Recent ucsbecon_dwp items

Reconsidering Causation

Mon, 24 Jun 2024 00:00:00 +0000

Recent applied work in economics has displayed renewed interest in the problem of characterizing the causal relations that link economic variables. However, many discussions avoid explicit specification ofwhat has to be true about a formal model to justify an assertion that one variable in it causes another. Such specification is supplied here. Related topics, such as determining whether correlation implies causation, or vice-versa, and when causal coefficients can be estimated using ordinary least squares or instrumental variables regressions, are discussed.

THE LAW OF ONE PRICE, BORDERS AND PURCHASING POWER PARITY

Mon, 28 Nov 2022 00:00:00 +0000

Conventional wisdom claims that the Law of One Price (LOP) fails in commodity markets, commodity borders are wide and Purchasing Power Parity (PPP) fails. But the evidence supporting those claims comes primarily from retail markets where price differentials do not represent risk-free profits. As we show, prices from a wide range of auction markets strongly support the LOP, reject wide borders and do not reject PPP. In addition, recognizing the difference between retail and auction markets helps explain several puzzles associated with exchange rates. The Keynesian paradigm dominates macroeconomics. We question that dominance for two reasons: (1) by reviving PPP we reject Liquidity Preference and support Loanable funds and (2) we reject the standard Keynesian assumption that commodity markets clear slowly and asset markets clear rapidly. Whether commodity or asset, retail markets clear slowly. Whether commodity or asset, auction markets clear rapidly.

Living Supply and Demand Curves

Sun, 27 Mar 2022 00:00:00 +0000

Living Supply and Demand Curves

Stem Cell Donor Matching for Patients of Mixed Race

Sun, 14 Feb 2021 00:00:00 +0000

The plight of multiracial leukemia patients who are unable to find matching stem cell donors has received much media attention. These news stories, while dramatic, are short on statistical information and long on misconceptions. We apply simple probability theory, the genetics of sexual diploid reproduction, and the theory of public goods to produce estimates of the probabilities that multiracial patients will find matching donors in the existing registry. We then compute the benefits and costs of registering more potential donors of single and mixed races. c

THE LAW OF ONE PRICE, PURCHASING POWER PARITY AND EXCHANGE RATES: SETTING THE RECORD STRAIGHT

Tue, 10 Nov 2020 00:00:00 +0000

Exchange-rate economics is filled with puzzles. The asset approach has failed and without it most open-economy models are built on sand. Conventional wisdom rejects the Law of One Price and views Purchasing Power Parity as useful at best in the long run. We show for the first time how recognizing differences between retail, wholesale and auction markets, and recognizing that trade involves time in transit, helps solve the puzzles and provides a theory of exchange rates using auction markets for assets and commodities. We also restore the Law of One Price and Purchasing Power Parity to the status of “not rejected”.

Housing Dynamics over the Business Cycle

Fri, 9 Oct 2020 00:00:00 +0000

Over the U.S. business cycle, fluctuations in residential investment are well known to systematically lead GDP. These dynamics are documented here to be specific to the U.S. and Canada. In other developed economies residential investment is broadly coincident with GDP. Nonresidential investment has the opposite dynamics, being coincident with or lagging GDP. These observations are in sharp contrast with the properties of nearly all business cycle models with disaggregated investment. Including mortgages and interest rate dynamics aligns the theory more closely with U.S. observations. Longer time to build in housing construction makes residential investment coincident with output.

Frequency and Accuracy in Proactive Testing for COVID-19

Sun, 6 Sep 2020 00:00:00 +0000

Frequency and Accuracy in Proactive Testing for COVID-19

THE LAW OF ONE PRICE, PURCHASING POWER PARITY AND EXCHANGE RATES

Thu, 11 Jun 2020 00:00:00 +0000

Exchange-rate economics is filled with puzzles. The asset approach has failed. Purchasing Power Parity is useful at best in the long run. There is no clear link between exchange rates and fundamentals. With no empirically supported theory for exchange rates, open-economy macro models are built on sand. This paper shows for the first time how recognizing differences between retail, wholesale and auction markets helps solve the puzzles, provides a theory of exchange rates based on auction markets for assets and commodities, and suggests a link between fundamentals and exchange rates.

Causal Inference

Wed, 10 Jul 2019 00:00:00 +0000

Causal Inference

Looking under the COUNTER for overcounted downloads

Tue, 16 Oct 2018 00:00:00 +0000

Looking under the COUNTER for overcounted downloads

FORWARD BIAS, UNCOVERED INTEREST PARITY AND RELATED PUZZLES

Mon, 26 Mar 2018 00:00:00 +0000

Uncovered interest parity is widely used in open economy macroeconomics. But the evidence rejects UIP and implies forward bias. There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none appear to explain the related puzzles discussed below. This paper shows how sterilized “leaning against the wind” and a combination of inflationary and liquidity effects of open market operations can explain forward bias and the failure of UIP even when expectations are rational. They also appear to be able to explain the related puzzles.

Do download reports reliably measure journal usage? Trusting the fox to count your Hens?

Mon, 27 Nov 2017 00:00:00 +0000

Download rates of academic journals have joined citation rates as commonly used measures of research influence. But in what ways and to what extent do the two measures differ? This paper examines six years of download data for more than five thousand journals subscribed to by the University of California system. While down- load rates of journals are highly correlated with citation rates, the average ratio of downloads to citations varies substantially among academic disciplines. We find that, typically, the ratio of a journal’s downloads to citations depends positively on its im- pact factor. Surprisingly, we find that, controlling for citation rates, number of articles, academic discipline and year of download, there remains a “publisher effect,” with some publishers recording significantly more downloads than would be predicted from char- acteristics of their journals. Download statistics are recorded and supplied to libraries by journal publishers, often subject to confidentiality...

Efficient Ethical Rules for Volunteer's Dilemma

Fri, 22 Sep 2017 00:00:00 +0000

Efficient Ethical Rules for Volunteer's Dilemma

When was Coase right?

Mon, 26 Jun 2017 00:00:00 +0000

This paper explores the conditions under which there is "Coasian independence" between the assignment of property right and efficient allocation of resources.

FORWARD BIAS, THE FAILURE OF UNCOVERED INTEREST PARITY AND RELATED PUZZLES

Mon, 26 Jun 2017 00:00:00 +0000

Uncovered interest parity is widely used in open economy macroeconomics. But the evidence rejects UIP and implies forward bias. There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none explain the related puzzles discussed below. This paper shows how the liquidity effects of open market operations and sterilized “leaning against the wind” can explain the failure of UIP and forward bias even when expectations are rational. They also appear to be able to explain the related puzzles better than any of the alternatives.

Bitcoin 1, Bitcoin 2, ... : An experiment in privately issued outside monies

Wed, 30 Nov 2016 00:00:00 +0000

The value of Bitcoin depends upon self-fulfilling beliefs that are hard to pin down. We demonstrate this for the case where Bitcoin is the only form of money in the economy and then generalize the message to the case of multiple Bitcoin clones and/or a competing sovereign currency. Some aspects of the indeterminacy we describe would no longer hold if Bitcoin were an interesting-bearing object.

Centralized netting in financial networks

Wed, 30 Nov 2016 00:00:00 +0000

We consider how the introduction of centralized netting in financial networks affects total netted exposures between counterparties. In some cases there is a trade-off: centralized netting increases the expectation of net exposures, but reduces the variance. We show that the set of networks for which expected net exposures decreases is a strict subset of those for which the variance decreases, so the trade-off can only be in one direction. For some network structures, introducing centralized netting is never beneficial to dealers unless sufficient weight is placed on reductions in variance. This may explain why, in the absence of regulation, traders in a derivatives network do not develop central clearing. Our results can be used to estimate margin requirements and counterparty risk in financial networks.

Let me, or Let George? Motives of competing altruists

Fri, 4 Dec 2015 00:00:00 +0000

Let me, or Let George? Motives of competing altruists

Arbitrage and the Law of One Price: Setting the Record Straight

Fri, 4 Dec 2015 00:00:00 +0000

Using retail commodity prices, most research finds positive Border Effects and rejects effective arbitrage and the Law of One Price. On the other hand, using auction prices, the finance literature and a few articles using commodities support effective arbitrage and the LOP. Using longer intervals and a wider variety of commodity auction prices than ever before, I find strong support for effective arbitrage and the LOP. In addition, for the first time, I use auction prices to look for Border Effects. Both half lives and standard deviations reject positive Border Effects.

Forward Bias, Uncovered Interest Parity and Related Puzzles

Wed, 23 Sep 2015 00:00:00 +0000

Teh Forward-Bias Puzzle, failure of uncovered interest parity and related puzzles suggest that there is a fundamental failure in internatonal financial markets. Many theories attempt to explain this bias and failure. But none of them has been widely accepted; at least partly because they are not consistent with the related puzzles. The model of monetary policy in Table 6 explains the Forward-Bias Puzzle and the UIP failure without appealing to risk premia or information failures. It also explains, or is at least consistent with, the related puzzles. Finally it suggests that we need to change the way we think about UIP.

Silence is Golden: Communication Costs and Team Problem Solving

Mon, 20 Jul 2015 00:00:00 +0000

Numerous studies have compared the performance of individuals and teams at solving intellective problems. The ubiquitous finding in the economics literature is that teams out-perform individuals. This result is intuitively appealing, as teams can benefit from sharing insights. We analyze experiments comparing the performance of teams and individuals at solving a series of challenging logic puzzles. Contrary to the existing literature, individuals meet or exceed the performance of teams on all measures. If we impose a small cost of communication on teams, the performance of teams improves to closely resemble the performance of individuals. Underlying these results is a definite negative relationship between frequency of communication and team performance. We also document a strong gender effect. Teams with more women perform considerably better even though men slightly outperform women when solving the puzzles individually.

Why ‘Optimal’ Payment for Healthcare Providers Can Never Be Optimal Under Community Rating

Mon, 27 Apr 2015 00:00:00 +0000

This article extends the received literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and health care. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers cannot be optimal either. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) by risk-rating of contributions combined with subsidization targeted at high risks with...

Market Socialism and Community Rating in the Affordable Care Act

Mon, 13 Apr 2015 00:00:00 +0000

Market Socialism and Community Rating in the Affordable Care Act

ECONOMIC RATIONALITY AND THE AREEDA-TURNER RULE

Mon, 30 Mar 2015 00:00:00 +0000

The Areeda-Turner rule in U.S. antitrust jurisprudence limits successful predatory pricing cases to circumstances where prices can be shown to have been set below marginal costs. While not cast so, the rule reflects the view that predatory pricing is rarely attempted; and even where attempted is rarely successful; and even where attempted and successful, is difficult to identify. In this paper, we examine the theoretical and empirical foundations of this rule, and conclude that it is time to demote the Areeda-Turner analysis from the status of a rule to that of a potentially useful form of inquiry in predatory pricing litigation, but one which is neither necessary nor dispositive.

Anatomy of a Slow-Motion Health Insurance Death Spiral

Mon, 30 Mar 2015 00:00:00 +0000

Adverse selection death spirals in health insurance are dramatic, and so far, exotic economic events. The possibility of death spirals has garnered recent policy and popular attention because the pricing regulations in the Affordable Care Act of 2010 make health plans more vulnerable to them (though some other aspects of the ACA limit them). Most death spirals tracked in the literature have involved selection against a group health plan that was dropped quickly by the employer. In this paper, we empirically document a death spiral in individual health insurance that was apparently triggered by a block closure in 1981 and developed slowly because the insurer partially subsidized the block. Indeed, we show that premiums rose dramatically from around the time of the block closure to at least 2009 (the last year of available data). By 2009, some, but very few policyholders remained in the block and premiums were roughly seven times that of a yardstick we developed. The history of...

A Test of Dual-Process Reasoning in Charitable Giving

Mon, 16 Mar 2015 00:00:00 +0000

Previous economic experiments on dual-process reasoning in altruistic decisions have yielded inconclusive results. However, these studies do not create a conflict between affective and cognitive motives, resulting in imperfect identification. We interact standard cognitive and affective manipulations in a giving task, and hypothesize that the affective manipulation has stronger effects when we simultaneously put the cognitive system under load. In line with earlier results, we find little evidence for dual-process reasoning in giving. Our independent treatment checks cast doubt on the effectiveness of standard treatment manipulations and show that both cognitive and affective manipulations consistently have opposite effects on the two sexes. We discuss the implications of our findings for economic experiments in this nascent research field.

Saving lives with stem cell transplants

Wed, 4 Feb 2015 00:00:00 +0000

Saving lives with stem cell transplants

Social comparisons in wage delegation: Experimental evidence

Tue, 10 Dec 2013 00:00:00 +0000

Social comparisons in wage delegation: Experimental evidence

Experimental Games on Networks: Underpinnings of Behavior andEquilibrium Selection

Tue, 10 Dec 2013 00:00:00 +0000

Experimental Games on Networks: Underpinnings of Behavior andEquilibrium Selection

Social and Moral Norms in Allocation Choices in the Laboratory

Tue, 10 Dec 2013 00:00:00 +0000

Social and Moral Norms in Allocation Choices in the Laboratory

Second-chance offers

Thu, 2 May 2013 00:00:00 +0000

Second-chance offers

THE FAILURE OF UNCOVERED INTEREST PARITY, FORWARD BIAS AND RELATED PUZZLES

Tue, 23 Apr 2013 00:00:00 +0000

Three puzzles are closely related to the forward-bias puzzle and the failure of uncovered interest parity: (1) UIP failure is greater for short than long maturities, (2) forward bias is larger between developed than between developing countries and (3) there is no systematic forward bias in commodity markets. A convincing explanation for these puzzles should also explain two other 'facts': (a) the time dependency of the forward bias and failure of UIP and (b) that UIP holds better under a gold standard than under flexible rates. A combination of covered interest parity and monetary policy provides the best available explanation.

Self-Image and Strategic Ignorance in Moral Dilemmas

Wed, 3 Apr 2013 00:00:00 +0000

Avoiding information about adverse welfare consequences of self-interested decisions, orstrategic ignorance, is an important source of corruption, anti-social behavior and even atrocities. We model an agent who cares about self-image and has the opportunity to learn the social benefits of a personally costly action. The trade-off between self-image concerns and material payoffs can lead the agent to use ignorance as an excuse, even if it is deliberately chosen. Two experiments, modeled after Dana, Weber, and Kuang (2007), show that a) many people will reveal relevant information about others' payoffs after making an ethical decision, but not before, and b) some people are willing to pay for ignorance. These results corroborate the idea that Bayesian self-signaling drives people to avoid inconvenient facts in moral decisions.

Individual Creativity, Ex-ante Goals and Financial Incentives

Mon, 4 Mar 2013 00:00:00 +0000

Creativity is a complex and multi-dimensional phenomenon that has hardly been considered byeconomists, despite a great deal of economic importance. This paper presents a series ofexperiments where subjects face creativity tasks where, in one case, ex-ante goals and constraintsare imposed on their answers, and in the other case no restrictions apply. The effects of financialincentives in stimulating creativity in both types of tasks is then tested, together with the impactof personal features like risk and ambiguity aversion. Our findings show that, in general,financial incentives affect “in-box” (constrained) creativity, but do not facilitate “blue sky”(unconstrained) creativity. However, in the latter case incentives do play a role for ambiguityaverseagents, who tend to be significantly less creative and seem to need extrinsic motivation toexert effort in a task whose odds of success they don’t know. We do find that measures ofcreative style, sensation-seeking preferences, and...

The Dark Side of Competition for Status

Mon, 4 Mar 2013 00:00:00 +0000

Unethical behavior within organizations is not rare. We investigate experimentallythe role of status-seeking behavior in sabotage and cheating activities aiming at improving one’sperformance ranking in a flat-wage environment. We find that average effort is higher whenindividuals are informed about their relative performance. However, ranking feedback alsofavors disreputable behavior. Some individuals do not hesitate to incur a cost to improve theirrank by sabotaging others’ work or by increasing artificially their own performance. Introducingsabotage opportunities has a strong detrimental effect on performance. Therefore, rankingincentives should be used with care. Inducing group identity discourages sabotage among peersbut increases in-group rivalry.

Obtaining Critical Values for Test of Markov Regime Switching

Fri, 2 Nov 2012 00:00:00 +0000

For Markov regime-switching models, testing for the possible presence ofmore than one regime requires the use of a non-standard test statistic. Carterand Steigerwald (forthcoming, Journal of Econometric Methods) derive in detailthe analytic steps needed to implement the test ofMarkov regime-switchingproposed by Cho and White (2007, Econometrica). We summarize the implementationsteps and address the computational issues that arise. A newcommand to compute regime-switching critical values, rscv, is introduced andpresented in the context of empirical research.

Letting Down the Team? Social Effects of Team Incentives