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Economics Working Papers, 2013

Copies may be downloaded on pdf, or hard copies may be requested from Joshua Hall, Working Paper Coordinator.


Author(s): Feng Yao and Junsen Zhang
Title: "Efficient Kernel-Based Semiparametric IV Estimation With An Application To Resolving A Puzzle On The Estimates Of The Return To Schooling."
Abstract: An interesting puzzle in estimating the effect of education on labor market earnings (Card (2001)) is that the 2SLS estimate for the return to schooling typically exceeds the OLS estimate, but the 2SLS estimate is fairly imprecise. We provide a new explanation that it could be due to the restrictive linear functional form specification on the control variables and the reduced form. For the parameters of endogenous regressors, we propose two kernel-based semiparametric IV estimators that relax the tight functional form assumption on the control variables and the reduced form. They have explicit algebraic structures and are easily implemented without numerical optimizations. We show that they are consistent, asymptotically normally distributed, and reach the semiparametric efficiency bound. A Monte Carlo study demonstrates that our estimators perform well in finite samples. We apply the proposed estimators to estimate the return to schooling in Card (1995). We find that the semiparametric estimates of the return to schooling are much smaller and more precise than the 2SLS estimate, and the difference largely comes from the misspecification in the linear reduced form.


Author(s): Joshua C. Hall
Title: "Does School District And Municipal Border Congruence Matter? A Spatial Hedonic Approach"
Abstract: Research on zoning typically assumes city planners aim to maximize housing prices with their land use decisions, either explicitly for public choice reasons or implicitly through the approval of land uses that create local net benefits. Noncongruence of school district and municipality borders severs the link between costs and benefits in the eyes of the median voter, however, which could result in excessive residential development and fiscal externalities that lowers property values. This paper uses a hedonic approach to indirectly observe the presence of these externalities. Border congruency between school districts and municipalities in Ohio is measured using GIS data and matched with a data set of 56,717 home sales. The hedonic results indicate that noncongruence is associated with lower housing prices, while the degree of noncongruence is positively related. For most school districts, the negative effect of noncongruency dominates. My results are robust and consistent across different model specifications and empirical approaches.


Author(s): Arne Feddersen, Brad R. Humphreys, and Brian P. Soebbing
Title: "Sentiment Bias in National Basketball Association Betting"
Abstract: We develop evidence of bettors with sentiment bias in the betting market on National Basketball Association (NBA) games. We use novel measures of team popularity, arena capacity-utilization and team all star votes received, as proxies for the presence of biased investors. Analysis of point spreads and bet outcomes for more than 33,000 NBA games played in 1981-2012 shows that bookmakers offer favorable point spreads on games involving popular teams, an outcome consistent with sentiment bias. These favorable point spreads do not translate into higher returns for informed bettors, suggesting that bookmakers shade point spreads to increase their profits.


Author(s): Roger D. Congleton
Title: "On the Inevitability of Divided Government and Improbability of a Complete Separation of Powers"
Abstract: This paper provides a tightly written overview and modest extension of the constitutional exchange and evolution model developed in Perfecting Parliament and uses that approach to analyze the division of authority that one would expect to see in contempo-rary constitutional governments. The analysis suggests that constitutions tend to be written, based on the king and council template, and buttressed by a more or less independent court system. Moreover, it suggests that constitutions change at the margin through time as constitutional bargaining takes place. This suggests that a complete separation of power is unlikely to be observed in the long run. Empirical evidence developed from the IAEP data base is consistent with these predictions.


Author(s): Carlos Martins-Filho, Feng Yao, and Maximo Torero
Title: "Nonparametric Estimation of Conditional Value-at-Risk and Expected Shortfall Based on Extreme Value Theory"
Abstract: We propose nonparametric estimators for conditional value-at-risk (VaR) and expected shortfall (ES) associated with conditional distributions of a series of returns on a financial asset. The return series and the conditioning covariates, which may include lagged returns and other exogenous variables, are assumed to be strong mixing and follow a fully nonparametric conditional location-scale model. First stage nonparametric estimators for location and scale are combined with a generalized Pareto approximation for distribution tails proposed by Pickands (1975) to give final estimators for conditional VaR and ES. We provide asymptotic characterizations of the proposed estimators and present the results of a Monte Carlo study that sheds light on their finite sample performance. Empirical viability of the model and estimators is investigated through a backtesting exercise using returns on future contracts for five agricultural commodities.


Author(s): Joseph Calhoun and Joshua C. Hall
Title: "Data Envelopment Analysis of Relative Efficiencies of Public and Private Institutions of Higher Learning"
Abstract: There has been considerable public debate surrounding the efficiency of higher education in the United States. Using Data Envelopment Analysis, we look at the efficiency of a majority of the institutions of higher learning in the United States. Using two different approaches, we find some evidence that private institutions of higher learning are more efficient than public ones. In particular, masters and bachelors-granting institutions with unrestricted revenue greater than 85% are more efficient than those with less than 85%. Public institutions tend to have more restricted funding, suggesting that their stakeholders constrain them from operating on the frontier.


Author(s): Arne Federsen, Brad R. Humphreys, and Brian P. Soebbing
Title: "Sentiment Bias and Asset Prices: Evidence from Sports Betting Markets and Social Media"
Abstract: Previous research using attendance-based proxies for the number of investors with sentiment bias supported the presence of investor sentiment in sports betting markets. We use data from social media (Facebook \Likes") to proxy for participants with investor sentiment and analyze variation in prices set by bookmakers for evidence of influence from investor sentiment. Based on prices and outcomes over two seasons in seven professional sports leagues in Europe and North America, we develop new evidence that asset prices reflect the presence of investor sentiment in these markets, or that bookmakers believe they exist, by offering favorable betting lines for popular teams. Favorable prices do not translate into a higher probability of winning a bet.


Author(s): Roger D. Congleton
Title: "The Contractarian Constitutional Political Economy of James Buchanan"
Abstract: This paper attempts to outline and summarize the main body of work on one strand of James Buchanan's work, constitutional political economy. The grounding ideas and inferences of Buchanan's approach can be summarized as follows: (a) The appropriate method for analyzing and understanding social phenomena is the individual. (b) There are often mutual gains that can only be realized through collective action. (c) Collective action produces both property right systems (civil law) and collective decision-making systems (political constitutions). (d) One cannot know beforehand the ex-act consequences of rules, nor can one read the minds of those affected by those rules. (e) Every individual counts, so the legitimacy of collective action can only be assured by decision procedures grounded in unanimity. (f) Every agreement that meets the unanimity criteria is, by definition, an improvement. (g) However, the legitimacy of collective action in general and constitutional governance in particular requires that individuals be fundamentally equal in their roles as citizens, both at the constitutional level of choice and in the civil society framed by the constitution chosen. This paper shows how these ideas emerged in Buchanan's research and are used to develop a very rich constitutional political economy.


Author(s): Terence Tai-Leung Chong and Feng Yao
Title: "The Debt-Equity Choice of Japanese Firms"
Abstract: Prior studies on the debt-equity choice of firms focus on capital market oriented economies. This paper examines whether firms in Japan, the world's largest bank-oriented economy, adjust their debt-equity choice towards the target. We find that the leverage rations of Japanese firms do adjust slowly towards their target levels. The adjustment speed has dwindled after the Asian Financial Crisis. In contrast to existing literature, we show that an increase in tangible assets reduces the leverage ratio of firms in Japan. It is also found that the effect of financial deficit is persistent while the market timing effect is not.


Author(s): Pedro Bento
Title: "Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation"
Abstract: I incorporate an insight of Friedrich Hayek - that competition allows a thousand flowers to bloom, and discovers the best among them - into a model of Schumpeterian innovation. Firms face uncertainty about the optimal direction of innovation, so more innovations implies a higher expected value of the `best' innovation. The model accounts for two seemingly contradictory relationships reported in recent empirical studies - a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. Notwithstanding the positive relationship between competition and growth, I find antitrust policy reduces industry-level growth.


Author(s): Pedro Bento
Title: "Niche Firms, Mass Markets, and Income Across Countries: Accounting for the Impact of Entry Costs"
Abstract: I develop a model of monopolistic competition in which I distinguish between niche markets and mass markets, in the spirit of Holmes and Stevens (2013). Firms choose between entering a small niche market with high markups or a large mass market with low markups. Entry costs have a much greater impact on output in the niche market as the gains to specialization are high, relative to the mass market where varieties are highly substitutable. Calibrated to match data from U.S. manufacturing, the model generates an elasticity of total factor productivity with respect to entry costs more than twice that in a model that abstracts from heterogeneous markets. I use data on entry costs across countries to show entry costs alone can account for half of the cross-country variation in productivity and income per worker, consistent with recent empirical estimates.


Author(s): Emily Chamlee-Wright and Joshua C. Hall
Title:  "Some Brief Syllabus Advice for the Young Economist"
Abstract: We touch on three major pieces of syllabus language that we think can help young economists manage their economics classes in a liberal arts environment. Like the writing of a constitution, it is not enough to just copy the words on the page in order for them to be effective. Instead they must fit the "facts on the ground" and the day-to-day experiences of students. If the syllabus talks about valuing everyone's time and yet the classroom experience does not reflect that, the syllabus language is useless. Like constitutions, however, syllabi are useful as a starting point for nurturing a mental model of the rigorous economics inquiry and discourse.


Author(s): Pedro Bento
Title:  "Patent Protection as a Tax on Competition and Innovation"
Abstract: I introduce patents into a general equilibrium model of innovation, where innovators choose between creating a new product market and competing in an existing market. Patent holders demand royalties from sequential innovators, but are constrained by the ability of innovators to work around patents. I show patent protection acts as a net tax on sequential innovators, reducing both competition and productivity growth. Calibrated to match moments from U.S. data, the model predicts that eliminating patent protection in the U.S. would generate a 23% increase in steady-state productivity growth as well as an increase in welfare equivalent to that from a 16% increase in annual consumption. I test several implications of the model using both U.S. and cross-country data. Consistent with the model, the data suggests an increase in the strength of patent protection reduces both productivity growth and the average quality of innovations.