Aspirations and Academic Achievement: The Spillover Effects of Beca 18 on Educational Outcomes of Younger Students

Elena Costarelli, Rosamaría Dasso Arana, and Bárbara Sparrow Alcázar analyze the effect of being near a Beca 18 beneficiary -a new scholarship program for high school students- on the academic achievement of second grade children.

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program. 

Authors:
Elena Costarelli, Rosamaría Dasso Arana, Bárbara Sparrow Alcázar

Master’s Program:
Economics

Abstract:

Using administrative data from the Ministry of Education in Peru, we analyze the effect of being near a Beca 18 beneficiary -a new scholarship program for high school students- on the academic achievement of second grade children. Previous literature suggests that information about the potential returns to education plays an important role on students’ achievement. Our hypothesis is that having a fellow nearby might change the perception of younger children and of their parents about returns to education, thus leading them to invest more on it. We use a difference in difference approach to test this hypothesis in a school panel data setting. As we are interested in the effect of information transmission, we use GPS location data to identify which schools are near a Beca 18 beneficiary. We test for several distance specifications with consistent results. Our findings suggest a positive spillover effect of the program on younger children in both reading and math performance.

Introduction:

Access to tertiary education is a well-known motivation for students to perform better at school. Good students are usually the ones that are able to attend better universities which in turn allows them to improve their living conditions. This is true in most developed countries, where access to good quality higher education is a possibility for most students. However, in the case of many developing countries, market failures and government limitations do not allow students to consider this possibility.

When facing the decision of educating their children, many families may consider it to be an unprofitable investment. Little information about the benefits of education in terms of higher future income and the lack of success stories among people close to them may all contribute to this perception. In this regard, the impact of a program that makes access to tertiary education may possibly affect the way people value education in a significant way. If parents and children are aware that been a good student may have a tangible future reward, their investment decisions may change.

Access to tertiary education is greatly limited to children from poor families in Peru. To address this issue, the Peruvian government recently created the Beca 18 program. Beca 18 is a merit/need based scholarship program that targets students applying to higher education institutions such as universities and technical institutes. The program gives selected students the opportunity of attending the best tertiary schools in the country. Before the program existed, even access to public universities was very limited. Beca 18 can be considered as one of the first real opportunities for children of low resources in Peru to access high quality tertiary education.

Current literature suggests that there is a positive relationship between policies that increase the perceived returns of education and educational outcomes among children. There is also evidence that supports that future access to scholarships and merit based programs may encourage better school performance. In this paper, we will analyze the impact of Beca 18 on the school performance of second grade children. To do this, we use test score data from the Ministry of Education and administrative records from the Beca 18 program. Using a difference in difference approach, we were able to identify a positive impact of being near a program beneficiary on both math and reading proficiency outcomes. 

Conclusions:

Our results suggest that the Beca 18 program has relevant spillover effects on the educational outcomes of younger children. Guided by our conceptual framework, we would expect this result to be a consequence of the fact that children and parents exposed to Beca 18 beneficiaries update their information about perceived returns to education, leading them to invest more time and resources in obtaining better educational results.

We also find that effects on math test scores are stronger and more robust to several specifications than effects on reading test scores. This result is consistent with findings of other studies suggesting that math scores are more quickly affected by changes in study behavior. We also find that the effect of being near a beneficiary decreases as the distance to the school of the beneficiary increases. This result is consistent with our hypothesis that the improvements in educational outcomes are a result of information transmission.

Another result worth discussing is that we found that the effect of the program is larger when the number of beneficiaries nearby increases. This suggests that investment decisions are affected by how likely it is to get the scholarship. It may also suggest that the investment decision may vary if there are more people acting as role models.

Overall, our results are relevant from a policy perspective. We present evidence that the program has relevant spillover effects that should be considered when evaluating its benefits. As public programs in Peru are under continuous scrutiny, further evidence that supports the program’s effectiveness is of greatly useful to ensure its continuity. Also, as our results suggest that the number of beneficiaries matter for investment decisions, the expansion of the program could lead to even greater spillover effects.

It is still important to note that the effects found here are not the main intended effects of Beca 18: the scholarship program was designed as a supply side policy intervention. Our findings support the idea that this program can have important demand side effects worth considering. We would also expect for these effects to increase over time: the success stories of current beneficiaries in the labor market could lead to an even greater increase of the expected returns of education.

Pulling together or tearing apart? Ethnic heterogeneity, natural shocks and common pool resources in rural Malawi

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Andrea Bacilieri, Abhijeet Khanna, Irene Pañeda Fernandez, Jonathan Stern

Master’s Program:
Economics

Abstract:

This paper examines how ethnic heterogeneity may affect the ability of Malawian rural households to solve collective action problems. The collective action challenges are natural shocks -floods, droughts, and irregular rain and availability of common pool resources – an irrigation system, a forest, and common pasture land. We measure household welfare through maize harvest and annual consumption. We find that ethnic polarization and fractionalization are unambiguously bad for maize harvest but, under natural shocks, the size of this negative relationship is reduced. This may be due to the way natural shocks cross ethnic lines and facilitate the overcoming of ethnic differences. The bad effects of polarization remain unchanged in the presence of a shock, suggesting that this is a more intransigent problem. With respect to consumption, we find diminishing returns to increased polarization, becoming negative for high levels of polarization. Results are strongest in the presence of a communal forest. This may be due to the repeated and continuous nature of communal forest management, and the way that polarization may facilitate the formation of coherent bargaining factions.

Summary:

In this paper we explore the effects of ethnic fractionalization and polarization in the presence of natural shocks and common pool resources. By greater fractionalization we mean a smaller probability that any two individuals come from the same ethnic group.  Polarization is a related concept which also takes into account the size of the bargaining factions- polarization being highest with two equally sized groups.

Our hypotheses were that ethnic heterogeneity would worsen the impact of shocks, and affect detrimentally the economic benefit derived from common pool resources. We sought to test these hypotheses by constructing a novel dataset for Malawi which combines indices of ethnic fractionalization and polarization calculated at the Territorial Authority level using the 2008 census and the Malawi Integrated Household Panel Survey for the year 2013. We argue for the exogeneity of our heterogeneity indices based on the low level of change in the ethnic makeup of Malawi over the past four years and the low level of migration within the country.

In the first part of our analysis we regress the log of maize harvest on the presence of shocks such as drought,  flood and irregular rain interacted with our ethnic heterogeneity indices and a set of agricultural, climate, household and community controls. We find that ethnic polarization and fractionalization are unambigiously bad for maize harvest. Counter to our expectations, we find that fractionalization appears to lessen the impact of a drought or irregular rain on harvest, although the net effect of increases in fractionalization remains bad for harvests. We posit tentatively that the reduction in the effect of  fractionalization in the presence of a shock could be due to the way natural shocks may cross ethnic lines and facilitate the overcoming of ethnic diff erences. The bad effects of polarization remain unchanged in the presence of a shock, suggesting that this is a more intransigent problem, and potentially a cause of enduring local level conflict.

In the second part of our analysis we regress the log of consumption on the presence of common pool resources such as forests, irrigation systems and common pasture land. We find no signicant relationship between consumption and fractionalization after testing both linear and quadratic specications. For polarization we find a quadratic relationship with consumption, which is strongest in the presence of a communal forest. This suggests that a certain degree of polarization could help communal forest management, with diminishing returns to increased polarization, becoming negative for high levels of polarization. We posit that this may be due to the repeated and continuous nature of communal forest management, and the way that polarization may facilitate the formation of coherent bargaining factions.

Through an exploration of the correlations between our ethnic heterogeneity indices and a set of community characteristics we find that greater  heterogeneity is negatively correlated with school quality and the availability of agricultural inputs. These results cast some doubt on the exogeneity of ethnic heterogeneity. However given that the ethnic indices are slow moving over time, these correlations may also suggest some of the mechanisms by which fractionalization and polarization aff ect economic development in rural Malawi. Further work might seek to explore further these mechanisms, and whether the empirical findings of this paper can be replicated in other countries and contexts.

Download the paper

Price parity in two-sided markets: a new perspective

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Sara Del Vecchio, César Ulate

Master’s Program:

Competition and Market Regulation

Paper Abstract:

Online platforms are believed to be beneficial to consumers in a number of ways. They facilitate consumers’ search and comparison, which in turn fosters competition between sellers. They drive the so called long tail effect that increases the variety of products offered, improving the consumer’s ability to find the right match for their needs. Platforms might adopt some particular measures aimed at protecting their profits, and potentially the viability of their business model. In the past few years, many online platforms have been under the scrutiny of various competition authorities regarding a particular clause they include in their contracts with sellers commonly called ’price parity clause’ or more specifically Across Platform Parity Agreement (APPA), this limits the seller’s ability to set lower prices (or better conditions) on other sale channels. At face value, price parity seems like a restriction on sellers’ pricing abilities which benefits consumers, as they can enjoy increased value service at apparently no additional cost.

We build a stylized model and we show that platforms can increase welfare and have pro-competitive effects, while price parity clauses are generally harmful for consumers surplus and welfare, nevertheless they can be good if they are indispensable for the platform viability.

Introduction:

The price parity clause included in platforms’ contracts with sellers, can be categorized as narrow or wide according to the scope of the price limitation. As illustrated in the figure below a ‘narrow APPA’ (the purple rectangular in the figure) refers to a clause where the seller is restricted from charging a lower price on their direct channel. By contrast, a ’wide APPA’ (the orange rectangular in the figure) is when the seller is limited from setting a lower price not only on their own website but also on any other competing platform. This will allow the platform to make claims, such as the ’best price guarantee’ as shown in the figure.

chart
Narrow & Wide Across-Platform Parity Agreements

Online platforms often argue that they need to include this constraint on seller’s price, otherwise consumers would just free ride on the platform services, and then complete the transaction on the seller’s own website which offers a lower price. At the same time, such clause in the seller-platform contract might generate anticompetitive effects, In particular, they may raise costs for sellers, which in turn are reflected into higher prices for consumers. Sellers pay a fee to intermediaries, which are insulated from competitive pressure due to the price parity clause itself.

Indeed, in the past few years many online intermediaries have been under the scrutiny of various competition authorities regarding APPAs that they were including in their contracts with sellers. There have been several cases across the world related to this clause, starting from the Apple eBook case in 2013, until the recent series of investigations in Europe regarding the online travel agent Booking.com.

In particular, the Booking.com case shows some inconsistencies in the decisions across Europe, in most of the countries (including UK, France, Italy and Sweden), Booking.com settled by agreeing to allow online travel agents, to offer lower room rates via Booking.com’s competitors, by dropping its wide APPA, restoring competition between online travel agencies. The commitments do allow Booking.com to retain its narrow APPA for prices and booking conditions, ensuring hotels offer the same rates and conditions that are provided on their own direct website. In Germany, instead, the Bundeskartellamt decided also to prohibit the narrow APPA. Nevertheless, in France they recently passed a Law (la Loi Macron) whereby they made APPAs illegal per se, with the aim of liberalising the economy and boosting growth. Furthermore, would be desirable more guidance on how to set out the most appropriate theory of harm in order to have convergence at European level in relation to these clauses.

Modeling Approach:

In this paper we build a stylised model with three different types of rational agents: (i) sellers, (ii) platforms and (iii) consumers. They all take sequential decisions in an infinitely repeated game. We include different search costs for consumers depending on the channel used to search and purchase a product. We focus only on pure strategies that lead to a particular Sub-Game Perfect Nash Equilibrium (SPNE) where all agents participate. We compare this SPNE across different scenarios: from the setting where there is a monopoly platforms, to the setting where we have competing platforms. We look at the equilibrium prices and welfare that arise in each of these scenarios with and without narrow and wide APPAs. Finally, we compare it to the counter-factual where no platform operates in the market.

Findings and Conclusion:

In terms of policy approach towards these clauses, our findings are in line with great part of the literature with respect to wide APPAs. Our model suggests that under no condition this clause can have pro-competitive effects, therefore the current European move towards a prohibition seems economically sound and sensible. With regards to narrow APPAs, instead, we believe the current call in many European countries for an outright ban could be detrimental for welfare, as it overlooks the benefits that platforms bring to the market. Indeed, we find that under some conditions these clauses despite limiting competition, do lead to efficiencies that the authorities should take into account.

We conclude that the existence of a platform is in general good, because as a first order effect it increases the number of transactions and reduces search costs for consumers. However, we find that prices will only be lower if there is effective competition between platforms. Furthermore, if the platform is not able to recover its costs though sales, then the viability of the platform may depend on the existence of the APPA. Hence, as shown the narrow APPA decreases welfare unless it is indispensable for the platform to operate.

Monetary policy effects on inequality: A country state-level analysis for the United States

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Carola Ebert, Sigurdur Olafson, and Hannah Pfarr

Master’s Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Our project focuses on the assessment of a potential relationship between monetary policy actions and economic inequality in form of the Gini index. The analysis is conducted for the United States on a country- as well as on a state-level. Lack of quality and comparability of inequality data is a major empirical challenge in the research on inequality in general. Thus, we use different methodology for the data on the Gini index to ensure the robustness of the main results on the country level. Moreover, the main contribution of this work is the analysis on a more dis-aggregated level, i.e. the state level and a regional level. The state- and region- level analysis provide a further line of investigation with respect to the relationship between monetary policy and inequality. When considering monetary policy effects on inequality on an aggregated country level, one cannot be sure whether potentially heterogeneous reactions of inequality within the country are washed away by the aggregation over states. Therefore, this paper does not only analyse the relation between monetary policy and inequality on the aggregate country level, but also on the state level. Furthermore, as a first step in the direction of investigating potential transmission channels of monetary policy into inequality, further tests with regards to the initial wealth levels across states are conducted.


Main Conclusion:

In this paper we analyzed the implication of a monetary policy shock for inequality on a country-level, regional-level and (on a) state-level (as well). The results are largely consistent across different model specifications and considering different geographic levels, implying that a contractionary monetary policy shock seems to raise inequality on impact. Although the effect is small, it is consistently positive across states and regions. Already the fact that we find that there is an effect of monetary policy on inequality is a contribution in itself.

chart

Our benchmark model using OLS leads to the conclusion that a contractionary monetary policy shock leads to an increase of inequality. This finding holds for richer as well as poorer states. The contemporaneous impact stays positive over the considered time horizon. We have run several robustness checks using different model specification for OLS as well as a VAR approach. These checks have confirmed the earlier findings.

chart


Outlook:

However, we have stressed that there is room for further investigation to shed light in this area.One potential way to go would be to expand the analysis by using alternative inequality measures. We conducted our analyses using the Theil and Atkinson indices obtained from Frank’s website. However, since the results obtained by using these two measures do not add anything to the analysis, we have not included them in the paper.

Furthermore, some authors stress the relevance of the top income and low income distribution when analyzing the effects of inequality. Therefore, one might think about controlling for the share of top incomes within the states to asses to what extent the reaction to monetary policy would change. We already tried capturing parts of these potential dynamics using the simple mean comparison tests for wealth dependence.

We find evidence that (seems to) suggest that monetary policy has a stronger impact on wealthy states and regions compared to poorer states and regions. Those results are obtained using simple mean-comparison tests and should be viewed as preliminary, as further research on the issue is necessary to concretely conclude whether the initial wealth-level of states and regions is relevant for the transmission mechanism from monetary policy on inequality.

After our results show that there is an effect of monetary policy on inequality, the next step in this line of research could be the investigation of the actual transmission mechanism. One could include a more elaborate analysis of the potential channels through which monetary policy affects inequality.

As a last remark, we want to point out that we were originally interested in investigating this topic for the European Monetary Union member states. This, however, is not possible due to data limitations. Firstly, across European countries there is no uniform definition and measurement of inequality. Secondly, the monetary union is fairly new and the data of a unitary monetary policy shock would be too short to conduct our analysis. Nevertheless, we do believe this is an interesting path for future research and, as pointed out in the literature review, the finding of a robust relationship between monetary policy and inequality backs this claim.

Misallocation Dynamics in Europe: Germany versus South

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:

Alexandros Georgakopoulos, Sampreet Singh Goraya, Viraj Rajeev Jorapur, Barrett William Owen, Jurica Zrnc

Master’s Program:

Economics

Motivation:

After the start of the Great Recession in Europe, the countries of the South (e.g. Spain) entered into a protracted stage of negative growth, amounting to an average decline in output of 1.6 perecent between 2008 and 2013, while Germany grew 0.8 percent on average in the same period. Furthermore, the decline in economic growth was accompanied by the under performance of total factor productivity growth in the South (-2.3%) relative to almost stagnant productivity growth in Germany (-0.5%). This points to some underlying factors which are not solely attributable to the demand shocks and the financial crisis.

KEY FINDINGS

Data and Measurement of Misallocation

Using a rich firm-level dataset we calculate various dispersion measures of marginal revenue products of production factors. We find that marginal revenue product of capital was increasingly more dispersed in the South, but not in Germany. A large part of this increase can be explained by the weakening link between capital and productivity. This implies that capital was increasingly allocated to less productive firms.

chart
Time-series of covariance between logTFPR and (Logk l) from 2006-2013,
Base year=2006, Amadeus and author’s own calculations

However, we also document increasing dispersion in marginal revenue product of labor, albeit of much smaller magnitude. This points to the possibility of common drivers behind the changes in both meassures. We argue that the common factor might be increased dispersion of TFP shocks during the recession. Similarly to Bloom et al. (2012) we interpret this as an increase in uncertainty. Furthermore, we calculate the potential gains by equalizing marginal revenue products of factors of production across firms in sectors, following Hsieh and Klenow (2007) methodology. Supporting our previous analysis, we find that gains from reallocation of resources increased considerably in the South but remained flat in Germany.

Determinants of Misallocation

In the next section, we explore different determinants of misallocation and relate it to different trends in South and Germany. First, we pool the data for six countries to explore general determinants of misallocation dynamics during the recession. Results point towards the importance of rising uncertainty during the recession, public sector influence and financial frictions in explaining the increase in misallocation during the recession. Furthermore, we find that sectors characterized with more business dynamism experienced more misallocation during the recession. This result is in accordance with Foster et al. (2014) which find that the intensity of reallocation fell rather than rose during the recent financial crisis in the US.

Secondly, we explore the differences between Germany and the South. We find that sectors with larger financial intensity were characterized by higher misallocation in the South, while not in Germany. This points to larger financial frictions in the South being important to explain the increase in misallocation. We find evidence that sectors prone to cronyism saw increased misallocation of capital in the South, while not in the North. We also find some evidence of benefits from product market reforms during recession in the South. We perform a number of robustness checks which generally support our results, although in some specifications, some parameters are not significant.

The Impact of Syrian Refugees on the Lebanese Labor Market

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Nagham Abdel Ahad and Gleb Bychkov

Master’s Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

In the light of the Syrian crisis which erupted in March 2011 and which is still on-going, many outcomes were and are still being produced. In this paper, we show particular interest in the refugee crisis that developed after the fast-tracked evolution of events in Syrian. More precisely, we shed light on the case of Lebanon, the small country on the Mediterranean, having an estimated native population of 4.55 million and hosting, at present, an estimated 1.15 million Syrian refugees on its territories, that is, more than 25% of its original population.

Our study focuses more specifically on the negative spillovers of the Syrian refugee inflow on the Lebanese labor market. Our objective is to build a model which we use to determine both the steady state in the Lebanese labor market prior to the Syrian refugee crisis and the equilibrium in the Lebanese labor market post the escalation of the refugee crisis. We therefore approach the dynamics of the labor market observing its reaction to the positive labor supply shock generated by the refugee influx. After calibrating the model, we watch closely the changes in our main variables of interest, namely, unemployment rates and wage levels, before and after the crisis.

In addition, we compare the results and the values our model gives for our variables of interest with the actual figures and data published or predicted by international reputable institutions, such as The World Bank and the Food and Agriculture Organization of the United Nations, for these same variables. Accordingly, we evaluate our model showing how far it succeeds in reflecting the reality of the situation and thus in predicting and generating figures as close as possible to the actual and true ones.

Conclusion:

Refugee inflows into host countries and communities can have significant impacts on these hosts on many levels. In our paper, we approach this issue from an economic perspective. More specifically, we focus on labor economics and labor market dynamics. In this context, we consider the case of the Lebanese labor market invaded by Syrian refugees who have fled to Lebanon because of the on-going war in Syria. We build a model, we calibrate it, we get the results, and we discuss them and use them to evaluate the performance of our model.

While The World Bank estimates a 20 percent unemployment rate in Lebanon post-crisis (almost double the rate pre-crisis), our model estimates an approximate 6.68 percent.

We proceed afterwards with a thorough discussion centered around these contradictory observations and we also go over a couple of limitations our model has, all of which might be able to account to some extent to the inconsistency in figures. This idea is interesting as it opens horizons and broadens the scopes for this work as one might expand the model so as to include an informal sector or additional distinctions between Lebanese native workers and Syrian migrant workers. We did not engage in doing this activity given the time constraints that we had. However, such expansions of the model can add great value to this work and can pave the way for further understanding and more successful outcomes.

We view our paper as a first step towards developing a flexible quantitative model that integrates opposing forces and that allows for a proper welfare analysis. More analysis is clearly welcome.

Re-examining the Global Liquidity-Asset Prices Linkage: Case of G7

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Ryan Jacildo and Ekaterina Rezepina

Master’s Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Research concerning the linkage between global liquidity and domestic economic affairs is hardly new. Interestingly, however, it never gets old mainly because of its policy significance. The welfare impact of shocks to capital flows (may it be short or long-term) is by and large the bottom line of all the discussions. Inquiries about other pertinent issues such as global financial imbalance and asset price bubbles, international financial stability and global financial safety nets, and economic early warning systems are in one way or the other broadly tied with global liquidity. Indeed, the impact of shocks to global liquidity can be systemically disruptive. And because international financial landscape constantly changes (i.e. degree of linkages estimated in one period may not hold in the subsequent periods), regular spot checks are important. The aftershocks of the global financial crisis (GFC) in 2007/2008, for instance, re-emphasize the significance of understanding the consequences of fluxes in capital movement and the extent of these consequences in various settings and time periods.

Motivation:

The main motivation behind this study is to contribute to empirical literature on cross-border liquidity spillover effects on asset prices in light of broadening global economic integration. We decided to focus on the case of the Group of 7 (G7) economies (e.g. Canada, France, Germany, Italy, Japan, United Kingdom, and United States) and follow closely the earlier work of Darius and Radde (2010) – henceforth D&R. For the same set of economies, D&R looked at the relationship of global liquidity and asset prices before and after the “Great Moderation” period. In an attempt to provide an account of what happened after 2007, this study examines the behavior of the same variables until end of 2015 and checks whether there are significant changes to the magnitude of the pass though effects of global liquidity, particularly on the equity and property prices in recent years.

Conclusions:

In light of the developments in the past decade that led central banks to flood the international financial system with liquidity, we deem it relevant to empirically re-examine the linkage between global liquidity and asset prices in large economies. To do the econometric analysis, we used available data from 1984q1 to 2015q4 and employed a VAR model following the specification suggested by D&R.

In the global analysis, we found that global liquidity has a positive significant impact on commodity prices using the sample from 1984q1 and 2015q4 but insignificant impact on equity prices. However, in our subsample analysis using the data from 1984q1 to 2007q4, our results showed that the impulse responses of both the CRB and the MSCI were positively significant and persistent while the impulse response function of house prices remained insignificant. Interestingly, D&R, which also used 1984q1 to 2007q4 as its Great Moderation subsample, found that the responses of commodity and equity prices to a liquidity shock were insignificant. In terms of the house prices, the results we obtained differed from those of D&R for periods from 1984q1 to 2007q4 in a sense that we found significantly negatively response to global liquidity albeit with a substantial lag of 16 quarters.

jacildo-rezpina1

In our spillover analysis, we extended the model of D&R by adding the local stock prices to the model. For each economy, we ran the regression using data from 1984q1 to 2015q4 as well as from 1984q1 to 2007q4 (to serve as our pre-GFC subsample). The results of this exercise convey that the positive effect of a global liquidity shock on house prices in Japan obtained using data from 1984q1 to 2015q period disappears when only pre-GFC period is considered. In the full sample analysis both global and domestic liquidity did not affect stock prices in Japan, whereas the effect of global liquidity turned out to be positive for the pre-GFC period.

Notwithstanding the sample used (may it be full or pre-GFC), the effect of global liquidity on house prices in France stays significant and negative, while the negative impact of global liquidity on stock prices obtained using full sample disappears in pre-GFC subsample. In the case of the latter, the stock prices turned out to be significantly positively affected by local liquidity, while the inclusion of post crisis years made this response negatively significant with a substantial lag.

Lastly, the result of the pre-GFC subsample analysis involving the UK reveals that the effect of local liquidity shock on stock prices is not significant as opposed to full sample estimation when the effect was positive. Moreover, the variance decomposition dictates that global GDP growth rate explains the largest proportion of the volatility of stock prices in the UK.

Moving forward, one way to get a better understanding of the results would be to properly assess the country-level intertemporal idiosyncratic factors just like in the global analysis. Certainly, the nature and timing of these structural shifts can vary from one country to another. We likewise suggest trying different proxies for the global liquidity or run the model for the monthly data without house prices that are available only quarterly and the monthly proxy for GDP. Using monthly data would allow a closer analysis of dynamics in the post-GFC period. It would also be interesting to extend the scope of this exercise to emerging economies.

The Italian Productivity Slump: A Tale of Zombies

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Authors:
Andrea Fabiani, Enrico Frezzini, Federico Morescalchi, Willy Scherrieble, and Ugur Yesilbayraktar

Master’s Program:

Economics

Paper Abstract:

During periods of low productivity and stagnation, banks develop incentives to renew loans at subsidized rates to firms that would otherwise be insolvent. Proliferation of these firms, which we label as Zombies, have ramifications on the economy. Theoretical models predict that industries with a large share of zombies should experience productivity slowdowns in conjunction with lackluster employment and investment trends.

In this paper, we try to document whether this form of capital misallocation prevails between 2007-2014, by analyzing balance sheet data for more than 19,000 non-financial companies from the AMADEUS database. In fact, Italy’s productivity growth has been ailing since the early 2000’s and the volume of non-performing loans increased dramatically after the 2008 financial crisis. Moreover, prevalence of relationship banking and lack of loan loss provisioning in the country created a breeding ground for zombie lending. We identify zombies by comparing the yearly interest rate payments for the companies in our sample with those implied by a weighted average of Italian sovereign yields.

Our main contribution to the literature is to extend the seminal work by Caballero et al. (2008) to Italy, so to quantify the statistical association between zombie lending and several indicators of economic performance. Up to our knowledge, we are the first to carry a similar exercise for an economy different from Japan, whose experience in the 1990’s gave rise to the literature on zombie lending.

The descriptive analysis of our data reveals the increasing trend in the number of zombies in the aftermath of the financial crisis of 2008; this phenomenon appears to be widespread across different sectors of economic activity.

figure
Figure 1: Pre and post-crisis average fraction of zombies (Overall economy)

 

figure
Figure 2: Pre and post-crisis average fraction of zombies (Asset weighted – Industry-level)

Furthermore, by means of OLS regressions, we show that TFP is lower and more unequally distributed in sectors with a relatively higher fraction of zombie firms, in accordance with theoretical predictions. However, the same exercise hints to a positive partial correlation between employment in healthy firms and zombie-lending, at odds with the theory.

We call for future research to explain this finding, either by enriching the underlying theoretical model so to account for realistic features of labor market or by testing the same hypothesis for other countries.

 

Brexit: BGSE Community Analysis

We want to know what the BGSE community is thinking and reading about the Brexit.

brexit-624x437

We invite all Barcelona GSE students and alumni to share their early reflections on the potential economic consequences of the UK’s recent vote to leave the EU. Did you focus on a related topic in your master project? Are you working at a think tank, central bank, or consulting firm where your projects will be impacted by this decision? Have you seen any articles or links that you found useful for understanding what lies ahead?

Here are a couple of pieces we’ve found to get the discussion going:

After Brexit: What next for the EMU, EU and UK?
(ADEMU webinar)

The BGSE participates in A Dynamic Economic and Monetary Union (ADEMU), a project of the EU Horizon 2020 Program. Last week, ADEMU researchers held a webinar to discuss the Brexit.

Background:

Europe has grown out of its crises when reason and solidarity have prevailed, but it has also been devastated by its crises when fear and nationalism have taken the lead. Brexit, in the aftermath of the euro crisis, brings this dichotomy back to the foreground. Since 2010 there have been important advances in the development of the Economic and Monetary Union (EMU) and flexible forms of participation have allowed other EU countries, reluctant to join the euro, to share the basic principles that define the EU and have a common presence in the interdependent global world.

According to the panelists, Brexit raises 3 crucial questions:

  1. Should the EMU be accelerated to become a centre of gravity within the EU, or slowed down to avoid a centrifugal diaspora? If accelerated, how?
  2. Should an ‘exit’ country be allowed free entry to the single market and other EU public goods without accepting freedom of movement?
  3. Should the EU remain as it is, or increase its capacity to offer common public services (Banking Union, border security, research funding, environment, etc.), or limit its scope of activity to the EU single and integrated market?

Webinar Panel:
– Joaquín Almunia (Former Vice-President of the European Commission, honorary president of the Barcelona GSE)
– Ramon Marimon (European University Institute and UPF – Barcelona GSE; ADEMU)
– Gorgio Monti (European University Institute; ADEMU)
– Morten Ravn (University College London; ADEMU)

Moderator:
Annika Zorn (European University Institute; Florence School of Banking & Finance)

From Brexit to the Future
(Joseph Stiglitz)

Nobel Laureate and Barcelona GSE Scientific Council member Joseph Stiglitz shares some reflections in the wake of the Brexit decision

What are you thoughts on Brexit?

We want to know what the BGSE community is thinking and reading about the Brexit. Please share your ideas, favorite sources for analysis, or observations from economists you respect in the comments below.

The rise of Voting Advice Applications – aquienvoto.org and the Spanish case

With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.

photo

With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.

The creator of the app is BGSE alum Hugo Ferradáns ’15, graduate from the Economics of Public Policy Program. Follow him on Twitter @Hferradans.

The rise of the internet era opened a door for innovative ways to help voters be informed about their political choices prior to casting their ballot. During the past 2015 Spanish General Election, new tools such as aquienvoto.org (whodoivote.org in English), an app that matches users’ policy preferences with parties’ proposed policies, became an easy and straightforward alternative for users to explore their political position and compare it to that of the biggest parties. Its success, with over 800,000 users and more than 30 million responses, suggests how technology and the social sciences can work successfully together to create a more informed and accountable electorate, especially in a multiparty political system such as the Spanish one.

But encouraging are more informed electorate is not the only benefit of Voting Advice Applications. In fact, the large amount of data that is generated from online applications such as aquienvoto.org can be a source of analysis and study regarding why people make their choices1, as well as a way to estimate what users care most about in a real-time basis before an election. This article, thus, will try to shed light on the usefulness of Voting Advice Applications to gather data on the political positioning of users. I will show some of the results that were acquired from aquienvoto.org, both on the policy preferences of users and on their most politically-aligned parties.

But first things first- What is exactly aquienvoto.org?

Aquienvoto.org is what is called in the field of political economy research a “Voting Advice Application” (VAA). VAAs are essentially an online test that matches users to parties depending on individual responses to policy-related statements. The user can either disagree or agree with the statements, as well as indicate whether that specific policy is important to him or her. After replying to several questions, the VAA gives the user a summary of what parties the user disagrees and agrees most with, mainly in the form of a ranking or a political map.

chart

Even though there some VAAs more sophisticated than others2, all VAAs acquire essentially the same data:

  1. the position of the user regarding a specific question (in a scale of completely agree to completely disagree with the statement in question),
  2. whether that user gives importance to that question and
  3. after answering all questions, the ranking of most preferred parties for each user.

Aquienvoto.org was able to gather information on 756,908 people, after dropping all users that did not complete at least level 1 (that is, replied to 31 questions).

What did users get as an advice from aquienvoto.org?

If we look at what party was the most first-ranked among users, we see that the centre-right Ciudadanos was the most preferred party throughout the whole period for roughly 33% of users. However, interestingly enough, the overall amount of people that voted for parties that are more leaned towards the left (Podemos,PSOE, United Left and Nós, representing 62.8% of votes)  is much higher than those in line with liberal and conservative policies (Ciudadanos, PP, PNV and DiL, being 37.2% of users’ first choices), indicating that users from aquienvoto.org are consistently left-wing.

ferradans_results

It is particularly noticeable the different layout that the results present when compared to the results from General Elections. For example, the conservative Partido Popular, which was ranked first in the elections with roughly 25% of votes, appeared last almost throughout the whole period for aquienvoto.org. It is clear that this might certainly come from the fact that VAA users are consistently younger and more left-wing than the average citizen, but it also poses a question that would be interesting to explore: do people vote in line with their policy preferences or are there other factors that are influencing voters’ decisions in the field of electoral politics?

How do people position themselves about certain issues and what they think are most important?

Unsurprisingly, the topics related to corruption were the ones users gave most importance to, with almost 10.67% of respondents (that is, 80,410 individuals) giving importance to the question “Politicians accused of corruption should resign and be illegitimated to run for office”, of which almost 93% of people responded that they agree or completely agree with the statement.

The second and third place of most-given-importance questions are related to the presence of religion in the political sphere (second place) and the presence of religion in the education curriculum (third place), for which both find a strong rejection towards religion.  Furthermore, social policy is an area of much importance to individuals as well, surely very much related to Spain’s current economic woes. Indeed, Spanish law related to mass evictions over the past years3 takes fourth place in most-given importance question (8.06% of total questions replied), followed by a statement on the education budget (7,46%), for which most people agree that increasing the budget is a top priority within government policy. These results are roughly constant throughout time, although the amount of users that gave importance to questions declined (graph 2).

ferradans_important

In terms of the most controversial topics out of all questions, where there are large amounts of people agreeing and disagreeing with the statement, we find the prohibition of bullfighting, the abolition of escuelas concertadas4 and the law regarding underage abortion5, having all of them a rather high rate of importance-responses as well.

Regarding what users are not interested on, that is, the questions that were least given importance to, it is seen that the four topics that are least important to users (starting from the least important) are the deficit and the ceiling of government expenditure, the legalization of prostitution, the regulation the financial sector, and the financing of the Autonomous Communities (the different regions of Spain).

What is the political position of the average user?

In order to give users the most interactive experience when analyzing their results, we created a map of their political position using eight different axis, as the Swiss VAA smartvote6 did. Using an algorithm, each response that a user gives contributes to create its “political map”, which can be later compared to the political map of the parties. Thus, using the responses from each user, we computed the political map for the average user, creating the image below.

ferradans_averageuser

As it can be seen, the average user is very much in favor of strong democratic institutions that condemn corruption at all levels, as it presents a rather high value for the axis related to democratic regeneration. Furthermore, it also presents a high value for welfare state and liberal society, and quite a low value for those questions supporting a liberal economy and a restrictive fiscal policy, which goes in line with the results mentioned above that users are more prone to identify themselves with left-wing policies.

Also, it can be seen that the average user rejects all statements related to regional nationalism, and favors those regarding state centralization. This changes, however, when comparing the average users from different regions, as people from Autonomous Communities such as Catalonia and the Basque Country strongly reject state centralization and favor regional nationalist policies.

What is left to be done from VAAs like aquienvoto.org?

Although VAAs can give academics a rich database, there are a number of methodological challenges that need to be overcome7, mainly regarding the representativeness of the sample. Indeed, if we want to make inferences on the positioning of the whole Spanish population, it is crucial that we acquire good quality data on the characteristics of users; something that has been proved difficult for online surveys. From aquienvoto.org, we are working to improve the process of data collection, providing users with the option to sign into an account where they can store their information and reply to surveys at any time. Nevertheless, we believe that more attention from Universities and governments should be given to these tools so that institutions and VAA organizations collectively work to make VAAs a better tool both for users and for the academia. Hopefully, that is what will happen in the next years to come.

For more information on the effect of VAAs on voting behavior, please check my article on Politikon

For inquiries on aquienvoto.org, please send an email to contacto@aquienvoto.org

  1. El auge de las aplicaciones de orientación del voto y su efecto en el comportamiento electoral, Politikon, June 2016.
  2. A review of the top Voter Advice Applications for the 2015 General Election, LSE British Politics and Policy Blog, April 2015.
  3. “If a citizen cannot pay his/her mortgage, giving the house to the bank should cancel his/her debt”
  4. An “escuela concertada” is a semi-private school that receives money from the government and at the same time charges fees to each student. It is unique to Spain.
  5. Whether underage girls should have permission from their parents by law to be able to have an abortion.
  6. https://www.smartvote.ch/
  7. Pianzola (2014), Selection biases in Voting Advice Application research.