# Discussion Papers

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

## 10 Most Recent Papers

### 15/06 Arkadiusz Szydlowski

In economic duration analysis, it is routinely assumed that the process which led to censoring of the observed duration is independent of unobserved characteristics. The objective of this paper is to examine the sensitivity of parameter estimates to this independence assumption in the context of an economic model of optimal unemployment insurance. We assume a parametric model for the duration of interest and leave the distribution of censoring unrestricted, allowing it to be correlated with both observed and unobserved characteristics. This leads to loss of point-identification. We provide a practical characterization of the identified set with moment inequalities and suggest methods for estimating this set. In particular, we propose a profiled procedure that allows us to build a confidence set for a subvector of the model parameters. We apply this approach to estimate the elasticity of exit rate from unemployment with respect to unemployment benefit and find that both positive and negative values of this elasticity are supported by the data. When combined with the welfare formula in Chetty (2008), these estimates do not permit us to put an upper bound on the size of the welfare change due to an increase in the unemployment benefit. We conclude that given the available data alone, one cannot credibly judge if the unemployment benefits in the US are close to the optimal level.

### 15/05 Dimitrios Varvarigos, Guangyi Xin

15/04 Social Interactions, the Evolution of Trust, and Economic Growth

We present a model where the dynamics of trust and the process of capital accumulation are jointly determined. Trust evolves intergenerationally, as the process of social interactions with people from different backgrounds creates experiences and forms opinions that are bequeathed to the next generation, thus shaping their level of trust. The provision of public goods and services is also a supporting factor towards the formation of trust. A key result is the possibility of social segregation if the level of trust is below a critical threshold. As a result, long-run equilibria are path-dependent. Both the current level of trust and the current stock of capital are important in determining the economy’s long-term prospects.

### 15/04 Aristotelis Boukouras, Kostas Koufopoulos

We consider a general economy, where agents have private information about their types. Types can be multi-dimensional and potentially interdependent. We show that, if the realized frequency of types (the exact number of agents for each type) is common knowledge, then a mechanism exists, which is consistent with truthful revelation of private information and which implements first-best allocations of resources as the unique equilibrium. The result requires the single crossing property on utility functions and the anonymity of the Pareto correspondence.

### 15/03 R. Emre Aytimur, Aristotelis Boukouras, Robert Schwagerz

15/03 The Citizen-Candidate Model with Imperfect Policy Control

We present a modified citizen-candidate model where the implemented policy arises from a compromise between the government and an unelected external power. We show that the two-candidate equilibria of this model differ significantly from the original: however small the cost of candidacy, the distance between the candidates' policies, both ideal and implemented, remains strictly above a threshold. Moreover, there may be one-candidate equilibria in which the only candidate is not the one most preferred by the median voter. Both results point out that, even with negligible cost of entry, there are limits to strategic delegation.

### 15/02 Aristotelis Boukouras

15/02 Separation of Owenership and Control: Delegation as Commitment Device

This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker for providing effort to complete a project. The worker's effort determines the probability that the project is completed on time, but the worker receives private benefits for every period she is employed. We show that hiring a manager on a short-term contract may increase firm value and we identify the conditions under which separation of ownership and control is optimal.

### 15/01 **Caterina Calsamiglia, Francisco Martinez-Mora, Antonio Miralles**

15/01 School Choice Mechanisms, Peer Effects and Sorting

We study the e¤ects that school choice mechanisms and school priorities have on the degree of sorting of students across schools and neighborhoods, when school quality is endogenously determined by the peer group. Using a model with income or ability heterogeneity, we compare the popular Deferred Acceptance (DA) and Boston (BM) mechanisms under several scenarios. With residential priorities, students and their households fully segregate into quality-anked schools and neighborhoods under both mechanisms. With no residential priorities and a bad public school, DA does not generate sorting in general, while BM does so between a priori good public schools. With private schools, the best public school becomes more elitist under BM.

### 14/19 **Stephen G. Hall, P. A. V. B. Swamy, George S. Tavlas**

14/19 On the Interpretation of Instrumental Variables in the Presence of Specification Errors

The method of instrumental variables (IV) and the generalized method of moments (GMM), and their applications to the estimation of errors-in-variables and simultaneous equations models in econometrics, require data on a sufficient number of instrumental variables that are both exogenous and relevant. We argue that, in general, such instruments (weak or strong) cannot exist.

### 14/18 **Stephen G. Hall, P. A. V. B. Swamy, George S. Tavlas**

14/18 Time Varying Coefficient Models; A Proposal for selecting the Coefficient Driver Sets

### 14/17 **Heather D. Gibson, Stephen G. Hall and George S.Tavlas**

14/17 How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

### 14/16 **Heather D. Gibson, Stephen G. Hall and George S.Tavlas**

14/16 Doom-loops: The Role of Rating Agencies in the Euro Financial Crisis

During the euro-area financial crisis, interactions between sovereign spreads and credit ratings appeared to have led to self-generating feedback loops. To examine the interaction between spreads and ratings, we estimate a simultaneous two-equation model in which spreads and ratings are endogenous. Using a panel of 5 euro-area countries, we construct time series comprising the ratings of its sovereigns determined by the three major rating agencies. We find that, controlling for the economic and political fundamentals, spreads and ratings strongly interacted with each other during the crisis, producing effects well-beyond those of the fundamentals, and with the interactions demonstrating high persistence.