Airline transport generates a growing share of global greenhouse gas emissions but as of late 2016, this sector has not faced U.S. fuel economy or emissions regulation. At any point in time, airlines own and lease a set of durable vehicles and have invested in human and physical capital and an inventory of parts to maintain these vehicles. Each airline chooses whether to scrap and replace airplanes in their fleet and how to utilize and operate their fleet of aircraft. We model these choices as a function of real jet fuel prices. When jet fuel prices are higher, airlines fly fuel inefficient planes slower, scrap older fuel inefficient planes earlier and substitute miles flown to their more fuel efficient planes.
An Economic Analysis of U.S Airline Fuel Economy Dynamics from 1991 to 2015 -- by Matthew E. Kahn, Jerry Nickelsburg
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Exchange Traded Funds (ETFs) -- by Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.
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Corporate Deleveraging -- by Harry DeAngelo, Andrei S. Goncalves, Rene M. Stulz
Proactive deleveraging from all-time peak market leverage (ML) to near-zero ML and negative net debt is the norm among 4,476 nonfinancial firms with five or more years of post-peak data. ML is 0.543 at the historical peak and 0.026 at the later trough for the median firm in this sample, with a six-year median time from peak to trough. These deleveraging episodes are largely proactive, with debt repayment and earnings retention accounting for 93.7% of the peak-to-trough decline in ML for the median firm. Attenuated deleveraging, with ML staying well above zero, is the norm at 3,118 firms that are delisted due to financial distress within four years of peak. Leverage is path dependent, with the key to explaining whether ML is high or low at the post-peak trough being how high it was at the peak and prior trough and whether the firm has had only a short time to deleverage, e.g., due to distress-related delisting. The findings are consistent with proactive deleveraging to avoid distress and to restore financial flexibility, and are hard to reconcile with materially positive target leverage ratios.
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Inflation Dynamics During the Financial Crisis -- by Simon Gilchrist, Raphael Schoenle, Jae Sim, Egon Zakrajsek
Using a novel dataset, which merges good-level prices underlying the PPI with the respondents' balance sheets, we show that liquidity constrained firms increased prices in 2008, while their unconstrained counterparts cut prices. We develop a model in which firms face financial frictions while setting prices in customer markets. Financial distortions create an incentive for firms to raise prices in response to adverse financial or demand shocks. This reaction reflects the firms' decisions to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.
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Hospital Competition, Quality, and Expenditures in the U.S. Medicare Population -- by Carrie Colla, Julie Bynum, Andrea Austin, Jonathan Skinner
Theoretical models of competition with fixed prices suggest that hospitals should compete by increasing quality of care for diseases with the greatest profitability and demand elasticity. Most empirical evidence regarding hospital competition is limited to heart attacks, which in the U.S. generate positive profit margins but exhibit very low demand elasticity - ambulances usually take patients to the closest (or affiliated) hospital. In this paper, we derive a theoretically appropriate measure of market concentration in a fixed-price model, and use differential travel-time to hospitals in each of the 306 U.S. regional hospital markets to instrument for market concentration. We then estimate the model using risk-adjusted Medicare data for several different population cohorts: heart attacks (low demand elasticity), hip and knee replacements (high demand elasticity) and dementia patients (low demand elasticity, low or negative profitability). First, we find little correlation within hospitals across quality measures. And second, while we replicate the standard result that greater competition leads to higher quality in some (but not all) measures of heart attack quality, we find essentially no association between competition and quality for what should be the most competitive markets - elective hip and knee replacements. Consistent with the model, competition is associated with lower quality care among dementia patients, suggesting that competition could induce hospitals to discourage unprofitable patients.
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Putting the Cycle Back into Business Cycle Analysis -- by Paul Beaudry, Dana Galizia, Franck Portier
This paper begins by re-examining the spectral properties of several cyclically sensitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique-equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We estimate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.
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Time-Inconsistent Charitable Giving -- by James Andreoni, Marta Serra-Garcia
This paper examines the interaction between moral contradictions and time in charitable giving. Applying a simple theoretical framework to two longitudinal experiments with actual charitable donations, we show that moral contradictions become the source of a new kind of time inconsistency linked to a demand for flexibility, rather than the more typical demand for commitment. This kind of time inconsistency coexists with the opposite of kind of time inconsistency arising from temptation to give, which is exhibited by a substantial minority of individuals. Our results reveal that time inconsistency is pervasive and exhibits unique features in the charitable domain.
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The Optimal Distribution of Population across Cities -- by David Albouy, Kristian Behrens, Frederic Robert-Nicoud, Nathan Seegert
The received economic wisdom is that cities are too big and that public policy should limit their sizes. This wisdom assumes, unrealistically, that city sites are homogeneous, migration is unfettered, land is given freely to incoming migrants, and federal taxes are neutral. Should those assumptions not hold, large cities may be inefficiently small. We prove this claim in a system of cities with heterogeneous sites and either free mobility or local governments, where agglomeration economies, congestion, federal taxation, and land ownership create wedges. A quantitative version of our model suggests that cities may well be too numerous and underpopulated for a wide range of plausible parameter values. The welfare costs of free migration equilibria appear small, whereas they seem substantial when local governments control city size.
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Heterogeneity and Persistence in Returns to Wealth -- by Andreas Fagereng, Luigi Guiso, Davide Malacrino, Luigi Pistaferri
We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway's administrative tax records. We document a number of novel results. First, in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile. Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, for wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
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Durable Coalitions and Communication: Public versus Private Negotiations -- by David P. Baron, Renee Bowen, Salvatore Nunnari
We present a laboratory experiment to study the effect of communication on durable coalitions - coalitions that support the same allocation from one period to the next. We study a bargaining setting where the status quo policy is determined by the policy implemented in the previous period. Our main experimental treatment is the opportunity for subjects to negotiate with one another through unrestricted cheap-talk communication before a proposal is made and comes to a vote. We compare committees with no communication, committees where communication is public and messages are observed by all committee members, and committees where communication is private and any committee member can send private messages to any other committee member. We find that the opportunity to communicate has a significant impact on outcomes and coalitions. When communication is public, there are more universal coalitions and fewer majoritarian coalitions. With private communication, there are more majoritarian coalitions and fewer universal coalitions. With either type of communication coalitions occur more frequently and last longer than with no communication. The content of communication is correlated with coalition type and with the formation and dissolution of durable coalitions. These findings suggest a coordination role for communication that varies with the mode of communication.
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Puzzles in the Forex Tokyo "Fixing": Order Imbalances and Biased Pricing by Banks -- by Takatoshi Ito, Masahiro Yamada
"Fixing" in the foreign exchange market is a market practice that determines the bid-ask-mid-point exchange rate at a scheduled time, 10am in Tokyo and 4pm in London. The fixing exchange rate is then applied to the settlement of foreign exchange transactions between banks and retail customers including broker dealers, institutional investors, insurance companies, exporters and importers, with varying bid-ask spreads. Our findings for the Tokyo fixing are summarized as follows. (1) Price spikes in the Tokyo fixing are more frequent than in the London fixing. (2) The customer orders are biased toward buying the foreign currencies, which is predictable. (3) Before 2008, the fixing prices set by banks were biased upward, and higher than the highest transaction price during the fixing time window. (4) Even after 2008, the fixing prices announced by banks were still above the median transaction price during the fixing window, suggesting that banks make predictable profits. (5) The calendar effects also matter for determination of the fixing rate and the price fluctuation around fixing time.
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International Borrowing Cycles: A New Historical Database -- by Graciela L. Kaminsky
The ongoing slowdown in international capital flows has brought again to the attention the booms and bust cycles in international borrowing. Many suggest that capital flow bonanzas are excessive, ending in crises. One of the most frequently mentioned culprits are the cycles of monetary easing and tightening in the financial centers. More recently, the 2008 Subprime Crisis in the United States has also been blamed for the retrenchment in capital flows to both developed and developing countries. To further understand international capital flow cycles, I construct a new database on capital flows spanning the first episode of financial globalization from 1820 to 1931. During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for global cycles in the absence of an active role of central banks in the financial centers. Also, panics in the financial center are rare disasters that can only be studied in this longer episode of financial globalization. This paper presents the historical data with an example for Latin America.
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Technical Aspects of Correspondence Studies -- by Joanna Lahey, Ryan Beasley
This paper discusses technical concerns and choices that arise when crafting a correspondence or audit study using external validity as a motivating framework. We will discuss resume creation, including power analysis, choice of inputs, pros and cons of matching pairs, solutions to the limited template problem, and ensuring that instruments indicate what the experimenters want them to indicate. Further topics about implementation include when and for how long to field a study, deciding on a participant pool, and whether or not to use replacement from the participant pool. More technical topics include matching outcomes to inputs, data storage, and analysis issues such as when to use clustering, when not to use fixed effects, and how to measure heterogeneous and interactive effects. We end with a technical checklist that experimenters can utilize prior to fielding a correspondence study.
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Gender, Marriage, and Life Expectancy -- by Margherita Borella, Mariacristina De Nardi, Fang Yang
Wages and life expectancy, as well as labor market outcomes, savings, and consumption, differ by gender and marital status. In this paper we compare the aggregate implications of two dynamic structural models. The first model is a standard, quantitative, life-cycle economy, in which people are only heterogenous by age and realized earnings shocks, and is calibrated using data on men, as typically done. The second model is one in which people are also heterogeneous by gender, marital status, wages, and life expectancy, and is calibrated using data for married and single men and women. We show that the standard life-cycle economy misses important aspects of aggregate savings, labor supply, earnings, and consumption. In contrast, the model with richer heterogeneity by gender, marital status, wage, and life expectancy matches the observed data well. We also show that the effects of changing life expectancy and the gender wage gap depend on marital status and gender, and that it is essential to not only model couples, but also the labor supply response of both men and women in a couple.
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Housing Demand, Cost-of-Living Inequality, and the Affordability Crisis -- by David Albouy, Gabriel Ehrlich, Yingyi Liu
Since 1970, housing's relative price, share of expenditure, and ``unaffordability'' have all grown. We estimate housing demand using a novel compensated framework over space and an uncompensated framework over time. Our specifications pass tests imposed by rationality and household mobility. Housing demand is income and price inelastic, and appears to fall with household size. We provide a numerical non-homothetic constant elasticity of substitution utility function for improved quantitative modeling. An ideal cost-of-living index demonstrates that the poor have been disproportionately impacted by rising relative rents, which have greatly amplified increases in real income inequality.
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The Affordable Care Act as Retiree Health Insurance: Implications for Retirement and Social Security Claiming -- by Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai
Using data from the Health and Retirement Study, we examine the effects of the Affordable Care Act (ACA) on retirement. We first calculate retirements (and in related analyses changes in expected ages of retirement and/or Social Security claiming) between 2010, before ACA, and 2014, after ACA, for those with health insurance at work but not in retirement. This group experienced the sharpest change in retirement incentives from ACA. We then compare retirement measures for those with health insurance at work but not in retirement with retirement measures for two other groups, those who, before ACA, had employer provided health insurance both at work and in retirement, and those who had no health insurance either at work or in retirement. To complete a difference-in-difference analysis, we make the same calculations for members of an older cohort over the same age span. We find no evidence that ACA increases the propensity to retire or changes the retirement expectations of those who, before ACA, had coverage when working but not when retired. An analysis based on a structural retirement model suggests that eventually ACA will increase the probability of retirement by those who initially had health insurance on the job but did not have employer provided retiree health insurance. But the retirement increase is quite small, only about half a percentage point at each year of age. The model also suggests that much of the effect of ACA on retirement will be realized within a few years of the change in the law.
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Past Performance and Procurement Outcomes -- by Francesco Decarolis, Giancarlo Spagnolo, Riccardo Pacini
Reputational incentives may be a powerful mechanism for improving supplier performance. We analyze their role in contract awarding, exploiting an experiment run by a firm which introduced a new vendor rating system scoring suppliers' past performance and linking it to the award of future contracts. We study responses in both price and performance to the announcement of the switch from price-only to price-and-rating auctions. Across the 136 parameters scored, overall compliance improves from 25 percent to 80 percent. Improvements involve all parameters and suppliers, but are more pronounced for parameters receiving a higher weight in the announced scoring auction. Prices do not significantly change overall, but we find some evidence of lower prices right after the announcement when suppliers compete to win contracts to get scored, and of higher prices once they have established a good reputation. Even under an upper bound estimate for this price increase, however, the cost of the policy is below its lower bound benefit estimate, which derives from a reduction in fatal accidents driven by improvements on the subset of parameters involving worksite safety.
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On a World Climate Assembly and the Social Cost of Carbon -- by Martin Weitzman
This paper postulates the conceptually useful allegory of a futuristic "World Climate Assembly" (WCA) that votes for a single worldwide price on carbon emissions via the basic democratic principle of one-person one-vote majority rule. If this WCA framework can be accepted in the first place, then voting on a single internationally- binding minimum carbon price (the proceeds from which are domestically retained) tends to counter self-interest by incentivizing countries or agents to internalize the externality. I attempt to sketch out the sense in which each WCA-agent's extra cost from a higher emissions price is counter-balanced by that agent's extra benefit from inducing all other WCA-agents to simultaneously lower their emissions in response to the higher price. The first proposition of this paper derives a relatively simple formula relating each emitter's single-peaked most-preferred world price of carbon emissions to the world "Social Cost of Carbon" (SCC). The second and third propositions relate the WCA-voted world price of carbon to the world SCC. I argue that the WCA-voted price and the SCC are unlikely to differ sharply. Some implications are discussed. The overall methodology of the paper is a mixture of mostly classical with some behavioral economics.
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International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma -- by Xuehui Han, Shang-Jin Wei
This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country's interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of "2.5-lemma" or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.
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Complementarity without Superadditivity -- by Steven Berry, Philip Haile, Mark Israel, Michael Katz
The distinction between complements, substitutes, and independent goods is important in many contexts. It is well known that when consumers' conditional indirect utilities for two goods are superadditive, the goods are gross complements. Generalizing insights in Gans and King (2006) and Gentzkow (2007), we show that superadditivity between one pair of goods can also introduce complementarity between competing pairs of goods. One implication is that lower prices can result from a merger between producers of goods that themselves offer no superadditivity.
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