Working Papers

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.

  • [1301]

    Jorge De la Roca, Diego Puga

    Learning by working in big cities


    Individual earnings are higher in bigger cities. We consider three reasons: spatial sorting of initially more productive workers, static advantages from workers’ current location, and learning by working in bigger cities. Using rich administrative data for Spain, we find that workers in bigger cities do not have higher initial ability as reflected in fixed effects. Instead, they obtain an immediate static premium and accumulate more valuable experience. The additional value of experience in bigger cities persists after leaving and is stronger for those with higher initial ability. This explains both the higher mean and greater dispersion of earnings in bigger cities.

  • [1302]

    Monica Martinez-Bravo

    The role of local officials in new democracies: Evidence from Indonesia


    New democracies experience greater electoral fraud and more clientelistic spending than established democracies. This paper shows that the body of appointed local officials that a new democracy inherits from the previous regime is a key determinant of the extent of these practices. With a unique dataset from the first post-Soeharto election in Indonesia, I show that the alignment of electoral results between village and district levels is considerably stronger for villages with appointed village heads than for those with elected village heads. I present a model that provides an intuitive interpretation of these results: Appointed officials have stronger incentives to influence voters because of their political career concerns.

  • [1303]

    Max Bruche, Anatoli Segura

    Debt maturity and the liquidity of secondary debt markets


    We develop an equilibrium model of debt maturity choice of firms, in the presence of fixed issuance costs in primary debt markets, and an illiquid over-the-counter secondary debt market with search frictions. Liquidity in this market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of debt holders who sell in the secondary market and hence reduce the interest rate that firms need to offer on debt. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. Firms individually do not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms. As a result, the laissez-faire equilibrium exhibits inefficiently short maturity choices.

  • [1304]

    Laura Crespo, Borja López-Noval, Pedro Mira

    Compulsory schooling, education and mental health: New evidence from SHARELIFE


    In this paper we provide new evidence on the causal effect of education on adult depression and cognition. Using SHARE data, we use schooling reforms in several European countries as instruments for educational attainment. We find that an extra year of education has a large and significant protective effect on mental health: the probability of suffering depression decreases by 6.5 percent. We find a large and significant protective effect on cognition as measured by word recall. We also explore whether heterogeneity and selection play a part in the large discrepancy between OLS and IV (LATE) estimates of the effect of education on depression and cognition. Using the data available in SHARELIFE on early life conditions of the respondents such as the individuals’ socioeconomic status, health, and performance at school, we identify subgroups particularly affected by the reforms and with high marginal health returns to education.

  • [1305]

    Lars Peter Hansen

    Challenges in identifying and measuring systemic risk


    Sparked by the recent "great recession" and the role of financial markets, considerable interest exists among researchers within both the academic community and the public sector in modeling and measuring systemic risk. In this essay I draw on experiences with other measurement agendas to place in perspective the challenge of quantifying systemic risk, or more generally, of providing empirical constructs that can enhance our understanding of linkages between financial markets and the macroeconomy.

  • [1306]

    Gabriele Fiorentini, Enrique Sentana

    Dynamic specification tests for dynamic factor models


    We derive computationally simple and intuitive expressions for score tests of neglected serial correlation in common and idiosyncratic factors in dynamic factor models using frequency domain techniques. The implied time domain orthogonality conditions are analogous to the conditions obtained by treating the smoothed estimators of the innovations in the latent factors as if they were observed, but they account for their final estimation errors. Monte Carlo exercises confirm the finite sample reliability and power of our proposed tests. Finally, we illustrate their empirical usefulness in an application that constructs a monthly coincident indicator for the US from four macro series.

  • [1307]

    Diego Puga, Daniel Trefler

    International trade and institutional change: Medieval Venice’s response to globalization


    International trade can have profound effects on domestic institutions. We examine this proposition in the context of medieval Venice circa 800–1600. Early on, the growth of long-distance trade enriched a broad group of merchants who used their newfound economic muscle to push for constraints on the executive i.e., for the end of a de facto hereditary Doge in 1032 and for the establishment of a parliament in 1172. The merchants also pushed for remarkably modern innovations in contracting institutions that facilitated long-distance trade e.g., the colleganza. However, starting in 1297, a small group of particularly wealthy merchants blocked political and economic competition: they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long-distance trade. Over the next two centuries this led to a fundamental societal shift away from political openness, economic competition and social mobility and towards political closure, extreme inequality and social stratification. We document this ‘oligarchization’ using a unique database on the names of 8,178 parliamentarians and their families’ use of the colleganza in the periods immediately before and after 1297. We then link these families to 6,971 marriages during 1400–1599 in order to document the use of marriage alliances to monopolize the galley trade and the consequent rise of extreme inequality, with those who were powerful before 1297 emerging as the undisputed winners.

  • [1308]

    Gilles Duranton, Diego Puga

    The Growth of Cities


    Why do cities grow in population, surface area, and income per person? Which cities grow faster and why? To these questions, the urban growth literature has offered a variety of answers. Within an integrated framework, this chapter reviews key theories with implications for urban growth. It then relates these theories to empirical evidence on the main drivers of city growth, drawn primarily from the United States and other developed countries. Consistent with the monocentric city model, fewer roads and restrictions on housing supply hinder urban growth. The fact that housing is durable also has important effects on the evolution of cities. In recent decades, cities with better amenities have grown faster. Agglomeration economies and human capital are also important drivers of city growth. Although more human capital, smaller firms, and a greater diversity in production foster urban growth, the exact channels through which those effects percolate are not clearly identified. Finally, shocks also determine the fate of cities. Structural changes affecting the broader economy have left a big footprint on the urban landscape. Small city-specific shocks also appear to matter, consistent with the recent wave of random growth models.

  • [1309]

    Roberto Ramos

    Banning US foreign bribery: Do US firms win?


    I document a striking stock market underperformance of US firms in industries engaged in international trade during the period March 1976 to December 1977. I argue that a suitable candidate for explaining it is the US unilateral banning of foreign bribery that takes place in this period of time. I conduct a long-run event-study to analyse the stock market performance of firms differing in exposure to this policy. The results show that the cumulative abnormal returns of companies in industries most opened to international trade start to fall precisely the day banning foreign bribery is introduced in the political debate, and keep falling until it becomes law. I also show that the patternsobserved are also evident when considering simply raw returns. Results are robust to different specifications and alternative explanations, such as oil prices or the exchange rate. I also disregard the influence of global shocks by performing the analysis for a country not subject to the policy. I conclude that the evidence points in the direction that the US unilateral banning of foreign bribery had a significant negative effect on the market value of firms most exposed to this policy.

  • [1310]

    Samuel Bentolila, Marcel Jansen, Gabriel Jiménez, Sonia Ruano

    When credit dries up: Job losses in the Great Recession


    We use a unique dataset to estimate the impact of a large credit supply shock on employment in Spain. We exploit marked differences in banks’ health at the onset of the Great Recession. Several weak banks were rescued by the State and they reduced credit more than other banks. We compare employment changes from 2006 to 2010 at firms heavily indebted to weak banks before the crisis and the rest. Our estimates imply that these firms suffered an additional employment drop between 3 and 13.5 percentage points due to weak-bank attachment, representing between 8% and 36% of aggregate job losses.

  • [1311]

    Gur Huberman, Rafael Repullo

    Moral hazard and debt maturity


    We present a model of the maturity of a bank’s uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank’s risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis.


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