Little is known about how adverse shocks spread through production networks. This column presents quantitative evidence on inter-firm contagion using natural disasters as exogenous instruments. Adverse shocks to upstream suppliers lower sales growth and valuation of a downstream firm.
Job Market Papers
JMP Vox presents columns based on the "Job Market Papers" of leading young scholars - the economists who are currently in contention for the world's most prestigious assistant professorships, post-doctoral posts, and entry-level research positions in the public sector.
Workers who suffer job displacement experience surprisingly large and persistent earnings losses. However, standard labour market models fail to explain such a phenomenon. This column explains the persistence of workers’ earnings losses by arguing that displaced workers face higher separation probabilities in new jobs, and take substantial time to find their ideal job. The framework also matches empirical findings on the shares of average earnings losses following displacement that are due to reduced employment and lower wages.
The interest rate derivatives market has grown tenfold over the past 15 years. These contracts are mostly held by commercial banks, raising financial stability concerns. This column discusses how hedging using derivatives affects bank lending and the occurrence of bank defaults.
We know that financial incentives can affect behaviour by increasing the payoff to completing a task. With incomplete information about a job, financial incentives can also affect potential applicants’ behaviour by conveying a signal about the nature of the job. In the context of a recruitment campaign for a new position, this column presents the first empirical evidence of the signal conveyed by incentives and its strong effect on the selection of workers and the performance of the organisation.
Illness shocks can decimate the economic opportunities of the poor. Women’s employment opportunities are particularly constrained by illness because their time is often diverted to the care of sick children. This column argues that the provision of publicly subsidised health insurance in Mexico has led to an increase in labour supply. This increase has occurred in part because insurance has enabled women to reallocate time away from caregiving tasks to work in the labour market. These findings suggest that health insurance does more than improve health: it also empowers women.
In setting tax levels, governments around the world must predict how consumers will respond. This is a surprisingly difficult problem to solve – consumer preferences vary significantly across individuals and cannot be directly observed. This column suggests that these challenges for accurate demand prediction are best overcome using nonparametric methods, and outlines a flexible approach for recovering the distribution of consumer preferences that can be used to predict individual demand responses as required for policy analysis.
The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. This column examines the trade-off between finance and entrepreneurship, and links the growth of finance to rising wealth inequality. Although financial intermediation helps allocate capital efficiently, people choosing a career in finance do not internalise the negative effect on the pool of talented entrepreneurs. This mechanism can explain the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.
For over a century, economists have expressed concerns with short-termism. In particular, long-term growth and investment could be sacrificed for the sake of short-term profit targets. This column examines short-termism using US firm level data on R&D and earnings targets. The author develops a macroeconomic model of long-term growth with short-term manager incentives. Managers appear to manipulate R&D to meet profit targets. The theoretical analysis suggests that such short-termism leads to 1% lower firm value together with around 0.1% lower long-term growth for the economy each year.
The effect of trade protection of infant industries in developing countries on their long-term growth has been widely debated. This column provides evidence on this topic using a novel dataset from the Napoleonic blockade against British trade. The author analyses the effect of this temporary trade protection on the cotton spinning as an infant industry, employing within-country variation in the trade protection. In the short run, better protected regions increased their production capacity in the infant industry. There is a persistence of this productivity in the long run as well.
The Great Recession was marked by disruptions to the supply of credit to firms and households. But little is known about how much supply shocks to household credit actually contributed to employment losses. This column uses data on US counties to examine the causal relationship running from the supply of household credit to employment during the recession. The author concludes that contractions in household credit supply caused substantial employment losses.
Rural policies that affect migration to the cities may have significant impact on urban labour markets. However, there is little empirical evidence on the magnitude of these effects. This column argues that India’s rural employment guarantee – the world’s largest workfare programme – reduces short-term migration from rural areas. At the same time, it increases wages of urban unskilled workers.
The Global Financial Crisis has ignited the debate about a European banking union. Whereas most research focuses on the single supervision mechanism for European banks, this column analyses the advantages and disadvantages of having a single resolution mechanism. If banks hold opaque assets, local resolution authorities can still play an important role in the new regulatory framework.
There is an ongoing debate among economists whether international trade contributes to business cycles synchronisation. So far, causal evidence has been limited. This column presents new research on the role of multinational firms in the transmission of shocks. The authors use a rich firm-level dataset from the US Census Bureau and the 2011 Japanese earthquake/tsunami as a natural experiment. They find that US firms with high dependence on Japanese inputs suffered large output losses following the earthquake. Global supply chains, therefore, play an important role in the cross-country transmission of shocks.
The pay-as-bid and the uniform-price auction formats are used to allocate trillions of dollars of goods annually. However, which of these formats yields better outcomes is an open question. This column discusses recent advances in the understanding of these auctions in the context of an ongoing debate regarding the optimal auction format.
Many lenders hire loan officers to screen soft information that may otherwise be ignored by credit scoring. However, in addition to their compensation costs, loan officers may have characteristics, such as being overly cautious, that could distort their decisions. This column documents the performance of loan officers using data from a Chinese lender. Despite the distortions, the loan officers contribute three times their pay in annual profits above what the lender could have earned by itself, even with the benefit of hindsight.