CEMFI publishes two series of research papers: Working Papers and Master Theses. The Working Papers series contains research work from full-time professors and PhD students.
Felipe Carozzi, Luca Repetto
We ask whether the birthplaces of Italian members of Parliament are favoured in the allocation of central government transfers. Using a panel of municipalities for the years between 1994 and 2006, we find that municipal governments of legislators' birth towns receive larger transfers per capita. Exploiting the fact that some birth towns are outside of the district of election, we conclude that this result cannot be driven by re-election incentives. On the contrary, we show that these incentives discourage legislators from diverting resources to their birthplace. We present evidence that those transfers are a way for a politician to prepare the ground for a post-congressional career in the municipal administration.
At the beginning of the past financial crisis sponsoring banks rescued their structured investment vehicles (SIVs) despite of lack of contractual obligation to do so. I show that this outcome may arise as the equilibrium of a signaling game between banks and their debt investors when a negative shock affects the correlated asset returns of a fraction of banks and their sponsored vehicles. The rescue is interpreted as a good signal and reduces the refinancing costs of the sponsoring bank. If banks’ leverage is high or the negative shock is sizable enough, the equilibrium is a pooling one in which all banks rescue. When the aggregate financial sector is close to insolvency, banks’ expected net worth would increase if rescues were banned. The model can be extended to discuss the circumstances in which all banks collapse after rescuing their vehicles.
Rosario Crinò, Laura Ogliari
Product quality plays a key role in economics, but differs markedly across countries and industries. What are the determinants and implications of this pattern? In this paper, we test an explanation for the large heterogeneity in product quality that rests on the interplay between cross-country differences in financial frictions and cross-industry differences in financial vulnerability. To guide the empirical analysis, we rely on a simple trade model featuring heterogeneous firms, endogenous output quality, country heterogeneity in financial frictions, and industry heterogeneity in financial vulnerability. The model clearly illustrates how the interaction of financial frictions and financial vulnerability shapes the geographical and sectoral variation in product quality. We estimate the model using a novel data set, which contains proxies for export quality, financial development, and financial vulnerability for virtually all manufacturing industries and countries in the world, over a period that spans the last three decades. Our results show that the interplay between financial frictions and financial vulnerability is a main driver of the observed variation in product quality across countries and industries. The model also suggests that quality adjustments are an important mechanism through which financial development affects international trade and shapes countries’ export structure. We find strong evidence consistent with this implication.
The extension of mass education not only affects the level of education of the labor force, but also raises the average education of local politicians. This paper investigates the impact of a large program of school construction in Indonesia on local governance and public good provision. By using a panel dataset of 10,000 villages and exploiting the staggered timing of local elections, I isolate the effects driven by changes in local governance. The results suggest that the school construction program led to important increases in the provision of public goods. Furthermore, the results are heterogeneous across villages: public goods experienced stronger increases in villages where there was a particular demand for that type of public good. I provide evidence that the results are driven by the increase in the level of education of the village head, which suggests that the level of human capital of local politicians is a key ingredient of public good provision in developing countries.
This paper develops a structural empirical model of contraception and participation choice under imperfect control of fertility, learning and unobserved heterogeneity to identify, estimate and give a behavioral content to the effect of the first born child on female labor supply. Family planning failures are exploited as sources of identification. The data are drawn from the 1995 US National Survey of Family Growth (NSFG) which no one has used before for this purpose and which contains full retrospective information on participation, contraception and children. The model is estimated combining the Nested Pseudo Likelihood Estimation and the Expected-Maximization algorithm. Key factors driving the importance of the effect are education, labor market experience, child's age and preferences for leisure and children. From a policy perspective, this heterogeneity is important in designing maternity leave and child care policies. Additionally, twins and gender composition of children are used as sources of variation in the model to estimate the effect of the second and the third born child. The Average Treatment Effect (ATE) of the first is -12.4%, of the second is -5.6% and of third born child is -4.9%. Finally, based on the dynamic model a weighting procedure is proposed to understand the Local Average Treatment Effects (LATE) found in the nonstructural literature.
Gabriele Fiorentini, Enrique Sentana
We derive computationally simple and intuitive score tests of neglected serial correlation in unobserved component univariate models using frequency domain techniques. In some common situations in which the information matrix is singular under the null we derive extremum tests that are asymptotically equivalent to likelihood ratio tests, which become one-sided, and explain how to compute reliable Wald tests. We also explicitly relate the incidence of those problems to the model identification conditions and compare our tests with tests based on the reduced form prediction errors. Our Monte Carlo exercises assess the finite sample reliability and power of our proposed tests.
Julio Galvez, Javier Mencía
We analyse the dependence between sovereign bonds’ and banks’ asset return distributions with a large panel of European data from 2001 to 2013. Using quantile regressions, we identify nonlinear contemporaneous and lagged dependence. As a result, shocks to crisis-hit sovereign bonds have contemporaneous effects on the whole distribution of banks’ returns, as well as a persistent impact in the tails. Our results offer relevant insights about the relationship between banking and sovereign crises. In particular, during the recent financial crisis, banks’ asset return distributions have lower means and fatter tails than in the absence of a simultaneous sovereign crisis.