The Economic Journal Current Issue

21 Nov 2020

Global Earnings Inequality, 1970–2018

Hammar O, Waldenström D.

We estimate trends in global earnings dispersion across occupational groups by constructing a new database that covers 68 developed and developing countries between 1970 and 2018. Our main finding is that global earnings inequality has fallen, primarily during the 2000s and 2010s, when the global Gini coefficient dropped by 15 points and the earnings share of the world's poorest half doubled. Decomposition analyses show earnings convergence between countries and within occupations, while within-country earnings inequality has increased. Moreover, the falling global inequality trend was driven mainly by real wage growth, rather than changes in hours worked, taxes or occupational employment.
21 Nov 2020

What is the Price of Tea in China? Goods Prices and Availability in Chinese Cities

Feenstra R, Xu M, Antoniades A.

We examine the price and variety of a sample of consumer goods at the barcode level in cities within China. Unlike the position in the United States, in China the prices of goods tend to be lower in larger cities. We explain that difference between the countries by the more uneven spatial distribution of manufacturers’ sales and retailers in China, and we confirm the pro-competitive effect of city size on reducing markups there. In both countries, there is a greater variety of goods in larger cities, but that effect is more pronounced in China. Combining the lower prices and greater variety, the price indexes in China for the goods we study fall with city size by around seven times more than in the United States.
21 Nov 2020

Public Capital and Economic Development

Cubas G.

Public capital is sizable and its share in total capital is higher in poor countries. The standard development accounting approach does not distinguish it from private capital, ignoring its public good features. The goal of this paper is to measure public capital stocks for a wide range of countries, and then develop and implement a development accounting framework that explicitly includes its non-rival aspects. The paper finds that factors of production account for a significantly greater share of cross-country differences in output per worker compared to the standard framework. With both non-rivalry and congestion, the contribution of factors of production decreases.
21 May 2020

The Structure and Behavioral Effects of Revealed Social Identity Preferences*

Hett F, Mechtel M, Kröll M.

A large body of evidence shows that social identity affects behaviour. However, our understanding of the substantial variation of these behavioural effects is still limited. We use a novel laboratory experiment to measure differences in preferences for social identities as a potential source of behavioural heterogeneity. Facing a trade-off between monetary payments and belonging to different groups, individuals are willing to forego significant earnings to avoid belonging to certain groups. We then show that individual differences in these foregone earnings correspond to the differences in discriminatory behaviour towards these groups. Our results illustrate the importance of considering individual heterogeneity to fully understand the behavioural effects of social identity.
08 May 2020

Toward an Understanding of the Welfare Effects of Nudges: Evidence from a Field Experiment in the Workplace

Bulte E, List J, van Soest D.

Social scientists have recently explored how framing of gains and losses affects productivity. We conducted a field experiment in peri-urban Uganda, and compared output levels across 1,000 workers over isomorphic tasks and incentives, framed as either losses or gains. We find that loss aversion can be leveraged to increase the productivity of labour. The estimated welfare costs of using the loss contract are quite modest—perhaps because the loss contract is viewed as a (soft) commitment device.
08 May 2020

Economic Rationality under Cognitive Load

Drichoutis A, Nayga R, Jr..

Economic analysis assumes that consumer behaviour can be rationalised by a utility function. Previous research has shown that some consistency of choices with economic rationality can be captured by permanent cognitive ability. No other known study however has examined how a temporary load in subjects’ working memory can affect economic rationality. Using two controlled laboratory experiments, we exogenously vary cognitive load by asking subjects to memorise a number while they undertake an induced budget allocation task (Choi et al., 2007a, b). Using a number of manipulation checks, we verify that cognitive load has adverse effects on subjects’ performance in reasoning tasks. However, we find no effect in any of the goodness-of-fit measures that measure consistency of subjects’ choices with the Generalized Axiom of Revealed Preference (GARP), despite having a sample size large enough to detect even small differences between treatments with 80% power. We also find no effect on first-order stochastic dominance and risk preferences. Our finding suggests that economic rationality can be attained even when subjects are placed under temporary working memory load, despite the fact that the load has adverse effects in reasoning tasks.
24 Apr 2020

Can Consumers Distinguish Persistent from Transitory Income Shocks?

Druedahl J, Jørgensen T.

The degree to which consumers can distinguish persistent from transitory income shocks is paramount for consumption-saving dynamics. In particular, even a small amount of imperfect information causes a severe bias in conventional estimators of the marginal propensity to consume. We provide a novel method that can identify consumers’ degree of information by using panel data on income and consumption, even allowing for measurement error. Employing our method to data from the Panel Study of Income Dynamics, we find that households have almost perfect information. This robust result indicates that the conventional estimators of the marginal propensity to consume are on firm ground.
17 Apr 2020

Ambiguity, Low Risk-Free Rates and Consumption Inequality

Luo Y, Nie J, Young E.

Macroeconomists failed to predict the Great Recession, suggesting that the existing macroeconomic models may have been misspecified. Bearing in mind this potential misspecification or ‘model uncertainty’, how do agents’ optimal decisions change? Furthermore, how large are the welfare costs of model misspecification? To shed light on these questions, we develop a tractable continuous-time general equilibrium model to show that a fear of model misspecification reduces both the equilibrium interest rate and the relative inequality of consumption to income, making the model’s predictions closer to the data. Our quantitative analysis shows that the welfare costs of model uncertainty are sizable.
14 Apr 2020

Negative Voters? Electoral Competition with Loss-Aversion

Lockwood B, Rockey J.

This paper studies the effect of voter loss aversion in preferences over both candidate policy platforms and candidate valence on electoral competition. Loss-aversion over platforms leads to both platform rigidity and reduced platform polarisation, whereas loss-aversion over valence results in increased polarisation and the possibility of asymmetric equilibria with a self-fulfilling (dis)-advantage for the incumbent. The results are robust to a stochastic link between platforms and outcomes; they hold approximately for a small amount of noise. A testable implication of loss-aversion over platforms is that incumbents adjust less than challengers to shifts in voter preferences. We find some empirical support for this using data for elections to the US House of Representatives.
01 Apr 2020

Measuring the Indirect Effects of Adverse Employer Behaviour on Worker Productivity: a field Experiment

Heinz M, Jeworrek S, Mertins V, et al.

We conduct a field experiment to study how worker productivity is affected if employers act adversely towards their co-workers. Our employees work for two shifts in a call centre. In our main treatment, we lay off some workers before the second shift. Compared to two control treatments, we find that the lay-off reduces the productivity of unaffected workers by 12%. We find suggestive evidence that this result is not driven by altered beliefs about the job or the management’s competence, but caused by the workers’ perception of unfair employer behaviour. The latter interpretation is confirmed in a prediction experiment with professional HR managers. Our results suggest that the price for adverse employer behaviour goes well beyond the potential tit for tat of directly affected workers.
03 Mar 2020

Honesty and Self-Selection into Cheap Talk

Fehrler S, Fischbacher U, Schneider M.

In many situations, people can lie strategically, for their own benefit. Since individuals differ with respect to their willingness to lie, the credibility of statements will crucially depend on who self-selects into such cheap-talk situations. We study this process in a two-stage political competition setting. At the entry stage, potential candidates compete in a contest to become their party’s candidate in an election. At the election stage, the nominated candidates campaign by making promises to voters. Confirming the model’s key prediction, we find in our experiment that dishonest people over-proportionally self-select into the political race and thereby lower voters’ welfare.
28 Feb 2020

Landscape Change and Trade in Ancient Greece: Evidence from Pollen Data

Izdebski A, Słoczyński T, Bonnier A, et al.

In this article we use pollen data from six sites in southern Greece to study long-term vegetation change in this region from 1000 BCE to 600 CE. Based on insights from environmental history, we interpret our estimated trends in the regional presence of cereal, olive and vine pollen as proxies for structural changes in agricultural production. We present evidence that there was a market economy in ancient Greece and a major trade expansion several centuries before the Roman conquest. Our results are consistent with auxiliary data on settlement dynamics, shipwrecks and ancient oil and wine presses.
28 Feb 2020

The Effects of Children's Gender Composition on Filial Piety and Old-Age Support*

Guo R, Zhang J.

Do parents forge children’s preference for old-age support? Becker (1993) conjectures that the inculcation of filial piety increases parents’ investment in children’s human capital. We provide the first empirical evidence on parents’ instilling of filial piety in children, by combining the natural experiment of twins with China’s One-Child Policy to obtain exogenous variations in children’s gender composition. Among the different models of filial-piety inculcation, our empirical results favour a Beckerian model of altruism inculcation in which parents solicit support from the child with a higher earnings endowment.