# Discussion Papers

Papers from 1998 onwards are available on-line as .PDF files.

If you would like to submit your paper to **Repec**, please email econplone@le.ac.uk

**10 Most Recent Papers**

### 17/15 Arkadiusz Szydłowski

17/15 Testing a parametric transformation model versus a nonparametric alternative

Despite an abundance of semiparametric estimators of the transformation model, no procedure has been proposed yet to test the hypothesis that the transformation function belongs to a finite-dimensional parametric family against a nonparametric alternative. In this paper we introduce a bootstrap test based on integrated squared distance between a nonparametric estimator and a parametric null. As a special case, our procedure can be used to test the parametric specification of the integrated baseline hazard in a semiparametric mixed proportional hazard (MPH) model. We investigate the finite sample performance of our test in a Monte Carlo study. Finally, we apply the proposed test to Kennan’s strike durations data.

### 17/14 Tewodros Makonnen Gebrewolde & James Rockey

17/14 The Global Gender Gap in Labor Income

This paper introduces a new measure of economic gender inequality (EGI) based on the ratio of women’s share of national labor income to men’s. This measure captures both the principles of equal pay for equal work and non-discrimination. Importantly, it can be calculated from existing data and is comparable across countries and time. We show that EGI has only been improving slowly and that current aggregate EGI is equivalent to 1.2 billion women working for nothing. Moreover, this gap is expected to increase in coming decades. Instrumental variable estimates suggest that while increases in income reduce EGI, living standards will have to triple for equality to be achieved in countries such as Mexico or Turkey.

### 17/13 Panicos O. Demetriades, Peter L. Rousseau & Johan Rewilak

17/13 Finance Growth and Fragility

We utilise a new international database of financial fragility indicators for 124 countries from 1998 to 2012 to investigate the effects of fragility on the finance-growth nexus. Cross-country growth regressions suggest that both financial fragility and private credit have negative effects on GDP growth over this period. The results are robust to controlling for systemic banking crises, confirming that financial fragility has additional negative effects on growth, even if a banking crisis is avoided. We also present results using interactions which suggest that (a) a large volume of impaired loans can amplify the negative effects of private credit on growth and (b) a sufficiently high z-score can eradicate the negative effects of private credit on growth.

### 17/12 Sanjit Dhami & Ali al-Nowaihi

17/12 Dominance concepts for discrete Fehr-Schmidt preferences with a focus on income inequality*

The evidence for other-regarding preferences is extensive. How should an individual with other regarding preferences compare two distinct distributions of income? We show that the classical concepts of first and second order stochastic dominance are inadequate to answer this question. We develop the relevant stochastic dominance concepts for the case of the popular other-regarding preferences in Fehr and Schmidt (1999) that we call FS preferences; we consider the linear and non–linear forms of FS preferences. These new dominance concepts, that we call first and second order FS dominance provide sufficient conditions for ranking income distributions. We showthat our concepts can be extended to uncertainty and are applicable to some other models of other-regarding preferences. Our use of a discrete framework is empirically realistic and avoids measure theoretic issues arising under the continuous case.

### 17/11 Philippe De Donder & Francisco Martinez-Mora

17/11 The Political Economy of Higher Education Admission Standards and Participation Gap

We build a political economy model in order to shed light on the empirically observed simultaneous increase in university size and participation gap. Parents differ in income and in the ability of their unique child. They vote over the minimum ability level required to attend public universities, which are tuition-free and financed by proportional income taxation. Parents can invest in private tutoring to help their child pass the admission test. A university participation gap emerges endogenously with richer parents investing more in tutoring. A unique majority voting equilibrium exists, which can be either classical or “ends-against-the-middle” (in which case parents of both low- and high-ability children favor a smaller university). Four factors increase the university size (larger skill premium enjoyed by university graduates, smaller tutoring costs, smaller university cost per student, larger minimum ability of students), but only the former two also increase the participation gap. A more unequal parental income distribution also increases the participation gap, but barely affects the university size.

### 17/10 Caterina Calsamiglia & Francisco Martinez-Mora & Antonio Miralles

17/10 Sorting in public school districts under the Boston Mechanism

We show that the widely used Boston Mechanism (BM) fosters ability and socioeconomic segregation across otherwise identical public schools, even when schools do not have priorities over local students. Our model includes an endogenous component of school quality - determined by the peer group - and an exogenous one. If there is an exogenously worse public school, BM generates sorting of types between a priori equally good public schools: an elitist public school emerges. A richer model with some preference for closer schools and flexible residential choice does not eliminate this effect. It rather worsens the peer quality of the nonelitist school. The existence of private schools makes the best public school more elitist, while reducing the peer quality of the worst school. The main alternative assignment mechanism, Deferred Acceptance, is resilient to such sorting effects.

### 17/09 Rui Luo

17/09 Skill Premium and Technological Change in the Very Long Run: 1300-1914

This paper sets out to explain the historical development of the skill premium in western Europe over a period ranging from the pre-modern era to the modern era (circa 1300 to 1914). We develop a model of the skill premium and technological change over the very long run which endogenously accounts for the transition across different growth regimes in this period. The model integrates two key elements in long-run growth, the human capital investment and the capital-human capital ratio, into the analysis and successfully explains the declining skill premium from 1300 to 1600 and the stable skill premium from 1600 to 1914. The explanation elucidates a number of well-known historical facts that have not been previously examined in the study of the skill premium.

### 17/08 Martin Foureaux Koppensteiner & Jesse Matheson & Réka Plugor

### 17/07 M**engxing Wei & ****Ali al-Nowaihi & ****Sanjit Dhami**

**Ali al-Nowaihi &**

**Sanjit Dhami**17/07 Can quantum decision theory explain the Ellsberg paradox?

We report the results of an experiment we performed to test the matching probabilities for the Ellsberg paradox predicted by the quantum decision model of al-Nowaihi and Dhami (2016). We fi…nd that the theoretical predictions of that model are in conformity with our experimental results. This supports the thesis that violations of classical (Kolmogorov) probability theory may not be due to irrational behaviour but, rather, due to inadequacy of classical probability theory for the description of human behaviour. Unlike earlier quantum models of the Ellsberg paradox, our model makes essential use of quantum probability. It is also more parsimonious than earlier models.

### 17/06 Dimitrios Varvarigos

17/06 Economic Growth and the Cultural Transmission of Attitudes towards Education