Economics Research in the Department

“The Collapse of International Trade during the 2008–09 Crisis: In Search of the Smoking Gun”
Andrei A. Levchenko, Logan T. Lewis , and Linda L. Tesar
IMF Economic Review (2010) 58: 214–253.
One of the most striking aspects of the recent recession is the collapse in international trade. This paper uses disaggregated data on U.S. imports and exports to shed light on the anatomy of this collapse. The paper finds that the recent reduction in trade relative to overall economic activity is far larger than in previous downturns. Information on quantities and prices of both domestic absorption and imports reveals a 40 percent shortfall in imports, relative to what would be predicted by a simple import demand relationship. In a sample of imports and exports disaggregated at the 6-digit NAICS level, the paper finds that sectors used as intermediate inputs experienced significantly higher percentage reductions in both imports and exports. It also finds support for compositional effects: sectors with larger reductions in domestic output had larger drops in trade. By contrast, the paper finds no support for the hypothesis that trade credit played a role in the recent trade collapse.

“Why Agnostic Sign Restrictions Are Not Enough: Understanding the Dynamics of Oil Market VAR Models” about this research
Lutz Kilian
and Daniel P. Murphy
Journal of the European Economic Association (forthcoming)
Sign restrictions on the responses generated by structural vector autoregressive models have been proposed as an alternative approach to the use of exclusion restrictions on the impact multiplier matrix. In recent years such models have been increasingly used to identify demand and supply shocks in the market for crude oil. We demonstrate that sign restrictions alone are insufficient to infer the responses of the real price of oil to such shocks. Moreover, the conventional assumption that all admissible models are equally likely is routinely violated in oil market models, calling into question the use of posterior median responses to characterize the responses to structural shocks. When combining sign restrictions with additional empirically plausible bounds on the magnitude of the short-run oil supply elasticity and on the impact response of real activity, however, it is possible to reduce the set of admissible model solutions to a small number of qualitatively similar estimates. The resulting model estimates are broadly consistent with earlier results regarding the relative importance of demand and supply shocks for the real price of oil based on structural VAR models identified by exclusion restrictions, but imply very different dynamics from the posterior median responses in VAR models based on sign restrictions only.

“Ownership Consolidation and Product Characteristics: A Study of the U.S. Daily Newspaper Market”
Ying Fan (December 6, 2011)
This paper develops a structural model of newspaper markets to analyze the effects of ownership consolidation, taking into account not only firms' price adjustments but also the adjust-ments in newspaper characteristics. A new data set on newspaper prices and characteristics is used to estimate the model. The paper then simulates the effect of a merger in the Minneapolis newspaper market and studies how welfare effects of mergers vary with market characteristics. It finds that ignoring adjustments of product characteristics causes substantial differences in estimated effects of mergers.

"Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality"
Maximilian Auffhammer and Ryan Kellogg
American Economic Review 101 (October 2011), 2687-2722
This paper examines whether U.S. gasoline content regulations, which impose substantial costs on consumers, have successfully reduced ozone pollution. We take advantage of spatial and temporal variation in the regulations' implementation to show that federal gasoline standards, which allow refiners flexibility in choosing a compliance mechanism, did not improve air quality. This outcome occurred because minimizing the cost of compliance does not reduce emissions of those compounds most prone to forming ozone. In California, however, we find that precisely targeted, inflexible regulations requiring the removal of particularly harmful compounds significantly improved air quality.

“Conditional Cash Transfer Programs, Credit Constraints, and Migration”
Manuela Angelucci (October 2011)
This paper models the effect of anti-poverty conditional cash transfer programs on labor migration. Their effect on migration depends on both the size and type of transfers. Conditional transfers, where the potential recipient has to comply with some requirement in order to qualify for eligibility, may decrease contemporaneous migration for some households, but increase future migration for others. In contrast, unconditional grants may increase current migration.

“Entry under Subsidy: the Competitive U.S. Local Telephone Industry”
Ying Fan and Mo Xiaoz (August 26, 2011)
The 1996 Telecommunication Act introduces entry into an originally monopolistic U.S. local telephone industry. As competitors cherry-pick rich, urban markets to enter, the Act calls for an explicit and pro-competitive subsidy policy to narrow the potential divide in telecom infrastructure. To study relevant economic factors in the design of such a policy, we estimate a dynamic oligopoly entry game using data on the competitors' entry decisions into local markets. As we observe the identities of potential entrants and their waiting time before actual entry, we allow these firms to be heterogeneous, long-run players who have the option value of waiting. We find that both market- and firm-level heterogeneity play an important role in a potential entrant's local entry decisions. Moreover, these entry decisions are significantly influenced by the consideration of both current and future competition. Using structural estimates, we evaluate the effectiveness of different subsidy policies.

“U.S. Border Enforcement and the Net Flow of Mexican Illegal Migration”
Manuela Angelucci (July 29, 2011)
Angelucci investigates the effect of U.S. border enforcement on the net flow of Mexican undocumented migration, both of which have been considerably increasing in the last three decades. This effect is theoretically ambiguous, as increases in border controls deter prospective migrants from crossing the border illegally but lengthen the duration of current illegal migrations. The inflow and outflow of illegal Mexican migration respond to changes in border enforcement. The marginal effect of enforcement on the inflow increases with enforcement and is consistent with the hypothesis that tighter enforcement selects more productive migrants. This positive selection makes the outflow sensitivity to marginal enforcement changes comparatively more stable over time. A marginal increase in border controls increases the stock of undocumented migrants between 1972 and 1986, has either no effect or a small and negative effect between 1987 and 1996, and has a larger and significant negative effect between 1997 and 2003.

“Social Security Health Insurance for the Informal Sector in Nicaragua: A Randomized Evaluation”
Rebecca L. Thornton, Laurel E. Hatt, Erica M. Field, Mursaleena A. Islam, Freddy Solís Diaz, Martha Azucena González
Health Economics (2010) 19: 181–206
This article presents the results from an experimental evaluation of a voluntary health insurance program for informal sector workers in Nicaragua. Costs of the premiums as well as enrollment location were randomly allocated. Overall, take-up of the program was low, with only 20% enrollment. Program costs and streamlined bureaucratic procedures were important determinants of enrollment. Participation of local microfinance institutions had a slight negative effect on enrollment. One year later, those who received insurance substituted toward services at covered facilities and total out-of-pocket expenditures fell. However, total expenditures fell by less than the insurance premiums. We find no evidence of an increase in health-care utilization among the newly insured. We also find very low retention rates after the expiration of the subsidy, with less than 10% of enrollees still enrolled after one year. To shed light on the findings from the experimental results, we present qualitative evidence of institutional and contextual factors that limited the success of this program

“The Welfare Cost of Unreliable Water Service”
Steve Salant, Lucas Davis, Brian Baisa, and William Wilcox
Journal of Development Economics (2010) 92: 1-12, May 2010
Throughout the developing world, many water distribution systems are unreliable. As a result, it becomes necessary for each household to store its own water as a hedge against this uncertainty. Since arrivals of water are not synchronized across households, serious distributional inefficiencies arise. We develop a model describing the optimal intertemporal depletion of each household's private water storage if it is uncertain when water will next arrive to replenish supplies. The model is calibrated using survey data from Mexico City, a city where many households store water in sealed rooftop tanks known as tinacos. The calibrated model is used to evaluate the potential welfare gains that would occur if alternative modes of water provision were implemented. We estimate that most of the potential distributional inefficiencies can be eliminated simply by making the frequency of deliveries the same across households which now face haphazard deliveries. This would require neither costly investments in infrastructure nor price increases.