Economics Department Working Paper Series

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https://hdl.handle.net/20.500.14394/338

The Economics Department Working Paper Series is a pre-publication outlet for research produced by Department faculty and graduate students.

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Implicit Coordination in Sellers' Inflation: How Cost Shocks Facilitate Price Hikes
(2024) Weber, Isabella Maria; Wasner, Evan; Lang, Markus; Braun, Benjamin; van 't Klooster, Jens
Supply shocks are now widely recognized as a driver of the recent inflation bout, but the role of firms’ pricing strategies in propagating input cost shocks remains contested. In this paper, we review the state of the academic debate over sellers’ inflation and assess whether, in line with this theory, economy-wide cost shocks have functioned as an implicit coordination mechanism for firms to hike prices. We use a dataset containing 138,962 corporate earnings call transcripts of 4,823 stock-market listed U.S. corporations from the period 2007-Q1 to 2022-Q2 to con- duct sentiment analysis via both dictionary-based natural language processing and a large language model approach. We find that large input price shocks (as well as their co-occurrence with supply constraints) correlate with positive sentiments expressed in executives’ statements about cost increases. Qualitative analysis pro- vides further insights into the reasoning behind executives’ optimism regarding their ability to turn an economy-wide cost shock into an opportunity to raise prices and protect or even increase profits.
Distributional implications and share ownership of record oil and gas profits
(2024) Semieniuk, Gregor; Weber, Isabella Maria; Weaver, Iain; Wasner, Evan; Braun, Benjamin; Holden, Philip; Salas, Pablo; Mercure, Jean-Francois; Edwards, Neil R.
The 2022 oil and gas crisis resulted in record fossil-fuel profits globally that rehabilitated the oil and gas industry, obstruct the energy transition and contributed to inflation. We analyse the size and the distribution of financial beneficiaries of these unprecedented profits across countries and across wealth groups within the United States, using company income statements and comprehensive ownership data, to construct a global network of shareholdings with 397,619 nodes. We estimate that globally, net income in publicly listed oil and gas companies reached US$916 billion in 2022. The United States was the biggest beneficiary receiving US$301 billion in fossil fuel profits both from domestic extraction and through global shareholding, more than U.S. investments of US$267 billion in the low carbon economy that year. Analyzing the U.S. distribution including privately held US companies, 51% of profits went to the wealthiest 1%, predominantly through direct shareholdings and private company ownership. In contrast the bottom 50% only received 1%. The incremental fossil-fuel profits in 2022 over those in 2021 were enough to increase the disposable income of the wealthiest Americans several percent and compensate a substantial part of their purchasing power loss from inflation that year, thereby exacerbating inflation inequality. Record fossil-fuel profits also reinforce existing racial and ethnic inequalities and inequalities between groups with different educational attainments. Our results also show that only a small share of overall profits benefits institutions that serve the wider public such as pension funds. We discuss how windfall profits taxes could be used to both lower inequality and accelerate the energy transition as increasing geopolitical tensions and climate impacts portend continued volatility in oil and gas markets.
A Note on the Theory and Empirics of the Goodwin Model
(2024) Basu, Deepankar
I discuss some theoretical and empirical points about the Goodwin model. First, I offer a simple proof that solution trajectories around the stable critical point in the Goodwin model are closed orbits but not limit cycles. Moreover, in a neighborhood of the stable critical point, the closed orbits are ellipses. Second, I compare the predictions of the Goodwin model with patterns observed in actual annual data for the U.S. economy for the period 1950-2019. I find that the predictions of the model regarding three key aspects of cycles-the amplitude, time period and the direction of motion-are fully or partially at variance with observed data.
Technical Change and the Rate of Profit in Classical-Marxian Models of Economic Growth
(2024) Basu, Deepankar
I study the effect of technical change on the equilibrium profit rate in Classical-Marxian models of economic growth with alternative closures. In each model, capitalists adopt a new technique of production only if it will increase the profit rate given their expectations about the movement of the real wage rate. The accumulation rate depends on a threshold rate of profit, below which capitalists do not invest. I consider three alternative closures: (a) a constant real wage rate (relevant for a labor surplus economy); (b) a constant wage share (relevant for an advanced capitalist economy with strong labor); and (c) a constant unemployment rate (relevant for an advanced capitalist economy with weak labor). For the model of the advanced capitalist economy with strong labor, the profit rate can fall after viable technical change irrespective of capitalists’ expectations about the trajectory of the real wage rate after technical change. For models of the labor surplus economy and the advanced capitalist economy with weak labor, the equilibrium rate of profit can fall after viable technical change only if capitalists’ choice of technique had been based on an expected fall in the real wage rate after technical change.
The Political Economy of Pragmatic Paranoia: The Strange Case of Pakistan
(2024) Razmi, Arslan
Pakistan's political economy has been characterized by some interesting and arguably unique features in recent decades. The combination of two stands out, in particular: (1) lifetime uncertainty for elected governments, and (2) a high degree of certainty that, due to reasons that are largely extraneous to popularity and policy performance, the incumbent party will not form the government in the next term. This paper argues, employing modified formal frameworks developed for other con- texts, that these features go a significant way in explaining why the economy has experienced dramatic cyclical fluctuations in internal and external macroeconomic indicators, especially official foreign exchange reserve stocks. In addition, the analysis helps explain the consistent underinvestment in tax revenue-generation capacity. The existing "partisan" and "opportunistic" varieties of political business cycle models do not satisfactorily capture these features. The analysis, thus, extends this literature in new directions.
Employment and Distribution Effects of the Minimum Wage
(2010) Slonimczyk, Fabian; Skott, Peter
This paper analyzes the effects of the minimum wage on wage inequality, relative employment and over-education. Using an effciency wage model we show that over-education can be generated endogenously and that an increase in the minimum wage can raise both total and low-skill employment, and produce a fall in inequality. Evidence from the US suggests that these theoretical results are empirically relevant. The over-education rate has been increasing and our regression analysis suggests that the decrease in the minimum wage may have led to a deterioration of the employment and relative wage of low-skill workers.
Is There a Tendency for the Rate of Profit to Fall? Econometric Evidence for the U.S. Economy, 1948-2007
(2010) Basu, Deepankar; Manolakos, Panayiotis T.
The law of the tendential fall in the rate of profit has been at the center of theoretical and empirical debates within Marxian political economy ever since the publication of Volume III of Capital. An important limitation of this literature is the absence of a comprehensive econometric analysis of the behaviour of the rate of profit. In this paper, we attempt to fill this lacuna in two ways. First, we investigate the time series properties of the profit rate series. The evidence suggests that the rate of profit behaves like a random walk and exhibits "long waves" interestingly correlated with major epochs of U.S. economic history. In the second part, we test Marx's law of the tendential fall in the rate of profit with a novel econometric model that explicitly accounts for the counter-tendencies. We find evidence of a long-run downward trend in the general profit rate for the US economy for the period 1948-2007.
Cyclical Patterns of Employment, Utilization and Profitability
(2010) Zipperer, Ben; Skott, Peter
The interaction between income distribution, accumulation, employment and the utilization of capital is central to macroeconomic models in the `heterodox' tradition. This paper examines the stylized pattern of these variables using US data for the period after 1948. We look at the trends and cycles in individual time series and examine the bivariate cycical patterns among the variables.
A Concise History of Exchange Rate Regimes in Latin America
(2010) Frenkel, Roberto; Rapetti, Martin
The paper analyzes exchange rate regimes implemented by the major Latin American countries since the Second World War, with special attention on the period of the second globalization process beginning in the 1970s. The analysis follows a historical narrative aiming to provide an understanding of the domestic and external circumstances in which various regimes were adopted. A simple conceptual framework is developed in order to emphasize how the exchange rate regime may affect key nominal and real variables in a small open economy. After an overview of the main trends followed by the major countries in the region over the last 60 years, the paper focuses on regimes that were implemented 1) with stabilization purposes (nominal anchors) and 2) with the aim of targeting the level of the real exchange rate. These two sections analyze in greater detail some experiences illustrating the pros and cons of both strategies. The paper closes with an assessment about exchange rate experiences in Latin America.
Social Preferences and Public Economics: Mechanism design when social preferences depend on incentives
(2008) Bowles, Samuel; Hwang, Sung-Ha
Social preferences such as altruism, reciprocity, intrinsic motivation and a desire to uphold ethical norms are essential to good government, often facilitating socially desirable allocations that would be unattainable by incentives that appeal solely to self-interest. But experimental and other evidence indicates that conventional economic incentives and social preferences may be either complements or substitutes, explicit incentives crowding in or crowding out social preferences. We investigate the design of optimal incentives to contribute to a public good under these conditions. We identify cases in which a sophisticated planner cognizant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a naive planner who assumes they are absent.
Economic Explanation, Ordinality and the Adequacy of Analytic Specification
(2004) Katzner, Donald W.; Skott, Peter
This paper examines the implicit links between models containing ordinal variables and their underlying unquantified counterparts that are necessary to make the former viable theoretical constructions. It is argued that when the underlying unquantified structure is unknown, the permissible transformations of scale applicable to the ordinal variables have to be restricted beyond that which is permitted by dint of the ordinality itself. The possibility of an underlying structure being known but unspecified is also considered. In the case of the efficiency wage model, the only usable transformations of the ordinal effort scale are those which are multiples of each other.
Green and Brown? Globalization and The Environment
(2004) Boyce, James K.
Globalization – viewed as a process of economic integration that embraces governance as well as markets – could lead to worldwide convergence toward higher or lower environmental quality, or to environmental polarization in which the ‘greening’ of the global North is accompanied by the ‘browning’ of the global South. The outcome will not be dictated by an inexorable logic. Rather it will depend on how the opportunities created by globalization alter balances of power within countries and among them.
Financial Development, Financial Structure, and Domestic Investment: International Evidence
(2003) Ndikumana, Léonce
Does it matter for domestic investment whether a country’s financial system is bank based or stock-market based? This paper posits that financial intermediation affects domestic investment notably by alleviating financing constraints, allowing firms to increase investment in response to increased demand for output. The key result is that the structure of the financial system has no independent effect on investment, in the sense that it does not enhance the response of investment to changes in output, while financial development makes investment more responsive to output growth. Consequently, rather than promoting a particular type of financial structure, countries should implement policies that reduce transactions costs in financial intermediation and enforce creditor and investor rights. This will facilitate the development of banks and stock markets, which will stimulate domestic investment.
Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries
(2002) Ndikumana, Léonce; Boyce, James K.
We investigate the determinants of capital flight from 30 sub-Saharan African countries, including 24 countries classified as severely indebted low-income countries, for the period 1970-1996. The econometric analysis reveals that external borrowing is positively and significantly related to capital flight, suggesting that to a large extent capital flight is debt-fueled. We estimate that for every dollar of external borrowing in the region, roughly 80 cents flowed back as capital flight in the same year. Capital flight also exhibits a high degree of persistence in the sense that past capital flight is correlated with current and future capital flight. The growth rate differential between the African country and its OECD trading partners is negatively related to capital flight. We also explore the effects of several other factors – inflation, fiscal policy indicators, the interest rate differential, exchange rate appreciation, financial development, and indicators of the political environment and governance. We discuss the implications of the results for debt relief and for policies aimed at preventing capital flight and attracting private capital held abroad.
What Determines Cartel Success?
(2002) Levenstein, Margaret C.; Suslow, Valerie Y.
International Cartel Enforcement: Lessons from the 1990s
(2001) Evenett, Simon J.; Levenstein, Margaret C.; Suslow, Valerie Y.
The enforcement record of the 1990s has demonstrated that private international cartels are neither relics of the past nor do they always fall quickly under the weight of their own incentive problems. Of a sample of forty such cartels prosecuted by the United States and European Union in the 1990s, twenty-four lasted at least four years. And for the twenty cartels in this sample where sales data are available, the annual worldwide turnover in the affected products exceeded US$30billion. Prevailing national competition policies are oriented towards addressing harm done in domestic markets, and in some cases merely prohibit cartels without taking strong enforcement measures. In this paper we propose a series of reforms to national policies and steps to enhance international cooperation that will strengthen the deterrents against international cartelization. Furthermore, aggressive prosecution of cartels must be complemented by vigilance in other areas of competition policy. If not, firms will respond to the enhanced deterrents to cartelization by merging or by taking other measures that lessen competitive pressures.
Incentives and Equity Under Standards-Based Reform
(2000) Betts, Julian R.; Costrell, Robert M.
The paper considers theoretical and empirical evidence on the impact of standards-based school reform. Our theoretical synthesis distinguishes between sorting and incentive effects of high standards, and spells out the potential tradeoffs and complementarities between enhancing efficiency and equity in student achievement. Differentiated credentials can be helpful in ameliorating tradeoffs, provided that distinct signals are clearly understood, especially between cognitive and non-cognitive skills. The paper reviews trends in state-level school accountability systems, and examines empirical evidence on the impact of increased standards and expectations on student achievement. Finally, the paper reviews some of the practical challenges facing the standards movement.
The Real Exchange Rate as an Instrument of Development Policy
(2009) Razmi, Arslan; Rapetti, Martin; Skott, Peter
Growth is endogenous in small open economies with substantial hidden or open unemployment, even under constant returns to scale. Growth promoting policies, however, have implications for the balance of trade, and two instruments are needed in order to achieve targets for both the growth rate and the balance of trade. The real exchange rate can serve as one of those instruments. Distributional con‡ict imposes constraints on real exchange rate policies, but in LDCs the main exchange-rate related distributional con‡ict may be over the sectoral distribution of pro…ts, rather than the real wage. This paper develops a model along these lines and presents empirical support for the hypothesis that real exchange rate undervaluations are a useful instrument for the pursuit of accumulation and growth in low income countries.
Optimal Parochialism: The Dynamics of Trust and Exclusion in Networks
(2000) Bowles, Samuel; Gintis, Herbert
Networks such as ethnic credit associations, close-knit residential neighborhoods, ‘old boy’networks, and ethnically linked businesses play an important role in economic life but have been little studied by economists. These networks are often supported by cultural distinctions between insiders and outsiders and engage in exclusionary practices which we call parochialism. We provide an economic analysis of parochial networks in which the losses incurred by not trading with outsiders are offset by an enhanced ability to enforce informal contracts by fostering trust among insiders. We first model one-shot social interactions among self-regarding agents, demonstrating that trust (i.e., cooperating without using information about one’s trading partner) is a best response in a mixed-strategy Nash equilibrium if the quality of information about one’s partner is sufficiently high. We show that since larger networks have lower quality information about specific individuals and greater trading opportunities, there may be an optimal (payoff-maximizing) network size. We then model the growth and decline of networks, as well as their equilibrium size and number. We show that in the absence of parochialism, networks may not exist, and the appropriate level of parochialism may implement an optimal network size. Finally, we explore the welfare implications and reasons for the evolutionary success of exclusion on parochial and other grounds.
The Determinants of Earnings: Skills, Preferences, and Schooling
(2000) Bowles, Samuel; Gintis, Herbert; Osborne, Melissa

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