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Working Papers

  • WP 14-32R2 | Neoclassical Inequality

    Daniel R. Carroll Eric Young

    Original Paper: WP 14-32 | Revisions: WP 14-32R


    In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.   Read More

  • WP 14-42R | The Politics of Flat Taxes

    Daniel R. Carroll Jim Dolmas Eric Young

    Original Paper: WP 14-42


    We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.   Read More

  • WP 17-16 | Politicizing Consumer Credit

    Pat Akey Rawley Z. Heimer Stefan Lewellen


    Using proprietary credit bureau data, we find that consumers’ access to credit decreases by 4.5 percent–8 percent when the borrower’s home-state U.S. senator becomes the chair of a powerful Senate committee. The reduction in credit access mostly affects historically credit-constrained consumers (low income and nonwhite and borrowers with poor credit scores), and is stronger in areas with less politically engaged constituents and more politically connected lenders. Additional evidence supports a “political protection” hypothesis—banks that are connected to powerful politicians consider fair-lending regulatory guidelines to be less binding. The results highlight the distinction between political power and legislative outcomes, and contrast recent findings that governments expand credit access to firms and consumers.   Read More

  • WP 17-15 | Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors

    Todd E. Clark Michael McCracken Elmar Mertens


    We develop uncertainty measures for point forecasts from surveys such as the Survey of Professional Forecasters, Blue Chip, or the Federal Open Market Committee’s Summary of Economic Projections. At a given point of time, these surveys provide forecasts for macroeconomic variables at multiple horizons. To track time-varying uncertainty in the associated forecast errors, we derive a multiple-horizon specification of stochastic volatility. Compared to constant-variance approaches, our stochastic-volatility model improves the accuracy of uncertainty measures for survey forecasts.   Read More

  • WP 16-05R | Choosing a Control Group for Displaced Workers

    Pawel Krolikowski

    Original Paper: WP 16-05


    The vast majority of studies on the earnings of displaced workers use a control group of never-displaced workers to examine the effects of initial displacements. This approach attributes earnings declines due to all future job instability to the initial displacement event, overstating the losses relative to the average treatment effect. This paper’s approach isolates the impact of an average displacement without conditioning on future displacement status in the control group. In comparisons of the standard and alternative approaches using PSID data, the estimated long-run earnings losses fall dramatically from 25 percent to as low as 5 percent.   Read More

  • WP 16-24R | Venture Capital and Underpricing: Capacity Constraints and Early Sales

    Roberto Pinheiro

    Original Paper: WP 16-24


    I present a model of the venture capital (VC) and public markets in which VCs suffer from capacity constraints, due to the shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to divest from ongoing projects in order to take advantage of new opportunities. This framework is able to match key features presented by the VC and initial public offer (IPO) empirical literatures: 1.) VC-backed firms are younger, smaller, and less profitable at the IPO than their non-VC backed counterparts; 2.) VC-backed IPOs are more underpriced than non-VC backed ones, 3.) There is a positive relationship between underpricing and VC fundraising; 4.) Small and young VC firms usually take portfolio firms public earlier than their large and mature counterparts; 5.) In hot IPO markets, VCs are more likely to take public both very young and small firms as well as mature and large firms, compared to cold markets. Differently, non-VC backed firms are usually smaller and younger in hot markets than in cold ones.   Read More

  • WP 17-13 | Dotcom Price Spiral

    Antonio Gledson de Carvalho Roberto Pinheiro Joelson Oliveira Sampaio


    We show that during the bubble implied growth rates coming from the underpricing of IPO market explains short term returns on the NASDAQ index. This result remains even if we replace actual underprice for others different instruments for underpricing that are based on predetermined variables and not correlated to market returns. We also do placebo tests to assess the relation between underpricing and NASDAQ returns over other periods. We show that growth proxies that are not contaminated by the booms and busts of the stock market are uncorrelated with the returns on the NASDAQ index in periods outside the bubble.   Read More

  • WP 17-14 | Dotcom Extreme Underpricing

    Antonio Gledson de Carvalho Roberto Pinheiro Joelson Oliveira Sampaio


    We conjecture that the Dotcom abnormal underpricing resulted from the emergence a large cohort of firms racing for market leadership/survivorship. Fundamentals pricing at the IPO was part of their strategy. Consistent with our conjecture, firms’ strategic goals and characteristics fully explain the abnormal underpricing. Contrary to alternatives explanations, underpricing was not associated with top underwriting; there was no deterioration of issuers’ quality; and top underwriters and analysts became more selective.   Read More

  • WP 16-14R | The Impact of Merger Legislation on Bank Mergers

    Elena Carletti Steven Ongena Jan-Peter Siedlarek Giancarlo Spagnolo

    Original Paper: WP 16-14


    We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers, and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks, and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.   Read More

  • WP 17-12 | Manufacturing Employment Losses and the Economic Performance of the Industrial Heartland

    Mark E. Schweitzer


    The industrial Midwest, sometimes referred to disparagingly as the “Rust Belt,” has long been recognized as a distinct economic region and an important contributor to the US economy. Prior research has emphasized the role that losses in the manufacturing sector have played in the plight of several Midwestern states and cities, particularly in the late 1970s and early 1980s. We identify a hypothetical industrial heartland region consisting of MSAs that have high concentrations of 1969 earnings in manufacturing relative to the US average and that are located within the geography often associated with the Rust Belt. For comparison purposes we also identify a set of manufacturing-intensive MSAs outside the region and a set of MSAs with low manufacturing concentrations (service-intensive MSAs). We then identify cross-sectional correlations in the economic performance of MSAs during and following losses in manufacturing employment and evaluate whether the industrial heartland region has a distinct response to those losses. We identify two major shocks to manufacturing employment: 1979 to 1983 and 2001 to 2010. While the second episode was slower to develop, the employment losses in manufacturing that were sustained during it are nearly as large as in the first episode. The size of manufacturing loss is reliably correlated across MSAs during and following these two manufacturing shocks with measures of economic performance including nonmanufacturing employment, unemployment, population, and per capita income levels. In addition, we find that manufacturing employment losses typically are associated with larger declines in economic performance in the MSAs of the industrial heartland than in other manufacturing-intensive MSAs or in service-intensive MSAs. Despite substantially lower shares of employment and earnings of manufacturing within the industrial heartland in 2001, the effect of the second manufacturing employment shock is substantial (particularly for real per capita income) and similar in magnitude to the first manufacturing shock.   Read More