The Economic Journal Current Issue

21 Aug 2019

Can Taxes Tame the Banks? Evidence from the European Bank Levies

Devereux M, Johannesen N, Vella J.

Following the 2007–2008 financial crisis, a large number of countries introduced levies on bank borrowing intended to reduce risk in the financial sector. This article studies the behavioural responses to bank levies and finds that banks exposed to levies increased their reliance on equity funding, but at the same time increased the risk of their assets; banks shifted risk from the liability side of their balance sheets to the asset side, which mitigated the impact of government intervention. Our analysis also shows that any reduction in total risk was concentrated among banks that pose no or little threat to financial stability.
31 Jul 2019

Diversity and Neighbourhood Satisfaction

Langella M, Manning A.

This article investigates the impact of ethnic diversity on individuals’ satisfaction with their neighbourhoods. It uses panel data and a variety of empirical methods to control for potential endogeneity of diversity and of location choices. We find that a higher white share raises overall satisfaction with the neighbourhood in our (overwhelming white) sample, but has no significant impact on generalised trust or other commonly used measures of social capital. We suggest that part of the impact of diversity on overall neighbourhood satisfaction may be through an effect on fear of crime, though we find no effect on actual crime.
19 Jul 2019

The Marginal Voter's Curse

Herrera H, Llorente-Saguer A, McMurray J.

The swing voter’s curse is useful for explaining patterns of voter participation, but arises because voters restrict attention to the rare event of a pivotal vote. Recent empirical evidence suggests that electoral margins influence policy outcomes, even away from the 50% threshold. If so, voters should also pay attention to the marginal impact of a vote. Adopting this assumption, we find that a marginal voter’s curse gives voters a new reason to abstain: to avoid diluting the pool of information. The two curses have similar origins and exhibit similar patterns, but the marginal voter’s curse is both stronger and more robust. In fact, the swing voter’s curse turns out to be on a knife edge: in large elections, a model with both pivotal and marginal considerations and a model with marginal considerations alone generate identical equilibrium behaviour.
19 Jul 2019

Does Success Breed Success? a Quasi-Experiment on Strategic Momentum in Dynamic Contests

Gauriot R, Page L.

We study how agents adapt their behaviour to variations of incentives in dynamic contests. We investigate a real dynamic contest with large stakes: professional tennis matches. Situations in which balls bounce very close to the court’s lines are used as the setting of a quasi-experiment providing random variations in winning probability. We find evidence of a momentum effect for men whereby winning a point has a positive causal impact on the probability to win the next one. This behaviour is compatible with a reaction to the asymmetry of incentives between leaders and followers. We do not find momentum for women.
18 Jul 2019

Evaluating Vacancy Referrals and the Roles of Sanctions and Sickness Absence

van den Berg G, Hofmann B, Uhlendorff A.

Job vacancy referrals are a common active labour market policy measure. Unemployment insurance agencies may combat moral hazard by punishing refusals to apply to assigned vacancies. During sickness spells, minimum requirements on search behaviour do not apply. This may reduce the threat effect of sanctions. We study effects of vacancy referrals and sanctions on unemployment duration and job match quality. We find that a vacancy referral increases the transition rate into work. We also find a positive effect of a vacancy referral on the probability of reporting sick.
05 Jul 2019

The Demographic Transition and the Position of Women: a Marriage Market Perspective

Bhaskar V.

Secular trends in cohort size cause large marriage market imbalances due to the age gap at marriage between men and women. Positive cohort growth adversely affects women in South Asia and sub-Saharan Africa. Secular decline improves their position in East Asia. I show that the age gap at marriage will not adjust in order to equilibrate the marriage market in response to persistent imbalances, even though it accommodates transitory shocks. This implies large distributional consequences on the sexes, and may increase dowries. I also analyse transition dynamics between steady states and examine how age gaps and transfers adjust in the transition.
02 Jul 2019

Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms

Chen C, Tian W, Yu M.

We examine how domestic distortions affect firms’ production strategies abroad by documenting two puzzling findings using Chinese firm-level data of manufacturing firms. First, private multinational corporations (MNCs) are less productive than state-owned MNCs, but they are more productive than state-owned enterprises overall. Second, there are disproportionately fewer state-owned MNCs than private MNCs. We build a model to rationalise these findings by showing that discrimination against private firms domestically incentivises them to produce abroad. The model shows that selection reversal is more pronounced in industries with more severe discrimination against private firms, which receives empirical support.
28 Jun 2019

Bias and Negligence with Freedom of Information

Argenziano R, Weeds H.

We analyse decision-making in the presence of Freedom of Information (FOI) rules. A decision-maker chooses whether to acquire costly information to inform his decision regarding a policy action. If information is not disclosed voluntarily a monitor may open a costly investigation, using FOI to access the information. A finding of biased decision-making or negligence in information acquisition generates a reward to the monitor and a penalty to the decision-maker. We find that strengthening FOI to reduce the cost of investigation may increase negligence without necessarily reducing bias. Moreover, increasing the reward for discovering negligence can paradoxically increase negligence in equilibrium.
28 Jun 2019

Can Helping the Sick Hurt the Able? Incentives, Information and Disruption in a Welfare Reform

Koenig F, Petrongolo B, Van Reenen J, et al.

The UK Jobcentre Plus reform sharpened bureaucratic incentives to help disability benefit recipients (relative to unemployment insurance recipients) into jobs. In the long run, the policy raised exits off diasability benefits by 10% and left unemployment outflows roughly unchanged, consistent with (i) beneficial effects of reorganising welfare offices for both groups, and (ii) a shift in bureaucrats' efforts towards getting disability benefit recipients into jobs relative to those on unemployment benefit. The policy accounted for about 30% of the decline in the aggregate disability rolls between 2003 and 2008. In the short run, however, we detect a reduction in unemployment exits and no effect on disability exits, suggesting important initial disruption effects from the big reorganisation. This highlights the difficulty of welfare reform as policymakers may focus on the short-run political costs rather than the long-run economic benefits.
27 Jun 2019

Size Matters: How Over-Investments Relax Liquidity Constraints in Relational Contracts

Englmaier F, Fahn M.

The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylised fact and most have focused on a fundamental agency problem between shareholders and managers. This article shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce and if it faces a volatile environment, then investments into general, non-relationship-specific capital can increase the efficiency of a firm’s labour relations.
29 May 2019

Wage Compression within the Firm: Evidence from an Indexation Scheme

Leonardi M, Pellizzari M, Tabasso D.

We revisit the role of labour market institutions by showing how they affect the sharing of firm-specific rents between employers and employees. We look at an Italian wage indexation mechanism (‘Scala Mobile’) that compressed the distribution of wages, imposing real wage increases at the bottom of the distribution. After developing a simplified version of a search model with intra-firm bargaining and on-the-job search, we document that skilled workers received lower wage adjustments when employed at firms with many unskilled workers and they tended to move towards more skill-intensive firms. Moreover, the system drove the least skill-intensive firms out of the market.
29 May 2019

Is China's Pollution the Culprit for the Choking of South Korea? Evidence from the Asian Dust

Jia R, Ku H.

This paper studies the impact of air pollution spillover from China to South Korea. To isolate the effects of cross-border pollution spillover from that of locally generated pollution, we exploit within-South Korea and over-time variation in the incidence of Asian dust—a meteorological phenomenon exogenous to district–time cells in South Korea—together with temporal variations in China's air quality. We find that conditional on being exposed to Asian dust, increased pollution in China leads to increased mortality from respiratory and cardiovascular diseases in South Korean districts, with the most vulnerable being the elderly and children under five.