10th Annual Meeting of the
Portuguese Economic Journal
Faculdade de Economia, Universidade de Coimbra
July 1-3, 2016
Book of Abstracts
Plenary Talk
Teacher Quality and Learning Outcomes in Kindergarten
Keynote Speaker: Pedro Carneiro (University College London, Institute for
Fiscal Studies, and Center for Microdata Methods and Practice)
Co-authors: M. Caridad Araujo, Yyannú Cruz-Aguayo, Norbert Schady
Abstract
We assigned two cohorts of kindergarten students, totaling more than 24,000 children, to
teachers within schools with a rule that is as-good-as-random. We collected data on children
at the beginning of the school year, and applied 12 tests of math, language and executive
function (EF) at the end of the year. All teachers were filmed teaching for a full day, and the
videos were coded using a well-known classroom observation tool, the Classroom
Assessment Scoring System (or CLASS). We find substantial classroom effects: A onestandard deviation increase in classroom quality results in 0.11, 0.11, and 0.07 standard
deviation higher test scores in language, math, and EF, respectively. Teacher behaviors, as
measured by the CLASS, are associated with higher test scores. Parents recognize better
teachers, but do not change their behaviors appreciably to take account of differences in
teacher quality.
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Abstracts of accepted presentations
(ordered according to Parallel Sessions)
Session: Public Economy and Development
Fixed Exchange-rate Policy and Real Wage Growth: Quasi-experimental Evidence
Presenter: Corrado Andini (University of Madeira, CEEAplA, IZA)
While the link between exchange-rate policies and the income distribution has been long studied,
causal evidence on impact of the former on the latter is scant. We exploit a quasi-natural experiment
created by the Italian government in November 1996. Using Difference-in-differences estimation and
data from the European Community Household Panel, we suggest that the fixed exchange-rate policy
adopted by Italy in the 1997-2000 period reduced the real hourly wage growth of Italian full-time
workers with permanent contracts, on average, by at least 5.4% in the private sector. The evidence
is consistent with a model by Andersen and Sørensen (1988) in which the private-sector unions ask
for a lower average exchange-rate risk premium under fixed exchange rates.
Gender and Entrepreneurial Success: Evidence from a Field Experiment
Presenter: Armando José Garcia Pires (Centre for Applied Research, NHH)
Co-author: Lars Ivar Oppedal
A number of field experiments in developing countries on business training and business grants have
shown that it is much more difficult to raise entrepreneurial outcomes for women than for men. We
present a simple model of entrepreneurship that aims to explain this puzzle. In the model,
entrepreneurship arises from the interaction of ability, access to capital and labor-time investment.
To this set-up, we add two social norms that are widespread in developing countries: women have
domestic obligations that restrict the time they can dedicate to their businesses, while men do not;
and women have less access to capital than men. The model indicates that raising entrepreneurial
capabilities of women in just one or two dimensions, such as ability (via business training) and capital
(via business grants), might not be sufficient to promote entrepreneurial success, since many of the
women will continue to be constrained in the labor-time dimension. Using data from a field
experiment in Tanzania with microfinance clients, we present evidence that supports this hypothesis.
In particular, we find that for non-time constrained women business training and business grants
have a positive impact on entrepreneurship, similar to that which we find for men. Such is however
not the case for time constrained women, where the intervention is found to have no effect.
Shades of Red and Blue: Political ideology and Sustainable Development
Presenter: Vitor Castro (FEUC, and NIPE)
Co-authors: Toke S. Aidt, Rodrigo Martins
We study the effect of political ideology on sustainable development, measured as investment in
genuine wealth, in a dynamic panel of 79 countries between 1981 and 2013. We find that a switch
from a left-wing or centrist government to a right-wing government has a robust positive and
statistically significant effect on investment in genuine wealth. We find no evidence of opportunistic
cycles in these investments.
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Session: Firm Dynamics
Firm Growth and R&D: Evidence from the Portuguese Manufacturing Industry
Presenter: Blandina Oliveira (Polytechnic Institute of Leiria, and CEFAGE, U. Évora)
Co-author: Adelino Fortunato
This work studies the effects of R&D activities and investment, both physical and R&D, on the growth
of firms by considering a dynamic firm growth model with serial correlation. The main hypotheses
maintain that firms with a strong commitment to R&D have a higher growth rate, and investment has
a positive effect on firm growth. We investigate such relations with reference to an unbalanced panel
data set of Portuguese manufacturing firms over the period of 1990 to 2001. We find that a systematic
tendency for smaller firms to grow more quickly is the main reason why firm growth is not entirely
stochastic.
How the Portuguese Firms Adjusted to the Economic and Financial Crisis: Main Shocks and
Channels of Adjustment
Presenter: Fernando Martins (Banco de Portugal)
This article reports the findings of a survey conducted in 2014/2015 on a sample of Portuguese firms
with the main purpose of identifying the major shocks faced by firms during the recent crisis and
detecting their response in terms of wag e-setting, price setting and labour force composition. Firms’
difficulties in being repaid by their customers and the decline of demand were reported as the two
most important factors affecting firms negatively during the crisis. The impact of these two shocks
was particularly felt in very small firms, in sectors such as construction, energy or trade and in firms
that sell mostly to domestic markets. Reducing employment was the main instrument to
accommodate negative shocks, in particular through the freeze or reduction of new hires, nonrenewal of temporary contracts at expiration or individual dismissals. An increasing number of firms
also froze the base wages of their workers and reduce their prices.
Economic Growth, the High-Tech Sector, and the High Skilled: Theory and Quantitative
Implications
Presenter: Pedro Mazeda Gil (CEF-UP - Center for Economics and Finance at University of Porto)
Co-authors: Óscar Afonso, Paulo Brito
Europe's “2020 Strategy” has the main goal of stimulating economic growth by increasing the weight
of the high-tech sector and the share of high-skilled workers. However, cross-country European data
suggests the relationship between economic growth and both the technology structure and the skill
structure is statistically insignificant. We investigate an analytical mechanism that connects these
facts by extending a directed-technical-change growth model and taking it to the data. Under high
relative barriers to entry into the high-tech sector and scale effects we replicate the empirical
relationships. We derive quantitative policy implications on the effects of a reduction of barriers to
entry.
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Impact of Economic Crises on Firm Dynamics: The Role of Financial Constraints
Presenter: Carlos Carreira (GEMF, and FEUC)
Co-author: Paulino Teixeira
Recessions are conventionally considered as times when the low-productivity firms are driven out
of the market. Do financial market frictions hamper this cleansing effect of recessions? We build a
model where recessions tend to be cleansing only in the absence of financial constraints. The best
projects require a higher level of investment, thus there is a shift towards the funding of projects that
are less productive (and less financially demanding) in times of tight financial constraints. Using data
from the pronounced Portuguese economic crisis for an empirical test, we do find a spike in firm exit
in 2008–2012 vis-à-vis the 2004–2007 pre-crisis period, and a substantial increase in job destruction
as well. We also found a non-negligible fraction of high productivity firms actually shut down. In turn,
our selected proxies for strictness in credit markets reveal that in deep recessions they are seemingly
associated with increased firm exit and lower employment creation. Our results show that credit
market stringency in conjunction with an unfavorable economic cycle is likely to generate a longlasting destructive process.
Session: Finance
Collecting New Pieces to the Regional Knowledge Spillovers Puzzle: High-tech versus Low-tech
Industries
Presenter: Luís Lopes (GEMF, and FEUC)
Co-author: Carlos Carreira
This paper analyses the effect on firm-level total factor productivity of regional knowledge spillovers,
using an unbalanced panel of Portuguese manufacturing firms covering the period 1996–2004. In
particular, it addresses the overlooked issue of a plausible non-linear effect and different across
industries, according to their technological capacity, n the basis of the OECD classification: low,
medium-low, medium-high and high technological industries. We found that the agglomeration
economies are present in different combinations for firms belonging to different industries. In
particular, the sectorial specialization has a positive impact on firms’ productivity, playing the most
significant role on the high-tech industries. Sectorial diversification is important for firms operating
in medium-tech industries, but not for firms belonging to low and high-tech industries. Finally,
regional knowledge base is also critical to explain productivity difference across industries. We also
found that non linearities are present and different across industries. We have found namely that
high-tech industries do benefit from the presence of KIBS industries but only after a certain level of
those activities.
Equity Market Integration in the Euro Area: A New Approach
Presenter: José João Dolores (FEP)
Co-author: Ana Paula Serra
We propose a new approach to analyze financial market integration. We analyze the geographic
investment style of equity mutual funds that invested mainly in the euro area. Specifically, we use
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style analysis model to measure the exposure of funds to euro and non-euro stock market
benchmarks over time. Our findings are consistent with previous studies that report increasing
financial integration in the euro area after the euro introduction. Yet we show a reversion in this
process just before the financial crisis. For funds based inside the euro area we document an increase
of their exposure to the euro area stock market benchmark; a preference for stocks whose domicile
is closer to the domicile of the fund; and a strengthening of the “euro bias” phenomenon. For funds
based outside the euro area, we find that the decrease preference for euro area stock market
benchmark brought by the financial crisis is not reverted thereafter, indicating a lower financial
integration level outside the euro area.
A Dynamic Analysis of the Determinants of Greek Credit Default Swaps
Presenter: Christian Richter (German University in Cairo)
Co-authors: Maria do Rosario Correia, Christian Gokus, Andrew Hughes
There is a consensus in finance literature that credit default swap spreads can be used to calculate
the default probability of a government bond. The question is therefore what determines the credit
default swap spreads and also what is a good indicator that predicts the future behaviour of this
security spreads. In this paper, we investigate several variables which have been used in the past to
predict the CDS spreads. We do this by analysing the behaviour of credit swaps spreads of Greek
sovereign debt over the recent financial crisis. We take into account the changes on the data
generating process as the crisis evolves. Moreover, we also investigate which part of the dynamic
process of CDS spreads is explained by each possible determinant. In order to do so, we use a timefrequency approach. As it turns out, some determinants are better in explaining the short term
behaviour of the CDS spreads whilst others explain the long term behaviour. We can also say by how
many months one factor determines the behaviour of the CDS spreads for Greek sovereign debt. With
this information we are able to determine the probability of default and what it depends upon.
A Smooth Transition Approach to Modelling Diurnal Variation in Models of Autoregressive
Conditional Duration
Presenter: Cristina Amado (NIPE, EEG-U. Minho)
Co-author: Timo Teräsvirta
This paper introduces a new approach for adjusting the diurnal variation in the trade durations. The
model considers that durations are multiplicatively decomposed into a deterministic time-of-day and
a stochastic component. The parametric structure of the diurnal component allows the duration
process to change smoothly over the time-of-day. In addition, a testing framework consisting of
Lagrange multiplier tests is proposed for specifying the diurnal component. Our methodology is
applied to the IBM transaction durations traded at the New York Stock Exchange.
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Session: Experimental
Social Learning in Experimental Games: Evidence from Rwanda
Presenter: Alexander Coutts (Nova SBE)
Artefactual and lab experiments are increasingly utilized to study variation in preferences across
groups and the relationship between preferences and economic outcomes. Social learning across
experimental sessions is rarely considered within the literature and not well understood, but may
alter the validity of such studies. In this paper I provide evidence of social learning during a large
implementation of public goods games in the Rusizi district in Rwanda. Contact with previous
participants led to significant behavioral change, despite theoretical predictions that such contact
will have no effects. Using GPS data on over 1,700 participants across 150 villages I document an
increasing pattern of contributions in public goods games over space and time. An investigation of
the mechanism behind the effect finds that it is strongest for individuals who exhibit conditionally
cooperative behavior, suggestive that contact involves social learning about cooperative norms.
Playing the game the others want to play: Keynes’ beauty contest revisited
Presenter: Rodolphe Dos Santos Ferreira (BETA-Strasbourg University)
Co-author: Camille Cornand
In Keynes’ beauty contest, agents make choices by referring to their expectations of some
fundamental value and of the conventional value to be set by the market. In doing so, agents respond
to fundamental and strategic motives, respectively. The prevalence of either motive is usually set
exogenously. Our contribution is to consider whether agents favor one of the two motives when the
relative weights put on them are taken as strategic variables. We show that the strategic motive tends
to prevail over the fundamental one, yielding a disconnection of agents’ actions from the
fundamental. This is done in a simple valuation game emphasizing the role of public information. We
then extend the same result to competition between the owners of two firms, by using a delegation
game in which informational issues are embedded into a broader microfounded setting.
Bank Runs and Regulatory Communication: An Experimental Analysis
Presenter: Miguel Fonseca (University of Exeter)
Co-authors: Surajeet Chakravarty , Todd R. Kaplan
The stability of financial systems has been at the forefront of policy-makers after the world witnessed
the collapse of major financial institutions in the 2007-2008 financial crisis. A better understanding
of the causes of bank failures is essential to avoid the significant welfare losses witnessed. We
experimentally analyze the role that revelation of financial information plays in the likelihood of
having a bank run. We base our experiments on the Diamond and Dybvig (1983) model. We have two
depositors that have to decide to withdraw today or tomorrow. If both withdraw today, they both
receive 200. If they both withdraw tomorrow, they both receive R, which is randomly selected a set
of numbers that range from 80 to 720. If one withdraws today and the other tomorrow, the one
withdrawing today receives 400 and the one withdrawing tomorrow receives 0. A regulator knows
the value of R. In our TRUTH treatment, the regulator must send the precise value of R to the
depositors before they decide. In our ANYT treatment, the regulator can send any range of R as long
as it contains the true value of R. In ANY, the regulator can send any range of R. We find that
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Depositors’ early withdrawal decisions as a function of the lower bound of the message about R are
significantly different in each of the three treatments. There is a significant drop in the likelihood of
withdrawing early in ANY and TRUTH when the lower bound of the message equals 400. In addition,
we find that there are more inefficient runs (for large R) and fewer efficient runs (for small R) in ANY
than in either TRUTH or ANYT. In ANY and ANYT, there were heterogeneous strategies used by the
regulators. Some were strategically vague and hid good states with worse states.
Static versus Dynamic Deferred Acceptance in School Choice: A Laboratory Experiment
Presenter: Joana Pais (UECE-ISEG, U. Lisbon)
Co-authors: Flip Klijn, Marc Vorsatz
In the context of school choice, we experimentally study how behaviour and outcomes are affected
when, instead of submitting rankings to the proposing or the receiving deferred acceptance
mechanism (DA), participants make decisions dynamically, going through the steps of each DA. Our
main results show that, (a) in the proposing DA, where it is a weakly dominant strategy to act
according to the true preferences, participants switch slightly less while, (b) in the receiving DA,
participants truncate more in the dynamic versions of the mechanisms than in the corresponding
static versions. As a consequence, for most markets we test, no significant differences exist among
the two versions of the proposing DA in what stability and average payoffs are concerned, but the
dynamic version of the receiving DA delivers a clear improvement over its static counterpart on both
dimensions.
Session: Health Economics
Association between Health Risk Behaviors: Tobacco and Alcohol
Presenter: Ana Reis (University of Coimbra)
Co-authors: Carlota Quintal, Óscar Lourenço
Tobacco and alcohol consumption are listed among the 10 leading risk factors that cause death and
disability-adjusted life years in the world, with economic and social consequences as well. Although
some studies analyze tobacco and alcohol consumption separately, there is a lack of empirical
evidence on the variables related with personal characteristics that influence both, and on the
potential bi-directional effect between tobacco and alcohol consumption. The aim of this study is to
empirically assess and discuss the relevance of implementing joint policies concerning tobacco and
excessive alcohol consumption. Using data extracted from the Survey of Health Ageing and
Retirement in Europe (SHARE), including Portuguese people aged 50 and over, in 2011, we propose
a bivariate probit model to analyze the variables that influence alcohol and tobacco consumption, in
order to control potential bias related to endogeneity problems. Additionally the joint and
conditional probabilities were estimated. Two measures of excessive alcohol consumption were
considered to identify potential differences between distinct dependence degrees. The results reveal
differences associated with different alcohol consumption measures. Tobacco consumption is
correlated with drinking problems, but the correlation coefficient between tobacco and heavy
drinking is not statistically significant. Age and physical activity reduce the probability of consuming
both tobacco and alcohol, and men are more like to consume the two goods together, regardless of
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the alcohol measure selected. Considering the results obtained, it seems to be useful to adopt joint
policies considering both smoking and drinking problems, focused on gender and age specificities
and encouraging physical activity. Furthermore, the results of the predicted probabilities of smoking
in the subsample of alcohol consumers showed differences between gender, age and marital status
that need to be regarded if we 2 want to control tobacco consumption among alcoholics. Specific
attention must be paid to unemployed and retired individuals who consume alcohol, given that these
individuals are more likely to smoke.
Health Investment and Long Run Macroeconomic Performance: A Quantile Regression Approach
Presenter: Francisca Silva Rosendo (FEUC)
Co-authors: Marta Simões, João Sousa Andrade
Health plays a fundamental role in individual welfare and the development of countries. As far as its
contribution to economic growth as a source of human capital is concerned however, there are
divergent views. This lack of consensus may stem from the fact that some empirical estimates
consider only the impact of health human capital on the average value of output growth rates,
ignoring the potential for differentiated effects across the distribution of the dependent variable. This
paper analyses the relationship between health and economic growth for a maximum sample of 92
countries over the period 1980-2010 applying the methodology proposed by Canay (2011) for
regression by quantiles (Koenker 2012a; Koenker 2012b) in a panel framework. This estimation
approach allows for the identification of different impacts of the explanatory variables across the
growth rate distribution. According to Mello & Perelli (2003), quantile regression is a suitable
estimation methodology in a growth context as it allows to capture countries’ heterogeneity and
assess how policy variables affect countries according to their position on the conditional growth
distribution. In terms of policy implications, as suggested by Barreto & Hughes (2004), it may the
case that, due to the presence of other (un-modelled) factors countries grow slower (or faster)
relative to the conditions suggested by the variables that are included in the model. Quantile
regression analysis allows us to identify those growth determinants that do not have the expected
notable effect on growth and hence determine the policy implications specifically for underperforming versus over achieving countries in terms of output growth. Our findings indicate that
better health is positively and robustly related to growth at all quantiles, but the quantitative
importance of the respective coefficients differs across quantiles in some cases with the impact
greater for countries with lower growth rates. These results apply to both positive (life expectancy,
consumption of calories per person per day) and negative (infant mortality rate, prevalence of
undernourishment in populations) health status indicators. Given the predominantly public nature
of health funding, cuts in health expenditures should thus be carefully balanced even in times of
public finances sustainability problems, particularly in times of growth slowdowns, since health
declines can be particularly harmful for growth for under achievers.
No Country for Unemployed Old Men: Do Business Cycles Explain Regional Differences in
Mortality Rates?
Presenter: João Pereira dos Santos (Nova SBE)
Co-author: Ernesto Freitas
Increased economic instability among developed countries has led to a renewed interest on the
impact of the economic cycle on health outcomes. We contribute to this discussion by looking into
the economic variables through which such a link could occur. Using a dynamic panel model with
data from all mainland Portuguese municipalities for the 2004-2013 period, we examine the
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connection between unemployment rates (total, per age-cohort, and per duration), income
inequality, and income levels with the total mortality rate. Controlling for an extensive set of
population and regional characteristics, our findings suggest that unemployment among people older
than 55 years old results in significantly higher mortality rates at the aggregate level. We also find
empirical evidence for the same effect with respect to mortality due to circulatory diseases.
How do treatment decisions depend on physicians’ financial incentives?
Presenter: Odd Rune Straume (NIPE, EEG-U. Minho)
Co-authors: Kurt R. Brekke, Tor Helge Holmas, Karin Monstad
We study whether and how physicians respond to financial incentives, making use of detailed
register data on the health-care services provided to patients by general practitioners (GPs) in
Norway over a six-year period (2006-11). To identify GPs’ treatment responses, we exploit that
specialization in general medicine entitles the GPs to a higher consultation fee, implying a change in
total and relative fee payments. To control for demand and supply factors related to becoming a
specialist, we estimate a GP fixed effect model focusing on a narrow time window around the date of
specialist certification. Our results show a sharp response by the GPs immediately after obtaining
specialist certification and thus a higher consultation fee: the number of visits increase, while the
treatment intensity (prolonged consultations, lab tests, medical procedures) decline. Based on a
theory model with excess demand for GP services, these results suggest that GPs are relatively profitoriented and that income effects are relatively small.
Session: Finance and Political Economy
Financial Regimes and Political Events: Stock Markets Volatility around Cabinet Elections
Presenter: Rúben Silva Branco (Banco de Portugal)
Co-authors: Luis Nunes, José Tavares
Our study examines the relation between elections and the volatility of stock market returns. We look
more closely at different periods around the government formation periods. We consider the cases
of Japan, Germany, and the United Kingdom, between the years 1960 and 2008. We identify both
normal volatility changes, driven by an ARCH process, as well as volatility regime shifts. For all
countries considered, we find an increase in the volatility of stock returns during cabinet formation
periods, either relative to the sample as a whole or the periods just before elections or immediately
after cabinets come to power. In terms of the impact on volatility regimes, the results are much more
heterogeneous across the countries analyzed. The standard deviation of stock returns during cabinet
formation periods can increase by 14 to 271 percent relative to periods distant from elections.
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Political Budget Cycles and Media Freedom
Presenter: Linda Gonçalves Veiga (NIPE, EEG-U. Minho)
Co-authors: Francisco José Veiga, Atsuyoshi Morozumi
This paper examines the effects of elections on the conduct of central governments’ fiscal policies. To
do so, it uses a unique panel database that includes disaggregated spending and revenue series at the
central government level for multiple countries over the 1975- 2010 period. After examining political
environments under which incumbent governments generate political budget cycles, we compare
their relative importance. Media freedom is identified as the factor that plays the most critical role.
Specifically, we find robust evidence that the electoral effect on budget deficits under low media
freedom is significantly larger than under high freedom, even when other determinants of PBCs are
controlled for. We then show that what drives the election-year rise in budget deficits under low
media freedom is an increase in the current, not capital, component of public expenditure.
The Electoral Dynamics of Human Development
Presenter: Rodrigo Martins (GEMF, and FEUC)
Co-author: Vítor Castro
This paper analyses the impact of elections, partisan and political support effects on the dynamics of
human development in a panel of 82 countries over the period 1980-2013. A GMM estimator is
employed and the results point out to the presence of an electoral cycle in the growth rate of human
development. Majority governments also influence it, but no evidence is found regarding partisan
effects. The electoral cycles have proved to be stronger in non-OECD countries, in countries with less
frequent elections, with lower levels of income and human development, in presidential and nonplurality systems and in proportional representation regimes.
Can Credit Rating Agencies Affect Election Outcomes?
Presenter: Miguel A. Ferreira (Nova SBE)
Co-authors: Igor Cunha, Rui Silva
We study the causal effect of municipalities’ credit ratings on election outcomes in the United States.
We use municipal bond rating changes due to Moody’s recalibration of its scale in 2010 as a source
of exogenous variation in ratings. We find that incumbent politicians receive significantly more votes
in upgraded municipalities relative to nonupgraded municipalities. This incumbent effect is due to
an expansion of local governments’ debt capacity that allows them to increase spending. The effects
are stronger among democratic incumbents. Our findings suggest that credit rating agencies can have
a significant impact on election outcomes.
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Session: Theory
Equilibria in a Japanese English Auction with Discrete Bid Levels for the Wallet Game
Presenter: Ricardo Gonçalves (Católica Porto Business School, and CEGE)
Co-author: Indrajit Ray
We consider the setup of a Japanese English Auction with exogenously fixed discrete bid levels for
the Wallet Game. We prove that the standard (with continuous bid levels) equilibrium (bidding twice
the private signal) is never an equilibrium in this setup. We show other cutoff equilibrium may exist
and characterize such an equilibrium for a wallet game with two bid levels.
Marriage, Employment Participation and Bargaining in Search Equilibrium
Presenter: Roberto Bonilla (Newcastle University)
Co-author: Alberto Trejos
We model a marriage market where singles consider the prospects of employment and income of
their potential spouses, and married couples make joint decisions on home production and labor
participation. A worker’s bargaining position for wages reflects their own productivity, and also the
employment status and conditions of their spouse. This double interaction between the marriage and
labor markets is affected by search frictions in both. We find that couples with different combinations
of productivities have different strategies regarding labor participation. When the search for mates
is easy, people marry others with very similar productivity, and the behavior of couples in the labor
market is symmetric. When finding mates is hard, people could marry others very different from
themselves, and if so their labor search strategy is going to be asymmetric. Married workers get
better job offers when their spouses are employed, and in some equilibria a person may search for
transitory jobs with the sole purpose of raising the long-term wages of their spouse. Firms may
respond by offering some very productive individuals wages that secure that their spouses stay at
home. Whether they follow that strategy or not may be a matter of multiple equilibria, depending on
parameter values. Keywords: Wage bargaining, frictional marriage markets, frictional labor markers,
home production.
A Binary Reward Schedule Revisited
Presenter: Egas M. Salgueiro (DEGEI/GOVCOPP, U. Aveiro)
Co-authors: Silvia F. Jorge, Marta Ferreira Dias
We address the issue of designing an optimal reward schedule in a principal-agent model with a riskaverse agent. The output depends on the agent effort and productivity, but also in a random noise
that makes impossible to observe the agent’s effort with certitude. We study the existence of a locally
optimal reward schedule in the class of binary schedules and conclude that the two regions
corresponding to the two different rewards must be separated by a single critical point, i.e. one region
above the other and not a central and a peripheral regions. For different types of utility function of
the agent, we run numerical simulations to determine the effect variations in the main parameters
(coefficient of risk-aversion, uncertainty, productivity and reserve utility) have on the minimum
expected cost and the critical point. Any change in the parameters that increases the ability of the
principal to monitor the effort of the agent, moves the solution closer to the 1st best equilibrium.
Finally, we use these numerical simulations to compare the efficiency of a binary reward schedule to
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a linear reward function with CARA utility of the agent. For most simulations the binary reward is
slightly less efficient, but for certain values of the parameters it may be more efficient than the linear
reward.
Trembling Mechanisms
Presenter: João Correia da Silva (Toulouse School of Economics, and CEF-FEP)
It is explained how, and to what extent, a mechanism designer can relax the participation constraints
by designing the (otherwise out-of-equilibrium) disagreement beliefs of the agents using a trembling
mechanism, which incorporates a communication device that, with a small probability, manipulates
the messages received from the agents to originate spurious rejections that are correlated with their
type announcements. Applications to collusion and arbitration (under private information) are
proposed.
Session: Education I
Expanding College Access in Taiwan, 1978 – 2014: Effects on Graduate Quality and Income
Inequality
Presenter: Shao-Hsun Keng (National University of Kaohsiung)
Co-authors: Chun-Hung Lin, Peter F. Orazem
Since 1990, Taiwan increased the college share of its labor force from 7% to 28% by converting junior
colleges to 4-year colleges. Such a rapid surge in skill supply should suppress college wages and
lower wage income inequality. Instead, wage income inequality rose by 7% between 1978 and
20014. We show that the surge of weaker college graduates made them weak substitutes for better
trained college graduates and led to an increase in wage inequality within skill groups. The college
premium would have been 58% higher had college quality remained unchanged at its 1990 level.
Rising wage income inequality due to increased variation in the quality of young college graduates
added another source of inequality to the Taiwan labor market. The Taiwan case shows that
increasing college access alone will not lower income inequality unless college quality is maintained.
Parental Valuation of School Attributes by the Poor: Evidence from Pakistan
Presenter: Hugo Reis (Banco de Portugal, and Católica Lisbon SBE)
Co-authors: Pedro Carneiro, Jishnu Das
This paper shows that very poor households are able to engage in sophisticated school choices in
markets where such choice is available, using data from Pakistan. Our model accounts for the
endogeneity of two important school attributes: fees, and the characteristics of the students
attending the school. As expected, central determinants of the choice of a school in our model is the
distance between a student’s residence and each school, fees, and the charactheristics of peers.
However, parents also value other school attributes such as the characteristics of teachers. We
estimate that the existence of a low fee private school market is of great value for households living
in these locations, reaching 25% to 98% of annual per capita income for those choosing private
schools.
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Teacher Characteristics and Students’ Progress
Presenter: Sandra Sousa (EEG-U. Minho)
Co-authors: Miguel Portela, Carla Sá
Teacher quality is widely thought of as an essential determinant of academic performance, yet there
is little agreement as to what specific characteristics make a good teacher (Hanushek and Rivkin,
2006). Using a pioneer matched student-teacher data, this research examines whether observable
teacher characteristics, such as gender, experience, education level and the fact that teachers are
displaced from their residence area to work, affect the achievement gains of secondary education
students. The results are based on data for the period between 2010 and 2012. The student
achievement analysis uses a value-added approach that adjusts for teacher fixed-effects. Results
show that female teachers have better performance on student achievement gains than males
teachers and that teachers working away from home have a negative and significant effects on
students achievement. Advanced degrees seems have no relationship to teacher quality as a
measured by student achievement gains, i.e. teachers with masters or PhDs do no better or worse
comparing with teachers with a graduation degree. Finally, teachers with more experience are more
effective in increasing student achievement gains than those with less experience.
Business Owners’ Educational Skills and Entrepreneurial Teams on Workers’ Wages: The Role
of Business Owners Gender
Presenter: Miguel Torres Preto (FEUC, and IN+, IST-U. Lisboa)
Co-authors: Filipa Madeira, Joana Mendonça
Teams of women and men are more likely to have complementary skills, insofar as rewarding their
workers with higher wages, may ultimately contribute to business venture success. This paper
intends to contribute to the literature on female entrepreneurship by shedding some light about the
implications of gender in entrepreneurial teams. Using detailed longitudinal matched employer–
employee, this study looks at the impact of female highly qualified business owners and mixed-sex
entrepreneurial teams on workers’ wages. Empirical findings indicate that having a female
entrepreneur in the team composition, positively impacts on workers’ wages. Important implications
can be drawn from this study, namely in the development of female entrepreneurship policies.
Session: Growth and Trade
Is the Productive Structure Relevant for National Growth? An Analysis of Multisectoral
Thirlwall’s Law Applied to the Portuguese Economy
Presenter: Micaela Antunes (GEMF, and FEUC)
Co-author: Jeanete Dias
International trade is one of the most relevant factors for economic expansion of a small country like
Portugal. Therefore, this work analyzes the impact that the Balance of Payments can have on
economic growth, using Thirlwall’s Law. Moreover, we examine whether the production structure
can influence national growth, by using Thirlwall’s Multi-Sectoral Law. Furthermore, the evolution of
the main exporting and importing sectors is described for the period 1994-2013 and the import and
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export demand functions are estimated both at the aggregated and at the sectoral level, to obtain the
income elasticities that allow the computation of the Balance-of-Payments equilibrium growth rate.
The results show that Thirlwall’s original Law is less accurate than the multi-sectoral perspective
regarding the Portuguese growth performance over last years.
An Empirical Assessment of Export Determinants Using a Gravity Model
Presenter: Sofia Gouveia (CETRAD, UTAD)
Co-authors: João Rebelo, Lina Lourenço-Gomes
In this study, a gravity model approach is used to analyze the main factors affecting Port wine exports,
differentiated by quality, from Portugal to the top 20 importer countries from 2006 to 2014. By
applying the Hausman-Taylor estimator, the findings show that the quantity and value of total Port
wine exports are positively determined by the gross domestic product (GDP) per capita, Portuguese
emigrant communities and a common language, while exports are negatively influenced by
landlockedness. In contrast to traditional gravity model, distance does not appear as a significant
determinant, a fact explained by the specificity and singularity of Port wine and by the long tradition
of this product in international markets. In addition, the results revealed specific determinants by
categories such as GDP – for aged Port – and wine consumption per capita – for high standard, vintage
and aged Port – suggesting that Portugal needs to increase its exports of high quality Port wine to
markets that are exhibiting a tendency towards growing wine consumption per capita and to large
and fast-growing economies.
The Total Factor Productivity of National Innovation Systems in the European Union
Presenter: Leonardo Costa (Católica Porto Business School)
Co-author: Nelson Eduardo
Innovation is important for economic growth. In this research, we analyze the productivity and
efficiency of the National Innovation Systems (NIS) of the European Union 28 (EU-28) Member States,
in the period 2006–2012. The data come from the Innovation Union Scoreboard 2014 report and
Eurostat. Based on the Battese and Coelli (1995) time-varying inefficiency model, a Cobb– Douglas
stochastic frontier is estimated as well as the effects of macroeconomic environmental variables on
inefficiency. Innovation growth is decomposed into total factor productivity (TFP) changes,
accumulation of inputs, and an unexplained residual component. Using an extension of the
Kumbhakar and Lovell (2000) decomposition, TFP changes are computed as the sum of technological
changes, changes in technical efficiency, and scale effects. Results show decreasing returns to scale
in innovation production. Concerning the effects of macroeconomic environmental variables,
technical inefficiency decreases with higher standards of living, the rate of economic growth, the
reduction of economic inequality, and the control of inflation and unemployment. Excessive financial
liquidity and political decentralization increase technical inefficiency. Growth in the innovation
production of the EU- 28 Member States is due to TFP changes, to the accumulation of inputs, and to
a residual non-explained component. Positive TFP changes resulted exclusively from the
improvement in technical efficiency.
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A Thresholds Analysis of Growth, Convergence and Structural Change in the EU: Insights for
Portugal
Presenter: João Sousa Andrade (GEMF, and FEUC)
Co-authors: Marta C. N. Simões, Adelaide P. S. Duarte
Following the political turmoil and economic crisis of the 1970s, Portugal enjoyed some years of
rapid (and above average) economic growth, accompanying the preparation and accession to the
European Union and the participation as a founding member in the Euro Zone. This process, however,
stopped since the beginning of the 21st century and this change in the growth rhythm was
exacerbated by the Great Recession. From about 1999-2000 onwards, economic growth in Portugal
slowed significantly, the non-tradables sector reinforced its role as the anchor of the economy, and
productivity growth stagnated or even declined, depending on the productivity measured
considered. This paper applies a thresholds regression approach to examine the growth and
convergence process of fourteen EU member states over the period 1980-2011. Given the changes in
the pattern of production towards a higher weight of the non-tradables sector that Portugal recorded
throughout the period under analysis, we use the share of non-tradables as the threshold variable
and derive some potential implications from our results for a better understanding of the Portuguese
growth and convergence process in preparation for and after accession to the European Union.
Threshold analysis allows us to identify those growth determinants that do not have the expected
effect on growth and hence determine the specific policy implications for different non-tradables
sector weight regimes.
Session: Structural Change
Job Destruction without Job Creation: Structural Transformation in the Overborrowed America
Presenter: Alessandro Galesi (Banco de España)
Co-author: Claudio Michelacci
In recent US business cycle episodes the correlation between manufacturing and service employment
has increased, and more so in recessions and US states where households are highly indebted. We
argue that this is because manufacturing output matters for the demand in services when households
are financially constrained. While manufacturing produces tradable goods whose demand is
determined internationally, most services are non-tradable with their demand set just by local
economic conditions. When manufacturing employment falls, households disposable income falls
which, due to the binding financial constraint, forces households to deleverage. This leads to a
contraction in manufacturing consumption that due to complementarity in consumption between
manufacturing and services makes the aggregate demand for services fall. As a result economic
activity falls more, households become even more constrained, and this further contracts demand for
services. This prevents job creation in services and comovement increases. So we have job
destruction in manufacturing without job creation in services.
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Relative Prices and Sectoral Productivity
Presenter: Margarida Duarte (University of Toronto)
Co-author: Diego Restuccia
The relative price of services rises with development. A standard interpretation of this fact is that
productivity differences across countries are larger in manufacturing than in services. The service
sector comprises heterogeneous categories. We document the behaviour of relative prices and
expenditure shares across two broad classifications of services: traditional services, such as health
and education, featuring a rising relative price with development, and non-traditional services, such
as communication and transportation, featuring a falling relative price. We find a strong reallocation
of real expenditures from traditional to nontraditional services with development. Using a standard
multi-sector model extended to incorporate an input-output structure, we show that cross-country
productivity differences are much larger in non-traditional services (a factor of 106.5-fold between
rich and poor countries) than in manufacturing (only 24.5-fold). Moreover, the productivity
difference between non-traditional services and manufacturing is reduced by half when abstracting
from intermediate inputs. Development requires solving the productivity problem in non-traditional
services in poor countries.
Labor Share and Capital Obsolescence
Presenter: Fernando Del Rio (Universidade de Santiago de Compostela)
Co-author: Francisco-Xavier Lores
We develop a matching model `a la Merz (1995) with investment-specific technical progress and a
production function with a non-constant elasticity of substitution between capital and labor, which
is consistent with the existence of a Balanced Growth Path in the presence of investment-specific
technical progress. The Cobb-Douglas production function and the CES production function are
parametric limit cases of the considered production function. In this framework, we show that, for
empirically plausible values of the elasticity of substitution, an increase in the obsolescence rate of
capital consistent with the observed increase in the economic depreciation rate of U.S. capital can
account for a large part of the average fall of the U.S. labor share after the middle of the seventies.
Financial Globalization with Firm Heterogeneity
Presenter: Delfim Gomes Neto (NIPE, EEG-U. Minho)
Co-author: Eduardo L. Giménez
We present a growth model in which firms are heterogeneous in productivity and face a credit
constraint to borrow. The model is analytically tractable and we can compare the dynamics of a
closed and an open economy. For capital-scarce countries, opening the economy leads to a decrease
of the real interest rate and an increase of capital through foreign inflows and productivity decreases.
It follows a transitional period with high capital, foreign capital inflows and growth, while
productivity stays low. In a second phase of the transition, productivity will increase as well as capital
and growth, and there will be capital outflows at least closer to the steady state. It may be possible to
have a different equilibrium after opening the economy, where productivity decreases initially and
stays at that low level, whereas GDP increases and will be higher in the steady state than in the closed
economy. These results of the model may help to shed light on the effects of financial globalization in
developing countries.
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Session: Industrial Organization I
A model of Obfuscation with Heterogeneous Firms
Presenter: Samir Mamadehussene (Northwestern University, Department of Economics)
This paper analyses how the incentives for firms to obfuscate consumers vary with their brand
awareness. I study a model under which consumers have limited time to search. Each firm chooses a
price and an obfuscation level, which represents the amount of time a consumer has to spend in order
to learn the firm’s price. Consumers search stores sequentially, and the search order is determined
by the firms’ brand awareness. Consumers keep searching down the list until they run out of time. At
that point, they purchase from the store with the lowest price, among the ones they visited. When a
firm obfuscates, it prevents some consumers from learning its price. Those consumers will only learn
prices from firms that are higher on the search order. This gives those firms some market power,
which leads them to set higher prices. The obfuscating firm benefits from that, since it can also list a
higher price. I find that, in equilibrium, the higher the ranking of the store, the more it will obfuscate
and the higher its price. Using a novel dataset on Internet Service providers from Canada, I find
empirical support for the predictions of the model. I measure obfuscation using observable criteria
on firms’ pricing schemes. I measure firms’ brand awareness by the number of Google searches in
the recent past. I find positive correlation between the firms’ level of brand awareness and both their
obfuscation level and price.
Revenue Sharing Agreements in Regulated Sectors
Presenter: Mariana Cunha (Católica Porto Business School, and CEGE)
Co-author: Ricardo Gonçalves
In a simple two-segment supply chain, we analyze the desirability and properties of revenue sharing
agreements, in regulated sectors, compared to two different scenarios: retail competition and
upstream regulation. Our model incorporates the possibility that the downstream firms exert retail
effort to stimulate demand. In doing so, they add an additional (effort-related) externality to the
supply chain (on top of the negative pricing externality). We find such revenue sharing agreements
to be mutually beneficial to firms as well as welfare enhancing, although when retail effort is relevant,
they do not yield a first-best outcome. These results provide several interesting policy and regulatory
recommendations.
Default Costs, Financial and Product Market Decisions and Default Risk
Presenter: Magali Pedro Costa (CEFAGE-U. Évora, and ESTG, Instituto Politécnico de Leiria)
Co-author: Cesaltina Pacheco Pires
Financial and output market decisions are crucial to the success or failure of an organization and are
influenced by the dynamic economic and competitive environment in which firms operate. In this
paper we analyze the equilibrium default risk in a two-stage differentiated product duopoly model
with demand uncertainty, where firms decide their financial structure in the first stage of the game
and decide their quantities in the second stage of the game, taking into account the existence of direct
and indirect default costs. Using numerical analysis, we analyze the impact of changing the level of
demand uncertainty, the degree of product substitutability and the direct and indirect default costs’
parameters on the equilibrium default risk. Our results show that symmetric increases in the default
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costs parameters lead firms to reduce their debt and quantity levels, implying lower default
probabilities and lower interest rates. Moreover, the firm default probability is decreasing with a
unilateral increase in its indirect default cost parameter, as the firm becomes more cautious in the
debt and output markets. Keywords: Capital structure; Product market competition; Default risk;
Direct default costs; Indirect Default costs.
The Impact of Price and Consumption Awareness on Residential Water Demand
Presenter: Rita Martins (GEMF, and FEUC)
Co-authors: H. Monteiro, J. Ramalho, E. Ramalho
The vast literature estimating residential water demand assumes households are aware of and
respond to changes in the tariffs or at least in the average price paid. We show that although water
consumption does respond to prices, water conservation can also be promoted by making the
consumer more aware of the price paid and the level of consumption. We estimate a discrete
continuous choice (DCC) model of residential water demand with household level data from Portugal
combining survey data with information from water utilities and from the Portuguese meteorological
agency. We find price and income elasticities of residential water demand to be −0.20 and +0.07,
respectively. Nevertheless, the rigidity of demand does not establish the limit of the role that tariffs
can have in promoting water conservation. We find that households who are aware of the actual unit
price and their consumption level, look at their (electronic) water bill frequently and in detail and
pay by direct debit consume on average 53% less. We also provide novel findings on the impact of
environmentally-friendly behaviors, rainwater harvesting and availability of alternative water
sources. The impacts of weather variables and dwelling and household features are also calculated.
The presence of economies of scale in water consumption related to household size is confirmed.
Session: Public Finance
Gone with the Wind? Local Employment Impact of Wind Energy Development
Presenter: Hélia Costa (London School of Economics)
Co-author: Linda Veiga
Investment in wind power has grown remarkably in the past decades in the European Union, and in
particular in Portugal. Although investment incentive policies use economic development arguments,
little evidence exists as to its net impact on job creation or local level effects. We assess the existence,
distribution and duration of local level labor impacts of wind power investment using a panel of all
278 Portuguese mainland municipalities for the years 2001-2014. Our results show there are short
term effects, mainly for low skilled labor, during the construction phase. We estimate a decrease of
0.37 percentage points in the total unemployment rate for each 100MW installed. We find positive
spatial spillovers for municipalities that are 30km or less away. We find no evidence of sustained
effects or impact during the operations and maintenance phase. These insights highlight the need to
couple incentive policies with labor market and educational reforms that reduce the mismatch in
necessary skills.
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The Impact of Credit Ratings on Stock Markets
Presenter: Pedro Verga Matos (ISEG – U. Lisbon, and ADVANCE)
Co-authors: Vasco Oliveira, Nicoletta Rosati
Credit ratings have been fairly discussed in recent years, primarily because of the possible impacts
they have in the economy. After the financial crisis of 2008 and with no autonomy to pursue an
expansionary monetary policy, crisis-hit countries such as Portugal and Spain are still struggling to
control their public debt and reviving the economy simultaneously, while trying to be upgraded in
their sovereign credit ratings. In this paper we propose a different approach in analyzing the impact
of changes in sovereign credit ratings on stock markets. We study the evolution of a segmented form
of the stock market index for several crisis-hit countries, including both European and Asian markets.
Such evolution is initially modelled by a homogeneous Markov chain, where the transition
probabilities from one starting level of the index to a new (lower or higher) level in the next period
depend on some explanatory variables, which include the country’s rating, GDP and interest rate,
through an ordered probit model. The credit ratings turn out to be determinant in the dynamics of
the stock markets for all three European countries considered - Portugal, Spain and Greece, while in
the Asian countries no evidence is found of correlation of market indices with the ratings.
Optimal Consumption of Polluting and Non-polluting Goods: The Role of Habits
Presenter: Alfred Greiner (Department of Business Administration and Economics)
We present a basic exogenous growth model with two consumption goods that differ as regards their
contributions to environmental pollution. Allowing for habit formation of the polluting good, we
show under which conditions habit formation raises the consumption of the clean good relative to
the dirty one in the competitive economy. Further, we demonstrate when habit formation generates
a lower steady-state pollution stock compared to the situation without habits. Finally, we determine
the Pigou tax rates and we illustrate that the social optimum may imply a higher steady-state
pollution than the competitive economy if the habit formation is sufficiently strong.
Economic Growth and Public and Private Investment Returns
Presenter: António Afonso (UECE; ISEG-U. Lisbon)
Co-author: Miguel St. Aubyn
We study the macroeconomic effects of public and private investment in 17 OECD economies through
a VAR analysis with annual data from 1960 to 2014. From impulse response functions we find that
public investment had a positive growth effect in most countries, and a contractionary effect in
Finland, UK, Sweden, Japan, and Canada. Public investment led to private investment crowding out
in Belgium, Ireland, Finland, Canada, Sweden, the UK and crowding-in effects in the rest of the
countries. Private investment has a positive growth effect in all countries; crowds-out (crowds-in)
public investment in Belgium and Sweden (in the rest of the countries). The partial rates of return of
public and private investment are mostly positive.
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Session: Sovereign Debt
Modelling Sovereign Debt Contagion: a Smooth Transition Approach
Presenter: Susana Martins (NIPE, EEG-U. Minho)
Co-author: Cristina Amado
The unprecedented recent sovereign debt crisis has shown persistent negative effects reaffirming
financial contagion as a transmission channel of instability and systemic risk. In this paper, the timing
and extent of sovereign debt contagion are investigated. It is measured and detected by a significant
increase in cross-market correlations that we assume follow a non-linear Smooth Transition
Conditional Correlation (STCC-) GARCH process. Over time, cross-market correlations change
smoothly between two states according to an observable transition variable. When this variable is
specified as a function of time, a pre-crisis and two crisis sub-periods are identified. Results show
evidence for contagion effects within the periphery countries, notably from Greece and Portugal, and
between the periphery and core countries during the recent sovereign debt crisis.
Revisiting the Fiscal Theory of Sovereign Risk from the DSGE View
Presenter: Eiji Okano (Nagoya City University)
Co-author: Kazuyuki Inagaki
We revisit Uribe’s ‘Fiscal Theory of Sovereign Risk’ advocating that there is a tradeoff between
stabilizing inflation and suppressing default. We develop a class of dynamic stochastic general
equilibrium model with nominal rigidities and compare two de facto inflation stabilization policies,
optimal monetary policy and optimal monetary and fiscal policy with the minimizing interest rate
spread policy which completely suppress the default. Under the optimal monetary and fiscal policy,
not only the nominal interest rate, but also the tax rate work to minimize welfare costs through
stabilizing inflation. Under the optimal monetary both inflation and output gap are completely
stabilized although those are fluctuating under the optimal monetary policy. In addition, volatility on
the default rate under the optimal monetary policy is considerably lower than one under the optimal
monetary policy. Thus, there is not the SI-SD trade-off. In addition, while the minimizing interest rate
spread policy makes inflation rate severely volatile, the optimal monetary and fiscal policy stabilize
both the inflation and the default. A trade-off between stabilizing inflation and suppressing default is
not so severe what pointed out by Uribe.
Market Beliefs and Fundamentals in the Portuguese Sovereign Debt Crisis
Presenter: Sandra Bernardo (Universidade Fernando Pessoa)
In order to assess if the current Portuguese sovereign debt crisis was driven by self-fulfilling
expectations or by fundamentals, this paper brings to data a multiple equilibria model, where default
expectations may affect the probability of default independently of the fundamentals. To do so, I
estimate the probability of default in the period 2000-15 using Markov switching models, with
constant and varying transition probabilities, and with regime-constant and regime-varying
coefficients. The estimation results suggest that (i) the default probability is jointly determined by
fundamentals (debt to GDP, growth, liquidity and international risk aversion) and by market
expectations, (ii) the existence of two significant states with different default probabilities indicates
the importance of expectations.
20
Labor Market Distortions under Sovereign Default Crises
Presenter: Tiago Tavares (Department of Economics, University of Rochester)
Risk of sovereign debt default has frequently affected emerging market and developed economies.
Such financial crisis are often accompanied with severe declines of employment that are hard to
justify using a standard dynamic stochastic model. In this paper, I document that a labor wedge
deteriorates substantially around swift reversals of current accounts or default episodes. I propose
and evaluate two different explanations for these movements by linking the wedges to changes in
labor taxes and in the cost of working capital. By adding these two features in a dynamic model of
equilibrium default I am able to replicate the behavior of the labor wedge observed in the data around
financial crisis. In the model, higher interest rates are propagated into larger costs of hiring labor
through the presence of working capital. As an economy is hit with a stream of bad productivity
shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm
demand for labor and generates a labor wedge. A similar effect is obtained with a counter-cyclical
income tax rate policy. The model is used to shed light on the recent events of the Euro Area debt
crisis and in particular of the Greek default event.
Session: Monetary and Fiscal Policy
Union Debt Management
Presenter: Juan Equiza-Goñi (University of Navarra)
Co-authors: Elisa Faraglia, Rigas Oikonomou
We study the role of government debt maturity in a monetary union in the absence of fiscal transfers
across countries. Our key finding is that fiscal hedging is only possible when spending represents an
aggregate shock in the union. In the case of idiosyncratic disturbances in spending it is not possible
to target a portfolio which provides fiscal insurance to the governments: the allocation is one of
incomplete financial markets. These implications are in line with the empirical evidence. Using a
sample of 5 Euro area countries and historical holding period returns on government debt, we find
that fiscal insurance is not significant against country specific shocks however, it is significant against
aggregate shocks. Our analysis extends the theoretical results of the literature on optimal fiscal policy
without state contingent debt to a two country model. We show that in the two country setup and
under an incomplete market the optimal tax schedule, consumption and leisure follow pure a random
walk.
The Existence and Persistence of Liquidity Effects: Evidence from a Large-scale Historical
Natural Experiment
Presenter: Nuno Palma (European University Institute, and University of Groningen)
The discovery of mines of precious metals in Central and South America led to a massive exogenous
monetary injection to Europe’s money supply. I argue this episode can be helpful to identifying the
causal effects of money in a macroeconomic setting. Using a panel of six European countries for the
period 1531-1790, I find strong evidence in favor of non-neutrality of money for changes in real
economic activity. The magnitudes are substantial and persist for a long time: an exogenous 10%
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increase in production of precious metals in America leads to a hump-shaped positive response of
real GDP, peaking at an average increase of 1.3% four years later. The evidence suggests this is
because prices responded to monetary injections only with considerable lags. Several exogeneity
tests and robustness checks confirm the results.
On Identification Issues in (Monetary) Business Cycle Accounting Models
Presenter: Francesca Loria (Department of Economics, European University Institute)
Co-authors: Pedro Brinca, Nikolay Iskrev
Since its introduction by Chari et al. (2007), Business Cycle Accounting (BCA) exercises have become
widespread. Much attention has been devoted to the results of such exercises and to methodological
departures from the baseline methodology. Little attention has been paid to estimation and
identification issues within these classes of models, despite the methodology typically involving
estimating relatively large scale dynamic stochastic general equilibrium models. In this paper we
investigate whether such issues are of concern in the original methodology proposed by Chari et al.
(2007) and in an extension proposed by Sustek ˇ (2011), namely Monetary Business Cycle Accounting
(MBCA). To assess such identification issues, we resort to two types of identification tests. One
concerns strict identification in population as theorized by Komunjer and Ng (2007) while the other
deals both with strict and weak identification in sample as in Iskrev (2015). As to the former, when
restricting the estimation to just the parameters governing the latent variable’s laws of motion, we
find that both in the BCA and MBCA framework, all parameters fulfill the requirements for strict
identification. If instead we estimate all structural parameters of the model jointly, both frameworks
show strict identification failures in several parameters. These results hold both in population and in
sample. We show that restricting estimation of some deep parameters can obviate such failures.
When we explore weak identification issues, we find that they affect both models and that they arise
from the fact that many of the parameters estimated do not have a distinct effect on the likelihood.
Finally, we explore the extent to which these weak identification problems affect the main takeaways
of a standard and monetary BCA exercise and find that the identification deficiencies are not
economically relevant for the standard BCA model.
QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis
Presenter: Ricardo Reis (Columbia University, and LSE)
Studies of quantitative easing (QE) typically focus on the recent past studying the policy’s
effectiveness during a financial crisis when nominal interest rates are zero. This paper examines
instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook
is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare
through two channels, the first via aggregate demand and nominal rigidities, and the second via
contractions in credit and disruption in financial markets. Managing the size and composition of the
central bank’s balance sheet can interfere with each of these channels, stabilizing inflation and
economic activity. The power of QE comes from interest-paying reserves being a special public asset,
neither substitutable by currency nor by government debt.
22
Session: Industrial Organization II
Vertical Partnership Vs. Vertical Merger under Asymmetric Information
Presenter: Zhuohan Zhang (Department of Economics, University of Leicester)
By now, many theoretical researches on technology transfer refer to asymmetric information.
However, the existing researches are limited to technology licensing under asymmetric information.
There’s potential opportunism by both parties of a licensing case: on one hand, the licensor may have
private information of its technology, and thereby overstate the value of technology before transfers
it; on the other hand, if the cost of imitation is sufficiently low, the licensee may imitate the licensed
technology, and thereby use the technology to produce the licensee’s own products without giving
payment to the licensor. Then if the licensor has much private information of its technology, while
the licensee’s cost of imitating technology is quite low, the licensor wants to get a payment from the
licensee before transferring technology to the licensee, while the licensee wants just the opposite.
Therefore it’s difficult for both parties to reach a licensing agreement in this situation. Then we
develop a theoretical model to discuss that when technology licensing fails because of the problem
mentioned above, how a northern firm and a southern firm can achieve cooperation by other modes.
The northern firm refers to a firm that has technological advantage and private information of its
exclusive technology, while the southern firm refers to a firm that has labor cost advantage. In our
model, the two firms can achieve cooperation by either of two modes: vertical partnership and
vertical merger. The southern firm can choose an offer of cooperation to make, while the northern
firm can only choose whether to accept the offer or not. Our results are around the relation between
the probability θ with which the northern firm is good type, and the southern firm’s choice. For the
southern firm to choose a vertical partnership offer that screens out bad type northern firm, θ should
be neither too low nor too high. As the technology gap between the northern firm’s two types widens,
the range of θ for choosing the partnership offer screening out bad type northern firm widens. Also,
the upper bound of this range of θ relaxes as the southern firm’s labor cost advantage strengthens.
The lower bound of this range of θ, however, is ambiguously affected by the southern firm’s labor
cost advantage, depending on the technology gap between the northern firm’s two types. If the
technology gap is sufficiently large, the lower bound relaxes as the labor cost advantage strengthens.
However, if the technology gap is sufficiently small, the lower bound tightens as the labour cost
advantage strengthens.
Sorry, We're Closed: Loan Conditions When Bank Branches Close and Firms Transfer to Another
Bank
Presenter: António Gil Nogueira (Banco de Portugal)
Co-authors: Diana Bonfim, Steven Ongena
We study loan conditions when bank branches close and firms subsequently transfer to a branch of
another bank in the vicinity. Such transfer loans allow us for the first time to observe the conditions
granted when banks pool-price new applicants. Consistent with recent theoretical work on hold up
in bank-firm relationships we find that transfer loans do not receive the discount in loan rates that
prevails when firms otherwise switch banks. We hereby critically augment recent empirical evidence
on dynamic cycles in loan rates.
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Understanding Productivity Dynamics: A Task Taxonomy Approach
Presenter: Tiago Fonseca (Instituto Superior Técnico, Universidade de Lisboa, and CEG-IST)
Co-authors: Francisco Lima, Sonia C. Pereira
With increased use of technology in the workplace, firms have changed their labor inputs, mainly by
substituting workers by computers. In this paper we develop a taxonomy based on occupational data
that allows classifying firms according to their labor inputs task intensity. We propose three main
categories: Abstract, Manual and Routine. Abstract firms are high-skilled labor intensive, Manual
firms are low skilled and Routine firms have most of its labor force performing repetitive work. We
apply the taxonomy to study productivity and productivity dynamics for Portuguese firms. The
results show the most productive firms group is Abstract and its share is increasing in the economy.
The least productive firms are Manual and have a stable share over time. Routine firms’ productivity
is between those two, and its share is declining over time. By developing and applying an extended
version of the dynamic Olley-Pakes decomposition method, we conclude that the overall Portuguese
aggregate productivity growth has increased due to a sharp increase in Abstract firms productivity
together with low productivity Routine firms leaving the market.
Foreign Acquisition and Internal Organization
Presenter: Natália P. Monteiro (NIPE, EEG-U. Minho)
Co-authors: Paulo Bastos, Odd Rune Straume
We study the effect of foreign takeovers on firm organization. Using a comprehensive data set of
Portuguese firms and workers spanning two decades, we find that foreign acquisitions lead to: (1) an
expansion in the scale of operations; (2) a higher number of hierarchical layers; (3) increased span
of control among top managers; and (4) increased wage inequality across layers. These results accord
with a theory of knowledge-based hierarchies in which foreign takeovers improve management
practices and reduce communication costs within the acquired firms. Evidence from auxiliary survey
data provides support to this mechanism by suggesting that acquired firms are more likely to use
information technologies that reduce internal communication costs.
Session: Education II
Is Retention Beneficial to Low-achieving Students? Evidence from Portugal
Presenter: Luis Catela Nunes (Nova SBE)
Co-authors: Ana Balcão Reis, Carmo Seabra
Approximately 12% of all 15-year-old students across OECD countries repeated a grade at least once
during their compulsory schooling. The impact of retention/promotion decisions on the academic,
professional and/or social trajectory of low-achieving students is a controversial issue and has been
the subject of a very large number of empirical studies; yet, the conclusions remain unclear. The
purpose of this paper is to contribute to this discussion. Our sample includes students from the 4th
grade of the public education system in Portugal that obtained negative scores in their final exams.
The data allow for a detailed matching between retained and promoted students, according to
demographic and socioeconomic variables and according to the score attained at the end of the 4th
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grade, with the objective of establishing a causal relationship between retention and student
achievement. We also propose an instrumental variables approach to check if there is indeed a causal
effect. Our results suggest that early retention improves achievement at the 6th grade level exam.
However, the overall effect of retention on the length of the cycle of studies is negative: although
progression for the retained in the following years is a little faster than for the promoted this effect
is not sufficiently strong to compensate for the initial year lost with the retention. Our work makes a
contribution to forecast the path of students over time and hence to forecast the resources required
by educational services. The results are important to correctly predict the impact of changes in
educational policies on students’ future performance.
The Reasons Behind the Progression in PISA Scores: An Efficient Frontier Approach
Presenter: Pedro Freitas (Nova SBE)
Co-author: Ana Balcão Reis
We use PISA data from 2003 to 2012 to estimate an education production function, which relates
student achievement with student, household, and school-level variables. We then perform an
efficiency analysis measuring the ability of each student to transform the given inputs into higher
academic outcomes. We do so by estimating a non-parametric efficient frontier using Data
Envelopment Analysis (DEA). We show that the evolution in PISA scores across the years is mainly
due to variation in inputs. We also show that students with a more favorable socioeconomic
background are more indifferent to variables such as class size and school size.
Uncertainty in Education: The Role of Communities and Social Learning
Presenter: Ana Figueiredo (Department of Economics and Business, Univ. Pompeu Fabra)
Empirical evidence suggests that in places where low-income families live apart from rich families,
upward mobility is lower. I focus on the role of information constraints at the neighborhood level as
a novel explanation for the observed pattern. I write a model of educational choice with two key
features: (i) individuals are uncertain about schooling returns, and (ii) learning happens at the local
level: they learn about the schooling returns by observing nearby skilled neighbors. In contrast to
current theoretical models that study local interactions, under information frictions and social
learning, it is not only about being around skilled neighbors, but is also about their wages
distribution: skilled neighbors only boost schooling investment if the labour market information they
disclose leads to an increase in the perceived net benefit of schooling. Using school-district data from
Michigan over the period 2008-2013, I find evidence supporting the model’s prediction: a higher
share of college graduates living in the school district only increases enrolment of high school
graduates in 4-year colleges if the median earnings of college graduates in that school district is
sufficiently high.
Educational Spillovers in Portugal
Presenter: Miguel Portela (NIPE, EEG-U. Minho, and IZA)
Co-authors: Sandra Sousa, Carla Sá
Using a Portuguese panel dataset and employing instrumental variables in an augmented Mincer
specification, in this paper is analyzed the external effects of human capital on individual wages,
where the aggregated human capital is measured by three different ways: regional average
education, share of qualified workers in regional workforce and a regional skill index. The results
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propose the existence of positive and significant external effects of human capital. In addition, it is
considered two qualification groups of workers as imperfect substitutes and it is found that the effect
is larger for the most qualified workers. Furthermore, the effect on individual wages slightly
decreases when the aggregated human capital of firm is included as an additional control and it seems
that human capital externalities predominate within firms compared to local human capital in a
county. Finally, assessing the relationship between geographical (regional and inter-regional) human
capital externalities across the mainland Portuguese counties and individual wages. Results suggest
that beyond the individual education and the human capital level of the county where individuals are
working, the human capital level of the neighboring countries also matters.
Session: Investment
The Q Theory of Investment: New Evidence from a Time-frequency Analysis
Presenter: Fabio Verona (Bank of Finland, Monetary Policy and Research Department, and
University of Porto, CEF.UP)
This paper revisits the empirical performance of the Q theory – primarily using the traditional
measure of Q based on equity prices, which seems to be the main culprit for the empirical failure of
the investment equation – in the time-frequency domain. Namely, we estimate the coefficients in the
investment equation over time and across frequencies using the continuous wavelet tools. The main
results, using U.S. aggregate data, are as follows. First, there is a strong, positive and statistically
significant correlation between investment and Q in about 50% of the time-frequency locus, i.e.
investment and Q are strongly correlated. Second, the coefficient on Q in the time-frequency domain
is on average 4 times larger than in the time domain, and it can be 10 times larger in some timefrequency regions. Third, cash flow is indeed an important determinant of corporate investment
policy, but so is Q, and including cash flow does not drive out Q. Actually, the coefficient on Q (cash
flow) is larger at low (medium) frequencies, so the power in the investment-Q (-cash flow)
relationship is in the long (medium) run. Finally, the cash-flow coefficient has not declined over time,
contrary to previous findings using micro-level data.
What Holds Investment Back Post-Crisis? Evidence from the 2013 Investment Tax Credit in
Portugal
Presenter: Francisca Rebelo (Banco de Portugal)
Co-authors: Laura Blattner, Luisa Farinha
We investigate competing explanations for low corporate investment in the Eurozone after 2010:
two debt-related explanations - debt overhang and financial constraints - and one explanation that
focuses on the role of low product demand. We exploit the 2013 extraordinary investment tax credit
in Portugal that gave firms a strong incentive to invest in the second half of 2013, and estimate how
much each factor contributed to whether a firm claimed the tax credit. We construct firm-level debt
overhang indexes based on (1) debt-earnings ratios and two measures that exploit the negative
relationship between debt overhang and debt maturity (Myers (1977)): (2) the debt maturity profile
when the tax credit was announced and (3) an industry classification according to investment
duration. To measure financial constraints we construct (1) an opaqueness index based on age, size
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and the fraction of nonreported data; (2) an index of credit access; and (3) out of sample estimates
from survey responses on the severity of financial constraints. We instrument for product demand
with the (1) industry-level growth rate and (2) revenue growth of matched firms in France. We find
that debt overhang is as important as financial constraints in reducing the likelihood of a firm using
the investment tax credit, and the effects are robust to the inclusion of demand IVs. Both demand and
debt-based measures have large and strongly significant effects.
Multinational Corporations and Institutions
Presenter: Chander Kant (Seton Hall University)
The relevant economics literature has recently coalesced around the view the effects of capital
account globalization on growth of developing countries is elusive; its main benefit is likely to be
collateral. This paper’s focus is on the most important capital account transaction, viz. foreign direct
investment (FDI) or investment through a multinational corporation (MNC): we examine its role (if
any) in improving institutional quality. The hypothesis is that an MNC brings with it a different
institutional knowhow, among others. Using the recently available and carefully collected (by the
World Bank) data on institutional quality for almost all developing countries, we show their
institutional quality is higher with a greater FDI presence: when a country has about one standard
deviation higher FDI, its rank in in protecting investors and enforcing contracts is higher by about 8
and that in ease of doing business is greater by about 12. These conclusions holds with various
robustness tests.
Cross-delisting, Financial Constraints and Investment Sensitivities
Presenter: Sónia Silva (EEG-U. Minho)
Co-author: Gilberto Loureiro
We investigate the impact of cross-delisting on firms’ financial constraints and investment
sensitivities. We find that firms that cross-delisted from a U.S. stock exchange face stronger postdelisting financial constraints than their cross-listed counterparts, as measured by investment-tocash flow sensitivity. Following a delisting, the sensitivity of investment-to-cash flow increases
significantly and firms also tend to save more cash out of cash flows. These effects are mainly driven
by cross-delisted firms from countries with weaker investor protection and are more predominant
after the passage of Rule 12h-6 (of 2007) that made it easier for foreign firms to leave U.S. markets.
Additionally, we find that the increase in investment sensitivities appears to be primarily driven by
informational frictions that constrain firms’ access to external financing. This effect is aggravated
when firms are from countries with weaker shareholder protection and less developed capital
markets.
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Session: Macro and Finance Theory
Portfolio Rebalancing and Asset Pricing with Heterogeneous Inattention
Presenter: Omar Rachedi (Banco de España)
Can households’ inattention to the stock market quantitatively account for the inertia in portfolio
rebalancing? I address this question introducing an observation cost in a production economy with
heterogeneous agents and borrowing constraints. In this environment inattention changes
endogenously over time and across agents. I find that inattention explains the lumpiness in portfolio
rebalancing and predicts that the degree of active rebalancing increases with wealth. Inattention
generates also limited stock market participation and countercyclical equity premium and stock
return volatility. Finally, I present a novel testable implication linking the effects of inattention on
portfolio choices to households’ funding liquidity.
“Now that you mention it”: A Survey Experiment on Information, Salience and Online Privacy
Presenter: Hélia Marreiros (University of Southampton)
Co-authors: Mirco Tonin, Michael Vlassopoulos
Personal data lie at the forefront of different business models and constitute the main source of
revenue of several online companies. In many cases, consumers have incomplete information about
the digital transactions of their data. This paper investigates whether highlighting positive or
negative aspects of online privacy, thereby mitigating the informational problem, can affect
consumers’ privacy actions and attitudes. Results of two online survey experiments indicate that
participants adopt a more conservative stance on disclosing identifiable information, such as name
and email, even when they are informed about positive attitudes of companies towards their privacy.
On the other hand, they do not change their attitudes and social actions towards privacy. These
findings suggest that privacy concerns are dormant and may manifest when consumers are asked to
think about privacy; and that privacy behavior is not necessarily sensitive to exposure to objective
threats or benefits of disclosing personal information.
Growth without Scale Effects due to Entropy
Presenter: Tiago Neves Sequeira (Univ. Beira Interior, and CEFAGE-UBI)
Co-authors: Pedro Mazeda Gil, Óscar Afonso
We eliminate scale effects in the Balanced Growth Path of an expanding-variety endogenous growth
model using the concept of entropy as a complexity effect. This allows us to gradually diminish scale
effects as the economy develops along the transitional dynamics, which conciliates evidence of the
existence of scale-effects long ago in history with evidence for no scale effect in current days
economies. We show that empirical evidence supports entropy as a stylized form of the complexity
effect. Then we show that the model can replicate well the take-off after the industrial revolution.
Finally, we show that a model with both network effects (as spillovers in R&D) and entropy (as
complexity effects) can replicate the main facts of the very long-run evolution of the economy since
1 A.D. Future scenarios may contribute to explain (part of) the growth crises affecting the current
generation.
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Balanced-budget Fiscal Policy (de)Stabilizing Rules
Presenter: Teresa Lloyd-Braga (UCP Católica Lisbon SBE)
Co-author: Leonor Modesto
We consider a finance constrained economy where the steady state is always unique and saddle point
stable in the absence of government. The introduction of constant structural public expenditures,
financed by income taxation, leads to indeterminacy and expectations driven fluctuations. We then
discuss the stabilization role of additional cyclical labor/capital income tax rates. We find that
sufficiently procyclical labor and/or capital income tax rates are able to stabilize locally the economy,
restoring local saddle path stability. However, procyclical tax rates are not able to eliminate steady
state multiplicity caused by the need to finance a fixed amount of government expenditures. Indeed,
there is at least another steady state with a lower level of output, that is either a source or
indeterminate. Hence, the economy is not completely insulated from instability linked to volatile
expectations. In contrast, when government spending is totally flexible along business cycles, we
recover steady state uniqueness and the saddle property if and only if tax rates are not
countercyclical.
Session: Political Economy
Property Rights Enforcement with Unverifiable Incomes
Presenter: Jan U. Auerbach (University of Exeter)
I study a planner’s choice of the level of property rights enforcement when agents that are
heterogeneous in productivity can appropriate each other’s’ resources. The planner cannot verify
incomes but hiding resources from taxation is costly. While this friction imposes a binding constraint,
the planner implements perfectly secure property rights. The allocation incentivizes production
through redistributive taxation and absorbs potential appropriators as personnel in enforcement.
Higher costs of hiding income allow the planner to implement more redistributive taxation and less
enforcement, leading to more production and higher welfare. A political economy friction does
generate imperfectly secure property rights.
Trade, Law and Order, and Political Liberties: Theory and Application to English Medieval
Boroughs
Presenter: Simone Meraglia (Department of Economics, University of Exeter)
Co-author: Charles Angelucci
We develop a framework that puts the administration at the core of the relationship between trade
and political liberties. A ruler chooses the size of an administration that (i) collects taxes and (ii)
provides law and order for a representative merchant to use. To be exploited, large gains from trade
require a relatively large administration. However, keeping a large administration in check is
difficult. When the resulting inefficiencies are significant, the ruler grants control of the
administration to the better-informed merchant, even though this facilitates tax evasion. We analyze
the case of post-Norman Conquest England (1066-1307) by using evidence on taxation, commerce,
and political liberties across boroughs. We use boroughs’ ownership as a proxy for the cost of
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controlling the administration, and find that rulers with a high cost are more willing to grant
boroughs the control of their administration. Also, provided it belongs to a high-cost ruler, a
borough’s propensity to receive a grant increases with its commercial importance. Finally, we find
that boroughs are willing to pay higher taxes in exchange for liberties.
Social capital, perceptions and economic performance
Presenter: José A. Hernandez (University of Las Palmas de Gran Canaria)
Co-author: César Guerrero-Luchtenberg
This paper describes how social capital emerges, relates to economic performance and evolves in the
long run. Using the concept of psychological equilibrium, two types of individuals are generated in
the population regarding their willingness to cooperate. We propose an evolutionary (learning)
process over those types driven by the total payoffs of the psychological game, and provide a
complete description of its dynamics. Macro-perceptions, defined as the individual perception of how
cooperative the society is as a whole, are key to explain convergence to the full social capital state in
the long run.
Term Limits on Portuguese Mayors: do They Matter?
Presenter: Francisco Veiga (NIPE, EEG-U. Minho)
Co-author: Linda Gonçalves Veiga
Term limits at the local government level were recently introduced in Portugal. The limit of three
consecutive terms in office became binding in the 2013 municipal elections, preventing about half of
the Portuguese mayors to run for reelection in the same municipality. This paper analyzes the effects
of this institutional change on local fiscal policy variables, using a sample comprising all (308)
municipalities, from 1998 to 2013. The results suggest binding term limits may imply costs by forcing
out competent mayors, but that they may bring the benefit of mitigating the opportunistic
manipulation of local finances. Finally, we did not find evidence of costs related to the accountability
effect of elections.
Session: Labor Economics
The Drivers of Wage Inequality Across Europe: A Recentered Influence Function Regression
Approach
Presenter: João Pereira (CEFAGE-U. Évora)
Co-author: Aurora Galego
This study analyzes the impact of individual characteristics as well as occupation and industry on
male wage inequality in nine European countries. Unlike previous studies, we consider regression
models for five inequality measures and employ the recentered influence function regression method
proposed by Firpo et al. (2009) to test directly the influence of covariates on inequality. We conclude
that there is heterogeneity in the effects of covariates on inequality across countries and throughout
wage distribution. Heterogeneity among countries is more evident in education and experience
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whereas occupation and industry characteristics as well as holding a supervisory position reveal
more similar effects. Our results are compatible with the skill biased technological change, rapid rise
in the integration of trade and financial markets as well as explanations related to the increase of the
remunerative package of top executives.
What Hides Behind Fixed-term Contracts Wage Gap?
Presenter: Filipe Silvério (Banco de Portugal)
In Portugal, about 20% of full-time workers are employed under a fixed-term contract. Using a rich
longitudinal matched employer-employee dataset for Portugal, with more than 20 million
observations and covering the 2002-2012 period, we confirm the common idea that fixed-term
contracts are not desirable when compared to permanent ones, by estimating a conditional wage gap
of -1.7 log points. Then, we evaluate the sources of that wage penalty by combining a three way highdimensional fixed effects model with the decomposition of Gelbach (2014), in which the three
dimensions considered are the worker's unobserved ability, the firm's compensation wage policy
and the job title effect. It is shown that the average worker with a fixed-term contract is less
productive than his/her permanent counterparts, explaining -3.92 log points of the FTC wage
penalty. Additionally, the sorting of workers into lower-paid job titles is also responsible for -0.59 log
points of the wage gap. Surprisingly, we found that the allocation of workers among firms mitigates
the existing wage penalty (in 4.23 log points), as fixed-term workers are concentrated into firms with
a more generous compensation policy. Finally, following Figueiredo et al. (2014), we further control
for the worker-firm match characteristics and reach the conclusion that fixed-term employment
relationships have an overrepresentation of low quality worker-firm matches, explaining 0.65 log
points of the FTC wage penalty.
Sources of the Union Wage Gap: Results from High-Dimensional Fixed Effects Regression Models
Presenter: Pedro Portugal (Banco de Portugal, Nova SBE, and IZA)
Co-authors: John T. Addison, Hugo Vilares
We estimate the impact of union density on wages using matched employer-employee-contract data
for Portugal. We extend omitted variable bias decomposition procedure of Gelbach (2016) to obtain
the contribution of worker, firm, and job-title heterogeneity to the union wage premium. The
principal result is the dominance of the allocation or workers among firms with different wage
policies. The unobserved skills of union workers have a modest impact on wages; unions do not place
their members into higher job-titles along the job career hierarchy; the wage cushion enables firms
to partially undo the bargained wage; and, while fringes matter, matching does not.
Changes in Bargaining Status and Intra-plant Wage Dispersion in Germany: Much Ado About
Nothing?
Presenter: Paulino Teixeira (GEMF, and FEUC)
Co-authors: John T. Addison, Katalin Evers, Arnd Kölling
A number of studies have reported that union decline is associated with rising overall wage
inequality. That said, the exact contribution of deununionization is controversial, not least in
Germany – our case study – where the phenomenon has also been linked to economic resurgence.
The present paper takes an unconventional approach to this potential source of rising inequality by
examining intra-plant wage dispersion in the wake of establishments exiting from or entering into
31
collective bargaining. Our estimation strategy hinges upon the identification of comparable groups
of establishments and on both short-run and medium- to long-term changes in the wage structure.
Using linked employer-employee data for 1996-2010, an interval of declining union membership and
coverage, we follow two main empirical strategies. First, we present a conditional difference-indifferences approach with propensity score matching and selection of separate treatment and control
groups. Second, we deploy a panel fixed-effects estimation approach that identifies in a unified
framework all the treatment and control groups before and after treatment. At most, a modest
widening effect on dispersion is detected for plants abandoning collective agreements. The converse
does not apply for those establishments joining collective agreements. The scale of the former effect
together with the lack of symmetry cast doubt on some of the more exaggerated claims as to the
importance of deunionization to wage inequality.
Session: Growth
Is the Skills Mismatch Important in a Skill-biased Technological Growth Model with Imperfect
Substitutability between Immigrants and Natives?
Presenter: Susana Gabriel (Universidade do Minho)
Co-authors: Pedro Mazeda Gil, Óscar Afonso
This paper evaluates how the skills mismatch induced by immigration affects per worker output, the
skill premium and the technological level in a number of OECD host countries. We use a skill biased
dynamic general equilibrium R&D growth model in which the standard R&D technology is modified
so that growth results from the direction of the technological knowledge, which in turn is induced by
the price channel. Immigration is introduced considering two features: perfect versus imperfect
substitutability between immigrants and native and skills mismatch between education level and
occupations. According to our quantitative results, the model shows that host production is
significantly larger when even a small degree of complementarity between immigrants and natives
is considered, and also, that there is significant product efficiency loss due to the mismatch.
Social Capital, Innovation and Economic Growth
Presenter: Maria João Thompson (NIPE, EEG-U. Minho)
Multidisciplinary innovation is the engine of growth of an increasing number of economies.
Innovation output depends increasingly on information sharing and cooperation between creative
agents. Sharing and cooperation requires the existence of generalised trust. Social capital consists of
trust and trust-based networks. Our main goal is to illustrate theoretically the importance of social
capital to the growth of an innovation economy.
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Are PIIGS so Different? An Empirical Analysis of Demand and Supply Shocks
Presenter: João de Sousa Andrade (GEMF, and FEUC)
Co-author: Irina Syssoyeva-Masson
This paper analyses responses to supply and demand shocks in PIIGS countries (Portugal, Ireland,
Italy, Greece and Spain). We compare the results obtained for PIIGS with those of two benchmark
economies (Germany and USA) and also with those of France, who despite of its government’s efforts,
is still unable to “reverse the unemployment curve” and to restore the desired rate of economic
growth. With regards to these responses is it still reasonable to consider them as a group apart? Our
methodological strategy is based on one of the pillars of empirical macroeconomics – the Okun Law
(OL) which is incorporated in a Structural Vector Autoregression (SVAR) model with Blanchard-Quah
(BQ) restrictions. In this paper, we address two drawbacks that usually are present in OL: the
interdependency problem and the non-stationarity problem. Using a non-parametric representation
we identify different behaviors in terms of the OL for the PIIGS, benchmark countries and France. We
built stable VAR models for each of the involved economies and use the BQ SVAR impulses to analyze
the importance of contemporary and long run effects of supply and demand shocks. We refer to our
BQ model as a pseudo BQ because we differentiate the unemployment rate to obtain a stationary
variable. Finally, we also retain the different time profiles of the responses to supply shocks. Based
on our results we conclude that it does not make sense to identify PIIGS as a separate group in terms
of the macroeconomic performance resulting from supply and demand shocks. Instead, a country
that stands out in from our analysis is France. If “PIIGS” means “countries with poor economic
performances” then France also must belong to this group.
Growth, Government Debt, Fiscal Rules and Singular Dynamics
Presenter: Paulo Brito (UECE, ISEG-U. Lisboa)
A fiscal rule controlling the government surplus as a function of the deviation of the actual debt ratio
from a target level is introduced in an otherwise benchmark endogenous growth model in which
productive government expenditures are financed by taxes and government debt. This generates a
feedback mechanism from the debt ratio to the expenditure ratio that can generate singular
dynamics, in the sense that rates of growth can become locally in finitely valued. We present a method
to deal with this case and show that depending on the design of the rule, and on the initial level of the
expenditure ratio, a robust unique equilibrium balance growth path exist converging to a BGP in
which the level of debt is different from the target. The existence of impasse-singularities constrain
the domain of existence of general equilibrium trajectories and can introduce dynamics which do not
occur in regular models. A bifurcation analysis in the space of the fiscal rule parameters is conducted
allowing for a proof of the existence of a singularity induced bifurcation point.
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Session: Macro and Fiscal Policy
Government Spending and Firms’ Dynamics
Presenter: Miguel Ferreira (Nova SBE)
Co-authors: Pedro Brinca, Francesco Franco
Using firm level data and government demand by industry we empirically dismantle the two paths
through which variations in government demand affect firms’ dynamics: demand and financial
markets. Theoretically, we try to validate empirical results and better understand the transmission
mechanism of a fiscal shock to firms’ dynamics, under a framework of heterogeneous firms. Empirical
results indicate that the financial markets channel prevails, with an increase in government demand
crowding out private investment through limiting the ability of firms to issue debt. An increase in
government demand decreases as well firms’ job creation, due to an expansion in labour costs. The
combination of an increase in costs of labour and capital causes more firms to leave the market and
less ones to enter. Although, these results do not apply in industries more dependent from
government demand, where the demand channel prevails, resulting in firms hiring more labour and
capital when facing a government demand expansion.
Accounting for Business Cycles
Presenter: Pedro Brinca (Nova SBE)
Co-authors: V. V. Chari, Patrick J. Kehoe, Ellen McGrattan
We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan
(2007), clear up some misconceptions about the method, and then apply it to compare the Great
Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have
four main findings. First, with the notable exception of the United States, Spain, and Ireland, the Great
Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor
wedge plays a dominant role only in the United States, and the investment wedge plays a dominant
role in Ireland and Spain. Third, in the recessions of the 1980s the labor wedge played a dominant
role only in Denmark and the United Kingdom. Finally, overall in the Great Recession the efficiency
wedge played a much more important role and the investment wedge played a much less important
role than they did in the recessions of the 1980s
Fiscal Policy and Financial Crises in a Monetary Union
Presenter: Miguel Faria e Castro (New York University)
Should the government bail out Wall Street or Main Street? I study the relative merits of different
types of fiscal support during a financial crisis, both in terms of macroeconomic stabilization and
welfare. I augment a standard monetary DSGE model of a small open economy with agent
heterogeneity, incomplete markets, endogenous default and an explicit financial sector. Banks supply
credit to both borrowers and firms. Periods of low income may trigger waves of default by
households, which deplete bank capital and reduce lending to both sectors. The financial accelerator
interacts with aggregate demand externalities to generate deep and protracted recessions. I then use
the model to study fiscal policy from both positive and normative perspectives. A fiscally constrained
planner who is restricted to distortionary forms of financing can alleviate crises by offering more or
less targeted forms of support: direct purchases of goods and services, transfers to households, debt
34
relief to households, or bailouts to the financial sector. I analyze the effectiveness of each of these
policies by looking at the state-dependent multipliers that emerge. In particular, and contrary to most
literature, I find that transfers to households can be more stabilizing than direct government
purchases when there is endogenous default. I then adopt a more normative approach and study the
optimal state-dependent combination of policies that a constrained planner should adopt. Taking the
financing of these policies as given, I study the problem of optimally allocating resources across the
different sectors. Finally, I use the model as a measurement tool to construct two counterfactuals
regarding the Great Recession: first, what would had happened in the absence of fiscal support?
Second, what would had happened in spending had been allocated optimally? I leverage the fact that
my analysis is conducted for small open economies within monetary unions and use data from both
the United States and the Eurozone to answer these questions.
From Sunspots to Black Holes: Singular Dynamics in Macroeconomic Models
Presenter: Luís F. Costa (UECE, ISEG – U. Lisboa)
Co-authors: Paulo Brito, Huw Dixon
We present conditions for the emergence of singularities, of both the fast-slow and impasse types,
where the dynamic system describing the economy exhibits singularities. We review geometrical
methods to deal with both types of singularity and illustrate their usage with two simple models: the
Benhabib and Farmer (1994) model and one with a cyclical fiscal policy rule. New strands of dynamic
behavior emerge here, in particular temporary indeterminacy.
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