightened fear of victimization. Nonetheless, we find that having greater economic resources mitigate the impact. This may be due to individuals with greater economic resources being able to avoid crime by affording better transportation or security at work.

The third chapter, co-authored with Duncan Thomas, evaluates whether attitudes toward deferred gratification change after having children. For this study we also exploit the MxFLS, which elicits attitudes toward deferred gratification (commonly known as time discounting) by asking individuals to choose between hypothetical payments at different points in time. We implement a difference-in-difference estimator to control for all time-invariant heterogeneity and show that our results are robust to the inclusion of time varying characteristics likely correlated with child birth. We find that becoming a mother increases time discounting especially in the first two years after childbirth and in particular for those women without a spouse at home. Having additional children does not have an effect and the effect for men seems to go in the opposite direction. These heterogeneous effects suggest that child rearing may affect time discounting due to generated stress or not fully anticipated spending needs.

Pro-urban bias in policy is a common phenomenon in many developing countries. Bates (1981) has famously argued the wish to industrialize paired with the political clout of urban residents results in distinctly anti-rural policies in many developing countries. At the same time, empirical reality is much more varied than the standard urban bias argument suggests. Many government have actively supported agricultural producers and rural citizens at early stages of development. Building on Bates' argument, this paper develops a theory that identifies conditions under which politicians will institute pro urban or pro rural policies, by considering the threat of a rural insurgency. Specifically, the direction of urban-rural bias is a function of the asymmetric political threat geographically distinct groups pose to the survival of the central government.

In this dissertation, I investigate the impact of administrative burdens on the US health care sector. Using observational data---particularly medical claims from Medicare----and policy variation in the administrative burdens to which health care providers are exposed, I use causal inference methods to understand the effects of various administrative burdens on economic, health, and fiscal outcomes in multiple contexts within the US health care system. I also use theoretical and structural modeling techniques to highlight and quantify the trade-offs faced by economic agents in the health care system and the impact of policy choices. Using turnover in the identity of private contractors that administer Traditional Medicare, I first find that exposing providers to the increased administrative burden imposed by higher-denial contractors does not reduce Medicare spending despite increasing claim denials. The increased administrative burden also leads providers to invest in billing effort, consolidate into larger firms, and earn lower profits. Next, I use similar variation across contractors to show that Medicare coverage restrictions slow the adoption of new medical procedures. Furthermore, I find that the diffusion patterns induced by these administrative burdens are consistent with social learning by providers about the value of the innovations, motivating a structural model of provider learning that indicates that coverage restrictions slow the learning process of the medical community. Finally, I use the staggered roll out of a prior authorization regulation along with criminal and civil lawsuits to identify the effects of ``pay-and-chase" litigation and an administrative burden regulation on the prevalence of health care fraud. I find that prior authorization was extremely effective at reducing health care spending without causing any adverse patient health outcomes, while litigation was much less effective. In conclusion, this dissertation finds that the administrative burdens that permeate the US health care sector have major impacts on market structure, innovation, and health care fraud, with the benefits and costs of these burdens being highlight context dependent.

This dissertation consists of three essays on asymmetric correlations in financial markets. In the first essay, I have two main contributions. First, I show that dividend growth rates have symmetric correlations. Second, I show that asymmetric correlations are different than correlations being counter-cyclical. The correlation asymmetry I study in this dissertation should not be confused with correlations being counter-cyclical, i.e. being higher during recessions than during booms. I show that while counter-cyclical correlations can simply be explained by counter-cyclical aggregate market volatility, the correlation asymmetry with respect to joint upside and downside movements of returns are not just due to the heightened market volatility during those times.

In the second essay I present a model in order to explain the correlation asymmetry observed in the data. This is the first paper to offer an explanation for observed correlation asymmetry. I formalize the explanation using an equilibrium model. The model is useful to understand both the cross-section and time-series of correlation asymmetry. By the means of my model, we can answer questions about why some stocks have higher correlation asymmetry, and why the correlation asymmetry was higher during 1990s? In the model asset prices respond the realization of dividends and news about the future. However, price responses to news are asymmetric and this asymmetry is endogenous. Price responses are endogenously stronger conditional on bad news than conditional on good news. This asymmetry also generates the observed correlation asymmetry. The price responses are asymmetric due to the ambiguity about the news quality. Information about the quality of the signal is incomplete in the sense that the exact precision of the signal is unknown; it is only known to be in an interval, which makes the representative agent treat news as ambiguous. To model ambiguity aversion, I use Gilboa and Schmeidler (1989)'s max-min expected utility representation. The agent has a set of beliefs about the quality of signals, and the ambiguity-averse agent behaves as if she maximizes expected utility under a worst-case scenario. This incomplete information about the news quality, together with ambiguity-averse agents, generates an asymmetric response to news. Endogenous worst-case scenarios differ depending on the realization of news. When observing ``bad" news, the worst-case scenario is that the news is reliable and the prices of trees decrease strongly. On the other hand, when ``good news" is observed, under the worst-case scenario the news is evaluated as less reliable, and thus the price increases are mild. Therefore, price responses are stronger conditional on a negative signal and this asymmetry creates a higher correlation conditional on a negative signal than conditional on a positive signal. I also show that the results are robust to the smooth ambiguity aversion representation.

Motivated by the model, I uncover a new empirical regularity that is unknown in the literature. I show that correlation asymmetry is related to idiosyncratic volatility: the higher the idiosyncratic volatility, the higher the correlation asymmetry. This novel empirical finding is also useful to understand the time-series and cross-sectional variation in correlation asymmetry. Stocks with smaller market capitalizations have greater correlation asymmetry compared to stocks with higher market capitalization. However, an explanation for this finding has been lacking. According to the explanation offered in this paper, smaller size stocks have greater correlation asymmetry compared to bigger size stocks because small size stocks tend to have higher idiosyncratic volatilities compared to bigger size stocks. In the time-series, correlation asymmetry shows quite significant variation as well. The average correlation asymmetry is especially high for the 1990s and decreases significantly at the beginning of the 2000s. This pattern in times-series can also be explained in terms of the time-series behavior of idiosyncratic volatilities. Several papers including Brandt et al. (2010), document higher idiosyncratic volatilities during 1990s while the aggregate volatility stays fairly stable. Basically, the high idiosyncratic volatilities during the 1990s also caused greater correlation asymmetry.

In the third essay, I study the correlation of returns in government bond markets. Similar to the findings in equity markets, I show that there is some evidence for asymmetric correlations in government bond markets. First, I show that the maturity structure matters for correlation asymmetry in bonds markets: Unlike long-maturity bonds, shorter-maturity bonds tend to have asymmetric correlations. Second, I show that the correlation asymmetry observed in European bond markets disappears with the formation of a common currency area. Lastly, I study the correlation between equity and bond returns in different countries. For long-maturity bonds, correlations with the domestic equity returns are asymmetric for half of the countries in the sample, including the U.S. These findings show that results on asymmetric correlations from equity markets can generalize, at least to some extent, to other financial markets.

This study uses the data from the National Institute for Children Health and Development Study of Early Child Care and Youth Development to evaluate features of wage and childcare price changes that are associated with positive effects on children's early cognitive skills. Identifying beneficial characteristics of changes in market variables is especially relevant in a policy environment where the main priority of tax incentives related to the use of childcare is not facilitating the formation of children's cognitive skills, but reducing reliance on the welfare system through increase in employment among poor households.

We estimate jointly the discrete household choices related to the employment status of the mother and the use of a paid care mode, the demand functions for quantity and quality of childcare, the production function for cognitive outcomes, the wage process for the mother, and childcare price equations based on the hedonic pricing method, while at the same time introducing unobserved heterogeneity in the disturbance terms of the estimated outcomes. Our strategy for handling selection problems also utilizes the exogenous variation in childcare prices across the 10 geographical markets defined by the study sites in the NICHD SECCYD dataset, which in our model influence choices, but do not affect cognitive outcomes directly.

Our results show that failing to account for common unobserved characteristics would lead to underestimating the impact of all analyzed wage and price changes. We find that prices and wages do not have a statistically significant impact on the quality of paid care, while the marginal product of that attribute of care is positive for almost all input combinations in the production of cognitive attainment. Therefore, a policy utilizing changes in wages and prices can be effective in improving early cognitive skill only through the impact of those changes on the intensity of paid care use.

The comparison of the effects of wage and price changes on early cognitive skills for three sets of values of the observable household characteristics representing low, middle and high income households lead to the following conclusions: (1) a tax credit for working mothers and childcare subsidies for center-based care can bring disproportionate gains for children in low and middle income groups; (2) subsidizing paid home care for children less than three and a half years old can be more effective than subsidizing center-based care for the same age group in terms of improving cognitive outcomes at the age of five; (3) conditioning childcare assistance for paid care on the employment status of the mother does not seem to have a strong negative effect on early skill formation; and (4) tax incentives affecting wage rates and childcare prices prove to be beneficial for the formation of early cognitive skills only when they are implemented while the child is less than three and a half years old.

People live and work in local markets spatially distinct from one another, yet space is absent from most economic models of the national labor market. Workers choose the markets in which they will participate, but there are costs to mobility. Furthermore, cities are heterogeneous in a number of dimensions, including their local labor market productivity, their housing supply, and their offering of amenities.

I examine the impact of these spatial considerations on the dynamics of local labor markets and the national market to which they aggregate. First I study the patterns of location choice through a gravity model of migration applied to rich panel data from the U.S. I find that location choices respond to temporal shocks to the labor market, but only after controlling for local heterogeneity. Next, with this result as motivation, I turn to development of a dynamic spatial equilibrium of the national labor market. I make a technical contribution to work in dynamic equilibrium modeling by empirically implementing an island economy model of worker mobility. I quantify the importance of worker mobility costs versus local housing prices for explaining spatial variation in the unemployment rate. I find that the link between the local housing market and the local labor market is important for explaining the spatial dispersion in unemployment, but mobility costs are not. Finally, I further exploit the dynamic equilibrium framework to examine the effect of local housing policy on labor market growth. I find that housing supply regulation is a constraint to growth, but is only binding on cities that are particularly desirable because of their labor market opportunities or amenities. I find that some lightly regulated markets have a contingent of population that has been pushed out of more regulated markets by high housing prices.

This dissertation explores the role of parents' financial resources in decisions made about college by parents and children entering adulthood and the consequences of those decisions for both parents and children. The second chapter examines the influence of parental wealth and income on children's college attendance and parental financing decisions, graduation, and the quality of college attended, as well as whether parental financing affects the subsequent indebtedness of parents and children. The results show that higher levels of parents' wealth and income increase the likelihood that children attend college with financial support relative to not attending college, and that parental wealth increases the likelihood that children graduate from college. There is descriptive evidence that parental support for college increases the subsequent level of housing debt that parents hold but does not reduce student debt for children.

Chapter 3 explores difference by race in the effects of parental wealth and income on college enrollment, financing, and graduation, against the backdrop of racial disparities between black and white families in wealth, income, and college outcomes. I find evidence of significant black-white differences in the effects of parental income and housing wealth. Higher levels of income raise the probability of college enrollment for children of white parents but not black. Conversely, increases to housing wealth raise the likelihood of enrollment only for black children. Increases to parental wealth and income increase the likelihood that white parents offer financial assistance to their children for college by similar amounts. There is no effect of wealth on the likelihood of financial transfers for black parents, but a large effect of income for black parents relative to white ones. I also find racial differences on graduation. I find a small but positive effect of increases in parental income on the likelihood of graduation from college for white children. For black children, I find no effect of income on graduation, but my results indicate that a one percent increase in parental income raises the likelihood of graduation by between 0.60 and 1.18 percent.