Economics - Theses
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Essays in public economics: The effects of major policies on old and young Australians
This thesis consists of three essays examining the causal effects of major policy changes affecting old and young Australians. In the first essay, I examine the distributional effects of a reform in 1994 that gradually increased women’s eligibility age for the retirement pension from 60 to 65. Using detailed longitudinal data, I find strong negative effects on household incomes for low to middle income households but little impact on households in the top half of the distribution. These unequal impacts meant that, among households containing older women, the reform increased relative poverty rates by 33 to 39 percent and inequality measures by 12 to 15 percent. These results demonstrate that increases in pension-eligibility ages, which are occurring in many countries as the population ages, can have strong regressive effects. In the second essay, I study the impact of the same reform on female labour force participation. Specifically, I replicate and extend the work of Atalay and Barrett (Review of Economics and Statistics 2015, 97(1): 71–87). Using repeated household surveys and a differences-in-differences design in which male cohorts form the comparison group, Atalay and Barrett estimate that the reform increased female participation rates by 12 percentage points. I successfully replicate this estimate but show, using earlier data, that the underlying parallel-trends assumption did not hold before the reform because of a strong female-specific participation trend across cohorts. Accounting for this trend, the estimated effect of the reform on female participation falls by two-thirds and becomes statistically insignificant at conventional levels. In the third essay, I focus on a policy affecting much younger adults. Specifically, I examine the effects of a road-safety restriction in New South Wales, Australia that prohibits probationary drivers from driving late at night with multiple passengers. Using linked administrative data on drivers’ licences and crashes, I estimate that the restriction caused a 57 percent reduction in late-night crashes involving probationary drivers with multiple passengers. Interestingly, the decline persists after the probation period, albeit in a weaker manner. This appears to result from a persistent reduction in late-night driving with passengers, which suggests that long-term driving habits can be shaped by such restrictions.
Empirical studies of consumer search and market power
This thesis explores the interplay of search frictions and market power. In the first essay, we study how prices are negotiated between consumers and firms. In the electricity market that we study, with competitive retailers, fixed and variable charges vary widely across consumers. We implement an audit study to identify the sources of price dispersion. We create a call centre staffed by actors that call real call centres to obtain rates for fictitious consumers with experimentally-assigned combinations of consumer characteristics. We find that of offline search leads to larger discounts than online search. Firms reduce their profit margins by 30% for call-in consumers who are informed about and who negotiate using low reference prices. We also document cross-sectional price discrimination between new consumers in a market and existing consumers. Holding price informedness and other consumer characteristics fixed, firms are less willing to negotiate lower prices with new arrivals than with existing clients of rival firms. My second essay investigates the impact of a mandatory information disclosure policy on market competition in the retail gasoline context. Information disclosure policies enhance search and are implemented with the aims of increasing demand elasticities and creating competition. However, if price transparency also makes it easier for firms to monitor their rivals’ behaviour, this raises concerns about tacit collusion. As such, the equilibrium impact on competition depends on which effect dominates. My study shows that the price disclosure policy leads to margin-enhancing effects in small regional markets. Digging deeper, I find that these margin-enhancing effects are directly associated with an equilibrium price transition, where a dominant firm uses price leadership to communicate their intention to transit from a price cycle equilibrium to a more profitable fixed price equilibrium. This transition, which occurred immediately after the information disclosure policy was introduced, suggests that firms were potentially using the platform to coordinate with each other. The final essay investigates how consumer search on price transparency platforms varies across socio-economic groups. In recent years, there has been a push for demand-side policies that aim to help consumers, especially disadvantaged households, make more informed decisions. However, it is not well-known who these initiatives benefit most. Therefore, this essay investigates how users on a price transparency platform who belong to different socio-economic backgrounds respond to changes in price dispersion. In the context of retail gasoline, my analysis reveals heterogeneous search responses to changes in price dispersion across socio-economic groups. In particular, I find that users who get the most value from search relative to income, such as the most vulnerable households, are least engaged in search.
Input-output linkages in growth and development
Do input-output linkages impact growth and development? This dissertation provides three main chapters studying the role of input-output linkages in structural change and productivity measurement. I find that (i) input-output linkages offer a new mechanism to account for structural change, which therefore complements the structural change literature; (ii) input-output linkages affect productivity measurement, particularly impact sector-level productivity measurement. Chapter 2 presents new evidence and mechanism of input-output linkages in structural change. Sectors with a larger growth of supply (forward) linkages of intermediate inputs absorb more labor to satisfy the rising demand for inputs sourcing from the downstream sectors. Sectors with a larger growth of demand (backward) linkages of intermediate inputs displace more labor, due to the increasing reliance on inputs sourcing rather than in-house production. Manufacturing sector increasingly sources services inputs, such as business services and management services, prompting a rise of services and a decline of manufacturing. Motivated by the evidence and mechanism in Chapter 2, Chapter 3 develops a general equilibrium model and quantifies the new mechanism of input-output linkages in structural change. The model features endogenous input-output linkages, nonhomothetic constant-elasticity-of-substitution (CES) preferences and technology, and heterogeneous firms. The model is structurally calibrated to the World Input-Output Database which contains 35 major economies through 1995-2007. I find that (i) the supply-linkages effects are at least comparable to other mechanisms in the literature, such as the price effects due to the sector-biased technological change; (ii) the demand-linkages effects are less critical due to the stable use of intermediate inputs across years; (iii) about half of the structural change attributes to the rising comparative advantage for supplying intermediate inputs by the services sector relative to by the manufacturing sector. Chapter 4 studies the role of input-output linkages in productivity measurement. I construct two hypothetical economies in the model. In the input-output economy, sectors produce gross output by using both intermediate and primary inputs. In the value added economy, sectors produce value added by using only primary inputs. I compare the two economies. I find that (i) aggregate productivity is theoretically equivalent; (ii) sectoral productivity measurement are different for all sectors and countries; (iii) without taking input-output linkages into account, previous measures of productivity are biased.
Empirical studies on firm-level productivity and innovation
In Chapter 1, I define a novel concept of low productivity spells. Instead of treating productivity as a continuous variable, I define a low-productivity state as poor productivity growth over 2 years consecutively. This provides an alternative insight into understanding firms which pose a potential drag on aggregate productivity growth. Using a competing risk framework, I find that over the course of 1991--2014, the exposure of import competition from China had a significant and negative effect on the exit from these low-productivity spells into high-productivity performance for listed firms in the U.S. On the other hand, this import exposure had no effect on the same firms shutting down. Together, these imply that the growth in import penetration from China had the effect of trapping U.S. manufacturing firms in low-productivity spells for longer. In Chapter 2, I investigate the effect of the America Invents Act (AIA) in 2011 on the patents granted by small firm compared with large firms. In first constructing my dataset, I further bootstrap the algorithm proposed by Autor, Dorn, Hanson, Pisano and Shu (2017) in merging patent data from the United States Patents and Trademarks Office USPTO with firm-level data from COMPUSTAT to better correct for false positives and true negatives, as well as enabling it to be more replicable. With a difference-in-difference framework using de-trended patenting data, I find a negative effect by the AIA on patents granted to small firms compared with large firms. However, this effect appears to be driven primarily by the amount of cash holdings firms have. A triple-difference framework which includes cash holdings finds the AIA had no significant effect on the patents granted to small firms which are cash-poor compared with large firms which are also cash-poor. In Chapter 3, I examine the effect of Chinese import competition on innovation by U.S. manufacturing firms originally investigated by Autor, Dorn, Hanson, Pisano and Shu (2017) but within a framework that differentiates this effect between small and large firms. In addition, I also measure the innovation response by firms using patents granted to them instead of their patent applications per se. With a model without heterogeneous effects, I find that the import penetration growth from China had increased innovation on average by all U.S. manufacturing firms when innovation is measured by the patents granted each firm. In a model with heterogeneous effects, I find this effect to be insignificantly different for large firms compared with small firms, and for cash-rich firms compared with cash-poor firms.
Essays in macroeconomics
This thesis studies three essays in macroeconomics. The first study evaluates the welfare effects of trade in a setting with risk averse workers and uncertainty in labour market outcomes. We provide conditions under which a small change in relative prices due to trade reduces welfare in both a static as well as a dynamic economy. Using a dynamic model we quantify the set of prices that result in a welfare loss following trade. We also examine the welfare implications of large price changes due to trade. For a realistic calibration, the gains from trade exist but are smaller than in a world with risk neutral individuals. The second study examines the labour market impacts of an extension of unemployment insurance policy. Unemployment insurance benefits are typically extended during recessions. Existing research shows that this policy increases the unemployment rate, the average duration of unemployment and the long term unemployment rate. But less is known about why these changes occur. I construct a job search model with an endogenous participation decision to quantify the contributions of (i) search effort (ii) job selectivity and (iii) labour market attachment to changes in unemployment outcomes. In a model calibrated to the US economy, I show that following a permanent extension of benefits for 10 weeks the unemployment rate increases by about 0.4 percentage points. I find that increased participation accounts for about 50% of the increase, while reduced search effort and increased selectivity each explain about 25% of the increase. This finding suggests that labour market participation is the most important margin in driving changes in the unemployment rate. In the third study, I examine the relationship between income inequality, sovereign borrowing and default decisions. To this end, I extend the traditional endogenous sovereign default framework proposed by Eaton and Gersovitz (1981) to allow for ex-ante income heterogeneity and a tax/transfer system for income redistribution across households. I show that an increase in income inequality increases incentives of a government to default. An increase in income inequality increases the need for income redistribution. A (utilitarian) government may find it optimal to default in order to transfer more resources to households for consumption. I show that, in equilibrium, in response to an increase in income inequality the government may issue less debt. In turn, the incentives to default decreases. In a simulated economy, I show that for a small increase in income inequality of about 5% relative to the equilibrium, these two forces offset each other and the probability of default remains unchanged. I find that, in a model with no income inequality, the impact of an increased debt dominates and the probability of default increases.
Measuring the macroeconomic impact of uncertainty
This dissertation provides three chapters that study uncertainty and its macroeconomics effects by using large data sets and combining both empirical and theoretical evidence. In the first chapter, we develop uncertainty indices for the United States and Australia based on freely accessible, real time Google Trends data. Our Google Trends Uncertainty (GTU) indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries. VAR investigations document an economically and statistically significant contribution to unemployment dynamics by GTU shocks in the United States. In contrast, the contribution of GTU shocks to unemployment dynamics in Australia is found to be much milder and substantially lower than that of monetary policy shocks. The second chapter estimates the impact of uncertainty shocks in a disaggregate model featuring state-level economic activity and uncertainty proxies. Uncertainty is measured using Google search data. The disaggregate model is shown to capture important spillover effects which a model focusing only on aggregate data would overlook. The impact of national uncertainty shocks is heterogeneous, and on average is quantitatively less relevant as state-level uncertainty shocks in explaining the unemployment dynamics at the state level. The importance of national uncertainty shocks is found to be related to the state-specific industry compositions and fiscal deficits. The last chapter shows how unexpected changes in uncertainty about the commodity market affects real economic activity in a small commodity-exporting country. Using Australia as a case study, I first propose a novel commodity uncertainty index that is measured by the conditional volatility of the unpredictable component of commodity prices. I find that Australia has experienced more uncertainty in the commodity market recently. Second, a VAR model is estimated to examine the respective effect of commodity uncertainty shocks. The VAR evidence shows that commodity uncertainty shocks lower output, consumption, investment and net exports. In contrast, hours worked do not fall. Last, I interpret these VAR results in a non-linear multi-sector DSGE model of the Australian economy by estimating key parameters in the DSGE model to match its responses to the VAR responses. Uncertainty shocks in the DSGE model trigger a precautionary response and cause a decline in output, consumption, and investment. By contrast, hours worked do not fall, a finding that could be explained by the sectoral allocation effect.
Challenges in early adulthood and the timing of nest-leaving
Recent young adult cohorts have delayed moving out from the parental home, reflecting social trends and macroeconomic conditions that undermine the affordability of independent living. This dissertation focuses on the timing of these nest-leaving transitions in relation to other significant decisions and events in early adulthood. Each of the three chapters investigates whether potentially adverse outcomes lead to earlier nest-leaving, which has been shown to be financially harrowing and disadvantaging. To address these research questions, I utilize longitudinal data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Methodologically, I extensively apply event history models and focus on effects on the timing of nest-leaving events. I address potential endogeneity between the nest-leaving decision and other choices in early adulthood by estimating these simultaneously, accounting for selection effects through random effects models. The first essay considers how heavy drinking and cigarette smoking affect the timing of leaving home. As risky health behaviors, I find evidence that young adults who drink heavily leave home sooner than moderate or non-drinking counterparts. Among women, early initiation of alcohol or tobacco use by age 15 further compounds nest-leaving risks, showing that substance usage is far more consequential for their co-residence with parents. The second essay investigates human capital investment in tertiary education, to determine if graduation or dropout rates disfavor students who move out and maintain their own independent household. This chapter also considers whether parents condition their offer of co-residence on the young adult's enrollment. The results indicate that men clearly benefit while co-residing, as they graduate sooner than counterparts who live independently. However, women do not significantly benefit from co-residence in this way, and instead tend to move out around the time of graduation. The third essay examines the pathways out from the parental home -- either with or without a partner -- and how these may be affected by negative life events. Sudden illness or injury of the young adult or a family member, the death of a close friend or a relative, and victimization to violent or property crimes are unforeseeable events that can compromise the young adult's ability to navigate key transitions in adulthood. Results suggest that men are more likely to remain at home longer after a family member is in ill health, whereas women are more likely to leave home soon after the death of a close friend or experiences of property crime. The findings across these essays consistently emphasize women's short-lived co-residence with parents, surfacing from disaggregated analyses by gender. Several factors which contribute to earlier nest-leaving are themselves disadvantaging in nature, and thus raise a concern that negative experiences early in adulthood could beget further hardships later on. This dissertation contributes to the nest-leaving literature by highlighting potential precursors of disadvantage, even while the young adult co-resides and receives in-kind parental transfers.
Decision-making under pressure: a study of tennis professionals
This thesis examines the effect of pressure on a sample of highly-trained individuals in a simple strategic setting. By modelling the strategic interaction between servers and receivers in professional tennis matches, the main contribution of this research is to present an environment where pressure can be introduced in a practical and reasonable manner. Using this environment, I am able to investigate the effect that pressure has on players' behaviour and its consequences for their payoffs. Thus, the analysis in this thesis is two-fold. The first component of the analysis examines the effect that pressure has on the decision-making ability of players. The second component examines the effect that pressure has on their point outcomes. The results indicate that pressure does have a marked effect on the service decisions of many players in the sample. I find that a significant number of servers have a particular strategy that they choose to play more often under pressure than they do otherwise. I also investigate the effect of pressure on the level of correlation between past and present choices and find similar results. The implication of this is that servers' behaviour changes when they are faced with high pressure situations. Since players are also found to behave in accordance with theoretical predictions in the absence of pressure, this leads to the possibility that players could be performing sub-optimally in such situations. Indeed, the results confirm that pressure has a generally negative effect on servers' chances of winning the point. Interestingly, there is less evidence for a link between the two effects. The correlation between the players whose choices change under pressure and those players whose outcomes are affected is small. This leads me to believe that there is a possibility that either player could benefit from exploiting the sub-optimal choices of the other in high pressure scenarios. These results suggest that the theoretical models that have been previously used to describe the serve-return interaction may be insufficient in the presence of pressure. Consequently, researchers may be led to incorrect predictions about behaviour in high-stakes environments by excluding pressure from their models. Therefore, I also provide some theoretical basis to rationalise the observed results by proposing several approaches to incorporate pressure into existing models.
Beliefs and learning in the laboratory: essays in experimental economics
This thesis uses economic experiments to contribute to the literature on belief elicitation and learning. Belief elicitation helps researchers disentangle the ways that preferences and beliefs jointly govern the decision-making process: it reveals how people form and update their expectations, and allows economists to shine a stronger light on preferences. The challenge facing researchers is to elicit accurate reports within the practical constraints imposed by experiments. This thesis makes two methodological contributions to the belief elicitation literature, with a focus on the Stochastic Becker-DeGroot-Marschak (SBDM) mechanism. We first compare implementation procedures drawn from the existing literature, and find that instructions adapted from Hao and Houser (2012), together with a pre-experiment quiz, yields the best balance of practicality and data quality. Having identified the most user-friendly implementation of the SBDM mechanism, we then provide a detailed comparison with belief elicitation using unpaid instrospection. There are only two comparisons in the literature, and our results provide a level of detail that will be of immediate benefit to researchers. We find that the SBDM mechanism yields small but significant improvements in the average accuracy of reports, that this result is robust to variations in subjects’ posterior beliefs, and that the SBDM mechanism does not create a stronger observer effect than introspection. Unexpectedly, we find that the SBDM mechanism’s performance is also robust to subjects’ type. Although suboptimal decisions are correlated with reporting errors under both elicitation techniques, the SBDM mechanism outperforms introspection even when subjects’ decisions systematically violate probabilistic sophistication and stochastic dominance. This thesis then turns to the relationship between learning and preferences, with a focus on Imposter Syndrome (Clance and Imes, 1978; Clance, 1985). The distinguishing feature of Imposter Syndrome is that successful individuals appear unaware of their aptitude. Using concepts from information economics, we propose and test a rational path by which risk averse or myopic individuals might end up exhibiting imposter-style behaviour—that is, over-investing in tasks and failing to learn their type. The data suggests that the majority of subjects undervalue the benefits of learning their type, and we find that subjects’ risk preferences are meaningfully correlated with investments and learning behaviour.
Monte Carlo methods for pricing early-exercise financial derivatives
Pricing and hedging early-exercise financial derivatives has long been a challenging problem for both industrial practitioners and academic researchers. Especially, when the driving dynamics are of path-dependence and high dimension, simulation-based methods may be the only feasible choice. In this thesis, we study Monte Carlo methods for pricing and hedging early-exercise financial derivatives from different aspects, e.g. theoretical convergence, time-efficiency, and practical effectiveness. Focusing on the buy-side, we analyze the bias in the classic Least Squares Monte Carlo pricing algorithms and then propose methods to accelerate pricing algorithms and improve the accuracy of exercise strategies. Regarding the sell-side, we put forward new methods to construct hedging portfolios and then compute seller's price without introducing sub-simulations. The hedging method can yield Deltas of the portfolio as well, which can be further used to conduct risk analysis. The goodness of strategies constructed for both buy-side and sell-side have been analyzed with respect to the theoretical convergence, and meanwhile, is numerically tested against challenging cases, e.g. long-term swap rate derivatives under displaced LIBOR market model. For multiple exercise derivatives, we develop a general non-nested Monte Carlo framework to construct both exercise and hedge strategies by considering both time-efficiency and tightness. The theoretical correctness of proposed framework has been formulated mathematically. Besides, it is examined numerically against long-term derivatives.
Sports behaving badly: an economic study of momentum
This thesis studies momentum and the behavioral implications of leading and lagging in multi-stage tournaments. More specifically, it tests the predicted outcomes of best-of-k tournaments using two contrasting theories of momentum and a large sample of men’s tennis matches. Using a laboratory experiment, it then investigates the implications leading and lagging has on the effort decisions of individuals in best-of-k tournaments.
When do trade networks matter in aggregate?: Essays in international trade
This thesis studies the informational effects of trade networks from an aggregated viewpoint. A recent literature shows that an enhanced trade network can allow a firm to lower informational frictions, leading to significant reductions in entry costs. While these interactions have been shown to hold for firms, it is an open question as to whether these effects persist more generally at higher levels of aggregation because a firm's network can both help and hinder other nearby firms. It is important to assess these aggregate effects because (i) it establishes whether firms can use empirically observable trade flows to inform decisions rather than investing in their own network; (ii) it can test current firm-level results using more complete networks and assess whether the effects found for specific countries and sectors can apply more widely. This thesis disentangles the aggregated network effects along a number of dimensions including: the extensive margin of trade, the intensive margin of trade and the duration of those relationships. Aside from investigating whether the reduction in informational frictions persists at more aggregate levels, it also assesses whether: (i) there is evidence of path dependence at aggregate levels; (ii) these effects are strictly from a network interaction or whether they arise from other processes; (iii) the information transmitted by the network is direct information about a location (such as information about specific market characteristics) or indirect information that might update the expectation of a firm might have about a particular market; and (iv) this information lowers costs or just increases the expected benefit of trade. This thesis finds that: (i) information from trade networks increases the probability of link formation; (ii) this increase in entry is predominately from common exporters that are contiguous to the importer; (iii) aggregate network information also facilitates greater aggregate trade and that it is more important in contexts where frictions are more important; (iv) more common exporters will increase the duration of trade links at the product level; and (v) common importers have a much smaller impact on duration that common exporters.