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Department of Economics
Working Papers

  SUNY at Albany Discussion Papers  
  You can search SUNY at Albany Economics Discussion Papers by author, title, keyword, JEL category, and abstract contents via IDEAS or EconPapers  
    | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005-2001 | 2000-1998 |  
2013 Discussion Papers
 [13-01] Kajal Lahiri, Huaming Peng, and Yongchen Zhao "Machine Learning and Forecast Combination in Incomplete Panels"  
  Abstract: We combine the probability forecasts of real GDP declines from the U.S. Survey of Professional Forecasters, after trimming the forecasts that do not have “value” in the sense of Merton (1981). For this purpose, we propose a new test to evaluate probability forecasts that does not require converting the probabilities to binary forecasts before testing. The test accommodates serial correlation and skewness in the forecasts, and is implemented using a circular block bootstrap procedure. We find that the number of forecasters making valuable forecasts decreases sharply as horizon increases. The beta-transformed linear pool, based only on the valuable individual forecasts, is shown to outperform the simple average for all horizons on a number of performance measures including calibration and sharpness. 
 [13-02] Kajal Lahiri, Huaming Peng, and Yongchen Zhao "Testing the Value of Probability Forecasts for Calibrated Combining"  
  Abstract: This paper focuses on the newly proposed on-line forecast combination algorithms in Sancetta (2010), Yang (2004), and Wei and Yang (2012). We first establish the asymptotic relationship between these new algorithms and the Bates and Granger (1969) method. Then, we show that when implemented on unbalanced panels, different combination algorithms implicitly impute missing data differently, making results not comparable across methods. Using forecasts of a number of macroeconomic variables from the U.S. Survey of Professional Forecasters, we evaluate the performance of the new algorithms and contrast their inner mechanisms with that of Bates and Granger’s method. Missing data in the SPF panels are specifically controlled for by explicit imputation. We find that even though equally weighted average is hard to beat, the new algorithms deliver superior performance especially during periods of volatility clustering and structural breaks. 
 [13-03] Baris Yoruk "Does giving to charity lead to better health? Evidence from tax subsidies for charitable giving"  
  Abstract: In the United States, charitable contributions can be deducted from taxable income making the price of giving inversely related to the marginal tax rate. The existing literature documents that charitable giving is very responsive to tax subsidies, but often ignores the spillover effects of such policies. On the other hand, a growing body of literature documents that giving to others reduces the stress and strengthens the immune system, which results in better health and longer life expectancy. These findings imply that tax subsidies for charitable giving may have positive spillover effects on health. This paper investigates this hypothesis using data from Center on Philanthropy Panel Study (COPPS), the philanthropy module of the Panel Study Income Dynamics (PSID). Understanding the spillover effects of charitable subsidies on health is quite important given the existing literature that links health status to several important economic outcomes. The results show that charitable subsidies have positive spillover effects on health. In particular, the implied cross-price elasticity of health index with respect to giving is -0.13. These results are robust to potential endogeneity of income and highlight the positive externalities created by tax subsidies for charitable giving. 
 [13-04] Baris Yoruk "Can technology help to reduce underage drinking? Evidence from the false ID laws with scanner provision"  
  Abstract: Underage drinkers often use false identification to purchase alcohol or gain access into bars. In recent years, several states have introduced laws that provide incentives to retailers and bar owners who use electronic scanners to ensure that the customer is 21 years or older and uses a valid identification to purchase alcohol. This paper provides the first comprehensive analysis of the effects of these laws using confidential data from the National Longitudinal Survey of Youth, 1997 Cohort (NLSY97). Using a difference-in-differences methodology, I find that the false ID laws with scanner provision significantly reduce underage drinking, particularly in the short-run. The impact of these laws are more pronounced for 16 and 17 year olds. For this group, I find that these laws reduce the probability of engaging in binge drinking up to 12 percentage points. These results are robust to alternative model specifications and imply that stricter false ID laws may significantly reduce underage alcohol consumption. 
 [13-05] Baris Yoruk "Charity ratings"  
  Abstract: How do charitable donors respond to the third party ratings that signal the quality of charities? I investigate this question using a novel data set from Charity Navigator which provides quality ratings for 5400 charities. Since Charity Navigator prominently displays a charity’s star rating which is assigned based on its overall rating, one can identify the causal impact of a one star increase in ratings on charitable contributions with a regression discontinuity framework that exploits the threshold values of the overall ratings. I find that in general, the third party ratings have a minor and often insignificant impact on charitable contributions received by charities. However, for relatively smaller and unknown charities, a higher rating leads to an increase in charitable contributions received. In particular, for these charities, I find that a one star increase in ratings is associated with a 19.5 percent increase in the amount of charitable contributions received. This result is robust under alternative model specifications and highlights the role of the third party ratings in not-for-profit markets. 
 [13-06] Ceren Ertan Yoruk and Baris Yoruk "Do minimum legal tobacco purchase age laws work?"  
  Abstract: This paper uses a regression discontinuity design to estimate the impact of the minimum legal tobacco purchase age (MLTPA) laws on smoking behavior among young adults. Using data from the confidential version of National Longitudinal Survey of Youth (1997 Cohort), which contains information on the exact birth date of the respondents, we find that the effect of the MLTPA on several indicators of smoking among youth is minor and often insignificant. However, we also show that granting legal access to cigarettes and tobacco products at the MLTPA leads to an increase in several indicators of smoking participation, including up to a 5 percentage point increase in the probability of smoking for males and for those who reported to have smoked before. These results are robust under several alternative model specifications and imply that policies that are designed to restrict youth access to tobacco are quite effective in reducing smoking participation among certain groups of young adults. 
 [13-07] Kajal Lahiri and Liu Yang "Confidence Bands for ROC Curves with Serially Dependent Data"  
  Abstract: We propose serial correlation robust asymptotic confidence bands for the receiver operating characteristic (ROC) curves estimated by quasi-maximum likelihood in the binormal model. Our simulation experiments confirm that this new method performs fairly well in finite samples. The conventional procedure is found to be markedly undersized in terms of yielding empirical coverage probabilities lower than the nominal level, especially when the serial correlation is strong. We evaluate the three-quarter-ahead probability forecasts for real GDP declines from the Survey of Professional Forecasters, and find that one would draw a misleading conclusion about forecasting skill if serial correlation is ignored. 
 [13-08] Kajal Lahiri and Yongchen Zhao "Quantifying Heterogeneous Survey Expectations: The Carlson-Parkin Method Revisited"  
  Abstract: We propose a generalized ordered response model that nests the popular Carlson-Parkin (CP) method to quantify household in flation expectations while explicitly control for cross-sectional heterogeneity in the threshold parameters and the variance. By matching qualitative and quantitative data from 1979 to 2012 from the University of Michigan’s Survey of Consumers, we find evidence against the threshold constancy, symmetry, and homogeneity assumptions of the CP method. We show that the quantified expectations produced by the generalized model outperform those produced by the CP method, most notably during the 2008 recession period. We also show that when an rolling-window identification scheme is employed instead of the unbiasedness assumption over the entire sample, quantified expectations are significantly better in terms of predictive accuracy when compared with the quantitative expect ations reported in the survey. 
 [13-09] Baris Yoruk "Do Charitable Subsidies Crowd Out Political Giving? The Missing Link Between Charitable and Political Contributions"  
  Abstract: In the United States, charitable contributions can be deducted from taxable income making the price of giving inversely related to the marginal tax rate. However, several other types of contributions such as donations to political organizations are not tax deductible. This paper investigates the spillover effects of charitable subsidies on political giving using five independent surveys of charitable and political giving in the United States conducted from 1990 to 2001. The results show that charitable and political giving are complements. Compared with non-donors, charitable donors are more likely to donate and give more to political organizations. Increasing the price of charitable giving decreases not only charitable giving but also the probability of giving and the amount of donations to political organizations. The implied elasticity of the amount of political contributions with respect to the tax price of charitable giving is as much as -0.88. This effect is robust under different specifications and with different sets of instrumental variables. These results highlight the positive externalities created by charitable subsidies and have important implications for economic models of political and charitable giving. 
 [13-10] Baris Yoruk "Are Generous People More Likely to Vote?"  
  Abstract: Policymakers in the Unites States and many other countries encourage charitable giving through various subsidies. In the United States, for instance, charitable contributions can be deducted from taxable income making the price of giving inversely related to the marginal tax rate. However, the net effects of such subsidies can be better understood by exploring the relationship between generosity and other types of prosocial behavior. This paper investigates the spillover effects of charitable subsidies on voting behavior using four surveys of charitable giving in the United States conducted from 1992 to 2001. Understanding the relationship between these two prosocial behaviors may be quite important given the ongoing debates about designing alternative policies to increase voter turnout rates. The results show that charitable giving and voting are complements. Increasing the price of giving not only decreases the probability of giving and contribution amount but also the probability of voting in presidential elections with an implied elasticity of the propensity of vote with respect to the tax price of giving as much as -0.4. This effect is robust under different specifications and with different sets of instrumental variables. These results highlight the positive externalities created by charitable subsidies and have important implications for economic models of voting and charitable giving. 
 [13-11] Ceren Ertan Yoruk and Baris Yoruk "Alcohol Consumption and Risky Sexual Behavior Among Young Adults: Evidence from Minimum Legal Drinking Age Laws"  
  Abstract: This paper exploits the discrete jump in alcohol consumption at the minimum legal drinking age (MLDA) in the United States and uses a regression discontinuity design to investigate the relationship between drinking and risky sexual behavior among young adults. Using confidential data from the National Longitudinal Survey of Youth (1997 Cohort), we document that young adults tend to drink up to 2.1 days more once they are granted legal access to alcohol at age 21. Under certain model specifications, we find that the discrete jump in alcohol consumption at the MLDA is associated with an increase in the probability of having sex by up to 8.3 percentage points. However, we also find that young adults, who gain legal access to alcohol at age 21, do not have a tendency to engage in risky sexual behaviors. Furthermore, we document that the effect of the MLDA on the probability of using several different birth control methods is not significant for those who had sex in the past four weeks. Our results are robust to alternative sample and model selections and imply that although the MLDA law is quite effective in reducing alcohol consumption among young adults, spillover effects of this law on risky sexual behaviors are relatively limited. 
 [13-12] Kajal Lahiri and Yongchen Zhao "Determinants of Consumer Sentiment: Evidence from Household Survey Data"  
  Abstract: We study the information content of the five components of the University of Michigan’s Index of Consumer Sentiment and identify the main determinants of these measures, using semiparametric ordered choice models and household data from the Surveys of Consumers from January 1978 to September 2012. Our findings suggest that consumers’ own perceptions and expectations, as measured by other survey questions in the Surveys of Consumers, are the most important determinants of the sentiment index. After this set of factors is controlled for, consumers’ demographic characteristics, aggregate macroeconomic variables, and professional forecasts account for little in addition. We also find that the sentiment components about the overall economic conditions are less sensitive to consumers’ own views and characteristics than the components about consumers’ household financial situations. These findings could motivate the use of consumer sentiment measures in a variety of applications, including forecasting consumption expenditures. 
 [13-13] Souvik Banerjee, Pinka Chatterji and Kajal Lahiri "Identifying the mechanisms for workplace burden of psychiatric illness"  
  Abstract: Although previous research indicates that mental disorders detract from labor market outcomes, little is known about which psychiatric symptoms are most important. The objective of this study is to identify the mechanisms, or most important symptoms, through which psychiatric disorders affect labor market outcomes. We focus on Major Depressive Episode, Panic Attack, Social Phobia and Generalized Anxiety Disorder. Our approach builds on prior work in that we consider the effects of symptoms both among individuals meeting and among individuals not meeting diagnostic criteria for mental disorders. Data come from the National Comorbidity Survey Replication and the National Latino and Asian American Study. We use a structural equation model with latent indices for mental disorders, where the indices are generated from the model using multiple indicators (symptoms) and multiple causes of the disorders. The outcomes are current employment/labor force participation, weeks worked in last year, and number of work absences in past month among employed individuals. We find that for Major Depressive Episode, symptoms of insomnia/hypersomnia, indecisiveness, severe emotional distress, and fatigue are crucial for labor market outcomes. In the case of Generalized Anxiety Disorder, the length of the episode, symptoms relating to difficulty controlling worry, and symptoms of worry/anxiety/nervousness causing significant emotional distress are most detrimental for work outcomes. Social Phobia and Panic Attack are not associated with labor market outcomes. Our findings suggest that interventions targeting these particular symptoms may be most helpful in improving work functioning. 
2012 Discussion Papers
  [12-01] Fang Yang "Social Security Reform with Impure Intergenerational Altruism"  
    Abstract: This paper studies the long-run aggregate and welfare effect of eliminating Social Security in a quantitative dynamic general equilibrium life-cycle model where parents and their chidren are linked by voluntary and accidental bequests. Social Security in this model with impure altruism has a smaller effect on capital accumulation than in a pure life-cycle model, a bigger effect than in a model with two-sided altruism. The welfare gain of eliminating Social Security system under impure altruism is smaller than that in a pure life-cycle model, and bigger than that in a model with two-sided altruism.  
  [12-02] Kajal Lahiri, George Monokroussos and Yongchen Zhao "Forecasting Consumption in Real Time: The Role of Consumer Confidence Surveys"  
    Abstract:We study the role of consumer confidence surveys in forecasting personal consumption expenditure. We reexamine existing models of consumption and consumer confidence using both quarterly and monthly data in real time. Additionally, we produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a real-time, jagged-edge data set. We establish in a robust way that consumer confidence significantly improves the accuracy of consumption forecasts. Furthermore, traditional macroeconomic theories seem to be unable to fully account for these results.  
  [12-03] Fang Yang "Lifetime Earning and Heterogeneity in Retirement Wealth: the Role of Bequests, Minimum Consumption, and Social Security"  
    Abstract: The data show large dispersion in household's wealth holding at retirement. In addition, the empirical correlation between household lifetime earnings and retirement wealth is much lower in the data than in many quantitative models. This paper quantifies and analyzes the implications of a life cycle model with intergenerational links (in the form of voluntary bequest motives and intergenerational transmission of ability) that also explicitly allows for defined benefit pensions, history-dependent social security, and a government-provided minimum consumption floor. The key finding is that this model goes a long way toward matching the observed wealth differences at retirement and their correlation with lifetime incomes.  
  [12-04] Kajal Lahiri, George Monokroussos and Yongchen Zhao "The yield spread puzzle and the information content of SPF forecasts"  
    Abstract: While the yield spread has long been recognized as a good predictor of recessions, it seems to have been largely overlooked by professional forecasters. We examine this puzzle, established by Rudebusch and Williams (2009), in a data-rich environment including not just the yield spread but many other predictors as well. We confirm the puzzle in this context by examining the contributions of both the SPF forecasts and the yield spread in predicting recessions, and by examining the information content of SPF forecasts directly. Furthermore, we take the first step towards a possible resolution of this puzzle by recognizing the heterogeneity across professional forecasters.  
 [12-05] Laurence Kranich "A Simple Theoretical Argument for Affrmative Action"  
   Abstract: We consider a society which is jointly committed to the principle of equal opportunity and to increasing aggregate wealth. However, the society faces the vestiges of past discrimination in the form of a historically skewed distribution of social resources. We consider the problem of allocating the existing quantity of social inputs, and we contrast two policy instruments to redress past differences: redistributing resources in order to compensate for, or offset, the effect of the asymmetry on productive abilities, or granting preferential treatment in employment to members of the disadvantaged group (affirmative action). We show that society is generally better off with affirmative action than without it, and, indeed, that a socially optimal policy may rely solely on affirmative action. 
 [12-06] Baris Yoruk "The impact of charitable subsidies on religious giving and attendance: Evidence from panel data"  
  Abstract: In the United States, charitable contributions can be deducted from taxable income making the price of giving inversely related to the marginal tax rate. The existing literature documents that charitable giving is very responsive to tax subsidies, but often ignores the spillover effects of such policies. This paper investigates the spillover effects of charitable subsidies on religious participation using a newly available individual-level panel data. Understanding these spillover effects may be quite important, given the existing literature that links religiosity to several economically important social behaviors. The results show that religious giving and participation are complements. Increasing the price of religious giving decreases not only religious contributions but also religious attendance. The implied cross-price elasticity of religious participation with respect to the after-tax price of giving is −0.27. Furthermore, a 1% increase in the amount of religious contributions is associated with a 0.4% increase in religious attendance. These results are robust under several different specifications and highlight the positive externalities created by charitable subsidies. They also have important implications for testing the validity of existing economic models of religious participation and giving. 
 [12-07] Adrian Masters "The value of leisure or disutility of work: Wage dispersion in a model of search with endogenous effort"  
  Abstract: Wage dispersion is generated in a sequential search environment through heterogeneity in firm productivity along with an individual wage-effort trade-off. For a given degree of TFP dispersion, the framework can generate any amount of wage dispersion. Calibrated to generate realistic gains from trade, it is able to generate the kind of wage dispersion observed in data. 
  [12-08] John Bailey Jones and Fang Yang "Skill-Biased Technical Change and the Cost of Higher Education" (Updated January, 2015)  
  Abstract: We document the growth in higher education costs and tuition over the past 50 years. To explain these trends, we develop a general equilibrium model with skill- and sector-biased technical change. Finding the model's parameters through a combination of estimation and calibration, we show that it can explain the rise in college costs between 1961 and 2009, along with the increase in college attainment and the change in the relative earnings of college graduates. The model predicts that if college costs had ceased to grow after 1961, enrollment in 2010 would be 3 to 6 percent higher. 
 [12-09] Kajal Lahiri and Liu Yang "Forecasting Binary Outcomes"  
  Abstract: Binary events are involved in many economic decision problems. In recent years, considerable progress has been made in diverse disciplines in developing models for forecasting binary outcomes. We distinguish between two types of forecasts for binary events that are generally obtained as the output of regression models: probability forecasts and point forecasts. We summarize specification, estimation, and evaluation of binary response models for the purpose of forecasting in a unified framework which is characterized by the joint distribution of forecasts and actuals, and a general loss function. Analysis of both the skill and the value of probability and point forecasts can be carried out within this framework. Parametric, semiparametric, nonparametric, and Bayesian approaches are covered. The emphasis is on the basic intuitions underlying each methodology, abstracting away from the mathematical details. 
 [12-10] Kajal Lahiri "Comment on "Forecast Rationality Tests Based on Multi-Horizon Bounds" by Andrew Patton and Allan Timmermann. Journal of Business and Economic Statistics, No. 1, Vol. 30, 2012, pp.1-17."  
2011 Discussion Papers
  [11-01] Kajal Lahiri and George Monokroussos "Nowcasting US GDP: The role of ISM Business Surveys"  
    Abstract: We study the role of the well-known monthly diffusion indices produced by the Institute or Supply Management in nowcasting current quarter US GDP growth. We investigate their marginal impact on these nowcasts when large unbalanced (jagged edge) macroeconomic data sets are used in real time to generate them. We find some evidence that these ISM indices can be helpful in improving the nowcasts in the beginning of the month when new ISM information becomes available ahead of other monthly indicators.  
  [11-02] John Bailey Jones and Fang Yang "Skill-Biased Technical Change and the Cost of Higher Education: An Exploratory Model"  
    Abstract: We document trends in higher education costs and tuition over the past 50 years. To explain these trends, we develop and simulate a general equilibrium model with skill- and sector-biased technical change. We assume that higher education suffers from Baumol's (1967) service sector disease, in that the quantity of labor and capital needed to educate a student is constant over time. Calibrating the model, we show that it can explain the rise in college costs between 1959 and 2000. We then use the model to perform a number of numerical experiments. We find, consistent with a number of studies, that changes in the tuition discount rate have little long-run effect on college attainment.  
2010 Discussion Papers
  [10-01] Burak Dindaroglu "Intra-Industry Knowledge Spillovers and Scientific Labor Mobility"  
    Abstract: I test the hypothesis that the mobility of scientific and technical personnel is a conduit for knowledge spillovers among innovative firms. Using a variant of the standard Tobin's Q equation, I show that firms who have access to large pools of externally created knowledge in their industrial and technological neighborhoods enjoy additional market value as a result of higher scientific labor mobility, while they suffer from higher mobility whenever external knowledge is limited. Specifically, a percentage point increase in the mobility rate (one additional job change for each 100 scientists) increases market value by 1% to 3.1% through spillovers for a firm that has access to the mean spillover pool. This effect is largely offset by the standalone negative impact of labor mobility on market value, thus the firm breaks even in terms of the net private value of increased labor turnover. These results are consistent with previous findings and anecdotal evidence, and provide further insight into why innovative firms cluster in industrial districts.  
  [10-02] Michael Sattinger "The Markov Consumption Problem"  
    Abstract: The paper derives the solution to a simple stochastic continuous-time dynamic control problem in which a consumer determines consumption and saving while moving between employment and unemployment according to a Markov process. The results differ from the permanent income hypothesis and some of Hall's 1978 results based on autoregressive income shocks.  
  [10-03] Michael Sattinger "Safety First Consumption"  
    Abstract: This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals.  
  [10-04] Michael Sattinger "Income Tax Incidence with Positive Population Growth"  
    Abstract: This paper derives the incidence of linear taxes on capital and labor in a competitive equilibrium in balanced growth. The paper further considers a tax on consumption and a tax credit. Tax incidence is determined using an analytic expression for the saving rate out of income net of all taxes and credits. Results for zero population growth do not extend to positive population growth, where the incidence of a tax on interest income is positive and a tax on consumption reduces the interest rate.  
  [10-05] Laurence Kranich (with Matteo Cervellati and Joan Esteban) "Work Values, Endogenous Sentiments and Redistribution" (update of WP 06-06)  
    Abstract: We examine the interactions between individual behavior, sentiments and the social contract in a model of rational voting over redistribution. Agents have moral "work values". Individuals' self-esteem and social consideration of others are endogenously determined comparing behaviors to moral standards. Attitudes toward redistribution depend on self-interest and social preferences. We characterize the politico-economic equilibria in which sentiments, labor supply and redistribution are determined simultaneously. The equilibria feature different degrees of "social cohesion" and redistribution depending on pre-tax income inequality. In clustered equilibria the poor are held partly responsible for their low income since they work less than the moral standard and hence redistribution is low. The paper proposes a novel explanation for the emergence of different sentiments and social contracts across countries. The predictions appear broadly in line with well-documented differences between the United States and Europe.  
  [10-06] Kajal Lahiri (with Gultekin Isiklar) "Estimating International Transmission of Shocks Using GDP Forecasts: India and Its Trading Partners"  
    Abstract: Using a Factor Structural Vector Autoregressive (FSVAR) model and monthly GDP growth forecasts during 1995-2003, we find that Indian economy responds largely to domestic and Asian common shocks, and much less to shocks the from the West. However, when we exclude the Asian crisis period from our sample, the Western factor comes out as strong as the Asian factor contributing 16% each to the Indian real GDP growth, suggesting that the dynamics of transmission mechanism is time-varying. Our methodology on the use of forecast data can help policy makers of especially developing countries with frequent economic crises and data limitations to adjust their policy targets in real time.  
  [10-07] Kajal Lahiri (with Antony Davies and Xuguang Sheng) "Analyzing Three-Dimensional Panel Data of Forecasts"  
    Abstract: With the proliferation of quality multi-dimensional surveys, it becomes increasingly important for researchers to employ an econometric framework in which these data can be properly analyzed and put to their maximum use. In this chapter we have summarized such a framework developed in Davies and Lahiri (1995, 1999), and illustrated some of the uses of these multi-dimensional panel data. In particular, we have characterized the adaptive expectations mechanism in the context of broader rational and implicit expectations hypotheses, and suggested ways of testing one hypothesis over the others. We find that, under the adaptive expectations model, a forecaster who fully adapts to new information is equivalent to a forecaster whose forecast bias increases linearly with the forecast horizon. A multi-dimensional forecast panel also provides the means to distinguish between anticipated and unanticipated changes in the forecast target as well as volatilities associated with the anticipated and unanticipated changes. We show that a proper identification of anticipated changes and their perceived volatilities are critical to the correct understanding and estimation of forecast uncertainty. In the absence of such rich forecast data, researchers have typically used the variance of forecast errors as proxies for shocks. It is the perceived volatility of the anticipated change and not the (subsequently-observed) volatility of the target variable or the unanticipated change that should condition forecast uncertainty. This is because forecast uncertainty is formed when a forecast is made, and hence anything that was unknown to the forecaster when the forecast was made should not be a factor in determining forecast uncertainty. This finding has important implications on how to estimate forecast uncertainty in real time and how to construct a measure of average historical uncertainty, cf. Lahiri and Sheng (2010a). Finally, we show how the Rational Expectations hypothesis should be tested by constructing an appropriate variance-covariance matrix of the forecast errors when a specific type of multidimensional panel data is available.  
  [10-08] Kajal Lahiri (with Gael Martin) "Applied Bayesian Forecasting in Economics: Editorial"  
  [10-09] Kajal Lahiri "Comment on `Forecasting Economic and Financial Variables with Global VARs' by M. Hashem Pesaran, Till Schuermann and L. Venessa Smith"  
  [10-10] John Bailey Jones (with Eric French) "The Effects of Health Insurance and Self-Insurance on Retirement Behavior"  
    Abstract: This paper provides an empirical analysis of the effects of employer-provided health insurance, Medicare, and Social Security on retirement behavior. Using data from the Health and Retirement Study, we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Our results suggest that Medicare is important for understanding retirement behavior, and that uncertainty and saving are both important for understanding the labor supply responses to Medicare. Half the value placed by a typical worker on his employer-provided health insurance is the value of reduced medical expense risk. Raising the Medicare eligibility age from 65 to 67 leads individuals to work an additional 0.074 years over ages 60-69. In comparison, eliminating two years worth of Social Security benefits increases years of work by 0.076 years.  
  [10-11] Adrian Masters "Money in a Model of Prior Production and Imperfectly Directed Search"  
    Abstract: This paper considers the effect of monetary policy and inflation on retail markets. It analyzes a model in which: goods are dated and produced prior to being retailed, buyers direct their search on the basis of price and general quality and, buyers' match specific tastes are their private information. Sellers set the same price for all buyers but some do not value the good highly enough to purchase it. The market economy is typically inefficient as a social planner would have the good consumed. The Friedman rule represents optimal policy as long as there is free-entry of sellers. When the upper bound on the number of participating sellers binds sufficiently, moderate levels of inflation can be welfare improving.  
  [10-12] Kajal Lahiri (with Hua Lin) "Gulf War Syndrome: Evidence Based on the National Survey of Veterans"  
    Abstract: The 2001 National Survey of Veterans, conducted ten years after the end of the Gulf War, provides invaluable information on the long time chronic health effects of the war. Using the semi-parametric Generalized Additive Model to control for different age distributions in our study sub-populations, we find that it is not the Gulf War deployment or combat per se, but the exposure to toxic chemicals that is the root cause of the myriad of health problems faced by many gulf war veterans. The simultaneous presence of multiple ailments for these veterans, known as the Gulf War syndrome, is also confirmed. Our study provides important additional evidence on the complexity in identifying the genuine health problems faced by the Gulf war veterans that came from widely varying socio-economic backgrounds.  
  [10-13] Barış K. Yörük (with Murat Mungan) "Fundraising and Optimal Policy   Rules"  
    Abstract: This paper develops a simple spatial model of fundraising, in which charities select a target population to solicit donations. First, we show that in a competitive charity market without any intervention, the number of charities in the market and/or the overall net funds raised by charities may be sub-optimal. Next, we analyze whether a social planner can prevent such shortcomings and show that a regulatory mechanism can be designed to achieve socially desirable outcomes. In contrast to the previous literature, our model does not necessarily produce monopoly as the optimal market structure. We show that if fixed costs associated with establishing charities are sufficiently low, then the optimal market structure is not a monopoly. Given the importance of the trade-off between the volume and variety of charitable services, we argue that this result may be of particular interest to policy makers.  
  [10-14] Barış K. Yörük "Do Charitable Solicitations Matter? A Comparative Analysis of Fundraising Methods"  
    Abstract: The existing literature either treats fundraising as an aggregate variable by ignoring the existence of several different fundraising methods through which charitable contributions are generated or focuses on the effectiveness of a particular fundraising method without making any comparison with alternative methods. Using biennial household surveys of charitable giving in the United States conducted from 1988 to 1999, which contain detailed questions on several fundraising methods, I first document that returns to fundraising are considerably different across alternative fundraising methods. Next, I investigate the factors associated with donors' responsiveness to various fundraising techniques. The results show that several observable characteristics of charitable donors can explain why some people are more responsive to particular fundraising techniques than others.  
2009 Discussion Papers
  [09-01] Barış K. Yörük. "Do Fundraisers Select Charitable Donors Based on Gender and Race? Evidence from Survey Data"  
    Abstract: Recent studies document that people are much more likely to donate to charity and volunteer their time when they are asked to. Using household surveys of giving and volunteering in the United States conducted from 1992 to 2001, which contain questions on whether the respondent was personally asked to give or volunteer, this paper investigates the factors associated with the probability of receiving a charitable solicitation and presents substantial evidence that race and gender differences play key roles in the selection of potential donors. In particular, males, blacks, and Hispanics are less likely to be solicited compared with females and whites. Using non-linear decomposition techniques, I find that differences in observable characteristics of individuals explain most of the racial gap in the probability of being solicited for charitable causes, but they fail to explain the gender gap in the probability of being asked to volunteer. Furthermore, these results are robust to alternative specifications. I also discuss related policy implications and argue that the economic impact of selecting potential donors based on gender and race can be considerable.  
  [09-02] Barış K. Yörük. "The Effect of Media on Charitable Giving and Volunteering: Evidence from the `Give Five' Campaign"  
    Abstract: Fundraising campaigns advertised via mass media are common. To what extent such campaigns affect charitable behavior is mostly unknown, however. Using giving and volunteering surveys conducted biannually from 1988 to 1996, I investigate the e¤ect of a national fundraising campaign, "Give Five", on charitable giving and volunteering patterns. The widely advertised "Give Five" campaign was aimed to encourage people to give five percent of their income and volunteer five hours a week. After controlling for selection into being informed about the "Give Five", I find that people who were informed about the campaign increased their weekly volunteering activity on average by almost half an hour, but their giving behavior was not significantly affected. I discuss the policy implications associated with this result and argue that although the "Give Five" campaign did not achieve its goal, its economic impact was considerable.  
  [09-03] Kajal Lahiri (with Fushang Liu). "On the Use of Density Forecasts to Identify Asymmetry in Forecasters’ Loss Functions"  
    Abstract: We consider how to use information from reported density forecasts from surveys to identify asymmetry in forecasters' loss functions. We show that, for the three common loss functions - Lin-Lin, Linex, and Quad-Quad - we can infer the direction of loss asymmetry by just comparing point forecasts and the central tendency (mean or median) of the underlying density forecasts. If we know the entire distribution of the density forecast, we can calculate the loss function parameters based on the first order condition of forecast optimality. This method is applied to forecasts for annual real output growth and inflation obtained from the Survey of Professional Forecasters (SPF). We find that forecasters treat underprediction of real output growth more dearly than overprediction,
reverse is true for inflation.
  [09-04] Kajal Lahiri (with Zulkarnain Pulungan). "Health Inequality and Its Determinants in New York"  
    Abstract: Self-assessed health status conditioned by several objective measures of health and socio-demographic characteristics are used to measure health inequality. We compare the quality of health and health inequality among different racial/ethnic groups as well as across 17 regions in New York State. In terms of average health and health inequality, American Indian/Alaskan Natives and Hispanics are found to be the worst, and North Country, Bronx County, and Richmond County lag behind the rest of the State. Three major contributing factors to health inequality are found to be employment status, education, and income. However, the contribution of each of these determinants varies significantly among racial/ethnic groups as well as across regions, suggesting targeted public health initiatives for vulnerable populations to eliminate overall health disparity.  
  [09-05] Kajal Lahiri (with Xuguang Sheng). "Learning and Heterogeneity in GDP and Inflation Forecasts"  
    Abstract: Using a Bayesian learning model with heterogeneity across agents, our study aims to identify the relative importance of alternative pathways through which professional forecasters disagree and reach consensus on the term structure of inflation and real GDP forecasts, resulting in different patterns of forecast accuracy. Forecast disagreement arises from two primary sources in our model: differences in the initial prior beliefs, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the U.S. and (ii) the successful inflation targeting experience in Italy after 1997, firmly establish the importance of these two pathways to expert disagreement, and help to explain the relative forecasting accuracy of these two macroeconomic variables.  
  [09-06] Kajal Lahiri (with Xuguang Sheng). "Measuring Forecast Uncertainty by Disagreement: The Missing Link"  
    Abstract: Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.  
  [09-07] George Monokroussos. "A Classical MCMC Approach to the Estimation of Limited Dependent Variable Models of Time Series"  
    Abstract: Estimating Limited Dependent Variable Time Series models through standard extremum methods can be a daunting computational task because of the need for integration of high order multiple integrals and/or numerical optimization of difficult objective functions. This paper proposes a classical Markov Chain Monte Carlo (MCMC) estimation technique with data augmentation that overcomes both of these problems. The asymptotic properties of the proposed estimator are established. Furthermore, a practical and flexible algorithmic framework for this class of models is proposed and is illustrated using simulated data, thus also offering some insight into the small-sample biases of such estimators. Finally, the versatility of the proposed framework is illustrated with an application of a dynamic tobit model for the Open Market Desk's Daily Reaction Function.  
2008 Discussion Papers
  [08-01] Fang (Annie) Yang. "Accounting for the Heterogeneity in Retirement Wealth"  
    Abstract: This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime earnings hold very different amounts of wealth at retirement. Earnings heterogeneity and borrowing constraints are essential in generating the variation in wealth at retirement among low lifetime earnings households, while inheritance heterogeneity helps to generate the heterogeneity in wealth at retirement among high lifetime earnings households.  
  [08-02] Fang (Annie) Yang (with Suqin Ge). "Accounting for the Gender Gap in College Attainment"  
    Abstract:One striking phenomenon in the U.S. labor market is the reversal of the gender gap in college attainment. Females have outnumbered males in college attainment since 1987. We develop a discrete choice model of college entry decisions to study the effects of changes in relative earnings, changes in parental education, and changes in the marriage market on time series observations of college attainment by gender. We find that the increase in the relative earnings between college and high school individuals and the increasing parental education have important effects on the increase in college attainment for both genders but cannot explain the reversal of the gender gap. Declining marriage rates decrease returns to college for females less than those for males, and thus is crucial in explaining the reversal of the gender gap in college attainment.  
  [08-03] John Bailey Jones (with Sohini Sahu). "Transition Accounting for India in a Multi-Sector Dynamic General Equilibrium Model"  
    Abstract: Using a quantitative methodology designed specifically for emerging economies, we measure the components of India's economic growth over the period 1960-2005. Our approach accounts for time-varying parameters, transitional dynamics and non-linear trends. We find that increased productivity in the service sector, facilitated by a structural shift toward services, is the principal driver of India's economic growth. Our measures also suggest that the allocation of inputs across sectors has not improved over this period, and in the case of labor appears to have significantly worsened. We further find that fluctuations in output around its trend are due primarily to fluctuations in sector-specific total factor productivity, with fluctuations in labor market distortions and labor taxes also playing important roles. In the period 1960-1980, productivity fluctuations in the agricultural sector are the dominant source of cycles. Since then, productivity fluctuations in the manufacturing and service sectors have been more important.  
  [08-04] Illoong Kwon (with Eva Meyersson Milgrom and Seiwoon Hwang). "Cohort Effects in Promotions and Wages: Evidence from Sweden and US"  
    Abstract: This paper studies the long-term effect of the business cycle at the time workers enter the labor market on workers?future promotions and wages. Using the Swedish employer-employee matched data, we find that a cohort of workers entering the labor market during a boom gets promoted faster and reaches higher ranks. This pro-cyclical promotion cohort effect persists even after controlling for workers?initial jobs, and explains most of the wage cohort effects that previous studies have focused on. We repeat the same analyses using personnel records from a single US company, and show that the qualitative results do not change.  
  [08-05] Illoong Kwon. "Patent Portfolio Race and Secrecy"  
    Abstract: When firms can protect their innovations by secrecy or lead-time, the additional effect of patent protection is not obvious. This paper shows that when firms compete for a single innovation, patent protection still increases R&D investment but decreases social welfare due to over-investment. However, when firms compete for multiple complementary patents (called a patent portfolio), patent protection decreases R&D investment and decreases social welfare due to under-investment. If firms cannot rely on secrecy, patent protection increases investment regardless of whether firms compete for a single patent or for a patent portfolio.  
  [08-06] Illoong Kwon. "Separating the Roles of Chairman and CEO: A Model of Leadership and Authority"  
    Abstract: This paper provides a simple model of authority and leadership to discuss the issue of splitting the roles of CEO and Chairman. The board has the formal authority, but can delegate the leadership to the CEO by providing the title of chairman to the CEO. The paper shows that the optimal leadership structure differs depending on the board's independence. However, once we endogenize the board's indepence and the CEO's type, there exists a unique equilibrium where the board chooses the maximum independence without splitting the titles. The paper also considers the CEO's possible resistance and the agency problem with the board.  
  [08-07] Illoong Kwon (with Eunjung Yeo). "Overstatement and Rational Market Expectation"  
    Abstract: When an agent overstates his/her true performance, a rational market can simply discount the reported performance, and correctly guess the true performance. This paper shows, however, that such rational market discounting leads to less productive effort by the agent and less performance-pay by the principal. Therefore, a rational market and a profit-maximizing principal can exacerbate the lack of productive effort by the agent.  
  [08-08] Illoong Kwon (with Katherine Guthrie and Jan Sokolowsky). "On the Objective of Corporate Boards: Theory and Evidence"  
    Abstract: There are two views on board objectives: (i) boards act as monitors with the objective to maximize firms' long-term fundamental values; and (ii) boards act myopically with a focus on firms' short-term market values. We propose a principal-agent model linking CEO incentive pay to earnings overstatement that allows us to differentiate between these objectives empirically. In response to an increase in the cost of overstating earnings, the model predicts an increase in CEO incentives if boards act as monitors, but a decrease in CEO incentives if boards are myopic. We find strong evidence of a decrease in CEO incentives around the Sarbanes-Oxley Act of 2002. Moreover, the model predicts that capital market pressure makes boards more myopic. We document a positive relationship between capital market pressure and CEO incentives. Around SOX, CEO incentives also fall by more in firms with high capital market pressure, as predicted by the model. Our results strongly support the myopic board view.  
  [08-09] Betty Daniel. "Exchange Rate Crises and Fiscal Solvency"  
    Abstract: This paper combines insights from generation-one currency crisis models and the Fiscal Theory of the Price Level (FTPL) to create a new generation-one type model. Fiscal solvency is the fundamental generating crises, as in generation-one models. The initial fixed-exchange-rate policy entails risks, both to its sustainability and to the real value of government debt. The risks are due to stochastic surplus shocks and an upper bound on the present value of surpluses. Stochastic surplus shocks, changes in expectations of future fiscal commitments, and changes in the policy parameters can raise current desired debt or reduce expected future surpluses. Should the government's desired debt exceed the present-value of expected future surpluses, agents refuse to lend into this position of insolvency. The sudden stop of capital inflows creates a crisis. Equilibrium can be restored with some combination of policy switching and debt devaluation to restore fiscal solvency. The model can explain a wider variety of crises than generation one models, including those involving sovereign default. It is applied to explain crises in Argentina (2001), Mexico (1994-95), and Southeast Asia (1997), which did not fit the stylized facts of generation one models.  
  [08-10] Betty Daniel. "Private Sector Risk and Financial Crises in Emerging Markets"  
    Abstract: Investment necessary for growth is risky and often requires external financing. For an emerging market, access to international credit markets is volatile and interest rates reflect risk of default. We present a theoretical model in which emerging market agents have access to a profitable two-period investment project of fixed size greater than their endowment. Credit market imperfections can magnify a small solvency problem into a financial crisis with widespread default and/or currency devaluation. In equilibrium, creditors o¤er single-period debt up to a ceiling based on expected future output. News about a negative productivity shock reduces the debt ceiling imposed by creditors, creating a sudden stop of capital floows. The sudden stop can be severe enough to trigger a debt crisis, when agents prefer default over debt repayment, and/or a currency crisis, as agents attempt to maintain desired consumption by swapping domestic currency for foreign currency to purchase goods. We also show that there are critical thresholds for parameters governing credit market imperfections that separate countries into a safe credit club with low interest rates and steady access and a risky club with high interest rates and volatile access.  
  [08-11] Betty Daniel (with Christos Shiamptanis). "Fiscal Policy in the European Monetary Union"  
    Abstract: A country entering the EMU surrenders its monetary policy, and its debt becomes denominated in terms of a currency over which it has no direct control. A country's promise to uphold the fiscal limits in the Maastricht Treaty and the Stability and Growth Pact is implicitly a promise not to allow its fiscal stance to deteriorate to a position in which it places pressure on the central bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority's freedom to determine the price level. We specify a simple model of fiscal policy in which the fiscal authority faces an upper bound on the size of its primary surplus. Policy is determined by a fiscal rule, specified as an error correction model, in which the primary surplus responds to debt and a target variable. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Using panel techniques that allow for unit roots and for heterogeneity and cross-sectional dependence across countries, we estimate the coefficients of the error correction model for the primary surplus in a panel of ten EMU countries over the period 1970-2006. The group mean estimate for the coefficient on lagged debt is consistent with the hypothesis that the monetary authority can control the price level in the EMU, independent of fiscal influence.  
  [08-12] Betty Daniel (with Christos Shiamptanis). "Fiscal Risk in a Monetary Union"  
    Abstract: A country entering a monetary union gives up the right to determine its own monetary policy. Individual fiscal authorities promise passive fiscal policy, allowing the central monetary authority to use active monetary policy. Since a government, which can print its own money, can honor its nominal debt unconditionally, entrance into a monetary union raises new issues of potential fiscal insolvency. When there is an upper bound on the magnitude of the surplus and stochastic shocks to the surplus, a government can find itself in a position in which it cannot borrow to continue with its desired passive fiscal policy. This paper considers the risk of a fiscal financial crisis in a monetary union under alternative assumptions about how the fiscal authority would respond. The response affects the timing and probability of a crisis. We consider both outright default and policy switching, whereby the fiscal authority in crisis switches to active fiscal policy and the monetary authority switches to passive monetary policy. We apply the model to estimate fiscal risk in the European Monetary Union. Using panel estimates of the parameters in the surplus rule and initial values for government debt and the primary surplus, we simulate fiscal risk under the two alternative fiscal responses to a crisis. We find that countries with initial values bound by the Maastricht Treaty limits are safe, while countries like Italy and Greece, in which debt has strayed far above these limits, might not be.  
2007 Discussion Papers
  [07-01] Illoong Kwon (with Eva Meyersson Milgrom). "Status in the Workplace: Evidence from M&A"  
    Abstract: Using mergers and acquisitions as a natural experiment, this paper analyzes how changes in workers?status in the workplace affect their turnover decisions. The evidence suggests that workers have different preferences for status depending on reference group. When compared with co-workers in the same occupation, workers positively value their status. However, when compared with workers in other occupations in the same firm, workers negatively value their status. Workers seem to give up absolute wage increase for higher status within occupation, which suggests that preference for status stems from status?social value, not from its instrumental value for future income.  
2006 Discussion Papers
  [06-01] Fang (Annie) Yang. "Consumption Over Life Cycle: How Different is Housing? "  
    Abstract: Micro data over the life cycle shows different patterns of consumption for housing and non-housing goods: the consumption profile of non-housing goods is hump-shaped while the consumption profile for housing first increases monotonically and then flattens out. These patterns hold true at each consumption quartile. This paper develops aquantitative, dynamic general equilibrium model of life-cycle behavior, which generates consumption profiles consistent with the observed data. Borrowing constraints are essential in explaining the accumulation of housing assets early in life, while transaction costs are crucial in generating the slow downsizing of the housing assets later in life.  
  [06-02] George Monokroussos. "Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy"  
    Abstract: I estimate, using real-time data, a forward-looking, dynamic, discrete-choice monetary policy reaction function for the US economy, that accounts for the fact that there are substantial restrictions in the period-to-period changes of the Fed's policy instrument (an issue which is however largely ignored in the existing literature). I overcome ensuing computational complications by estimating the model using Markov Chain Monte Carlo methods. I find a substantial contrast between the periods before and after Paul Volcker's appointment as Fed Chairman in 1979, both in terms of the Fed's response to expected inflation and in terms of its response to the (perceived) output gap: In the pre-Volcker era the Fed's response to inflation was substantially weaker than in the Volcker-Greenspan era; conversely, the Fed seems to have been more responsive to (inaccurate real-time estimates of) the output gap in the pre-Volcker era than later. These results, which carry through a series of extensions and robustness checks, provide support for the "policy mistakes" hypothesis (according to which the pre-Volcker Fed made mistakes in its conduct of monetary policy, and starting with Volcker's appointment the Fed avoided to a substantial extent mistaken practices of the past) as an explanation of the stark contrast in US macroeconomic performance between the pre-Volcker and the Volcker/Greenspan periods.  
  [06-03] Kajal Lahiri (with Zulkarnain Pulungan). "Health Inequality and Its Determinants in New York"  
    Abstract: Self-assessed health status conditioned by several objective measures of health and socio-demographic characteristics are used to measure health inequality. We compare the quality of health and health inequality among different racial/ethnic groups as well as across 10 economic development regions in New York State. In terms of average health and health inequality, American Indian/Alaskan Natives and Hispanics are found to be the worst, and North Country and Southern Tier regions lag behind the rest of the State. Three major contributing factors to health inequality are found to be employment status, education, and income. However, the contribution of each of these determinants varies significantly among racial/ethnic groups as well as across regions, suggesting targeted public health initiatives for vulnerable populations to eliminate overall health disparity.  
  [06-04] Kajal Lahiri (with Gultekin Isiklar). "How Far Ahead Can We Forecast? Evidence From Cross-country Surveys"  
    Abstract: Using monthly GDP forecasts from Consensus Economics Inc. for 18 developed countries reported over 24 different forecast horizons during 1989-2004, we find that the survey forecasts do not have much value when the horizon goes beyond 18 months. Using two alternative approaches to measure the flow of new information in fixed-target survey forecasts, we found that the biggest improvement in forecasting performance comes when the forecast horizon is around 14 months. The dynamics of information accumulation over forecast horizons can provide both the forecasters and their clients with an important clue in their selection of the timing and frequency in the use of forecasting services. The limits to forecasting that these private market forecasters exhibit are indicative of the current state of macroeconomic foresight.  
  [06-05] Kajal Lahiri (with Fushang Liu). "Modeling Multi-Period Inflation Uncertainty Using a Panel of Density Forcasts"  
    Abstract: This paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the Survey of Professional Forecasters (SPF). Based on a dynamic heterogeneous panel data model, we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest. In addition, the strong link between past forecast errors and current forecast uncertainty, as often is noted in the ARCH literature, is largely lost in a multiperiod context with varying forecast horizons. We propose a novel way of estimating “news” and its variance using the Kullback-Leibler Information, and show that the latter is an important determinant of forecast uncertainty. Our evidence suggests a strong relationship of forecast uncertainty with level of inflation, but not with forecaster discord or with the volatility of a number of other macroeconomic indicators.  
  [06-06] Laurence Kranich (with Matteo Cervellati and Joan Esteban). "The Social Contract with Endogenous Sentiments"  
    Abstract: In this paper we present a model of rational voting over redistribution where individual self-esteem and relative esteem for others are endogenously determined. Individuals differ in their productivities, and their behaviour and political views are influenced by moral standards concerning work. Agents determine what they take to be proper behaviour and they judge others, and themselves, accordingly, increasing their esteem (or self-esteem) for those who perform in excess of the standard and decreasing their esteem for those who work less. The desired extent of redistribution depends both on individual income and on individual attitudes toward others. The model has two types of equilibria. In a “cohesive" equilibrium, all individuals conform to the standard of proper behaviour, income inequality is low and social esteem is not biased toward any particular type. Under these conditions equilibrium redistribution increases in response to larger inequality. In a “clustered" equilibrium skilled workers work above the mean while unskilled workers work below. In such an equilibrium, income inequality is large and sentiments are biased in favor of the industrious. As inequality increases, this bias may eventually overtake the egoistic demand for greater taxation and equilibrium redistribution decreases. The type of equilibrium to emerge crucially depends on inequality. We contrast the predictions of the model with data on inequality, redistribution, work values and attitudes toward work and toward the poor for a set of OECD countries.  
  [06-07] Michael Jerison (with John K.-H. Quah). "Law of Demand"  
    Abstract: We formulate several laws of individual and market demand and describe their relationship to neoclassical demand theory. The laws have implications for comparative statics and stability of competitive equilibrium. We survey results that offer interpretable sufficient conditions for the laws to hold and we refer to related empirical evidence. The laws for market demand are more likely to be satisfied if commodities are more substitutable. Certain kinds of heterogeneity across individuals make the laws more likely to hold in the aggregate even if they are violated by individuals.  
  [06-08] Michael Jerison. "Nonrepresentative Representative Consumers"  
    Abstract: Single consumer models are often used to focus attention on economic efficiency, leaving aside equity considerations. In general, these “representative consumer" models do not accurately portray the effects of changes in policies, endowments or technology in the multi-consumer economies they are meant to represent; but even when they do, they are not necessarily adequate for evaluating efficiency. The representative consumer can be Pareto inconsistent, preferring a situation B to A even though all the consumers in the represented economy prefer A to B. It is not clear from the literature how serious a defect this can be. The known examples of Pareto inconsistency are not robust. Small changes in the consumers' preferences remove the Pareto inconsistency. It has been an open question whether large robust Pareto inconsistencies are possible.
This paper shows that they are. In one example, the actual consumers require 56% more income than the representative consumer requires in order to be compensated for the doubling of a price. But such large Pareto inconsistencies require that there is a Giffen good for the representative consumer. We argue that the inconsistencies of representative consumers in most macroeconomic applications are likely to be small and we give conditions ruling out inconsistencies entirely.





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